1997 AGN MAR 18 I28 - Laserfiche WebLink

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''' OF COLTON AGENDA REPORT FOR COUNCIL MEETING OF MARCH 18,1997 SUBJECT: GENERAL WATER RATE INCREASE In order to generate the $10 million to complete the capital improvement mroQrmnn' two options are available to the City. First, retail rates could be raised at some level to create a capital improvement fund. At $500,000 per year, it would take approximately 20 years to raise the $10 million identified by staff, and others. Obviously, at that rate, other system components would be in need of repair before the initial projects were completed. Second, the City could issue debt to fund the capital improvement program. This ensures that funds to complete the program are available at the beginning, and throughout, the term of the construction projects. This approach also includes a rate increase to cover the costs of the borrowed funds, much in the same magnitude as the internally funded program. ALTERNATIVES The first alternative is always to do nothing. The utility could operate osit has for the past few years and hope that there are no major failures of the water system which could impair orhalt our ability toproduce and deliver oafe, reliable water service to the water customers. Clearly, this is not the alternative proposed by staff and would be frowned upon by the State Department of Health Services and our consulting engineers. The second, and preferred alternative, is to issue bonds for the improvements. Here again, there are various options available. Staff has investigated two viable ways to complete the debt funding. The projects proposed would qualify for State Revolving Funds (SRF). These would be issued at a lower rate than revenue bonds but include the following rather burdensome requirements and consequences: 1) SRF procedures would delay receipt of the funds for two to three years; 2) SRF procedures impose additional engineering and administrative requirements that add costs, reduce flexibility, and may further delay the projects; 3) time delays in the completion of projects increase the risks to water system reliability; 4) time delays can increase costs due to inflation. Staff's preferred option is to participate in a proposed FARECal financing currently under preparation. The City has preliminarily requested $10 million for the proposed capital improvement program. Participation in the FARECal program offers some advantages even though the interest rate may be higher than the SRF loan. The FARECal program would give the utility and the City greater flexibility and latitude in any future financings and lessen some of the burden of dealing with the State as a regulator of our debt. Attached is a five year financial forecast of the ire this forecast indicates that a 7.0% general rate increase is necessary to become effective June 30, 1997. The increase would primarily be required to assure adequate funds to cover the new debt service for the capital improvement program. At this time there are no significant additional operating costs projected for the utility. Operational and maintenance costs have stabilized and staff sees no radical change from the current level of operations. An increase of this magnitude would provide adequate coverage of the debt and create a cash flow which would fund operations and provide for a modest reserve margin over the next four years. Even with this increase, the forecast indicates that further adjustments may be necessary during FY2000-01 in the range of 6 percent. It is difficult to say with any certainty that other factors may come into play that will affect this projection. Page 2 of3 Item No. -� -- -' F - 1-'[~'- - ,~'-�—