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Home My WebLink About0260.092.. , , - ~ . ............. ' , , . '., ""!"-,-. May 14, 1992 HONORABLE CITY COl~CIL Palo Alto, California BUDGET ~ 2-94 Attention: Finance Comrnittee Members of the Ccuncil~ Report i-n Brie! staff has prepared this report to advise Council of the status of the Enterprise Funds' reserve levels. The levels are related to the proposed 1992-94 budget submittals and proposed r~te in~reases. ReservElS discussed in this repc1rt include the Transfer Stabi lization Reserves (TSR) f system Improvement Reserves (SIR), Emerge ncy Plant Replacement P"eserves (EPR} I Calaveras, Gas SupplerI1ental Supply CSSR) and Landfill Closure/Pest Clc-5ur~ Mainten.ance Reserves. The TSR and SIR levels are an indication of the fiscal health of the various Enterprise Funds. This report reco~~ends that the interes~ earned by the Gas Supplemental Supply Reserve no longer be added to the SSR but be accrued to the Gas SIR. This 'Will allo· .... the reserve to remain at the Council-approved level \'o'ithout need for annual adjustJ;',ents~ Backgroung; The estimated balances in ec::ch reserve 2:S of June 30. 1992 are listed 5n Table 1 of this report. It should be noted that the information used to estimate the balance in each reserve as of June 30, 1992 reflects tlle ~ost recent finanCial information available; therefore, it is slightly different from ,",'hat. was budg!?:ted for 1991-92~ The estimated balances incl~de actual interest earnings and movement of funds for specific Ccuncil-apPI'OvE!d uses. Table 2A lists the estimated balance in each reserve as projected for June 3D, 1993, taking into account prcpc~ed rate changes and uses of reserves. Table 2B lists tbe estimated balance in eacll reserve as projected for June 3D, 1994, taking into account proposed rat':. changes and anticipated ust;s of reserves. L ->""~',,"""---....-,...-.c-"", ... ~ F':~: .. ~.";j. .... 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N" ," :;; ~ ~ ~ ! ~ ! ~ ~ ~ ~ ~ • ~ ~ ;; ~ ~ ; ,," .-. • ! • ! • ~ ~ !i ~ ~ ~ : ! 0 :i , ~ ~ . ~ 5 • ~ • 0 ~ • ~ • :;; ~ j • ! • CMR: 260: 92 ] -- "-'--r . -' . -"","".; _;-4I'l'5~~~~"·"1:'C~~i~1 I L_ '""", ,,-.. .......... ' ~ ~ ~ ~ ~ ~ i ~ i N ~ ~ :;; ~ t .. < g :; " ~~ --,-~" ~ N-.. ~" 3 ~ ! f ~ i " , N " ~ ! :. " i ~ " ~ > ~ ~ • ..; ~ ! ~ ~ ~ il ~ : <; ~ ; ~" = ~ ~ ~ ~ • ~ ~ N • § ;: ~ ~ ~ ~ :! e Si ~ • ~ • ~ = ~ ;I: ~ ;:: ~ 0 , ::; ~ 0" ~" c" ~ N" e! ~ N 5 ~ f ii: w ~ ~ ~ , ~ ~ e ~ ~ II" '" 0 ~ ~ ~ ~ ~ • • ~ r ~ ~ w ::: ~ .. ~ • ~ l' ~ • ~ -~ " ~ , ~ ~" ~ t ~ ~ :-~ f 0" N-N" : ~ = ~ ~ ~ , ~~ 1; : § ~ ~ '" ~ ~ ; ~" -" ! ~ ; = ~ 0 • • ~ ~ : ~ u • . " , ! g ~ . . e-• u w ;; $ ~ . 1 ii J CHR:2£O:92 , - For each reserv~, Council has establishEd either a target balance and/or ~ range within whi=h the balance in each fund should fall. The Sl.1!J'Jllary Table in the conclusiorJ shc .... 's ' .. 'het..her or not the projected 1992-93 and 199}-94 reserve balz,l"1ces .... il1 fall within the ranges or target set by Council. The 'Transf~.r Stabilization Peserve (TSR) iotaS established in the Ele.::tric. Water and Gas Funds 1:0 ensure that prudent transfer levels are provided for. as determined by the enterpI ise method eloqy. The minimum b31ance in tr.e fund l-:as been established to be: the n~xt year's General Fund return ,;:m equitJ' transfer, and the Pl ...... ximum has bee!1 established at 20 percent of the next year's estimated sales