Loading...
HomeMy WebLinkAbout04-26-23 Board Packet 1 OTAY WATER DISTRICT SPECIAL MEETING OF THE BOARD OF DIRECTORS DISTRICT TRAINING ROOM (LOWER-LEVEL PARKING LOT) 2554 SWEETWATER SPRINGS BOULEVARD SPRING VALLEY, CALIFORNIA WEDNESDAY April 26, 2023 12:00 P.M. AGENDA 1. ROLL CALL 2. PLEDGE OF ALLEGIANCE 3. APPROVAL OF AGENDA 4. PUBLIC PARTICIPATION – OPPORTUNITY FOR MEMBERS OF THE PUBLIC TO SPEAK TO THE BOARD ON ANY SUBJECT MATTER WITHIN THE BOARD’S JU- RISDICTION INCLUDING AN ITEM ON TODAY’S AGENDA RECESS TO CLOSED SESSION 5. CLOSED SESSION a) CONFERENCE WITH LEGAL COUNSEL – PENDING LITIGATION [GOVERN- MENT CODE § 54956.9(b)] MARK COZIAHR, ET AL. vs. OTAY WATER DISTRICT, CASE NO. 37-2015- 00400000-CU-MC-CTL b) CONFERENCE WITH REAL PROPERTY NEGOTIATORS pursuant to California Government Code Section §54956.8 Property: SALT CREEK GOLF COURSE 525 HUNTE PARKWAY CHULA VISTA, CA 91914 Agency negotiator: General Counsel Under negotiation: Disposition of Property 2 RETURN TO OPEN SESSION 6. REPORT ON ANY ACTIONS TAKEN IN CLOSED SESSION. THE BOARD MAY AL- SO TAKE ACTION ON ANY ITEMS POSTED IN CLOSED SESSION. WORKSHOP 7. DISCUSSION OF THE FISCAL YEAR 2024 BUDGET KEY FIGURES AND ASSUMP- TIONS IMPACTING THE UPCOMING BUDGET PROPOSAL (BEACHEM/KOEPPEN) 8. ADJOURNMENT All items appearing on this agenda, whether or not expressly listed for action, may be delib- erated and may be subject to action by the Board. The Agenda, and any attachments containing written information, are available at the Dis- trict’s website at www.otaywater.gov. Written changes to any items to be considered at the open meeting, or to any attachments, will be posted on the District’s website. Copies of the Agenda and all attachments are also available by contacting the District Secretary at (619) 670-2253. If you have any disability which would require accommodation in order to enable you to par- ticipate in this meeting, please call the District Secretary at 670-2253 at least 24 hours prior to the meeting. Certification of Posting I certify that on April 24, 2023, I posted a copy of the foregoing agenda near the regular meeting place of the Board of Directors of Otay Water District, said time being at least 24 hours in advance of the special meeting of the Board of Directors (Government Code Sec- tion §54954.2). Executed at Spring Valley, California on April 24, 2023. /s/ Tita Ramos-Krogman, District Secretary STAFF REPORT TYPE MEETING: Budget Workshop MEETING DATE: April 26, 2023 SUBMITTED BY: Kevin Koeppen, Assistant Chief of Finance PROJECT: DIV. NO.All APPROVED BY: (Chief) Joseph R. Beachem, Chief Financial Officer Jose Martinez, General Manager SUBJECT: Informational Item to Present FY 2024 Budget Key Figures and Assumptions Impacting the Upcoming Budget Proposal GENERAL MANAGER’S RECOMMENDATION: This is an informational item presenting the FY 2024 budget key figures and assumptions. PURPOSE: The purpose of this informational item is to present to the Board key figures and assumptions impacting the FY 2024 budget. BACKGROUND: The District’s budget process begins in January and ends with the adoption of the next fiscal year budget at the June Board meeting, and implementation of rates the following January. This Budget Workshop is the second of three presentations related to the FY 2024 budget and covers the key budget assumptions and inputs. The first presentation, the 2023 Economic Study, was given to the Board on April 5, 2023. The final presentation of the consolidated budget is scheduled for the June 7 Board meeting. At that meeting, staff will be presenting the consolidated FY 2024 budget and requesting that the Board: •Approve the FY 2024 Operating and Capital Improvement Program (CIP) Budget and associated rate changes. •Approve the fund transfers for potable, recycled, and sewer. •Adopt the Salary Schedule. •Approve the continued advance funding of the District’s unfunded pension and OPEB unfunded liability. •Direct staff to draft and mail rate increase notices for potable, recycled, and sewer. The budget is put together presenting the most realistic set of factors and assumptions based on information received from various AGENDA ITEM 7 2 sources including: the wholesale water suppliers, the Metropolitan Water District of Southern California (MWD), the San Diego County Water Authority (CWA), and the City of San Diego (the City); vendors such as SDG&E, and an economic report prepared this year by London Moeder Advisors. Staff uses this information in conjunction with other economic indicators affecting taxes and revenues, such as inflation and interest rates, to prepare the budget. Based on input from the Board, staff performed a sensitivity analysis on past growth projections and reviewed the associated rate risk. A summary of this analysis is included later in the Major Assumptions section of this staff report. FY 2023 Projected Operating Results Through February 28, 2023, the District has an operating surplus of $1.8 million. Staff is projecting the surplus will remain close to this level for the remainder of the fiscal year. The surplus is primarily due to higher than anticipated property tax revenues and vacancy-related personnel savings compared to the amounts in the proposed budget. Staff is incorporating this surplus benefit to offset pressures on rates in FY 2024 including the increasing CIP, increasing potable water purchase costs, and inflation. Budget Strategy The culmination of the budget process is the recommendation of changes to water and sewer rates which meet the following primary budget objectives: • Recommend rates that are compliant with the requirements of Proposition 218, • Maintain reserve levels at target levels in each of the next six (6) years, • Maintain debt coverage, excluding growth, at target levels for the next six (6) years, • Maintain debt coverage, excluding growth, above the target of 150% for water and sewer for the next six (6) years, and • Support the Strategic Plan initiatives. Strategic Planning In addition to the budget and rate setting process, the District’s ongoing focus on strategic planning continues to play