-1-

City Commission Special Meeting

"Utility Revenue Sufficiency

and Rate Study"

June 8, 2015

-2-

Agenda

Background and Objectives

Connection Fee Analysis

Revenue Sufficiency Analysis

Proposed Water and Wastewater Rates

Conclusions and Recommendations / Future City Actions

-3-

Background Study Goals and Objectives

Study Goal:

Recommend a Sustainable Financial and Cost

Recovery Plan that Produces Stable Rates at the

Lowest Cost to the Customers Over the Long-Term

-4-

Study Objectives: Maintain Financial Strength and Creditworthiness of the Utility

(Financial Risk)

Promote Increased Capital Re-investment from Rates (High Quality

Service and Compliance)

Address Rate Design Issues (Cost Recovery and Equitability)

Avoid Future "Rate Shock" to Customers (Bill Impact)

Provide Ability to Issue Additional Bonds in Future (Financial

Position)

Consider Reduction to the Outside-City Surcharge (Cost Recovery)

Background Study Goals and Objectives (cont'd.)

-5-

Background Study Approach

No Formal Evaluation of Rates in over 20 Years

Rates have Historically been Indexed for Inflation

Fiscal Year 2015 Approximately 1.3%

Rate Evaluation Included Three-Part Process:

Update Connection Fees Charged to New Development

Review of Sufficiency of Rate Revenues

Design Alternative / Updated Revenues

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Connection (Impact) Fee Analysis

-7-

Overview of Connection Fees

Support Policy of "Growth Paying for Growth"

Existing Customers Not Responsible for New Capital

Favorable Existing Customer Benefit Keeps Monthly Utility

Rates Reasonable

Recover Capital Cost of Capacity Allocable to New Users

Must Meet "Rational Nexus" Provisions Dictated by Case Law

and Florida Impact Fee Act

Must Relate Capital Expenditures to Growth

Fee must be Based on Most Recent and Localized Data

-8-

Connection Fee Methodology

Two Primary Components to Fee

Capital Expenditures (Costs Allocated to ERC)

Level of Service (Demand Allocated to ERC)

First Component Capital Expenditures

Includes Plant Investment Recognized as "System" Costs

Does Not Include "On-site" Costs (Meters, Services,

Local Lines)

Based on Evaluation of Fixed Assets and Capital

Improvement Plan

-9-

Connection Fee Methodology (cont'd.)

Second Component Level of Service

Relates to Capacity Allocated to an ERC Gallons per Day Basis

Rate Ordinance has 350 GPD Water and Sewer

Recommend the Following Levels of Service:

GPD per ERC Comment

Water 300 Based on Indoor Use with Allowance for Fixture

Units for Hose Bibs; Comprehensive Plan at 220 GPD

Wastewater 210 Reduced to Match Capacity Analysis Report to FDEP

and Representative of Comprehensive Plan

-10-

Proposed Connection Fees

and Implementation

Connection Fee Comparison:

Note: Connection Fees Cannot be Implemented

Until 90 Days After Approval and Notification

Water Wastewater Totals

Existing Fee $1,785.00 $2,341.50 $4,126.50

Proposed Fee 2,228.00 1,668.00 3,896.00

Difference $443.00 ($673.50) ($230.50)

-11-

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

Residential Capital Recovery Charge Per ERC Comparison of Neighboring Utilities

Water Wastewater Average: $4,040

$4,127 $3,896

Revenue Sufficiency

Financial Position (cont'd.)

-12-

Connection Fee Recommendations

Fees Considered by PRMG to be Reasonable and Meets Criteria Established by Case Law / Florida Impact Fee Act

Adopt Proposed Water and Wastewater Connection Fees

Upon Approval, Notify Community for Implementation Not Less Than 90 Days After Adoption

Further Questions and Discussions

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Revenue Sufficiency Analysis

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Utility Accounted for as "Enterprise Fund"

Governmental Accounting Standards Board:

System Not Supported by General Fund Contributions

Rates Must be Sufficient to Fully Fund All Expenditures / Funding Requirements and Maintain Strong Fiscal Position

Referred to as "Revenue Requirements"

"Enterprise funds should be used to account for

operations that are financed and operated in a manner

similar to private business enterprises -- where the

intent of the governing body is that costs of providing

services to the general public on a continuing basis be

financed or recovered primarily through user charges."

