Down the tubes, Part 1: Council votes to raise water and sewer revenues by 50%

The average rate payer will see an increase of roughly $43 a month in their combined bill.

This is Part 1 of a two-part article on the proposed increase to Sebastopol’s water and sewer rates.

On Tuesday, April 23, at a special meeting of the Sebastopol City Council, the council examined two options to rescue the city’s water and wastewater (i.e., sewer) systems, which are both in financial trouble. The city’s wastewater fund is $1.1 million in the red, and the water fund is just barely in the black.

The two options for solving this problem were these:

• Option 1 proposed a 50% revenue increase for water and a 65% revenue increase for wastewater. This was billed as the fastest route to financial stability with a lower risk of infrastructure failure.

• Option 2 proposed a 37% revenue increase for water and a 50% revenue increase for wastewater. These smaller increases were meant to lessen the impact on rate payers, but they carry a higher risk of infrastructure failure and disruption in service.

City staff recommended choosing Option 1, but the council balked at a 65% increase in wastewater rates. After four hours of discussion, the city council decided to split the difference: opting for Option 1 for water and Option 2 for wastewater. In other words, the council is looking to raise revenue for both water and wastewater funds by 50% in the first year, followed by smaller increases in following years.

This doesn’t mean your water and wastewater rates will be going up by 50%. These revenue targets will be met with a three-tiered rate structure that is based on how much water you use and how much wastewater you produce. Councilmember Sandra Maurer called it a “use less, pay less” system. This three-tiered system will be discussed in depth later in this article.

How did we get here?

Enterprise funds like water and sewer, which are supported by rate payers, are never supposed to go into the red. Ideally, it’s a pay-as-you-go system, with the city determining how much the water and sewer systems will cost and setting rates to cover that. This includes properly funding maintenance and repair costs of infrastructure, such as pumps and pipes.

But something has gone badly awry in Sebastopol. Revenue from ratepayers for both water and wastewater hasn’t been enough to cover expenses since 2019-2020, depleting the funds’ reserves and, in the case of wastewater, requiring infusions of cash from the city’s General Fund. This year, the city will need to subsidize the wastewater fund by $1.1 million.

“‘How did we get here?’ is probably the most common question we get asked,” said City Manager Don Schwartz at the meeting. “The last time the rates were adopted, there was a plan to use the fund balance (people think about it as ‘the reserves’) to help keep rates low. That’s our interpretation of what the numbers were suggesting.”

“In the water fund, expenses were higher than projected. We think inflation and the pandemic supply chain issues contributed to that,” Schwartz said. “We added new debt to fund water meters and wells, and we reduced capital expenses. So when you spend your fund balance down to keep rates low, but don’t invest in your system, you end up in a situation like we’re in now.”

“In the wastewater fund, we again used the fund balance to help keep rates low,” Schwartz explained. “Actual revenues were much lower than projected revenues. We don’t really know why. Again we added new debt to fund the sewer pump station, and we reduced capital expenses. So again, we spent down the fund balance without investing enough in the system, so we end up very short of funds and with a system that isn’t quite where it really needs to be.”

In other words, Sebastopol has aging water and wastewater infrastructure and no money—not in the enterprise funds and not in the General Fund—to fix them.

After explaining this situation, Schwartz expounded on what he called “The First Rule of Holes.”

“The First Rule of Holes is that, when you're in one, stop digging,” he said. “And right now we are in one—in the sewer fund in particular, being upside down by the end of this fiscal year by over a million dollars. And we’re on the precipice of being in one financially with the water fund, having minimal reserves and no ability to issue debt. Not that issuing debt is an ultimate solution, but when you can’t do that—and we can’t do that—that’s a sign of a serious problem.”

What is a Rate Study?

Schwartz introduced consultant Kevin Kostiuk of Raftelis, the company the city hired to conduct the Rate Study, which will determine what water and sewer rates will be for the next few years.

Kostiuk gave a long and complex presentation, laying out the guiding principles of the Rate Study process and where we are in that process, as well as breaking down how rates are structured.

