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A Motion to Concur with the Initial Recommendations of the 2025 Water & Sewer Rate Study and Direct Staff to Prepare a Water Rate Ordinance for 2026 for Consideration by the Board of Trustees.
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Introduction
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During the initial phase in the 2025 Water & Sewer Rate Study, Village staff requested that NewGen Strategies and Solutions evaluate the Water & Sewer Fund's existing financial and operating information, make a recommendation for 2026 Water & Sewer Rates, and prepare for a discussion with stakeholders on rate methodology and billing format strategies for the future. NewGen recommends that the Village increase Water & Sewer rates in 2026 to move towards three financial goals: maintaining a Water & Sewer Fund balance consistent with industry best practices, stabilizing cash flow within the Water & Sewer Fund, and increasing fixed revenue recovery.
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Recommended Action
Adopt the Motion.
Prior Board Action
There is no prior Board action associated with this item.
Background
Public Works staff posted a Request for Qualifications (RFQ) for the 2025 Water & Sewer Rate Study in late January to engage a qualified consulting firm to provide an independent analysis of existing rates and fees and recommend appropriate adjustments in rate levels and/or structures. In mid-February, Public Works staff interviewed two of the three qualified, responsive firms: NewGen Strategies and Solutions, as well as Raftelis. After careful review and deliberation, Public Works chose to move forward with NewGen Strategies and Solutions based on their submittal, qualifications, informative interview, and reference check.
As part of the initial phase in the 2025 Water & Sewer Rate Study, Village staff requested that NewGen evaluate the Water & Sewer Fund's existing financial and operating information, develop goals for the Water & Sewer Fund based on that analysis, and make a recommendation for the 2026 Water & Sewer rates. While the Village has been able to maintain a healthy Water & Sewer fund balance over the past few years, it is clear that rising costs due to inflation, forthcoming regulatory mandates, and aging infrastructure are quickly putting the Village on a path towards necessary expenditures outpacing anticipated revenues. NewGen assisted Village staff in identifying three key financial goals for the 2025 Water & Sewer Rate Study:
1. Maintain a minimum Water & Sewer fund balance consistent with industry best practices.
2. Stabilize cash flow within the Water & Sewer fund.
3. Increase fixed revenue recovery.
While analyzing available financial data for the Water & Sewer fund, NewGen found that if the Village were not to increase water and sewer rates in 2026, it would anticipate that the revenues generated would be approximately $20.9 million, while the expected expenditures could be as high as $22.9 million, requiring a $2.0 million drawdown from the fund balance. With the goal of stabilizing cash flow within the Water & Sewer fund and the knowledge that the City of Chicago's anticipated wholesale water rate hike will impact nearly 68% of the Water & Sewer fund's operating costs, NewGen recommended a 5 percent increase to the volumetric water and sewer rates, along with a 100 percent increase to the fixed meter charge in 2026. In recent years increasing the volumetric water and sewer rate in alignment with increases made by the City of Chicago has become standard practice; however, NewGen wanted to take a two-pronged approach to rate increases after finding that nearly 60% of the Village's expenditures from the Water & Sewer Fund are fixed, while only 5% of Water & Sewer revenues are generated from fixed charges.
Following an initial rate recommendation for fiscal year 2026, Village staff also requested that NewGen prepare a presentation for stakeholders on rate methodology and billing format strategies to better inform the second phase of the 2025 Water & Sewer Rate Study. This will allow for further discussion and input into NewGen's water & sewer rate and rate structure recommendations for 2027-2030, which are anticipated in 2026.
Timing Considerations
The Village is currently planning for the 2026 fiscal year. Estimated Water & Sewer revenues for the 2026 fiscal year are used during the budget planning process to assist with key decisions surrounding operating budget and capital improvements. Finance Committee consideration at this time will allow staff to prepare the necessary rate ordinances to present to the full Village Board at upcoming meetings in November.
Budget Impact
The budget impact associated with this action item is addressed in the Staff Recommendation and Alternatives sections.
Staffing Impact
There is no staffing impact associated with this item. The item aligns with the department's core service delivery.
