HomeMy WebLinkAbout05-02-19 Board Packet 1
OTAY WATER DISTRICT
SPECIAL MEETING OF THE BOARD OF DIRECTORS
DISTRICT BOARDROOM
2554 SWEETWATER SPRINGS BOULEVARD
SPRING VALLEY, CALIFORNIA
THURSDAY
May 2, 2019
3:00 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
JURISDICTION BUT NOT AN ITEM ON TODAY'S AGENDA
WORKSHOP
5. DISCUSSION OF THE FISCAL YEAR 2020 BUDGET KEY FIGURES AND AS-
SUMPTIONS (BEACHEM)
6. ADJOURNMENT
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All items appearing on this agenda, whether or not expressly listed for action, may be
deliberated and may be subject to action by the Board.
The Agenda, and any attachments containing written information, are available at the
District’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 through the District Secretary by
contacting her at (619) 670-2280.
If you have any disability which would require accommodation in order to enable you to
participate in this meeting, please call the District Secretary at 670-2280 at least 24 hours
prior to the meeting.
Certification of Posting
I certify that on April 26, 2019, 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 Section §54954.2).
Executed at Spring Valley, California on April 26, 2019.
/s/ Susan Cruz, District Secretary
STAFF REPORT
TYPE MEETING: Budget Workshop MEETING DATE: May 2, 2019
SUBMITTED BY: Kevin Koeppen, Assistant Chief
of Finance
PROJECT: DIV. NO. All
APPROVED BY:
(Chief)
Joseph R. Beachem, Chief Financial Officer
Mark Watton, General Manager
SUBJECT: Informational Item to Present FY 2020 Budget Key Figures and
Assumptions Impacting the Upcoming Budget Proposal
GENERAL MANAGER’S RECOMMENDATION:
This is an informational item presenting the FY 2020 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 2020 budget.
BACKGROUND:
Each year the District goes through a rate setting process with new
challenges. The process begins in January and ends with the
adoption of the next fiscal year budget in the May/June timeframe,
and implementation of rates the following January.
As part of the budget, staff presents the most realistic set of
factors and assumptions based on information received from various
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 the
Xpera Group. Staff uses this information in conjunction with other
economic indicators affecting taxes and revenues, such as inflation
and interest rates, to prepare the budget.
In prior years, staff held a single Budget Workshop in May. During
that workshop staff presented several items pertaining to the budget
to the Board. For FY20, to be responsive to the Board’s request,
staff is modifying the budget process by splitting the Budget
workshops into three presentations that will provide the Board
greater opportunity to evaluate the overall budget.
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The Economic Outlook presented at the April 3rd Board meeting was
the first of the three presentations to the Board pertaining to the
FY 2020 budget. This report is the second presentation during which
we will review key assumptions and inputs used to prepare the
budget. A final presentation will be held on June 5th to present
the consolidated budget. At the June 5th Board meeting, staff will
be presenting the consolidated FY 2020 budget and requesting the
Board approve the following items: the FY 2020 Operating and CIP
Budget, Interfund Transfers, and actions associated with recommended
rate changes.
Rate Strategy
The culmination of the budget process is the recommendation of
changes to water and sewer rates, which meet the following primary
budget objectives:
o Recommend rates that are compliant with the requirements
of Proposition 218,
o Maintaining targeted reserve levels based on the
District’s Reserve Policy,
o Result in debt coverage levels being above the target
level of 150% excluding growth revenues and debt covenant
requirement of 125% including growth revenue,
o Support the Strategic Plan initiatives.
As part of the analysis staff evaluates the ability to smooth the
financial impacts on customers over a period of time. This might
result in rate increases being shifted back or forward by a year to
avoid a spike in rate increases.
With sewer customers, they are primarily sensitive to the total
monthly bill amounts, as this is what they see and pay. However,
they can also be sensitive to rates. While the bill amount is
simply the usage multiplied by the rate, it is different from water
in that it is a fixed bill for the year based on the rate and the
prior year winter average usage. Usage may vary year to year, and
to compensate for this, the rate may swing in the opposite direction
of the change in winter averages to maintain a steady and slightly
increasing net revenue stream. This creates a difficult dynamic
when there is a significant year over year winter average usage drop
and when focused solely on the rates instead of the bill amount.
Fortunately, sewer customers focus on the total bill amount, which
for the average customer is typically held steady with a moderate
increase. When winter average usage drops significantly, like this
budget year, the rate must move significantly in the opposite
direction. In this situation, even while most customers are focused
on the bill amount, staff will be smoothing out the necessary
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increases over the 6-year period to avoid a significant spike in
rates.
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. A water cost of service study was
completed and presented to the Board on April 17, 2017.
Subsequently, a sewer cost of service study was completed and
presented to the Board on March 7, 2018.
Subsequent to the completion of the cost of service studies,
Proposition 218 hearings were held on October 4, 2017 for water and
October 3, 2018 for sewer. At the conclusion of the 218 hearings
the Board approved the terms of the 218 Notice, which allowed for
rate increases to pass-through 100% of cost increases from the
District suppliers and up to 10% rate increases for internal costs
for a period up to 5 years. The 5-year effective period for water
expires in FY 2022, while the 5-year period for sewer expires in
FY 2023. Staff will evaluate the cost benefit of bringing the two
lines of business cost of service studies into alignment in 2022.
Strategic Planning
In addition to the budget and rate setting process, the District’s
focus on strategic planning has played a positive role in the
financial strength of the District. By managing staffing,
automating processes, and implementing Best Management Practices,
the District has become more efficient and cost effective. The
Strategic Plan is foundational to the budget process as it drives
many of the programs of the District which are funded through the
budget process.
