HomeMy WebLinkAbout04-26-23 Board Packet 1
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 26, 2023
12:00 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
RECESS TO CLOSED SESSION
5. CLOSED SESSION
a) CONFERENCE WITH LEGAL COUNSEL – PENDING LITIGATION [GOVERN-
MENT CODE § 54956.9(b)]
MARK COZIAHR, ET AL. vs. OTAY WATER DISTRICT, CASE NO. 37-2015-
00400000-CU-MC-CTL
b) CONFERENCE WITH REAL PROPERTY NEGOTIATORS pursuant to California
Government Code Section §54956.8
Property: SALT CREEK GOLF COURSE
525 HUNTE PARKWAY
CHULA VISTA, CA 91914
Agency negotiator: General Counsel
Under negotiation: Disposition of Property
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RETURN TO OPEN SESSION
6. REPORT ON ANY ACTIONS TAKEN IN CLOSED SESSION. THE BOARD MAY AL-
SO TAKE ACTION ON ANY ITEMS POSTED IN CLOSED SESSION.
WORKSHOP
7. DISCUSSION OF THE FISCAL YEAR 2024 BUDGET KEY FIGURES AND ASSUMP-
TIONS IMPACTING THE UPCOMING BUDGET PROPOSAL (BEACHEM/KOEPPEN)
8. 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
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 24, 2023, 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 24, 2023.
/s/ Tita Ramos-Krogman, District Secretary
STAFF REPORT
TYPE MEETING: Budget Workshop MEETING DATE: April 26, 2023
SUBMITTED BY: Kevin Koeppen, Assistant Chief
of Finance
PROJECT: DIV. NO.All
APPROVED BY:
(Chief) Joseph R. Beachem, Chief Financial Officer
Jose Martinez, General Manager
SUBJECT: Informational Item to Present FY 2024 Budget Key Figures and
Assumptions Impacting the Upcoming Budget Proposal
GENERAL MANAGER’S RECOMMENDATION:
This is an informational item presenting the FY 2024 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 2024 budget.
BACKGROUND:
The District’s budget process begins in January and ends with the
adoption of the next fiscal year budget at the June Board meeting,
and implementation of rates the following January. This Budget
Workshop is the second of three presentations related to the FY 2024
budget and covers the key budget assumptions and inputs. The first
presentation, the 2023 Economic Study, was given to the Board on
April 5, 2023. The final presentation of the consolidated budget is
scheduled for the June 7 Board meeting. At that meeting, staff will
be presenting the consolidated FY 2024 budget and requesting that
the Board:
•Approve the FY 2024 Operating and Capital Improvement Program
(CIP) Budget and associated rate changes.
•Approve the fund transfers for potable, recycled, and sewer.
•Adopt the Salary Schedule.
•Approve the continued advance funding of the District’s
unfunded pension and OPEB unfunded liability.
•Direct staff to draft and mail rate increase notices for
potable, recycled, and sewer.
The budget is put together presenting the most realistic set of
factors and assumptions based on information received from various
AGENDA ITEM 7
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sources including: the 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); vendors
such as SDG&E, and an economic report prepared this year by London
Moeder Advisors. Staff uses this information in conjunction with
other economic indicators affecting taxes and revenues, such as
inflation and interest rates, to prepare the budget. Based on input
from the Board, staff performed a sensitivity analysis on past
growth projections and reviewed the associated rate risk. A summary
of this analysis is included later in the Major Assumptions section
of this staff report.
FY 2023 Projected Operating Results
Through February 28, 2023, the District has an operating surplus of
$1.8 million. Staff is projecting the surplus will remain close to
this level for the remainder of the fiscal year. The surplus is
primarily due to higher than anticipated property tax revenues and
vacancy-related personnel savings compared to the amounts in the
proposed budget. Staff is incorporating this surplus benefit to
offset pressures on rates in FY 2024 including the increasing CIP,
increasing potable water purchase costs, and inflation.
Budget Strategy
The culmination of the budget process is the recommendation of
changes to water and sewer rates which meet the following primary
budget objectives:
• Recommend rates that are compliant 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, at target levels for
the next six (6) years,
• Maintain debt coverage, excluding growth, above the target of
150% for water and sewer for the next six (6) years, and
• Support the Strategic Plan initiatives.
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 the financial strength of the agency. By managing staffing,
leveraging business and operating technologies, and implementing
best management practices, the District has become more efficient
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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.
Proposition 218
The State of California has well-established legal constraints
regarding utility rate setting, of which California Constitution
Article XIII D, Section 6 (commonly referred to as “Proposition
218”), is at the forefront. 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 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. A sewer cost of service study was completed and
presented to the Board on May 6, 2020, followed by a Proposition 218
hearing on October 7, 2020. At the conclusion of the 218 hearings,
the Board approved the terms of the 218 Notices which allowed for
rate changes for a period of up to five (5) years of 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, and 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. For sewer the
non-supplier cost increase is limited to 10%.
