Title
2019 Utility Rate and General Facility Charge (GFC) Recommendations
Recommended Action/UAC Deliverable:
Review staff’s recommended rates and GFCs for 2019.
Issue:
Review 2019 Utility rates including LOTT and GFC proposals. Forward recommendations to City Council for review during their budget deliberations. Council’s Finance Committee plans to review Utility rates on October 17, 2018.
Staff Contact:
Gary Franks, 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 annually. The evaluation begins with review of the draft Capital Facility Plan (CFP) in the spring and concludes with utility rate and GFC recommendations in September or October. UAC recommendations are important to subsequent City Council decision-making.
City staff shared the draft 2019-2024 CFP with the UAC in May. The UAC will continue the discussion in the context of overall utility finances and rates. A recommendation on the CFP is needed for the Olympia Planning Commission in October.
Background and Analysis:
City Utilities are expected to provide uninterrupted public health services for our community. Our responsibilities include ensuring that drinking water is healthy, sewer infrastructure safely conveys waste to the LOTT treatment facility, solid waste is managed for reuse or disposed of, flooding is minimized, and our urban natural resources are protected.
Given these core public health mandates, Utilities are structured as municipal enterprise funds. Enterprise funds are financially self-supporting, rather than supported by the general tax funds. In turn, utility revenue does not support tax-based City programs. The Utilities pay a fair share of various City overhead costs (e.g., building mortgage, insurance, administrative overhead). End of the year savings stay in the Utilities are commonly transferred to the capital construction programs.
Typical single family residences pay a bi-monthly utility bill totaling $250 for the four City Utilities and LOTT Clean Water Alliance. Multifamily, commercial, and institutional customers are charged on a similar rate structure that incorporates their variable use of utility services. Annual rate increases are expressed to the UAC and Council as changes to single family accounts, acknowledging that non-single family accounts see similar percentage changes in their bills.
Consistent with national trends, City utility rates often increase in excess of inflation. Many State and Federal mandates feed into these increases. Fortunately, our programs and infrastructure are in overall good shape compared to many cities. Still, we need to keep up with new needs while maintaining and upgrading our increasingly aging infrastructure.
In recent surveys, our community confirms that they understand both the importance of our services and the competence that we bring to our responsibilities. They apparently understand that our services come at a cost.
General facility charges (GFCs) are also reviewed during the annual budget process. GFCs are a one-time charge collected from new development. The charges reflect the financial value of the existing utility infrastructure and the benefits the system provides to 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 evaluate the GFCs.
LOTT Clean Water Alliance charges monthly rates for operating the wastewater treatment facility as well as a capacity development charge (CDCs). The LOTT CDC is similar to the City’s GFC. The rates are approved by the LOTT Board, collected by the City, and passed on to LOTT.
Summary of Proposed 2019 Rates
With few exceptions, costs associated with providing our core services are relatively flat for 2019. Economic growth in Olympia is generating additional revenue that helps offset these annual cost increases (e.g., salary, benefits, energy, insurance). Our revenue projections for 2019 include a one percent growth-related increase for Waste ReSources and a 1.5 percent increase for the three water utilities.
Even with additional revenue, we are regretfully bringing forward substantial rate increases in all four City Utilities for 2019. LOTT is also proposing a rate increase of three percent. Overall key drivers to potential rate increases include:
• A two to three percent salary cost of living allowance (COLA) for City employees. Annual City sales tax revenue influence the amount of the COLA.
• Increasing need for cash funding for capital projects.
• Deterioration of commodity markets for recycles.
• A new operations and maintenance staff position.
• Several potential new initiatives. As discussed with the UAC previously, City Council may be interested in increasing participation in the Lifeline customer assistance program. However, recent discussions may result in a decrease in additional costs. Staff will update the UAC at the September 6th meeting.
• Also, Council is considering raising the municipal tax on utilities by 0.5 percent. These taxes help support the City’s general fund programs.
• The need for continued sea level rise response funding.
The specific potential cost increases for each utility are discussed in subsequent sections.
2019 Budget and Rate Analysis
Storm & Surface Water Utility: 5.4 percent rate increase proposed.
The Storm and Surface Water Utility responds to flood mitigation, water quality improvement, and aquatic habitat enhancement needs. The Utility also leads City-wide implementation of the regulatory requirements of the State’s National Pollution Discharge Elimination System (NPDES) Phase II permit.
The current balancing position for 2019 (projected revenue less expenditures) for stormwater is approximately -$37,000. Total expenditures for 2019 are projected to be $5,511,000, a $104,000 increase. The expenditure increase is offset by increasing revenue.
New expenditures include:
• Salary COLA at three percent: $46,000 or a 1.0 percent rate increase. The COLA could end up being two percent.
• Sea level rise response: $125,000 annually or a 2.7 percent rate increase.
• New operations vehicle: $3,800 annually or a 0.06 percent increase. Cost is split with the Wastewater Utility.
