Loading...
HomeMy WebLinkAboutWater Rates Analysis Report - 3/1/2021 TOWN OF ORO VALLEY WATER UTILITY WATER RATES ANALYSIS REPORT MARCH 202 1 ORO VALLEY TOWN COUNCIL Joseph Winfield, Mayor Melanie Barrett, Vice Mayor Timothy Bohen, Councilmember Harry “Mo” Green, II, MD, Councilmember Joyce Jones-Ivey, Councilmember Josh Nicolson, Councilmember Steve Solomon, Councilmember ORO VALLEY WATER UTILITY COMMISSION Charlie Hurt, Chair Tom Marek, Vice Chair Greg Hitt, Commission Member Chuck Hollingsworth, Commission Member Byron McMillian, Commission Member Robert Milkey, Commission Member Richard Reynolds, Commission Member TOWN STAFF Mary Jacobs, Town Manager David Gephart, CPA, Chief Financial Officer Peter A. Abraham, P.E., Water Utility Director Mary E. Rallis, CPA, Water Utility Administrator TABLE OF CONTENTS SECTION TITLE PAGE Index of Appendix Executive Summary 1 Introduction 4 Methodology 5 Growth Rates 6 Water Use Trends 7 Debt Service Debt Service Coverage Requirements 9 Cash Reserve Policy for Operating Fund 10 Operating Fund Revenue Forecast 11 Revenue Requirements 13 Water Resource and System Development Impact Fee Fund 15 Proposed Financial Scenario 17 Recommendation on Water Rates 20 Conclusion 22 Appendix APPENDIX A. Proposed Financial Scenario Pro Forma A-1 Operating Fund A-2 Groundwater Preservation Fee A-3 Water Resource and System Development Impact Fee Fund A-4 Summary of all Funds B. Rate Schedules & Tables for Bill Comparisons B-1 Proposed Water Rate Schedule B-2 Tables for Bill Comparisons by Meter Size - P otable B-8 Tables for Bill Comparisons by Meter Size - Reclaimed C. 5-Year Capital Improvement Schedules C-1 Operating Fund C-2 Groundwater Preservation Fee C-3 Water Resource and System Development Impact Fee Fund D. Assumptions for Proposed Financial Scenario D-1 Operating Fund D-4 Water Resource and System Development Impact Fee Fund E. Development Impact Fee Schedule E-1 Water Resource and System Development Impact Fee Schedule - 1 - TOWN OF ORO VALLEY WATER UTILITY WATER RATES ANALYSIS REPORT MARCH 202 1 Executive Summary An annual review of the revenue requirements and water rates is a n integral component in ensuring the long- term financial health of the Water Utility. The Oro Valley Water Utility Commission review s and makes recommendations for water revenue requirements, water rates and fee structures. The Commission evaluates staff recommendations based on a rates analysis to ensure compliance with Town policies and bond covenants. Water rates and service charges are reviewed annually in accordance with Mayor and Town Council Water Policies – II.A.2.b(4). The Water Utility has based these financial projections on the American Water Works Associations (AWWA) cash-needs a pproach. 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. This Water Rates Analysis Report contains detailed information on the O perating Fund and the Water Resource and System Development Impact Fee Fund. Funds are analyzed annually to project revenue and revenue requirements. As an enterprise of the Town, the Water Utility generates revenue from rates, fees and service charges and does not receive revenue from taxes or other monies from the General Fund. Additionally, revenue generated by the Water Utility does not fund operating costs of any other Town department. In accordance with policy, the water rates analysis is prepared annually based on the most up-to-date information available for a five-year period. Although the analysis is for five years, any rate increase considered would be approved only for the first year in the five -year projection period. The Water Utility Commission has made a recommendation on the proposed financial scenario. Under the proposed financial scenario, the Operating Fund is projected to have a cash balance of $4,147,284 at the end of the five-year projection period. This exceeds the cash reserve requirement. In addition, the debt service coverage ratio of 1.3 is exceeded each year. Operational needs and capital improvements are included in the analysis. The proposed financial scenario demonstrates a strategic balance between incur ring new debt and a planned use of cash reserves to finance capital projects. The proposed financial scenario evaluates the impact of future costs and the revenue sources that will be required to meet those costs. The proposed water rates in the financial scenario will increase the Utility’s fixed and variable cost recovery. - 2 - The Water Utility Commission and Water Utility staff have made the following recommendations on water rates in the proposed financial scenario for Fiscal Year 2021/22: A. Increase to the potable water base rates B. Increase to the potable commodity rates C. Increase to the reclaimed commodity rate A. The current and proposed monthly base rates for potable water are shown in Table 1 below: Table 1 Cost per month B. The current and proposed commodity rates for potable water usage are shown in Table 2 below: Table 2 Per 1,000 gallons - 3 - The financial impact of the proposed base and commodity rate increase for a customer with a 5/8-inch meter using 7,000 gallons is $1.15 per month. Customers with a 5/8-inch meter represent 87 percent of the total customer base and include residential, commercial and irrigation classifications with the vast majority of those being residential. The base rate increase would be $0.73 per month for all customers with this meter size . The proposed commodity rate increase for customers in Tier 1 would be $0.06 per 1,000 gallons used per month. C. The reclaimed commodity rate is proposed to increase from $2.15 to $2.25 per 1,000 gallons used per month. An increase of $0.10 per 1,000 gallons used per month. The Water Utility presents this water rates analysis in support of the recommended rates contained in the proposed financial scenario. The Oro Valley Water Utility Commission and Water Utility staff respectfully recommend the proposed increase to the potable base rate s, increase to the potable commodity rates and increase to the reclaimed commodity rate as detailed in the proposed financial scenario. - 4 - TOWN OF ORO VALLEY WATER UTILITY WATER RATES ANALYSIS REPORT MARCH 202 1 Introduction The Oro Valley Water Utility was established in 1996 as a self -supporting enterprise of the Town. The Water Utility is comprised of two separate funds that have been established for specific purposes. The Funds are as follows: ► Operating Fund ► Water Resource and Development Impact Fee Fund The Operating Fund is the primary fund for the Water Utility. Revenue s for this fund include water sales, service fees, miscellaneous charges and interest income. The expenses in this fund include personnel, operations and maintenance for both potable and reclaimed water systems, capital costs for existing potable water system improvements and related debt service. The Water Utility pays the General Fund for services received including finance, human resources, fleet services, information technology, legal, insurance and rental of office space; however, it does not receive revenue from taxes or other payments from the General Fund. Groundwater Preservation Fee (GPF) revenue and expenses are accounted for within the O perating Fund but are segregated because GPF revenue is restricted for specific uses . This is illustrated in Appendix A, Page A-2. The Water Resource and Development Impact Fee Fund (WRSDIF) is used to account for development impact fees collected. Funds may be used for all types of water resources, the infrastructure to deliver those resources and any related debt including Central Arizona Project (CAP ) capital infrastructure repayment costs. Additional information is provided on page 15 of this report. The revenue and expenses of the Operating Fund and the WRSDIF Fund are combined to determine if the Water Utility meets the debt service coverage requirement established in the Mayor and Town Council water policies and current bond covenants. Revenues and expenses are accounted for separately in each