BOARD AGENDA MEMORANDUM
Government Code § 84308 Applies: Yes ☐ No ☒
(If “YES” Complete Attachment A - Gov. Code § 84308)
SUBJECT:
Title
Work Study Session on the Capital Improvement Program Preliminary Fiscal Year 2027-2031 Five-Year Plan and Preliminary Fiscal Year 2026-2027 Groundwater Production Charges.
End
RECOMMENDATION:
Recommendation
A. Review the Capital Improvement Program (CIP) Evaluation Team’s recommended funding scenarios for the CIP preliminary Fiscal Year 2027-2031 (FY 2027-31) Five-Year Plan and approve the recommendations and the inclusion of three projects in the CIP Draft FY 2027-31 Five-Year Plan; and
B. Discuss and provide direction on the preliminary FY 2026-27 (FY 27) Groundwater Production Charge analysis.
Body
SUMMARY:
Each year, the Capital Improvement Program (CIP) team prepares its rolling five-year plan, which is presented for Board consideration and approval. The CIP Five-Year Plan describes the Santa Clara Valley Water District (Valley Water) capital investments by type of improvement and provides information on planned capital projects and Valley Water’s intended source(s) of funding.
The annual CIP development process, wherein capital project plans are updated to reflect changes to scope, schedule or planned expenditures (as detailed in Attachment 1), works in coordination with the biennial budget process, which allocates funding to these projects, and the groundwater production charge process, which establishes water rates.
This Work Study Session combines, for Board review: the Baseline CIP Preliminary FY 2027-31 Five-Year Plan (Attachment 2), which reflects all processed changes to scope, schedule or planned expenditures, and consists of a list of projects organized by type of improvement, with estimated costs and proposed funding sources; and the Preliminary FY 2026-27 Groundwater Production Charge Analysis.
Background
As part of the annual CIP process, capital project plans are updated to reflect all changes to scope, schedule, or planned expenditures from the Board Adopted CIP FY 2026-30 Five-Year Plan and referenced as Project Plan Updates (Attachment 1).
Based on the project plan updates presented in Attachment 1 and administrative changes to other projects due to inflation, the total CIP Five-Year Plan decreased by $2.598B. The total project cost (TPC) increases or decreases (with inflation) from the Board Adopted CIP FY 2026-30 Five-Year Plan by fund are as follows: General Fund (Fund 11) decreased by $2.78M; Watersheds Stream Stewardship Fund (Fund 12) decreased by $132.64M; Safe, Clean Water and Natural Flood Protection Program Fund (Fund 26) increased by $17.39M; Water Utility Enterprise Fund (Fund 61) decreased by $2.476B; and Information Technology Fund (Fund 73) decreased by $3.87M. These totals are the Baseline Preliminary Five-Year Plan totals, Attachment 2, and do not reflect any recommended or pending changes
Along with the review of the baseline CIP Preliminary FY 2027-31 Five-Year Plan, staff is seeking Board input on the preliminary analysis to incorporate into the development of the groundwater production charge recommendation. The groundwater production charge analysis includes a water demand projection, a discussion of key capital project funding, and several scenarios for Board consideration.
Capital Investments Not Included in the CIP
Valley Water contributions to water infrastructure capital investments led by external agencies are not included in the CIP Preliminary FY 2027-31 Five-Year Plan. While not included in the CIP, these investments are evaluated in the Water Supply Master Plan (WSMP) 2050 and budgeted and forecasted through operating projects. They are also included and reflected in the financial modeling that is analyzed during the development of the CIP Five-Year Plan.
These investments include:
1. Sisk Dam Raise Project
2. Delta Conveyance Project
3. Sites Reservoir Project
Additionally, to ensure consistency with Valley Water’s various planning efforts, CIP staff continues coordinating with water supply planning staff. The WSMP 2050 assumes that capital projects included in the Five-Year Plan, which repair/replace existing infrastructure, are a baseline for inclusion in their planning efforts.
