A communication transmitted from Louis A. DePasquale, City Manager, relative to recommendations for the block rates for water consumption and sewer use for the period beginning April 1, 2020 and ending March 31, 2021

City of Cambridge Executive Department LOUIS A. DePASQUALE LISA C. PETERSON City Manager Deputy City Manager March 23, 2020 To the Honorable, the City Council: The setting of the Water/Sewer rate occurs each March. We understand that based on current circumstances, the timing is not ideal. However, the moderate sewer rate increase provided in this recommendation will not take effect until July 1. The City will continue to explore opportunities to provide relief to our tax, fee and rate payers in these difficult times. It should be noted that the Sewer Budget is comprised mostly of fixed costs such as debt service and the MWRA assessment, which total 87.5%. The Water/Sewer invoices that will be issued in July will be for the usage period April- June 2020 and will reflect the new sewer rate. The water rate reflects no increase from FY20. 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 an 6.3% increase in the sewer use block rate, resulting in a 4.8% increase in the combined rate for the period beginning April 1, 2020 and ending March 31, 2021. This is the tenth consecutive year that the City has been able to produce a 0% increase in the water rate. In last year's recommendation, the projected FY21 rate increases for water, sewer, and combined were 1.5%, 6.3%, and 5.2%, respectively, based on March 2019 consumption rates and projected budgets. We have been able to produce a lower water rate than estimated primarily due to the use of $1million from the Water Fund balance, and the Sewer Rate is consistent with prior year projections. 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 Massachusetts Water Resources Authority (MWRA) budget; therefore, revenue needs are based upon estimated expenditures. Generally, 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 Two major factors determine the rate necessary to generate enough revenues: water consumption and the budget. The FY21 Water Operating Budget reflects a decrease from the FY20 Budget primarily due to a reduction in debt service payments. The planned FY21 capital allocation is $5,680,000 using pay-as-you-go capital funding based on current revenues. This is a $1,180,000 increase from FY20. FY21 capital projects consist of significant improvements to our water distribution system including water mains ($2.1M), Filter Media replacement water treatment plant equipment and systems upgrade, reservoir facilities improvements, Fresh Pond

Master Plan implementation and reservation projects, reservoir gaging station maintenance, water meter replacement, watershed consulting services, hydroelectric renewable energy generation, and PC upgrades. Water and sewer charges are generally linked to water consumption, with sewer costs comprising approximately 76.2% of total water and sewer expenditures. Table 4 on page 5 indicates the details of Water Fund projected revenues and expenditures for FY20-25. Table 7 on page 8 shows actual Water Fund balances for FY15-19 and the projected balance for FY20. SEWER The FY21 Sewer Budget reflects a $3,866,976 increase from the FY20 Projected 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 87.5% of the total FY21 Sewer Budget. The preliminary FY21 MWRA assessment is scheduled to increase by $752,418 or 2.8% from the final FY 20 assessment. The MWRA rate increase projected for the City is subject to change based on the MWRA budget, which is adopted later in spring 2021. 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 costs attributable to the $17,165,000 general obligation bonds (net of premium) issued in March 2020, used to fund sewer projects in The Port, Cambridgeport, Alewife and River Street, as well as capital repairs and climate change sewer projects. The FY21 capital allotment of $3,050,000 in sewer revenues will continue to finance the remedial reconstruction program. 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 (FY21-25) calls for an additional investment of approximately $170,002,640 (primarily sewer, $146,922,640) in the water and sewer systems. The City carefully monitors the issuance of debt to fund authorized sewer projects and takes advantage of State MWRA interest free loans and grants to ensure that debt service cost increases, which impact the sewer rate, remain moderate. Subsidies from the State Revolving Fund (SRF) loan program will cover only $44,507 or 0.1% of the total debt service of $26,453,538 for all FY21 sewer projects. The City will continue to receive state subsidies on existing debt. The FY21-25 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 FY20-25. 2

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 FY20 Projected FY21 Budget % Change Water 0.0% $17,381,677 $17,375,160 Sewer 6.3% $56,950,000 $60,542,557 Combined Water / Sewer Revenue 4.8% $74,325,160 $77,924,234 FY21 projected revenues are based on FY20 projected collections and reflect our practice of conservative revenue projections. The table below reflects the FY20 actual and FY21 proposed water and sewer rates. TABLE 2 FY20 FY21 FY20 FY21 Water Annual Consumption* Proposed Sewer Proposed Rate Rate Sewer Rate Water Rate 0 - 40 CcF Block 1 $12.51 $3.02 $3.02 $11.77 Block 2 41 - 400 CcF $12.44 $3.24 $13.22 $3.24 401 - 2,000 CcF $3.44 $13.36 $14.20 Block 3 $3.44 $3.65 $3.65 2,001 - 10,000 CCF Block 4 $14.39 $15.30 Over 10,000 CcF Block 5 $3.96 $15.30 $16.26 $3.96 *All rates are per CF. CcF is an abbreviation of 100 cubic feet. One CF is approximately 750 gallons. The table below reflects the average change to combined water and sewer residential bills. TABLE 3 Residential Type FY21 Projected Annual Variance FY20 Average % Change $934 $45 4.8% Single Family $ 979 Two Family $1,177 $1,233 $56 4.8% $83 $1,811 4.8% $1,728 Three Family 3

SENIOR DISCOUNT PROGRAM There are currently 2,624 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 75 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 FY20, the income guidelines are as follows: single, income of $27,234 with assets of $54,465 or less; married, income of $40,852 with assets of $74,890 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 FY17-21 period were as follows: water, 0.0%; sewer, 6.3%; and combined, 4.7%. Tables 4, S, 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 FY20 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 5.2% for FY21-25. The projected increase is the result of the City's commitment to bonding sewer infrastructure improvement projects and increases in the MWRA assessment of 2.8% (based upon the FY21 MWRA wholesale Assessment schedule). If the increases in MWRA assessment are moderate, the rate increases that are shown will be lowered. 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 provide major investment in our infrastructure. Very truly yours, Ouns City Manager Attachments 4

