No matter approach, enterprise funds losing reserves, 2 panels told

Benicia Finance Director Karin Schnaider said Tuesday that Benicia City Council could take an aggressive but expensive approach to ending the backlog of postponed water and wastewater infrastructure repairs and preventive maintenance.

She said the Council also could choose to delay those measures, which could save money in the short run, but would risk greater expenses for expected equipment breakage and the higher costs of repairs instead of maintenance.

Or, Schnaider said, the Council could choose a middle-road approach, making some important repairs but delaying others.

However, no matter which way the Council decides, the water and wastewater funds will run out of reserves, she told a joint study session of the Council and Benicia Finance Committee.

City staff has been asked to consider other options and delve into more research, then return with additional information to guide the Council and Finance Committee in considering how the news would impact water and wastewater rates.

Schnaider and Public Works Director Graham Wadsworth presented a 10-year forecast for both the water and wastewater funds, which enterprise funds, meaning they aren’t supposed to use General Fund money. Instead, their revenues are expected to cover their expenses, just as a business is supposed to operate.

The city is in the middle of a five-year water and wastewater rate increase approved in 2012, though the wastewater increases will end in 2016 and water rate increases end in 2017. Both will stay flat after that, unless new rate increases are put in place.

In addition, Benicians are paying a drought surcharge that may end by March 2016, depending on when the drought ends and associated unexpected expenditures are recovered.

The 2015-17 water and wastewater budgets can’t fund preventive maintenance and capital improvements without dipping into reserves.

Part of the problem is the drought, Schnaider said. Benicians are conserving far more than city employees anticipated. Instead of the initial 20-percent or the state’s new mandate of 25-percent average, residents and business owners are saving in the vicinity of 40 percent.

Schnaider said some of that conservation won’t change even if El Niño refills the state’s reservoirs to the brim. That’s because many Benicians have replaced lawns with drought-tolerant plants, bought energy-efficient appliances and bathroom fixtures and adapted their washing machines so used water can be recaptured for irrigation.

The drought could end, and some residents may reduce some of their conservation practices, she acknowledged. But other changes are permanent.

Current conservation rates are good for dealing with the lack of water, Schnaider said, but mean that rate increases and the surcharge aren’t enough to produce sufficient water and wastewater revenues to cover operating expenses, debt repayment, maintenance, repairs and new-equipment purchases and still keep a reserve for unexpected needs.

In fact, with the water program, she said, revenues only cover operational costs and debt repayment.

She said among the expenses for Fiscal Year 2015-16 are $2,602,000 for personnel, $1,281,000 for purchased supplies, $812,000 for purchased services and $565,000 for utilities needed to operate the water treatment plant and delivery system. Stand-alone cost allocations are $1,212,000.

By Fiscal Year 2025-26, she said, those expenditures would be $2,979,000 for personnel, $1,665,000 for purchased supplies, $1,063,000 for purchased services and $878,000 for utilities. Cost allocations are $1,537,000.

“If the drought continues, it is assumed that $800,000 will be needed every five years (2018 and 2023) for the purchase of outside water supplies,” Schnaider and Wadsworth wrote in their presentation.

That, she told the Council and the Finance Committee, “is on the conservative level.” She said the city might consider setting money aside for water buys to avoid a dip into fund reserves.

The water system has two outstanding debts, a water revenue refunding bond issued in 2002 to refinance a 1997 bond, and the 2004 State Revolving Fund Loan for the water treatment plant. The refunding bond will be paid off in the next 10 years, and the loan should be paid off shortly afterward, Schnaider told the panels.

The city’s bond covenant requires the city’s water revenues to be 120 percent of operations, which Schnaider defined as “keeping the lights on.” Operating expenses in Fiscal Year 2016-17 are $6,573,000, and the water fund’s revenue coverage should be $7,844,000.

The 2015-17 two-year budget doesn’t have any funds designated for preventive maintenance, Schnaider said. “There is not enough money, even with the rate increase,” she said. Nor was any money earmarked for capital expenses — purchases of new equipment.

Wadsworth said employees developed three water fund models to demonstrate what is needed: optimal, which would underwrite the city’s entire water master plan but would require a significant boost in water rates; minimal, which would result in low rates but run the risk of expensive breaks and unexpected expenditures; and the middle-road, “achievable” approach.

That third scenario would let the city address the most critical needs but would defer those that weren’t expected to cause harm to the water treatment plant or the way Benicia delivers water to customers.

But all three approaches lead to revenue shortfalls, an average of 22 percent for the optimal approach, 17 percent for the middle-road approach and 14 percent for the minimal approach. In all three, shortfalls could be more than double the average, Schnaider and Wadsworth warned.