Capital Project Prioritization - Funding Categories
In response to the challenges identified in executing Santa Clara Valley Water District’s (Valley Water) Capital Improvement Program (CIP) and the feedback received from the Board during the August 29, 2025, workshop, staff have implemented a series of refinements to the CIP Prioritization Process. These enhancements aim to better align project prioritization with risk to public health and safety, strategic goals, and financial feasibility, ensuring that limited funding is directed toward the most critical and impactful projects.
Funding Categories
To assist with decision-making and resource allocation, projects will continue to be organized into three funding categories that reflect their risk exposure and urgency:
Category 1 - High Risk Exposure
• Urgent repair or replacement needs
• Projects that are regulatory/mandated or driven by public health and safety
• Projects currently under construction or requiring immediate continuation
Category 2 - Moderate Risk Exposure
• Critical repairs or replacements needed to maintain service reliability
• Projects primarily addressing public health and safety, but without the immediacy of Category 1
Category 3 - Low Risk Exposure
• New infrastructure or placeholder projects that support long-term goals
• Projects that align with strategic and master planning priorities but are not urgent
These categories serve as initial funding filters, enabling the Board to focus resources on high-risk and mandated projects while maintaining visibility of longer-term investments in the capital program.
Valley Water’s CIP Five-Year Plan includes projects that meet the criteria for all three Categories, all of which are critical to meet Valley Water’s mission. In alignment with Ends Policies (goals and objectives for accomplishing Valley Water’s Mission), the Board may approve the funding of projects in any category.
Initially Validated Unfunded Projects
Each year, Valley Water staff can submit new projects to be considered for inclusion in Valley Water’s CIP. For each potential new project, staff develops a business case to compare capital, non-capital, and non-asset alternative solutions; evaluates the lifecycle costs of these solutions; and identifies a recommended solution that minimizes lifecycle cost while balancing service levels and risk.
Between October and November each year, these newly proposed, initially validated projects are presented to the CIP Committee and Board, along with a list of currently unfunded projects, which have been validated during prior years, for review and comment. CIP Committee and Board feedback is considered when preparing the recommended scenarios for developing the CIP Preliminary Five-Year Plan.
During this CIP Development Cycle, the Board will consider 11 unfunded projects: four initially validated and seven previously validated/currently unfunded projects.
Development of the CIP Preliminary Five-Year Plan
The CIP Evaluation Team (Chief Executive Officer (CEO), Assistant CEO, Chiefs and Deputies of the divisions initiating, delivering, implementing, and operating capital projects) meets in November of each year to consider the CIP Committee and Board feedback, review the financial models, and determine which, if any, initially validated or unfunded projects should be recommended for inclusion in the CIP. To ensure Valley Water’s high-priority business needs are met in adherence to Board policy, the CIP Evaluation Team reviews the projects based upon:
• Board Priorities
• Asset’s remaining lifespan
• Available funding/staff resources
• Urgency of investment
Based upon the outcome of its review, the CIP Evaluation Team recommends whether the newly proposed capital projects should be funded in the CIP Preliminary FY 2027-31 Five-Year Plan or remain on the unfunded list. During this CIP Development Cycle, the Board will consider 10 unfunded projects: three initially validated and seven previously validated/currently unfunded projects. Additionally, it has been determined that the Currently Unfunded Project List should be revised and expanded to align with Valley Water’s Watersheds Master Planning Process for next year’s CIP Cycle. Shown below in Table 1 are the CIP Evaluation Team’s recommendations regarding the Initially Validated and Unfunded Projects.
Table 1: CIP Evaluation Team Recommendations for
FY 26 Initially Validated and Unfunded Projects
Water Supply - WS
Water Resources Stewardship - WRS
Flood Protection - FP
* Llagas Capacity has prior year actuals = $6,947, TPC = $105,778
** Planning and Design phases of these projects are currently funded in the CIP five-Year Plan
Recommended Funding Scenarios for Consideration
The CIP Evaluation Team reviewed the fund models after inputting the project plan updates (Attachment 1), which were then utilized to prepare the Baseline CIP Preliminary FY 2027-31 Five-Year Plan. Based on the impact these changes had on the health of Funds 12, 26, and 61, and taking into consideration feedback received from the CIP Committee and the Board, the Team has prepared recommendations for each fund for January 13, 2026, Board work study review of the CIP Preliminary FY 2027-31 Five-Year Plan.
