1998 AGN JUL 21 I02 - Laserfiche WebLink

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Page 2 Water Rate Increase Utilities Commission Meeting of April 27, 1998 The Master Plan identifies projects amounting to $15.8 million to be completed between now and the end of the year 2000. These improvements are to enhance the service to customers from the existing water system, raise the reliability of the water production and delivery system, and to satisfy the anticipated growth over the next ten years. In order to generate the $15.8 million to complete the capital improvement program, 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 30 years to raise the $15 million identified by Staff, and the consultant. 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 program. 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 as it has for the past few years and hope that there are no major failures of the water system, which could impair or halt our ability to produce and deliver safe, reliable water service to the water customers. Clearty, 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. Revenue bonds could be issued by the City to fund the Capital Improvement Program to be expended over three years. Repayment of the bonds would occur over a 25 -year period. Obviously, the preferred option is to raise rates to create a capital improvement fund. Otherwise it would take several years to accrue enough cash to fund even the first major project. Though this option exists, it is not viable for providing an effective way to deal with the system needs. Attached is a five-year financial forecast of the revenue requirements for the Water Utility. Simply put, this forecast indicates that a 20% general rate increase is necessary to become effective July 1, 1998, to proceed with a major portion of the recommended Capital Improvement Program. 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 other significant changes in operating costs projected for the utility. Operational and maintenance costs have stabilized and Staff sees no radical change from the current level of operations. A rate 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 FY2001-02 in the range of 15 percent. It is difficult to say with any certainty whether other factors may come into play that will affect this projection. The 20% increase would result in an average monthly residential water bill (30 ccf) going from $29.38 to $35.26, an increase of $5.88. Of course, this difference would vary depending on the amount of water used, but the percentage change would be constant. Staff is not recommending any change in the design of the water rates. Presently there is no supporting data to indicate that the current design is unfair in the allocation and recovery of the revenue requirements. Even following the rate change, residential customers will only be paying $0.0016 per gallon of water. Item No.