TO: Mayor and City Council
THROUGH: Keith Stahley, City Manager
FROM: Brian D. Martin, PE, Public Works Director
SUBJECT:
title
Proposed Fees and Charges for Utility Service Rates (Water, Wastewater, and Stormwater).
Ward(s): All Wards
Councilor(s): All Councilors
Neighborhood(s): All Neighborhoods
Result Area(s): Good Governance; Natural Environment Stewardship: Safe, Reliable and Efficient Infrastructure.
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SUMMARY:
summary
City Council has had a long-standing commitment to providing adequate funding for the City’s water, wastewater, and stormwater systems (the Utility). The Utility Fund is separate from the General Fund and provides funding for basic utility system necessities. Utility services include provision of clean drinking water on demand, treatment of wastewater, flood mitigation, and maintaining sufficient pressure and water storage for fire protection. Adequate Utility funding is essential to meet the current and future needs of our community and to comply with state and federal regulations. Because of this commitment, Council has consistently adopted the rate increases necessary to operate and maintain the systems, provide the services, complete important capital projects, and preserve the financial health and stability of the Utility.
A Water/Wastewater Task Force (Task Force) is commissioned every two years to advise the Public Works Director on the utility rate setting process. The 2024 Task Force members included four Salem City Councilors, a Marion County Commissioner, representatives from City of Keizer and City of Turner, a representative of Suburban East Salem Water District, representatives from Salem Chamber of Commerce and the Strategic Economic Development Corporation (SEDCOR), and two community members at-large. The Task Force reviewed a range of utility rate proposal scenarios and is recommending 4.5 percent rate increases for water, wastewater, and stormwater in 2025 and 2026. Resolution No. 2024-46 (Attachment 1) contains this recommendation. In addition to water, wastewater, and stormwater rates, the exhibit to Resolution No. 2024-46 (Attachment 2) includes fee adjustments for septic waste and leachate.
Consistent with the recommendation of the Task Force, the staff recommendation also includes utility funding for the Emergency Utility Assistance Program of up to $400,000 in 2025 and anticipate that same level of funding in 2026. Restatement and extension through December 31, 2026 of the Emergency Utility Assistance Program is the subject of Agenda Item 24-437 and Resolution No. 2024-47 on this Council meeting agenda.
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ISSUE:
Shall Council adopt Resolution No. 2024-46 establishing fees and charges for utility service rates (water, wastewater, and stormwater) effective January 1, 2025, and January 1, 2026, and approve the allocation of up to $400,000 of utility revenue for 2025 for the Emergency Utility Assistance Program?
RECOMMENDATION:
recommendation
Adopt Resolution No. 2024-46 establishing fees and charges for utility service rates (water, wastewater, and stormwater) effective January 1, 2025, and January 1, 2026, and approve the allocation of up to $400,000 of utility revenue annually for 2025 for the Emergency Utility Assistance Program.
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FACTS AND FINDINGS:
The Public Works Department operates a large and complex water, wastewater, and stormwater utility. Department staff are committed to reliably operating the Utility and protecting the health, safety, and welfare of the community. Responsible stewardship of the Utility’s physical condition and financial resources is a top priority of the Public Works Department. As a result of careful financial planning and small annual rate increases - also known as ‘revenue slope adjustments’ - the City has been able to make the required infrastructure investments, navigate economic challenges and emergencies, and address emerging operational needs without resorting to emergency or excessive rate increases. Annual rate adjustments provide flexibility and resiliency to manage the long-term financial health of the Utility.
The Utility Fund is currently financially sound; however, inflationary pressures require rate adjustments of at least 4.5 percent for the next two years to maintain financial health. The 4.5 percent revenue slope preserves capacity for capital investments and maintains adequate reserves for both the short-term and long-term. The following sections of this report provide additional information regarding the process used to develop the recommendation, the need to maintain financial stability, and the level of support required for future operational and capital projects.
