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Water and Sewer System March 28, 2000 The water and sewer system is one of the City's most valuable assets. It is a major contributor to our quality of life and our economic well being. To secure the stable future of the utility system, we must balance meeting the quality and performance criteria established for this highly regulated industry with prudent fiscal management to preserve the revenue generating capacity of the system. At their August 1997 retreat, the City Council reviewed the Public Utilities' long-term strategic financial plan. The focus of the 10-year plan is to begin revitalization and renewal of the water and sewer infrastructure where almost 50% of the system is more than 40 years old. While this fact is not unusual given that the City will soon celebrate its 250th birthday, it is important to replace the oldest parts of the system so that we may continue to enjoy quality drinking water. Also included in this plan are the major capital expenditures required to meet the federal requirements of the Safe Drinking Water Act. Citizens evidenced their support of the first five-year $25 million phase of the plan through their affirmative votes in the May 1998 referendum. To accomplish specific elements of the plan, it will be necessary to gradually increase water and sewer rates. As outlined to Council during their retreat and to citizens during the referendum process, these increases will provide the resources to fund the necessary capital investment for water and sewer infrastructure replacement. A financial model has been developed to forecast future rates. The forecast is updated for the budget based on results of the prior fiscal year and any changes in assumptions. Each year, the forecast picture improves. The rate increases I am recommending are slightly below the forecasts of 1997 and continue to be the lowest water rates in Hampton Roads. [Figure 6] The proposed rate increase for water usage is from the current rate of $2.50 to a new rate of $2.60 per 1,000 gallons. The proposed rate increase for sewer is from the current rate of $1.81 to a new rate of $1.95 per 1,000 gallons. For the average residential user of just over 5,000 gallons of water per month, the average monthly increase is 50 cents for water and 70 cents for sewer. Figure 6: Water Rate Comparison Chesapeake N o rfo lk Suffolk Virginia Beach Portsmouth (proposed) 2.83 3.36 3.25 3.65 2.60 DEBT SERVICE Debt Objective: Maintain affordable debt levels as measured by: · Debt as a percentage of operating revenues should be less than 10%; · Debt per capita should be between $1,000 and $2,500; and · Debt as a percentage of real estate assessed value should be between 3% and 6%. One of our largest single expenditure items is our debt service. The City utilizes municipal general obligation bonds to fund the majority of our capital projects such as schools, roads, drainage and municipal facilities. Similar to a home mortgage, these bonds are paid back over 20 years. Also like a home mortgage, the City can borrow only what it can afford to pay on annual basis. The target level of affordability we have established is that debt service will be less than 10% of our operating revenues. [Figure 7]