SLVWD Board Meeting Summary

September 7, 2023

Mark Dolson

Highlights:

• Cost of Service Analysis and Rate Design

• Compensation Study Request for Proposals (RFP)

• Next Board meeting is at 6:30 PM on September 14th

Preliminaries

There was no report from the Closed Session prior to the meeting.

Director Mahood, still recovering from illness, attended remotely.

There were no additions or deletions to the agenda.

There were two non-agenda-related public comments.  A Boulder Creek resident said he was very happy with recent improvements in fire hydrant placement in his neighborhood, but he wanted to call the District’s attention to what he saw as missing coverage in the vicinity of Prospect Avenue.  President Smolley advised him to email District Manager Rick Rogers.

Rich Collier of Boulder Creek expressed concern about potential noise levels associated with a proposed new pump house on West Park Avenue, and he put forth four specific requests for relevant data.  District Manager Rick Rogers said the District expected to receive the report from the acoustic consultant on Monday September 11th, and to discuss this at the upcoming Engineering and Environmental Committee meeting (rescheduled for) 9:00 AM Thursday September 14th.

New Business

Cost of Service Analysis and Rate Design

Finance Manager Kendra Reed introduced this agenda item.   She said Staff has been working with Raftelis on the Rate Study, and the Board was now soliciting input from the community on the work to date.  Sudhir Pardiwala of Raftelis shared a PowerPoint presentation which is expected to be presented again at a Special Board meeting Thursday September 14th.  This presentation can be downloaded from the District’s website by going to:

https://www.slvwd.com/projects/pages/2023-rate-study

and clicking on “Financial Plan Presentation (09/07/2023)”

Sudhir described the SLVWD system as consisting of nine surface water intakes, seven well heads, 52 storage tanks, 30 booster pump stations, two surface water treatment plants, 190 miles of mainlines, about 7,900 service connections, 36 zones, and over 600,000 hundred cubic feet (1,377 acre-feet) of water delivered each year.  Over 85% of the District’s revenue comes from rates, about 9% from taxes and assessments, and the remainder from grants, interest income, and other operating/non-operating revenue.  The study assumes that water demand will change from 2022 only due to an increase of accounts of about eight accounts per year, except for 150 accounts being added from Bracken Brae and Forest Springs in FY24.

Sudhir listed the service goals as: replacing undersized and leaking mains, reducing water loss, improving systemwide reliability in times of emergency, and having additional water storage in times of emergency.  A five-year average of expenses showed 29% going to supply and treatment, 28% to distribution, 16% to finance, 15% to administration, 7% to engineering, and 4% to watershed maintenance.  Projected capital expenditures totaled $27M in FY24, $15M in FY25, $13M in FY26, $9M in FY27, and $8M in FY28.

Sudhir further reported that 94% of the District’s expenses were independent of the volume of water consumed, whereas this was true for only 37% of its rate revenue.  He listed the District’s reserve targets as 4.5 months of the Operations and Maintenance budget (targeting $3.7M) and 2.5% of the infrastructure replacement cost (targeting 2.5% of $375M = $9.4M).

Sudhir presented two separate options for the financial plan for the District’s water delivery.  If the District elects to replace the Cross-Country Pipeline with an above-ground pipeline (with an estimated cost of $25M, 90% of which is guaranteed to be covered by FEMA), then the proposed solution would be to increase rates by 9% per year for five years and to secure a $15M loan in FY24.  If the District elects to bury the replacement pipeline (with an estimated cost of $52M and a possibly lower rate of FEMA reimbursement), then the proposed solution would be to increase rates by 9.5% per year for five years and to secure a $17M loan in FY24.  But this solution would result in significantly lower reserves than in the above-ground scenario.

Sudhir presented an entirely separate analysis and proposed rate increase for the 56 residences in Bear Creek Estates that rely on the District for wastewater service.  This system was last upgraded between 2005 and 2013, already has relatively high rates, and is operating under a notice of violation.  The planned long-term solution is for the District to make the necessary upgrades required to connect to the County wastewater system in 2031.  This will require $2.6M, half of which may come from grant funding, but the rest of which will have to be funded by further rate increases.

