Water and Sewer system rate study
october 2008
TABLE OF CONTENTS
WATER RATE STUDY
Typical Year Budget
Water Sold
Debt Service Schedule
Debt Service Coverage
Utility Service Company, Inc.’s Contract
Capital Improvement Program
Deferred Maintenance Schedule
Cash Flow Analysis
Water Meter Deposit
Meter Setting Fee
Impact Charge
Required Reserve Funding
Water Loss
Water System for Fire Protection
Budget Practices
Recommended Water Rate
EXHIBITS
Exhibit A – Typical Year Forecast
Exhibit B – Water Sold Data
Exhibit C – Bond Payment Schedule
Exhibit D – Yearly Cost and Payment Amounts for Utility Service Co., Inc. Contract for Tank Maintenance
Exhibit E – Schedule of Work and Fees with Projected Future Renovations
Exhibit F – Capital Improvement Program (CIP)
Exhibit G – New Water Rate Determination
Exhibit H – Adoption of Financial Policies
Exhibit I – DNR Letter
Exhibit J – Insurance Services Office Letter
CITY OF
WATER SYSTEM RATE STUDY
The City of
The water system rate study provides the city with recommendations for a water rate to meet the following objectives:
· Revenues to meet annual operating and maintenance expense
· Revenues to meet annual principal and interest payments on existing revenue bonds
· Revenues to fund Capital Items and Deferred Maintenance
The report and accompanying forecast were prepared to provide the city council and staff with information regarding costs to provide service to customers and to develop a water rate that will not be used for any other purpose.
Some of the assumptions may not materialize and unanticipated events and circumstances may occur. The actual results achieved during the forecast period will vary and these variations may be material. Bartlett & West, Inc., as consultants, do not have responsibility to update the report for events and circumstances occurring after the date of the report.
TYPICAL YEAR BUDGET:
The Typical Year Budget (TYB) (Exhibit A) for the water rate analysis has been constructed. This budget documents how the new water revenue will support the assumed operation and maintenance expenses, debt service and reserves. Depending on how the actual revenues and expenses occur each year, the city will be able to assess the adequacy of the water rate to meet each future year’s financial obligations. The city will be provided an electronic copy of the typical year budget so that it can be used each fiscal year as a new budget is created for the water system operations. Each year’s budget for operation and maintenance expenses, debt service and reserves can be assessed so that adequate annual water revenues are being generated. If not, it is the desire of the city to use the tools provided in this water rate study to make smaller annual adjustments. The TYB for 2009 is highlighted by $270,450 in total water system revenues, $180,994 in operation and maintenance expenses, $56,000 in principal and interest payments and a net income of $33,456. Work sessions with the Mayor and Public Works Director on July 29th, August 7th, September 17th and September 30th provided a comprehensive and detailed analysis of historical revenues and expenses to project forward for the TYB. Additionally, an Executive Summary was provided the city council on September 8th to outline and discuss the work completed to date.
WATER SOLD:
Since the Water Sold (Exhibit B) is a critical element in the water rate determination, the historical water sold information has also been developed into an electronic spreadsheet for future updating by the city staff to determine what level of water sold is to be used in the water rate computation. The years 2005, 2006, 2007 and a partial year projection for 2008 was used to create the base line for the water sold amount to be used in the water rate determination. The amount of 29,000,000 gallons per year was used as the Water Sold for the water rate determination. The city should be on guard to continue to develop the water sold trend but recognize which years might be “dry years” and “wet years”.
DEBT SERVICE SCHEDULE:
An electronic Debt Service Schedule (Exhibit C) has also been created so that the city can refer to it each year to insert each year’s principal and interest payments into the TYB. This bond issue has approximately $575,000 of principal still due with a maturity date of April, 2021. The debt service schedule was taken directly from the bond ordinance. The amount of debt service varies each year with the remaining maturity schedule showing a low of approximately $57,435 in 2008 and a high of approximately $64,087.50 in 2017.
DEBT SERVICE COVERAGE:
The Bond Ordinance requires that the City maintain a minimum 110% coverage of principal and interest on the bonds. The Typical Year Budget for 2009 will generate a debt service coverage of approximately 160%. Please note that the bond ordinance language for the debt service coverage, allows the city to use the other water system revenues in addition to the water revenue produced by the water rate in the computation. The debt service coverage can be calculated by taking net income in the TYB and dividing it by the total amount of principal and interest for the year. The calculation is shown on the TYB at the bottom of the page and is shown as (A-B)/C.
