HomeMy WebLinkAbout07 ANNUAL WATER ENTERPRISE FINANCIAL MODEL UPDATEDocusign Envelope ID: 986AA054-0725-4395-8229-B3E25F62944C
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Agenda Item
7
AGENDA REPORT Reviewed:
City Manager
aInitial
Finance Director
N/A
NOVEMBER 19, 2024
ALDO E. SCHINDLER, CITY MANAGER
MICHAEL GRISSO, DIRECTOR OF PUBLIC WORKS
ANNUAL WATER ENTERPRISE FINANCIAL MODEL UPDATE
On December 5, 2023, the City Council approved annual water rates effective January 1 of
each year, with the final adjustment occurring on January 1, 2028. To ensure annual rate
adjustments are consistent with the operating needs of the Water Enterprise, staff
completed an annual update to the Water Enterprise Financial Model.
RECOMMENDATION:
That the City Council receive and file this report.
FISCAL IMPACT:
There is no fiscal impact associated with this item.
CORRELATION TO THE STRATEGIC PLAN:
This item contributes to the fulfillment of the City's Strategic Plan Goal C: Financial
Strength, Item 5, providing adequate financial resources for a well -maintained and reliable
water system.
BACKGROUND AND DISCUSSION:
Fiscal Health
In 2023, a comprehensive Cost -of -Service Rate Study of the Water Enterprise (Rate Study)
was conducted by IB Consulting to evaluate ongoing operational costs as well as one-time
expenses for infrastructure improvements to determine annual revenue needs. The Rate
Study established a five-year financial plan allocating costs across customer classes to
ensure each customer equitably pays its fair share of the cost to operate the water system.
The Rate Study was shared with the community and presented to the City Council for
setting of rates. On December 5, 2023, the City Council approved rates for a period of five
years, as allowable under Proposition 218.
Docusign Envelope ID: 986AA054-0725-4395-8229-B3E25F62944C
City Council Agenda Report
Annual Water Enterprise Financial Update
November 19, 2024
Page 2
It is good practice to review the financial position of the Water Enterprise annually to
evaluate changes in the operation (expenses) and customer water demand (revenue). For
Fiscal Year 2023-24, the Enterprise total revenue exceeded expenses resulting in a positive
change in net position of $1,592,000. For Fiscal Year 2024-25, revenue is projected to be
$23.9M and expenses $23.2M, with a positive change in net position of $633,000.
Supportive of the Rate Study, the positive gains in net operating position will help stabilize
the Water Enterprise reserve funds and be reinvested in the water system infrastructure
through planned capital improvements.
The actual Fiscal Year 2023-24 and projected Fiscal Year 2024-25 surplus funds are being
reinvested to fund water infrastructure improvements and rebuild the Water Enterprise
reserve balance. The Water Enterprise is also required to satisfy debt service coverage
ratio requirements based on bond covenants and meet reserve policies to mitigate financial
risk related to operating cashflow needs and unexpected increase in expenses.
Water Supply
Historically, the City has relied on groundwater as the primary source of water supplied to
customers. In 2020, polyfluoroalkyl substances (PFAS) became a contaminate of concern
in groundwater. The City owns and operates groundwater wells that are impacted with PFAS
and, in February 2021, the City elected to shut down all groundwater sources that were
operating at or near regulatory response levels. The City's reliance on imported water
increased from 5% to 50% of water supply. Imported water is significantly more expensive
than groundwater, which was the primary driver of the 2023 Rate Study and related rate
adjustments.
To reduce the amount of imported water needed, a temporary PFAS treatment plant was
installed at the Columbus Tustin Well and will continue to operate until the City's new PFAS
treatment plant is complete. The temporary treatment plant has been in service for two (2)
years which has helped the City avoid additional imported water costs in an amount of
approximately $1.45M. The City has also partnered with East Orange County Water District
to obtain additional groundwater through interagency transfers reducing the reliance on
higher cost imported water. The cost of groundwater purchased through these agreements
is approximately 30% less than the cost of imported water. These actions allowed the City
to meet 72% of demand with groundwater in FY 2023-24.
The City's new treatment plant is being constructed by the Orange County Water District
(OCWD) and is expected to be operational in the spring of 2025. It is expected that once
operational, this treatment plant will allow the City to shift water supply back to the traditional
average of 95% groundwater and 5% imported water. The return to traditional operations has
been updated and modeled within financial plan using anticipated costs projections. The next
annual update including actual operating costs for the new treatment plant.
Docusign Envelope ID: 986AA054-0725-4395-8229-B3E25F62944C
City Council Agenda Report
Annual Water Enterprise Financial Update
November 19, 2024
Page 3
The Water Enterprise financial position is in line with original projections and therefore staff
recommends the water rates remain in effect as published. The next annual update will be
provided to the City Council in the fall of 2025.
V%-,A C—ter
Michael Grisso
Director of Public Works