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Home My WebLink AboutWater Rates Analysis Report - 11/2/2011i, ._ -Ckwo o%0- Oro Valley Water Utility Commission Water Rates Analysis Report November 2, 2011 TOWN OF ORO VALLEY WATER UTILITY COMMISSION WATER RATES ANALYSIS REPORT NOVEMBER 2, 2011 ORO VALLEY TOWN COUNCIL Satish Hiremath, Mayor Mary Snider, Vice Mayor Bill Garner, Council Member Barry Gillaspie, Council Member Joe Hornat, Council Member Steve Solomon, Council Member Lou Waters, Council Member ORO VALLEY WATER UTILITY COMMISSION Dave Powell, Chair Richard Davis, Vice Chair John Hoffmann, Commissioner Robert Milkey, Commissioner Richard Reynolds, Commissioner Elizabeth Shapiro, Commissioner Winston Tustison, Commissioner TOWN STAFF Greg Caton, Interim Town Manager Stacey Lemos, Finance Director Philip C. Saletta, P.E., Water Utility Director Shirley Seng, Water Utility Administrator TABLE OF CONTENTS SECTION TITLE PAGE Index of Appendices List of Acronyms Executive Summary 1 Introduction 3 Water Use Trends 4 Growth Trends 5 Vacant Homes and/or Disconnected Meters 6 Debt Service Coverage Requirement 6 Enterprise Fund 7 Alternative Water Resources Development Impact Fee Fund 11 Potable Water System Development Impact Fee Fund 13 Preferred Financial Scenario 15 Recommendation on Water Rates, Fees & Charges 16 Other Service Fees & Charges 18 Conclusion 18 Appendices INDEX OF APPENDICES APPENDIX A. Assumptions for Preferred Financial Scenario A-1 Enterprise Fund A-3 Alternative Water Resources Development Impact Fee Fund A-4 Potable Water System Development Impact Fee Fund B. Preferred Financial Scenario B-1 Enterprise Fund B-3 Alternative Water Resources Development Impact Fee Fund B-4 Potable Water System Development Impact Fee Fund B-5 Summary of all Funds C. Rate Schedules & Tables for Bill Comparisons for Preferred Financial Scenario C-1 Potable Water Rates C-2 Reclaimed Water Rates C-3 Tables for Bill Comparisons by Meter Size LIST OF ACRONYMS LIST OF ACRONYMS USED IN THIS REPORT AF Acre Feet AWRDIF Alternative Water Resources Development Impact Fee AWWA American Water Works Association CAGRD Central Arizona Groundwater Replenishment District CAP Central Arizona Project COLA Cost Of Living Allowance EDU Equivalent Dwelling Unit FY Fiscal Year GPF Groundwater Preservation Fee LTS Long Term Storage O&M Operating and Maintenance PWSDIF Potable Water System Development Impact Fee WIFA Water Infrastructure Finance Authority TOWN OF ORO VALLEY WATER UTILITY COMMISSION WATER RATES ANALYSIS REPORT NOVEMBER 2, 2011 EXECUTIVE SUMMARY The functions and duties of the Oro Valley Water Utility Commission include reviewing and developing recommendations for water revenue requirements, water rates and fee structures. The Commission annually evaluates staff recommendations based on a rates analysis to assure the recommendations meet Town policies and bond covenants. Water rates and charges shall be reviewed annually under Mayor and Town Council Water Policies — II.A.2.b(4). The Utility has based its financial analysis on the American Water Works Association (AWWA) Cash Needs Approach. The AWWA is the largest national organization that develops water and wastewater policies, specifications and rate setting guidelines accepted by both government -owned and private water and wastewater utilities worldwide. J This Water Rates Analysis Report contains detailed information on the three funds that comprise the Oro Valley Water Utility: ➢ Enterprise Fund ➢ Alternative Water Resources Development Impact Fee Fund ➢ Potable Water System Development Impact Fee Fund Each fund is individually analyzed with regard to revenue and revenue requirements. The assumptions used to prepare this report are similar to prior years and include water use trends, vacant homes and/or disconnected meters, growth trends and debt service coverage requirements. All of these will be addressed within this report. The Water Utility Commission has made a recommendation for a Preferred Financial Scenario. The Preferred Financial Scenario generates the revenue needed to maintain an adequate cash balance of $3.9 million for the Enterprise Fund over the projected five year 1 period. The Preferred Financial Scenario reduces the need for future financing by using J available cash for capital projects. 1 The Preferred Financial Scenario also builds the cash balance of the Alternative Water J Resources Development Impact Fee Fund over the five year period while continuing to pay off current debt on the reclaimed water delivery system. Building this cash balance will be important as the Town moves forward with the delivery of Central Arizona Project (CAP) water. More information on the Preferred Financial Scenario may be found on page 15. The Preferred Financial Scenario includes five year projections for each fund. This allows the Utility to evaluate the impact of future costs and the revenue sources that will be required to meet those costs. Based on the data contained within the Preferred Financial Scenario, the Water Utility Commission has made recommendations on water rates for FY 2011-12. Those recommendations are as follows: M! ➢ No increase in the monthly base rates for potable and reclaimed water use. ➢ No increase in the tiered commodity rates for potable and reclaimed water use. ➢ No change in the water use contained within the 4 tiers for all meter sizes I ➢ No increase in the potable or reclaimed Groundwater Preservation Fee. ➢ No increase in potable or reclaimed construction water rates r This report does not contain an alternate financial scenario. Due to sound fiscal and water l resource management, it is projected that the Utility will meet revenue requirements with no proposed water rate increases for the base and commodity rates in FY 2011-12. Reduction f of the Utility's outstanding debt has significantly improved the debt service coverage ratio which is a key factor in the water rates analysis. This has been a main driver for water rate increases in the past. Additionally, management of water resources as it relates to recovery wells, long term storage credits and groundwater extinguishment credits has reduced the Utility's obligation to the Central Arizona Groundwater Replenishment District. The substantial savings realized from these actions coupled with budget reductions for both operating costs and capital projects have resulted in no proposed increases for the base and commodity for FY 2011-12. It is