HomeMy WebLinkAbout05-21-09 Board PacketOTAY WATER DISTRICT
SPECIAL MEETING OF THE BOARD OF DIRECTORS
DISTRICT BOARDROOM
2554 SWEETWATER SPRINGS BOULEVARD
SPRING VALLEY,CALIFORNIA
THURSDAY
May 21,2009
10:00 A.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.ADOPT RESOLUTION NO.4136,APPROVING THE FISCAL YEAR 2009-2010
OPERATING AND CAPITAL BUDGETS;APPROVE FUND TRANSFERS FOR
POTABLE,RECYCLED,AND SEWER;AND OBTAIN APPROVAL OF THE
PROPOSITION 218 NOTICES AND DIRECT STAFF TO PROCEED WITH THE
PROPOSITION 218 HEARING FOR THE RECOMMENDED RATE INCREASES
(BEACHEM)
6.APPROVE A FIVE-YEAR RATE INCREASE AND FIVE-YEAR PASS-THROUGH
OF WHOLESALER COST INCREASES (BEACHEM)
7.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 May 15,2009,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 May 15,2009.
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AGENDA ITEM 5
TYPE MEETING:
SUBMITTED BY:
APPROVED BY:
(Chief)
APPROVED BY:
(Ass!.GM):
STAFF REPORT
Speci~~oard MEETING DATE:
Ri ta~h.r:~anager W.O.fG.F.NO:
Joseph R:'B~achem,Chief Financial Officer
C:';/J ,yI)!!~?!?';"'·~
German Alvar~Assistant General Manager
May 21,2009
DIV.NO.All
SUBJECT:Adopt Resolution No.4136 to Approve the FY 2009-2010
Operating and Capital Budget;Approve Fund Transfers for
Potable,Recycled,and Sewer;and Obtain Approval of the
Proposition 218 Notices and Direct Staff to Proceed with the
218 Hearing for the Recommended Rate Increases
GENERAL MANAGER'S RECOMMENDATION:
That the Board:
a)Adopt Resolution No.4136 of the Board of Directors of
Otay water District to approve the Fiscal Year 2009-
2010 Operating and Capital Budget.
b)Approve the following fund transfers:
Potable:
General Fund to Replacement $2,710,000
General Fund to Designated Betterment $3,700,000
General Fund to Sewer General Fund $200,000
Recycled:
General Fund to Replacement $950,000
General Fund to Designated Expansion $1,610,000
General Fund to Designated Betterment $110,000
Sewer:
General Fund to Designated Betterment $753,000
Expansion to Designated Betterment $410,000
c)Direct staff to proceed with the Proposition 218
hearing and notices for the recommended rate
increases,with changes as approved by the General
Manager.
COMMITTEE ACTION:
See Attachment A.
PURPOSE:
To obtain approval of the Fiscal Year 2009-2010 Operating and
Capital Budget;various fund transfers;adoption of Resolution
No.4136;and direction to move forward with the Proposition 218
hearing and notices.The average water rate increase being
recommended is 19.9%and the sewer rate increase averages
between 7.2%and 9.6%with two options being presented.
BACKGROUND:
Each year the District goes through a rate setting process with
new challenges.The process begins in January of each year and
ends with the implementation of rates in the following January.
This year,CWA is not only raising rates by an unprecedented
18.1%but is also raising rates on September 1st ,four months
earlier than the typical process.This compressed timeline
creates significant time constraints as the 218 notices must now
be ready at the same time the budget is approved.Staff has
prepared both the Operating Budget and CIP Budget and has water
and sewer rates ready for presentation to the Board.
DISCUSSION:
This year,the challenges for water are the unprecedented water
cost increases by CWA &MWD,the need to strengthen debt
coverage ratios,continued economic recession,and reduced water
sales.The focus on the sewer side is on higher costs due to
regulations and the decision on whether to maintain existing
reserves or draw down the reserves while revenues are increased
gradually.The following discussion and the attached
presentation review these significant issues.
Water Costs
The Fiscal Year 2010 has a number of challenges that have an
impact on the water and sewer rates.The potable water
suppliers,CWA and MWD,have had unprecedented rate increases of
18.1%and 21.1%,respectively.This is primarily a result of
the water supply problems that face the State of California.
The cost of securing a water supply,in this water crisis,is
driving up the cost of water.In addition,new CWA and MWD
facilities costs are adding to this cost pressure.Finally,
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with lower water sales,due to conservation messages and
economic challenges,the fixed costs are being spread over a
smaller sales base.All these factors playa significant role
in the higher cost of water to the District.
With water costs representing 49%of the District's operating
budget,it is understandable that nearly half of the rate
increase is providing the $3.86 million more necessary to
purchase approximately 8%less water than was planned to be
purchased in the prior year.Likewise,some District customers
will see that they will pay more for less water as these
difficult times continue.