The five-year period for sewer is set to expire in 2025; therefore,
a sewer cost of service study is currently underway. To incorporate
newly available AMI data into water rates, a water cost of service
study is being performed concurrently. As a result, a Proposition
218 hearing is projected to be held in October 2025 for both sewer
and water, which will affect the January 1, 2026 water and sewer
rates.
FY 2023 Challenges
Ongoing Litigation
Pending rate litigation is having a significant impact on the FY
2024 budget. While the District believes a favorable result will be
achieved in both cases, the District needs to begin phasing in the
adverse rate impact associated with a potential unfavorable result.
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Real Estate Sales
The timing of the receipt of proceeds pertaining to the Salt Creek
property is projected to be delayed by two years. Staff is
projecting the proceeds will be received in FY 2027. The FY 2023
budget assumed the proceeds would be received in FY 2025. This delay
is advancing the timing and amount of projected debt issuances.
Overall, the combined impact of changes in assumptions pertaining to
pending litigation and real estate are having a significant impact
on this year’s projected rate increases. The total impact on rates
is planned to be phased in over time but is the equivalent of a 3%
one-time increase in rates.
Inflation
According to the Bureau of Labor Statistics, in January 2023, the
Consumer Price Index (CPI) for all goods in the San Diego Metro area
rose 6.4% during the last 12 months. The District is experiencing
inflation in some of its operating and capital areas in excess of
6.4% which includes water supply, energy, and chemical costs. While
inflation has risen above the recent historic lows, the FY 2023 rate
model anticipated and projected higher inflation. In FY 2023, staff
was predicting annual inflation of 5.5% for administrative and
material costs. As a result, a significant amount of inflation had
already been incorporated into last year’s projection.
Staff is estimating CWA rate increases will be just under 10.0% for
FY 2024. Further discussion regarding CWA rates is included in the
Water Costs section of this staff report. Similar to administrative
and material costs, staff had projected water cost inflation above
recent levels as part of the FY 2023 projection. The FY 2023 budget
projected the CWA variable rate would increase 7.3% in FY 2024 and
8.0% in FY 2025. While CWA’s draft increase is greater than
projected, a significant portion of the increase was part of the FY
2023 projection.
SDG&E rates have increased over 10% year-over-year and SDG&E is
seeking to increase their rates 14% on January 1, 2024.
Lastly, the District’s unit price on chemicals has increased over
$300,000, or greater than 100% from the budgeted FY 2023 unit price.
Staff estimates inflationary increases on the FY 2024 administrative
and materials budget is driving a $1.0 million increase to the
annual operating budget which represents an 8.2% inflation rate.
Increased chemical costs due to inflation above 100% is the largest
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component driver of this inflation. Excluding chemicals, increased
operating costs resulting from inflation is estimated to be 5.9%.
Such inflationary impacts to the District are partially mitigated
through increasing returns on investments and long-term contracts
with pricing structures that are fixed for the duration of the
contract or include pricing structures whereby annual price
increases are for fixed dollar amounts that are less than the CPI.
Although Federal interest rates are rising to combat inflation, the
London Moeder Advisors’ economic report cites inflation will likely
last well into 2024, albeit, at a more moderately tempered pace than
what the nation has experienced over the last two years. The
tempered pace is supported by the March 2023 CPI data. For the FY
2024 six-year rate model, staff is assuming administrative and
material inflation to decrease gradually from 5.5% in FY 2025 to
4.0% by 2028.
CIP Projects
The six-year CIP projection is increasing due to newly identified
CIP projects and inflation. The total six-year CIP budget is
increasing $40.2 million from $108.4 million in FY 2023 to $148.6
million in FY 2024.
There are many factors impacting the overall CIP increase including,
but not limited to: new projects being identified, updates to
engineering estimates and/or design as part of the normal project
progression, and inflation. Staff estimates overall CIP inflation of
8.8%.
The proposed CIP six-year budget is discussed further in the CIP
section of this staff report.
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 62% of the operating budget.
For FY 2023, the CWA/MWD purchases budget was approximately $58.3
million. Every 1% increase in CWA/MWD rates equates to an
approximate $540 thousand increase in cost to the District, or a
0.5% increase in District potable rates.
In March, CWA presented a draft budget to its Board, which included
a proposed 13.7% increase on variable treated water purchase costs.
CWA cited the following reasons for the increase:
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• A 7% increase from its primary supplier, MWD,
• Inflationary pressures,
• Reduced water sales volumes, and
• No longer having the flexibility to absorb increasing costs,
which it had been able to partially mitigate in prior years.
Since that time, CWA staff has undertaken an effort to reduce the
proposed increase and District staff has confidence that CWA will be
successful in reducing the draft 13.7%. While staff is confident in
that effort, District staff is assuming that a lower rate increase
will lead to higher future increases resulting in CWA ultimately
having materially similar rates within three years.
