HomeMy WebLinkAbout04 ANNUAL WATER ENTERPRISE FINANCIAL PLAN UPDATEDocusign Envelope ID: OEABD08D-F8D6-4A68-ADDC-3F8DA65DF63F
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Agenda Item 4
Initial
AGENDA REPORT Reviewed: a`�S
City Manager
Finance Director N/A
NOVEMBER 18, 2025
ALDO E. SCHINDLER, CITY MANAGER
MICHAEL GRISSO, DIRECTOR OF PUBLIC WORKS
ANNUAL WATER ENTERPRISE FINANCIAL PLAN 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. At the close of each
fiscal year, staff reviews the financial position of the Water Enterprise and updates the
Water Enterprise Financial Plan to ensure future annual rate adjustments are consistent
with ongoing operating needs.
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: OEABD08D-F8D6-4A68-ADDC-3F8DA65DF63F
City Council Agenda Report
Annual Water Enterprise Financial Update
November 18, 2025
Page 2
It is best 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 2024-25, the (unaudited) net cash position improved by $1 M. Fiscal Year 2025-
26 projections include rate revenue of $25.7M and operating expenses of $24AM, with a
positive change in net cash position of $1.3M.
The actual Fiscal Year 2024-25 and projected Fiscal Year 2025-26 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 operates groundwater wells that were 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.
In 2021, the City partnered with Orange County Water District (OCWD) to design and
construct the Main Street PFAS Treatment Facility to treat and deliver up to 10 million gallons
of high -quality drinking water per day to the community. The Main Street PFAS Treatment
facility was commissioned on June 2, 2025 and is currently operating, helping reestablish the
City's groundwater supply and stabilizing the Water Enterprise financial position.
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 2026.
Michael Grisso
Director of Public Works