Transportation & Seattle Public Utilities Committee - Special Meeting 12/12/22

We are recording.

Good morning.

Welcome to the December 12, 2022 special meeting of the Transportation and Seattle Public Utilities Committee.

Our committee will now come to order.

The time is 9.30 AM.

I'm Alex Peterson, chair of the committee.

Will the clerk please call the roll?

Council Member Herboldt.

Council Member Morales.

Here.

Council Member Sawant.

Present.

Council Member Strauss.

Present.

Chair Peterson.

Present.

For present.

Thank you.

Approval of the agenda.

There's no objection.

Today's proposed agenda will be adopted.

Hearing no objection, the agenda is adopted.

Chair's report.

Good morning.

Thank you, everyone, for attending this special committee meeting today, December 12, 2022. Of course, it's called a special meeting whenever it's not during the regularly scheduled time.

We're expecting today to be a shorter meeting.

On the agenda, we have two items, items we were just not able to fit last time.

The first is an informational update from Seattle Public Utilities on the Ship Canal Water Quality Project.

We recently heard from SPU on this mega environmental project this past summer.

A second on our agenda, we have a briefing from the independent accounting firm, Moss Adams, on their plan for their regularly scheduled annual financial audit of Seattle Public Utilities, which, as we know, is a $1.3 billion enterprise.

One last note, I want to remind everyone that thanks to the addition of today's special meeting, we are able to cancel our January 3rd committee meeting.

So today will be the last meeting in 2022 of the Transportation Seattle Public Utilities Committee.

I really want to thank SDOT and SPU for the many detailed presentations they brought to our committee this year and of course to our I want to say a big thank you to all of our members of the public, including city Council central staffers, including Calvin Chow, Brian Goodnight, Lish Whitson, and many others who have written memos and legislation for us this past year.

And many thanks to our committee clerk, Hannah Thorsen, for keeping us on track.

I look forward to starting up our committee again on January 17, 2023. But not so fast.

We still have to make it through today.

I'm not seeing anybody signed up for public comment online or in person, but I'll go ahead and at least start the beginning of the comment period and close it out.

I won't go through all the instructions.

So at this time, we will open the general public comment period for the Transportation Seattle Public Utilities Committee.

And again, in our hybrid meeting, We are looking to see if anybody signed up online.

Nobody is.

IT, could you just confirm that for me?

You're not seeing anybody sign up online either?

There are no public comment registrants.

Okay.

And we also have nobody in person.

So with there being no speakers present, I will go ahead and close the public comment period for today's Transportation Seattle Public Utilities Committee meeting.

We can now go to our first legislative item on the agenda.

Will the clerk please read the full title of the first agenda item into the record?

Agenda item one, Ship Canal Water Quality Project Update for briefing and discussion.

Thank you.

I do want to recognize that Councilmember Herbold has been here as well.

Good morning.

Thank you, Councilmembers, for being here during this special time on a Monday morning.

I hope you all had a good weekend.

And so let's go ahead and get into this item here.

Colleagues, today we have with us Andrew Lee, the General Manager and CEO of Seattle Public Utilities, and his team will update us on the $600 million Ship Canal Water Quality Project.

I'll turn it over to SPU to do

Really appreciate you having us here this morning.

I'm Andrew Lee, Seattle Public Utilities General Manager and CEO.

One second.

I'm joined here today with Kerry Burchard-Juarez, who is the Deputy Director of the Project Delivery and Engineering Branch, and then also Keith Ward, who is our Executive Sponsor for the Ship Canal Water Quality Project.

So you can go to the next slide.

We're here today to provide you with an update for this incredibly important project, the Ship Canal Water Quality Project.

I will start off by providing a brief overview of the project and why we are here, and then I'll pass it off to Keith Ward, who will really dive into cost estimates, including the project's cost estimate, the schedule, risks that we've realized, and then he will summarize where we're at going forward.

We can go to the next slide.

As you know, the Ship Canal Water Quality Project is a huge investment in Puget Sound and for our region.

Once it is operational, it will reduce Seattle's combined sewer overflows by more than 75 million gallons on average each year.

On this project, we do have a joint project agreement together with King County Wastewater Treatment Division, and that results in a cost split between our two agencies.

