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HomeMy WebLinkAbout12-01-20 F&A Committee Packet 1 OTAY WATER DISTRICT FINANCE AND ADMINISTRATION COMMITTEE MEETING and SPECIAL MEETING OF THE BOARD OF DIRECTORS BY TELECONFERENCE 2554 SWEETWATER SPRINGS BOULEVARD SPRING VALLEY, CALIFORNIA TUESDAY December 1, 2020 12:30 P.M. This is a District Committee meeting. This meeting is being posted as a special meeting in order to comply with the Brown Act (Government Code Section §54954.2) in the event that a quorum of the Board is present. Items will be deliberated, however, no formal board actions will be taken at this meeting. The committee makes recommendations to the full board for its consideration and formal action. AGENDA 1. ROLL CALL 2. PUBLIC PARTICIPATION – OPPORTUNITY FOR MEMBERS OF THE PUBLIC TO SPEAK TO THE COMMITTEE ON ANY SUBJECT MATTER WITHIN THE COMMITTEE'S JURISDICTION BUT NOT AN ITEM ON TODAY'S AGENDA This meeting is being held via teleconference. Members of the public may submit their comments on agendized and non-agendized items by either of the following two meth- ods: a) No later than a half hour before the start of the meeting, complete the Request to Speak Form and email it to BoardSecretary@otaywater.gov. Your request to speak will be acknowledged during the “Public Participation” portion of the meeting when the committee will hear your public comment. When called to speak, please state your Name and the City in which you reside. You will be provided three minutes to speak. OR b) No later than a half hour before the start of the meeting, email your comment to BoardSecretary@otaywater.gov and it will be read aloud during the “Public Par- ticipation” portion of the meeting. Please provide your Name and the City in which you reside, with your comment. Your comment must not take more than three minutes to read. The District’s meeting is live streamed. Information on how to watch and listen to the District’s meeting can be found at this link: https://otaywater.gov/board-of- directors/agenda-and-minutes/committee-meetings/ 2 DISCUSSION ITEMS 3. REPORT ON IMPACTS OF COVID-19 ON THE DISTRICT’S FISCAL YEAR 2021 BUDGET AND SIX-YEAR PROJECTION (KOEPPEN) [10 minutes] 4. REPORT ON CUSTOMER DELINQUENCIES AND THE DISTRICT’S EFFORTS TO ENCOURAGE CUSTOMERS TO PAY THEIR WATER BILLS DURING THE PANDEMIC (CAREY) [10 minutes] 5. ADJOURNMENT BOARD MEMBERS ATTENDING: Mitch Thompson, Chair Mark Robak All items appearing on this agenda, whether or not expressly listed for action, may be delib- erated and may be subject to action by the Board. The Agenda, and any attachments containing written information, are available at the Dis- trict’s website at www.otaywater.gov. Written changes to any items to be considered at the open meeting, or to any attachments, will be posted on the District’s website. Copies of the Agenda and all attachments are also available 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 par- ticipate 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 November 25, 2020 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 meeting of the Board of Directors (Government Code Section §54954.2). Executed at Spring Valley, California on November 25, 2020. /s/ Susan Cruz, District Secretary 1 STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: January 6, 2021 SUBMITTED BY: Kevin Koeppen, Assistant Chief of Finance PROJECT: DIV. NO. All APPROVED BY: Joseph R. Beachem, Chief Financial Officer Jose Martinez, General Manager SUBJECT: Informational Item Regarding the Updated Impacts of COVID-19 on the District’s FY 2021 Budget and Six-Year Projection GENERAL MANAGER’S RECOMMENDATION: This is an informational item only. COMMITTEE ACTION: See Attachment A. PURPOSE: To update the Board on the impacts COVID-19 is having on the FY 2021 budget and related six-year projection. BACKGROUND: The purpose of this staff report is to review the updated FY 2021 budget rate model which has been modified to reflect reductions in the adverse impacts of COVID-19 on the FY 2021 budget and six-year rate model projection. The FY 2021 budget included $8.8M of adverse impacts related to COVID-19. The adverse impacts were fully offset by CIP savings initiatives of $8.5M and OPEX savings initiatives of $0.4M. AGENDA ITEM 3 2 Staff is recommending that no modifications be made to the FY 2021 budget as the expected benefit of additional revenues associated with this budget update is anticipated to be entirely offset by the need to add or accelerate three (3) CIP projects that have been identified subsequent to the FY 2021 budget process. These CIPs will be added in the 2022-2026 proposed CIP budget. When compared to the original FY 2021 six-year rate model, staff is projecting reserves will exceed projected levels by approximately $5.5M by FY 2024. Approximately $2.7M of the excess reserve is projected to be realized in FY 2021. The benefit is based on actual overall sales volumes to date which have not been seriously impacted by COVID-19 as previously