TO: Members of the Governing Board
FROM: Christopher Silke, District Engineer
REPORT BY: Christopher Silke, District Engineer
SUBJECT: Presentation of the 2024 NBRID Water and Sewer Rate Study and Discussion of the Funding Scenarios to Balance the Utility Budget
RECOMMENDATION
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Receive presentation of the Napa Berryessa Resort Improvement District (NBRID) Water and Sewer Rate Study and instruct NBRID staff to advance either Scenario B or C as outlined in previous financial reports and summarized below as a short-term measure to boost revenue until re-development of a recreational resort, housing rebuilds, and utility infrastructure upgrades can bring fiscal stability to the operating budget. (No Fiscal Impact, Discretionary)
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BACKGROUND
The water and sewer utility operating budget faces mounting deficits due to customer loss, unplanned expenses, and infrastructure weakness at risk of failures. Napa County has provided a series of temporary loans to support the NBRID’s utility operations and minor capital projects. In early 2024, a certified Median Household Income Survey report concluded NBRID is a Disadvantaged Community (DAC) creating opportunities to fund capital improvement projects via grants provided the District has a balanced operating budget with sufficient cash reserves. RDN, Inc., the District’s Utility Finance Consultant, will present updated water and sewer operating budget projections to achieve financial sustainability. Adjustment to User Rates and/or adoption of a Special Tax across the subdivision parcel base is a pre-requisite to applying for capital improvement project financial assistance through State Water Resource Control Board, Division of Financial Assistance Programs.
In May of 2021 and June 2023, the District requested and received two $1,000,000 loans from Napa County for payment of expenditures above and beyond the District’s available fund balance until such time as a proposed resort development at Steele Canyon would be actively paying bimonthly user charges which would help amortize the overall cost of the system across a larger user base. Following the 2021 loan, a 15% rate increase to water and sewer user fees was approved by customers and adopted by the Board in November 2021 with an effective date of December 1, 2021.
The approved rate increase was not intended to solve the projected operating budget deficits, as the rate increase required to accomplish a balanced budget through user fees was considered larger than the community would likely approve under a Proposition 218 hearing; rather a budget overview was presented to the community and a 15% increase was the maximum adjustment receiving majority support in the public forum. While the rate increase did bring in additional revenue for operations, several equipment failures and their associated short-term rentals and critical infrastructure project needs, including engineering services for the Pond No. 2 Slide Repair Project, exceeded the rate adjusted revenue stream.
In July 2024, the County issued a loan in the amount of $1,160,366 to the District for operating budget supplemental appropriations and implementing capital project upgrades to the automated SCADA System and Sewer Lift Station 2 that had burdened the District with extraordinary expenses. The outstanding loan balance from the County now totals $5.0 million.
A Median Household Income Survey of the community overseen by Rural Community Assistance wrapped up in April 2024 with a certified report submitted to the State Water Resources Control Board for acceptance into Disadvantaged Community Financial Assistance Programs that offer grant monies to fund water and sewer utility capital improvement projects. District staff are experienced with Drinking Water and Clean Water SRF programmatic guidelines and requirements to planning, designing and construction successful multi-million dollar capital projects. Prior to pursuance of grant funded water and wastewater priority projects, District customers and property owners have to support paying more into the utilities by enacting increases in user rates and/or adopting a Special Tax that will cease operating budget deficits with cash in reserves until future home buildout and possibly a recreational resort development at the Steele Canyon Recreation Area expands the District’s user base revenue.
The District’s operating budget has been the subject of multiple Board presentations in recent years. The following summary of NBRID water and sewer utility finances gives a historical perspective for today’s RDN, Inc. and District staff presentation.
OVERVIEW:
The Napa Berryessa Resort Improvement District provides water and sewer services to all customers in Unit 1 and 2 of the Berryessa Highlands and the Oakridge Estates Subdivisions. It was originally created to also provide water and sewer services to the 513-acre recreational Steele Park Resort located adjacent to the Berryessa Highlands. The Steele Park Resort totaled 228 equivalent dwelling units (EDUs) and was closed in 2008, however, the District will likely resume service to a new concessionaire of unknown EDUs that may open operations at the same location within five years in the future.
