HomeMy WebLinkAbout04-24-24 Board Packet 1
OTAY WATER DISTRICT
SPECIAL MEETING OF THE BOARD OF DIRECTORS DISTRICT TRAINING ROOM (LOWER-LEVEL PARKING LOT)
2554 SWEETWATER SPRINGS BOULEVARD SPRING VALLEY, CALIFORNIA WEDNESDAY
April 24, 2024 12:30 P.M. AGENDA
1. ROLL CALL
2. PLEDGE OF ALLEGIANCE 3. APPROVAL OF AGENDA
4. PUBLIC PARTICIPATION – OPPORTUNITY FOR MEMBERS OF THE PUBLIC TO SPEAK TO THE BOARD ON ANY SUBJECT MATTER WITHIN THE BOARD’S JU-RISDICTION INCLUDING AN ITEM ON TODAY’S AGENDA
WORKSHOP
5. 2025 ECONOMIC OUTLOOK UPDATE FOR SAN DIEGO COUNTY PREPARED BY LONDON MOEDER ADVISORS (KEVIN KOEPPEN / GARY LONDON)
6. DISCUSSION OF THE FISCAL YEAR 2025 BUDGET KEY FIGURES AND ASSUMP-
TIONS IMPACTING THE UPCOMING BUDGET PROPOSAL (JOE BEACHEM / KEVIN KOEPPEN) RECESS TO CLOSED SESSION
7. CLOSED SESSION a) CONFERENCE WITH LEGAL COUNSEL – EXISTING LITIGATION [GOV-ERNMENT CODE §54956.9]
OTAY WATER DISTRICT vs. CITY OF SAN DIEGO; CASE NO. 37-2017-00019348-CU-WM-CTL RETURN TO OPEN SESSION
8. REPORT ON ANY ACTIONS TAKEN IN CLOSED SESSION. THE BOARD MAY AL-SO TAKE ACTION ON ANY ITEMS POSTED IN CLOSED SESSION.
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9. ADJOURNMENT
All items appearing on this agenda, whether or not expressly listed for action, may be delib-
erated and may be subject to action by the Board. The Agenda, and any attachments containing written information, are available at the Dis-trict’s website at www.otaywater.gov. Written changes to any items to be considered at the
open meeting, or to any attachments, will be posted on the District’s website. Copies of the
Agenda and all attachments are also available by contacting the District Secretary at (619) 670-2253.
If you have any disability which would require accommodation in order to enable you to par-
ticipate in this meeting, please call the District Secretary at 670-2253 at least 24 hours prior
to the meeting.
Certification of Posting I certify that on April 22, 2024, I posted a copy of the foregoing agenda near the regular meeting place of the Board of Directors of Otay Water District, said time being at least 24
hours in advance of the special meeting of the Board of Directors (Government Code Sec-
tion §54954.2).
Executed at Spring Valley, California on April 22, 2024.
/s/ Tita Ramos-Krogman, District Secretary
STAFF REPORT
TYPE MEETING: Budget Workshop MEETING DATE: April 24, 2024
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 Report Presenting the 2024 Economic Outlook
Update for San Diego County Prepared by London Moeder
Advisors
GENERAL MANAGER’S RECOMMENDATION:
Informational Report presenting the 2024 Economic Outlook Update
for San Diego County prepared by London Moeder Advisors.
PURPOSE:
To present to the Board the 2024 Economic Outlook Update for San
Diego County prepared by Gary London of London Moeder Advisors.
DISCUSSION:
Each year, the District goes through a budget process with new
challenges. The budget process starts in December and
culminates with a budget presentation to the Board in June.
Consistent with the FY 2024 budget process, the FY 2025 budget
will be presented to the Board in three (3) presentations:
1.The first consists of this Economic Outlook Update
presentation, which will be used to evaluate potential
economic impacts on revenues and budget for growth.
2.The second presentation will review key assumptions and
inputs used to prepare the budget including known
opportunities and challenges.
3.The third and final presentation of the consolidated budget
will be on June 5. At that time, staff will be presenting
Agenda Item 5
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the consolidated FY 2025 budget and request Board approval
of the following items:
• The FY 2024-2025 Operating and Capital Budget.
• The interfund transfers for potable, recycled, and
sewer.
• Actions associated with the recommended rate changes.
• Staff will also request direction from the Board to
draft and mail water and sewer rate notices.
To prepare the budget, staff makes every effort to present the
most realistic set of factors and assumptions based on
information received from various sources, including growth and
economic expectations. Part of this process includes engaging
an Economist to perform an Economic Outlook study evaluating the
projected health of both the global and local economies. The
study includes discussions about macro and micro economic
activities, including a six-year projection of development
within the District. Staff incorporates the information
provided in this report into the budget preparation including
estimated growth-related revenues and costs, and inflation
factors.
For the six-year period spanning from 2025 to 2030, the current
Economic Outlook study projects a 10% decrease in Equivalent
Dwelling Units (EDUs) compared to the figures reported in last
year’s study for the corresponding period. The overall
projection suggests a slight reduction in EDUs, which equates to
a $4.3 million dollar decrease in capacity fees based on the
2024 dollar value.
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400
600
800
1,000
1,200
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
ED
U
'
s
Fiscal Years
Equivalent Dwelling Units (EDU's) -Actual and Projected
Actual
Projected 2025
Projected 2024
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FISCAL IMPACT: Joseph R. Beachem, Chief Financial Officer
The $4.3 million decrease in capacity fee revenue projections
will place upward pressure on rates over the next five years,
equivalent to a one-time rate increase of 0.7%.