About 65% of this project is funded by Seattle Public Utilities and our rate payers, and then about 35% is funded by King County and the region.

Construction on this overall program will take place in five different Seattle locations, which you can see here on this map.

And it includes a 2.7 mile long storage tunnel, which is that kind of gray bluish line that connects the different sites.

Our first construction project began in 2018 at the upper left corner in this Ballard site.

We have three others.

One is under construction.

One starts soon and another will start construction next year.

This project is one of many projects, but it is our largest project and our federal consent decree with EPA, Department of Ecology, and the Department of Justice for sewage overflows.

And that also includes a regulatory completion date of December 31st of 2025 for this overall program.

Go to the next slide.

So this brings us to why we're here today.

We are here today because we, our department flagged an issue for Council Member Peterson, and he requested that we update the committee on this issue this morning.

And to summarize the issue, we anticipate needing to increase the budget and to also extend the schedule for completion of this mega project, the Shipcanal Water Quality Project.

Before we describe the challenges of the past few years, I want to assure the committee that SPU is committed to managing this program cost within our existing rate path established in our existing strategic business plan.

Providing a predictable rate path is part of our department's commitment to our customers.

And so while we may adjust this project's cost, we will still manage it within our rate path that we committed to previously.

The budget and schedule for the Ship Canal Water Quality Project was established four years ago in 2018. And as you are all aware, over the past four years, the project and our entire lives have experienced unprecedented events.

That includes unprecedented escalation because of inflation.

Also all the challenges related to COVID-19 and other risk events that are actually very common to construction projects.

We are now doing a comprehensive project review and update.

So all of these events can be reflected in our budget and our schedule.

At this point, I'm going to pass the presentation off to our project executive, Keith Ward, who will walk us through more details about our cost estimates, those risk events that I just mentioned, and our anticipated schedule for completing the project.

So at this point, I'll pass it off to Keith.

Thanks, Andrew.

So as Andrew noted, our current budget was established in 2018. It was a $570 million budget based on a 65% confidence.

I'm going to provide a brief introduction to the data we used to establish the cost estimate.

The cost estimate includes the following.

Base costs, like construction, soft, and property costs, and escalation, which is an informed prediction of how much costs will increase in the future.

These items are included as single value.

We use historical averages and current trends to estimate these.

The cost estimate also included are uncertainties and risks.

Uncertainties and risks are unknowns that we can't know until a later date or events that may or may not happen.

For both of these, we set aside reserves or contingency to cover impacts based on their probability.

If a risk holds a 40% probability, will set aside 40% of the cost to cover it.

Our cost estimate also included a confidence.

This is standard practice for very large projects like the Chippewa Water Quality Project.

Competences reflect the variability and uncertainty in a project.

Budgets can't absorb all possible uncertainties and risks unless set at a very high confidence with a corresponding very high budget.

This means that in 2018, our Estimates of cost escalation, uncertainties, and risks, there was a 65% chance that cost would go, would be at or below 570 million when we finished the project, and a 35% chance that we'd be above this.

Most agencies budget between 50 and 80% confidence.

If too high a confidence is budgeted, then funds for other projects may not be available.

In my 2018 presentation to this committee, I noted that our budget didn't include, didn't cover significant cost impacts or delays, major risk events, or escalation significantly beyond the historical averages.

Unfortunately, this is exactly what we've experienced.

I'm now going to talk about two areas that have recently impacted our budget.

Major challenge for us is record high escalation.

I mentioned this to you in my July presentation of this year.

The three construction-related indices shown here show the percent annual escalation change from the previous year from 2008 to 2022 for items like construction labor, materials, and equipment.

To the left of the blue line, you can see that in general between 2008 and mid 2017, the annual change stayed under 5%.

Our 2018 cost estimate was completed during what was considered a period of high escalation from 2017 to 28. And we assumed that Seattle area would return to the historical average within five years when we developed our budget.

It was on track to do that, as you can see to the right of the blue line.

But more recently, these indices show escalation changing at between 15 to 20% annually.

This is record setting and impacts the construction projects received.

Early next year, we'll advertise our final construction package called the Bowerd Pump Station and Conveyance Project.

On this approximately $125 million project, we now currently anticipate that escalation will cost up to $30 million more than previously estimated.

