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BARTLE WELLS ASSOCIATES 7 | Pag e City of San Leandro Draft 2024 Wastewater Rate Study Ongoing Operating Cost Inflation The City faces annual cost inflation due to annual increases in a range of expenses including sewage collection, sewage treatment, engineering, and administration, etc. On top of rate increases needed for capital improvements, annual rate increases are needed to keep revenues aligned with cost inflation and prevent rates from falling behind the cost of providing service. Wastewater cost inflation has historically been higher than the Consumer Price Index (CPI) for consumer goods and services. Historically inflation has typically remained consistently around 3%, but recently inflation has reached forty-year highs with the CPI and ENR CCI exceeding 7% in 2022. It is not expected that inflation will remain at such high levels in the future. For the purposes of this rate study, inflation is projected to be 8% in the first year due to anticipated rising costs, and 3.5% for the remaining four years, in line with the City’s budget inflationary projections. Wastewater Reserve Funds Maintaining a prudent minimal level of fund reserves provides a financial cushion for dealing with unanticipated expenses, revenue shortfalls, and non-catastrophic emergency capital repairs. This rate study has set dedicated financial reserves at one year of the City’s annual sewer revenues. BWA developed a financial plan designed to maintain prudent reserve levels that are in-line with industry standards. The City has indicated that discharge standards seem likely to increase, which is why the City has created a project to address the nutrients going into the bay. To see to this need, this rate study set aside $2 million per year from the reserve balance to go toward the City’s Nutrient Optimization project. Debt Service The City is currently making debt service payments on two different loans. The City received a State Revolving Fund (SRF) loan of $43 million in 2015 and a Bank of America loan of $7.6 million in 2021 to replace the aging collection system infrastructure. The debt service ends in FY 2034/35 for the SRF loan and in FY 2035/36 for the Bank of America loan. The debt covenants on the outstanding wastewater debt require that the City generate net operating revenues of at least 1.30 times its total annual debt service payments. This is referred to as “debt service coverage.” 3.3 Financial Plan Assumptions The financial projections incorporate the latest information available and several reasonable and slightly conservative assumptions for planning purposes. Key assumptions include: Revenue Assumptions • Wastewater rate revenues are based on estimated revenues for the current fiscal year. • Rates proposed will be effective on July 1, 2025, with rate adjustments planned to become effective on July 1 of each of the subsequent four years. • BWA assumed 0.8% growth for residential users, in line with the Plan Bay Area 2050 growth estimate.