SLVWD Board Meeting Summary
September 14, 2023
Mark Dolson
Highlights:
Cost of Service Analysis and Rate Design
Next Board meeting is at 6:30 PM on October 5th
Preliminaries
No actions were taken in the Closed Session prior to the meeting.
All five Directors were present in person.
There were no additions or deletions to the agenda.
There were no non-agenda-related public comments.
Unfinished Business
Cost of Service Analysis and Rate Design
Director Mahood introduced this agenda item with a brief presentation aimed at clearly identifying the Board’s objectives and the key questions to be resolved. She listed the overall goals of the meeting as twofold: (1) receive input from the public re: the Rate Study being performed by Raftelis, and (2) arrive at a Board consensus on the choices and parameters in the underlying revenue model so Raftelis can proceed to develop alternative rate structures based on this model.
Director Mahood noted that Sudhir Pardiwala of Raftelis would follow her remarks by walking everyone through a slightly revised version of his September 7th presentation (with the revisions reflecting intervening feedback from the Budget and Finance Committee along with Staff). She identified two major questions for the Board to address.
First, for purposes of the rate study, how should the District plan to rebuild the cross-country raw water pipelines destroyed in the August 2020 CZU Fire (i.e., above-ground pipe vs. buried pipe)? The associated working assumptions are that the above-ground solution would cost $25M (with 90% of this being reimbursed by FEMA) whereas the buried solution would cost $52M (with the possibility that FEMA would reimburse a significantly lower percentage). Director Mahood said the Budget and Finance Committee consensus was that the District was more likely to ultimately elect the above-ground approach due to the improved associated ability to accumulate reserves, due to substantial environmental impact concerns associated with the buried approach, and due to the possibility of significant delays in pursuing the buried approach due to potential City of Santa Cruz objections.
Second, does the Board concur with the current assumptions in the Raftelis revenue model? Director Mahood identified a number of key subsidiary questions:
What assumptions should the model use regarding relevant rates of inflation? The Budget and Finance Committee directed Raftelis to use its default 10-year-average rate of inflation for Years 3 through 5, but to use the average of the past three years for Years 1 and 2.
What assumptions should the model make about the rate of growth for the District’s operating expenses? The Budget and Finance Committee agreed to retain the Raftelis default assumption that expenses grow at the same rate as inflation. This has not been the case in recent history, but Sudhir argued that the District’s reserves should be able to accommodate unanticipated one-time hits (e.g., the $250,000 in additional fees that the City of Santa Cruz is forcing the District to spend in defense of its Conjunctive Use Plan). Other unforeseen expenses might include unfunded state mandates such as the Santa Margarita Groundwater Agency or possible new state rules about so-called PFAS (per- and polyfluoroalkyl substances).
Can the District complete $27M in capital projects in FY2024 and more than $50M in FY2024-2026? The Budget and Finance Committee found this to be highly implausible. They recommended distributing capital expenditures through 2028 (meaning that less of an immediate cash injection will be required).
Are reserve targets set appropriately? The Budget and Finance Committee was satisfied that the targets conform to the District’s 2021 reserve policy of 4.5 months of annual operating expenses (i.e., $3.7M) and 2.5% of total capital assets (i.e., 2.5% of $375M = $9.4M).
How fast should the District aim to reach its target reserve levels? The Budget and Finance Committee recommended that reserve levels should increase every year, reaching target levels in Year 4.
Should the District rely on fixed annual rate increases or should it front-load the rate increases so that the burden is greatest in the first few years? Districts typically elect not to front-load, but the SLVWD went without any increase last year and is facing extraordinary expenses for CZU wildfire and 2023 storms that recent experience indicates won’t be reimbursed for years. The Budget and Finance Committee recommended that the increase be higher in Years 1 and 2 than in Years 3 through 5.
Does the District want to assume debt (and in what form)? The current Raftelis model shows the District relying on a 20-year market loan at 4.3% interest. A possible alternative approach would involve a bond, but this possibility needs significant further discussion. It is more conservative to assume a loan because fewer than 50% of bond measures end up passing, and the Board’s top priority is to protect the District from insolvency. Director Hill said the District should shop for the best deal that it can obtain when it actually goes out for debt.