We've also encountered underground risk events, and I'm going to mention a few here.

I want to assure you that our storage tunnel project did prepare for the variability of underground work.

To design the project, we performed 73 borings along the tunnel alignment to assess soil and groundwater condition, and then we integrated the ground condition into the contractor's material.

This included telling the contractor to expect up to 88 boulders greater than three feet.

Unfortunately, this past spring we encountered a risk event that was less than 5% likely.

The largest boulder ever seen in a North American tunnel alignment, which was 12 feet in diameter.

Our team, including our contractor, worked diligently to grind through this mega boulder.

The contractor are asserting damages of about 3.5 months schedule delay and $16 million cost.

We have retained experts and are working closely with our city attorneys to defend us against these costs.

We also discovered underground infrastructure that wasn't accurately reflected in 100-year-old historical records called as-built.

These are records in which people document how they actually installed new infrastructure.

Unfortunately, this different condition cost about $1.8 million.

We've done work to develop preliminary estimates based on these impacts.

And our preliminary assessment indicates an 8 to 14% increase in the current total project budget to between $615 million to $650 million, or a $45 to $80 million increase from our current budget of $570 million.

Our project update, which will give us more certainty about our revised budget, and I'll talk about the timing of this in a few minutes.

King County's share of the increase is about a third.

We are continuing to implement cost-saving measures, such as changing our contract terms to share risk for future escalation increases, which should decrease bid cost.

Please note that the project costs will be managed within our existing rate path with no impact to the city's general fund.

SPU will reprioritize some of our sewer capacity improvement projects over the next several years in order to accommodate a cost increase within our current rate path.

Risk events such as delays and tunneling have also impacted our schedule.

Our preliminary estimates indicate that project construction will extend beyond our consent decree regulatory deadline of December 31st, 2025. We are managing schedule impacts by optimizing some commissioning activities and incentives for accelerating work in our last construction project.

We are also in force majeure discussions with our regulators.

These discussions talk about how forces beyond our control have caused our schedule to extend.

We're also using liquidated damages, which are financial penalties if our contractors do not achieve the milestone on time.

As I've said, we are working on a project update so that we can provide new cost and schedule estimates.

This process is built around the advertising and bidding for our Ballard Pump Station and Conveyance Project, which will take place between February and late May of next year and is shown on this graphic in light gray.

Knowing the bid amount for our last construction package will provide us more budget clarity because it represents about $125 million in construction.

We are preparing budget scenarios in advance of this bid.

This will allow us to prepare for different bidding scenarios.

We'll review scenarios with our team in February and March, and then after we get bids, we can relatively quickly create a revised budget and schedule.

We expect to have this in July 2023, and we hope to come back to this committee around that time.

Please know that while we work on the update, we are continuing to deliver This project, this includes completing the majority of our storage tunnel completing the eight foot diameter tunnel under the ship now and beginning our walling for conveyance construction project in less than a month.

We want to thank you for allowing us to come to the committee today and just wanted to quickly summarize today's update.

The Ship Canal Water Quality Project has been impacted by escalation, the pandemic, and underground risk event.

We anticipate releasing a revised budget and extended schedule in the summer of 2023. But despite this anticipated budget increase, Seattle Public Utilities is committed to managing project costs within our rate path established in our existing strategic business.

Thank you.

Thank you.

Colleagues, any questions?

I've got a couple of comments, but any questions from colleagues on this update?

Council Member Herbold, please.

Thank you.

I was interested to know a little bit more about the information around the county's share to address the unanticipated costs.

Can you just talk a little bit about what that one third ratio is based upon and what our conversations have been yet with King County about this expectation?

Sure.

We have a joint project agreement, which is a contractual document ratified by both councils back in, I think, 2015. And there's two types of cost sharing.

The majority of the project elements are at a 65%, 35% cost share, which is 65% for the city, 35% for the county.

There are a couple of projects which are basically for SPU, which are 100% for our cost share.

So in general, once you factor those in any type of generally the overall project cost and even the cost increases will be about 70, 69, 70% for the city, 30% for the county.

We've been very transparent.

That's a really big thing for our team and working in partnership with the county base.

So they are fully aware all the way up to the executive level about these, everything that I'm presenting today to you and that caution.

Thank you.

Council Member, just one other aspect of it.