a positive role in the financial strength of the agency. By managing staffing, leveraging business and operating technologies, and implementing best management practices, the District has become more efficient 3 and cost effective. The Strategic Plan is essential to the budget process as it drives and prioritizes funding for many of the District’s service and operational programs. Proposition 218 The State of California has well-established legal constraints regarding utility rate setting, of which California Constitution Article XIII D, Section 6 (commonly referred to as “Proposition 218”), is at the forefront. Proposition 218 requires that water and sewer utilities establish cost-based rates for the services provided. To comply with this requirement, the District performs periodic cost of service studies and Proposition 218 hearings. A water cost of service study was completed and presented to the Board on April 27, 2022, followed by a Proposition 218 hearing on October 5, 2022. A sewer cost of service study was completed and presented to the Board on May 6, 2020, followed by a Proposition 218 hearing on October 7, 2020. At the conclusion of the 218 hearings, the Board approved the terms of the 218 Notices which allowed for rate changes for a period of up to five (5) years of all future pass-through costs and cost increases or decreases to cover changes to rates, fees, or charges from the District’s water and energy suppliers, and overall non-supplier cost increases not to exceed the annual increase in the Consumer Price Index-U for the San Diego- Carlsbad area as of January 31 of the preceding year. For sewer the non-supplier cost increase is limited to 10%. The five-year period for sewer is set to expire in 2025; therefore, a sewer cost of service study is currently underway. To incorporate newly available AMI data into water rates, a water cost of service study is being performed concurrently. As a result, a Proposition 218 hearing is projected to be held in October 2025 for both sewer and water, which will affect the January 1, 2026 water and sewer rates. FY 2023 Challenges Ongoing Litigation Pending rate litigation is having a significant impact on the FY 2024 budget. While the District believes a favorable result will be achieved in both cases, the District needs to begin phasing in the adverse rate impact associated with a potential unfavorable result. 4 Real Estate Sales The timing of the receipt of proceeds pertaining to the Salt Creek property is projected to be delayed by two years. Staff is projecting the proceeds will be received in FY 2027. The FY 2023 budget assumed the proceeds would be received in FY 2025. This delay is advancing the timing and amount of projected debt issuances. Overall, the combined impact of changes in assumptions pertaining to pending litigation and real estate are having a significant impact on this year’s projected rate increases. The total impact on rates is planned to be phased in over time but is the equivalent of a 3% one-time increase in rates. Inflation According to the Bureau of Labor Statistics, in January 2023, the Consumer Price Index (CPI) for all goods in the San Diego Metro area rose 6.4% during the last 12 months. The District is experiencing inflation in some of its operating and capital areas in excess of 6.4% which includes water supply, energy, and chemical costs. While inflation has risen above the recent historic lows, the FY 2023 rate model anticipated and projected higher inflation. In FY 2023, staff was predicting annual inflation of 5.5% for administrative and material costs. As a result, a significant amount of inflation had already been incorporated into last year’s projection. Staff is estimating CWA rate increases will be just under 10.0% for FY 2024. Further discussion regarding CWA rates is included in the Water Costs section of this staff report. Similar to administrative and material costs, staff had projected water cost inflation above recent levels as part of the FY 2023 projection. The FY 2023 budget projected the CWA variable rate would increase 7.3% in FY 2024 and 8.0% in FY 2025. While CWA’s draft increase is greater than projected, a significant portion of the increase was part of the FY 2023 projection. SDG&E rates have increased over 10% year-over-year and SDG&E is seeking to increase their rates 14% on January 1, 2024. Lastly, the District’s unit price on chemicals has increased over $300,000, or greater than 100% from the budgeted FY 2023 unit price. Staff estimates inflationary increases on the FY 2024 administrative and materials budget is driving a $1.0 million increase to the annual operating budget which represents an 8.2% inflation rate. Increased chemical costs due to inflation above 100% is the largest 5 component driver of this inflation. Excluding chemicals, increased operating costs resulting from inflation is estimated to be 5.9%. Such inflationary impacts to the District are partially mitigated through increasing returns on investments and long-term contracts with pricing structures that are fixed for the duration of the contract or include pricing structures whereby annual price increases are for fixed dollar amounts that are less than the CPI. Although Federal interest rates are rising to combat inflation, the London Moeder Advisors’ economic report cites inflation will likely last well into 2024, albeit, at a more moderately tempered pace than what the nation has experienced over the last two years. The tempered pace is supported by the March 2023 CPI data. For the FY 2024 six-year rate model, staff is assuming administrative and material inflation to decrease gradually from 5.5% in FY 2025 to 4.0% by 2028. CIP Projects The six-year CIP projection is increasing due to newly identified CIP projects and inflation. The total six-year CIP budget is increasing $40.2 million from $108.4 million in FY 2023 to $148.6 million in FY 2024. There are many factors impacting the overall CIP increase including, but not limited to: new projects being identified, updates to engineering estimates and/or design as part of the normal project progression, and inflation. Staff estimates overall CIP inflation of 8.8%. The proposed CIP six-year budget is discussed further in the CIP section of this staff report. Water Costs Water purchase costs from the District’s suppliers are a significant component of the District’s overall budget. Potable and recycled water costs constitute approximately 62% of the operating budget. For FY 2023, the CWA/MWD purchases budget was approximately $58.3 million. Every 1% increase in CWA/MWD rates equates to an approximate $540 thousand increase in cost to the District, or a 0.5% increase in District potable rates. In March, CWA presented a draft budget to its Board, which included a proposed 13.7% increase on variable treated water purchase costs. CWA cited the following reasons for the increase: 6 • A 7% increase from its primary supplier, MWD, • Inflationary pressures, • Reduced water sales volumes, and • No longer having the flexibility to absorb increasing costs, which it had been able to partially mitigate in prior years. Since that time, CWA staff has undertaken an effort to reduce the proposed increase and District staff has confidence that CWA will be successful in reducing the draft 13.7%. While staff is confident in that effort, District staff is assuming that a lower rate increase will lead to higher future increases resulting in CWA ultimately having materially similar rates within three years. CWA has provided a high-low “all-in” forecast of future rates, which is based on the results of certain assumptions including: MWD rate increases, water sales, construction costs, and operating and maintenance cost increases. Based on CWA’s proposed increase and known results of many of the high-low assumptions, District staff is projecting CWA rates in future years will be near the high forecasted “all-in” rate. For budget purposes, District staff is assuming CWA’s all-in rate will increase 9.8% in FY 2024, 8.9% in FY 2025, and 5.5% annually from FY 2026 to FY 2029. Using these assumptions, District staff is forecasting CWA will be in the 97th percentile of its high-low forecast by 2029. The following table summarizes Otay’s forecasted CWA rate from 2023 to 2029. CWA Projected “All-in” Rate 7 Recycled For FY 2024, the recycled purchases budget from the City is approximately $5.8 million, which is a $310,000 or 5.6% increase compared to FY 2023. The increase is due to a 5% increase in the purchase price of water and a 90 acre-foot increase in the contractual take-or-pay volume. Staff is assuming that the penalty associated with the current take-or-pay agreement will be eliminated in FY 2027, when the current agreement expires. In addition, there are outstanding items that may impact CWA/MWD future rates and charges. Such items carry uncertainty as to the amount and timing of the impacts to the District. These items include: a potential CWA rate redesign, agencies detaching from CWA, and a renegotiated recycled agreement with the City. Sewer Challenges The primary long-term challenge for sewer continues to be the City’s increasing wastewater fees. The City’s Pure Water program, which incorporates a secondary equivalency for the Point Loma WWTP, impacts the wastewater fees paid for by the District’s sewer customers for sewage treatment. The ultimate cost of the City’s Pure Water program remains the most significant cost increase facing the District’s sewer customers over the next six (6) years, and beyond. There is still significant ambiguity regarding how these costs will affect our customers. As mentioned in an April 3, 2019 Engineering Staff Report, the District’s sewer customers’ share of Pure Water Phase I is estimated to be $2.6 million and Phase II is estimated to be $5.7 million. The combined effect on rates totaling 29% will need to be phased into the District’s sewer rates over the next 15 years. The District is four (4) years into the 15-year period. While estimates of the Pure Water program are built into the budget projections, the separate billing of the Pure Water program has not been incorporated into the City’s sewage treatment fees; therefore, there is still some risk regarding the ultimate outcome to the District. The City has received grant funding and low-cost State Revolving Fund (SRF) loan financing for its Pure Water program. These funding sources directly reduce the overall Pure Water cost and reduce the District’s pay-go funding requirement, smoothing out the cashflow impact to the District’s customers. Payments for SRF loans do not start until a year after construction completion, meaning the Pure Water program cost impacts covered by SRF are expected to be delayed until 2026 or 2027. 8 The District has also mitigated the cost of the Pure Water program by lowering our contracted capacity. A modification in annual average daily metro capacity from 1.287 MGD to 0.38 MGD, under the new Metro amended agreement, has reduced the District’s ultimate Pure Water burden. For the CIP component of Pure Water, staff is assuming a $31 thousand increase of the District’s operating Metro fees in FY 2024 based on an estimate provided by the City. In addition to the operating fees, the District has established a CIP project associated with the capacity under the new amended agreement. The sewer CIP for Pure Water is estimated to cost $8.3 million over the next 15 to 20 years. Based on information from the City, the current six-year CIP projection includes $480 thousand for the Pure Water program. The District is also anticipating an increase in costs related to a shared-facility agreement with the County of San Diego (the County). A section of the District’s sewer system is a shared facility owned and operated by the County. The County is undergoing a necessary rehab project of the shared facility which is estimated to cost the District’s sewer operation approximately $2.1 million over the next six (6) years. CalPERS and OPEB Update The pension and OPEB liabilities carry an interest cost of 6.8%, which is the District’s highest interest cost. By focusing on reducing and eliminating the unfunded pension liability, the District is reducing the highest interest cost liability which represents a savings opportunity. Overall, CalPERS and CERBT 2022 investment returns lagged actuarial expectations resulting in a reduction in the funding levels of both the District’s pension and OPEB plans. As of June 30, 2021, which is the most recent CalPERS actuarial pension valuation, the District’s pension was 95.5% funded, an increase of 10.1% compared to the June 30, 2020 funded level. The increase was mainly due to CalPERS achieving an actual investment return of 21.3% versus an actuarial return of 6.8%. Staff is anticipating the benefit from the FY 2021 return will be largely offset by the fiscal year 2022 loss of 6.1%, resulting in the plan returning to a funding status of approximately 85%. The CalPERS fund annualized returns for the five-year period ending June 30, 2022 were 6.7%. 9 As of June 30, 2022, the OPEB plan was 85% funded, which is a 19% reduction compared to the 104% funding as of June 30, 2020. The reduced funding level is similarly a result of lower than expected investment returns in 2022. Staff will be recommending the District redirect approximately $1.2 million that is currently being utilized to advance fund CalPERS to CERBT in order to return the OPEB to 100% funding level. This recommendation is consistent with prior budget recommendations during periods in which the OPEB plan is not fully funded. The objective of this advance funding is to save the ratepayers money. Continuing to advance fund the District’s OPEB and CalPERS plans will save the District approximately $6.0 million over the 12- year advance funding period, which began in 2021. As part of the continuing efforts to reduce the District’s highest cost debt, the FY 2024 budget includes continued advanced funding of the unfunded obligations. Major Assumptions Growth Projections At the April Board meeting, staff presented the annual economic report, including growth projections, which are utilized to forecast future capacity revenues and incremental increases in monthly revenues. The Board requested that staff perform an additional analysis of the growth projections to determine if a reduction was necessary. Staff met with Gary London of London Moeder Advisors to discuss the projection and obtain clarification of comments made by Mr. London at the April Board meeting. Mr. London clarified that any shortfall in developer activity in one year would be recovered within the following presented years, and while there will likely be slippage between the years, Mr. London was very comfortable with his overall prediction for the six-year period. Otay staff reviewed the forecast and agreed with Mr. London’s assessment. Staff performed an assessment of the historical growth forecasts comparing them to actual capacity fee collections and determined that capacity revenues have historically exceeded the forecast, with two exceptions. In 2020, capacity revenues were 29% less than historical forecasts. The shortfall in 2020 was most likely COVID- driven as 2021 and 2022 capacity fee revenues were 22% and 87% greater than historic forecasts. Staff is projecting the 2023 capacity revenues to be approximately 25% less than budget. This shortfall is primarily due to a pause in development that occurred 10 between October and December 2022. During this period, a rampant rise in interest rates caused builders to pause. Since that time, developer activity has returned. The following table displays historical actual capacity fee collections as a percentage of the forecast. In terms of capacity fee collection's impact on rates, the District’s budget objective of achieving a no growth debt service target of 150% provides a level of risk mitigation for the impact that a capacity fee shortfall would have on rates. Staff performed a sensitivity analysis and determined that an overall 10% shortfall for the six-year period would result in a $4 million reserve shortfall throughout the six-year period. To the degree the shortfall was not able to be offset by deferring expansion related projects, the District would issue debt. A $4 million debt issuance would reduce the District’s debt service coverage by 1%. The impacts of a 10% capacity shortfall alone would not result in a change in rates. In terms of incremental monthly water revenues, a shortfall in the annual volume growth projections of 0.25% would have an inconsequential impact on rates. Potable Sales Volumes Through March 31, 2023, actual potable water sales were 8.7 million units, which was 3.8% below the budget of 9.0 million units. The reduction is due to above average rainfall and conservation. Through 11 March 31, 2023, year—to-date rainfall of 16.9 inches was 140% above the historical average. Staff is continuing the practice of using an average of actual historic volumes to determine budgeted volumes. This practice results in budgeted volumes that are in the median range of recent annual high and low volumes. Over the long term, this methodology anticipates rainfall will equal average levels thus reducing the likelihood of rate spikes due to shifts between wet and dry years. The District began using this method in 2020. Prior to using this method, the District relied on long-term weather forecasts, which resulted in significant volume variances when the actual weather differed significantly from predictions. Using the historic average method has provided a more stable outlook on long-term volumes and revenues. For the FY 2024 budget, staff is using a four-year average from FY 2020 to FY 2023, plus a growth factor based on the London Moeder Advisors’ economic report presented at the April Board meeting, which equates to an approximate 1% annual customer growth. The assumption that new customers will connect throughout the year and will use approximately half the volume of the existing customer base translates to an assumed volume growth of 0.25% annually. Staff recognized FY 2021 volumes were above historic levels due to COVID- 19; however, inclusion or exclusion of FY 2021 volumes has less than a 1% impact on the total budgeted volume. The following table contains a chart of historical potable volumes, rainfall, the four-year average, and the FY 2024 volume calculated as the four-year average, plus growth. Historical Unit Sales (in million HCF) and Rainfall (in inches) Actual Projected Average Budget FY 2020 FY 2021 FY 2022 FY 2023 4-Year FY 2024 Rainfall 16.7 4.8 6.8 16.9 11.3 N/A Units 11.4 12.6 12.3 11.6 12.0 12.0 On the following page are the projected unit sales assumptions proposed for the FY 2024 six-year rate model. Additional discussion pertaining to the projected volumes can be found immediately following the table. 