anticipated. Staff is projecting that the $5.5M benefit will be fully offset by the three newly identified CIP projects. The three newly identified CIP projects consists of two pipeline replacements (Olympic Parkway and Jamul) and a tank recoating project. The following modifications have been made to the original FY 2021 rate model to reflect modified assumptions from the anticipated adverse impacts of COVID-19 to what is currently expected: 1. Water sales were adjusted to reflect volumes consistent with past usage, removing the respective 12% and 15% reductions in potable and recycled volumes. This adjustment to sales results in a one-time reserve benefit of $5.3M. 2. Reinstatement of penalty revenue is projected to increase the one-time reserve benefit by approximately $230k. As staff looks forward to preparing the FY 2022 budget and rate model these benefits could be used to do one or a combination of the following: 1. Reduce projected debt issuances. 2a. Reduce future annual rate increases from 4.4% to 4.1% (0.3%) per year for five (5) years. 2b. A one-time benefit reducing the FY 2022 rate increase from 4.4% to 3.3%. 3. Fund newly identified CIP projects. It should be noted that the pandemic has not subsided and there remains uncertainty about the duration and depth of the impact to some areas of the District. The ban on locking for 3 nonpayment remains, unemployment numbers remain high, and as the county re-entered level purple in November, restrictions and closures of commercial businesses have been reinstated. Each of these items has the potential to adversely impact the District’s finances in the future. Budget Update Sales Update Through October, the District’s water sales volume has not experienced the relative adverse impact of COVID-19 anticipated in the FY 2021 budget. Staff updated the six-year rate model by increasing revenues, purchases, and power costs based on the historic volumes and current trends. Staff has not adjusted bad debt and property tax as the impact of COVID-19 on these items has not been determined. The following table summarizes the benefit of the additional sales. The original budget assumed a sharp reduction of FY 2021 water volumes, followed by a recovery of the reduction over the following three (3) years. Fifty percent of the recovery was projected to occur in FY 2022 and the remaining 50% would recover evenly over the following two (2) years. The recovery is summarized at the bottom of the table resulting in a total updated budget benefit of $5.3M compared to the original budget. Budget Update Net Reserve Benefit (Detriment) Potable Volume 10,227,100 11,618,300 1,391,200 Recycled Volume 1,286,200 1,503,700 217,500 Potable Revenues 78,749,000$ 85,076,000$ 6,327,000$ Potable Purchases 46,840,000 51,346,000 (4,506,000) Potable Power Cost 2,244,000 2,528,000 (284,000) Recycled Revenue 8,411,000$ 9,625,000$ 1,214,000$ Recycled Power 502,000 587,000 (85,000) FY 2021 Total 136,746,000$ 149,162,000$ 2,666,000$ FY 2022 1,333,000$ FY 2023 666,500$ FY 2024 666,500$ 6 - Year Reserve Benefit Estimate 5,332,000$ FY 2021 4 Penalty Waiver The sales figures in the preceding table have been adjusted to reflect the penalty waiver continuing until June 30, 2021. As of November 16, 2020, penalties continue to be waived. Staff is currently evaluating the potential reinstatement of penalties in the second half of FY 2021. Reinstating penalties in the second half of FY 2021 may increase the projected reserves by a total of up to $200k. Reduced Future Debt Issuances For FY 2021, the District implemented half the rate increase that would have been proposed under normal circumstances. To offset the reduced revenues, and adoption of the half-rate increase budget option, the original FY 2021 budget projected $20.1M of debt be issued over the six-year period. Prior to COVID-19 the full-rate increase scenario projected no debt would be issued for the water system over the six-year period. As staff prepares the FY 2022 budget, the benefit could be used to reduce future debt issuances. Reduced Future Rate Increases The benefit could also be used to reduce future rate increases. The following table summarizes the original water rate increases projected in the FY 2021 budget compared to two updated methods of utilizing the reserve benefit. The first updated method, titled “smoothed adjustment”, allocated the benefit evenly across all future years. The second updated method, titled “one-time adjustment”, utilizes the entire benefit to reduce the FY 2022 rate increase, followed by future rate increases that are consistent with the original budget. The projected debt issuances under these scenarios would be $20.1M, plus an additional amount needed to fund the newly identified CIP projects. 