FY 2020 Challenges
CIP Inflationary Pressures
Due to market conditions the costs of CIP projects are increasing
significantly compared to prior year expectations. For projects
continuing from the FY 2019 budget to the FY 2020 budget, the
respective CIP budget has increased by $12.5 million, with
individual projects increasing up to 30% or more. Further
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discussion regarding these increases is included in the CIP section
of this Staff Report. While not reflected in this figure, new
projects added to the FY 2020 CIP budget are also impacted by the
increasing construction costs.
Water Sales
Predicting changes in usage patterns due to weather patterns,
political climate, and growth are key challenges of the budget
process. In FY 2018, the District experienced a significant
recovery in water sales volumes versus FY 2017, resulting in the
potable and recycled volumes exceeding budget by 10% and 12%,
respectively. For FY 2019, above average rainfall will result in
water sales volumes being less than budget. Staff is estimating
potable volumes will be 10.0% below budget and recycled volumes will
be 5.0% below budget.
Historically, staff has relied on long-range weather predictions as
part of the process to budget water volumes. In preparing the FY
2019 budget, the National Weather Service predicted precipitation
for the 2018/2019 winter would be comparable to 2017/2018. The
actual precipitation for the 2018/2019 winter season has been more
than four times the 2017/2018 precipitation, which has resulted in
projected net revenues being an estimated $2.1 million less than
budget. When considering savings initiatives implemented by staff,
this shortfall has been reduced to an estimated $1.1 million.
While the State is no longer considered to be in a drought and the
State Water Resources Control Board (SWRCB) has rescinded
conservation mandates, the SWRCB has maintained water-use reporting
requirements and prohibitions against wasteful practices. Beginning
January 1, 2020, new shut-off regulations become effective, which
increases the burden on staff for locking past due accounts. Also,
there is a potential water tax, which is likely to become effective
in the near future. The mechanics of the tax are still unclear, but
this adds another fee to our customers and creates an additional
reporting requirement for staff.
Water Costs
For FY 2020, the all-in potable rate (variable, plus fixed fees) is
increasing 3.2% from $1,703 per AF in FY 2019 to $1,758 per AF in
FY 2020. Based on the proposed budgeted units, this will increase
the cost of water by $1.5 million. This increase is within the
amount projected in the FY 2019 rate model for FY 2020. For the
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6-year rate model, staff is projecting CWA rates will increase
annually by an average of 5.6%. CWA also provides a projection of
expected high and low future rates through 2023. CWA’s rate for
FY 2020 is in the 20th percentile of the low projection. Over the
6-year period Otay’s projected annual increase of 5.6% results in a
projected cost above the 90th percentile of CWA’s forecast. Staff
believes this assumption is relatively conservative. If CWA’s rates
remain at the 20th percentile for future years, the benefit will be
incorporated into future rate recommendations.
The recycled water rate from the City for FY 2019 is expected to
remain at $1.73/HCF in FY 2020. A $150 thousand increase is
anticipated in recycled purchase cost due to the take-or-pay
contractual minimum volume increasing. In addition, it is estimated
that the SDCWA and the Metropolitan Water Authority credits of $1.2
million per year will expire at the end of FY 2023, which will
impact the projected rate increases over the next 6 years.
Insurance Costs
Overall insurance costs are expected to increase $260 thousand, with
workers compensation increasing $140 thousand and general/liability
insurance increasing $120 thousand. The increase in workers
compensation is mainly due to an increase in the experience
modification assigned to the District based on the District’s claim
history. The experience modifier is increasing from 219% in FY 2019
to 294% in FY 2020, which accounts for the majority of the $140
thousand increase. SDRMA is also implementing a 5.0% workers
compensation rate increase to all its clients, which is a smaller
component of the overall workers compensation increase. The
increase in general/liability insurance is based on the District’s
recent claim history. Between 2013 and 2019 the District paid $4.3
million in premiums, while SDRMA has paid out $5.3 million in
liability claims against the District. The claims were largely 3rd
party damages related to main breaks. In light of this history, the
increases are not surprising. Staff is working with SDRMA to gather
the details on how the premiums are calculated and looking for any
way to decrease our cost. Staff is also looking into optional
deductible levels (currently not offered), and phasing in of higher
insurance costs.
Sewer Challenges
The three primary challenges facing the sewer operation in FY 2020
are the reduced water usage on winter averages, the new debt
coverage requirement that comes into play with the issuance of debt,
and the Pure Water costs.
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Sewer is impacted by the reduced water usage, because the variable
component of the sewer bills are based on winter water usage from
January through April. Through March the residential winter average
usage compared to last year decreased 33.0%, which significantly
reduces the average customer’s sewer bill and the overall sewer
revenues. This drop in winter averages reduces annual sewer revenue
by $266 thousand.
Based on the 6-year CIP plan, staff is recommending a debt issuance
for sewer, which is estimated to be up to $6.0 million to fund a
portion of the sewer CIP, and anticipates the terms of the debt will
include a debt coverage covenant of 125%. This new debt coverage
requirement is expected to have an impact on rates over the next
6 years. When combined with the Pure Water Program impact the debt
coverage percentage is estimated to be at 148%, which is $48
thousand above the 125% covenant.
The City of San Diego’s Pure Water Program is the most significant
cost increase facing the sewer customers over the next 6 years, and
beyond. As mentioned in the April 3, 2019 Staff Report, Otay’s
sewer customer’s share of Pure Water Phase I is estimated at $2.6
million and Phase II is estimated at $5.7 million. The combined
effect on rates totaling 29% will need to be phased into rates over
the next 15 years. Even though the City provided a funding
requirement projection to the District over a year ago, the
projection only provided cash flow information through 2022 and
excluded cash flow projections for Phase II costs. There is still
significant ambiguity on how these costs will affect our customers.
