Town of Hillsborough - Sewer Service Rate Study

HF&H Consultants, LLC

Town of HillsboroughSewer Service Rate Study

Financial Advisory Committee MeetingFebruary 25, 2021

Town of Hillsborough Sewer Service Rate Study

Financial Advisory Committee Meeting February 25, 2021

HF&H Consultants, LLC 1 Preliminary – Subject to Revision

Agenda

• Introductions• Purpose of the Meeting• Background• Rate Study Process• Preliminary Findings & Recommendations• Questions & Discussion




Purpose of the Meeting

• Inform committee members of the rate study process and status

• Present preliminary analysis to facilitate brainstorming

• Elicit input from committee members




BACKGROUND




Where Have We Been?• Sewer rates last studied in 2015

– Resulted in annual rate increases of 10%, 10%, 10%, 7%, 7%– Last of the five annual rate increases was effective July 2020– Current charge = $3,543 per year

• Town was under a Cease and Desist Order which mandated the Town to develop a plan to reduce public sewer overflows

• Additional revenue was used to annually fund $3.5 million per year, focusing on the following:

– Reducing inflow and infiltration through pipeline replacement projects– Smoke testing– Assisting residents repair private laterals– Preventing excess storm water from entering the sewer system

• Capital upgrades were successful; reducing overflows from an average of 38 per year in 2012 to less than an average of 12 per year since 2019




Where Are We Going?

The Public Works Department continues to follow the Sanitary Sewer Master Plan by reducing I&I by pipe replacement projects and working with homeowners with deficient laterals

– We are replacing up to 2 miles per year under our pipe replacement program and will have completed 6 miles of new main replacement over the past 4 years.

– Deficient laterals are being replaced: as a condition of sale, during our main line projects, and during smoke testing projects.

– This year’s smoke testing project and pipeline replacement targeted the south basin which flows directly into the San Mateo Wastewater Treatment Plant.

Project Description 2021-22 2022-23 2023-24 2024-25 2025-26 5-Year Total1 Smoke Testing & Video Inspections Priority Basins $160,000 $160,000 $160,000 $160,000 $160,000 $800,0002 Priority Basins I&I Rehabilitation Program $2,800,000 $2,800,000 $2,800,000 $2,800,000 $2,800,000 $14,000,0003 Flow Metering/Modeling $180,000 $0 $0 $180,000 $180,000 $540,0004 Crystal Springs Flow Meter $0 $100,000 $0 $0 $0 $100,0005 Miscellaneous Sewer System Repairs $150,000 $150,000 $150,000 $150,000 $150,000 $750,0006 Sewer Lift Station Improvements $700,000 $1,050,000 $0 $0 $0 $1,750,0007 CCTV Inspection/Root Removal $285,000 $0 $285,000 $0 $285,000 $855,0008 Subtotal $4,275,000 $4,260,000 $3,395,000 $3,290,000 $3,575,000 $18,795,0009 ENR CCI adjust. (1% annually) 1.01 1.02 1.03 1.04 1.05

10 Total $4,317,750 $4,345,626 $3,497,872 $3,423,587 $3,757,361 $19,342,19611 Average $3,868,439




Treatment Plant Upgrades

A. Payment & Financing = Towns share $32.8M to $48M (previously $57.8M to $70.0M) Present Value

San Mateo issued bonds in 2019 WIFIA (Federal Financing) ~35% savings

over 30 years Total Project cost = $921 M




RATE STUDY PROCESS




Rate Study Process/Timeline• November 2020 – Town issued a Request for Proposal (RFP) to conduct a sewer

service rate study• December 2020 – HF&H met with Town staff to discuss project objectives,

methodology, and timeline• January 2021 – Preliminary analysis completed; HF&H and Town staff met

periodically to discuss analysis, results, and rate increase scenarios• February 25, 2021 – Financial Advisory Committee; Present preliminary results and

solicit feedback• March 8, 2021 – Council Meeting; Present preliminary results and gain feedback• March 22, 2021 – Council Meeting; Present results; Staff requests authorization to

mail Proposition 218 notices indicating proposed rate increases through FY 2025-26 • ~March 26, 2021 – Mail Proposition 218 notices to rate payers• June 14, 2021– Council Meeting; Protest hearing held; Council may adopt rates if

protest is not successful (i.e., less than majority of ratepayers protest the increase); First reading of the ordinance