Debt Coverage and Credit Ratings
The District has had two credit rating upgrades over the past
three years.From A+to AA-,then from AA-to AA.While the
credit rating is an overall rating and many factors are
considered when these ratings are determined,one of the main
financial ratios considered is the Debt Coverage Ratio.This
ratio is the measure of net revenues compared to debt service.
The District has historically held the "no growth"version of
the debt coverage ratio over 125%with a target of 150%.In the
2009 budget approval,this ratio was brought down to 100%in
order to alleviate the unusually high rate increases that were
anticipated.This level was considered to be sufficiently high
to retain a strong overall financial position,and in fact,the
second upgrade occurred after this position was taken.However,
with the economic difficulties experienced over the past year
there are new expectations and the definition of a strong debt
coverage has changed.
With a 19.9%rate increase,the District will raise this ratio
for 2010 to 208%,a strong position.However,in 2011 with the
debt service on the proposed new debt mentioned below the ratio
will drop to 140%.This is still a strong position.Staff
evaluated how secure this level was if sales fluctuated by
significant amounts.The analysis shows that a drop in sales of
4.1%more than expected would still leave the District at 125%
in 2011.The two year outlook is where the ratio is the lowest
which leaves the District time to react in the rate setting of
the 2011 budget.In addition,the District will have the
ability to implement drought pricing if sales drop significantly
below the 2011 budget expectations.
Financing Plan
The District uses a comprehensive approach to financing.The
Finance Policy provides guidance on debt issuances and
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refinancing and the Reserve Policy provides guidance on both
fund transfers and reserve balances.With these policies,staff
formulates a six-year financing plan that identifies the timing
and amounts of debt issuance,the level of rate increases,debt
coverage ratios,reserve balances,and necessary transfers.
Staff is proposing that the District issue $41 million of new
debt in order to finance the next two years of capital
improvements.The eIP is also supported by $10.4 million of the
transfers requested above.
With the proposed debt and transfers,the District will be able
to maintain all reserve levels at or above target,as per the
Reserve Policy,and provide sufficient funds to finance the
capital improvements for fiscal years 2010 and 2011.
Water Sales
In the 2009 budget process the District anticipated that water
sales would decline as a result of the drought and the
conservation messages.The 2009 projected water sales were
reduced by a 2%conservation factor generating a budget of
38,783 acre-feet of purchases from the District's water
suppliers.With the economic recession added to the
conservation messages,the actual level of conservation through
March 2009 has exceeded the 2%conservation projection by 3.8%
(5.8%).
The significance of the sales level was again highlighted in the
2010 budget cycle by the implementation of allocations by eWA.
Prior to knowing the amount of the allocation,the focus was on
the determination of the financial risk of selling more water
than the allocation and the probability of this occurring.
Projected water sales became one of the two key pieces of
information in determining this risk.If the allocation was
exceeded,the financial cost to the District would be
substantial at twice the Tier 2 water rate.
With the difficulty of determining an accurate sales projection
in this economy and with the drought messages,staff hired the
firm of Rea &Parker to perform a survey on planned water
conservation of the District's residential customers.District
staff supplemented this survey by contacting other classes of
customers.The results were used to project a future sales
reduction of 4.8%.This conservation factor was then placed
into the District's Rate Model,along with projections of meter
sales and conversions of potable customers to recycled,to
determine a projected water purchases amount of 35,554 acre-
feet.
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Due to the substantial investment in recycled water and the
conservation already being achieved by Otay customers the
allocation for the District is well above the anticipated
purchases in 2010.The allocation level is set at 39,832 acre-
feet while the projected purchases for 2010 are only 35,554
acre-feet,leaving a 10.7%cushion before the District is at
risk of incurring penalty pricing.
With these two pieces of information,projected sales and the
allocation,the District has determined that,even with the high
uncertainty of projecting sales,there is only a minimal chance
of exceeding the allocation level.This leaves a positive
financial impact of selling more than budget and the standard
negative impact of selling less than budget.The District's
focus on sales now is centered on the possibility of greater
conservation than is anticipated.
Variable revenues on water sales represent 72%of District's
budget with variable costs representing 38%of budgeted
expenses.The District will monitor sales closely in order to
determine the financial impact of lower than expected sales.
While reserves are sufficient to cover even a dramatic cut in
sales,the debt coverage ratios need to be maintained to insure
that the District can retain its ability to issue additional low
cost debt.
Adjustment to Tiers
Typically,rate studies are not revisited for four to five
years.However,with the change in customer's consumption,
District staff,in concert with the firm of PBS&J,revisited the
tier structures of the District's customer classes.The 2009
rate study methodology was used to propose modifications to the
consumption levels of each tier.The winter average is the
break point for the base tier and the middle tier.The summer
average is the break point for the highest tier.The new tiers
have a modest impact on rates,reducing the anticipated rate
increase by 0.4%.This also keeps the District in sync with the
rate study methodology.The detailed changes can be found in
the attached proposed 218 notices.
Relative Position to Other Districts
Annually,the District performs a survey of how Otay's rates
compare to other water providers in the county.For many years
the District has remained in the lower half of this comparison.