rever-ue. The Sy£.tem Irnprove:nent Reserve (SIR) tJas been. t!3tablished in a.ll six Enterprise Funds to permit large planned expenditures and to permit pa.rticipation in supply project alternatives as they arise. The minimum SIR balance has been set at 75 percent ~nd th~ ma;..:l~!..i.n at 150 per:::e!"lt :Jf the next }'€ar' s capital Imp'="o .... ernent Program (elP). The Em~rgenc:f Plant Replacement Reserve (£PR) is required. by the City Charter in the Electric, Water, Cas arod ""'dste~'ater Fur-,ds to:-replacement or emergene;y repairs of damaged equipment. This reserve may not exceed 5 percent of the net book value of the fixed assets in the fund to which it applies. More detailed infor~dtion on each of the various r~serves is provided in Appendix 1. This analysis does not cover certain other reserves: Encumbrances and Re~ppropriations. Underground Loar., conservation Loan, and Debt Service. While those reserves are irnp.:Jrt.a:nt pat''ts of each fund's operations, they are already committed fot" a specific purpose. analysis Electric F:Yll.Q The Electric Fund reserves estimated balances on Ju~€ 30, 1~92, the rninimUIll and l!la:o<imum set by current Council policy, and the proposed ending balance for 1992-93 and 1993-94 are listed bela ...... RESERVE TSR SIR EPR Calaveras CMR:260:92 ELECTRIC FUND RESERVE BALANCES (Millions) FISO.L YR. 1991-92 ESTIMATED ENDING BALANC_L ~lO.) 9.6 1.9 26 • .2 5 __ ...Jf-,IS~AL YEAR 1992-9_3 __ MINlMLr:-~ BALANCE ¥..AXIML'M ~ALANCE ~ 1).2 B.5 3 . 1 PROPOSED _BA~CE 510.6 9.1 1.9 2L5 , I ,_"J: • I ---- - RESERVE TSR SII> EPR Calaveras FISCAL YEAR 1993-9~ :MINJMlTM MAXIMUM PROPOSED BALANCE ~A!,;l..J.~C;: B~LJ...NCE SIS. 4 $1< .7 $9.8 5.2 10.3 8.7 3.4 2.0 19.0 The re:::s.erves in the Ele.::tric Fund remain st!"ong. The Calaveras Reserv~ was establ ished to be aral,oln down ~\Ier 3. number of )'ears to ~inimize rate increases associated with absocbing the Calaveras debt service reqwirements. The Calaveras reserve is proposed to be drawn down in both years to offset debt s~rvice costs ~hich ~ould otherwise be require-:i to corne from the rates. The reserve is expecte.d to be depleted in approximately the 1999-2001 time frame. Water FUnd The W~ter Fund reserves estimated balances on June 3D, 19S2, the minimum and maximum set by current Council policy and the propvsed ending balance to~ 1992-53 and 1993-94, a~e listed belo~. RESERVE TSR SIR EPR TSR SIR EPR CMR:260:92 WATER FUND RESERVE BALANCES (Millions) FrSC~.L YF.. 1991-92 ESTlMAT£D ENDlNG ~~ __ LAr~CE __ fISCAL YEAR 1992-93 $ .1 .2 .5 MINIMUM BA~~J; $1. 6 1.0 MAXIMUM BALANCE $2.7 2.4 .9 PROPOSED BALANCE $ .7 .7 .5 FISCAL YE~~_1~93-94 MINI.'ofLTM E.l!.LANCE $1. 7 2.0 MAX I MI}M BA1At,,{!:,E $3. 1 4.0 1.0 PROPOSED BAtA.""CE $1.4 1.0 .6 . I ! :1 I ! - , .. ". -. ~ . ~~,,:,. ,- In both years, th~ ending projected balances in the SIR and TSR ",ill be significantly below the :ninirnum res:srve targets. In 1992- 93 a 34.0 perce~t rate increase is ~roposed and in 1993-94 a 14 p2rcent rate incr~'3.st:! is pr-:·pcsed. The 10 .. · reserve balances eire due to increased wholesale prices paid by Palo Alto, conservation efforts by cllstomers. lost revenues as a result of the drought and the acceleratiQn of the infrastructure program. The reserves are being deliberately funded becaus~ they are dspleted and to help ..:.ffset t.he magr,itude of future rate increases that will be required to fund infrastructure work. Gas Fund The Gas Fund reserves esti:nated balances on J'J.ne 3D. 1992. the ~lnimurn and r;.aximurn set by current COUncil policy, and the. proposed ending balance for 1992-93 ar,d 1593-94 are listed bel 0'''''. 