12 Projected Unit Sales (in million HCF) Six-Year Rate Model Projection FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 6-year Avg Growth % 12.0 12.1 12.1 12.1 12.2 12.2 12.1 0.32% The following analysis shows historic and projected volumes compared to last year’s projections and ranges. • The green line represents a maximum volume year based on relevant historical actual volume. • The red line represents the minimum volume year based on relevant historical actual volume. • The yellow section represents the volume associated with growth. • The black solid line represents the FY 2024 projection, totaling the existing (blue) plus the growth (yellow) volumes. Recycled Sales Volumes Through March 31, 2023, the actual recycled water sales volume was 1.1 million units, which was 5.7% below budget. The reduction in 13 volume is due to above average rainfall discussed in the previous potable sales volume section of this report. The FY 2024 recycled volume projections have been prepared using the same historical average plus growth methodology used to prepare the potable volume projection. The following tables and chart contain historical recycled volumes, rainfall, the four-year average, the FY 2024 volume calculated as the four-year average, plus growth, as well as the six-year forecast. Historical Unit Sales (in million HCF) and Rainfall (in inches) Actual Projected Average Budget FY 2020 FY 2021 FY 2022 FY 2023 4-Year FY 2024 Rainfall 16.7 4.8 6.8 16.9 11.3 N/A Units 1.5 1.8 1.6 1.5 1.6 1.6 Following are the projected unit sales assumptions proposed for the FY 2024 six-year rate model. Additional discussion pertaining to the projected volumes can be found immediately following the table. Projected Unit Sales (in million HCF) Six-Year Rate Model Projection FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 6-year Avg Growth % 1.6 1.6 1.6 1.6 1.6 1.6 1.6 0.25% The analysis on the following page shows historic and projected volumes compared to last year’s projections and ranges. • The green line represents a maximum volume year based on relevant historical actual volume. • The red line represents the minimum volume year based on relevant historical actual volume. • The yellow section represents the volume associated with growth. • The black solid line represents the FY 2024 projection, totaling the existing (blue) plus the growth (yellow). 14 Capital Improvement Program (CIP) Budget As a component of the annual budget development process, the Engineering staff update the CIP budget using the following process: • CIP projects are selected based on the Water Facilities Master Plan (WFMP), the Urban Water Management Plan (UWMP), Sub Area Master Plans (SAMP), Integrated Water Resources Plan (IRP), Wastewater Management Plan (WWMP), the Cathodic Protection Plan, the District’s Strategic Plan, Asset Management Plan, and other focused or specific planning documents and reports to manage growth, maintenance, and the life extension of assets. • The CIP goes through an iterative process to meet the criteria of growth, service levels, supply targets, and system reliability. • CIP target expenditures for the next six (6) years are refined and used in the rate model. The following general criteria are used to determine the reasonableness of a project before it is considered for inclusion within the CIP budget: 1,799 1,817 1,452 1,470 FY 2024 1,598 1,616 1,000 1,200 1,400 1,600 1,800 2,000 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Otay Water District Recycled Sales Volume Analysis FY 2024 Budget and Six-Year Projection (in thousand units) Base Volume Cumulative Growth Ceiling Floor 15 • Safety and existing facility conditions • Operating system conditions and energy improvements • Water and sewer system deficiencies • Regulatory and permitting agencies requirements • Developer driven requirements • Economic outlook • Growth projections • Water supply diversification goals • Board and management directives This year, the total six-year CIP budget of $148.6 million is increasing by $40.2 million versus last year. The total water CIP budget for the six-year period is $137.2 million, which is a $38.6 million increase compared to FY 2023. The sewer CIP of $11.4 million is increasing $1.6 million compared to FY 2023. To maintain reserves at target levels for both water and sewer, staff is currently projecting debt issuances for water in 2025 and 2027, and for sewer in 2027. As the District approaches the timing of issuing debt, an analysis will be performed to determine the cost benefit of combining the two water debt issuances into a single issuance. The following schedule contains a roll-forward of the six-year CIP budget followed by explanations for the roll-forward amounts. FY 2023 Six-Year CIP Budget $ 108.4 New Projects $ 28.9 Completed Projects $ (1.9) Ongoing Project Changes Budget Increases $ 24.2 Budget Decreases $ (3.5) Budget Expenditures for FY 2023 $ (7.5) FY 2024 Six-Year CIP Budget $ 148.6 The $28.9 million for 28 new CIP projects predominantly consists of the following: • $11.0 million for the 870-2 Reservoir to provide a secondary storage reservoir to allow the District to replace the floating cover and liner for the 870-1 Reservoir. • $5.2 million total in 11 CIP budgets for Developer pipeline reimbursement projects. 16 • $4.9 million for several pipeline replacement projects in Jamul. • $4.8 million for valve replacement within the District. Budget increases of $16.7 million are due to a combination of increasing scope of work, updates to engineering estimates, and inflation. Scope of work increases are approximately $4.3 million. Increases associated solely with inflation are $3.2 million, or 11%. Financing Plan The District uses a comprehensive approach to financing. The Debt Policy provides guidance for debt issuance and refinancing. The Reserve Policy provides guidance on both fund transfers and reserve balances. With these policies, a six-year financing plan is formulated that identifies the timing and amounts of debt issuances, the level of rate increases, debt coverage ratios, reserve balances, and necessary transfers. The District’s comprehensive approach to financing establishes financial targets that add to the financial strengths of the District. Those strengths include: • AA credit rating which saves ratepayers money through reduced debt costs. • Financial stability which allows the District to set rates based on the long-term financial needs of the District. This allows the District to anticipate financial challenges well into the future and prevents unnecessary rate spikes to District customers. Open Items Following is a list of items that are in process and will be presented at the final Budget Board presentation on June 7: • Overall budget summary • Rates and rate increases • Debt service coverage • CWA Rates and Fixed Charges • Labor and benefits • Materials and maintenance expenses • Administrative and legal expenses • Salary Schedule • Rate comparison 17 • Fund transfers • Budget approval FISCAL IMPACT: Joseph R. Beachem, Chief Financial Officer This is an informational item. Each one of the items discussed above will impact the proposed rate increases over the next six-year period. Recommended changes to rates will be based on the District maintaining reserves at target levels and meeting its debt coverage targets. To the degree that these targets and covenants are met, the financial impact of the items discussed in this staff report will be phased in over multiple years. For both water and sewer, staff is estimating that debt service coverages and the reserve requirements will be at or above targeted levels for the six-year period. STRATEGIC OUTLOOK: The District ensures its continued financial health through long- term financial and debt planning. LEGAL IMPACT: None. Attachments: A) Presentation – FY 2024 Budget Workshop FY 2024 Budget Workshop April 26, 2023 1 Attachment A Workshop Agenda Introduction and Objectives Joe Beachem Challenges, Strengths, District Actions, Drought and Conservation, Clean Fleets, and Valve Replacement Strategic Plan Initiatives Adolfo Segura Capital Improvement Budget Bob Kennedy Key Assumptions, Financing Plan, and Conclusion Kevin Koeppen 2 Jose Martinez Budget Objectives Support Strategic Plan objectives Support essential operations of the District Reserves at target for all six years Debt coverage, excluding growth, above target of 150% for both water and sewer for all six years Fund the Six-Year CIP budget Establish rates that are compliant with Proposition 218 3 Budget Timeline April Board Meeting •Economic Study presented •Legislative update presented Today Special Board Meeting •Budget Workshop June Board Meeting •Budget Approval 4 Budget Process Six-Year Rate Model MWD/CWA & City Sewer Rates Assumptions Interest Rates Inflation Growth Sales Debt Targets Debt Coverage Reserve Levels Operating Budget CIP Budget Water & Sewer Rates DroughtYear-end Balances Six-Year CIP Budget Input Operating Budget InputStrategic Plan 5 ▪Cost of Service Study Performed –2022 ▪Proposition 218 Hearing –October 5, 2022 ▪Next Cost of Service Study currently underway ▪Next Proposition 218 Hearing –October 2025 Timeline ▪5-years ▪100% pass-through of supplier-related costs, including SDG&E ▪Pass-through of non-supplier cost increases, not to exceed the annual increase in the CPI for the San Diego-Carlsbad area as of Jan. 31 of preceding year. Board Approved Terms Proposition 218: Water 6 Proposition 218: Sewer ▪Cost of Service Study Performed –2020 ▪Proposition 218 Hearing –October 7, 2020 ▪Next Cost of Service Study currently underway ▪Next Proposition 218 Hearing –October 2025 Timeline ▪5-years ▪100% pass-through of supplier-related costs, including SDG&E ▪Up to 10% rate increases for internal costs Board Approved Terms 7 Challenges, Strengths, and District Actions Jose Martinez 8 Challenges Affordability Proposition 218 Real Estate Increase in Six-Year CIP San Diego County Water Authority Rates Inflation Regulatory Creep and Unfunded Mandates Workforce Turnover Drought/Making Conservation a Way of Life 9 Strengths Strategic Planning process CWA diversification of regional supply (drought-proofing San Diego) ▪$3.2 million received in FY 2021 ▪$2.5 million received in FY 2022 CWA refunds ▪Continue annual advance funding practice ▪Recommending to redirect $1.2 million currently being utilized to advance fund CalPERS to CERBT in order to return the OPEB to 100% funding level ▪$6 million estimated savings over the 12-year advance funding period, which began in 2021 OPEB and Pension Funding ▪32% increase in customers per FTE Efficiency Gains (since 2007) ▪S&P ‘AA’ rating Bond Rating ▪Reserve, Debt, and Investment Policies Sound Financial Management 10 District Actions ▪Low Income Household Water Assistance Program (LIHWAP) –over $78K to date Advocating for Customers ▪2023 Winter Storm Emergency Declaration –District is pursuing an estimated $75K to restore damaged roads. ▪2023 COVID-19 –over $284K submitted FEMA/CalOES Assistance ▪Habitat Management Area and Mitigation –over $70K ▪Climate Adaptation and Resiliency Plan –over $230K ▪Joint Sweetwater Authority -Otay Water District Recycled Water lntertie Project Planning Study -$300K (applied for, not yet approved) o Under review by SWRCB –may require 50% matching funds ($150K) which would be split with SWA Grant Efforts 11 Drought/ Making Conservation a Way of Life 12 ▪Driest 3-year period (2020-2022) ▪Governor announced Water Supply Strategy (August 2022) o Make up for supplies the state could lose over next two decades. o Capture, recycle, de-salt, and conserve. ▪Executive Order N-5-23 signed March 24, 2023 o Ended 15% state voluntary water savings target while continuing to make conservation a way of life. o Ended required Level 2 Water Shortage Contingency Plan (WSCP) actions. Drought Response and Extreme Weather ▪CWA will propose to deactivate WSCP Level 1 at June 22 board meeting. ▪District will monitor state and CWA direction. SWRCB Emergency Regulation expires June 10, 2023 ▪May 2023 –Formal rulemaking process anticipated to begin. ▪Late 2023 –SWRCB will adopt urban water-use efficiency standards, performance measures, and variances. ▪January 1, 2024 –Urban water suppliers calculate targets. ▪Many unknowns (only two of seven state components/standards have been approved) –difficult to determine District financial impacts. SB 606 and AB 1668 (2018) ▪Revised standard for indoor residential water use to be 47 GPCD (from 52.5 GPCD) beginning in 2025 and lowering the standard again to 42 GPCD (from 50 GPCD) in 2030. SB 1157 (2022) Advanced Clean Fleet Rulemaking ▪Executive Order N-79-20 accelerates the state’s transition to carbon neutrality by setting a course to end sales of internal combustion passenger vehicles by 2035. ▪CARB is tasked with transitioning fleets to zero-emission vehicles (ZEVs) to meet the state’s goals. ▪The Advanced Clean Fleets proposed rulemaking for Public Fleets would require: o 50 percent of class 2B and above replacement or addition to be ZEVs by January 2024. o 100 percent of class 2B and above replacement or addition to be ZEVs by January 2027. o 100 percent zero-emission off-road vehicles and equipment by 2035, where feasible. ▪Otay Water District and other California water agencies along with the Association of California Water Agencies (ACWA) submitted several comments to CARB and met with CARB staff, seeking an exemption for emergency response vehicles and further clarification on the proposed regulation. ▪CARB will adopt rule at the April 27 workshop after 15 days of public comment which began on March 23 and ended on April 7. Otay Water District provided comments during this period. ▪AB 1594 (E. Garcia) –Back-up legislation on clean fleet regulations if water agencies do not get what they are seeking in regulations. It would require any state regulation that seeks to require, or otherwise compel, the procurement of medium-and heavy-duty ZEVs by a public agency utility to ensure that those vehicles can support a public agency utility’s ability to maintain reliable water and electric services, respond to disasters in an emergency capacity, and provide mutual aid assistance statewide and nationwide, among other requirements. Valve Replacements 200 200 200 200 200 200784 1803 3823 4690 6988 634 1089 2892 6715 11405 18393 19027 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 15000 16000 17000 18000 19000 20000 2030 2040 2050 2060 2070 2080 Previous Practice Replaced Past Due Cumulative Past Due Valve Replacement Strategy 0 200 400 600 800 1000 1200 An n u a l R e p l a c e m e n t T o t a l s Replacement Dates End of Life Valves OWD Replacement Pilot (60 annually)Neighboring District Replacement Strategy (150 Annually) Board’s proactive approach to financial and operational stability Financial strength through establishing debt coverage targets and Reserve Policy Invested in staffing, software, equipment, and other infrastructure to achieve efficient operations Investment in emergency preparation from policies to equipment Efficient use of equipment and vehicles Converted variable bonds to fixed Limited exposure to CalPERS changes in future discount rates by making advanced payments 16 Strategic Plan FY2023 –FY2026 Adolfo Segura 17 AGING WORKFORCE/ KNOWLEDGE TRANSFER CULTURE (RETENTION & RECRUITMENT OF TOP TALENT) CUSTOMER SERVICE FINANCIAL (BUSINESS SYSTEMS & LONG-TERM BENEFIT COST ANALYSIS) CYBERSECURITY RIGHT SIZING STORAGE & DISTRIBUTION SYSTEM ASSET MANAGEMENT OVERVIEW The District’s four-year strategic plan (SP), FY23 –FY26, is a roadmap for how the District will execute key objectives, respond to current challenges, and improve the essential services it provides to its customers. Key areas of focus include: 11 strategies, 35 objectives, and 34 KPIs 18 BALANCED SCORECARD Focuses on the financial performance of the District FINANCIAL Focuses on the District’s culture and development of staff to ensure there is a productive and skilled workforce in place LEARNING AND GROWTH Focuses on customer service levels, satisfaction, brand, and confidence CUSTOMER Focuses on business processes designed to deliver and improve customer objectives and services INTERNAL BUSINESS PROCESS 19 CUSTOMER Enhance and build public awareness of the District’s priorities, initiatives, programs, and services (4 objectives) Answer Rate Technical Water Complaint Potable Water Compliance Rate Customer Opinion Survey STRATEGIES ·1 TOTAL OBJECTIVES ·4 KEY PERFORMANCE INDICATORS ·4Enhance customer and community engagement to increase public awareness of the water industry and the District, while continuing to provide superior customer service 20 FINANCIAL Maintain a long-range financing plan that sets forth the long- term funding needs of the District (5 objectives) Invest in technology enhancements to improve customer engagement and satisfaction (2 objectives) STRATEGIES ·2 TOTAL OBJECTIVES ·7 Operate the District in a financially sustainable and transparent manner CIP Project Expenditures vs. Budget Construction Change Order Incidence Billing Accuracy Sewer Rate Ranking Water Rate Ranking Water Debt Coverage Ratio Sewer Debt Coverage Ratio Reserve Levels KEY PERFORMANCE INDICATORS ·14 Accounts per Full-Time Employee (FTE) Distribution System Loss Planned Potable Water Maintenance Ratio in $ Planned Recycled Water Maintenance Ratio in $ Planned Wastewater Maintenance Ratio in $ Direct Cost of Treatment per MGD 21 INTERNAL BUSINESS PROCESSES STRATEGIES ·6 TOTAL OBJECTIVES ·19 Leverage the use of renewable and clean energy resources and reduce the use of hazardous chemicals (4 objectives) Implement technologies to improve response time, security, and operational