FOR THE COUNCIL MEETING OF OCTOBER 17, 2023
COUNCIL AGENDA REPORT
TO: City Council
FROM: Interim City Manager Alex Posada
Prepared by: Director of Utilities Shad S. Springer
SUBJECT: Public Hearing and Approval of Water and Sewer Rates Commencing each January 1 from 2024 through 2027
Description:
The City Council will conduct a public hearing and first reading to approve water and sewer rates commencing each January 1 from 2024 through 2027.
Environmental Notice: The activity is not a “Project” as defined under Section 15378 of the California Environmental Quality Act State Guidelines; therefore, pursuant to State Guidelines Section 15060(c)(3) no environmental review is required.
RECOMMENDATION:
1. Receive a Staff Presentation regarding water and sewer rates;
2. Conduct a Public Hearing;
3. Determine whether a majority protest exists; and
4. If no majority protest exists, introduce an ordinance for a first reading, and continue for a second reading and adoption at the next regular meeting of the City Council, approving water and sewer rates for the next four years, commencing each January 1 from 2024 through 2027.
SUMMARY:
The Utilities Department is recommending new water and sewer rates in order to account for increased operating and capital costs . Rates are proposed to change each January from 2024 through 2027. Water and sewer rates were last adjusted in January 2023.
Utility rate -making methodologies and legal requirements, including Proposition 218 (“Prop 218”), were followed in evaluating and proposing these rates. Under Prop 218, rate changes are subject to a written majority protest provision. A majority protest of ratepayers for this item consists of 9,958 protests.
BACKGROUND:
Legal Requirements. The City is required to conduct proceedings pursuant to Article XIII D, Section 6(a)1 of the California Constitution with respect to fees for water service, sewer service, refuse collection, and other property-related services. Article XIII D, Section 6(a) is a portion of Prop 218, which was adopted by the voters in 1996. Prop 218 requires that 2 the amount of the fee or charge to property owners does not exceed the proportional cost of the service attributable to the associated parcel. In addition, revenue from the fee cannot be used for any purpose other than that for which it is charged.
Prop 218 further requires that notice be provided to all utility users a minimum of 45 days prior to a Public Hearing and include the amount of the proposed rates; basis on which the proposed rates were calculated; reasons for the change; and date, time, and place of the Public Hearing. The Utilities Department mailed the required notice in English and Spanish as a utility bill insert to City customers throughout the month of August 20 23 (Attachment “A”) (“Prop 218 Notification”).
Cost of Service Study.
The City initiated a n update to
its 2019 comprehensive cost of
service study for the water and
wastewater enterprise funds.
The update was conducted by
the same third -party consulting
firm responsible for preparing
the City’s 2019 cost of service
study. The scope of the eight -
month project was to evaluate
and update the City’s short- and
long-term financial plan to
ensure sufficient revenues to fund operating and capital needs and identify cost-based and equitable rates for the City’s water and sewer customers. A report was developed outlining the approach used to achieve these obj ectives, along with the study’s findings, conclusions, and recommendations. That report, on file with the Utilities Department, provides the basis for implementing the proposed water and wastewater rates.
Public Workshop. The Utilities Department hosted a Public Workshop on September 27, 2023, at Shepard Hall to provide detailed information regarding its process for evaluating and setting rates and to receive comments and answer questions from the public (Attachment “B”). The City advertised the Public Wo rkshop in the Prop 218 Notification, via a news release, and published an advertisement in the Santa Maria Times on September 20th (Attachment “C”). Four City residents attended the Public Workshop.
Public Hearing and Majority Protest. Proposed rates are subject to a written majority protest provision (50 percent plus one ). Therefore, if 9,958 of the City’s 19,913 water/sewer customers file a written protest opposing the proposed rates, the new rates cannot be adopted. Written protests to proposed rates are required to be delivered prior to the conclusion of the October 17th Public Hearing, as advertised in the Prop 218 Notice.
As of September 29, 2023, the City Clerk’s Office had received four written protests.
Historical Rate Increases. From 1981 through 2017, and again from 2020 through 2023, the City of Santa Maria (“City’) implemented annual water and/or sewer rate adjustments.
Graphic: Water and Wastewater Revenue Requirement Overview • Determines level of rate (revenue) adjustment necessaryCompares utility revenues to expenses
• Adequate funding of renewal and replacements
• Meets target ending reserve balances
Uses prudent financial
planning criteria
• 10-year period for the City’s study
• Rate study focus is next 4-year period
Reviews a
specific period
• No transfer of funds between water and wastewater
• Rates must support operations and capital
Utilities is analyzed on a
“stand-alone basis”
• Generally-accepted method for municipal utilitiesUtilizes “cash basis” methodology
3 DISCUSSION:
The Utilities Department is committed to providing quality, safe, and reliable drinking water service and maintaining a complex sewer collection and treatment system at the lowest possible costs. Staff maintains and operates the water and sewer systems 365 days a year and the City incurs costs to meet all State and Federal regulatory requirements; funding of a nnual renewal and replacement capital; operating expenses for chemicals, supplies, and power; as well as maintaining prudent financial metrics such as reserve fund balances and debt service coverage ratios.