UTILITY SERVICE COMPANY, INC.’S CONTRACT:
An electronic “Yearly Cost and Payment Amounts” (Exhibit D) for the Tank Maintenance Contract (Exhibit E) with Utility Service Company, Inc. has been created for the city’s use in budgeting the annual payment (10 years) for this service. Since the payments vary each year, the schedule shows a running balance of available funds to make the payment or the short fall that must be made up from the higher annual payments (Years 3, 4, 5) but will be restored in future years based on the budgeted payment to this account. This annual amount is a budget amount in the TYB. This cost represents approximately $0.85 per 1,000 gallons in the new water rate.
CAPITAL IMPROVEMENT PROGRAM:
A five year Capital Improvement Program (CIP) (Exhibit F) has been developed for the city’s use in making future additions to the water system. The projects listed in the CIP are some of the projects from the city’s recently completed 2007 Master Plan with a DNR Supervised Program. The CIP incorporates funding from the city’s available bonding capacity of $571,200 from the November 7, 2000 bond election. The bond election was held for $1,000,000 of Waterworks Revenue bonds. In 2001, the city issued $765,000 of the bonds with a balance of $235,000, however, $336,200 of the $765,000 was used to refund prior bonds and does not count as new bonds being issued. The refunded bonds were authorized from a prior election. The balance ($235,000) plus the refunding amount of $336,200 adds up to the $571,200 available bonding capacity. If the city implements the CIP as projected, the Cash Flow Analysis will require that the city issue at least $295,900 of new bonds of the available $571,200 bonding capacity. This will leave a balance of $275,300 for other future projects. The timing and amount for the issuance of these new bonds will take additional planning by the city staff and council. An additional water rate increase of $0.90 per 1,000 gallons would be required to finance a bond issue of $295,300 for 20 years at an interest rate of 5% as shown in Exhibit F. This is in addition to the proposed new water rate. It is important to note that the CIP will need to be updated each year to account for actual expenditures or projects that may change priority from year to year.
DEFERRED MAINTENANCE SCHEDULE:
Additionally, a running five year Deferred Maintenance Schedule (DMS) has been developed for the city’s need to accumulate funds for the tank maintenance program and the replacement of a pump/motor for the city’s water supply wells. This schedule will meet the financial requirements for the recent Utility Service Company, Inc.’s contract (10 yrs). Additionally, funds will be available to be placed in a reserve account for pump/motor replacement for the water supply wells based on a 8 year cycle. An additional $1,500 per year has been budgeted for contingency in the DMS.
CASH FLOW ANALYSIS:
A Cash Flow Analysis (Exhibit F) schedule has been provided to demonstrate how the revenues/expenses flow “in and out” to meet the assumptions of the CIP and Deferred Maintenance Schedule. This will be new for the city and will need to be followed closely each year. The “In” flows are the budgeted amount for the Utility Service Company, Inc.’s Annual Contract ($24,529), CIP transfer from the “net” of the TYB ($33,000 first year), $28,000 as required in Ordinance No. 2002-17 and the portion of the new bond issue such as $50,900 for the first year (2009). The “Out” flows are the total budgeted amount from the CIP such as $107,500 for the first year (2009) and the total Deferred Maintenance amount such as $28,029 for the first year (2009).
WATER METER DEPOSIT:
The Water Meter Deposit Ordinance No. 2007-02 was evaluated to identify if the current deposits for residential and commercial users was adequate. After examining the accounts receivable and the time of collection, it was determined that the current water meter deposit is adequate.
METER SETTING FEE:
There is no recommended change to the Meter Setting Ordinance No. 2003-18 which is based on actual cost.
IMPACT CHARGE:
The Impact Charges in Ordinance No. 2002-17 were reviewed and discussions were held with the city staff. The updating of the Impact Charge reflected a 5% percent change each year since it was adopted as well as an adjustment based on cost increases of all the components that comprise the water system. It is recommended that the $500 Impact Charge be increased to $750 and each meter size increase be proportionally increased as the current schedule allows. The “Charges” in the City’s Appendix B in Ordinance No. 2002-17 would change to the following: ¾ inch - $750; 1 inch – $1,250; 1 ½ inch - $2,500; 2 inch - $4,000; 3 inch - $8,750 and 4 inch - $16,250.