Fund 12 Recommended Scenario = Baseline, with the following modifications:
1. Include the Aquatic Resource Creation at Ford Rd Perc Pond ~ $6.37M
2. Implement fund transfer from Fund 12 to Fund 26 in future years to balance the fiscal health of Fund 26 (transfer estimated to be ~$110M over multi-year period)
Fund 26 Recommended Scenario = Baseline, with the following modifications:
1. Cancellation of up to ~$48M in fund transfer from Fund 26 to Fund 61 for Project C1 - Anderson Dam Seismic Retrofit; and
2. Transfer of Project E5 - San Francisquito Creek Flood Protection from the CIP Five-Year Plan into an Operating Project for budgeting and long-term forecasting.
Fund 61 Recommended Scenario = Baseline, with the following modifications:
1. Include Pure Water Silicon Valley - Full-Scale Direct Potable Reuse (DPR) Facility ~$2,448.90M
2. Include Santa Teresa Water Treatment Plant Infrastructure Rehabilitation (WTP Master Plan Implementation) ~$242.67M
3. Cancellation of up to ~$48M in fund transfer from Fund 26 to Fund 61 in Fiscal Years 2026-32 for Project C1 - ADSRP.
New Project Plan Updates/Project Plan Update Revisions to Funded Capital Projects
Since the Significant Project Plan Updates submittal deadline this October, new project plan updates have been processed. The changes below were not finalized in time for the December 15, 2025, CIP Committee Meeting, but they have since been incorporated into the Baseline Preliminary FY 2027-31 Five-Year Plan.
A list of the new project plan updates is provided below and incorporated into Attachment 1:
1. Upper Penitencia Ck, Coyote Ck-Dorel Dr, Corps (E4) (26324001)
2. Ogier Ponds Separation from Coyote Creek (D4.2) (26044003)
3. PWTP Residuals Management (93234044)
4. South County Recycled Water Pipeline 1B (91094009)
5. RWTP Reliability Improvement Project (93294057)
Additional Pending Project Plan Updates/Project Plan Update Revisions to Funded Capital Projects
Since the December 15, 2025, CIP Committee presentation, additional project plan updates have been identified. The pending changes have not been finalized or incorporated into the Baseline CIP Preliminary FY 2027-31 Five-Year Plan. The changes will be incorporated for the March 10, 2026, Board Meeting.
A list of the projects with pending changes is provided below:
1. Almaden Dam Improvements (91854001)
2. SCW Regnart Creek Rehabilitation (F8) (26044056)
3. SCADA Master Plan Implementation (95044002
4. Coyote Creek Chillers (91864008)
5. Land Rights - South County Recycled Water Pipeline (91094001)
6. Almaden Valley Pipeline Replacement (92304001)
Projects Planned for Closure
Additionally, five (5) projects in the Board Adopted CIP FY 2026-30 Five-Year Plan are anticipated to be completed and/or closed out by June 2026, as listed below:
1. Hale Creek Enhancement Pilot Study (26164001)
2. San Francisco Bay Shoreline EIAs 1-4 (26444002)
3. South County Recycled Water Pipeline (91094010)
4. Coyote Creek Percolation Dam Replacement (91864009)
5. Pacheco Reservoir Expansion (91954002)
Based on the recommended scenarios and the most recent project plan updates, the total CIP Five-Year Plan increased by $100.28M. The total project cost (TPC) increases or decreases (with inflation) from the Board Adopted CIP FY 2026-30 Five-Year Plan by fund are as follows: General Fund (Fund 11) decreased by $2.78M; Watersheds Stream Stewardship Fund (Fund 12) decreased by $126.28M; Safe, Clean Water and Natural Flood Protection Program Fund (Fund 26) increased by $17.39M; Water Utility Enterprise Fund (Fund 61) increased by $215.81M; and Information Technology Fund (Fund 73) decreased by $3.87M. These totals reflect the Recommended CIP Preliminary FY 2027-31 Five-Year Plan, Attachment 3, and do not reflect any recommended or pending changes.