CWA has provided a high-low “all-in” forecast of future rates, which
is based on the results of certain assumptions including: MWD rate
increases, water sales, construction costs, and operating and
maintenance cost increases. Based on CWA’s proposed increase and
known results of many of the high-low assumptions, District staff is
projecting CWA rates in future years will be near the high
forecasted “all-in” rate.
For budget purposes, District staff is assuming CWA’s all-in rate
will increase 9.8% in FY 2024, 8.9% in FY 2025, and 5.5% annually
from FY 2026 to FY 2029. Using these assumptions, District staff is
forecasting CWA will be in the 97th percentile of its high-low
forecast by 2029. The following table summarizes Otay’s forecasted
CWA rate from 2023 to 2029.
CWA Projected “All-in” Rate
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Recycled
For FY 2024, the recycled purchases budget from the City is
approximately $5.8 million, which is a $310,000 or 5.6% increase
compared to FY 2023. The increase is due to a 5% increase in the
purchase price of water 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.
In addition, there are outstanding items that may impact CWA/MWD
future rates and charges. Such items carry uncertainty as to the
amount and timing of the impacts to the District. These items
include: a potential CWA rate redesign, agencies detaching from CWA,
and a renegotiated recycled agreement with the City.
Sewer Challenges
The 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 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. There is still significant
ambiguity regarding how these costs will affect our customers. 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. 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
four (4) years into the 15-year period. While estimates of the Pure
Water program are built into the budget projections, the separate
billing of the Pure Water program has not been incorporated into the
City’s sewage treatment fees; therefore, there is still some risk
regarding the ultimate outcome to the District.
The City has received grant funding and low-cost State Revolving
Fund (SRF) loan financing for its Pure Water program. These funding
sources directly reduce the overall Pure Water cost and reduce the
District’s pay-go funding requirement, smoothing out the cashflow
impact to the District’s customers. Payments for SRF loans do not
start until a year after construction completion, meaning the Pure
Water program cost impacts covered by SRF are expected to be delayed
until 2026 or 2027.
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The District has also mitigated the cost of the Pure Water program
by lowering our 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, staff is assuming a $31
thousand increase of the District’s operating Metro fees in FY 2024
based on an estimate provided by the City. In addition to the
operating fees, the District has established a CIP project
associated with the capacity under the new amended agreement. The
sewer CIP for Pure Water is estimated to cost $8.3 million over the
next 15 to 20 years. Based on information from the City, the current
six-year CIP projection includes $480 thousand for the Pure Water
program.
The District is also anticipating an increase in costs related to a
shared-facility agreement with the County of San Diego (the County).
A section of the District’s sewer system is a shared facility owned
and operated by the County. The County is undergoing a necessary
rehab project of the shared facility which is estimated to cost the
District’s sewer operation approximately $2.1 million over the next
six (6) years.
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 which
represents a savings opportunity. Overall, CalPERS and CERBT 2022
investment returns lagged actuarial expectations resulting in a
reduction in the funding levels of both the District’s pension and
OPEB plans.
As of June 30, 2021, which is the most recent CalPERS actuarial
pension valuation, the District’s pension was 95.5% funded, an
increase of 10.1% compared to the June 30, 2020 funded level. The
increase was mainly due to CalPERS achieving an actual investment
return of 21.3% versus an actuarial return of 6.8%. Staff is
anticipating the benefit from the FY 2021 return will be largely
offset by the fiscal year 2022 loss of 6.1%, resulting in the plan
returning to a funding status of approximately 85%. The CalPERS fund
annualized returns for the five-year period ending June 30, 2022
were 6.7%.
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As of June 30, 2022, the OPEB plan was 85% funded, which is a 19%
reduction compared to the 104% funding as of June 30, 2020. The
reduced funding level is similarly a result of lower than expected
investment returns in 2022. Staff will be recommending the District
redirect approximately $1.2 million that is currently being utilized
to advance fund CalPERS to CERBT in order to return the OPEB to 100%
funding level. This recommendation is consistent with prior budget
recommendations during periods in which the OPEB plan is not fully
funded.
The objective of this advance funding is to save the ratepayers
money. Continuing to advance fund the District’s OPEB and CalPERS
plans will save the District approximately $6.0 million over the 12-
year advance funding period, which began in 2021. As part of the
continuing efforts to reduce the District’s highest cost debt, the
FY 2024 budget includes continued advanced funding of the unfunded
obligations.
Major Assumptions
Growth Projections
At the April Board meeting, staff presented the annual economic
report, including growth projections, which are utilized to forecast
future capacity revenues and incremental increases in monthly
revenues. The Board requested that staff perform an additional
analysis of the growth projections to determine if a reduction was
necessary.