• Expanded Lifeline assistance program: Assumed $19,000 or a 0.35 percent increase.
• 0.5 percent increase in municipal taxes: $30,000 or a 0.6% increase.
Additionally, we are requesting that a temporary employee with long-term funding through the stormwater capital program be transitioned to a permanent employee. The employee works on the UAC and Council supported aquatic habitat program. Funds would be transferred from the capital program to the operating budget with no rate impact.
Last year, we discussed financial challenges with the underfunded stormwater capital program. This year, we initially planned to request an additional $200,000 (4.3 percent rate increase) in funding for capital projects. With across the board rate increases for the four Utilities, we recommend deferring the increase to 2020. An ongoing audit of stormwater rates and revenues suggest that some additional funds could become available in 2019. If so, those funds could be directed to the capital program.
Storm and Surface Water GFCs: 10 percent increase proposed.
Based on an independent financial analysis, Storm and Surface Water GFCs could justifiably be increased from the current base charge of $1,190/new single family residence to $2,383. Also, the vehicle trip component of the GFC could be increased from $4.50/vehicle trip to $19.04/vehicle trip. The GFC was not increased in 2018.
Staff propose phasing in increases - a 10 percent base charge increase ($119) and a $1.50/trip increase. These increases would generate approximately $25,000 annually for the capital program. GFCs for non-residential developments would see proportional increases.
Wastewater Utility: 3.9 percent rate increase proposed.
The City’s Wastewater Utility safely conveys wastewater from our homes and businesses to the LOTT’s Budd Inlet 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.
The 2019 proposed budget for the City’s Wastewater Utility is anticipated to increase by approximately $74,000 to $7,062,477. The total Wastewater Utility expenditures also include payments to LOTT ($12,295,940 in 2018). With a 1.5 percent growth in accounts, the current balancing position (revenue less expenditures) for 2019 is +$49,000. Growth revenue more than offsets increasing core expenditures.
Similarly to the Storm and Surface Water Utility, new expenditures generate the need for a rate increase:
• Salary COLA at three percent: $34,000 or a 0.5 percent rate increase.
• 0.5 percent increase in municipal taxes: $101,000 or a 1.6 percent increase. The City Wastewater Utility pays the tax on LOTT pass-through revenue. Since the combined City Utility and LOTT revenues total $20 M, a 0.5 percent tax increase is substantial.
• Additionally, the Utility will pay taxes on potential new LOTT revenues associated with their three percent rate increase: $43,000 or a 0.6 percent increase.
• New Maintenance Work I staff position: 0.5 percent increase. Pump Stations Section has increased the number of critical facilities it operates from 38 to 87 in 20 years - without a staff increase. The cost of the position would be split with the Drinking Water Utility.
• New operations vehicle: $3,800 annually or a 0.06 percent increase. Cost would be split with the Storm and Surface Water Utility.
• Expanded Lifeline assistance program: Assumed $24,000 or a 0.35 percent increase.
Wastewater GFCs: No proposed increase.
Wastewater GFCs increased three percent in 2016 to $3,442/single-family residence. A recent financial analysis justifies a very minor increase. Staff recommends deferring the increase to a future year.
LOTT Clean Water Alliance: Three percent rate increase and a three percent increase to the CDC.
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.
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. LOTT staff briefed the UAC on their finances in June.
On August 8, the LOTT Board preliminarily approved a three percent ($1.40/month) rate increase to the local jurisdictions. With this rate increase, LOTT charges for Olympia customers would increase $400,000 in 2019. A three percent CDC increase was also proposed. The LOTT CDC would increase three percent ($181) to $6,230.69.
Drinking Water Utility: 4.8 percent rate increase proposed.
The Drinking Water Utility continues to have infrastructure needs. Some needs are required by our public health mandates; others reflect needed upgrades and replacements of our aging pipe system. The highly pressurized pipe system does not deteriorate gracefully. Services of the Utility are consistent with the 2015-2021 Water System Plan. Utility finances were comprehensively evaluated in the Plan.
Drinking water rates have increased appreciably in recent years. Last year’s increase was 4.4 percent. The increase was entirely associated with our need to start making loan payments in 2018 on three major capital projects - Log Cabin Reservoir, Meridian Reservoir Corrosion Control Facility, and the Fones Road Pump Station. The three projects total $18 million.
The proposed Utility expenditures for 2019 are $14,411,962 a $ 327,000 increase over 2018. The projected 1.5 percent growth in account revenue generates a current balancing position (revenue less expenditures) of -$226,000.
New expenditures for the Drinking Water Utility include:
• Salary COLA at three percent: $72,000 or a 0.6 percent rate increase. The COLA could be less.
• Benefits correction: $134,000 or a 1.1 percent rate increase. Annual benefit calculations in 2017 for 2018 came in too low. Unfortunately, the combined correction for 2018 and 2019 is substantial.
