Final Draft FY 2009/10 Budget and Long Range Plan of Finance Attachment A – Executive Summary May 7, 2009 REVENUES Regional Connection Fees The drastic drop in new development and the subsequent impact to Connection Fee revenue was evident by the end of the second quarter when new connections were reported to be 25% of total budget, or 732. As of January 2009, the number of new connections reported by member agencies was only 820, or 27% of the budgeted 3,000 EDUs. Total Connection Fees are projected to be $5.1 million(about 1,100 EDUs at $4,673 per EDU). A more frequent occurrence has been the cancellation of new development projects and the return of permit fees by certain member agencies for previously issued permits. With the economic recession anticipated to continue for at least the next couple of years, the number of new connections for FY 2009/10 is only anticipated to be 1,000 EDUs, or $4.8 million, the lowest in the last 20 years. User Charges/ Fees Regional System The increase in the EDU Volumetric rate from $9.62/EDU to $10.75/EDU approved by the Board on February 18, 2009, accounts for $4 million of the anticipated increase from the projected Volumetric Revenue of $30 million to the $34 million budgeted in FY 2009/10. Volumetric flows have not increased significantly over the last two or three years. These static flow levels can be attributed to the combination of effective regional water conservation efforts and the slowdown in new development and higher residential and commercial vacancies as a result of the current economic recession. This trend is expected to continue as increased water conservation programs are implemented across the State. Total EDU volumetric flows are expected to have a stagnant growth compared to the historical average growth of 2%: No. of EDUs Fiscal Year (millions) % Change 2008 Actual 3.09 2009 Projected 3.11 0.85% 2010 3.14 0.75% 2011 3.17 1.0% NRW System In 2004, the Agency adopted pass-through rates for the NRW system. Charges from Los Angeles County Sanitation District (LACSD) for the Northern system and from the Santa Ana Watershed Project Authority (SAWPA) for the Southern system are directly passed on to connected users. These rates are updated annually and consists of: Capacity Volumetric Strength Administrative Surcharge o Non-Recycled Water Users o Recycled Water Users Final Draft FY 2009/10 Budget and Long Range Plan of Finance Attachment A – Executive Summary May 7, 2009 Page 2 On February 24, 2009, the Pretreatment & Source Control Department facilitated the NRW Workshop to update connected users on the financial status of the NRW System and to notify them of the proposed rate increases for FY 2009/10: Current Proposed Rate UM Rate FY 2009/10 Capacity Capacity Charge Unit $85 $90 Admin Surcharge- Non-Recycled Water Users % 40% 50% Admin Surcharge- Recycled Water Users on a Pro Rata Basis % 10% 10% The closure of Sunkist Growers Inc. in 2008 and their anticipated relinquishment of the 24 capacity units next fiscal year, plus 50% reduction in anticipated flows for James Hardie Building Products represents an estimated loss of volumetric fees of approximately $350,000. The loss will be partially offset by new connections such the City of Ontario IX Plant temporarily leasing 3 capacity units. Total NRW volumetric revenues in FY 2009/10 are estimated at $3.1 million, no increase compared to the FY 2008/09 projected actual. The Agency is also working with the Reliant Powerplant (old SCE Entiwanda facility) and LACSD to renegotiate the terms of the 1962 agreement to incorporate the current NRW cost of service ratesa and charges. Imported Water Surcharge & Meter Charges An increase from $10/AF (acre foot) to $12/AF in the imported water surcharge is proposed beginning January 1, 2010. The $2/AF increase will result in additional surcharge fees of $62,500 to support administrative costs in the Water Resources (WW) fund responsible for managing the Agency’s conservation programs. The change in the effective date from a fiscal to a calendar year is to align with our member agencies rate adjustment schedule which is on a calendar year basis. An increase in the monthly meter charge from $.595 per unit to $.745 per unit is also proposed effective July 1, 2009. The increased meter rate will result in approximately $340,000 additional meter charge revenues in FY 2009/10 to support the Readiness to Serve (RTS) costs from MWD. The monthly number of meter units is estimated at 188,000 units. A Water Workshop will be held in May 2009 to notify imported water users of the proposed rate increases