It is expected that all water providers in the county are facing
the same rate pressures as they are all purchasing water from
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CWA and MWD,some to a greater extent than others,depending on
the relative dependence on CWA water.Many water districts are
looking at implementing rates that are close to 20%or greater.
The District's survey,shown in the attached presentation,shows
that an average water user in the county,15 units,will be
charged the seventh lowest rates if they are an Otay customer.
A conserving customer,10 units,will be charged the sixth
lowest rates if they are an Otay customer.
Water Rates
In addition to the high cost of water,reduced water sales puts
additional pressure on the rate increase required to balance the
budget and maintain a healthy financial position.This year,
because of the water shortage and the pending allocation to be
set by CWA,projected water sales and purchase levels are even
more important in the budgeting process.The starting point for
water sales was the past 12 months of consumption.This was
considered a good starting point because it takes into account
some of the economic pressures and drought messages that
customers will continue to experience.
To better estimate the future conservation of customers,staff
conducted two surveys;one conducted by the professional survey
firm of Rea and Parker and one by Otay's staff.Rea and Parker
contacted single-family residential customers,and customer
service and conservation staff contacted master metered,
commercial,public,and landscape customers.Customers were
asked about how they might be changing their consumption levels
as a result of both the economic pressures and the conservation
messages that they have heard.They were also asked about their
plan to achieve this conservation level.The results of these
surveys were analyzed,and the following conservation factors
were used in the Rate Model:
•Single-family and mastered metered residential customers
conservation is 5.3%
•Landscape and recycled customers plan to cut consumption by
10%
•Public and commercial customers have no consumption changes
The most realistic set of the above stated factors have been
used in the FY 2010 budget creation and rate setting.Although
we cannot predict with certainty how these factors will actually
occur,collecting as much information as possible improves the
accuracy of the most likely financial scenario.Using this
information in the budget process helps prepare the District to
anticipate likely outcomes.
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Sewer Rate Options
There are two options being presented to the Board for sewer
rate increases.This year,due to the increased regulations,
staff will be budgeting a greater level of monitoring of the
sewer system.This monitoring effort makes up the majority of
the $400,000 increase in eXPenses in this year's sewer budget.
This is a substantial increase on only a $2.4 million budget.
The first option (staff's recommendation)is to implement a 7.2%
average rate increase over the next six years,raising the
operating revenues over time to be on par with operating
expenses.This would draw down the sewer general fund reserves
by $1.3 million.This drawdown is consistent with the Reserve
Policy as the general fund is over the target level and will
even exceed the maximum as the potable general fund repays the
transfer that was made last year.This option will place a draw.
down of general funds into the budget in order to balance the
budget in the next six years.No sewer funds are under target
levels,the general fund will exceed target levels,and the
replacement fund currently exceeds the maximum level.
The second option is to implement a 9.6%average rate increase
over the next six years,which will draw down reserves in the
first three years but replenish them in the later three years.
Following this six-year time period the rate increases would
drop significantly as the operating revenues would be well above
operating expenses.
Efficiencies Through Strategic Management
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,therefore
more cost effective,as demonstrated by its relative rate
position and bond rating among other agencies in the region.
Operating Budget
The Fiscal Year 2009-2010 balanced budget supports the pass-
through of CWA's increases in water costs,effects of reduced
water sales,an increased Capital Budget,new programs to meet
regulatory requirements,and the strengthening of the District's
financial position.The budget includes a 19.9%rate increase
for potable and recycled,and a 7.2%rate increase for sewer.
The Rate Model projects a 19.9%increase for the next two years
and a 7.0%increase for the following four years.
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Rate Implementation -Water
The 19.9%rate increase is being implemented for both potable
and recycled customers.Staff is recommending an increase in
the variable water rate to all classes of potable customers of
20.9%,and the adjustment of the tiers in accordance with our
most recent rate study,to reflect the lower water consumption.
The fee increases for a single-family residence is $7.02 to
$9.77.The MWD/CWA pass-through fee is proposed to increase
39.2%to fully collect the fixed cost by our water providers as
shown below:
Customer Service Charge $1,148,800
Emergency Storage Charge $2,246,600
Infrastructure Access Charge $1,344,900
Capacity Reservation Charge $628,800
Readiness-to-Serve Charge $1,140,700
Total MWD/CWA Fixed Charges $6,509,800
An increase in the system fee of 5.5%,from $13.83 to $14.58 for
a single-family residence,is also necessary to balance the
budget.This mix of increases between MWD/CWA and system fees
brings the fixed revenue sources closer to the 30%maximum
recommended by the Best Management Practices (BMP)11.The
fixed fee components of the District's revenues are important to
maintain revenue stability.However,maintaining a balance with
variable revenue promotes conservation.
For the recycled water customers,staff is also recommending the
same percentage increases of 20.9%in the variable water rates,
and 5.5%for the system fee.Recycled water rates are set at
85%of the potable irrigation rate in accordance with our
recycled rebate agreement with CWA.
