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HomeMy WebLinkAbout04-16-25 Board Packet1 OTAY WATER DISTRICT SPECIAL MEETING OF THE BOARD OF DIRECTORS DISTRICT TRAINING ROOM (LOWER-LEVEL PARKING LOT) 2554 SWEETWATER SPRINGS BOULEVARD SPRING VALLEY, CALIFORNIA WEDNESDAY April 16, 2025 2:30 P.M. AGENDA 1.ROLL CALL 2.PLEDGE OF ALLEGIANCE 3.APPROVAL OF AGENDA 4.PUBLIC PARTICIPATION – OPPORTUNITY FOR MEMBERS OF THE PUBLIC TO SPEAK TO THE BOARD ON ANY SUBJECT MATTER WITHIN THE BOARD’S JU- RISDICTION INCLUDING AN ITEM ON TODAY’S AGENDA PUBLIC HEARING 5.COMPLIANCE WITH NEW LEGAL OBLIGATIONS REGARDING PUBLIC HEARING ON OTAY WATER DISTRICT VACANCIES AND RECRUITMENT AND RETENTION EFFORTS (ASSEMBLY BILL 2561 GOVERNMENT CODE §3502.3) [SUZIE LAW- SON] WORKSHOP 6.DISCUSSION OF THE FISCAL YEAR 2026 BUDGET KEY FIGURES AND ASSUMP- TIONS IMPACTING THE UPCOMING BUDGET PROPOSAL [JOE BEACHEM / KEVIN KOEPPEN] 7.ADJOURNMENT All items appearing on this agenda, whether or not expressly listed for action, may be delib- erated and may be subject to action by the Board. The Agenda, and any attachments containing written information, are available at the Dis- trict’s website at www.otaywater.gov. Written changes to any items to be considered at the open meeting, or to any attachments, will be posted on the District’s website. Copies of the 2 Agenda and all attachments are also available by contacting the District Secretary at (619) 670-2253. If you have any disability which would require accommodation in order to enable you to par- ticipate in this meeting, please call the District Secretary at 670-2253 at least 24 hours prior to the meeting. Certification of Posting I certify that on April 14, 2025, I posted a copy of the foregoing agenda near the regular meeting place of the Board of Directors of Otay Water District, said time being at least 24 hours in advance of the special meeting of the Board of Directors (Government Code Sec- tion §54954.2). Executed at Spring Valley, California on April 14, 2025. /s/ Tita Ramos-Krogman, District Secretary STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: April 16, 2025 SUBMITTED BY: Suzie Lawson Human Resources Manager PROJECT: Various DIV. NO. ALL APPROVED BY: Adolfo Segura, Chief of Administrative Services Jose Martinez, General Manager SUBJECT: COMPLIANCE WITH NEW LEGAL OBLIGATIONS RE: PUBLIC HEARING ON OTAY WATER DISTRICT VACANCIES AND RECRUITMENT AND RETENTION EFFORTS (ASSEMBLY BILL 2561/GOVERNMENT CODE §3502.3) GENERAL MANAGER’S RECOMMENDATION: The Board of Directors will conduct a public hearing and receive a report on vacancies in Otay Water District positions, and recruitment and retention efforts pursuant to Assembly Bill 2561/Government Code §3502.3. PURPOSE: Assembly Bill 2561 (AB 2561) requires public agencies, including the Otay Water District (District), to hold at least one (1) public hearing per fiscal year, prior to the adoption of the final budget, to discuss vacancies and recruitment and retention efforts. This report discusses the District's legal obligations under the new law, effective January 1, 2025, and ensures compliance with such legal obligations. ANALYSIS: Background: On September 22, 2024, AB 2561 was signed into law to add Government Code (GC) §3502.3 to the Meyers-Milias-Brown Act to address the issue of job vacancies in local government, which may adversely affect the delivery of public services and employee workload. Among other requirements, the bill mandates that public agencies present the status of vacancies and recruitment and retention efforts during a public AGENDA ITEM 5 2 hearing before the agency’s governing body at least once per fiscal year. The bill was enacted into law and is codified at GC §3502.3. The new law went into effect on January 1, 2025. Compliance Requirements In compliance with the new legal obligations, the District is required to do the following: 1.Public Hearing: At least once each fiscal year, at a public hearing before the Board of Directors (Board), the District shall present information regarding the status of vacancies and recruitment and retention efforts (GC §3502.3(a)(1)) and identify any necessary changes to policies, procedures, and recruitment activities that may lead to obstacles in the hiring process (GC §3502.3(a)(3)). If the Board adopts an annual or multi-year budget during the fiscal year, this presentation must occur prior to the Board’s adoption of the final budget for the District (GC §3502.3(a)(2)). 2.Employee Organization Participation: Allow the recognized employee organization at the District, the Otay Water District Employees’ Association (OWDEA), to make a presentation during the public hearing concerning vacancies and recruitment and retention efforts (GC §3502.3(b)). 3.Additional Reporting for High Vacancy Rates: If vacancies within a single bargaining unit meet or exceed 20% of authorized full-time positions in that bargaining unit, upon request of the recognized employee organization, the District must provide additional information during the public hearing, including the following: (1) the total number of vacancies; (2) the number of applicants; (3) the average time to fill positions; and (4) opportunities to improve compensation and working conditions for employees in the bargaining unit (GC §3502.3(c)). There are 111 budgeted positions represented by OWDEA. The vacancy rate as of December 31, 2024, was 4.5%; therefore, the District is not currently subject to additional reporting upon request of OWDEA. Vacancies: During the 2024 Calendar Year, 28 total vacancies were created within the District. By December 31, 2024, there were five (5) of 111 budgeted positions (4.5%) represented by OWDEA that remained vacant: 1) Utility 3 Locator; 2) Reclamation Plant Operator I/II/III; 3) Utility Worker I/II; 4) Customer Service Field Representative I/II; and 5) Senior Utility Worker/Equipment Operator. As of December 31, 2024, one (1) of 35 budgeted unrepresented positions (2.8%) remained vacant: Recycled Water Program Supervisor. The recruitment for the anticipated Utility Maintenance Supervisor vacancy, due to a retirement scheduled for January 9, 2025, was also in progress. Recruitment and Retention Efforts The Human Resources team collaborates with the hiring department to identify sources of targeted outreach, which include the District website as well as professional organization websites (e.g., American Water Works Association, California Water Environment Association, Water/Wastewater Jobs, California Special Districts Association, Association of California Water Agencies, San Diego Water Works, Brown & Caldwell Water Jobs, Construction Management Association of America), Jobs Available, mailing lists, social media, and direct contact with qualified applicants who have previously applied. Community outreach includes advertising with local newspapers and community colleges. The District’s website provides updated frequently asked questions on the recruitment process and provides the opportunity for applicants to submit job interest cards to receive email notification when a position of interest becomes open to applications. The District also tailors supplemental questions to allow for efficient screening of applications. Staff have not identified any necessary changes to policies and procedures that may present obstacles in the current hiring process, and to help prepare for potential future vacancies, department chiefs submit a long-term staffing & succession plan each year as part of the budget process. The District values its employees and in addition to offering competitive pay and benefits, has created retention initiatives, which include an