Where does San Juan’s revenue come from and how is it spent?
The San Juan Water District receives revenues from several sources, but the largest source is from rate revenues, as illustrated in this pie chart:
For Fiscal year 2016/2017 84% of revenues are expected to come from your rate revenue. Some of the revenues, such as property taxes and connection fees are dedicated to the capital program, leaving your rate revenues as the primary source of funding for operating the system. This pie chart shows “Where Your Rate Money Goes:"
How have San Juan’s Retail Operating Expenses and Revenues changed in recent years and what has it done to control costs?
Since fiscal year ending June 30, 2014, the retail operations of the District have generated cumulative losses in excess of $3.5 million. Rate increases over that time period have stopped the bleeding, but have not been sufficient to generate net income needed to fund the capital program as shown in this chart.
The San Juan Water District understands that everything we do is paid for with your hard earned dollars. The District has taken many actions to control operating costs, including:
- Controlling pension costs by transferring the responsibility to employees to fund 100 percent of the employee’s share of pension costs.
- Created a second tier of reduced pension benefits.
- Created a second tier of reduced benefits for retiree health benefits.
- Held staffing levels relatively constant. Much needed positions have been delayed for years. While there have been some shifts in staffing levels over the years, since the year 2000 the District has reduced the work force by two full time equivalent positions. District staff have identified some critical functions that are not being accomplished adequately, such as a dedicated employee to address labor laws and other human resources issues. These additional positions were proposed to be covered by the funding generated by the rate increase, but staff are developing a proposal for the Board to consider at the March 29 rate hearing that would not include these new positions.
- Proposed pay down of the Unfunded Pension Liability. Due to larger than expected investment losses within the California Public Employee’s Pension System (CalPERS), the District has an unfunded pension liability, meaning the assets within the system are less than the liability (the amount needed to pay future pension benefits). CalPERS requires us to the pay the unfunded liability over a period of 20-30 years at an interest rate of 7-7.5%. Utilizing existing reserves to pay this off early saves the District millions of dollars in interest costs.
- Refinancing existing debt. The District issued $30.5 million of debt in 2009 to fund various capital improvement projects. Interest rates have fallen since that time and the district is now working on refinancing this debt, which could save up to $500,000 per year in interest costs.
These efforts, combined with a constant mindfulness to operate efficiently and frugally has resulted in operating expenses being relatively stable since at least Fiscal year 2013/2014. As illustrated in this chart, operating expenses increased by a modest 2% since fiscal year 2013/14, well below the CPI, the common measure of inflation:
How come recent rate increases haven’t solved the problem?
Due to the historic drought, and the basic structure of the rates, operating revenues have not been sufficient to cover operating expenses, much less provide the revenue to fund the Capital Improvement Program, as illustrated by the green line, relative to the blue column, in this chart. In order to maintain the network of pipes and pumps that brings water to your home, the District needs to spend between four and five million dollars per year replacing pipes, pumps and other critical infrastructure and equipment. Here is the retail capital improvement plan. While certain revenues are designated to go towards the capital program, the operating revenue needs to generate revenues sufficient to cover operating expenses and transfer up to $2,000,000 per year into the Capital Fund. If this is not done, then the District will have to rely upon increased debt financing, which is expensive and ultimately leads to larger rate increases.
One of the reasons operating revenues have not been sufficient to cover operating costs is the structure of the rate.In spite of recent and significant rate increases, revenues have not increased enough. This is because too much of the rate comes from the usage charge. No matter how large of a percentage increase we apply to the usage charge, if people don’t use the water, the revenue is not generated, as shown in this chart. Approximately 90% of the Districts operating costs are fixed, meaning that they don’t fluctuate with the amount of water sold. Yet, only 57% of our revenues come from the daily base charge (the fixed portion of the rate). This means that in drought years, the rates are not sufficient to cover operating expenses. The District has structured the proposed rate increase so that over the five year period, only the daily base rate will increase, the usage charge will remain the same. At the end of the five year period the rate structure should be corrected so that the fixed costs are covered by the fixed rate and the variable costs (the cost of treated water and the costs to pump that water to you) will be covered by the usage charge.
How much debt does San Juan have?
San Juan’s Board of Directors works hard to fund future projects on a pay-as-you-go basis to avoid the interest costs associated with debt. However, when reserves are not adequate, San Juan is required to issue debt to fund capital projects. In order to build reserves sufficient to fund future projects, San Juan is proposing a new rate structure.
As of June 30, 2016, the San Juan Water District had a debt balance of $39.9 million. The District’s debt is divided between wholesale and retail. Wholesale’s share of the debt is $25.6 million and Retail’s share is $14.3 million. Additionally, since Retail purchases water from Wholesale, Retail pays a portion of Wholesale’s total debt. The other agencies that purchase water from Wholesale, Citrus Heights Water District, Fair Oaks Water District, Orange Vale Water Company and the City of Folsom (north of the American River), also pay a portion of Wholesale’s debt.
What are SJWD retail reserve levels and are they adequate?
Retail reserves were $11.3 million as of June 30, 2016. After factoring in the proposed operations and capital budget for FY 2016-17, the reserve balances will be approximately $5.9 million at June 30, 2017, as shown here:
This includes both the operating and capital reserves.
Assuming the Retail operation has $500 million in capital facilities that have a maximum expected life of 100 years, a prudent budget for San Juan will include spending at least $5 million per year on capital projects to be able to avoid failures in the District’s infrastructure. ($500 million/100 years = $5 million per year).
Without rate increases, the District is not able to adequately maintain its capital facilities. The amount of reserves expected to be available at the end of 2016 for capital projects such as pipeline and facilities projects will not be sufficient to fund our 10-year replacement program without incurring significant and unsustainable levels of debt.
A lack of adequate capital reserves costs customers more in the long run because more and more expensive, emergency repairs to the system are required and because necessary capital projects are pushed into the future when the costs of those projects will be more expensive. San Juan is working hard not to "kick the can any farther down the road."