Sebastopol City Council
June 2, 2026

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CITY OF SEBASTOPOL CITY COUNCIL
AGENDA ITEM REPORT FOR MEETING OF: June 2, 2026
=========================================================================================== To: Honorable Mayor and City Councilmembers
From: Enterprise Fund Oversight Committee
Department: Public Works/Administrative Services
Subject: Report Out
=========================================================================================== RECOMMENDATIONS): That the City Council receive and file the informational report from the Enterprise Fund Oversight Committee (EFOC) and discuss its recommendations during the FY 2026-27 budget process.

PROCESS OF AGENDA ITEM:
• Presentation of agenda item by staff and Committee
• Council questions of staff
• Public comment
• Council discussion
• Receipt of Item; There is no action to be taken at tonight’s meeting EXECUTIVE SUMMARY: The Enterprise Fund Oversight Committee (EFOC) was established by City Council direction to provide independent, advisory oversight of the City’s Water and Wastewater Enterprise Funds. Since its organizational meeting on December 17, 2025, the EFOC has conducted a thorough review of financial practices, operational performance, infrastructure needs, and received the requirements of Proposition 218 and Proposition 26 from City Attorney Alex Mog. A brief explanation of Prop 218 and Prop 26 is listed below.

PROPOSITION 218 AND 26 OVERVIEW: Proposition 218 (the “Right to Vote on Taxes Act,” adopted by California voters in 1996) and Proposition 26 (2010) establish strict constitutional protections for ratepayers of property-related fees such as water and sewer charges. Key requirements include:

Proposition 218 (“Prop. 218”) establishes requirements for property-related fees, which includes water and sewer fees. Among other things, Prop 218 requires that: 1) revenues derived from the fee must not exceed the funds required to provide the service; 2) revenues derived from the fee must not be used for any purpose other than that for which the fee is imposed; and 3) fees may not be imposed for general government services.

Prop. 218 allows the General Fund to charge the Enterprise Fund for services but those charges must be based on the actual cost of the services provided. The General Fund can be reimbursed for the services it provides the Enterprise Funds either through “direct charges” or a cost allocation plan.

When a direct charge methodology is used, the General Fund charges labor costs for employees providing services based on the precise services provided. Not only does this approach require employees to constantly track and bill their time, but this approach also does not account for a wide array of indirect costs (such as central administration, IT, insurance, etc.).

A cost allocation plan is a method to assign the Enterprise Funds their share of indirect costs that support their operation.

Agenda Item Number 5
Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

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BACKGROUND:

The Duties of the Committee in the approved resolution are as follows:

The Committee shall act in an advisory capacity to the City Council and no express authority or power to act on behalf of the City is hereby delegated. To carry out its stated purpose, the Committee shall perform the following duties:
a) Reviewing Annual Budgets and Financial Reports: The Committee will analyze the financial health of the Enterprise Funds, ensuring that budgets and financial statements reflect accurate and sustainable practices. b) Analyzing Rate Studies and Rate Adjustment Proposals: The Committee will evaluate proposed rate changes, including providing recommendations on cost allocation methods to ensure fairness and financial viability.
c) Evaluating Long-Term Financial Planning and Capital Improvement Needs: The Committee will assess capital improvement plans (CIP), master plans, and long-term financial forecasts related to Enterprise Fund operations, ensuring that projects are properly prioritized and funded and that master planning efforts align with Enterprise Fund financial sustainability.
d) Engage with the public and other stakeholders to ensure that the community’s interest and concerns are reflected in the Committee’s recommendations.
e) Such other duties as assigned by the City Council.
f) Shall submit an annual report to the Council in early June before the next fiscal year budget is adopted.

Committee members include:
• Councilmember Phill Carter (Chair)
• Greg Dabel (Vice Chair)
• Oliver Dick
• Kate Haug
• Mary Meihaus
Staff support was provided by Public Works Operations Supervisor Erik Billing; Public Works Director Oriana Hart; Administrative Services Director Ana Kwong and Admin Tech Torran Korman.

COMMITTEE ACTIVITIES: The EFOC met multiple times as well as conducted joint sessions with the Budget Committee. All meetings were open to the public.

Key activities included:
• Formation of two ad hoc subcommittees
o Finance/Billing and Infrastructure/Operations—to conduct in-depth analysis • Requested and received requests for information on:
o cost allocation
o billing
o water rights
o water quality
o credit card fees
• Conducted infrastructure walking tours of water and sewer facilities • Reviewed tracking of Public Works staff hours (water/sewer) • Analysis of sewer repair priorities and Morris Street pump station data Agenda Item Number 5
Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

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• Received presentation on the water master plan
FINANCE / BILLING AD HOC SUBCOMMITTEE RECOMMENDATIONS (Kate Haug and Mary Meihaus) The goal of the Finance and Bill Ad Hoc Committee is to achieve full compliance with Proposition 218 and Proposition 26, protect ratepayers from subsidizing General Fund activities, improve transparency and accountability, and correct long-standing mismanagement issues. This ad hoc committee has provided additional eyes on the enterprise funds with the intention to create a roadmap that creates transparency to the public, having clear, justified data that demonstrates compliance; and importantly rebuilding community trust.

Key recommendations to City Council: It is not the intent of this Ad Hoc Committee to have the City Council implement all recommendations for the current FY budget. Instead, we recommend a phased approach to ensure a smooth and responsible transition.

A brief overview of the recommendations are listed below with the detailed report included to this agenda item as Attachment 1.

Phase 1 – July 1, 2026 – December 31, 2026

1. Reject Current Model (Scenario A) as recommended by the Budget Committee and majority of the Enterprise Fund Oversight Committee and approved by the City Council at their May 5th City Council Meeting. This ad hoc committee recommends that City Engineer contract be a direct billing and that the allocation for Finance/Administrative be cut by 50%. It is also recommended that all contracted services (attorneys, engineers, consultants) should be directly billed.

2. Refund of FY 24 25 and FY 25 26 Attorney Fees ($350,000). Enterprise funds were charged approximately $350,000 for attorney fees with minimal actual attorney billings.

3. It is recommended that staff implement employee time tracking Immediately. Per the flyer in the attached report, Springbrook (the City’s current finance software) has a time tracking module, or there are other similar low-cost tools for tracking of time. This would allow time to be tracked across General Fund, Water, and Sewer to accurately allocate salaries/benefits as well as provide as a tool for management for review of how time is spent on services. It was also recommended that customer service hours be to 8am-12pm Monday-Thursday with a payment drop-box system located within City Hall for payments outside those hours. Payment drop-boxes are standard in many cities. This would help reduce costs to the enterprise funds while maintaining service levels.

4. Forgive $1.2M Sewer "Loan" to General Fund. Although repayment is not scheduled until FY 2027-28, the Committee recommends full forgiveness of this loan. It is also recommended that the City review the contract with Syserco and pursue Syserco for overcharges and lack of promised savings. SmartMeters delivered no net cost savings, increased expenses, and introduced new cybersecurity risks.

5. To ensure transparency and accountability, the Public Works Director should be designated as the single lead for Capital Improvement Projects – both to manage timelines and funding - to ensure project completion and financing accountability. It is recommended a monthly or quarterly report be provided to the City Council. The report should include:
o Status of each active project
o Costs spent to date
o Budget vs. actual comparison
o Timeline and any delays
o Funding sources and remaining needs
Agenda Item Number 5
Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

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6. Eliminate Tiered Water Rates and Rate Increases until a compliant cost-allocation model (with time tracking) is in place. It is recommended that the City postpone the upcoming July 1, 2027 rate increase and remove tiered pricing to September 1, 2027 to allow the financial ad hoc committee to review smart meter data to determine impact (minimal or not) to the enterprise fund. Allowing the committee the time to review and provide accurate data regarding removal of tiered rate impacts not only helps to restore public trust, but it is a show of good faith to the community that this committee is reviewing all options.

7. It is recommended that the Committee continue in its role to be advocates for the ratepayers and represent the ratepayers at Council meetings. It is requested that Enterprise Fund financial decisions should be presented to the Committee for review and recommendation before going to Budget Committee and/or City Council.

Phase 2 – January 1, 2017 – June 30, 2027

8. Major Cost Allocation Reforms:
o Direct bill all contracts and salaries/benefits based on time tracking. o Adjust shared costs (utilities, yard, etc.) by actual FTE usage. o Eliminate double-charging (e.g., determine accurate fees associated with a single combined water/sewer bill).
o Remove non-ratepayer costs (homeless cleanup, holidays, grants, conferences). o Annual true-up via audit with refunds or additional payments. o Reconcile for vacant positions and new hires. Charging for vacant positions is unfair to ratepayers and recommended the need to adjust allocation methods, such as when there are vacant positions.

9. Assume Contractor Management is included in any direct-billed administrative FTEs.

10. Issue RFP for Utility Billing. City staff can research RFPs issued by other California cities of similar size and adapt one for Sebastopol’s specific needs (combined water/sewer billing for ~3,000 customers, 6 bills per year). The goal is to determine whether outsourcing is cost-effective. Issuing the RFP does not commit the City to outsourcing; it provides data and options for future Council decision-making.

11. Forensic Audit. An audit could be conducted to determine if past budgets reconciled over/under payments to the enterprise funds and review vacant position overcharges. Recommendation of a forensic audit is not implying fraud, but to determine correct allocation of charges to the enterprise funds.

12. It is also recommended that an outside consultant would not be required for cost allocation as time tracking data would determine the cost allocations. Once employee time tracking is implemented, the actual timetracking data will provide the factual basis for all cost allocations.

13. It is recommended that Public Works assess how new development affects the sewer system and implement proactive solutions, including:
o Establish a Developer Fee Schedule to generate dedicated funding for necessary sewer system upgrades required by new growth.
o Develop a realistic funding and infrastructure timeline ensuring sewer and water system upgrades are completed before new development comes online.
o Address the broader issue of Sebastopol’s aging sewer infrastructure, which drives high costs for ratepayers and represents a major source of energy waste.