employee recognition program to acknowledge employee contributions and accomplishments, employee service awards for those achieving milestones of 5-year intervals, and an education reimbursement program. The District also offers flexible work schedules, a Health Reimbursement Arrangement (HRA), and a deferred compensation plan. The District demonstrates its commitment to its employees’ professional growth by offering a variety of training and development opportunities through Vector Solutions, AWCA JPIA, the LCW Training Consortium, professional organization memberships, conference 4 attendance, and the Centre for Organization Effectiveness. In addition, temporary assignments provide employees with direct, hands-on experience performing the duties of higher-level positions when filling in for employees on leave. The District has not experienced issues regarding retention efforts, as the current average employee tenure is 10.5 years. FISCAL IMPACT: Joe Beachem, Chief Financial Officer There is no direct fiscal impact associated with conducting the public hearing required under GC §3205.3. However, if deemed necessary, addressing future recruitment and retention issues may involve budget and bargaining considerations, which will be presented to the Board as appropriate. LEGAL IMPACT: None. ATTACHMENTS: Attachment A – AB 2561 Text Attachment B – PowerPoint Presentation SHARE THIS:Date Published: 09/23/2024 09:00 PM AB-2561 Local public employees: vacant positions.(2023-2024) Assembly Bill No. 2561 CHAPTER 409 An act to add Section 3502.3 to the Government Code, relating to public employment. [ Approved by Governor September 22, 2024. Filed with Secretary of State September 22, 2024. ] LEGISLATIVE COUNSEL'S DIGEST AB 2561, McKinnor. Local public employees: vacant positions. Existing law, the Meyers-Milias-Brown Act (act), authorizes local public employees, as defined, to form, join, and participate in the activities of employee organizations of their own choosing for the purpose of representation on matters of labor relations. The act requires the governing body of a public agency to meet and confer in good faith regarding wages, hours, and other terms and conditions of employment with representatives of recognized employee organizations and to consider fully presentations that are made by the employee organization on behalf of its members before arriving at a determination of policy or course of action. This bill would, as specified, require a public agency to present the status of vacancies and recruitment and retention efforts at a public hearing at least once per fiscal year, and would entitle the recognized employee organization to present at the hearing. If the number of job vacancies within a single bargaining unit meets or exceeds 20% of the total number of authorized full-time positions, the bill would require the public agency, upon request of the recognized employee organization, to include specified information during the public hearing. By imposing new duties on local public agencies, the bill would impose a state-mandated local program. The bill would also include related legislative findings. The California Constitution requires local agencies, for the purpose of ensuring public access to the meetings of public bodies and the writings of public officials and agencies, to comply with a statutory enactment that amends or enacts laws relating to public records or open meetings and contains findings demonstrating that the enactment furthers the constitutional requirements relating to this purpose. This bill would make legislative findings to that effect. The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement. This bill would provide that no reimbursement shall be made pursuant to these statutory provisions for costs mandated by the state pursuant to this act, but would recognize that a local agency or school district may pursue any available remedies to seek reimbursement for these costs. Vote: majority Appropriation: no Fiscal Committee: yes Local Program: yes Home Bill Information California Law Publications Other Resources My Subscriptions My Favorites 11/16/24, 4:00 PM Bill Text - AB-2561 Local public employees: vacant positions. https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240AB2561 ATTACHMENT A THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. The Legislature finds and declares as follows: (a)Job vacancies in local government are a widespread and significant problem for the public sector affecting occupations across wage levels and educational requirements. (b)High job vacancies impact public service delivery and the workers who are forced to handle heavier workloads, with understaffing leading to burnout and increased turnover that further exacerbate staffing challenges. (c)There is a statewide interest in ensuring that public agency operations are appropriately staffed and that high vacancy rates do not undermine public employee labor relations. SEC. 2. Section 3502.3 is added to the Government Code, to read: 3502.3. (a) (1) A public agency shall present the status of vacancies and recruitment and retention efforts during a public hearing before the governing board at least once per fiscal year. (2)If the governing board will be adopting an annual or multiyear budget during the fiscal year, the presentation shall be made prior to the adoption of the final budget. (3)During the hearing, the public agency shall identify any necessary changes to policies, procedures, and recruitment activities that may lead to obstacles in the hiring process. (b)The recognized employee organization for a bargaining unit shall be entitled to make a presentation at the public hearing at which the public agency presents the status of vacancies and recruitment and retention efforts for positions within that bargaining unit. (c)If the number of job vacancies within a single bargaining unit meets or exceeds 20 percent of the total number of authorized full-time positions, the public agency shall, upon request of the recognized employee organization, include all of the following information during the public hearing: (1)The total number of job vacancies within the bargaining unit. (2)The total number of applicants for vacant positions within the bargaining unit. (3)The average number of days to complete the hiring process from when a position is posted. (4)Opportunities to improve compensation and other working conditions. (d)This section shall not prevent the governing board from holding additional public hearings about vacancies. (e)The provisions of this section are severable. If any provision of this section or its application is held invalid, the invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application. (f)For purposes of this section, “recognized employee organization” has the same meaning as defined in subdivision (a) of Section 3501. SEC. 3. The Legislature finds and declares that Section 2 of this act, which adds Section 3502.3 to the Government Code, furthers, within the meaning of paragraph (7) of subdivision (b) of Section 3 of Article I of the California Constitution, the purposes of that constitutional section as it relates to the right of public access to the meetings of local public bodies or the writings of local public officials and local agencies. Pursuant to paragraph (7) of subdivision (b) of Section 3 of Article I of the California Constitution, the Legislature makes the following findings: It is in the public interest, and it furthers the purposes of paragraph (7) of subdivision (b) of Section (3) of Article I of the California Constitution, to ensure that information concerning public agency employment is available to the public. SEC. 4. No reimbursement shall be made pursuant to Part 7 (commencing with Section 17500) of Division 4 of Title 2 of the Government Code for costs mandated by the state pursuant to this act. It is recognized, however, that a local agency or school district may pursue any remedies to obtain reimbursement available to it under Part 7 (commencing with Section 17500) and any other law. 11/16/24, 4:00 PM Bill Text - AB-2561 Local public employees: vacant positions. https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240AB2561 AB 2561 Vacancy Report April 16, 2025 ATTACHMENT B AB 2561 –Vacancy Report Requirements 1.Annual Public Hearing Once per fiscal year, prior to adoption of the final budget, hold a public hearing before the Board of Directors regarding the status of vacancies and recruitment and retention efforts. 