Sudhir identified the immediate next steps as: (1) adjusting the financial plan and scenarios as needed (including a decision about which Cross-Country Pipeline replacement strategy to base the rate increase on), and (2) performing a cost-of-service analysis and developing a range of options for a revised rate structure.  His projected timetable showed the financial requirements being finalized in September, rate discussions with the Board in October, public outreach September through November, Board discussion in December, a public hearing in January, and new rates implemented February 1, 2024.

Director Hill said the Budget and Finance Committee had been working on this for the past two months.    He said it was important to recognize that this is not business as usual because of the looming cost of rebuilding the Cross-Country Pipeline.

Director Mahood added that this lays out how dire the District’s circumstances are, due both to the fire impact and to the perhaps $5 million in storm damage during the past year.  She further noted that the District has gone without rate increases for the past two years, so rates have not kept up with inflation, and this has negatively impacted reserves.  She said she had questions for Sudhir both about his inflation assumptions and about his preference for a flat 9% rate increase each year as opposed to a higher, catch-up increase in the first few years.  Sudhir said a flat increase minimizes the impact on customers in any one year.  Director Mahood said she was worried about a possible big future gap between the annual rate increase and inflation.

Director Fultz shared some of his dissatisfactions with the overall process of devising a new rate structure.  He also said he couldn’t make any substantive evaluation without being able to look at the detailed numbers and formulas, and he asked when the Board could have access to the underlying model.  Sudhir said the model had been provided to Staff, but Kendra said it had not been shared with the Board.

Director Fultz further objected to the failure to distinguish between unrestricted reserves and reserves associated with debt financing (which must be used in a set period of time for a predetermined purpose).  Sudhir said this was standard practice.

Director Ackemann said she agreed that a fixed annual rate increase would be easier for customers to manage.  She pointed out that 9% of the average monthly bill of $95 is about $8.50.  Director Ackemann also called attention to the fact that 94% of the District’s costs are classified as “fixed” (meaning that they are independent of the volume of water consumed).

President Smolley pursued this further.  He noted that the District can’t significantly reduce fixed expenses without reducing staff.  He asked Sudhir what he recommended the District do to address the imbalance between fixed and variable revenue (since, for example, conservation reduces variable revenue).  Sudhir said there is a fine balance with fixed vs. variable rates.  The problem with relying heavily on fixed charges is that this places a heavy burden on minimal users.  This is almost never done.  The California Water Council used to recommend that fixed charges not exceed 30%.  They have more recently stepped away from this due to drought.  He added that having 94% of costs fixed is unique for a water district, as most utilities are in the 50% range.  He added that some agencies may go into the low 40% range for the fixed portion of their rates, but no higher than this.

Director Fultz seized on the topic of “fixed” costs to reiterate his concerns about increasing operating expenses.  Director Mahood pointed out that the proportion of fixed vs. variable charges was beyond the scope of this evening’s meeting (which was supposed to be devoted purely to questions about the District’s projected revenue requirements) and would be properly addressed when tiered rate options are considered in a future meeting.

President Smolley opened the floor for public comment.  Bruce Holloway of Boulder Creek had two comments.  First, he expressed concern about the possibility (based on recent history) of the District borrowing money and not immediately putting this to good use.  Second, he observed that PG&E does not charge separately for their fixed costs.

A resident of Bear Creek Estates expressed personal confusion on a number of points.  Board members offered clarifications and advised him that more information was available online.

Virginia Wright of Felton offered her appreciation for the presentation.

Tom Fredricks of Felton noted that his last California American water bill (in 2013) was higher than his current SLVWD bill.  Consequently, he felt very grateful to SLVWD.