STRATEGIC OUTLOOK:
The District ensures its continued financial health through
long-term financial planning and debt planning.
LEGAL IMPACT:
None.
Attachments:
A)London Moeder Advisors PowerPoint Presentation
B)London Moeder Advisors Economic Outlook Report
Nathan Moeder
619.269-4012
nathan@londonmoeder.com
Gary London
619.269.4010
glondon@londonmoeder.com
Attachment A
Consumer Price Index -G7 Countries
2010 -2022
GDP per capita (Current US$) -G7 Countries
2000 -2022
Unemployment Rate Estimate (% of total labor force) -G7 Countries
2000 -2022
United States Unemployment Rate
Seasonally AdjustedMonthly 2006 -December 2023
United States Initial Claims for Unemployment InsuranceSeasonally Adjusted
Weekly Jan 2007 -Dec 2023
United States Light Vehicle Sales2015 -2023
Economic Outlook – Otay Water
District 2024
February 2024
Attachment B
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STAFF REPORT
TYPE MEETING: Budget Workshop MEETING DATE: April 24, 2024
SUBMITTED BY: Kevin Koeppen, Assistant Chief
of Finance
PROJECT: DIV. NO. All
APPROVED BY: Joseph R. Beachem, Chief Financial Officer
Jose Martinez, General Manager
SUBJECT: Informational Item to Present FY 2025 Budget Key Figures and
Assumptions Impacting the Upcoming Budget Proposal
GENERAL MANAGER’S RECOMMENDATION:
This is an informational item presenting the FY 2025 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 2025 budget.
BACKGROUND:
The District’s budget process begins in January and ends with the
adoption of the next fiscal year’s budget at the June Board meeting,
with implementation of rates occurring the following January. The
Budget Workshop commenced with a presentation of the 2024 Economic
Study. In this portion of the Budget Workshop, staff will elaborate
on other key budget assumptions and inputs. The final presentation of
the consolidated budget is scheduled for the June 5 Board meeting. At
that meeting, staff will present the consolidated FY 2025 budget and
request that the Board:
•Approve the FY 2025 Operating and Capital Improvement Program
(CIP) Budget and associated rate changes.
•Approve the fund transfers for potable, recycled, and sewer.
•Adopt the Salary Schedule.
•Approve the continued advance funding of the District’s unfunded
pension and OPEB unfunded liability.
•Direct staff to draft and mail rate increase notices for
potable, recycled, and sewer.
Agenda Item 6
The budget is put together presenting 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 the economic report prepared this year by London
Moeder Advisors. Staff uses this information in conjunction with
other economic indicators affecting taxes and revenues, such as
inflation and interest rates, to prepare the budget.
FY 2024 Projected Operating Results
Through February 29, 2024, the District has an operating deficit of
$1.2 million. Staff projects the deficit will remain at this level
for the remainder of the fiscal year. The deficit is primarily due to
lower-than-anticipated water sales volumes resulting from higher-
than-average rainfall. Staff is incorporating this deficit into the
rate projections.
Budget Strategy
The culmination of the budget process is the recommendation of
changes to potable water, recycled water, and sewer rates which meet
the following primary budget objectives:
• Recommend rates that comply with the requirements of Proposition
218,
• Maintain reserve levels at target levels in each of the next six
(6) years,
• Maintain debt coverage, excluding growth, above the target of
150% for water and sewer for the next six (6) years, and
• Support the Strategic Plan initiatives.
Strategic Planning
In addition to the budget and rate setting process, the District’s
ongoing focus on strategic planning continues to play a positive role
in the financial strength of the agency. By managing staffing,
leveraging business and operating technologies, and implementing best
management practices, the District has become more efficient and cost
effective. The Strategic Plan is essential to the budget process as
it drives and prioritizes funding for many of the District’s service
and operational programs.
Proposition 218
The State of California has well-established legal constraints
regarding utility rate setting, of which California Constitution
Article XIII D, Section 6 (commonly referred to as “Proposition
218”), is at the forefront. Proposition 218 requires that water and
sewer utilities establish cost-based rates for the services provided.
To comply with this requirement, the District performs periodic cost
of service studies and Proposition 218 hearings.
A water cost of service study was completed and presented to the
Board on April 27, 2022, followed by a Proposition 218 hearing on
October 5, 2022. A sewer cost of service study was completed and
presented to the Board on May 6, 2020, followed by a Proposition 218
hearing on October 7, 2020. At the conclusion of the 218 hearings,
the Board approved the terms of the 218 Notices which allowed for
rate changes for a period of up to five (5) years of all future pass-
through costs and cost increases or decreases to cover changes to
rates, fees, or charges from the District’s water and energy
suppliers, and overall non-supplier cost increases not to exceed the
annual increase in the Consumer Price Index-U for the San Diego-
Carlsbad area as of January 31 of the preceding year. For sewer the
non-supplier cost increase is limited to 10%.
The five-year period for sewer is set to expire in 2025. Therefore, a
sewer cost of service study will be budgeted in FY 2025, with the
results incorporated into the FY 2026 budget and January 1, 2026
rates. A water cost of service study is projected to be performed in
FY 2027, with the results incorporated into the FY 2028 budget and
January 1, 2028 rates.
Real Estate Sales
The receipt of proceeds pertaining to the Salt Creek property is
projected to occur in two years, in FY 2027. When compared to prior
years’ assumptions, the timing is consistent with the FY 2024
projection; however, staff has increased the anticipated sale
proceeds from $20.0 million to $26.7 million.
