16 - Wastewater Treatment Plan Renovation Project-Long Term Financing-Wastewater Utility Rate Adjustment

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schedule, thus our first few payments are more interest and less principal, making them more affordable to help us as we move towards increasing our rates. Looking at the estimated scenarios, the two options are only a few million in grand total expense over the life of the COs from one another. And given the size of these COs, both just over $100 million (principal and interest), this is a very minor increase spread out over nearly 30 years. The result being we have the softest transition possible in to the rate adjustments while still getting this project done. Adjustment of Rates: Fourth, the most important factor we have worked on is the needed rate increase to cover this expense. The debt will be issued in the form of COs, thus they are backed by the good faith credit of the City, i.e. our ability to raise Property Tax if ever needed, but we will be paying for these using the Waste Water Utility Rates. To begin, the City has a Rate Maintenance Policy that, in short, is designed to maintain a healthy and stable utility for the citizens. Deviation from this policy runs the risk of affecting our credit score, ability to take out debt from creditors, and ultimately our ability to operate and provide this much needed service to the community. We therefore attempt to design our rates to be 1.1:1 revenue to expense. What this means is for every $1.00 of expense, we set the rate to — in theory — raise $1.10 because we know utility revenues are very volatile (they depend on usage which is impacted by the economy, number of customers, failures in the lines resulting in water loss, wet/dry seasons, and ultimately whether people pay their bills or not). To have a 1:1 revenue to expense means we are setting the rate to hopefully break even. Anything less than a 1:1 is to knowingly deplete any reserves we have. While we set the rates at 1.1:1, there is always the possibility that we will end up needing to use some of the reserve based on the unknowns described above. And while it is okay and normal to use the reserves once in a while, to knowingly deplete the reserves year after year will have dire consequences long term. Working with our rate consultant, keeping in mind the Rate Maintenance Policy, but also recognizing the need to soften the impact to the rate payers, we have developed three options for the Council to consider tonight and provide direction on what to be brought back in February. These options are all designed to get us ultimately to the 1.1:1 ratio; but over the next 5 years, in order to help soften the impact, maintain at a minimum a 1:1 ratio. The only way to maintain 1.1:1 upfront is to drastically increase the rates now. That is certainly an option, but we wanted to provide the City Council with some options that get us to 1.1:1 long term, but set the rates to at least maintain 1:1 over the next several years, knowing that due to the volatility of rate payments, we might dip below 1:1 from time to time, thus using our reserves, but ultimately getting to the 1.1:1 in time. Please understand that adjustments in time to the proposed rates may have to take place because ultimately the cost of the project will depend on the bids that we receive and the interest rates determined when the COs are sold in the market. In addition, the City must continue to operate which might positively or negatively impact rates from time to time. City Staff though will do everything possible to manage operations to stay as tight as we have been in Waste Water Treatment these past years. The following table shows the three rate options: