To the Honorable, the City Council:

RECOMMENDATIONS
That the City Council approve the following block rates for water consumption and sewer use for the period beginning April 1, 2009 and ending March 31, 2010. The City administration and City Council continue to recognize that it is important to mitigate the effects of water and sewer increases both for FY10 and future fiscal years as much as possible. Therefore, I am submitting a recommendation that calls for a 2.7% increase in the water rate, a 7.9% increase in the sewer rate, resulting in a 6.2% increase in the combined rate.

It is important to note that water consumption, along with the budget, are the major factors in determining the rate necessary to generate sufficient water and sewer revenues. Sewer charges are directly tied to water consumption, with sewer costs representing approximately 2/3 of total water and sewer expenditures. Therefore, when consumption is declining, revenues will be negatively impacted. In the current fiscal year, water consumption is down by over 4% from the previous fiscal year. This decrease can be attributed to the impact of a slowdown in economic activity, conservation measures implemented by residents, universities and businesses, water-efficient appliances and systems, and weather conditions.

While the total FY10 Water Budget reflects a budget decrease of 3.4% from FY09 Projected and the total Sewer Budget reflects a 2.3% increase from FY09 Projected, which includes a 7.6% increase in the MWRA assessment, the impact of lower consumption, and therefore lower revenues, is driving the combined rate increase of 6.2%.

In my recommendation to you last year, the projected FY10 rate increases for water, sewer and combined were 3.1%, 6.5% and 5.4%, respectively, based on consumption rates last March. The average annual increases for the FY05-09 period were as follows: Water, 1.7%; Sewer, 6.3%; and Combined, 4.6%, which includes the water rate showing a 0% increase in both FY06 and FY08 and a sewer rate increase of 0% in FY08.

FY10 estimated sewer revenues will cover the FY10 estimated Massachusetts Water Resources Authority (MWRA) assessment, which is scheduled to increase by $1,503,019 to $21,333,055, or 7.6%. The MWRA rate increase provided to the City is subject to change based on the MWRA budget adopted later in the Spring 2009. In addition, estimated sewer revenues will cover operating and capital increases.

In March 2009, the City issued $4,810,000 in bonds to finance several sewer reconstruction projects throughout the city. The annual debt service costs attributable to these bonds are included in the sewer budget.

FY10 estimated water revenues will cover salary and benefit increases for Water Department employees as well as additional chemical costs related to the operation of the water plant. Debt service costs continue to decline, by $232,900 this year, due to the pay-off of the bonds for the water treatment plant and additional debt service savings generated by the refinancing of existing debt in 2007. The projected fund balance for FY09 is $5,354,168, of which $1,250,000 will be used in FY10 to offset a higher rate increase.

The chart below reflects the FY09 actual and FY10 proposed water and sewer rates.

*All rates are per CcF. CcF is an abbreviation of 100 cubic feet. One CcF is approximately 750 gallons.

BACKGROUND
In March of each year, the City Council establishes water and sewer rates, which determine water and sewer revenues for the next fiscal year. Because of the timing requirements, water and sewer rates are set prior to the adoption of both the Cambridge budget and MWRA budget; therefore, revenue needs are based upon estimated expenditures. Historically, water and sewer rates have been established so that revenues generated by them, when combined with other revenue sources, cover projected annual costs. While the projected  FY10 rate increases of 2.7% for water, 7.9% for sewer and 6.2% for combined,   are above the average annual increases for the past five years (FY05-09) -Water, 1.7%; Sewer, 6.3%; and Combined, 4.6%, they are still moderate. It should be noted that the water rate reflected a 0% increase in both FY06 and FY08 and a sewer rate increase of 0% in FY08.

The Water Department is nearing completion of an online AMR reading feature, which will allow customers to review their account activity. It is anticipated that this feature will be completed by the beginning of the fiscal year in conjunction with the new water and sewer billing system. In addition, the Water and Finance Departments are beginning implementation of the MUNIS water and sewer billing system, which should be completed by the end of this fiscal year to allow for FY10 billing, and which is the same billing system the City uses for property tax billing.

WATER
Beginning ten fiscal years ago (2000), a portion of the fund balance from the Water Fund has been used to offset increases in the operation of the Water Department. In FY10, the fund balance support will be $1,250,000, which is a decrease of $250,000 from the FY09 amount. It is expected that use of the fund balance will be eliminated in FY11, which coincides with a significant decrease in the water debt service.  This is a slight decrease in the use of fund balance from prior fiscal years. For example, the estimated use of fund balance for FY09 was $1,500,000.   By using $1,250,000 from the fund balance in FY10, the City is able to achieve a 2.7% water rate increase while providing capital funds for infrastructure improvements. As Table 3 on page 6 indicates, the total FY10 water operating and capital budget decreased by 1.1% from $19,890,430 in FY09 to $19,670,820, not  including a one-time $500,000 appropriation for the Concord Avenue / Brookline Street Water Main Replacement Project. As noted above, the decrease in debt service has partially offset increases in the operating budget.

The Capital allocation has remained at its FY09 level of $1,000,000. In addition, a $500,000 planned appropriation from the $5.4 million Projected Water Fund Balance for the Concord Avenue / Brookline Street Water Main Replacement Project is included in the FY10 Capital Budget. This use of fund balance is part of an overall strategy to use reserves for one-time major capital needs.   Table 3 on page 6 indicates the details of Water Fund projected revenues and expenditures for the years 2009 to 2014. Table 6 on page 9 shows actual Water Fund balances for FY04-08 and the projected balance for FY09. 