fund. Pursuant to ARS 9-463.05 Section B.9., impact fees mus t be placed in a separate fund and accounted for separately. ARS 9-463.05 Section B.5. states that the impact fees may not be used for operations and maintenance of existing facilities. - 5 - Methodology Step 1: Five -Year Financial Plan The first step of the water rates analysis is to develop a five-year financial plan that projects the Water Utility’s revenues, expenses, capital project financing, annual debt service, and cash reserve funding. The factors used in determining the projections are growth rates, water use trends, debt service coverage require ments, cash reserve requirements and inflation rates. The financial plan is used to determine the revenue adjustment, which allows the Water Utility to recover adequate revenues to fund e xpenses and cash reserves. Step 2 : Revenue Requirement Determination for Test Year After completing the five-year financial plan, the rate making process can begin by determining the revenue requirement for the test year, also known as the rate -setting year. The test year for this water rates analysis is Fiscal Year 2019/20 which will be used to capture the rate impacts resulting from a change in rate structure without a revenue adjustment. The revenue requirement should sufficiently fund the Water Utility’s operating and maintenance (O&M) costs, annual debt service, capital improvement plan (CIP) costs, and cash reserv e funding for the upcoming Fiscal Year 2021/22 budget. Step 3 : Water Rates Analysis The annual cost of providing water service, or the revenue requirements, is then distributed to customer classes and tiers based on their water usage and demand on the system. Fixed and variable costs are analyzed to determine the impact on customer classes and tiers. Step 4 : Rate Design and Calculation After allocating the revenue requirements to each customer class and tier, the rate design and calculation process can start. Rates are designed to properly support and optimize the Water Utility’s policies and objectives. Rates also act as a public information tool in communicating these policy objectives to customers. This process also includes a rate impact analysis for all proposed water rates and sample customer bill impacts. Step 5 : Administrative Record Preparation and Rate Adoption The final step in a water rates analysis is to develop the administrative record in preparation for the rate adoption process. The administrative record, also know n as the Water Rates Analysis Report, documents the results of the water rate analysis and presents the methodologies, rationale, justifications, and calculations utilized to determine the proposed water rates. - 6 - Growth Rates As indicated in the graph below, new metered connections continue to remain stable due to continued development within the Town. The Water Utility had a total of 2,132 of new metered connections over the last 10 years. At the end of Fiscal Year 2019/20, the customer base totaled 20,461 metered connections. In developing the growth projections, assistance was received from the Town’s Community and Economic Development Department for the current housing inventory, along with plans that have been submitted for review, to conservatively estimate future growth. The growth projections used for this report are consistent with the Town’s financial forecasting and are shown below in Table 3. Table 3 0 50 100 150 200 250 300 350 61 97 214 165 155 232 340 331 264 273 ANNUAL GROWTHFISCAL YEAR Annual Growth - 7 - Water Use Trends The Water Utility has experienced a reduction in water use even though the number of connections has increased by 2,132 over the last ten years. The graph below indicates water usage from Fiscal Year 2010/11 through Fiscal Year 2019/20. As noted below, in Fiscal Year 2010/11 water usage was at 3,115 million gallons and 2,929 million gallons in Fiscal Year 2019/20. A decline of 186 million gallons even though new connections increased by 2,132 during this time period. The revenue projections in this water rate analysis compiled water data from Fiscal Year 2019/20 when the average water use was 7,200 gallons per month, which is consistent with prior years . The historical decline in water use has been experienced not only on a local level, but also on regional and national levels. This can be largely attributed to water conservation – both intentional and unintentional. Intentional water conservation is the conscious effort to reduce water use by commonly known measures including changing landscape to drought tolerant plants and the removal of lawns. Unintentional water conservation is a result of plumbing code changes and other regulatory changes regarding water efficiency. For example, all new water using appliances and fixtures are required to be low flow. The consumer’s intention may not have been to conserve water when they chose to replace a n aging or broken dishwasher, clothes washer or bathroom faucet. - 500 1,000 1,500 2,000 2,500 3,000 3,500 3,115 3,063 2,948 3,071 2,889 2,929 3,045 3,288 2,707 2,929 Gallons in millionsFiscal Year Potable & Reclaimed Water Deliveries - 8 - Debt Service The current annual debt service obligations are met with revenue generated from water rates, groundwater preservation fees and impact fees. A summary of the existing debt and the outstanding balances a s of December 31, 2020 are shown below in Table 4. Table 4 In January 2021, the 2008 and 2009 WIFA loans and the Series 2012 Senior Lien Water revenue bond were refunded through a private placement bond issue. This refunding opportunity resulted in a net present value savings to the Water Utility of $250,861 at an interest rate of 1.54 percent. The 2021 Senior Lien Water revenue refunding bond is in the amount of $5,582,000 and has a maturity date of July 1, 2029. Bond proceeds will be held in an escrow account until the refunding dates. The 2008 WIFA loan will be refunded in January 2021, the 2009 WIFA loan will be refunded in July 2021 and the Series 2012 Senior Lien Water revenue bond will be refunded in July 2023. In April 2017, the Town entered into an Intergovernmental Agreement with Metropolitan Domestic Water Improvement District and the Town of Marana to construct a recharge, recovery and delivery system known as the Northwest Recharge, Recovery, and Delivery System (NWRRDS) project to bring additional Central Arizona Project (CAP) water into the Town. This rates analysis include s an assumption for new debt in the amount of $7,000,000 in Fiscal Year 2022-23 to finance portions of the NWRRDS project. The timing of this debt is dependent on the progress of the project. If the project is delayed, the debt will also be delayed. It is assumed that the Utility will issue traditional bonds with a 20-year term at a four percent interest rate. The debt will be repaid with revenue derived from GPF funds as this portion of the project benefits the existing customers. There is no proposed debt associated with the growth-related portion of the NWRRDS project. The growth-related portion of the project will be paid for with cash from development impact fees. Project costs identified for the NWRRDS project may be found in the five -year capital plan shown in Appendix C. There is no new debt for existing system capital improvements in this analysis. Costs in the five-year capital plan for existing system projects will be cash funded. - 9 - Debt Service Coverage Requirements The method for calculating the debt service coverage ratio is pursuant to the Town Financial and Budgetary Policies adopted by the Town Council in 2008. Section C.1 – Debt Capacity, Issuance & Management states the following with respect to debt service covera ge 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 Series 2012 Senior Lien Water revenue bonds, the 2008, 2009, 2014 Water Infrastructure Finance Authority (WIFA) loans and Series 2021 Senior Lien Water revenue refunding bonds are used in the calculation of the debt service coverage requirement. The 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 ple dged 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 bond indentures. Even though the bond indentures pledge these excise taxes as the repayment source, the Water Utility is responsible to pay for these debt service payments from water sales revenues. However, since excise taxes are pledged as coverage, a calculated debt service coverage ratio of 1.0 is applied to avoid double coverage when calculating the debt service coverage ratio for these excise tax-backed bonds in the water rates analysis. 