INFRASTRUCTURE / OPERATIONS AD HOC SUBCOMMITTEE RECOMMENDATIONS (Greg Dabel and Oliver Dick) Agenda Item Number 5
Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

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The Infrastructure/Operations Ad Hoc Subcommittee conducted hands-on assessments through multiple facility walking tours, detailed review of the Sewer Master Plan, analysis of Public Works staff time allocation, evaluation of the Morris Street pump station, and review of water quality practices.

The goal of the Infrastructure/Operations Ad Hoc Subcommittee is to conduct in-depth, hands-on analysis of the city's water and wastewater infrastructure and operations to support long-term sustainability, regulatory compliance, and effective capital planning for the Enterprise Funds.

Key recommendations to City Council:

1. Receive and file the full Infrastructure/Operations Ad Hoc Subcommittee report, including all supporting data from:
o Infrastructure recorded walking tours (video links attached) o Sewer Master Plan repair priorities
o Tracked Public Works staff hours (water vs. sewer)
o Morris Street pump station flow rates and electrical usage during rainfall events o Water quality analysis

2. Direct staff to incorporate the subcommittee’s findings and prioritize recommendations into:
o The Sewer System Master Plan Update (currently being prepared by GHD Inc). o The Water System Master Plan Update (currently being prepared by GHD Inc). o The FY 2026-27 Capital Improvement Plan (CIP), with particular emphasis on the highest-priority sewer line repairs and pump station improvements
o Future budget development and ongoing operational reporting to the EFOC

3. Prioritize funding in the FY 2026-27 CIP and future budgets for the top-priority sewer main rehabilitation projects identified in the Master Plan and during field tours.

4. Prioritize funding in the FY 2026-27 CIP and future budgets for the top-priority sewer main rehabilitation projects identified in the Master Plan and during field tours.

5. Direct Public Works staff to implement improved tracking and reporting of maintenance staff time allocation between water and sewer systems. This will better support accurate cost allocation and Proposition 218 compliance.

6. Request staff to evaluate and report back on potential upgrades or operational improvements at the Morris Street pump station to reduce inflow and infiltration (I&I) during wet weather events. This will help lower longterm treatment and energy costs.

The committee as a whole review the recommendations from both subcommittees.

ITEMS OF EFOC COMMITTEE CONSENSUS:

The Committee was in consensus that the items listed below were key items for consideration in the upcoming budget discussions:

Finance
• City should not use any of the Clearsource cost allocation plans and should not use them in the future • Employees should track time for water/sewer to accurately charge their time • Eliminate tiered water prices until we have data to determine true costs • Refunding of attorney’s fees to the general fund
Infrastructure
• Focus on I & I to reduce additional costs incurred when it rains Agenda Item Number 5
Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

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• Grant seeking for CIP projects
• (more of a finance item but this was a big one for both subcommittees) City should start charging rate payers the 3% fees when they pay with credit card instead of eating the cost FISCAL IMPACT:

There is no additional fiscal impact associated with receipt of this informational item.

CONCLUSION AND NEXT STEPS: The Enterprise Fund Oversight Committee recommends that the City Council:
• Receive and file this report and its recommendations; • Discuss the recommendations as part of the FY 2026-27 budget adoption process CITY COUNCIL ACTION: This is an informational item only. Recommendations to the Council from the Enterprise Fund Oversight Committee could be considered during budge hearings.

ATTACHMENT(S):
• Finance and Billing Ad Hoc Committee Full Report/Presentation • Infrastructure/Operations Ad Hoc Committee Full Report APPROVALS:

Department Head Approval: Approval Date: 5/21/26
CEQA Determination (Planning): Approval Date: N/A
The proposed action is not a project under the California Environmental Quality Act (CEQA) Administrative Services (Financial) Approval Date:

Costs authorized in City Approved Budget: ☐ Yes ☐ No  N/A Account Code (if applicable) ___________________________ City Attorney Approval: Approval Date: N/A
City Manager Approval: Approval Date: 5/21/26
Agenda Item Number 5
Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

Key Areas for Cost Allocation Discussion
1)Contract Services - City Attorney, City Engineer,
2)Finance/Administrative Services
3)Public Works
4)City Council
5)City Manager
6) Vacant Positions, Projected v. Actual Expenses
and Cost Allocation
7)Tiered Rates
Key Propositions and State Laws
Prop 218 (1996)
California Proposition 218, passed in 1996, mandates that local water and sewer rate increases cannot exceed the cost of providing services, prohibiting revenue for general government use.

Prop 26 (2010)
Passed in 2010, California Proposition 26 amended the state constitution to reclassify many regulatory fees as taxes, requiring a 2/3 supermajority vote by local governments rather than a simple majority
. It restricts fees that address broad environmental or public health impacts, often impacting water and sewer fees if they exceed the specific cost of service.

Key details regarding Prop. 26 and water/sewer fees include:
● Definition of a "Tax": Under Prop. 26, charges that do not directly benefit the payer, but rather the general public (e.g., environmental mitigation), are considered taxes.
● Impact on Water Utilities: The measure was designed to stop "hidden taxes" on water, utilities, and other services.
● Exceptions: It does not apply to:
○ Specific user fees (e.g., a fee for a specific, direct water service). ○ Fees imposed as a condition of property development.
○ Property-related fees already covered by Proposition 218. ● Legal Burden: Local governments must prove that charges are not taxes, and that fees are no more than necessary to cover reasonable costs. 1 Agenda Item Number 5
Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

What Must Be Done to Be Prop. 218 and Prop. 26 Compliant 1) Move all contracted services - Legal, Engineering, Consultants - to direct billing with invoices tracking to show expenses are for Water and Sewer only.
2) Move all salaries and benefits for Finance, Council, City Manager, Public Works to Direct Billing. (Currently double billing for Public Works Salaries in Cost Allocation Plan & Direct Bill).
3) Correct FTE positions to reflect historical data and departmental budget narratives. According to the 2014/2015 budget, Finance should have 1.5 FTE between Water and Sewer. This would be .75 FTE for Sewer and .75 FTE for Water. Currently, Finance allocates 75% or 3 FTE To Water and Sewer - .1.5 FTE for Sewer and 1.5 FTE for Water - which has resulted in significant overcharging to Water and Sewer Ratepayers and subsidization of the General Fund, which is illegal.

Public Works 2026 time tracking showed 3 FTE between Water and Sewer.

This would be 1.5 FTE for Sewer and 1.5 FTE for Water. Public Works Management .25 FTE Sewer and .25 FTE Water. City Manager and Council Time need to be tracked.

Review budget narratives from 2014-2024 to see job responsibilities for the City versus Water and Sewer. The Budget Narratives for the various City Departments show the full scope of job activities and show how much responsibility is for Water and Sewer in comparison to job functions that serve the City's general function and administration. Very little mention of Water and Sewer can be found in any job descriptions.
4) Reduce Departmental Allocation percentages for shared expenses to appropriate amounts. Finance has 1.5 FTE out of 4 FTE, this is 37.5% of the department. The Allocation for shared expenses should be 18.75% for Water and 18.75% Sewer. Public Works has 3.5FTE out of 12 FTE, which is 30%. The Corporate Yard shared Cost Allocation would be 15% Water and 15% Sewer.
5) Remove any Departmental Costs that do not relate to Water and Sewer.
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Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

6) Use actual expenses to determine transfer of funds out of Water and Sewer funds to the City's General Fund.
7) Adjust salary and benefit costs when positions are vacant. Recent examples are vacant City Manager and Vacant Director of Public Works. 6) Calculate the amount the City has overcharged Ratepayers since 2016 when the City failed to reduce the Cost Allocation percentage in the Finance Department when the Finance Department doubled in size but had the exact same amount of work for Water and Sewer as they did prior to the increase in Department size.
7) Calculate the amount the City has overcharged for Contract Services and repay the Water and Sewer Enterprise Funds. Calculate any refunds due to Water and Sewer Ratepayers due to vacant positions. Calculate any refunds due to Water and Sewer Ratepayers as when Cost Allocation transfers were not based on actual expenses.
7) Do not increase water rates in July 2026. Remove Tiered Pricing. 3 Agenda Item Number 5
Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

CONTRACT SERVICES -
PER PROP. 218 (1996) AND PROP. 26 (2010)
City Cannot Profit from Contract Services
1) All contract services such as Contract Attorney and Contract Engineer must be direct billed to the Enterprise Fund. If not, the City is using the difference between the contract amount and the amount expensed to the Enterprise Fund as profit to supplement other general services that do not directly benefit the Ratepayer. This is illegal.
2) The city may apply an administrative fee to process the invoice and documented staff time to manage the contract. This must be documented. 3) No contract services should be included in an allocation plan. 4) Per Ana, the City made a $588,057 profit from ratepayers (FY 2021-2024) by overcharging from what was billed to Water and Sewer through the Cost Allocation Plan v. what was actually billed by the Engineering consultants.

Engineering
FY 21
Allocated $214,063
Billed 79,853
$134,210 profit 2021
FY 22
Allocated 259,904
Billed 259,904
$6676 profit 2022
FY 23
Allocated $251,946
Billed $78,613
$173,333 profit 2023
FY 24
Allocated $288,047
Billed $14,200.11
$273,838 profit 2024
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Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

5) Legal Expenses. Prior to 2024, Larry McLaughlin served as City Attorney and City Manager. Records show that no significant legal action has occurred between 2015 and 2025 except for a suit by River Watched, which was not billed to the Sewer Enterprise Fund. Well 4 is in an on-going lawsuit but 2012 Rate Study shows there was a separate Well 4 litigation fund of $117,586 in 2012. Legal fees have been consistently charged to ratepayers; no backup documentation exists for fiscal years 2015-2024.