On August 19, 2020, the Hennessey Fire (part of the 2020 LNU Lightning Complex Fire) burned through the community, destroying over 100 homes and damaging infrastructure critical to the operation of the District’s water and wastewater facilities. Prior to the fire, there were approximately 330 active customers in the District. There are now 245 active user accounts - up from 227 after the fire. Full build-out of the subdivisions would total approximately 552 accounts.
Operations and maintenance costs to support water and sewer services is provided by three principal sources of revenue: a small portion of ad valorem county property tax proceeds passed through to the District; a water / sewer availability charge that is assessed with the property tax bill; and water/sewer use charges received from bi-monthly utility billings to district customers.
Water and sewer rates are typically set to capture the service costs associated with planned Operations and Maintenance (O&M) of the utility systems after the ad valorem and special availability assessments are fully expended. Staff salaries, contracted operations labor, specialty vendors and trades, miscellaneous goods, chemicals, fuel, power, equipment, and repairs make up the majority of expenses incurred each budget cycle. Prior and current O&M budget deficiencies have been backstopped with County loans. As of October 2024 Napa County has issued promissory notes to the District totaling $5,000,000 to cover operating expense volatility. Cost overruns are primarily attributed to non-scheduled work by operators responding to winter storms and other emergencies, and process and pump breakdowns. Since the system is built without redundant components, breakdowns naturally result in equipment rentals and emergency facility repairs.
Funding for capital improvement project (CIP) expenses has never been incorporated into rate calculations, nor has a separate reserve fund been established for CIP or asset replacement. This lack of funding to support asset and infrastructure renewal has resulted in equipment failures and permit violations. Bonds, loans, and available operations fund balance have been used for some of the minor projects associated with remediation of failures. In 2011, the District received a loan of ~$11M from the USDA Rural Development Program for three major improvement projects - the Wastewater Storage Capacity Upgrades Projects, the Wastewater Treatment Plant Replacement Project, and the Water Treatment Plant Replacement Project. In accordance with the loan agreement for the USDA Improvement Bond, NBRID is required to deposit $112,033 into a Depreciation Reserve annually. This contribution is the only reserve contribution covered by user rates, or in some years by available fund balance if annual revenue falls short of the requirement.
The District can and has used the funds included in the Depreciation Fund for “timely replacement of short lived assets” associated with the 2011 USDA project; however, there are currently seven (7) projects totaling ~$8.5M that have been identified as near-term projects important to continued compliance with regulatory permits and to increased efficiency of operations of the District's facilities that fall outside of the limits for use of USDA depreciation funds. These projects, if funded, would likely decrease certain operations and maintenance costs, but a new funding source would be required to fund these projects, as well as other proactive investments into the District’s infrastructure, to prevent potential catastrophic failures in the future.
Staff is investigating State and Federal funding opportunities for these projects, but based on a recent household income survey, grant eligibility is limited and loan eligibility would require a significant local match. The USDA bonds also require the District to commence formal proceedings against delinquent payers when the District’s overall delinquency rate reaches 5%, which has now occurred. Staff is reviewing these required actions with Counsel and will return to the Board with more information on this at a later date. The delinquencies of course further erode the District’s financial situation as operational fund balance would need to be utilized to supplement shortfalls of the annual USDA loan payments.
