A. Receive and file report from Raftelis Financial Consultants, Incorporated regarding Utility Authority revenue requirements and recommended changes to the City’s Master Schedule of Fees for the Utility Authority Water Funds.

B. Schedule a public hearing on proposed rate adjustments for the Utility Authority Water and Sewer Funds to be held on Monday, December 4, 2023.

C. Direct staff to prepare and mail notices to all La Habra property owners regarding the scheduling of a public hearing on Monday, December 4, 2023, to consider the proposed rate adjustments for the Utility Authority Water and Sewer Funds.

In December 2021, based upon the Raftelis evaluation and staff recommendations, the City Council/Authority Directors adopted a two-year water and sewer rate structure that adjusted fees to provide the necessary resources to provide operating and capital funding for the Water and Sewer funds. The approved rate structure went into effect on January 1, 2022, and will continue through December 31, 2023.

In May 2023 the La Habra Utility Authority (Authority) entered into an agreement with Raftelis Financial Consultants, Inc. (Raftelis) to reevaluate the water and sewer costs of service and to develop a five-year financial plan in accordance with Proposition 218 regulations. The goal of this review and study was to balance the Authority’s water and sewer revenues against planned and projected expenses, while maintaining prudent operating and capital reserves, and maintain required debt service coverage levels.

Several factors impacting the Authority’s Water fund operating costs were considered as part of the rate study:

The California Domestic Water Company (CDWC) produces and delivers to the Authority approximately 5,894 acre-feet (AF) of water annually for La Habra water customers, accounting for approximately 69 percent of the City’s total annual water needs.  Their supply source comes from groundwater pumped out of the Main San Gabriel Basin (Basin).  Drought conditions in recent years, combined with higher water demand, drew the Basin’s groundwater down to historically low levels.  In 2017, the Basin Watermaster developed a plan to correct the declining groundwater elevations in the Basin by purchasing imported water from the Metropolitan Water District (MWD) and allowing it to percolate into the Basin’s groundwater table. The Watermaster established a replenishment assessment fee charged to all water producers in the Basin to pay for the cost of the imported water.  This fee is still incorporated into CDWC’s rates for all water that they produce and deliver to the Authority. Originally estimated to add $800,000 per year, this cost has increased to approximately $1.23 million per year. It is estimated that 39% of this cost increase was due to the assessment going up in price in 2021, and another 1% increase is scheduled for FY 2023-24. The majority of the cost increase, or 60%, is due to increased amounts of water purchased from CDWC in the last several years. If the Authority were to use the same amount of CDWC water based on the cost from 2017, the cost would be around $967,000.

The Authority currently owns 2,580.25 common stock of CDWC shares. Each share entitles the Authority to a calculated amount of water based on the number of shares owned and the acre-foot per share ratio of water allocated for that fiscal year.  The AF/share ratio is adjusted annually and is dependent upon available water supplies within the Basin.  Historically, this ratio has averaged 1.55 AF/share.  In 2007 this ratio was as high as 1.90 AF/share and in 2005 it was as low as 1.35 AF/share. Starting in Fiscal Year 2023-2024, due to continuing demands on the Basin, the ratio was established at 1.45 AF/share, the same level as the previous year’s 1.45 AF/share.  Due to current amount of water provided per CDWC share and assuming the same level of water purchased as in Fiscal Year 2022-2023, the projected cost increase to the Authority is approximately $181,381 in Fiscal Year 2023-2024 and approximately $355,944 in Fiscal Year 2024-2025 as the cost to purchase water increases each year.

The Authority’s planned water and sewer system capital expenditures are generally funded through rate-based revenues on a pay-as-you-go basis.  Projected capital expenditures for the Water Enterprise Fund are $1.8 million during Fiscal Year 2023-2024 and $1.8 million in Fiscal Year 2024-2025.  Projected capital expenditures for the Sewer Enterprise Fund are $435,000 during Fiscal Year 2023-2024 and $435,000 in Fiscal Year 2024-2025. The rate study incorporated these planned capital expenditures to ensure both respective funds can maintain adequate reserve levels once construction is complete.  The water fund’s target reserve level is approximately $6.1 million and the sewer fund’s target reserve level is approximately $1.2 million.

Raftelis has prepared two detailed reports, one for the Water fund and another for the Sewer fund. Both were updated and revised in 2023.  Both reports reflect proposed changes to the existing rates and the methodology utilized in calculating the new rate structure. The water report proposes rate adjustments through Fiscal Year 2035 and the sewer report proposes adjustments through Fiscal Year 2035.  Water demands continue to fluctuate due to significant drought conditions in one year followed by significant rainfall the next year. Due to potential changes in Basin water levels this next water year, rather than recommend a three- or four-year water rate structure, staff recommends adopting a two-year rate adjustment and then re-evaluating the status of the water supplies, demands and Authority operating/capital costs for both water and sewer at that time.  Furthermore, staff recommends that the first rate adjustment for both water and sewer take effect on January 1, 2024, and the second rate adjustment take effect January 1, 2025.