Legal fees were reasonable and in-line with other comparable institutions. There is no real contest around fees while Larry McLaughlin served in the role as City Attorney. 6) After McLaughlin retired, the City contracted an attorney. The City does not have a Legal Department, it is all contracted services. At this point, the legal fees for Water and Sewer rose dramatically even though there was no litigation for Water and Sewer. 7) In Public Records Request from July 10, 2025, it stated FY 2024/25 ratepayers were charged $51,618 in legal fees. Billing records show that only $13,850 were actually billed by attorneys.
8) From information from an Enterprise Oversight Committee, the Finance Department showed an allocation of $184,587 for legal fees for FY 2024/2025. Records still show that only $13,850 were actually billed by attorneys. 9) For FY 2024/2025, Ratepayers were overcharged by $170,737. Clarification has been received to what was actually allocated.
8) For FY 2025-2026 $189,263 was allocated. I have requested the attorney bills and thus far it is $9651.50.

SOLUTION: MOVE ALL CONTRACTED SERVICES TO DIRECT BILLING AND TRACK TIME TO PROCESS INVOICES AND MANAGE CONTRACTS. REFUND RATEPAYERS OVER CHARGES FROM LEGAL AND ENGINEERING CONTRACTS. 5 Agenda Item Number 5
Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

Finance/Administrative Services
A History and Why Expenses Increase by 300% in 9 years
Billing fees in 2015 was $306,989 for Water and Sewer. Billing fees in 2024 were $944,971 - rising over 3 times in a 9 year period while the number of accounts remained the same.
1) The root of this dramatic increase is how the Cost Allocation plan was never adjusted when the Finance Department increased its size from 2014-2016. When the Finance Department added new employees, it should have DECREASED its allocation to Water and Sewer. The amount of account and billing work is STATIC for Water and Sewer. The amount of customers remain more or less the same over a 20 year period. With more employees increasing the budget for the Finance Department, the Cost Allocation should have been adjusted downward.
2) From 2014-2024, Finance allocated 71-75% of its total budget to Water and Sewer.
3) In FY2014/ 2015, there were only 2 FTE in Finance - a Director and Junior Accountant.

In 2014/2015 a 75% allocation to Water and Sewer equaled 1.5 FTE. All the billing and HR responsibilities for Water and Sewer was completed with 1.5 FTE. 4) In 2015, Finance hired a third FTE, yet Finance continued to allocate 74% of its budget to Water and Sewer even though the number of bills and PW employees did not increase. At this point, the allocation should have been reduced to reflect 1.5 FTE in a 3 FTE Department. Thus in 2015, the allocation should have been 50% reflecting a 1.5 FTE dedicated to Water and Sewer. (3 FTE minus 1.5 FTE equals 1.5% or 50% of the staff).
5) In 2016/2017, Finance added another hire bringing the department total up to 4 FTE. This is a doubling of employees from 2014. The number of utility customers remained the same and remains the same. At this point, the finance department should have reduced their allocation to Water and Sewer to 37.5% to reflect 1.5 FTE out of a total of 4 FTE.
6) The failure to adjust the allocation, resulted in massive overcharging of customers.

See below a detailed accounting below:
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City Council Meeting Packet for June 2, 2026

This Data represents the Finance Department's Budget and Includes the Cost Allocation Rate used, the payment from the General Fund, the payment from the Water Enterprise Fund, the payment from the Sewer Enterprise Fund and the Finance Department's total budget.

In all instances, the General Fund pays considerably less than the Enterprise Fund even though the majority of work done by the Finance Department is in General Services for the City.

FY 2015/2016 General Fund Water Sewer Total Budget
74% CAP Used $124,340 $180,332 $175,586 $480,258
If the allocation was reduced to 50% to reflect an increase in staff by 1 FTE, then the allocation to water and sewer should have been $240,129. By keeping the allocation static, The City overcharged by $115,789.

FY 2016/2017 General Fund Water Sewer Total Budget
72% CCAP Used $152,425 $222,566 $216,709 $606,800
In 2016/2017, finance added another new hire bringing the total FTEs to 4. The allocation should have been reduced to 37.5% to reflect the 1.5 FTE dedicated to Water and Sewer.

Accounts remained static. A 37.5% allocation charge to Ratepayers would be $227,550.

The City overcharged by $211,725.

FY 2017/2018 (don’t have budget) - Estimate $232,897.50 overcharge (10% increase) FY 2018/2019 (don’t have budget) - Estimate $256,187.25 overcharge (10% increase) FY 2019/2020 (don’t have budget) - Estimate $281,805.97 overcharge (10% increase) FY 2020/2021 (don’t have budget) - Estimate $309,986.57 overcharge (10% increase) NOTE: Budget for Finance doubles in 4 Years. Yet, the number of water accounts remains static.

FY 2021/2022 General Fund Water Sewer Total Budget

74.62% CAP $306,073 $456,110 $444,107 $1,206,290
If the allocation was reduced to 37.5% to reflect 1.5 FTE out of 4 FTE for the entire Finance Department, the Ratepayer cost should be $452,358.75.

The City overcharged by $447,859.

FY 2022/2023 General Fund Water Sewer Total Budget
Finance $339,720 $509,078 $495,682 $1,344,480

74.73% CAP
If the allocation was reduced to 37.5% to reflect 1.5 FTE out of 4 FTE for the entire Finance Department, the Ratepayer cost should be $504,180.

The City overcharged by $500,580.
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Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

FY 2023/2024 General Water Sewer Total Budget

71.6% CAP $397,919 $508,319 $494,942 $1,401,180
If the allocation was reduced to 37.5% to reflect 1.5 FTE out of 4 FTE for the entire Finance Department, the Ratepayer cost should be $525,442.50
The City overcharged by $477,818.50.

From 2015 - 2024 the City overcharged the Ratepayers at minimum $2,845,489 (a final number will be available once all budgets are analysed) due to the fact the finance department failed to adjust its allocation to reflect 1.5 FTE out of 4 FTE.

SOLUTION: ALL SALARIES AND BENEFITS FOR FINANCE SHOULD BE DIRECT BILLED. ADJUST TO 1.5 FTE FOR BOTH WATER AND SEWER. .5 FTE ADMIN TECH AND .25 ACCOUNTANT FOR WATER AND .5 FTE ADMIN TECH AND .25 ACCOUNTANT FOR SEWER.

CHANGE FINANCE WATER & SEWER MODEL FOR EFFICIENCY.
1) ADMIN TECH CUSTOMER SERVICE HOURS 8-NOON MONDAY - THURSDAY AND ADMIN FUNCTION 4-5 MONDAY-THURSDAY.
2) SEPARATE PO BOX FOR WATER AND SEWER.
3) PAYMENT BOX IN CITY HALL THAT IS AVAILABLE WHEN CITY HALL IS OPEN.
4) EYE ON WATER APP VIDEOS ON CITY WEBSITE.
5) CONSIDER CLOSING COMMERCIAL WATER OPERATION IF THE
EXPENSES ARE GREATER THAN THE PROFIT.
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Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

Finance/Administrative Services
Is 1.5 FTE Justified? Or is 1 FTE/ 25% Allocation More Accurate? 75% is not Justified - Ratepayers Need to Be Reimbursed for Overcharging The Water and Sewer Bill is Combined.

Ratepayers should not be charged 2x for sending out the same bill. 1) Per Prop 218 and Prop. 26, Ratepayers are only required to pay for services directly related to Water and Sewer service. In the Finance Department's self produced budget job description and workload produced for the City budgets, Water and Sewer are rarely mentioned. In the below description only 1 out of 48 tasks mentions water and sewer. These narratives are present in all budgets from 2014-2023. 2) Finance Department is responsible for Finance, Human Resources and Risk Management and performs many general services tasks for the City that are not related to Water and Sewer. For instance, the 2023 - 2024 City budget is 287 pages long.

Water and Sewer account for 7 pages (pages 184-191) or 2.43% of the budget. Is

2.43% a more accurate reflection of the Finance's Department time spent on Water and Sewer?
3) Given the wide range of tasks outlined below. Is 1.5 FTE justified? 4) 3 FTE or 75% of the Finance budget expensed to Water and Sewer is not legally defensible.
5) 1 FTE or 25% of the Finance Department budget seems more appropriate if billing and customer service are streamlined to 1 administrative assistant at .75 FTE and 1 senior administrator at .25 FTE. If customer service hours are reduced to 8-noon M-T with an additional hour from 4-5 for mail collection and payment processing, that would be an assistant at .5 FTE. This would leave an additional .25 FTE for the assistant. The senior position could have 520 hours per year, which seems adequate given the fact that bills are only generated 6x per year, the Enterprise budget is only produced quarterly, contract invoices are less than 10 and Public Works is the only department directly associated with Water and Sewer and their time should be allocated at 35%. 6) Water and Sewer bills are sent out 6x per year and are combined. The current allocation model bills each Enterprise fund separately. This would appear to be a double charge as 1 or 1.5 FTE would be taking care of both bills at one time. 9 Agenda Item Number 5
Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

SOLUTION: Attribute 1 or 1.5 FTE Salary and benefits to Direct Billing. Allocate 25% or

37.5% Department Overhead to Water and Sewer combined, meaning 12.5% OR

18.75% Water and 12.5% OR 18.75% Sewer.
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Agenda Item Number 5
City Council Meeting Packet for June 2, 2026

See the below narrative from the Finance Department for FY 2015/2016 Finance Department
The Finance Department provides support in three distinct areas: Finance, Human Resources, and Risk Management. This department is responsible for the control of the City’s financial records; City payroll functions; Employee Benefit and Personnel administration; and Risk Management Insurance administration.

