a. Water and Wastewater Financial Business Plan and Water & Sewer Rate Recommendations Summary Presentation.

(1)

WORK SESSION

April 22, 2014

City Commission Room, 700 N. Jefferson, Junction City KS 66441

Mayor Michael Ryan

Vice Mayor Mick McCallister

Commissioner Pat Landes

Commissioner Jim Sands

Commissioner Cecil Aska

City Manager Gerald Smith

Assistant City Manager Cheryl Beatty

City Attorney Catherine Logan

City Clerk Tyler Ficken

1. 7:00 P.M. - CALL TO ORDER

2. SPECIAL PRESENTATIONS:

a.

Water and Wastewater Financial Business Plan and Water & Sewer Rate

Recommendations Summary Presentation.

(2)

Backup material for agenda item:

a. Water and Wastewater Financial Business Plan and Water & Sewer Rate

Recommendations Summary Presentation.

(3)

City of Junction City

City Commission

Agenda Memo

April 15, 2014

From: Gregory S. McCaffery, Municipal Services Director

To: City Commission and Gerald Smith, City Manager

Subject: Water and Wastewater Financial Business Plan and Water & Sewer Rate Recommendations Summary Presentation

Objective: City Commission Workshop for the Water and Wastewater Financial

Business Plan and Water & Sewer Rate Recommendations Summary Presentation

Explanation of Issue: The City on February 18, 2014 retained the services of Raftelis

Financial Consultants, Inc. (RFC) to complete a Water and Wastewater Financial Business

Plan and provide recommendations on water and sewer rates towards implementation of

the City’s water & wastewater overall systems operations. These operational costs include general operations & maintenance, capital improvements, and debt obligations for each system.

The City, through HDR Engineering (HDR), recently complete reports which identified immediate, short and long term improvement needs at the City’s three treatment plants. Additionally, City staff and HDR Engineering completed a review of the City’s Master Water & Wastewater Plans, completed by Burns & MacDonald towards needed water distribution and sanitary collection systems replacement needs. These “Needs Summaries” were used towards the development of the Financial Business Plan, in addition to the overall costs for services and debt obligations.

RFC will provide three alternatives to the City Commission for consideration and discussion. These alternatives include the existing water and wastewater revenues, costs of service and planned improvements and rate considerations. The presentation is provided in order that the City Commission has a general understanding of the financial needs and development of the City’s a water & sewer rate recommendations.

As a follow-up to this presentation, and subject to input from the City Commission, it is the intent of RFC to provide an overall recommendation to the City for consideration and approval of the final Financial Business Plan and Water & Sewer Rate Recommendations. These recommendations would be subsequently brought before the City Commission for consideration at a regular Commission meeting in late May/ June 2014.

(4)

City of Junction City

CITY OF

JUNCTION CITY

Water and Wastewater Financial Business Plan

(5)

For Discussion

• Adequacy of Existing Water and Wastewater Revenues

• Water and Wastewater Financial Business Plan

−

Alternative #1 (Recommended Schedule)

−

Alternative #2 (Extended)

−

Alternative #3 (Deferred Regulatory)

• Cost of Service Study

• Rate Design Considerations

(6)

City of Junction City

ADEQUACY OF

(7)

Factors Impacting Revenue

Sufficiency

• Demand Factors

−

Normal decline in per capita water consumption

−

Difficulties in forecasting account growth/decline

• Operating Costs

−

Inflationary O&M Increases

−

Financial Management Practices (e.g. reserve policy)

• Capital Costs

−

Cash Funded Capital

(8)

City of Junction City

Water Utility Revenues at Existing

Rates

$1 $2 $3 $4 $5 $6 $7 $8 $9 $10 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 M illio n s

Recommended Extended Deferred Regulatory Revenue @ 2014 Rates

(9)

Wastewater Utility Revenues at

Existing Rates

$1 $2 $3 $4 $5 $6 $7 $8 $9 $10 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 M illio n s

(10)

City of Junction City

FINANCIAL BUSINESS

PLAN

(11)

Financial Planning Overview

• Purpose: determine rate revenue required for financial

sustainability

• Process

−

Forecast customer units of service and revenue at existing rates

−

Forecast operation and maintenance expenditures (“O&M”)

−

Forecast capital expenditures

»

CIP

»

Existing and Proposed DS

(12)

City of Junction City

Factors Driving Financial Plans

• Inflationary O&M Increases

• Size and Timing of Capital Improvements

• Financial Policies

(13)

Inflationary O&M Increases

• Largely associated with personnel costs

−

Annual COLA adjustments to Salaries and Medical

−

Legacy costs

»

Pension and Retiree Healthcare

»

Generally increase with salaries, usually higher based on pension funding

levels

• Also related to the cost of materials and supplies (e.g. chemicals,

electricity)

• Veolia Water Contract

• Increases in cost of services provided via the General Fund (i.e.

