TO:
Honorable Mayor and Members of the City Council
THROUGH:
Bruce Moe, City Manager
FROM:
Steve S. Charelian, Finance Director
Julie Bondarchuk, Financial Controller
Amira Khodari, Accounting and Payroll Supervisor
SUBJECT:Title
Consideration of an Increase to Stormwater Assessments (Finance Director Charelian).
(Estimated Time: 30 Mins.)
APPROVE
Line
_________________________________________________________
Recommended Action
RECOMMENDATION:
Staff recommends City Council authorize staff to proceed with obtaining an updated Engineer’s report and conducting a survey related to a potential increase in Stormwater assessments.
Body
FISCAL IMPLICATIONS:
There are sufficient funds of $46,000 in the Fiscal Year (FY) 2022-2023 General Fund budget to accommodate obtaining the Engineer’s report and survey, estimated to cost $19,000 and $27,000 respectively.
The City adopts a structurally balanced budget annually, with operating revenues exceeding operating expenditures. However, increased costs for operations, ongoing transfers to the Stormwater Fund, and support for infrastructure projects have put a strain on the General Fund budget. The most recent General Fund financial forecast, presented to City Council with the Proposed Operating Budget on May 2, 2023, projects a declining unreserved fund balance and dipping into the Economic Uncertainly Reserve by FY 2025-2026. This is primarily driven by outgoing transfers of approximately $35 million over a six-year period (FY 2022-2023 to FY 2027-2028).
To maintain the City’s goal of fiscal sustainability and financial stewardship, staff has researched revenue enhancement measures in order to continue to align service levels with community expectations. One of these measures includes an increase in Stormwater fees.
Ongoing transfers to subsidize the Stormwater Fund have significantly impacted the General Fund unreserved fund balance. In FY 2021-2022, the General Fund transferred nearly $2.2 million to support Stormwater Fund operations. Current Stormwater fees have not increased since 1996 since the inception of Proposition 218, and the annual revenues of approximately $350,000 are insufficient to fund necessary operations and infrastructure. Current estimates of General Fund subsidies to the Stormwater Fund are projected at approximately $11.4 million over the next six fiscal years. An increase in fees is required to maintain the support of Stormwater Fund operations and reduce General Fund subsidies.
If there are no actions taken to enhance revenues, service levels may be impacted or the City may have to defer capital projects to balance future budgets. This may also result in non-compliance with clean water mandates.
BACKGROUND:
On April 16, 1996, the City adopted Ordinance No. 1945 which created a separate enterprise fund for Stormwater programs and initiated a Stormwater fee in order to provide a secure funding source for stormwater operations, maintenance, and capital improvements. The program includes flood management, compliance with clean water requirements, and design and construction of capital infrastructure.
Stormwater fees are paid by property owners and have not been increased since the program’s inception in 1996. Currently, single-family residential (SFR) property owners pay a fixed fee of $19.12 per year. The City submits applicable fees to the County to be included on the property tax bills issued in October. In order to include the fee on the property tax bill, the City Council must hold a public hearing, at which time the City Council considers all objections and protests regarding the proposed levy of the fee for the fiscal year.
Initially, collected revenues were sufficient to fund ongoing maintenance, operations, and capital improvements. The Stormwater Fund currently generates approximately $345,000 annually from direct property assessments. The majority of properties within the City are single-family residential properties, and are currently charged a flat fee of $19.12 per year.
However, the current revenues are not able to support the regular operations of the Fund. The City’s Stormwater program has been running a deficit year after year. In previous fiscal years, the program has received a transfer from the General Fund to maintain minimum service levels. Between FY 2018-2019 and FY 2021-2022, the General Fund has provided the Stormwater Fund with over $6.0 million in subsidies. Due to operations and capital requirements, the General Fund is projected to increase subsidies to about $11.4 million over the next six years. Although the City was able to obtain grants to fund mandated infrastructure projects to comply with the Clean Water Act, ongoing maintenance costs of $300,000 annually would remain unfunded. Additionally, the City may have further fiscal impact from State and Federal mandated projects, which could be partially offset by grants.
The City conducted a fee study in 2019 to research the fee increase options. The study recommended that the City move away from charging a fixed rate per lot for SFR and instead charge a rate per surface area. If approved at the time, the average SFR property owner would have been charged an additional $50 per year for a total of $70 annually. The new rate would have generated $1.2 million for the Stormwater Fund in the year of implementation and could have been increased on an annual basis based on the Consumer Price Index (CPI). The additional funding provided through an increased fee reduces the amount of General Fund transfers needed to continue service levels, meet clean water regulatory requirements, and develop a long-term financial plan for capital projects to continue improving water quality and minimizing the impacts of flooding in local areas.