Staff met with Gary London of London Moeder Advisors to discuss the
projection and obtain clarification of comments made by Mr. London
at the April Board meeting. Mr. London clarified that any shortfall
in developer activity in one year would be recovered within the
following presented years, and while there will likely be slippage
between the years, Mr. London was very comfortable with his overall
prediction for the six-year period. Otay staff reviewed the forecast
and agreed with Mr. London’s assessment.
Staff performed an assessment of the historical growth forecasts
comparing them to actual capacity fee collections and determined
that capacity revenues have historically exceeded the forecast, with
two exceptions. In 2020, capacity revenues were 29% less than
historical forecasts. The shortfall in 2020 was most likely COVID-
driven as 2021 and 2022 capacity fee revenues were 22% and 87%
greater than historic forecasts. Staff is projecting the 2023
capacity revenues to be approximately 25% less than budget. This
shortfall is primarily due to a pause in development that occurred
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between October and December 2022. During this period, a rampant
rise in interest rates caused builders to pause. Since that time,
developer activity has returned. The following table displays
historical actual capacity fee collections as a percentage of the
forecast.
In terms of capacity fee collection's impact on rates, the
District’s budget objective of achieving a no growth debt service
target of 150% provides a level of risk mitigation for the impact
that a capacity fee shortfall would have on rates. Staff performed a
sensitivity analysis and determined that an overall 10% shortfall
for the six-year period would result in a $4 million reserve
shortfall throughout the six-year period. To the degree the
shortfall was not able to be offset by deferring expansion related
projects, the District would issue debt. A $4 million debt issuance
would reduce the District’s debt service coverage by 1%. The impacts
of a 10% capacity shortfall alone would not result in a change in
rates.
In terms of incremental monthly water revenues, a shortfall in the
annual volume growth projections of 0.25% would have an
inconsequential impact on rates.
Potable Sales Volumes
Through March 31, 2023, actual potable water sales were 8.7 million
units, which was 3.8% below the budget of 9.0 million units. The
reduction is due to above average rainfall and conservation. Through
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March 31, 2023, year—to-date rainfall of 16.9 inches was 140% above
the historical average.
Staff is continuing the practice of using an average of actual
historic volumes to determine budgeted volumes. This practice
results in budgeted volumes that are in the median range of recent
annual high and low volumes. Over the long term, this methodology
anticipates rainfall will equal average levels thus reducing the
likelihood of rate spikes due to shifts between wet and dry years.
The District began using this method in 2020. Prior to using this
method, the District relied on long-term weather forecasts, which
resulted in significant volume variances when the actual weather
differed significantly from predictions. Using the historic average
method has provided a more stable outlook on long-term volumes and
revenues.
For the FY 2024 budget, staff is using a four-year average from FY
2020 to FY 2023, plus a growth factor based on the London Moeder
Advisors’ economic report presented at the April Board meeting,
which equates to an approximate 1% annual customer growth. The
assumption that new customers will connect throughout the year and
will use approximately half the volume of the existing customer base
translates to an assumed volume growth of 0.25% annually. Staff
recognized FY 2021 volumes were above historic levels due to COVID-
19; however, inclusion or exclusion of FY 2021 volumes has less than
a 1% impact on the total budgeted volume.
The following table contains a chart of historical potable volumes,
rainfall, the four-year average, and the FY 2024 volume calculated
as the four-year average, plus growth.
Historical Unit Sales (in million HCF) and Rainfall (in inches)
Actual Projected Average Budget
FY 2020 FY 2021 FY 2022 FY 2023 4-Year FY 2024
Rainfall 16.7 4.8 6.8 16.9 11.3 N/A
Units 11.4 12.6 12.3 11.6 12.0 12.0
On the following page are the projected unit sales assumptions
proposed for the FY 2024 six-year rate model. Additional discussion
pertaining to the projected volumes can be found immediately
following the table.
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Projected Unit Sales (in million HCF)
Six-Year Rate Model Projection
FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 6-year Avg Growth %
12.0 12.1 12.1 12.1 12.2 12.2 12.1 0.32%
The following analysis shows historic and projected volumes compared
to last year’s projections and ranges.
• 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 yellow section represents the volume associated with
growth.
• The black solid line represents the FY 2024 projection,
totaling the existing (blue) plus the growth (yellow) volumes.
Recycled Sales Volumes
Through March 31, 2023, the actual recycled water sales volume was
1.1 million units, which was 5.7% below budget. The reduction in
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volume is due to above average rainfall discussed in the previous
potable sales volume section of this report. The FY 2024 recycled
volume projections have been prepared using the same historical
average plus growth methodology used to prepare the potable volume
projection. The following tables and chart contain historical
recycled volumes, rainfall, the four-year average, the FY 2024
volume calculated as the four-year average, plus growth, as well as
the six-year forecast.