REQUIRED RESERVE FUNDING:
As of September 1, 2008, the required reserve funds for the existing Water System Revenue Bond Ordinance are fully funded. The Debt Service Reserve Account is fully funded at the $60,000 level and if used must be replenished at a rate of $400 per month. The Depreciation Reserve Account is fully funded at the $23,500 level and if used must be replenished at a rate of $250 per month. All other water system funds flow to the Surplus Account. The Bond Ordinance does not prescribe any determined level for the Surplus Account and has accumulated funds near the $400,000 level. The new water rate schedule will allow the city to place $28,000 per year in reserves to meet the requirements of Ordinance No. 2002-17, Section 6 for the use of replacing components of, or improving, the water system. The use of the $28,000 is shown in the Cash Flow Analysis as a line item “In” (Exhibit F). The $28,000 replacement component equates to $0.97 per 1,000 gallons in the new water rate. As the City’s water system continues to grow, it is recommended that the city evaluate the adequacy of the current level of $28,000 as a replacement component of the water rate schedule.
WATER LOSS:
The city should continue to take steps to reduce the water system’s “water loss”. The water loss is attributable to different functions of operating a water system such as flushing water lines for maintenance purposes and the water used in the filling, flushing of new water lines and possibly water provided to the fire department. The cost to the city for the water loss factor is mainly all the cost in pumping the water which does not have a significant impact on the water system finances. If water loss is not maintained at low levels, it will impact the available capacity of the water supply wells for future water sales resulting from new developments and adding new customers along the existing water lines. With the current water loss being reported in a range of 30%, the city can achieve savings in operation and maintenance costs through less pumping. This will prolong the life of the pump and motor as well as provide more available capacity for future growth.
WATER SYSTEM FOR FIRE PROTECTION:
It is recommended that the City continue to collaborate with the Gravois Fire Protection District regarding the influence the city’s water system has on the ISO (Insurance Service Organization) rating. The current classification is a Class 7/10. The ISO conducts a Public Protection Classification survey that is used by local insurers for underwriting and calculating premiums for residential, commercial and industrial properties. The latest report is dated November 4, 2005 and is enclosed as Exhibit J.
BUDGET PRACTICES:
An article is enclosed as Exhibit H from the Government Finance Officers Association (GFOA) of recommended budget practices. The framework is organized around the four principles of the budget process: (1) Establish broad goals to guide government decision making, (2) Develop approaches to achieve goals, (3) Develop a budget consistent with approaches to achieve goals, and (4) Evaluate performance and make adjustments.
RECOMMENDED WATER RATE:
The recommended Water Rate (Exhibit G) as a result of the study is $8.50 per 1,000 gallons (31% increase) to be adopted for the city’s next fiscal year starting January 1, 2009. The actual effective date of the water rate change will need to be coordinated with the actual billing cycle and the meter reading dates. This will be a revision to Ordinance No. 2002-17. The city does not have any outstanding debt with Rural Development or DNR and no further approvals are necessary from them. It is recommended through the use of the new financial spreadsheets that the city evaluate the adequacy of the water rate each year during the budget session for the water system operations. Please be reminded that the issuance of any new Water Revenue Bonds will require an additional increase in the water rate. As reported in the CIP section for a bond issue of $295,900, the water rate will need to be increased $0.90 per 1,000 gallons to cover principal and interest payments as well as a 10% reserve.
The work sessions were very meaningful to develop the best understanding of the financial operations of the water system. As the city moves forward to implement the water rate change, the council and city staff will be in the best position to explain the process used as well as explain how the water rate was developed. The city should be commended upon taking the necessary steps to assure that the water system will provide the best service to its customers, meet all financial obligations to their bond holders, and have funds available to meet future emergencies should they occur.
We appreciate the opportunity to serve you.
Sincerely,
John T. Conway, PE
Exhibits A through J ..................Click Here for Exhibits
TABLE OF CONTENTS
SEWER RATE STUDY
Typical Year Budget
Water Sold
Debt Service Schedule
Debt Service Coverage
Available Bonding Capacity
Sewer Security Deposit
Impact Charge
Required Reserve Funding
Additional Recommendations
Recommended Sewer Rate
EXHIBITS
Exhibit A – Typical Year Forecast
Exhibit B – Water Sold Data
Exhibit C – Bond Payment Schedule – Series A and Series B
Exhibit D – State Revolving Fund – Bond Repayment Schedule
Exhibit E – Appendix A – Sewer Rate Analysis
CITY OF
SEWER SYSTEM RATE STUDY
The City of
The sewer system rate study provides the city with recommendations for a sewer rate to meet the following objectives:
· Revenues to meet annual operating and maintenance expense
· Revenues to meet annual principal and interest payments on existing revenue bonds
· Revenues to fund Capital Items and Deferred Maintenance
The report and accompanying forecast were prepared to provide the city council and staff with information regarding costs to provide service to customers and to develop a sewer rate and will not be used for any other purpose.
