CITY COUNCIL WORKSHOP AGENDA PACKET

Page 2 of 10 • Rate Structure Optimization – Evaluates rate structures (fixed vs. variable charges, tiered rates, conservation-based pricing) to balance revenue stability, affordability, and conservation goals • Reserves & Emergency Preparedness – Establishes appropriate reserve funds for emergencies, unforeseen expenses, and future capital projects to prevent financial shortfalls • Debt Management – Analyzes existing and potential debt obligations to determine sustainable funding strategies, including bond issuances or low-interest loans • Regulatory & Policy Compliance – Aligns financial planning with state and federal regulations, including cost-of-service principles outlined by the American Water Works Association (AWWA) and other governing agencies • Long-Term Financial Sustainability – Forecasts future rate adjustments needed to support system operations and avoid sudden, steep rate increases. A well-structured financial plan provides a strategic framework for covering the full scope of operational and capital costs, ensuring that water customers receive reliable service while maintaining financial sustainability. Components of a financial plan are developed to address: o Cost Analysis – A comprehensive evaluation of current and future operational expenses, including maintenance, staffing, infrastructure upgrades, and water treatment o Revenue Requirements – The total funding necessary to support system operations, capital improvements, and contingency planning o Long-Term Financial Stability – Establishing reserves and financial policies to ensure the system remains financially viable without sudden or excessive rate increases. The financial plan typically presents multiple scenarios that will deliver the needed revenues, thereby allowing the City Council to select an approach that balances financial responsibility, infrastructure investment, and ratepayer impacts. As proposed in this report, the three scenarios are characterized as Stabilize, Enhance, and Accelerate. The selected scenario will serve as the foundation for proposed water rate adjustments over the 2026-2029 study period. The adoption of water rate increases will be considered by the City Council in a later step of the process, scheduled for June 2025. As noted, this comprehensive Water Rate Study is intended to ensure financial sustainability, equitable cost distribution, and compliance with legal requirements, including prescribed notification to ratepayers (e.g., Proposition 218). The study is currently in the first phase - Financial Plan Analysis - where staff and consultants evaluate revenue needs, expenses, reserve recommendations, and funding scenarios to determine the revenues needed for financial sufficiency. Based on City Council feedback and acceptance of the Financial Plan Analysis, staff will proceed to the next phase of the water rate study: Cost-of-Service and Rate Calculations. That step is scheduled for City Council consideration in April/May to solicit feedback and determine direction for the water rate structure, a proposed water rate based on the recommended structure, and an evaluation of financial impacts on ratepayers. Once the Cost-of-Service and Rate Calculations are accepted Page 4 of 27