Overall, the total impact pertaining to real estate and pending
litigation, discussed in the next section, is significantly affecting
this year’s projected rate increases. The total impact on rates is
planned to be phased in over time but equates to a one-time 2.2%
increase.
FY 2024 Challenges
Ongoing Litigation
Pending rate litigation is having a significant impact on the FY 2025
budget. While the District believes a favorable result will be
achieved, the District needs to incorporate an adverse rate impact
associated with a potential unfavorable result.
Inflation
According to the Bureau of Labor Statistics, in January 2024, the
Consumer Price Index (CPI) for all goods in the San Diego Metro area
rose 3.8% during the last 12 months, a significant decline from the
January 2023 CPI index of 6.4%. The District is experiencing
inflation in some of its operating and capital areas in excess of
3.8% which includes water supply, energy, medical, and chemical
costs. For the FY 2025 administrative and materials budget, staff
estimates inflationary increases totaling $460 thousand, representing
a 3.2% inflation rate. While inflation remains above recent historic
lows, the FY 2024 rate model anticipated and projected higher
inflation. In FY 2024, staff predicted annual inflation of 5.5% for
administrative and material costs. As a result, a significant amount
of inflation had already been incorporated into last year’s
projection for FY 2025.
At CWA’s April 25 Board meeting, CWA staff will present several rate
increase alternatives. The proposed alternatives have effective
increases ranging from 16% to 25%, significantly higher than the
prior year’s projection of approximately 10%. Further discussion
regarding CWA’s rates is included in the Water Costs section of this
staff report. Like administrative and material costs, staff had
projected water cost inflation above recent historic levels as part
of the FY 2024 projection.
Net SDG&E rates increased nearly 20% in FY 2024, compared to a
budgeted increase of 10%. Staff has evaluated, and continues to
evaluate, opportunities to lower energy costs. For FY 2025, SDG&E is
seeking to increase their rates by 7%. The FY 2025 budget will be
increased to account for the higher-than-anticipated increase in FY
2024 and the additional increase anticipated in FY 2025.
These inflationary impacts on the District are partially mitigated
through increasing returns on investments and long-term contracts
with fixed pricing structures or structures that include annual price
increases set at fixed dollar amounts that are less than the CPI. It
is important to recognize that in future years, when these contracts
are repriced, even if inflation levels have declined, these contracts
will be reset to recapture prior inflationary levels that were
temporarily avoided.
Although Federal interest rates rose to combat inflation, inflation
will likely continue into 2025, albeit at a more moderately tempered
pace than what the nation has experienced over the last three years.
This expectation is supported by the January 2024 CPI data. For the
FY 2025 six-year rate model, staff is assuming administrative and
material inflation will remain at the current level of 3.8% for FY
2025 to FY 2030.
CIP Projects
The six-year CIP projection is increasing due to newly identified CIP
projects, existing project construction delays resulting in rollover
expenses, and inflation. The total six-year CIP budget is increasing
$22.7 million from $148.0 million in FY 2024 to $170.7 million in FY
2025.
There are many factors impacting the overall CIP increase including,
but not limited to: new projects being identified, delays in existing
projects, updates to engineering estimates and/or designs as part of
the normal project progression, and inflation. Staff estimates an
overall annual CIP inflation of 4.6%.
The proposed CIP six-year budget is discussed further in the CIP
section of this staff report.
Water Costs
Water purchase costs from the District’s suppliers are a significant
component of the District’s overall budget. Potable and recycled
water costs constitute approximately 62% of the operating budget. For
FY 2024, the CWA/MWD purchases budget was approximately $62.6
million. Every 1% increase in CWA/MWD rates equates to an approximate
$540 thousand increase in cost to the District, or a 0.5% increase in
District potable rates.
There are several factors exerting upward pressure on CWA rates,
including but not limited to: rising purchase costs from its supplier
MWD, immediate decreases in demand due to high rainfall, long-term
and permanent decreases in demand due to roll-off and conservation,
and declines in its own financial metrics (e.g., declines in its rate
stability fund and debt coverage ratios).
Periodically CWA has provided a high-low “all-in” forecast of future
rates, which is based on the results of certain assumptions
including: MWD rate increases, water sales volumes, construction
costs, and increases in operating and maintenance costs. Considering
the proposed alternatives and CWA’s financial challenges, Otay staff
believe that CWA will be challenged to hold rates within the high
limit of the “all-in” forecast.
• Under a 16% rate increase alternative, future rate increases
would need to average approximately 3.9% or less.
• Under a 25% rate increase alternative, future rate increases
would need to average approximately 2.3% or less to remain
within the high limit of the “all-in” forecast.
Given that CWA’s recent historic rate increases have exceeded the
levels necessary to remain within the high limit, coupled with the
pressures facing CWA related to the upcoming roll-offs, it is highly
probable that CWA’s rates will surpass the high limit.
Based on the current information available to the District, Staff is
anticipating the current year’s CWA increase projections will exceed
last year’s projections.
The projection for 2026 is an estimate based on the assumption that
any increase passed in 2025 will be added to the 2026 rate increase,
with a return to more typical historic patterns in 2027. However,
considering the challenges CWA is facing, returning to 6.0% in 2027
and beyond may pose difficulties. Staff will adjust the projections
as more information becomes available from CWA.
Additionally, there are outstanding items that may impact CWA/MWD
future rates and charges. Such items carry uncertainty as to the
amount and timing of the impacts to the District. Examples of these
items include a potential CWA rate redesign and agencies detaching
from CWA.