(14)

City of Junction City

O&M Inflation Assumptions

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

Medical Transfer to Other Funds Chemicals Utilities-Electric Utilities-Gas General Materials/Supplies Vehicle Maintenance Telecommunications Salaries and Wages Benefits Pension

(15)

Capital Improvement Programs

• Some recapitalization necessary on an annual basis

• Level and frequency based on age of water and wastewater

system and original construction materials

• Can reduce O&M costs (i.e. less sewer back-ups, water main

breaks etc.)

• Avoids “mining assets”

• CIP includes projects from Burns and McDonnell Master Plans

+ WTP/WWTP needs identified by HDR Engineering

• Plan to fund future improvements with KPWSLF loans + some

(16)

City of Junction City

Water CIP

$2 $4 $6 $8 $10 $12 $14 $16 $18 $20 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 M illio n s

Recommended Extended Deferred Regulatory

(17)

Wastewater CIP

$5 $10 $15 $20 $25 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 M illio n s

Capital Expenditures (Wastewater)

(18)

City of Junction City

Financial Policies

• Separate Financial Plans for Each Utility

−

Equity for Customers

−

Ensures one fund is not subsidizing another

• Operating Reserve

−

Target of 90 days O&M and Debt Service

−

Generally minimum rec’d for utilities

• Existing and Proposed Debt Service Coverage

−

Currently GO and SRF outstanding

−

Minimum Target of 1.25 Overall

(19)

Reserve Balance (Water)

$1 $1 $2 $2 $3 $3 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 M illio n s

(20)

City of Junction City

Reserve Balance (Wastewater)

$1 $1 $2 $2 $3 $3 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 M illio n s

Target ("Recommended") Target ("Extended") Target ("Deferred Regulatory")

(21)

Debt Service Coverage (Water)

1.10 1.15 1.20 1.25 1.30 1.35 1.40 1.45 1.50 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Recommended Extended Deferred Regulatory Target (1.25x)

(22)

City of Junction City

Debt Service Coverage (Wastewater)

0.50 1.00 1.50 2.00 2.50 3.00 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Recommended Extended Deferred Regulatory Target (1.25x)

(23)

COST OF SERVICE

STUDY

(24)

City of Junction City

Cost of Service Study Overview

• Purpose:

−

Allocate costs to customer classes based on the demands they impose

on the water and wastewater utility systems

−

Demand

»

Water: Average and Peak (Max Day, Max Hour) usage, and Customer

Costs

»

Wastewater: Volume, Strength (BOD and TSS) and Customer Costs

• Process

−

Determine revenue requirement

−

Allocate revenue requirement to cost components

−

Determine units of service by customer class

−

Determine unit cost of service

−

Allocate costs to customer classes

(25)

(26)

City of Junction City

Rate Design Considerations

−

Balance Between Fixed vs. Volumetric Charges

−

Move to Customer Class Rates?

−

Contract Rates

(27)

Existing Breakdown

Considerations

• Fixed Charges

−

Typically recovers meter reading

billing and collection and CS

−

(+) Stable $

−

(-) Impact on lower volume users

• Volumetric

−

Recovers average and peak demand

(water), strength and volume

(wastewater)

−

(+) Impact on lower volume users,

−

(-) Variable $

Fixed Versus Volumetric Charges

$0.42

$0.58

(28)

City of Junction City

Move to Rates by Customer Class?

−

All classes currently pay the same volume and fixed charges

−

More equitable

»

Customers pay according to how they cause costs to be incurred by

utility

›

Wastewater: higher volume and strength classes pay more

›

Water: higher peaking classes pay more

−

Creates winners and losers (initially)

−

Potential Demand Response

»

Losers may use less

»

Winners unlikely to increase usage

−

Can be difficult to understand/explain

(29)

Contract Rates

• Armour Eckridge

−

Water

»

5% total water rate revenue

»

The higher of $1.00 per 1,000 gallons or 60% of residential rate

»

Currently charged 37% of Tier 2 rate

›

$.88 per CCF

›

$1.18 per 1,000 gallons

»

Recommendation: Should move towards 60%

−

Wastewater

»

10% of wastewater rate revenue

»

AE Units and revenue lower than stipulated in ED contract

»

Recommendation: Industrial Surcharge should be increased

• Grandview Plaza: Inflation Only (3% assumed)

(30)

City of Junction City

(31)

Projected Combined Bill (5 CCF)

$20.00 $40.00 $60.00 $80.00 $100.00 $120.00 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 $ /M o n th

(32)

City of Junction City

Water Bill vs. Area Utilities

29

$0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00

(33)

Wastewater Bill vs. Area Utilities

$10.00 $20.00 $30.00 $40.00 $50.00 $60.00

(34)

City of Junction City