BOARD AGENDA MEMORANDUM
Government Code § 84308 Applies: Yes ☐ No ☒
(If “YES” Complete Attachment A - Gov. Code § 84308)
SUBJECT:
Title
Water Supply Capital Workshop to Review the Capital Validation and Evaluation Processes, Review the Funding Filters for Prioritization, Introduce New Capital Funding Categories, and Provide an Overview of Capital Projects Included in the Capital Improvement Program Fiscal Years 2024-28 Five-Year Plan Funded by the Water Utility Enterprise Fund.
End
RECOMMENDATION:
Recommendation
Receive information and provide feedback, as necessary.
Body
SUMMARY:
On May 16, 2023, upon adoption of the Capital Improvement Program (CIP) Fiscal Year (FY) 2024-28 Five-Year Plan, Santa Clara Valley Water District’s (Valley Water) Board of Directors requested a workshop for all projects in the CIP. The majority of Valley Water’s capital projects are funded primarily by three funds: the Watershed Stream Stewardship Fund (Fund 12); the Safe, Clean Water and Natural Flood Protection Program Fund (Fund 26); and the Water Utility Enterprise Fund (Fund 61). Today’s Water Supply Workshop focuses on projects funded by Fund 61. The Fund 12 and Fund 26 Workshop will be conducted in January in alignment with the Board’s review of the CIP Preliminary FY 2025-29 Five-Year Plan.
The majority of revenue for Fund 61 is generated by water charges. Valley Water’s District Act provides that water charges may be levied to further the protection and augmentation of the water supplies as well as produce groundwater for beneficial use; may be collected from all those within a zone who own or operate water producing wells whether currently active or not; and that water charge revenue may be used to pay for: water supply, water quality, and infrastructure. CIP Water Supply Projects are funded primarily through water charges and are categorized into the following types of improvements: Storage Facilities, Transmission Facilities, Treatment Facilities, and Recycled Water Facilities.
Capital Project Validation and Evaluation Processes
The annual update of the CIP’s Five-Year Plan includes a Validation Process to review and evaluate potential new projects for inclusion into the CIP. Many of these new projects are identified through Master Plans, such as the Water Supply Mater Plan (WSMP), Program Plans, or through the Asset Management Plan (AMP). Additionally, new projects can be created by direction of the Board or requested by a Chief based on business needs or to improve Valley Water services.
Below is a diagram illustrating the Validation Process:
For each potential new project, staff develops a business case to compare capital, non-capital, and non-asset alternative solutions; evaluate the lifecycle costs of these solutions; and identify a recommended solution that minimizes lifecycle cost while balancing service levels and risk. Staff then submits the business case for review by their respective Deputy Officer. Once approved, Initially Validated Projects are presented to both the CIP Board Committee (Committee) and the Board of Directors for feedback.
As illustrated in the Annual CIP Process graphic, capital project managers simultaneously perform an annual review of their projects to identify any changes to scope, schedule and/or cost and provide project plan updates, which are included in Valley Water’s financial models for Funds 12, 26, and 61. Initially Validated Projects are assessed along with the impact the capital project plan updates have had on the financial health of each respective fund.
Each November, the CIP Evaluation Team, comprised of executive management and CIP staff, meets to consider Board feedback and review the fund models to prepare the CIP Preliminary Five-Year Plan for the CIP Committee review in December and for the Board to provide feedback and direction in January. The Board’s review and approval of the CIP Preliminary Five-Year Plan is considered a key decision point in the annual cycle for the development of the CIP Five-Year Plan.
Capital Project Prioritization
Although all capital projects are important to fulfilling Valley Water’s mission, funding constraints require the prioritization of projects to ensure the fiscal health of funds. While in 2019, Valley Water’s Board of Directors deemed the Validation Process as robust and sufficient for prioritizing projects for inclusion in the CIP, in 2022, the Board approved the Funding Filters for Prioritization and ranked them by the order of their priority as follows:
Funding Filters for Prioritization
1. Repair/Replace Existing Infrastructure Projects
2. Public Health and Safety Projects
3. Shovel-Ready (Permits and Land Rights Secured) Projects
4. Multi-Benefit Projects
A. Environmental Justice Benefit Projects
5. Partially Externally-Funded (Grants and Partnerships) Projects
As funding constraints due to rising capital costs continue to be addressed and in response to recent recommendations from the CIP Performance Audit, staff has developed Funding Categories. These categories will enhance the Funding Filters tool to improve transparency, ensure objectivity, and provide clarity to both the Board and the public.