'l'SR SIR EPP. SSR RESERVE TSR SIR EPR SSR GAS FUND RESERVE E.Zl..U .... ~CES Willions) FISCAL YR. 1991-92 ESTIMATED ENDING BA!..ANcE $2.7 3.5 ., 4., ___ F~CAL 'yEAR 1992-93 HINIMUM B;'.LA,"l'CE $1. 7 2.3 M.:;XIMUM BA.~N..~ $3.7 4.6 .8 3.0 PROPOSED BALANCE ___ £F-"ISC.iI..L YEA? 1993-94_ MINIY.LTM BALANCE $1.9 '.3 y .... l,.XIMlJH BAL.b.NCE $3.8 4.7 .9 3.0 PROPOSED EAI,.,AJ{CE $1.7 2.7 .6 3.0 The reserve b<llances in the Gas Fund are .... 'lthin the ranges recommended by council in 1992-93. In this year it is proposed to draw-from the Supplen1ental Suppl}' Reserve to bring the balance to the Council-approved target. The e.upplemental Supply Reserve has been accumulating inte['est and this has incre.ased the balance in the reserve over the Council-approved target. Staff proposes a CMR:260:92 7 - policy change to allcc~te the interest inco~e earned on the SSR to the SIR. In 1993-94 the res:<':!rve bal~nces ... rill remain within the ranges approved by council, loIith the exce!,Jtion of the TSR .... nich " .. ill drop slightly belo,", the rT"inil'!r.Jm ti'::rget. Thiz is a temporary dra-..do'Wn ot the TSR in lieu of. a rate incre.a.se~ Tile reserve ... ill be brought back: up toO approved levels at the time of the next rat.e increase. pt'"ojected for 1994-95. The Wastewater Fund's estimated reserve :Cal,ances on June 30. 1992, the minimum and maximum set by, current Council pol icy. and the proposed ending bal~nce for 1992-9) and 1993-94 are listed belo~. WASTEWATER FUND RESERVE BAL~~CES (Millions) SIrt 'J."reatment Collection EPR Treatment Collection RESERVE SIR Treatment Collection EPR Treatment ColI ect i Ol1 CMR:26C:92 e__ ,.-_.".'--'< L FISCl\L YR. 1991-92 ESTIMATED ENDING BALANCE .2.3 2.0 .3 1.1 .6 .3 8 FISCAL YEAR 1992-93 MINIMt)101J BAL..~NCE .1.6 Y.AXIWu"M Ill\LANCE .3.1 2.3 PROPOS!;D _llALl\NCE $3.7 2.3 1., 1.1 .8 • 3 _____ [lSeA1.. YEA.."\_ 1993-94 MINIMU1-! BAJ~ .. NCE $1. 6 MAXIMUM BALANI,:'.J; $3.3 2 .4 PROPOSED 8ALANC_E ;4.8 2.8 2.0 1.2 .9 .3 - The "rc::stewater Fund Reserves as ~ whole are above the: li-rn its set by Council in 1992-93. The Wastewater reserves cO.'lsist of both Traatment and Collectio~. The bolance in the SIR of the Treat~ent subfund cont inues to increase due to the intere-st ear-I'l8d on the reserve. Th~ reserve is net inte~tionally funded. The co~ lection portion of th~ j.,'astewa-ter Reserves has traditionally had low reser .... e balances. This has occurred be<:ause of the ongoing increases in Treatment E!xpe:nditures for environmental 1I'.~.1.dates (of ~hich a portion of the cost is t~en passed tc Collection). and because of reduced revenues as a result of reduced l.l~ter usage by City customers d'...lring the drought. The Collection reserves rlave been Llsed to offset the_se increases in costs and reductions in revenues. The reserves are being purposely funded in 1992-93 to reach a more prudent level. In 1993-94 the total reserve levels continue to increase and will be over the leve 1s set by counci 1. T.'1is is because of the interest earned on the .,.;'aste'JIo"a"ter Treat"Z7.ent reser-ves and the planned funding of the Wastewater CollectiDn ~eserves. The Refuse Fund r-eserves e.stimated ba13nces on June 30, 1992, the minimum or maximu~ set by current council policy. and the proposed ending balance for 1992-9J and 1993-94 are listed below. SIR I...A..NDFILL/POST CL<lSURE SIR LANDFILL/POST CLOSt.'RE C¥.R:260:92 REFUSE RESERVE BALANCES (~H 11 ions) FISCAL YR. 1991-92 ESTI¥.ATED ENDING BALJ..NCE $2.9 1.1 9 F I SeAL 'i EA8_1n9 9 2 -9 3 RECOMMENDED LEVEL $2.0 PROPOSED BALA!lCE $2.3 1.7 FISCAL YE.