important to understand that each year the water rates analysis is prepared based on the most up-to-date information available for a 5-year projection period. Operational needs and capital improvement requirements change annually and are carefully evaluated when they are included in the analysis. For example, if the need arises to deliver more than 1500 AF of CAP water before FY 15-16, it is very likely that the capital expenditures and operating costs would increase to a level that rate increases would be needed within the 5-year projection period. It is important that the Utility perform the required water rates analysis every year because any extraordinary operating or capital cost could result in the need for a rate increase. The Commission presents this Water Rates Analysis Report for the review and consideration of the Mayor and Council. The Commission and Water Utility Staff are available to discuss this report in greater detail at the Council's request. The Oro Valley Water Utility Commission is proud to serve the Town of Oro Valley, its citizens and the customers of its water utility. The Commission extends their appreciation to the Mayor and Council for their consideration and guidance and looks forward to their continued direction. 2- TOWN OF ORO VALLEY WATER UTILITY COMMISSION i� WATER RATES ANALYSIS REPORT NOVEMBER 2, 2011 �.l j INTRODUCTION J The Oro Valley Water Utility was established in 1996 as a self-supporting enterprise of the Town. The Utility is comprised of three separate funds that have been established for specific purposes. The Funds are as follows: ➢ Enterprise Fund ➢ Alternative Water Resources Development Impact Fee Fund ➢ Potable Water System Development Impact Fee Fund 1 The Enterprise Fund is the operating fund for the Utility. The expenditures managed from this fund include personnel, operations and maintenance for both potable and reclaimed water systems, capital costs for existing potable water system improvements and related 7 debt service. Revenue for this fund includes water sales, service fees and miscellaneous charges and interest income. The Utility does not receive any money from the Town General Fund. The Utility does pay the General Fund for services including finance, human resources, fleet, information technology, legal, insurance and rental of office space. The Alternative Water Resources Development Impact Fee Fund was established in 1996 to J manage capital expenditures related to alternative water resources including reclaimed water and Central Arizona Project (CAP) water. Expenditures include acquisition of water rights required for growth and capital costs, including debt service, to deliver reclaimed water and CAP water to the Town. Revenue for this fund is received from impact fees collected at the time water meters are purchased and from interest income. Additionally, the Groundwater Preservation Fees, which are collected through the Enterprise Fund, are transferred to the Alternative Water Resources Development Impact Fee Fund to pay for capital costs and debt service. The Potable Water System Development Impact Fee Fund was established in 1996 to J manage capital expenditures related to expansion or growth -related potable water capital projects and related debt service. These projects include wells, pump stations, reservoirs and mains for the potable water system. Revenue for this fund is received from impact fees collected at the time water meters are purchased and from interest income. The revenue and expenditures of all three funds are combined primarily to determine if the Utility meets the debt service coverage requirement established in the Mayor and Town Council Water Policies and the 2003 Bond Covenants. Otherwise, each fund is independent with regard to revenue and expenses. The revenue from the individual impact fee funds J may not be consolidated nor used for any purpose other than for which they were originally established. Each fund is addressed in more detail in the report. Figure 1 illustrates the relationship between the three funds. 3- Figure 1 1 Enterprise Fund AWRDIF Fund PWSDIF Fund Rev: Water sales, service Rev: AWRDIF impact Rev: PWSDIF impact fees and charges fees & groundwater fees preservation fees Exp: Operating costs, Exp; Alternative water Exp: Growth related existing system capital resources (CAP & potable water capital improvements and reclaimed water), related improvements and debt service capital improvements & related debt service debt service Summary of All Funds The Utility combines all funds to determine the overall debt service coverage ratio required by Town Policy & bond covenants. The assumptions used to prepare this report are similar to prior years and include water use trends, vacant homes and/or disconnected meters, growth trends and debt service coverage requirements. All of these are addressed within this report. WATER USE TRENDS The Utility has experienced an overall reduction in water use, both potable and reclaimed, over the last six years. The chart below illustrates an 11 % reduction in total water use from fiscal year 2005-06 through 2010-11. The reduction in water use may be a result of a combination of occurrences including conservation, reduction in growth, vacant homes and/or disconnected meters and under registering meters. There was a 3% increase in water use during FY 2010-11 over the previous year. This is likely attributable to less than normal rainfall. The average single family residential customer with a 5/8 x 3/4 inch water meter increased their monthly water use to 8,400 gallons, up from 8,024 gallons last year. For the analysis in this report, the average monthly water use for a single family residential customer with a 5/8 x 3/4 inch water meter will be calculated at 8,000 gallons per month. Revenue projections for this analysis included this reduction in water use. 4- J 6-YEAR WATER USE HISTORY POTABLE & RECLAIMED WATER 3,500,000,000 3,394,664,000 3,400,000,000 3,300,000,000 y Z 3,200,000,000 3,161,384,000 3,190,671,000 4 3,100,000,000 3,096,242,000 3,111,492,000 3,021,805,000 3,000,000,000 2,900,000,000 — 2,800,000,000 2005-06 2006-07 2007-08 2008-09 2009-10 2010.11 GROWTH TRENDS The Utility's growth rates have decreased significantly over the past several years. The growth projections used for this report were provided by the Town's Finance Director and are consistent with the Town's overall financial planning. The chart below illustrates the Utility's growth rate based on new metered connections over the last 6 years. It is projected that growth rates will stabilize at 35 new metered connections annually from FY 2011-12 through FY 2015-16 which is also consistent with the Town's financial planning. 