Rate Implementation -Sewer
In Fiscal Year 2009,a 4.6%rate increase was projected based on
cost estimates at the time.Now,due to the higher cost
associated the regulatory requirements of the Sewer System
Management Plan,the estimated rate increase is increased to
7.2%.Since sewer costs only represent 3.7%of the total
Operating Budget,even relatively small changes in the budget
can cause significant fluctuations in the sewer rate.
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Budgeted Revenues
The budgeted revenues include an increase in potable water sales
of 14.7%and in recycled water sales of 19.8%.These increases,
despite reduced water sales of 8.3%for potable and 4.5%for
recycled,because of the economy and conservation,are offset
by a 12.4%rate increase on January 1,2009 and another 19.9%
rate increase planned for September 1,2009.
Sewer budgeted revenues increased 17.1%due to half year's
increase from last fiscal year of 4.6%(one-half of this is
2.3%),another half year for this year's planned 7.2%increase,
and a small amount of growth in this area of 0.6%.Another
factor is the implementation of the third year of the winter-
consumption based rate structure,where the maximum charge is
now based on 30 units (after the 15%discount)increasing the
charge for higher consumption customers.This change is revenue
neutral to the District,but it will bring the District into
compliance with Best Management Practices 11 which encourages
conservation and ensures users pay their fair share for
services.
Other changes in the Operating Revenues include the following:
•Due to lower meter sales,Meter Fee Revenues are expected
to decrease by 59.2%.
•Capacity Fee Revenues are expected to increase by 7.3%due
to more than expected work in the planning area.
•Betterment Fees for Maintenance are expected to decrease
36.2%due to more planned maintenance,which reduces the
more costly corrective maintenance.
•Annexation Fees are expected to decrease by 75.1%due to
lower meter sales and fewer parcels requiring to be
annexed.
•Property Tax revenues are expected to decrease 5.3%due to
an anticipated reduction in assessed values of 6%.
•Non-Operating Revenues are expected to slightly decrease by
2.9%.
Property Tax
For Fiscal Year 2010,there is an anticipated Proposition 1A
borrowing of 8%of the property taxes built into the Rate Model
as a transfer out of funds to the state.
Expenses
The most significant item in expenses is the 12.2%increase in
water purchases which is due to the same conservation and CWA
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price increases mentioned above.This increase has both a
variable and fixed component.The total increase in variable
potable water costs is $2,850,100.The price component of this
increase is expected to be $119 per acre-foot for purchases from
CWA.The fixed costs paid to CWA and MWD are projected to
increase the District's expenses by $1,189,900 which is
highlighted in the section above.Recycled water costs are
expected to decrease by $178,800.This is mostly due to a
volume decrease of 3.3%combined with a reasonable price
inflator by the City of San Diego.The estimated increase was
based on CPI inflators from the start of the contract and would
be an increase of 27.2%on January 1,2010.
Sewer costs are expected to increase by $411,300 due to
increases in the state regulatory requirements of the Sewer
System Management Plan.
Power costs are budgeted to decrease 6.6%due to the volume
decreases of water sales requiring less pumping costs,combined
with an anticipated SDG&E rate increase of 3.5%on January 1,
2010.
Labor and benefits costs are expecting a minimal increase of
0.16%or $27,400.These changes are due to the following:
•Reduction in FTE by 2.75 and position changes decrease
of $166,900
•Cost of living of 3%and merit increases pursuant to
current MOU increase of $502,900
•Changes in the vacancy factor and vacation and sick
leave decrease of $23,900
•Reduction in overtime of $30,800
•Benefit cost increases of $221,100
•Increase of charges to CIP which reduces cost by
$475,000
The Administrative Expenses decreased by 10.2%or $605,900.
This is due largely to three main factors:
1.The shifting of three projects in the engineering
department to the CIP budget based on further analysis of
this work.The three projects are Asset Management for
$300,000,Multiple Species for $141,000,and San Miguel
Habitat Management for $225,000.
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2.Increases in the pump station paving program of $80,000 and
an increase in bad debt expense of $70,000 due to the
current economic conditions.
3.A decrease in the overhead allocation of $92,600 due to the
shifting of cost between Operating and CIP budgets.
The Materials and Maintenance budget experienced an overall
decrease of 1.84%or $71,200.Two large decreases are due to
reduced fuel cost ($137,600)and a slight decrease in the
Metropolitan charge of $60,900.An offsetting increase in the
Safety budget of $124,400 is for disaster preparedness expenses
for the Emergency Operations Center,which is one of the
District's Strategic Plan items.
Funding to reserves is increasing by $3.8 million as compared to
last year.This year,the funding is needed to keep the
Betterment and Replacement Reserves on target and to fund these
projects.This funding will keep reserve levels in compliance
with the Reserve Policy.Additionally,the Operating budget is
funding the Potable and Sewer General Fund Reserves in the
amount of $1.5 million to keep these reserves on target and to
strengthen the District's debt coverage ratio.