~ 1993-94 REC'Jl'1MENDED LE\;'EL $2.0 PROPOSED BP.LANCE $1. 9 2.8 ~j ii 'I , , ~:~-. \ r·· .. '··· .:,' :-. ~ , .. ' -. . --~-.---- The policy a,dopted by Counc~l in 1990 '.;'az to target the SIR balance at S2.0 nlillion; t,he Refuse Fund \liill be slightly ~ver the target in 1992-93 and slightly below the target in 199)-94. A 10 percent r3te increase has b~en pr-opcsed in 1992-93. Approximately $~ 6 million of the Refuse Fund Sys-.:e!':1 Improvenent R£.senle \liill also he utilized as a source of funding in 1992-93 in order to mitigate the need for a larger rate i~creose needed because of costs associated lIlit,h expanded environmental progre-:':ls and recycling mandates~ and to maint~in the reserve bal~nce near the recomnended $2.0 level. A 30 percent rate increase has bE-en proposed for 1993 -94. Approxi1rLately $.5 mi llion of the Refuse F\.,md System rmprove1"lent F'..lnd ""ill also be utilized as a source of fUl"Idif!g in 1993-94, in order to meet additional source reduction costs, increased E~vironroantal Trust Fund payments, increased long terr.l ha'..11ing costs: and for the San Jose business tax that is to be charged on each ton of refuse disposed at landfills located in San Jose. Future rate increases are proj ected for the follo""ing two y.;.ars in order to meet e_xpeocted increases in environmental programs and recycling :mandates. The Landfill Closure/Post Closure Mainter.anc~ Reserve was estab lished in 1989-90 to fund lam:l:fi11 closure and post-closure maintenance costs as mand~ted by State 1 a",'. This reserve .i 11 be tuilt up until 1998-99 when the balanc~ is projected to be $7.2 million. This balance will keep Palo Alto in co;:pliance with e~isting State-mandatee post-closure reserve requirements. There is no Transfer stabilization Reserve associated ;,,-ith the Refuse Fund since there is no i~tenticn tv tra~sfer funds to the Ceneral Fund. Storm prainag~ 'The Storm Drainage Fund reserve r the range or target set by Council~ the estimated balance on June 30, 193~ and the propose,,:! ending balance for 1992-93 and 1993-94 are listed below. CMR: 260: 92 10 RESERVE SIR RESERVE SIR STOru.,. DR.a.rNAGE RESERVE: BALANCES (Hi 11 ions) FISCAL YR. 1991-92 ESTlMATE~ ENDING B~.L>.NCE $3.8 Recommended _-"L,.E·"-,· ~__ $.5 PROPOSED .JV-.LANC; $.6 __ -LF",IESCAL YEAH 1993-94 RECOMM:ENDED LEV~k.. __ _ $.5 PROPOSED BA~ti.C_~ ($1. 0) In 1989, Council approved staff's recommendations for a Storm Drainage Fund iroplel11en+"_<.tion plan. Staff proposed '" System Improvement Reserve Fund target of $0.5 i!:.illion to be built up over time. The balance of the storm D~ainage System Improvement Reserve as of June 3D, 1992, ~ill be approximately $3.8 million, due to Lhe additio:1 of proceeds of $4.6 million in bond fUnas; which were received in 1991-92'; to provide for' capital improvement project funding for the Storm Drainage Fund through 1993-94. A portion of the system Improvement Reserve Fund ... ·as used to payback an advance from the General Fund for capital pr-oject funding in 1991-92. The projected ending balaJ'l.ce of the System Impl'overo.ent Reserve