Item 08 - Water and Sewer Rate Adjustments

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Water and Sewer Rate Adjustment Authorization January 20, 2026 Page 3 Additional capital improvements, including the emerging need for treatment facilities to remove Per- and Polyfluoroalkyl Substances (PFAS) from drinking water, as well as increased operating and maintenance costs, require a review of the current rate structure and enterprise finances. PFAS emerged as a known contaminant in recent years and in 2024 the Environmental Protection Agency adopted a maximum contaminant level requiring public water systems to treat and remove PFAS from drinking water. This new treatment requirement has added an unplanned significant increase in capital, maintenance, and operational expenses. Furthermore, 50% of the water distribution infrastructure is past its useful life and an estimated 70% will reach its useful life by 2040. Similarly, the sewer system requires an average of four (4) miles of pipe replacement per year for the next 100 years, but currently, only about one (1) mile of replacement per year can be afforded. Since Council last adopted a rate structure, there has been new case law regarding water and sewer rates, creating additional criteria for compliance with Proposition 218. The City's rate structure must be adjusted to comply with existing requirements and ensure that rates are fair and equitable and do not subsidize or benefit one customer class versus another (for example, low-income rates or different rates for residential vs. industrial users are not allowed). Based on the recommendations of the 2019 Cost of Service and Rate Study and the adopted rate plan, the City issued $44 million of bonds in 2024 to fund major capital improvement projects, including the Smart Water Meter Program and water well improvement projects. The City secured favorable financing terms based in part on its AA credit rating, as evaluated by S&P Global Ratings, and the existence of an adopted rate plan demonstrating alignment between revenues and expenditures. In more recent years, operating expenses have continued to increase while revenues have remained relatively unchanged, reducing the utilities' ability to build and maintain reserve balances necessitated by debt covenants and best practices. Maintenance of these balances is a key factor in ongoing credit evaluations. According to the most recent S&P publication from 2025, S&P affirmed the existing AA credit rating but revised the outlook from stable to negative. To support long-term financial sustainability and continued compliance with Proposition 218, staff recommended hiring a consultant to prepare an updated cost -of -service and rate study. On May 20, 2025, upon the completion of a competitive procurement process, the City Council awarded a contract to Robert D. Niehaus, Inc. to perform a long-term financial planning and cost -of -service study for both the water and sanitary sewer enterprises (Study) (Exhibit 1). The objectives of the Study are to examine the City's financial and strategic goals and, if necessary, develop and recommend a new rate structure to ensure the future financial stability of both water and sewer enterprises, while ensuring that the rates are in compliance with applicable law.