6 YEAR GROWTH RATES 600 j e, s Q 500 1508 F U Z 400 v368 346 p 300 W w w 200 196 f w 100 z 68 61 0 2005-06 2006-07 2007-08 2008-09 2009-10 2010.11 FISCAL YEARS 5- VACANT HOMES AND/OR DISCONNECTED METERS To better understand declining water use, the Utility's customer base was analyzed. The analysis revealed that 246 meters were disconnected or had the water service turned off and locked as of June 30, 2011. The following is the classification of those meters: ➢ Residential 131 ➢ Commercial 10 ➢ Irrigation 93 ➢ Construction 12 Each account was categorized by user classification and meter size and then analyzed to project if and when the water service would be restored. It was assumed that 5% of all residential meters would be re -activated annually beginning in FY 2011-12. After review, it was determined that all construction meters were homes that were under construction when the water service was disconnected thus it was assumed that 5% of these meters would also be re -activated annually. Analysis of the commercial accounts revealed that it was highly unlikely that any of these meters would be re -activated. Likewise, the majority of irrigation meters were for common areas which are not likely to be re -activated in the near future. These meters are not being billed; therefore, there has been a negative impact on water sales revenue. This impact was factored into the 5 year projections as a reduction in water sales and Groundwater Preservation Fees (GPF) revenue. The revenue reduction for FY 2011-12 is projected to be $306,286. As the meters are projected to be re -activated, the reduction in revenue is minimized proportionate to the number of meters, meter size, average water use and projected water rates on an annual basis. DEBT SERVICE COVERAGE REQUIREMENTS During this water rates analysis process, staff applied the method for calculating the debt service coverage ratio pursuant to Town Financial and Budgetary Policies adopted by the Town Council in 2008. Section CA — Debt Capacity, Issuance & Management states the following with respect to debt service coverage ratios: "When utility revenues are pledged as debt service payments, the Town will strive to maintain a 1.3 debt service coverage ratio or the required ratio in the bond indenture (whichever is greater) to ensure debt coverage in times of revenue fluctuation." The Water Utility currently pays debt service on a number of outstanding debt issuances and loans. For the Series 2003 Senior Lien Water Revenue Bonds, the 2007 and 2009 Water Infrastructure Finance Authority (WIFA) Loans, water utility revenues are specifically pledged as the repayment source for these obligations at 1.3 times coverage per the Town's adopted financial policy. The remaining outstanding debt obligations of the Water Utility are excise tax pledged obligations meaning that the Town's unrestricted sources of sales taxes, fines, permit fees and state shared revenues are pledged as the repayment sources for these bonds in the 6- bond indentures. Even though the bond indentures pledge these excise taxes as the repayment source, the Water Utility will continue to be responsible for and budget for these debt service payments at a calculated debt service coverage ratio of 1.0 rather than the 1.3 times coverage. It is important to note that the bond indentures for the excise tax -backed bonds require that the Town's excise tax collections each fiscal year total at least 2.5 times the annual debt service requirements in order to avoid having to fund a debt service reserve fund. These conditions have been met annually in the past and are expected to continue in the future. For FY 2010-11 the debt service coverage ratio was 7.62 and is projected to remain the same for FY 2011-12. This methodology of segregating the water utility revenue -pledged debt from the excise tax - pledged debt in the rates analysis process is an accepted practice in the industry and has been reviewed by the Town's Finance Director and the Town's financial advisors with Stone and Youngberg. The debt service coverage ratio is determined by dividing the annual net operating revenue by the annual debt service payments. Using the methodology described above is in accordance with the 2008 policy and reduces the amount of the debt service coverage requirement amount. 7 JENTERPRISE FUND REVENUE The Enterprise Fund had a cash balance of $10 million at the beginning of FY 2011-12. Enterprise funds may be used for operating costs including personnel, operations and maintenance, capital improvements for the existing potable water system and debt service. The following table provides the Utility's budgeted revenue compared to the actual revenue for FY 2010-11: I J Revenue Source FY 2010-11 Budgeted FY 2010-11 Actual Difference Over (Under) Water Sales $ 11,689,300 $ 12,020,514 $ 331,214 Service Fees/Charges $ 458,700 $ 530,186 $ 71,486 Interest Income $ 44,000 $ 22,389 ($ 21,611) Total $ 12,192,000 $ 12,573,089 $ 381,089 The nominal increase in water sales is a result of increased water consumption during FY 2010-11 given the Utility did not have a rate increase during that period. The $71,486 is revenue the Utility received in excess of the service fees budget. The reduction in interest income is a result of lower interest rates experienced with the downturn in the economy. vim Revenues projected for FY 2011-12 were based on anticipated annual growth in the customer base of 35 single family residential customers and water consumption patterns similar to FY 2010-11. Analysis of the water use trends for FY 2010-11 indicated the average monthly use for a single family residence with a 5/8 x 3/4 inch water meter increased from 8,024 gallons to 8,400 gallons per month. For this analysis, 8,000 gallons per month was used to project water sales revenue. This increase may be a result of a reduced rainfall during that specific period. The vacant and/or disconnected metered accounts, were taken into consideration when projecting future water sales revenue. The following table indicates the amount of water sales revenue that would be realized with the existing rate structure and no water rate increase: FY 2010-11 FY 2011-12 Difference Actual Water Sales