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CITY OF SAN BERNARDINO - REQUEST FOR COUNCIL ACTION
Dept: Water Department
Subject: Set public hearing for
November 17, 2004, at 4:00 p.m. for
review of Sewer Rate Study 2008.
From: Stacey R. Aldstadt
Date: August 26, 2008
MICC Meeting Date: September 15, 2008
Synopsis of Previous Council Action:
Resolution 82-201 setting rates effective June 1, 1992
Resolution 91-361 repealing Resolution 82-201.
Resolution 93-384 setting increased rates effective 01/01/94, repealing Resolution 91-361.
Resolution 95-367 setting decreased rates effective 09/21/95, repealing Resolution 93-384.
Resolution 98-12 amending Resolution 96-347 and repealing Resolution 95-367.
Resolution 2004-124 setting increased rates effective July 1, 2004,repealing Resolutions
96-347 and 98-12.
Ways & Means Committee Review August 20, 2008 of Sewer Rate Study 2008.
Recommended Motion:
Set public hearing for November 17, 2008, at 4:00 p.m. for review of Sewer Rate Study
2008.
Contact person: nnn Sh""kplfnrn
Phone: 'lRd_'l1Rd
Supporting data attached:
yes
Ward: All
FUNDING REQUIREMENTS: Amount:
Source: (Acct. No.) NIA (property assessment)
(A"d np""'ir1inn)
Finance:
Council Notes:
Agenda Item No.
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CITY OF SAN BERNARDINO
WAYS AND MEANS COMMITTEE REVIEW
Staff Report
Subject:
On July 15, 2008, the Board of Water Commissioners (Board) conducted a sewer rate workshop to
review the 2008 Sewer Rate Study performed by R. W. Beck, Inc., a nationally recognized
engineering and rate consulting firm. The study analyzed cost of service, developed revenue
requirements, and designed rates to meet the fmancial requirements of the sewer treatment facilities
operated by the Water Department. The Board voted unanimously to authorize submission of the
2008 Sewer Rate Study to Mayor and Common Council for adoption of a two-step rate adjustment,
approximating five percent (5%) each, to be implemented January 1, 2009 and January 1, 2010,
respectively.
Background:
The sewer treatment facilities are owned and operated by the Water Department. Sewer fees and
charges were last adjusted July 1, 2004. Since that time, there has been significant increases in costs
associated with sewer treatment; e.g., sludge hauling, state and federal environmental requirements,
laboratory testing, chemical costs, electricity, gas, master service agreement charges, wages and
benefits.
Ideally, sewer treatment rates should, at minimum, fund operations, maintenance, and debt service.
Our sewer treatment costs are projected to be higher than rate revenue. In addition, the projected
decrease in construction activity will result in capacity fee revenue less than that required to fund
necessary capital improvements. While the 2008 Sewer Rate Study proposes a five percent (5%)
annual adjustment over a five-year period to meet the requirements of sewer treatment facilities, we
are proposing only the above two-step rate adjustment at this time.
The sewer collection facilities are owned by the City and operated by its Public Services Department.
The City faces a requirement to increase existing videotaping of sewer lines and repair its aging
sewer line infrastructure. The additional trucks and crews necessary to maintain system growth and
reduce sewer overflows have contributed to its increased operation and maintenance costs. Water
Department staff assisted the Public Services Department in the development of a five-year strategic
plan designed to meet the requirements of the collection system with the least possible financial
impact on our customers. We are proposing a similar two-step rate plan for the collection system to
support this effort.
Financial Impact:
The total rate adjustment for both the treatment and collection system varies between 5.0% and
5.8% per year, based upon customer classification and usage characteristics. Please refer to the
attached bill comparison by class, as well as the attached adjustment comparison to other local
communities.
Recommendation:
It is recommended that the Ways and Means Committee authorize submission of the 2008 Sewer
Rate Study to Mayor and Common Council to establish a date for a public hearing and adopt a
resolution to adjust sewer treatment and collection charges in a two-step process to be effective
January 1, 2009 and January 1, 2010, respectively.
CITY OF SAN BERNARDINO - REQUEST FOR COUNCIL ACTION
Staff Report
Subject:
Set public hearing for Monday, November 17, 2008, at 4:00 p.m. in the Council Chambers of
City Hall to consider Sewer Rate Study 2008 and proposed adjustments to sewer treatment and
collection charges.
Background:
The Board of Water Commissioners approved submission of the Sewer Rate Study 2008 at their
regular meeting of July 15, 2008.
The Ways and Means Committee approved submission of the Sewer Rate Study 2008 at their
meeting of August 20, 2008.
Financial Impact:
None.
Recommendation:
Set public hearing for November 17,2008, at 4:00 p.m. in the Council Chambers of City Hall to
consider the Sewer Rate Study 2008 and proposed adjustments to sewer treatment and collection
charges.