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 Fiscal Year 2019-20, the debt service coverage ratio was 8.93 for the General Fund which exceeds the 2.5 requirement. 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 Chief Financial Officer and the Town’s financial advisors with Stifel, Nicolaus & Company, Inc. The debt service coverage ratio is determined by dividing the annual net operating revenue by the annual d ebt service payments. The methodology described above is in accordance with the 2008 policy and reduces the amount of the required debt service coverage. Applying this methodology has been key in minimizing water rate increases. Debt service coverage for the Water Utility’s outstanding senior lien debt issuances and loans in the proposed financial scenario is shown in Table 5 below. This includes current and proposed new debt. Table 5 - 10 - Cash Reserve Policy The cash reserve policy may be found in the Town of Oro Valley Mayor and Council Water Policies Section II.A.1.d. The policy states “The Utility shall maintain a cash reserve in the Operating Fund of not less than 20% of the combined total of the annual b udgeted amounts for personnel, operations and maintenance, and debt service. This cash reserve amount specifically excludes budgeted amounts for capital projects, depreciation, amortization and contingency. No cash reserve is required for the water utility impact fee funds.” In the proposed financial scenario, the projected cash reserve balance for the Operating Fund for each year in the analysis is listed below in Table 6 showing compliance in all years. The projected cash reserve balances include annual increases in the monthly base rate and commodity rates. Table 6 Cash reserve balances in the Operating Fund are projected to be stable throughout the analysis. This is a result of strategically balancing the required financing of capital projects with the planned used of cash reserves. The Water Utility works diligently to balance the use of cash reserves with the issuance of new debt to minimize rate increases. There is no cash reserve requirement for revenue from the GPF because these funds are restricted to pay for renewable water resources, infrastructure and associated debt. Although accounted for in the Operating Fund, the GPF cash is segregated from the Operating Fund cash. It is not fiscally prudent to combine cash that has a restricted use with cash that has unrestricted use when determining compliance with a cash reserve policy. Expenses paid by GPF revenue are segregated from the general operating expenses for purposes of calculating the cash reserve requirement. In the proposed financial scenario, the projected cash reserve balance for the GPF in each year of the analysis is listed below in Table 7. Table 7 GPF cash reserve balances are projected to remain stable over the five-year projection period. This is a direct result of balancing the use of cash and issuance of new debt to pay for capital projects associated with the delivery of additional CAP water through the NWRRDS project. The ongoing revenue from the GPF will be used to pay future annual debt service on the portion of capital costs that will be financed. - 11 - Operating Fund Revenue Forecast The Operating Fund is projected to have a cash balance of $7,791,461 at the beginning of Fiscal Year 2021-22 and is projected to have a balance of $4,147,284 at the end of Fiscal Year 2025/26. These funds may be used for operating costs including personnel, operations and maintenance, capital improvements for the existing potable water system and debt service. Groundwater Preservation Fees are included in the Operating Fund; however, the revenues, expenses and cash balances for the GPF are accounted for separately within the Operating Fund and are not included in the cash balance above . The use of GPF funds is restricted to renewable water resources, infrastructure and associated debt. The following revenue forecast was based on analysis of the Water Utility’s historic water use trends and projected growth in the number of new connections . The revenue forecast includes proposed increases in the potable water base rates as shown below in Table 8. Table 8 The revenue forecast includes proposed increases in the potable commodity rates as shown below in Table 9: Table 9 - 12 - The potable water base and commodity rates are projected to increase annually beginning in Fiscal Year 2021/22. The proposed base rate increase will generate a 55 percent fixed cost recovery. Fixed costs are expenses incurred that do not fluctuate based on the volume of water sold. Examples of fixed costs include , but are not limited to, debt service, personnel, billing costs, fleet maintenance and regulatory costs. The proposed commodity rate increase accounts for the remaining 45 percent of the fixed costs which are recovered with revenue generated from the volume of water sold. The proposed rate increases encourage water conservation with lower base rate increases and higher commodity rate increases for higher water usage. The reclaimed base rates are proposed to remain unchanged throughout the projection period; however, the reclaimed commodity rate is proposed to increase from $2.15 to $2.25 per 1,000 gallons. Table 10 below includes the water sales for potable, reclaimed and GPF revenue forecast for the five -year projection period using the proposed base and commodity rates: Table 10 Other revenue generated by the Utility consists of service fees and charges. Service fees and charges include funds received from an Intergovernmental Agreement with the Pima County Wastewater Reclamation Department to provide monthly billing services on their behalf. Service fees and charges also include, but are not limited to, new service establishment fees, late fees, reconnection fees, inspection fees and plan review fees. The total of all service fees and charges are projected to generate annual revenue of $869,500. Projections for interest income for the Operating Fund are a cumulative total of $396,417 over the five-year period. Projected interest income for the GPF monies are a cumulative total of $156,030 over the five-year period. The interest rate assumed for the projection period is 1.5 percent annually. - 13 - Revenue Requirements Below in Table 11 is a summary of revenue requirements for the Operating Fund that were used in the financial analysis. These revenue requirements exclude expenses to be paid with GPF revenue. Table 11 Projected personnel costs include two percent a nnual merit increases, two percent annual increases in retirement contributions and half a percent annual increases in health care costs. Health care costs are reduced primarily because employees are paying a higher portion of the premiums. There are no new employees being added within the five -year projection period. These projected increases are consistent with the General Fund’s financial planning. A portion of the personnel costs are allocated to the reclaimed water system based on a weighted average of 8.28 percent annually. The projected operations and maintenance (O&M) costs for both the potable and reclaimed water systems are based on the Fiscal Year 2020/21 budget and include inflationary increases of two percent annually. The inflation factors are consistent with the General Fund’s financial planning. A cost allocation model is used to allocate various administrative and operational costs to the reclaimed water system. Also, included is an increase