City Council
Report
City Council Meeting: June 10, 2025
Agenda Item: 12.A
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To: Mayor and City Council
From: Rick Valte, Public Works Director, Public Works, Water Resources Subject: Public Hearing and Adoption of a Resolution Establishing Scheduled FiveYear Water Service Rate Adjustments Recommended Action
Staff recommends that the City Council:
1. Hold a public hearing for the proposed five-year water rate adjustment;
2. Adopt a finding of Categorical Exemption pursuant to Section 15273 of the CEQA Guidelines for the five-year water rate adjustment public hearing;
3. Receive public comments pursuant to Proposition 218 requirements;
4. Consider all protests against the proposed water rate adjustments that have been submitted in accordance with Proposition 218; and
5. Adopt the resolution establishing five-year schedule of water rate adjustments to go into effect July 1, 2025.
Summary
The City of Santa Monica continues to be a recognized leader in the world for its innovative water infrastructure projects and environmental policies aimed to provide a resilient, reliable and sustainable water supply. The Water Resources Division of the City’s Public Works Department provides drinking water, wastewater collection, and recycled water services to residential, commercial, and institutional customers throughout the city. These services are funded through self-sustaining Water and Wastewater Enterprise Funds that are separate from the City’s General Fund. The Water and Wastewater Enterprise Funds are evaluated every five years to ensure that sufficient funding is available to: 1) supply high-quality drinking water for potable use, 2) maintain routine operation and maintenance of the water distribution and wastewater collection infrastructure, 3) implement capital improvement program (CIP) projects for 2 of 10
system resiliency and reliability, 4) advance sustainable water management efforts (e.g., water conservation and sustainable groundwater management), and 5) comply with Proposition 218 requirements to ensure cost of services are properly allocated amongst user classifications and rate tiers. The City Council has consistently taken a strategic approach to setting future water and wastewater rates that balance a concern for keeping costs affordable to the community while adequately investing in long-term water quality, reliability, resiliency, and sustainability.
Staff in the Water Resources Division have retained a rate study consultant, NBS, to conduct the rate study and recommend rate adjustments as outlined in the Water and Sewer Rate Study Report (Attachment A). Rate adjustments are needed to invest in system reliability and resiliency as well as keeping pace with escalating costs in serving over 93,000 residents and 2,700 businesses and institutions that make up the City’s 18,000+ accounts for water and wastewater services. The Water and Sewer Rate Study Report recommends a 20% increase for Fiscal Year (FY) 2025-26, 16% increase for FY 2026-27, 9% increase for FY 2027-28, 9% increase for FY 2028-29, and 6% increase for FY 2029-30 for the Water Enterprise Fund. The recommendation also includes implementing a 20% fixed charge and 80% commodity charge structure as well as adjusting the rate tiers and tier thresholds to reflect current cost of service. In addition, staff also recommends adopting the drought rate structure and maintaining the lowincome assistance program. The estimated average increase for each major customer class’s bi-monthly water charges of the total utility bill per year is listed below. • Single Family Homes - an estimated $29 increase for an average single-family home bimonthly bill, or roughly $15 per month, each year over five years. • Multi-Family Units - an estimated $66 increase on the bi-monthly bill for an average 8-unit multifamily residential building, which represents an approximate monthly increase of $4 per unit, each year over five years. • Commercial - an estimated $119 increase for an average commercial building’s bimonthly bill each year over five years.
Due to the legal requirements of Proposition 218 to appeal or protest rate increases, the 3 of 10
individual Water and Wastewater rate studies are being presented in separate public hearings and require separate action by Council. Proposition 218 notices (Attachment B) were mailed out the week of April 14, 2025, to inform all affected property owners of the proposed rate increases. Staff have also conducted in-person outreach to neighborhood groups, held general outreach meetings and to members of the business community to solicit feedback and provide education. Staff recommends City Council hold a public hearing, receive public comments, consider any protests against the proposed water rate adjustment, and adopt the resolution (Attachment C) to establish the five-year schedule of water rate adjustments.
