~ Purpose of lot reduction ~

The purpose of this analysis is to determine the effect of Brooktrails' efforts at lot reduction on the water and sewer rates of residents.

Summary and Conclusions

The cost of the lot reduction to Brooktrails residents is dependent on the rate of construction, the rate at which lots are reduced, and the ultimate buildout. If you assume construction and reduction rates will be those used in the Specific Plan, the cost of the lot reduction program is about $1/month for residents. If you assume construction and reduction rates will be similar to those we have experienced in the past few years, the cost of the lot reduction program will be a maximum of $3/month. However, at the current construction and reduction rates, buildout would occur before a dam is needed, thereby saving residents about $17/month, starting in the year 2077.

Background

Most of the money needed to operate and maintain Brooktrails' sewer and water services comes from two sources - owners (or renters) of developed property, and owners of vacant property. All vacant property owners pay an annual water standby fee of $30. In addition, those vacant lots with sewer service available pay an annual sewer standby fee of $50. About 18% of the vacant lots do not have sewer service and do not pay the sewer standby fee.

Owners of developed property pay both annual standby fees and monthly service fees. The standby fees are $5/year for water and $50/year for sewer service, if available. Monthly service fees are a combination of base charges and water-volume usage charges. The contribution from developed property owners and vacant property owners is summarized in the following table ⁽¹⁾.

One of the primary objectives of the Brooktrails Specific Plan is to reduce the number of lots. Obviously, as the number of lots are reduced, the number of vacant lots paying the standby fees also goes down. This results in less income to operate and maintain the sewer and water systems. To make up the difference, residents will end up paying more. The question is, "how much more?"

Analysis

To answer this question, I first developed two spreadsheets - one which represents build rates and lot reduction rates estimated in the Specific Plan, and one which represents rates that we have actually seen over the past 2 years. The spreadsheets determine the monthly costs to residents as the number of vacant lots, and their associated standby fees diminish as a result of both the lot reduction program and development. The monthly cost to residents is simply the projected water and sewer budget minus the total annual standby fees received from vacant lot owners.

Buildout occurs when the number of developed lots equals the number of "buildable" lots. For the Specific Plan Example, buildout occurs in the year 2062, at a level of roughly 4000 Single Family Residences (SFRs). When the population in Brooktrails exceeds 3000 SFRs, additional water storage will be necessary, which will most likely require a dam. Dam construction is the one major capitol expansion project that is not covered by the water connection fees. Residents, and perhaps vacant lot owners, will have to pay for the dam through some type of benefit assessment. Since this is an actual cost of providing service, I have included the estimated monthly payment for the dam as part of the monthly sewer and water fees. For the analysis of current reduction and construction, buildout occurs at about 2500 SFRs, which is low enough that a dam would not be needed.

Another small twist in this analysis was how to handle inflation. Originally, it was my intent to ignore inflation, so I could show only the cost increases from the lot reduction program. Another way to accomplish this would be to just say all costs used are in year-2000 dollars. This would assume that as costs go up due to inflation, fees would go up at the same rate. However, this isn't quite accurate. The Brooktrails Board of Directors has the authority to raise water and sewer service fees by resolution. Assuming our current budget is adequate, it is foreseeable that we would raise fees in response to cost increases due to inflation. On the other hand, standby fees are subject to Proposition 218, and could only be raised by a 2/3 majority vote from the property owners. It is very unlikely that this would happen. In addition, the water standby fees for vacant lots are already at the maximum allowed under Government Code Sec 61765.7. The effect of this is that residents will pay for inflation, and the contribution from the vacant property owners will slowly be eroded as inflation diminishes the value of the fixed standby fees.

Figure 1 shows the results of the analysis. The red line in Figure 1 represents average monthly residential water and sewer bills if construction rates and lot reduction rates are similar to those predicted in the Specific Plan. The green line in Figure 1 show the effects of construction and reduction rates continuing as we have seen over the past few years.