The guiding principles of the Rate Study are as follows:

Financial Stability: The city must meet water and wastewater system financial obligations from its own rate revenues; the utility enterprises should be sustainable over time.

Affordability of Service and Conservation: Allow customers to have more control over their bill and an incentive to conserve.

Equitability: Fairness in rates between existing customers based on their use of the systems; and fairness between current and future users.

In addition, Raftelis suggested that both funds maintain at least a 20% reserve, capable of paying 90 days of operations and management expenses.

In the five-stage rate study process, described in the image below, the city is at Step 3: Rate design. There are a couple of steps before the rate increases discussed in this article are put into practice: they have to undergo legal review; all customers must be notified of the increases; and the city must hold a public hearing on the matter.

Note: All of the charts in this article come from the Raftelis presentation in staff report. If they have been edited to show new data that will be noted.

What’s up with the water system?

Sebastopol’s water system is old, and one of its main wells, Well #4, needs to be replaced. The problem is the water fund doesn’t have enough money in reserve as collateral to borrow the substantial funds needed to replace that well, which provides 30% of the water used in town.

The plan adopted by the city council on Tuesday is intended to put the water fund back on a firm financial footing so that it will cover all water system expenses and, in three years, will be eligible to borrow money to pay for the well. This entails increasing the amount of money coming into the water fund by 50% in the next fiscal year (2024-25), starting in July of this year. Another 16% increase in revenue will be needed the year after that (2025-26), followed by three years of smaller 1.5% revenue increases.

To achieve these revenue goals, the city has to raise the rates that citizens pay for water. Right now everyone pays a flat rate of $4.52 per kgal (1 kgal = 1,000 gallons), no matter how much water they use. Under the new system, that would change.

Raftelis proposed a three-tiered system for single family homes.

• The first tier is 0-7 kgal, which would be charged at a rate of $5.48 per thousand gallons.

• The second tier is 8-16 kgals, which would be charged at a rate of $6.99 per thousand gallons.

• The third tier is 16 gallons and above, which would be charged at a rate of $9.71 per thousand gallons.

According to Kostiuk, the first tier is based on the average amount of water used by Sebastopolians in winter (i.e., that’s water primarily for household use, not irrigation). Tier 2 is based on peak summer use, which includes irrigation.

Everyone would start at Tier One, so the first 7,000 gallons of water you used would be charged at the $5.48 rate. The next 8,000 gallons you used would be charged at the $6.99 rate; and if you went over 16 kgals, those additional gallons would be charged at the $9.71 rate.

This rate structure is designed to incentivize water conservation. It also allows residents more control over their water bills and reduces the impact on those who use less water.

Different rates apply to commercial customers; these would go up from the current rate of $4.52 per thousand gallons to $6.03 per thousand gallons. Water customers who have a separate irrigation meter (usually large institutions) will see the largest increase, up from $4.52 to $10.86 per thousand gallons.

In addition to increases based on water use, the fixed cost associated with the size of your water meter will also be increasing. For single family homes, this will mean an increase from $49.33 to $74.10 as of July of this year, with smaller increases each year after that. The graphic below captures five years of increases in both fixed costs and variable costs, based on water use.

Wondering what all these changes will do to your water bill? No surprise: it’s going to go up.

In this chart, very low is 2 kgal; low is 7 kgal; medium is 9-16 kgal; high is 16-21; and very high is over 21 kgal. (Note: This chart has been edited from the original)

As you will learn in Part 2 of this article, these increases are not written in stone—at least not yet. This week, the city will send out a letter to all rate payers informing them of the proposed rate increase. That will be followed by a 45-day protest period. (Opponents must submit a written protest.) A public hearing will be held on June 18 to receive public comments, count the protests, and consider the adoption of the water and wastewater rates. If approved, they will go into effect on July 1, 2024.

This is Part 1 of a two-part article on proposed increases to Sebastopol’s water and wastewater rates. Part 2, which will be published on Thursday, May 2, deals with the proposed wastewater increases, the council’s and public’s reaction to the proposed rate increases, and next steps in the process.