The modification in capacity from 1.287 MGD to 0.38 MGD under the
new Metro agreement, when fully executed, will likely reduce the
future Pure Water allocation to the District. The City is seeking
grant funding, which if obtained, may be a direct reduction in the
overall Pure Water cost. The City has also applied for low cost
State Revolving Fund (SRF) financing, but there is uncertainty as
the City is still going through the SRF approval process. If debt
financing is obtained, it would smooth out the cash flow
requirements for Otay’s customers. Failure to obtain the projected
SRF loan or grant funding could impact the projected Metro JPA fees.
Over a year ago, the City provided a projection of the Phase I cash
funding required by Otay’s sewer customers through 2022. Staff
include these costs into the forecast; however, no new guidance has
been provided since that time. Phase II is also impacting the
6-year rate model beginning in FY 2024. However, to date, the City
has not provided detail annual cash flow projections for the Phase
II costs. Staff have incorporated a District prepared cash flow
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estimate of Phase II costs into the 6-year rate model, based on the
Otay’s total obligation of $5.7 million and Phase II starting in
FY 2024.
Due to these factors, there is much uncertainty regarding the Pure
Water costs; however, staff is expecting an updated long-range
projection after the Metro JPA meeting in May. Staff will be
incorporating any necessary changes into the FY 2020 rate model for
the final budget presentation on June 5th. Changes in the presumed
assumptions could impact the proposed sewer rate increases from
FY 2020 to FY 2025.
For the CIP component of Pure Water, staff is assuming a $50
thousand increase in the District’s Metro fees based on the City
communicating that CIP spending will increase $5.0 million per year.
The District currently represents approximately 1.0% of the Metro
capacity, which equates to the $50 thousand annual increase. In
addition to the capital cost funding requirements, staff has assumed,
based on input from the City, 5.0% annual increases in operating
costs for FY 2020 to FY 2024 and a one-time 10.0% increase in FY
2025 as Phase I becomes operational and Phase II advances. Based on
these assumptions, total annual Metro fees are expected to increase
from $733 thousand in FY 2020 to $1.2 million by 2025. Prior to
Pure Water, annual Metro fees were approximately $600 thousand.
There are some items that are offsetting the impact of the sewer
challenges:
o The CIP component of Pure Water costs, and the associated
capacity rights, are considered an intangible asset under GASB
51, which allows this component of the Metro JPA fees to be
capitalized and amortized over the life of the Metro agreement.
This change in accounting will provide relief to the sewer
operating budget by reducing the Metro JPA annual operating
expense by an average of $250 thousand, which benefits sewer’s
debt coverage ratio calculation. The CIP component of Pure
Water will now be funded by replacement reserves and recovered
over a longer period based on targeted reserve levels.
o The District’s sewer operation is anticipating receiving a $200
thousand refund from the City of San Diego related to the
annual Metro JPA true up for FY 2017. On an annual basis, the
City reconciles the sewer costs to sewer revenues and refunds
the Metro member agencies for any excess revenue collected. In
FY 2019 the District received a refund of approximately $400
thousand related to FY 2016. While the District does
anticipate future refunds, the amount and timing of the refunds
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are unknown. Due to the timing and amounts being unknown staff
has not included any additional future refunds in the 6-year
rate model. Any refunds received will be added to the reserves
in the year received and benefit the following year’s 6-year
rate model.
o The District receives approximately $24 thousand in
miscellaneous revenues from the County for a shared facility
owned and operated by the District. Historically, these
revenues were treated similar to miscellaneous water revenues,
which are not allowed to be included in the water debt service
coverage calculation as they are non-operating rental revenues.
Historically, sewer treatment of miscellaneous revenue has also
excluded miscellaneous sewer revenue from the sewer debt
service coverage calculation; however, due to the nature of
these revenues being operating related, they are eligible
revenues for the purpose of the debt service coverage
calculation. Therefore, this represents a $24 thousand annual
reduction in the retail customer revenues needed to meet the
debt coverage covenant.
o During FY 2018 the District completed an examination of sewer
laterals connected to its sewer mains. As a result the
District added approximately 25 customers during FY 2019
resulting in an additional $12 thousand of annual revenue.
CalPERS and OPEB Update
The District has taken measures to reduce the financial impact of
the pension. Efforts include: staff reductions, reducing the
benefit through PEPRA, and advanced funding of the District’s
pension obligation. On August 15, 2018, the District made an
advance payment of $31.8 million to CalPERS. At that time, staff
estimated the District would save $16.4 million over a 25 year
period. Based on the revised estimated UAL from CalPERS and the
finalized debt terms, the District is estimating a savings of
approximately $16.0 million.
For the OPEB plan, the District has been fully funding the annual
OPEB contribution while also paying the retiree cost without seeking
reimbursement from the OPEB trust. This effort, causes an advance
funding of OPEB, which has put the OPEB fund on track to be fully
funded in FY 2021. The average annual advanced funding to the OPEB
plan is $1.2 million. Like prior budgets, this budget shifts the
$1.2 million funding to the pension after the OPEB plan is fully
funded and continues until the pension is fully funded. Current
estimates project that this additional funding to the pension will
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save the District approximately $6.8 million through 2033, when the
pension plan is projected to be fully funded.
Major Assumptions
Potable Sales Volumes
Through March 31, 2019, actual potable water sales were 8.6 million
units, which was 10.7% below the budget. For the FY 2020 budget
staff is planning to use a three-year average volume as the basis
for the volume assumptions, and increasing this average by the
anticipated growth. This methodology is a change from the historic
methodology where staff based volume assumptions on long-term
weather forecasts, which have been historically inaccurate leading
to actual volumes significantly varying from the budgeted amount.
