Otay Water District Adopts Fiscal Year 2019 Budget and Water and Proposed Sewer Rate Increases
Balanced Budget Supports Changes in Rates and Charges from the District’s Suppliers
The Otay Water District’s Board of Directors adopted the fiscal year 2019 budget at its special board meeting on May 21, 2018. The approved $132.2 million budget includes $108 million in operating funds and $24.2 million in the capital improvement program (CIP). The CIP budget is part of the District’s ongoing commitment to maximize reliable water supplies and expand infrastructure to meet the needs of a growing customer base. The fiscal 2019 budget reflects the District’s ongoing efforts to minimize rate increases, proactively maintain the public water and sewer system and provide timely water and sewer system improvements to meet the needs of its service area.
The proposed fiscal 2019 budget supports changes in rates and charges from the District’s suppliers including the San Diego County Water Authority, the City of San Diego, and San Diego Gas and Electric (SDG&E). The adopted budget also supports the District’s CIP budget and strategic objectives. The budget presents an overall average water rate increase of 3.2 percent and a proposed sewer revenue increase of 4.6 percent, effective Jan. 1, 2019.
“The budget and rate setting process supports the District’s mission of providing exceptional water and wastewater services to its customers, and to manage its resources in a transparent and fiscally responsible manner,” says Tim Smith, President of the Board of Directors. “The Board works to ensure that we are doing our best to minimize rate increases for our customers.”
One of the primary challenges for the District and other San Diego County water agencies has been mandatory water reductions from the drought and potential state legislative regulations. Predicting changes in usage patterns due to political mandates, weather patterns and growth are key challenges of the budget process. In fiscal year 2018, the District has been experiencing a recovery in water sales volumes versus the sales volumes experienced in fiscal year 2017. District staff attributes the recovery to the elimination of mandated conservation in April 2017 and reductions in rainfall between fiscal years 2017 and 2018.
Although potable water sales are expected to increase by one percent above fiscal year 2018 projected volumes, recycled water sales will be six percent less than the fiscal 2018 projected volumes. The decrease in projected volumes is due to the closure of the Salt Creek golf course. Also, fiscal year 2018 rainfall of 3.3 inches was 63 percent below the 10-year average of 8.9 inches. The National Weather Service is forecasting similar conditions for the Southwest in the upcoming winter months.
The current six-year rate model estimates growth will average approximately 1.2 percent annually from fiscal 2019 to 2024. These modest figures were used to ensure adequate margins are achieved to support the District’s financial position and provide stability in the event of future downturns in water usage due to changes in climate conditions or economic events.
The District currently maintains a split AA/AA- credit rating, which is comprised of a ‘AA’ rating from Standard & Poor’s (S&P) and a ‘AA-’ rating from Fitch Ratings (Fitch). The last credit rating update the District received from either credit agency was in 2016. A credit rating is an overall rating that considers many factors, with debt coverage being one of the main financial factors. These ratings are all related to the District’s water side of the business.
The financial strength of the District’s sewer business is evaluated separately from the water business. The challenges facing the sewer operation in fiscal 2019 are similar to the challenges it faced in fiscal 2018. The funding of the CIP costs, anticipated debt covenant requirements and Metro sewer cost increases related to the City of San Diego’s Pure Water program remain the driving factors of the projected sewer rate increases. When compared to Metro costs projections prior to Pure Water, the current six-year budget for Metro sewer expenses increased approximately $450,000, or an average of $75,000 per year, due to the City accelerating its Pure Water program and passing through the associated costs its member agencies. The proposed rate increases from fiscal 2019 to 2024 are needed to fund the Pure Water program, achieve the 125 percent debt coverage covenant and maintain reserves at targeted levels.
Due to Metro refunds, reductions in the projected Metro fee increases, and reductions in the fiscal 2019 budgeted CIP expenditures, sewer is able to defer borrowing until fiscal 2020. Due to these changes, District staff is also able to recommend reducing rates and smooth the remaining recommended rate increases over additional years.
In addition to the budget and rate setting process, the District’s focus on strategic planning has played a positive role in the financial strength of the District.
“The District has been able to improve customer service and enhance internal efficiencies while containing operational costs through leveraging investments in technology, reducing internal expenses, implementing Best Management Practices and automating services, such as online bill pay, paperless billing, automated meter reading and an interactive phone system,” says Mark Watton, Otay Water District’s General Manager.
Compared to other water retail providers’ rates in San Diego County, the District falls on the lower end of the rate spectrum. Annually, the District performs a countywide survey of water provider rates. Otay is at the fourth lowest rate when compared to all 22 agencies in the county. All San Diego County retail providers are facing rate pressures, depending on their relative dependence on imported water and power from its suppliers. The District also performs an annual survey comparing its sewer rates to other sewer providers in the county. Survey data shows that District’s average residential sewer customer will be charged the sixth lowest rate when compared to all 28 agencies in the county.
For more information on the fiscal year 2018 budget and proposed rate structure, visit otaywater.gov/board-agenda and click on the May 21 Board packet link.