Water Infrastructure 101: Why Water Rates Have Been Going up

Paul Toor: Unlike improvements to streets and parks, which do not have their own source of revenue and are funded by [the city’s] general fund—the common money that we get from property taxes—funding for water comes from the enterprise fund. What that means is water utility revenue should be supporting water infrastructure through water rates. That is, whatever expenditures are made on water must be covered through water rates because there isn’t enough revenue going around in the general fund. Now, the city can spend on water projects by borrowing from its reserve fund, but it has to make up for that from somewhere. At the end of the day, an enterprise fund should be self-supporting.

Patch: What happens when the city is forced to deal with long-delayed water infrastructure improvements, as is currently the case?

Toor: The city sells bonds to finance infrastructure projects—as we have done [in 2004 and 2009]. In 2009, the city sold $43.9 million worth of bonds, which will be paid off in the next 30 years at the rate of $2.7 million per year. But because of some prior debt, the debt service for bonds is about $3.3 million every year—and it has to come from water rates. What that means is that we need $3.3 million annually just to pay the debt. It’s not an operation cost and it has nothing to do with the water system, which are separate costs. That was the topic of discussion in the city council last month.

Patch: So, there are water infrastructure projects that have been going on since 2009?

Toor: Yes, they were running at a little slow pace, but now we have picked up the pace. Right now we have capital improvement projects worth $54 million over the next five years. Some of the money is from the bonds we sold, and some will come from water revenues. In all, we are looking at $50 million of our own money, and we’re hoping to get $4 million in federal and state grants that we have been exploring for the last two years. Right now we do have money, fully funded from bonds, to complete about $30 million worth of projects.

The council approved those projects, we designed them. The interesting thing about water projects is that as we work on them we’ve got to simultaneously keep the water system in operation. And that’s the reason we can’t start all the projects at the same time. For example, I have to replace two water tanks—the Wilson Reservoir, built in 1923, and the Garfield Reservoir. We cannot take both tanks out of service and still have a reliable source of supply to residents.

Patch: Are the water tanks in the city earthquake-resistant?

Toor: That’s another challenge we have. Our tanks are old. They were built in the 1920s and 1940s. One of the tanks we’re replacing now was built in 1924. Another tank, the Graves tank, we don’t know when it was built but it was purchased by the city in 1939. It’s totally outdated. It has a wood structure with a tin roof, which nobody does anymore. We are doing structural evaluations of all the tanks to see if they are compliant with the new seismic regulations. 

Patch: What are your other challenges?

Toor: First of all, we have to get all these projects delivered. We are on track and are pretty confident we’ll be able to deliver them. At last month’s council meeting, we got final design approval for the Garfield water tank. It’s a huge tank, with a storage capacity of 6.25 million gallons. And that’s just the tank; we also have to build for operations and water pumping. We’ll be inviting bids for the tank’s construction this year and will be ready to start construction by April 2014.

Technically, when the bonds were sold in 2009, the water infrastructure projects should have begun. Typically, bonds are sold when you have an infrastructure design in progress and you’re ready to start construction. What happened here was that we had a design, we sold the bonds, but there was a lot of turnover of staff. As a result, things did not progress as the pace they should have. So we’re running one to two years behind schedule.

But that’s immaterial now. What’s important is that we have to service the debt from the sale of the bonds. And the only way we can get money to repay the debt is by increasing water rates, as we have been doing for the past few years. The difference is that this will be the last rate increase. In 2014 we are proposing an 11-percent increase. In 2015, another 4 percent, and in 2016 another 4 percent. That’s a 19-percent increase over the next three years. After that, our debt servicing will stabilize at about $3 million every year. 

Patch: Isn’t that quite a hefty increase?

Toor: It’s quite a bit because we had a substantial rate increase last year, too. And last to last year, too. And the year before that, too. The problem is that until a few years ago, the city never had any water rate increases. I like to say that water rate increases should be evolutionary, not revolutionary. If you don’t keep pace with rate increases on an ongoing basis, then all of a sudden you have to have a substantial rate increase. And the city would have needed less money than it does now it had done some infrastructure upgrades while increasing rates modestly at the same time.

Patch: Isn’t the cost of water also going up?

Toor: Yes. We have to buy some of our water from the Upper San Gabriel Valley Municipal Water District. Their cost of water has gone up more than 200 percent over the last five years because, they say, the state is charging them more for water. Water from the Upper San Gabriel Valley used to cost about $230 per acre foot. Right now, the cost is $673 an acre foot. All that cost has to be passed onto the customer because water in an enterprise fund. Whatever we spend to deliver water has to come from water rates—unless we dip into some other fund, which we can’t because there’s no [spare] money. The reality is that there isn’t enough revenue to meet all our needs. Our streets need to be fixed, trees need to be trimmed—it’s an old city.

Patch: The city has been making a push to conserve water. What are some of the practical ways to conserve water on a wide scale?

Toor: Sixty to 70 percent of the water that an average household uses is used outside the house in gardens and open spaces. So, you can have green grass, which needs a lot of water, or you can take the grass out and put some drought-resistant plants. That will reduce your water use by 20 percent.

There are basically two ways to reduce water usage. One is by public education. The other is by hitting consumers’ pocket books—and that’s why we have a tiered-rate structure for water. Those who consume more water pay more for every unit.

Related: City Council Grapples with Proposed Water Rates Increase