For the FY 2020 budget, the 3 year average of 11.68 million units
was adjusted by 0.5% to 11.74 million units. The 0.5% adjustment is
estimated growth. Water sales growth for new customers is based on
the Economic Outlook Report prepared by Alan Nevin of the Xpera
Group, and presented at the April 3rd Board meeting. For the FY
2020 budget rate model 6-year period, covering FY 2020 to FY 2025,
the District is budgeting to sell 2,979 potable meters, which
equates to annual average meter growth of approximately 1.0%. Based
on future residential growth consisting of smaller footprints and
efficient fixtures, the 1.0% growth was reduced to 0.5% for purposes
of estimating future water volumes. The following table shows the
historical water volumes from 2013 to 2019, along with the three and
five year averages.
Below are the projected unit sales assumptions proposed for the
FY 2020 6-year rate model. The methodology used to prepare the
potable volume component of the FY 2020 budget and 6-year rate model
results in a 6-year average volume projection that is within 1.0% of
the historic 3 and 5 year averages, and within 1.0% of the averages
excluding the FY 2016 drought year. This volume is considered
reasonable given the estimated 6.0% meter growth over the same
6-year period.
Projected Budget
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 3-Year 5-Year*
13,189,042 13,720,119 12,744,425 10,475,290 11,250,331 12,227,383 11,575,702 12,796,700 11,684,472 11,654,626
* Excluding the drought year, FY 2016, the average for the 4 remaining years was 11,949,460
Historical Unit Sales (in HCF)
Actual
FY 2019
Averages
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Recycled Sales Volumes
Through March 31, 2019, actual recycled water sales were 1.1 million
units, which was 8.3% below budget. Similar to the potable water
estimate, staff is using a 3-year average volume as the basis for
its future volume assumption, plus 0.5% to adjust for growth.
For the FY 2020 budget the 3-year average of 1.58 million units was
adjusted by 0.5% for growth to 1.59 million units. For the FY 2020
budget rate model 6-year period, covering FY20 to FY25, the District
is budgeting to sell 256 recycled meters, which equates to annual
average meter growth of approximately 1.0%. Based on the assumption
that future recycled areas would include more drought tolerant
footprints the 1.0% growth was reduced to 0.5% for purposes of
estimating future water volumes. The table below shows the
historical water volumes from 2013 to 2019, along with the 3 and 5
year averages.
Below are the projected unit sales assumptions used in the FY 2020
6-year rate model. The methodology used to prepare the recycled
volume component of the FY 2020 budget and 6-year rate model results
in a 6-year average volume projection that is within 1.0% of the
historic 3 and 5 year averages. This volume is considered
reasonable given the estimated 6.0% meter growth over the same
6-year period.
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 6-Year Average Annual Growth
11,739,145 11,797,841 11,856,830 11,916,114 11,975,695 12,035,574 11,886,867 0.50%
Projected Unit Sales (in HCF)
FY 2020 6-Year Rate Model Averages
Projected Budget
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 3-Year 5-Year
1,293,936 1,944,845 1,734,408 1,491,677 1,530,088 1,739,741 1,484,061 1,565,300 1,584,630 1,595,995
* Actual Figures exclude Salt Creek golf course, which closed in FY 2018.
** Excluding the drought year, FY 2016, the average for the 4 remaining years was 1,622,074
Actual*
FY 2019
Averages**
Historical Unit Sales (in HCF)
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 6-Year Average Annual Growth
1,592,739 1,600,703 1,608,706 1,616,750 1,624,833 1,632,958 1,612,781 0.50%
Projected Unit Sales (in HCF)
FY 2020 6-Year Rate Model Averages
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Power Costs
Power costs of $3.3 million for water and sewer are budgeted to
increase $15 thousand or 0.5% versus the FY 2019 budget. This is
due primarily to a 6.0% anticipated rate increase from SDG&E, offset
by reductions in volumes compared to the FY 2019 budget.
Capital Improvement Program (CIP) Budget
As a component of the annual budget development process, the
Engineering staff updates 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 District’s Strategic 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 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 requirements.
Developer driven requirements.
Economic outlook.
Growth projections.
Water supply diversification goals.
Board and management directives.
This year, the total 6-year CIP budget of $88.3 million is
decreasing by $4.5 million versus last year. The water total CIP
budgets for the six-year period are $79.9 million, which is a $1.7
million decrease compared to FY 2019, while the sewer CIP of $8.4
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million is decreasing $2.8 million compared to FY 2019. Staff is
projecting the water fund will have adequate reserves to fund the
water projects, while the sewer fund will need to borrow funds in FY
2020. The following schedule contains a roll-forward of the 6-year
CIP budget followed by explanations for the roll-forward amounts.
The $10.0 million in new projects consist mainly of the following:
o $2.0 million meter replacement program budgeted to begin in
2023 with the majority of funds being spent in 2025.
o $1.8 million for replacement of the Cottonwood sewer lift
station. This is a shared facility with the County of San
Diego; therefore, the District is also budgeting for half of
this project to be funded by the County of San Diego. The
County’s portion of the funding is reflected in other revenues.
o $1.8 million for pipeline replacements in the La Presa area.
o $1.5 million for the District’s capacity rights associated with
the Metro Pure Water CIP program.
o $600 thousand for modifications to the 832-1 pump station.
o $375 thousand for replacement of backflow prevention devices on
interconnections on Otay Mesa.
The $1.1 million of completed projects represents projects completed
and placed in service. The completed projects include:
o $500 thousand for the relocation of appurtenances at Alta Road
and Otay Mesa Road. The responsibility for this work was
transferred to the developer for the Otay Crossing Commerce
Park development.
o $224 thousand for safety and security enhancements throughout
the District.
o $122 thousand related to closeout of multiple reservoir coating
projects.
o $70 thousand for trenchless sewer rehabilitation.
o $60 thousand for a recirculation pipeline chemical supply and
analyzer feed replacement at the 520 reservoir.
