65B - PROPOSED WATER AND SEWER RATE ADJ

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Authorize Staff to Prepare Documents for Proposed Water and Sewer Rate Adjustments December 2, 2014 Page 2 Capital Improvement PrOgram During the review of available asset records and operational data to develop a comprehensive repair and replacement (R &R) program for the City, the following observations were made: • Average age of the water and sewer systems is 50 years • Life expectancy for water and sewer mains range from 40 to 60 years • More than 70% of the water system was installed pre -1980s • More than 85% of the sewer system was installed pre -1980s • Average age of water pipe breakage is 35 to 45 years • Current replacement rate for water /sewer lines is less than the industry standard of 1% of total system miles per year. A risk -based analysis to determine the risk of failure, the consequence of failure, and a business - risk exposure (BRE) rating for each asset was conducted. The analyses concluded the following: • Approximately 13 miles of water lines (5% of the system), costing $35.3 million, have a high probability of failure in the next 5 years • Approximately 62 miles of sewer lines (15% of the system), costing $29 million, has a high probability of failure in the next 5 years The proposed Capital Improvement Programs (CIP) for the water and sewer utilities incorporate the critical R &R projects identified by the risk assessment as well as a ramp -up of annual R &R replacements. (See Exhibit 1, Table 7; and Exhibit 2, Table 8.) The studies also examined the impact to the City in a scenario where CIP activities are deferred. Using a methodology developed by the American Society of Civil Engineers (ASCE), the cost impacts to Santa Ana households, businesses, and local economy were estimated. These potential costs would be in addition to the cost of replacing the asset and possible fines issued by oversight agencies. Included in the projections are items such as claim payments made for temporary relocation or property damage, impacts to businesses due to main failures /spills, and the economic loss due to lost water supply, loss of jobs, and business closures. (See Exhibit 1, Table ES -3; and Exhibit 2, Table ES -3.) Financial Plan To support the proposed water and sewer CIPs, the financial analysis recommends issuing revenue bonds. For the water CIP, an estimated $24 million in debt financing is needed; for the sewer CIP, the amount is $18.2 million. As part of the analysis, existing reserve levels were examined to determine if changes were required. To maintain the programs on a solid financial footing, it is recommended that the utilities maintain a working capital reserve of 90 days of operations and maintenance plus a $1 million emergency reserve. Staff also recommends that as the CIP backlogs are reduced and the systems regain financial stability, an R &R reserve be established for each utility. Annual funding of the reserves would gradually build to a level equal the depreciation of the system. 65B -2