Recycled
For FY 2025, the recycled purchases budget from the City is
approximately $5.8 million, which is a $310,000 or 5.6% increase
compared to FY 2024. The increase is due to a 5% increase in the
purchase price of water and a 90 acre-foot increase in the
contractual take-or-pay volume. Staff is assuming that the penalty
associated with the current take-or-pay agreement will be eliminated
in FY 2027, when the current agreement expires.
In addition, the District is still working towards a renegotiated
recycled water agreement with the City.
Sewer Challenges
The primary long-term challenge for sewer continues to be the City’s
increasing wastewater fees.
The City’s Pure Water program, which incorporates a secondary
equivalency for the Point Loma WWTP, impacts the wastewater fees paid
2024 2025 2026 2027 2028 2029 2030
FY24 Projections 10.2%9.9%5.5%5.5%5.5%5.5%
FY25 Projections 10.2%16%-25%6% -10%6.0%6.0%6.0%6.0%
for by the District’s sewer customers for sewage treatment. The
ultimate cost of the City’s Pure Water program remains the most
significant cost increase facing the District’s sewer customers over
the next six (6) years, and beyond. There is still significant
ambiguity regarding how these costs will affect our customers. As
mentioned in an April 3, 2019 Engineering Staff Report, the
District’s sewer customers’ share of Pure Water Phase I is estimated
to be $2.6 million and Phase II is estimated to be $5.7 million. The
combined effect on rates totaling 29% will need to be phased into the
District’s sewer rates over the next 15 years. The District is five
(5) years into the 15-year period. While estimates of the Pure Water
program are built into the District’s budget projections, the
separate billing of the Pure Water program has not been incorporated
into the City’s sewage treatment fees; therefore, there is still some
risk regarding the ultimate outcome to the District. Furthermore, the
City is proceeding with amending the current Metro agreement, and
changes to the agreement will also impact the District’s annual
Metro-related fees.
The City has received grant funding and low-cost loan financing for
its Pure Water program, such as the State Revolving Fund (SRF). These
funding sources directly reduce the overall Pure Water cost and lower
the District’s pay-go funding requirement, smoothing out the cashflow
impact to the District’s customers. Payments for low-interest loans
do not commence until a year after construction completion, meaning
the Pure Water program cost impacts covered by SRF are expected to be
delayed until 2026 or 2027.
The District has also mitigated the cost of the Pure Water program by
lowering our contracted capacity. A modification in annual average
daily metro capacity from 1.287 MGD to 0.38 MGD, under the new Metro
amended agreement, has reduced the District’s ultimate Pure Water
burden.
For the CIP component of Pure Water, staff assumes a $145 thousand
increase to the six-year CIP. The increase is based on an estimate
provided by the City for projected Pure Water capital construction
costs. The sewer CIP for Pure Water is estimated to cost $8.3 million
over the next 15 to 20 years. Based on information from the City, the
current six-year CIP projection includes $625 thousand for the Pure
Water program.
The District is also anticipating an increase in costs related to a
shared-facility agreement with the County of San Diego (the County).
A section of the District’s sewer system is a shared facility owned
and operated by the County. The County is undergoing a necessary
rehab project of the shared facility which is estimated to cost the
District’s sewer operation approximately $2.4 million over the next
six (6) years.
CalPERS and OPEB Update
The pension and OPEB liabilities carry an interest cost of 6.8%,
which is the District’s highest interest cost. By focusing on
reducing and eliminating the unfunded pension liability, the District
is reducing the highest interest cost liability, representing a
savings opportunity. Overall, CalPERS and CERBT 2022 investment
returns lagged actuarial expectations, resulting in a reduction in
the funding levels of both the District’s pension and OPEB plans.
As of June 30, 2022, which is the most recent CalPERS actuarial
pension valuation, the District’s pension was 81.8% funded, a
decrease of 13.7% compared to the June 30, 2021 funded level. The
decrease was mainly due to CalPERS incurring an actual investment
loss of 6.1% versus an actuarial or expected return of 6.8%. The
CalPERS fund’s average annualized return for the five-year period
ending June 30, 2022 was 6.7%.
As of June 30, 2023, the OPEB plan was 74% funded, which is an 11%
reduction compared to the 85% funding as of June 30, 2022. The
reduced funding level is similarly a result of lower than expected
investment returns in 2022, as well as a 15% increase in medical
costs that became effective on January 1, 2024.
Staff will recommend that the District advance fund approximately
$350 thousand to its defined benefit programs. Due to an increase in
the OPEB funding target, the advanced funding level is lower than the
historic level of $1.3 million. Staff will also recommend returning
the advance funding level to the $1.3 million level over the next six
years. These recommendations are consistent with those communicated
as part of the OPEB Informational Report presented to the Board at
the February 7, 2024, Board meeting.
The objective of this advance funding is to save the ratepayers
money. Continuing to advance fund the District’s OPEB and CalPERS
plans will save the District approximately $5.5 million over the 12-
year advance funding period, which began in 2021. As part of the
continuing efforts to reduce the District’s highest cost debt, the FY
2024 budget includes continued advanced funding of the unfunded
obligations.
Major Assumptions
Growth Projections
Staff plans to incorporate the growth projections provided by London
Moeder at the Budget Workshop on April 24 into the six-year growth
projection.
Potable Sales Volumes
Through March 31, 2024, actual potable water sales were 8.5 million
units, which was 5.0% below the budget of 9.0 million units. The
reduction is due to above average rainfall. Through March 31, 2024,
year—to-date rainfall of 11.9 inches was 19% above the historical
average.
Staff is proposing to continue the practice of using an average of
actual historic volumes to calculate future budgeted volumes. The
District began using this method in 2020. Prior to using this method,
the District relied on long-term weather forecasts, which often
resulted in significant volume variances when actual weather deviated
from predictions. Using the historic average method has provided a
more stable outlook on long-term volumes and revenues.
The table below summarizes the historic unit sales variances under
the historical average methodology. The historical average
methodology has resulted in less year-over-year variability and a
relatively accurate measure of usage over the long-term, facilitating
more predictive budgeting and rate-setting.
For the FY 2025 budget, and consistent with FY 2024 practice, staff
is using a four-year average from FY 2020 to FY 2024, plus a growth
factor based on the London Moeder Advisors’ economic report, which
equates to less than 1% annual customer growth. The assumption that
new customers will connect throughout the year and will use
approximately half the volume of the existing customer base
translates to an assumed volume growth of 0.22% annually. Staff
recognizes FY 2021 volumes were above historic levels due to COVID-
19; however, inclusion or exclusion of FY 2021 volumes has less than
a 1% impact on the total budgeted volume.
The following table contains a chart of historical potable volumes,
rainfall, the four-year average, and the FY 2025 volume calculated as
the four-year average, plus growth.
The following table contains the projected unit sales assumptions
proposed for the FY 2025 six-year rate model. Additional discussion
pertaining to the projected volumes can be found immediately
following the table.
The analysis on the following page shows historic and projected
volumes compared to last year’s projections and ranges.
• The green line represents a maximum volume year based on
relevant historical actual volume.
• The red line represents the minimum volume year based on
relevant historical actual volume.
• The yellow section represents the volume associated with growth.
• The black solid line represents the FY 2025 projection, totaling
the existing (blue) plus the growth (yellow) volumes.
Projected Average Budget
FY 2021 FY 2022 FY 2023 FY 2024 4-Year FY 2025
Rainfall 4.9 6.8 17.1 11.9 10.2 N/A
Units 12.6 12.3 11.2 11.4 11.9 11.9
Historical Unit Sales (in million HCF) and Rainfall (in inches)
Actual
FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 6-year Avg Growth %
11.9 11.9 11.9 12.0 12.0 12.0 11.9 0.22%
6-Year Rate Model Projection
Projected Unit Sales (in million HCF)
Recycled Sales Volumes
Through March 31, 2024, the actual recycled water sales volume was 1.1
million units, which was 13.4% below budget. The reduction in volume is
due to above average rainfall discussed in the previous potable sales
volume section of this report. The FY 2025 recycled volume projections
have been prepared using the same historical average plus growth
methodology used to prepare the potable volume projection. The following
tables and chart contain historical recycled volumes, rainfall, the
four-year average, the FY 2024 volume calculated as the four-year
average, plus growth, as well as the six-year forecast.
On the following page are the projected unit sales assumptions
proposed for the FY 2025 six-year rate model. Additional discussion
pertaining to the projected volumes can be found immediately
following the table.
Projected Average Budget
FY 2021 FY 2022 FY 2023 FY 2024 4-Year FY 2025
Rainfall 4.9 6.8 17.1 11.9 10.2 N/A
Units 1.8 1.7 1.4 1.4 1.6 1.6
Historical Unit Sales (in million HCF) and Rainfall (in inches)
Actual
Projected Unit Sales (in million HCF)
Six-Year Rate Model Projection
FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 6-year Avg Growth %
1.6 1.6 1.6 1.6 1.6 1.6 1.6 0.22%
The following analysis shows historic and projected volumes compared
to last year’s projections and ranges.
• The green line represents a maximum volume year based on
relevant historical actual volume.
• The red line represents the minimum volume year based on
relevant historical actual volume.
• The yellow section represents the volume associated with growth.
• The black solid line represents the FY 2025 projection, totaling
the existing (blue) plus the growth (yellow).
Capital Improvement Program (CIP) Budget
As a component of the annual budget development process, the
Engineering staff update the CIP budget using the following process:
• CIP projects are selected and prioritized based on the Water
Facilities Master Plan (WFMP), the Urban Water Management Plan
(UWMP), Sub Area Master Plans (SAMP), Integrated Water Resources
Plan (IRP), Wastewater Management Plan (WWMP), the Cathodic
Protection Plan, the District’s Strategic Plan, Asset Management
Plan, and other focused or specific planning documents and
reports which are used to manage growth, maintenance, and the
life extension of assets.
• The CIP goes through an iterative process to meet the criteria
of growth, service levels, supply targets, and system
reliability.
• CIP target expenditures for the next six (6) years are refined
and used in the rate model.
The following general criteria are used to determine the
reasonableness of a project before it is considered for inclusion
within the CIP budget:
• Safety and existing facility conditions
• Operating system conditions and energy improvements
• Water and sewer system deficiencies
• Regulatory and permitting agencies’ requirements
• Developer driven requirements
• Economic outlook
• Growth projections
• Water supply diversification goals
• Board and management directives
This year, the total six-year CIP budget of $170.7 million increased by
$22.7 million versus last year. The total water CIP budget for the six-
year period is $157.9 million, which is a $21.3 million increase
compared to FY 2024. The sewer CIP of $12.8 million is increasing $1.3
million compared to FY 2024. To maintain reserves at target levels for
both water and sewer, staff is currently projecting debt issuances for
water in 2026 and 2028, and for sewer in 2027. As the District approaches
the timing of issuing debt, an analysis will be performed to determine
the cost benefit of combining the two water debt issuances into a single
issuance. The following schedule contains a roll-forward of the six-
year CIP budget followed by explanations for the roll-forward amounts.
