Proposal for Rate Study
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800.755.6864 І fax: 888.326.6864 І 3190 S. Vaughn Way, Suite 550, Office 523, Aurora, CO 80014 І www.willdan.com August 21, 2024 Mr. Nick Russo Public Works Director City of El Mirage 10335 N 121st Ave El Mirage, Arizona 85335 RE: Proposal to Complete a Water, Sewer, and Sanitation Rate Study Update Dear Mr. Russo: On behalf of Willdan Financial Services (Willdan), and Pat Walker Consulting LLC (collectively the Willdan Team), we are pleased to submit this proposal to the City of El Mirage (City) to complete a Water, Sewer, and Sanitation Rate Study Update for the City. This proposal includes the following sections: Project Understanding, Basic Services, Project Team, and Fee Estimate. Project Understanding Rate Study It is our understanding that the City is looking to update the financial projections for the City’s water, sewer and sanitation funds, including an update of the rates to reflect projected revenue requirements. The study will also re- evaluate the overhead allocations to each of the three funds. Proposed Scope of Services We will undertake the following tasks to meet the City’s study objectives: Task 1: Project Orientation and Management We will facilitate a Study Orientation kick off meeting with City representatives to assure mutual understanding of study objectives and finalize the study schedule. Task 2: Data Collection The Willdan Team will develop a written data request identifying the data that will be needed in the preparation of this study. The types of data to be requested will include, but are not limited to: FY 2023-24 audited financials by detailed line item FY 2024-25 budgets (by line item) and other financial data; Capital improvement programs; and System growth projections. The initial written data request will be submitted approximately one week after receiving notice to proceed on the project. Upon receiving the City’s response(s) to the initial data request, Willdan will review, compile any questions or secondary data requirements. Task 3: Development of an Optimized Financial Plan The Willdan Team will refine the customized financial planning model as a tool for the City to analyze the utility’s Mr. Nick Russo City of El Mirage Proposal to Provide a Water, Sewer, and Sanitation Rate Study Update August 21, 2024 | Page 2 current and projected flow of funds and financial position under various scenarios. The model will include the following: Revenue analysis; Customer growth and demand projections; Operating expense projections; and Other revenue requirements. Non-operating revenue requirements will be identified and projected over the forecast period. A major component of these non-operating revenue requirements is principal and interest payments associated with outstanding and anticipated debt. We will also incorporate pertinent City fiscal policies, such as reserve requirements. Once the revenue sufficiency model has been developed and calibrated, we will facilitate a decision support workshop with City representatives. During this meeting, we will review the baseline modeling results and interactively test various “what-if” scenarios to ensure that the model reflects the City’s future financial position under the most realistic assumptions. At the workshop, we will review the underlying data and assumptions in the model and begin testing various alternative assumptions. This will be accomplished using a “dashboard” of the model projected on screen, with the entire group observing and participating. This real-time feedback, with the use of clear graphical displays, allows the entire team to quickly understand the implications of alternative assumptions and either pursue the idea further or discard it and move on to another idea. The process allows full participation by stakeholders in simulation exercises that quickly and effectively demonstrate the effect of alternative financial plans on the City’s financial condition. Changes in various parameters such as operating and capital expenditures, reserve requirements, or customer growth rates can be evaluated in terms of resulting rate increases. Alternatively, certain levels of rate increases can be evaluated in terms of the resulting effect on the City to meet budgeted and projected costs, maintain reserves, comply with debt service coverage requirements, and maintain a generally sound financial condition. Task 4: Cost-of-Service Analysis We will perform a cost-of-service analysis for all three utilities to ensure that the costs associated with water and sewer operations are allocated equitably to each customer class, to support the development of cost-based rates, and to aid in the development of financial plans for the future. The cost-of-service activities will be coupled with the revenue sufficiency and rate modeling tasks, so that the impact of changes in capital expenditures, O&M expenditures, growth projections, and other parameters on the cost-of-service can be determined. This analysis will include gathering cost information associated with water and sewer rates and allocation to functions, classification and each existing customer class. We will also review the number and type of existing customer classes and make recommendations to add or consolidate customer classes, if necessary. The allocation of sewer rates to customer classes will be conducted to estimate the cost of serving each customer class and to enable rate restructuring, as necessary, based on the service requirements. Costs will be allocated in accordance with industry standards. Classification of Costs Operating and non-operating costs will be classified into functional components. Classification of costs into functional components will allow costs (including general and administrative