of 17 percent charged by Tucson Water for the wheeling of reclaimed water. This is a one -time increase in Fiscal Year 2021/22 and remains flat in the remaining projections fiscal years. Central Arizona Project (CAP) wheeling costs are fees charged by Tucson Water to wheel Oro Valley’s CAP water through their recharge and recovery system. The Intergovernmental Agreement with Tucson Water was renegotiated in Fiscal Year 2016/17. Costs are assumed to incre ase annually by four percent. The total annual delivery of 2,530 acre feet is projected in the five-year projection period. The operating costs for the delivery of CAP water through the NWRRDS project are estimated to begin in Fiscal Year 2023/24 through Fiscal Year 2025/26 for a total of $960,000. These costs are offset by a reduction in CAP wheeling charges from Tucson Water which are projected to decrease by approximately $760,000 when the NWRRDS becomes operational. - 14 - Central Arizona Project (CAP ) water recharge costs represent costs to take annual delivery of the Utility’s entire CAP water allotment of 10,305 acre feet. This water will be recharged and stored in various recharge facilities including the Tucson Water facilities. Costs to take delivery of and store the CAP water are based on the rate schedule adopted by the Central Arizona Project . The five -year projection period includes an increase of 20 percent in Fiscal Year 2022/23 for the projected Tier I shortage. Costs in later fiscal years will increase by 15 percent through the remaining five-year projection period. Projected capital outlay for existing system improvements in this analysis includes well rehabilitation, tank replacement, re -lining of reservoirs, booster station modifications, water main replacements, vehicles and water meters. These projects will be cash funded in the five -year projection period. The schedule for five -year capital improvements may be found in Appendix C. Debt service costs are relatively flat over the projection period. The existing debt service is declining as older debt is paid off while the proposed new debt increases the annual costs netting a flat annual cost. Expenses paid with GPF funds include the existing customers’ portion of the CAP water capital costs associated with ownership of the CAP water allotment. These costs increase annually based on projected rates developed by the Central Arizona Project. Debt service for the reclaimed water system is paid with GPF funds. Outstanding debt on the reclaimed water system will be paid in full by Fiscal Year 2029/30. This analysis includes an assumption that the Water Utility will borrow an additional $7 million in Fiscal Year 2022/23 for the NWRRDS project. Table 12 is a summary of expenses paid with GPF revenue that were used in this financial analysis : Table 12 - 15 - Water Resource and System Development Impact Fee Fund The Water Resource and Development Impact Fee Fund (WRSDIF) is used to account for development impact fees collected. Revenues are from impact fees collected at the time water meters are purchased and from interest income. Expenses include capital repayment obligation charges for the Town’s CAP allotment, CAP infrastructure and associated debt incurred to deliver CAP water to the Town to meet the demands of future growth. In addition, wells, pump stations, reservoirs and mains for the potable water system required to meet the demands of future growth will also be financed with these impact fees. The WRSDIF Fund is projected to have a cash balance of $16,596,255 at the beginning of FY 2021/22 and is projected to have $1,887,719 at the end of FY 2025/26. The revenue sources for the WRSDIF Fund are from impact fees collected when a water meter is purchased and from interest earned on cash balances. Interest income is projected to be a total of $432,306 for this analysis. The interest rate assumed for the projection period is 1.5 percent. The revenue forecast was based on new service units related to the number of new connections. A service unit is the equivalent of one single family residential (SFR) 5/8-inch water meter. The SFR service units are equal to the number of new connections. O ther service units are forecast based on pending development projects within the Town. Other service units include commercial, multi-family and irrigation uses with the number of service units depending on the estimated meter sizes for each project. In addition, the service units are forecasted based on historic trends and pending development projects within the Town. The impact fee for a SFR 5/8-inch water meter or one service unit is projected to be $6,387. It is assumed that the Development Impact Fees will remain constant throughout the five-year projection period. Table 13 below indicates the projected growth in service units and the revenue associated with that growth. These growth projections are consistent with the Town’s financial planning. Table 13 WRSDIF funds may be used for capital expe nses related to CAP water. Capital costs assessed by the Central Arizona Project for 3,000 acre feet of the Town’s CAP water allotment are included under operating expenses. Capital expenses during this projection period total $21,160,000 and include the design and construction of the NWRRDS project that will deliver additional CAP water to the Town. Funds may also be used for capital expenses related to potable water system improvements including wells, booster stations, reservoirs and water mains required to meet the demands of new growth. Capital projects are identified in the five - year capital improvement plan shown in Appendix C. Debt service for previously constructed growth-related facilities is also paid from impact fee revenue. - 16 - The annual expenses and debt service for the WRSDIF Fund are listed in Table 14 below. No new debt is proposed during this projection period. Table 14 - 17 - Proposed Financial Scenario Prior to developing forecasts, financial considerations were evaluated relating to projected operating costs, capital expenses, the Water Utility’s existing cash reserves, existing outstanding debt and debt service payments. When developing a proposed financial scenario, the goal of the Water Utility is to ensure all existing rate setting policies are met, cash reserves are utilized to minimize future debt and proposed rate increases do not result in rate shock. One of the rate setting policies included in the Mayor and Council Water Policies is for rate structures to be designed to encourage water conservation. The development of water conservation pricing, also known as a tiered commodity rate, began in 1999 when a second tier was added to the uniform or flat commodity rate. That structure evolved into four tiers by 2007. Over the last 12 years, the Utility has increased the tiered commodity rates to a level that encourages water conservation. This year, the proposed financial scenario includes modest increases to both the potable base and commodity rates and an increase to the reclaime d commodity rate. The chart below illustrates an overall decline in potable water deliveries over the past ten years even though the Water Utility experienced growth in the customer base. To stabilize revenue when water deliveries decline or fluctuate, it is necessary to increase fixed charge revenue which is revenue received from base rates. Fixed costs are costs incurred by the Water Utility that do not fluctuate based on the volume of wa ter delivered. These costs include, but are not limited to, billing related costs, regulatory expenses, personnel, debt service, insurance, fleet maintenance and administrative services paid to the Town’s General Fund. These costs are all incurred every ye ar regardless of the volume of water delivered. The Utility’s fixed costs projected for Fiscal Year 2021/22 total $10.7 million. Ideally, these costs would be paid by revenues received from the base rate revenue. Base rates charged to customers are the same every month regardless of the volume of water delivered. The existing base rates generate just under $5.6 17,500 18,000 18,500 19,000 19,500 20,000 20,500 21,000 1,000,000,000 1,200,000,000 1,400,000,000 1,600,000,000 1,800,000,000 2,000,000,000 2,200,000,000 2,400,000,000 2,600,000,000 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20 Service ConnectionsGallons DelvieredPotable Water Deliveries & Growth Water Deliveries Service Connections - 18 - million or 53 percent of the fixed costs. As a result, the Utility is dependent on water sales to generate the revenue needed to recover the remaining fixed costs as well as the variable costs . Variable costs are those costs incurred by the Utility that fluctuate based on the volume of water delivered. As deliveries increase or decrease, associated costs do the same. Variable costs include, but are not limited to, power for pumping, chemicals for disinfection, delivery of reclaimed water, CAP water wheeling costs and maintenance on plant facilities. The Utility’s variable costs projected for FY 2021/22 total $3.9 million. These costs are paid by revenues received from the variable charge revenue also known as commodity rate revenue. Commodity rates are charged on the volume of water delivered which varies from customer to customer and from month to month. The existing commodity rates generate $7.4 million. Funds in excess of the variable costs are used to help pay for fixed costs. The proposed commodity rate increases will generate revenue to pay for the fixed costs not recovered by the proposed base rate increase. Table 15 below illustrates how regional water providers , except Marana, have increased their base rates to compensate for the declines in water consumption as compared to the historical and the 2021 proposed rates for Oro Valley. Table 15 Table 16 illustrates Oro Valley’s proposed potable base and commodity rates per 1,000 gallons. Water rates of other water providers in the region are included for comparison purposes along with water resource fees that are similar to the Oro Valley Water U tility GPF. Table 16 - 19 - The Water Utility developed a proposed financial scenario that supports key financial and policy goals. The proposed scenario generates the revenue needed to maintain an adequate cash balance in all funds over the projected five-year period thus meeting the cash reserve requirements in each year . Additionally, the proposed scenario balances the use of both available cash and proposed new debt to finance capital projects. Under this proposed scenario, the fixed cost recovery is projected to increase from 53 percent to 55 percent by the end of Fiscal Year 2021/22. If all proposed rate increases are implemented as shown in the proposed financial scenario, fixed cost recovery will be approximately 61 percent by the end of Fiscal Year 2025/26. The financial projections for the Operating Fund and WRSDIF Fund were combined to evaluate the overall debt service coverage at the end of each fiscal year. Analysis indicates that, under the proposed 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 . The pro forma for the proposed financial scenario may be found in Appendix A. The assumptions used to develop the financial projections in the proposed financial scenario may be found in Appendix D. - 20 - Recommendation on Water Rates After reviewing the analysis of the two funds and their respective revenue requirements contained in the proposed financial scenario, the Water Utility Commission and Water Utility staff recommend the following for Fiscal Year 2021/22: A. Increase to the potable water monthly base rates B. Increase to the potable commodity rates C. Increase to the reclaimed commodity rate A. Tables 17 & 18 shown below are the proposed potable water base rates and commodity rates for each meter size. Approximately 87 percent of the Utility’s customers have a 5/8-inch water meter and consume an average of 7,000 gallons. These customers will see an increase in their bill of $1.15 per month. Table 1 7 Cost per month B. Table 1 8 Per 1,000 gallons - 21 - C. The reclaimed base rates will remain unchanged while the commodity rate is proposed to increase to $2.25 per 1,000 gallons from $2.15 per 1,000 gallons. This proposed rate increase is used for the five- year projection period. The average 18-hole golf course consumes 10,000,000 gallons per month and will see an increase in their bill of $1,000 per month. Direct comparison of specific base rates and commodity rates is not ideal for cost comparisons because of the varying rate structures of each utility. A more effective comparison is to calculate the cost for specific consumption levels for one month. Table 19 below provides a calculation of a monthly bill amount for a single-family residential customer with a 5/8-inch meter for the water utilities surrounding the Oro Valley Water Utility service area. Table 19 Proposed rates for all Oro Valley Water Utility meter sizes may be found in Appendix B. Tables that calculate monthly bills under the proposed rates may also be found in Appendix B. Monthly bill amounts are calculated in 1,000 gallon increments for the 5/8-inch meters and a variety of increments for larger meter sizes. - 22 - Conclusion On an annual basis, the water rates analysis is prepared with 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. It is important that the Water Utility perform a water rates analysis every year to plan for changes in operating costs, capital costs or debt service . This Water Rates Analysis Report is presented in support of the water rates contained in the proposed financial scenario. The Oro Valley Water Utility Commission and the Water Utility staff respectfully recommend approval of the water rates detailed in the proposed financial scenario. The Oro Valley Water Utility staff and Commission are dedicated to serving the Town of Oro Valley and the customers of its water utility and extend their appreciation to the Mayor and Council for consideration of the recommended water rates. APPENDIX A Proposed Financial Scenario Pro Forma A-1 Operating Fund A-2 Groundwater Preservation Fee A-3 Water Resource and System Development Impact Fee Fund A-4 Summary of All Funds Oro Valley Water Utility – Operating Fund A-1 Oro Valley Water Utility – Operating Fund Groundwater Preservation Fees A-2 Water Resource and System Development Impact Fee Fund A-3 Summary of All Funds A-4 Summary of All Funds A-5 APPENDIX B Rate Schedules & Tables for Bill Comparisons B-1 Proposed Water Rate Schedule B-2 Tables for Bill Comparisons by Meter Size – Potable B-8 Tables for Bill Comparisons by Meter Size – Reclaimed TABLE FOR MONTHLY CHARGES & PERCENT INCREASE COMPARISON RESIDENTIAL & IRRIGATION CUSTOMERS WITH A 5/8-INCH METER Tier Levels GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED BILL BILL INCREASE 0 18.26 - 18.26 18.99 - 18.99 0.73 4.0% 1,000 20.60 0.90 21.50 21.39 0.90 22.29 0.79 3.7% 2,000 22.94 1.80 24.74 23.79 1.80 25.59 0.85 3.4% 3,000 25.28 2.70 27.98 26.19 2.70 28.89 0.91 3.3% 4,000 27.62 3.60 31.22 28.59 3.60 32.19 0.97 3.1% 5,000 29.96 4.50 34.46 30.99 4.50 35.49 1.03 3.0% 6,000 32.30 5.40 37.70 33.39 5.40 38.79 1.09 2.9% 7,000 34.64 6.30 40.94 35.79 6.30 42.09 1.15 2.8% 8,000 37.89 7.20 45.09 39.14 7.20 46.34 1.25 2.8% 9,000 41.14 8.10 49.24 42.49 8.10 50.59 1.35 2.7% 10,000 44.39 9.00 53.39 45.84 9.00 54.84 1.45 2.7% 11,000 47.64 9.90 57.54 49.19 9.90 59.09 1.55 2.7% 12,000 50.89 10.80 61.69 52.54 10.80 63.34 1.65 2.7% 13,000 54.14 11.70 65.84 55.89 11.70 67.59 1.75 2.7% 14,000 57.39 12.60 69.99 59.24 12.60 71.84 1.85 2.6% 15,000 60.64 13.50 74.14 62.59 13.50 76.09 1.95 2.6% 16,000 63.89 14.40 78.29 65.94 14.40 80.34 2.05 2.6% 17,000 68.42 15.30 83.72 70.74 15.30 86.04 2.32 2.8% 18,000 72.95 16.20 89.15 75.54 16.20 91.74 2.59 2.9% 19,000 77.48 17.10 94.58 80.34 17.10 97.44 2.86 3.0% 20,000 82.01 18.00 100.01 85.14 18.00 103.14 3.13 3.1% 21,000 86.54 18.90 105.44 89.94 18.90 108.84 3.40 3.2% 22,000 91.07 19.80 110.87 94.74 19.80 114.54 3.67 3.3% 23,000 95.60 20.70 116.30 99.54 20.70 120.24 3.94 3.4% 24,000 100.13 