Chapter 11 - Paying for the Plan

This chapter describes the current finances of the Utility as well as summarizes the financial policies and funding needed to implement the Plan. The detailed financial report by the City’s financial consultant, Financial Consulting Solutions Group (FCSG), is presented in Appendix K.

The Wastewater Utility finances the infrastructure improvements and planning and program implementation services described in the Plan. Finances are managed separately for operations and capital improvements. Most revenue is from monthly rates charged to customers and general facilities charges (GFCs) charged for new sewer connections.

11.1 Revenue and Expenses

Revenue primarily comes from monthly rates and is used to fund staffing and administrative expenses, capital projects, taxes, and depreciation and amortization of capital assets. Rate revenue has increased from $10.96 million in 2005 to a projected $16.28 million in 2013. About two-thirds of this revenue is the rate charged by the LOTT Clean Water Alliance for wastewater treatment services and collected by the City through monthly charges (projected to be $10.49 million in 2013). GFCs supplement the capital budget.

Figure 11.1 illustrates the amounts generated from Utility rates and GFCs in 2012, excluding revenues collected for LOTT.

View Figure 11.1 Categories of Utility Revenue, 2012

For the 2012 Wastewater Utility budget, approximately 38 percent of the Utility’s costs were attributable to capital projects and debt-service; the remaining 62 percent supported operations and administration expenses (see also Section 11.6 and Figure 11.2 below). The City’s six-year Capital Facilities Plan (CFP) is updated each year by City Council. The CFP includes the capital projects identified in Chapter 10.

11.2 Assets and Liabilities

The Wastewater Utility maintains a balance sheet of current and long-term assets and liabilities. Between 2005 and 2012, total assets increased from $28.05 million to $49.55 million. Current and long-term liabilities increased from $0.70 million to $9.06 million. As of 2012, the City’s long-term debt was $7,775,406 from two bonds, a Public Works Trust Fund loan, and a State Revolving Fund loan.

The City’s financial consultant, FCSG, reports that the Utility has generally realized positive net income and annual increases in net asset value over the past few years, exhibiting relatively stable financial performance. The Utility displays a strong, high quality balance sheet, with long-term debt as a percent of assets increasing from 1.3% to 13.2% over the comparative period. As it is common for municipal utilities to have outstanding debt equal to 15% - 35% of the booked cost of fixed assets, the Utility still has significant long-term borrowing capacity that might be used to finance future capital improvements if and when needed and appropriate.

11.3 Rates and Rate Structure

The Utility currently has about 15,918 single and multi-family residential accounts (about 60% are single family residential) and 1,563 commercial and public sector accounts. The Utility’s rate structure for all customers is based on equivalent residential units (ERUs). The ERU is based on the wastewater generated from residential and commercial sources. See Section 2.3, Wastewater Flows, in Chapter 2 for an explanation of how the ERU is calculated.

A rate increase of 5 percent ($0.58/month per ERU) in 2006 helped fund improved program management capability. The 2013 Wastewater Utility rate is $18.54 per ERU per month. Gravity sewer, STEP system and community onsite system customers pay the same monthly rate. In addition, the City collects monthly rates of $33.99 per ERU, which is paid to the LOTT Clean Water Alliance for wastewater treatment services.

The Utility also collects general facility charges (GFCs) from new developments. These charges are one-time fees that recover a proportionate share of the costs associated with existing and planned Utility infrastructure from newcomers to the City’s wastewater system. Its purpose is to promote equity between existing and future customers. The GFC establishes a pro rata share of capitalized system costs attributable to new development, and imposes that cost as a condition of service. While revenue generated by GFCs varies appreciably from year to year, annual revenues averaged approximately $793,000 over the past five years.

11.4 Financial Policies

As an enterprise fund, the Utility is fully self-sufficient, relying solely on its own revenues for financial viability. The consultant’s analysis of the Utility’s ability to fund the Plan is based on a set of fiscal policies that define the City’s minimum financial criteria. These fiscal policies relate to cash management, capital funding strategy, financial performance and rate equity.

Cash Management

The City’s policy is to maintain working capital and other reserves consistent with possible fluctuation in revenues and expenditures. Historically, the Wastewater Utility’s standard is to maintain a minimum operating fund balance equal to 10 percent of annual operating expenses (excluding payments to LOTT as a "pass-through" of revenue derived from LOTT’s monthly rate). In addition, a capital contingency reserve equal to 5 percent of active capital appropriations is maintained in case of capital cost overruns or acceleration of capital expenditures.

It is worth noting that the anticipated change to volume-based rates for residential customers will increase the volatility of Utility revenues. This volatility is limited by the fact that the proposed structure is a tiered flat-rate structure based on water usage - the primary revenue risk is that customers that are near the usage threshold of a defined tier would use less water and fall into a lower rate tier. The financial analysis prepared by FCSG suggests that the existing operating fund balance will be adequate to cover some fluctuation in revenue levels over the next several years. Depending on the revenue impacts that the Utility experiences following the implementation of the volume-based structure, it may wish to consider increasing its minimum reserve balances to address future volatility.

Capital Funding Strategy

The City has two basic policies to provide ongoing capital funding resources:

• To require an equitable financial contribution from all new development; this requirement is met through the GFC. GFC revenues are used first to pay current Utility debt service payments, and second as a source of cash funding for future capital projects.

• To require existing ratepayers to support the City’s full cost of providing service, including annual depreciation expense on Utility assets. Though depreciation is not a cash expense per se, the City uses depreciation expense as a basis for funding capital re-investment in the system. To avoid charging customers for the future replacement of assets that they are concurrently paying for through the debt service component of rates, the City’s capital re-investment policy determines annual funding levels by deducting current debt principal payments from depreciation expense in the useful life of the infrastructure. This approach does not ensure full cash funding of system replacements, but is a common way to equitably charge current customers for use and decline of the system. It provides a major source of capital re-investment, which can be augmented with use of debt financing.

Financial Performance

These policies include the requirement to maintain a balanced budget, to meet minimum reserve requirements and to set rates to ensure payment of annual debt service for revenue bonds.

11.5 Paying for the Plan

Implementation of the Plan will decrease the average annual CFP funding from approximately $4.5 million to $1.5 million. Capital expenditures will total $9.0 million between 2014 and 2019. Debt financing of a portion of these costs is not anticipated.

The financial analysis established a hierarchy of capital funding:

• First using available cash and investment resources; existing capital fund balances are used to directly fund project costs.

• Second, use utility equity resources - ongoing revenue from GFCs to directly fund project costs.

The following rates will fund Plan implementation:

• Monthly City Wastewater Utility Rates: Annual rate revenue increases of 4 percent from 2014 - 2016, and 3 percent from 2017 - 2018. Two volume-based rate structure alternatives have been developed for consideration in 2014:

Table 11.1

Potential Wastewater Utility Rates with Tiered Structure

Alternative A

2013

2014

2015

2016

2017

2018

Tier 1 (0-2 ccf per Month)

$18.54

$13.06

$13.58

$14.13

$14.55

$14.99

Tier 2 (>2 ccf per Month)

$18.54

$19.59

$20.37

$21.19

$21.82

$22.48

 

 

 

 

 

 

 

Alternative B

2013

2014

2015

2016

2017

2018

Tier 1 (0-2 ccf per Month)

$18.54

$13.53

$14.07

$14.63

$15.07

$15.53

Tier 2 (2-4 ccf per Month)

$18.54

$17.65

$18.36

$19.09

$19.66

$20.25

Tier 3 (>4 ccf per Month)

$18.54

$20.29

$21.10

$21.95

$22.60

$23.28

• Customers using 2 ccf or less per month (about 18% of the total single-family customer base) will actually see a reduction in their monthly bill under both alternatives. Depending on the alternative, their bill will decrease by $3.01 - $3.55 (16 - 19 percent) by 2018.

• Customers that use more than 2 ccf but not more than 4 ccf per month (about 25% of the total single-family customer base) will see a cumulative increase of $3.94 (21 percent) in their monthly bill under Alternative A, averaging $0.79 (4 percent) per year through 2018. Under Alternative B, these customers will see a cumulative increase of $1.71 (9 percent) in their monthly bill by 2018, which averages to an increase of $0.34 (2 percent) per year.

• Customers that use more than 4 ccf per month (about 57% of the total single-family customer base) will see an increase under both alternatives. Depending on the alternative, their bill will increase by $3.94 - $4.74 (21 - 26 percent) by 2018, which averages to $0.79 - $0.95 (4 - 5 percent) per year during the planning period.

• Considering LOTT charges (which are expected to increase with inflation on the order of 2 - 3 percent per year), customers using 2 ccf or less will see an increase of less than 0.5 percent in their total wastewater bill by 2018; other customers will see an increase averaging 2 - 3 percent per year.

• Increased GFC. An increase of 4.5 percent from $3,198.51 to $3,342.00 per ERU, to reflect the current pro rata share of system costs.

11.6 Comparison of LOTT and Olympia’s Cost Centers

Implementation of the Plan is reflected in three cost centers: (1) net operating expense, (2) debt service (bonds and loans), and (3) capital facilities plan expense. Figure 11.2 shows this cost breakdown for each entity, for the period 2013-2018.

View Figure 11.2 Comparison of LOTT and Olympia’s Cost Centers, 2013 - 2018

The pie charts in Figure 11.2 indicate that LOTT’s budget is capital project-intensive, while the City’s Wastewater Utility budget is operations and maintenance-intensive. LOTT is responsible for funding the network of infrastructure that comprises the regional treatment and transmission system. The City’s Wastewater Utility, by contrast, is relatively smaller in scale and funds a variety of annual operating costs including taxes, interfund transfers, and City overhead in addition to more labor-intensive functions such as field work and customer service.