Jim Mosher of Felton echoed Virginia Wright's appreciation for the District’s work.  With regard to Director Fultz’s desire to carefully separate Operating Expenses from Capital Expenses, he questioned whether there was a clear line between the two.  His impression was that a lot of what the District currently classifies as capital has a pretty major impact on operating expenses.  For example, much of what the Environmental Department does is directly aimed at supporting Capital Improvement projects, but this doesn’t show up in the capital budget.  He also urged the Board to consider how it can support low-income people when they are faced with a significant rate increase.  He suggested that an expansion of the Ratepayer Assistance Program might be in order.  Finance Manager Kendra Reed responded that some operating personnel capital expenditures are capitalized.  [Note: the amount of salary that ends up being capitalized in this way remains relatively small (around $200,000).  Much more Staff time ends up not being captured by this mechanism.]

Stacey Wilbur of Bear Creek Estates had questions about his wastewater bill which the Board tried to clear up for him.  President Smolley ended up advising him that Kendra could provide further detail offline.

Alina Layng of Boulder Creek joined Virginia Wright and Jim Mosher in thanking everyone for their work.  She urged the District to continue seeking grant funding.

Director Fultz reminded the Board of his estimate that the District’s operating margin should be in the vicinity of $5-6 million (as opposed to the current $3 million) and of his concern about previous rate increases being sold as necessary for capital improvement but ultimately being used to fund substantially larger increases in operating expenses than originally projected.

Director Mahood responded that the entire Board was already in agreement on the importance of spending a lot of money on capital improvements and repairs.  She also noted that the Board had already agreed that the Fire Surcharge funds would go into a restricted fund, and there was nothing preventing the Board from imposing similar constraints on the rate increase.  She added that the City of Santa Cruz has done this.  Director Fultz remained concerned that the Raftelis model assumed only a 4.5% annual increase in operating expenses whereas the more recent average has been 7%.

President Smolley said the discussion would continue at the next meeting.  Sudhir said the presentation would be the same until further direction is provided.

Compensation Study Request for Proposals (RFP)

Finance Manager Kendra Reed introduced this agenda item.   As part of the Memorandum of Understanding (MOU) for the Management, Supervisory, and Confidential and Classified Employees Units, approved by the Board in May, the District agreed to procure a complete and comprehensive salary benchmark study conducted by a qualified consultant within six to twelve months.  The goal of this agenda item was to obtain Board approval for a draft RFP aimed at soliciting bids.  Rick mentioned that he was still waiting to receive feedback from the union.

Director Fultz commented that he was pretty cynical about the value of studies such as this because he felt that they tended to result in a round-robin ratcheting effect.  Also, he said he didn’t see any actual benchmarking analysis in the RFP requirements.  He said benchmarking was mentioned in the title, but the actual study appeared to involve only a look at somewhat similar jobs.   He also noted that 32 of the 37 District employees had their own job classification.   He further objected that the weighting percentages in the evaluation criteria of the RFP didn’t make sense.  Lastly, he argued that the Rate Study should be delayed until the results of the Compensation Study became available.  He requested that the schedule for the Rate Study be discussed at the next Board meeting.

President Smolley said he didn’t think Staff yet knew the schedule for the Rate Study.  Director Mahood agreed that the evaluation percentages should be revised, but she pointed out that the MOU limits the rate at which any of the salaries can be adjusted, and that this negotiated limit will prevent the Compensation Study results from dramatically impacting the Rate Study.

Director Ackemann agreed with Director Fultz that the question of benchmarks needed more attention.

President Smolley clarified that evaluation of the RFP responses would be the responsibility of an internal working group including employee representatives.  He moved that the RFP be revised to address the Board’s dissatisfaction with the benchmarking requirements and the RFP evaluation process, and that the revised RFP be released.  Director Ackemann seconded.

There was no public comment.  The motion passed 4-1 with Director Fultz opposed.

Consent Agenda

These items are deemed adopted if nobody pulls any of them for further discussion. The minutes for the Board’s August 30th meeting were adopted without comment.  For the minutes for the Board’s August 17th meeting, Director Fultz requested that the phrase “per Board policy” be added to the end of the sentence, “Director Fultz was upset this item was not bid on.”

The meeting adjourned at 8:40 PM.