and provide them an overview of conservation program and activities for FY 2009/10: Proposed Current FY Rate UM Rate 2009/10 Effective Date *September 1, 2009 AF Surcharge Acre Foot $10 $12 Final Draft FY 2009/10 Budget and Long Range Plan of Finance Attachment A – Executive Summary May 7, 2009 Page 3 Monthly Meter Charge Per Unit $.595 $.745 July 1, 2009 *Effective date is based on MWD adopted rates effective date. Recycled Water Sales/Rebates The proposed increase to the Recycled Water rate was presented as part of the LRPF as early as September 2008. A change in the effective date from a fiscal year to a calendar year basis is also being proposed to align with our member agencies water rate adjustment schedule: Unit of Current Proposed Effective Date Rate Measure Rate FY 2009/10 Recycled Water Rate-Direct *September 1, Deliveries Acre Foot $66 $75 2009 Recycled Water Rate-Recharged *September 1, Groundwater Deliveries Acre Foot $66 *$85 2009 *The additional $10/AF proposed for recharged groundwater deliveries will support operating and maintenance costs for recycled water related groundwater basins. Effective date is based on MWD adopted rates effective date of September 1, 2009 (action taken on April 14, 2009 by MWD Board of Directors). Total Recycled Water sales for FY 2009/10 are estimated at $2.0 million for 28,200 AF, including 3,300 AF in groundwater deliveries. The Three Year Business Plan (3YBP), adopted by the Board in December 2007, accelerated the construction of the Recycled Water Distribution System, the primary infrastructure estimated to be completed by FY 2011/12. The ultimate goal of the 3YBP is to increase direct deliveries to 50,000 AF, including recharged groundwater deliveries. Groundwater Recharge Total Fiscal Year Direct Sales AF AF AF FY 2008/09 18,500 3,200 21,700 FY 2009/10 25,000 3,300 28,200 FY 2010/11 33,600 4,700 38,300 FY 2011/12 39,400 5,200 44,600 FY 2012/13 46,000 4,600 50,600 FY 2013/14 47,000 5,300 52,300 FY 2014/15 48,000 5,600 53,600 In December 2009, the Agency finalized the Local Resources Program Agreement (LRP) with Final Draft FY 2009/10 Budget and Long Range Plan of Finance Attachment A – Executive Summary May 7, 2009 Page 4 MWD expanding the Agency’s Recycled Water Program beyond the 17,000 AF currently eligible for the LPP (Local Project Program) rebate of $154/AF. The first phase of the LRP is for 14,400 AFY (acre foot per year) and up to $250/AF for direct deliveries of recycled water for irrigation and other non potable uses, including the water extracted from groundwater basins. The agreement can be amended administratively in the future for up to 33,000 AFY. Total rebates in FY 2009/10 are estimated as follows: $2.1 million LPP Rebate - $154/AF for recycled water sales up to 17,000 AF, excluding the initial 3,500 AF per fiscal year. $2.4 million LRP Rebate - $250/AF for recycled water sales in excess of 17,000 AF per fiscal year, including recharged groundwater sales. Property Taxes Another major source of revenue for the Agency is Property Taxes which are projected to be $35.5 million in FY 2008/09, 1% higher than last fiscal year. However, the San Bernardino Tax Assessor is projecting a drop of approximately 6% in assessment values this year which will impact property tax revenues next fiscal year. Budgeted property tax revenue includes a 6% drop in FY 2009/10 for a total of $33.8 million. An additional drop of 1% is budgeted in FY 2010/11. Historically the Agency has used property taxes to support debt service and capital costs. The proposed allocation of property taxes in FY 2009/10 Budget is consistent with this policy: Fund Percentage Property Tax Allocation RC Fund 65% $ 21.3 RO Fund 20% $ 6.5 WC Fund 7% $ 2.3 GG Fund 8% $ 2.6 100% $ 32.7 The property tax reallocation of 7% to the Recycled Water Program will only be in place for a four year period, FY 2009/10 – FY 2012/13. Property taxes will support debt service costs until targeted direct sales of 50,000 AF are reached in FY 2012/13 and Recycled Water Sales and Rebates can support program costs. In FY 2013/14, the allocation to the RO Fund will be reinstated to 27%, with no future property tax allocations to the Recycled Water Program. The 7% is lower than the initially proposed allocation of 13% due to lower debt service costs as a result of project delays and 0% stimulus SRF (State Revolving Fund) Loan financing for Phases IV and V for the Northeast section projects. No change in the allocation to the Regional Capital Improvement (RC) fund of 65%, or the Administrative Services (GG) fund of 8% is proposed. Final