April 19, 2005

SUBJECT: Proposed Fiscal Year 2005/2006 Utility Rates

As part of the yearly process of reviewing the financial condition of the utility enterprise funds, staff recommends that the City Council adopt annual changes in utility rates. This report presents an analysis of revenues, expenditures, revenue requirements and utility rates. As a result of recommendations for FY 2005/2006, monthly costs associated with water, wastewater, and solid waste collection services for an average residential customer would increase by 5.2% overall. This represents monthly increases to the average residential customer of $0.99 for water, $1.08 for wastewater, and $1.53 for solid waste services, yielding an average monthly residential utility bill of approximately $72.42 at the new rates. The City’s commercial rates will increase by the same overall percentage as residential rates.

Recommended increases are as follows:

Water 4.5%

Wastewater 5.5%

Solid Waste 5.5%

The rate recommendations are based on the preliminary FY 2005/2006 budget. The Recommended FY 2005/2006 Budget is scheduled to be reviewed by the City Council on May 23, 2005 with final adoption scheduled for June 21, 2005. It is not anticipated that subsequent changes to the FY 2005/2006 budget will materially impact the rate recommendations.

It is important to note that even with the rate changes recommended above, Sunnyvale residents enjoy rates that are approximately 30% lower than the average of surrounding communities (see Attachment A). This represents annual savings of approximately $370.00 per household. Commercial customers also enjoy rates that are competitive with surrounding communities (see Attachment B).

At a study session on April 2, 2005, Council inquired about how rates would compare with surrounding communities if the two highest jurisdictions were removed. Staff has presented an additional summary line in Attachment A, that calculates the rate comparison without the two highest cities. Under this comparison, Sunnyvale residents still enjoy rates that are approximately 21% less than surrounding communities. This represents annual savings of approximately $226 per household.

Rates will be effective upon adoption of the attached Rate Resolution and appear on utility bills on or after July 1, 2005.

Sunnyvale utility rates are based entirely on the City’s costs for operating and maintaining its water, wastewater, and solid waste facilities and services. Each of the City’s utilities is operated as an independent enterprise, and all expenses and revenues for each service are accounted for separately from other funds. No tax revenues are used to cover the costs of utility services, nor are any revenues from Water Supply and Distribution, Wastewater Management or Solid Waste Management fees used to support other City programs or services not related to utilities. It is important to note that the practice of long term planning and the use of a Rate Stabilization Reserve have enabled the City of Sunnyvale to maintain utility rates at the lowest possible level by spreading the effects of anticipated operational, capital, and infrastructure costs over twenty years. The Rate Stabilization Reserve enables each of the utility funds to maintain a fairly consistent pattern of rate adjustments over the entire twenty years, minimizing volatile swings in rates which would otherwise occur due to unanticipated increases or decreases in cost in a particular year.

Each year as part of the budget process, staff analyzes the current condition of and long-term outlook for the Water Supply and Distribution, Wastewater Management, and Solid Waste Management Funds. These analyses are referred to as the Long Term Financial Plans. They include a review of available fund balances, state and federal environmental requirements, anticipated capital, infrastructure, and operational requirements, revenues, and a detailed inspection of significant expenditure areas (e.g. the anticipated cost of purchased water, forthcoming regulations related to solid waste disposal and wastewater discharge, etc.). The results of this analysis lead to proposed adjustments to rates that will generate the revenues necessary to meet planned expenditures.

The City attempts to keep utility rates as stable as possible while maintaining high quality and efficient services through long term planning. Only rates are being brought forward at this time. Rates are brought forward in April, outside of the regular budget adoption process, to ensure that the new rates are reflected on utility bills beginning on the first day of the new fiscal year. The City bills the large majority of its customers on a bi-monthly basis. This means that a bill issued on July 1^st is for services provided approximately from May 1^st to June 31^st. In order for a July 1^st bill to reflect the new rates, the rates must be effective no later than May 1^st. Therefore, the rate recommendations are based on the preliminary FY 2005/2006 budget. The Recommended FY 2005/2006 Budget, which will include the full expenditure budgets for the Water Supply and Distribution, Wastewater Management, and Solid Waste Management Programs, is scheduled to be reviewed by the City Council on May 23, 2005 with final adoption scheduled for June 21, 2005. It is not anticipated that subsequent changes to the FY 2005/2006 budget will materially impact the rate recommendations.