Background
The Water and Wastewater Rate Study would establish the basis to set the water and wastewater rates for FY 2025-26 through 2029-30 in compliance with Proposition 218 requirements. Proposition 218 stipulates, among other things, that charges for water and wastewater services must not exceed the proportional cost of the service attributable to each parcel or customer. Staff have worked closely with a rate consultant, NBS, to establish the cost of service that is in compliance with Prop 218 requirements.
The rate study included a review of the following to set the water and wastewater rate structure:
• Operating and capital revenue requirements for the City’s Water and Wastewater enterprise funds over a five-year period, FY 2025-26 through FY 2029-30; • Fund reserves, maintain AAA bond rating/capacity, and cover current and future debt obligations;
• Water and sewer rates / structure – adjusting the fixed-service charge component, tiered rates, number of tiers, usage allocations by tier, and customer class designations (e.g. residential, commercial);
• Affordability of rates including low-income discounts / rates for purposes of determining the level of subsidy from non-rate payer funds (e.g., City’s general fund);
• Cost of service for each rate/fee/charge by customer class, meter size and tier; • Impact of proposed changes versus existing rates;
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• Funding for capital improvement program projects (e.g. system resiliency projects including rehabilitating the City’s four potable water storage reservoirs); • Fire service. In 2020, the Legislature adopted SB 1386 (Gov. Code Section 53750.5). SB 1386 adopted findings, declaratory of existing law, that propertyrelated water service costs may include, but are not limited to, any costs associated with constructing, maintaining, repairing, upgrading, and replacing hydrants, and costs associated with obtaining, treating, and distributing adequate volumes of water to meet the water demands of properties served by the water service provider, including water supplied for firefighting purposes. As per the cost-of-service allocation in the report, the charges for water service related to hydrants are proportionately allocated among properties receiving water service as part of the fixed meter service charge; and
• Other related factors as identified by the public, City Council, advisory groups and staff as part of the rate study outreach process.
The consultant’s financial analysis considered the cost of service to operate the system, produce and distribute high-quality drinking water, replace and upgrade existing facilities, implement routine capital improvement projects, and fund one-time CIP projects that would maintain infrastructure reliability and resiliency. The financial analysis for the water and wastewater enterprise funds were broken down into three key components:
1. Expenditures, broken down into three categories:
a. Operating & Maintenance (O&M) - Salaries and benefits of Water Resources staff (current and future to support expanded operations from water self-sufficiency projects added in the prior five-year rate study period) as well as all the supplies, contracted services, and water sustainability programs to produce local water and maintain a reliable and resilient water supply for customers. The O&M expenditure also includes debt service taken on to fund water self-sufficiency projects from the prior rate study period (e.g. $78 million water revenue bond in the water fund and $55 million State Revolving Fund loan in the wastewater fund). O&M 5 of 10
expenditures typically account for approximately 70-75% of the total water fund expenditures.
b. Routine Capital Projects - Replace aging water mains on a 100-year cycle, upgrade software infrastructure and facilities to function efficiently, reliably, and meet industry standards. Routine capital projects typically account for approximately 20-25% of the total water fund expenditures. c. One-time Capital Projects - Non-routine capital improvement projects to replace or maintain aging assets, including rehabilitating the City’s four potable water storage reservoirs that total 40 million gallons in storage, replacing aging operation facilities (e.g. water operations center and water quality laboratory) and re-drilling and replacing aging groundwater production wells.
2. Revenues - the primary source of revenue generated by the established water and wastewater rates.
3. Reserves - to ensure continuity of water and wastewater service due to unforeseen events. The water and wastewater enterprise fund’s current reserve policy include:
a. Capital Rehabilitation and Replacement Reserve = 3% of capital assets. b. Operating Reserve = maintain minimum of 60 days of operating budget and target a 90-day operating reserve.
c. Rate Stabilization Reserve = intended for unexpected decrease in revenues or increase in expenditures (e.g. higher than forecasted increase for charges from regional wastewater collection/treatment provider). A rate stabilization reserve of $1 million has been set by City Council previously.