Reserves would run out by Fiscal Year 2017-18 under the optimal and the achievable strategies, they said. The depletion would be delayed another year under the minimal funding approach.

“There’s not enough money to keep the lights on,” Schnaider said, and current revenue projectons can fund only operations and debt repayment.

The wastewater fund will have one last 2-percent increase in July 2016, after which it plateaus unless increases are put in place, Schnaider said.

That fund has been affected less by the drought, she said, but staff has determined its reserves also are waning. As they did for the water fund, employees developed three scenarios for future planning for the wastewater fund, she said.

In the 10-year forecast, Fiscal Year 2015-16 expenditures for personnel is $2,551,000; purchased supplies, $635,000; purchased services, $1,016,000; utilities, $506,000; and cost allocations, $1,229,000. In 10 years those expenses are expected to be $2,919,000 for personnel, $828,000 for purchased supplies, $785,000 for utilities and $1,542,000 for cost allocations.

This fund has three outstanding debts: the 2005 Wastewater Refunding Revenue Bonds, the 1998 State Revolving Fund Loan for the Wastewater Treatment Plant, and the 2003 State Revolving Fund Loan for the inflow and infiltration project.

The loans will be paid off during the period of the 10-year forecast, Schnaider said.

She said that just as city employees did for the water fund, they developed optimal, achievable and minimal approaches for the wastewater fund, and found that revenue falls short in each. On average, because the optimal approach would be more aggressive about purchases, maintenance and repairs, the average shortfall would be 30 percent. The middle-road achievable shortfall would be 13 percent, and the minimal, less expensive but more risky tactic, would have a shortfall average of 4 percent.

The optimal approach would deplete reserves by Fiscal Year 2016-17; the achievable approach would see reserves disappear a year later. The minimal scenario keeps reserves around until Fiscal Year 2019-20. “It might be doable, but at a high risk,” Schnaider said of the latter approach.

Current revenue projections allow for preventive maintenance in addition to debt repayment and operational costs, but don’t include capital or reserves, she said.

Benicia needs safe, secure and reliable drinking water, Schnaider and Wadsworth said. The city has 150 miles of pipes, five storage tanks, three pressure zones, 9,800 water meters and 1,500 hydrants for drinking water.

The wastewater system has 9,000 sewer laterals, 150 miles of pipes, 23 pump stations, inflow and infiltration controls, odor control, disinfection, chlorine removal and the discharge into the Carquinez Strait.

“That’s a lot to take care of,” Wadsworth said. “All need to be maintained.” That’s because it’s less expensive to maintain than it is to fix, he explained.

In addition, Benicia must keep upgrading its nearly 80-year-old water and wastewater infrastructure, because state regulations keep getting tighter and sewage spills into the strait could be costly.

Because it deals with a different fund, the proposed water-reuse project that could recycle effluent doesn’t affect either of the enterprise funds, city staff members said.

While city staff is acknowledging Benicia may need to raise water rates, “I don’t like to come back each year with a ‘218,’” Schnaider said.

She was referring to California Proposition 218 and the procedure it establishes for notifying water and wastewater customers about potential rate increases. Those who object must inform the city during a specific time period, which is included in the notifications. Depending on the protests, the city may impose the increases. The matter doesn’t go to conventional election polls for the vote.

When the city last increased rates, in 2012, “We were coming out of a recession,” Councilmember Alan Schwartzman said, explaining that the Council didn’t want the increases to be a burden. He was among those who wanted to see what the optimal approaches would need in terms of new rate increases.

City Manager Brad Kilger concurred. “It’s important you have the information you need,” he said.

“I feel the same way,” Vice Mayor Mark Hughes said. “We need to make an informed decision.”

Mayor Elizabeth Patterson advocated for expanding the sources of water for the city, particularly since last year, the State Water Project that normally supplies Benicia with about 75 percent of its water only gave the city and its other contractors 5 percent of the water they purchased under their contracts.

Patterson also urged the city to update its water management plan.

City Treasurer Ken Paulk described some creative rainwater capture methods. While conceding they might not be employable because of California’s environmental regulations, he said the methods have been used to refill reservoirs elsewhere.

The matter of the water and wastewater rates will be part of an extended discussion that will continue into 2016, Wadsworth said.

Information about potential new rates will be presented Oct. 20, with a second meeting about rates taking place Dec. 1. Should the Council agree, a notice of intent of the Prop. 218 rate study would take place Dec. 15, with the last day to postmark the notice Dec. 18.

A public hearing of the Prop. 218 notice and first reading of the urgency ordinance would take place Feb. 2, 2016, and the second reading would be heard Feb. 16.

Should the new rates be imposed, the first utility bill with the new costs would be sent to customers March 1, 2106.