MANDATED
Finance
Prepare Annual City Budget
Prepare Audited Financial Reports
Respond to Public Records Requests
Prepare Federal, State & County Reports
Prepare semi-monthly Payroll
Administer Bond Requirements
Administer Animal & Business Licensing
Human Resources/Risk Management
Ensure compliance with federal and state-mandated requirements Administer City’s labor and employee relations program
Administer employee medical leaves
Administer compensation and benefits
Administer hiring processes
Serves as one of two City-assigned REMIF Board Members
CORE
Finance
Administer Utility Billing Operation
Process Accounts Payable/Receivable
Process Cash Receipts
Perform Treasury Management
Perform Financial Analysis
Administer and Maintenance ongoing of the City’s User Fee Schedule Administers the Street Lighting Assessment District, and the Woodstone Assessment District
Maintains the Fixed Asset inventory
Human Resources/Risk Management
Provide notice to employees of medical leave and benefits rights under law Resolve return to work, risk management, and safety issues with supervisors and 11 Agenda Item Number 5
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managers
Coordinate with oversight and benefit administration organizations Design and maintain classification and compensation structures Provide direction to payroll staff for legal compliance for 100 employees 41 Compile and maintain official personnel records for all employees Maintains and manages the City’s Payroll, Personnel, Medical, and Worker’s Compensation records
Creates and implements various employee benefit / insurance programs and policies as needed
Updates job descriptions for all departments
Administration of required AB1825 Anti-Harassment training for City staff Serves as the insurance and benefit administrator for City staff Manages Public Employee Retirement System program
Administration of the Health, Life, Short Term and Long Term Disability insurance programs
Administration of the City’s self-funded Dental and Vision insurance programs Administers the City’s Child Care benefit program
Administers City’s 457 Deferred Compensation programs
Administers FMLA Family Medical Leave Act leave of absences for employees Administers the City’s Medical After Retirement programs Administers the COBRA program for former employees and their dependents Administration of HIPAA privacy act
Assists employees with all of the City’s benefit programs Responsible for managing REMIF’s Risk Management programs including City insurances for Property Insurance, Liability Insurance, Vehicle Insurance, Earthquake & Flood Insurance, and Boiler Insurance
Responsible for managing REMIF’s Employee Insurance programs including Health Insurance, Life Insurance, Short Term and Long Term Disability Insurance, and Voluntary Life Insurances
Responsible for management of REMIF’s Workers Compensation Insurance coverage
Responsible for maintaining REMIF’s list of all property insured for the City including City buildings, City property and the City’s vehicle and equipment fleet Staffing levels for this department were increased mid-way during the 2012/13 fiscal year.

For the 2015/16 fiscal year, the department employed three full-time employees, which matched our staffing levels in calendar year 2009. Even with three full-time employees, our staffing level remains below the high mark of four full-time employees, which the department maintained for most of the 1980's and 1990's. The Director continues to 12 Agenda Item Number 5
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recommend that staffing levels be increased to four full-time employees.

Major Accomplishments in 2014/2015:

Responded to and provided information for numerous Public Records Requests.

Continued to assist with employee negotiations for the three employee union organizations.

Continued to assist the City Manager with multiple salary and job description modifications.
42 Relocated Finance Director’s office to the east-side of City Hall building.

Relocated City Hall’s server to upstairs office.

Redesigned and made improvements on the City’s annual budget.

Contacted a consultant firm to obtain Citywide I.T supports.

Objectives for 2015/2016:

Upgrade the City’s financial software
Update cell tower lease agreement slated to expire June 2016 Collaborate with City Clerk’s Office in updating Personnel Resolution Enhance and invest into staff development
Continue to improve the City’s annual budget
Continue to streamline for efficiency with year-end close processes

ADMINISTRATIVE SERVICES (FINANCE) DEPARTMENT
Narrative for the City's 2023- 2024 Budget (pages 69-71) Accountant/Analyst (Confidential)

1.00 FTE
Administrative Services Director

1.00 FTE
Administrative Technician

1.00 FTE
Accountant 1.00 FTE
• Prepare Annual City Budget
• Prepare Audited Financial Reports
• Respond to Public Records Requests
• Prepare Federal, State & County Reports • Prepare bi-weekly Payroll • Administer Business Licensing
• Ensure compliance with federal and
MANDATED - state-mandated requirements
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• Administer compensation and benefits
• Administer hiring processes
CORE
● Administer Utility Billing Operation
● Process Accounts Payable/Receivable
● Process Cash Receipts
● Perform Treasury Management
● Perform Financial Analysis
● Administer and Maintenance ongoing of the City’s User Fee Schedule ● Administers the Street Lighting Assessment District
● Maintains the Fixed Asset inventory
● Design and conduct recruitment and selection procedures ● Assist outside HR Advisor to provide notice to employees of medical leave and benefits rights
under law
● Coordinate with outside HR Advisor return to work, risk management, and safety issues with
supervisors and managers
● Coordinate with oversight and benefit administration organizations

DISCRETIONARY
● Coordinate the provision of mandatory supervisory training, and of non-mandatory supervisory and managerial training related to legal compliance in employment practices ● Assist outside HR Advisor to confer and coach employees at all levels to identify and resolve workplace concerns
● Compile and maintain official personnel records for all employees ● Maintain, update and disseminate employment-related City policies and procedures

DISCRETIONARY
• Perform Internal/External Audits
• Support Grant Award Administration
• Support City Council Meetings
• Support review Contractual and Lease Agreements
• Assist with performance of Feasibility and Cost-Benefit Studies • Act as the City’s California Public Employees Retirement System liaison Major Accomplishments in 2022-23:

Received the Distinguished Budget Presentation Award (7th time recipient) Received the Certificate of Achievement for Excellence in Financial Reporting (6thTime recipient)
Selected a Financial Advisor to assist the City in revenue enhancement, and/or debt refinancing opportunities
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Issued RFP/RFQ for Water Rate Study and Human Resource
Developed and Implemented city-wide budget module
Completed Utility User Tax (UUT) ballot
Goals and Objectives for 2023-24:

To fill the remaining vacancy in the Administrative Services Department Issue RFP for Cost Allocation Plan (CAP)
Create internal service funds
Create 115 Pension Trust
Assist and support Public Works & Engineering with water rate study Assist Police with email conversion
Convert citywide email domain name from dot.org to dot.gov for security reasons Continue to be the recipient of the Distinguished Budget Presentation Award Continue to be recipient of Certificate of Achievement for Excellence in Financial Reporting
Performance Measurements
Unqualified opinion on annual comprehensive financial statements Percentage (100%) of staff indicating an understanding of internal controls, such as time reporting and adhere to purchasing & travel reimbursement policies Percentage (99.9%) of accurate tax reporting forms (W-2s and 1099s) Percentage (5%) utility billing collection rates and number of shut offs Percentage (0%) of revenues subject to audit or review
Public records act requests fulfilled
Number of reviews and audits conducted
Timely submission of required reports:

State Controller’s report
● Street Report
● State Compensation Report
● Annual Maintenance of Efforts (Proposition 172)
● Single Audit
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Public Works
An Accurate Allocation is Needed
1) Public Works is a critical department for Water and Sewer. They perform routine water testing, sewer line flushing, maintenance and repair. It is important to get the Public Works allocation correct as they are the single City Department most directly associated with Water and Sewer Service.
2) Until recently, Public Works has not tracked their time spent on Water and Sewer.

The Public Works Department has 10 laborers who work 100 hours per week. Time tracking from January and February 2026 indicate that Public Works Employees spend approximately 20% of their time on Water and Sewer. The new Public Works director says that might be higher, perhaps 30%. This would translate to approximately 2-3 FTE in terms of labor and perhaps .25 FTE in terms of Management. (SEE Public Works Narratives from previous budgets which show the huge range of tasks - parks, roads, holiday decorations, bathroom repair and management, homeless cleanup, government buildings, public spaces - that Public Works performs outside of Water and Sewer Tasks.)
3) Using the new data, it would appear that 1.5 FTE in Water and 1.5 FTE in Sewer and a 15% allocation of the Corporate Yard for Water and 15% allocation of the Corporate Yard for Sewer would be an appropriate allocation for Public Works. 4) Currently, Public Works has 2.85 FTE in Water and 2.3 FTE in Sewer as a distinct line item in the budget. For FY 2024/2025, Water had $280,890 in salaries, Sewer had $253,365 in salaries.
5) In addition, there are Salaries for Public Works in the Cost Allocation Plan. Water had $309,277 in Public Works fees via the Cost Allocation Plan and Sewer had $217,364 fees via the Cost Allocation plan.
6) Ratepayers are being overbilled and doubled billed for Public Works Salaries. 7) The amount allocated to the Corporate Yard needs to be reduced to reflect actual usage by Water and Sewer.
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SOLUTION: Move all Salaries and Benefits to Direct Billing and remove salaries from Cost Allocation Plan. Track time to get an accurate FTE account which will most likely be between 2-3 FTE. Reduce amount of attributed expenses of Corporate Yard to reflect the actual usage by Water and Sewer. Read Budget narratives to get a full scope of Public Works Time spent on Water and Sewer.
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City Council
What Percentage is Legal and Accurate
Per Prop. 218, Cost Allocation for City Council is highly regulated and must be documented.

Key Considerations:
● Direct Benefit Rule: Revenue from water/sewer fees must be used strictly for the service itself and cannot be redirected to unrelated city projects like parks, police, or general fund expenses.
● Proportional Cost: Charges must reflect the actual, proportional cost of providing the service to the parcel.
● Permissible Transfers: Transfers from utility accounts to the general fund are only allowed for valid reimbursements of services actually provided to the utility by the city.
● Audit Trail: If Council time is charged, it must be supported by documentation showing the time was dedicated to utility-specific tasks (e.g., rate setting, infrastructure decisions).
● Using enterprise funds for general council duties unrelated to water/sewer management violates the prohibition against using these funds for general governmental services.
1) City Council spends very little time on Water and Sewer. Until the recent formation of the Enterprise Oversight Committee, Council only addressed Water and Sewer at Budget meetings one time per year and with the occasional targeted project like the Syserco Loan. At most, Council spends 4% of their time per year on Water an d Sewer.
2) For FY 2024-2025, Ratepayers paid $102,674 for Council Time. For 2025-2026, $104,658 is allocated for Council Time. This is not an accurate reflection of time spent on Water and Sewer and needs review.