Projected Water Sales Increase (Decrease) Revenue Revenue $ 12,020,514 $ 11,946,045 ($ 74,469 ) The projected revenue decrease is a result of the need to account for vacant and/or disconnect homes. For this analysis, it is projected that only 5% of the residential accounts will have service restored on an annual basis. REVENUE REQUIREMENTS The following table is a comparative summary of operating expenses for the Water Utility Enterprise Fund. Actual expenses (excluding depreciation and amortization) for FY 2010-11 are compared to the projected expenses for FY 2011-12 used in the financial analysis: Utility Expenditures FY 2010-11 Actual FY 2011-12 Projected Difference Increase(Decrease) Personnel $ 2,418,118 $ 2,448,308 $ 30,190 O & M $ 2,967,008 $ 3,437,360 $ 470,352 CAP Recharge $ 749,280 $ 647,500 ( $ 101,780) CAGRD $ 474,936 $ 261,771 ( $ 223,165) Debt Service $ 2,846,995 $ 2,791,954 ( $ 55,041 ) Subtotal Expenditures $ 9,456,337 $ 9,576,893 $ 120,556 Capital Outlay $ 2,359,193 $ 4,162,000 $ 1,802,807 Total Expenditures $11,815,530 $13,738,893 $ 1,923,363 Projected personnel costs do not include any new personnel and there are no merit l increases or Cost of Living Allowances (COLA). The projected increase of $30,190 is due to the increase in retirement and insurance benefits for existing personnel. s- The projected operations and maintenance (O&M) costs include the O&M costs for both the potable water system and the reclaimed water system. The projected increase of $470,352 includes the addition of $300,000 to fund Town services received by the Utility; $95,000 for reclaimed water purchases; $23,000 in power costs; $24,000 in professional services and $16,000 in reservoir maintenance. IJ The timing for CAP deliveries is scheduled on a calendar year basis and occasionally the n costs related to the deliveries cross into two different fiscal years. The Utility recharged J 4,000 AF in CY 2010 and will recharge 5,000 AF in CY 2011. In CY 2012 the Utility is proposing to recharge 5,000 AF of CAP water. Although Central Arizona Groundwater Replenishment District (CAGRD) costs are included in the O&M budget for the Enterprise Fund, they are itemized in the table above because of the significant cost of the line item. The Utility is limited in the amount of control it has over 1 these specific costs. The rates are set by the CAGARD and are assessed on the volume of excess groundwater pumped and the minimum payment requirements pursuant to our agreement with CAGRD. The projected decrease in costs for the CAGRD is a result of the reduction in water use and continued management of water and financial resources. The Utility will use Long Term Storage (LTS) credits to offset a portion of the costs charged by the CAGRD through permitted recovery wells. In addition, the Utility will transfer LTS credits directly to the CAGRD to further reduce the financial obligations. There are a number of other annual O&M expenses that the Utility has the least control over and therefore is unable to reduce anticipated expenditures. In addition to the CAP and CAGRD costs, some of the other expenses that the Utility has the least control over include: electrical power for pumping, water quality testing, chemicals for disinfection, potable and reclaimed water purchased from other providers. These specific costs are determined by the volume of water pumped to meet customer demands. Other costs over which the Utility has least control include software maintenance on existing software, regulatory permits, insurance, office lease, services provided by other Town departments and costs directly related to billing. The billing costs include printing of the billing forms, envelopes, postage, J outsource vendor for bill insertion and delivery to post office, lockbox and other bank J charges for processing payments. Where applicable, the materials and/or services have l been bid or quotes have been received to assure the lowest price. J The O&M expenses that the Utility has minimal control over include maintenance on production and distribution facilities such as wells, boosters, reservoirs, and water mains. The Utility includes known preventative maintenance costs in the budget as well as contingency funds for unknown repairs and maintenance. The majority of these facilities are underground which allows for unforeseen malfunctions. Additionally, water mains develop leaks that must be repaired immediately. The Utility budgets for these specific items based on historical data; however, it is difficult to predict the exact amount that may be spent in any given year. The O&M expenses that the Utility has the most control over include office supplies, field supplies, memberships and subscriptions, printing, telecommunications, uniforms, rentals, training, conservation education and outside professional services. The Utility has decreased these costs annually over the last three years. IM Projected debt service will decrease for FY 2011-12 as a result of the debt amortization scheduled payments. Debt service payments are established by debt amortization l l schedules prepared by the Town's Bond Underwriters for all past bond issues. Likewise, l WIFA also provides debt amortization schedules that the Utility must adhere to. All debt service payments are pre -defined for any given fiscal year unless funds are available to pay r' off the debt as the Utility has done in the past. ll The chart below illustrates the O&M costs with regard to the level of control the Utility has over these costs. OPERATING EXPENSES FY 2011-12 (excludes capital outlay) O&M Least Control Debt Service $3,318,845 $2,791,954 �� 34% 29% O&M Minimal Control $975,125 10% Personnel _ O&MMostControl $2,448,308--$204,835 25% 2% Projected capital outlay for existing system improvements in FY 2011-12 in the amount of $4,162,000 include the replacement of 2200 water meters and installation of AMI equipment in the Countryside service area; replacement of a booster pump station, water main replacements and the completion of a 3-million gallon reservoir. The reservoir is eighty percent expansion related; therefore, that portion was funded from the Potable Water System Development Impact Fee Fund. Capital outlay also includes the purchase of water meters, solar and security equipment. Projected expenditures in the Enterprise Fund are proposed to be funded with revenue generated from water rates, fees, charges, cash reserves and a loan from WIFA. _10- I n ALTERNATIVE