1. Water/Wastewater Task Force Review and Recommendation
The Water/Wastewater Task Force was organized in the early 1990s to advise the Public Works Director. Every two years, the Task Force reviews the Utility’s financial plan and considers rate proposal scenarios developed by staff and consultants. After careful review of all the available information, the Task Force recommends a rate proposal to the Public Works Director who brings it to the City Council for adoption.
The 2024 Task Force met six times this summer between June and September to consider:
• The proposed revenue slope (Fact and Finding 3),
• Two fee adjustments (Fact and Finding 7), and
• Three policy issues (Fact and Finding 9).
2. Financial Health Measured by Days of Cash in Fund Balance
Over ten years ago, when the Utility was carrying bond debt with annual payments equivalent to 33 percent of the Utility Fund budget, financial planning focused on setting rates to meet minimum bond covenants. This required that the Utility achieve net revenue after all expenses that was at least 1.25 times the annual debt payment. Over time, the Utility has been able to retire debt and financial planning has shifted focus to a different metric: the number of days of unrestricted cash in the Utility Fund at the end of each fiscal year (FY). In 2020, the City of Salem’s utility revenue bonds received a rating of Aa2 from Moody’s. This rating recognizes, in part, the fact that the Utility maintains between 150 and 250 days of unrestricted cash in the Utility Fund.
During rate-setting in 2022, a 5.0 percent revenue slope was adopted for 2023 and 2024 with the future revenue slope for 2025 and beyond modeled at 3.5 percent. This was the future revenue slope that, at the time, provided longer term financial stability. The ‘days of unrestricted cash’ metric was used to evaluate financial stability, and 200 days of unrestricted cash was defined as the target, representing the mid-point of the 150- to 250-day range of the metric. In 2022, the modeling projections anticipated 191 days of cash within five years and a stable financial position over the next ten years.
3. 2024 Financial Modeling Results
Updated financial modeling conducted in early 2024 revealed that a 3.5 percent revenue slope for 2025 and beyond can no longer provide the same financial stability as anticipated in 2022. This change resulted from inflationary increases to Operating costs for the Utility - e.g. electricity, chemicals, pipe - in 2022 and early 2023 that were greater than the adopted revenue slope of 5.0 percent. Continuing to model a future revenue slope of 3.5 percent resulted in a declining cash position throughout the forecast period with the Utility falling below the minimum recommended unrestricted days of cash metric in FY 2025 and declining in later years. A declining financial position will likely result in a lower bond rating in the future with a higher interest rate or could require a more significant utility rate increase to support a future bond sale. A modified revenue slope of 4.5 percent in the short term provides the minimum rate increase needed to maintain sufficient reserves and unrestricted days of cash.
During the 2024 financial analysis process, the team modeled eleven different rate scenarios of between 3.50 and 5.0 percent rate increases for two years. These scenarios also included three funding levels for the Emergency Utility Assistance Program of between $300,000 and $500,000 per year. Based on the information available in September, the Task Force recommended a proposed revenue slope of 4.5 percent in 2025 and 4.5 percent in 2026 with $400,000 in Emergency Utility Assistance annually. At that time, the estimated unrestricted days of cash remained at 150 in FY 2025 and improved to 188 days by FY 2031.
Since that time, new information has become available related to anticipated personal services expenditures and new Oregon Public Employee Retirement System (PERS) rates. These updated costs have been incorporated into the financial model and result in a significant change in the projection of unrestricted days of cash. Without any other budget reductions, the days of unrestricted cash would decline from 150 in FY 2026 to 102 by FY 2031. In order to retain at least 150 days of unrestricted cash and honor the Task Force recommendation and public notifications of proposed rate increases of 4.5 percent in 2025 and 4.5 percent in 2026, staff will reduce capital expenditures and/or hold the staffing plan flat the next two years.
