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HomeMy WebLinkAbout2024-06-25; Municipal Water District; ; Proposal from the San Diego County Water Authority for prepayment of fixed chargesMeeting Date: June 25, 2024 To: President and Board Members From: Scott Chadwick, Executive Manager Staff Contact: Dave Padilla, Interim General Manager dave.padilla@carlsbadca.gov, 442-339-2356 Shoshana Aguilar, Senior Management Analyst shoshana.aguilar@carlsbadca.gov, 760-814-0241 Subject: Proposal from the San Diego County Water Authority for prepayment of fixed charges Districts: All Recommended Action Receive a report on the proposal from the San Diego County Water Authority for prepayment of fixed charges and provide direction to staff on how to proceed with the proposal. Executive Summary The San Diego County Water Authority has invited its member agencies to prepay fixed charges for water purchases for a period of 12 months, as part of an effort to lower the proposed rate increases for calendar year 2025. In exchange for prepayment, the Water Authority would provide a 4% to 6% discount on fixed charges, the exact amount depending on the timeframe for prepayment. According to the Water Authority, if every member agency participated, the prepayment discount may reduce the projected regional effective rate increase for 2025 by nearly 1.5%. While the Water Authority Board has not yet made a final decision on 2025 rates, this may result in a Carlsbad Municipal Water District-specific reduction in its effective rate from 18.7% to 17.36%, with the benefit of the 4% discount on fixed charges. The Water Authority Board is expected to consider rates at its meeting on June 27, 2024. The CMWD annual fixed rate cost to purchase water for the CMWD customers in 2024 is $7.2 million, or about 20% of total payments to the Water Authority. For calendar year 2025, that amount is projected to increase by 25%, to $9 million. The other 80% of the CMWD water budget is for variable costs based on the amount of water purchased and for desalinated ocean water. June 25, 2024 Item #15 Page 1 of 5 CA Review GH MUNICIIPAL WATER D IISTRIC'f Staff Report The discount that the Water Authority has offered is comparable to the expected return on investments under the city’s normal cash investment practices. However, as detailed below, there are additional potential benefits to the Water Authority for the prepayment plan. Explanation & Analysis The Water Authority has and continues to see significant reductions in the demand for water because of water reuse projects, conservation and the recent rains, as well as higher costs due to inflation and charges from the Metropolitan Water District. These factors cause volatility in the rates charged to the CMWD. The anticipated increases in the Water Authority’s rates over the next two years are expected to be significantly higher than in the past and are difficult to predict precisely. The Water Authority Board is considering rate increases of approximately 18% for calendar year 2025. The prepayment discount options the Water Authority is offering are only being offered by the Water Authority as a one-time, short-term option. The table below details the three prepayment options and corresponding rate and service period compared to the discount received and estimated interest earned plus the amount of potential savings. Payment due Discount rate Fixed charges service period Estimated payment Estimated discount Estimated interest for retained funds1 Estimated savings July 2024 6% Calendar year 2025 $9,029,988 $541,799 $534,706 $7,094 January 2025 4% Calendar year 2025 $9,029,988 $361,200 $292,918 $68,281 July 2024 4% Fiscal year 2024-25 $8,132,994 $325,320 $275,317 $50,002 However, there are additional potential benefits to the Water Authority for prepayment: • The one-time prepayment would increase the cash on hand that the Water Authority can invest and potentially reduce the cost of any new debt incurred in fiscal year 2026. • It may lower the effective rate increase, which could help the entire region with water affordability. For the CMWD, the effective rate may decrease from 18.7% to 17.36% which results in a fixed charge reduction ranging between $325,320 and $541,799. However, there is no guarantee on the total reduction amount. • Extra cash on hand may allow the Water Authority to cover the upfront costs of negotiated sales of surplus water rights, similar to the landmark water exchange designed to boost water levels in Lake Mead announced in December 2023. That deal was expected to save the Water