Item 23 - Public Hearing to Consider Proposed Water and Sewer Rate Adjustments

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Water and Sewer Rates March 17, 2026 Page 7 The sewer enterprise's FY 2025/26 budget includes $8.8 million in operating expenses. Maintenance requirements of the City's sewer system are generally steady and in accordance with the City's adopted Sewer System Management Plan which is on file with the State. Total operating expenses are expected to increase by approximately 4% each year, based on applying specific inflation factors to each budget line item. By the end of the five-year rate -setting period, total operating expenses are expected to reach $10.7 million. At the current revenue rate, present service levels would be unattainable after fiscal year 2029 without completely depleting the reserve balance. Financial Plan The study examined revenue needs over the next 10 years, including expenditures for operations and maintenance, as well as anticipated capital improvements, for the water and sewer enterprises. The main inputs to the financial plan include operating expenses and inflation (including the cost of wholesale water and power), capital investment and funding sources, reserve targets, and debt service coverage requirements. The reserve policy for each utility includes the following three elements: Operating Reserve — three (3) months operating expenses Capital Reserve — 50% of the average annual capital investment over 10 years (i.e. $4 million) Emergency Reserve - $4 million to address unanticipated system needs Revenues for the water and sewer enterprises are not keeping pace with increasing operating costs. As a result, existing revenues do not provide adequate funding to support planned capital improvements or to build and maintain reserve balances at levels recommended by the consultant and consistent with generally accepted industry practices. Over time, this limits the utilities' capacity to reinvest in aging infrastructure or to maintain reserve and debt coverage benchmarks typically reviewed in ongoing evaluations by S&P Global Ratings, which can influence future credit ratings borrowing costs. The study evaluated phased rate adjustments over a five-year period to address these longer -term needs. Under the proposed rate plan, both the water and sewer enterprises are projected to gradually build reserve balances, maintain appropriate debt service coverage, and fund planned capital improvements in a manner that supports reliable service and long-term financial sustainability. In brief, these recommended rates evaluated in the study are intended to: Fully fund utility operations o Costs to replenish the groundwater basin o Costs to purchase imported water o Costs for electrical power