Sunnyvale Municipal Code sections 8.16.120 (Solid Waste), 12.16.020 (Wastewater), and 12.24.010 (Water) authorize the City Council to establish by resolution fees and charges based on cost influencing factors. Policy 7.1B.10c of the General Plan’s Fiscal Sub-Element states that enterprise costs shall be fully offset by user charges and fees derived from enterprise activity.

Water Supply and Distribution Fund

Water rates increased by 5% in FY 2004/2005. The Adopted FY 2004/2005 Water Supply and Distribution Fund Long Term Financial Plan included a planned increase of 5% for 2005/2006. This year’s recommended rate increase for FY 2005/2006 is 4.5%, one half percent lower than projected. The remainder of the rate projections included in the FY 2004/2005 plan and the current rate projections included in the FY 2005/2006 plan are shown in the FY 2005/2006 Water Supply and Distribution Fund Long Term Financial Plan (Attachment 3).

The first step in setting the revenue requirement for the Water Supply and Distribution Fund is the completion of the Twenty Year Water Forecast. This planning tool is used to develop projections for water purchases for the next twenty years.

In FY 2003/2004, Sunnyvale received water from four different sources. Approximately 45% was purchased from the Santa Clara Valley Water District (SCVWD), and 42% was purchased from San Francisco Public Utilities Commission (SFPUC). Additionally, 5.5% was pumped from Sunnyvale wells, and recycled water production accounted for the remaining 7.5%.

A significant portion (61.7%) of the Water Supply and Distribution Fund’s projected FY 2005/2006 operating expense is purchased water. This is anticipated to increase to 73.8% by FY 2014/2015. Currently the City is paying the SFPUC $492 per acre foot and SCVWD $495 per acre foot. The forecast anticipates a cost for FY 2005/2006 of $466 per acre foot for SFPUC water and $510 per acre foot for water purchased from SCVWD.

The City also receives charges in the form of a pump tax from the SCVWD for pumping ground water from City wells. The unit cost for well water is also influenced by the power costs associated with running the pumps. The projected well water total unit cost (tax plus power) for FY 2005/2006 is $503 per acre foot.

Finally, the City’s Water Pollution Control Plant (WPCP) provides recycled water as part of the Water Reclamation Project begun in 1993. Recycled water is wastewater that has been treated to very high standards. Recycled water currently provides landscaping water for the Sunnyvale Municipal Golf Course, Baylands Park, Twin Creeks softball complex, the SMaRT Station, and several commercial businesses in the Moffet park commercial/industrial area. The cost for recycled water is borne by both the Water Supply and Distribution Fund and the Wastewater Management Fund. The Water Supply and Distribution Fund distributes and sells recycled water and also benefits through reduced reliance on potable water sources. The Wastewater Management Fund produces recycled water benefiting from the resulting diversion of wastewater from discharge to the San Francisco Bay through reduced wastewater management regulatory requirements.

In addition to the benefits provided by recycled water discussed above, the City receives a $115 per acre foot rebate from the SCVWD to encourage its use of recycled water. As recycled water is provided only on the north end of the City where the majority of water comes from the SFPUC, the rebate, as a practical matter, reduces the unit cost of SFPUC water. The rebate is based upon a contractual agreement between the City and the SCVWD from 1997. The original contract envisioned a 25 year period of rebates with renewal at five year increments. However, SCVWD is considering alternative ways to fund recycled water and the City’s current contract ends this fiscal year. Staff is currently in negotiations with SCVWD. The projected water rate includes the presumption that we will continue to receive the rebate for at least the next five years. Finally, a complete analysis of the total unit cost of recycled water (including the avoided environmental costs of discharging to the San Francisco Bay) will be performed as part of the Water and Wastewater Cost of Service Utility Rate Study currently underway.

Prior to preparing the Twenty Year Water Forecast, staff obtains projections from each of the City’s water wholesalers for the next year and beyond. These projections are generally received late in our process and are subject to change, and in fact have a history of changing significantly. Staff has received ten years of projections from SCVWD, five years from SFPUC and an estimated additional five years of SFPUC rates from the Bay Area Water Supply and Conservation Agency (BAWSCA). SFPUC rates beyond FY 2007/2008 have been adjusted by staff to be no less than 6% to reflect actual historical average increases.

Staff begins the actual preparation of the Twenty Year Water Forecast by looking at the total projected amount of water that will be required for the next twenty years, factoring in demand trends, water conservation, growth and projections of population trends and corresponding water usage.