At the City Council Study Session held on March 25, 2025, City Council directed staff to proceed with Water Rate Option 1 that balances rate increases with outside funding/financing support to minimize financial impacts on the rate payers. Under Water Rate Option 1, staff will pursue grants and financing options (e.g. federal/state loans or water revenue bond) to fund rehabilitation of the City’s potable water storage reservoirs and replacement of the water operations center and water quality laboratory. 6 of 10
Discussion
Water Enterprise Fund
The City’s Water Fund supports production, treatment, and distribution of high-quality drinking water to meet the City’s water demands. Over the past five years since the last five-year water rates were adopted in January 2020, revenues have been lower than originally projected in each year as a result of the COVID-19 pandemic (e.g. decline in water use in commercial and multi-family residential customers) and climate change impacts on water usage (severe drought conditions followed by extreme wet winter periods). Between FY 2019-20 and FY 2023-24, the Water Fund had experienced a total revenue shortfall of approximately $18.5 million. In addition, revenues for FY 2024- 25 are forecasted to have a shortfall of nearly $5 million and will need to dip into the Water Fund reserves to mitigate the shortfall. Expenditures for both operation and construction during and post pandemic have also exceeded original projections due to higher than anticipated market inflation rates (e.g. 3-4% prior to the 2020 COVID-19 pandemic and 4-9% general inflation after; ~4% in the water sector prior to the 2020 COVID-19 pandemic and 6-16% after) caused by supply chain shortages and increases in material costs.
Despite the revenue shortfalls and high market escalation rates experienced over the past five years, the Water Resources Division was still able to successfully deliver the majority of the local water supply and water efficiency projects outlined in the 2018 Sustainable Water Master Plan (Attachment D). These projects included the Olympic Well Field Restoration, Arcadia Water Treatment Plant Production Efficiency Enhancement and Expansion Project, Advanced Metering Infrastructure Project, and Groundwater Resiliency Projects (two new groundwater production wells and two new groundwater recharge wells). Staff managed to bridge the funding gap for these water self-sufficiency projects by securing a $10 million grant from the California Department of Water Resources and a $78 million water revenue bond as well as deferring selected routine CIP projects (e.g. annual water main replacement).
For the current five-year rate cycle (FY 2025-30), expenditures (O&M, routine capital, and one-time capital projects) are forecasted to outpace revenues by nearly $6-$7 7 of 10
million in FY 2025-26 alone and the gap will continue to grow without a rate adjustment to replenish reserves and keep pace with market escalation rates. In addition, several critical projects are planned for this five-year rate cycle to address resiliency and aging infrastructure. Therefore, a water rate adjustment is necessary to:
• Rehabilitate the City’s four potable water storage reservoirs (total capacity of 40 million gallons or roughly four days of the city’s total water supply) that range from 60 to over 100 years old. These four storage reservoirs are critical in providing water to meet peak daily/seasonal and emergency fire demands. • Replace the City’s drinking water operations center and water quality laboratory that are both over 60 years old. The two aging facilities are the brain of the City’s water system which monitor and control the entire drinking water treatment and distribution network throughout the city.
• Maintain routine operation and maintenance expenditures of the water system, including salaries and benefits of Water Resources staff, contracted services, and water sustainability programs.
• Fund routine capital projects to maintain water supply resiliency and emergency preparedness.
• Maintain reserve levels to ensure operational continuity.
In addition to the water rate adjustment, the Rate Study also included the following key elements:
• Drought Rate Structure - A drought rate structure was developed and would be implemented in the event of a statewide drought mandate to conserve water and approved by the Council. Having the drought rate structure in place would ensure sufficient funds are maintained to safeguard reliable operations in the event of a drought event. The drought rate structure is included in the Rate Study Report (Attachment A) and also in the Proposition 218 Notices (Attachment B). • Low Income Subsidy - The current low-income subsidy would be maintained and adjusted to match the updated water tier breakpoints. The current low income subsidy reduces the Tier 1 water rate by $1 per HCF (hundred cubic feet) for qualifying customers. The customer would qualify for the low-income assistance 8 of 10
program by providing proof that they either qualify for the Southern California Gas Company or Southern California Edison’s low-income assistance programs.