DISCUSSION:
To maintain current service levels and provide funding for infrastructure demands, the Finance Subcommittee unanimously recommends that City Council consider an increase to the Stormwater fees.
Inflation and supply chain issues have created challenges in providing expected service levels while maintaining fiscal sustainability. This is very evident in infrastructure projects, with some public project bids coming in as high as two and a half times more than initially budgeted. Funding infrastructure maintenance and replacement remains a critical issue for many organizations. However, capital projects tend to be very expensive, and the City is financially challenged to adequately fund infrastructure needs.
Beyond project funding, the Stormwater Fund is currently not generating enough from revenue to fully support operations and maintenance without annual subsides from the General Fund. Ideally, revenues from enterprise funds should support operations and accumulate enough funds for infrastructure maintenance and enhancements. Based on a rate analysis conducted in September 2019, changing the Stormwater fee from an annual fixed rate to a rate based on surface area will generate approximately $1.2 million in revenue for the Stormwater Fund.
A fee increase is required to address funding deficits related to Stormwater capital and operating needs. The majority of properties within the City are SFR properties, and are currently charged a flat fee of $19.12 per year. For several years, the current fee has not been able to support the regular operations of the fund. If approved by City Council, staff will order an Engineer’s report to identify the parcels subject to the fee as well as update the fee calculation. After obtaining the updated rates from the Engineer’s report, staff will then proceed with a statistically valid survey to poll reception to the measure. Staff will then return to City Council with the proposed fee increases and survey results. At that time, City Council can decide to proceed with one of the two options below:
Option 1: The Stormwater fee increase can be added to the ballot in the next election in November 2024. This would require a two-thirds vote of the ballots cast to take effect.
Option 2: City Council can decide to proceed with a Proposition 218 process. This involves conducting a protest hearing and then a mail-in ballot process. The process starts with public outreach and a 45-day protest period where property owners can submit a protest to the City. If a majority protest is not received by the end of the protest hearing, the City Council can then proceed with a 45-day mail-in ballot process. A majority vote of ballots cast in favor of the fee increase is necessary to adjust the rates.
The Finance Subcommittee (FSC) recommended Option 2 for a Proposition 218 process to increase Stormwater fees during the April 20, 2023, FSC meeting. If City Council proceeds with a Proposition 218 process, the tentative timeline is as follows:
Date Description
May 16 Approval to proceed with obtaining updating Engineer’s report and survey.
Jun-Jul Staff works on obtaining updated Engineer’s report and survey.
Aug 15 Staff return to CC with Engineer’s report and survey results.
Obtain authority to proceed with Proposition 218 process.
Aug-Oct 45-day Protest Period.
Oct 17 Conduct Public Hearing.
Oct-Dec 45-day Ballot Period.
Jul 2024 If approved by voters new rates effective for FY 2024-2025.
POTENTIAL OBSTACLES
A measure titled “Taxpayer Protection and Government Accountability Act” is slated for the November 2024 election and has potential impacts on any voter-approved or City Council enacted fee increases. This initiative adopts new and stricter rules for raising taxes, fees, assessments and property-related fees by amending the State Constitution, including portions of Prop 13, 218 and 26, and includes provisions that would retroactively void all state and local taxes or fees adopted after January 1, 2022, that did not align with its requirements. This measure would make it more difficult for local voters to pass measures needed to fund local services and infrastructure. Current general tax measures and voter-approved fee increases require a simple majority to pass. If passed, the new measure would require a two-thirds vote to pass new tax or fee increases.
POLICY ALTERNATIVES:
City Council can decline to pursue a Stormwater fee increase. Based on forecasts in the Proposed Operating Budget presented to City Council on May 2, 2023, service levels may be impacted or the City may have to defer capital projects to balance future budgets if no action is taken to enhance revenues.
CONCLUSION:
Staff recommends that City Council proceed obtaining an Engineer’s report and authorize a survey in relation to a Stormwater fee increase.
PUBLIC OUTREACH:
If City Council decides to proceed with an increase in Stormwater fees, a survey and public outreach will be conducted.
ENVIRONMENTAL REVIEW:
The City has reviewed the proposed activity for compliance with the California Environmental Quality Act (CEQA) and has determined that the activity is not a “Project” as defined under Section 15378 of the State CEQA Guidelines; therefore, pursuant to Section 15060(c)(3) of the State CEQA Guidelines the activity is not subject to CEQA. Thus, no environmental review is necessary.
LEGAL REVIEW:
The City Attorney has reviewed this report and determined that no additional legal analysis is necessary.
ATTACHMENT:
1. PowerPoint Presentation