Capital Improvement Program (CIP)Budget
Each year with the budget process,the Engineering Department
updates the CIP Budget.This year,the six-year CIP budget has
increased by $52 million from last year's CIP.This increase is
mostly a result of the integrated water resources plan and new
water supply projects developed from this plan.These new
projects and cost changes to existing projects are reviewed and
approved along with the Operating Budget.The following process
is used to prepare the CIP Budget:
o CIP projects selected are based on CIP criteria,the
Water Resources Master Plan (WRMP),the Urban Water
Management Plan (UWMP),and Integrated Water Resources
Plan (IRP).
o The CIP goes through an iterative process to meet the
criteria of financial,growth,and service levels.
o The CIP targets expenditures for the next six years.
The Engineering staff uses the following general criteria to
determine the reasonableness of a project before it is included
in the CIP Budget:
o Existing Facility Conditions
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o Operating System Conditions
o Water and Sewer System Deficiencies
o Regulatory and Permitting Requirements
o Developer Driven Schedules
o Economic Outlook and Growth Projections
o Board and Management Directives
This year,the ClP Budget includes the following amounts by
project category.Project details within each of the categories
are located in Attachment C under the Capital Budget tab.
Capital Backbone
Developer Reimbursement
Replacement and Renewal
Capital Purchases
Total (millions)
$28.7
0.1
6.7
1.8
$37.3
There are a total of 83 projects in the current six-year ClP
plan.Each project is listed in the FY 2009-10 Preliminary
Operating and Capital Budget (Attachment C).The total six-year
cost of the 83 projects is $222.4 million.
Staff has attempted to present the most realistic set of factors
and assumptions based on information received from various
sources,including water suppliers MWD and CWA,vendors such as
SDG&E,and other suppliers,and finally other economic
indicators affecting revenues such as property taxes and lease
agreements.
FISCAL IMPACT:
By being proactive,the District can better educate its
customers and ensure we take the least amount of risk,
minimizing the rate impacts,and ensuring the fiscal strength
the District throughout these difficult economic times.
~
of
The recommended balanced budget totals $75.7 million for
Operating and $37.2 for the ClP.With budget approval,the
District will move forward into the 2010 Fiscal Year with clear
financial direction.Staff is recommending to set rates based
on the same methodology as the recent rate study,and prepared
the Proposition 218 notices with recommended rate changes which
support this budget.This budget provides sufficient funding to
pay increased water costs;continued funding for the District's
administration,maintenance,and operations;strengthens our
financial position,and is consistent with the Strategic Plan
and Reserve Policy.
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STRATEGIC OUTLOOK:
The District ensures its continued financial health through
long-term financial planning and debt planning.
LEGAL IMPACT:
None.
Attachments:
A)Committee Action Form
B)Fiscal Year 2010 Budget Workshop Presentation
C)Resolution No.4136
D)Preliminary Operating and Capital Budget Fiscal Year 2009-
2010
E)Proposition 218 Notice -Residential Water and Sewer Rates
F)Proposition 218 Notice -Residential Water Rates
G)Proposition 218 Notice -Residential Sewer Rates
H)Proposition 218 Notice -Public and Commercial Water Rates
I)Proposition 218 Notice -Landscape,Agriculture &
Construction Water Rates
J)Proposition 218 Notice -Recycled Water Rates
K)Proposition 218 Notice -Commercial Sewer Rates
L)Proposition 218 Notice -Land Only
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ATTACHMENT A
Adopt Resolution No.4136 to Approve the FY 2009-2010
Operating and Capital Budget;Approve Fund Transfers for
Potable,Recycled,and Sewer;and Obtain Approval of the
Proposition 218 Notices and Direct Staff to Proceed with
SUBJECT/PROJECT:the 218 Hearing for the Recommended Rate Increases
COMMITTEE ACTION:
The Finance,Administration,and Communications Committee
recommends that the Board adopt Resolution No.4136 to approve
the FY 2009-2010 Operating and Capital Budget;approve fund
transfers for potable,recycled,and sewer;and obtain approval
of the Proposition 218 notices and direct staff to proceed with
the 218 hearing for the recommended rate increases.
NOTE:
The "Committee Action"is written in anticipation of the
Committee moving the item forward for board approval.This
report will be sent to the Board as a committee approved item,
or modified to reflect any discussion or changes as directed
from the committee prior to presentation to the full board.
F:\DianeA\Staff Rpts 2009\commMtgAdoptBudget052109.doc
Attachment C
RESOLUTION NO.4136
A RESOLUTION OF THE BOARD OF DIRECTORS OF
OTAY WATER DISTRICT ADOPTING THE
FISCAL YEAR 2009-2010
OPERATING AND CAPITAL BUDGET
WHEREAS,the Otay Water District Board of Directors have
been presented with a budget for the operation of the Otay Water
I
District for Fiscal Year 2009-2010;and
WHEREAS,the Operating and Capital Budget has been reviewed
and considered by the Board,and it is in the interest of the
District to adopt a budget for said year;and
NOW,THEREFORE,BE IT RESOLVED,DETERMINED AND ORDERED by
the Board of Directors of the Otay Water District that the
Operating and Capital Budget for the operation of the District,
incorporated herein by reference,is hereby adopted as the
District's budget for Fiscal Year 2009-2010.