Staff conducts ongoing and systematic rate analy ses through the use of a water and wastewater rate proforma. The proforma assesses and evaluates the City’s current cost of service and rates for water and wastewater utilizing industry -recognized generally accepted rate-setting principles and methodologies, with the intent to achieve short- and long-term financial sustainability.
Rate structures must meet each utility’s (water and wastewater) ongoing revenue requirements, including operating expenditures, bond covenants, capital improvement needs, and fund reserve policies. Water and sewer revenue requirements must:
Reflect the need to prudently fund annual water operation and maintenance expenses (including State Water infrastructure costs) and sewer operation and maintenance expenses;
Adequately fund annual water infrastructure renewal and replacement and plan for future sewer infrastructure replacement and regulatory requirements; and Meet ending reserve targets annually using reserves to fund capital improvements.
As proposed, the water and sewer rates will meet ongoing, known revenue requirements for the utilities. It should, however, be noted that the proposed rates do not consider future operational or financial implications associated with unknown Central Coast Water Authority costs or new compli ance requirements issued by Local, State, or Federal regulators related to the drought, water conservation requirements, or other more prescriptive regulations regarding water quality.
Water Rates. All customers are charged a flat rate based on the size of the water meter serving the property and are also charged a variable rate based on the amount of water used (consumption) each month. This billing system reflects the fixed or flat costs incurred to serve a customer through a meter, as well as the varia ble cost to supply increasing amounts of water.
In addition to providing necessary revenues to operate and maintain the City’s utilities, the proposed rates also simplify the current rate structure. For water, this includes:
Eliminating separate water rates for Mobile Home Park customers. The current consumption patterns of Mobile Home Park customers are similar to General Use 4 customers; as such, both classes should be grouped in the same customer class to create the proportionality expected under Prop 218.
The water rates update was developed consistent with the principles and methodologies established by the American Water Works Association (AWWA) M1 Manual, Principles of Water Rates, Fees, and Charges to meet the requirement of Proposition 218 in developing cost-based and proportional rates.
Sewer Rates. Single-family residential customers, Multi-family residential customers, and Hotels, Motels, and Rest Homes are charged a flat rate for sewer. Commercial and heavy- use (industrial) customers are charged a variable rate. The variable rate depends on the type of business due to the actual discharge into the Wastewater Treatment Plant ; each 100 cubic feet of wastewater is charged an incremental amount based on the business type, to account for the volume of wastewater discharged and the strength of that wastewater.
In addition to providing necessary revenues to operate and maintain the City’s utilities, the proposed rates also simplify the current rate structure. For sewer, this includes:
The inclusion of the Apartment/Multi-Family ≤2 Rooms, Apartment/Multi-Family ≥3 Rooms, and Mobile Homes within the customer class for Multi-Family Residential.
This was done to simplify the City’s rate structure as well as to acknowledge that these customers are very similar in their use and requirements of the wastewater system.
The sewer rates update was developed using generally accepted rate-setting principles and industry standard methodologies as outlined in the Water Environment Federation’s Manual of Practice No. 27, Financing and Charges for Wastewater Systems to develop cost-based and proportional rates.
Alternatives
The City Council may:
(1) Elect not to approv e the rates. This will lead to inadequate funding of the utilities and the City may not meet bond covenants and other rate coverage requirements. (2) Direct Staff to evaluate alternate rates and return to City Council for future consideration. Any alternate rate options will also need to be based on a cost -of- service study and the requirements of Prop 218; therefore, alternate rates will not be significantly different from those currently proposed.
To maintain a positive cash balance and meet the fiscal requirements of the water and sewer utilities, the Utilities Department recommends approving the water and sewer rates as shown on the Prop 218 Notice. The proposed rates are necessary to generate sufficient revenue to fund the City’s operating and capital needs.
5 If approved as proposed, City customers’ combined monthly water and sewer bills will remain substantially lower in comparison to other surrounding water and sewer agencies (Attachment “D”).
Fiscal Considerations
Proposed rates reflect fixed and variable costs incurred by the City for the supply, treatment, and distribution of d rinking water to City customers and the collection and treatment of sewer from City customers. In addition, the recommended rates will allow the City to continue developing the fiscal resources required to manage operational, maintenance, repair, and repla cement costs of the water and wastewater systems and maintain a positive cash balance.
Impact to the City
The recommended water and sewer rates are cost -based, equitable, and legally defensible.
Impact to the Community
Under State law, the City may not c harge more than the cost to provide the service.
Because the City is required by State law to charge for the cost of the service, subsidies are not available for customers unless the City obtains outside funding to offset its costs.
Staff will continue to seek outside funding opportunities to reduce financial impacts on ratepayers.
ATTACHMENT A: NOTICE OF PROPOSED RATE INCREASES (PROP 218 NOTIFICATION) ATTACHMENT B: PUBLIC WORKSHOP QUESTIONS
ATTACHMENT C: PUBLIC NOTIFICATIONS
ATTACHMENT D: WATER AND SEWER RATES COMPARISONS