Historical Unit Sales (in million HCF) and Rainfall (in inches)
Actual Projected Average Budget
FY 2020 FY 2021 FY 2022 FY 2023 4-Year FY 2024
Rainfall 16.7 4.8 6.8 16.9 11.3 N/A
Units 1.5 1.8 1.6 1.5 1.6 1.6
Following are the projected unit sales assumptions proposed for the
FY 2024 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 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 6-year Avg Growth %
1.6 1.6 1.6 1.6 1.6 1.6 1.6 0.25%
The analysis on the following page shows historic and projected
volumes compared to last year’s projections and ranges.
• 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 yellow section represents the volume associated with
growth.
• The black solid line represents the FY 2024 projection,
totaling the existing (blue) plus the growth (yellow).
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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 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 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:
1,799 1,817
1,452 1,470
FY 2024
1,598
1,616
1,000
1,200
1,400
1,600
1,800
2,000
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Otay Water District
Recycled Sales Volume Analysis
FY 2024 Budget and Six-Year Projection
(in thousand units)
Base Volume Cumulative Growth Ceiling Floor
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• 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 $148.6 million is
increasing by $40.2 million versus last year. The total water CIP
budget for the six-year period is $137.2 million, which is a $38.6
million increase compared to FY 2023. The sewer CIP of $11.4 million
is increasing $1.6 million compared to FY 2023. To maintain reserves
at target levels for both water and sewer, staff is currently
projecting debt issuances for water in 2025 and 2027, and for sewer
in 2027. As the District approaches the timing of issuing debt, an
analysis will be performed to determine the cost benefit of
combining the two water debt issuances into a single issuance. The
following schedule contains a roll-forward of the six-year CIP
budget followed by explanations for the roll-forward amounts.
FY 2023 Six-Year CIP Budget $ 108.4
New Projects $ 28.9
Completed Projects $ (1.9)
Ongoing Project Changes
Budget Increases $ 24.2
Budget Decreases $ (3.5)
Budget Expenditures for FY 2023 $ (7.5)
FY 2024 Six-Year CIP Budget $ 148.6
The $28.9 million for 28 new CIP projects predominantly consists of
the following:
• $11.0 million for the 870-2 Reservoir to provide a secondary
storage reservoir to allow the District to replace the floating
cover and liner for the 870-1 Reservoir.
• $5.2 million total in 11 CIP budgets for Developer pipeline
reimbursement projects.
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• $4.9 million for several pipeline replacement projects in
Jamul.
• $4.8 million for valve replacement within the District.
Budget increases of $16.7 million are due to a combination of
increasing scope of work, updates to engineering estimates, and
inflation. Scope of work increases are approximately $4.3 million.
Increases associated solely with inflation are $3.2 million, or 11%.
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 approach to financing establishes
financial targets that add to the financial strengths of the
District. Those strengths include:
• AA credit rating which saves ratepayers money through reduced
debt costs.
• Financial stability which allows the District to set rates
based on the long-term financial needs of the District. This
allows the District to anticipate financial challenges well
into the future and prevents unnecessary rate spikes to
District customers.
Open Items
Following is a list of items that are in process and will be
presented at the final Budget Board presentation on June 7:
• Overall budget summary
• Rates and rate increases
• Debt service coverage
• CWA Rates and Fixed Charges
• Labor and benefits
• Materials and maintenance expenses
• Administrative and legal expenses
• Salary Schedule
• Rate comparison
17
• Fund transfers
• Budget approval
FISCAL IMPACT: Joseph R. 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. To the degree that these targets and covenants are met, the
financial impact of the items discussed in this staff report will be
phased in over multiple years. For both water and sewer, staff is
estimating that debt service coverages and the reserve requirements
will be at or above targeted levels for the six-year period.
STRATEGIC OUTLOOK:
The District ensures its continued financial health through long-
term financial and debt planning.
LEGAL IMPACT:
None.
