Title
Recommendation to Approve the Sewer Rate Study Report; and Adoption of Resolution Declaring the City's Intention to Revise the Sewer Service Charge and Establish Procedures for Accepting Protests Pursuant to Article XIIID, Section 6(a) of the California Constitution Regarding Property-Related Fees and Charges. (Public Works 501)
Body
To: Honorable Mayor and Members of the City Council
From: Jennifer Ott, City Manager
EXECUTIVE SUMMARY
The City of Alameda (City) collects sewage generated by Alameda residents and businesses and conveys it via a network of sewer pipes and pump stations to the East Bay Municipal Utility District (EBMUD) for treatment. The City contracted with NBS, a specialized fiscal consultant, to conduct a comprehensive review of the City’s sewer fund. The City last conducted a sewer rate review in 2020, which recommended 3% annual rate revenue increases through Fiscal Year (FY) 2024-2025. Although Proposition 218 sets the legal rate horizon to 5 years, it is best practice to prepare a ten-year cash flow projection to assess annual revenue requirements to accomplish the following objectives:
• Fund sewer pipeline replacements and other capital improvements
• Maintain adequate operating and capital reserves
• Meet or exceed debt coverage requirements
• Mitigate impacts on the ratepayers
The City operates its sewer collection system under a Federal Consent Decree, which also includes EBMUD and other East Bay agencies. Alameda is mandated to replace approximately 2.6 miles of sewer pipeline annually for the remaining term of the Consent Decree, or through 2035. This significant on-going capital cost is a main driver in determining the necessary revenue adjustments.
Staff recommends an annual 3% rate revenue increase for FY2025-2026 through FY 2029-2030. As shown in the bill comparison in the Rate Study, Exhibit 1, even with the proposed 3% annual rate revenue increase in FY 2025/2026, the monthly sewer service charge for Alameda remains low compared to the sewer bills of other East Bay agencies that discharge to EBMUD.
Staff recommends City Council adopt the proposed resolution of intent to raise sewer rates, set a public hearing for the rate increase and establish Guidelines for the Submission and Tabulation of Protests. Pending City Council's adoption of the resolution, the City will send property owners a written notice announcing the proposed sewer service charge increase and announce the public hearing date of June 3, 2025.
BACKGROUND
The City owns and operates approximately 135 miles of sewer main and 46 pump stations and conveys its wastewater to the treatment plant owned by EBMUD. Many of the City's sewers were installed in the early to mid-20th century and show signs of deterioration such as loose joints, cracks, and breaks. The City, by design, has separate sanitary sewer and storm water drainage systems. Infiltration and inflow (I/I) is stormwater that should enter the storm drainage system but instead enters the sewer system through these cracks and other defects in the sewer pipes. I/I causes excessive sanitary flows during wet weather events that exceed both local conveyance and regional treatment capacity.
In the 1980s, EBMUD constructed three wet weather facilities (WWFs), with regulatory approval, to handle the increased sanitary flow during large storm events. However, in 2007, EBMUD's discharge permit for the WWFs was remanded by the State Water Resources Control Board (SWRCB) based on the Environmental Protection Agency (EPA) ruling that the discharges d not meet secondary treatment standards and therefore, are in violation of the Clean Water Act.
In 2009, the EPA filed a complaint against EBMUD for the continued use of the WWFs. The EBMUD lawsuit was followed by a separate suit by the EPA against each of the municipal entities that operate sewer collection systems discharging to the EBMUD system. The City was named in the second lawsuit, along with the other dischargers including Albany, Berkeley, Emeryville, Oakland, Piedmont, and Stege Sanitary District (collectively the "Satellites"). The EPA case against the Satellites was legally based on allegations of "unpermitted" discharges or sanitary sewer overflows (SSOs) from their systems. However, the primary objective was not related to SSO enforcement, but rather to ensure that an aggressive program to reduce wet weather flows would be carried out by the Satellites.
Negotiations ensued, and the EPA, Department of Justice, SWRCB and the Regional Water Quality Control Board (RWQCB) entered into a Stipulated Order with EBMUD and the Satellites separately requiring detailed maintenance and sewer rehabilitation work to address the influx of stormwater into the sewer collection systems during wet weather events. The Stipulated Orders remained binding until a final remediation program was codified in the Final Consent Decree for Case Nos. C09-00186 and 09-05684.
DISCUSSION
The City is required by State law and City policy to collect sufficient revenues to cover the costs of operating the sewer facilities. These revenues allow the City to safely and reliably convey sewage generated by residents and businesses and protect human health. Costs recovered through the revenue include salaries and benefits for sewer facilities staff, contractual services, materials, equipment, supplies, and infrastructure rehabilitation. In addition, revenues generated from the sewer rates are used to pay off debt incurred in the process of building the capital improvement projects mandated by the Final Consent Decree.
In accordance with the Final Consent Decree, the City is required to complete certain minimum improvements to its sewer facilities over the term of the Consent Decree. To comply with these requirements, the City must improve operations and maintenance protocol; upgrade pump and lift stations; and rehabilitate sewer mains and manholes that have reached the end of their useful life. In addition, the City must implement its Sewer System Management Plan, approved by the City Council on October 21, 2014, which consists of source control, capacity assurance, emergency response, and program evaluation.
