Chapter 12 – Financial Program

12.1    Fiscal Policies

12.2    Rates and Rate Structure

12.3    Capital Funding Strategy

12.4    Evaluation of Revenue Requirements

Tables

Table 12.1    Revenue Requirement Forecast ($000s)

This chapter describes the current finances of the Storm and Surface Water Utility, and summarizes its financial policies and the funding needed to implement this Plan. A detailed financial analysis was performed by the Utility’s financial consultant, FCS Group (Appendix 5). The results indicate that the overall financial condition of the Utility remains healthy. The Utility, through this Plan, will continue to be guided by prudent financial management principles.

Direction is provided for this chapter by the City’s Comprehensive Plan. In particular, Utilities Goal 2 and its associated policies help guide the Utility’s financial program:

Reliable utility service is provided at the lowest reasonable cost, consistent with the City’s aims of environmental stewardship, social equity, economic development and the protection of public health.

12.1 Fiscal Policies

The Utility is responsible for funding all its related costs through user fees; it does not depend on tax revenues or General Fund resources. The primary source of funding for the Utility is stormwater rate revenue; miscellaneous operating revenues and investment earnings provide additional resources to fund the utility’s revenue needs. The City’s utilities are financed and operated like private business enterprises, which requires periodic determination of revenues earned, expenses incurred, and net income for capital, maintenance, public policy, management control, and accountability.

Like any business, municipal utilities require certain minimum levels of cash reserves to operate. These reserves address variability and timing of expenditures and receipts, as well as occasional disruptions in activities, costs, or revenues. Given the Utility’s responsibility to provide an essential service at a certain standard, protection against financial disruptions is even more important than it would be for a private-sector or non-essential counterpart. The Operating Fund is intended to maintain a minimum reserve balance equal to 10% of annual operating expenses. The Capital Fund is assumed to maintain a minimum reserve balance equal to 5% of active capital appropriations as a capital contingency reserve.

12.2 Rates and Rate Structure

The Utility’s rate structure is designed to be fair and equitable in distributing the costs of managing flooding, water quality and aquatic habitat according to each customer’s relative impact.

Rates and General Facility Charges (GFCs) are based on impervious surface area. The link between impervious surface, runoff contribution, and increased flooding, water quality degradation, and damage to habitat is scientifically strong and supportable. This basis appropriately links land development with issues addressed in this Plan, such as flooding (conveyance capacity), water quality, and habitat protection.

For non-residential customers, the existing rate structure incorporates the actual amount of impervious surface area on the parcel and rate categories based on the date of development. Impervious surface establishes a link to a property’s contribution to stormwater runoff. It is expressed as a number of impervious units, with one unit equal to 2,528 square feet of impervious surface. This measurement approximates the average amount of impervious surface on a developed residential parcel in Olympia. The date distinction recognizes the relative stormwater management practices required by regulations imposed on development compared to current standards. The existing category break-points for this rate basis are: prior to January 1980, between January 1980 and January 1990, and after January 1990.

The Utility proposes to move to a rate structure also based on impervious surface, but with categories based on the actual onsite stormwater mitigation installed and maintained on a property rather than a date of construction. FCS Group performed a detailed review of the Utility’s expenses and found that about two-thirds of the Utility’s annual costs are fixed and do not vary with onsite mitigation. Recognizing that onsite mitigation only impacts about one-third of the Utility’s costs, the proposed rate structure reflects a modified structure of credits.

The rate structure the Utility is considering will have three categories:

•    Properties with no stormwater mitigation will pay the full rate

•    Properties with flow control and/or water quality treatment will receive up to a 20% discount

•    Properties designed to fulfill low impact development or 100 percent infiltration will receive up to a 50% discount

It is worth noting that the Utility does not have to offer discounts at all, but can choose to do so as a policy decision to encourage environmentally sustainable development.

Rate revenue requirements are discussed in Section 12.4. A series of rate increases (13%-3% per year) are proposed to accommodate projected operating and capital needs during the 2018-2023 planning period. This results in a cumulative increase of roughly 55% over the six-year period. The primary factors driving the need for the proposed rate increase are: capital projects, staffing increases to support low impact development inspection and maintenance, and making the pilot habitat management program permanent.

FCS Group determined that Olympia’s storm and surface water rates are comparable to a group of peer jurisdictions. It should be noted that Olympia, unlike many of its peers, encompasses significantly greater stream miles and shoreline and has been proactive in constructing and maintaining regional stormwater facilities to retrofit developed areas.

