CMA 2017 #76 · Agenda item attachment · Mar 27 2017

March 27, 2017 To the Honorable, the City Council: RECOMMENDATIONS The City administration and City Council continue to recognize the importance of minimizing increases in water and sewer rates. I recommend that the City Council approve a 0% increase in the water consumption block rate and a 7.7% increase in the sewer use block rate, resulting in a 5.6% increase in the combined rate for the period beginning April 1, 2017 and ending March 31, 2018. This is the seventh consecutive year that the City has been able to produce a 0% increase in the water rate. In last year’s recommendation, the projected FY18 rate increases for water, sewer, and combined were 4.0%, 7.5%, and 6.6%, respectively, based on March 2016 consumption rates and projected budgets. We have been able to produce a lower water rate than estimated primarily due to lower operating budget projections in the Water Budget. The sewer rate is slightly higher than anticipated due to a Massachusetts Water Resources Authority (MWRA) assessment in the Sewer Budget that is 3.0% higher than the projection provided by the MWRA last year. 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 Cambridge 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 related revenue sources, cover projected annual costs. WATER In FY17, due to extreme drought conditions in Massachusetts, the City appropriated $3,600,000 from the Water Fund Fund Balance to purchase water from the MWRA to ensure an adequate supply of water to meet the needs of residents, businesses, and universities. The Water Department is projecting to use only $1,600,000 of that amount since conditions have started to improve. We are also recommending a transfer of $1,000,000 from the remaining $2,000,000 to the Water Department Public Investment Fund for meter replacement. The Department continues to carefully monitor the city's water supply system and implement water conservation efforts. The FY18 water rate does not include additional funds to purchase MWRA water. The planned FY18 capital allocation is $3,500,000 using pay-as-you-go capital funding based on current revenues. FY18 capital projects include waterworks construction, meter and meter transmission unit replacement, a drainage and community garden project, Fresh Pond Master Plan implementation, U.S. Geological Survey gauging stations, and reservoir facility improvements.

2 Two major factors determine the rate necessary to generate sufficient revenues: water consumption and the budget. The total FY18 Water Budget reflects a $1,494,040 decrease from the FY17 Budget. The Water Department is able to offset costs related to cost-of-living allowances, pensions, and health benefits in the salaries and wages portion of the operating budget with decreases in debt service payments and capital expenditures. Water and sewer charges are directly linked to water consumption, with sewer costs comprising approximately 74.1% of total water and sewer expenditures. When consumption declines, revenues are negatively impacted. In the current fiscal year, water is being consumed at a slightly lower rate compared to the previous fiscal year due to the drought and water conservation efforts. Table 4 on page 5 indicates the details of Water Fund projected revenues and expenditures for FY17-22. Table 7 on page 7 shows actual Water Fund balances for FY12-16 and the projected balance for FY17. SEWER The FY18 Sewer Budget reflects a $3,631,896 increase from the FY17 Budget. This includes the MWRA assessment, debt service payments, and the sewer component of the Public Works budget. Debt service on sewer bonds and the MWRA assessment account for 90.6% of the total FY18 Sewer Budget. FY18 estimated sewer revenues will cover the FY18 estimated MWRA assessment, which is scheduled to increase by $1,206,845 from the FY17 final assessment. The MWRA rate increase projected for the City is subject to change based on the MWRA budget, which is adopted later in spring 2017. These changes have typically been minor in past years. 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. Included in the sewer budget are debt service increases attributable to the $21,045,000 general obligation bonds issued in March 2017, which include sewer projects in Agassiz, Cambridgeport, Harvard Square, and the Port, as well as capital repairs. The FY18 capital allotment of $1,000,000 in sewer revenues will continue to finance the remedial reconstruction program and development. The City Council has authorized significant investments in the water and sewer systems to ensure Cambridge continues to benefit from a healthy and environmentally sound water and sewer system. In addition to the projects currently under way, the City’s five-year capital plan (FY18-22) calls for an additional investment of approximately $140,615,500 (primarily sewer, $118,615,500) in the water and sewer systems. 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. Subsidies from the SRF loan program will cover only $44,307 or 0.2% of the total debt service of $22,344,311 for all FY18 sewer projects. The City will continue to receive state subsidies on existing debt. The FY19-22 capital plan includes other projects that may be eligible for subsidized loans from the state. As in past years, it is not certain that these projects will receive state subsidies and the debt service on these projects has been calculated based on funding through general obligation bonds. If state subsidies become available to the City, they will be used to lower the sewer rate in future years. Table 5 on page 6 shows the detail of sewer-related expenditures and revenues for FY17-22.