Authority a projected $15 million to $20 million. Each member agency is currently considering the proposal. A few agencies have indicated that they are not supporting the Water Authority’s proposal. The City of San Diego, the largest member agency, has not yet announced a decision. June 25, 2024 Item #15 Page 2 of 5 Options Staff request the Board’s direction on next steps. Based on the options provided by the Water Authority, staff have identified the following options for consideration: 1. Direct the Executive Manager to sign an agreement with the Water Authority, when approved as to form by the General Counsel or designee, to execute one of the following options: A. Make July 2024 fixed charges payment for calendar year 2025 (Jan. 1, 2025-Dec. 31, 2025) Under this option, the Water Authority would provide a 6% discount to the CMWD for calendar year 2025 fixed charges. The estimated savings to the CMWD is the least of the three pre-payment options, primarily due to the timing of the pre- payment. Payment to the Water Authority for calendar year 2025 would be due July 12, 2024. B. Make January 2025 fixed charges payment for calendar year 2025 The Water Authority would provide a 4% discount to the CMWD. The estimated savings to the CMWD are the greatest among the three pre-payment options. Payment for calendar year 2025 to the Water Authority would be due Jan. 3, 2025. C. Make July 2024 fixed charges payment for fiscal year 2025 (July 1, 2024-June 30, 2025) The Water Authority would provide a 4% discount to the CMWD. The estimated savings to the CMWD is comparable to Option 1b. Payment to the Water Authority would be due July 12, 2024. If any of those options are selected, the potential risks to the CMWD may include a reduction in the estimated savings from potentially higher yields on the city’s investments. Further, any benefit to the Water Authority’s credit rating may not be realized as anticipated if any of the member agencies decline to participate in the proposal, potentially increasing future water rates. 2. Take no action to authorize approval of an agreement for prepayment of fixed charges. Staff will inform the Water Authority that the CMWD will not participate in the prepayment plan and the district will continue to pay monthly fixed charges to the Water Authority as usual. Fiscal Analysis Savings The Water Authority proposal does not provide considerable savings or costs over the CMWD’s estimated investment income. The other potential benefits to prepayment would ultimately be passed through to the CMWD ratepayers, as Carlsbad continues to purchase water from the Water Authority. Reserves The Utilities Reserve Policy, City Council Policy 96, approved by the CMWD Board on March 7, 2023, established reserve requirements for the water funds. Based on the Standard and Poor's June 25, 2024 Item #15 Page 3 of 5 2021 Sector Summary for Municipal Water and Wastewater Utilities, agencies with ratings of BBB+ and above held average cash on hand at a minimum of approximately 200 days. A component of this rating is days of operating costs, which, for the reserve policy, is a target of 120 days. While the prepayment temporarily reduces the cash balance, the days of operating costs are still above the target of 120 days of operating costs, as shown below: Estimated operating expense1 $48,148,866 Prepayment $9,029,988 Cash balance $31,279,221 Cash balance, adjusted $22,249,233 Days of operating costs 237 Days of operating costs, adjusted 169 1) Based on fiscal year 2024-25 requested budget, excluding depreciation. The overall fund balance and debt ratio is not impacted because the cash converts to a prepaid balance. Funds are available in the Water Operations Fund to cover any of the prepayment options offered, and paying the Water Authority’s fixed charges under these options would not require use of reserves. Budget authorization across fiscal years Staff have analyzed the impact of the CMWD Board authorizing a prepayment option that extends beyond fiscal year 2024-25. The CMWD potable water budget will have sufficient appropriations in fiscal year 2024-25 to cover the accounting for the prepayment during that time. The balance of the prepayment that will be accounted for as an expense in the subsequent fiscal year would be authorized by the Board as part of the fiscal year 2025-26 budget. Fiscal stewardship The CMWD purchases all its potable water from the Water Authority and rate increases are passed on to the CMWD customers. The fiscal health of the Water Authority directly impacts all of its member agencies, and the