Recommendations for the block rates for water consumption and sewer use for the period beginning April 1, 2020 and ending March 31, 2021

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