2021 2022 2023 2024 2025 2026 Original 2.9%4.4%4.4%4.4%4.4%4.4% Smoothed Adjustment 2.9%4.1%4.1%4.1%4.1%4.1% One-time Adjustment 2.9%3.3%4.4%4.4%4.4%4.4% Fund Newly Identified CIP Projects Throughout the year staff identifies new CIP projects that will be added to the following year’s budget. Since the last budget was approved in June, staff has identified three (3) new CIP projects, which include two (2) pipeline replacement projects 5 and a reservoir coating project. The amount of these projects is anticipated to exceed the $5.5M benefit projection. Through the upcoming budget process other CIPs might also be identified. Original Budget The District’s FY 2021 budget and six-year rate model reflected the following estimated adverse impacts related to COVID-19. In response, the District implemented savings initiatives, which are also summarized in the table below. Approximately $8.5M of the $8.9M of total six-year savings initiatives was due to CIP reductions in FY 2021 and FY 2022. The following table summarizes the impacts of COVID-19 incorporated into the original budget. The negative impact on bad debt was not adjusted as part of this update. As of November 16th, COVID-19 continues to impact the region and there remains a ban on locking for non-payment. As a result of not being able to lock, the FY 2021 outstanding lockable balance as of November 16, 2020, has increased $300k compared to FY 2020. Due to the duration of COVID-19 remaining unknown, the ban on locking, and the current trend in lockable accounts, staff did not reduce the bad debt budget as part of the update. Based on communication with the San Diego County Assessor’s Office and insufficient data to substantiate an adjustment, the negative impact on property taxes was not adjusted as part of this update. The District received written communication in April from the San Diego County Assessor’s Office that tax remittances could be affected by COVID-19. District staff 6 contacted the Assessor’s Office as part of this review and was informed that property taxes are being adversely impacted by COVID-19. They were not able to provide specific details concerning the District’s tax receipts, the majority of which are received in December and April. The negative impact on capacity fee revenue was not adjusted as part of this update. Through October the District had sold 224 EDUs. At the current run-rate the 2021 capacity fees are trending above budget; however, capacity fees are not necessarily consistent, and there can be significant fluctuations month-to-month. There is no certainty that future capacity fee sales will continue at the current pace; therefore, we did not adjust the capacity fee revenues as part of this update. FISCAL IMPACT: Joseph R. Beachem, Chief Financial Officer As an informational item, this report does not have a fiscal impact. STRATEGIC GOAL: To ensure that the costs of service are born by responsible parties. This revenue source will help the District meet its fiscal responsibility to its ratepayers. LEGAL IMPACT: None. General Manager Attachments: A) Committee Action Form 7 ATTACHMENT A SUBJECT/PROJECT: Informational Item Regarding the Updated Impacts of COVID- 19 on the District’s FY 2021 Budget and Six-Year Projection COMMITTEE ACTION: This is an informational item only. 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. STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: January 6, 2021 SUBMITTED BY: Andrea Carey Customer Service Manager PROJECT: DIV. NO. All APPROVED BY: Joseph R. Beachem, Chief Financial Officer Jose Martinez, General Manager SUBJECT: Report on Customer Delinquencies GENERAL MANAGER’S RECOMMENDATION: This is an informational item only. COMMITTEE ACTION: See Attachment A. PURPOSE: To update the Board on the current state of customer delinquencies and the efforts staff is making to encourage customers to pay their water bills during the pandemic. ANALYSIS: On March 4, 2020, Governor Gavin Newsom declared a state of emergency in California due to the 2019 novel coronavirus (COVID-19) health emergency. On March 16th, Governor Newsom signed Executive Order N- 28-20 acknowledging many utility providers, both public and private, have voluntarily announced moratoriums on service disconnections and late fees for non-payment in response to COVID-19. On April 2nd, Governor Newsom signed Executive Order N-42-20 suspending the ability of water utilities, throughout the state, to disconnect residential or small business water services for non-payment. Recognizing the importance of hand washing and good hygiene to combat the spread of COVID-19, the District stopped its practice of AGENDA ITEM 4 disconnecting customers for non-payment on March 16th. Governor Newsom’s April 2nd executive order converted the action from voluntary to mandatory. On March 19th, recognizing the economic burden COVID-19 was having on residential and commercial customers, the District stopped imposing late penalty charges on past due payments. Customer Delinquency Prior to March, an average of 200 meters were locked monthly for non- payment. By law, these customers had balances over 60 days delinquent and had been notified multiple times regarding the delinquent balance prior to service being interrupted. In order to evaluate overall