4. Estimated Impacts on Customer Bills
Sample bills for all customer classes and service areas are displayed in Attachment 3. The typical residential customer account in Salem uses 8 ccf of water per month, and the average wastewater base is 5.3 ccf. These assumptions are used in the example below for a customer account with a 3/4-inch meter, typical for a residential customer. An account with these characteristics is anticipated to experience an increase of $4.63 per month in 2025 and $4.86 per month in 2026.
The total monthly City of Salem utility bill for a typical residential customer shown above represents less than 2.0 percent of Salem’s monthly median household income. Note that customers with financial needs may qualify for utility assistance programs described in Attachment 4.
5. Comparison to Other Cities
Salem has historically been on the lower end - in terms of cost - of the group of Oregon cities that provide comparable water, wastewater, and stormwater utility services. Total bills shown are based on rates in effect in July 2024. Salem’s proposed rate increase would take effect January 1, 2025. Some of the identified cities may be considering a rate proposal in the coming months. However, based on what is known at present, with the Salem’s proposed rate increases, Salem is anticipated to move from tenth to ninth on the list of twelve jurisdictions providing comparable services, which include: Keizer, Corvallis, Wilsonville, Eugene, Hillsboro, Gresham, Beaverton, Independence, Albany, Tigard, and Portland.
6. Cost of Service Analysis (COSA)
Salem provides utility services to customers in many customer classifications and service areas, and to customers both inside and outside of Salem’s corporate City limits. Salem’s utility rates are based on a cost-of-service model under which the costs to provide treated drinking water, to collect and treat wastewater, and to convey stormwater are assigned to the appropriate groups of customers in proportion to the services they receive. This is considered a nationwide best practice in the industry and provides transparency in rate setting.
In Salem’s cost-of-service model, assumptions are made about anticipated water consumption, wastewater volumes, and impervious surfaces (a surrogate measure for stormwater runoff) to estimate the unit demand for each service type. Rates are set to recover the cost of providing these service units. Customer accounts are then billed based on the actual level of services received in the specific classification and service area.
The COSA Technical Update from 2022 (Attachment 5) remains valid and no changes have been proposed for the 2024 rate-setting cycle. The next COSA technical update is anticipated for the 2026 rate-setting cycle.
7. Proposed Fee Adjustments for Other Revenue (Non-rate Revenue)
The financial review process includes evaluation of other revenue sources in addition to the utility rate revenue. Some of these revenue sources are set by market rates and are reviewed and proposed for adjustment to remain competitive with other service providers in our area.
The City of Salem accepts four types of waste hauled by truck to the Waste Processing Facility on Airway Drive South or directly to the Willow Lake Water Pollution Control Facility located north of Keizer. These waste streams include leachate, septage, domestic sludge, and FOG (fat, oils, and grease). Two of these waste streams are the subject of proposed fee adjustments during this rate setting cycle. Increases in the cost of labor and materials to operate the treatment facilities warrant an adjustment in processing fees for these services. A regional market analysis indicates the City of Salem will remain competitive with the proposed incremental increases.
Leachate from the Coffin Butte Landfill and other landfills is a result of the waste degradation process at that location. Additional leachate is formed when rainwater infiltrates the waste in the landfill and picks up contaminants. This liquid is collected and hauled to Salem’s Waste Processing Facility where it is deposited in the wastewater collection system. Fee adjustments for leachate were last adopted in 2022 with half-cent increases in 2023 and 2024. The Task Force recommends one-cent increases from $0.04 per gallon in 2024 to $0.05 per gallon in 2025 and $0.06 per gallon in 2026.
Septage includes any liquid or solid material removed from septic tanks, cesspools, portable toilets, and similar systems that receive ‘domestic sewage’, a term used to distinguish this waste stream from industrial wastewater. Fee adjustments were adopted in 2022 for one-cent increases in 2023 and 2024. The Task Force again recommends one-cent increases from $0.14 per gallon in 2024 to $0.15 per gallon in 2025 and $0.16 per gallon in 2026.
If volumes remain constant, the proposed fee increases will generate an additional $100,000 to $200,000 of revenue per year.