PASSED,APPROVED AND ADOPTED by the Board of Directors of
Otay Water District at a special board meeting held this 21st day
of May 2009,by the following vote:
Ayes:
Noes:
Abstain:
Absent:
President
ATTEST:
District Secretary
ITEMS
Adopt Resolution No.4136,Approving the Fiscal Year
2009-2010 Operating and Capital Budgets;Approve Fund
Transfers for Potable,Recycled,and Sewer;and Obtain
Approval ofthe Proposition 218 Notices and Direct Staff to
proceed with the Proposition 218 Hearing for the
Recommended Rate Increases
Please reference:
Attachment 1 for the Powerpoint Presentation and
Attachment 2 for Preliminary Operating and Capital
Budget for Fiscal Year 2009 -2010
posted to
Otay Water District website.
ITEMS
Adopt Resolution on No.4136,Approving the Fiscal Year
2009-2010 Operating and Capital Budgets;Approve Fund
Transfers for Potable,Recycled,and Sewer,and Obtain
Approval of the Proposition 218 Notices and Direct Staff to
Proceed with the Proposition 218 Hearing for the
Recommended Rate Increases
Please reference Attachment 3 "Proposition 218 Notices"
posted to
Otay Water District website.
AGENDA ITEM 6
STAFF REPORT
Approve a Five-Year Rate Increase and Five-Year Pass-through
of Wholesaler Cost Increases
TYPE MEETING:Special Board
SUBMITTED BY:
APPROVED BY:
(Chief)
APPROVED BY:
(Ass!.GM):
SUBJECT:
MEETING DATE:
~W.O.lG.F.NO:
Jos-~~Chief Financial Officer
{/-;19,tJ Y ;77
German Alvarez,Assistant General Manager
May 21,2009
DIV.NO.All
GENERAL MANAGER'S RECOMMENDATION:
That the Board authorize the staff to send Proposition 218
notices informing the recipients that the District proposes to
adopt:
• A five-year rate increase,not to exceed 10%,on all water
and sewer rates and charges to cover the added cost of
providing water and sewer service.This rate increase does
not include the added cost of wholesale services covered by
the pass-through rate increase below.
• A five-year pass-through rate increase of water and sewer
costs from the District's wholesalers and sewer service
providers such as the Metropolitan Water District of
Southern California (MWD),San Diego County Water Authority
(CWA),County of San Diego,and the City of San Diego.
COMMITTEE ACTION:
Please see Attachment A.
PURPOSE:
The purpose of the notices,the proposed schedule of rate
increases,and the proposed pass-through is to allow for timely
and necessary periodic rate increases within the limitations
specified on the notices.
ANALYSIS:
With the passing of Proposition 218,the process of implementing
rate changes became more restrictive with stringent restrictions
on the notice,a required hearing,and an additional 45-day
waiting period.In FY 2010,due to the economic challenges,CWA
and MWD have implemented rate increases four months earlier than
is typical.This seriously compresses the time available to the
District to react.Many districts have looked to a Prop 218
five-year option that allows for more rapid rate implementations
at a lower cost.Staff is recommending that the District also
use this option,allowing the District to be better able to
react in a timely fashion to untimely wholesaler rate increases.
Water Pass-through
The water increase proposed to take effect on September 1,2009,
would contain adjustments to pass-through the increases being
implemented within the next few months by the District's water
wholesalers,namely MWD,CWA,and the City of San Diego.The
District has been informed that CWA and MWD do not expect to
implement additional increases during 2010.However,they do
expect to implement increases in January 2011,and annual rate
increases in each subsequent year through 2014.The proposed
218 notices have the following language in them that will allow
for an annual pass-through of these costs without an additional
step of the annual 218 notices and hearing.
" ..authorize timely and necessary periodic increases of
rates and charges to pass-through increased or decreased
charges implemented by the District's public agency
wholesalers,such as the San Diego County Water Authority
(CWA),the Metropolitan Water District of Southern
California (MWD),and the City of San Diego."
The District would be required to provide a 30-day notice of
rate changes but would not be subject to a stringent 218 public
hearing process or protest.The District has always provided
notice of increases to its customers even before the 218
requirements.This language will cover the next five years.
Sewer Pass-through
The sewer increase proposed to take effect on January 1,2010,
would pass-through the increases from the City and County of San
Diego for sewer collection and treatment.It is expected that
the city will also implement annual increases in each subsequent
year through 2014.Just as in the 218 notices for water,the
proposed sewer 218 notices have language that will allow for an
annual pass-through of these wholesaler costs without an
additional step of the annual 218 notices and hearing.