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Revenue Sufficiency

Determine Ability of Revenues to Meet Expenditures / Funding Needs (Sufficiency)

Approach:

Projection of Revenues Under Existing

Projection of Revenue Requirements

Operating Expenses / Debt Payments

Transfers for Pay-Go Capital / Reserves

Compliance with Policies / Bond Resolution

Projected Revenue Sufficiency of Existing Rates

Gross

Revenues

Gross Revenue

Requirements

Compliance

Debt /

Capital

Expenses

Growth Fees

Other Rev /

Income

Rate

Revenues

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Revenue Sufficiency

Demand and Revenue Characteristics

Growth in Customers = 1.7% or 200 Customers Annually

Based on Capacity Analysis Report Projections

Maintained Reduced Water Sales per Account

System Characteristics Fiscal Year 2015

Customer Demographics

Retail Accounts Water Sewer

Inside City 7,403 6,812

Outside City 4,825 3,469

Totals 12,229 10,281

Percent Outside 39.5% 33.7%

Monthly Water Sales per Residential Account = 3,450 Gallons

Utility Rate Revenues

Retail Rate Revenues Water Sewer Total

Rate Revenue $5,251,655 $5,155,782 $10,407,437

Outside Surcharge 546,755 418,984 965,740

Totals $5,798,411 $5,574,766 $11,373,177

Percent of Total Revenues

89.1%

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Revenue Sufficiency

Operating Expenses

Operating Expense Growth During Forecast Period

FY 2015 Budget Served as Baseline for Operating Expenses

Increased Approximately 3.0% per Year

Due to Inflation and Growth

Water and Sewerage Maintenance Index = Over 5% Annually Last 5 Years

Personnel / Power / Chemicals / Sludge = 58% of Total

Operating Expenses

Forecast Period Reduced Personnel (3) Due to CIP

Contingency Allowance of 1% Unforeseen Expenditures

Operating Expenses = 63% of Total Revenue Requirements

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Revenue Sufficiency Capital

Improvement Plan FY 2015-FY 2020

$47.8 Million in Capital Needs / Averages $7.9 Million Annually

Based on City CIP Adjusted for Inflation in Outer

Years

Essentially All of CIP Though Fiscal Year 2020 for

Renewals and Replacements

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Revenue Sufficiency Capital

Improvement Plan FY 2015-FY 2020

Primary Projects:

Funded from Rate Revenues, Reserves / Annual Operations, Existing / New Debt and Grants Balanced Funding Approach

Project Description

Funds

Required

Project

Amount

Reverse Osmosis Water Treatment 2018-2019 $14,471,600

San Marco Water Main Replacement 2016-2017 3,277,000

Utility Road Relocations / Projects 2016 1,290,000

I&I and Pump Station Rehab Sewer Projects 2016-2020 3,283,000

West Augustine Sewer Project 2016-2020 1,088,000

WWTP Headworks Replacement / BTU Expand. 2019-2020 5,500,000

Automated Meter Program / Replacement 2016 1,137,000

Totals $30,046,600

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Revenue Sufficiency

Capital Improvement Plan

2015 2016 2017 2018 2019 2020

Debt $3.0 $0.9 $3.0 $1.6 $9.1 $4.9

Grants $0.0 $0.0 $0.0 $0.0 $5.4 $0.0

Connection Fees $0.0 $0.0 $0.0 $0.4 $1.3 $2.0

R&R Fund $2.9 $1.0 $1.0 $1.0 $1.3 $1.5

Operating Fund $3.0 $2.0 $0.0 $0.5 $0.0 $0.0

Rates $0.3 $0.3 $0.3 $0.3 $0.3 $0.3

Total $9.3 $4.2 $4.2 $3.8 $17.2 $8.7

$0.0

$5.0

$10.0

$15.0

$20.0

Mil

lion

s

Capital Funding Plan

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Revenue Sufficiency Capital

Improvement Plan Funding Issues

Renewal and Replacement (R&R) Account

Ongoing Capital Funded from Rates Key Financial Metric for

Rating Agencies

Account Established by Bond Resolution Authorizing Issuance of

Senior Bonds

Minimum Annual Deposit Requirement = 25% of Annual Debt

Payment (insures coverage)

Equates to $709,000 / Year = Approximately 6% of Rate Revenue

Represents a Low Funding Level Considered Insufficient for

Long-term

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Revenue Sufficiency Capital

Improvement Plan Funding Issues (cont'd.)

R&R Account Funding Recommendation

Adopt Funding Target at 15% of Rate Revenue

In Addition to "Departmental Capital"

Phase into Target Deposit Level Over Time

Forecast Assumes a 9% Deposit Increasing to 15% by 2024

Approximately $1.2 Million per Year for Forecast Period

Capital Funded from Rates = 15% of Total Revenue Requirements

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Revenue Sufficiency Debt Payments

Existing Utility Allocated Debt $28.2M Outstanding Allocated to Utility

Current Debt Service Payments = $3,323,000 Annually

Reduction in Debt in FY 2024

Proposed Additional Utility Debt $29.2M All Low-Interest SRF Loans from State

No Payments Until Projects Completed / Interest Capitalized

3 Loans Assumed to Match CIP Funding Needs Most Flexible

Proposed Debt Service =$1,420,000 Annually by 2022

Annual Debt Service Payments = 22% of Total Revenue

Requirements

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Revenue Sufficiency Debt Payments

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Revenue Sufficiency

Projected Revenue Increases

Existing Revenues Not Sufficient to Meet Projected Expenditures

Recommending a Phased Rate Structure Implementation Plan

Revenue Adjustments Include Annual Price Index (Inflation)

Proposed Revenue Increases:

Effective Date (Fiscal Year)

of Phased Rate Restructure

Percent Increase in System Revenue Targeted

Assumed

Inflation Index

Additional

Adjustment

Total

Revenue Increase

October 1, 2015 (FY 2016) 2.00% 3.75% 5.75%

October 1, 2016 (FY 2017) 2.30% 3.45% 5.75%

October 1, 2017 (FY 2018) 2.40% 3.35% 5.75%

October 1, 2018 (FY 2019) 2.30% 3.45% 5.75%

October 1, 2019 (FY 2020) 2.40% 0.60% 3.00%

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Revenue Sufficiency

Reasons for Revenue Increase

Low Customer Demands and Growth

Anticipated Loss of Bulk Sales to St. Johns County in FY 2017 ($160,000)

Continued Inflation Impacts on Cost of Service

Need to Fund Capital Plan Includes Additional Debt

Increase CIP Funding from Operations

Maintain Strong Financial Position

Note: Revenue Sufficiency Analysis Served as Basis for

Development of Proposed and Re-structured Rates

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Projected Financial Position

and Benchmarks

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Projected Financial Position

and Benchmarks (cont'd.)

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Projected Financial Position

and Benchmarks (cont'd.)

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Projected Financial Position

and Benchmarks (cont'd.)

