Dear Council Members and City Staff,
As a member of the Enterprise Oversight Committee, Financial Subcommittee, I have spent over 100 hours looking at past budgets and the Cost Allocation Model. I have done a deep dive on past budgets to see exactly why the Water and Wastewater Enterprise Funds had significant increases in costs without any money left for Capital Improvements even though rates kept rising and Sebastopol does not purchase water.
The Cost Allocation Plans being presented contain many problematic items, which are outlined below.
From my extensive research, it is clear the City has never been Prop. 218 compliant as it has never tracked employee time dedicated Water and Sewer. In addition, the City used a flat percentage model for many years and never adjusted it when it had staff increases, which impacted the amount charged on the flat rates. For instance, the Finance Department went from 2 to 4 people and kept charging the Enterprise Funds 75% of their budget even though the number of accounts remained the same. It should have been reduced to 18.75% to Water and 18.75% to sewer. In addition, one bill (mailed every other month) covers both Sewer and Water so any billing time should be split between Water and Sewer.
It is unclear where ClearSource got their data. It was said that it came from interviews with staff, which may or may not be an accurate reflection of time spent. It certainly is inaccurate when it comes to Council Time. In Prop. 218, there is no mention of consultants or Cost Allocation Plans. It is a simple law.
Prop. 218 is easy to apply. It simply to charge the enterprise accounts charges associated with Water and Sewer. You do this by tracking employee time.
Our attorney, Alex, tracks his time in 6 minute intervals and bills accordingly. City employees have not tracked their time in hour intervals.
Prop. 26 says the burden of proof is on the City. The City has no data as it has never kept track of the hours spent on Water and Sewer.
My recommendation is to choose move all contractor fees into direct billing and cut the Finance/Administrative services in half, which should have been done in 2016 when staff increased to 4 people from 2. If you move the attorney because the attorney is a contractor then all contractors like Engineering need to go into direct billing.
If there are FTE in Finance and Administration dedicated to Water and Sewer, it is assumed part of their duties would be to manage and pay contractors.
To understand them, you need to look at the past cost plan.
Cost Allocation Fees are a distinct line item in the Water and Sewer budgets. Cost Allocation is IN ADDITION to direct billed costs such as Public Works Salaries and the Santa Rosa Sewage Processing. The model has several issues which need to be resolved per Prop. 218 and Prop. 26.
1) City Council: Prop. 218 generally forbids City Council costs to be passed through to ratepayers. In addition, Council spends less than 4% of its time on Water and Sewer (the exception is Council Member Carter). City Council time must be tracked per Prop. 26. a. Proposition 218 does not allow for general City Council costs to be billed to utility ratepayers. It strictly prohibits using property-related fees—such as water, sewer, and trash—for purposes other than providing the service. Fees must reflect the direct, proportional cost of providing that specific service to the parcel. 2) City Manager: City Manager pass through costs must be directly related to Utility Management. The City Manager should track their time so that this is an accurate amount.
a. Proposition 218 generally prohibits billing City Manager costs or other general government overhead to utility ratepayers. It restricts fees to the actual cost of providing the service, prohibiting charges for general services like police, fire, or administrative overhead unrelated to the service (e.g., water, sewer).
3) Contract City Attorney: All contract services must be direct billed. a. Proposition 218 generally prohibits marking up contract services for profit.
Under Proposition 218, property-related fees—including those for contracted services—cannot exceed the proportional cost of providing the service. Fees must directly reflect the cost of service, preventing local governments from generating profit or covering unrelated expenses.
b. $184,587 for legal fees for FY 2024/2025. Records still show that only $13,850 were billed by attorneys for services rendered to Enterprise Funds. c. For FY 2025-2026 $189,263 was allocated. I have requested the attorney bills and thus far it is $9651.50.
4) City Clerk: General Government Overhead cannot be passed on to Ratepayers.
City Clerk time must be tracked per Prop. 26.
a. Proposition 218 generally prohibits passing "city clerk services" or other general government overhead costs through to ratepayers. Under Prop 218 (California Constitution Art. XIII D), fees for property-related services, such as water or sewer, cannot exceed the proportional cost of providing that specific service.
5) Admin/Financial Services: The allocation needs to be reduced to represent accurate employee FTE or the billing service needs to be outsourced to reflect competitive pricing. The 2014 Allocation amount was never reduced when staffing increased in 2015 and 2106. Number of utility bills stayed the same but staffing increased. Finance costs have risen over 300% even though the amount of bills has remained the same. Correct allocation is .75 FTE for Water and .75 FTE for Sewer. 6) Public Works: Engineering – Engineer is contract and needs to be direct billed. The Engineering tech is billed via the Public Works Yard Cost allocation plan. We have no Engineering Department. Therefore, it can’t be allocated. a. Per City Data, the City made a $588,057 profit from ratepayers (FY 2021- 2024)
7) Public Works: The current direct billed salaries are 3.5 FTE for Water and 3.1 FTE for Sewer. In addition, Public Work salaries are also included in the Cost Allocation Plan. This includes Public Works Director, Engineering Tech and some Public Works Labor and is about 1 FTE for Water and 1 FTE for Sewer. This brings the total of FTE attributed to Water to 4.5 FTE and 4.1 FTE For Sewer.
1) This needs to be reviewed as it is clear that Public Works is not spending 71% (8.6 FTE out of 12 FTE) on Water and Sewer. Employees need to track their time in order to get accurate data on how much time is spent on Water and Sewer.
2) Recent time tracking shows 30-40%% of Public Works Time spent on Water and Sewer. Using the spreadsheet submitted by Eric Billing, a total of 1103 hours over a 29 day period was spent on Water and Sewer, which average a total of 38 hours per day. Out of 100 hours per day, that is 38 percent of time spent by labor on Water and Sewer. That is 3.8 FTE between Water and Sewer as each 10 hours represents 1 FTE.
Time Tracking is Essential for Prop. 218 Compliance.
“Cities ensure Proposition 218 compliance—which requires that fees for propertyrelated services do not exceed the cost of providing them—by using automated, digital time-tracking systems to precisely allocate employee hours to specific, fundrestricted services. These systems use digital time-tracking software to create auditable, timestamped records, ensuring that personnel costs charged to specialized funds (like water or sewer) are verified and compliant.” Appendices which show Historical Cost Allocation Amounts Historical List of Finance Department Costs Allocated to Water and Sewer. Note there is a 200% increase of allocated overhead from FY 2015 to FY 2023, 8 Year Period, even though the number of customers and utility bills remain static. Note significant increase AFTER SmartMeters are installed even though cost savings was promoted as reason for increasing Enterprise Fund Expenses for Syserco Loan.
Historical List of Legal Charges -
From Adopted Budget, Legal Fees for 2014/2015 were:
From Adopted budget, Legal Fees for 2015/2016 were:
From a Public Records request, attorney's fees range from $8754 to $51,618 from FY 2017 to 2024. There are no significant legal challenges to the Water or Sewer activities which would warrant a 250% increase of the $184,587 charged in the 24/25 FY.