8. Emergency Utility Assistance
For many years, the Emergency Utility Assistance program was funded solely with private donations. The program provided customers in need with a maximum of $150 in financial assistance during a calendar year. Since 2016, program changes have increased total utility funding for the program, increased the maximum assistance per account, and broadened the pre-qualification criteria to include customers who provide proof of qualifying for:
• The Emergency Food Assistance Program (TEFAP) through the United States Department of Agriculture (USDA);
• The Low-Income Housing Energy Assistance Program (LIHEAP) through Mid-Willamette Valley Community Action Agency; or,
• Section 8 Rental Housing Assistance or other qualification through Salem Housing Authority.
In 2022, the Emergency Utility Assistance program was extended for two years, funded at $300,000 annually, with a modified maximum of $500 per customer/account per calendar year. Authorized funding for the program expires December 31, 2024, unless City Council approves an extension.
A restatement and extension through December 31, 2026 of the Emergency Utility Assistance Program is also under consideration as Agenda Item 24-437. The Task Force recommended continuation of this program at $400,000 annually with an assistance limit of $350 per customer/account per calendar year. The recommended utility rates are based on a financial plan that incorporates this recommendation from the Task Force. The staff recommendation for this report is to authorize the allocation of $400,000 for calendar year 2025, with the anticipation that staff will request that City Council authorization a $400,000 allocation for calendar year 2026 in the future.
Applicants for Emergency Utility Assistance are qualified through St. Vincent dePaul, and The Salvation Army and indirectly through Mid-Willamette Valley Community Action Agency (MWVCAA) due to qualification for the Low Energy Housing Assistance Program (LIHEAP).
9. Policy Issues
In addition to financial recommendations on utility service rates and the Emergency Utility Assistance Program, the Task Force also considered three important policy issues:
• Extension of water service to the Brooks-Hopmere Service Area;
• Extraterritorial water service; and
• Irrigation at Creekside Golf Course.
Discussions focused on long-term impacts to Salem’s systems, customer service and customer classifications, and general rate structure.
None of the three policy issues are included for action currently. They will come to Council as separate reports in the future. Although the Task Force was supportive of discussions with Marion County to extend service to the Brooks-Hopmere Service Area, Marion County now may be pursuing a different solution. Council Policy X-4 regarding extraterritorial water service is proposed to be amended to include new criteria under which properties located outside the Urban Growth Boundary that are abutting City limits and are adjacent to City rights-of-way may receive water service if they are experiencing decreased ground water levels or increased contaminants. Creekside Golf Club is working with staff to modify current water use patterns that can have an impact on pumping and distribution in that area of south Salem. A discounted irrigation rate is being considered to provide an incentive for this change in operations that will provide relief to the City’s water distribution and pumping systems. Two of these issues will be coming to City Council in the coming months.
10. Public Outreach
All Task Force meetings were noticed to the public. Agendas, minutes, presentations, policy papers, and supporting documents were posted to the Boards and Commissions website under Other Advisory Groups and Water/Wastewater Task Force. Recordings were uploaded after each meeting.
On October 16, 2024, a total of 51,647 postcards were mailed directly to customers in all utility service areas notifying them of the public hearing on proposed utility rates. The postcard was in English and Spanish and contained information about the proposed rate increase. The postcards included the URL for the Utilities webpage, an email address to request an account analysis, and information on how to submit testimony to the City Recorder or provide virtual testimony during the hearing. The Utilities webpage also includes information on how to access financial assistance programs, a utility bill estimator, and information about the proposed rate increases.
Septic and leachate customers received a direct email notification from Public Works about the hearing and proposed changes.
BACKGROUND:
Financial Planning Goals
Long-term financial planning is integral to the Utility’s success. This planning focuses on ensuring adequate investments are made in the water, wastewater, and stormwater systems. These investments include managing capital construction, properly funding operations and maintenance, maintaining sufficient reserves and debt coverage, and balancing the many needs of the Utility with the practice of smaller, predictable annual rate increases and avoiding periodic and sporadic rate spikes.