WATER RESOURCES DEVELOPMENT IMPACT FEE FUND ll REVENUE l 1 The Alternative Water Resources Development Impact Fee Fund (AWRDIF) had a cash balance of $1.5 million at the beginning of FY 2011-12. AWRDIF funds may be used for rj capital expenditures related to alternative water resources including reclaimed water and J CAP water. The revenue sources for the AWRDIF Fund are from impact fees collected when a water meter is purchased and from interest earned on cash balances. The n Groundwater Preservation Fees (GPF) collected through the Enterprise Fund are `J transferred to the AWRDIF Fund to help repay outstanding debt for the reclaimed water delivery system and for future debt on the CAP water delivery system. The following table provides the budgeted revenue for FY 2010-11 compared to the actual revenue for FY 2010-11: Revenue Source FY 2010-11 Budgeted FY 2010-11 Actual Difference Over Under Impact Fees $ 468,308 $ 400,988 ($ 67,320) GPF $ 2,298,285 $ 2,077,080 ($ 221,205 ) Interest Income $ 8,000 $ 2,320 ( $ 5,680) Total Revenue $ 2,774,593 $ 2,480,388 ($ 294,205 ) The decrease in impact fee revenue occurred as a result of a decrease in the number of meters that were purchased. The decrease in GPF revenue was a result of delaying the implementation of the approved increase until October 2011. Revenues projected for FY 2011-12 were based on anticipated annual growth in the customer base of 35 new connections or 44 Equivalent Dwelling Units (EDUs). An EDU is equivalent to one single family residence with a 5/8 x 3/4 inch meter. For impact fee projections, the Utility converts the estimated new connections to EDUs at a ratio of 1.25 EDUs to 1 new connection based on historical trends. In FY 2010-11 the actual growth rate was 86 EDUs as compared to the projected 94 EDUs. 1 The following table indicates the amount of impact fee and GPF revenue that would be J realized with the current impact fees and no increase to the GPF: Revenue Source FY 2011-12 Revenue Projection Existing Im act Fees & GPF Impact Fees $ 219,208 GPF $ 2,383,854 Total Revenue $ 2,603,062 _J REVENUE REQUIREMENTS I The following table is a comparative summary of expenditures for the AWRDIF Fund. The following table provides the budgeted expenditures for FY 2010-11 compared to the actual expenditures for FY 2010-11: Expenditures FY 2010-11 Budget FY 2010-11 Actual Difference Under(Over) Professional Services $ 190,000 $ 258,934 ( $ 68,934) CAP Capital Costs $ 123,660 $ 154,575 ( $ 30,915) Capital Improvements $ 0 $ 20,610 ( $ 20,610) Debt Service $ 2,785,918 $ 2,784,286 $ 1,632 Total $ 3,099,578 $ 3,218,405 ( $ 118,827 ) The professional services are expenses incurred for renewable water studies including the CAP water pilot study for treatment techniques, cost of service study for wheeling CAP water, alternatives analysis and pipeline routing studies for the future delivery of CAP water. The increase in CAP capital costs is a result of a change in the rates assessed by the Central Arizona Project. When the budget was prepared, the cost was based on CAP's preliminary rate of $12 per acre foot. Their final rate was approved at $15 per acre foot. The capital improvements in FY 2010-11 represent the completion of construction costs for the second phase of the reclaimed water system. The debt service includes repayment of the portion of the Series 2003 Bonds used to finance phase 1 of the reclaimed water delivery system and the 2007 WIFA loan used to finance phase 2 of the reclaimed water delivery system. Also included in the debt service for FY 2010-11 was the payoff of the loan for the reallocation of 3,557 AF of CAP water in the amount of $1,017,211. By paying this loan off one year early, the Utility saved $25,777 in interest. Projected expenditures in the AWRDIF Fund are proposed to be funded with revenue generated from impact fees, groundwater preservation fees and interest income. In the table below, actual expenses for FY 2010-11 are compared to the projected expenses for FY 2011-12 used in the financial analysis. Expenditures FY 2010-11 Actual FY 2011-12 Projected Difference Increase(Decrease) Professional Services $ 258,934 $ 160,200 ( $ 98,734) CAP Capital Costs $ 154,575 $ 154,575 $ 0 Capital Improvements $ 20,610 $ 515,000 $ 494,390 Debt Service $ 2,784,286 $ 1,775,678 ( $ 1,008,608 ) Total $ 3,218,405 $ 2,605,453 ($ 612,952) h l� I■1 Il Il I I I I The professional services are projected to decrease with the completion of CAP related studies. Although some of the studies will be on -going, both the cost of service study and water quality study have been completed. The CAP capital costs are projected to remain the same based on established CAP rates. The $515,000 in capital improvements identified above represent the funds needed to build infrastructure necessary to accomplish the wheeling of 1500 AF of CAP water. Deliveries are expected to begin in January 2012. The decrease in debt service is a result of the Utility's paying off the remaining debt owed on the reallocation of 3,557 AF of CAP. The final payment was made in December 2010. POTABLE WATER SYSTEM DEVELOPMENT IMPACT FEE FUND REVENUE The Potable Water System Development Impact Fee Fund (PWSDIF) had a cash balance of $7.3 million at the beginning of FY 2011-12. The PWSDIF Fund was allocated a portion of the Series 2003 Bond proceeds to finance construction of growth -related potable water system improvements and the refinancing of the Series 2000 Bond issue. In addition to the remaining bond proceeds, cash reserves were used for projects in FY 2010-11. It is projected that all future growth -related improvements will be paid for with cash. The revenue sources for the PWSDIF Fund are from impact fees collected when a water meter is purchased and from interest earned on cash balances. The Town Council adopted new impact fees in 2007. These new fees became effective in September 2007. The following table provides the budgeted revenue compared to the actual revenue for FY 2010-11: Revenue Source FY 2010-11 Budget FY 2010-11 Actual Difference Over(Under) Impact Fees $ 249,702 $ 244,376 ($ 5,326) Interest Income $ 33,500 $ 13,737 ($ 19,763) Total $ 283,202 $ 258,113 ($ 25,089) Revenues were projected for FY 2011-12 based on anticipated annual growth in the customer base of 35 new connections or 44 EDUs. An EDU is equivalent to one single family residence with a 5/8 x 3/4 inch meter. For impact fee projections, the Utility converts the estimated new