In order to truly judge the cost of the lot reduction, you have to compare those rates with what the rates would be if there was no lot reduction program. To do this, I developed two more spreadsheets that were identical to the two spreadsheets discussed above, except the lot reduction rate was set to zero. The orange line in Figure 1 shows projected residential fees for a build rate of 40 SFRs/year, and the blue line shows projected fees for a build rate of 20 SFRs/year. As with the Specific Plan example, the orange line shows a jump in year 2040 as a result of dam construction. The blue line shows a jump in the year 2077, also as a result of dam construction. Figure 2 shows the actual cost of the lot merger program on residential water and sewer fees. The red line in Figure 2 is the difference between the red line and the orange line in Figure 1. The green line in Figure 2 is the difference between the green line and the blue line in Figure 1.

From Figure 2, you can see that the cost of the lot reduction program is surprisingly low. From a practical perspective, this occurs for several reasons. First, even though there are roughly four times as many vacant lots as developed lots, the vacant lots only contribute about 1/3 of the total current funds. Therefore, their contribution is not that big to start with. Second, even without a lot reduction program, the number of vacant lots will gradually decrease as development occurs, and those standby fees will be lost. Finally, because it will be difficult, if not impossible to raise standby fees, the actual value of the vacant lot contributions will decrease over time, as residents will end up bearing all the costs of inflation.

Following is a description of the various assumptions and variables used in the spreadsheets. The numbers and letters in parentheses correspond to specific rows and columns.

(1) Build Rate: For the Specific Plan Example, a build rate of 40 Single Family Residences (SFRs) per year was used. This has been the average growth rate over the past 20 years, and was used as a basis for some of the planning. For current-rate analysis, a growth rate of 20 SFRs/year was used, which is about what we have averaged since the end of the building boom in 1993.

(2) Reduction Rate: This is the assumed number of lot reductions performed each year, which includes lot mergers and lot donations. Conceivably, it would also include District buy-outs, conservation easements, and any other mechanism that could be used to reduce the number of lots. For the Specific Plan example, the number of 28 reductions per year was obtained by multiplying the build rate (40 SFR/year) by the ratio of reduction to construction identified in the Specific Plan (Table 11.2-4), which is 0.69. For the current-rate case, a reduction to construction ratio of 3.0 was used, which is roughly what we have accomplished since the lot merger program was implemented in 1998. The "reduction to construction ratio" (r:c) is shown in cell (10).

(3) Occupancy: Since Brooktrails has a number of multi-SFR lots, "occupancy" is the average number of SFRs per lot. The value of 1.09 SFRs/lot, was calculated from the Specific Plan (Table 11.2-1).

(4) "Buildable" Lots: This is an estimate of the number of lots in Brooktrails that could physically or legally accommodate a house. It's difficult to say what this number really is, but 5000 is typically assumed to be the maximum development possible. Table 11.2-3 in the Specific Plan assumes that 785 lots will remain undeveloped ("attrition"). Subtracting 785 from the original total of 6188 lots, gives a maximum development of 5403 lots. Using 5403 lots in the analysis, instead of 5000, changes the water and sewer rates at buildout by less than 2% in both the Specific Plan example and the current-rate analysis.

(5) Reduction Efficiency: Not every lot that is merged, donated, or otherwise disposed of, is a buildable lot. The Reduction Efficiency, assumed to be 80%, is the percent of lots reduced that are buildable. In other words, if 100 lots are merged, I assume that 80 of them were buildable lots, and 20 would never have been developed anyway, even if they weren't merged or donated. For the Specific Plan example, a Reduction Efficiency of 80% results in an attrition of about 744 lots (see column 'g' in year 2061), which is very close to what the Specific Plan assumes (785). For the current-rate analysis, a Reduction Efficiency of 80% results in an attrition of 412 lots.

