MMWD weighs rate hikes as reserves sag, costs rise

Marin Municipal Water District directors have embarked on series of discussions about how to replenish the utility’s financial reserves after two years of drought while expanding and repairing its aging water supply system.

The board’s meeting on Tuesday marked the first detailed look at increasing water rates and fees for the first time in four years. The proposed rate hikes are expected to be larger compared to others in recent history, staff said, in order to rebuild the district’s financial safety net, fund tens of millions of dollars worth of deferred maintenance of its aging water system and add new, potentially expensive sources of water to weather worsening droughts, staff said.

“If we are going to go forward taking into consideration the extreme dry years that we anticipate or we want to be prepared for, we need to have a different rate structure,” said Monty Schmitt, the board’s newly appointed president.

District staff said the agency faces several financial pressures, including a reduction in water use, increased imports of more costly Russian River water, inflation and a backlog of maintenance.

In the past two years, water use dropped by more than 20% as a result of residential conservation during the worst periods of the drought. As a result, the district lost about $25 million in revenue. Residents are continuing to conserve water compared to 2020 usage, staff said.

Russian River water imports from Sonoma Water agency also increased to reduce demand on the district’s shrinking reservoir supplies, which added another $6 million in costs.

As a result of these expenses, inflation and other projects, the district forecasts that its discretionary reserves will drop to about $23 million at the end of June, which would be a 60% decrease from the $63 million balance it had at the start of the drought in 2021.

“We’re using less water, we have less revenue sources coming in and our expenses are largely fixed,” district finance director Bret Uppendahl told the board.

These financial challenges fall in the lap of a newly reorganized board of directors with a majority of new members. The new members — Ranjiv Khush, Matt Samson and Jed Smith — were elected in November after running campaigns calling for new water supply investments and criticizing incumbents for not preparing for the drought emergency that put the agency at risk of depleting local reservoirs as soon as mid-2022.

As it considers the rate increase, the board will be asked to decide how to split available funds between rebuilding reserves, ongoing maintenance costs and paying for new water supplies. The board also will need to consider whether to fund some projects through debt.

One proposal by staff to rebuild reserves is to invest about $7 million per year in the next four years. Khush questioned whether the district would need to replenish reserves all the way back to $60 million if the new rates incorporated drought charges during dry years, which were not included in the current rate structure approved in 2019.

“Running very lean in order to accumulate these reserves gives us much less margin to innovate and come up with ways to make our water supply less vulnerable,” Khush said during the meeting. “If we were less vulnerable the argument for maintaining such a large reserve would diminish.”

Some board members said the historical board practice of keeping rates stagnant for several years at a time no longer fit with the district’s challenges.

“That long period of not increasing rates has set us with what I do believe is a true backlog,” Smith said. “Now it’s time to do it, now it’s time to reinvest in our infrastructure, reinvest in our supply and our storage.”

Uppendahl said rates would ideally be raised in a consistent predictable manner, but that the district’s history of rate increases shows large swings during recent decades. In the 30 years since 1992, the district did not raise rates in 16 years, including one year in the early 1990s when rates were reduced by 25%. By contrast, the district also approved rate increases of 10% or more during three years since 1992.

“This tells a really important story,” Samson said.

District water rates increased at an average rate of about 4% each year since 1992, with inflation during that time running at an average of 3% per year, Uppendahl said. By comparison, a survey by the American Water Works Association, a nonprofit organization, showed water agencies nationwide increased water rates by an average of 10% annually from 1998 to 2018, which Uppendahl said was about twice the rate of inflation. In the same time period, the Marin Municipal Water District hiked rates by an average of about 4.4%, according to Uppendahl.

“We kept rates at barely above inflation and at the same time I think we were not maintaining our system,” Schmitt said.

Larry Russell, who has served on the board since 2004, cautioned his colleagues on how they view the rate increase history. He also pushed back on Schmitt’s statement that the district hasn’t been maintaining the water supply system, adding that the district budgets more than $20 million toward maintenance.