connections to EDUs at a ratio of 1.25 EDUs to 1 new connection based on historical trends. The following table indicates the amount of impact fee revenue that is projected for FY 2011-12 compared to actual revenue received in FY 2010-11: FY 2010-11 FY 2011-12 Difference Actual Revenue Projected Revenue Increase(Decrease) $ 244,376 $ 112,948 ($ 131,428) 13- The estimated decrease in impact fee revenue is a result of the projection that fewer meters will be sold in FY 2011-12. In FY 2010-11 the actual growth rate was 86 EDUs as compared to the projected 94 EDUs. REVENUE REQUIREMENTS Growth -related potable water system improvements are managed through the PWSDIF Fund. These improvements include new potable water reservoirs, pump stations, water mains and wells that are required to meet the demands of new customers. The following table is a comparative summary of expenditures for the PWSDIF Fund and provides the budgeted expenditures compared to the actual expenditures for FY 2010-11: Expenditures FY 2010-11 Budgeted FY 2010-11 Actual Difference Under(Over) Capital Improvements $ 3,430,000 $ 2,852,000 $ 578,000 Debt Service $ 639,671 $ 639,920 ( $ 249 ) Total $ 4,069,671 $ 3,491,920 $ 577,751 The capital improvements budgeted in FY 2010-11 were not completed in the same fiscal year they were budgeted. It is expected that these projects will be completed by December of 2011. In the table below, actual expenses for FY 2010-11 are compared to the projected expenses for FY 2011-12 used in the financial analysis. Expenditures FY 2010-11 Actual FY 2011-12 Projected Difference Increase(Decrease) Capital Improvements $ 2,852,000 $ 740,000 ( $ 2,112,000 ) Debt Service $ 639,920 $ 634,883 ( $ 5,037) Total $ 3,491,920 $ 1,374,883 ( $ 2,117,037) The capital improvements for FY 2011-12 include the completion of a 3-million gallon reservoir and related piping that began in FY 2010-11. This reservoir is eighty percent expansion related; therefore, eighty percent of the cost of the reservoir was funded from the r PWSDIF Fund. The remaining twenty percent of the cost was funded from the Enterprise l Fund. Projected expenditures in the PWSDIF Fund are proposed to be funded with cash reserves generated from impact fees. The debt service payments are pursuant to the repayment schedule provided by the bond underwriters. -14- PREFERRED FINANCIAL SCENARIO (� Prior to developing financial forecasts, financial considerations were evaluated relating to I 1 proposed future operating costs, significant short and long term capital expenditures, the Utility's existing cash reserves, existing outstanding debt, proposed future debt and the related debt service payments. To arrive at a Preferred Financial Scenario, the goals of the J Commission were to ensure that all existing rate setting policies were met, cash reserves were utilized to minimize future debt and if there were to be proposed rate increases, those n increases would not result in rate shock. In prior years, a key component in the rate setting J process was the calculation of the debt service coverage ratio. A 1.3 debt service coverage ratio was established by Council policy with the adoption of Resolution No. (R)05-09. The Water Utility Commission has made a recommendation for a Preferred Financial Scenario. The Preferred Financial Scenario generates the revenue needed to maintain an adequate cash balance in all funds over the projected five year period. Additionally, the Preferred Financial Scenario reduces the amount of future financing by using available cash for capital projects. The Preferred Financial Scenario meets the debt service coverage requirements in all five years of the projection period. 7 The Preferred Financial Scenario also builds the cash balance of the Alternative Water Resources Development Impact Fee Fund over the five year period while continuing to pay off the current debt on the reclaimed water delivery system. Building this cash balance will be important as the Town moves forward with increased deliveries of CAP water. The following are key assumptions used to develop the financial projections contained in the Preferred Financial Scenario. The entire set of assumptions may be found in Appendix A. ➢ Annual growth is estimated at 35 new connections annually which equates to 44 EDUs annually. ➢ Water use patterns remain constant throughout the 5 year period and are based on actual water use for FY 2010-11. ➢ Vacant homes and/or disconnected residential meters will be re -activated at 5% per year beginning in FY 2011-12. ➢ The Utility will use cash reserves and a WIFA loan to fund existing system capital improvements in FY 2011-12. All capital improvements in FY 12-13 through FY 14- 15 will be funded with cash. ➢ Capital improvements in FY 15-16 will be funded with a loan from WIFA. J ➢ All 18-hole golf courses will be delivered reclaimed water throughout the 5 year projection period. ➢ Projected operating costs in FY 2011-12 are similar to the Utility's budget. Future years include annual inflation factors after one time expenditures have been deducted. ➢ Delivery of 1500 AF of CAP water proposed to begin in January 2012. ➢ The Potable Water System Development Impact Fees are not projected to increase within the 5 year projection period. ➢ The Alternative Water Resources Development Impact Fees are not projected to increase within the 5 year projection period. Analysis of the Preferred Financial Scenario indicates that the Enterprise Fund can utilize cash reserves to finance a portion of the proposed existing system capital improvements for 1 FY 2011-12 with $700,000 financed from a WIFA loan received in 2009. The Preferred -15- Financial Scenario proposes using cash to finance existing system capital improvements for the following three years of the projection period. It has been assumed that the Utility finance $2,880,000 through WIFA for capital projects in FY 15-16. These financing assumptions result in a slow decline of the Utility's projected cash balance. The projected ending cash balance of the Enterprise fund at the end of the five year analysis period is $4.8 million. The O&M portion of the wheeling costs for delivery of CAP water will be paid through water rates; however, the capital component of the wheeling costs will be funded with revenue derived from Groundwater Preservation Fees and Alternative Water Resources Development Impact Fees. The financial projections detailed in the Preferred Financial Scenario for