for 1992-93 is $0.6 million which reflects the us~ cf $3.1 million to fund capital proje:cts and $0.5 :million for the ii:-Jal payback. of the General Fund advance. For 19503-94 the reflected ending balance is negative (Sl.O); hO' ... ·E-ver thE bend sale · .. ·.as sized a-c a level t.hat ShoUld alloW' t:he fund to spend on capi"t2l1 projacts -without ente.ring into a negative cash balance situation beca~se spending on capital projects lags appt"oprio:.tions. No rate increase ,.;ill be required until 1994-95. This Fund also dC'es :lot include a Tran~fer stabi 1 ization ResE!r<""e since there is nO intention to transfe!" funds to the General Fund. Conclusion As summarized in the table bela",,', oIily the only fund balance projected to fall belo;,; the acceptabl€: rar.ges established by council in 1992-93 is in the water Fund. In 1993-94 the Water Fund reserves and TSR in the Gas Fund .... ,ill fall belo'''' the acceptable. ranges established by Council. Staff ..... 'i11 }:eep COllncil informed if CMR:260:92 11 L .£ ' r f ___ '""""= - any other reserve fund balanc~s fall be 10"" tt-.e tar9~ts designated by Council. fJJl~ Electric Water Gas Wastewater Treatment Collection Refuse stOrttl Drainage Dllill Ele.ctric Water Gas wastewater Treatment Collection Refuse Storm Drainage SL"}I"..MARY TA.BLE FROJEC7ED 1992.-93 RESE.RVE Bl\u.."'CES WITHIN OR OUTSIDE RECOMMENDED P ... ZI.NGE TSB §.lB g£B QTIl-"B Yes Yes Yes No No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes ,UMMARY TABLE PROJECTED 1993-94 RESERVE BALANCES WITHIN OR Ou~SIDE RECOMMENCED RANGE Yes (Calaveras) Yes (SSR) Yes (Landfill Closure) 1SR 2lB .ITE QTI!tE Y"s Yes Yes Yes (Calaveras) No No Yes No' Yes Yes Yes (SSF) Yes Yes Us Yes Yes Yes Yes Yes (Landfill Closure) Yes *Reserve .. ill dip slightly belo,,' minimum to support t .... 'o-year cycle on rate adjustments. CMR:260:92 l2 - Sta.!f recommends tttat. Council change the current reserve policy to allow the inteI:est earned oy the G~s Supplei.iental Supply Reserve (SSR} to be allocated to the G3S System Improve~ent Reserve (SIR) . .Respeo;,;:t.fully submitted. II: ;, -/. I I / < ji,t ';tf./ i-1'S'.\)""rvlJ VIRGINIA HA..~lNGTON /' Senior Financial Analyst ,~I ( ----,) / , '/" -" ~, 72.,/0 r I L f ., C(j -' j EM!l,Y "-=150 - Fir nee Dire t I' / \...,. CMR:260:92 13 ., - 1\PPEN'DIX 1 Tr~nsfer stabilization Raserv~ (TS?] The Electric, Kater and Cas Transfer Stabilization Reser~es were established by Council Res.,:,l ... ti.on in 1~~:S5. Ea.':::h reserve ",.as established to ensure that prudent transfer levels are provided for, as determined by the ent':!rprise metljodcl,~gy. All retained earnings not allocated to any other re~erves are placed in the TSR. Interest allocated to the balance is credited to the reserve. In 1988 Council directed that a ;:,.il1irr1\.':~ and m2!>.:,irnL<m ba lance be ~aintained at a level of the next year's Ge~eral Fund return en equity transfer and 20 percent of the next year's sales revenue, respectively. The Wastevater. Refuse and Storm Drainage Funds do not provide a trans fEr en equity t·:::) the ,::;en-2ra 1 Fund ar"l.d do not reg'..liro!; the est.aLlishment of thi s reserve. System Improve-ment Reserves (S:R} The Syste.m Improvement Rese:-ves h;,ve been established by Council resolutions in all Enterprise Funds to permit larg":' planned expenditures and to provide financial resout"c!?S for participatiol"l in attractive supply alternatives as the)/ arise. In 1988 COUncil directed that an SIR reserve balance target. be set at 110 percent of the following year's projected capi.tal I!!!prcver:1cnt program (CIP) expenditures for Electric, Water, Gas and Waste,,,,,a"ter. This target level is r'3com:mended to provide adequate funds to contil"'.ue capital/infrastructure .... or}: planned for the upcoming years, plus a 10 percent increment for unexpected projects that may develop during the year. Also approved · .. 'ere lO~ier 2I,""d UpPe:L levels of t:t",e reserve at I ~ percent and 15D percent, respscti ... ely, of the following year's elP. The recornl!lended levels for the SJR in Ref'.J.se ar.d StO?;D1 Crainage were set "lfili th the recommendation of staff. Tho:: Refuse Fund SIR policy targets the reserve balance ~t about $2.0 million. This amount would cover emergency cqu ipment purchases, higi"'~er-than budgeted contract refL:.se callectior. costs, and one year's cCm.I!"lit Itent of funds to the Refuse ClosurejPost-Clostlre Maintenance Reserve~ as mandated by State la .. '. Tt,e storm Drainage Fund SIR policy establishes a reserve target cf $.5 mi 11 ion to be bui It up over time. E.:mergency Plant Replacement Reserve (F.PR) Th .... ~ reserve was Wastewater Funds emergencies only. CMR:260:92 L establish~d for the Electric, water, Gas~ and as set forth ty the City charter for unplanned 'l'!"le Refuse and stor~ Dra iilage Funds have no EPR. 1 ti , ! '. - The charter directs that EPR reserve ba lar':ces ar-e not to exceed 5 percent of the: rlet book value of the fixed ass~ts of the fund. council also dire=ted that the balance of the reserve should be eq-.lal to an amount that covers the !!lost expensivE ite:ii\ of equipl'!'.ent which l if lost l would cause int.enuptior. iM the r'.o:'r.1al activity of that '!.Jtility~ .As reqlJired ,by the City Chart~r, thesoe funds are available for usoe only rot'" replacet:1ent or emergency repairs of damaged eq~iFment, and such uses require special appropriation by coul"Icil. Calaveras Reserve This reserve 'Was established in 1983 by Council Resolu"tion t::> funQ obligations arising from the Calaveras Hydroelectric Project. The reserve is no longer being fund.ed but is accruing the interest allocated to its cash balance~ The l-eserve is us~d to help alleviate rate shock and s~'!'ead out r;;te increases that are required to pay Calaveras debt service requirerr.ents. Supplemental Suppl:r' Reserve (SSFJ In 1983 Councj 1 epproved the establish!T1ent of a reserve for a limited gas supply and development program. The level of the SSR was established at $3.0 mill ion, based upon the est.iT.'lated cost of drilling SUfficient 'Wells to suppl:r' approximately 10 percent of the City's gas reqlJirements. This reSPL'\le 'Will allo·.· the City to develcp an optirt'lurn supply portfol io recognLz ing the balance between supply, reliability and price considerations. Interest earned is to be credited to the reserve and is the only annual addition to the reserve balance. No funds have been used fron this reserve to date. Landfill Closure/Post Closure Maintenance Reserve This reserve 'Was established in 1989-90 to fund landfill closure and post-closure ~aintenance costs, as mandated b~ State law. The reserve w-i 11 be bui 1 t unti 1 1999-2000 ... ;hen the ba lance is proj ected to be $7.2 million. T~is reserve ~as established to keep Palo Alto in compliance \.dth scate-mandated closlJre reserve requirements. CMR:.260:92 2