Attachments:
A) Presentation – FY 2024 Budget Workshop
FY 2024
Budget
Workshop
April 26, 2023
1
Attachment A
Workshop Agenda
Introduction and Objectives Joe Beachem
Challenges, Strengths, District Actions, Drought and
Conservation, Clean Fleets, and Valve Replacement
Strategic Plan Initiatives Adolfo Segura
Capital Improvement Budget Bob Kennedy
Key Assumptions, Financing Plan, and Conclusion Kevin Koeppen
2
Jose Martinez
Budget Objectives
Support Strategic Plan
objectives
Support essential
operations of the District
Reserves at target for all
six years
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
•Economic Study presented
•Legislative update presented
Today
Special Board Meeting
•Budget Workshop
June
Board Meeting
•Budget Approval
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
▪Next Cost of Service Study currently underway
▪Next Proposition 218 Hearing –October 2025
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 –2020
▪Proposition 218 Hearing –October 7, 2020
▪Next Cost of Service Study currently underway
▪Next Proposition 218 Hearing –October 2025
Timeline
▪5-years
▪100% pass-through of supplier-related costs, including SDG&E
▪Up to 10% rate increases for internal costs
Board Approved Terms
7
Challenges,
Strengths, and
District Actions
Jose Martinez
8
Challenges
Affordability
Proposition 218
Real Estate
Increase in Six-Year CIP
San Diego County Water Authority Rates
Inflation
Regulatory Creep and Unfunded Mandates
Workforce Turnover
Drought/Making Conservation a Way of Life
9
Strengths
Strategic Planning process
CWA diversification of regional supply (drought-proofing San Diego)
▪$3.2 million received in FY 2021
▪$2.5 million received in FY 2022
CWA refunds
▪Continue annual advance funding practice
▪Recommending to redirect $1.2 million currently being utilized to advance fund CalPERS to CERBT in order to return the OPEB to 100% funding level
▪$6 million estimated savings over the 12-year advance funding period, which began in 2021
OPEB and Pension Funding
▪32% increase in customers per FTE
Efficiency Gains (since 2007)
▪S&P ‘AA’ rating
Bond Rating
▪Reserve, Debt, and Investment Policies
Sound Financial Management
10
District
Actions
▪Low Income Household Water Assistance Program (LIHWAP) –over $78K to
date
Advocating for Customers
▪2023 Winter Storm Emergency Declaration –District is pursuing an estimated
$75K to restore damaged roads.
▪2023 COVID-19 –over $284K submitted
FEMA/CalOES Assistance
▪Habitat Management Area and Mitigation –over $70K
▪Climate Adaptation and Resiliency Plan –over $230K
▪Joint Sweetwater Authority -Otay Water District Recycled Water lntertie
Project Planning Study -$300K (applied for, not yet approved)
o Under review by SWRCB –may require 50% matching funds ($150K) which
would be split with SWA
Grant Efforts
11
Drought/
Making
Conservation
a Way of Life
12
▪Driest 3-year period (2020-2022)
▪Governor announced Water Supply Strategy (August 2022)
o Make up for supplies the state could lose over next two decades.
o Capture, recycle, de-salt, and conserve.
▪Executive Order N-5-23 signed March 24, 2023
o Ended 15% state voluntary water savings target while continuing to make conservation a way of life.
o Ended required Level 2 Water Shortage Contingency Plan (WSCP) actions.
Drought Response and Extreme Weather
▪CWA will propose to deactivate WSCP Level 1 at June 22 board meeting.
▪District will monitor state and CWA direction.
SWRCB Emergency Regulation expires June 10, 2023
▪May 2023 –Formal rulemaking process anticipated to begin.
▪Late 2023 –SWRCB will adopt urban water-use efficiency standards, performance measures,
and variances.
▪January 1, 2024 –Urban water suppliers calculate targets.
▪Many unknowns (only two of seven state components/standards have been approved) –difficult to determine District financial impacts.
SB 606 and AB 1668 (2018)
▪Revised standard for indoor residential water use to be 47 GPCD (from 52.5 GPCD) beginning in 2025 and lowering the standard again to 42 GPCD (from 50 GPCD) in 2030.
SB 1157 (2022)
Advanced Clean Fleet Rulemaking
▪Executive Order N-79-20 accelerates the state’s transition to carbon neutrality by setting a course to end sales of
internal combustion passenger vehicles by 2035.
▪CARB is tasked with transitioning fleets to zero-emission vehicles (ZEVs) to meet the state’s goals.
▪The Advanced Clean Fleets proposed rulemaking for Public Fleets would require:
o 50 percent of class 2B and above replacement or addition to be ZEVs by January 2024.
o 100 percent of class 2B and above replacement or addition to be ZEVs by January 2027.
o 100 percent zero-emission off-road vehicles and equipment by 2035, where feasible.
▪Otay Water District and other California water agencies along with the Association of California Water Agencies
(ACWA) submitted several comments to CARB and met with CARB staff, seeking an exemption for emergency response
vehicles and further clarification on the proposed regulation.
▪CARB will adopt rule at the April 27 workshop after 15 days of public comment which began on March 23 and ended on
April 7. Otay Water District provided comments during this period.
▪AB 1594 (E. Garcia) –Back-up legislation on clean fleet regulations if water agencies do not get what they are seeking
in regulations. It would require any state regulation that seeks to require, or otherwise compel, the procurement of
medium-and heavy-duty ZEVs by a public agency utility to ensure that those vehicles can support a public agency
utility’s ability to maintain reliable water and electric services, respond to disasters in an emergency capacity, and
provide mutual aid assistance statewide and nationwide, among other requirements.