FY 2024 Six-Year CIP Budget 148.0$
New Projects 9.7$
Completed Projects (1.1)$
Ongoing Project Changes:
Change due to ongoing normal project progression 3.6$
Increase due to inflation 5.4$
Increase due to change in scope 5.1$
FY 2025 Six-Year CIP 170.7$
The $9.7 million for 13 new CIP projects predominantly consists of
the following:
• $3.0 million for the 16-inch diameter steel potable water
transmission main assessment and repair on Olympic Parkway in
the 980 pressure zone.
• $1.4 million for the 14-inch diameter ACP potable water pipeline
crossing SR-125 on Orville St in the 640 pressure zone.
• $1.2 million for the 12-inch steel potable water pipeline on
Sweetwater Springs Blvd, southwest of Jamacha Blvd in the 850
pressure zone.
• $0.5 million for relocation of pipelines for the County of San
Diego’s conflicts.
• $0.5 million to assess and upgrade the administrative building
for compliance with the current Americans with Disabilities Act.
• $0.5 million to convert from aqueous ammonia at the 803-4
reservoir to the safer and more stable liquid ammonium sulfate.
• $0.5 million to replace and upgrade the District’s Utility
Network Framework from the existing geographic information
system.
Budget increases of $14.1 million are due to a combination of
increasing scope of work, updates to engineering estimates, and
inflation. Scope of work increases are approximately $5.1 million.
Increases associated solely with inflation are $5.4 million, or 3.6%.
Financing Plan
The District uses a comprehensive approach to financing. The Debt
Policy provides guidance for debt issuance and refinancing. The
Reserve Policy provides guidance on both fund transfers and reserve
balances. With these policies, a six-year financing plan is
formulated that identifies the timing and amounts of debt issuances,
the level of rate increases, debt coverage ratios, reserve balances,
and necessary transfers.
The District’s comprehensive financing approach establishes financial
targets that add to the financial strengths of the District. These
strengths include:
• AA credit rating, which saves ratepayers money by reducing debt
costs.
• Financial stability, which enables the District to focus on the
long-term financial needs of the District and anticipate future
financial challenges.
Open Items
On the following page is a list of items that are in process and will
be presented at the final Budget Board presentation on June 5:
• Overall budget summary
• Rates and rate increases
• Debt service coverage
• CWA Rates and Fixed Charges
• Labor and benefits
• Materials and maintenance expenses
• Administrative and legal expenses
• Salary Schedule
• Rate comparison
• Fund transfers
• Budget approval
FISCAL IMPACT: Joe Beachem, Chief Financial Officer
This is an informational item. Each one of the items discussed above
will impact the proposed rate increases over the next six-year
period. Recommended changes to rates will be based on the District
maintaining reserves at target levels and meeting its debt coverage
targets. To the degree that these targets and covenants are met, the
financial impact of the items discussed in this staff report will
occur over multiple years.
For sewer, staff estimates that debt service coverage and reserve
requirements will meet or exceed targeted levels for the six-year
period. For water, staff projects that debt service coverage will
meet or exceed target levels for the six-year period.
Additionally, staff projects that water reserves will meet or exceed
target levels for fiscal years 2026 through 2030. For 2025, staff
anticipates water reserves will remain above target with a positive
outcome of pending litigation, and will remain above the minimum
level in the event of a negative outcome of pending litigation.
STRATEGIC GOAL:
The District ensures its continued financial health through long-term
financial and debt planning.
LEGAL IMPACT:
None.
Attachments:
A) Presentation – FY 2025 Budget Workshop
FY 2025
Budget
Workshop
April 24, 2024
1
Attachment A
Workshop Agenda
Introduction and Objectives Joe Beachem
Challenges, Strengths, and District Actions Jose Martinez
Capital Improvement Budget Beth Gentry
Key Assumptions, Financing Plan, and Conclusion Kevin Koeppen
2
Budget Objectives
Support Strategic Plan
objectives
Support essential operations
of the District
Maintain reserves at target for
all six years
Maintain debt coverage,
excluding growth, above
target of 150% for both water
and sewer for all six years
Fund the Six-Year CIP budget
Establish rates that are
compliant with Proposition
218
3
Budget Timeline
April
Board Meeting
•Legislative update presented
Today
Special Board Meeting
(Budget Workshop)
•Economic Study Presentation
•Budget Key Figures and Assumptions
June
Board Meeting
•Budget Approval
4
Budget Process
Six-Year
Rate Model
MWD/CWA &
City Sewer Rates
Assumptions
Interest Rates
Inflation
Growth
Sales
Debt
Targets
Debt Coverage
Reserve Levels
Operating
Budget
CIP
Budget
Water
&
Sewer
Rates
DroughtYear-end
Balances
Six-Year CIP
Budget Input
Operating
Budget InputStrategic
Plan
5
▪Cost of Service Study Performed – 2022
❖Proposition 218 Hearing –October 5, 2022
▪Cost of Service Study –2027
❖Next Proposition 218 Hearing –October 2027
Timeline
▪5-years
▪100% pass-through of supplier-related costs, including SDG&E
▪Pass-through of non-supplier cost increases, not to exceed the annual increase in the CPI for the San Diego-Carlsbad area as of Jan. 31 of preceding year.