You asked what were the cost shares based off of?

Back in 2015, when we were going through the alternatives analysis, we each had the option of completing or addressing the problems of sewage overflows independently or jointly.

And, um, and so what we did was we calculated kind of.

If we were to do it independently, here's how much that would have cost.

And here's what SP would have paid the portion of the total.

Here's what the County would have paid total.

And, um, and at the time it was less expensive for us, obviously to do a joint project.

And so we, we based the shares on the joint project based on what we would have paid independently, our shares.

And, um, and, and that obviously holds true for, if there are any increases and that's also based off of the same ratio.

very helpful.

Thank you.

Thank you.

Colleagues, any other comments or questions?

I want to thank SPU for this important update.

Obviously, we saw the issue with the mega boulder.

We're very familiar with inflationary cost increases and COVID impacts.

I appreciated your presentation back.

I believe it was July 19th, where you had actually recognized some cost savings you had achieved through value engineering and refinancing of debt, which was obviously really important so that you could manage these costs increases now.

And keeping us within the existing rate path that we had approved is so important for our rate payers since those utility bills are generally regressive.

unless people are enrolled in the utility discount program and then not impacting our regular budget, our general fund budget, just to manage it within SPU is really important.

So thank you for your diligence in doing that.

We'll want to have you back here again, no later than six months from now, I would say, and we'll increase the frequency as needed for our oversight role.

But I appreciate your teams, you know, balancing the transparency of presenting this information with a certainty, you know, coming to us with a relatively firm range of what the costs will be.

Colleagues, any final notes or General Manager Lee, any parting comments?

Okay.

Well, thank you, everybody.

We will go ahead and we'll be in touch, I know.

We'll go ahead and go on to item number two, which is the last item on our agenda today.

Will the clerk please read the full title of the second agenda item into the record?

Agenda item two, Moss Adams 2022 audit plan of Seattle Public Utilities for briefing and discussion.

Thank you.

Colleagues, today we'll hear from the independent accounting firm Moss Adams on their plan for its regularly scheduled annual financial audit of Seattle Public Utilities.

And before we turn it over to Moss Adams, just wanted to welcome Brian Goodnight from our city council central staff.

Brian, is there anything, any opening remarks you have before we talk about this sort of entrance stage of the audit?

Thank you, Chair.

Yes, Brian, good night, Council Central staff.

Just to say that the SPU is required to have these audits of all three of its enterprise funds, so the Water Fund, the Solid Waste Fund, and the Drainage and Wastewater Fund, and consistent with auditing standards.

So they're here today, as you said, to talk about their kind of audit plan for 2022, and they typically come back with the results of audits in around the May-June timeframe of the following year.

Thank you.

Thank you very much.

Okay, welcome, Moss Adams.

All right, thank you and good morning.

I'm Lori Tish.

I'm the partner with Moss Adams leading our engagement and with me today to give the presentation is Nicole Siegmeyer-Janes and she is managing the project for our team.

At this point, we do have a short PowerPoint to share with you as we walk along and I will start sharing my screen now to walk you through that.

All right, and if you could just give me a quick okay that you are seeing my Yes, we see it.

All right, well, I will start out going through the scope of services.

We do perform our audits in accordance with two different sets of standards.

The US generally accepted auditing standards, which is really just the base layer, if you will.

And then we also overlap that with government auditing standards.

which is really done in connection with the state auditor who audits the city of Seattle under government auditing standards.

And it's not all that different.

It does overlay an additional level of independence requirements, an additional report on internal control.

So we spend a little more effort and time on looking at the internal controls as they pertain to the generation of those financial statements.

So it's not, it wouldn't be apparent to you as the client that we're using two different sets of standards, one overlaid on top of the other.

But again, it does add a little bit more effort and time on our part from continuing education requirements, looking at internal controls and our independence with the city and with Seattle Public Utilities.

We will be issuing three different sets of reports.

We do separate audits of each fund.

So the water fund, drainage and wastewater, and solid waste.

Now, as I mentioned, we will also be issuing an internal control report related to each of those funds on internal controls related to the financial statements and compliance with laws and regulations that pertain to those financial statements.

We will also be coming back, as Brian mentioned, we'll be coming back to you at the conclusion of our audit later this next spring to go over the results of our procedures.

Now, just as a reminder, we're the auditors and our role is to actually form and express an opinion on whether those three sets of financial statements are prepared and presented in conformity with generally accepted accounting principles.

We're also required to communicate to this body any significant matters that come up and then come back, of course, at the end and report back to you.

Now, I would not wait until next spring if something material were to come up, such as a material weakness and internal controls.

We would be in contact with Alex and with this committee right away when that came up.

But the other thing I wanted to mention is just there is a responsibility of management, and that is that they prepare the financial statements with your oversight.

They govern the internal control structure that relates to those financial statements.

And just as a reminder as well, we are auditing the financials, but that's not necessarily meaning that we're designing procedures that look into certain areas where, again, our main purpose is to present that opinion on the fairness of presentation of the financial statements.

But as you'll see later when I have a slide here that I'm going to be getting inquiries from you, we are very interested to hear in what areas of risk you think pertain the most to these entities and areas that you'd like us to look into.

So I say that with respect to that's our purpose, but we're also very aware of risks and other areas.

And we do want to hear from you with regard to that.

Now I'm going to turn it over to Nicole, who's going to go over the timeline and some of the areas that we believe have the most risk in the financial statements and let you know what we will be covering.

Nicole?

Yes, thank you, Lori.

So this slide gives an overview of our general timeline for the audit procedures.

It's sort of broken into two chunks with the change in the calendar year.

So we're coming to the end of our preliminary planning phase, which started back in September.

We've been doing planning for the audit and the procedures we'll be performing, performing testing over IT systems and general controls.

We have a special IT specific team that assists with that.

We also performed interim work, which focuses on internal controls with financial reporting processes.

And here we are in December presenting to you.

After the first of the year and specifically in March and April, we'll be performing our final fieldwork procedures where we'll be doing the bulk of our testing work.

And we will be issuing our report by our deadline of April 30th, followed by exit presentations to you in May.

So this slide details some of the significant risks that we have identified through our planning procedures, which is based on our understanding of the utilities and the industry and what we know about activity during the year so far.

So some of these key items include utility plant and construction work, such as the Ship Canal project, which was discussed previously.

Debt and related accounts and bond issuances, and there's a lot of work around the periphery accounts related to those.

Environmental liabilities, regulatory accounts, the deferral of charges, including capitalized interest, operating revenues, operating and non-operating expenses, and IT and general computer controls.

And so based on these identified areas, this helps guide our final audit plan that we develop and the procedures that we will be performing.

So our responsibility as auditors is to obtain reasonable assurance that the financial statements are free from material misstatement, either caused by fraud or error.

And so we as an engagement team have discussions and perform risk assessments to identify what those risks are and then to design and then perform procedures to specifically address those identified risks.

There are inherent limitations in an audit that there are some unavoidable risks that something that could be material may not be detected through our procedures.

However, we do the best that we can to perform our risk assessment and identify and design those procedures to prevent that from happening.

And so something that has been mentioned is the concept of materiality.

And when we refer to a material misstatement, what we mean by that is it's a threshold for an amount, a dollar amount in the financials that could impact the decisions of users of the financial statements.

And so we set this amount based on certain quantitative and qualitative factors, and it helps guide various things throughout the audit, such as our significant risk areas, what is considered to be of interest to stakeholders, and the nature, timing, and extent of the testing work that we'll be performing.

I will add something on to Nicole's point.

When we audit a public sector entity, a governmental entity such as yourselves, the qualitative factors oftentimes are much more important than they are in, say, a commercial enterprise, because we are aware of how you're funded through taxpayers, through ratepayers, through your citizens.

And so we do take care to look at qualitative factors.

For example, there may be an account that's not financially or metrically material to the financial statements, but it may be very important to your citizens and to your rate payers.

And so we to do try to take special care in looking at that through that lens through the citizens lens to the rate payers lens on on that importance.

Anything from deposits that they may have with utility to just other types of accounts that are important to them.

So we do take a very different approach to a governmental entity in this area than we would a private enterprise.

One thing I just wanted to mention as well is our audit opinion will potentially show up in other types of documents, such as a bond offering or an annual report.

And we understand that when we issue an audit opinion to you that you do have various uses for those audit opinions.

