City utilities face $2.5 billion-plus deferred asset gap; staff says rate adjustments needed

City of Sacramento Department of Utilities staff told the Utilities Rate Advisory Commission on Jan. 28 that the city’s water, storm drainage and wastewater systems carry a combined estimated deferred asset investment in the range of more than $2.4 billion and that current revenues and one‑time gains are insufficient to address the gap.

Cheryl Hume, engineering and water resources division manager, described deferred maintenance as postponed repairs and replacements that push systems beyond recommended life expectancies and increase the risk of catastrophic failures and emergency costs. Hume said the department estimates roughly $832 million of deferred maintenance for the water system, about $364 million for the storm drainage system and about $1.3 billion for the wastewater system.

Kelly Sherfy, supervising financial analyst, told commissioners that fiscal year 2025 closed with stronger‑than‑budgeted results across funds but that much of the upside was one‑time income. Sherfy said the water fund reported roughly $160 million in revenues for FY25, boosted by a one‑time $13.4 million Tigert settlement and higher investment earnings; staff cautioned those gains should not be treated as recurring revenue when planning FY26 and FY28 rate proposals.

Staff provided examples of FY25 spending on deferred projects: Hume said the department spent about $10.7 million on water‑system deferred maintenance in FY25 while also listing the Freeport reservoir pump replacement improvement project at nearly $22 million, which staff said covered construction, replacement pumps, electrical equipment and fiber infrastructure. Hume also highlighted about $7.25 million spent on critical drainage projects (primarily pump station repairs) and $4.3 million spent on wastewater rehabilitation, of which two emergency projects — the Pioneer outfall repair (~$1.26 million) and the 5th Street sinkhole repair (more than $600,000) — accounted for roughly 43% of wastewater spending in FY25.

Commissioners pressed staff on several points. Commissioner Olsen asked for itemized priority expenses and site tours for high‑cost deferred projects; staff agreed to provide deferred‑maintenance lists and noted an established process for commissioner site visits. Commissioners and staff discussed the state’s Zero‑Emission Vehicle (ZEV) fleet mandate and whether vehicle replacement costs should be included in rates; Yvette Vingland, assistant director, said the city is coordinating with the fleet manager, that exemptions and deadline extensions exist, and that uncertainty in available heavy‑duty electric vehicles and required site power upgrades complicates planning.

Senior Deputy City Attorney Mike Voss addressed legal risk tied to rate design under Prop 218, saying courts typically defer to reasonable utility business decisions and are unlikely to second‑guess prudently justified investments. He cautioned, however, that courts have struck down unreasonable uses of ratepayer funds, so staff must document the nexus between charges and utility service.

Staff said the department will include delivery capacity planning in rate proposals: even if additional funding were available immediately, the department would need to phase projects because of design, planning and staffing limits; commissioners were told staff may propose hiring additional engineers and retaining consultants as part of rate packages to accelerate delivery.

The commission did not adopt any rate changes at the meeting; staff asked for continued support as they finalize rate scenarios to present in the coming months, with recommended financial plans and proposed rates expected at a June meeting as part of the FY28 rate development timeline.

The meeting closed with no public comment on the deferred maintenance item; the commission will reconvene in March.