Board Approved Terms
Proposition 218: Water
6
Proposition 218: Sewer
▪Cost of Service Study Performed – 2020
❖Proposition 218 Hearing –October 7, 2020
▪Cost of Service Study –FY 2025
❖Next Proposition 218 Hearing –October 2025
Timeline
▪5-years
▪100% pass-through of supplier-related costs, including SDG&E
▪Up to 10% rate increases for internal costs
Board Approved Terms
7
Challenges,
Strengths,
and District
Actions
Jose Martinez
8
Challenges
Affordability
San Diego County Water Authority Rates
Drought and Extreme Weather
Regulatory Creep and Unfunded Mandates
Workforce Turnover
Proposition 218
Increase in Six-Year CIP
Inflation
9
CWA Rate
Increase
Drivers
10
Cross Connection Control Policy Handbook
▪Final draft approved by State Water Resources Control Board (SWRCB) Dec. 19.
▪Handbook will replace portions of Title 17 that address cross connection and backflow regulations.
▪District will be required to provide Cross Connection Control Plan to SWRCB by July 1, 2025.
▪Staff provided comments regarding portions of the handbook that will result in increased workload and additional
costs to customers, specifically regarding:
▪Residential Fire Sprinklers – Items required to remove backflow requirement on residential homes with fire
sprinklers would require the District to inspect homes retroactively to ensure specific plumbing materials are
used and there is a looped fire system in place.
▪Staff believes most homes will not be compliant and will require installation of backflow devices.
▪About 3,200 homes estimated to be affected.
▪Hazard Assessment on All Sites – District would have to perform hazard assessments on all service connections
and resurvey each time a commercial or multiresidential property changes ownership.
▪Since the District requires the highest form of backflow protection for all commercial, multiresidential, and
residential properties with wells on site, site surveys were done only as needed.
▪Staff will have to perform assessments on more than 50,000 services and create a process to resurvey
commercial and multiresidential properties when ownership changes.
11
Pump Station Condition Assessment Program
▪Pilot Pump Station Condition Assessment
Project completed in January 2024
▪Assessed the current state of critical
assets at four (4) District pump stations*
▪Evaluated remaining useful life (RUL) of
assets and identified R&R needs over
next 10 years
▪Pilot Purpose: Develop and extend
methodology established during pilot study
to accompany remaining District pump
station sites
12
Field Condition Assessment Results by Pump Station
*Condition assessment performed at 870-2 to document current asset conditions. Not included in chart due to age of facility.
Facility-level COF Results
13
COF
Score Description Asset Class
5
Catastrophic
impact on the
main
functionality
of facility
Pumps, Motors,
Switchgear, Tank,
SCADA, Control Panels,
MCC, Transformer, Main
Switchboard, Engines
4
Major loss of
redundancy
Power Panels, Valves,
VFDs, Vessels, Eyewash
Stations
3
Moderate
loss of
redundancy
Ventilation Fans, Flow
Meters, Transmitters,
Air Compressors
2 Minor loss
Building, Non-Process
Structures (e.g., Vault),
Access Ladder
1 Lowest
impact
Concrete Pad,
Pavement, Fence,
Access Gate, Lighting
District
Actions
14
▪Low Income Household Water Assistance Program (LIHWAP)
oReceived $86K in FY 2024 and $236K overall since the program’s inception
▪Extended Water and Wastewater Arrearage Program
oReceived $65K in FY 2024 and $598K overall since the program's establishment
▪Proactively lead efforts to mitigate and counter unfunded mandates and regulatory creep.
oAB 1594, Lead and Copper Rule Revisions, Cross Control, etc.
Advocating for Customers
▪2022 Winter Storm – awarded $77K to restore damaged roads.
▪COVID-19 Safe Opening –submitted over $277K, awarded $59K to date
FEMA/CalOES Assistance
▪Water Energy and Efficiency Grant (WEEG) – requesting $500K
o Applied: February 2024; Estimated Award: Fall 2024
▪Climate Adaptation and Resiliency Plan (CARP) –awarded $232K
▪Habitat Management Area and Mitigation –awarded $78K
▪Water Recycling Funding Program –joint project with Sweetwater Authority
o Applied for $500K funding
o Cost split 50% with Sweetwater Authority
Grant Efforts
Strengths
Strategic Planning process
CWA diversification of regional supply (drought-proofing San Diego)
Land sale
▪Continue annual advance funding practice
▪Recommending to redirect $350,000 advance fund defined benefit programs
▪$5.5 million estimated savings over the 12-year advance funding period, which began in
2021
OPEB and Pension Funding
▪31% increase in customers per FTE
Efficiency Gains (since 2007)
▪S&P ‘AA’ rating
Bond Rating
▪Reserve, Debt, and Investment Policies
Sound Financial Management
15
Board’s proactive approach to financial and
operational stability
Financial
strength through
establishing debt
coverage targets and
Reserve
Policy
Invested in
staffing, software,
equipment, and other
infrastructure to achieve
efficient
operations
Investment
in emergency
preparation from policies