3 COMBINED WATER & SEWER The table below reflects the projected combined water and sewer metered revenue requirements needed to cover water and sewer expenditures. TABLE 1 FY17 Projected FY18 Budget % Change Water $17,500,000 $17,492,975 0.0% Sewer $47,750,000 $51,432,184 7.7% Combined Water / Sewer Revenue $65,250,000 $68,925,159 5.6% FY18 projected revenues are based on FY17 projected collections and reflect our practice of conservative revenue projections. The table below reflects the FY17 actual and FY18 proposed water and sewer rates. TABLE 2 Annual Consumption* FY17 Water Rate FY18 Proposed Water Rate FY17 Sewer Rate FY18 Proposed Sewer Rate Block 1 0 – 40 CcF $3.02 $3.02 $9.50 $10.23 Block 2 41 – 400 CcF $3.24 $3.24 $10.05 $10.82 Block 3 401 – 2,000 CcF $3.44 $3.44 $10.79 $11.62 Block 4 2,001 – 10,000 CcF $3.65 $3.65 $11.62 $12.51 Block 5 Over 10,000 CcF $3.96 $3.96 $12.35 $13.30 *All rates are per CcF. CcF is an abbreviation of 100 cubic feet. One CcF is approximately 750 gallons. The table below reflects the average change to combined water and sewer residential bills. TABLE 3 Residential Type FY17 Average FY18 Projected Annual Variance % Change Single Family $784 $828 $44 5.60% Two Family $1,096 $1,157 $61 5.60% Three Family $1,590 $1,679 $89 5.60%

4 SENIOR DISCOUNT PROGRAM There are currently 2,657 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 87 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 FY17, the income guidelines are as follows: single, income of $25,346 with assets of $50,689 or less; married, income of $38,019 with assets of $69,698 or less. FUTURE OUTLOOK FOR RATES Overall, the City has been extremely successful over the past five years in producing minimal water and sewer rate increases. The average annual increases for the FY13-17 period were as follows: water, 0.0%; sewer, 3.9%; and combined, 2.8%, which include both the water and sewer rates showing 0% increases in FY13. Tables 4, 5, 6 and 7 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 FY17 Fund Balance. Although the City currently does not project the use of Fund Balance in the out years, it will continue to review appropriate use of Fund Balance for a specific project, or to lower the rate. As can be seen in Table 6, the annual combined water/sewer rate is projected to increase by an average of approximately 4.8% for FY18-22. The projected increase is the result of the City’s commitment to bonding sewer infrastructure improvement projects and increases in the MWRA assessment (based on estimates received from the MWRA). MWRA increases are projected to be 5.1% in FY18 and 3.7-3.8% in FY19-FY22. If increases in the MWRA assessment are more moderate, the rate increases that are shown will be lowered. If consumption increases and therefore revenues increase, rate increases will be affected positively. Conversely, if consumption decreases, there will be a negative effect on water and sewer revenues. Our water and sewer program is structured to produce reasonable rate increases in the future. The goal of the City Administration and City Council is to minimize the effects of water and sewer rate increases on residents as much as possible, while continuing to invest in our infrastructure. Very truly yours, Louis A. DePasquale City Manager Attachments