• City overhead charges from other city services generate a 0.8 percent rate increase. Depreciation or cash funding for the capital program: $150,000 or a 1.2% rate increase. Last year, the UAC supported increasing annual capital funding by $210,000 per year. Several years ago, our financial consultants strongly encouraged us to increase annual cash funding for drinking water projects to $1,700,000/year. Our 2018 allotment is $1,197,000.
• New Maintenance Work I staff position: $35,000 or a 0.3 percent increase. As indicated in the Wastewater section, Pump Stations has increased the number of critical facilities it operates over the past 20 years without a staff increase. The cost of the position would be split with the Wastewater Utility.
• Expanded Lifeline assistance program: Assumed a 0.35 percent increase.
• 0.5% increase in municipal taxes: $30,000 or a 0.6 percent increase.
The Utility is becoming more financially stable and meets its mandates. Our community’s water quality is excellent and our water rights are adequate for at least 50 years.
With this rate proposal a typical water charge for a single-family residence would increase from $53.24/bi-monthly (2018) to $55.79 in 2019.
Drinking Water GFCs: No proposed increase.
The current GFC of $4,433/ single family residence reflects recent capital investments. Drinking Water GFCs were increased 6.7 percent in both 2015 and 2016.
Waste ReSources Utility: Varying rate increases proposed (see table below).
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 Waste ReSources 2019 budget is $12,814,200, a $337,629 (or 2.7% increase) over 2018. While organics and commercial garbage remain flat with no increase, we project a historic loss of revenue in residential accounts, due to the recycle commodity values dropping to unprecedented levels since January. Drop box accounts have seen a slight expense increase due to an uptick in salaries, benefits, fuel, and replacements of drop boxes.
Other key drivers in the proposed 2019 expense budget remain the same with tipping/tonnage fees, salaries, benefits, equipment, fuel, and taxes making up over 86% of the total budget. As with the water-related utilities, proposed expenditures include salary COLA increases and a municipal tax increase of 0.5%.
Annexations in 2017 added over 500 residential customers. The next annexation will not occur until 2023, thereby growth in the residential sector is expected to be nominal at 1% to 2% from infill, and continued buildout of planned residential communities. The largest growth areas are commercial, multi-family, and mixed-use, with garbage tons trending to increase by 750 tons.
On the revenue side, with a surge in the economy, commercial garbage is bringing in more revenue, which will help balance the overall fund.
New recycle contracts were put in place in early 2017. Budget expenditures now reflect the full cost of hauling and processing recyclable materials. One hundred percent of the commodity values are now being received as revenue. Revenue from material values, which normally offset processing and some hauling costs, fell sharply when China imposed restrictions on imports and followed with an outright ban. The loss of recycling revenue creates a budget impact of over $400,000. Uncertainty about commodity values is expected to continue for the near future, possibly 18-36 months.
Based on projected 2019 revenues minus expenditures, the Waste ReSources budget is out of balance by approximately $425,781. Staff recommends implementing rate increases for two service classes (residential & drop box). Continuing to smooth rates by subsidizing the organics program, and offsetting the revenue shortfall in residential with commercial revenue.
Starting in 2018, Council approved a four percent rate adjustment to create a future debt reserve fund to construct a new maintenance facility for Waste Resources on the City’s Carpenter Road property in the near future. With money from the first rate increase, staff proposes developing a capital fund for the existing funds and proposes no additional increase in 2019. Staff will use the current funds to hire a consultant to complete 30% design review. Design will help us better understand future rate needs, thus identifying future debt reserve goals.
Based on the above, the proposed 2019 Waste ReSources rate increases are as follows:
Customer Class 2018 2019
Drop Box 6% 5.5%
Residential 6% 5.5%
Commercial 5% 0%
Organics 0% 0%
Waste ReSources GFCs: N/A. Waste ReSources does not collect a GFC. The Utility budget is dominated by operating rather than capital costs.
Implications of Potential Rate Increases
The combined expenditures for the four utilities and LOTT in 2019 is projected to be $51,355,000. With the proposed rate increases, typical residences and businesses would be see a 4.3 percent increase in their bills. For residences, this increase would be approximately $10.75 every two months.
Optional yard waste service is not included in these estimates. The service costs $20.50 bi-monthly for a residence.
Overall GFCs would increase from $14,875 for a single family home to $15,175.
Neighborhood/Community Interests (if known):
City Utilities provide essential public health services to Olympia residents. While services are appreciated, cost increases are unfortunate.
Options:
The UAC is expected to provide recommendations to Council by October 17th.
1. Support staff proposals for 2019 City utility rates and GFCs.
2. Propose alternative rate recommendations.
Financial Impact:
Under Option 1, the typical single-family residential customers will experience a 4.3 percent increase in their 2019 utility bill. This proposed increase is preliminary and could change modestly.
Staff Recommendation:
Proceed with Option 1.