The FY 2005/2006 water usage projection is based on a recent analysis done by the SFPUC for the purposes of sizing the facilities of their capital improvement plan to ensure they can provide an adequate amount of water for the long term. The growth numbers that were used by the SFPUC’s consultant are numbers provided by the Association of Bay Area Governments (ABAG) and are consistent with other assumptions used by the City for similar purposes. The study also assumes the impact of the Plumbing Code, which requires the implementation of water conservation measures (like low flow toilets) at different milestones in the next ten to twenty years.

To complete the purchase analysis, staff looks in detail at each source of water supply. This includes evaluating the associated purchase requirements under the contracts for each wholesale supplier, the unit costs for each source, and the projected need for and availability of, recycled water to supply those customers. The forecast is developed using the cheapest source of water available over the period considering contract limitations, sometimes shifting the emphasis on individual supplies dependent on the factors discussed above.

On March 21, 2005, City staff received a memo from BAWSCA’s attorney detailing the SFPUC’s staff proposal to BAWSCA that the wholesale water rate be reduced by 9.8% effective April 1, 2005, and remain flat for FY 2006/2007. The purpose of this rate approach was to draw down a substantial credit which now exists in favor of the wholesale customers.

This approach would avoid sharp rate fluctuations, which would result if the credit was handled through a literal reading of the Master Water Sales Contract. The alternative to the two year, ten percent rate reduction is a one year 18% reduction, and then a second year 20% increase. Sunnyvale and other BAWSCA Agencies have agreed to implement the SFPUC’s proposal. This has been reflected in the twenty year forecast, and results in SFPUC water as our cheapest source of water, with everything else remaining constant, through FY 2009/2010.

As Council is aware, the SFPUC’s water system is facing substantial capital improvement needs over the next ten to fifteen years. In May of 2002, the SFPUC approved a $3.6 billion Capital Improvement Program (CIP) and Long Range Financial Plan. In November 2002, the San Francisco voters approved a $1.6 billion bond measure, the largest ever approved in city history, to fund the San Francisco portion of the project. The remaining portion of the CIP is to be funded by the suburban users.

To date, SFPUC has done very little to move forward on implementing the CIP. A new General Manager was recently appointed and charged with completing the CIP. In 2004, the projected CIP costs were increased by $200 million. Then in early February of this year, SFPUC Staff proposed another increase of $500 million for a total increase to the CIP of $700 million. This action resulted in the BAWSCA Board Chair and BAWSCA General Manager personally delivering a letter to the SFPUC President and General Manager that voiced a lack of confidence among the BAWSCA Board of Directors that San Francisco can do their job on time and on budget.

The letter further called for Mayoral leadership from Mayor Newsom in implementing the CIP, that no further makeovers be made to the CIP, and that San Francisco must get the CIP’s costs under control.

Sunnyvale staff has two representatives to the BAWSCA Technical Advisory Committee, regularly attends BAWSCA Board Meetings, and will continue to monitor developments in this area.

The Santa Clara Valley Water District is now faced with its most significant financial challenge since its inception. The State of California is shifting approximately $51 million in Property Tax revenue from the District to the state budget in FY 2004/2005 and FY 2005/2006. This tax shift, the highest assessed from any special district in the state, has impacted the district significantly.

The SCVWD has two distinct missions, one to provide wholesale water to public and private water utilities in Santa Clara County, and the other manage the county’s water resources and provide for flood control management. Only the water utility side of their business has the ability to generate revenue. The flood control side is paid for from property tax assessments that can’t be raised without a two thirds vote of county residents. The district splits water utility service into two regions, the North County, and the South County. The total water utility share of the property tax shift is $15 million over two years.

Although significant, through reductions in staffing, the deferral of non-critical capital projects, and the prudent use of reserves, SCVWD has proposed a flattened rate strategy that absorbs the impact of the property tax shift while keeping rates competitive with other supplies. However, of note is a recent development with the SCVWD where the district board is considering adding an additional $5/acre foot charge to compensate for the property tax shift. The fiscal impact of this change would be about $66,600 in additional purchase water costs for FY 2005/2006. What is unknown to staff is if this change would reset the rate base or simply be a one year spike. Staff is attending the public hearings and plans to oppose this additional charge. The district will close their hearing on April 19^th. Staff will update Council on the status of the additional charge as part of the oral presentation of this report.

