City Council
Report
City Council Meeting: June 10, 2025
Agenda Item: 12.B
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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 Wastewater Rate Adjustments Recommended Action
Staff recommends that the City Council:
1. Hold a public hearing for the proposed five-year sewer rate adjustment;
2. Adopt a finding of Categorical Exemption pursuant to Section 15273 of the CEQA Guidelines for the five-year sewer rate adjustment public hearing;
3. Receive public comments pursuant to Proposition 218 requirements;
4. Consider all protests against the proposed sewer rate adjustments that have been submitted in accordance with Proposition 218; and
5. Adopt the attached resolution establishing five-year schedule of sewer 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 City’s Public Works Department – Water Resources Division provides drinking water, wastewater collection, and recycled water services to residents, 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 system 2 of 9
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.
The Water and Sewer Rate Study Report recommends a 7 percent increase for Fiscal Year (FY) 2025-26, 7 percent increase for FY 2026-27, 7 percent increase for FY 2027- 28, 6 percent increase for FY 2028-29, and 6 percent increase for FY 2029-30 for the Wastewater Enterprise Fund. The recommendation also includes implementing a 20 percent fixed charge and 80 percent commodity charge structure as well as adjusting the rate tiers and tier thresholds to reflect the current cost of service. In addition, staff also recommends adopting the drought rate structure and maintaining the low-income assistance program. The estimated average increase for each major customer class bimonthly sewer charges of the total utility bill per year is listed below. • Single Family Homes - an estimated $8 increase for an average single-family home bimonthly bill, or roughly $4 per month, each year over five years. • Multi-Family Units - an estimated $18 increase on the bi-monthly bill for an average 8-unit multifamily residential building, which represents an approximate monthly increase of $1 per unit, each year over five years. • Commercial - an estimated $31 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 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 3 of 9
neighborhood groups, held general outreach meetings and to members of the business community to solicit feedback and provide education. Staff recommends City Council to hold a public hearing, receive public comments, consider any protests against the proposed sewer rate adjustment, and adopt the resolution (Attachment C) to establish the five-year schedule of sewer rate adjustments.
Background
The Water and Wastewater Rate Study will 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 has 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;
• Funding for capital improvement program projects (e.g., system resiliency projects including rehabilitating the City’s four potable water storage reservoirs); and
• Other related factors as identified by the public, City Council, advisory groups 4 of 9
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 will maintain infrastructure reliability and resiliency. The financial analysis for the water and wastewater enterprise funds are 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 sustainability programs to maintain reliable wastewater collection services for the community. The O&M expenditure also includes debt service taken on to fund water self-sufficiency projects from the prior rate study period (e.g., $55 million State Revolving Fund loan in the wastewater fund). O&M expenditures typically account for approximately 70-75% of the total wastewater fund expenditures.
b. Routine Capital Projects - Replace aging sewer mains, 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 wastewater fund expenditures.
2. Revenues - the primary source of revenue generated by the established water and sewer 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 includes:
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 5 of 9
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.
Discussion
Wastewater Enterprise Fund
The City provides wastewater service through operation and maintenance of an extensive wastewater collection system as well as advanced treated recycled water through the Sustainable Water Infrastructure Project (SWIP). The City is one of 28 agencies that contracts with the City of Los Angeles for wastewater treatment services provided at the City of Los Angeles’ Hyperion Treatment plant. Under the terms of the agreement with the City of Los Angeles, the City pays a proportionate share of the operations and maintenance expenses as well as capital charges for the Hyperion treatment and collection system. Payment to the City of Los Angeles for treatment typically accounts for 30% to 50% of the Wastewater Fund’s annual budget. Similar to the Water Enterprise Fund, the Wastewater Enterprise Fund also experienced a total revenue shortfall of approximately $12 million. Revenue targets were met in FY 2022-23 due to the $4 million in principal forgiveness from the low interest State Revolving Fund loan provided by the State of California to finance the construction cost for SWIP. In addition, revenues for FY 2024-25 are forecasted to have a shortfall of nearly $3.4 million. Expenditures for both operation and construction during and post pandemic have also exceeded original projections due to higher than anticipated market inflation rates caused by supply chain shortages and increases in raw material costs.
Staff was still able to deliver on local water supply projects despite the revenue shortfalls and high market escalation rates experienced over the past five years. In particular, the wastewater fund, with support from the City’s stormwater fund, was able to deliver the award winning SWIP that captures stormwater, urban runoff, and municipal wastewater to produce purified water for non-potable (e.g., irrigation) and potable reuse (groundwater recharge). Staff was able to bridge the funding gap by securing a $8.77 million grant from the State Water Resources Control Board 6 of 9
Proposition 1 Stormwater grant, $7.5 million grant from the Los Angeles County Measure W Safe Clean Water Program, and a $55 million low interest loan from the State Water Resources Control Board Clean Water State Revolving Fund.
For the current five-year rate cycle (FY 2025-26 through FY 2029-30), the recommended rate adjustment for the wastewater fund aims to keep pace with market escalation rates over the five-year period at 7% for FY 2025-26, 7% for FY 2026-27, 7% for FY 2027-28, 6% for FY 2028-29, and 6% for FY 2029-30. The wastewater fund is not expected to fund any major one-time capital projects during the current rate study period and will fund primarily routine capital projects to maintain existing wastewater infrastructure. There are two one-time projects that are listed under the wastewater fund but are reimbursed by the City of Los Angeles: the Moss Avenue Pump Station Improvements and the Santa Monica Urban Runoff Recycling Facility (SMURRF) Upgrades. The Moss Avenue Pump Station Improvements project is a part of City of Los Angeles’ Amalgamated System for wastewater collection, and cost associated with the project is 100% reimbursed by the City of Los Angeles. Upgrades at the SMURRF is a 50/50 cost share with the City of Los Angeles as the facility reduces pollution from dry weather urban runoff from the watershed and in the ocean.
Low Income Provision
The current and proposed rate structure includes a low-income provision where the wastewater rate for qualified single-family, low-income customers is discounted. On February 24, 2015, Council approved a discount rate of $1 per hundred cubic feet (HCF) for the first wastewater tier. Low-income customers qualify for the discount by providing evidence of enrollment in the low-income program offered by Southern California Edison or the Southern California Gas Company.
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 in order to avoid it being subsidized by other ratepayers. The average annual General Fund transfer to the Wastewater Fund has historically been around $50,000 per year and, most recently, approximately $104,000 for FY 2023-2024, benefiting over 360 customer 7 of 9
accounts. Staff recommends funding low-income customers at the same levels.
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 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
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 8 of 9
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 deliver reliable wastewater services 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 (FY2025-26 through FY2029-30) would allow the Wastewater enterprise fund to collect sufficient revenues to meet the projected operating expenditures, maintain adequate fund reserve levels, and replace aging infrastructure. Revenues from the rate changes are incorporated in the FY 2025-27 Proposed Biennial Budget, pending adoption, and the Wastewater Fund’s five-year forecast.
Prepared By: Sunny Wang, Water Resources Manager
Approved Forwarded to Council
Attachments:
A. Santa Monica Water and Sewer Rate Study Report
B. Prop 218 Notices
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C. PW - Resolution - Wastewater Service Rates
D. Award Professional Services Contract to NBS Government Finance Group, dba NBS (Web Link)
E. Five-Year Water and Wastewater Rate Study Session (Web Link) F. PowerPoint Presentation