DEI Impact
Raising water rates, or shifting toward higher fixed charges, can have diversity, equity, and inclusion implications, especially in how they affect low-income and marginalized communities. Water prices have been increasing faster than household incomes, putting disproportionate financial burdens on low-income and marginalized communities, resulting in an affordability gap and forcing households to sacrifice rent, food, medical care, or other essentials, including hygiene.
When households cannot pay elevated water bills, they often face shut-offs and potential liens. Water shut-offs and the economic strain they cause disproportionately affect African-American families, elderly individuals, people with disabilities, and families with children. Lack of running water, or the need to conserve water to lower costs, severely hinders basic hygiene, which poses potential public health risks.
Community Input
At this time, there has been no community input given in relation to this item.
Staff Recommendation
In anticipation of an increase in the wholesale water rate from the City of Chicago and in an effort to maintain a healthy fund balance while making the necessary capital infrastructure improvements in 2026, Village staff recommend a 5 percent increase to the volumetric water and sewer rates along with a 100 percent increase to the Fixed Meter Charge.
Advantages:
* With these increases, the Village would maintain a nearly neutral cash flow for the Water and Sewer Fund, effectively sustaining current cash reserve levels and improving its fixed revenue recovery ratio in 2026.
* By maintaining the current Water & Sewer fund balance, the Village sets itself on a sustainable path towards long-term resilience and its target reserve level of 50 percent of annual O&M expenses.
* The Village's average residential water bill would remain in a competitive position relative to neighboring municipalities.
Disadvantages:
* Increases in fixed revenue recovery impact lower-usage customers on a larger percentage basis than higher-usage customers.
* This action could burden paying customers with sudden or disproportionate increases that could prove regressive in the long run.
Alternatives
Alternative 1:
Apply a 100 percent increase to the Fixed Meter Charge and use the Water & Sewer fund balance for additional expenditures (in excess of revenues) related to operating costs and capital infrastructure improvements.
Advantages:
* Nearly 60 percent of the Village's expenditures are fixed, while only 5 percent of the water and sewer revenues are generated from fixed charges. By increasing the Fixed Meter Charge, the Village shows a commitment to phasing in increases to fixed charges to target a 25 percent fixed revenue recovery.
* Even though 2026 necessary expenditures outpace anticipated revenues, this action allows the Village to phase in increases towards its goal of cash flow stabilization.
Disadvantages:
* With revenues not growing to meet necessary expenditures in 2026, the Village would need to use approximately $1.1 million from the current Water Fund balance.
* Increases in fixed revenue recovery impact lower-usage customers on a larger percentage basis than higher-usage customers.
Alternative 2:
Do not increase the water and sewer rates or the fixed meter charge in 2026.
Advantages:
* Builds trust with the community by showing stability and consistency.
* Keeps household expenses predictable, which is especially important for low or fixed-income families who may struggle with affordability.
* Assists businesses and even promotes development, with long-term financial planning, since the water rate could be seen as a fixed operating cost.
Disadvantages:
* The currently effective rates would require over $2.0 million in drawdowns from the Water & Sewer fund balance to meet anticipated operating costs and capital infrastructure improvements in 2026.
* While the Village would maintain a fund balance above the minimum reserve level, it does not set the Village on a sustainable path, as revenues are not growing to meet expenditures.
* With rising costs associated with inflation, infrastructure needs, and drought management, the Water & Sewer fund could eventually face budget shortfalls, deferred maintenance, or service quality issues if rates are not adjusted in alignment with necessary expenditures.
Anticipated Future Actions
Following the Finance Committee's recommendations, Village staff will prepare the necessary rate ordinances to present to the Village Board at the November 4th and November 11th meetings.
Prepared By: Erin Duffy, Deputy Public Works Director
Reviewed By: Rob Sproule, Public Works Director
Approved By: Kevin J. Jackson, Village Manager
Attachment(s):
1. Initial Water and Sewer Rate Study Report
2. Water & Sewer Rate Study Initial Results Presentation