Valve Replacements
200 200 200 200 200 200784
1803
3823
4690
6988
634
1089
2892
6715
11405
18393
19027
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
12000
13000
14000
15000
16000
17000
18000
19000
20000
2030 2040 2050 2060 2070 2080
Previous Practice
Replaced Past Due Cumulative Past Due
Valve Replacement Strategy
0
200
400
600
800
1000
1200
An
n
u
a
l
R
e
p
l
a
c
e
m
e
n
t
T
o
t
a
l
s
Replacement Dates
End of Life Valves OWD Replacement Pilot (60 annually)Neighboring District Replacement Strategy (150 Annually)
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
16
Strategic Plan
FY2023 –FY2026
Adolfo Segura
17
AGING WORKFORCE/ KNOWLEDGE TRANSFER
CULTURE (RETENTION & RECRUITMENT OF
TOP TALENT)
CUSTOMER SERVICE
FINANCIAL (BUSINESS SYSTEMS & LONG-TERM
BENEFIT COST ANALYSIS)
CYBERSECURITY
RIGHT SIZING STORAGE &
DISTRIBUTION SYSTEM
ASSET MANAGEMENT
OVERVIEW
The District’s four-year strategic plan (SP), FY23 –FY26, is a roadmap for how the District will execute key
objectives, respond to current challenges, and improve the essential services it provides to its customers.
Key areas of focus include:
11 strategies, 35 objectives, and 34 KPIs 18
BALANCED SCORECARD
Focuses on the financial
performance of the District
FINANCIAL
Focuses on the District’s culture
and development of staff to
ensure there is a productive and
skilled workforce in place
LEARNING AND
GROWTH
Focuses on customer service
levels, satisfaction, brand,
and confidence
CUSTOMER
Focuses on business processes
designed to deliver and
improve customer objectives
and services
INTERNAL BUSINESS
PROCESS
19
CUSTOMER Enhance and build public awareness of the District’s
priorities, initiatives, programs, and services (4 objectives)
Answer Rate
Technical Water Complaint
Potable Water Compliance Rate
Customer Opinion Survey
STRATEGIES ·1
TOTAL OBJECTIVES ·4
KEY PERFORMANCE INDICATORS ·4Enhance customer and community engagement to increase public awareness of the water industry and the District, while continuing to provide superior customer service
20
FINANCIAL
Maintain a long-range financing plan that sets forth the long-
term funding needs of the District (5 objectives)
Invest in technology enhancements to improve customer
engagement and satisfaction (2 objectives)
STRATEGIES ·2
TOTAL OBJECTIVES ·7
Operate the District in a financially sustainable and transparent manner
CIP Project Expenditures vs.
Budget
Construction Change Order
Incidence
Billing Accuracy
Sewer Rate Ranking
Water Rate Ranking
Water Debt Coverage Ratio
Sewer Debt Coverage Ratio
Reserve Levels
KEY PERFORMANCE INDICATORS ·14
Accounts per Full-Time Employee
(FTE)
Distribution System Loss
Planned Potable Water Maintenance
Ratio in $
Planned Recycled Water
Maintenance Ratio in $
Planned Wastewater Maintenance
Ratio in $
Direct Cost of Treatment per MGD
21
INTERNAL BUSINESS
PROCESSES
STRATEGIES ·6
TOTAL OBJECTIVES ·19
Leverage the use of renewable and clean energy
resources and reduce the use of hazardous
chemicals (4 objectives)
Implement technologies to improve response time,
security, and operational effectiveness (4 objectives)
Develop appropriate water resource mix to meet the
water reliability needs of the community (3 objectives)
Respond to anticipated water shortages through rate
structure modification, conservation assistance, and
outreach (2 objectives)
Advancement of District's Asset Management Program
(4 objectives)
Cyber and Physical Security (2 objectives)
Practice ongoing
infrastructure renewal and
organizational improvement
through planning and
increased operational
efficiency
22
Business Recovery Exercises
Vulnerability Assessment
Mark-out Accuracy
Easement Evaluation and
Field Inspection
System Valve Exercising
Program
Potable Water Distribution
System Integrity (Leaks)
Potable Water Distribution
System Integrity (Breaks)
Recycled Water System
Integrity (Leaks)
Recycled Water System
Integrity (Breaks)
Sewer Overflow Rate
Potable Tank Inspection and
Cleaning
Hydrant Maintenance Program
Injury Incident Rate
KEY PERFORMANCE INDICATORS ·13
INTERNAL BUSINESS
PROCESSES
Practice ongoing
infrastructure renewal and
organizational improvement
through planning and
increased operational
efficiency
23
Coordinate workforce planning activities to determine
future needs,identify gaps,and implement actions to
close the gaps (3 objectives)