delinquency during COVID-19, staff has been tracking the number of lockable accounts on a weekly basis. Below are the month-end lockable account numbers after March. Owners and tenants are broken out separately as tenant accounts hold additional risk to the District. April May June July Aug Sept Oct Nov* Owner 447 589 600 469 498 578 576 608 Tenant 424 421 429 405 425 477 464 473 Total 871 1010 1029 874 923 1055 1040 1081 *as of November 16th As expected, the total number of lockable accounts continues to increase far beyond the pre-COVID-19 monthly average. Additionally, the total lockable delinquent dollar amount continues to rise as customers accrue additional delinquent water bills. April May June July Aug Sept Oct Nov* Owner $95,334 $196,864 $240,513 $198,605 $205,805 $218,828 $232,601 $247,298 Tenant $70,878 $116,506 $119,982 $130,590 $158,471 $193,412 $204,142 $214,658 Total $166,212 $313,370 $360,495 $329,195 $364,276 $412,240 $436,743 $461,956 *as of November 16th Outreach Efforts At the onset of the pandemic, to be sensitive to customers’ financial uncertainty, staff greatly reduced delinquent outreach to customers with past due balances. In a typical month prior to COVID-19, delinquent customers would receive a delinquent notification on their monthly bill, an email notifying them of the outstanding balance, a phone call or mailed postcard warning of impending water shut-off for non-payment, and a text message the day before disconnection advising them to pay immediately. Beginning in March, outreach was reduced to the past due notification on their water bill and a courtesy email reminding them of their outstanding balance. Without the threat of disconnection, calls from customers behind on their water bills reduced significantly. In early June, in response to increasing delinquent balances, staff sent out a postcard to over 700 customers that were more than 90 days delinquent. This postcard reminded customers that they had an outstanding water balance and, even though service would not be disconnected, they would ultimately be responsible for the balances accrued. Beginning in July, staff resumed automated phone calls notifying customers of outstanding balances. For anyone that is not successfully reached by phone, a postcard is mailed. Customers also receive a courtesy text message on the same day the payment reminder email is sent. On October 1st, staff began sending letters out to property owners notifying them of seriously delinquent balances on their tenant accounts. Previously, owners were notified when their tenant account was locked for non-payment. Since disconnection for non-payment is temporarily suspended, this new letter replaces that notification. The District wants to ensure property owners are aware of these past due balances because delinquencies on tenant accounts can negatively impact the owner’s ability to have accounts in the names of future tenants. Collection Efforts Disconnecting water service for non-payment has always been the most expedient way to collect outstanding balances. Below are other options the District has to aid with collections. Property Lien The District has the ability to lien property owners when their accounts become delinquent. Customers are sent an intent to lien letter which gives them the opportunity to bring their account current within 30 days. If they fail to pay during that time, a lien is filed with the county. If the property owner wants to sell the property or refinance their loan, they will have to pay their outstanding water debt to have the lien released. Prior to the COVID-19 pandemic, this was done for active accounts that had been locked and remained unpaid, sewer only accounts that had a delinquent balance over $100, and closed accounts where the owner continued ownership of the property but failed to pay the final balance. At the end of July, staff began to initiate the lien process on active owner accounts that owed greater than $1000 over 120 days past due. Since that time, the process has been expanded and, by the end of December, will include all owner accounts that have past due balances over 120 days. This lien gives the District some security to collect. District staff is currently looking at potentially expanding the lien process to include placing a lien on a landlord’s property for delinquent tenant balances. The State Water Code allows outstanding tenant debts to become the property owner’s responsibility and a lien to be placed on the property if unpaid. The District has never exercised this practice but, with the inability to disconnect, may look at this as another option to secure payment on tenant accounts. Property Tax Lien Once a year, the District may send delinquent balances to the county to be placed on annual property tax roll. Staff looks at all past due balances of closed, locked, and sewer only owner accounts as of May 31st. A letter is sent to property owners in June giving them 30 days to pay these outstanding balances. If payment is not received