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05/27/1998FISCAL REVIEW COMMITTEE MEETING CITY OF CLEARWATER May 27, 1998 Present: Daniel Fleck Chair Carol Warren Committee Member Richard Lynch Committee Member Jean Stuart Committee Member Michael E. Burton Burton & Associates Robert L. Lockridge Burton & Associates Keith A. Bush Public Works Controller Rich Baier Public Works Administrator Tina Wilson Budget Director Brenda Moses Board Reporter Absent: Daniel Moran Committee Member The Chair called the meeting to order at 10:08 a.m. in the Engineering Department conference room at the Municipal Services Building. To provide continuity for research, the items were not necessarily discussed in order. Public Works Administrator Rich Baier said water and sewer system and stormwater rates are being reviewed because of tourism, public safety, and economic development. It is anticipated over $100 million is required to alleviate street and structure flooding, particularly in downtown, the beach, east Clearwater, and North Greenwood. The Burton & Associates rate study lays the basis to begin solving those flooding issues at 5-year intervals. In response to a question, Budget Director Tina Wilson said water and sewer reserves are quickly diminishing due to disappointing revenues. Mr. Baier said Clearwater is the last city in Pinellas County producing an affluent, treated wastewater. Pumping from City-owned wells has decreased from 40% to 25% over the last few years due to brackish water or dry wells. Phase One of a reclaimed water program is being implemented throughout the City, beginning with Island Estates. It is anticipated the City will be purchasing 100% of potable water from Pinellas County within the next 3 years due to stricter potable water standards being imposed by the FDEP (Florida Department of Environmental Protection) and SWFWMD (Southwest Florida Water Management District). In response to a question, Mr. Baier said the City’s wells are in 3 major locations: 1) Lake Chautauqua in Countryside at the end of Landmark Drive extension; 2) in the Florida Power right-of-way on Northeast Coachman Road next to Coachman Ridge Estates; and 3) in Countryside, near the Wastewater Treatment Plant. The City has received nearly one-third of the available funds from the PABB (Pinellas Anclote Basin Board). The PABB is moving away from funding reclaimed water through grants. Michael Burton of Burton & Associates said although reclaimed water is an excellent tool toward water conservation, it reduces water billing charges, reducing revenues. Installation of reclaimed water will help to avoid the need to purchase additional water from Pinellas County. ITEM #1 - Water and Sewer System Rate Study Presentation Robert Lockridge and Michael Burton of Burton & Associates presented a detailed revenue sufficiency analysis and financial management plan, alternative rate scenarios, and Capital Improvements Program for FY 1998/99 - FY 2002/03, (Exhibit #1). The study includes a target reserve of 3 months operating and maintenance expenses for reserves. Mr. Lockridge explained utility rates are set on a cost recovery basis. The first task is to identify: 1) direct and indirect operation and maintenance costs; 2) transfers out; 3) maintenance of reserves; and 4) capital costs for replacement and expansion of the system funded by cash or debt. When rates are set, total costs equal the revenue requirement to fund the utility. The goal of the study is to ensure revenue sufficiency, economic efficiency, fair and equitable cost burden, market acceptability, and resource conservation. For each year in the forecast period, an analytical process is performed. Using historical financial data, economic assumptions, capital and operating plans, policy considerations, and regulatory requirements in a rate model, a business plan is determined for borrowing requirements, operating costs, revenue projections, and rate requirements. Three factors can cause rate increases: 1) meeting debt service coverage to bring in enough revenue to ensure when operating expenses are subtracted, 15% of revenue is left after debt service; 2) cash requirements; and 3) maintenance of reserves. Capital expenditures require cash but are capitalized and not considered expenses. The model then determines if a rate increase is needed. Operating expenses are subtracted from gross revenues and must result in a 15% margin of safety, or a rate increase is necessary. The model indicates after operating and maintenance expenses are paid, debt service is paid. Coverage is tested and if insufficient, a rate increase is necessary. Other costs such as capital expenditures and transfers to the general fund are paid. Coverage is tested again and if cash flow is insufficient, a rate increase is necessary. Reserves are tested to ensure a 3-month cash flow for operating and maintenance expenses. Positive net fund balances are used to fund Capital Improvements Projects. Budget Director Tina Wilson said CIP (Capital Improvement Projects) are defined as a project over $25,000 with a life of more than 1 year. The model presents different alternatives in terms of how the City wants the system to operate. Optional rate plans include: 1) equal leveled annual rate increases; 2) a large increase early in the period; and 3) increases tied to national price index increases. In response to a question, Mr. Baier said replacement of drainage lines are in the CIP rather than under operation and maintenance, because they extend the life of the facility. That item is considered an asset rather than an expense, and is of a longer term nature. In response to a question, Ms. Wilson said Penny for Pinellas funds were not a major source of revenue for this