Improve Organization Effectiveness (2 objectives)
Employee Voluntary Turnover Rate
Training Hours per Employee
Safety Training Program
STRATEGIES ·2
TOTAL OBJECTIVES ·5
LEARNING AND
GROWTH
Foster a workforce culture of employee development and innovation
KEY PERFORMANCE INDICATORS ·3
24
Capital
Improvement
Program
FY 2024 –
FY 2029
Bob Kennedy
25
Construction Climate/Mitigation
Factors
Influencing
Construction
Climate
Shortage of skilled and unskilled labor
Increase in the Consumer Price Index
Regional competition for contracting resources
Materials cost escalation due to demand and material shortages
Mitigation
Strategies
Value engineering
Grouping projects to attract bidders
Pre-purchasing of materials
Adding no-cost time extension into specs
Grant funding
26
CIP Budget Guidelines
Development trend is expected to be unchanged in FY 2024
New development with multi-family dwellings in greater proportion to single-family dwellings
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
27
CIP Six-Year Budget Look Forward
($Millions)
FY 2023
FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028
Totals $ 12.6 $ 22.0 $ 24.3 $ 18.0 $ 15.9 $ 15.6
Six-Year Total: $108.4
FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Totals $ 15.3 $ 24.9 $ 24.4 $ 30.1 $30.2 $23.7
Six-Year Total: $148.6
FY 2024
28
Six-Year Budget Differences
FY 2023 vs. FY 2024 $ Millions (Negative Value)
FY 2023 Six-Year CIP Budget $ 108.4
New Projects 28.9
Completed Projects (1.9)
Ongoing Project Changes
Budget Increases
Budget Decreases
Budget Expenditures for FY 2023
24.2
(3.5)
(7.5)
FY 2024 Six-Year CIP Budget $ 148.6
29
High Profile CIP Projects
Fiscal Year 2024 CIP ($ Millions)
Various Waterline Replacements (39 Total)
Meter Replacement
Reservoir Construction/Rehabilitation Projects
Pump Station Upgrades & Modifications
RWCWRF Projects
$ 6.5
1.2
1.1
0.8
0.7
Total Expenditure Projection
% of Total FY 2024
$ 10.3
67%
30
Pipeline Replacement Projects (39 Total)
Reservoir Construction or Rehabilitation Projects (16 Total)
Meter Replacement
Pump Station Replacement and Rehabilitation
Pipeline Misc. Appurtenances
Sewer Basin Improvements
Equipment & Vehicles
RWCWRF Projects (10 Total)
$ 43.5
30.5
18.2
13.7
9.4
9.0
7.0
5.0
Total Expenditure Projection $ 136.3
% of Total FY 2024 –FY 2029 Budget 92%
High Profile CIP Projects
Fiscal Year 2024 –2029 CIP ($ Millions)
31
Key
Assumptions,
Financing Plan,
and Conclusion
Kevin Koeppen
32
FY 2024
Assumptions
▪Budgeted volumes
▪Growth revenues
Revenues
▪CWA Costs
▪Impacted by inflation
▪Regulatory creep
Operating and CIP Costs
▪Advance Fund
Pension and OPEB Strategy
33
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
▪$1.9 million reserve reduction
▪20% debt service coverage reduction
▪Reserves maintain above target and debt service coverage above covenant
Budget Drought Resiliency -10% volume reductions
34
FY 2024 Budget Volumes
Potable Units
(in millions)
Recycled Units
(in millions)
Rainfall
(inches)Type
2020 Actual 11.4 1.5 16.7 Wet
2021 Actual 12.6 1.8 4.8 Dry
2022 Actual 12.3 1.6 6.8 Dry
2023 Projection 11.6 1.5 16.9 Wet
4-year Average 12.0 1.6 11.3
Growth 0.25%0.25%
FY 2024 Budget 12.0 1.6
35
Potable Water Volumes
Unit Sales (In Millions)
36
12.2
12.4
11.6
11.7
FY 2024
12.0
12.2
10.0
10.5
11.0
11.5
12.0
12.5
13.0
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Base Volume Cumulative Growth Ceiling Floor
Recycled Water Volumes
Unit Sales (In Thousands)
1,799 1,817
1,452 1,470
FY 2024
1,598 1,616
1,000
1,200
1,400
1,600
1,800
2,000
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Base Volume Cumulative Growth Ceiling Floor 37
CWA Projected All-in Rates
2024 –9.8% increase
2025 –8.9% increase
2026 and beyond –5.5% annual
increases
2029 –97th percentile by 2029
38
Rate Drivers
Water
Proposition 218
Land sale
Water purchase costs
Increase in Six-Year CIP projection
Debt coverage above target for six years
Reserves at or above target over six years
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
Inflation
39
Financing Plan
Water
•2025 Debt Issuance
•2027 Debt Issuance
Sewer •2027 debt issuance
40
Closing Comments
June 7th Presentation
▪Budget Summary
▪Rate Increase Recommendation
▪Debt Coverage Projection
▪Labor & Benefit Costs
▪Direction to Mail Rate Increase
Notices
▪Admin & Materials Costs
▪Salary Schedule
▪Rate Comparison
▪Budget Approval
41
Questions and Input
42