5 TABLE 4 FY17-22 Water Projections FY17 FY17 FY18 FY19 FY20 FY21 FY22 Budget/Recap Projected Budget Projected Projected Projected Projected Water Expenditures: Operating 11,223,705 12,406,365 11,349,345 11,803,319 12,275,452 12,766,470 13,277,128 Existing Debt 2,745,505 2,745,505 2,624,505 2,503,501 471,501 - - Subtotal Operating Budget 13,969,210 15,151,870 13,973,850 14,306,820 12,746,953 12,766,470 13,277,128 Capital 5,000,000 6,000,000 3,500,000 3,500,000 5,000,000 5,000,000 5,000,000 Finance 225,000 225,000 225,000 225,000 225,000 225,000 225,000 Conservation 52,805 52,805 54,125 55,478 56,865 58,286 59,744 Public Works 400,000 400,000 400,000 400,000 400,000 400,000 400,000 Community Development 30,000 30,000 30,000 30,000 30,000 30,000 30,000 Animal Commission 10,000 10,000 10,000 10,000 10,000 10,000 10,000 Total Expenditures 19,687,015 21,869,675 18,192,975 18,527,298 18,468,818 18,489,756 19,001,872 Assumptions: 1) Operating Budget for FY18 is based on City Manager's Submitted Budget and increases 4% for FY19-22. 2) Debt Service decreases according to Debt Service Schedule. 3) Capital as shown. 4) All others remain constant from FY18-22, but Conservation will increase by 2.5%. Financing Plan Beginning Fund Balance 10,338,547 10,338,547 6,868,872 6,868,872 6,868,872 6,868,872 6,868,872 Revenue: Meter Revenue 17,137,015 17,500,000 17,492,975 17,827,298 17,768,818 17,789,756 18,301,872 Miscellaneous Water Charges 700,000 900,000 700,000 700,000 700,000 700,000 700,000 From Fund Balance 1,850,000 - - - - - - Total Revenue 19,687,015 18,400,000 18,192,975 18,527,298 18,468,818 18,489,756 19,001,872 Total Expenditures 19,687,015 21,869,675 18,192,975 18,527,298 18,468,818 18,489,756 19,001,872 From Fund Balance 1,850,000 - - - - - - Ending Fund Balance 8,488,547 6,868,872 6,868,872 6,868,872 6,868,872 6,868,872 6,868,872 Projected Rate Increase 0.0% 1.9% 0.0% 0.1% 2.9%

6 TABLE 5 FY17-22 Sewer Projections FY17 FY17 FY18 FY19 FY20 FY21 FY22 Budget/Recap Projected Budget Projected Projected Projected Projected Sewer Expenditures: Public Works 3,477,745 3,465,745 3,610,140 3,754,546 3,904,727 4,060,917 4,223,353 Capital 1,000,000 1,000,000 1,000,000 1,250,000 2,250,000 2,500,000 2,500,000 Existing Debt 19,898,495 19,942,737 19,262,682 21,116,253 23,954,053 25,015,893 25,301,505 New Debt 3,081,629 3,930,634 2,426,250 2,692,875 3,641,250 Finance 225,000 225,000 225,000 225,000 225,000 225,000 225,000 Community Development 44,500 44,500 44,500 44,500 44,500 44,500 44,500 MWRA 23,898,855 23,745,695 24,952,540 25,875,784 26,859,065 27,879,709 28,939,137 Total Expenditures 48,544,595 48,423,677 52,176,491 56,196,717 59,663,595 62,418,894 64,874,745 Assumptions: 1) The FY18 MWRA assessment is based on the preliminary estimate received from the MWRA and reflects a 5.1% increase from the final FY17 assessment. FY19-22 assessments are based on annual rate increases of 3.7%, 3.8%, 3.8%, and 3.8% respectively (source: MWRA). 2) Public Works allocation increases by 4% in FY19-22. 3) Capital as shown. 4) Debt Service increases according to Debt Service schedule. 5) All others remain constant. Financing Plan Revenue: Sewer Service Charge 47,800,354 47,750,000 51,432,184 55,452,343 58,919,155 61,674,387 64,130,171 Non- Metered Sewer Revenues 700,000 1,000,000 700,000 700,000 700,000 700,000 700,000 MWPAT Subsidy (existing) 44,241 44,241 44,307 44,374 44,440 44,507 44,574 Total Revenue 48,544,595 48,794,241 52,176,491 56,196,717 59,663,595 62,418,894 64,874,745 Projected Sewer Service Charge Increase 7.7% 7.8% 6.3% 4.7% 4.0%

7 TABLE 6 FY17-22 Combined Water and Sewer Projections TABLE 7 FY12-17 Water Fund Balances FY17 FY17 FY18 FY19 FY20 FY21 FY22 Budget / Recap Projected Budget Projected Projected Projected Projected Metered Water Revenue 17,137,015 17,500,000 17,492,975 17,827,298 17,768,818 17,789,756 18,301,872 Metered Sewer Revenue 47,800,354 47,750,000 51,432,184 55,452,343 58,919,155 61,674,387 64,130,171 Total 64,937,369 65,250,000 68,925,159 73,279,641 76,687,973 79,464,143 82,432,043 % Increase - - 5.6% 6.3% 4.7% 3.6% 3.7% As of 6/30/12 As of 6/30/13 As of 6/30/14 As of 6/30/15 As of 6/30/16 As of 6/30/17 (Actual) (Actual) (Actual) (Actual) (Actual) (Projected) Water Fund Balance 8,410,762 9,075,357 9,741,315 11,687,672 10,338,547 6,868,872