AGENDA ITEM
TO: HONORABLE MAYOR
AND MEMBERS OF THE CITY COUNCIL
FROM: CARLO TOMAINO
CITY MANAGER
BY: THOMAS BEKELE
PUBLIC WORKS DIRECTOR/CITY ENGINEER
SUBJECT:
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PROPOSITION 218 PROTEST HEARING - WATER RATE INCREASES
summary
Summary:
The 2023-2028 City of Signal Hill Strategic Plan identifies the update of the Water Master Plan (WMP) and Water Rate Study (RS) as key initiatives for Fiscal Year (FY) 2024-2025. On December 12, 2023, the City Council executed a professional services agreement and directed staff to complete the WMP and RS updates. The WMP provides a detailed assessment of the City’s water system, evaluates current and projected supply and demand, and outlines a five-year capital improvement plan. The RS establishes a five-year tiered rate structure to generate sufficient revenue for operations, capital projects, and debt service.
Over the past 18 months, staff has presented updates on the WMP and RS, including proposed rate adjustment options, during the Subcommittee meeting, multiple City Council meetings, and community workshops. These efforts ensured transparency and provided opportunities for public input and City Council feedback. On March 25, 2025, following the completion of the WMP and RS, receipt of public feedback, and a thorough review process, the City Council directed staff to initiate a Proposition 218 Public Hearing process to consider the recommended self-funded rate adjustment option, with the hearing scheduled for May 27, 2025. The proposed new rate structure includes annual rate adjustments of 15% for Fiscal Years 2025-2026 and 2026-2027, 14% for Fiscal Years 2027-2028 and 2028-2029, and 10% in FY 2029-2030. Staff is requesting that the City Council receive, file, and adopt the final Water Master Plan and receive and file the Water Rate Study reports. The RS document has been available for public review on the City’s website since April 3, 2025.
In addition, during tonight’s meeting, the City Council will conduct a Proposition 218 Public Hearing to consider the proposed water rates and record property owner protests received during the 45-day protest period. The City will receive oral comments, however, these will not be counted as formal protests unless accompanied by a written submission received prior to the close of the public hearing. After the hearing, the City Clerk will tabulate all valid written protests. If more than 50 percent of the affected property owners or customers of record submit written protests, the City Council cannot adopt the proposed rate adjustments. If the City does not receive a majority protest, the City Council may proceed to adopt the proposed water rates. If the City Council adopts the new rates, they would take effect on July 1, 2025.
Strategic Plan Goal(s):
Goal No. 1 Financial Stability: Ensure the City’s long-term financial stability and resilience.
Goal No. 4 Infrastructure: Maintain and improve the City’s physical infrastructure, water system, and recreational spaces.
Goal No. 5 High-Functioning Government: Strengthen internal communication, recruitment, retention, systems, and processes to increase the effectiveness and efficiency of City services.
recommendation
Recommendation:
1. Receive, file, and adopt the Water Master Plan.
2. Receive and file the Water Rate Study Report.
3. Conduct a Proposition 218 Public Hearing and
4. If a majority of the property owners or tenants of the identified parcels affected by the proposed rate increases do not submit written protests against the proposed rates, waive further reading and adopt a Resolution entitled:
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SIGNAL HILL, CALIFORNIA, ESTABLISHING RATES FOR WATER SERVICE FEES AND TAKING OTHER ACTIONS RELATED THERETO
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Fiscal Impact:
If adopted by the City Council, the proposed water rate increases would result in phased rate increases as follows:
• FY 2025-2026: 15%
• FY 2026-2027: 15%
• FY 2027-2028: 14%
• FY 2028-2029: 14%
• FY 2029-2030: 10%
The new rates would take effect on July 1, 2025, and would generate the necessary revenue to maintain a reliable water service as projected in today’s cost of purchase or value, fund critical capital improvement projects, and ensure the long-term financial sustainability of the City’s water system.
Table 1: Proposed monthly meter service charges ($/Month)
Table 2: Proposed water usage rates ($/CCF)
Table 3: Proposed monthly fire service charges ($/Month)
The proposed rate adjustments are essential to support ongoing operations, replace aging infrastructure, and maintain compliance with state and federal regulations. Without the proposed adjustments, the City would face increasing financial strain to provide residents with safe drinking water in the form of rising operational costs, deferred maintenance, and reduced revenues from conservation mandates.