2. Employee Organization Participation Allow the employee organization to make a presentation concerning vacancies and recruitment and retention efforts during the public hearing. 3. Additional Reporting for High Vacancy Rates Upon request of the employee organization, if vacancies within the bargaining unit meet or exceed 20% of the authorized FTEs within that bargaining unit. (Does not apply for April 16, 2025 report.) AB 2561 – Vacancy Report Vacant Positions Vacant Positions as of December 31, 2024 OWDEA Represented Vacant Positions: 1. Utility Locator 2. Reclamation Plant Operator I/II/III 3. Utility Worker I/II 4. Customer Service Field Representative I/II 5. Senior Utility Worker/Equipment Operator Unrepresented Vacant Positions: 1. Recycled Water Program Supervisor Budgeted FTEs: OWDEA 111 Unrepresented 35 Total 146 OWDEA Vacancies: 4.5% Unrepresented Vacancies: 2.8% AB 2561 – Vacancy Report Recruitment & Retention Efforts Standard Advertising Sources: •San Diego Water Works •SD Reader (Classified) •Star News (Classified) •Grossmont Cuyamaca Community College •Disabled American Veterans •Navy Nuke Job Finder-Facebook group/LinkedIn Group •Military Transition Center •Veterans Village •Able2Work •Work for Warriors Commonly Requested Advertising Sources: •Brown and Caldwell (BC Water Jobs) •AWWA •ACWA •WaterDistrictJobs.com •Jobs Available •CSDA (CA Special District Association) •CWEA (CA Water Environment Association) Recruitment Efforts ➢Robust Targeted Outreach •Professional Organizations •Social Media •Local newspapers ➢Website •Updated FAQs •Job Interest Cards •Information for Military Applicants ➢Tailored Job Postings & Supplemental Questions •Tailored to each job to attract qualified applicants and for efficient screening AB 2561 – Vacancy Report Recruitment & Retention Efforts Retention Efforts ➢Competitive Pay & Benefits ➢Employee Recognition Program •Kudos & High Five Awards •Employee Services Awards ➢Education Reimbursement Program ➢Flexible Work Schedules ➢Health Reimbursement Arrangement ➢Training & Development Opportunities •In-person Training & Webinars •Professional Organization Membership & Conferences •Centre for Organization Effectiveness •Vector Solutions •LCW Training Consortium •ACWA JPIA Training •Temporary AssignmentsAverage employee tenure = 10.5 years AB 2561 – Vacancy Report Questions? STAFF REPORT TYPE MEETING: Budget Workshop MEETING DATE: April 16, 2025 SUBMITTED BY: Kevin Koeppen, Assistant Chief of Finance PROJECT: DIV. NO. All APPROVED BY: Joseph R. Beachem, Chief Financial Officer Jose Martinez, General Manager SUBJECT: Informational Item to Present FY 2026 Budget Key Figures and Assumptions Impacting the Upcoming Budget Proposal GENERAL MANAGER’S RECOMMENDATION: This is an informational item presenting the FY 2026 budget key figures and assumptions. PURPOSE: The purpose of this informational item is to present to the Board key figures and assumptions impacting the FY 2026 budget. BACKGROUND: The District’s budget process typically begins in January and ends with the adoption of the next fiscal year’s budget at the June Board meeting, with implementation of rates occurring the following January. In this Budget Workshop, staff will elaborate on key budget assumptions and notable inputs affecting this year’s budget including growth projections, capital improvement projects, significant changes to administrative and materials expenditures, sales volume projections, and water purchase costs. The final presentation of the consolidated budget is scheduled for the June 4 Board meeting. At that meeting, staff will present the consolidated FY 2026 budget and request that the Board: •Approve the FY 2026 Operating and Capital Improvement Program (CIP) Budgets and associated potable and recycled rate changes. •Approve the fund transfers for potable, recycled, and sewer. •Adopt the Salary Schedule. AGENDA ITEM 6 •Approve the continued advance funding of the District’s unfunded pension and OPEB unfunded liability. •Direct staff to draft and mail potable and recycled water rate increase notices and Proposition 218 hearing notices for the upcoming October 2025 Proposition 218 hearing on sewer rates. The budget is assembled using the most realistic set of factors and assumptions based on information received from various sources, including wholesale water suppliers—the Metropolitan Water District of Southern California (MWD), the San Diego County Water Authority (CWA), and the City of San Diego (the City)—as well as vendors such as SDG&E and developers. Staff use this information in conjunction with other economic indicators affecting taxes and revenues, such as inflation and interest rates, to prepare the budget. FY 2025 Projected Operating Results Through February 28, 2025, the District has an operating surplus of $0.4 million. Staff projects that the surplus will remain at this level through the remainder of the fiscal year. The surplus is primarily due to the discounted prepayment of CWA fixed charges and actual operating expenditures being less than budget. Administrative and material expenditures are less than budget due to the deferral of certain projects. Power costs are less than budget due to SDG&E implementing its rate increase later than the District had budgeted. Staff is incorporating this surplus into the rate projections. Budget Strategy The culmination of the budget process is the recommendation of changes to potable water, recycled water, and sewer rates, guided by the following primary budget objectives: •Recommend rates that comply with the requirements of Proposition 218; •Maintain reserve levels at target levels in each of the next six (6) years; •Maintain debt coverage, excluding growth, above the target of 150% for both water and sewer over the next six (6) years; and •Support the Strategic Plan initiatives. Reserve target levels are defined in the District’s Reserve Policy found in the District’s Code of Ordinances. The targeted debt coverage, excluding growth, of 150% is set to provide assurance that the District meets its debt service covenant of 125% for water and 115% for sewer. Strategic Planning In addition to the budget and rate-setting process, the District’s ongoing focus on strategic planning continues to play a positive role in maintaining the agency’s financial strength. By managing staffing, leveraging business and operating technologies, and implementing best management practices, the District has become more efficient and cost effective. The Strategic Plan is essential to the budget process, as it drives and prioritizes funding for many of the District’s service and operational programs. The Strategic Plan initiatives are published on the District’s website (https://www.otaywater.gov/about- otay/news-and-documents/strategic-plan/). Proposition 218 The State of California has well-established legal constraints regarding utility rate setting, foremost among them California Constitution Article XIII D, Section 6 (commonly referred to as “Proposition 218”). Proposition 218 requires that water and sewer utilities establish cost-based rates for the services provided. To comply with this requirement, the District performs periodic cost-of- service studies and conducts Proposition 218 hearings. A water cost-of-service study was completed and presented to the Board on April 27, 2022, followed by a Proposition 218 hearing on October 5, 2022. At the conclusion of the hearing, the Board approved the terms outlined in the 218 Notices, which allowed for rate changes over a period of up to five (5) years. These changes include all future pass-through costs and cost increases or decreases to cover changes to rates, fees, or charges from the District’s water and energy suppliers, as well as overall non-supplier cost increases not to exceed the annual increase in the Consumer Price Index-U for the San Diego-Carlsbad area as of January 31 of the preceding year. The next water cost-of-service study is projected to be completed in FY 2027, with results incorporated into the FY 2028 budget and rates effective January 1, 2028. The five-year period for sewer rates expires this year. Therefore, a sewer cost-of-service study was performed and the results were presented at the April Board meeting. A Proposition 218 hearing will be held on October 1, 2025. If approved, the new rates will be effective January 1, 2026. Real Estate Sales Proceeds from the sale of the Salt Creek property are projected to be received in FY 2028. Overall, the total impact pertaining to real estate and pending litigation, as discussed in the next section, is significantly affecting this year’s projected rate increases. While the total impact on rates is planned to be phased in over time, it equates to a one-time 1.0% increase. FY 2026 Challenges For the FY 2026 budget and six-year projection, there are several challenges putting upward pressure on water rates, including water purchase costs, administrative and material expenditure drivers, and CIP projects. Many of these pressures are consistent with those communicated in the FY 2025 budget and six-year projection. Water Costs Water purchase costs from the District’s suppliers are a significant component of the District’s overall budget. Potable and recycled water costs constitute approximately 63.1% of the water operating budget. Potable On March 27, 2025, CWA presented its draft budget for FY 2026 and FY 2027 to its Board. CWA’s presentation included “placeholder” rates for calendar year 2026 which equate to an overall rate increase to the District of 16.8%. Staff projects the calendar year 2026 rate increase will increase annual water purchase costs by $12.5 million. The District anticipates CWA will provide updated rate guidance in late April, which will be incorporated into the budget that staff will present in June. Recycled For FY 2026, the recycled purchases budget from the City is approximately $7.3 million, which is $1,161,000, a 19.0% increase compared to FY 2025. The increase is due to a currently projected 25.0% increase in the purchase price of water on January 1, 2026 and a 90 acre-foot increase in the contractual take-or-pay volume. Staff is assuming that the penalty associated with the current take-or-pay agreement will be eliminated in FY 2027, when the current agreement expires. However, the City of San Diego’s recently published Sewer Cost of Service Study projects its recycled water rate will increase 138.0% from a current rate of $2.46 per HCF to $5.86 per HCF by 2029. This projected 138.0% rate increase will offset the financial benefit associated with eliminating the take-or-pay penalty increasing recycled water cost by $16.0 million, approximately $2.7 million annually, compared to the FY 2025 six year-projection. The District continues to work towards a renegotiated recycled water agreement with the City, with the intention of avoiding the proposed rate. Administrative and Material Expenditures There are several one-time and ongoing increases to administrative and material expenditures that are putting upward pressure on rates. These increases are partially mitigated through reductions from savings or elimination of FY 2025 one-time expenditures. FY 2026 Administrative and Material Budget Increase Breakdown Increase Driver/Category Ongoing Increases One-time Increases Total % Inc. of the Total Admin & Materials Budget Proposition 218 Legal - 650,000 650,000 4.3% Emergency main breaks 660,000 - 660,000 4.4% Planning document updates - 590,000 590,000 3.9% Inflationary 406,100 - 406,100 2.7% Regulatory creep 334,800 - 334,800 2.2% Strategic plan 143,000 120,000 263,000 1.7% Insurance premium * 161,000 - 161,000 1.1% All other increases 431,500 - 431,500 3.1% Total increases before savings 2,136,400 1,360,000 3,496,400 All other savings/budget decreases (1,404,500) Total FY 2025 overall budget increase $2,091,900 *The $322,000 total increase to the insurance premium is attributable 50%, or $161,000, to insurance market conditions and 50% to inflation included in the inflationary figure above. Proposition 218 Challenges Pending rate litigation is significantly impacting the FY 2026 budget. Staff anticipates that the penalty phase of the trial will be completed in FY 2026. Both the penalty and increased legal defense fees for Proposition 218 must be included in this budget. For FY 2026, the District’s legal fees pertaining to the Proposition 218 litigation defense are projected to increase by $650,000. Risk Management Challenges The cost of insurance to the District continues to increase due to increasing infrastructure replacement costs and the growing risk of catastrophic events across the insurance industry as a whole. To partially mitigate the rising cost of insurance, the District is projecting an increase in operating costs of approximately $650,000 pertaining to third-party public street repairs due to damage caused by main breaks. As a practice, from 2013 through 2025, the District submitted these costs to its insurance provider for reimbursement. This practice is atypical in the industry, as main break repairs are generally considered operational costs. This practice has also adversely impacted the District’s experience modifier, a factor used to calculate the District’s insurance premiums based on claims history and future risk. Due to this atypical practice, the District has the highest experience modifier of all the members of the Association of California Water Agencies Joint Powers Insurance Authority (ACWA JPIA). Eliminating the practice of submitting these claims for reimbursement will ultimately reduce the District’s experience modifier over time, thereby reducing insurance costs. Regulatory Creep Unfunded mandates continue to impact the District. The most significant of these mandates are expenditures related to the cross- connection regulations. Planning Document Updates This increase consists of expenditures associated with updating the long-term planning of the District’s infrastructure and water supplies, which are performed periodically. This update is projected to begin in late FY 2025 and be completed in FY 2027. These updates are necessary to ensure the District’s infrastructure and water supplies can reliably and efficiently meet the District’s current and projected demands and regulatory requirements as they are known and projected today. Inflationary Inflationary increases continue to impact the District’s operating expenditures; however, the rate of inflation has subsided from the highs