costs) to be allocated between: Functional components within each service; Current and future customers; Mr. Nick Russo City of El Mirage Proposal to Provide a Water, Sewer, and Sanitation Rate Study Update August 21, 2024 | Page 3 Separate geographic services areas, such as in/outside the City; Charges for special services (“miscellaneous fees and charges”) and user fees; and Each customer class. Task 5: Rate Design Analysis This task will involve modeling several alternative rate structures using the City’s financial data and billing statistics to demonstrate the resulting customer impacts and to identify key issues associated with the new rates and charges. Basic standards for rate design accepted by the industry are: Revenue sufficiency – rate revenue should provide sufficient income so that, when combined with other sources of funds, total system costs are covered. Fairness and equity – based on cost responsibility as reflected in cost-of-service allocations, in accordance with industry standards. Administrative simplicity – so that rates are understandable to customers and efficiently administered by staff. Customer acceptance – customers understand the rates, view them as fair, and consider them to be reasonable compared to other costs and other utilities. Objectives such as equity and cost recovery are given in this type of analysis, but additional items such as customer acceptance and simplicity are often key concerns for stakeholders. While there are many common objectives, some objectives vary by utility, due to different operating conditions, such as previous responses to rate increases, customer class demographics, resource availability, growth pressures and socioeconomic conditions. Our analysis will help the City align rates in support of overall goals, with special attention to conservation based rates. Through the rate design process, we will update the existing rate structures for cost of service as well as developing one (1) additional rate structure alternative for each of water and sewer (a BOD based option). We will also examine the potential for construction hydrant meters. For sanitation we will explore the utilization of the City’s opt-in program for recycling and the impact to rates. Task 6: Overhead Cost Allocation The General Fund provides service to the City’s Water, Sewer and Sanitation utilities. In this task the Willdan Team will work with the City to identify and appropriately allocate General Fund costs to each of the three utilities. The General Fund departments or cost centers that have a portion of their costs allocated to other departments or City services include: City Council City Clerk Legal Administration Information Technology Human Resources Finance Facilities Management Water Engineering We will re-evaluate the current overhead cost allocations by updating the existing model for FY 2024-25 financials, FTEs and utility accounts and make recommendations for adjustments as appropriate. The revised allocations will be reflected in the financial plans developed in Task 3. Mr. Nick Russo City of El Mirage Proposal to Provide a Water, Sewer, and Sanitation Rate Study Update August 21, 2024 | Page 4 Task 7: Drought Rates The Willdan Team will work with the City to develop drought rates that can be implemented in the event that different drought stages are declared. A drought rate model will be developed and provided to the City to allow for drought rate alternatives. Task 8: Miscellaneous In addition to the objectives in Tasks 3 through 7, the City has identified the following objectives to be reviewed and evaluated as part of the study: Best practices for minimum water storage credits Development of a separate storm drainage enterprise fund Water main replacement in OTS EPCOR sewer line emergency tie in project Loss of Microsoft as a customer Identify true cost for shut-offs of service PP for solar at WRF Task 9: Reports and Presentations Taking a proactive role in communicating with stakeholders increases trust in the utility provider, improves the stakeholders’ understanding of utility operations and services, and establishes a foundation for future positive relations within the community. During this task, we will develop presentation formats specifically tailored to the needs of the audience. We stress clear, concise presentation of findings, using easily understandable terminology and clear, colorful graphics. Assigned staff is trained, skilled and experienced in managing difficult presentation environments at all organizational levels in a manner that results in the satisfaction of the audience’s need for information. We recognize that the presentation of recommendations for rate increases and significant changes in rate structure can be difficult and must be managed with tact, confidence, and honesty. We will prepare 1 (one) version of the draft report (including 10 years of rates) for City staff comment. Once the City staff’s comments have been compiled, we will revise and finalize the report. City Staff Responsibilities Willdan recommends that the City assign a key individual as project manager. As our analyses is developed, it is expected that the City’s appointed project manager will: 1) Coordinate responses to informational requests; 2) Coordinate review of work products; and 3) Identify appropriate staff members for participation in meetings and facilitate scheduling. We will ask for responses to initial information, follow-up requests, and comments on reports within five business days or otherwise agreed upon timetable. If there are delays, the project manager will follow up with the parties involved to establish an estimated date for the delivery of information and/or feedback. To ensure continued progression, the project manager will reconvene with the rest of the Willdan