the AWRDIF Fund include assumptions that construction of the CAP water interim delivery system will be managed through the AWRDIF Fund. As discussed above, the capital component of the wheeling cost will also be paid through this fund. The financial projections detailed in the Preferred Financial Scenario for the PWSDIF Fund assume no new capital projects in the last four years of the projection period. This will be reviewed annually for changes, but until the growth rate changes, it is unlikely that the Utility will need to construct growth -related facilities. The Potable Water System Development Impact Fees are not projected to increase during the five year period. The projections for the Enterprise Fund, AWRDIF Fund and the PWSDIF Fund were combined to evaluate the overall debt service coverage at the end of each fiscal year. Analysis indicates that, under the Preferred Financial Scenario, the Utility will meet the debt service coverage requirement established by the Mayor and Council Water Polices and Bond Covenants for all five years. Proformas for the Preferred Financial Scenario may be found in Appendix B. RECOMMENDATION ON WATER RATES, FEES & CHARGES After reviewing the analysis of the three funds and their respective revenue requirements contained in the Preferred Financial Scenario, the Water Utility Commission is recommending: ➢ No increase in the monthly base rates for potable or reclaimed water use. ➢ No increase the commodity rates for potable or reclaimed water use. ➢ No change in the water use contained within the 4 tiers for all meter sizes. ➢ No increase in the potable or reclaimed construction water rate. ➢ No increase in the Groundwater Preservation Fee for potable water use. ➢ No increase in the Groundwater Preservation Fee for reclaimed water use. The detailed schedule of the existing water rates may be found in Appendix C. The following table illustrates the proposed water rates for a single family residential customer with a 5/8 x 3/4 inch water meter. Approximately 87% of the customers fall into this category. Other water providers in the region are included for comparison. Tucson Water's commodity rates are assessed on the use of 100 cubic feet which is equivalent to L. -16- 748 gallons. To simplify the comparison, the rates for Tucson Water have been converted to represent the charge for 1,000 gallons. n n Water Provider Monthly Base Rate Tier 1 Cost Per 1,000 Gals. Tier 2 Cost Per 1,000 Gals. Tier 3 Cost Per 1,000 Gals. Tier 4 Cost Per 1,000 Gals. Oro Valley Current 14.19 2.20 2.99 4.03 5.38 Oro Valley Proposed 14.19 2.20 2.99 4.03 5.38 Metro Water 17.50 2.00 2.70 4.05 5.40 Marana Water 15.12 2.46 3.43 4.46 5.50 Tucson Water 7.53 2.14 8.11 11.62 15.88 A table providing proposed rates for all Oro Valley Water Utility meter sizes may be found in Appendix C. Tables that calculate the dollar and the percentage increase that a customer would experience on a monthly bill under the existing rates may also be found in Appendix C. Monthly bill amounts are calculated in 1,000 gallon increments for the 5/8 x 3/4 inch meters and a variety of increments for larger meter sizes. As with Oro Valley Water, the other regional water providers no longer include water usage in their base rates. Oro Valley, Metro and Marana all assess their rates on usage of 1,000 gallons whereas Tucson Water assess their rates on cubic feet. Additionally, the tiered rate structures for all the utilities vary with regard to the number of tiers and the volume of water included in each tier. For comparison purposes, the following table provides a calculation of a monthly bill amount for a single family residential customer with a 5/8 x 3/4 inch meter for the water utilities surrounding the Oro Valley Water Utility service area. Direct comparison of raw base rates and commodity rates is less effective because of the varying rate structures of each utility. A better comparison is to calculate the cost for specific consumption levels for one month. Please note that these charges only reflect water use fees and specifically exclude taxes, Groundwater Preservation Fees and similar renewable water resource fees charged by other water providers. Water Utility Cost for 8,000 Gallons Cost for 15,000 Gallons Cost for 25,000 Gallons Cost for 40,000 Gallons Oro Valley - Current 32.58 53.51 92.77 164.02 Oro Valley - Proposed 32.58 53.51 92.77 164.02 Metro Water 33.60 60.60 110.55 211.80 Marana Water 34.80 56.87 96.32 173.62 Tucson Water 24.65 62.08 151.93 352.82 -17- This report does not contain an alternate financial scenario. Due to sound fiscal and water resource management, it is projected that the Utility will meet revenue requirements with no proposed water rate increases throughout the five year projection period. Reduction of the l Utility's outstanding debt has significantly improved the debt service coverage ratio which is l a key factor in the water rates analysis. This has been a main driver for water rate increases in the past. Additionally, management of water resources as it relates to recovery wells, r long term storage credits and groundwater extinguishment credits has reduced the Utility's obligation to the CAGRD. It is important to understand that each year the water rates analysis is prepared based on the most up-to-date information available. Operational needs and capital improvement requirements change annually and are carefully evaluated when they are included in the analysis. For example, if the need arises to deliver more than 1500 AF of CAP water before FY 15-16, it is very likely that the capital expenditures and operating costs could increase to a level that rate increases could be needed within the 5-year projection period. It is important that the Utility perform a water rates analysis every year because any extraordinary operating or capital cost could result in the need for a rate increase. OTHER SERVICE FEES & CHARGES The Preferred Financial Scenarios does not include increases in other service fees and charges. These fees and charges are evaluated annually to determine if any adjustments are needed. CONCLUSION The Commission presents this Water Rates Analysis Report for the review and consideration of the Mayor and Council. The Commission and Water Utility Staff are available to discuss this report in greater detail at Council's request. Utility Staff will be requesting Council's acceptance of the Water Rates Analysis Report on November 2, 2011. The Oro Valley Water