experienced a few years ago. The District has identified $407,100 in inflationary related increases impacting the FY 2026 budget. Strategic Plan Initiatives The conversion of the District’s Enterprise Resource Planning (ERP) system and utility billing (UB) solutions are the primary drivers of the $304,500 increase associated with strategic plan initiatives. The developer of the current ERP and UB systems, Tyler Eden, is ceasing support and development requiring the District to implement new systems. The District is currently evaluating potential UB system providers. Subject to the completion of this evaluation, the stated increase may change based upon the recommended vendor. CIP Projects The six-year CIP projection is increasing due to newly identified CIP projects, prior year construction delays resulting in rollover expenses, and inflation. The total six-year CIP budget is increasing $14.7 million from $170.7 million in FY 2025 to $185.4 million in FY 2026. When compared to the five-year period carried over from the FY 2025 budget, the CIP for FY 2026 through FY 2030 is increasing by $6.1 million. Of particular importance is the increase in the six-year sewer CIP, which is projected to increase by $7.7 million (net of cost sharing reimbursements)—from $11.8 million in FY 2025 to $19.5 million in FY 2026. This increase in sewer CIP is expected to significantly impact sewer rates. Staff anticipates proposing an additional debt issuance to partially mitigate this increase. The District’s sewer business is more sensitive to increases of this magnitude because sewer is a much smaller system. The sewer system serves approximately 4,700 customers, or less than one-tenth the number of water customers, and sewer’s operating budget is only 3.0% the size of the water operating budget. The proposed six-year CIP budget is discussed further in the CIP section of this staff report. Sewer Challenges A primary long-term challenge for sewer continues to be the City’s increasing wastewater fees. The City’s Pure Water program, which incorporates a secondary equivalency for the Point Loma Wastewater Treatment Plant (WWTP), impacts the wastewater fees paid for by the District’s sewer customers for sewage treatment. The ultimate cost of the City’s Pure Water program remains the most significant cost increase facing the District’s sewer customers over the next six (6) years and beyond. Draft language was released to the Metro Technical Advisory Committee on March 17, 2025, which includes a revised billing system. Staff is reviewing how these changes will affect the District’s annual Metro- related fees. As mentioned in an April 3, 2019, Engineering Staff Report, the District’s sewer customers’ share of Pure Water Phase I is estimated to be $2.6 million, and Phase II is estimated to be $5.7 million, for a total of $8.3 million over 15 to 20 years. The combined effect on rates totaling 29% will need to be phased into the District’s sewer rates over the next 15 years. The District is currently six (6) years into the 15-year period. Estimates for the Pure Water program are built into the District’s budget projections, and the separate billing of the Pure Water program was incorporated into the City’s sewage treatment fees started in FY 2024. The City has received grant funding and low-cost loan financing for its Pure Water program, such as the State Revolving Fund (SRF) and Water Infrastructure Finance and Innovation Act (WIFIA) funds. These funding sources directly reduce the overall Pure Water cost and help smooth out the cash flow impact to the District’s customers. Payments for low-interest loans do not commence until a year after construction completion. Phase 1 construction concluded in FY 2025, which is causing significant loan repayments to begin in FY 2026. The District has mitigated the cost of the Pure Water program by lowering its contracted capacity. A modification in annual average daily Metro capacity from 1.287 MGD to 0.38 MGD, under the new Metro amended agreement, has reduced the District’s ultimate Pure Water burden. For the CIP component of Pure Water, FY 2026 is based on a small expenditure, as the City is projecting revenues from loans and grants to outpace expenditures as construction slows for Phase 1, as noted previously. In the remaining years, staff assumed constant capital expenditures based on projections provided by the City at the January 2025 Metro TAC meeting. The increase is based on a projection provided by the City for projected Pure Water capital construction costs. The current six-year CIP projection includes $510 thousand for the Pure Water program. The District is budgeting for reimbursements related to a shared facility agreement with the County of San Diego (County). A section of the Ditrict’s sewer system is a shared facility, owned and operated by Otay. Otay is undergoing necessary replacements for the Cottonwood Lift Station Replacement CIP (S2069), for which the County is responsible for about 47.0%. CalPERS and OPEB Update The pension and OPEB liabilities carry an interest cost of 6.8%, which is the District’s highest interest cost. By focusing on reducing and eliminating the unfunded pension liability, the District is reducing the highest interest cost liability, thereby creating a savings opportunity. As of June 30, 2023, which is the most recent CalPERS actuarial pension valuation, the District’s pension plan was 82.7% funded, and the OPEB plan was 94.0% funded. Staff recommends that the District continue to advance fund its defined benefit programs. Staff will recommend that the District advance fund the OPEB plan $671 thousand in FY 2026. These recommendations are consistent with the Board’s past practice of advance funding its defined benefit obligations. The objective of this advance funding is to save the ratepayers money and provide additional assurance that the plans are adequately funded, which benefits the employees. Continuing to advance fund the District’s OPEB and CalPERS plans is expected to save the District approximately $5.5 million over the 12-year advance funding period that began in 2021. As part of the continuing efforts to reduce the District’s highest cost debt, the FY 2026 budget is projected to include continued advanced funding of these unfunded obligations. Major Assumptions Growth Projections Staff has incorporated a 0.2% growth projection into the six-year growth projection. Potable Sales Volumes Through February 28, 2025, actual potable water sales totaled 8.6 million units, which is 3.6% above the budget of 8.3 million units. The additional volume is due to below-average rainfall. Through February 28, 2025, year—to-date rainfall of 1.39 inches is 85.0% below the historical average. Staff proposes continuing the practice of using an average of actual historic volumes to calculate future budgeted volumes. The District began using this method in 2020. Prior to using this method, the District relied on long-term weather forecasts, which often resulted in significant volume variances when actual weather deviated from predictions. Using the historic average method has provided a more stable and accurate outlook on long-term volumes and revenues. For the FY 2026 budget, and consistent with FY 2025 practice, staff is using a four-year average from FY 2022 to FY 2025, plus a growth factor of less than 1.0.