Over the past few years, while the focus has been on San Francisco’s Capital Improvement Project issues, Sunnyvale has been working to identify and scope projects to improve the City’s water supply and distribution capital and infrastructure. In addition to $3.3 million in capital and infrastructure projects included in the FY 2004/2005 budget, the City Manager’s Recommended Budget and Long Term Financial Plan proposes $30 million in fully identified water infrastructure projects and $10 million in fully identified water capital projects over the twenty year plan.

Public Works staff have proposed a methodical and measured repair and rehabilitation plan for the water supply facilities with the goal of extending infrastructure life by up to 100 years. Some of the highlights include a $2 million project to retrofit the City’s water tanks to withstand a strong earthquake, $1.07 million in security and vulnerability improvements, $13.2 million to replace old and corroded waterlines, and $2 million for the recoating of the interior of seven water tanks.

The Water Supply and Distribution Fund carries a loan that was advanced from the General Fund in FY 2002/2003 for an original principal balance of $1,632,000. The loan was provided to fund the Water Supply and Distribution Fund’s portion of the cost to acquire 239 Commercial Street, the property adjacent to the corporation yard. The FY 2003/2004 terms of the loan were repayment beginning in FY 2007/2008 at 6% interest per year for twenty five years.

This year’s Water Supply and Distribution Fund Long Term Financial Plan reflects an accelerated repayment schedule. The revised schedule retains the same interest rate (6%) but accelerates repayment to only eight years. This change to cash flow helps the fund mitigate the impact from projected large increases in SFPUC water costs from FY 2015/2016 to FY 2024/2025 by bringing the loan payments forward and thereby freeing up rate revenue in the second ten years of the plan to absorb increased purchase water costs while keeping rates stable. The FY 2005/2006 Water Supply and Distribution Fund Interfund Loan Schedule is provided as Attachment E.

The proposed Water Supply and Distribution Fund Long Term Financial Plan (Attachment C) reflects the recommendation that water charges increase by 4.5% for FY 2005/2006. This is half a percent lower than the rate projected last year for FY 2005/2006. Staff’s recommendation is to use the wholesale water rate reductions from SFPUC combined with the prudent use of the rate stabilization and contingency reserves to balance the plan and fund the proposed capital and infrastructure improvement projects approved in this year’s project budget review process. Projections for the remainder of the Water Supply and Distribution Long Term Financial Plan are included on the bottom of Attachment C.

The Water Rate Survey is presented as Attachment D. As shown in Attachment A, Monthly Utility Bill Comparisons – Single Family Residential, the City’s residential water rate remains below average when compared with neighboring cities.

Wastewater rates increased by 5% in FY 2004/2005. The FY 2004/2005 Wastewater Management Fund Long Term Financial Plan included a planned increase of 5% for FY 2005/2006. This year’s recommended rate increase for FY 2005/2006 is 5.5%, one half percent higher than planned. The remainder of the rate projections included in the FY 2004/2005 plan and the proposed rate projections to be presented to Council for adoption with the FY 2005/2006 plan are shown in the FY 2005/2006 Wastewater Management Fund Long Term Financial Plan (Attachment F).

The City of Sunnyvale owns and operates an extensive system for management of wastewater within city limits and in a small area in Northern Cupertino (known as the Rancho Rinconada Service Area). The system includes approximately 327 miles of sewer pipes and a 29.5 million gallon per day Grade V Water Pollution Control Plant. Operations include the purveyance of sewage to the treatment plant, wastewater treatment, recycled water production, industrial discharge inspection and enforcement, and many other services related to wastewater.

Infrastructure maintenance and replacement has been and remains the largest issue for the Wastewater Management Fund. As identified in previous utility rate reports, in order to address this issue staff took a two pronged approach. First, on December 19, 2001, the Sunnyvale Financing Authority sold its Water and Wastewater Revenue Bonds Series 2001 in the amount of $34.3 million. The project refunded the Authority’s 1992 Utility Revenue Bonds and provided an additional $12.5 million for new wastewater projects.

The bond money is being used or has been used to fund the cost of the most pressing infrastructure projects at the plant and throughout the city’s collection system. Major projects include the Borregas sanitary sewer trunk replacement, rehabilitation of the treatment ponds, pond levy improvements, rehabilitation of storm pump stations #1 and #2, resurfacing of the sludge drying beds, chlorinating and decholorinating equipment replacement, rehabilitation of the digesters, and laboratory roof and air exchange equipment replacement. A detailed status on the bond funded projects was provided to Council on September 8, 2004 (RTC#04-341).