prepayment options may enhance the Water Authority’s ability to engage in future water exchanges, float debt and provide flexibility for funding capital improvement program projects that enhance regional supply reliability. As for the CMWD rates, staff are currently updating the cost-of-service studies and anticipate returning to the Board to consider rate increases between late November 2024 and January 2025. Next Steps Staff will implement the Board’s direction. If the Board decides to move forward with prepayment, a motion authorizing the Executive Manager to sign an agreement with the Water Authority, subject to approval as to form by the General Counsel or designee, to execute a specific option would be required. If the General Counsel or designee cannot reach agreement on terms with the Water Authority, then staff will return to the Board for further direction. June 25, 2024 Item #15 Page 4 of 5 Environmental Evaluation This action does not require environmental review because it does not constitute a project within the meaning of the California Environmental Quality Act under California Public Resources Code Section 21065 in that it has no potential to cause either a direct physical change or a reasonably foreseeable indirect physical change in the environment. Exhibits None June 25, 2024 Item #15 Page 5 of 5 All Receive -Agenda Item # I b For the Information of the: CITY COUNCIL Date~/zj2t..\-cA ¥-cc~ CM _L~_VDCM (3) ~ June 25, 2024 To: From: Via: Ccarlsbad Municipal Water District CMWD Board Memorandum Re: Carlsbad Municipal Water District Board of Directors Paz Gomez, Deputy City Manager, Pub~orks Scott Chadwick, Executive Manager ~ Additional Materials Related to Staff Report Item No. 15: Proposal from the San Diego County Water Authority for Prepayment of Fixed Charges (Districts -All) This memorandum provides additional information related to Staff Report Item No. 15 (staff report) on tonight's City Council meeting agenda. The CMWD Board will be asked to provide direction on one of two options: 1. Direct the Executive Manager to sign an agreement with the San Diego County Water Authority (Water Authority), when approved as to form by the General Counsel or designee, for prepayment of fixed charges for a 12-month period. 2. Take no action to authorize an agreement for prepayment of fixed charges. The Water Authority provided initial prepayment options to all its member agencies on May 30, 2024 (Attachment A) and provided an additional option on May 31, 2024 (Attachment B), which is subject to a June adoption of Calendar Year 2025 Rates and Charges by the Water Authority Board. The staff report summarized the three options that have been offered by the Water Authority, which were described in the staff report as sub-options A, B, and C to Option 1. The upfront payment options are dependent on action of the Water Authority Board, which will meet on June 27, 2024. The fiscal impact of each option to each member agency is dependent on Calendar Year 2025 Water Authority rates, specifically fixed charges, which the Water Authority Board will also consider on June 27, 2024. For these reasons, the CMWD Board is being asked to provide direction on whether to participate in the prepayment program (Option 1) or whether to take no action (Option 2). Attachments: A. May 30, 2024, proposal from the Water Authority B. May 31, 2024, proposal from the Water Authority cc: Geoff Patnoe, Assistant Executive Manager Cindie McMahon, General Counsel Dave Padilla, Interim General Manager Zach Korach, Finance Director Carlsbad Municipal Water District 5950 El Camino Real I Carlsbad, CA 92008 I 442-339-2722 t May 30, 2024 /JJJ.. San Diego County ~ Water Authority Subject: Upfront Payment Discount Pilot Program Dear Member Agency Rate Workgroup, Attachment A In keeping with the Water Authority's commitment to seek innovative solutions during this challenging rate cycle, we are preparing to offer all member agencies a 4% discount for upfront payments of fixed charges for CY 2025 . This pilot program would allow member agencies to make a single payment by January 3, 2025, to cover their fixed costs for the year rather than paying in 12 equal installments. If every member agency participated, the Upfront Payment Discount would reduce the projected regional effective rate increase for CY 2025 by nearly 1.5 percentage points. For example, if the Board selects rate increase Alternative 9 (moderate -risk CIP) and the payment discount is fully adopted by member agencies, the average effective rate would decrease from 18.15% to 16. 