Solvang staff warn wastewater treatment upgrade and rising costs threaten reserves; council hears rate scenarios

Solvang utility staff presented a detailed update on water and wastewater finances and capital needs, telling the City Council that previously adopted rate steps were generally meeting operational needs but that reserves will drop sharply once major construction and debt service begin.

Jose, the utilities presenter, said the 2022 rate study envisioned steep near‑term sewer increases and built in debt service: “In year 1, the rate increase was 37.5% for waste for sewer bills. The next 3 years were 17.5%.” He told council those increases assumed repayment of a loan projected in the study and warned that, if the treatment project’s price rises further or other CIP work is required, additional rate increases could be necessary.

Why it matters: Solvang’s wastewater project is the largest near‑term capital obligation identified by staff; a higher cost would translate into larger or longer rate increases for customers. Staff presented three scenarios for 2026–27 (including 0%, partial and full proposed increases) and showed the tradeoffs: short‑term rate relief reduces near‑term affordability pressure but worsens long‑term capital readiness and reserve levels.

Details: Staff displayed five‑year revenue and reserve charts for both utilities. On the water side, the presenter said a steady 5.5% annual adjustment had aligned projected and actual revenues through the study period and supported financial stability. On wastewater, Jose said the 2022 study assumed debt repayment and included rate steps large enough to cover an assumed $18 million loan; however, he said the preliminary engineering report (PER) and escalating construction estimates have pushed the current engineer’s estimate to “approximately $25,000,000.”

Wendy Scott, a city staff member involved in utilities, told the council that prior to the 2022 study the wastewater reserve fund had been in a negative balance and that rates were designed to rebuild reserves: “Back in like, before they did the rate study, the wastewater reserve fund was in a negative balance.” She also explained that ongoing contractor payments for the PER are being made from existing funds and could be rolled into future loan financing.

Financing and timeline: Staff described delays in the USDA loan process and said USDA offered the most favorable terms but that the PER revisions and cost escalations must be resolved before USDA can commit. Staff said they are also evaluating SRF, bond financing and smaller grants (for example, for an emergency generator) and have contacted the congressional office for potential earmark support, but federal appropriations remain uncertain.

Capital priorities: Staff listed major CIP items including: the wastewater treatment plant upgrade (projected at roughly $25 million in the latest estimate), two lift‑station upgrades (LSL and fuel drive), sewer manhole and line relining, water mainline replacement work (which staff is phasing to manage cost escalation), AMI automated metering (budgeted at $330,000), well projects and reservoir improvements. Staff said the city is currently operating the wastewater plant at about half of its design capacity and could absorb Los Olivos’ flows without additional capacity.

Staff recommendation and next steps: Jose recommended implementing the proposed 2026–27 rate increases for both water and wastewater and beginning the next rate study early in 2026 with public outreach and an ad‑hoc council committee. He emphasized that steady, modest increases reduce the risk of much larger increases later.

No council vote to change rates occurred at the meeting. Council members asked for additional detail on class‑based billing, the composition of revenues, potential non‑rate mitigation measures (visitor‑fees, bonds, grants), and options to re‑phase project elements to lower up‑front costs. Staff said it would return with more detailed funding options and outreach plans.