Second, staff has been focused on the continued identification of projects for the future. In the past two years, Public Works staff have worked together to identify and isolate the cost and life span of various pieces of infrastructure and schedule those into the long term infrastructure replacement plan. A significant piece of this analysis will come to a close late this calendar year with the completion of the WPCP Infrastructure Assessment Study being performed currently by Corollo Engineers. The FY 2005/2006 Long Term Financial Plan reflects large infrastructure and capital expenditures on projects that have been identified through this process, with a focus again on the most critical projects. Some highlights are:

• Replacement of Digester Lids – $9.3 million

• Primary Sedimentation Basin Renovation – $10.7 million

• Air Flotation Tank Rehabilitation – $3.4 million

• Pond Sediment Removal – $11.8 million

• Sewer Lift Stations Re-build – $1.03 million

• Replacement/Rehabilitation of Sanitary Manholes and Pipes – $19 million

Staff is recommending that these projects be funded through the prudent use of the Rate Stabilization Reserve combined with five years of significant rate increases.

Currently, the Wastewater rate structure consists of four different categories of commercial/industrial customers. The categories are based on the results of a Wastewater Costs of Service Study completed in 2001 and are intended to reflect the cost each user class places on the system. The rate categories are:

• Low Strength – Users such as Laundromats and carwashes that have little impact on the wastewater system.

• Standard Strength – Offices, retail, and other standard sewer uses where the primary use is restroom facilities.

• High Strength – Food Service Businesses.

• Significant Industrial User – This is a category that assigns a unique rate to each customer based on actual sampling data. These users are manufacturers, metal plating, and other specialized fields that have unique wastewater discharge.

Staff has received feedback from customers that fall into the High Strength category that feel our rate for this service is too high. Staff feels that the customers have a legitimate concern and is recommending that, as another wastewater rate study will be complete in time for the FY 2006/2007 utility rate process, the high strength rate should not be increased for FY 2005/2006. The results of the study will either adjust the rate to the appropriate level, or confirm that the rate is appropriate at which time regular increases can be resumed.

In FY 2003/2004, high strength users accounted for approximately $850,000 in revenue. Holding the rate flat would cost the Wastewater Fund a one time revenue loss of approximately $47,000 (0.3% of total revenues). Staff is confident that the Wastewater Fund Rate Stabilization Reserve can absorb this amount for one year without requiring an additional rate adjustment.

The Wastewater Management Fund carries two interfund loans that were advanced from the General Fund. The first loan was to finance the remodel of the primary facilities of the wastewater treatment plant, expanding the capacity from 22.5 million gallons per day to 29.5 million gallons per day. The loan was advanced by the General Fund in FY 1980/1981 for a total of $10,700,000 at 7% interest. The original term was for 20 years. Payment of the loan began in FY 2004/2005.

The second loan advanced from the General Fund was to assist the Wastewater Management Fund with cash flow issues by providing needed cash to stabilize rates. The loan was advanced in FY 1995/1996 for a total of $2,453,635 at 7% interest. The term is for 20 years with ongoing payments on the loan deferred until FY 2004/2005.

The Proposed FY 2005/2006 Wastewater Management Fund Long Term Financial Plan reflects changes to the first loan, but no changes to the second loan. Payments on the first loan have been reduced for FY 2005/2006 and FY 2006/2007, deferred for FY 2007/2008, FY 2008/2009, and FY 2009/2010 and increased for the remaining term of the loan, which has remained the same. This change has mitigated the rate increases needed in the Wastewater Management Fund during the first ten years of the plan. The FY 2005/2006 Wastewater Management Fund Interfund Loan Schedule is provided as Attachment H.

The proposed Wastewater Management Fund Long Term Financial Plan (Attachment F) reflects the recommendation that wastewater charges increase by 5.5% for FY 2005/2006. This is half a percent higher than projected last year. However, of note is staff’s recommendation that subsequent increases ranging from 7.5% to 8.5% over a five year period will be required to build the revenue base to fully fund the needed infrastructure replacement over the twenty year plan. Projections for the remainder of the Long Term Financial Plan are included on the bottom of Attachment F.

The Wastewater Rate Survey is presented as Attachment G. As shown in Attachment A, Monthly Utility Bill Comparisons – Single Family Residential, Sunnyvale’s residential wastewater rate remains below average when compared with neighboring cities.