7%. If only some agencies participate, those agencies would accrue the savings while other agencies remain at the average effective rate increase. The actual figures are subject to change pending Board action, and the logistical details remain under development. However, we anticipate that an Upfront Payment Discount of 4% would be applied to participating agencies' annual fixed charge allocations that are set when the Water Authority Board adopts rates. In addition, a discount of 6% is available for prepayment funds received in July 2024. Fixed charges include Customer Service, Storage, Transportation (fixed portion only), Supply Reliability, Infrastructure Access Charge, MWD RTS and MWD Capacity Charge. No discount will be offered for any variable or volumetric-based rate. The tentative roll-out schedule is as follows: 1. Meetings with member agency finance staff in June 2024 2. Opt-in deadline of October 31, 2024 3. Upfront payment invoices issued in November 2024 4. Payments due by COB January 3, 2025 5. Fixed charge allocation credits will be provided in each monthly bill during 2025 6. The program will be evaluated in late 2025 for potential future applicability The Water Authority can offer this incentive because upfront payments will be invested at approximately the same rate as the discount. This approach is assumed to be revenue neutral over the course of the year and would continue to meet cost-of-service requirements. Upfront payments benefit the Water Authority-and therefore the entire region -by enhancing our ability to float debt related to future water exchanges and by providing flexibility for funding CIP projects that enhance regional supply reliability. 4677 OVERLAND AVE, SAN DIEGO, CA 92123 I {858) 522-6600 I SDCWA.ORG Member Agency Rate Workgroup May 30, 2024 Page 2 We hope that you will consider this opportunity to make a small but meaningful reduction in the cost of water for your ratepayers, and we look forward to partnering with you on this approach. Please email Pierce Rossum at prossum@sdcwa.org to schedule an appointment to discuss details of this pilot program for your agency. Sincerely, Lisa Marie Harris CFO/Finance Director San Diego County Water Authority Member Agency Rate Workgroup May 30, 2024 Page 3 Upfront Payment Discount Pilot Program Frequently Asked Questions • Can agencies select certain fixed charges to prepay or select different pay periods? o At this time, we don't have the capacity to customize plans, however, we welcome suggestions for improving the overall program and may be able to offer variations in future years. The exception is that we will accept prepayment in July for a 6% discount on fixed charges. • Why is the discount 4%? o The discount is based on reasonably anticipated investment earnings. • Does the influx of cash allow the Water Authority to reduce rates more than previously anticipated? o No. The projected rate increases are necessary to cover higher costs for CY 2025. The discount program does not change total anticipated revenue needed to cover costs. • Will the discount program reduce future rate increases? o No. At the end of the 12-month period, anticipated ending fund balances are expected to be neutral. • Will you offer this program every year? o It's too early to say. We will evaluate it in partnership with member agencies in 2025 and make a determination about the following year. • Why don't you charge full cost and then provide interest credits through the year? o The prepayment discount approach is easier to track and implement than having agencies pay the full cost and "crediting" interest. The discount also allows the Water Authority to forecast additional investment income without a higher interest expense that would require 1.5x coverage. May 31, 2024 /Ji.. San Diego County (W Water Authority Subject: Upfront Payment Discount Pilot Program Follow-up Dear Member Agency Rate Workgroup, Attachment B In response to this feedback, the Water Authority is offering the following FY 2025 Alternative to encourage maximum participation in this program to reduce the cost of water for ratepayers. Alternative Upfront Payment of FY 2025 Fixed Charges 1) Payment in July 2024 for the remaining CY 2024 Fixed Charge allocation (July- December) and CY 2025 Fixed Charge allocations (January-June). 2) The 4% discount would be applied to CY 2025 Fixed Charges (to provide a reduction to CY 2025 Effective Rate impact). 