Some of the assumptions may not materialize and unanticipated events and circumstances may occur. The actual results achieved during the forecast period will vary and these variations may be material. Bartlett & West, Inc., as consultants, do not have responsibility to update the report for events and circumstances occurring after the date of the report.
TYPICAL YEAR BUDGET:
The Typical Year Budget (TYB) (Exhibit A) for the sewer rate analysis has been constructed. This budget documents how the new sewer revenue will support the assumed operation and maintenance expenses, debt service and reserves. Depending on the how the actual revenues and expenses occur each year, the city will be able to assess the adequacy of the sewer rate to meet each future year’s financial obligations. The city will be provided an electronic copy of the typical year budget so that it can be used each fiscal year as a new budget is created for the sewer system operations. Each year’s budget for operation and maintenance expenses, debt service and reserves can be assessed that adequate annual sewer revenues are being generated. If not, it is the desire of the city to use the tools provided in this sewer rate study to make smaller annual adjustments. The TYB for 2009 is highlighted by $246,880 in total sewer system revenues, $229,000 in operation and maintenance expenses and a net income of $16,100.
The TYB for the sewer system has been expanded to include the sales tax revenue and how the proceeds will be used. The sales tax is designated to pay the following obligations: fund the Replacement Account, pay the principal and interest payments on the SRF loan and the principal and interest payments on the RD, USDA Series A and Series B bonds. Based upon a typical sales tax revenue of $217,000 per year, the City would realize a net income of $10,130 per year after payment of the above described bond obligations.
Work sessions with the Mayor and Public Works Director on July 29th, August 7th, September 17th and September 30th provided a comprehensive and detailed analysis of historical revenues and expenses to project forward for the TYB. Additionally, an Executive Summary was provided the city council on September 8th to outline and discuss the work completed to date.
WATER SOLD:
Since the Water Sold (Exhibit B) is a critical element in the sewer rate determination, the historical water sold information has also been developed into an electronic spreadsheet for future updating by the city staff to determine what level of water sold is to be used in the sewer rate computation. The years 2006, 2007 and a partial year projection for 2008 was used to create the base line for the water sold amount to be used in the sewer rate determination. The amount of 34,000,000 gallons per year was used as the Water Sold for the sewer rate determination. The Water Sold computation has been adjusted for the temporary sewer sales to the Gravois Sewer District. The annual water sold amount of 36,000,000 gallons was adjusted down to 34,000,000 gallons as per the city records. The city should continue to develop the water sold trend but be on guard to recognize which years might be “dry years” and “wet years”.
DEBT SERVICE SCHEDULE:
An electronic Debt Service Schedule (Exhibit C) has also been created so that the city can refer to it each year to insert each year’s principal and interest payments into the TYB. The first bond issue is held by Rural Development, USDA and has two bonds referred to as $2,125,000 Series A and $48,100 Series B. Fixed monthly payments are made on each bond issue that total $10,639 per month ($127,668 per year).
The second bond issue is held by the State of
DEBT SERVICE COVERAGE:
The Bond Ordinance requires that the City maintain a minimum 110% coverage of principal and interest on the bonds. The Typical Year Budget for 2009 will generate a debt service coverage of approximately 125%. Please note that the bond ordinance language for the debt service coverage, allows the city to use the other sewer system revenues in addition to the sewer revenue produced by the sewer rate in the computation. The debt service coverage can be calculated by taking net income in the TYB and dividing it by the total amount of principal and interest for the year. For the sewer system, the debt service coverage computation includes the net income from the sewer operations as well as the net income from the sales tax implementation.
AVAILABLE BONDING CAPACITY:
There is no available bonding capacity for the sewer system. Any new bond issuance would require another bond election.
SEWER SECURITY DEPOSIT:
The Sewer Security Deposit Ordinance No. 2007-03 was evaluated to identify if the current deposits for residential and commercial users were adequate. After examining the accounts receivable and the time of collection, it was determined that the current sewer security deposit is adequate.