Utility Commission is proud to serve the Town of Oro Valley, it citizens and the customers of its water utility. The Commission extends their appreciation to the Mayor and Council for their consideration and guidance and looks forward to their continued direction. NB2 APPENDIX A Assumptions for Preferred Financial Scenario A-1 Enterprise Fund A-3 Alternative Water Resources Development Impact Fee Fund A-4 Potable Water System Development Impact Fee Fund PREFERRED FINANCIAL SCENARIO ASSUMPTIONS FOR ENTERPRISE FUND l; Growth 35 new metered connections for water rates each year for 5 years Growth rates provided on 3/02/11 by S. Lemos, Finance Director, Town of Oro Valley Water Rate Structure 4 Tiers — all usage in each tier to remain the same. Base Rate No increase in base rates all 5 years. Commodity Rate Increases f No increase in commodity rates all 5 years. Construction Water Rate No change — the rate remains at $1.00 more than Tier 4 in each year Potable GPF Rates (cost per 1,000 gallons) No increase in potable GPF in all 5 years. Reclaimed GPF Rates (cost per 1,000 gallons) No increase in reclaimed GPF in all 5 years Water Use Trends 7 Used similar water use trends as those in FY 10-11. The average monthly water use for a residential customer with a 5/8 x 3/4 inch water meter increased to 8,400 gallons per month in FY 10-11 from 8,024gallons in FY 09-10. For this analysis 8,000 gallons was used as the average monthly water use. 1 Vacant Homes and/or Disconnected Meters J There were 246 known vacant home and/or disconnected meters at 6/30/11. The residential & construction (143) are projected to be re -activated at 5% per year beginning in FY 2011-12. The remaining commercial & irrigation (103) are projected to remain disconnected. Other Revenue Based on FY 11-12 proposed budget. Did not project increases as misc. charges fluctuate. (NSF fees, reconnect fees, sewer billing, stormwater billing, plan review) Beginning Cash Balance Taken from 6/30/11 Balance Sheet of respective funds (MUNIS reports dated 9/27/11) Interest Income Interest projections were provided on 7/08/11 by S. Lemos, Finance Director, Town of Oro Valley. The interest rate is 0.5% for all 5 years. Personnel Costs Based on Utility's proposed budget for FY 11-12. No new employees were added over the 5 year projection period. FY 11-12 includes a 1% increase for benefit costs. For all remaining years a 2% increase per year was added to the prior FY. These costs were provided by S. Lemos, Finance Director and is consistent with overall Town planning. Potable O&M 1 Based on Utility's proposed budget for FY 11-12 updated with the most recent information; J 2.2% inflation annually for all remaining years. J A-1 J PREFERRED FINANCIAL SCENARIO ASSUMPTIONS FOR ENTERPRISE FUND (continued) Reclaimed O&M Based on Utility's proposed budget for FY 11-12; 2.2% inflation annually for all remaining years. Additionally, projected a reclaimed water rate increase to $500/AF in FY 12-13 when the existing agreement expires. CAP Recharge Costs Based on the rate schedule adopted by CAP 6/02/11. Recharge 5,000 AF in FY 11-12. Assumed recharge of 6,000 AF annually for remaining years. 2,500 AF with Kai Farms and 2,000 AF with Tucson Water and 500 —1,000 AF with CAWCD at $15/AF CAGRD Costs Based on S. Seng worksheet and rate schedule adopted by CAP 6/02/11. CAGRD Savings Savings for CAGRD costs are based on what costs to CAGRD would be if we were not taking direct delivery of CAP less what the CAGRD costs are when we do take direct delivery. Power Savings Savings are based on power costs not incurred directly by the Utility. We will not pump groundwater equal to the volume of CAP water that is delivered. Savings for power costs estimated at $113 per AF. Debt Service P&I debt service for 2003 Excise Tax Bonds taken from amortization schedules provided by Stone &Youngberg (S&Y). P&I debt service for 2003 Sr. Lien Bonds taken from amortization schedules provided by S&Y. P&I debt service for 2005 Excise Tax Bonds taken from amortization schedules provided by S&Y. P&I debt savings for 2007 Excise Tax Bonds taken from schedules provided by S&Y. P&I debt service for 2009 WIFA loan taken from preliminary schedule provided by WIFA using $3,403,000 at 3.171 % interest for 20 years P&I debt service for proposed 2015 WIFA loan was estimated by S. Seng — $2,880,000 at 4.25% interest for 20 years. Debt Service Coverage 1.30 coverage ratio for 2003 Sr. Lien Bonds & WIFA Loans 1.00 coverage ratio for all Excise Tax Pledged Bonds Capital Improvements Projects are identified in 5-Year CIP dated 3/16/11 and Potable Water System Master Plan. Cash funding existing system improvements in FY 11-12, FY 12-13, FY 13-14 and FY 14-15. $700,000 of the existing system improvements in FY 11-12 funded with the 2009 WIFA loan. Assumed WIFA loan to finance existing system improvements in FY 15-16 ($2,880,000). PREFERRED FINANCIAL SCENARIO ASSUMPTIONS FOR AWRDIF FUND Growth 35 new connections for water rates for all years, 44 EDUs for impact fees (35 x 1.25 = 44) Growth rates provided on 3/02/11 by S. Lemos, Finance Director, Town of Oro Valley AWRD Impact Fees Increased to $4,982 per EDU, Ordinance No. (0) 08-14, effective 12/2/08 Not projected to increase in the five year projection period. Revenue Revenue for all years derived from 44 EDUs at $4,982 Potable GPF Rates (cost per 1,000 gallons) No increase in the Potable GPF for the 5 year period. Reclaimed GPF Rates (cost per 1,000 gallons) No increase in the Reclaimed GPF for the 5 year period. Beginning Cash Balance Taken from 6/30/11 Balance Sheet of respective funds (MUNIS reports dated 9/27/11). Interest Income Interest projections were provided on 7/08/11 by S. Lemos, Finance Director, Town of Oro Valley. The interest rate is 0.5% for all 5 years. CAP Capital Costs Based on 10,305 AF at rate schedule adopted by CAP 6/02/11. Debt Service P&I debt service for 2003 Sr. Lien Bonds (reclaimed phase 1) taken from amortization schedules provided by Stone & Youngberg. P&I debt service for 2007 WIFA Loan (reclaimed phase 2) provided by WIFA. Debt Service Coverage 1.30 coverage ratio for 2003 Sr. Lien Bonds & WIFA Loans Capital Improvements Capital improvements include infrastructure required for the wheeling of CAP water in FY 11-12 and expansion of the reclaimed water system main in FY 12-13. No other capital improvement projects have been included in the remaining 3 years. 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