3) The discount would be defined based on the specific 12-month period (FY 2025) total, rather than the CY 2025 total. Note: This option is only viable with a June adoption of CY 2025 Rates and Charges by the Water Authority Board. Accordingly, there are now three options available -the two outlined on May 30 and the alternative described above: 1) July payment for CY 2025 Fixed Charges (maximum effective rate savings of 6%) 2) January payment for CY 2025 Fixed Charges 3) July payment for FY 2025 Fixed Charges Please continue to provide your comments and feedback. We appreciate the opportunity to partner with you on this approach and will continue to tailor this program as we are able to meet the needs of our member agencies. Sincerely, Lisa Marie Harris CFO/Finance Director San Diego County Water Authority 4677 OVERLAND AVE, SAN DIEGO, CA 92123 I (858) 522-6600 I SDCWA.ORG Proposal from the San Diego County Water Authority for Prepayment of Fixed Charges Shoshana Aguilar, Senior Management Analyst Utilities Department Zach Korach, Finance Director June 25, 2024 arlsbad Municipal Water District 2 TODAY’S PRESENTATION •Proposal Overview •SDCWA Context •Options & Fiscal Impact •Board Direction ITEM 15: PROPOSAL FROM SDCWA FOR PREPAYMENT .• .. arlsbad Municipa l Water District 3 PROPOSED ACTION Receive a report on the proposal from the San Diego County Water Authority for prepayment of fixed charges and provide direction to staff on how to proceed with the proposal. ITEM 15: PROPOSAL FROM SDCWA FOR PREPAYMENT .• .. arlsbad Municipa l Water District 4 SDCWA BACKGROUND Provides water to 23 member agencies in the San Diego region. CMWD is 4% of SDCWA’s total water demand. SDCWA water purchases are 75% of the CMWD potable water operating budget. ITEM 15: PROPOSAL FROM SDCWA FOR PREPAYMENT .. ~arlsbad ate:r District Municipa l w 5 SDCWA PROPOSAL •May 30th proposal from SDCWA and additional option provided on May 31st for prepayment of 12 months of fixed charges. •In exchange, SDCWA would provide a discount on the fixed charges of 4 to 6%. •The discount is comparable to the expected return on City investments. •The prepayment has additional potential benefits to the Water Authority. ITEM 15: PROPOSAL FROM SDCWA FOR PREPAYMENT .• .. arlsbad Municipa l Water District 6 SDCWA CONTEXT Demand for water has decreased due to water reuse projects, conservation, and recent rains. Water Authority has experienced cost increases from Metropolitan Water District and inflation. Water Authority Board will consider rate increases between 15 and 18% for CY 2025 on June 27, 2024. ITEM 15: PROPOSAL FROM SDCWA FOR PREPAYMENT .. ~arlsbad· ate:r District Municipa l w 7 PREPAYMENT OPTIONS ITEM 15: PROPOSAL FROM SDCWA FOR PREPAYMENT Estimated Payme,nt due Discou nt Fixed charges Estimated Estimated interest for Estimated rate service period payment disco unt retain ed savings funds Ju ly .2024 6% Calendar year $,9,02~:t988 $541,7991 $534,706 $71094 2025 Ja n uary 2.02.5 4% Ca len dla r yea r 2025, $,9,02~:t988 $361,200 $292,918 $681281 Ju ly .2024 4% IIFi sea I year $,8, 1321994 $325,320 $275,317 $S[tmJ2 2024-2.5 .. arlsbad Municipa l Water District 8 SDCWA BENEFITS Potentially reduce the cost of managing debt Could provide cash flow for negotiating sale of surplus water Increased cash on hand SDCWA can invest ITEM 15: PROPOSAL FROM SDCWA FOR PREPAYMENT $ arlsbad Municipa l Water District 9 FISCAL IMPACT •No considerable savings or costs over CMWD’s estimated investment income. •Prepayment would not put CMWD reserves below the minimum target per Council Policy No. 96. •The fiscal health of the Water Authority directly impacts all member agencies, and prepayment may enhance the Water Authority’s ability to: o manage debt o engage in future water exchanges o provide flexibility for funding CIP ITEM 15: PROPOSAL FROM SDCWA FOR PREPAYMENT 10 PROPOSED ACTION Receive a report on the proposal from the San Diego County Water Authority for prepayment of fixed charges and provide direction to staff on how to proceed with the proposal. ITEM 15: PROPOSAL FROM SDCWA FOR PREPAYMENT .• .. arlsbad Municipa l Water District 11 NEXT STEPS ITEM 15: PROPOSAL FROM SDCWA FOR PREPAYMENT •Choose to take no action and not make a prepayment •Make a motion to authorize CMWD Executive Manager to sign an agreement with SDCWA subject to General Counsel approval Estimated Payme,nt due Discoun t Fixe,d charges Estimated Estimated interest for Estimated rate service period payment discount retain ed savings funds Ju ly 2024 6% Ca llendar year $,9,029,98,8 $541,799 $5,34J706 $7,094 2025, January 202.5 4% Ca llendar year 2025 $,9,029,988 $361,200 $292,918 $68,281 Ju ly 2024 4% Fisca l year $,8,132,994 $325,320 $275,317 $50,002 2024-25