Team to identify tasks that can be started while waiting for requested data. Willdan will rely on the validity and accuracy of the City’s data and documentation to complete our analysis. Willdan will rely on the data as being accurate without performing an independent verification of accuracy, and that we will not be responsible for any errors that result from inaccurate data provided by the client or a third party. Mr. Nick Russo City of El Mirage Proposal to Provide a Water, Sewer, and Sanitation Rate Study Update August 21, 2024 | Page 5 Municipal Advisor Project Disclaimer The City of El Mirage further represents, acknowledges, and agrees that: (i) The City uses the services of one or more municipal advisors registered with the U.S. Securities and Exchange Commission (“SEC”) to advise it in connection with municipal financial products and the issuance of municipal securities; (ii) The City is not looking to Willdan to provide, and City shall not otherwise request or require Willdan to provide, any advice or recommendations with respect to municipal financial products or the issuance of municipal securities (including any advice or recommendations with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues); (iii) The provisions of this proposal and the services to be provided hereunder as outlined in the scope of services are not intended (and shall not be construed) to constitute or include any municipal advisory services within the meaning of Section 15B of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations adopted thereunder; (iv) For the avoidance of doubt and without limiting the foregoing, in connection with any revenue projections, cash-flow analyses, feasibility studies and/or other analyses Willdan may provide the City with respect to financial, economic or other matters relating to a prospective, new or existing issuance of municipal securities of the City, (A) any such projections, studies and analyses shall be based upon assumptions, opinions or views (including, without limitation, any assumptions related to revenue growth) established by the City, in conjunction with such of its municipal, financial, legal and other advisers as it deems appropriate; and (B) under no circumstances shall Willdan be asked to provide, nor shall it provide, any advice or recommendations or subjective assumptions, opinions or views with respect to the actual or proposed structure, terms, timing, pricing or other similar matters with respect to any municipal financial products or municipal securities issuances, including any revisions or amendments thereto; and (v) Notwithstanding all of the foregoing, the City recognizes that interpretive guidance regarding municipal advisory activities is currently quite limited and is likely to evolve and develop during the term of the potential engagement and, to that end, the City will work with Willdan throughout the term of the potential Agreement to ensure that the Agreement and the services to be provided by Willdan hereunder, is interpreted by the parties, and if necessary amended, in a manner intended to ensure that the City is not asking Willdan to provide, and Willdan is not in fact providing or required to provide, any municipal advisory services. Project Team Kevin Burnett – Project Manager Mr. Burnett is a Senior Project Manager with 23 years of utility analysis experience. Mr. Burnett possesses extensive experience with utility rate and cost of service studies for retail and wholesale use. His project experience includes solid waste, water, sewer, reuse, and stormwater rate studies using state-of-the-art utility financial planning tools. He has developed both short and long-term financial plans for utilities of all sizes – including regional water authorities and regional sewer providers with individual wholesale service contracts. Pat Walker – Co-Project Manager/Local Liaison With more than 40 years of experience in local government and municipal finance, Ms. Walker has provided a broad array of management and financial planning services. She served the City of Chandler, Arizona for 23 years as Chief Financial Officer. In this role, she developed numerous budgets, user and impact fee studies, financial models, and capital financing plans. In 2007, Ms. Walker became a municipal management and financial consultant to cities, Mr. Nick Russo City of El Mirage Proposal to Provide a Water, Sewer, and Sanitation Rate Study Update August 21, 2024 | Page 6 towns, and utilities across the country. In 2012, she formed Pat Walker Consulting LLC to continue her consulting work to municipalities. Ms. Walker has teamed with Mr. Burnett for over20 years preparing water and sewer capacity fee, rate studies and impact fees. Ms. Walker has extensive experience presenting and facilitating meetings before Councils, City staff, and formal/informal stakeholder groups in a community. Michael Cronan – Analyst Mr. Cronan is a senior analyst within Willdan’s Financial Consulting Services group, his primary function is to support project managers and senior analysts with utility rate studies, cost allocation plans and user fee studies, and in the formation of special tax districts. He specializes in analysis for a variety of clients, including cities, water districts, public utilities, and school districts. Fee Estimate On the basis of the Scope described herein, total billings will not exceed $51,640. Willdan appreciates this opportunity to submit our proposal and qualifications. If you have any questions, please feel free to contact me at kburnett@willdan.com or (303) 990-4616. Very truly yours, WILLDAN FINANCIAL SERVICES Jeff McGarvey Vice President / Managing Principal Kevin Burnett Senior Project Manager The terms of this proposal are accepted. CITY OF EL MIRAGE, ARIZONA Signature: Title: Date: