Title
2016 Utility Rate and General Facility Charges (GFC) Recommendations
Recommended Action/UAC Deliverable:
Recommended rates and GFCs for 2016
Report
Issue:
Review 2016 Utility rates, including LOTT, and GFC proposals. Forward recommendations to City Council for review during budget deliberations. Council’s Finance Committee review Utility rates on October 23, 2015.
Dan Daniels, Public Works Waste ReSources Director, 360.753.8780
Andy Haub, Public Works Water Resources Director, 360.753.8475
Presenter(s):
Same as above
Previous Utility Rate Work Items Before the UAC:
The Utility Advisory Committee reviews City Utility finances, capital investments, and rates on an annual basis. The evaluation typically begins with review of the Capital Facility Plan (CFP) in June of each year and concludes with Utility rate and GFC recommendations in October. UAC recommendations are important to subsequent City Council decision-making.
Volume-based wastewater rates, a key component of this year’s rate evaluation, were discussed in detail during the October, 2014 meeting and briefly during the June, 2015 meeting. The rates are supported by the Wastewater Management Plan.
Background and Analysis
The City Utilities provide vital public health services for our community - safe drinking water, sanitary sewers, waste reduction and disposal, flood management, and environmental protection. Utility staff emphasize both effectiveness and efficiency in the delivery of these services.
The 2016 Utility rates will maintain 2015 service levels. The rate increases ensure that essential Utility services continue to be provided reliably and without interruption. Consistent with past practices, any annual savings above mandatory financial reserves are used to minimize rate increases. No appreciable program modifications or expansions are proposed.
The City Utilities are municipal enterprise funds. They are financially self-supporting without the input of general tax funds. Conversely, Utility revenue is not allowed to support other tax-based City programs. The Utilities pay a fair share in support of various City overhead costs (e.g., building mortgage, legal and executive services).
General facility charges (GFCs) are also reviewed during the annual budget process. GFCs are a one-time cost collected from new development. The charges reflect the financial value of the existing municipal infrastructure system and the benefits the system provides to the new development. Each of the water-related Utilities collects a unique GFC. GFCs are determined by a State-guided set of calculations that define the value of the existing and planned infrastructure and the distribution of costs among current and future users. Every few years, City staff hires independent financial consultants to help evaluate the GFCs. A more detailed explanation of the GFC calculation (Attachment 1) that was shared with the UAC in 2013 is attached for your use as needed.
LOTT Clean Water Alliance also charges monthly rates and a capacity development charge (CDCs) that are collected by the City and passed on to LOTT. LOTT CDC application and calculation are largely the same as City GFCs.
Summary of Proposed 2016 Rates
As detailed in the following sections, the proposed 2016 combined rate increase for a single family residence is 4.5 percent or $5.03 per month. However, if volume-based wastewater rates are implemented as proposed, residences could see rate increases ranging from negative 1.9% to 5.1% percent or negative $4.32 to $11.42 for each two month billing cycle. Typical bi-monthly Utility bills would increase (or decrease) from approximately $224.21 in 2015 to between $219 and $235 in 2016. Multifamily and non-residential accounts would increase at approximately 4.5 percent.
GFCs and CDCs would increase approximately $549 or 4.1 percent for a newly constructed single family home. Combined City GFCs and LOTT CDCs for a new single family home in 2015 total $13,355.
See Attachment 1, Proposed Utility expenditures and attachment 2, for the Sample Bi-monthly Bill and GFCs/CDCs.
2016 Rate Proposals
Storm & Surface Water Utility: 6.7 percent rate increase proposed.
The Storm and Surface Water Utility responds to community expectations for flood mitigation, water quality improvement, and aquatic habitat enhancement. The Utility is also the lead in City-wide implementation of the regulatory requirements of the State’s NPDES (National Pollution Discharge Elimination System) Phase II permit.
The proposed 6.7 percent rate increase covers 2016 expenditure increases of approximately $290,000. The total Utility budget for 2016 is $5,191,687. With the proposed rate increase, single family residences would see a $0.80 bi-monthly increase in their storm and surface water rates ($0.40/month). Single family and duplex storm and surface water rates in 2016 would be $25.49 bi-monthly ($12.75/monthly).
