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Water and Sewer Rate Adjustment Authorization <br />January 20, 2026 <br />Page 5 <br />Maintenance of the City's public water systems must adhere to strict standards set at <br />both the State and Federal levels. Additionally, the presence of PFAS in the <br />groundwater supplies has required unprecedented investment in PFAS treatment <br />facilities, which will result in additional annual maintenance and operations costs for the <br />City. Total operating expenses are expected to increase by approximately 4% each <br />year, based on applying specific inflation factors to each budget line item. By the end of <br />the five-year rate -setting period, total operating expenses are expected to reach $89.4 <br />million. Without adjustments to revenues, sustaining current service levels over the <br />planning period would be unsustainable. <br />The sewer enterprise's FY 2025/26 budget includes $8.8 million in operating expenses. <br />Maintenance requirements of the City's sewer system are generally steady and in <br />accordance with the City's adopted Sewer System Management Plan which is on file <br />with the State. Total operating expenses are expected to increase by approximately 4% <br />each year, based on applying specific inflation factors to each budget line item. By the <br />end of the five-year rate -setting period, total operating expenses are expected to reach <br />$10.7 million. At the current revenue rate, present service levels would be unattainable <br />after fiscal year 2029 without completely depleting the reserve balance. <br />Financial Plan <br />The study examined revenue needs over the next 10 years, including expenditures for <br />operations and maintenance, as well as anticipated capital improvements, for the water <br />and sewer enterprises. The main inputs to the financial plan include operating expenses <br />and inflation (including the cost of wholesale water and power), capital investment and <br />funding sources, reserve targets, and debt service coverage requirements. The reserve <br />policy for each utility includes the following three elements: <br />Operating Reserve — three (3) months operating expenses <br />Capital Reserve — 50% of the average annual capital investment over 10 years <br />(i.e. $4 million) <br />Emergency Reserve - $4 million to address unanticipated system needs <br />Revenues for the water and sewer enterprises are not keeping pace with increasing <br />operating costs. As a result, existing revenues do not provide adequate funding to <br />support planned capital improvements or to build and maintain reserve balances at <br />levels recommended by the consultant and consistent with generally accepted industry <br />practices. Over time, this limits the utilities' capacity to reinvest in aging infrastructure or <br />to maintain reserve and debt coverage benchmarks typically reviewed in ongoing <br />evaluations by S&P Global Ratings, which can influence future credit ratings and <br />borrowing costs. <br />The study evaluated phased rate adjustments over a five-year period to address these <br />longer -term needs. Under the proposed rate plan, both the water and sewer enterprises <br />are projected to gradually build reserve balances, maintain appropriate debt service <br />