FY19 6‐Year CIP 92.8$
New Projects 10.0$
Completed Projects (1.1)$
Deferred Projects (3.9)$
Ongoing Project Changes
Budget Adjustment 12.5$
Budged expenditures for ongoing projects in‐progress (22.0)$
FY20 6‐Year CIP 88.3$
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o $50 thousand for vehicle charging stations at the
administration building.
The $3.9 million represents the deferral of projects included in the
FY 2019 budget. It should be noted that the amount represents
budgeted dollars and no funds were spent on these projects to date.
Below is a listing of the applicable projects along with an
explanation for the discontinuance or deferral.
o $2.3 million related to a 20-inch pipeline replacement in the
711 zone on Otay Lakes Road at Santa Paula. This project was
deferred due to the reduction of water demand in this pressure
zone.
o $1.5 million for the reservoir recoating and upgrades at the
520-2 reservoir which was discontinued. The 640-1&2 reservoirs
will be used to serve this pressure zone to reduce reservoir
maintenance costs and reduce energy costs for the 850-2, 803-1
and the 832-1 pump stations.
o $140 thousand related to the deferral of a project to install
an interconnection with Padre Dam at Dehesa Valley. This
project was deferred until Padre Dam initiates construction of
a pipeline closer to the District boundary.
The $12.5 million increase for budget adjustments is related to
increasing budgets for ongoing projects due to changing market
conditions, as noted in a Staff Report presented to the Board on
November 7, 2018.
On several recent Staff Reports, staff has noted that in the current
bidding climate, the number of bidding contractors has been reduced.
During calendar year 2017, the District’s average number of bidders
was 5.7 across seven (7) projects advertised for construction. The
average number of bidders across ten (10) projects advertised for
construction during calendar year 2018 was reduced to 2.6. When the
number of construction projects available for bid grows regionally,
the contractors can be selective on the projects they choose to bid.
The District has seen a notable increase in the overall number of
projects under construction within the District boundaries,
including Village 3, Village 2, Millenia, Otay Crossings and the
SR-11 freeway extension to the border.
Material costs have also gone up. On June 1, 2018, the federal
government imposed a 25% tariff on steel and a 10% tariff on
aluminum imports. The Metropolitan Water District recently reported
material costs have increased 5% to 10% since March 2018. Other
local agencies are reporting increases to their construction costs
as well.
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In total, there were forty projects with budget increases totaling
$15.7 million offset by nine projects that decreased a total of $3.2
million including:
o $3.0 million (30%) increase for 711-2 pump station replacement
and expansion (P2578) as a result of bids the District received
for the 870-2 PS replacement project.
o $2.1 million (145%) increase for the Heritage Road bridge
replacement and utility relocation project (P2553) as a result
of recent bids Caltrans received on the SR-11 pipeline
replacement project and the recent bids the District received
for pipeline replacement projects on Hidden Mesa and Vista
Vereda Road.
o $1.1 million (32%) increase for the 1655-1 reservoir project
(P2040) as a result of design refinement of the access road to
the future reservoir and results of recent construction bids
the District has received.
o $1.1 million (61%) increase in the project for a lower Otay
Pump Station redundancy (P2619) as a result of design
refinement of the project, the remote location of the project,
the small working area at the site, and results of recent
construction bids the District has received.
o $1.0 million (83%) increase in the 12-inch pipeline replacement
project in the 803 pressure at Vista Grande (P2615) as a result
of recent bids the District received for pipeline replacement
projects on Hidden Mesa and Vista Vereda Road .
o $850 thousand (131%) increase in the 624/340 PRS at Paseo
Ranchero and Otay Valley Roads (P2616) as a result of recent
bids the District received for pipeline replacement projects on
Hidden Mesa and Vista Vereda Road.
o $800 thousand (32%) increase in the 12-inch pipeline
replacement, 978 zone, at Pence and Vista Sierra Drive (P2616)
as a result of recent bids the District received for pipeline
replacement projects on Hidden Mesa and Vista Vereda Road.
o $710 thousand (47%) increase in the 12-inch pipeline
replacement in the 978 zone on Hidden Mesa Drive (P2625) which
was approved by the Board on November 7, 2018.
o $400 thousand (29%) increase in the 944-1 cover/liner
replacement project (R2121) as a result of recent bids the
District received for pipeline replacement projects on Hidden
Mesa and Vista Vereda Road.
o $400 thousand (50%) increase the North District area cathodic
protection improvements (P2646) as a result of recent bids the
District received for pipeline replacement projects on Hidden
Mesa and Vista Vereda Road.
o $370 thousand (82%) increase to the 8-inch pipeline
replacement, in the 850 zone, at Coronado Avenue (P2608) as a
15
result of recent bids the District received for pipeline
replacement projects on Hidden Mesa and Vista Vereda Road.
o $300 thousand (12%) increase for the Vista Diego hydro-
pneumatic pump station replacement (P2639) as a result of
recent construction bids the District has received.
o $300 thousand (30%) increase for the central area cathodic
protection improvements (P2647) as a result of design
refinement of the project and results of recent construction
bids the District has received.
o $1.0 million (25%) decrease in SR-11 Utility Relocations to
reflect changes in Otay Crossing Commerce Park development SAMP
and the deletion of a Siempre Viva Road bridge waterline.