% annual customer growth. The assumption that new customers will connect throughout the year and will use approximately half the average volume of the existing customer base translates to an assumed volume growth of 0.2% annually. The following table contains a chart of historical potable volumes, rainfall, the four-year average, and the FY 2026 budgeted volume calculated as the four-year average, plus growth. Historical Unit Sales (in million HCF) and Rainfall (in inches) Actual Projected Average Budget FY 2022 FY 2023 FY 2024 FY 2025 4-Year FY 2026 Rainfall 6.8 17.1 11.9 4.2 10.0 N/A Units 12.3 11.2 11.3 12.1 11.7 11.7 The following table contains the projected unit sales assumptions proposed for the FY 2026 six-year rate model. Additional discussion pertaining to the projected volumes can be found immediately following the table. Projected Unit Sales (in million HCF) Six-Year Rate Model Projection FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 6-year Avg Growth % 11.7 11.8 11.8 11.8 11.9 11.9 11.8 0.20% The analysis on the following page shows historic and projected volumes compared to historic highest and lowest applicable volumes. • The green line represents a maximum volume year based on relevant historical actual volume. • The red line represents the minimum volume year based on relevant historical actual volume. • The blue section represents the average volume associated with the existing customer base. • The yellow section represents the volume associated with growth. Recycled Sales Volumes Through February 28, 2025, actual recycled water sales volume was 1.3 million units, which was 16.5% above the budgeted 1.1 million units. The additional volume is due to below-average rainfall discussed in the previous potable sales volume section of this report. The FY 2026 recycled volume projections have been prepared using the same historical average plus growth methodology used for the potable volume projection. The following tables and chart contain historical recycled volumes, rainfall, the four-year average, the FY 2026 volume (calculated as the four-year average plus growth), and the six-year forecast. Historical Unit Sales (in million HCF) and Rainfall (in inches) Actual Projected Average Budget FY 2022 FY 2023 FY 2024 FY 2025 4-Year FY 2026 Rainfall 6.8 17.1 11.9 4.2 10.0 N/A Units 1.7 1.4 1.4 1.7 1.6 1.6 The following are the projected unit sales assumptions proposed for the FY 2026 six-year rate model. Additional discussion pertaining to the projected volumes can be found immediately following the table. Projected Unit Sales (in thousand HCF) Six-Year Rate Model Projection FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 6-year Avg Growth % 1,561 1,564 1,567 1,570 1,573 1,576 1,569 0.20% The following analysis shows historic and projected volumes compared to historic highest and lowest volumes. • The green line represents a maximum volume year based on relevant historical actual volume. • The red line represents the minimum volume year based on relevant historical actual volume. • The blue section represents the average volume associated with the existing customer base. • The yellow section represents the volume associated with growth. Capital Improvement Program (CIP) Budget As a component of the annual budget development process, the Engineering staff update the CIP budget using the following process: • CIP projects are selected and prioritized based on the Water Facilities Master Plan (WFMP), the Urban Water Management Plan (UWMP), Sub Area Master Plans (SAMP), Integrated Water Resources Plan (IRP), Wastewater Management Plan (WWMP), the Cathodic Protection Plan, the District’s Strategic Plan, Asset Management Plan, and other focused or specific planning documents and reports which are used to manage growth, maintenance, and the life extension of assets. • The CIP goes through an iterative process to meet the criteria of growth, service levels, supply targets, and system reliability. • CIP target expenditures for the next six (6) years are refined and used in the rate model. The following general criteria are used to determine the reasonableness of a project before it is considered for inclusion within the CIP budget: • Safety and existing facility conditions • Operating system conditions and energy improvements • Water and sewer system deficiencies • Regulatory and permitting agencies’ requirements • Developer driven requirements • Economic outlook • Growth projections • Water supply diversification goals • Board and management directives This year, the total six-year CIP budget of $185.4 million increased by $14.7 million versus last year. The total water CIP budget for the six- year period is $166.6 million, which is an $8.7 million increase compared to FY 2025. The sewer CIP of $18.8 million is increasing $6.1 million compared to FY 2025. To maintain reserves at target levels for both water and sewer, staff is currently projecting debt issuances for water in 2026, 2028, and 2030, and for sewer in 2029 and 2031. There is $2.8 million budgeted for a total of seven new CIP projects predominantly consisting of the following: • $1.7 million for Utility Billing Software. • $0.5 million for easement access improvements. • $260 thousand for filter media replacement at the RWCWRF. • $250 thousand for cathodic protection improvements in Otay Mesa. Financing Plan The District uses a comprehensive approach to financing. The Debt Policy provides guidance for debt issuance and refinancing. The Reserve Policy provides guidance on both fund transfers and reserve balances. With these policies, a six-year financing plan is formulated that identifies the timing and amounts of debt issuances, the level of rate increases, debt coverage ratios, reserve balances, and necessary transfers. The District’s comprehensive financing approach establishes financial targets that maintain the financial strength of the District. These strengths include: • AA credit rating, which saves ratepayers money by reducing debt costs. • Financial stability, which enables the District to focus on the long-term financial needs of the District and anticipate future financial challenges. The prior projection of future rate increases are shown in the following table. The preliminary increases in the financial requirements are also shown. A general rule of thumb is that for water, $1.2 million in ongoing costs equates to a one-time 1.0% rate increase. For sewer, the equivalent amount is $35,000 for a 1.0% increase. These are preliminary numbers that will be affected by open items. Open Items On the following page is a list of items that are in process and will be presented at the final Budget Board presentation on June 4: • Overall budget summary • Rates and rate increases • Adoption of water rates to be effective January 1, 2026. • Debt service coverage • CWA Rates and Fixed Charges • Labor and benefits • Materials and maintenance expenses • Administrative and legal expenses • Salary Schedule • Rate comparison • Fund transfers • Budget approval FISCAL IMPACT: Joe Beachem, Chief Financial Officer This is an informational item. Each one of the items discussed above will impact the proposed rate increases over the next six-year period. Recommended changes to rates will be based on the District maintaining reserves at target levels and meeting its debt coverage targets. For sewer and water, staff estimates that debt service coverage and reserves will meet or exceed targeted levels for the six-year period. STRATEGIC GOAL: The District ensures its continued financial health through long-term financial and debt planning. LEGAL IMPACT: None. Attachments: A)Presentation – FY 2026 Budget Workshop FY 2026 Budget Workshop April 16, 2025 1 Attachment A Workshop Agenda 2 Introduction and ObjectivesJoe Beachem Challenges, Strengths, and District ActionsJose Martinez Administrative and Material Budget ImpactsKevin Koeppen Capital Improvement Program BudgetBeth Gentry Key Assumptions, Financing Plan, and ConclusionKevin