And we just have a request under auditing standards that when that occurs that we have a chance to read the document that our opinion is going into.

And we do that just to make sure circumstances haven't changed or that it is being used appropriately and for the purpose that we intended when we issued the opinion.

And we do have a good relationship with management when bond issuances occur.

They do give us a draft ahead of time so we have a chance to look at that.

This is more of a, I will not bore you and spend a lot of time on this area.

These are the new accounting pronouncements that were issued by the Governmental Accounting Standards Board.

And these are the ones that are coming up for impact for this year, for fiscal 22. The biggest one is the Lisa standard.

And we have been working with management on this for probably the last 18 months in prep for this.

This does change the way that leases are reflected in the financial statements.

So in the past, certain types of leases might have just been expensed and shown as lease expense.

And depending on whether you're the lessee or the lessor, all of those leases are now going on to that balance sheet as showing as a capital asset or as a liability, depending on what side you're on, lessee or lessor.

And so management has done a lot of work to try to identify all of the leases that fit into this category.

And you will be seeing a change in the financial statements where there's going to be a category of leases right there with capital assets for that right to use asset that you might not normally have seen.

And you would have just seen in a note disclosure, for example.

So There will be an impact to this, and we will come back to you this spring and explain in detail how that impacted your financial statements.

The other three probably will not have any impact or very little impact.

The GASB 91 relates to conduit debt, which at this point you do not hold any conduit debt, so that won't be applicable.

The omnibus had just a variety of different points in it and going through it, we don't see anything that will have an impact to Seattle Public Utilities.

GASB 97 has more of an impact on the city.

And there may be a couple of changes to the note disclosure on the deferred compensation plan disclosure in SPU's footnotes.

But at this point, again, not a major impact.

There are some more coming up in future years that will, again, have some impact.

Most likely the GASB 96 subscription-based IT arrangements.

That is very similar to the leasing standard that I just went over where any type of right to use of IT arrangement would need to go onto your balance sheet and have some more no disclosures.

So that's going to be the big one coming up in 2023. And the other ones likely very, very little impact, if any.

The compensated absences, you certainly do have that.

That is your accrual for your vacation for your employees.

Probably slight updates and some additional disclosures.

We'll have to look at that.

It's not effective until 2024, so we haven't spent a lot of time on it, but I don't think it will have a large material impact on the financial statements themselves.

And with that, I wanted to open it up to everyone to just discuss anything that you've just seen in our presentation.

Nicole mentioned, obviously, Utility plan and construction work and process such as the ship canal project are a huge part of our audit effort.

And I did just want to find out, though, if there was any other areas that you felt you would like to find out how much we look into those or areas that you believe are of higher level risk and anything else that you have concerns about.

So I would like to open the floor up now for questions and comments.

Thank you very much.

I appreciate your mentioning the large capital projects.

That's obviously top of mind for us.

I do note that the $1.3 billion budget for Seattle Public Utilities is going up for next year.

I think it's increasing to $1.4 billion.

Colleagues, any other or any comments or questions for the independent accounting firm that will be doing their annual audit of SPU?

And is it correct that we can also, you know, if there were, if council members wanted to contact you directly, they could do that as well?

Yes.

And in fact, I do have a contact page here with our whole entire leadership team with our email addresses and our phone numbers.

So feel free to contact us at any time.

Great.

And in terms of past audits, the last couple of years, last two or three years, were there any material adverse findings?

No, we have issued letters of recommendations in the past, but in the past few years, no, there have not been any material weaknesses or significant deficiencies noted as a result of our audit.

Okay, thank you.

Council members, any comments or questions?

Okay, this is pretty standard.

I know a similar thing is happening with Seattle City Light, and it happens every year, but just want to keep them coming back to our committee for the opening of the audit, and then, of course, we'll get the results in the spring.

Yes.

All right.

Terrific.

Well, thank you so much for your time today.

Appreciate it.

Thank you.

and well, colleagues, that was our second and last item on our agenda, so the time is now 10.09 a.m., and this concludes the December 12, 2022 meeting of the Transportation and Seattle Public Utilities Committee.

As I noted earlier, we are canceling the January 3rd committee meeting, so our next committee meeting will be January 17, 2023. Thank you, everybody.

We are adjourned.

Bye.