Director Fultz noted that this update was not part of the Board packet, and he therefore sought to immediately ask questions specifically about Director Mahood’s presentation before hearing about the updated model from Sudhir Pardiwala of Raftelis. President Smolley said he would allow two questions. First, Director Fultz asked if any distinction was being made between cash reserves and targeted debt reserves. Director Mahood said these were still being lumped together. Second, Director Fultz asked if the underlying 5-year budget was only being assumed for the purposes of the Rate Study or whether the Board was explicitly committing to this specific budget. Director Mahood said the District was continuing to do its formal budgeting purely on a two-year basis. She said the Rate Study budget was solely for the purpose of producing an underlying revenue model, and that specific restrictions on funds could still be discussed and adopted at a future date.
Sudhir reprised his September 7th presentation but with the following changes:
Cost of living is assumed to initially increase at 4% per year, then 3%. Cost of construction is assumed to initially increase at 5.5%, then 4%.
Scenario #1, with a lower level of capital project funding (based on an estimated cost of $25M for replacing the raw water pipelines more or less as they were before the CZU wildfire) would require annual increases in revenue of 10%, 10%, 7%, 7%, and 7%, assuming the assumption of $19M in debt in FY24 in the form of a market rate loan.
Scenario #2, with a moderate level of capital project funding (based on an estimated cost of $52M for a buried pipeline) has annual increases of 12%, 12%, 10%, 10%, and 10%, with $23M debt in FY24
The full 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 (09/14/2023)”
President Smolley attempted to step through the questions initially presented by Director Mahood. The first question was what assumption should be made about rebuilding the raw-water cross-country pipelines. President Smolley noted that the $25M cost estimate came as a surprise to the Engineering and Environmental Committee, and that the committee requested a more fully-developed cost estimate at its meeting on the morning of September 14th. He also observed that the Board hadn’t yet had a full discussion of the two options.
Director Fultz argued that it was premature to attempt to decide this question. He suggested that there were alternate approaches still to be explored, that the Rate Study couldn’t proceed until this issue was decided, and that the District would be in a different financial position if it had adhered to the 3% increase in operating expenses forecast in the 2017 Rate Study (as opposed to the 6% actual increase). President Smolley commented that Director Fultz was getting away from the question under consideration. Directors Ackemann and Hill each noted that the District needed to make some assumption for purposes of finalizing the revenue model, and they were comfortable assuming the above-ground solution. District Manager Rick Rogers also favored this approach.
President Smolley turned to the second question and asked for comments on the assumed rate of inflation. Director Fultz noted that historical cost increases have exceeded the rate of inflation, and he asked whether Raftelis took this into account. Sudhir said it did not.
President Smolley said he thought the Budget and Finance Committee recommendations were reasonable for the next two questions. He moved on to the question of how fast the District should aim to reach its target reserve levels. Director Fultz objected to lumping together cash reserves and debt reserves. He said he could perform a sensitivity analysis if he had access to the underlying model, and he asked when this would be made available to the Board. [Note: the model was made available to Board members shortly after the meeting.] Director Fultz also suggested that a bond might have advantages over a loan. President Smolley said this was not the place to discuss the choice of a bond vs. a loan. For the purposes of the revenue model, the District was making the conservative assumption that the debt would be in the form of a loan. Director Fultz countered that he was entitled to discuss anything that appeared on any of the Raftelis slides.
President Smolley opened the floor for public comment. The first speaker asked why decisions were needed this evening. Director Mahood reiterated that Raftelis needed to know how much revenue is needed in order to take their next steps.
The second speaker focused on the separate rate increase for the 56 residences served by Bear Creek Wastewater. He said the increase made no sense to him, as the current charges were completely obscene. He also didn’t understand the significance of the work planned for 2031. President Smolley explained that this was necessary to allow the District to connect to the system that the County is putting in place. Rick said the District also needed to install a new collection system. He also pointed out that the speaker’s bill was for water and wastewater combined. He said he would happily provide further information offline.