effectiveness (4 objectives) Develop appropriate water resource mix to meet the water reliability needs of the community (3 objectives) Respond to anticipated water shortages through rate structure modification, conservation assistance, and outreach (2 objectives) Advancement of District's Asset Management Program (4 objectives) Cyber and Physical Security (2 objectives) Practice ongoing infrastructure renewal and organizational improvement through planning and increased operational efficiency 22 Business Recovery Exercises Vulnerability Assessment Mark-out Accuracy Easement Evaluation and Field Inspection System Valve Exercising Program Potable Water Distribution System Integrity (Leaks) Potable Water Distribution System Integrity (Breaks) Recycled Water System Integrity (Leaks) Recycled Water System Integrity (Breaks) Sewer Overflow Rate Potable Tank Inspection and Cleaning Hydrant Maintenance Program Injury Incident Rate KEY PERFORMANCE INDICATORS ·13 INTERNAL BUSINESS PROCESSES Practice ongoing infrastructure renewal and organizational improvement through planning and increased operational efficiency 23 Coordinate workforce planning activities to determine future needs,identify gaps,and implement actions to close the gaps (3 objectives) Improve Organization Effectiveness (2 objectives) Employee Voluntary Turnover Rate Training Hours per Employee Safety Training Program STRATEGIES ·2 TOTAL OBJECTIVES ·5 LEARNING AND GROWTH Foster a workforce culture of employee development and innovation KEY PERFORMANCE INDICATORS ·3 24 Capital Improvement Program FY 2024 – FY 2029 Bob Kennedy 25 Construction Climate/Mitigation Factors Influencing Construction Climate Shortage of skilled and unskilled labor Increase in the Consumer Price Index Regional competition for contracting resources Materials cost escalation due to demand and material shortages Mitigation Strategies Value engineering Grouping projects to attract bidders Pre-purchasing of materials Adding no-cost time extension into specs Grant funding 26 CIP Budget Guidelines Development trend is expected to be unchanged in FY 2024 New development with multi-family dwellings in greater proportion to single-family dwellings In preparing the budgets for the individual CIP projects, the Engineering Department used recent construction and bidding data to adjust costs for each project Reprioritized projects based on District’s planning documents to control spending to keep rates stable 27 CIP Six-Year Budget Look Forward ($Millions) FY 2023 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Totals $ 12.6 $ 22.0 $ 24.3 $ 18.0 $ 15.9 $ 15.6 Six-Year Total: $108.4 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 Totals $ 15.3 $ 24.9 $ 24.4 $ 30.1 $30.2 $23.7 Six-Year Total: $148.6 FY 2024 28 Six-Year Budget Differences FY 2023 vs. FY 2024 $ Millions (Negative Value) FY 2023 Six-Year CIP Budget $ 108.4 New Projects 28.9 Completed Projects (1.9) Ongoing Project Changes Budget Increases Budget Decreases Budget Expenditures for FY 2023 24.2 (3.5) (7.5) FY 2024 Six-Year CIP Budget $ 148.6 29 High Profile CIP Projects Fiscal Year 2024 CIP ($ Millions) Various Waterline Replacements (39 Total) Meter Replacement Reservoir Construction/Rehabilitation Projects Pump Station Upgrades & Modifications RWCWRF Projects $ 6.5 1.2 1.1 0.8 0.7 Total Expenditure Projection % of Total FY 2024 $ 10.3 67% 30 Pipeline Replacement Projects (39 Total) Reservoir Construction or Rehabilitation Projects (16 Total) Meter Replacement Pump Station Replacement and Rehabilitation Pipeline Misc. Appurtenances Sewer Basin Improvements Equipment & Vehicles RWCWRF Projects (10 Total) $ 43.5 30.5 18.2 13.7 9.4 9.0 7.0 5.0 Total Expenditure Projection $ 136.3 % of Total FY 2024 –FY 2029 Budget 92% High Profile CIP Projects Fiscal Year 2024 –2029 CIP ($ Millions) 31 Key Assumptions, Financing Plan, and Conclusion Kevin Koeppen 32 FY 2024 Assumptions ▪Budgeted volumes ▪Growth revenues Revenues ▪CWA Costs ▪Impacted by inflation ▪Regulatory creep Operating and CIP Costs ▪Advance Fund Pension and OPEB Strategy 33 Water Volumes ▪Four-year historic average usage ▪Ceiling based on highest normal volume/driest year ▪Floor based on lowest volume/wettest year Average Usage Approach ▪Long-term accuracy of rate projections Goal = Projected Volumes at the Midpoint ▪$1.9 million reserve reduction ▪20% debt service coverage reduction ▪Reserves maintain above target and debt service coverage above covenant Budget Drought Resiliency -10% volume reductions 34 FY 2024 Budget Volumes Potable Units (in millions) Recycled Units (in millions) Rainfall (inches)Type 2020 Actual 11.4 1.5 16.7 Wet 2021 Actual 12.6 1.8 4.8 Dry 2022 Actual 12.3 1.6 6.8 Dry 2023 Projection 11.6 1.5 16.9 Wet 4-year Average 12.0 1.6 11.3 Growth 0.25%0.25% FY 2024 Budget 12.0 1.6 35 Potable Water Volumes Unit Sales (In Millions) 36 12.2 12.4 11.6 11.7 FY 2024 12.0 12.2 10.0 10.5 11.0 11.5 12.0 12.5 13.0 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Base Volume Cumulative Growth Ceiling Floor Recycled Water Volumes Unit Sales (In Thousands) 1,799 1,817 1,452 1,470 FY 2024 1,598 1,616 1,000 1,200 1,400 1,600 1,800 2,000 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Base Volume Cumulative Growth Ceiling Floor 37 CWA Projected All-in Rates 2024 –9.8% increase 2025 –8.9% increase 2026 and beyond –5.5% annual increases 2029 –97th percentile by 2029 38 Rate Drivers Water Proposition 218 Land sale Water purchase costs Increase in Six-Year CIP projection Debt coverage above target for six years Reserves at or above target over six years Inflation Sewer City of San Diego Pure Water Project Increase in Six-Year CIP projection County shared facility projects Reserves at or above target over six years Inflation 39 Financing Plan Water •2025 Debt Issuance •2027 Debt Issuance Sewer •2027 debt issuance 40 Closing Comments June 7th Presentation ▪Budget Summary ▪Rate Increase Recommendation ▪Debt Coverage Projection ▪Labor & Benefit Costs ▪Direction to Mail Rate Increase Notices ▪Admin & Materials Costs ▪Salary Schedule ▪Rate Comparison ▪Budget Approval 41 Questions and Input 42