21.60 121.73 104.34 21.60 125.94 4.21 3.5% 25,000 104.66 22.50 127.16 109.14 22.50 131.64 4.48 3.5% 26,000 109.19 23.40 132.59 113.94 23.40 137.34 4.75 3.6% 27,000 113.72 24.30 138.02 118.74 24.30 143.04 5.02 3.6% 28,000 118.25 25.20 143.45 123.54 25.20 148.74 5.29 3.7% 29,000 122.78 26.10 148.88 128.34 26.10 154.44 5.56 3.7% 30,000 127.31 27.00 154.31 133.14 27.00 160.14 5.83 3.8% 31,000 131.84 27.90 159.74 137.94 27.90 165.84 6.10 3.8% 32,000 136.37 28.80 165.17 142.74 28.80 171.54 6.37 3.9% 33,000 142.66 29.70 172.36 149.44 29.70 179.14 6.78 3.9% 34,000 148.95 30.60 179.55 156.14 30.60 186.74 7.19 4.0% 35,000 155.24 31.50 186.74 162.84 31.50 194.34 7.60 4.1% 36,000 161.53 32.40 193.93 169.54 32.40 201.94 8.01 4.1% 37,000 167.82 33.30 201.12 176.24 33.30 209.54 8.42 4.2% 38,000 174.11 34.20 208.31 182.94 34.20 217.14 8.83 4.2% 39,000 180.40 35.10 215.50 189.64 35.10 224.74 9.24 4.3% 40,000 186.69 36.00 222.69 196.34 36.00 232.34 9.65 4.3% 41,000 192.98 36.90 229.88 203.04 36.90 239.94 10.06 4.4% 42,000 199.27 37.80 237.07 209.74 37.80 247.54 10.47 4.4% 43,000 205.56 38.70 244.26 216.44 38.70 255.14 10.88 4.5% 44,000 211.85 39.60 251.45 223.14 39.60 262.74 11.29 4.5% 45,000 218.14 40.50 258.64 229.84 40.50 270.34 11.70 4.5% 46,000 224.43 41.40 265.83 236.54 41.40 277.94 12.11 4.6% 47,000 230.72 42.30 273.02 243.24 42.30 285.54 12.52 4.6% 48,000 237.01 43.20 280.21 249.94 43.20 293.14 12.93 4.6% 49,000 243.30 44.10 287.40 256.64 44.10 300.74 13.34 4.6% 50,000 249.59 45.00 294.59 263.34 45.00 308.34 13.75 4.7% B-2 TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR SF & MF RESIDENTIAL & IRRIGATION CUSTOMERS WITH A 3/4-INCH METER BASE RATE 28.48$ COMMODITY RATE: TIER 1 = 2.40$ FOR 0 - 10,000 GALLONS TIER 2 = 3.35$ FOR 10,001 - 24,000 GALLONS TIER 3 = 4.80$ FOR 24,001 - 48,000 GALLONS TIER 4 = 6.70$ FOR ALL USAGE OVER 48,000 GALLONS GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 27.38 - 27.38 28.48 - 28.48 1.10 4.0% 7,000 43.76 6.30 50.06 45.28 6.30 51.58 1.52 3.0% 11,000 54.03 9.90 63.93 55.83 9.90 65.73 1.80 2.8% 28,000 114.40 25.20 139.60 118.58 25.20 143.78 4.18 3.0% 50,000 217.58 45.00 262.58 227.98 45.00 272.98 10.40 4.0% TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR COMMERCIAL CUSTOMERS WITH A 3/4-INCH METER BASE RATE 28.48$ COMMODITY RATE: TIER 1 = 2.40$ FOR ALL WATER USAGE TIER 2 = N/A TIER 3 = N/A TIER 4 = N/A GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 27.38 - 27.38 28.48 - 28.48 1.10 4.0% 7,000 43.76 6.30 50.06 45.28 6.30 51.58 1.52 3.0% 11,000 53.12 9.90 63.02 54.88 9.90 64.78 1.76 2.8% 28,000 92.90 25.20 118.10 95.68 25.20 120.88 2.78 2.4% 50,000 144.38 45.00 189.38 148.48 45.00 193.48 4.10 2.2% TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR SF & MF RESIDENTIAL & IRRIGATION CUSTOMERS WITH A 1-INCH METER BASE RATE 47.46$ COMMODITY RATE: TIER 1 = 2.40$ FOR 0 - 17,000 GALLONS TIER 2 = 3.35$ FOR 17,001 - 40,000 GALLONS TIER 3 = 4.80$ FOR 40,001 - 80,000 GALLONS TIER 4 = 6.70$ FOR ALL USAGE OVER 80,000 GALLONS GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 45.63 - 45.63 47.46 - 47.46 1.83 4.0% 17,000 85.41 15.30 100.71 88.26 15.30 103.56 2.85 2.8% 27,000 117.91 24.30 142.21 121.76 24.30 146.06 3.85 2.7% 38,000 153.66 34.20 187.86 158.61 34.20 192.81 4.95 2.6% 50,000 205.46 45.00 250.46 213.31 45.00 258.31 7.85 3.1% B-3 TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR COMMERCIAL CUSTOMERS WITH A 1-INCH METER BASE RATE 47.46$ COMMODITY RATE: TIER 1 = 2.40$ FOR ALL WATER USAGE TIER 2 = N/A TIER 3 = N/A TIER 4 = N/A GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 45.63 - 45.63 47.46 - 47.46 1.83 4.0% 15,000 80.73 13.50 94.23 83.46 13.50 96.96 2.73 2.9% 27,000 108.81 24.30 133.11 112.26 24.30 136.56 3.45 2.6% 38,000 134.55 34.20 168.75 138.66 34.20 172.86 4.11 2.4% 50,000 162.63 45.00 207.63 167.46 45.00 212.46 4.83 2.3% TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR IRRIGATION CUSTOMERS WITH A 1.5-INCH METER BASE RATE 94.91$ COMMODITY RATE: TIER 1 = 2.40$ FOR 0 - 35,000 GALLONS TIER 2 = 3.35$ FOR 35,001 - 80,000 GALLONS TIER 3 = 4.80$ FOR 80,001 - 160,000 GALLONS TIER 4 = 6.70$ FOR ALL USAGE OVER 160,000 GALLONS GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 91.26 - 91.26 94.91 - 94.91 3.65 4.0% 38,000 182.91 34.20 217.11 188.96 34.20 223.16 6.05 2.8% 64,000 267.41 57.60 325.01 276.06 57.60 333.66 8.65 2.7% 90,000 364.71 81.00 445.71 377.66 81.00 458.66 12.95 2.9% 125,000 523.26 112.50 635.76 545.66 112.50 658.16 22.40 3.5% TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR COMMERCIAL & MULTIFAMILY CUSTOMERS WITH A 1.5-INCH METER BASE RATE 94.91$ COMMODITY RATE: TIER 1 = 2.40$ FOR ALL WATER USAGE TIER 2 = N/A TIER 3 = N/A TIER 4 = N/A GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 91.26 - 91.26 94.91 - 94.91 3.65 4.0% 30,000 161.46 27.00 188.46 166.91 27.00 193.91 5.45 2.9% 64,000 241.02 57.60 298.62 248.51 57.60 306.11 7.49 2.5% 90,000 301.86 81.00 382.86 310.91 81.00 391.91 9.05 2.4% 125,000 383.76 112.50 496.26 394.91 112.50 507.41 11.15 2.2% B-4 TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR IRRIGATION CUSTOMERS WITH A 2-INCH METER BASE RATE 151.87$ COMMODITY RATE: TIER 1 = 2.40$ FOR 0 - 56,000 GALLONS TIER 2 = 3.35$ FOR 56,001 - 128,000 GALLONS TIER 3 = 4.80$ FOR 128,001 - 256,000 GALLONS TIER 4 = 6.70$ FOR ALL USAGE OVER 256,000 GALLONS GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 146.03 - 146.03 151.87 - 151.87 5.84 4.0% 57,000 280.32 51.30 331.62 289.62 51.30 340.92 9.30 2.8% 130,000 520.13 117.00 637.13 537.07 117.00 654.07 16.94 2.7% 250,000 1,063.73 225.00 1,288.73 1,113.07 225.00 1,338.07 49.34 3.8% 325,000 1,524.92 292.50 1,817.42 1,604.17 292.50 1,896.67 79.25 4.4% TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR COMMERCIAL & MULTIFAMILY CUSTOMERS WITH A 2-INCH METER BASE RATE 151.87$ COMMODITY RATE: TIER 1 = 2.40$ FOR ALL WATER USAGE TIER 2 = N/A TIER 3 = N/A TIER 4 = N/A GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 146.03 - 146.03 151.87 - 151.87 5.84 4.0% 57,000 279.41 51.30 330.71 288.67 51.30 339.97 9.26 2.8% 128,000 445.55 115.20 560.75 459.07 115.20 574.27 13.52 2.4% 250,000 731.03 225.00 956.03 751.87 225.00 976.87 20.84 2.2% 325,000 906.53 292.50 1,199.03 931.87 292.50 1,224.37 25.34 2.1% TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR IRRIGATION CUSTOMERS WITH A 3-INCH METER BASE RATE 303.71$ COMMODITY RATE: TIER 1 = 2.40$ FOR 0 - 112,000 GALLONS TIER 2 = 3.35$ FOR 112,001 - 256,000 GALLONS TIER 3 = 4.80$ FOR 256,001 - 512,000 GALLONS TIER 4 = 6.70$ FOR ALL USAGE OVER 512,000 GALLONS GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 292.03 - 292.03 303.71 - 303.71 11.68 4.0% 50,000 409.03 45.00 454.03 423.71 45.00 468.71 14.68 3.2% 150,000 677.61 135.00 812.61 699.81 135.00 834.81 22.20 2.7% 300,000 1,221.43 270.00 1,491.43 1,266.11 270.00 1,536.11 44.68 3.0% 500,000 2,127.43 450.00 2,577.43 2,226.11 450.00 2,676.11 98.68 3.8% B-5 TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR COMMERCIAL & MULTIFAMILY CUSTOMERS WITH A 3-INCH METER BASE RATE 303.71$ COMMODITY RATE: TIER 1 = 2.40$ FOR ALL WATER USAGE TIER 2 = N/A TIER 3 = N/A TIER 4 = N/A GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 292.03 - 292.03 303.71 - 303.71 11.68 4.0% 50,000 409.03 45.00 454.03 423.71 45.00 468.71 14.68 3.2% 150,000 643.03 135.00 778.03 663.71 135.00 798.71 20.68 2.7% 300,000 994.03 270.00 1,264.03 1,023.71 270.00 1,293.71 29.68 2.3% 500,000 1,462.03 450.00 1,912.03 1,503.71 450.00 1,953.71 41.68 2.2% TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR IRRIGATION CUSTOMERS WITH A 4-INCH METER BASE RATE 474.56$ COMMODITY RATE: TIER 1 = 2.40$ FOR 0 - 175,000 GALLONS TIER 2 = 3.35$ FOR 175,001 - 400,000 GALLONS TIER 3 = 4.80$ FOR 400,001 - 800,000 GALLONS TIER 4 = 6.70$ FOR ALL USAGE OVER 800,000 GALLONS GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 456.31 - 456.31 474.56 - 474.56 18.25 4.0% 300,000 1,272.06 270.00 1,542.06 1,313.31 270.00 1,583.31 41.25 2.7% 550,000 2,276.56 495.00 2,771.56 2,368.31 495.00 2,863.31 91.75 3.3% 700,000 2,956.06 630.00 3,586.06 3,088.31 630.00 3,718.31 132.25 3.7% 850,000 3,723.56 765.00 4,488.56 3,903.31 765.00 4,668.31 179.75 4.0% TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR COMMERCIAL & MULTIFAMILY CUSTOMERS WITH A 4-INCH METER BASE RATE 474.56$ COMMODITY RATE: TIER 1 = 2.40$ FOR ALL WATER USAGE TIER 2 = N/A TIER 3 = N/A TIER 4 = N/A GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 456.31 - 456.31 474.56 - 474.56 18.25 4.0% 300,000 1,158.31 270.00 1,428.31 1,194.56 270.00 1,464.56 36.25 2.5% 550,000 1,743.31 495.00 2,238.31 1,794.56 495.00 2,289.56 51.25 2.3% 700,000 2,094.31 630.00 2,724.31 2,154.56 630.00 2,784.56 60.25 2.2% 850,000 2,445.31 765.00 3,210.31 2,514.56 765.00 3,279.56 69.25 2.2% B-6 TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR RESIDENTIAL & IRRIGATION CUSTOMERS WITH A 6-INCH METER BASE RATE 949.12$ COMMODITY RATE: TIER 1 = 2.40$ FOR 0 - 860,000 GALLONS TIER 2 = 3.35$ FOR 860,001 - 2,000,000 GALLONS TIER 3 = 4.80$ FOR 2,000,001 - 3,500,000 GALLONS TIER 4 = 6.70$ FOR ALL USAGE OVER 3,500,000 GALLONS GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 912.62 - 912.62 949.12 - 949.12 36.50 4.0% 425,000 1,907.12 382.50 2,289.62 1,969.12 382.50 2,351.62 62.00 2.7% 1,000,000 3,380.02 900.00 4,280.02 3,482.12 900.00 4,382.12 102.10 2.4% 1,500,000 5,005.02 1,350.00 6,355.02 5,157.12 1,350.00 6,507.12 152.10 2.4% 2,000,000 6,630.02 1,800.00 8,430.02 6,832.12 1,800.00 8,632.12 202.10 2.4% TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR COMMERCIAL & MULTIFAMILY CUSTOMERS WITH A 6-INCH METER BASE RATE 949.12$ COMMODITY RATE: TIER 1 = 2.40$ FOR ALL WATER USAGE TIER 2 = N/A TIER 3 = N/A TIER 4 = N/A GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 912.62 - 912.62 949.12 - 949.12 36.50 4.0% 425,000 1,907.12 382.50 2,289.62 1,969.12 382.50 2,351.62 62.00 2.7% 1,000,000 3,252.62 900.00 4,152.62 3,349.12 900.00 4,249.12 96.50 2.3% 1,500,000 4,422.62 1,350.00 5,772.62 4,549.12 1,350.00 5,899.12 126.50 2.2% 2,000,000 5,592.62 1,800.00 7,392.62 5,749.12 1,800.00 7,549.12 156.50 2.1% TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR CUSTOMERS WITH A 8-INCH METER BASE RATE 1,518.60$ COMMODITY RATE: TIER 1 = 2.40$ FOR 0 - 860,000 GALLONS TIER 2 = 3.35$ FOR 860,001 - 2,000,000 GALLONS TIER 3 = 4.80$ FOR 2,000,001 - 3,500,000 GALLONS TIER 4 = 6.70$ FOR ALL USAGE OVER 3,500,000 GALLONS GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 1,460.19 - 1,460.19 1,518.60 - 1,518.60 58.41 4.0% 425,000 2,454.69 382.50 2,837.19 2,538.60 382.50 2,921.10 83.91 3.0% 1,000,000 3,927.59 900.00 4,827.59 4,051.60 900.00 4,951.60 124.01 2.6% 1,500,000 5,552.59 1,350.00 6,902.59 5,726.60 1,350.00 7,076.60 174.01 2.5% 2,000,000 7,177.59 1,800.00 8,977.59 7,401.60 1,800.00 9,201.60 224.01 2.5% (There are no active 8-inch potable meters in the OVWU system) B-7 TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR COMMERCIAL AND MULTIFAMILY CUSTOMERS WITH A 8-INCH METER BASE RATE 1,518.60$ COMMODITY RATE: TIER 1 = 2.40$ FOR ALL WATER USAGE TIER 2 = N/A TIER 3 = N/A TIER 4 = N/A GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 1,460.19 - 1,460.19 1,518.60 - 1,518.60 58.41 4.0% 425,000 2,454.69 382.50 2,837.19 2,538.60 382.50 2,921.10 83.91 3.0% 1,000,000 3,800.19 900.00 4,700.19 3,918.60 900.00 4,818.60 118.41 2.5% 1,500,000 4,970.19 1,350.00 6,320.19 5,118.60 1,350.00 6,468.60 148.41 2.3% 2,000,000 6,140.19 1,800.00 7,940.19 6,318.60 1,800.00 8,118.60 178.41 2.2% (There are no active 8-inch potable meters in the OVWU system) TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR CUSTOMERS WITH A 1.5-INCH METER - RECLAIMED WATER USE BASE RATE 73.08$ COMMODITY RATE: TIER 1 = 2.25$ FOR ALL WATER USAGE TIER 2 = N/A TIER 3 =N/A TIER 4 = N/A GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 73.08 - 73.08 73.08 - 73.08 0.00 0.0% 50,000 180.58 23.50 204.08 185.58 23.50 209.08 5.00 2.5% 135,000 363.33 63.45 426.78 376.83 63.45 440.28 13.50 3.2% 200,000 503.08 94.00 597.08 523.08 94.00 617.08 20.00 3.3% 250,000 610.58 117.50 728.08 635.58 117.50 753.08 25.00 3.4% TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR CUSTOMERS WITH A 2-INCH METER - RECLAIMED WATER USE BASE RATE 116.94$ COMMODITY RATE: TIER 1 = 2.25$ FOR ALL WATER USAGE TIER 2 = N/A TIER 3 =N/A TIER 4 = N/A GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 116.94 - 116.94 116.94 - 116.94 0.00 0.0% 150,000 439.44 70.50 509.94 454.44 70.50 524.94 15.00 2.9% 240,000 632.94 112.80 745.74 656.94 112.80 769.74 24.00 3.2% 450,000 1,084.44 211.50 1,295.94 1,129.44 211.50 1,340.94 45.00 3.5% 600,000 1,406.94 282.00 1,688.94 1,466.94 282.00 1,748.94 60.00 3.6% B-8 TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR CUSTOMERS WITH A 3-INCH METER - RECLAIMED WATER USE BASE RATE 233.86$ COMMODITY RATE: TIER 1 = 2.25$ FOR ALL WATER USAGE TIER 2 = N/A TIER 3 =N/A TIER 4 = N/A GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 233.86 - 233.86 233.86 - 233.86 0.00 0.0% 20,000 276.86 9.40 286.26 278.86 9.40 288.26 2.00 0.7% 80,000 405.86 37.60 443.46 413.86 37.60 451.46 8.00 1.8% 100,000 448.86 47.00 495.86 458.86 47.00 505.86 10.00 2.0% 150,000 556.36 70.50 626.86 571.36 70.50 641.86 15.00 2.4% TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR CUSTOMERS WITH A 4-INCH METER - RECLAIMED WATER USE BASE RATE 365.41$ COMMODITY RATE: TIER 1 = 2.25$ FOR ALL WATER USAGE TIER 2 = N/A TIER 3 =N/A TIER 4 = N/A GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 365.41 - 365.41 365.41 - 365.41 0.00 0.0% 220,000 838.41 103.40 941.81 860.41 103.40 963.81 22.00 2.3% 300,000 1,010.41 141.00 1,151.41 1,040.41 141.00 1,181.41 30.00 2.6% 450,000 1,332.91 211.50 1,544.41 1,377.91 211.50 1,589.41 45.00 2.9% 600,000 1,655.41 282.00 1,937.41 1,715.41 282.00 1,997.41 60.00 3.1% TABLE FOR MONTHLY CHARGES AND PERCENT INCREASE COMPARISON FOR CUSTOMERS WITH A 6-INCH METER - RECLAIMED WATER USE BASE RATE 730.83$ COMMODITY RATE: TIER 1 = 2.25$ FOR ALL WATER USAGE TIER 2 = N/A TIER 3 =N/A TIER 4 = N/A GALLONS CURRENT CURRENT CURRENT PROPOSED PROPOSED PROPOSED TOTAL PERCENT USED IN WATER GPF MONTHLY WATER GPF MONTHLY MONTHLY INCREASED 1 MONTH BILL BILL INCREASE 0 730.83 - 730.83 730.83 - 730.83 0.00 0.0% 900,000 2,665.83 423.00 3,088.83 2,755.83 423.00 3,178.83 90.00 2.9% 5,000,000 11,480.83 2,350.00 13,830.83 11,980.83 2,350.00 14,330.83 500.00 3.6% 10,000,000 22,230.83 4,700.00 26,930.83 23,230.83 4,700.00 27,930.83 1,000.00 3.7% 15,000,000 32,980.83 7,050.00 40,030.83 34,480.83 7,050.00 41,530.83 1,500.00 3.7% 20,000,000 43,730.83 9,400.00 53,130.83 45,730.83 9,400.00 55,130.83 2,000.00 3.8% B-9 APPENDIX C 5-Year Capital Improvement Schedules C-1 Operating Fund C-2 Groundwater Preservation Fee C-3 Water Resource and System Development Impac t Fee Fund C-1 C-2 C-3 APPENDIX D Assumptions for Proposed Financial Scenario D-1 Operating Fund D-4 Water Resource and System Development Impact Fee Fund PROPOSED FINANCIAL SCENARIO ASSUMPTIONS FOR THE WATER UTILITY’S OPERATING FUND The Operating Fund is the primary fund for the Water Utility. The sources of revenue are water sales, service related charges and Groundwater Preservation Fees (GPF). Expenses for administration, operations, existing system improvements and debt service are accounted for i n this fund. Beginning Cash Balance The beginning cash balance is estimated based on budgeted revenues, expenses and known cost over runs for FY 2020 -21. Actual cash balances on the 6/30/20 balance sheet are added to budgeted revenues, less budgeted expe nses and known unbudgeted expenses. Cash Reserve Requirement Mayor and Town Council Water Policies require the Utility to maintain cash reserves in the Operating Fund of not less than 20% of the combined total of the annual budgeted amounts for personnel, O&M and debt service. This specifically excludes expenses for capital projects, depreciation, amortization and contingency. Growth Projections New Development growth projections for FY 2021 -22 through FY 2025-26 were based on data provided by the Town’s New Development Permitting Manager and were updated with information from the Town’s Finance Department to be consistent with the Town’s financial forecasting. Connections FY 21-22 FY 22-23 FY 23-24 FY 24-25 FY 25-26 Single Family Residential 328 290 215 145 145 Irrigation 4 4 4 4 4 Water Sales and Water Use Consumption Trends The average monthly water consumption for a residential customer with a 5/8 -inch water meter in 2019-20 was 7,200 gallons per month. To account for the overall average continued decline in water consumption, this analysis assumes 7,000 gallons per month. Projected reclaimed deliveries are based on 2019-20 data. Service Related Revenues Service related revenues are based on the proposed FY 2021-22 budget. Service related revenues include billing for sewer fees on behalf of Pima County Wastewater and t he Town’s Storm Water Department. Additionally, other service related revenues include: late fees, reconnect fees, new service establishment fees, backflow permitting fees, engineering plan review fees and construction inspection fees. Groundwater Preserv ation Fees (GPF) GPF revenues are based on the water consumption for FY 2019 -20. The GPF funds are dedicated to pay for water resources other than groundwater as it relates to debt service, capital costs, CAP delivery costs and water wheeling. Interest Income Interest rates are projected at 1.5% annually over the 5 -year pro forma. The projected interest rate was provided by the Town’s Finance Department. D-1 PROPOSED FINANCIAL SCENARIO ASSUMPTIONS FOR THE WATER UTILITY’S OPERATING FUND (continued) Personnel No new employees were added during the projection period. The following increases were provided by the Town’s Finance Department and are consistent with Town financial forecasting: the annual merit increase is projected to be 2% annually and health care costs are projected to increase by .50% annually. It is projected that the Arizona State Retirement System (ASRS) contribution is projected to increase 2% annually over the five -year projection period. Inflation Rates Inflation rates are projected at 2% annually over the 5-year pro -forma. The projected inflation rate was provided by the Town’s Finance Department. O&M Potable Expenses These expenses are based on the Water Utility’s proposed budget for FY 2020 -21 plus 2% inflation. O&M Northwest Recharge, Recovery & Delivery System (NWRRDS) Expenses - Potable This expense is based on the assumption that the NWRRDS project will begin p artial operations in FY 2023-24 with estimated costs in the first year of $160,000. In future years costs are estimated at $800,000. O&M CAP Wheeling Expenses - Potable This expense includes the fees charged by Tucson Water to wheel the Town’s CAP wate r through their recharge and recovery system in accordance with an IGA. The increases are projected to be 4% annually over the 5 -year pro forma . It is also assumed that the Utility will wheel 2,510 AF annually for the first 4 years. In FY 2025 -26 the NWRRDS system will be in operation; therefore, CAP wheeling can be reduced to 950 acre feet. O&M CAP Recharge Expenses - Potable This expense is based on the rate schedule adopted by CAP 6/4/20. The figures represent the annual expense to deliver the Utility’s entire allotment of CAP water (10,305 AF) for recharge. Fiscal Year 2023/24 in cludes increased costs due to the projected Tier 1 shortage. O&M Reclaimed Expenses Pursuant to the existing IGA, the reclaimed water is delivered at an interruptible rate. Fiscal Year 2021/22 includes Tucson Water’s 17% one-time rate adjustment due to the implementation of Tucson Water’s updated reclaimed cost allocation model. The Town delivers more reclaimed water than it is entitled to. To cover this shortfall a cost t o purchase additional reclaimed water from Tucson Water has been included annually. Additionally, the O&M expenses include allocations for personnel, administrative costs and fleet service costs. The reclaimed cost allocation model was used to allocate these costs using a variety of methodologies. O&M CAP Capital Expenses This expense is paid for from the GPF funds and is based on 7,305 AF per the rate schedule adopted by CAP 6/04/20. D -2 PROPOSED FINANCIAL SCENARIO ASSUMPTIONS FOR THE WATER UTILITY’S OPERATING FUND (continued) Capital Improvement Program (CIP) – Existing System Improvements The capital costs associated with the Existing System Improvements CIP are primarily to ensure continued water systems reliability and efficiency. These costs are determined as part of an annual review of the water system. The 5-year pro forma includes cash funding $1.25 million per year in capital costs for existing system improvements. Capital Improvement Program (CIP) – NWRRDS A portion of the capital costs associated with the NWRRDS CIP are paid for by GPF funds. The NWRRDS CAP delivery system will be capable of d elivering up to an additional 4,000 acre feet per year of CAP water into Oro Valley’s water service area. The 5 year pro forma is based on Engineering cost estimates. New debt of $7 million is included in the pro forma in FY 2022/23 for the NWRRDS project. Debt Service The following table identifies the existing debt service included in this pro forma: Bonds Type Description Amortization Schedule By 2008 Sr. Lien Reclaimed Ph. 2 WIFA 2009 Sr. Lien Existing System CIP WIFA 2012 Sr. Lien Refunding (Reclaim Ph. 1) Stone & Youngberg 2012 Sr. Lien Refunding (2003) Stone & Youngberg 2014 Sr. Lien AMI Project WIFA 2015 Excise Tax Refunding (2005) Stifel & Nicolaus & Co. 2017 Excise Tax Refunding (2007) Stifel & Nicolaus & Co. 2018 Excise Tax Existing System CIP Stifel & Nicolaus & Co. 2021 Sr. Lien Refunding Stifel & Nicolaus & co. Minimum Debt Service Coverage Requirement 1.30 debt service coverage ratio for 2012 Sr. Lien Bonds & all WIFA Loans D -3 PROPOSED FINANCIAL SCENARIO ASSUMPTIONS FOR THE WATER UTILITY’S WATER RESOURCE AND SYSTEM DEVELOPMENT IMPACT FEE (WRSDIF) FUND The WRSDIF fund accounts for development impact fees that are collected at the time a new water meter is purchased. This impact fee is intended to fund costs for water resources, the infrastructure to deliver those resources and any related debt includi ng CAP capital infrastructure repayment related to new development. Beginning Cash Balance Beginning cash balance is estimated based on budgeted revenues, expenses and known cost over runs for FY 2020 -21. Actual cash balances on the 6/30/20 balance sheet are added to budgeted revenues, less budgeted expenses. Growth Projections New Development growth proje ctions for FY 2021-22 through FY 2025-26 were based on data provided by the Town’s New Development Permitting Manager and were updated with information from the Town’s Finance Department to be consistent with the Town’s financial forecasting. Service Units FY 21-22 FY 22-23 FY 23-24 FY 24-25 FY 25-26 Single Family Residential SU’s 328 290 215 145 145 Other SU’s 10 10 10 10 10 WRSDIF Impact Fee Revenue The new impact fees will be $6,387 per service unit effective on July 1, 2021. Interest Income Interest rates are projected at 1.5% annually over the 5 -year pro forma. The projected interest rate was provided by the Town’s Finance Department. O&M CAP Capital Expenses This expense is based on 3,000 AF per the rate schedule adopted by CAP on 6/4/20. Capital Improvement Program (CIP) – NWRRDS A portion of the capital costs associated with the NWRRDS CIP are paid for by the WRSDIF Impact fees. The NWRRDS CAP delivery system will be capable of delivering up to an additional 4,000 acre feet per year of CAP water into Oro Valley’s water service area. The 5 year pro forma is based on Engineering cost estimates. Debt Service The following table identifies the existing debt service included in this pro forma: Bonds Type Description Amortization Schedule By 2012 Sr. Lien Refun ding (2003) Stone & Youngberg 2021 Sr. Lien Refunding Stifel & Nicolaus & co. Debt Service Coverage 1.30 debt service coverage ratio for 2012 & 2021 Sr. Lien Bonds D-4 APPENDIX E Development Impact Fee Schedule E-1 Water Resource and System Development Impact Fees