12.3 Capital Funding Strategy

For the 2018-2023 planning period, the proposed capital facilities projects will cost an estimated total of $17.4 million, as shown in Chapter 11, Table 11.1. The Utility funds its capital program using resources in the following priority order:

1.    Available grant funding.

2.    Available low interest loans.

3.    Accumulated capital reserves.

4.    Annual revenue collections from GFCs.

5.    Annual resources from rates earmarked for system reinvestment funding.

6.    Annual transfers of excess resources (over minimum balance targets) from the Operating Fund, if any.

7.    Interest earned on Capital Improvement Fund balances and other miscellaneous capital resources.

8.    Revenue bond financing.

GFCs are imposed on new customers connecting to the system as a condition of service and are in addition to any other costs related to onsite stormwater mitigation. The GFC is typically based on a blend of historical and planned future capital investment in system infrastructure. Its underlying premise is that growth (future customers) will pay for growth-related costs that the Utility has incurred (or will incur) to provide capacity to serve new customers. GFC revenues provide a source of cash funding for the Capital Facilities Plan (CFP).

The Utility bases GFCs on impervious units (2,528 sq. ft. of impervious surface) and average daily vehicle trips based on the Institute of Traffic Engineers’ Trip Generation Manual. As explained in Section 12.2, there is a scientific link between impervious surface and stormwater degradation (flooding, water quality, and habitat). There is similarly a correlation between traffic density (average daily vehicle trips) and water pollutant levels

FCS Group calculated an updated GFC as part of the financial analysis for this Plan. The analysis determined that increases in the GFC are justified. The GFC per impervious unit could be increased by $1,193 or about 100.0% from the 2017 charge of $1,190 and the per average daily vehicle trip could be increased to $19.04 or about 423.1% from the 2017 charge of $4.50 per average daily vehicle trip. The Utility’s practice is to phase increases to smooth impacts to customers. In coming years, the Utility will consider increases to per impervious unit and per average daily vehicle trip GFCs.

In addition to funding the capital program with charges to new customers, the Utility requires existing ratepayers to support the City’s full cost of providing service, including annual depreciation expense on existing Utility assets. Existing customers benefit from a system of infrastructure that has been funded through a combination of sources; this infrastructure deteriorates over its useful life and will eventually fail, requiring replacement.

12.4 Evaluation of Revenue Requirements

FCS Group analyzed the annual revenue required to fund the projected operating expenses, capital costs, and policy-based requirements (e.g. reserve funding, system reinvestment funding). Rate and other operating revenues must be sufficient to meet the utility’s projected cash needs including operations and maintenance, debt service, system reinvestment funding, and any reserve funding needed to meet the minimum balance target for the Operating Fund. Table 12.1 summarizes the annual revenue requirement forecast through 2022. It shows that rate increases will be needed primarily due to the capital program, which impacts rates through additional cash funding requirements.

Table 12.1 Revenue Requirement Forecast ($000s)

 

2017

2018

2019

2020

2021

2022

Revenues

Rate Revenue at Existing Rates

$5,029

$5,041

$5,053

$5,064

$5,076

$5,087

Other Revenues

13

11

10

8

8

8

Total

$5,042

$5,052

$5,063

$5,072

$5,084

$5,095

Expenses

Operating Expenses

$4,504

$4,662

$4,854

$5,062

$5,283

$5,442

Debt Service

123

123

208

431

426

422

System Reinvestment

688

909

1,200

1,400

1,600

1,700

Total

$5,315

$5,694

$6,262

$6,893

$7,309

$7,564

Net Cash Flow at Existing Rates

($273)

($642)

($1,199)

($1,821)

($2,225)

($2,469)

Annual Rate Adjustment

 

13.0%

13.0%

10.0%

7.0%

3.0%

Summary After Rate Adjustments:

Rate Revenue

$5,029

$5,696

$6,452

$7,113

$7,628

$7,875

Net Cash Flow

($273)

($62)

$39

($7)

$34

($1)

Ending Operating Fund Balance1

$1,109

$971

$554

$548

$581

$580

Minimum Operating Fund Balance

$450

$466

$485

$506

$528

$544

1 Ending balance reflects transfers in 2018 and 2019 totaling $531,000 to the Capital Fund to pay for projects.