Recommendations for the block rates for water consumption and sewer use for the period beginning April 1, 2021 and ending March 31, 2022

To the Honorable, the City Council:

The setting of the Water/Sewer rate occurs each March. As the City continues to be impacted by the COVID-19 pandemic, we have worked hard to provide relief to residents and businesses as well as limit increases in taxes, fees, and rates where possible.

The establishment of the FY22 Water/Sewer rates is challenging since consumption is down for the current fiscal year, which impacts water and sewer revenues. However, we have been able to adjust some expenditures to offset lower revenues projected for FY22 based on FY21 estimates to allow for a modest increase in rates. Operating and capital expenditures have been modified and reduced for FY22 from what was projected in last year’s letter.

The FY22 Sewer Budget reflects savings resulting from reduced bond issuance and receiving a low interest rate (0.93%) on sewer bonds sold earlier this month and being able to take an advantage of an opportunity to restructure our Massachusetts Water Resource Authority (MWRA) loans. It should be noted that the Sewer Budget is comprised mostly of fixed costs such as debt service and the MWRA assessment, which totals 87.8% of the total Sewer Budget.

The Water/Sewer bills that will be issued in July will be for the usage period April- June 2021 and will reflect the new sewer rate. The water rate reflects a minimal increase from FY21. The water and sewer rate increases provided in this recommendation will not take effect until July 1.

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 1.0% increase in the water consumption block rate and an 8.0% increase in the sewer use block rate, resulting in a 6.5% increase in the combined rate for the period beginning April 1, 2021 and ending March 31, 2022. This is the first time in eleven years that the City has had any increase in the water rate.

The previous ten years have been 0% increases. In last year’s recommendation, the projected FY22 rate increases for water, sewer, and combined were 1.9%, 6.6%, and 5.5%, respectively, based on March 2020 consumption rates and projected budgets.

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.

2 WATER

Two major factors determine the rate necessary to generate enough revenues: water consumption and the budget. The FY22 Water Operating Budget reflects a small increase from the FY21 Budget primarily due to salary costs.

The planned FY22 capital allocation is $5,300,000 using pay-as-you-go capital funding based on current revenues. This is a decrease of $380,000 from FY21.

FY22 capital projects consist of significant improvements to our water system including water mains; upgrading the treatment plant’s Supervisory Control and Data Acquisition (SCADA) system which is the software and hardware that enables the Operators to operate, control and document the operations of the treatment plant; Fresh Pond Master Plan implementation and reservation projects; reservoir gaging station maintenance; water meter replacement; watershed consulting services; and hydroelectric renewable energy generation design.

In FY21, $1 million from the Water Fund balance was used to support capital projects. For FY22, that amount will be increased to $1.8 million.

Water and sewer revenues are generally linked to water consumption, with sewer costs comprising approximately 76.4% of total water and sewer expenditures. As a result of Covid-19 pandemic related shutdowns, billed water consumption has decreased approximately 9% in the first half of FY21 as compared to the first half of FY20.

This fluctuation was also affected by increased conservation efforts due to the drought declared by the Massachusetts Department of Environmental Protection (MADEP) during the early summer of 2020, which ended in January 2021. These factors resulted in an FY21 projected water service charge shortfall of $1,308,143 from the FY21 water rate letter. This shortfall is partially mitigated by projected savings in the Water Operating Budget of $278,000, leaving a projected Water Fund balance of $10,448,366.

Table 4 on page 5 indicates the details of Water Fund projected revenues and expenditures for FY21-26. Table 7 on page 8 shows actual Water Fund balances for FY16-20 and the projected balance for FY21.

SEWER

The FY22 Sewer Budget reflects a $768,624 increase from the FY21 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 87.8% of the total FY22 Sewer Budget.

The preliminary FY22 MWRA assessment is scheduled to increase by $1,313,180 or 4.9% from the final FY21 assessment. The MWRA rate increase projected for the City is subject to change based on the MWRA budget, which is adopted later in spring 2022. 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 $18,420,000 general obligation bonds (net of premium) issued in March 2021, used to fund sewer projects in The Port, Cambridgeport, Alewife and River Street, as well as capital repairs and climate change projects.

The FY22 capital allotment of $2,750,000 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 (FY22-26) calls for an additional investment of approximately $219,710,000 (primarily sewer, $197,700,000) in the water and

3 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 $44,574 or 0.17% of the total debt service of $26,099,960 for all FY22 sewer projects. The City will continue to receive state subsidies on existing debt. The FY22-26 capital plan includes other projects that may be eligible for subsidized loans from the state.