Santa Cruz, City of

California

The City of Santa Cruz (City) Water Department provides water service to a population of approximately 93,000. The City relies entirely on local sources for the community’s water supply which is currently susceptible to water supply instability. Similar to many other cities and utilities in California, the City’s water department is faced with several challenges including aging infrastructure and the resulting intensive capital improvement costs, drought and its subsequent impacts, increasing operations and maintenance costs, and volatile water sales. These obstacles in recent years has driven the City to develop financial policies to help mitigate potential risks and to establish sound financial management practices, and conduct a long-range financial plan to ensure financial sufficiency and sustainability of the City’s water system.

In 2012, the City commissioned RFC to develop a Financial Plan Model as a tool to assess the financial implications of different financial policies. RFC evaluated the risks associated with water supply variances, various capital spending plans, etc. RFC presented the Model to the Water Commission to illustrate the Water Enterprise’s financial health under various scenarios related to financial policies. The Model was delivered to City staff along with a training session to demonstrate all key aspects of the Model. RFC also provided a user manual to assist City staff with use of the Model in the future.

RFC is currently working on a series of projects for the City of Santa Cruz to help ensure the financial sustainability of the City’s water system. The City engaged RFC to conduct a Water Demand Offset Fee Study to evaluate the feasibility of implementing a Water Demand Offset Fee for the City. Water Demand Offset Fees are a form of funding of conservation measures which are used to offset the demand generated by new developments. Water savings can be achieved in many different ways, such as installing high-efficiency retrofits to replace inefficient fixtures, removing turf, or converting irrigation accounts to recycled water. RFC used the water conservation measures savings and costs from the Water Conservation Master Plan to calculate the proposed Water Demand Offset Fee. RFC presented the results of the study to the Water Commission and assisted the City with evaluating the fees and policy decision of whether or not to implement such a fee.

RFC also evaluated the City’s system development charges to ensure new customers, or existing customers requiring larger meters, pay an equitable share when connecting to the system. The City’s system development charges had not been updated since 2004, did not account for any changes that occurred to the system, and were under charging new customers. RFC calculated the proposed system development charges using the equity buy-in approach. RFC presented the proposed system development charges to the Water Commission in December or 2014. The results of the study were summarized in the Systems Development Charge Report and will be presented to the City Council for implementation in July of 2015.

Recently, the City has been under a Stage 3 water shortage due the continued drought. In October 2014, the City implemented drought cost recovery fees effective for the following two years. Under mandatory curtailment and rationing customers use less water and therefor the Water Department earns less revenue. The City engaged RFC to develop a revenue calculator to examine the effects on the City’s revenue from various levels of water usage. This tool helps the City understand the financial impacts caused by the rationing and helps project the expected revenues from the drought cost recovery fees.

Additionally, RFC is currently working with the City to design an appropriate, Proposition 218 compliant, water rate structure. RFC conducted a pricing objective workshop with the Water Commission and City Council to prioritize rate-setting objectives. RFC analyzed and set forth the pros and cons for a number of rate structures and discussed these with City Staff, the Water Commission, and the City Council. Based on the input and direction provided by key staff, the Water Commission, and the City Council, RFC will present a framework for the rate structure best suited for the City and will perform a cost of service based rate design. The rate design is expected to be completed in October of 2015.