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22 bud doc_water memoPage 1 VILLAGE OF BUFFALO GROVE TO: Dane C. Bragg, Village Manager FROM: Chris Black, Finance Director DATE: June 2, 2021 RE: FY 2021 20-year Water Pro-Forma Background In 2012, the Village developed a 20-year Water and Sewer Fund pro-forma to evaluate the water and sewer system’s infrastructure needs. As identified in previous pro-formas, the Village’s historical rates were not sufficient to fund water and sewer operations and capital needs. As a result, in 2019, the Village Board directed staff to develop a formal funding strategy for the Water and Sewer Fund that will allow needed capital improvement to occur over the next 20 years. The goal was to develop a funding strategy to cover $150 million of sewer/water infrastructure with no impact to the tax levy and maintain a competitive rate amongst other providers within the region. As a result, the Village Board adopted a new rate structure and fixed facility fee, effective January 2020. Furthermore, the Village implemented a new local motor fuel tax in effort to align roadwork with water/sewer improvements. For the Board’s review is an updated 20-year water pro-forma reflecting the new rate structure as well as the issuance of debt occurring in 2020. The pro-forma shows that Public Works is able to complete over $150 million in water and sewer capital infrastructure through 2039. Rate and Consumption History The Village maintained a water and sewer rate of $1.80/1,000 gallons for a period of twenty three years (1983-2005). One significant reason leading to this period of rate stability was due to the age of the water and sewer infrastructure. During the peak growth decades of the 1980’s and 1990’s, developers donated approximately 53 percent of the water and sewer system assets. Through a combination of minimal capital expenses, receipt of building and development fees, coupled with a period of growing water consumption, the Water Fund was able to generate strong cash reserves to allow for a strategy of pay-as-you-go financing for future infrastructure repair. Funding for future infrastructure replacement (funding depreciation) was never a component of the rate structure. Beginning in 2003, a pattern of declining water usage started. In 2002, 1.63 billion gallons of water were billed. In 2020, 1.15 billion gallons were billed, a decrease of nearly 30%. There is no expectation that the amount of water billed will reach those levels again absent a significant drought or the addition of heavy industrial uses. The following chart shows the annual gallons billed since 2010. 1,000,000 1,050,000 1,100,000 1,150,000 1,200,000 1,250,000 1,300,000 1,350,000 1,400,000 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Annual Gallons Billed (in thousands) Page 2 The latest pro-forma uses an estimate of 1.15 billion gallons and will carry forward through the next 20 years. Although there will be an increase in total consumers over the next two decades with Link Crossing and the Lake Cook Corridor Developments, continued conservation efforts, weather patterns, and other impacts on water usage could partially counterbalance that growth. Water and Sewer System Assets The utility system consists of 186 linear miles of water and sewer main. Based on actual experience in the field, the service life of the water main infrastructure is 65 years. Over the next 20 years, it is estimated that 24 percent of the water mains will reach their useful life. As the first iterations of infrastructure replacement have come due, the Village has engaged in extensive study of the system and developed a replacement program, culminating in 2020’s Infrastructure Modernization Program. The following chart shows the pattern of construction of water main since 1929. Sewer assets have a longer life span as the structures are not pressurized. The Village’s preferred approach is to line existing sanitary sewer mains, thereby extending the life considerably while reducing the life cycle cost of the asset. As a general rule, sanitary sewer lining can extend the life of a gravity-fed main by 50 years. Recent Rate Changes Fixed Facility Fee As recommended in the water and sewer rate analysis prepared by Strand and Associates, the Village Board implemented a new fixed facility fee per metered utility account, starting in 2020. The fixed facility fee is a flat rate assessed to each metered account for access to the water and sewer system. - 20,000 40,000 60,000 80,000 192919581960196219661968197019721974197619781980198219841986198819901992199419961998200020022004200620082010201320152017Water Main Construction in Linear Feet Page 3 The fixed fees collected are used for the maintenance and replacement of the capital infrastructure for the delivery of clean water and the removal of the wastewater. The current fee schedule is as follows: The fixed fee will be evaluated every five years by utilizing the aggregate Consumer Price Index (CPI-U) over the preceding five-year period to determine if the rate must be increased. The 20-Year Water/Sewer Pro-Forma assumes a 10 percent increase to the facility fee to occur in 2025. Water/Sewer Rate The Village’s consumption model is driven by water rate and consumer use. The fees collected from system users should cover operating expenses such as the cost of the water sourced from the Northwest Water Commission as well as the cost for pumping, storage and distribution. In 2020, the Village Board approved a one-time 11 percent increase to meet and sustain growth in operating expenditures. Beginning in 2021, this rate will increase each year by 4 percent, as adopted by ordinance by the Village Board. The combined sewer and water rate per 1,000 gallons is $7.35. Water and Sewer Fund Financials Historically, the Water and Sewer Fund addressed infrastructure maintenance and improvement on a pay as you go basis. Due to the relative age of the system, many system repairs and replacements are coming due over the next 20 years based on the growth periods for the Village. Since 2012, $18.7 million in infrastructure repairs and improvements has been spent, including $6 million in water meter replacement costs. The meter replacement costs were funded through an installment note scheduled to be retired in 2029. As noted, the Village Board approved two revenue streams, a fixed facility fee combined with a water/sewer rate increase and a local motor fuel tax to fund capital improvements. These actions allow the Village to address the first generation of major water and sewer infrastructure replacement as well as street repair and replacement. By combining utility and street improvements, the Village is able to comprehensively address repairs and improvements in neighborhoods and limit disruption to residents. In May 2020, the Board also approved the issuance of a bond totaling $26 million - $13 million for water/sewer and $13 million for streets, to begin the Infrastructure Modernization Program. Over the next five years, the Village will invest approximately $50 million into water, sanitary sewer and streets. The long-term goal is to transition from a debt/cash strategy to a cash-only strategy (pay-as-you-go) to fund all system replacements. From 2021 through 2025, the Village has programmed $31 million in water and sewer capital projects. Fixed Facility Fee Rate per month All Single-Family Detached, Single-Family Attached Residential/Governmental/Institutional $17.39 Multi-Family, Commercial/Industrial Based on Meter Size 1" meters or less $17.39 1.5" meters $22.02 2" meters $45.17 3" meters $115.68 4" meters $180.68 6” meters $199.20 Page 4 The Village completed approximately $4 million in capital projects in FY 2020. Many of these projects are identified on the Village’s Website as part of the Infrastructure Modernization Program. From 2025 through 2029, the Water and Sewer fund will be self-funded for necessary capital improvements. In 2030 and again in 2033, the Village will need to issue additional debt to keep pace with the water and sewer improvements. As shown, that debt could be fully supported by revenues generated in the Water and Sewer Fund. All debt is scheduled to be retired by 2048. After completing the largest surge of infrastructure replacement through 2033, the Water and Sewer fund begins to rebuild cash balances exceeding from 2035-2039, while also supporting over $26 million in capital improvements during the same period. As a result of the Village’s careful infrastructure planning, Public Works is able to complete over $150 million in water and sewer capital infrastructure through 2039, consistent with the recommendations of the Strand & Associates water/sewer system study.