City Manager Letter

City Of Cambridge - CITY CLERK OFFICE, CAMBRIDGE MASSACHUSETTS

That the City Council approve the following block rates for water consumption and sewer use for the period beginning April 1, 2008 and ending March 31, 2009. The City administration and City Council continue to recognize that it is important to mitigate the effects of water and sewer increases both for FY09 and future fiscal years as much as possible. Therefore, I am pleased to submit a recommendation that calls for a 2.1% increase in the water rate, a 4.8% increase in the sewer rate and a 3.9% increase in the combined rate.

In my recommendation to you last year, the projected FY09 rate increases for water, sewer and combined were 2.1%, 7.7% and 5.8%, respectively. It should also be noted that the FY08 water and sewer rates reflected a 0% combined rate increase for the first time in the City’s history (in FY06, the water rate alone had a 0% increase).

FY09 estimated sewer revenues will cover the FY09 estimated Massachusetts Water Resources Authority (MWRA) assessment, which is scheduled to increase by $1,635,020 to $20,110,418, or 8.8%. The MWRA rate increase provided to the City is subject to change based on the MWRA budget adopted later in the Spring 2008. In addition, estimated sewer revenues will cover operating and capital increases.

In February 2008, the City issued $6,242,358 million in bonds to finance several sewer reconstruction projects throughout the city. The annual debt service costs attributable to these bonds are included in the sewer budget.

FY09 estimated water revenues will cover salary and benefit increases for Water Department employees as well as additional chemical costs related to the operation of the water plant. Debt service costs continue to decline, by $267,435 this year, due to the pay-off of the bonds for the water treatment plant and additional debt service savings generated by the refinancing of existing debt last year. The projected fund balance for FY08 is $6,607,264 of which $500,000 will be used in FY09 to offset a higher rate increase.

The chart below reflects the FY08 actual and FY09 proposed water and sewer rates.

All rates are per CcF. CcF is an abbreviation of 100 cubic feet. One CcF is approximately 750 gallons.

In March of each year, the City Council establishes water and sewer rates, which determine water and sewer revenues for the next fiscal year. Because of the timing requirements, water and sewer rates are set prior to the adoption of both the

budget and MWRA budget; therefore, revenue needs are based upon estimated expenditures. Historically, water and sewer rates have been established so that revenues generated by them, when combined with other revenue sources, cover projected annual costs. It is important to note that increases of 2.1%, 4.8% and 3.9% in the water, sewer and combined rates, respectively, are below the average annual increases for the past five years. The average annual increases for the FY04-08 period were as follows: Water, 2.3%; Sewer, 6.8%; and Combined, 5.1%, which includes the water rate showing a 0% increase in both FY06 and FY08 and a sewer rate increase of 0% in FY08.

As of last year, the Automated Meter Reading (AMR) installation has been fully implemented. In addition to installing approximately 15,000 meter transmitter units (MTU) to water meters, which provide four daily readings per account, the Water Department has replaced approximately 8,400 water meters.  The AMR system has eliminated estimated water and sewer bills, since actual readings are now used to determine bills.

The Water Department has institutionalized a "High Read" notification system for customers. This system uses daily meter reads from the AMR System to detect and highlight abnormally high water usage (potential leaks). When a high read is detected, the Water Department contacts the property owner, which enables the property owner to address the problem when it begins, minimizing high water bills and conserving water. In conjunction with this initiative, all water customers were asked to provide updated contact information (telephone number, e-mail address) to improve the notification process.

The Water Department has begun the process of implementing an online AMR reading feature which will allow customers to review their account activity. It is anticipated that this feature will be substantially completed in the new fiscal year.  In addition, the Water Department is beginning implementation of the MUNIS water and sewer billing system in the next fiscal year, which is the same billing system the City uses for property tax billing.

Beginning nine fiscal years ago (2000), a portion of the fund balance from the Water Fund has been used to offset increases in the operation of the Water Department. In FY09, the fund balance support will be $500,000, which is an increase of $215,000 from the FY08 amount. It is estimated that use of the fund balance will be eliminated in FY11, which coincides with the significant decrease in the water debt service.   This is a significant decrease in the use of fund balance from prior fiscal years. For example, the estimated use of fund balance for FY07 was $1,150,000.    By using $500,000 from the fund balance in FY09, the City is able to achieve a 2.1% water rate increase while providing capital funds for infrastructure improvements. As Table 3 on page 6 indicates, the total FY09 water operating and capital budget increased slightly (less than 1%) from $19,576,815 in FY08 to $19,666,350, not including a one-time $1 million appropriation for the Concord Avenue Water Main Replacement Project. As noted above, the decrease in debt service has partially offset increases in the operating budget.

The Capital allocation has remained at its FY08 level of $1,000,000. In addition, a $1 million planned appropriation from the $6.7 million Water Fund Balance for the Concord Avenue Water Main Replacement Project is included in the FY09 Capital Budget. This use of fund balance is part of an overall strategy to use reserves for one-time major capital needs.    Table 3 on page 6 indicates the details of Water Fund projected revenues and expenditures for the years 2008 to 2013. Table 6 on page 9 shows actual Water Fund balances for FY03-07 and the projected balance for FY08.