Draft FY 2009/10 Budget and Long Range Plan of Finance Attachment A – Executive Summary May 7, 2009 Page 5 Grants A total of $20 million in federal and state grants is anticipated for FY 2009/10: $14 million from United States Bureau of Reclamation (USBR) $ 4 million from State Water Resources Control Board (SWRCB) $ 2 million from Metropolitan Water District (MWD) A total of $17 million will fund the construction of the Recycled Water Distribution System in the Recycled Water Program as defined in the Three Year Business Plan (3YBP) adopted by the Board in December 2007. The $14 million USBR grant is part of the $20 million grant awarded by the Federal Reclamation Wastewater and Groundwater Study and Facility Act (Title XVI) Program. The initial installment of $1 million was received in FY 2007/08, and a second installment of $5 million is expected to be received as early as April 2009. The SWRCB grant of $4 million is part of the Phase IV of the Northeast Area Project SRF funding. The $2 million from MWD is the final payment on the Ultra Low Flush Toilet (ULFT) Conservation Program. Beginning in FY 2010/11, MWD will be administering the ULFT program directly. SRF Loan Proceeds Historically SRF Loans have been the primary financing source for the Recycled Water Distribution System. In March 2009, the Agency submitted an application to the State Water Resources Control Board (SWRCB) for the RP1 Dewatering Facility Expansion project in the RC Fund. Unlike other municipal debt, SRF loans, issued by the SWRCB, have no explicit costs of issuance and carry a low fixed interest rate (0% - 2.7%) making it one of the least costly financing options available. The American Recovery and Reinvestment Act of 2009 (ARRA) signed into law by President Obama on February 17, 2009, provided SWRCB with $280 million in federal stimulus funding. The Agency submitted applications for various projects for stimulus funding including: Recycled Water Distribution System Phases IV & V - $38 Million Regional RP1 Dewatering Facility Expansion Project - $27 Million SRF Loans issued under the stimulus plan will have special financing terms: Recycled Water Loans – 0% interest rate, 20 year term, and eligible for grant proceeds. Regional Loans – 1% interest rate, 20 year term, not eligible for grant proceeds. Assuming approval of the two applications mentioned above under the stimulus financing terms, total SRF loan and grant proceeds expected in FY 2009/10 are: Final Draft FY 2009/10 Budget and Long Range Plan of Finance Attachment A – Executive Summary May 7, 2009 Page 6 USBR SRF Grant Grant Total Program Loan Proceeds Proceeds Proceeds Proceeds Recycled Water Program $21,800,000 $2,730,000 $14,000,000 $38,530,000 Regional Program – RP1 Dewatering Expn. $10,500,000 $0 $0 $10,500,000 Regional Program – SB Pump Station via City of Fontana $4,200,000 $0 $0 $4,200,000 EXPENSES Operational Expenses Utilities Utility costs are expected to increase by $740,000 or 8.9% in FY 2009/10 compared to FY 2008/09 Amended Budget of $8.3 million. The increase is due to a combination of the reduction in self generated electricity, increased electricity purchase from the grid, and an anticipated rate increase from Southern California Edison (SCE) expected to take effect in April 2009. The reduction in electricity production by the Agency was primarily the result of the Southern California Air Quality Management District (SCAQMD) Amended Rule 1110.2, (Emissions from Gaseous & Liquid Fueled Engines). The recently amended rule limits the percentage of natural gas that can be utilized in biogas fueled engines to only 10% with 90% of the fuel coming from biogas. (90/10). This resulted in the shutdown of one of the two engines at RP1 due to the unavailability of biogas for both engines. The shutdown will lead to a loss of 7 million kWh in generated electricity, or $1,152,000 (at the current budgeted rate of $.16 kWh). Also affected were the RP5 Solids Handling (RP5 SH) and Renewal Energy Efficiency Project (REEP) facilities designed on a biogas to natural gas ratio of 60/40 blend for optimal power generation and performance. On February 18, 2009, the Board recommended the suspension of both facilities and approved an independent evaluation to determine the most feasible options for the Agency to meet its long term energy needs. In addition to higher electricity purchases, is the loss of approximately $500,000 in generated powers sales to the Chino Basin Desalter Authority (CDA). The suspension of the RP5 SH and REEP facilities also shutdown the CDA engines which were dependent on the