SEWER
Sewer operating and capital budgets have increased from the FY09 adjusted budget levels by 2.3%, due to a projected 7.6% increase in the Massachusetts Water Resources Authority (MWRA) assessment, and salary and benefit increases. Overall, the sewer rate is projected to increase by 7.9%.

The increase in the MWRA assessment is due to rising energy and utility costs, higher interest costs on MWRA debt, additional health insurance costs for MWRA employees, and changes in public health and environmental requirements that increase overall spending costs for the MWRA.

As mentioned above, this sewer increase is higher than the rate projected for FY10 in last year's letter. However, because of the City's continuing effort to control water and sewer rate increases, the increase is not as large as it would have been, as a result of decreased water consumption. It should be noted that the MWRA assessment and debt service on sewer bonds account for 90.8% of the total Sewer budget. The Sewer operating budget is above its FY09 level, while the capital allocation has decreased by $1,000,000 to $600,000.

However, unlike the Water budget, sewer revenues are credited to the General Fund and not to a separate Proprietary Fund that can be drawn upon if the need arises.

CAPITAL PROJECTS
The debt service increase is primarily attributable to the following sewer projects that were included in the March 2009 bond issue: Agassiz, Cherry Street / S. Mass. Ave., Cambridgeport, and Fresh Pond projects. Since May 1998, the City Council has authorized $229,575,075 for water and sewer capital projects in the Capital Budget process. This impressive investment in our water and sewer systems represents significant progress towards ensuring that Cambridge will continue to benefit throughout this century from a healthy and environmentally sound water and sewer system. In addition to the projects currently under way, the five-year capital plan calls for an additional investment of approximately $180,249,354 (primarily sewer, $167,999,354) in the water and sewer systems.

The additional funds for water will be used mainly for improvements to the distribution and transmission system including water main replacement on main streets in conjunction with sewer reconstruction projects, equipment replacement, improvements to security control systems, engineering and program development, and improvements to the watershed.

Sewer improvements are projected to continue in the following areas: Cherry Street / South Massachusetts Avenue; Agassiz Neighborhood; Fresh Pond; Cambridgeport; Harvard Square; and Western Avenue.  The City carefully monitors the issuance of debt to fund authorized sewer projects and makes adjustments to ensure that debt service cost increases, which impact the sewer rate, are moderate.

During the past decade, the State has made substantial contributions to the City's water and sewer capital improvement program through the State Revolving Loan Program. In FY09, state subsidies covered $2,133,055, or 10.0% of the total debt service of $21,423,910. It is expected that the City will continue to receive State subsidies on existing debt.  The FY10-14 capital plan includes several projects that may be eligible for subsidized loans from the State. However, since it is not certain that these projects will receive state subsidies, the debt service on these projects has been calculated based on funding through General Obligation bonds. In order to proceed with the projects while restricting the growth of the sewer rate, the original five-year plan for sewer projects has been extended, since the total debt service on the loans will be covered through the sewer service charge. If state subsidies become available to the City, they will be used to lower the sewer rate in future years. Table 4 on page 7 shows the detail of sewer-related expenditures for FY09-14.

Table 1 below summarizes the change in water and sewer metered revenue, while Table 2 presents the estimated average charge to residential water/sewer bills.

Projected FY09 revenues reflect a reduction based on consumption from the estimates used to set the FY09 rates. FY10 projected revenues are based on FY09 projected collections and reflect our practice of conservative revenue projections. 

                                                                           TABLE 1
                                                  Combined Water / Sewer Metered Revenue

                                                                          TABLE 2
                                    Average Change to Combined Water and Sewer Residential Bills 

 SENIOR DISCOUNT PROGRAM
There are currently 2,839  homeowners who qualify for the age 65+ water / sewer 15% discount (not to exceed $90 annually), which is not tied to the homeowner's income.

There are also 111 elderly homeowners who qualify for an income-based discount of 30% (not to exceed $180 annually). To qualify for the 30% discount, a homeowner must be 65 or older and must have been granted the Clause 41C elderly real estate exemption. For FY09, the income guidelines are as follows: single, income of $22,281 with assets of $44,562 or less; married, income of $33,422 with assets of $61,273 or less.

FUTURE OUTLOOK FOR RATE
Tables 3, 4, 5 and 6 contain five-year forecasts for water, sewer and combined revenue estimates as well as Water Fund Balances for the past five years and the projected FY09 fund balance. As can be seen in Table 5, the annual combined water / sewer rate is projected to increase by an average of approximately 5.7% for FY10-14. The projected increase is the result of the City's infrastructure improvement program and increases in the MWRA assessment (based on estimates received from the MWRA) of 1.0-11.5% in FY11-14 and the impact of lower consumption. If increases in the MWRA assessment are more moderate and subsidies for new State Revolving Fund loans are funded, the rate increases that are shown will be lowered. Also, if consumption increases and therefore revenues increase, rate increases will be affected positively. However, if consumption continues to decrease, there will be a further negative effect on water and sewer revenues.

As noted in my previous communications to the City Council, the FY10 budget process will be different from previous fiscal years based on the current economic conditions. This is the first indication of this impact. Because of our planning process, which includes conservatively estimating our water and sewer revenues and controlling expenditure growth, including debt issuance, we have been able to mitigate a portion of the rate increase that would otherwise have occurred, based on the decrease in consumption.  This has allowed us to generate a moderate water and sewer rate increase in FY10 while still investing in our utility infrastructure.

I believe we have structured our water and sewer program to produce reasonable rate increases in the future to meet the City administration and City Council goal to mitigate the effects of water and sewer increases on residents as much as possible.

Very truly yours,
Robert W. Healy
City Manager