OPERATION BUDGET AND RATES:
During creation of the Fiscal Year (FY) 2019-20 operating budget, District staff performed a preliminary analysis of final budgets dating back six (6) years and used the data from the analysis to create a five-year projection through FY 2024-25. The purpose of the exercise was to determine if the existing user rate schedule, at that time last updated in FY 2010-11, was sufficient to maintain the operations budget through the projection period. The analysis indicated that current rates were not able to accommodate the budget in that year, or through the five-year projection period. Staff calculated an example rate structure that would accommodate the five-year projections for the operations budget - the expense projections did not include funding for a CIP Staff presented the analysis to the Board on October 8, 2019, and direction was given to pursue a consultant to complete a Cost of Service Study (COS) and Rate Setting Analysis. A COS Analysis is a tool used by utilities to ensure that user rates are tied to their costs of providing services to their customers and involves analyzing historical expenses, user consumption, customer growth trends, and capital improvement project plans to proforma budget cash flow, typically over five years, to asses revenue requirements and User Rates necessary for financial sustainability.
The District issued a Request for Proposals for the COS Analysis following the October 2019 meeting and Robert D. Niehaus, Inc (RDN) of Santa Barbara, CA was retained to conduct the COS Analysis for the District in March 2020. After several months of analysis, RDN completed the COS Analysis in early August 2020 - just prior to the destructive Hennessey Fire. The conclusion of the Final Draft of the COS Analysis was that a structural deficiency existed within the District’s operating budget and User Rates were insufficient to balance the budget as well as future budgets over their five-year study period and beyond. The recommendation by RDN was a substantial increase to water and sewer user fees. This same budgetary structural deficiency still exists today.
After the fire in 2020, RDN added a brief post-fire budget analysis to conclude their work on the COS Analysis, including a preliminary post-fire rate requirement scenario to balance the budget with the caveat that additional budget analysis was necessary to finalize projections and re-evaluate User Rates to balance the budget with a reduced customer base. District staff completed the suggested budget analysis, and RDN's contract was amended in March 2021 to include review of the District's revised budget and calculation of a new rate requirement of and structure for Proposition 218 consideration. In general, it is possible for operating revenue to be supplemented in conjunction with or entirely through a special assessment voted on by property owners in the District; however, RDN only investigated balancing the O&M Budget through User Rates, and the rate requirement calculated exceeded a 75% increase over the current rate schedule.
After several staff meetings and a community meeting held onsite at the Berryessa Highlands Volunteer Fire Station, a reduced rate increase of ~ 15% was proposed as the maximum property owners would agree to without a protest. After the meeting the District noticed an intent to increase water and sewer rates. The Governing Board approved the rate increase in November 2021 with an effective date of December 1, 2021.
Three years later, the District has had to rely on three loans from Napa County totaling $2,506,000 to maintain operations and supplement funding for one minor capital improvement project that was required to repair critical infrastructure at the District’s treated wastewater storage facility.
In May 2023, District staff was directed to retain the Rural Community Assistance Corporation (RCAC) to conduct an updated Median Household Income (MHI) study to determine if the District qualified as a Disadvantaged Community (DAC) and the capital funding opportunities that accompany that determination. The updated MHI Survey report was certified in April 2024 and concluded that NBRID qualified as a DAC with an MHI calculated at $62,000.
District staff presented the MHI results to the Board in April 2024 and recommended that RDN, Inc. be retained once again to update their prior COS Analysis to determine a sustainable water and sewer rate structure in advance of the District applying for funding opportunities now available to it as a DAC. The COS Analysis is near complete and will be presented at today’s meeting.
LOANS
As described above, the water and sewer user rates, even with the approved increases in 2011 and 2021, have not been sufficient to cover operations and maintenance expenses for many years. The lack of sustainable User Rates, combined with emergency equipment failures and outdated infrastructure has required the District to rely on available fund balance almost every fiscal year for the past 15 years.
Insufficient fund balance has left the District with no option but to request loans from Napa County to pay for a portion of the District’s operations, maintenance, and minor capital improvement project costs dating back to 2008. District indebtedness to the County is as follows:
Loan No. 1: A consolidation of an October 14, 2008 loan in the amount of $474,000 used to pay HydroScience Engineers for design services related to water facility improvements and a June 29, 2010 loan in the amount of $395,000 used to cover shortfalls in the FY 09-10 operating budget and for minor facility improvements.