SOLUTION: ANALYSE AGENDA ITEMS AND REDUCE COUNCIL TIME TO REFLECT ACTUAL TIME SPENT ON WATER AND SEWER. REDUCE ALLOCATION IN COST ALLOCATION PLAN.
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City Manager/City Clerk
What Percentage is Legal and Accurate
1) Using the same Prop. 218 guidelines, the City Manager and City Clerk must prove that their allocation of their time toward Water and Sewer is accurate. As there have been little to no management of the Water and Sewer Enterprise Accounts over the last 20 years and time has not been tracked by the City Manager and the City City, it is impossible to know what the proper allocation would be. 2) The Budget Narratives of City Manager and City Clerk show a huge amount of responsibilities that are for general City management and general City business. 3) Looking at Council Agendas, Water and Sewer take up less than 4% of the agenda items.
4) For FY 2024-2025, Ratepayers paid $280,228 for City Manager.. For 2025-2026, $286,063 is allocated for City Manager. This is not an accurate reflection of time spent on Water and Sewer and needs review. In addition, the City did not have a City Manager for the majority of 2025 and part of 2026.
5) For FY 2024-2025, Ratepayers paid $101,163 for City Clerk. For 2025-2026, $103,725 is allocated for City Clerk. This is not an accurate reflection of time spent on Water and Sewer and needs review.

SOLUTION: Analyze Budget Narratives, Council Agendas and track time to see what an accurate percentage would be for City Manager/ City Clerk. Reduce the Allocation accordingly which reflects documented time. In addition, Ratepayers need to be refunded the excess fees for 2024/2025 and 2025/2026 due to the vacant City Manager Position and inflated Allocation Rate. 19 Agenda Item Number 5
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Vacant Positions
How Are Ratepayers Reimbursed
1) The City often has vacant positions such as the recent vacancies of the City Manager and the Director of Public Works. When the City is not paying salaries for vacant positions, how are Ratepayers reimbursed?
SOLUTION: TRACK VACANT POSITIONS ASSOCIATED WITH THE ENTERPRISE FUNDS AND REDUCE THE AMOUNT EXPENSED TO THE ENTERPRISE FUNDS.

RATEPAYERS NEED TO HAVE REDUCED CHARGES FOR THE CITY MANAGER AND DIRECTOR OF PUBLIC WORKS VACANCIES.

PROJECTED V. ACTUAL EXPENSES

CITY NEEDS TO BASE TRANSFER ON ACTUAL EXPENSES
1) The City uses projected expenses for budget forecasting. This is a standard procedure. At the end of the fiscal year, the City has the actual expenses. Per Prop. 218, the City should only charge Ratepayers for actual expenses.

SOLUTION: AT THE END OF EACH FISCAL YEAR, ADJUST COSTS FOR ENTERPRISE FUNDS TO MATCH ACTUAL EXPENSES. REFUND ANY EXCESS CHARGES.
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City of Sebastopol Tiered Rates - Illegal
1) The City of Sebastopol implemented a tiered rate system in 2024 without providing any financial documentation for the rates. This is in violation of Prop. 218, prop. 26 and AB 1827.
2) The City of Sebastopol does not buy water and therefore does not have increased water costs if more water is used.
3) To run the City of Sebastopol's Water and Sewer system, the majority of costs are fixed and therefore not dependent on usage.
4) The City of Sebastopol's infrastructure is old and has not been maintained. In fact, Master Water and Sewer plans are being updated for the first time in 20 years.

Thus any incremental damage by higher water users would have already occurred and not be the financial liability of current users.
5) As discussed in this document, many aspects of the Ratepayer expenses managed by the City need review and adjustment. Ratepayers will be receiving a refund for overcharges by the City. Therefore accurate pricing is unable to be calculated until the adjustments are made in Ratepayer Expenses.
6) To capture increased energy costs at Peak PG&E time, analyze what increases would be legal for water use between 4pm and 9pm.

SOLUTION: AS A TEMPORARY SOLUTION UNTIL THE CITY EXPENSES ARE UPDATED, DO NOT CHARGE TIERED PRICING AND USE THE LOWEST TIER. IN

THE FUTURE, IMPLEMENT HIGHER TIERS FOR WATER USAGE DURING PEAK ENERGY COSTS AS DETERMINED BY PG&E PEAK PRICING.
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AB 1827 (2025) Tiered Rate Pricing - City Must Provide Proof AB 1827 provides a "safe harbor" for water agencies to continue implementing conservation-focused, tiered pricing, as long as they can demonstrate the costs are proportionately higher for high-volume users
Tiered water pricing in compliance with California Assembly Bill (AB) 1827 (2024) allows water agencies to charge higher rates for higher water usage, provided that those rates are based on the actual, incremental costs of supplying that water (e.g., peak demand costs, extra infrastructure) rather than purely on conservation incentives To justify tiered rates under AB 1827 with existing infrastructure and no purchased water, a city must provide defensible, data-driven evidence that higher usage tiers cause higher, proportional costs (e.g., peak demand infrastructure stress, increased pumping/treatment). The rates cannot be arbitrary, even for conservation, and must adhere to Prop 218.

Key Requirements to Justify Tiers:
● Cost-of-Service Analysis: The city must prove with data that higher usage tiers specifically cause higher costs, not just that users consume more. ● Peaking Factors: AB 1827 allows justifying higher rates based on peak usage demand or maximum potential water use. Even with built-out infrastructure, higher, simultaneous demand might require higher pumping rates or faster capacity depletion. ● Proportionality: The rate per unit in higher tiers must be proportional to the cost of serving that specific level of demand.
● Documented Data: The city must have studies showing that, for example, Tier 3 water costs more to deliver than Tier 1 due to the need for peak-load management.

How Much More Can They Charge?
● No Fixed Amount: AB 1827 does not set a specific multiplier. ● Cost-Based: The amount is limited by the documented incremental cost. If, for example, peak demand forces the city to run extra pumps (energy costs) or treat water differently, those specific additional costs determine the rate hike. ● Legality: The rates must not exceed the proportional cost of providing service. If the city cannot prove that high-tier users cost significantly more to serve than low-tier users, high, punitive, tiered rates are likely to be found unconstitutional. ● UC Agriculture and Natural Resources +4
●
Essentially, the city needs a technical, evidence-based report (often using American Water Works Association (AWWA) standards) to justify the price difference. 22 Agenda Item Number 5
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Tiered Rates - Time of Use Metering and PG&E Pumping Costs A city or water agency in California can charge higher rates for water used during PG&E peak hours (typically 4 pm–9 pm) under Assembly Bill 1827 (AB 1827), provided the rate structure is directly supported by cost-of-service data
AB 1827, which went into effect on January 1, 2025, allows water agencies to pass on the incrementally higher costs of providing service—such as higher electricity rates for pumping—to customers who create that peak demand.

Here is the breakdown of how this works in accordance with California law:

1. The Legal Basis (AB 1827 & Prop 218)
● Proportional Cost: Proposition 218 requires that fees for water service not exceed the proportional cost of service to a parcel.
● AB 1827 Authorization: This law clarifies that agencies can allocate costs based on "projected peak water usage". It explicitly permits agencies to consider the higher costs associated with specific times of high water demand.
● Justification: The city cannot simply charge more because it is "conservation-oriented." The higher, tiered, or time-of-use rate must be supported by evidence showing it actually costs more to pump, treat, or deliver water during those peak hours.

2. The Relationship to PG&E Rates
If the city pumps water directly into the system or fills tanks during the 4 pm–9 pm peak window, it incurs higher electricity charges from PG&E. AB 1827 authorizes the city to pass these specific "incremental" energy costs onto the customers who are using water during that time.

3. Requirements for the City
● Data-Driven: The city must have data proving that the costs of operating the water system are higher during these specific hours (4 pm–9 pm). ● Time-of-Use Metering: The city must be able to accurately measure water usage during those hours for the rate to be deemed fair and proportional. ● Not a Penalty: The higher rate must reflect actual cost-of-service, not a penalty designed merely to discourage usage.

Summary
AB 1827 strengthens the ability of municipalities to implement Time-of-Use (TOU) rates that align with utility peak pricing (like PG&E's 4–9 pm window). However, the city must conduct a study to prove that the rate increase directly matches the increased cost of operating the system at that time
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1. Recommended Cost Allocation Plan : NONE OF THE CURRENT SCENARIOS - See attached documents regarding "Key Points" and "Current Cost Allocation Model" a. The Financial Sub-Committee does not recommend any of the scenarios presented as the current models are not best practice and are not supported by documentation. The Finance Sub-Committee recommends moving Engineering Contract to Direct Billing and reducing Financial Administrative Department allocation by 50% based on historical modeling. All contract billing should be moved to direct billing for Prop. 218 compliance.