-31-

Revenue Sufficiency Recommendations

Accept Financial Forecast and Capital Funding Plan

Adopt Revenue Increases for Next Four Years in Rate Resolution / Then Reinstitute Rate Indexing

In Third Year Re-evaluate the Sufficiency of Rates and Adjust As Necessary

Other Recommendations:

Adopt Financial Targets and Establish Policy

Initiate SRF Application Process to Secure First Loan

Further Questions and Discussions

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Rate Restructure (Design) Analysis

-33-

Existing Rates and Issues

Existing Rates for Inside-City Service

Outside-City Customers 25% Surcharge Applied

37% of Customers Surcharge Accounts for 8.5% of Total

Rate Revenue

Water Rates All Customers Wastewater Rates All Customers

Meter (Base) Charge $17.30 Meter (Base) Charge $23.64

Usage Charge Usage Charge

First 3,000 Gallons $0.00 First 3,000 Gallons $0.00

All Use Above 4.82 All Use Above 6.06

-34-

Existing Rates and Issues

Issues and Rate Objectives

Meter (Base) Charge Includes 3,000 Gallons of Service /

Impacts Low Water Users

Disincentive to Promoting Water Conservation

Industry Moving Away from the Minimum Use Provisions

No Price Allowance for Water Conservation (SJRWMD)

All Customers Pay Same Base Charges Regardless of Size

Hotel Pays Same as Real Estate Office

Not Consistent with Industry Norms

City Expressed Desire to Reduce Outside-City Surcharge

-35-

Proposed Rate Structure Adjustments

Adjust Base Charge to Reflect Meter Size Differences

Larger the Meter Greater the Charge

Links Base Charge to Customer Capacity

Consistent With Industry / FPSC

Phase-Out the "Free Service Allowance" in Base Charge

Pay for What you Use Awards Conservation at Low Use

Propose a Three-Year Phasing Plan

-36-

Proposed Rate Structure Adjustments

Implement Water Conservation Block Structure

Will Meet Water Use Permit Requirements

Adopt Same Block Structure as St. Johns County

Phase Reduction in Outside-City Surcharge (20% Reduction)

NOTE: Rate Structure Change Will Result in Customers

Receiving Different Percent Rate Adjustments

Existing

FY

2016

FY

2017

FY

2018

FY

2019

FY

2020

Outside Surcharge 25% 24% 23% 22% 21% 20%

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Proposed Residential

Inside-City Water Rates

Existing 2016 2017 2018 2019 2020

Residential Service

All Meter Sizes $17.30 $16.34 $13.02 $8.95 $9.46 $9.74

Water Usage Charge

Base Use Allowance 3 Kgal 2 Kgal 1 Kgal 0 Kgal 0 Kgal 0 Kgal

Block 1 Base Use $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Block 2 Up to 10 Kgal 4.82 4.17 4.56 4.89 5.17 5.33

Block 3 10 to 20 Kgal 4.82 6.20 6.78 7.21 7.62 7.85

Block 4 20 to 30 Kgal 4.82 9.43 10.15 10.70 11.32 11.66

Block 5 Over 30 Kgal 4.82 12.51 13.68 14.67 15.51 15.98

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Rate Design Notes Current Billed Residential Flow

65% of Billed Water at First 3,000 Gallons of Service

30% of Billed Water Between 3,000 and 10,000 Gallons of Service

2% of Billed Water Between 20,000 and 30,000 Gallons of Service

3.5% of Billed Water Above 30,000 Gallons of Service

Assumed No Flows Above 30,000 Gallons in Analysis to Reflect Effects of Price Elasticity

Proposed Residential

Inside-City Water Rates (cont'd.)

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Existing 2016 2017 2018 2019 2020

Commercial Service

Meter Sizes

5/8 or 3/4-inch $17.30 $18.48 $14.19 $8.95 $9.46 $9.74

1-inch 17.30 23.81 19.83 14.92 15.78 16.25

1-Inch 17.30 37.15 33.90 29.83 31.55 32.50

2-inch 17.30 40.35 44.08 47.73 50.47 51.98

3-inch 17.30 66.48 77.64 89.50 94.65 97.49

4-inch 17.30 103.81 125.58 149.17 157.75 162.48

Water Use Charge

Base Use Allowance 3 Kgal 2 Kgal 1 Kgal 0 Kgal 0 Kgal 0 Kgal

Block 1 Base Use $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Block 2 Up to 10 Kgal 4.82 5.24 5.73 6.12 6.47 6.66

Proposed Residential

Inside-City Water Rates (cont'd.)