Summary of Groundwater Production Charge Analysis
Staff has prepared the preliminary FY 2026-27 groundwater production charge analysis, which includes several scenarios for Board review. Staff is seeking Board input on the preliminary analysis to incorporate into the development of the groundwater production charge recommendation.
The groundwater production charge reflects the benefits of Valley Water activities in protecting and augmenting groundwater supplies and is applied to water extracted from the groundwater basins in Zones W-2, W-5, W-7, and W-8. Zone W-2 encompasses the Santa Clara groundwater subbasin north of Metcalf Road or the North County. Zone W-5 overlays the Llagas subbasin from northern Morgan Hill south to the Pajaro River. Zone W-7 overlays the Coyote Valley south of Metcalf Road to northern Morgan Hill, and W-8 encompasses the area below Uvas and Chesbro Reservoirs.
The groundwater production charge recommendation will be detailed in the 55th Annual Report on the Protection and Augmentation of Water Supplies that staff plan to provide to the Clerk of the Board on February 27, 2026. The Public Hearing on groundwater production charges is scheduled to open on April 14, 2026. It is anticipated that the Board will set the FY 2026-27 groundwater production charges by May 12, 2026, and they will take effect on July 1, 2026.
The FY 2026-27 groundwater production charge and surface water charge setting process will be conducted consistent with the District Act requirements, and Board Resolutions 99-21 and 12-10 (Attachments 4 and 5).
Water Use Assumptions
The estimated actual District managed water use for FY 2024-25 is approximately 219,000 acre-feet (AF), which is about 3,000 AF lower than budgeted water use. Lower water use compared to last year’s budget was likely due to several factors, including a lower rebound from the 2023 drought than anticipated, combined with milder weather (dry but slightly cooler than usual).
Consistent with last year’s reduced long-term projections, the adopted budget FY 2025-26 water use is 219,000 AF. The water usage forecast for FY 2026-27 is 221,250 AF and may be modified as necessary during the upcoming rate-setting process.
The multi-year projection reflects modest annual growth in District-managed water use, returning to around 230,000 AF by FY 2031-32.
Groundwater Production Charge Projection Scenarios
Staff has prepared a preliminary baseline groundwater production charge projection scenario for Board review, consistent with the CIP Evaluation Team’s recommendation to fund two new projects. Staff can model additional scenarios for the Board as needed.
For the preliminary baseline scenario, the increase in the North County Zone W-2 Municipal and Industrial (M&I) groundwater production charge is 9.1% for FY 2026-27. In South County, the increases in the M&I groundwater production charge projections are 6.4% for Zone W-5; 8.6% for Zone W-7; and 8.0% for Zone W-8.
The overall impact of the preliminary baseline scenario for FY 2026-27 on the average household using about 11 HFC monthly would result in an estimated increase of $5.63 per month in North County, $1.01 per month in South County Zone W-5, $1.82 per month in South County Zone W-7, and $0.93 per month in South County Zone W-8.
Staff assumes the continuation of the Contract Treated Water Surcharge at $115/AF to maintain alignment with retailers’ costs to pump water from their wells.
Staff has prepared the following scenarios for Board consideration:
Scenario 1: Baseline
‒ Agricultural rates remain at 10% or less of the lowest groundwater charge zone Municipal & Industrial rate
‒ District-managed water use projection of around 221,500 acre-feet
‒ Projects in the draft FY 27-31 CIP 5-Year Plan, including:
‒ Anderson Dam Seismic Retrofit with WIFIA loan
‒ Rinconada Water Treatment Plant Reliability Improvement Project
‒ Santa Teresa Water Treatment Plant Infrastructure Rehabilitation Project
‒ Pure Water Silicon Valley (Phase 1 Demonstration Facility & Phase 2 Full-Scale Direct Potable Reuse (DPR) Facility) with WIFIA loan
‒ Dam Safety Program: Almaden, Calero, Coyote & Guadalupe
‒ Water rates will fund 3.23% of Delta Conveyance Project planning costs, participation in the B.F. Sisk Dam Raise project at San Luis Reservoir, and 0.66% participation in the Sites Reservoir Project
‒ Master Plan Project placeholders: SCADA, Water Treatment Plants & Distribution System
Scenario 2: Baseline with expanded Sites participation.