model. The rate study will be consistent with budget proposals. Mr. Lockridge said the water and sewer system model: 1) assumes no growth; 2) calculates wage inflation based on current wage settlements at 5.5% a year; 3) considers other inflation costs of 3%, excluding health insurance at 4%; 4) calculates interest earnings at 5.5% the first 2 years, 4.5% for the third year and 3.5% for the remaining 2 years; 5) calculates working capital for 3 month’s operating and maintenance expenses; and 6) calculates borrowing at 6% for 30 years, using revenues bonds with 1 year capitalized interest. In response to a question, he said although the City is embarking on a redevelopment process, the rate model has incorporated a conservative “no growth” scenario in either consumption or in number of customers. Due to public awareness of conservation, usage has dropped and will continue to impact future revenues. If growth occurs in future years, lower rate increases than predicted can be applied. Uncertainties regarding the City’s future water supply is unknown and being negotiated with Pinellas County. Public Works Controller Keith Bush said in 1994, Pinellas County raised water rates to the City. The City passed those rates on to the customer. Mr. Lockridge said some of the major issues to consider regarding rate increases are: 1) anticipation of increased water costs when the City must purchase 100% of its water supply from Pinellas county; 2) implementation of an automatic annual “price index increase to keep up with inflation costs; and 3) timing of rate increases. He strongly suggested consideration of an annual “price index” increase. In response to a question, he said another city with which he has worked has adopted 3% price increases annually tied to the CPI (Consumer Price Index). The city that did not incorporate price indexes implemented higher annual rate increases to adjust for the shortfall. Discussion ensued regarding the alternative rate scenarios as shown in Exhibit #1. Mr. Lockridge said scenarios 1 - 3 assume the City can continue producing their own water resources. Since that is highly unlikely, scenario #4 indicates a 12.7% rate increase due to a mild baseline increase in 1999 of only 0.3%. This scenario also assumes Pinellas County only increases their charges to the City by the assumed inflation rate of 3%. The cost of water at 3% per year is included in each scenario. It was suggested implementing a 3% sewer and water rate increase in FY 1999/2000, and reviewing future suggested rate increases before adoption. It was noted the City will have a “wait and see” situation yearly until resolution of the water supply crisis. Mr. Lockridge said a 3% rate increase would be equivalent to approximately $1.50 to $2.50 a month per resident. If no increase is implemented in FY 1999/2000, rate increases will be higher in later years. It was remarked that had an inflationary rate increase been adopted over the last 8 years, today’s discussion would probably not be taking place. In response to a question, Mr. Baier said Belleair has its own self-supportive water system. Dunedin has its own water system and has built a reverse osmosis brackish water supply system tank. The County supplies a small portion of St. Petersburg’s water. Smaller municipalities such as Largo, Pinellas Park, Kenneth City, Treasure Island, Belleair Beach, and others purchase water from Pinellas County. The average household bill for potable water outside irrigation on Island Estates is $32.50 per month. Interior water usage charges are typically $46 - $49 per month. The average household bill is generally an average of $70 per month without a second meter. Member Lynch moved to recommend a 3% water and sewer rate increase in FY 1999, with annual rate “index” increases not to exceed 3.5% per year, with staff justification and Commission approval. The motion was duly seconded and carried unanimously. ITEM #2 - Stormwater Rate Study Presentation Mr. Baier said stormwater fees were implemented in 1991. They pay for operational items such as maintenance, personnel, and equipment costs. Approximately $500,000 to $700,000 is available yearly City-wide for new drainage flood projects. Staff has identified important projects that must be done. In response to a question, he said the City has never had a large dollar stormwater fund reserve. Mr. Lockridge said the current residential stormwater utility fee is $3.00 per month. After funding a $30 million CIP, in 2003 the fee will be $4.76 a month. However, due to the loss of the School Board fee, the fee will be $4.91. Scenarios 3, 4 and 5 (Exhibit #2) indicate levelized rate increases. Mr. Baier said a $24 yearly rate increase will rebuild major roads, put in major retention ponds, and solve flooding issues. For $2.00 a month per household, residents receive $30 million in improvements. In response to a question, Mr. Baier said increases to commercial enterprises depend on the number of equivalent residential units and the impervious surface on the site. He said the 3 largest issues affecting stormwater utilities are: 1) IMR’s (Information Management Resources) purchase of the old annex property; 2) redevelopment of the Sunshine Mall; and 3) downtown redevelopment. Downtown is a closed basin with one drainage pipe in front of the Oaks and Pierce 100 that outfalls the entire downtown. Ms. Wilson said in 1991 the former City Commission made a decision to shift costs from the General Fund into the stormwater utility fund to prevent a tax increase. Due to time limitations, a meeting is scheduled for 7:30 a.m. on June 8, 1998, in the Engineering Conference Room at the Municipal Services Building, to further discuss stormwater rates. The meeting adjourned at 12:05 p.m.