TO: JAMES B. HENDRICKSON, CITY MANAGER

FROM: JUDY SMITH, ASSISTANT CITY MANAGER

SUBJECT: ADOPTION OF RATE ANALYSIS REPORT AND METHODOLOGY TO LEVY A SEWER USER FEE

The Issue

Shall the City Council adopt the Engineer's Rate Analysis Report approving the methodology to levy a sewer user fee to finance an initial 10-year program of sewer improvements?

Background

In April 2002, the City Council received a report from the consulting engineering firm of AKM on the condition of the City's sanitary sewer system. The commissioning of the report was motivated by several factors: 1) A persistent sewer problem and subsequent sewage spill in August 1999 at the rear of several homes on Via Arriba, 2.) The knowledge that the current age of the system was beginning to approach the end of the expected useful life and 3.) Increased state and federal mandates for active management of sewer systems with the threat of stiff fines for violations of federal clean water regulations.

After videotaping a sample (25%) of the system, the report outlined the conditions found. The report identified $29.4 million in repairs for the system over a period of thirty years. Based on this information, the City's engineering staff and consultant developed a capital program with options ranging from aggressive to essentially passive. The City Council chose a mid-level program of improvements, which are projected to cost $1.5 million over each of the next ten years ($15 million), which will address the following:

• Repair very poor sewers (significant structural damage, major root intrusion - $7.45 million);
• Refurbish two City-owned pump stations (Via Barri, Rocky Point) and associated force mains ($4.5 million);
• Replace under-sized sewers (6 inch pipe) with 8 inch pipe so that Los Angeles County can assume maintenance responsibility of these lines ($2 million);
• Begin repair of poor sewers ($1,000,000 in 10th year of program - total need currently identified as $15.4 million).

In June 2002, the Council appointed a 10-member Citizen's Financial Advisory Committee to review sewer and other capital needs and recommend a financing mechanism to ensure the improvements. The Committee, after considering all City finances and requirements of law (Proposition 218), recommended a restricted 2.5 % utility user tax for non-sewer improvements and a property-related sewer fee to fund the sewer program. Foremost in the Committee's deliberations was that each property's cost for the sewer improvements should be related to its use of the sewer system.

Based upon the Committee's unanimous recommendation, which was accepted by the City Council, the City solicited proposals from several firms to prepare a report on the recommended methodology to levy a sewer fee. The firm chosen, Harris and Associates, with input from the Citizen's Committee has prepared the attached report for consideration and approval this evening.

Analysis and Findings

Before establishing the methodology to levy the fee, there are legal requirements imposed by Proposition 218 (Right to Vote on Taxes) as contained in the State Constitution, which any fee must meet as follows:

• Revenues derived from the fee shall not exceed the funds needed to provide the service - in this case $1.5 million per year to finance the program of upgrades and refurbishment.
• Revenues cannot be used for any purpose other than that for which the fee is imposed.
• The amount of the fee shall not exceed the proportional cost of service attributable to the property.
• Charges based on potential or future use of the system are not permitted, therefore vacant parcels or properties not connected to the City sewer system will not be charged.

After ensuring legal requirements were met, the engineers proposed three alternative fee methodologies. These alternatives were presented to the Citizen's Financial Advisory Committee for review. Because there is no direct measure of each parcel's use of the sewer system, the use must be estimated. Each of these options is viable from a technical standpoint. They are as follows:

• Design flow - wherein a land use (single family, condominium, retail, office, other professional) would be assessed the same fee based upon the design capacity of the sewer system to accommodate sewage flow generated by each use;
• Water Consumption - after providing some factor for water which does not enter the sewer system, that water used by the property equals flow generated to the sewer system, and
• A combination factor which included both design flow and water consumption. Under this method all single-family homes would be assessed the same fee and all other land uses would be calculated based on water consumption.

The Citizen's Financial Advisory Committee unanimously recommends that the City Council use water consumption as the methodology for the sewer user fee. Each parcel's estimated sewer use will be individually calculated based upon water use for that property. The committee further recommends that water use be based on the three lowest months of use in the City as a whole. It is assumed the three lowest months of use correspond to the three wettest rainfall months. Using the average of the three lowest months accounts for landscape watering, which does not enter the sewer system. For calendar year 2002, the three lowest months of water use in the City were January, February and March.

Harris and Associates has prepared a Rate Analysis Report, attached. It reflects a sewer rate of $1.02 which will be applied to each unit of estimated sewer use. The estimated sewer use for a property is based upon the average of each property's water use as follows:

? Water use for the months of January, February and March 2002, added together, divided by three and multiplied by 12 (months).

This rate will generate funds necessary to cover the budget of $1.5 million in improvements. The average single family residence (SFR) estimated sewer use is 268 units, which means an average single family residence will pay $273. There are 1,698 SFR above the average and 3,068 SFR below the average. The median sewer fee for all parcels with water use is $216. This fee will appear on the property tax bills.

For each subsequent year, the sewer rate of $1.02, may be adjusted by a cost escalator using the Engineering News Record Construction Cost Index for Los Angeles area, as of February each year. In addition, every year, each property's cost will be updated and re-calculated using water consumption information from a previous twelve-month period (calendar year), again based upon the three lowest months of water use for the City as a whole. The total revenue to be raised by the fee will be based on the annual program budget of $1.5 million (adjusted annually by the Construction Cost Index change from the prior year); less any interest earnings accrued on the sewer fund balance.

Once the City Council adopts the Rate Analysis Report, a notice to each property owner will be prepared which reflects the proposed cost for that property. The information will include the date and time of the public hearing on this matter, which will be 7:30 PM on Tuesday, June 10, 2003, and the means by which a property owner may protest the fee.

Attached to the staff report are the proposed procedures which the City will use to conduct the protest process. It specifies the contents for the written protest, when and where a protest may be filed and how protests will be tabulated.

If a majority of the property owners protest, the fee may not be imposed. If less than a majority protest, in accordance with the provisions of Proposition 218, the City Council may adopt an ordinance imposing the fee by majority vote of the Council. The ordinance will specify that the sewer fee, based on the proposed methodology, shall be imposed for a 10-year period, at which time it will expire. Future needs for sewer capital financing would be re-evaluated at that time and new financing approval would be sought.

In addition to the public hearing on June 10, the City will hold a series of informational meetings to explain the sewer system, the program of improvements and the fee methodology. The notice mailed to all property owners will include the date, time and location of these meetings.

Alternatives Available to the City Council

1. Accept the Engineer's Report on the Sewer Fee Methodology and Rate Analysis and proceed with the process to implement a property-related fee to finance sewer capital improvements.

2. Chose one of the two alternate fee methodologies outlined in the Sewer Methodology and Rate Analysis Report.

3. Decline to adopt the report at this time. The proposed methodology was reviewed and recommended by the Citizen Finance Committee and any delay or modification to the report will require a change in the adoption timetable.

Recommendation

It is recommended that the City Council:

1. Adopt the Engineer's Rate Analysis report, approving the methodology to levy a sewer user fee to finance an initial 10-year sewer improvement program;
2. Establish June 10, 2003 at 7:30 P.M. as the date and time for the public hearing;
3. Adopt the protest procedures; and
4. Direct staff to prepare the required notification to all affected property owners.

Budgetary Impact

The City Council has approved a program of sewer improvements, which is estimated to cost $1.5 million over each of the next ten years. Interest earnings from the sewer fund balance in the estimated amount of $149,097 will be used to offset a portion of the cost to property owners. A dedicated finance source, in the form of a sewer-related property fee, is needed to ensure that these improvements are made. The annual amount to be raised from the property fee for FY 2003-04 totals $1,395,900.