Koeppen Budget Objectives Support Strategic Plan objectives, including affordability Support essential operations of the District Maintain reserves at target for all six years Maintain debt coverage, excluding growth, above target of 150% for both water and sewer for all six years Fund the Six-Year CIP budget Establish rates that are compliant with Proposition 218 3 Budget Timeline April Board Meeting (4/2/25) •Sewer Cost of Service Study presented Budget Workshop (4/16/25) •Budget Key Figures and Assumptions May Board Meeting (5/7/25) •Adopt Administrative Exhaustion Resolution June Board Meeting (6/4/25) •Budget Approval October Proposition 218 Hearing (10/1/25) •Sewer rates 4 Budget Process Six-Year Rate Model MWD/CWA & City Sewer Rates Assumptions Interest Rates Inflation Growth Sales Debt Targets Debt Coverage Reserve Levels Operating Budget CIP Budget Water & Sewer Rates DroughtYear-end Balances Six-Year CIP Budget Input Operating Budget InputStrategic Plan 5 ▪Cost of Service Study Performed – 2022 ❖Proposition 218 Hearing –October 5, 2022 ▪Cost of Service Study –2027 ❖Next Proposition 218 Hearing –October 2027 Timeline ▪5-years ▪100% pass-through of supplier-related costs, including SDG&E ▪Pass-through of non-supplier cost increases, not to exceed the annual increase in the CPI for the San Diego-Carlsbad area as of Jan. 31 of preceding year. Board Approved Terms Proposition 218: Water 6 Proposition 218: Sewer ▪Cost of Service Study Performed – FY 2025 ❖Upcoming Proposition 218 Hearing –October 2025 ❖Rates effective January 1, 2026 Timeline ▪5-year schedule of rates ▪100% pass-through of Metro and County treatment costs ▪Pass-through of non-supplier cost increases, not to exceed the five-year schedule of maximum rate increases. Board Approved Terms 7 Challenges, Strengths, and District Actions Jose Martinez 8 Challenges Affordability MWD/CWA/City of San Diego Rates Drought and Extreme Weather Regulatory Creep and Unfunded Mandates Proposition 218 Increase in Six-Year CIP 9 CWA Rate Increase Drivers 10 Rate Increase and Projections 2025 2026 2027 FY2025 Projections CWA Proposed May 2024 18.0%15.0%4.0% CWA Passed June 2024 14.0%16.4%5.7% Cross Connection Control Policy Handbook ▪Final draft approved by the State Water Resources Control Board (SWRCB) on December 19, 2023. ▪Handbook will replace portions of Title 17 that address cross-connection and backflow regulations. ▪District will be required to provide Cross-Connection Control Plan to SWRCB by July 1, 2025. ▪Staff provided comments regarding portions of the handbook that will result in increased workload and additional costs to customers, specifically regarding: o Residential Fire Sprinklers – Items require the installation of backflow prevention assemblies on residential homes with fire sprinklers would require the District to either inspect homes retroactively to ensure specific plumbing materials are used and there is a flow-through fire system in place, or require the installation of a backflow prevention assembly. •Staff believes most homes will not be compliant and will require installation of backflow devices. •About 3,400 homes estimated to be affected. o Hazard Assessment on All Sites – The District would have to perform hazard assessments on all service connections and resurvey each time a commercial or multi-residential property changes ownership. •Since the District requires the highest form of backflow protection for all commercial, multi-residential, and residential properties with wells on site, site surveys were done only as needed. •Staff will have to perform assessments on more than 50,000 parcels and create a process to resurvey commercial and multi-residential properties when ownership changes.11 Advanced Clean Fleets (ACF) ▪USEPA Waivers – removing drayage and high-priority fleets from the requirement to comply with ACF, while state and local governments are still required to comply. ▪Not all elements of the ACF Regulation require a federal waiver or authorization; therefore, the state and local government fleets portion of the ACF Regulation remains unaffected. ▪Under the current exemption process for purchasing a traditional Internal Combustion Engine (ICE) vehicle, it is essential to provide supporting data—whether telemetric, manually recorded, or anecdotal. This data helps illustrate the real-world challenges operators face during emergencies, where relying solely on existing zero-emission vehicles (ZEV) may severely limit their ability to respond effectively. ▪ CARB is seeking additional input to better understand how responding to emergency situations, such as the recent LA Fires, strain water agency fleet operations. o ZEVs may or may not be capable of meeting fleet needs during emergencies. ▪AB 1594 & SB 496 12 100-Year Valve Replacement Outlook Years 2006 to 2106 QUANTITY ANALYSIS (In-House and Contractor Replacements Combined) 1 2 3 Scenarios 1. All valves replaced at end of useful life (50 years) a. Over 1,200 valves in years 2052 and 2102 2. Risk based: replacement of critical valves only a. Operationally critical b. Affects critical customers c. Quantity of customers affected (>70) d. High-risk locations (easements) e. Valves associated to critical pipelines (various pipe materials) 3.Same as Scenario 2 but adjusted for workload balance a. Less than 200 valve replacements per year (average) Contractor Replacements (blue) 1.Major roads 2.Transmission mains 3.30” and greater 4.Depth (>6 feet or at District’s discretion) 100-Year Valve Replacement Outlook STAFFING LEVELS FOR IN-HOUSE VALVE REPLACEMENTSQuantity Analysis 2 3 Key takeaways for Scenario 3 1.Current staffing levels will likely need to be increased in late 2030s when the yearly replacement quantities are consistently greater than 80 (above red dash). 2.The average yearly quantity can be adjusted to be below 160 valve replacements as shown. Key takeaways for Scenario 2 1. Valve replacement quantities vary with some years exceeding staff level capabilities (approximate quantities): a. 80 valves = Current staffing level capability (red dash) b. 160 valves = Increased staffing level capability (blue dash) 2. Yearly valve replacements should be adjusted to balance workload and optimize staffing levels. District Actions 15 ▪Affordability – SB 1255 (2024) Coordinated opposition – Cost to implement program would be higher than those benefitting from program, potentially increasing rates. SB 350 (no funding source), AB 532 (clarify law to allow water systems to establish LIRA programs and create state-run programs for certain systems). ▪Bills (2024) to Protect Water Rates and Service –Related Fees and Charges Against Proposition 218 Litigation: SB 1072 (Padilla) –Otay and City of San Diego Sponsored bill, AB 2257 (Wilson), AB 1827 (Papan) ▪Drought –SB 366 (2024) District supported but Governor vetoed, SB 72 (California Water Plan Long-Term Supply Targets). ▪Proactively leading efforts to mitigate and counter unfunded mandates and regulatory creep. ▪ACF -AB 1594 (2024) & SB 496, SB 454 (PFAS mitigation fund), AB 367 (Ventura fire suppression bill), AB 372 (prioritize funding to rural communities), Cross Control, etc. Advocating for Customers ▪Clean Air for All Grant (CARB/APCD) – awarded $128K in Jan. 2025, spending anticipated in FY27 ▪Climate Adaptation and Resiliency Plan (CARP) –awarded $231K in Nov. 2023 ▪Cybersecurity Grant Program (CalOES) –$250K in Dec. 2024, spending anticipated in FY26/27 ▪WaterSmart USBR AMI Upgrade Phase 2 and 3 o Phase 2 awarded $500K in Feb. 2025 o Phase 3 applied for $2M in funding in Nov. 2024 ▪Water Recycling Funding Program –joint project with Sweetwater Authority o Awarded June 2024, total