The third speaker asked if the District’s budgets were available online. Finance Manager Kendra Reed said they were. The speaker also thought it would make sense to base the model on historical trends.
Bruce Holloway of Boulder Creek said he went to both committee meetings this week. He noted that the Budget and Finance Committee didn’t have the above-ground vs. buried question on its agenda, yet this issue was substantially discussed, and this disturbed him. He said the reserve policy was on the Budget and Finance Committee agenda, but it was not discussed. If it had been, he would have shared his own thoughts. Director Ackemann said the Board was not actually deciding whether the pipeline would be built above-ground or buried; it was merely deciding what assumption to bake into the Rate Study revenue model. Making a final decision will take much more time and data, and additional funding can be sought if needed. Director Fultz complained that the District should have already managed to make a final decision. President Smolley disagreed.
Jim Mosher of Felton and a public member of the Budget and Finance Committee said the agenda was to go through the Raftelis slides and give advice. This was the context in which the above-ground vs. buried issue was discussed. He added that he personally believed the above-ground approach was best, and he also agreed that it was unrealistic to assume the District could spend $24M on capital projects in a single year.
Cynthia Dzendzel of Felton congratulated the Board on discussing so many important and contentious issues. She added that difficulty in attracting qualified personnel is a challenge for many local agencies including SLVWD. She said she was in favor of increasing the inflation estimate and the operating expense estimate.
Alina Layng of Boulder Creek said she was confused by the discussion of the above-ground vs. buried question, particularly in light of seeing different numbers at the Engineering and Environmental Committee meeting. She felt left out of this conversation.
Chris Schiermeyer identified himself as the Superintendent of the San Lorenzo Valley Unified School District. He asked the Board to consider that the school district can’t charge people more when its water rates increase. He noted that school districts are often treated differently than residential water users for billing purposes.
President Smolley returned the discussion to the Board. He said his impression was that the Board was comfortable using the $25M estimate for rebuilding the raw-water pipelines. Sudhir commented that there were still quite a few unknowns. He also suggested that assuming the buried approach for the pipeline would give the District significantly more flexibility. Director Mahood called this an important point that should be discussed further by the Board at its next meeting.
Director Fultz complained about the Staff’s failure to include the Raftelis presentation in the agenda packet and also urged everyone to heed Bruce Holloway’s concerns about the Brown Act.
At this point, Director Mahood left the meeting due to a health issue. From this point forward, the meeting grew increasingly contentious.
Director Fultz objected again to the default schedule. He argued both that it was unfair to expect the public to respond over the holidays and that the Board might benefit from having a few additional weeks of discussion in any event. He said he was sorry if other Board members found his comments tedious.
President Smolley said a final decision on the above-ground vs. buried question was not remotely imminent. He said the Board would conduct further discussion of the Raftelis revenue model at its next meeting based on the $25M estimate. Director Fultz complained again that the Board should have been able to reach a final conclusion on the pipeline by now. Director Hill argued that omissions from recent agenda packets suggested that the District was trying to move faster than it was capable of. He suggested that the Board consider extending the Rate Study schedule by a few weeks.
Director Ackemann said that getting fresh agendas out every week was difficult for the Staff, especially under challenging conditions. She further stated that Director Fultz’s repeated assertion that the Proposition 218 process is “rigged” merely reflected his personal opinion. She characterized this language as inflammatory, misleading to the public, needlessly repetitious, and unfair to the Board which is merely following the law.
Director Fultz replied that everyone was merely sharing their opinions. He also argued that the law provided only a minimum standard, and the Board could opt to be more accommodating of his concerns. Lastly, in response to the charge that he was often repeating himself, he argued that Board meetings are intended to inform the public, and there were different members of the public at each meeting who deserved to hear from him.
President Smolley disagreed that the Proposition 218 process involves a “rigged” vote. He said the Board had concluded its intended work for the evening, and he declared the meeting adjourned.
The meeting adjourned at 8:30 PM.