The $22.0 million represents the net change in the 6-year forecast
due to FY 2019 expenditures rolling off the 6-year budget and
FY 2025 budget being added to the 6-year plan. The FY 2019 actual
CIP spending rolling off for the FY 2020 budget is primarily
comprised of the following items, which were included in the FY 2019
budget:
o $7.9 million for the 870-2 pump station replacement (P2083).
o $3.5 million for the Campo Road sewer main replacement (S2024).
o $2.2 million for the 711-3 reservoir cover/liner replacement
(P2561).
o $1.9 million for the 12-inch pipeline replacement project in
the 978 zone at Hidden Mesa Road (P2625).
o $1.6 million for reservoir coatings and upgrades at the 803-2
(P2565) and 980-2 (P2546) reservoirs.
o $1.3 million for the current AMR change-out program (P2604).
o $1.1 million for the 12-inch pipeline replacement project in
the 978 zone at Vista Vereda Road (P2574).
o $1.1 million for phase three of the Calavo Basin Sewer
rehabilitation.
The budgeted amounts for FY 2019 ongoing projects continuing into FY
2025 primarily consist of the following:
o $2.3 million for the Vista Diego hydro-pneumatic pump station
replacement (P2639).
o $915 thousand for the 1485-2 reservoir coating and upgrades
(P2631)
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
16
balances. With these policies, a 6-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.
Staff is proposing no debt issuance for water as part of the FY 2020
budget. To support sewer’s planned CIP expenditures, staff will
proposing that sewer issue up to $6.0 million in 2020.
Open Items
Following is a list of items that are in process and will be
presented at the final Budget Workshop on June 5th:
o Overall budget summary
o Rates and rate increases
o Debt service coverage
o Sewer annual and winter average updates
o Labor and benefits
o Materials and maintenance expense
o Administrative and legal expense
o Salary Schedule
o Rate comparison
o 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 6-year
period. Recommended changes to rates will be based on the District
maintaining reserves at target levels and meeting its debt coverage
covenants. 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 will be above targeted levels and that reserve
requirements, as impacted by CIP, water sales, and Pure Water, will
be the primary driver of rate recommendations over the next 6 years.
STRATEGIC OUTLOOK:
The District ensures its continued financial health through long-
term financial planning and debt planning.
17
LEGAL IMPACT:
None.
Attachments:
A) Presentation – FY 2020 Budget Workshop #1
OTAY WATER DISTRICT
FY 2020 BUDGET
WORKSHOP #1
MAY 2, 2019
1
Attachment A
WORKSHOP AGENDA
2
Introduction and Objectives (Joe Beachem)
Challenges and Strengths (Mark Watton)
Strategic Plan Initiatives (Adolfo Segura)
Key Assumptions (Kevin Koeppen)
Capital Improvement Budget (Dan Martin)
Conclusion (Kevin Koeppen)
BUDGET PROCESS
3
6-Year
Rate Model
Year-end
Balances
Operating
Budget Input
6-Year CIP
Budget Input
MWD/CWA & City
Sewer Rates
Strategic
Plan
Assumptions
Interest Rates
Inflation
Growth
Sales
Targets
Debt Coverage
Reserve Levels
Operating
Budget
CIP
Budget
Water
&
Sewer
Rates
BUDGET OBJECTIVES
4
Support Strategic Plan Objectives
Support the operations of the District
Maintain reserves at or above target
Debt coverage target of 150%, excluding growth, for both water
& sewer
Fund the 6-year capital budget
Establish rates that are compliant with Proposition 218
PROPOSITION 218
5
Water
Water Cost of Service Study Performed - 2017
Prop 218 Hearing - October 4, 2017
Sewer
Sewer Cost of Service Study Performed - 2018
Prop 218 Hearing - October 3, 2018
Board Approved Terms:
5-years (Water to 2022 and Sewer to 2023)
100% Pass-through of supplier related costs
Up to 10% rate increases for internal costs
RATE STRATEGY
6
Maintain strategic objectives
Smoothing impacts
Monthly bill impact
Reserve rate ranking
CHALLENGES & STRENGTHS
(MARK WATTON)
7
CIP INFLATION
$12.5 million increase in projects primarily due to
market conditions:
Bidding climate
Labor shortages
Tariffs
8
12,364 12,511
13,189
13,720
12,744
10,475
11,250
12,227
11,576 11,739
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Actual Actual Projected Budget
POTABLE WATER VOLUMES
9
Unit Sales (in thousands)
10
1,576 1,553
1,779
1,945
1,734
1,492 1,530
1,740
1,484 1,593
‐
500
1,000
1,500
2,000
2,500
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Actual Projected Budget
RECYCLED WATER VOLUMES
Unit Sales (in thousands)
* Actual figures exclude Salt Creek golf course, which closed in FY 2018.
POLITICAL INITIATIVES
Conservation Mandates
New legislation with arbitrary residential GPCD goal of 55 vs.
Otay at 81
Potential Water Tax
State Water Fix
Regulatory Fee Increases Across All Agencies
Regulatory Agencies Modified Interpretation of Regulations
(regulatory creep)
Shut-off Regulations 11
CHALLENGES – SEWER
12
Reduction in winter averages
City of San Diego Pure Water program
Debt coverage covenants
OTHER CHALLENGES
13
Water Costs
All-in rate per AF increasing from $1,703 to $1,758
Cost impact = $1.5 million
Insurance increasing $260,000
Workers Compensation increasing $140,000
General Liability increasing $120,000
CHALLENGE & STRENGTH –GROWTH
Rapid rise in growth through 2018
14
Budget Projected Budget
2014 2015 2016 2017 2018 2019 2019 2020
EDU's 246 407 424 343 1133 925 880 730
Actual
STRENGTHS
15
Strategic Planning Process
CWA diversification of regional supply (drought‐proofing San Diego)
Efficiency Gains (Since 2007)
23% headcount reduction
36% increase in customers per FTE
Proactive approach to funding PERS and OPEB
Savings of $16.0 million over the next 25 years
OPEB fully funded in 2021
Bond Rating
S&P ‘AA’ rating
Sound Financial Management
Reserve, debt and investment policies
STRATEGIC PLAN
FY2019 – FY2022
(ADOLFO SEGURA)
16
OVERVIEW
17
Continuing with the closure of the FY15 – FY18 plan, the District has developed a new four‐year
Strategic Plan (SP), FY19 – FY22, designed to address new initiatives, projects, and track
essential day‐to‐day performance metrics. Key areas of focus are:
Advancement of employee development programs
Advancement of the Asset Management (AM) and Capital Improvement Project (CIP)
Programs
Enhancement of customer engagement
Enhancement of cybersecurity
Long‐term business planning of the sewer and recycled water system
Pension and OPEB liability financing
Management of new water regulations
SP: 19 strategies, 49 objectives, and 42 KPI’s
MISSION
18
To provide exceptional water and wastewater services to its
customers and to manage District resources in a transparent
and fiscally responsible manner.