agreement over $300K o Cost split 50% with Sweetwater Authority ▪Cottonwood Sewer Pump Station Replacement –shared agreement with County of San Diego o Estimated total reimbursement of $4.2M ▪CWA & Mexico Agreement o Potential of $650K in funding –CWA approvals required Grant & Cost-Sharing Efforts Strengths Strategic Planning process CWA diversification of regional supply (drought-proofing San Diego) Land sale ▪Continue annual advance funding practice ▪$5.5M estimated savings over the 12-year advance funding period, which began in 2021 OPEB and Pension Funding ▪30% increase in customers per FTE Efficiency Gains (since 2007) ▪S&P ‘AA’ rating Bond Rating ▪Reserve, Debt, and Investment Policies Sound Financial Management 16 Board’s proactive approach to financial and operational stability Financial strength through establishing debt coverage targets and Reserve Policy Invested in staffing, software, equipment, and other infrastructure to achieve efficient operations Investment in emergency preparation from policies to equipment Efficient use of equipment and vehicles Converted variable bonds to fixed Limited exposure to CalPERS changes in future discount rates by making advanced payments Administrative Exhaustion 17 Administrative and Material Budget Impacts Kevin Koeppen 18 FY 2026 Administrative and Materials Budget Increase Breakdown Increase Driver/Category Ongoing Increases One-time Increases Total % Inc of the Total Admin & Materials Budget Proposition 218 challenges $ -$ 650,000 $ 650,000 4.3% Emergency main breaks 660,000 -660,000 4.4% Planning document updates -590,000 590,000 3.9% Inflationary increases 406,100 -406,100 2.7% Regulatory creep 334,800 -334,800 2.2% Strategic plan initiatives 143,000 120,000 263,000 1.7% Insurance premium increases*161,000 -161,000 1.1% All other increases 431,500 -431,500 3.1% Total increases before savings 2,136,400 1,360,000 3,496,400 All other savings/budget decreases (1,404,500) Total FY 2026 overall budget increase $ 2,091,900 19*The $322,000 total increase to the insurance premium is attributable 50% to inflation, included in the inflationary increases figure above, and 50% to insurance market conditions unrelated to inflation. Capital Improvement Program FY 2026 – FY 2031 Beth Gentry 20 Construction Climate/Mitigation Factors Influencing Construction Climate Shortage of skilled & unskilled labor & increase in labor costs Regional competition for contracting resources Materials/Equipment cost escalation due to demand and material shortages Extended delivery times Uncertainty in international trade policies (e.g., tariffs, etc.) Increase in the Consumer Price Index Mitigation Strategies Value engineering Grouping projects to attract bidders Pre-purchasing of some materials Extended contract timelines for non-urgent projects Grant funding 21 CIP Budget Guidelines New residential development includes more multi-family dwellings in proportion to single-family dwellings with commercial/industrial outpacing residential Near term development trend is expected to be slightly lower in FY 2026 and the 5-year projection In preparing the budgets for the individual CIP projects, the Engineering Department used recent construction and bidding data to adjust costs for each project Reprioritized projects based on District’s planning documents to control spending to keep rates stable 22 CIP Six-Year Budget Look Forward ($ Millions) FY 2025 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 Totals $ 16.0 $ 31.5 $ 33.4 $ 36.3 $ 31.5 $ 22.0 Six-Year Total: $170.7 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Totals $ 18.7 $ 35.4 $ 38.8 $ 36.2 $ 31.7 $ 24.6 Six-Year Total: $185.4 FY 2026 23 Significant CIP Project Expenditures Fiscal Year 2026 CIP ($ Millions) Reservoir Construction or Rehabilitation Pump Station Upgrades & Modifications Various Pipeline Replacements (7 Total) Vehicles & equipment RWCWRF Projects Reservoir Coating Meter Replacement $ 4.0 2.0 1.9 1.5 1.1 1.0 1.0 Total Expenditure Projection % of Total FY 2026 $ 12.5 67% 24 Pipeline Replacement Projects (35 Total) Meter Replacement Reservoir Construction or Rehabilitation Pump Station Replacement and Rehabilitation Reservoir Coatings Vehicles & Capital Equipment Valve Replacement RWCWRF Treatment $ 43.4 30.5 29.2 23.8 14.8 10.1 5.1 3.7 Total Expenditure Projection $ 160.6 % of Total FY 2026 – FY 2031 Budget 87% Significant CIP Project Expenditures Fiscal Year 2026 – 2031 CIP ($ Millions) 25 Key Assumptions, Financing Plan, and Conclusion Kevin Koeppen 26 FY 2026 Assumptions ▪Budgeted volumes ▪Growth revenues Revenues ▪CWA Costs Operating ▪Advance fund Pension and OPEB Strategy 27 Water Volumes •Four-year historic average usage •Ceiling based on highest normal volume/driest year •Floor based on lowest volume/wettest year Average Usage Approach •Long-term accuracy of rate projections Goal = Projected Volumes at the Midpoint 28 FY 2026 Budget Volumes 29 *Rainfall through March 12, 2025. Potable Units (in millions) Recycled Units (in millions) Rainfall (inches)Type 2022 Actual 12.3 1.7 6.8 Dry 2023 Actual 11.2 1.4 17.1 Wet 2024 Actual 11.3 1.4 11.9 Wet 2025 Projection 12.1 1.7 4.2*Dry 4-year Average 11.7 1.6 10.0 Growth 0.20%0.20% FY 2026 Budget 11.7 1.6 Potable Water Volumes Unit Sales (In Millions) 30 12.1 12.3 11.4 11.2 FY 2026 11.7 11.9 10.0 10.5 11.0 11.5 12.0 12.5 13.0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Base Volume Cumulative Growth Ceiling Floor Recycled Water Volumes Unit Sales (In Thousands) 31 FY 2026 1,561 1,724 1,742 1,392 1,410 1,576 1,000 1,200 1,400 1,600 1,800 2,000 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Base Volume Cumulative Growth Ceiling Floor CWA Rate Increase Drivers 32 Rate Increase and Projections * Weighted average increase in CWA/MWD rates and charges applicable to the District. ** Based on “Placeholder” rates published by CWA in March 2024 Board of Director meeting presentation. 2025 2026 2027 FY2025 Projections CWA Proposed May 2024 18.0%15.0%4.0% CWA Passed June 2024 14.0%16.4%5.7% Otay Effective Rate Increase*15.7%16.8%**6.0% Other Increase Drivers 33 Prior Year Potable Rate Increase Projections and Unanticipated Pressures FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2025 Rate Increase Projection 10.8%5.4%6.7%6.7%6.7% Admin & Materials Expenditures $2.1M $1.5M $0.8M $0.8M $0.9M Prior Year Recycled Rate Increase Projections and Unanticipated Pressures FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2025 Rate Increase Projection 5.3%5.3%5.3%5.3%5.3% Water Purchase Cost $1.0M $3.0M $1.8M $2.8M $3.6M Prior Year Sewer Rate Increase Projections and Unanticipated Pressures FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2025 Rate Increase Projection 4.8%4.8%4.8%4.8%4.8% Sewer CIP $0.0M $0.0M $0.0M $1.1M $2.7M Rate Drivers Water Water purchase costs Proposition 218 Land sale Increase in Six-Year CIP projection Debt coverage above target for six years Reserves at or above target over six years Regulatory creep, strategic plan initiatives, inflation Sewer City of San Diego Pure Water Project Increase in Six-Year CIP projection County shared facility projects Reserves at or above target over six years Regulatory creep 34 Financing Plan 35 ▪2026 Debt Issuance ▪2028 Debt Issuance ▪2030 Debt Issuance Water ▪2029 Debt Issuance ▪2031 Debt Issuance Sewer Closing Comments June 4th Presentation ▪Budget Summary ▪Water Rate Recommendations ▪Debt Coverage Projection ▪Final CWA Rates and Charges ▪Labor & Benefit Costs ▪Direction to Mail Water Rate Increase Notices and Sewer Proposition 218 Notices ▪Administrative and Materials Expenses ▪Salary Schedule ▪Fund Transfers ▪Rate Comparison ▪Budget Approval 36 Questions 37