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CITY OF MORGAN HILL
FY 15-16
OPERATING AND CIP BUDGET
CITY OF MORGAN HILL
FY 15-16
OPERATING AND CIP BUDGET
CITY OF MORGAN HILL
FY 15-16
OPERATING AND CIP BUDGET
CITY OF MORGAN HILL
FY 15-16 OPERATING AND CIP
CITY OF MORGAN HILL
FY 15-16
OPERATING AND CIP BUDGET
CITY OF MORGAN HILL
FY 15-16
OPERATING AND CIP BUDGET
CITY OF MORGAN HILL
FY15-16
OPERATING AND CIP BUDGET
Water Operations
(continued)
Complete a strategic business plan for the Utility Division of the Public Works Department
Engage the community in a water rate conversation to determine and develop a sustainable and equitable re-
sponse to the continued drought conditions
FINANCIAL COMMENTS
The FY 15-16 budget for Water Operations incorporates the final year of a five-year rate adjustment period as recom-
mended in the July 2011 Water Rate Study Update and approved by the City Council in October 2011. Effective January
1, 2012 ratepayers saw an increase of 16.5 percent in fixed meter and consumption charges, and further rate adjust-
ments of 6.25 percent on January 1 of each subsequent year through 2016. Rate increases are necessary to sustain the
City’s water maintenance program, invest in ongoing capital project needs, and meet required fiscal obligations.
On January 17, 2014, Governor Jerry Brown signed a proclamation of a state of emergency in California due to record
dry conditions. A State water conservation campaign was launched to make all Californians aware of the drought and
encourage personal actions to reduce water usage by 20 percent. Residents of Morgan Hill responded to the Gover-
nor's proclamation by saving 20.1 percent, leading all communities in Santa Clara County in achieving our goal. Re-
duced water usage also reduced the City's water revenues. While reductions in revenues were anticipated, allocated
reductions within the tiered rate structure did not achieve forecasted levels. Consumption in the upper two tiers did
not reach projected revenue levels, while the lower revenue generating tier one saw a broad increase. This shift in
consumer usage behavior, when applied to the City's current rate structure, resulted in a budget shortfall.
With the drought extending through the winter of 2014/15, the community is faced with additional impacts to its wa-
ter supply. On April 1, 2015, Governor Brown issued Executive Order B-29-15 further restricting water use and intensify-
ing water waste penalties. The City of Morgan Hill is required to reduce its water consumption to 28 percent below its
calendar year 2013 consumption level. This level of consumption is 2 percent below the 30 percent conservation level
the Santa Clara Valley Water District is requesting water purveyors within its boundaries to achieve.
FY 15-16 Water Operations recommended budget incorporates a 30 percent reduction in water consumption from the
2013 base year level, resulting in water sales revenue decrease of -$1.4 million from FY 14-15 Adopted Budget. Due to
the reduction in revenue, there will be no annual transfer from the Water Operations Fund for capital improvement
projects for FY 15-16 and thereafter. The following assumptions are included in the Water Fund Five-Year Forecast: 1)
Water conservation of 30 percent in FY 15-16 and FY 16-17, and 20 percent in FY 17-18 through FY 19-20, 2) growth factor
of 2 percent annually, 3) ground water production costs increases of 11.6 percent in FY 15-16, 5.9 percent in FY 16-17, 5.8
percent in FY 17-18, and 4.8 percent in FY 18-19 and FY 19-20, and 4) 2.5 percent increase in personnel accounts.
A preliminary water rate study with a limited focus on the short-term financial impacts of the drought was completed
in FY 14-15. It was determined that a broad based five-year comprehensive rate study was an appropriate response.
As evidenced in the preliminary water rate study, the existing rate structure may not be aligned with the community's
drought-driven water usage behavior. As a result, a rate study will be completed in FY 15-16 to determine the financial
impact of continuing with the current rate structure and assessing alternative rate structures that may be better
suited to current usage patterns and environmental conditions. The objective of the rate study is to construct a rate