Following a competitive solicitation, the City entered into a contract with NBS to conduct a comprehensive sewer financial plan and rate study. The City last conducted a sewer rate review in 2020 that recommended rate increases through FY 2024-2025. NBS evaluated sewer funding needs and revenue sources and recommends an annual 3% rate revenue increase for the sewer service charge for the next five years through FY 2029-30. Their analysis is based on rates being adequate to:
• Fund sewer pipeline replacements and other capital improvements
• Maintain reasonable and adequate operating and capital reserves
• Meet or exceed debt coverage requirements
• Mitigate impacts on the ratepayers
NBS developed a 10-year cash flow projection to determine annual revenue requirements and projected sewer rate increases. The complete Sewer Rate Study by NBS is included as Exhibit 1. Based on the ten-year cash flow projection, a 4% annual rate revenue increase over the next five years brings in excess revenue to comply with the Consent Decree, meet debt coverage and reserve requirements and avoid a rate spike in the future. However, a 3% annual rate revenue increase accomplishes these objectives and is less impactful to ratepayers. A 2% annual rate revenue increase does not keep pace with inflation and by FY 2028-2029, projected expenses will outpace revenue, and the fund balance begins to dip below the minimum reserve target. Staff recommends an annual 3% rate revenue increase for FY 2026-2030. As shown in the bill comparison below, even with the proposed 3% annual rate revenue increase in FY 2025/2026, the monthly sewer service charge for Alameda remains low compared to the sewer bills of other East Bay agencies that discharge to EBMUD.
Proposition 218 and Protest Procedures: Proposition 218, also known as the "Right to Vote on Taxes Act", was approved by California voters in 1996. The Act, which added Article XIlIC and XIIID to the California Constitution, provides a methodology for voters to repeal or reduce taxes, assessments, fees, and charges though the initiative process; reiterates the requirements for voter approval for local "special" and "general" taxes; and imposes restrictions and requirements on real property assessments and certain types of fees. In accordance with Proposition 218, when increasing sewer service charges, the City must first provide written notice by mail to all property owners on whom the sewer service charge will be imposed and conduct a public hearing no sooner than 45 days following the written notice.
In addition, the City Council must adopt a resolution establishing Guidelines for the Submission and Tabulation of Protests (see Exhibit 2). In accordance with Proposition 218 requirements for sewer service charge increases, the City Council has the authority to approve the sewer service charge unless the City receives written protests opposing the proposed sewer service charge by a majority of the affected property owners. If the City receives a majority written protests, the City Council cannot approve the sewer service charge. Staff will return to City Council with either a new recommendation if these written protests are received or a final approval for the sewer service charge increase of 3% which requires a four/fifths vote to pass.
Pending the City Council's adoption tonight of a "Resolution Declaring the City's Intention to Revise the Sewer Service Charge and Establish Procedures for Accepting Protests Pursuant to Article XIID, Section 6(a) of the California Constitution Regarding Property-Related Fees and Charges", the City will send property owners a written notice announcing the proposed sewer service charge increase and the date of the scheduled public hearing. Protest procedures and reference to where the complete "Guidelines for the Submission and Tabulation of Protests" will be included. The mailed notice will be printed in English, Chinese and Spanish. In addition, the notice will be posted on the City website so that the content will be available in ten additional languages through use of the Google translator.
ALTERNATIVES
• Adopt the Resolution as proposed.
• Direct staff to proceed with an alternative rate revenue adjustment (ex. 4% or 2% per year).
• Do not adopt the resolution. Failure to increase the sewer service charge could lead to the City's use of General Fund reserves to cover costs necessary to avoid strict EPA penalties for non-compliance.
FINANCIAL IMPACT
An annual increase of 3% to the sewer service charge each year for the next five years will ensure funding for ongoing operations and maintenance, provide adequate cash reserves, and comply with the Consent Decree mandates. Failure to increase the sewer service charge could lead to the City's use of General Fund reserves to cover costs necessary to avoid strict EPA penalties for non-compliance.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
The City of Alameda Strategic Plan project TIE21 is to rehabilitate 8 miles of sewer pipes.
ENVIRONMENTAL REVIEW
This action does not constitute a “project” as defined in California Environmental Quality Act (CEQA) Guidelines Section 15378 and therefore no further CEQA analysis is required.
CLIMATE IMPACT
There are no climate impacts.
RECOMMENDATION
Approve the Sewer Rate Study Report and adopt a Resolution Declaring the City's Intention to Revise the Sewer Service Charge and Establish Procedures for Accepting Protests Pursuant to Article XIID, Section 6(a) of the California Constitution Regarding Property-Related Fees and Charges.
Respectfully submitted,
Erin Smith, Public Works Director
Financial Impact section reviewed,
Ross McCarthy, Acting Finance Director
Exhibit:
1. Sewer Rate Study