TABLE 4 FY20-25 Water Projections FY21 FY24 FY23 FY20 FY20 FY25 FY22 Budget/Recap Projected Projected Budget Projected Projected Projected Water Expenditures: 12,361,794 12,728,390 Operating 12,110,299 14,890,416 14,317,708 13,237,526 13,767,027 Existing Debt 471,501 471,501 Subtotal Operating Budget 12,833,295 14,890,416 12,728,390 13,237,526 12,581,800 14,317,708 13,767,027 4,500,000 Capital 5,680,000 4,500,000 4,300,000 4,300,000 4,500,000 4,300,000 225,000 225,000 225,000 225,000 Finance 225,000 225,000 225,000 58,287 64,338 56,865 59,744 61,237 56,865 62,768 Conservation 400,000 400,000 400,000 400,000 Public Works 400,000 400,000 400,000 30,000 30,000 30,000 30,000 30,000 30,000 Community Development 30,000 10,000 10,000 10,000 10,000 10,000 Animal Commission 10,000 10,000 Total Expenditures 18,055,160 17,803,665 19,131,677 18,793,264 18,462,269 19,345,476 19,919,754 Assumptions: 1) Operating Budget for FY21 is based on City Manager's Submitted Budget and increases 4% for FY22-25. 2) Debt Service decreases according to Debt Service Schedule. 3) Capital as shown. 4) All others remain constant from FY22-25, but Conservation will increase by 2.5%. - Financing Plan 12,009,438 11,662,943 Beginning Fund Balance 11,662,943 11,009,438 11,009,438 11,009,438 11,009,438 Revenue: 17,375,160 17,355,160 17,712,269 18,043,264 17,381,677 18,595,476 Meter Revenue 19,169,754 700,000 Miscellaneous Water Charges 750,000 775,000 750,000 750,000 750,000 750,000 From Fund Balance 1,000,000 18,055,160 Total Revenue 19,131,677 19,345,476 18,462,269 18,793,264 18,150,160 19,919,754 17,803,665 18,055,160 19,131,677 18,793,264 Total Expenditures 18,462,269 19.919,754 19,345,476 - From Fund Balance 1,000,000 Ending Fund Balance 11,662,943 12,009,438 11,009,438 11,009,438 11,009,438 11,009,438 11,009,438 0.0% Projected Rate Increase 1.9% 1.9% 0.0% 3.1% 3.1% 5

TABLE 5 FY20-25 Sewer Projections FY21 FYZO FY2O FY22 FY23 FY25 FY24 Budget/Recap Budget Projected Projected Projected Projected Projected Sewer Expenditures: Public Works 4,056,655 4,056,655 4,360,930 4,535,367 4,716,782 4,905,453 5,101,672 3,050,000 Capital 4,000,000 1,500,000 6,000,000 6,500,000 1,500,000 5,000,000 25,193,255 25,193,255 Existing Debt 23,941,345 24,225,559 25,343,515 25,152,603 28,366,038 New Debt 2,512,193 3,887,500 5,556,175 4,468,750 5,372,500 Finance 225,000 225,000 225,000 225,000 225,000 225,000 225,000 44,500 44,500 44,500 Community Development 44,500 44,500 44,500 44,500 MWRA 27,153,096 26,636,150 30,897,323 28,347,832 26,400,678 29,595,137 32,256,805 Total Expenditures 61,287,064 57,655,560 57,420,088 65,265,758 69,393,683 77,366,515 73,281,054 Assumptions: 1) The FYZI MWRA assessment is bass on the preliminary estimate received from the M WRA and reflects a 2.8% increase from the final F Y20 assessment (source: WRA, February 2020). Frolic rises a bad i coz bud and increased by 4% in F 72.25. 3) Capital as shown. 4) Debt Service increases according to Debt Service schedule. 5) All others remain constant. Financing Plan Revenue: Sewer Service Charge 64,521,185 56,911,915 56,950,000 60,542,557 72,581,054 • 68,649,043 76,666,515 700,000 Non- Metered Sewer Revenues 1,200,000 700,000 700,000 700,000 700,000 700,000 MWPAT Subsidy (existing) 44,507 44,440 44,440 44,641 44,574 58,194,440 Total Revenue 57,656,355 61,287,064 65,265,758 73,281,054 77,366,515 69,393,683 Projected Sewer Service Charge Increase 6.4% 5.7% 6.6% 6.3% 5.6% 6

TABLE 6 Combined Water and Sewer FY20-25 FYZO FY21 FY2O FY25 FYZ2 FY23 FY24 Budget/Recap Projected Budget Projected Projected Projected Projected Metered Water Revenue 17,355,160 17,375,160 17,381,677 18,595,476 17,712,269 18,043,264 19,169,754 Metered Sewer Revenue 56,911,915 60,542,557 64,521,185 56,950,000 72,581,054 68,649,043 76,666,515 Total 74,325,160 82,233,454" 77,924,234 74,267,075 86,692,307 95,836,268 91,176,530 % Increase 4.8% 5.5% - 5.1% 5.2% 5.4% -

TABLE 7 Water Fund Balances FY15-20 As of 6/30/15 As of 6/30/16 As of 6/30/19 As of 6/30/18 As of 6/30/17 As of 6/30/20 (Actual) (Actual) (Actual) (Actual) (Actual) (Projected) Water Fund Balance 10,338,547 11,687,672 10,655,609 11,662,943 9,948,999 12,009,438