Staff can model additional scenarios for the Board as needed.
Other Assumptions
All scenarios assume the continued practice of relying on the State Water Project (SWP) Tax to pay 100% of the SWP contractual obligations. Pursuant to Water Code Section 11652, Valley Water, whenever necessary, is required to levy on all property in its jurisdiction not exempt from taxation, a tax sufficient to provide for all payments under its SWP contract with the California Department of Water Resources (DWR). The baseline scenario assumes setting the SWP Tax for FY 2026-27 at $28M. The SWP Tax for the average household in Santa Clara would be about $42 per year.
All scenarios assume Water Utility operations cost of $266.4M in FY 2026-27 versus the FY 2025-26 adopted budget of $269.6M.
The preliminary analysis does not include unfunded capital projects or additional unfunded operations cost needs identified by staff.
Summary of Groundwater Production Charge Analysis Issues
Staff is seeking Board direction to be incorporated into the 55th annual Report on Protection and Augmentation of Water Supplies (PAWS) scheduled to be filed with the Clerk of the Board on February 27, 2026.
CIP Board Committee
The Board established a CIP Committee to review and discuss in greater detail the various processes and information used to prepare an annual update to the CIP Five-Year Plan. In 2025, the CIP Committee was comprised of Director Nai Hsueh (CIP Committee Chair), Director Tony Estremera (CIP Committee Vice Chair), and Director Jim Beall.
The CIP Committee met monthly in 2025 to review and discuss information related to capital projects, the development of the CIP, and to provide feedback to staff and recommendations to the full Board, as required.
CIP Committee Review of the CIP Preliminary FY 2027-31 Five-Year Plan
On December 15, 2025, the CIP Committee reviewed the baseline CIP Preliminary FY 2027-31 Five-Year Plan. The CIP Committee reviewed the CIP Evaluation Team’s recommended funding scenarios to support the overall financial health of Funds 12, 26, and 61.
In reviewing the project plan updates (Attachment 1), the corresponding financial analysis, and the CIP Evaluation Team’s recommendations for Funds 12, 26, and 61, the CIP Committee provided feedback but made no additional recommendations for the Board’s consideration regarding the CIP Preliminary FY 2027-31 Five-Year Plan.
Review and Approval Process for the CIP FY 2027-31 Five-Year Plan
Receiving Board direction regarding the Recommended CIP Preliminary FY 2027-31 Five-Year Plan (Attachment 3) will allow staff to proceed with preparing the CIP Draft FY 2027-31 Five-Year Plan.
The CIP Draft FY 2027-31 Five-Year Plan is scheduled to be presented to the Board at its meeting on March 10, 2026. At that time, staff will recommend that the Board review and authorize the release of the CIP Draft FY 2027-31 Five-Year Plan for a 60-day public review period. After the public review and responses to comments are completed, a Resolution to Adopt the CIP Final FY 2027-31 Five-Year Plan will be presented to the Board in May 2025 for approval in conjunction with the FY 2026-27 biennial budget.
The proposed changes to the CIP are summarized by Fund and will be presented in the PowerPoint presentation (Attachment 6).
Additionally, to ensure consistency with Valley Water’s various planning efforts, CIP staff continues to coordinate with staff leading the development of the Water Supply Master Plan 2050, Watershed Master Plans (formerly known as the One Water Plan), and Watersheds and Water Utility Asset Renewal Plans. These plans assume that capital projects included in the Five-Year Plan, which repair/replace existing infrastructure, are baseline projects for inclusion in their planning efforts. If necessary, these plans will be updated to align with the CIP FY 2027-31 Five-Year Plan, as adopted by the Board.
