CITY COUNCIL WORKSHOP AGENDA PACKET

Page 5 of 10 rate revenues annually and issue new debt to fund critical capital improvement projects (CIP) identified in the WSMP. This combined approach—incremental rate adjustments and debt issuance—will help stabilize the City's water and recycled water utility funds over the study period (2026-2029). Issuing debt to fund CIP project provides several advantages, including: reducing the need for large, immediate rate increases by spreading costs over time; stabilizing ratepayer impacts by smoothing out rate adjustments over a longer horizon; and promoting generational equity, ensuring that costs are shared by both current and future beneficiaries of the infrastructure investments. However, debt issuance also comes with considerations, including increasing overall project costs due to interest payments and requiring additional financial management policies to maintain debt coverage and prepare for future borrowing capacity. It is common practice for agencies to issue debt to fund critical capital improvements. Through the financial plan analysis, staff recommends issuance of debt to minimize the magnitude of future rate adjustments while ensuring long-term financial stability for the City’s water and recycled water enterprise funds. The financial model assumes 6% interest rate, 30-year term, and 2% issuance cost (capitalized). Although it is possible the City could get a lower rate in the future, WRE has been using 6% as a more conservative estimate. Stabilize Scenario The Stabilize Scenario evenly distributes water fund capital investments over the 20-year Capital Improvement Plan (CIP), with some but not all of the WSMP Priority A projects - such as emergency back up generator replacements and fire flow projects - completed in the first five years. This approach helps minimize near-term infrastructure costs and balances resource demands, simplifying implementation. However, it defers certain critical infrastructure rehabilitation projects, leading to higher long-term costs. Compared to the Enhance and Accelerate scenarios, the Stabilize Scenario has the least impact on reducing long-term infrastructure costs and provides only average performance in maintaining water service levels over the 20-year period. Under this scenario, the minimum recommended water revenue increases to meet the needs are: • 12 percent in FY 2025/26 and FY 2026/27 • 8 percent in FY 2027/28 and FY 2028/29 Additionally, the City would issue new debt totaling $30 million over the four-year study period: • $10 million in FY 2020/26 • $10 million in FY 2026/27 • $10 million in FY 2027/28 • No new debt in FY 2028/29 This combination of rate increases and debt issuance ensures the City meets all financial performance targets, including maintaining reserve balances and a minimum 125 percent debt coverage ratio. By evenly distributing capital investments, the City can fund essential CIP Page 7 of 27