To further prioritize projects, each Funding Filter has been assigned maximum points based upon the order of their priority as follows:
Funding Filters Point Scale
1. Repair/Replace Existing Infrastructure Projects 5 points
2. Public Health and Safety Projects 4 points
3. Shovel Ready (Permits and Land Rights Secured) Projects 3 points
4. Multi-Benefit Projects 2 points
A. Environmental Justice Benefit Projects ½ point
5. Partially Externally-Funded (Grants and Partnerships) Projects 1 point
The Board determined its top priority is to repair and/or replace existing infrastructure. Since the majority of capital projects have this objective, additional points will be assigned based on the existing asset’s risk score, as determined in the AMP, to further prioritize these projects.
Valley Water’s AMP measures risk as Business Risk Exposure (BRE), which is a risk score derived from the multiplication of two factors: Probability of Failure (POF) and Consequence of Failure (COF). The calculation also includes a redundancy factor, which is applied to the POF. The POF score ranges from 1 to 5, with 1 being like new and 5 being failed. Valley Water’s COF score ranges from 0 to 30, with 30 being the greatest consequence of failure. The Business Risk Exposure (BRE) scores for Valley Water assets can, therefore, range from 1 to 150 (POF = 5 x COF = 30), with 150 being the highest risk score for an asset.
Business Risk Exposure Adjustment Factor
1. Risk ≥ 88 = Add 10 points
2. Risk 76-87 = Add 4 points
3. Risk ≤ 75 = Add 0 points
Categories1 and 2 focus on further prioritizing those projects based upon their risk of failure. Category 3 applies to projects that have a lower risk of failure and new infrastructure projects. Further details of the three Categories are as follows:
1. Category 1: ≥ 19 points
Category 1 Projects meet our obligation to repair/replace our existing infrastructure, targeting the inclusion of projects with an AMP BRE score that is ≥ 88 and are required for public health and safety. In addition, projects that are under construction or mandated (required by law, regulation, federal order, lawsuit, etc. …) are automatically included in Category 1.
2. Category 2: 13-18.5 points
Category 2 Projects meet our obligation to repair/replace our existing infrastructure, targeting projects with an AMP BRE score that is between 76-87 and are required for public health and safety.
3. Category 3: ≤ 12.5
Category 3 applies to projects that have a lower risk of failure, ≤ 75 for our existing infrastructure projects, and new infrastructure projects, as identified/prioritized in Valley Water’s Master Plans and Program Plans. In addition, small capital improvement projects and placeholder projects are automatically included in Category 3. Small capital projects cost less than $5 million (unless otherwise approved by the Board), can be completed within two fiscal years and do not require right-of-way acquisition. Placeholder projects are projects that are anticipated to be needed, but may not yet have defined scopes, schedules, or funding sources.
Valley Water’s CIP Five-Year Plan includes projects that meet the criteria for all three Categories, all of which are critical to meeting Valley Water’s mission. In alignment with Ends Policies, the Board may approve the funding of projects in any category.
The Funding Filters for Prioritization have been applied to all capital projects and in preparation for the Water Supply Capital Workshop, staff has also assessed the BRE scores for our existing infrastructure Water Supply Capital Projects. Based upon the points applied to each project, the Water Supply Capital Projects have been divided into the three Funding Categories outlined in this memo. These projects will be reviewed by Category during the presentation (Attachment 1).
During the Board’s review of the CIP Preliminary FY 2025-29 Five-Year Plan, if funding constraints require prioritization, staff will bring forward recommendations for funding based upon the associated risk score for our existing infrastructure as established by Valley Water’s AMP, and for new infrastructure, in alignment with our Master Plans and Program Plans.
Capital projects that the Board has deemed a lower priority may be postponed or moved to the CIP’s Unfunded List. The Unfunded List is reviewed by the CIP Evaluation Team, CIP Committee and the Board on an annual basis and is considered for potential funding and inclusion in the annual CIP Five-Year Plan.
ENVIRONMENTAL JUSTICE IMPACT:
There are no Environmental Justice impacts associated with this item.
FINANCIAL IMPACT:
There is no financial impact associated with this item.
CEQA:
The recommended action does not constitute a project under CEQA because it does not have a potential for resulting in direct or reasonably foreseeable indirect physical change in the environment.
ATTACHMENTS:
Attachment 1: PowerPoint
*Handout 2.2-A: PowerPoint
UNCLASSIFIED MANAGER:
Manager
Luz Penilla, 408-630-2228