The City of Allen continues to face water and sewer fund operating cost increases from the North Texas Municipal Water District (NTMWD) as well as the need to fund water and sewer system maintenance and capital improvements internal to the City's water and sewer systems. We are also experiencing increased internal expenses that are due to City growth and requirements to comply with the wastewater Capacity, Management, Operations and Maintenance (CMOM) Program.  The City developed this program following a 2015 inspection by the Environmental Protection Agency (EPA) and the Texas Commission on Environmental Quality (TCEQ).  It is also important that the City plan water and sewer rates to assure the Water and Sewer Fund can financially support new water and sewer infrastructure, have the capital improvement funding to replace or rehabilitate the older parts of the water and sewer system reaching the end of their life cycles, and pay its debt service.

Almost all of the revenues in the water and sewer fund are from water and sewer charges to customers.  Water revenues make up about 60 percent of the total fund revenues.  Water revenues are obviously a function of water usage and this usage is susceptible to the unpredictability of the weather.  Additionally, water revenues become reduced when the area enters drought conditions and water usage for landscape irrigation becomes constrained by drought declaration.  Water revenues naturally increase in the four to five hotter, dryer months of the year.  Sewer revenues are not susceptible to unpredictable weather and droughts.

NTMWD Cost Increases:

In the FY18 projected water and sewer fund budget, NTMWD expenses to the City for water and wastewater represent a significant 64 percent of all fund expenses.  The District's rates are accelerating due to costs associated with providing services in a rapidly growing service area, to provide for the O&M of its aging infrastructure, and to make  expenditures/investments related to increasing Federal and State regulation.  The Table below depicts the annual increase in City payments to NTMWD based on past experience and future projections of NTMWD rates.

Table 1 above shows the NTMWD payment increases by the City of Allen from FY16 to FY22.  The FY16, FY17, and FY18 rate increases have happened since the City's last water and sewer rate increase that took place in FY15; on February 1, 2015.  Including the NTMWD rate increases on October 1, 2017; the fund's annual expense for NTMWD services will have increased some $7.42 million per year since the City's last rate increase.  The City was fortunate that in Fiscal Years 16 and 17 we were able to absorb the increased costs by allowing the fund reserves to reduce from 178 Days of Reserve to the 117 Days of Reserve we expect at the end of FY17.   However, in FY18 the City must manage the cumulative $7.42 million annual cost increase through an increase in water and wastewater charges to customers.  Table 1 extends out to FY22 to show that NTMWD cost increases continue at a steady rate per year for several more years into the future.  This puts the Water and Sewer Fund in a position to require continued annual rate increases to manage these continuing "wholesale" cost increases to the City.

During the last eight months, the City conducted a Water and Sewer Rate Study (FY17 Rate Study) to determine what rate increases are required over time to accommodate NTMWD's rate increases as well as to fund internal City fund operations.

As the City had not increased rates since 2015, the initial analysis presented the case for a very significant rate increase in FY18.  Two actions by the Allen City Council allowed the rate study to reduce its initial rate increase by one-half of the initial projection. Those two actions were:

1. In July 2017, City Council approved significant increases in both water and sewer "Impact Fees."  These are fees paid by new residential and commercial developments to help mitigate the cost of development of new water and sewer infrastructure that will serve the new customers.  The cause of the impact fee increases City Council approved are largely due to NTMWD's ongoing rate increases.  In fact, some 74 percent of water impact fees and 64 percent of wastewater impact fees are now designated to the Water and Sewer Fund to pay for NTMWD charges.  Between Fiscal Years 2018 and 2027, these fees will offset $15.75 million in NTMWD charges that otherwise the City would have passed along to customers as part of their annual rate increases.
2. For years, the City has funded water and sewer related capital improvements on a "Pay as You Go" (PAYG) basis.  The fund faces significant costs for projects to replace aging water and wastewater lines in a number of subdivisions.  There are also costs for smaller scale projects that happen on a regular basis like the periodic painting of water tanks.  City Council approved the issuance of Revenue Bonds by the water and sewer fund to cover the costs of three large-scale capital projects with an anticipated cost of $24.2 million.  This measure allows these substantial costs to spread over a 15 or 20-year time; thereby reducing the near-term water and sewer rate increase.

All water and sewer rate increases recommended by the 2017 Rate Study are applied to both the minimum bill and the volumetric charge on water and sewer accounts.  In the water and sewer Rate Tables below, the current rate resolution charges that took effect February 1, 2015 are shown in the rates in the Column titled "Feb 15."  The proposed rates appear in the Column titled "Nov 17."  The Tables below provide a representative summary of billing charges by rate class and meter size.  The attached Rate Resolution provides a complete reference of all rate classes and rates.

The combined monthly impact of the recommended water and wastewater rate changes on a residential account using 10,000 gallons: Current $81.74 bill would increase to $89.92, an increase of $8.18.

The combined monthly impact of the recommended water and wastewater rate changes on a commercial account with a 2-inch water meter using 50,000 gallons: Current $398.48 bill would increase to $438.33, an increase of $39.85.

The proposed rate resolution also establishes volumetric charges (surcharges) for periods of constrained water supply in Section 3 of the resolution. This section of the rate resolution is intended for initiation based upon the North Texas Municipal Water District requesting a drought rate surcharge to be implemented as a result of constrained water supply. Section 3 of the rate resolution reflects rate surcharges from 25 percent up to 150 percent. The surcharge amounts are not applied to inside building (domestic) uses in the non-residential rate category.  The surcharge is applied to residential consumption above 15,000 gallons; and the irrigation, fire protection, and construction (fire hydrant meter) rate classes above 1,500 gallons of usage. The resolution specifies the initiation and termination of a rate surcharge to be upon NTMWD's request; with the charge being initiated and/or terminated on billings mailed the first day of the month after NTMWD requests the charge to be initiated or terminated.

Staff recommends the City Council adopt a Resolution implementing the Water and Sewer rate increases recommended for Fiscal Year 2017-2018.

I make a motion to adopt Resolution No. _________ setting new rates for residential and commercial water and sewer services.