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. In recent years, these obstacles have driven the City to develop financial policies to help mitigate potential risks and to establish sound financial management practices.
Raftelis has worked on a series of projects for the City to help ensure the financial sustainability of the City’s water system. The City engaged Raftelis to conduct a Water Demand Offset Fee Study to evaluate the feasibility of implementing a Water Demand Offset Fee. Water Demand Offset Fees are a form of funding 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. Raftelis used the water conservation measures savings and costs from the Water Conservation Master Plan to calculate the proposed Water Demand Offset Fee. Raftelis 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.
The City commissioned Raftelis to develop a financial plan model as a tool to assess the financial implications of different financial policies. Raftelis evaluated the risks associated with water supply variances, various capital spending plans, etc. and 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. A user manual was also provided by Raftelis to assist City staff with use of the model in the future.
Raftelis also evaluated the City’s system development charges to ensure new system users or existing users requiring increased system capacity recover their fair share of the costs associated with the water facilities required to serve them. System development charges are one-time fees collected as a condition of establishing a new connection to the City’s water system or expansion of an already existing connection. The purpose of these fees is to pay for development’s share of the costs of new and existing water facilities. 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 no longer charging new customers their fair share of the costs. Raftelis calculated the proposed system development charges using the equity buy-in approach. Raftelis presented the proposed system development charges to the Water Commission in December of 2014. The results of the study were summarized in the Systems Development Charge Report and were presented to the City Council for implementation. The City adopted a phased implementation of the system development charges in June 2015 along with an annual inflationary adjustment.
In 2015, the City entered a Stage 3 water shortage due to the continued drought. Under mandatory curtailment and rationing, customers use less water and, therefore, the Water Department earns less revenue. The City implemented drought cost recovery fees to combat the revenue shortage. The City engaged Raftelis to develop a revenue calculator to examine the effects on the City’s revenue from various levels of water usage. This tool helped the City understand the financial impacts caused by the rationing and helped project the expected revenues from the drought cost recovery fees.
Additionally, Raftelis worked with the City to design an appropriate, Proposition 218-compliant, water rate structure. Raftelis conducted a pricing objective workshop with the Water Commission and City Council to prioritize rate-setting objectives. Raftelis 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, Raftelis presented a framework for the rate structure best suited for the City and performed a cost of service-based rate design. Raftelis developed a dynamic model capable of evaluating six different rate scenarios. The rate structure included an analysis to determine the allocation to inside customers versus outside customers, allocations by class, and tier. In addition, a separate infrastructure reinvestment charge was developed to help finance the significant repairs and replacements and to clearly communicate the needs to the City’s customers. Rates were successfully adopted in August 2016.
In 2017, Raftelis assisted the City with a Water Reliability Financial Impact Study to meet the grant requirements of the State Water Resource Control Board Water Recycling Funding Program. Raftelis obtained a high-level understanding of the financial impacts associated with the recycled water project alternatives and documented the results of the study in the Construction Financing Plan and Revenue Program section of the Recycled Water Facilities Planning Study. Raftelis identified and discussed various funding mechanisms, recycled water pricing policy considerations, cost categories, and cost allocations. Based on the selected projects, unit prices were developed and presented to City staff.
