Water-use reductions sap Healdsburg revenue, prompt cuts at City Hall

While the drought crisis might be over in Sonoma County, the financial fallout is set to continue for many households and businesses as well as municipalities that were forced to cut water use over the past three years.

Healdsburg is the latest example.

Its water and wastewater rates were already scheduled to go up 8% July 1 as the second of five yearly increases before the city confronted sharply reduced revenues in its water and wastewater revenue this year.

The plunge in income resulted from the mandatory reductions in water use Healdsburg put in place to conserve its diminished water supplies through the worst of the drought.

The financial ripples have led the city to freeze two vacant Utility and Public Works positions and defer infrastructure maintenance to limit any wider hit to city expenses, Healdsburg Finance Director Katie Edgar said last week at a budget review during the City Council meeting.

The water and wastewater funds combined were set to account for about 12% of Healdsburg’s overall $112.4 million revenue for the 2022-23 fiscal year, which ends June 30.

But as of March 31, the end of the third quarter, both funds were lagging in revenue, down 10% to date, for a combined $1.09 million loss over projections through that period.

The City Council approved on a 5-0 vote a series of moves to forestall that gap getting any bigger over the upcoming fiscal year, which begins July 1.

“To some degree, conservation is the new normal,” said City Manager Jeff Kay, acknowledging the dramatic swings in water supply and the effect they’ve had on consumption and city policy.

Healdsburg’s not alone. Cities and other water suppliers across the county and state are trying to shore up their budgets after more than three years of drought forced measures to cut use, crimping a key source of revenue.

Healdsburg, which relies on the upper Russian River and groundwater for its supplies, led the county in water conservation, cutting per capita use by nearly 54% between July 2020 and July 2021, according to state data.

Healdsburg asked residents to reduce water use by as much as 40% in 2021. It lifted conservation mandates only last month, on the heels of a heavy winter that replenished local reservoirs and river flows.

Part of that mandate included a 6% shortage surcharge on residents’ water bills, which generated about $200,000 this fiscal year to offset the lost revenues during the drought, Edgar said.

To account for the shortfalls, spending out of the water fund was slashed by about $251,000, while spending out of the wastewater fund was reduced by about $9,600 for fiscal year 2023-24.

That will mean delayed maintenance on water fountains, distribution pipes and pumps.

Council member Evelyn Mitchell asked Utilities Director Terry Crowley if that deferred maintenance could be cause for community concern.

“It's going to be a challenge for staff over the next 12 months,” he said. “But it's not something that we can continue to sustain year after year after year.”

Healdsburg is the lone municipality in Sonoma County that also operates its own electric utility, and it suffered a financial loss on that front, too.

It’s electric fund was down by 6%, to $9.01 million through the third quarter.

Staff also budgeted for an additional $1 million in expenses for the upcoming year to account for higher market costs for electricity, Edgar said.

Though the city’s electric, water and wastewater funds did worse than expected, the city’s general fund, which includes finance, legal, police and fire departments, is expected to have a balance of $248,600 to close out the current fiscal year, Edgar said.

Because both expenses and revenue are projected to be slightly under budget, the general fund will cover one position typically paid for out of the water and wastewater funds next year.

Sales tax, which makes up the bulk of the general fund budget, was down about 16%.

But those figures do not include revenue from March and staff expects sales tax to “slightly exceed” the current revenue estimate.

“While we see a slowing in the growth for sales tax revenue, we do not see any indications of a recession,” she said. She anticipates small growth next fiscal year and to end this fiscal year in alignment with budget projections, she added.

Similarly, staff expect property tax to meet or exceed budget expectations, even though it also came in 16% below projections, at $1.75 million through the third quarter.

Two more waves of property tax due to the city this year should put the budget in alignment, Edgar said.

General fund expenses were about $14.24 million or 70% of the budget. Legal services is the only department projected to go over budget by $179,000 through the end of the year.

“Due to salary savings because of vacancies in both the police department and finance department we do think we can absorb those costs and we will end the year under budget as a whole in the general fund,” Edgar said.

Lodging tax was lower than expected through the third period due to “an unusually long and rainy winter this season,” Edgar said.

Collections were down 13%, at $4.8 million through the third quarter.

With summer around the corner, “we do expect tourism and the (lodging tax) revenue to rebound quickly and to close some of the apparent budget gap,“ though they anticipate to be slightly under budget, she said.

Edgar expects to return to City Council with further budget amendments after the council considers electric rate increases at the June 5 meeting.

You can reach Staff Writer Jennifer Sawhney at 707-521-5346 or jennifer.sawhney@pressdemocrat.com. On Twitter @sawhney_media.