IMPACT CHARGE:
The Impact Charges in Ordinance No. 2002-11 were reviewed and discussions were made with the city staff. The updating of the Impact Charge reflected a 5% percent change each year since it was adopted as well as an adjustment based on cost increases of all the components that comprise the sewer system. It is recommended that the $500 Impact Charge be increased to $750 and each meter size increase be proportionally increased as the current schedule allows. The “Charges” in the City’s Appendix C in Ordinance No. 2002-17 would change to the following: ¾ inch - $750; 1 inch – $1,250; 1 ½ inch - $2,500; 2 inch - $4,000; 3 inch - $8,750 and 4 inch - $16,250.
REQUIRED RESERVE FUNDING:
The required reserve requirements for the sewer system are a little more complex than for the water system. The required reserve requirements are broken down into the following categories:
1) The required reserve requirements for the DNR SRF Direct Loan created a Debt Service Reserve. The Debt Service Reserve was prefunded as a part of the original bond issue in the amount of $82,690 and remains fully funded. For this bond issue, there is no Depreciation Reserve Account “amount” similar to the other city bond issues. However, the bond ordinance refers to the city’s adoption of a Sewer Rate Ordinance (Ordinance No. 2002-11) and the creation with funding of a Replacement Account.
2) The bond issues held by Rural Development have reserve requirements. The city must fund a Debt Service Reserve at a rate of $12,780 per year until the required level of $127,780 is reached. Additionally, the city must fund a Depreciation Reserve Account at a rate of $12,780 per year once the Debt Service Reserve fund is full and continues until the bond issue is retired. Any additional funds available after funding these accounts, flow to the Surplus Account which does not have any required minimum or maximum level.
3) The city’s “Sewer Rate Schedule Ordinance” (Ordinance No. 2002-11) requires the deposit of $31,000 per year into an account set up specifically for the use of replacing components of, or improving, the sewer system. This schedule is Appendix B to the ordinance. Appendix B of the ordinance is still applicable to the financial operation of the sewer system and should continue to be used. Please note that the sales tax revenue will now be funding this replacement account rather than from sewer revenue.
The city needs to be sure that the designated invested funds for each of the reserve accounts is appropriately identified.
ADDITIONAL RECOMMENDATIONS FOR THE SEWER SYSTEM OPERATIONS:
1. Not all the lift stations have remote terminal units for the radio telemetry system. The city has consistently added at least one new unit per year. It is recommended that the city maintain this routine and if funds allow to accelerate the schedule.
2. The sewer department has been able to paint the basins at least 3 times with their own staff and should continue with this practice
3. The filter change out at the wastewater treatment plant should be scheduled as the staff determines.
4. The bulb replacement for the UV is nearing consideration given the time that the wastewater treatment plant has been on line.
5. The sewer department should continue with the smoke testing as time and staff will permit.
6. A future consideration for the sewer system is the need to provide new overflow basin for stormwater as well as a dewatering system for the sludge.
7. The city should consider the development of a Master Plan for the sewer system similar to the Master Plan for the water system.
RECOMMENDED SEWER RATE:
As a part of the DNR requirements to receive financing from them, the city was required to develop a Sewer Rate Schedule Ordinance. This study has followed the existing format of that ordinance so that the city will maintain compliance with DNR requirements. Also, when the revised ordinance is submitted to them for approval, it will be easier for DNR to follow the existing format of what was originally approved. The recommended Sewer Rate as a result of the study is $7.26 per 1,000 gallons (37% increase) to be adopted for the city’s next fiscal year starting January 1, 2009. This will be a revision to Ordinance No. 2002-11. With the city having outstanding debt with Rural Development and DNR, the city is required to submit the documentation for the sewer rate change to Rural Development and DNR. Their written approval is required before the new sewer rate can be implemented.
The work sessions were very meaningful to develop the best understanding of the financial operations of the water system. As the city moves forward to implement the water rate change, the council and city staff will be in the best position to explain the process used as well as explain how the water rate was developed. The city should be commended upon taking the necessary steps to assure that the water system will provide the best service to its customers, meet all financial obligations to their bond holders, and have funds available to meet future emergencies should they occur.
We appreciate the opportunity to serve you.
Sincerely,
John T. Conway, PE
Exhibits A through E ..............Click Here to review Exibits