Solid Waste rates increased by 4% in FY 2004/2005. The FY 2004/2005 Solid Waste Management Fund Long Term Financial Plan included a planned increase of 4.5% for FY 2005/2006. This year’s recommended rate increase for FY 2005/2006 is 5.5% which is 1% higher than projected. The remainder of the rate projections included in the FY 2004/2005 plan and the projected rate projections to be presented to Council for adoption with the FY 2005/2006 plan are shown in the FY 2005/2006 Solid Waste Management Fund Long Term Financial Plan (Attachment I).

Sunnyvale’s solid waste management system is comprised of three primary operations. Solid waste collection is performed under contract with the City by Bay Counties Waste Services, doing business as Specialty Solid Waste and Recycling (Specialty). Solid waste processing and transfer is carried out at the Sunnyvale Materials Recovery and Transfer Station (SMaRT Station) under a contract with GreenTeam/Zanker. Solid waste is disposed of at the Kirby Canyon Landfill in San Jose, which is operated by Waste Management.

In budgeting for municipal solid waste management expenses, the most significant factor driving revenues and expenses are tons of solid waste collected, transferred and disposed. Much like the analysis of purchased water costs in the Water Supply and Distribution Fund, staff begins preparation of the Solid Waste Long Term Financial Plan by projecting the amount of material that is anticipated to be delivered to the SMaRT Station.

Staff first sets a base tonnage, and then projects tonnage through the first 10 years of the plan. For forecasting purposes, staff has separately projected residential versus commercial/industrial tons. Residential projections are based on new housing forecasts from the Department of Community Development and are expected to remain relatively flat. The commercial/industrial forecast is based on the 8 year economic cycle of tonnage that is reflected in historical data for the Solid Waste Fund. These projections closely reflect the same economic cycle that has been used to forecast the City’s Sales Tax, Property Tax, and construction related fees, and reflect the economic sensitivity of solid waste revenues.

Revised tonnage projections for FY 2005/2006 are down slightly from last year’s anticipated projections, dropping 1.6% from 105,193 tons to 104,181 tons. As mentioned earlier, tons ramp up to 107,962 in FY 2007/2008 and then decrease in the following years, trending with the economic cycle.

As mentioned earlier, the City contracts with Specialty for the collection of solid waste and recyclables throughout the City. Specialty is paid on a monthly basis, but their payment is determined once a year through an extensive process referred to as the Contractor Payment Review. In a nutshell, Specialty submits a contractor payment request to the City for the coming year. The City then audits that request with assistance from a financial consultant and works with Specialty to determine the final payment.

The Contractor payment for the following fiscal year is driven primarily by actual expenditures from the prior fiscal year that are adjusted by various indexes as identified in the contract. For example, the FY 2005/2006 contractor payment is driven primarily by FY 2003/2004 adjusted actual expenditures.

The projected FY 2005/2006 contractor payment is up $871,732 (5.8%) from the prior year’s projection. The largest increase occurs in labor costs which are up $630,000 from FY 2004/2005 due to increases in health care and worker’s compensation costs. Under the old contract (a contract extension was negotiated and awarded by Council on December 14, 2004, RTC #04-436) many of these items were based on prior year expenditures, adjusted by an index. Because costs in these areas are rapidly increasing, the prior compensation method meant that the Company’s reimbursement for health and worker’s compensation lagged behind its pace of expenditure. Under the new contract and extension, the insurance components of the payment are based on the latest premium information provided by the insurers to bring them to current levels.

Total vehicle costs are up $180,347, with $169,648 of this amount due to increases in the cost of diesel and natural gas fuel. The diesel fuel index was up 37% and the natural gas index was up 15.7%, driving the increases in fuel costs. Finally, the Producer Price Index which is used to adjust the majority of the miscellaneous costs, rose by 8.8%.

The increase has been included in the recommended FY 2005/2006 solid waste rate increase. However, staff has flattened the projected contractor payment for FY 2006/2007 under the assumption that the increase to labor costs is largely due to the catch up period resulting from the payment methodology changes under the new contract.

As part of staff’s routine review of equipment condition, cost, interest earnings, and CPI changes in the SMaRT Equipment Replacement Fund (490-200), a recommendation was made to replace the two materials recovery lines. Under consultation with URS Engineers, the original SMaRT Station design engineer, staff has scoped and proposed a project to replace both material recovery lines with new equipment that will meet the following goals:

• Update the facility with current materials recovery technology.

• Reduce the amount of equipment downtime and repair.

• Increase the diversion of recyclables from the waste stream.

• Increase the revenues from the sale of recyclables.

• Reduce landfill disposal costs.

• Reduce operating (labor) costs.

The project will take an initial investment from the three partner cities of $5,000,000. However upon completion, the project will reduce ongoing costs and increase revenues so as to save the city a net present value of approximately $11 million over the twenty years of the plan.

The Solid Waste Management Fund carries two interfund loans that were advanced from the General Fund. The first loan provided $3,680,000 during Fiscal Years 1985, 1988 and 1989 to construct a system to convert methane gas to a marketable form of energy. An additional $10,505,152 was advanced by the General Fund to the Solid Waste Management Fund, for the purpose of stabilizing solid waste rates, between FY 1994/1995 and FY 1998/1999 for a total of $14,185,152. Both advances bear interest of 7%. The loans have since been combined and their original terms were to have them paid off over a term of 29 years. Initial repayment began in the current fiscal year and continues through FY 2023/2024.

The second loan advanced $1,707,698 from the Water fund in FY 1993/1994 to fund a portion of the cost to close and place a final cover on the Sunnyvale Landfill. That loan will be paid off in the current fiscal year.

The Solid Waste Management Fund Long Term Financial Plan reflects a change to the remaining loan. Payment is deferred for FY 2005/2006 and reduced from FY 2006/2007 to FY 2009/2010. Beginning in FY 2010/2011, payments are increased for the remainder of the term, which remains unchanged. These adjustments allow for more stabilized rate increases over the term of the plan. The Solid Waste Management Fund Interfund Loan Schedule is provided as Attachment K.

The proposed Solid Waste Management Fund Long Term Financial Plan (Attachment I) reflects the recommendation that Solid Waste rates increase by 5.5% overall for FY 2005/2006. This is one percent higher than the 4.5% increase projected for FY 2005/2006 last year.

Projections for the remainder of the Long Term Financial Plan are included on the bottom of Attachment I.

The Solid Waste Rate Survey is presented as Attachment J. As shown in Attachment 1, Monthly Utility Bill Comparisons – Single Family Residential, Sunnyvale’s residential solid waste rate remains below average when compared with neighboring cities.

The proposed utility rate changes are necessary to maintain the funds in a sound financial condition. Again, even with the proposed rate changes, Sunnyvale’s utility rates remain competitive when compared to current rates charged in other cities. Attachment 1 compares Sunnyvale’s proposed rates with current rates in the other cities because information on proposed rates in other cities was unavailable (except where noted) at the time this report was prepared. The same wholesalers provide water in varying percentages to all of the jurisdictions surveyed. Therefore it is likely that trends seen in the water rate for Sunnyvale will also be seen in other jurisdictions.

The recommended increases to utility rates are as follows:

Water 4.5%

Wastewater 5.5%

Solid Waste 5.5%

The proposed utility rates, which reflect the costs of operations, capital projects, and infrastructure projects, are recommended in order to continue to maintain high quality service, meet the obligations of state and federal environmental requirements, and maintain the funds in a sound financial condition.

PUBLIC CONTACT

Public contact is provided via publication and posting of the City Council Agenda. A utility bill insert or postcard announcing the date of the Utility Rate Hearing was sent directly to customers. Mobile home park management was given utility rate postcards for distribution to their residents. An ad announcing the hearing was placed in the Sunnyvale Sun the week of April 11. The Economic Development Manager notified various business associations within the City of the availability of this report and the hearing date. Neighborhood Associations registered with the Office of the City Manager were also notified of the hearing the week of April 11. In addition, the City Council held a Study Session on April 2, 2005 regarding the Utility Rate Setting Process.

Reports to Council are also available in the Sunnyvale Library and on the City’s website. Once the rates have been adopted, an insert specifying the utility rate changes will be enclosed in every utility bill.

1. Adopt the attached resolution establishing the aforementioned water, wastewater and solid waste collection rates.

2. Adopt rates other than those proposed.

Staff recommends adoption of Alternative 1.

Prepared by:

Timothy J. Kirby
Revenue Systems Supervisor

Reviewed by:

Marvin A. Rose
Director of Public Works

Reviewed by:

Mary J. Bradley
Director of Finance

Approved by:

Amy Chan
City Manager