Modesto starts process to raise water rates, OKs better financing deal

The Modesto City Council has started the process to increase water rates as much as nearly 80 percent over five years for the typical single-family residence and a new letter of credit that backs city debt and that is estimated to save the city’s general fund $1.1 million over three years.

The council approved two consultants’ studies related to the proposed water rate increases and to initiate a Proposition 218 process to raise rates. Local governments must follow the proposition in order to increase water rates. It requires governments to notify those affected by the proposed rate increase and give them the chance to protest, and it requires a public hearing before rates are approved.

Modesto will send notices to property owners and ratepayers but will count one protest per parcel. If a majority protest, then Modesto cannot raise rates. But such protests reaching a majority are rare. The city is expected to hold the hearing in August; with council approval, the rate increases would start Sept. 1.

A city report states the typical single-family residence is looking at a monthly bill increase from $41.77 to $73.81 over five years, but the rate increases could be lower. The council would adopt the increases each year and could approve increases of lesser amounts than authorized depending on such factors as the water system’s finances and the water supply.

City officials have said Modesto needs the rate increase to shore up the water system’s finances (the system has seen revenue fall as customers reduce consumption because of the drought and state-mandated conservation) and to pay for roughly $159 million in infrastructure projects over the five years. Those projects include replacing aging water mains and building new storage tanks.

One of the consultant reports says what Modesto charges the typical single-family residence puts the city near the top third among 18 Valley and foothills communities, and the rate increases would put Modesto closer to the top. The proposed rate increases are for all of the city’s water customers, including business and industry.

The letter of credit backs the city’s 2008 refinancing of debt it issued to build city facilities, including its share of Tenth Street Place, the city-county administration center. Bank of America has issued the city letters of credit and required the city to set aside $7 million in its general fund to back the letter. The bank also charges Modesto a 1.1 percent annual fee for the letter based on the outstanding debt.

Bank of the West recently approached the city with an offer to provide a letter of credit at a lower annual fee and without the requirement of setting aside the $7 million. Bank of America made a counteroffer, and the city chose to stay with it. Bank of America reduced its annual fee to 0.60 percent and reduced what it charges the city for banking services. A city report says Modesto will save $1.1 million over the three-year term of the new letter of credit.

The city plans to use the $7 million to beef up its general fund reserves, or rainy-day fund, which is now $3 million.

This story was originally published June 9, 2016 at 4:28 PM with the headline "Modesto starts process to raise water rates, OKs better financing deal."