Loan No. 2: A consolidation of a May 3, 2011 loan in the amount of $205,000 used for non-budgeted County costs including engineering, accounting, Auditor's Office, legal and County Executive Office expenses that were needed for the day-to-day operations of the district; a June 5, 2012 loan in the amount of $325,000 used for a) legal expenses that exceeded the amount budgeted as a result of an Administration Civil Liability (ACL) Complaint (R5-2011-0590) issued by the Regional Board for wastewater discharge violations that occurred in FY 10-11; b) professional services expenses related to the contract with Western Water Constructors; and c) emergency repairs to the District’s water distribution system; and a September 11, 2012 loan in the amount of $95,000 used to cover an unexpected payment of a fine in the amount of $95,000 included in a stipulated order issued by the Regional Board which settled Administrative Civil Liability Complaint R5-2011-0590. (Consolidated with Loan No. 4 as part of Loan No. 7 described below.)
Loan No. 3: A June 18, 2013 loan for $1,100,000 used to satisfy the United States Department of Agriculture (USDA) reserve requirements for two capital improvement loans was issued to the District. This loan was defeased in Fiscal Year 2022.
Loan No. 4: On May 18, 2021, a loan for $1,000,000 for the express purpose of covering a projected accumulated operations budget deficit of over $600,000, including minor equipment repair/replacement, through Fiscal Year 2023-24. The loan was requested after over 100 homes were destroyed in the August 2020 Hennessey Fire, substantially reducing the District’s revenue. (Consolidated with Loan No. 2 as part of Loan No. 7 described below.)
Loan No. 5: A October 27, 2022 loan for $345,634 used to cover construction expenses related to the repair of a failed berm to a four (4) million gallon treated wastewater storage pond without utilizing available fund balance that is necessary to ensure continuous operations of the water and wastewater facilities in the operations budget. All current loans were issued pursuant to Government Code section 25214.4(b), which allows for repayment after three years after the end of the fiscal year in which the loan was made.
Loan No. 6: On June 6, 2023, a loan for $1,000,000 for the express purpose of covering a projected accumulated operations budget deficit of over $400,000, including unplanned maintenance expenses and minor equipment repair/replacement into Fiscal Year 2023-24. The loan was requested after over 100 homes were destroyed in the August 2020 Hennessey Fire, substantially reducing the District’s revenue.
Loan No. 7: On June 25, 2024, issuance of a promissory note for $1,625,000 that consolidates Loans 2 and 4 as described above.
Loan No. 8: On July 23, 2024, a loan for $1,160,366 for the express purpose of covering a projected accumulated operations budget deficit of over $300,000, including unplanned maintenance expenses and minor equipment repair/replacement into Fiscal Year 2025-26. Remaining loan proceeds are earmarked to upgrade the District’s computerized SCADA System and Sewer Lift Station 2 that operates on a single pump to serve two thirds of community’s sanitary sewer flow. The loan was requested after over 100 homes were destroyed in the August 2020 Hennessey Fire, substantially reducing the District’s revenue.
CONCLUSION:
Water and sewer user rates are insufficient to cover projected expenses for the current and future fiscal year(s). An adjustment to the User Rates and/or initiation of a Special Tax assessed to parcels should be considered to resolve structural financial problems, position the District to secure capital improvement project grant funds through State Programs and take advantage of a once in generation opportunity to build infrastructure that is capable of maintaining compliance with drinking water and environmental regulations without further assessments.
The below table summarizes the projected operating budget standing over the next five (5) fiscal years if no action is taken to increase operating revenue - this is called Scenario Zero, or No Action in the Presentation. The deficits noted continue to increase through the 10-year study period ending with a $5.9M deficit by the end of FY 2033-2034. (A surplus is projected in FY 2024/2025 due to the $1,000,000 loan received in July 2024.)