(6) Vacant Lot Fees: This is the current annual sewer ($50) and water ($30) standby fees charged to vacant lot owners. However, since only about 82% of vacant lots have sewer service available, the overall fee was adjusted to represent what an "average" vacant lot would pay. This is the $30/year water standby fee plus 82% of the $50/year sewer standby fee:

$30/year + 0.82($50/year) = $71.00/year

I assume the rates will not be increased. In fact, the water standby fee is the maximum allowable under California Law (Government Code Section 61765.7), and any increases in the sewer standby fee would require a 2/3 voter approval under Proposition 218, which is very unlikely to happen.

(7) Current SFRs: According to the latest development summary (10/31/99) there are 1307 SFRs in the Specific Plan Area.

(8) Current Total Lots: This was obtained from the County (see attached letter). According to the County, 6106 lots in the Township were assessed water standby fees. Of these, 63 lots are in "Spring Creek", leaving 6043 total lots in the Brooktrails Specific Plan Area.

(9) Current Op. Budget: From the 1999-2000 Brooktrails budget, the total operating budget includes personnel costs, maintenance and operation costs, capitol outlay, contingency reserve, capitol replacement, and equipment replacement. Static reserves, such as the "Wastewater Capitol Recovery Fund", and the "Debt Service Reserve", were not included. The water portion of the budget was then proportioned to reflect only the Brooktrails Specific Plan Area. The following Table summarizes this calculation:

Brooktrails Water = $649,050 x (1307 SFRs/1367 SFRs) = $620,562

Total Opeating Budget = $620,562 + 396,680 = $1,017,242

(10) r:c: The "reduction to construction ratio".

(11) Inflation: The assumed rate at which costs of operating and maintaining the sewer and water systems will rise each year. I used 2% as a conservative guess. Actual inflation over the past few years have been considerably higher.

(a) Year: Calendar year.

(b) Total Budget: For Year 2000, the current budgeted amount is used. For future years, I assumed that 75% of the budget is proportional to the number of SFRs the Township is serving, and 25% of the budget remains fixed (per Paul's recommendation).

(c) SFRs: For Year 2000, the number of SFRs is taken to be the current number of SFRs listed in cell (7). For future years, the number of SFRs is calculated by multiplying the number of developed lots by the occupancy rate (1.09 SFRs/lot).

(d) Developed Lots: For Year 2000, the number of developed lots is calculated by dividing the number of SFRs (1307) by the occupancy rate (1.09 SFRs/lot). For future years, the number of developed lots is calculated by adding the annual Build Rate in cell (1) to the previous years total.

(e) Total Lots: For Year 2000, the number of total lots is assumed to be the number listed in cell (8). For future years, the total lots is calculated by subtracting the annual Reduction Rate in row (2) from the previous years total.

(f) Buildable Lots: For Year 2000, I start with the number of assumed buildable lots shown in cell (4). For future years, the number of buildable lots is calculated by subtracting the annual Reduction Rate, multiplied by the Reduction Efficiency, from the previous years total.

(g) Vacant Lots: This is the difference between the total lots (e) and the developed lots (d).

(h) Vacant Lot Fees: For year 2000, this is the vacant lot fee calculated for cell (6). For future years, the vacant lot fee is discounted to reflect inflation. All other costs are assumed to be in year-2000 dollars.

(i) Vacant Lot Income: The number of vacant lots (g) multiplied by the annual vacant lot fees in cell (6)

(j) Residential Fees: This is the total budget (b) minus the vacant lot fees (h)

(k) Residential Fees/SFR: The average monthly sewer and water payment for the owner of a developed lot, which is calculated by dividing the total Residential Fees (j) by the number of SFRs (c), and dividing that by 12 (months per year). In reality this would include the actual monthly service charge for water and sewer, plus the monthly equivalent of the annual standby fees. For owners of developed unsewered lots, their actual average bill would be about $14/month less than what is shown in this column; for owners of developed, sewered lot, their actual average bill would be about $2/month greater than the amount shown.

1. Standby fee data was obtained from the County (see attachment). Usage fees were obtained from the Brooktrails 1999-2000 budget. The numbers were proportioned to reflect income from the Specific Plan Area only.