VISION
To be a model water agency by providing stellar service, achieving
measurable results, and continuously improving operational
practices.
MISSION
FINANCIAL INTERNAL
BUSINESS
PROCESSES
$
CUSTOMER
BALANCE SCORECARD
PERSPECTIVES
LEARNING AND
GROWTH
“Alignment of the District’s mission, vision, and plan execution”
20
Enhancement and building of awareness and engagement among the District’s customers
and stakeholders and within the San Diego Region of the District’s strategies, policies,
projects, programs, and legislative/regulatory issues (3 objectives)
Assessment and enhancement of communication tools and increase online presence and
social media exposure (1 master objective, 12 sub)
STRATEGIES: 2
CUSTOMER
Execute and deliver services that meet or exceed customer expectations, and increase customer engagement in order to improve District Services..
TOTAL OBJECTIVES: 4
KEY PERFORMANCE INDICATORS (KPIs): 3
Answer Rate
Technical Water Complaint
Potable Water Compliance Rate
21
Integration of resource planning and facility optimization (3 objectives)
Evaluation of key system alternatives and financial impact (2 objectives)
Enhancement of business systems (4 objectives)
Enhancement of the Asset Management (AM) and Capital Improvement Programs (CIP)
(4 objectives)
Development of alternative Public Employees’ Retirement System (PERS) financing strategy
to fund ahead of PERS schedule (1 objective)
Negotiation and implementation of new labor agreement and optimize employee benefit
programs (2 objectives)
FINANCIAL
Plan and execute sound financial activities that are essential to running and sustaining District operations, with the lowest possible impact to customers..$
TOTAL OBJECTIVES: 16
STRATEGIES: 6
22
$
CIP Project Expenditures vs. Budget
Construction Change Order Incidence
O&M Cost per Account
Billing Accuracy
Overtime Percentage
Sewer Rate Ranking
Water Rate Ranking
Water Debt Coverage Ratio
Sewer Debt Coverage Ratio
Reserve Levels
Account per Full‐Time Employee (FTE)
Percent of Customers Paying Bills Electronically
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
Leak Detection Program
Injury Incident Rate
FINANCIAL
Plan and execute sound financial activities that are essential to running and sustaining District operations, with the lowest possible impact to customers..
KEY PERFORMANCE INDICATORS (KPIs): 19
23
Optimization of meter activity operations (3 objectives)
Enhancement of customer experience (Customer Service & Communications) (2 objectives)
Enhancement of the Supervisory Control and Data Acquisition (SCADA) system services via SCADA roadmap
project (1 objective)
Enhancement of enterprise geographic data (4 objectives)
Enhancement of maintenance and program standards (4 objectives)
Enhancement of contracting and facility services (3 objectives)
Enhancement of the Confined Space Program (1 objective)
Evaluation and leveraging of the use of available Human Resources self-service and capital management
technology solutions (3 objectives)
Maintenance of a reliable, scalable, secure, and high-performing technology infrastructure to support current and
future service needs (4 objectives)
Optimization of the District’s Hazardous Waste Operations and Emergency Response (HAZWOPER) and Confined
Space Emergency Response Team (1 objective)
INTERNAL BUSINESS PROCESSES
Improve business services by continually improving essential processes,
invest in strategic technology, and achieve new efficiencies.
TOTAL
OBJECTIVES: 26
STRATEGIES: 10
24
Enterprise Technology Services Availability
Mark‐out Accuracy
Project Closeout Time
Annual Recycled Water Site Inspections
Recycled Water Shutdown Testing
Easement Evaluation and Field Inspection
Recycled Water System Integrity
Sewer Overflow Rate
System Valve Exercising Program
Potable Water Distribution System Integrity
Emergency Facility Power Testing
Potable Tank Inspection and Cleaning
Main Flushing and Hydrant Maintenance
Critical Valve Exercising
Percent of Preventative Maintenance Completed
(Fleet Maintenance)
Percent of Preventative Maintenance
Completed (Reclamation Plant)
Percent of Preventative Maintenance Completed
(Pump/Electric)
INTERNAL BUSINESS PROCESSES
Improve business services by continually improving essential processes,
invest in strategic technology, and achieve new efficiencies.
KEY PERFORMANCE INDICATORS (KPIs): 17
25
Enhancement of leadership and employee training programs, and knowledge transfer process
(2 objectives)
LEARNING & GROWTH
Provide hands-on leadership, support, and empowerment of staff, in order to maintain an accountable high-performing workforce..
TOTAL OBJECTIVES: 2
KEY PERFORMANCE INDICATORS (KPIs): 3
Employee Voluntary Turnover Rate
Training Hours per Employee
Safety Training Program
STRATEGY: 1
KEY ASSUMPTIONS
(KEVIN KOEPPEN)
26
12,744
10,475
11,250
12,227
11,576 11,739 11,798 11,857 11,916 11,976 12,036
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Actual Projected Budget
POTABLE WATER VOLUMES
27
Unit Sales (in thousands)
1,734
1,492 1,530
1,740
1,484 1,593 1,601 1,609 1,617 1,625 1,633
500
700
900
1,100
1,300
1,500
1,700
1,900
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Actual Projected Budget
RECYCLED WATER VOLUMES
28
Unit Sales (in thousands)
Historical figures exclude Salt Creek golf course, which closed in FY 2018.