Background:
The City of Signal Hill operates and maintains a complex water system that serves potable water to over 3,100 customers. The City’s water system is supplied by importing from the Metropolitan Water District (MWD) and groundwater extracted from the Central Basin through three City-owned wells: Well 7 and Well 10, located in Long Beach, and Well 9, located at the City Yard in Signal Hill. The City's water infrastructure includes three storage reservoirs, three booster pump stations at Gundry, Temple, and Hilltop, and approximately 50 miles of pipelines ranging from 4 to 20 inches in diameter. The City treats groundwater collected from Wells 7 and 10 at the Gundry Treatment Plant, where the Gundry Reservoir functions as a critical forebay supporting the City’s broader distribution network. Meanwhile, Well 9 undergoes an advanced on-site three-stage nano-filtration system followed by a liquid granular activated carbon treatment. The water system operates within three primary pressure zones and a sub-zone to address the City’s challenging topography, with emergency interconnections to Long Beach and Lakewood to ensure supply reliability.
Maintaining the City’s water system requires highly trained, certified staff to ensure safe operations and regulatory compliance. The City also relies on an ongoing capital improvement plan to address aging infrastructure, rising maintenance needs, and evolving safety standards. To sustain these efforts, periodic rate adjustments are necessary to maintain the system’s financial health, comply with state and federal mandates, and avoid service disruptions. State law requires water rates to be proportional to the cost of service. The City’s rates cannot exceed the cost of providing services. The City determines the cost of service by conducting an extensive water rate study that evaluates, in great detail, the operating and capital expenditures necessary to maintain the water system. On December 12, 2023, the City Council awarded a contract to Dudek to update the City of Signal Hill’s Water Master Plan (WMP) and Water Rate Study (RS), last updated in 2018 and 2019, respectively. Dudek, an engineering firm, partnered with Raftelis, a financial consulting firm specializing in utility rate studies, worked with staff to develop comprehensive WMP and RS.
As noted above, there are two critical and complimentary components to ensure the City’s water system meets the capital and operational needs of our community. The WMP provides a comprehensive water infrastructure assessment, evaluates current and future supply and demand needs, and outlines a five-year roadmap of prioritized capital improvement plan to address deferred maintenance, maintain system integrity, and comply with the California State Board’s water quality regulations. The RS complements the WMP by evaluating the water system's revenues and expenditures and establishing a sustainable and equitable five-year tiered rate structure to fund operations, capital projects, and debt service. The City’s water system revenue primarily comes from customer water rates, which are structured by usage tiers and customer classifications. Additional funding sources include connection fees, developer contributions through the Water Development Fund, and potential state or federal grants. The Water Development Fund generates revenue by collecting fees from developers to support capacity enhancements required for new developments; however, contributions are inconsistent and cannot be relied upon as a stable funding source. On the expenditure side, the RS includes costs for water supply, system maintenance and upgrades, administrative operations, and existing debt obligations. This approach ensures that revenues align with the City’s long-term infrastructure and financial requirements.
The need for a water rate adjustment is driven by several factors, including unfunded state and federal mandates, aging infrastructure, rising operational costs, and declining revenues due to conservation efforts. For example, since 2019, insurance costs alone have increased by $200,000. Between 2020 and 2024, the Water Replenishment District’s replenishment fee rose by 15%, and the Metropolitan Water District’s imported water rates increased by 30%, collectively adding approximately $200,000 in annual expenses. At the same time, conservation mandates have led to reduced water consumption, resulting in a revenue loss of approximately $900,000 over the past four years. This trend is expected to continue due to legislation such as Assembly Bill 1572, which reinforces statewide conservation requirements and further impacts revenue generation.
The table below reflects the Water Capital Improvement Plan (CIP) planned through Fiscal Year 2029 - 2030, as recommended in the Water Master Plan (WMP). These projects address critical infrastructure needs related to water quality, system reliability, and regulatory compliance. Staff has taken great care in developing the proposed CIP for the Water Division to ensure that projects are both necessary and appropriately timed to not overburden the overall rate structure. Staff believes the proposed schedule and project allocation below reflects necessary improvements to meet State requirements and ensure the water system does not suffer from deferred maintenance that would otherwise compromise water quality or the delivery of clean water to residents.
Table 4: Water Capital Improvement Plan
* This study considers only capital projects through FY 2029-2030.
Following completion of the WMP and financial analysis, staff presented three five-year rate adjustment options for the City Council to consider.