• July 12, 2021 – Council Meeting; Second reading of the Ordinance• July 26, 2021 – Council adopts sewer service charges for County tax roll FY 2021-22




PRELIMINARY FINDINGS AND RECOMMENDATIONS




Key Issues Impacting Sewer Rates• Generally, annual operating costs are increasing at the rate

of inflation; No additional headcount is anticipated• Significant capital spending necessary to replace the

pipeline and improve infiltration and inflow into the sewer system

• Uncertain costs of treatment at San Mateo Clean Water Program – Treatment Plan Upgrade and Expansion

– Staff has recently reached a tentative agreement with the County, the City of San Mateo and the adjoining Sewer District on terms for the cost of the San Mateo plant cover any non-financial points

– The Town’s share will be based on flow with a “look back” to verify flow over a 5- to 10-year period. The projected cost is $48M over a 30-year period, with payments of ~$2.4M for 10 years and ~$1.2M for 20 years




Revenue Requirement – What are Rates Paying For?

• Wastewater treatment costs are expected to double with the needed improvements at the San Mateo Treatment Plant

• Collection system improvements remaining steady at ~$3.9 million per year

• Current Rate = $3,543 per Equivalent Dwelling Unit per year




Target Reserves For Rate Setting

• Debt Reserve: Typically required when debt-financing capital projects– Equal to one year’s debt service payment on SRF & $375k on COPs

($756,838)

• Operating Reserve: Provides working capital for month-to-month Operating & Maintenance costs (O&M; e.g., salaries, benefits, supplies) as well as reserve for contingencies such as natural disaster

– Typically set in relation to billing frequency; accounts for the lag between when costs are incurred and when revenue is received

– Town bills sewer charges on the County tax roll and receives revenue primarily only twice a year: December and April

– Current Town policy: 20% of annual O&M Costs and Debt Service Payments

– Common industry practice for rate setting: 6 – 9 months (50% – 75%) of annual O&M Costs




Target Reserves For Rate Setting

• Capital Reserve: Provides working capital for paying contractors without delays caused by cash flow limitations

– Town has no official capital improvement reserve policy– Common industry practice for rate setting: Average annual capital

expenditures over the five-year planning period (~$3.8M)




Strategies Considered For Bridging the Revenue Shortfall

1. Increase Rates – “High” increases may be undesirable coming off recent increases

2. Use Reserves – Short-term fix; Funds quickly depleted without rate increases 3. Combination of #1 & #2 – Maintain an “adequate” reserve balance




Bridging the Revenue Shortfall - Proposed• 4% Annual increases

($12 - $14 per month)

• Use reserves for next couple of years to reduce the necessary rate increases; Replenish reserves back to target levels by FY 2025-26

• If Treatment Plant upgrade costs are less, increases can be less; Town’s proportionate share of costs still being analyzed




Bridging the Revenue Shortfall – Alternative • Reduce Target

Reserve Fund Balance to ~$7.0M based on current Town policy

• 3% annual increases ($9 - $10 per month)

• If Treatment Plant upgrade costs are less, increases can be less; Town’s proportionate share of costs still being analyzed




SummaryThe proposed rates are needed to keep revenues aligned with long-term funding needs, including:• Fund $19.3 million in collection system capital improvements to reduce

sewer overflows, assist residents with private lateral repairs, and prevent excess stormwater from entering the sewer system which leads to unnecessary treatment costs of rainwater;

• Fund the Town’s proportionate share (~$48 million over a 30-year period) of a $1 billion upgrade at the San Mateo treatment plant to replace aging infrastructure, meeting current and future regulatory requirements and reduce wet-weather overflows.

• Maintain adequate operating and capital reserves, which will enable the Town to retain its high credit rating thereby minimizing cost of debt.

• Fund inflationary increases in existing staff and collection system operating and maintenance costs. Not staffing increases necessary.




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Town of Hillsborough - Sewer Service Rate Study