Five-year Rate Increase
The proposed 218 notices also include language notifying water
and sewer rate-payers and property owners of the proposed five-
year 10%increase.This is a not to exceed percentage and
actual increases would not exceed the cost of providing service.
These increases would also be subject to a 30-day prior written
notice,but would not be subject to additional 218 hearings or
protests.The language in the notices is as follows:
"The District is proposing to adopt a five-year schedule of
proposed rate increases to be implemented beginning on
September 1,2009 and periodically thereafter through June
30,2014.Under the proposed rate schedule,the average
customer's water rates will increase by an amount
sufficient to cover cost increases related to providing
water service,but not to exceed 10%per year."
Each 218 notice includes tables showing the proposed FY 2010
rate increases followed by assumed 10%rate increases for the
following four years.If the cost of providing the service,not
taking into account any pass-through costs,exceeds 10%for any
year,the District will need to provide a Prop 218 notice before
implementing an applicable rate increase.Any increase under
this provision will go through budget and Board approval.
FISCAL IMPACT;'~
This action has no direct financial impact.If after the 218
hearing this is approved,then the rate setting process will
become less complicated and costly,saving the District via
fewer mailings,less legal review,and reduced staff time.
STRATEGIC GOAL:
Ensure financial health through formalized policies,prudent
investing,and efficient operations.
LEGAL IMPACT:
None.
General Manager
Attachments:
A)Committee Action Form
B)Legal Opinion
ATTACHMENT A
Approve a Five-Year Rate Increase and Five-Year
SUBJECTIPROJECT:Pass-through of Wholesaler Cost Increases
COMMITTEE ACTION:
The Finance,Administration,and Communications Committee
recommends that the Board approve that provisions be placed in
the 218 notices to adopt:
• A five-year rate increase,not to exceed 10%,on all water
and sewer rates and charges to cover the added cost of
providing water and sewer service.This rate increase does
not include the added cost of wholesale services covered by
the pass-through rate increase below.
• A five-year pass-through rate increase of water and sewer
costs from the District's wholesalers and sewer service
providers such as the Metropolitan Water District of
Southern California (MWD),San Diego County Water Authority
(CWA),County of San Diego,and the City of San Diego.
NOTE:
The "Committee Action"is written in anticipation of the
Committee moving the item forward for board approval.This
report will be sent to the Board as a committee approved item,
or modified to reflect any discussion or changes as directed
from the committee prior to presentation to the full board.
F:\DianeA\Staff Rpts 2009\COmmMtgPassThroughlnc052109.doc
ATTACHMENT B
April 28,2009
Members ofthe Board ofDirectors and
Mark Watton,General Manager
Otay Water District
2554 Sweetwater Springs Blvd.
Spring Valley,California 91978-2096
Re:Analysis Concerning the Proposed Schedule ofRate Increases
Gentlemen:
We have been informed that,as a result of California's water shortage,the Metropolitan
Water District (MWD)and the San Diego County Water Authority (CWA)anticipate increases
on the costs of water sold to the Otay Water District (Otay)and other retailers.At the same time,
the amount of water provided to Otay may be significantly decreased.Due to these changes,
Otay may need to raise additional revenues to cover increased costs on a short notice.
To ensure that its customers share the increased costs,Otay may need to increase water
rates and also may need to pass through any MWD and CWA cost increases ("pass through")as
promptly as possible,within applicable provisions of the law.Otay has requested guidance as to
how to implement these increases,especially as related to the "pass through,"and the procedural
requirements t'or providing notice to its customers.This correspondence addresses these issues
in detail.
I.General Background Regarding Rate Schedules and Formulas
Otay may establish rate schedules and formulas that are "reasonably related"to the
benefits received by its customers.See Cal.Const.,Art.XIII D,§6,subd.(b)(l)and (3);
Howard Jarvis Taxpayers Assn.v.City of Roseville (2002)97 Cal.AppAth 637,at 648.
Generally,in order for pricing methodology for water rates to comply with the substantive
provisions of Article XIII D,Section 6,of the California Constitution,the revenues derived from
the rates must not exceed the reasonable cost ofproviding water service,taking into account both
basic and incremental costs.Rate calculations may include a schedule of adjustments,including
a clearly-defined formula for adjusting for inflation;provided that the property-related charge,as
adjusted for inflatiori,does not exceed the cost of providing the service.Further,revenues
should not exceed the proportional cost ofproviding water service attributable to a customer's
parcel,as determined by considering:(I)customer classes based on service characteristics,
demand patterns,and other factors;(2)basic use allocations;(3)meter size;(4)metered volume
of water consumed;and (5)the public agency's discretionary allocation of incremental costs
between and among the increments ofwater use subject to conservation charges.