Cost of service requirements under Proposition 218 require that the discount provided to qualified low-income customers be covered by the City’s General Fund to prevent it from being subsidized by other ratepayers. The average annual General Fund transfer to the Water Fund is currently around $115,000, which benefits approximately 360+ customer accounts.
• Recycled Water Rate - The uniform recycled water rate has been updated to reflect current cost of service. The uniform recycled water rate is lower than the Tier 1 water volumetric charge to incentivize customers to use recycled water and reduce potable water consumption.
Community Outreach
Throughout the rate study period, staff presented at the City’s neighborhood groups, civic/business groups and one open house event to educate the community about the rate study and potential impacts of rate adjustments, and answer questions about the rate study.
In addition to input received from City Council during the March 25, 2025 Study Session, staff also solicited feedback from the Commission on Sustainability, Environmental Justice, and the Environment (Commission) on March 17, 2025, where the recommended rate increase was supported by the Commission.
A public hearing is required as part of the Proposition 218 process to allow the community to provide comments, the City Clerk to tally Proposition 218 protests received, and the Council to vote on the recommended rate increases. Separate public hearings are being held for the Water and Wastewater Funds to comply with Proposition 218 requirements. Proposition 218 notices (Attachment B) were mailed out the week of April 14, 2025, to inform all affected property owners of the proposed rate increases.
The Proposition 218 notices include a summary of the new rate and tier structures.
Environmental Review
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The City’s water and wastewater rate study is categorically exempt from CEQA pursuant to Section 15273 of the CEQA Guidelines, which states that CEQA does not apply to the establishment, modification, structuring, restructuring, or approval of rates, tolls, fares, and other charges by public agencies which the public agency finds are for the purpose of meeting operating expenses, purchasing for leasing supplies, equipment, or materials, meeting financial reserve needs and requirements, and obtaining funds for capital projects, necessary to maintain service within existing service areas. The intent of the rate study is to adjust water and wastewater rates to maintain system reliability and resiliency while ensuring the rates are proportional to the cost of service provided to each parcel or customer. Therefore, adjustment of rates is exempt from CEQA.
Past Council Actions
Meeting Date Description
May 14, 2024
(Attachment E)
Award Professional Services Contract to NBS Government
Finance Group, dba NBS, to Analyze the Existing
Water/Wastewater Rate Structure and Establish a New Five-Year Rate Structure for Potable Water, Recycled Water, and
Wastewater Commodity Charges; Fire Line Rates; and Capital Facility Fee for Calendar Years 2025 to 2029
March 25, 2025
(Attachment F)
Five-Year Water and Wastewater Rate Study Session
Financial Impacts and Budget Actions
The recommended rate increases in the Water and Sewer Rate Study will provide the necessary revenue to provide high-quality drinking water to the community, maintain a modern and reliable water system, and invest in reliability and resiliency. The proposed rate increases over the next five years (FY 2025-26 through FY 2029-30) would allow the Water Fund to collect sufficient revenues to meet the projected operating expenditures, maintain adequate fund reserve levels, and replace aging infrastructure.
Revenues budgeted for the FY 2025-27 Proposed Biennial Budget and the Water Fund’s five-year forecast reflect the impact of the rate changes. 10 of 10
Prepared By: Sunny Wang, Water Resources Manager
Approved Forwarded to Council
Attachments:
A. Santa Monica Water and Sewer Rate Study_DRAFT FINAL
B. Prop 218 Notice
C. Resolution - Water and Recycled Water Service Rates
D. 2018 Sustainable Water Master Plan Update
E. Award Contract to NBS Government Finance Group, dba NBS (Web Link) F. Five-Year Water and Wastewater Rate Study Session (Web Link) G. Written Comments
H. PowerPoint Presentation