POTABLE WATER COST PROJECTION
CWA ALL‐IN TREATED WATER COST PER AF
29
72
Actual Projected*
* CWA’s provided a projection through 2023. For 2024 and 2025, the CWA high and low forecasts were estimated by Otay staff using a 5.0% inflation factor.
POWER COSTS
30
Power cost increase of $15,000 or < 1.0% vs FY 2019 budget
Increase in SDG&E Rates offset by decrease in water volumes
In FY 2019 the rate per kilowatt hour increased 5.7%
In FY 2020 an additional 6.0% power rate increase
RATE DRIVERS
31
Water
No new debt issuances proposed for the next 6 years
Stable debt coverage
Reserves driving rates
Sewer
$6.0 million debt issuance in 2020
Stable debt coverage above covenant and target
Debt coverage and reserves driving rates
72
CAPITAL IMPROVEMENT
PROGRAM
FY 2020-2025
(DAN MARTIN)
32
GROWTH PROJECTIONS1
33
FISCAL YEARS
2020 2021 2022 2023 2024 2025
Single‐Family Dwelling Units 600 500 400 400 300 300
Condominium Units 1,200 1,000 800 600 500 400
Apartment Units 400 300 300 300 300 300
Non‐Residential2
(Permit valuation in millions of
dollars)
$21.9 $21.9 $21.9 $21.9 $21.9 $21.9
1Source: The Xpera Group’s report February 12, 2019 (all dwelling units reflected above do not have a one‐to‐one ratio with an
EDU and are converted to EDUs for budget purposes)
2 Source: The Xpera Group’s report February 12, 2019 Non‐Residential Permit Valuations (Historic and Projected) Otay Water
District and San Diego County 2002‐2025
METER SALES AND GROWTH
34
‐
200
400
600
800
1,000
1,200
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
ED
U
'
s
Fiscal Years
Equivalent Dwelling Units (EDU's) ‐Actual and Projected
Actual
Projected 2020
Projected 2019
FY 2019 Budgeted – 925 EDU’s
FY 2019 Forecast – 880 EDU’s
FY 2020 Projected – 730 EDU’s
SAN DIEGO COUNTY WATER AUTHORITY
CONSTRUCTION COST TREND
35
Source - SDCWA March 14, 2019 Presentation on Escalating Construction Costs
and Impact on Capital Improvement Program – Materials, Equipment, & Labor
CONSTRUCTION CLIMATE/MITIGATION
Factors Influencing Construction Climate
Shortage of Skilled and Unskilled Labor
Regional Competition for Contracting Resources
Materials cost escalation due to demand and Federal tariffs
Mitigation Strategies
Cost Estimate Preparation
Value Engineering
Grouping Projects to attract Bidders 36
CIP BUDGET GUIDELINES
Growth is expected to continue for FY 2020
New development with multi-family in greater proportion to
single-family dwellings
In preparing the budgets for the individual CIP projects, the
Engineering Department used recent construction and bidding
data to adjust costs for each project
Reprioritized projects based on District’s planning documents
37
CIP SIX‐YEAR BUDGET LOOK FORWARD
($ MILLIONS)
38
FY 2019
FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Totals $ 24.2 $ 18.4 $ 13.6 $ 10.7 $ 12.4 $ 13.5
Six‐Year Total: $92.8
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Totals $ 17.2 $ 13.3 $ 16.3 $ 14.6 $14.7 $12.2
Six‐Year Total: $88.3
FY 2020
SIX-YEAR BUDGET DIFFERENCES
FY 2019 vs. FY 2020 $ Millions (Negative Value)
FY 2019 6‐year CIP Budget $ 92.8
New Projects 10.0
Completed Projects (1.1)
Deferred Projects (3.9)
Ongoing Project Changes
Budget Adjustment
Budget Expenditures for FY 2019
12.5
(22.0)
FY 2020 Six‐Year CIP Budget $ 88.3 39
HIGH PROFILE CIP PROJECTS
Fiscal Year 2020 ($ Millions)
870-2 PS Replacement (Complete in 2020, $18.2M)
Temporary Lower Otay Pump Station Redundancy
Campo Road Sewer Replacement (Complete in 2020, $10.5M)
Other Pipeline Replacement Projects (11 Total)
AMR Change Out
850-1 Reservoir Interior/Exterior Coating
Other Coating/Cover/Liner Projects (10 Total)
Portable Trailer Mounted VFD Pumps
Vehicle Capital Purchases
$ 4.7
2.0
1.5
1.5
1.4
0.8
0.7
0.5
0.4
Total Expenditure Projection $ 13.5
% of Total FY 2020 Budget 78%
40
HIGH PROFILE CIP PROJECTS
Fiscal Year 2020 – 2025 CIP ($ Millions)
711-2 PS Replacement
Various Waterline Replacements (11 Total)
Reservoir Improvements
Sewer Basin Improvements
870-2 PS Replacement
$ 13.0
13.0
9.7
5.4
4.8
AMR and Meter Replacement 4.3
Total Expenditure Projection
% of Total FY 2020 - 2025 Budget
$ 50.2
57%
41
JUNE 5TH PRESENTATION
42
Budget Summary
Rate Recommendation
Debt Coverage Projection
Winter Average Update
Labor and Benefit Costs
72
Admin & Material Costs
Salary Schedule
Rate Comparison
Budget Approval
72
QUESTIONS?
43