generated power for operation. These sales were reported in the RO fund. The increase in electricity costs was partially offset by the power generated by the solar panels at the RP1, RP5 and CCWRF facilities. The average fixed rate for all three facilities is lower than the anticipated increased SCE rate, ($.18 kWh), and is expected to save approximately $300,000 Final Draft FY 2009/10 Budget and Long Range Plan of Finance Attachment A – Executive Summary May 7, 2009 Page 7 next fiscal year. Unlike the uncertainty of future SCE rates increase, solar generated power rates increase only at a fixed 2% per year throughout the 20 year contract. Chemicals Chemical costs are estimated at $4.8 million for FY 2009/10, approximately a decrease of $1,260,000 or 20.7% less than the FY 2008/09 Amended Budget of $6.1 million. The suspension of the RP5 SH accounts for 50%, or $400,000, of the anticipated reduction. The other 50% is an overall decrease based on optimal use of chemical doses and anticipated contract pricing. Biosolids Recycling A key assumption for biosolids recycling costs is the full operational status of the Inland Empire Regional Composting Facility (IERCF) in FY 2009/10. Anticipated biosolids recycling costs for FY 2009/10 are expected to decrease by almost 70% from projected actual of $3.0 million to proposed budget of $910,000. The reduction is primarily the result of the difference in transportation costs from $8 per load to the IERCF compared to nearly $50 per load for offsite and out of state costs. Operational interruptions at the IERCF that impact throughput capacity may result in offsite disposal of biosolids at a higher cost and may require budget amendments. IERCF Operation and Capital Contribution Beginning in FY 2009/10, the operating and capital costs and partner contributions for the IERCF will be recorded in the RO and RC funds, respectively. These costs and contributions were previously recorded in the Organics Management (OM) fund. The OM fund will be merged with the Regional Program beginning FY 2009/10. A key assumption is the full operational status of the IERCF in FY 2009/10 and a possible change in the funding approach from partner contributions to a rate basis where each partner pays a fixed rate per load delivered to the facility. Under the terms of the JPA agreement with LACSD if IEUA utilizes only 45% of the capacity then LACSD will pay the pro rata share of 55% of the costs through a tipping fee rate for operating costs. The rate would be based on cost of service and will cover 100% of total budgeted costs based on full throughput capacity. A reconciliation will be performed at the end of the fiscal year and as part of the rate setting process for the following fiscal year. The FY 2009/10 total operating costs for the IERCF are estimated at $6.4 million. The RO fund budget includes the 50% share of employment costs of $1.4 million and other operating costs of $1.8 million, assuming a 50% utilization by each partner. The anticipated contribution from LACSD is estimated at $3.2 million equivalent to 50% of the total operating expenses including employment costs. A capital contribution of $250,000 is budgeted in the RC fund to cover capital requirements in FY 2009/10. Administrative Expenses Employment Costs Historically a 3% - 4% vacancy factor has been applied, however, based on current vacancy status and anticipated staffing changes, a 6% vacancy factor is assumed for FY 2009/10. This Final Draft FY 2009/10 Budget and Long Range Plan of Finance Attachment A – Executive Summary May 7, 2009 Page 8 will result in approximately $1.1 million in overall employment cost reductions. Included in the Cost Containment Strategy is the possible implementation of a hiring freeze for non Agency critical positions. No change in the current count of 308 FTE (Full Time Equivalent) as proposed. Currently the Agency has 292 FTE positions filled and expects to achieve the 6% vacancy rate by June 2009. Partially offsetting these cost reductions is the 3% COLA based on MOU agreements for approximately $800,000 and the estimated increase in employee benefits of approximately $300,000 due to anticipated higher insurance premiums (up to 10% increase for medical insurance costs) and employer contributions to CALPERS program (a combined contribution rate of 20%). Total employment costs for FY 2009/10 equal the FY 2008/09 Amended Budget of $30.7 million. Training and Employee Development Programs As part of the Cost Containment Strategy, overall training and employee development programs will continue to be closely monitored in FY 