Water Rates:

The City bills for water consumption in one-hundred cubic foot increments (ccf), also referred to as “units” on a water bill.  Each billing unit (or ccf) represents 748 gallons of water.

La Habra’s current water rate is a tiered volumetric structure for residential use and a fixed volumetric structure for multi-family, commercial, municipal, irrigation, and fireline customers.  Each user group has a fixed monthly fee based upon the size of the water meter.  Raftelis has reviewed and adjusted the current structure and modified the rates based on revised water purchase costs and any changes in existing usage patterns and revenues.  These modifications are Proposition 218 compliant.
 

The current and proposed water rate structure for each customer class is shown below:

There are approximately 13,500 water meters in the City and approximately 8,100 of them are classified as residential, utilizing a 5/8” water meter. 

On average, a single-family residence uses 16 ccf of water per month and is served by a 5/8” water meter. At current rates, the water bill for this scenario is $78.18 per month.  If the rate adjustments are adopted as proposed, this same water bill would increase to $83.96 per month in Calendar Year 2024, and then increase to $89.81 per month in Calendar Year 2025. 

A lower consumption single-family residence that uses 8 ccf of water per month that is served by a 5/8” water meter currently pays $40.02 per month.  If rate adjustments are adopted as proposed, this same water bill would increase to $43.40 per month in Calendar Year 2024, and then increase to $46.45 per month in Calendar Year 2025. 

A higher consumption single-family residence that uses 24 ccf of water per month that is served by a 5/8” water meter currently pays $133.70 per month.  If rate adjustments are adopted as proposed, this same water bill would increase to $143.64 per month in Calendar Year 2024, and then increase to $153.65 in Calendar Year 2025. 

Sewer Rates:

Raftelis has reviewed and adjusted the current structure and modified the rates based on inflationary factors costs and any changes in existing usage patterns and revenues.  These modifications are Proposition 218 compliant.  The Sewer rates consist of a monthly fixed charge per dwelling unit by customer class type and a variable charge per hundred cubic feet of water by customer class type.  The revenue requirements for each customer class is allocated by the amount of wastewater generated by that class.  Since the City operates as a collection-only system, sewer flow is the most defensible rationale for allocating revenue requirements across different customer classes.  The current and proposed sewer rate structure for each customer class is shown below:

 

Based upon the average water use of 16 units per month for a single-family residence being served by a 5/8” water meter; the current monthly bill is $11.84.  If adopted as proposed, this same sewer bill would increase to $13.63 per month in calendar year 2024, and then increase to $14.42 per month in Calendar Year 2025.

Based upon a water use of 8 units per month and being served by a 5/8” water meter, a single-family residence monthly sewer bill is currently $8.32.  If adopted as proposed, this same bill would increase to $9.55 per month in Calendar Year 2024 and then increase to $10.10 per month in Calendar Year 2025.

Based upon a water use of 24 units per month and being served by a 5/8” water meter, a single-family residence monthly sewer bill is currently $15.36.  If adopted as proposed, this same bill would increase to $17.71 in Calendar Year 2024, and then increase to $18.74 in Calendar Year 2025.

Prior to implementing new rates, the City and Authority are required to conduct a public hearing in accordance with the requirements of Proposition 218.  This process mandates a 45-day advance notice of the meeting to all property owners within the Authority’s service area.  Staff has prepared a sample notice showing the proposed rate adjustments as Attachment 3.  If approved, the public hearing will be set for Monday, December 4, 2023.
 

Printing costs for the notice will be approximately $4,500, and mailing costs for the notice will be approximately $5,000, for a total of approximately $9,500.  The Adopted Fiscal Year 2023-2024 water and sewer budgets have adequate funding allocated for the printing and mailing of notices. 

If the proposed water rate adjustments are approved, they are estimated to generate additional revenues of approximately $635,912 in Fiscal Year 2023-2024, and approximately $814,401 in Fiscal Year 2024-2025. If the proposed sewer rate adjustments are approved, they are estimated to reduce annual revenues by approximately $78,825 in Fiscal Year 2023-2024, and approximately $241,305 in Fiscal Year 2024-2025. Both water and sewer fund balances are in a good financial position.

ED 9.1          Balanced Fiscal Practices
ED 9.2          Long-Term Infrastructure Viability

Goal 2 – Management of Public Revenues and Fiscal Assets
Objective A – Closely monitor revenues, expenditures, and fiscal trends to ensure the City’s long-term fiscal stability.