From: Kate Haug
Sent: Tuesday, July 7, 2026 4:07 PM
To: Zulema Higgins <[email protected]>
Cc: Mary Gourley <[email protected]>; Kyle Falbo ; Laura Hagar ; Lee Mathias
; Mary Cone ; Stephen Zollman
<[email protected]>; Jill McLewis <[email protected]>; Neysa Hinton <[email protected]>; Windsor, Amie
; hausnetwork ; Phill
Carter <[email protected]>; Sandra Maurer <[email protected]> Subject: Water and Wastewater Forecast - The Responsible Way to Freeze Rates and Remove Tiers - Public Comment 7/7
Dear Council Members and City StaƯ,
Please find attached a comprehensive analysis of Water and Wastewater Budgets with detailed data that shows what happens if you freeze rates and remove tiers without also following the EFOC Finance Committees Grand Jury recommendations. It also shows you what happens when you do follow the recommendations. The outcome of following the recommendations is significant and a win/win for Council, the City, and Ratepayers. If the recommendations are followed, the City can avoid legal issues by freezing rates and removing tiers, move toward Prop. 218 and Prop. 26 compliance, satisfy the Grand Jury restitution of $5,500,000, fund identified infrastructure needs, and keep rates static through the year 2031.
As I have written on numerous occasions, the EFOC never recommended freezing water rates and removing tiers in isolation. Our recommendations were meant to be taken in tandem similar to instructions for building a table with 4 legs. You need to attach all 4 legs for the table to function. To freeze rates and remove tiers, you need to follow the rest of the recommendation for the process to work.
I hope you review the attached document. I think it is compelling and provides data that should inform the Council's decision tonight.
Thank you,
Kate Haug
EFOC
Sebastopol Water Fund — Rate-Freeze Scenario Analysis | Page 1 Water and Westwater Enterprise Fund — Rate-Freeze
Scenario/Rate-Tier Removal Analysis
Fiscal Impact of July 7, 2026, Proposal to Freeze Rates and Eliminate Tiers Prepared for July 7, 2026, City Council meeting · Five-year forecast through FY2030-31 Prepared by: Kate Haug, Mary Meihaus, Lee Mathias
Executive Summary
On July 7, 2026, the City Council will consider suspending the tiered water rate structure and freezing water rates at their 7/1/2025 levels. This analysis models the five-year fiscal consequences of that action and compares it to two alternatives: continuing the currently adopted rate schedule (the baseline) and adopting the rate freeze together with the cost-side reforms recommended by the Enterprise Fund Oversight Committee (EFOC).
The central finding is straightforward. Freezing Water rates and removing the rate-tiers in isolation leaves frozen revenue to be overtaken by steadily rising costs. The fund's operating margin collapses to a deficit by FY2028-29, and reserves fall from roughly $2.4 million today into a deficit of about -$0.1 million by FY2030-31 — below the City's 25% reserve policy floor and continue into the red. This is the same pattern of revenue reduction that drove the Water Operating Fund to a negative balance in FY2023-24 and forced the emergency rate study and steep rate increases of 2024.
Rate relief is not the problem — doing it alone is. When the freeze is paired with the EFOC's recommended cost-allocation reforms, the attorney-fee refund, and the shift of the Syserco energy loan to the General Fund, the fund remains healthy — above the reserve policy in every year of the forecast. The reforms supply the savings that make the revenue reduction sustainable.
Taken together, the changes recommended here move both the Water and Sewer enterprise plans toward Proposition 218 and Proposition 26 compliance with how central-government costs are allocated to the funds. They also provide sufficient revenue for the infrastructure repair the systems require, and they keep rates stable for the next several years — until there is enough time-tracking data to build a new, defensible Cost Allocation Plan and, on that foundation, a properly grounded new rate study.
One caveat is the unknown condition of the old clay sewer pipes. We have miles of pipe, and the replacement cost is high. The currently projected reserve in the Wastewater Enterprise Fund is large but still may not be high enough, once the city produces the Sewer Study.
If the proposed changes are adopted the city would have the added advantage of being able to present a plan compliant with the Grand Jury recommendation to restore $5.5MM to the Enterprise funds. The plan outlined here would total $5.5MM returned to rate payers over 6 years in addition to the savings rate payers realize from paying the lowest tier an having near-term rate increases suspended.
Sebastopol Water Fund — Rate-Freeze Scenario Analysis | Page 2 Figure 1. Water fund reserve under the three paths. The July 7 action alone (red) falls below the 25% policy floor; paired with the full EFOC package (green) it stays healthy.
Purpose and Background
The City of Sebastopol operates its water system as an enterprise fund, meaning water rates cover the cost of running, maintaining, and rebuilding the system. In 2024, following a period in which the water fund's reserves were drawn down to a deficit, the Council commissioned a rate study and adopted a multi-year schedule of rate increases to rebuild reserves and fund a substantial capital program.
The Enterprise Fund Oversight Committee (EFOC) is the City's citizen oversight body for water and wastewater operations. The EFOC has recommended eliminating the tiered volumetric rate structure (which the City Attorney has identified as legally vulnerable under Proposition 218) and freezing rate increases — but only as one part of a larger package that also:
• Reforms how central-government overhead is charged to the enterprise funds. 30% of administrative overhead would be allotted to the Enterprise Funds with 15% of identified departmental budgets attributed to Water and 15% of identified departmental budgets attributed to Sewer.
• Refunds $350,354 in attorney's fees the Committee contends were improperly charged. $130,867 would be restored to Water Fund. $219,487 would be restored to Sewer Fund. • General Fund repays Water Fund for previous Syserco Lease Payments of $843,965 over four years.
• Shifts responsibility for future Water Fund Syserco energy lease payments to the General Fund.
• “Forgiveness” of $1,200,000 “loan” from General Fund to Sewer Fund.
Sebastopol Water Fund — Rate-Freeze Scenario Analysis | Page 3 The action placed before the Council on July 7, 2026, adopts revenue reduction without the accompanying cost-side reforms. This analysis below quantifies what that distinction means for the water fund's solvency over the next five years.
The staff recommendation is to fix volumetric rates at $5.22. This $5.22 rate is used throughout the analysis below.
Staff Recommendations to Council for rate freezes for Water customers Source: 7/6/2026 Council Staff Report
Sebastopol Water Fund — Rate-Freeze Scenario Analysis | Page 7 The EFOC's Full Recommendation — the Responsible Alternative The EFOC did not recommend freezing rates and eliminating tiers as a standalone act of revenue reduction. It recommended that step only in conjunction with cost-side measures that bring the enterprise funds toward Proposition 218 compliance and recover money owed to ratepayers:
1. Reject the FY2026-27 Cost Allocation Plan and reform it toward Prop 218 compliance:
• Remove City Council time from the enterprise funds — no allocation to water or sewer. • Reduce the City Manager allocation to 30% of that department's budget. (15% to each fund)
• Reduce the Finance / Administration allocation to 30% of that department's budget. (15% to each fund)
• Cap in-house legal at $12,500 per enterprise fund (historically, charges never exceeded this).
• Move the engineering contract into Contracted Services (~$100,000 per fund) rather than carrying it as overhead.
2. Refund $354,000 of improperly charged attorney's fees to the enterprise funds.
3. Shift the Syserco energy-project loan to the General Fund. The City's no-bid decision to partner with Syserco Energy Solutions left water ratepayers paying as much as twice what comparable water systems pay. Under this action the General Fund assumes responsibility for that decision — taking over the $168,593 annual loan payment and repaying the water enterprise $843,965 for prior loan payments already made from water rates.
4. Institute time tracking to build a defensible, cost-of-service Cost Allocation Plan (meet Prop 26 requirements) before any new rate study is commissioned.
The cost-allocation reform is modest in its impact on the General Fund but decisive for the enterprise funds. The chart below shows the water fund's share of the four central departments the reform touches: City Council overhead is removed entirely, and the City Manager and Finance charges are cut to a defensible 15%-of-budget basis to each fund.
Figure 4. The EFOC cost-allocation reform (water fund share). Council overhead is eliminated; City Manager and Finance charges are reduced to a Prop 218-defensible level.
Sebastopol Water Fund — Rate-Freeze Scenario Analysis | Page 10 The concern for Wastewater Fund is therefore the reverse of the Water Fund. There is no depletion risk from a freeze; if anything, the current plan returns money to ratepayers while still leaving reserves well-funded for the capital program.
The current plan has $5.1MM in capital projects included. However, one caveat is the clay sewer pipe. The city owns 30 miles of gravity sewer mains. Since clay was the primary material used through the 1960s and 70s, we can assume most are clay pipes. The EFOC committee reported to council that the pipes are getting stormwater infiltration leading to increased pumping and treatment costs. Clay has a life expectancy of 30 -60 years so much of a 1960s era system is past that.
Replacement of the entire 30 miles depends on materials used but likely ranges from $16MM to $40MM. The sewer master plan when complete will give a better picture of cost and what the pace of repair needs to be.
Figure 6. The same cost-allocation reform applied to the wastewater fund. As with water, City Council overhead is removed, and the City Manager and Finance charges are cut to a Prop 218/26-defensible level.
Sebastopol Water Fund — Rate-Freeze Scenario Analysis | Page 11 Conclusion and Recommendation
Freezing water and wastewater rates and eliminating the rate-tiers is legitimate and, for the tiers, legally advisable objective — and it is welcome opportunity to return misallocated funds to ratepayers by eliminating rate tiers and freezing planned rate increases. Rate payers will get substantial savings in their water and sewer charges over the next couple of years.
But the modeling is clear that the revenue reduction cannot responsibly be adopted on its own.
Standing alone, it recreates the exact conditions — a collapsing operating margin and a depleting reserve — that produced the FY2023-24 crisis and the rate shock that followed. The City still faces a substantial capital program; it cannot simply cut revenue and leave the cost side untouched.
The fiscally and legally prudent path is the EFOC's full package of recommendations:
• Suspend the tiers and freeze the increases,
• At the same time reform, the Cost Allocation Plan toward Prop 218 compliance, • Refund the improperly charged attorney's fees,
• Direct charge legal and Engineering contract expense
• Move the Syserco loan payments to the General Fund.
• Repay the Water Fund $843,965 of prior Syserco loan payments over 4 years from the General Fund.
• Forgive the General Funds $1,200,000 “loan” to the Sewer Fund.
That combination delivers rate relief while keeping the water and wastewater funds above their reserve policy throughout the forecast. Adopting the freeze without those companion measures is half of the recommendation that creates the risk.
Taken together, the changes recommended here move both the Water and Sewer enterprise plans toward Proposition 218 and Proposition 26 compliance with how central-government costs are allocated to the funds. They also provide sufficient revenue for the infrastructure repair the systems require, and they keep rates stable for the next several years — until there is enough time-tracking data to build a new, defensible Cost Allocation Plan and, on that foundation, a properly grounded new rate study
If all recommendations are enacted, these actions show a good faith and responsible response to the Grand Jury findings and recommendations.
Prepared from the City's FY2026-27 Proposed Budget, the 2024 Raftelis Rate Study, the adopted 2024-2028 rate schedule, and the CIP Global Summary. All reserve figures are model outputs reconciled to the adopted budget; a companion Excel workbook contains the full scenario detail and formulas.