2009/10. Total training, including conferences and travel, are budgeted at $300,000 in FY 2009/10. Local conferences and seminars will be encouraged to minimize travel and overnight lodging costs. Employee development programs such as MAP (Management Action Program) and TEAMS will also be scaled down significantly or temporarily suspended. Professional Services Total Professional Services are estimated at $5.0 million in FY 2009/10, a reduction of nearly $2.5 million from the FY 2008/09 Amended Budget. A reduction on overall Agency security and landscaping services attributed to approximately $1 million in cost reductions. The scaling down of employee development program resulted in the reduction of approximately $245,000 in training consultation services. The suspension of the RP5 SH and REEP facilities eliminated the need for previously budgeted equipment maintenance agreements and contract services of approximately $200,000. An overall reduction in contract labor and materials accounts for the remaining cost reduction in this category. As reported to the Board and the Regional Sewage Committees in November 2009, professional services are significantly under the total budget amount for the current fiscal year. More effective use of in house resources to perform tasks budgeted for outside consultants, and delays in certain capital project start ups which will require ongoing maintenance or contracting services, have resulted in the favorable variance. As of the end of the 3rd Quarter, Professional Services are under 60% of total budget. Debt Service Costs Total debt service costs are estimated at $27 million for FY 2009/10, including the repayment of $3 million to the NC fund from the Recycled Water Program. This intra fund loan payment is part of the $11 million loan provided to the Recycled Water Program at the end of FY 2007/08 and reported to the Board as part of the CAFR presentation in January 2009. Final Draft FY 2009/10 Budget and Long Range Plan of Finance Attachment A – Executive Summary May 7, 2009 Page 9 Debt service costs $24 million (net of intra fund repayment), consist of principal, interest and financial costs; $19.7 million in Bond related principal and interest, $3.6 million in SRF loan, $.3 million in SARI (Santa Ana Regional Interceptor), and $.4 million in financial expenses: Proposed Debt (in millions) FY 2009/10 Bonds $ 19.7 SRF Loans $ 3.6 SARI Loan $ .3 Financial Expense $ .4 Total Debt Service, net of Intra Fund Repayment: $ 24.0 Capital Project Costs Total capital costs for FY 2009/10 are estimated at $59.4 million: FY 2009/10 CAPITAL PROGRAM ALLOCATION ($ Millions) Program Amount Percentage Wastewater $19.9 33% Recycled Water $36.6 62% Non-Reclaimable (NRW) $2.5 4% Admin Services (GG) $0.4 1% Total Program $59.4 100% The proposed FY 2009/10 – FY 20018/19 TYCIP of $256 million is $194 million less than the FY 2008/09 – FY 2017/18 TYCIP adopted in June 2008 of $450 million: TEN YEAR CAPITAL IMPROVEMENT PLAN (TYCIP) COMPARATIVE CAPITAL PROGRAM ALLOCATION ($ Millions) Program FY 2009 TYCIP FY 2010 TYCIP Increase/(Decrease) Wastewater $215 $90 ($125) Recycled Water $190 $131 ($59) Non-Reclaimable (NRW) $37 $28 ($9) Recharge Water $8 $0 ($8) Admin Services (GG) $0 $7 $7 Total Program $450 $256 ($194) The FY 2008/09 TYCIP excludes capital projects budgeted in the Admin Services (GG) Fund in the amount of $16.7 million. Final Draft FY 2009/10 Budget and Long Range Plan of Finance Attachment A – Executive Summary May 7, 2009 Page 10 FUND BALANCES/RESERVES While the ultimate goal of the Agency is to have fund reserves that not only comply with legally mandated levels as defined in the various Bond covenants, but also adequately meet as pay-as- you-go capital, and unforeseen events, there is an additional pressure to minimize or avoid rate increases in the next couple of years. Aggressive cost containment measures, including the deferral of nearly $200 million in non essential capital projects in the next 10 year period, will sustain adequate fund balances for the next fiscal year and future four year forecast. Target Reserves = 50%: Fund Balance (Dollars in Millions) 180 Millions 160 140 120 100 80 60 40 20 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Series1 Targeted Reserves = 50% Operating Revenues Based on key assumptions in the proposed FY 2009/10 Budget, targeted reserves are met in aggregate by all Agency funds. Targeted reserves as defined in the Long Range Plan of Finance (LRPF) consists of 50% Operating Revenue plus Debt Service Reserves.
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