Option 1: Self-Funded Model:
The self-funded model includes rate increases of 15% in the first two years, 14% in years three and four, and 10% in year five. This option provides the most long-term cost savings by eliminating the need for borrowing. By relying solely on existing reserves and future revenues, this approach avoids interest payments and long-term financial obligations, making it the most fiscally conservative strategy.
Option 2: Partially Debt-Financed Model:
Option 2 is a partially debt-financed model with rate increases of 14% in the first year, 12% in the second, 10% in the third, and 8% in the fourth and fifth years, combined with a single $9 million bond that the City Council may elect to pursue in year four. This approach allows the City to complete projects without fully depleting reserves, but introduces long-term debt and associated interest costs, while also imposing financial restrictions through debt covenants.
Option 3: Partially Debt-Finance CIP:
This model provides for a consistent percent annual rate increase of 9% over five years, combined with issuing two bonds: $6 million in the third year and another $6 million in the fifth year. Although this option offers the lowest immediate rate impact, it results in the highest debt levels, greater exposure to market risks, and higher long-term costs due to interest and debt management complexities. As a result, the options that require the Water Division to take on long-term debt are likely to impose future costs on ratepayers.
Water Rate Subcommittee
On December 10, 2024, the City Council appointed a Water Rate Subcommittee to evaluate the proposed rate options. After a thorough review, the Subcommittee recommended Option 1, the Self-Funded Model, recognizing its long-term financial benefits, eliminating debt obligations, and aligning with the City's goal of maintaining ownership and control over critical infrastructure. The recommended rate adjustments of 15% in fiscal years 2025-26 and 2026-27, 14% in fiscal years 2027-28 and 2028-29, and 10% in fiscal year 2029-30 would provide the necessary funding for essential capital projects, ensure regulatory compliance, and support the long-term sustainability of the City’s water system without incurring new debt. Following a City Council workshop on February 27, 2025, and a community workshop on March 10, 2025, on March 25, 2025, the City Council directed staff to proceed with the recommended self-funded rate adjustment and set a public hearing for May 27, 2025, in accordance with Proposition 218 requirements.
Analysis:
Proposition 218, also known as the "Right to Vote on Taxes Act," regulates how local governments can impose or increase property-related fees, including charges for water services. As noted earlier, under Proposition 218, water rates must connect directly to the actual service cost, ensuring transparency and fairness. Revenues collected from these charges may not exceed the funds necessary to provide the corresponding services, may only be used exclusively for those services, and can only be levied on properties that actively use or can immediately benefit from such services.
In compliance with Proposition 218, the City is required to send written notices of any proposed rate adjustments to all property owners and rate payers and hold a public hearing at least 45 days after mailing the notices. The notices must include the proposed rate structure, the rationale for the rate increase, the basis for rate calculations, and the details of the public hearing process. On April 4, 2025, the Public Works Department mailed Proposition 218 notices to all record property owners and tenants responsible for water service charges (Attachment C). Staff has enclosed proof of publication as part of this report for the City Council’s information (Attachment D). As noted in the notice, written protests must include the protestor’s name, parcel address, and signature. Each parcel is limited to one valid protest submission, and submissions via email or electronic means are not permitted. The City Clerk is responsible for receiving and tabulating written protests submitted during the 45-day protest period.
During tonight's Proposition 218 Public Hearing, the City Council will accept and consider all written protests, as well as hear oral comments regarding the proposed adjustments to water rates. Oral comments, however, will not be counted as formal protests unless accompanied by a written submission. The City Clerk will report on the number of protests received up to the start of the hearing and will continue accepting written protests until the public hearing is closed. After the hearing, the City Clerk will complete the final tabulation of all valid written protests. If more than 50 percent of the affected property owners or customers of record submit written protests, the City Council cannot adopt the proposed rate adjustments. If the City does not receive a majority protest, the City Council may proceed to adopt the proposed water rates.
The proposed rate adjustments include a 15% increase in Fiscal Year 2025-26, a 15% increase in Fiscal Year 2026-27, a 14% increase in Fiscal Years 2027-28 and 2028-29, and a 10% increase in Fiscal Year 2029-30. If the City Council adopts the new rates, these would take effect on July 1, 2025.
Reviewed for Fiscal Impact:
_________________________
Siamlu Cox
Attachments:
A. Water Master Plan Report
B. Water Rate Study
C. Proposition 218 Notice
D. Proof of Publication
E. Resolution No. 2025-05-6875