Attachments: Staff Report - Board of Water Commissioners July 15,2008
Staff Report - Ways & Means August 20, 2008
Sewer Collection Strategic Plan
Sewer Rate Adjustment Bill Comparison
Sewer Rate Adjustment Comparison to Other Local Communities
CITY OF SAN BERNARDINO
MUNICIPAL WATER DEPARTMENT
BOARD OF WATER COMMISSIONERS
STAFF REPORT
TO: Stacey R. Aldstadt, General Manager
FROM: Don Shackelford, Director of Finance
SUBJECT: SEWER RATE ADJUSTMENT WORKSHOP
DATE: July 8, 2008
BACKGROUND:
The Mayor and Common Council of the City of San Bernardino is the governing body responsible
for setting rates for sewer treatment and collections. While the sewer treatment facilities are
managed by the Water Department (Department), the collection facilities are managed by the City's
Public Works Department (public Works). Sewer rates were last adjusted July 1, 2004.
In January 2008, the Department retained R. W. Beck (Beck), a nationally recognized utility
engineering and rate consulting fInn, to conduct a cost of service analysis, develop revenue
requirements, and design rates for the sewer treatment operations.
In June 2008, the Department met with staff from the City Manager's ofHce and Public Works to
discuss implementation of new sewer rates. Public Works requested the Department's assistance in
developing revenue requirements for the collection operations. The City Manager's ofHce suggested
it would be more efHcient to submit one presentation to Council for adoption of sewer rates for
both the treatment and collections operations.
The next step toward adopting new rates is an open dialogue with the Board of Water
Commissioners in a workshop designed to present and discuss information in support of the
proposed changes in treatment charges and rate adjustment.
DISCUSSION:
Attachment A contains a Sewer Rate Study conducted by Beck, which summarizes projected sewer
revenue requirements for fIve years (FY 2009-2013), documents fIscal policy issues that affect the
revenue requirements, and provides detailed support calculations. The study identifIes four fInancial
targets utilized by fmancially prudent utilities:
1. Maintain debt service coverage in excess of 1.25x;
2. Maintain cash in excess of six months O&M expenses;
3. Fund 100% of depreciation expenses through rates; and
4. Ensure rates provide the cost-of-service basis for each class of customer.
Sewer Rate Adjustment Workshop
July 8, 2008
Page 2 of 3
Beck reviewed historical operating expenses, existing assets, eXlstmg debt service, projected
expenditures, potential fInancing strategies, required capital improvements, local economic factors
and system loading and flow information. Revenue requirements were established utilizing an
iterative process that reviews various projected impacts of proposed rates. Beck's model
functionalized, classifIed, and allocated costs among various customer classes based on usage
characteristics of each class. The results were analyzed over a fIve-year period to arrive at a rate
alternative that meets the needs of the Department at the lowest possible costs to the consumer.
The results of the Beck analysis include:
1. A recommendation to increase sewer rates approximately 5% each year for the next fIve
years. This meets the Department's debt service coverage while maintaining an appropriate
level of cash. Utilizing this structure allows the Department to recover 83% of its
depreciation to fund future construction of replacement assets as facilities age beyond their
useful life.
2. A discussion regarding bond covenants and the use of capital acqulSlt10n fees in the
calculation of debt coverage. Bond coverage ratios are currently above required levels;
however, capital acquisition fees are highly influenced by the economics of, and
development in, the service area. A severe economic downturn may signifIcantly impact
debt coverage and potentially violate of bond covenants, requiring an immediate rate
increase. The Department should implement rates that produce revenues to sustain debt
coverage without the use of highly volatile acquisition fees.
3. A discussion regarding the erosion of cash balances since the last rate adjustment. Even
with 5% increases each year for the next fIve years, Beck's analysis indicates the
Department's sewer cash balance will continue to decline in excess of $5 million over that
period.
4. A review of the current cost-of-service. Beck's analysis suggests additional samples be
obtained regarding wastewater strength and discharge flows to further evaluate the
appropriate cost-of-service by individual class.
The information presented in the Beck report supports the following staff recommendations:
1. Staff recommends a two-step adjustment in sewer treatment fees, rates and charges of
approximately 5% each (as identifIed in Attachment B) for implementation February 1, 2009
and January 1, 2010, respectively. The Department's fInancial position will then be reviewed
for further adjustment recommendation to Mayor and Common Council prior to January 1,
2011.
2. Staff recommends rounding the adjustments (identifIed in the Beck report) where possible,
to the nearest 5 cents, to simplify the rate calculation for our customers. Rounding will not
signifIcantly impact a customer's bill or the percentage increase.
Sewer Rate Adjustment Workshop
July 8, 2008
Page 3 of 3
In conjunction with the City Manager's office and Public Works, the Department has developed the
following timeline for adoption of the adjustment for sewer treatment fees.
July 15, 2008
August 20, 2008
November 6, 2008
January 5, 2009
February 1, 2009
Board of Water Commissioners Workshop
Ways and Means Committee Workshop
Public notification of rate adjustment hearing
Public hearing and rate adoption
Rate implementation
RECOMMENDATION:
Staff recommends that the Board of Water Commissioners make the following motion:
~ "Submit the sewer rate study to Mayor and Common Council for adoption of a two-
step rate adjustment for sewer treatment rates, fees and charges to be implemented
February 1, 2009 and January 1, 2010 respectively."
Respectfully submitted,
D?S~
Director of Finance
City of San Bernardino
Public Services Department
Sewer Collection Strategic Plan
Executive Summary:
The Public Services Department (public Services) of the City of San Bernardino has
completed a five-year strategic plan to project revenue requirements necessary to fund
existing operations and capital improvements to its aging sewer collection infrastructure.
The revenue requirements indicate an approximate 5% annual increase over the next five
years is necessary to complete this scope of work. Public Services is responsible for the
sewer collection system. The San Bernardino Municipal Water Department (SBMWD) is
responsible for sewer treatment.
The strategic plan proposes that Public Services:
1. maintain cash in excess of six months of operation and maintenance expenses; and
2. set rates and fees adequate to recover the cost of service in an equitable manner from
various customer classes.
Public Service maintains no assets and therefore records no depreciation expense.
Additionally, there is no debt associated with the collection system; therefore, no debt
coverage ratio must be met.
State Water Resource Control Board Order No. 2006-0003-DWQ establishes statewide
waste discharge requirements for sanitary sewer systems. In short, it requires all public
agencies that own and operate more than one mile of sewer lines develop and implement a
sewer system management plan for inspection, maintenance, rehabilitation and replacement
to prevent the occurrence of sewer spills. Should a spill occur, the State will verify that a
plan exists, it is adequate, it results in overflow reductions, and it is followed. Failure to do
so may result in substantial fines.
Public Services will embark on an aggressive replacement program to film, document and
replace its aging sewer collection infrastructure. The proposed five-year strategic plan offers
an aggressive schedule to spend $400,000 in video and rehabilitation costs each year. The
collections system encompasses approximately 510 miles of infrastructure within San
Bernardino. The proposed program utilizes video to visually inspect approximately 9%,
roughly 45 miles, of existing infrastructure each year. Based on history, Public Services will
need to rehabilitate approximately 11 % of the videoed infrastructure.
The strategic plan proposes an approximate 5% adjustment in collection fees and charges
each year over the next five years. In conjunction with SBMWD, Public Services will
implement a two-step adjustment of approximately 5% per year on January 1, 2009 and
January 1, 2010, respectively. An ongoing financial assessment of the sewer collection system
will be made prior to January 2011, and an update will be provided.
Five-Year Srrategic Plan:
Background:
Public Services maintains sewer collection facilities that serve approximately 43,300
customers. Residential services comprise 85% of that service with approximately 36,900
connections, the remaining being nonresidential connections.
Assumptions:
In developing a five-year revenue requirements model, staff made the following
assumptions:
1. Usage and number of services will increase 1.5% per year.
2. Inflation will increase current expenses 4% per year.
3. Substantial investment in equipment is required to maintain the system.
4. Increase of two positions is needed: one Inspector and one Facility Locator Tech
5. An aggressive replacement program is needed to video 100% of the collection
system and complete appropriate rehabilitation within 10 to 12 years. On an annual
basis, $400,000 will be spent to video the current collection system and repair
identified problems. This equates to a replacement of approximately 45 miles of
plant each year.
As conditions change over time, the new strategic planning model can be utilized to provide
an updated analysis regarding future revenue requirements.
Results:
When combined with existing cash balances, the strategic financial planning model allows
the determination of rates required to fund the above costs. The results of the model
indicate:
1. a five-year, five percent annual increase is sufficient to encompass the costs
associated with the proposed replacement schedule;
2. existing cash balances of $3.2 million will offset additional rate adjustments in
support of the replacement program. The "days cash held" will be reduced from the
current 260 days to 175 days over that five-year period; slightly below a targeted six-
month cash reserve goal;
3. funding for the personnel and capital necessary to successfully complete the
replacement program will be supported by the proposed rates; and
4. customers will incur only minor increases, compared to other utilities in the area,
while greatly mitigating the potential risk caused by the age of the sewer collections
facilities.
Financial Impact:
The combined rate adjustment for sewer collection and treatment varies between 5.0% and
5.8% per year, based upon customer classification and usage characteristics.
Proposed Strategy:
In conjunction with SBMWD and its sewer treatment operations, staff recommends the
Ways and Means Committee authorize that the Mayor and City Council establish a date for
public hearing and adopt a resolution to adjust sewer collection charges by approximately
five percent (5%) in a two-step process to be effective January 1, 2009 and January 1, 2010,
respectively.
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