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Rate Design Notes Commercial Customers

Rate Design Goes to 10-Inch metered Customers

61% of Accounts 5/8- or 3/4-inch meters

Proposed Residential

Inside-City Water Rates (cont'd.)

-41-

Comparison of Residential Water Bill

at Existing and Proposed Rates

Fiscal Year 2016 Recommended Rates Water

Usage Inside Outside

Kgals Existing Proposed Change ($) Existing Proposed Change ($)

0 $17.30 $16.34 ($0.96) $21.61 $20.26 ($1.35)

1 17.30 16.34 (0.96) 21.61 20.26 (1.35)

2 17.30 16.34 (0.96) 21.61 20.26 (1.35)

3 17.30 20.51 3.21 21.61 25.43 3.82

4 22.12 24.68 2.56 27.64 30.60 2.96

5 26.94 28.85 1.91 33.67 35.77 2.10

6 31.76 33.02 1.26 39.70 40.94 1.24

7 36.58 37.19 0.61 45.73 46.12 0.39

8 41.40 41.36 (0.04) 51.76 51.29 (0.47)

9 46.22 45.53 (0.69) 57.79 56.46 (1.33)

10 51.04 49.70 (1.34) 63.82 61.63 (2.19)

15 75.14 80.70 5.56 93.97 100.07 6.10

20 99.24 111.70 12.46 124.12 138.51 14.39

- Average Usage for City of St. Augustine.

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Revenue Sufficiency Financial Position

$-

$10

$20

$30

$40

$50

$60

Comparison of Typical Inside-City Residential Water Bill at 4,000 Gallons

Water Average: $25.17

$22.12 $24.68

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Proposed Residential

Inside-City Wastewater Rates

Existing 2016 2017 2018 2019 2020

Residential Service

All Meter Sizes $23.64 $22.24 $18.29 $13.42 $14.19 $14.62

Sewer Flow Charge

Base Use Allowance 3 Kgal 2 Kgal 1 Kgal 0 Kgal 0 Kgal 0 Kgal

Block 1 Base Use $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Block 2 Up to 10 Kgal $6.06 $5.12 $5.60 $5.99 $6.33 $6.52

Maintain Residential Billing Threshold of 10,000 Gallons

-44-

Proposed Residential

Inside-City Wastewater Rates (cont'd.)

Existing 2016 2017 2018 2019 2020

Commercial Service

Meter Sizes

5/8 or 3/4-inch $23.64 $22.24 $18.29 $13.42 $14.19 $14.62

1-inch 23.64 22.24 18.29 13.42 14.19 14.62

1-Inch 23.64 30.24 26.75 22.37 23.66 24.37

2-inch 23.64 50.24 47.90 44.73 47.30 48.72

3-inch 23.64 55.04 63.13 71.57 75.69 77.96

4-inch 23.64 94.24 113.47 134.20 141.92 146.18

Sewer Flow Charge

Base Use Allowance 3 Kgal 2 Kgal 1 Kgal 0 Kgal 0 Kgal 0 Kgal

Block 1 Base Use $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Block 2 Up to 10 Kgal $6.06 $5.12 $5.60 $5.99 $6.33 $6.52

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Comparison of Residential Wastewater Bill

at Existing and Proposed Rates

Fiscal Year 2016 Recommended Wastewater

Usage Inside Outside

Kgals Existing Proposed Change ($) Existing Proposed Change ($)

0 $23.64 $22.24 ($1.40) $29.52 $27.58 ($1.94)

1 23.64 22.24 (1.40) 29.52 27.58 (1.94)

2 23.64 22.24 (1.40) 29.52 27.58 (1.94)

3 23.64 27.36 3.72 29.52 33.93 4.41

4 29.70 32.48 2.78 37.08 40.28 3.20

5 35.76 37.60 1.84 44.64 46.62 1.98

6 41.82 42.72 0.90 52.20 52.97 0.77

7 47.88 47.84 (0.04) 59.76 59.32 (0.44)

8 53.94 52.96 (0.98) 67.32 65.67 (1.65)

9 60.00 58.08 (1.92) 74.88 72.02 (2.86)

10-20 66.06 63.20 (2.86) 82.44 78.37 (4.07)

- Average Bill for City of St. Augustine.