to equipment
Efficient use of equipment
and vehicles
Converted variable
bonds to fixed
Limited exposure to
CalPERS
changes in future
discount rates by
making advanced
payments
16
Capital
Improvement
Program
FY 2025 –
FY 2030
Beth Gentry
17
Construction Climate/Mitigation
Factors
Influencing
Construction
Climate
Shortage of skilled & unskilled labor & increase in labor costs
Increase in the Consumer Price Index
Regional competition for contracting resources
Materials cost escalation due to demand and material shortages
Mitigation
Strategies
Value engineering
Grouping projects to attract bidders
Pre-purchasing of materials
Grant funding
18
CIP Budget Guidelines
Near term development trend is expected to be slightly lower in FY 2025 and the 5-year
projection
New development with multi-family dwellings in greater proportion to single-family
dwellings
In preparing the budgets for the individual CIP projects, the Engineering Department used recent construction and bidding data to adjust costs for each project
Reprioritized projects based on District’s planning documents to control spending to keep rates stable
19
CIP Six-Year Budget Look Forward
($ Millions)
FY 2024
FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Totals $ 15.3 $ 24.9 $ 24.4 $ 30.1 $ 29.9 $ 23.4
Six-Year Total: $148.0
FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030
Totals $ 16.0 $ 27.5 $ 33.2 $ 36.8 $ 32.6 $ 24.6
Six-Year Total: $170.7
FY 2025
20
Six-Year Budget Differences
FY 2024 vs. FY 2025 $ Millions (Negative Value)
21
FY 2024 Six-Year CIP Budget 148.0$
New Projects 9.7$
Completed Projects (1.1)$
Ongoing Project Changes:
Change due to ongoing normal project progression 3.6$
Increase due to inflation 5.4$
Increase due to change in scope 5.1$
FY 2025 Six-Year CIP 170.7$
Significant CIP Project Expenditures
Fiscal Year 2025 CIP ($ Millions)
Various Waterline Replacements (5 Total)
Reservoir Construction/Rehabilitation Projects
Meter Replacement
Vehicles & equipment
Pump Station Upgrades & Modifications
RWCWRF Projects
$ 3.5
2.0
1.4
1.4
1.3
1.1
Total Expenditure Projection
% of Total FY 2025
$ 10.7
67%
22
Pipeline Replacement Projects (10 Total)
Reservoir Construction or Rehabilitation
Meter Replacement
Pump Station Replacement and Rehabilitation
Vehicles
Reservoir Coatings
Valve Replacement
RWCWRF Treatment
$ 31.2
28.1
19.7
15.1
6.8
6.7
5.7
2.9
Total Expenditure Projection $ 116.2
% of Total FY 2025 – FY 2030 Budget 68%
Significant CIP Project Expenditures
Fiscal Year 2025 – 2030 CIP ($ Millions)
23
Key
Assumptions,
Financing Plan,
and Conclusion
Kevin Koeppen
24
FY 2025
Assumptions ▪Budgeted volumes
▪Growth revenues
Revenues
▪CWA Costs
Operating
▪Advance Fund
Pension and OPEB Strategy
25
Water Volumes
▪Four-year historic average usage
▪Ceiling based on highest normal volume/driest year
▪Floor based on lowest volume/wettest year
Average Usage Approach
▪Long-term accuracy of rate projections
Goal = Projected Volumes at the Midpoint
▪$2.6 million reserve reduction
▪30% debt service coverage reduction
Budget Drought Resiliency - 10% volume reductions
26
Historical Average Methodology
27
FY 2025 Budget Volumes
28
Potable Units
(in millions)
Recycled Units
(in millions)
Rainfall
(inches)Type
2021 Actual 12.6 1.8 4.9 Dry
2022 Actual 12.3 1.7 6.8 Dry
2023 Actual 11.2 1.4 17.1 Wet
2024 Projection 11.4 1.4 11.9*Wet
4-year Average 11.9 1.6 10.2
Growth 0.22%0.22%
FY 2025 Budget 11.9 1.6
*Rainfall through March 31, 2024.
Potable Water Volumes
Unit Sales (In Millions)
29
12.4
12.5
11.2
11.3
FY 2025
11.9 12.0
10.0
10.5
11.0
11.5
12.0
12.5
13.0
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Base Volume Cumulative Growth Ceiling Floor
Recycled Water Volumes
Unit Sales (In Thousands)
30
1,799 1,814
1,410 1,425
FY 2025
1,581
1,596
1,000
1,200
1,400
1,600
1,800
2,000
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Base Volume Cumulative Growth Ceiling Floor
OWD CWA Projections
31
•2025 Current CWA Proposals
•16% to 25% Increase
•Likely will exceed the current high forecast based on:
•Current rate proposed alternatives
•Historical increases
•Future challenges
2024 2025 2026 2027 2028 2029 2030
FY24 Projections 10.2%9.9%5.5%5.5%5.5%5.5%
FY25 Projections 10.2%16%-25%6% -10%6.0%6.0%6.0%6.0%
Rate Drivers
Water
Water purchase costs
Proposition 218
Land sale
Increase in Six-Year CIP projection
Debt coverage above target for six years
Reserves at or above target over six years
Regulatory creep, strategic plan initiatives, inflation
Sewer
City of San Diego Pure Water Project
Increase in Six-Year CIP projection
County shared facility projects
Reserves at or above target over six years
Regulatory creep
32
Financing Plan
33
▪2026 Debt Issuance
▪2028 Debt Issuance
Water
▪2027 Debt Issuance
Sewer
Closing Comments
June 5th Presentation
▪Budget Summary
▪Rate Increase Recommendation
▪Debt Coverage Projection
▪Final CWA Rates and Charges
▪Labor & Benefit Costs
▪Direction to Mail Rate Increase Notices
▪Admin & Materials Costs
▪Salary Schedule
▪Fund Transfers
▪Rate Comparison
▪Budget Approval
34
Questions and Input
35