FY 24-25 FY 25-26 FY 26-27 FY 27-28 FY28-29 FY 29-30
Surplus/(Deficit) $ 400,000 ($ 300,000) ($ 800,000) ($1,400,000) ($2,000,000) ($2,700,000)
The following three Scenarios - to be discussed in detail during the RDN, Inc. Presentation - summarize the possible adjustments to customer rates and property owners to bring the budget into balance after 10 years. Scenarios with rate adjustments include an option to increase rates in a single year, or over a 5-year period. All rate adjustments include an annual increase to account for estimated inflation throughout the study period. All rate adjustments are subject to Proposition 218. After five years the rates included in these options would require another protest hearing to retain the proposed annual inflation adjustment for another 5-year period, etc.
(Note - not included in the operations rate analysis is the annual USDA Bond Assessment payment that is currently included on the tax bill for every property owner. The funds collected as part of this assessment are not used for operations, rather they are used to repay the District’s debt to the USDA for the approximately $11M in loan financing received in 2011/2012 to upgrade wastewater storage capacity and replace the wastewater and water treatment plants.)
Scenario A - Adjusts Water and Sewer User Rates upward by 95 percent. The Governing Board previously opposed any further action on this approach.
Scenario B - Proposes a User Rate increase of 66 percent coupled with a Special Tax assessment of $800 for developed parcels and $400 for undeveloped parcels that will replace the existing annual Water and Sewer Availability Charge of $240.
Scenario C - Does not adjust user rates, but rather replaces the existing annual Water and Sewer Availability Charge of $240 with a proposed Special Tax assessment of $2,150 on each of the 552 parcels. At the end of five years (FY 2030), the total yearly utility payments (User Rates, USDA Bond Assessment, Special Tax or Availability Charge) from active water/sewer utility customers would increase by approximately $3,000 for Scenario B and $2,000 for Scenario C.
Scenarios A - C all project a positive fund balance at the end of the 10-year study period.
High water and sewer bills are not unique to the District. This is an issue throughout the State of California where communities with small numbers of customers are still required to meet all State and Federal water and wastewater regulations regardless of budget deficits. Water and wastewater operations and infrastructure costs are significant and only growing each year as material and labor costs rise, and when there are a limited number of customers responsible for funding their local utility (in this case the District), these costs are often disproportionately high when compared to the larger systems (e.g. City of Napa).
Over the past several decades, community meetings on these matters have stirred disagreements within the community because of the financial impacts on many households. For example, in 1997 a ballot measure to convert the existing Water/Sewer Availability Charge (totaling $240 per parcel per year) into a Special Tax adjusted by the annual Consumer Price Index was rejected by voters, and in 2010 the residents successfully protested a rate increase proposed to cover costs of operations, maintenance, and capital projects necessary to update the wastewater facility. The rejection of the proposed increases noted above is not surprising. Small water and wastewater utilities across the State of California are faced with providing a public service at fair prices and maintaining compliance with increasingly stringent State and Federal water and wastewater regulations. The fact is that small utilities have pumps and treatment processes that are similar to their urban peers but they are disproportionately challenged financially with fewer customers to spread the costs.
All rate and/or assessment Scenarios above require either a Proposition 218 protest hearing, or special ballot measure, or both to enact. Proposition 218 User Rate/Special Assessment/Tax process is several months from initial notices to ballots / protest periods to their effective date, if passed. Revenue lags by another two to six months depending on the measure. The District operations will rely on County loans every two to three years if no action is taken or District customers/property owners reject all proposals.
A Community Meeting will be scheduled for Wednesday, November 6, 2024 or Wednesday, November 13, 2024 at the Capell Valley Fire Station to disclose the latest utility finance analyses by RDN, Inc. and seek input from residents on the scenarios presented and direction given to staff today.
PROCEDURAL REQUIREMENTS
1. Staff report and presentation
2. Board questions for staff
3. Public comment
4. Provide direction to staff as appropriate
FISCAL & STRATEGIC PLAN IMPACT
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Is there a Fiscal Impact? |
No |
ENVIRONMENTAL IMPACT
ENVIRONMENTAL DETERMINATION: The proposed action is not a project as defined by 14 California Code of Regulations 15378 (State CEQA Guidelines) and therefore CEQA is not applicable