To: Members of the Castle Rock Water Commission
From: Mark Marlowe, P.E., Director of Castle Rock Water
Nichol Bussey, Business Solutions Manager
Paul Rementer, Enterprise Fund Analyst
Title
2023 Rates & Fees Study Deliverables - Five Year Financial Plan
Town Council Agenda Date: NA
Body
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Executive Summary
As part of the annual rates and fees study, Castle Rock Water staff gathers several pieces of information to input into the four enterprise models for calculating proposed rates, proposed system development fees and cost of service. Throughout the study, staff will bring to Commission some of those inputs and deliverables used for this process.
5 Year Financial Plan
Castle Rock Water (CRW) each year completes a five-year financial plan for the forecasted revenues and expenses. Attachment A shows the draft five-year financial plan for 2024-2028. Attachment A shows the total of all enterprise funds combined along with a breakdown of each enterprise fund for the last three year’s historical actuals, the 2023 approved budget, the 2023 year-end estimates and the proposed five-year projections.
This summary shows revenues and expenses broken down into the main budget categories. The five-year plan feeds off of the 2023 year-end estimates. On the revenue side, year-end estimates are driven largely by estimated changes from budget to the system development fees with a large decrease as a result of the downturn in the housing market and potential reductions in rate revenues due to the extremely wet May and June. CRW is updating estimates on system development fees monthly based on actual permit activity during the year. The current best estimate is 550 single family detached permits this year, a decrease of 34%. Overall, revenues are currently estimated to be down $2.6M relative to budget. These numbers will be updated as additional data becomes available.
On expenses, overall year-end estimates for capital expenditures are slightly lower for capital due to timing of projects and the ability for staff to complete all planned projects. With respect to specific funds, the Water Fund is showing that capital expenses will be at the amended budget. There are some critical projects in the Water Fund to build CRW’s capacity to meet future peak demands for all of the growth the service area has experienced over the last five years and improve system reliability. Currently, this spending in conjunction with the decreased revenues from system development fees may leave the Water Fund short on reserves. Staff has reviewed two options to address the potential decreased reserve balances. The first and recommended option is to take several short term (3 year) interfund loans from the Wastewater Fund to ensure completion of the 2023 capital plan in the Water Fund. The second option is to move capital projects out several years to ensure appropriate reserves are maintained. The reduction in system revenues has put pressure on CRW’s rehabilitation and replacement plans in the Water Fund with several key projects being pushed 2-3 years out into the future. It will be critical that these projects are not pushed further, but staff recommends a near term focus on peak demand capacity. In addition, for the Water Fund, it is likely we will need to utilize some of the rate revenue stabilization reserve this year due to the low water use in May and June to keep rate increases consistent with the 2022 plan. This reserve will have to be replenished in 2024 and 2025. Multiple years of wet weather could negatively impact future rates in the five-year window.
As noted in the other funds, capital expenditures are lower due to timing of projects. This does lead to an increase in budgeting of capital for next year’s budget plan. The other funds are also seeing a large decrease in system development fee revenue. Rate revenue is not impacted however due to the fact that the rates in the other funds are largely fixed rates that are not dependent on the amount of product delivered. CRW staff have changed the timing of many of our large capital projects to account for the drop in system development fee revenue, pushing a number of key projects out in time especially in the Water Resources Fund. For example, the Chatfield Reservoir Pump Back project has been moved almost five years out from its original timing. Attachment B provides the capital plan for the funds as adjusted over the five-year period.
The two largest revenue categories, Charges for Services and System Development fees, are predicted to show steady increases throughout the five-year timeframe despite the likely revenue shortfalls in 2023. These increases are projected based upon current Town growth estimates and rate increases established during the rates and fees process. See Tables 1, 2, and 3 below.
TABLE 1 - Growth Estimates
|
Customer Class |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
|
Residential |
836 |
550 |
500 |
1,000 |
1,000 |
1,000 |
1,000 |
|
Multifamily |
27 |
25 |
29 |
64 |
64 |
64 |
64 |
|
Commercial |
11 |
6 |
8 |
29 |
13 |
13 |
13 |
|
Irrigation |
15 |
6 |
8 |
29 |
13 |
13 |
14 |
TABLE 2 - Rate Increase Assumptions
|
Fund |
2024 |
2025 |
2026 |
2027 |
2028 |
|
Water |
4.5% |
4.5% |
4.5% |
4.5% |
4.5% |
|
Water Resources |
7.5% |
7.5% |
7.5% |
7.5% |
0% |
|
Stormwater |
4.5% |
4.5% |
4.5% |
4.5% |
4.5% |
|
Wastewater |
0% |
0% |
0% |
0% |
0% |
TABLE 3 - System Development Fee Increase Assumptions
|
Fund20242025202620272028 |
|
|
|
|
|
|
Water |
10.0% |
10.0% |
10.0% |
10.0% |
10.0% |
|
Water Resources |
3.0% |
3.0% |
3.0% |
3.0% |
3.0% |
|
Stormwater |
3.0% |
3.0% |
3.0% |
3.0% |
3.0% |
|
Wastewater |
3.0% |
3.0% |
3.0% |
3.0% |
3.0% |
In 2024, overall revenues show an annual increase over 2023, driven primarily by $7.1M in reimbursements in the Water Resources Fund from the Parker Water and Sanitation district for the Parker Midsection Pipeline as well as $907K in Stormwater for developer contributions related to McMurdo Gulch. In 2026, we anticipate the need for approximately $40.0M in debt to fund future capital improvement projects that begin to hit in the 2027 timeframe. The five-year financial plan is currently predicting an interest rate of 3.0% for this debt. CRW staff is monitoring the situation closely on borrowing costs. In addition, CRW staff are looking into potential grant funds and borrowing from the State Revolving Fund. For 2023, the State Revolving Fund is offering loans of less than $3M at an interest rate of 3.00% for 20 years and 3.25% for up to 30 years. Loans over $3M will have a subsidized interest rate of 80% of current market rates.
Overall, the operational expenses are projected to increase slowly and fairly consistently over the five-year planning period in response to providing service to an increasing customer base. The changes in expenses can be found mostly in the Capital Improvement Program (CIP) projects and overall capital needs year over year based on the master planning process. The personnel costs are in draft form as staff is in the process of working with the Finance Department to update the personnel costs for the 2024-2028 planning period including any possible full time equivalent (FTE) additions, merit increases and changes to overall employee benefit costs. Key assumptions used for the five-year plan include:
Assumptions in Tables 2 and 3 above
4.5% annual increases in personnel costs
3.0% annual increases in energy costs
3.0% annual increases in service and other costs
0% for revenues from investments
Attachments
Attachment A: 5 Year Financial Plan
Attachment B: 5 Year Capital Plan