The proposed budget incorporates inflationary increases including salaries and benefits ($115,000) and various City overhead costs including information technology, City administration, fleet services, Maintenance Center rent, and Fire Department technical rescue services ($133,000). A potential cost of living salary increase is included in the salary increases. Additionally, the Utilities pay State and City taxes of approximately 11.5% on rate revenue.
New services include increased funding for stream water quality monitoring in anticipation of new Clean Water Act expectations ($5,000) and a debt service of $20,000 for the now-completed State Avenue stormwater retrofit project. The budget includes funding for a temporary grant-funded position to help with infrastructure mapping and asset management. The position does not impact Utility finances.
Revenue from new customer accounts is assumed to be 1% or roughly $45,000.
The rate structure for the Storm and Surface Water Utility is straight-forward. Stormwater rates are based on a flat-rate monthly charge for single family and duplex residential accounts. Other accounts including commercial, multifamily, and institutional developments are charged based on the quantity of impervious surface on the site and the year of development. Older developments consistently provide less onsite stormwater treatment and storage infrastructure than newer developments. Therefore, non-residential accounts incorporate a three-tiered rate structure with older developments paying more than new developments. The percent increase in single family residential rates is applied to multifamily and non-residential accounts. A comprehensive evaluation of stormwater rates is planned for 2016.
Storm and Surface Water GFCs: No increase to base charges. Increase trip-generated charges by 75%.
Based on recent independent financial analysis (FCS Group, 2013), the City increased the storm and surface water GFC from $1,094 to $1,190 per single family residence in 2015. The 10 percent increase applies to other types of development (e.g. multifamily, commercial) based on established impervious surface relationships between single family residential and other land uses.
The financial analysis also justified increasing the trip-generated charge from $1.80/vehicle trip to $11.24/trip. The trip charge incorporates the fact that some new land uses result in a greater number of vehicle trips to and from the land use on a daily basis than other land uses. For example, a convenience store generates more trips per day and therefore more City-wide vehicle-related water quality problems than a piano store. Industry standards are used to estimate trips by land use type.
In turn, vehicle use generates the need for publicly-funded water quality retrofits for our streets. The substantial increase in the charge is justified by recent and planned Utility investments in water quality retrofits in City streets.
In 2014, the UAC recommended phasing-in the vehicle trip charge. The charge was increased to $3.15/trip for 2015. Staff recommends increasing the charge to $4.50 in 2016.
Wastewater Utility: No rate increase proposed. However, if adopted, volume-based wastewater rates will appreciably affect rate collection from single-family residents.
The City’s Wastewater Utility safely conveys wastewater from our homes and businesses to the LOTT Clean Water Alliance treatment facility in downtown Olympia.
The proposed operating budget for City wastewater services reflects the goals and policies of the City’s 2013 - 2018 Wastewater Management Plan. Additionally, the proposed rates reflect UAC and City Council support for volume-based wastewater rates. Volume-based rates have been built into the rate proposal, but remain subject to Council adoption.
The 2016 proposed budget for the City’s Wastewater Utility is anticipated to increase by approximately $80,000. Wastewater salaries and benefits have decreased by about $15,000 even with an anticipated cost-of-living allowance of approximately $28,000. This is a result of minor staffing shifts among Water Resources staff (especially Storm and Surface Water) as well as an influx of new employees with associated lower salaries. Similarly to the other water Utilities, City overhead and indirect services costs have increased by $106,000.
Staff proposes using unanticipated savings in 2015 to cover the $80,000 shortfall. No rate increase is recommended. However, additional wastewater rate increases are proposed by the LOTT Clean Water Alliance as discussed in a subsequent section.
Volume-based Wastewater Rates
Currently, the Wastewater Utility applies flat-rates to single-family residences and duplexes. Multifamily and commercial accounts are charged a minimum flat rate plus a volume charge based on drinking water usage. City wastewater rates for single family residences and duplexes in 2015 are $39.33 bi-monthly (plus LOTT Alliance rates).
Consistent with the Wastewater Management Plan and UAC recommendations, a tiered wastewater rate system has been incorporated into the rate recommendation for 2016. City Council reviewed the UAC recommendation and asked that the approach be part of the 2016 rate decisions.
As discussed most recently at the June 4 UAC meeting, the tiered system provides a lower rate for consumers that use low quantities of drinking water and therefore generate low volumes of wastewater. The approach could also encourage water conservation among high drinking water users. As proposed, approximately 17 percent of single-family wastewater customers would receive a 35 percent rate reduction. Approximately 70 percent of all customers (including multifamily and commercial) would pay 5 percent more. The other 13 percent of customers could see little change. See Attachment 2, for the Sample Bi-monthly Bill and GFCs/CDCs.
Wastewater GFCs: 3% increase proposed.
Wastewater GFCs were evaluated in 2013 by an independent consultant and new charges subsequently implemented in 2014. Wastewater GFCs were not increased in 2015. The current wastewater GFC is $3,342 for a new single family home.
Staff proposes an inflationary increase of 3 percent or $100 for 2016. The 2016 City GFC would be $3,442 for single family homes. It would be applied proportionally to other customer groups.
LOTT Clean Water Alliance - Wastewater Treatment Charges: 3 percent rate increase proposed.
The LOTT Clean Water Alliance (Lacey, Olympia, Tumwater, and Thurston County) collects revenue for its operations and capital projects through the Utility bills of the local jurisdictions. LOTT charges are approved by the LOTT Board of Directors which is comprised of one elected official from each of the four partner jurisdictions. Increases to both LOTT monthly charges and new connection charges are proposed for 2016.
LOTT’s budgeting and revenue decisions are largely driven by infrastructure costs, including major upgrades to LOTT’s Budd Inlet Treatment Plant. Infrastructure investments including debt service over the 2013-2018 planning period represent 70 percent of LOTT’s total projected expenses. Operating costs, including staffing, represent 30 percent of the total.
Wastewater Service Charge (WSC)
An inflationary adjustment in LOTT monthly rates of 3 percent is proposed for 2016. With the proposed rate increase, LOTT charges would increase $1.08 per month for a single family residence. The current LOTT charge is $72.12 bi-monthly for single family residences. Rates in 2016 would be $74.28. Non-single family accounts would increase proportionately. Annual inflationary adjustments to the rate were identified by the LOTT Board as part of LOTT’s long-term funding strategy for the 2013-2018 planning period.
Capacity Development Charge (CDC)
The capacity development charge (CDC) is a separate charge paid when users hook-up to the system, and is the primary funding source for projects that increase capacity for new growth on the LOTT system. The proposed increase in the CDC is both inflationary and supportive of new construction to increase system capacity. It would result in the one-time connection charge for new single family residences to increase from $5,136.38 to $5,354.57. In addition to a 3% inflationary increase, this includes a $64.10 increase that occurs annually through 2019 to cover the estimated costs of planned projects through 2020.
Drinking Water Utility: 7.3 percent rate increase proposed.
The City Drinking Water Utility provides us with healthy water. Services of the Utility are consistent with both the 2009-2014 Water System Plan and the draft 2015-2021 Plan. The draft Plan and its comprehensive evaluation of drinking water finances will be brought to City Council for likely adoption in October. Information from the financial evaluation is incorporated into the 2016 budget recommendations.
The appreciable costs associated with meeting State and federal public health directives are an ongoing challenge for the drinking water program. Our policies mandate the Utility to fully comply with water quality standards. Drinking water capital facility costs are high as we both build new water quality technologies and maintain existing infrastructure.
Drinking water expenditures in 2016 are projected to be $12.3 million with a financial shortfall of $775,000 compared to 2015.
In general, the drinking water budget is more complicated than the other two water-related Utilities. Both expenditures and revenues are influenced by a number of external dynamics. In 2016, we expect expenditures to be up and revenues down.
Salary and benefit increases including, a cost-of-living allowance, in 2016 are modest at approximately $26,000. City overhead and indirect services are budgeted to be $170,000 higher than 2015. Key financial drivers include fleet services, Maintenance Center rent, information services, City administration, and Fire Department technical rescue services. Debt service for financed capital facility projects will increase by $141,000 as we begin to pay for the McAllister Wellfield construction.
Even with customer account growth, overall revenues are projected to decrease in 2016 as the City of Lacey and the Thurston PUD stop buying wholesale water from Olympia. They have developed new water supply sources and no longer need Olympia water. Revenue loss is substantial ($267,000). On the other hand, revenue generated from telecommunication antenna leases for utility water towers is expected to increase from $245,000 to $360,000.