2. Recommended forgiveness of the $1.2M Sewer Enterprise "loan" to the General Fund.
a. The Sewer Fund had no fiscal oversight. Cost Allocation expenses rose by 75% between 2014/2015 and 2019/2020 with no oversight by City Manager or City Council. This drove the Sewer Fund into deficit with no justification for such an extreme rise in costs. Cost Allocation amount in 2014/2015 was $476,690. Cost Allocation amount in 2019/2020 was $837,433. There is no data to justify this rise.
b. The Financial Sub-Committee recommends forgiveness of Loan from General Fund to Sewer Fund as this loan was caused by the gross mismanagement of the Sewer Fund by the former City Manager including the Syserco Loan, which lacked proper due diligence and oversight, not performing regular 3-5 year updating of Cost Allocation Plan, not basing the Cost Allocation Plan on time tracked hours, which is the standard method of proof in court cases involving Prop. 218. Syserco Loan added $280,796 annually to Enterprise Funds as 75% of cost was allocated to Enterprise Funds. While the loan was promised to reduce expenses, Finance/Administration expenses INCREASED by $206,200 or 29% from FY 2021 to 2022! See Cost Allocation for Finance Department at the end of the document. The SmartMeters yielded a net increase of expenses for the Water Enterprise Fund with no discernible energy or cost savings to counteract the loan payment and increase in Finance charges.
c. Syserco loan for SmartMeters was done without competitive bidding as Staff used California Government Code Section 4217, the state law that authorizes public agencies to use energy-savings performance contracts to pay for efficiency and infrastructure upgrades using the savings generated by the project itself, rather than upfront capital. Savings have not materialized. d. It looks like the City of Sebastopol paid double for SmartMeters when compared to the recent purchase by Sweetwater Springs for similar meters. Sweetwater looks like they got a better service contract.
e. The Citizen Survey never indicated that SmartMeters would incur debt and increase Water and Sewer Bills.
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f. City should consider suing Syserco or getting loan forgiveness for Syserco Loan as cost savings never materialized and City was overcharged by 30-50% for SmartMeters. In addition, SmartMeters provided zero cost savings for the City and might have increased costs. The switch to digital meters leaves the City vulnerable to cyberattacks, which are more aggressive due to the rapid progress of Artificial Intelligence. A case could be made that a small City like Sebastopol would have been significantly better off with analog meters given the increased Cybersecurity risks.
g. The aged sewer system of clay pipes is the biggest source of waste within the current system. The clay pipes incur rain water during storms which is then pumped (energy usage) and processed (energy usage and cost) at the Santa Rosa substation. The volume triples during storms, which is hugely expensive and uses substantial amounts of energy. If the Council wanted to remedy a source of waste, money should have been borrowed to fix the clay pipes, which would have shown real savings and conserved energy.

3. Refund Enterprise Funds $350,354 for excessive Attorney Fees for 24/25 and 25/26. There is no data to justify charged amounts. No invoice records, no historical precedent, no reasonable comparison to other districts. a. Prop. 218 and Prop. 26 explicitly state that the City cannot make a "profit" or use Ratepayer Fees as a tax. The City charged Ratepayers $184,587 for legal fees for FY 2024/2025. Records show that only $13,850 were billed by attorneys for services rendered to Enterprise Funds. That means the City made a profit of $170,737. For FY 2025-2026 $189,263 was allocated. I have requested the attorney bills and thus far shows $9651.50 was billed resulting in a $179,617 profit for the City. A total refund of $350,354 is owed to the Ratepayers/Enterprise Funds for this excessive allocation of Attorney's Fees. Prop. 26 mandates the burden of proof is on the City. The City has no records to document these fees. In addition, the Ratepayers are paying an excessive amount for Administrative Fees and any handling of attorneys contracts or project management should be included in the Administrative Fees Ratepayers are already paying.

4. Implement Time Tracking Software for Employees to Record Time. There are many applications that charge a small monthly fee for time tracking. Time tracking is the way to avoid lawsuits and to bill Water and Wastewater correctly and to be most Prop. 218 and Prop. 26 compliant.
a. Staff has never implemented any time tracking to account for salaries and hours attributed to Water and Sewer. Any institution that is billing a variety of entities should be tracking time and attributing it accordingly. The City of Sebastopol has at least 3 billing pools: the General Fund, the Wastewater Fund and the Water Fund. Employees should be attributing their time to one of three Funds. b. Springbrook, the City's current administrative software provider, offers time tracking that is integrated into the system the City already uses. See flyer.

City can easily implement time tracking using Springbrook. c. Time tracking can also be used in Council Meetings to determine where Council spends the majority of their focus and time.
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d. Time tracking might also help City Staff and Council see where staff time is spent and help the City decide how to allocate staff time to meet priorities. e. Here is a list of potential software vendors addition to Springboard:
https://connecteam.com/pricing/
https://www.infor.com/industries/public-sector#solutions https://www.getharvest.com/time-tracking/time-tracking-app-for-government https://www.timetac.com/en/government-organizations/

5. Recommended to implement the following measures to be transparent and within Prop. 218 and Prop. 26 Compliance:
a. Direct billing of contracted services, including any contract services such as Attorney, Contract Engineer, Consultant and all other contractors. This needs to be done immediately.
b. Implement Time Tracking for any department that bills the Water or Sewer Enterprise Fund. This includes Finance/Administration, Public Works, City Manager, City Council, City Clerk. This has never been done by the City. This is the standard for Prop. 218 Compliance and meets the burden of proof for Prop.

26. Time Tracking should denote if the employee time is spent on Water or Sewer.
c. Correction of FTE allocations based on Time Tracking. Assume that part of the Salaried Employees job includes managing Contracts so that no additional time will be added for contract management.
d. Correct managerial Cost Allocation based on time tracking for City Manager, City Council and City Clerk. City Council cannot justify 61% of its time on Water and Sewer.
e. Adjust shared departmental costs (utilities, office supplies, equipment) based on Departmental FTE. Corporate yard is one example of shared costs. f. Direct bill salaries and benefits based on Time Tracking. Remove Salaries and Benefits from Cost Allocation.
g. Eliminate redundancy. The Finance Department sends out a single Water and Sewer bill. The total time it takes to send out a bill needs to be split between the two accounts. Currently, it is doubled.
h. Eliminate any costs that are not of benefit to the ratepayer and the delivery of water and management of wastewater such as cleaning up homeless encampments, subsidizing holiday decorations, grants to local nonprofits, conference costs for government employees. Costs that serve the General City Services and General City Government must be eliminated to be Prop. 218 compliant.
i. When the actual annual expenses are confirmed by an Audit, either additional payment by the Enterprise Fund to the General Fund or a Refund from the General Fund to the Enterprise Fund must be made and recorded. The Audit will reveal either an overpayment or underpayment by the Enterprise Funds. This must be reconciled.
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j. If the Adopted Budget contains vacant positions, a refund must be made to the Enterprise Funds to reflect money transferred via Cost Allocation during the Fiscal Year, which was not spent on the employee as the position was vacant. k. Re-evaluate the Cost Allocation and Direct Salaries any time there is a new hire or vacant position that relates to Water and Sewer Enterprise Funds.

6. Include Contractor Management and Invoice Processing in any FTE Administrative Salaries assigned to Water and Sewer.
a. It should be assumed that if an Administrator has a direct billed FTE salary assigned to the Water and/or Sewer Enterprise Fund that part of their job is managing contractors and paying contractor invoices as is already the standard practice for contracts paid by the Enterprise Funds.

7. Issue Request for Proposals (RFP) for outside utility billing services. a. The Finance Department sends out 6 bills per year to approximately 3000 Water and Sewer Customers. The bill is combined Water and Sewer. b. Billing is extraordinarily expensive and appears to be burdensome to the Finance Department. Bids have been received that are under $200,000 per year, which is significantly less expensive than the current system. In addition, the City's Finance Department has had problems receiving different types of payment. c. Outside vendors can provide the same service for less money, with more transparency and more accountability.
d. Transferring to an outside vendor would free up the Finance/Administrative services for other work for the City.
e. Reach out to other cities to see if they have done an RFP.

8. Issue Request for Proposals (RFP) for a comprehensive forensic audit of the Enterprise Funds.
a. The Committee recommends engaging an independent forensic auditing firm to perform a detailed examination with the following scope: 1) Review past Adopted and Audited Budgets to make sure that the Enterprise Accounts are reconciled for any over or underpayment to the General Fund and 2) Make sure the Ratepayers were not charged for vacant positions.
b. Per prop. 218, the City can only charge Ratepayers for ACTUAL expenses. c. Cost Allocation Transfers happen quarterly based on the ADOPTED budget. If the ADOPTED budget is more than the ACTUAL Expenses, Ratepayers are owed a refund. This has not been done for 2024/2025 and 2025/2026. It is unclear if this was ever done, meaning that Ratepayers have been consistently over charged with the overcharge being recorded via City Budgets, which is a violation of Prop. 218. This is a stark example of how the Cost Allocation Plan does not adhere to Prop. 218 compliance.
d. See Email Exchange with Finance Director Kwong at end of Document.

9. Designate Public Works Director as Lead for Capital Improvement Projects and Capital Improvement Financing.
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Improvements. The City needs to assign a single person to follow Enterprise Capital Improvements from month to month and year to year and to also follow available capital to make sure that Capital Improvements can be completed on a timely basis. The City's Capital Improvement Lead should work with the Enterprise Oversight Committee to ensure Capital Improvements are identified, funded and completed within a reasonable time line.

10. Recommended that all financial decisions be presented to Enterprise Oversight Committee prior to Council and that Enterprise Oversight Members represent Ratepayers in Council Meetings
a. Council has an extraordinary amount of data and topics to track. Historically, Council has spent very little time analyzing and following Water and Sewer Capital Improvements or the Enterprise Funds and their Budgets. This has led to problematic decisions like the Syserco Loan.
b. The Enterprise Oversight Committee focuses solely on the Water and Sewer Enterprise Funds and Capital Improvements. They follow and track Water and Sewer and represent the Ratepayer in decision making. The Enterprise Oversight Committee is typically most versed and historically informed on the budgets and on-going infrastructure needs.

11. Remove Tiered Water Pricing and do not raise water prices until the new Cost Allocation Model supported by time tracking is in place. This has no impact on the General Fund.
a. Tiered Water Rates are illegal unless tied to costs. The City has not documented any costs in relationship to the current tiered rates. There is no data to support the tiered rates. Per attorney discussion, tiered rates are illegal if there is no documentation. During pricing discussions, members of the public made several requests for data which justified tiered rates. None was presented. City is open to class action lawsuit as there is no documentation to support tiered rates and the previous Cost Allocation Model is not Prop. 218 compliant due to lack of time tracking of employee time.
b. If the City would like to use Tiered Rates, they could base it on Time of Use when PG&E rates are higher which is 4pm to 9pm. SmartMeters should allow this type of designation.

12. Eliminate Consultant for Cost Allocation Model
a. Prop. 218 is easy to implement with employee time tracking. Once employees track their time, the Enterprise Committee can establish a Cost Allocation Model based on data from employee Time Sheets. This is best practice and is legally valid.
b. Retain Enterprise Oversight Committee to update Cost Allocation Model on an annual basis.