Sewer operating and capital budgets have increased from the FY08 adjusted budget levels, due to a projected 8.8% increase in the Massachusetts Water Resources Authority (MWRA) assessment, and salary and benefit increases.    Debt service costs related to the February 2008 bond sale are lower than projected. Overall, the sewer rate is projected to increase by 4.8%.

The increase in the MWRA assessment is due to rising energy and utility costs, higher interest costs on MWRA debt, additional health insurance costs for MWRA employees, and changes in public health and environmental requirements that increase overall spending costs for the MWRA.

As mentioned above, this sewer increase is lower than the rate projected for FY09 in last year’s letter and reflects the City’s continuing effort to control water and sewer rate increases.   It should be noted that the MWRA assessment and debt service on sewer bonds account for 88% of the total Sewer budget. The Sewer operating budget is above its FY08 level, while the capital allocation has increased by $100,000 to $1.6 million.

However, unlike the Water budget, sewer revenues are credited to the General Fund and not to a separate Proprietary Fund that can be drawn upon if the need arises.

The debt service increase is primarily attributable to the following sewer projects that were included in the February 2008 bond issue: Agassiz, Cherry Street / S. Mass. Ave., Harvard Square, Cambridgeport, and Western Avenue projects. Since May 1998, the City Council has authorized $218,345,000 for water and sewer capital projects in the Capital Budget process. This impressive investment in our water and sewer systems represents significant progress towards ensuring that

will continue to benefit throughout the century from a healthy and environmentally sound water and sewer system. In addition to the projects currently under way, the five-year capital plan calls for an additional investment of approximately $165,176,000 (primarily sewer, $155,476,000) in the water and sewer systems. The additional funds for water will be used mainly for improvements to the distribution and transmission system, equipment replacement, energy efficient lighting and Variable Frequency Drives (VFDs), engineering and program development, and improvements to the watershed. Sewer improvements are projected to continue in the following areas:

; Agassiz Neighborhood; Fresh Pond; Cambridgeport;

.  The City carefully monitors the issuance of debt to fund authorized sewer projects and makes adjustments to ensure that debt service cost increases, which impact the sewer rate, are moderate.

During the past decade, the State has made substantial contributions to the City’s water and sewer capital improvement program through the State Revolving Loan Program. In FY08, state subsidies covered $2,240,320, or 10.8% of the total debt service of $20,726,285. It is expected that the City will continue to receive State subsidies on existing debt.  The FY09-13 capital plan includes several projects that may be eligible for subsidized loans from the State. However, since it is not certain that these projects will receive state subsidies, the debt service on these projects has been calculated based on funding through General Obligation bonds. In order to proceed with the projects while restricting the growth of the sewer rate, the original five-year plan for sewer projects has been extended, since the total debt service on the loans will be covered through the sewer service charge. If state subsidies become available to the City, they will be used to lower the sewer rate in future years. Table 4 on page 7 shows the detail of sewer-related expenditures for FY08-13.

Table 1 below summarizes the change in water and sewer metered revenue, while Table 2 presents the estimated average charge to residential water/sewer bills.

Projected FY08 revenues are reasonably consistent with the estimates used to set the FY08 rates in the second full year of using the AMR system. It is anticipated that, during the third year of AMR, billing and collection data provided by the system will continue to be refined in order to establish an even more reliable base for future projections. FY09 projected revenues are based on FY08 projected collections and reflect our practice of conservative revenue projections.

Combined Water / Sewer Metered Revenue

Average Change to Combined Water and Sewer Residential Bills

There are currently 2,887   homeowners who qualify for the age 65+ water / sewer 15% discount (not to exceed $90 annually), which is not tied to the homeowner’s income.

There are also 112 elderly homeowners who qualify for an income-based discount of 30% (not to exceed $180 annually). To qualify for the 30% discount, a homeowner must be 65 or older and must have been granted the Clause 41C elderly real estate exemption. For FY08, the income guidelines are as follows: single, income of $21,548 with assets of   $43,097 or less; married, income of $32,323 with assets of $59,258 or less.

Tables 3, 4, 5 and 6 contain five-year forecasts for water, sewer and combined revenue estimates as well as Water Fund Balances for the past five years and the projected FY08 fund balance. As can be seen in Table 5, the annual combined water / sewer rate is projected to increase by an average of approximately 5.7% for FY09-13. The projected increase is the result of the City’s infrastructure improvement program and increases in the MWRA assessment (based on estimates received from the MWRA) of 4.3-9.8% in FY10-13. If increases in the MWRA assessment are more moderate and subsidies for new State Revolving Fund loans are funded, the rate increases that are shown will be lowered.

In closing, I believe that our efforts to successfully implement our AMR system, conservatively estimate our water and sewer revenues and control expenditure growth, including debt issuance, have allowed us to generate a very low water and sewer rate increase in FY09 while investing in our utility infrastructure.  As noted above, there was 0% water and sewer increase in FY08.

While a 0% rate increase is not realistic every year, I believe we have structured our water and sewer program to produce reasonable rate increases in the future to meet the City administration and City Council goal to mitigate the effects of water and sewer increases on residents as much as possible.