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Members of the Board ofDirectors and
Mark Watton,General Manager
April 28,2009
Page 2
It should be noted that many public agencies,including Otay,have adopted tiered water
rate structures.These structures are intended to encourage conservation by imposing higher
charges per unit of water as the amount of consumption increases.This form of "inclining
block"rate structure was validated in Brydon v.East Bay Municipal Water District (1994)24
Cal.App.4'h 178.After the adoption of Proposition 218,in the year 2000,and more importantly,
after the court's decision in Bighorn Desert-View Water Agency v.Virjil (2006)39 Cal.4th 205,
ruling that water is a property-related service,it was unclear whether a tiered rate structure could
comply with the provisions ofProposition 218.Effective January 1,2009,AB 2882,signed into
law by the Governor in 2008,reaffirms the tiered structure and incorporates a requirement into
the Water Code to implement tiered rates to prevent the waste and unreasonable use of water.
Regardless of whether an agency implements a tiered-rate structure based on allocation or other
method, the provisions ofArticle XIII D,Section 6,ofthe California Constitution apply.
II.Pass Through Rate Increases to Its Customers
Effective January I,2009,AB 3030,which added section 53756 to the California
Government Code,established certain requirements for implementing rate increases structured to
include annual inflationary increases or to authorize the agency to pass through increases or
decreases in the cost of purchasing wholesale water from another agency.Such.requirements
must be read in light ofthe provisions ofArticle XIII D,section 6,ofthe California Constitution.
Section'53756 provides that a public agency,such as Otay,may adopt a schedule offees
or charges authorizing automatic adjustments that pass through increases in wholesale charges
for water or adjustments for inflation.In compliance with the provisions ofSection 53756,when
adopting a schedule offees or charges that implements a pass through,the following applies:
(a)The schedule offees or charges may not exceed five years;
(b)The schedule of fees or charges may include a schedule of adjustments.If
applicable,the schedule of adjustments may include a clearly defined formula to
make annual adjustments for inflation.Regardless of the proposed form of the
schedule of adjustments,and any formula used in connection therewith,the
property-related fee or charge,as adjusted,should not exceed the cost of
providing the service;and
(c)The schedule offees or charges may provide for automatic adjustments that pass
through the adopted increases or decreases in the wholesale water charges
f'stablished by MWD and CWA.
III.Notice to Customers
Article XIII D,Section 6 of the California Constitution imposes procedural and
substantive requirements on new or increased fees or charges for on-going water service.
Proposition 218 amended this Article and Article XIII C to add provisions requiring that a public
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Denver,Colondo 80202
t.303.292.6545
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Members ofthe Board ofDirectors and
Mark Watton,General Manager
April 28,2009
Page 3
agency proposing to impose a new fee or increase an existing property-related fee or charge must
provide written notice by mail to the record owner of each parcel upon which the fee or charge
will be imposed.The notice must contain certain information respecting the proposed fee or
charge and the date,time and location the public agency will conduct its public hearing on the
proposed fee or charge.Article XIII D,section 6(a)(2)further requires that the public hearing be
held not less than 45 days after the mailing of the notice.If at the conclusion of the public
hearing the public agency receives written protests against the imposition ofthe proposed fee or
charge from a majority ofthe affected property owners,the fee or charge may not be imposed.
Ongoing water rates paid by water customers are "property-related"fees and thus subject to
Proposition 218's substantive and procedural requirements.See Howard Jarvis Taxpayers Assn.
v.City ofFresno,127 Cal.App.4th 914.Thus,normally,Otay's increased water rates would be
subject to Proposition 218's notice and hearing requirements.
However,in certain circumstances,these requirements may be waived.Specifically,
where implementing any adjustment made pursuant to a schedule of fees or charges as
authorized pursuant to California Government Code section 53756,an agency is not required to
follow the notice provisions ofCalifornia Constitution article XIII D,section 6.Thus,the 45 day
notice requiretnents of Prop 218 do not have to be followed.Otay must,however,provide
written notice of any adjustment pursuant to a schedule not less than 30 days prior to the
effective date of the adjustment.Such notice may be given,as provided in California
Government Code section 53755(a),by including it in Otay's regular billing statement for the fee
or charge or by any other mailing to the address to which Otay customarily mails the billing
statement for the fee or charge.
IV.Conclusion
Otay is facing an increase in wholesale water costs as well as a decrease in wholesale
water allocation.In order to effectively manage this increase in costs and decrease in water,
Otay,among other things,must provide for increases to its water rates and charges.Pursuant to
the provision of the California Government Code,section 53756,Otay may adopt up to a five-
year schedule of rates of charges.Subject to the notice requirements specified above,the
schedule may provide for automatic adjustments to pass through MWD and CWA increases or
decreases and inflationary adjustments may also be implemented.
Sincerely,f'~/'",
(\Afll l'/f'/YtVVlVL/vi-,
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GARCIA CAL~RON RUIZ,9.~p
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Denver,Colorado 80202
t.303.292.6545
f.303.292.6546
500South GtandAvc..Suite 1100
Los Angeles,California 90071
t.213.347.0zio
f.213.347.0216
625 Broadway,Suite 90B
San Diego,Californio.92101
t.619.564.8400
f.619.564.8404
50West San [IcrnRndo Street,Suite 330
SanJaR,California 95)13
r.408,298.7400
f.408.298.7404