13. Work with Public Works to Clarify the Impacts of New Development on the Sewer System to develop
a. Fee Schedule for Developers to ensure that there is enough funding for System Upgrades needed to support new Development.
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b. City needs to determine 1) How many MORE units can be built under CURRENT capacity and 2) an ideal number of development units we want to see if the future (ie 150 ADUs, 350 hotel rooms, 2500 more bedrooms - dispersed across housing types such as single family, apartment, ADU, etc.)
c. ADUs under 750 cannot be charged for increased demand and wear on the sewer system either through higher hook up fees or impact fees.

Demand, wear and tear on the infrastructure system created by ADUs must be offset by fee increases in other areas. This should be taken into consideration as developers build more ADUs in conjunction with single family and town homes and as individuals add ADUs onto existing properties.
d. Under Proposition 218, a property with two units can be charged a higher fixed water meter charge than a single-family home if the utility can demonstrate that the two-unit parcel imposes a higher proportional cost on the system. The fee must directly relate to the cost of providing service, and higher usage or demand justifies higher charges. It is recommended that each unit on a property be charged a Water Meter Fixed charge to help fund the wear and tear on the Sewer and Water system from ADUs.
e. Create a funding and infrastructure timeline that is viable for system upgrades to happen prior to development so the sewer and water systems are robust enough to support new customers.
f. Create funding model so capital improvement costs are proportional to benefit to property.
g. Sebastopol's aged sewer system is costly to consumers and probably the biggest source of energy waste as it takes in rain water during high storm periods which is then pumped (energy usage) and processed (cost) at the Santa Rosa station.
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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:
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From a Public Records request, attorney's fees range from $8754 to $51,618 from FY 2017 to 2024. In FY 2024/2025 $184,587 was charged to Ratepayers for legal fees. FY 2025-2026 $189,263 was allocated. There are no significant legal challenges to the Water or Sewer activities which would warrant a 250% increase. Note: Attorney services are contracted and would have invoices to match services. No invoices have been produced that match these fees.

Email Correspondence with Finance Director Kwong re: Audited v. Actual Budgets and the Cost Allocation Plan:

Director Kwong's Statement
Perhaps the grid below may be helpful in illustrating this inquiry. Up until FY 2024–25, the City has annually trued up the cost allocation plan using actual, audited expenditures. Any variance between budgeted allocations and actual costs was addressed through this annual true-up process as you can see in highlighted yellow. I am providing the Finance Department as an initial example to confirm that this approach meets your needs before proceeding with other departments.

With the current cost allocation plan approved by the City Council, no separate true-ups were performed for FY 2024–25 or FY 2025–26 and cost allocation happens based on the adopted budget. However, the FY 2026–27 cost allocation plan (the Option A placeholder, as discussed by the Budget Committee and the Enterprise Fund Oversight Committee) is based on FY 2024–25 actual expenditures, which effectively serves as the true-up for FY 2024–25.

Kate Haug Response:

How is the difference between the Adopted and Actual Budget reconciled? For instance, for 20/21, the General Fund owes the Enterprise Fund $90.395 for the difference between Adopted and Actual Budget.

Does the General Fund make a transfer for the $90,395 back to the Enterprise Funds to reconcile the difference?
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The Third Quarter Water Fund Budget with Notations Showing Duplication 9 Agenda Item Number 5
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The Third Quarter 2026 Wastewater Fund Budget
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Cost Allocation Comparisons
2014/2015 Cost Allocation Breakdowns which clearly show what percentages of City Administration are allocated to Water Enterprise and Sewer Enterprise:
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Current Allocation Structure which shows a dramatic increase in Council Time and City Clerk Time allocated to Enterprise Funds without any data to back it up. In 2014/2015 City Attorney was inhouse and was allocated at 8%. In 2025, Attorney is Contract and allocated at 29%. Contract attorney should be direct bill and there is no justification for a significant increase. 2014/2015 Budget Shows 3.5 FTE attributed to Public Works 12 Agenda Item Number 5
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This is reflected in the Budgets for Water and Wastewater:
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There is a dramatic increase in the Cost Allocation Budget from 2014/2015 to 2019/2020. A 66% increase for Water
and a 75% increase for Wastewater with no explanation or data to support. See following charts:
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This is the current model Costs Allocation Model. 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.

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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.
a. 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.
b. 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 property-related services do not exceed the cost of providing them—by using automated, digital time-tracking systems to precisely allocate employee hours to specific, fund-restricted 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.” Agenda Item Number 5
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Public works hours tracked by Eric Billing.

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EFOC – Finance
Sub Committee
• Financial analysis of
Water & Sewage
Funds within Cost
Allocation-City of Sebastopol
• By Kate Haug & Mary
Meihaus
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• 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.

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Historical List
of Legal
Charges
• From Adopted Budget, Legal Fees for
2014/2015 & 2015/2016 were:

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• From a Public Records request, attorney's fees range from $8754 to $51,618 from FY 2017 to 2024. In FY 2024/2025 $184,587 was charged to Ratepayers for legal fees. FY 2025-2026 $189,263 was allocated. There are no significant legal challenges to the Water or Sewer activities which would warrant a 250% increase. Note: Attorney services are contracted and would have invoices to match services. No invoices have been produced that match these fees.

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Email Correspondence with Finance Director
Kwong re: Audited v. Actual Budgets and the Cost
Allocation Plan:
• Director Kwong's Statement
• Perhaps the grid below may be helpful in illustrating this inquiry. Up until FY 2024–25, the City has annually trued up the cost allocation plan using actual, audited expenditures. Any variance between budgeted allocations and actual costs was addressed through this annual true-up process as you can see in highlighted yellow. I am providing the Finance Department as an initial example to confirm that this approach meets your needs before proceeding with other departments.
• With the current cost allocation plan approved by the City Council, no separate true-ups were performed for FY 2024–25 or FY 2025–26 and cost allocation happens based on the adopted budget. However, the FY 2026– 27 cost allocation plan (the Option A placeholder, as discussed by the Budget Committee and the Enterprise Fund Oversight Committee) is based on FY 2024–25 actual expenditures, which effectively serves as the true-up for FY 2024–25.

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Kate Haug Response
•How is the difference between the Adopted and
Actual Budget reconciled? For instance, for
20/21, the General Fund owes the Enterprise
Fund $90.395 for the difference between
Adopted and Actual Budget. Does the General
Fund make a transfer for the $90,395 back to
the Enterprise Funds to reconcile the
difference?
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• Cost Allocation Fees are the costs associated with
supporting City Employees who work on Water and
Sewer. These fees include office supplies, toilet
paper, utilities, computer software and other costs
associated with hosting an employee in an office.

Contractors include their office expenses in their
billing and are reflected on their invoices paid by
the City. Therefore any person who is a contractor
should not be in the Cost Allocation Plan. All
contractors should be direct billed.

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Cost Allocation Comparisons
• 2014/2015 Cost Allocation
Breakdowns which clearly
show what percentages of
City Administration are
allocated to Water Enterprise
and Sewer Enterprise:

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Current Cost
Allocation
• Current Allocation Structure
which shows a dramatic
increase in Council Time and
City Clerk Time allocated to
Enterprise Funds without any
data to back it up. In
2014/2015 City Attorney was
inhouse and was allocated at
8%. In 2025, Attorney is
Contract and allocated
at 29%.
• Contract attorney should be
direct bill and there is no
justification for a significant
increase.

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2014/2015 Budget Shows 3.5 FTE attributed to
Public Works
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Budget Expenditures
•There is a dramatic increase in the
Cost Allocation Budget from
2014/2015 to 2019/2020. A 66%
increase for Water and a 75% increase
for Wastewater with no explanation or
data to support. See following charts:

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Top 4 Finance Committee Recommendations
• 1. Recommended Cost Allocation Plan: NONE OF THE

CURRENT SCENARIOS
• 2. Implement Time Tracking Software for Employees to Record Time. There are many applications that charge a small monthly fee for time tracking. Time tracking is the way to avoid lawsuits and to bill Water and Wastewater correctly and to be most Prop. 218 and Prop. 26 compliant.
• 3. Remove Tiered Water Pricing and do not raise water prices until the new Cost Allocation Model supported by time tracking is in place. This has no impact on the General Fund. • 4. Refund Enterprise Funds $350,354 for excessive Attorney Fees for 24/25 and 25/26. There is no data to justify charged amounts. No invoice records, no historical precedent, no reasonable comparison to other districts.

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DRAFT
Enterprise Fund Oversight Committee
May 2026 Progress Report to Sebastopol City Council
The Committee has taken walking tours of water and sewer facilities, met with public works staff and consultants, reviewed sewer/water masterplan, and scrutinized the Enterprise Fund budget. Representing ratepayers, our goals include assuring adequacy, safety, and capacity of water/sewer infrastructure, legal compliance, public transparency, and planning for long-term capital needs.

Committee Recommendations

1. Conduct study for purposes of accurately/fairly/reasonably allocating staff time/city overhead charges to the Enterprise Fund (in accordance with Prop 218 requirements).

The current allocation formulas are based on estimates developed ten years ago and have not been updated or adjusted to re�lect changes. The Committee believes the current cost allocation methods may not survive legal challenge. The Committee also believes the City has historically overcharged the Enterprise Fund for city ‘overhead’ (possibly by as much as $1 million in 2026/27). Areas of overcharge concern include legal, contract, �inance and admin services, city council, and vacant positions. Any overcharge starves the Enterprise Fund of money for vital capital improvement projects.

2. Complete and fully implement new cost allocation (based on study above) in 2027/28 city budget.

3. Set aside any ‘savings’ realized from the study (above) and reserve for capital improvement projects.

Costs for capital improvement projects exceed current income projections (based on current cost allocation deductions from Enterprise Fund). Any ‘savings’ realized by reducing overhead charges to the Enterprise Fund should be earmarked for capital improvement projects.