The 2015 drought has increased water use and therefore Utility revenue. We project drinking water revenues to be up between 10 and 15 percent or $1 to $1.5 million in 2015. These funds could be used to offset all or part of the 2016 rate increase. Rates would then increase appreciably in 2017. Given ongoing challenges in the drinking water capital program, City financial managers and Utility staff recommend that the extra revenue be transferred to capital accounts after year-end finances are reconciled. Staff will be prepared to discuss these options in detail during the UAC meeting.
While debt financing is essential for the Utility, annual loan payments are appreciable ($812,000). Debt service payments to cover $15,800,000 of bonds and loans for the McAllister Wellfield and water meter replacement project began in 2014. We have recently applied for another approximately $6 million in State revolving fund loans.
Given these challenges, the Utility remains financially stable and meets its water quality performance expectations. Our community’s water quality is excellent and our water rights are adequate for at least 50 years.
The base water charge for a single family residence in 2015 is $44.97 bi-monthly. Total charges vary with water use and customer class. With the 7.4 percent rate increase, the base charge would increase $3.35 to $48.32 bi-monthly or $24.16 per month.
Drinking Water GFCs: 6.7 percent increase proposed.
A 2014 calculation by independent consultants based on the 20 year capital facility plan (CFP) indicate that drinking water GFCs could increase from $3,456 to $4,150, a $692 increase per new single family residence. The increase reflects the high level of ongoing capital investment.
Drinking water GFCs were increased 6.7 percent in 2015 to $3,687. Another 6.7 percent increase is proposed for 2016 bringing the GFC to $3,934. The final phase of the 20 percent increase could be considered for 2017.
Waste ReSources Utility: Varying rate increases proposed.
The Waste ReSources Utility provides a wide range of waste reduction, recycling and disposal services. It implements programs for residential, commercial, drop box, and organics customers. Policy direction is set by the Towards Zero Waste: Olympia's Waste ReSources Plan 2015-2020.
The proposed 2016 budget key drivers remain the same with tipping/tonnage fees, salaries, benefits, equipment, fuel and taxes making up over 88 percent of the total budget. The 2016 budget also reflects the need to purchase an additional residential collection truck to keep up with growth, and converting the current part-time Maintenance Worker I position to a full-time position.
On the revenue side, recycle commodity values continue to decline. The combined value of recycled commodities is projected to fall short of customer fees. Given this dynamic, the 2016 proposed budget reflects an additional $60,000 increase in residential special disposal fees.
In 2010, solid waste (garbage) disposal fees increased over 48 percent. At the same time, a 3 percent increase in the municipal utility tax was adopted. In order to minimize financial impacts to our customers, excess reserves above minimum requirements were used to help smooth rate increases. Rate smoothing ended in 2014. Revenues for 2015 and beyond need to cover expenditures without the use of any reserve funds.
Based on projected 2016 revenues and expenditures, the Waste ReSources budget is out of balance by approximately $337,600. Staff recommends implementing rate increases for all four service classes. Continuing to smooth rates and subsidize the organics program through the commercial rates, as subscriptions continue to grow, is also recommended. See Attachment 2 to review the projected rate increase estimates beyond 2016.
Proposed rate increases for 2016 include the following:
• Drop box 3%
• Residential 5.5%
• Commercial 4%
• Organics 9%
The proposed rate increase for an average residential customer (65-gallon with recycle, bi-weekly) follows:
|
|
2015 |
2016 |
Difference |
|
Garbage rate increase (5.5%) |
$43.90 |
$46.31 |
$2.41 |
|
Yard waste/organics rate increase ( 9%) |
$17.66 |
$19.25 |
$1.59 |
|
Total bi-monthly with garbage, recycle and organics |
$61.56 |
$65.56 |
$4.00 |
Waste ReSources GFCs: N/A. Waste ReSources does not collect a GFC. The Utility budget is dominated by operating rather than infrastructure costs.
Neighborhood/Community Interests (if known):
City Utilities provide essential public health services to Olympia residents. These services cost approximately $115/month/single family residence.
Options:
1. Support staff recommendations for 2016 Utility rates and GFCs. Forward to City Council for their consideration.
2. Propose alternative recommendations for 2016 rates and GFCs for Council consideration.
Financial Impact:
Under Option 1, typical single family residential customers will experience a negative 1.9 percent to 5.1 percent increase in their bi-monthly bill. GFCs and LOTT CDCs for new development would increase by 4.1 percent.
Staff Recommendation:
Support Option 1 and forward to City Council for their consideration.