Communications and Community Outreach
Informing members of the community about the CIP efforts, process and program details remains an integral part of Valley Water’s communications and public engagement. Staff regularly invite community members to participate in the CIP public comment period, the CIP Public Hearings, and other milestone dates through frequent social media posts. Staff promotes monthly CIP committee meetings on Nextdoor, Facebook and Twitter (X) and boosts them on Facebook once the meeting agenda is posted online, typically within the week leading up to those scheduled meetings.
In early December 2025, a detailed blog about the CIP Five-Year Plan and process was shared with the community. A three-blog series to highlight projects within the CIP launched in January. These blogs will be posted on valleywaternews.org and shared in Valley Water’s newsletter, Facebook, and Twitter (X). Staff also posts on the CIP webpage and project pages about how to submit public comments and other reminders about ways community members can participate in the CIP process.
Additionally, Valley Water’s public events, including scheduled Speakers Bureau presentations, serve as venues for staff to remind community members about the CIP efforts and how they can participate in that process. Staff support all Board-approved CIP efforts with year-round community engagement. CIP project outreach includes the distribution of information through mailings, social media updates, email blasts, Nextdoor notifications, hosting public meetings, and updating project webpages with details about current project progress. On average, staff post about CIP projects approximately five times per month, across all our platforms.
ENVIRONMENTAL JUSTICE IMPACT:
While individual capital projects may have environmental justice impacts and conduct outreach and engagement to impacted communities, which will be reported to the Board accordingly, the CIP Preliminary FY 2027-31 Five-Year Plan and the FY 2026-27 Groundwater Production Preliminary Analysis Work Study Session has no environmental justice impact.
The CIP Preliminary FY 2027-31 Five-Year Plan is a projection of Valley Water’s capital funding for planned capital projects. Its purpose is to document planned capital projects to help integrate Valley Water work with the larger community by aligning Valley Water planning with other local agency planning efforts. The CIP Preliminary Five-Year Plan documents any changes to capital projects’ planned funding and expenditures and is updated and brought to the Board of Directors for approval each year in January.
Each February, upon the Board’s direction, the CIP Draft Five-Year Plan has a 60-day public review period. To ensure meaningful engagement of all Santa Clara County communities in the decision-making process, staff provides a copy of the CIP Draft Five-Year Plan to Santa Clara County, its cities, and land use agencies and publishes a public notification for review before the Board of Directors adopts the Resolution to Adopt the CIP Five-Year Plan in May.
The CIP is thus produced each year in collaboration with government, academic, private, non-governmental, and non-profit organizations, as well as diverse and disadvantaged communities, and as such, adheres to the Board’s General Principles and Ends Policies, which are integral in ensuring that Valley Water meets its mission.
FINANCIAL IMPACT:
While there is no direct financial impact associated with the recommended action to approve the CIP Preliminary FY 2027-31 Five-Year Plan, the CIP Five-Year Plan presents a funding plan that shows the intended source of funds for each project. Valley Water’s FY 2026-27 proposed biennial budget will include the approved projects in the first year of the CIP FY 2027-31 Five-Year Plan.
Furthermore, this preliminary analysis of the groundwater production charges does not have any immediate financial impact, however, the adopted groundwater production charges will affect the future finances of the Water Utility Enterprise.
CEQA:
The recommended action does not constitute a project under CEQA because it does not have potential for resulting in direct or reasonably foreseeable indirect physical change in the environment.
ATTACHMENTS:
Attachment 1: Project Plan Updates
Attachment 2: Baseline CIP Preliminary FY 2027-31 5-Year Plan
Attachment 3: Rec. CIP Preliminary FY 2027-31 5-Year Plan
Attachment 4: Resolution No. 99-21
Attachment 5: Resolution No. 12-10
Attachment 6: PowerPoint
*Handout 3.5-A: PowerPoint
UNCLASSIFIED MANAGER:
Manager
Luz Penilla, 408-630-2228
Darin Taylor, 408-630-3068