-46-

Revenue Sufficiency Financial Position (cont'd.)

$-

$10

$20

$30

$40

$50

$60

Comparison of Typical Inside-City Residential Wastewater Bill at 4,000 Gallons

Wastewater Average: $36.56

$29.70 $32.48

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Comparison of Residential Combined Water and

Wastewater Bill at Existing and Proposed Rates

Fiscal Year 2016 Recommended Combined

Usage Inside Outside

Kgals Existing Proposed Change ($) Existing Proposed Change ($)

0 $40.94 $38.58 ($2.36) $51.13 $47.84 ($3.29)

1 40.94 38.58 (2.36) 51.13 47.84 (3.29)

2 40.94 38.58 (2.36) 51.13 47.84 (3.29)

3 40.94 47.87 6.93 51.13 59.36 8.23

4 51.82 57.16 5.34 64.72 70.88 6.16

5 62.70 66.45 3.75 78.31 82.40 4.09

6 73.58 75.74 2.16 91.90 93.92 2.02

7 84.46 85.03 0.57 105.49 105.44 (0.05)

8 95.34 94.32 (1.02) 119.08 116.96 (2.12)

9 106.22 103.61 (2.61) 132.67 128.48 (4.19)

10 117.10 112.90 (4.20) 146.26 140.00 (6.26)

15 141.20 143.90 2.70 176.41 178.44 2.03

20 165.30 174.90 9.60 206.56 216.88 10.32

- Average Bill for City of St. Augustine.

-48-

Revenue Sufficiency Financial Position (cont'd.)

$-

$20

$40

$60

$80

$100

$120

Comparison of Typical Inside-City Residential Water and Wastewater Bill at 4,000 Gallons

Water Wastewater Average: $61.73

$51.82

$57.16

-49-

Rate Design Recommendations

Adopt the Alternative Rate Structure Plan

Promotes Conservation / Reflects Industry Norms / All Service Billed

Based on Use

Adopt Rates for Next Four Years / Then Reinstitute Rate Indexing

Adopt the Municipal Cost Index for Future Index Calculations

Index Should Never Be Less than Zero

In Third Year Re-evaluate the Sufficiency of Rates and Structure and Adjust as Necessary

NOTE: Must Notify all Customers on Utility Bill of Date of Public

Hearing per Florida Statutes Further Questions and Discussions

-50-

Recommendations for

2015/2016 Budget Hearings

Adopt Financial Plan 5-Year CIP

Adopt Connection Fees and Level of Service Notify of Adjustment and Implement 90 Days After Notification

Adopt Rate Restructuring Plan Adopt 4-year Rate Phasing Plan and Include All Years in Rate Ordinance

Phase a Reduction of the Outside-City Surcharge to 20% Over a 5-Year Period

Initiate Customer Notification of Public Hearing for Rate Adoption on Utility

Bill

Re-evaluate Rates After 3 Years and Adjust as Necessary to Maintain Financial

Plan / CIP Program Funding

-51-

Additional Questions

and Commission Discussion

-52-

Residential Billed Water Use

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

0

5,000

10,000

15,000

20,000

25,000

30,000

Bills Rendered Cumulative Bills

Nu

mb

er o

f B

ills

C

um

ula

tive %

of B

ills

Billed Usage

-53-

Next Steps

Address Additional Questions or Concerns

City Council Direction Set Public Hearing Date to Adopt Rates and Fees