4. City staff should continue to seek and exhaust all grant opportunities for water/wastewater capital improvement projects but should not expect or rely on grants.

The city should set aside enough money each year to avoid drastic rate increases, bond measures, or parcel tax to pay for capital improvement projects.

5. Request staff to identify sources of wet weather in�low and in�iltration into sewer system. Prioritize and implement sewer upgrades or operational improvements to reduce rainfall intrusion.

Flow at the Morris Street pump station increases dramatically during storms (by almost 4x’s). Stormwater runoff does not need to be pumped or treated. Costs for pumping (electric) and treatment costs at Llano facility increase proportionately during rainfall events. Reducing rainwater intrusion will save hundreds of thousands of dollars annually and will reduce wear-and-tear maintenance costs.

6. Implement an Ordinance and instruct staff to enforce the removal of any household rainwater hookups to sewers.

7. Implement an accounting policy and system to add credit card bank fees to water/sewer bills.

When customers pay water/sewer bills with a credit card, banks charge the city a 2-3% fee. The city currently absorbs these bank fees which cost nearly $100,000 per year.

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INFRASTRUCTURE / OPERATIONS AD HOC SUBCOMMITTEE REPORT
Ad Hoc Committee to the Enterprise Fund Oversight Committee (EFOC) Dated: May 10, 2026

Infrastructure/Operations Ad Hoc Subcommittee of the Enterprise Fund Oversight Committee report out.

Executive summary of findings for city council
Water: The city aquifers are deep and well stocked, with some naturally occurring arsenic in the southernmost wells which is processed out and mixed with other city well water. Water is electrically pumped from these aquifers uphill to the two storage tank locations on the west of the city. Gravity is then used to provide water pressure.

While the city currently has adequate water supply, our aquifer pumps do not currently reach deep enough to take advantage of greater supply, and the well pumps are only in adequate mechanical shape. The city’s most important and heavily relied on well, pump 4 at the fork of Main and Petaluma, must be replaced and relocated. This site is also where substantial filtration for water quality occurs.

Most of the pipework is in adequate condition, some cast iron junctions are points of failure at EOL and need to be replaced.

Sewer: Much of the gravity fed sewer pipes are clay short sections with leaky joins. A small amount of the pipe has been replaced with PVC, more of this replacement needs to happen. The system is not well sealed, resulting in ingress of run-off water during winter rains. Sewage is pumped from the Morris street substation to the Llano Road vortex where it is processed by Santa Rosa at cost by volume. This substation is in good condition.

Because storm water enters the sewer system, ratepayers are paying for the processing of substantial extra sewage volume during the wet months. This infrastructure is in poor condition and not fit for purpose of supporting increased housing and commercial development without significant upgrade. Public works staff spend significant time pumping out with two pump trucks and keeping the system patched up and running.

Energy costs: Are significant with PGE electrical charges for operating the wells and sewer pump(s).

Staffing: 10 staff in public works working 10-hour shifts split between the general and enterprise fund, with specialists in water and sewer who sometimes have to be pulled away from infrastructure operations to clean up after homeless, vandalism of water supply etc.

While not in the scope of this committee, our poor-quality road surfaces arguably contribute to undersurface pipe deterioration and damage due to vibration and uneven load distribution.

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INFRASTRUCTURE / OPERATIONS AD HOC SUBCOMMITTEE REPORT
Ad Hoc Committee to the Enterprise Fund Oversight Committee (EFOC) Dated: May 10, 2026

Also, not in scope but relevant are storm drains which are general fund. This system is in poor condition and has major issues with pipe blockage. Because it is causing storm water spills into sewer lines this is creating additional enterprise fund expense.

Our subcommittee Recommendations to City Council:

1. Receive and file the full Infrastructure/Operations Ad Hoc Subcommittee report, including all supporting data from:
o Infrastructure recorded walking tours (video links attached) o Sewer Master Plan repair priorities
o Tracked Public Works staff hours (water vs. sewer)
o Morris Street pump station flow rates and electrical usage during rainfall events
o Water quality analysis

2. Direct staff to incorporate the subcommittee’s findings and prioritize recommendations into:
o The Sewer System Master Plan Update (currently being prepared by GHD Inc).
o The Water System Master Plan Update (currently being prepared by GHD Inc).
o The FY 2026-27 Capital Improvement Plan (CIP), with particular emphasis on the highest-priority sewer line repairs and pump station improvements
o Future budget development and ongoing operational reporting to the EFOC

3. Prioritize funding in the FY 2026-27 CIP and future budgets for the top-priority sewer main rehabilitation projects identified in the Master Plan and during field tours.

4. Prioritize funding in the FY 2026-27 CIP and future budgets for the top-priority sewer main rehabilitation projects identified in the Master Plan and during field tours.

5. Direct Public Works staff to implement improved tracking and reporting of maintenance staff time allocation between water and sewer systems. This will better support accurate cost allocation and Proposition 218 compliance.

6. Request staff to evaluate and report back on potential upgrades or operational improvements at the Morris Street pump station to reduce inflow and infiltration (I&I) during wet weather events. This will help lower long-term treatment and energy costs.

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INFRASTRUCTURE / OPERATIONS AD HOC SUBCOMMITTEE REPORT
Ad Hoc Committee to the Enterprise Fund Oversight Committee (EFOC) Dated: May 10, 2026

Report
Aquifer, wells and water supply
All the wells are drawing from the same Wilson Grove aquifer beneath the city. The vast aquifer has different geographical areas requiring different treatments. The southern area has natural (not pollution caused) arsenic which requires treatment at wells 6 and 7 before distribution.

All four city wells are located south of 12/Bodega
Well 4 is the oldest well and the main work horse for the city, producing 40% of supply/1000 gallons per minute/400 feet deep. This well has substantial filtration systems for sand, past dry cleaning fluids and gas station pollution mitigation. This well is nearing end of life and is a major CIP concern.

Well 4 needs to be redrilled at least 50 feet away from the current well with a new pump.

The pump is above ground so easier to work on than the other well pumps, which are all submerged.

Well 8 (corner of Jewell Avenue) was made more technically efficient as part of the Syserco project but is shallow and can only be run for 2 hours at a time, then takes 2 hours to refill, needs to be drilled deeper. Well 6 is located behind El Coronel restaurant, pumping and filtering the natural arsenic.

Well 7 is at the extreme south of the city east of 112 and also filters arsenic. (Well 5 is not used and has long been out of service).

The water supply works by well pumps surfacing aquifer water which is pumped to two large city reservoir locations on the west side of the city at Pleasant Hill Road (newer 1980’s tanks) and 1st street (slightly older).

The pumps work on a demand system, only scheduled to run in order to keep the reservoirs full. There is enough water for seven days supply in these tanks if the pumps are not working. The reservoirs are inspected and cleaned internally every five years. (Next year is inspection time again).

When you turn on a faucet sometimes water is pumping west en route to fill the reservoirs. Once the reservoirs are full the water is gravity fed back down into the city and the pumps are not operating. There are two water zones. Well 4 and 7 fill the 1st street reservoir, well 6 and 8 fill pleasant hill. Water is blended/mixed once in the underground pipe infrastructure.

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INFRASTRUCTURE / OPERATIONS AD HOC SUBCOMMITTEE REPORT
Ad Hoc Committee to the Enterprise Fund Oversight Committee (EFOC) Dated: May 10, 2026

Water pressure. The fire hydrants have different color-coded zones. Most are blue/1500 gallons per minute. In the area around Dowd Drive the hydrants are green denoting lower flow. The water pressure for the city is acceptable.

Regarding water supply, the city is required to have twice the capacity needed for current properties. We are within a couple of hundred before maximum number of properties is hit which has CEQA and ADU construction implications.

Sewer
All CoS sewage routes to the Morris street pumping station via gravity. The one uphill exception is handled by Green Valley lift station, which pumps sewage up to the top of pleasant hill to then gravity feed down to Morris Street.

Morris Street station pumps out to a vortex at Llano Road, after which the county takes responsibility. Morris Street is powered by electric grid/PGE and has a backup CAT diesel generator. The Syserco deal modernized some of the control mechanisms.

The sewer system’s biggest cost concern is clay pipe, of which there is a lot.

Total is 26~28 miles of pipe with most of the clay pipe installed in the 1970’s, joined every 3 feet. Camera inspection is performed internally every 5 years. There are many illegal city wastewater tie ins off gutters etc. which add to everyone’s sewer costs. This combined with storm water run-off abrades and degrades the pipe.

The city’s best sewer pipe is pvc sdr35 which was installed in the ‘90s.

A loop system is needed at Lynch Road, and isolation valves installed throughout the system so that failed pipe sections can be isolated.

Underground infrastructure
The Storm drain system is not part of enterprise, they are general fund, along with roads. While discussing them here is out of scope the infrastructure is old and leaky, resulting in rainwater infiltrating the sewer system. This is an enterprise issue because adding significant amounts of water to the sewage pumping results in massively higher sewer treatment costs.

Example: Morris Street typically flows 40000 gallons per day. During the recent heavy rain, the figure was 1.5 million gallons of mostly rainwater. PGE pumping costs and treatment costs are very substantial.

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INFRASTRUCTURE / OPERATIONS AD HOC SUBCOMMITTEE REPORT
Ad Hoc Committee to the Enterprise Fund Oversight Committee (EFOC) Dated: May 10, 2026

Major financial costs and concerns
The leaking and failing general fund-maintained storm drain system has a major impact on enterprise infrastructure wear and tear and transmission power costs, which translate to higher rate payer bills.

Illegal city wastewater tie ins off gutters etc. add more to everyone’s sewer costs.

Substantial clay pipe replacement with pvc sdr35 or better is needed with new isolation valves installed, and loop systems to provide alternate water supply routes.

Well 4 requires relocating with new drilling and a new pump, a substantial CIP project.

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