by mid-July, the balances are sent to the county to be collected with the upcoming property taxes. Due to COVID-19, the District opted not to send these charges to the county for the 2020-2021 tax year. The District will be looking to revise the current criteria for the 2021- 2022 tax year and may choose to send active account delinquent balances to the county at that time. This practice is a highly effective way to collect delinquent balances. Collections Agency Currently, when an account has an outstanding balance, been closed for 60 days, and the property is not owned by the account holder, the account is sent to an outside collection agency. The District’s collection rate once these balances are sent to collections is currently 20%. If the balance remains outstanding after another 60 days, it is then written off. Payment Arrangements Customer Service staff is available to coordinate payment arrangements on delinquent balances. At this time, only a few customers have requested arrangements, but staff anticipates these requests will become more common when the ability to disconnect resumes. State guidelines and the District’s Code of Ordinances allows the District to amortize the delinquent balance up to 12 months (at the District’s discretion), provided current bills continue to be paid on-time. Neighboring Agencies Staff speaks regularly with other county water agencies to discuss their response to growing customer delinquencies. Most agencies are taking the same actions the District has with regards to customer outreach and collection efforts. At this time, a couple of agencies have incorporated the use of flow restrictors on their severely delinquent customers. In surveying other local Districts and meter professionals throughout the state, most are not open to this option at this time because it reduces the customer’s access to water during the public health crisis. State Updates In addition to District staff monitoring delinquencies closely and continuously thinking of ways to mitigate the risk these balances carry, the State Water Resources Control Board (SWRCB) is also looking at this issue closely. The SWRCB and the Public Utility Commission held a joint workshop in late October to obtain input from agencies on the possible financial implications for water entities due to customer delinquency as well as input from community organizations on the needs of the low-income population. At that meeting, SWRCB stated they would be looking into the long-term impacts for both water agencies and customers. The District recently participated in a customer delinquency survey in which total residential delinquency data as of October 30, 2020 was reported to SWRCB by customer zip code. Potential Future Actions Staff will continue to observe any guidance or legislation that may come from the state or federal government on this subject. Staff is currently examining three (3) mechanisms that could be implemented individually or in combination to alleviate the risk associated with growing customer delinquencies. Staff may be returning to the Board in March or April with recommendations regarding the following items: Property Liens on Landlords for Tenant Debt As stated above, staff is evaluating the option to initiate the lien process on a landlord’s property with delinquent tenant debt. Staff is currently working through the various challenges of making this procedural change including looking at the impact to current landlords, the changes required within the District’s Code of Ordinances, and the outreach needed to ensure property owners are aware of their responsibility when a tenant signs into a new account. With rising tenant debt due to the moratorium on disconnections, the ability to lien the property adds additional security to the collecting of this debt should a delinquent tenant move out. Reinstating Penalties The District has lost over $500,000 in revenue since late fees were put on hold in mid-March. Staff is currently evaluating reinstating penalties in the coming months. Charging a penalty motivates customers to make payments in a timelier manner. In the winter months, the District typically collects $50,000 per month in penalty charges. Additional Outreach to Customers Staff is discussing several other additional methods to reach out to our delinquent customers and improve the probability of collecting on delinquent accounts. Future options may entail: leaving physical notices at the property, making phone calls to both owners and tenants, and/or additional postcard mailers, texts, and email messages. FISCAL IMPACT: Joe Beachem, Chief Financial Officer The District increased its write-off budget from $109,000 to $485,000 in FY 2021 due to the expected financial implications of COVID-19 and inability to disconnect water service for delinquent water bills. LEGAL IMPACT: None. Attachments: A) Committee Action ATTACHMENT A SUBJECT/PROJECT: Report on Customer Delinquencies COMMITTEE ACTION: 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.