HomeMy WebLinkAbout06-12-2012 PH3 B3 MattinglyAGENDA
CORRESPONDENCE
Date's I ►z Item# � x`"83
council MCMORAnc)
city of san Luis owspo, utilities aepaatment
DATE: June 12, 2012
TO: Mayor and City Council
VIA: Katie Lichtig, City Manager
FROM: Carrie Mattingly, Utilities Director
Al
JUN 12 2012
CJ CLERK
hard copy,
email:
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SUBJECT: Agenda Correspondence: PH3 Water Fund Review & B3 Sewer Fund Review
The following questions were directed to the Utilities Department regarding Item PH3 - Water
Fund Review and Item B3 - Sewer Fund Review and are answered below.
1) What is the status of Councilmember Carter's request to do a 10 -year look -back on
water /sewer rates and costs so that Council can better understand what is driving increases
over the long term?
Answer: We'll be providing information during the upcoming 2013 -15 financial planning
process that looks back and forward as well as for a longer period of time, not just forward for
the next fiscal year.
2) Were the significant reduction in Cal Poly water rates previously anticipated?
Answer: We knew whenever we renegotiated the water /sewer contract with Cal Poly, the
exclusion of the Nacimiento debt payment would reduce the ratio of the City's current rate Cal
Poly pays, likely reducing revenues to some extent. We could not anticipate exactly what the
final agreed upon contract would look like as it is a negotiated agreement. We did not previously
incorporate a reduction in Cal Poly water revenues into prior fund analyses for 2012 -13 as it was
not possible and imprudent during a negotiation to project the outcome. With the contract
finalized for approval, the reduced revenue is now incorporated in the 2012 -13 budget and
projected year revenues.
3) Page P113 -14, Project Assumptions - Water Fund, shows the anticipated water service
rate increases over time. Page 131 -15, Project Assumptions - Sewer Fund, does not. Please
provide me with those sewer rate increase assumptions.
Answer: A complete Attachment 1 for Item B 1 is attached. Page B 1 -15 now shows the sewer
rate increase assumptions.
As this is the budget supplement, projected service rates for both water and sewer are the same as
they were last year. We do not go through the extensive work effort to analyze projected rates
during the supplement. Projected rates will be updated during the upcoming financial planning
and rate setting process.
Agenda Correspondence: PH3 Water Fund Review & B3 Sewer Fund Review
June 12, 2012
Page 2
4) What is our policy with respect to fund balances for the water and sewer funds? With
the General Fund we have a 20% reserve policy. The fund balances for water & sewer are
significantly higher, which makes sense if funds were being accumulated for major capital
projects. Although major capital projects are planned in the future, the WRF upgrade for
instance, and fund balances are being used in part to pay for such things, that does not
seem to be the primary purpose of the high fund balances.
Answer: The 20% reserve policy applies to sewer and water as well; it's on our radar to assess
whether or not this level of reserve is appropriate for the enterprise funds. There are also debt
ratios we are required to adhere to in order to meet our bond covenants. The fund balances are
used primarily to pay for capital projects, whether debt service, or with cash. It is used for rate
stabilization. We have large debt service payments for several million dollars in both water and
wastewater that must be paid all at once right at the beginning of the fiscal year. The funds must
be able to pay that debt when it is due, so our revenue requirements are very lumpy. There are
also future capital investments in the out years you do not see in the analysis.
Currently there is just one line item that holds all the resources, regardless of what the plan is for
them. We'll be working on making incremental changes to designate reserve funds (such as a
rate stabilization fund or capital investment reserve) that will make it easier for you in the future
to be able to identify how these funds being set aside are going to be put to use.
5) When will we be looking at rate increases that approach the CPI (consumer price
index)?
Answer: Given the volatility in the water and wastewater industry specifically related to energy,
equipment, and raw materials costs, it's something to consider as to whether or not correlating
CPI with the cost of operating a utility is an appropriate indicator or gauge for rate increases.
Additionally, the financial impact of regulation on the utilities is disconnected from CPI. While
future projections are best professional judgment, projected rate increases are currently looking
to consistently be in the single digit range. From my perspective, it appears the city is near the
end of a long stretch of significant water rate increases that needed to happen in order to bring on
an additional water supply for the community and also recover from the impacts of the recession.
For sewer, revenues from existing debt service payments will stabilize or moderate future rates
increases for wastewater related to the pending treatment plant upgrade.
EXHIBIT A
2012 SEWER FUND
FINANCIAL SCHEDULES
Attachment 1
Page 9
B1 -13
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