For many years, City Council has adopted the smallest revenue slope increases needed to achieve these financial goals and comply with requirements of Council Policy C-14 <https://www.cityofsalem.net/home/showpublisheddocument/1540/637793306901000000>, the Utility Fund Financial Policy. The 2024 financial plan indicates the proposed revenue slope meets the thresholds in the policy as follows:
• Debt reserves are maintained to meet bond covenant requirements
ü The debt reserve for 2025 is $14.6 million
• A minimum 120-day operating reserve is maintained
ü The 120-day operating reserve for FY 2025 is $29.5 million
• An unrestricted cash balance is maintained between 150 to 250 days to maintain a Aa2 bond rating
ü 150 days of unrestricted cash for FY 2025 is $40 million
• Net revenues will exceed debt service requirements
ü In FY 2025, net revenue is projected be 2.36 times the debt service requirement
A decade ago, when annual debt service requirements represented 30 percent of total annual utility revenue and 33 percent of expenditures, financial analysis focused primarily on debt coverage ratios. Current debt obligations will decline in the future as the 2012 Refunding is retired in FY 2025 and the 2017 Refunding is retired in FY 2027.
Public Works Department staff continue to identify operational efficiencies and savings opportunities in areas that are controllable; however, the majority of each system’s expenses are fixed, regardless of how much water is consumed, wastewater is treated, or stormwater is conveyed. Labor costs are fixed and represent approximately 34 percent of the operating budget. Materials and services such as electricity, chemicals, and pipe represent 32 percent of the budget and are subject to inflationary pressures and economic trends. Capital transfers represent 20 percent of the budget, and costs related to construction activities are also affected by inflation and economic trends. Debt Service represents 10 percent of the budget, and Capital Outlay and Contingency represent the remaining 4 percent of the budget. Cost increases in the operating and capital budgets exceeded the rate adjustments adopted for 2023 and 2024.
Future year operating expenditures are currently modeled to increase at between 3.1 and 7.9 percent through 2030. Although current inflationary pressures on materials may be lower, recently adopted labor contract provisions exceeded the modeling assumptions and will impact the overall future financial position. Future budgets, forecasts, and long-term financial planning for the next rate proposal in 2026 will reflect these increased costs.
As previously stated, Salem has been consistent in adopting smaller annual rate increases to prevent large rate hikes experienced in some communities. This approach has been successful in allowing the community to avoid large increases necessitated by economic challenges or urgent and unanticipated capital needs.
It is important to note that fifteen years ago, after over 10 years of annual increases of between 6.5 and 14.0 percent, the Mayor and Council at the time wanted to give the community some relief and adopted rate increases of zero and 3.0 percent effective in 2011 and 2012. They also delayed the implementation of the stormwater Utility for two years and adopted a phased approach over the following four years.
The future impact of the zero rate increase in 2011 was a 6.0 percent in 2013 and 6.0 percent in 2014. The delayed implementation of the stormwater utility resulted in the need for a 5.0 rate increase for stormwater services for four years from 2019 to 2022 to bring revenue and expenditures in line and support the expanding Green Stormwater Infrastructure requirements.
From 2015 to 2022, the Utility was able to maintain water and wastewater rate increases at or below 3.0 percent annually. These smaller, consistent, annual adjustments are predictable for customers and help prevent larger increases in the future.
Small to moderate annual rate increases help the Utility to manage emergencies and unforeseen circumstances without large or immediate rate increases. The financial landscape changes each month as new information becomes available. Routine financial planning and updates promote flexibility and resiliency.
Alicia Blalock, Assistant Director
Public Works Administration Division
Attachments:
1. Resolution 2024-46
2. Exhibit 1 to Resolution 2024-46
3. Sample Bills
4. Utility Assistance Programs
5. Cost of Service Analysis - 2022 Technical Update
6. Comments on Proposed Water Rates received through October 22, 2024