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HomeMy WebLinkAbout0240.094April 28, 1994 HONORABLE CITY COUNCIL Palo Alto, California 'Attention: Finance committee Hembers of the Council: BUDGB C' /:. -9 '1 ,/ I .• This is an inforrnational report and no Council action is req~'ired. Report in D.d.§.t This report summarizes the projected 1994-95 status of utility f'I.md reserve levels. Tho levels are related to the proposed FV 199~-95 budget submittals and proposed rate increases. Reserves discussed fn this t'eport include the Rate stabilizatlon Reserve (RSR) , Emerqe"~y Plant Replacement Reserv~s (EPR) j Calaveras Reserve, GaG supplemental .Gupply Reserve (SSR) and the state Water Resources Board Reserve. As summarized below, at the end (Jf 1994-95 J the Electric and Waetewater Treatroent Rate stabilization Reserves will be over tho maximum guidelines established by council. staff 'Will monitor these reSl".rves and retul.'n to Council with recommendations rogardinq potential disbursements of the excess balance in the Electric I-lHid and changes in the reserve policy for the Wastewater Treat'Dlent FUnd. Due to lower-than-predicted interest earnings, the Calaveras Reserve is being drawn down more quickly than planned. Staff will continue to monitor the Calaver~s Reserve. The storm Dra~naqo RSR funding assumes the sale of bonds to continue the next three years of infrastructure work l as included in the 1994-95 Proposed Budget document. Finally, lower operating costs have led to significant fundinq of the Water RSR. The water RSR is now within the Council approved guidelines. Below is a summary table showing each reserve and wheth~r or not the ending balances are projected to be within the Council approved guidelines. CMR:240:94 . .. I I ! I I o SUMMARY TABLE PROJECTED 1994-95 RES.F.RVE BALANCES WITlfIII RECOMMENDED RANGE ---- FUND RSR EPR OTHER Electric High Yes Yes (Calaveras) Gas Yes Yes Y~~R) Refuse Yes Yes (Water Resources Board) ---- Wastewater Treatment High Yes Wastewater Collection Yes Yes --_. ---- Wator Yes Yes ---- Storm Drainage High --------== fyrR2 Sll: ~~eh Reser~~ Table 1 (attachod) includes the following: the estimated balance in each reserve as of June 30, 1994; the fun1illg or \lse of the reserve as included in-the 1994-95 proposed budget; the projected closing balance on June 30, 1995j and the minimum rmd maximum targets for each reserve. It should be noted that the illforrnation used to estimate th(>. balance in each reserve as of .June JO, 1994 reflects the most recent financial information available; there­ fore, it is different from what was shown in the 1993-94 Adopted Budget and the 1993-94 Midyear Report. Additional revisions to this estimate will likely occur as the fourth quarter actual results are realized. The Rate Stabilization ~e~erVQ (RSR, replaced the Transfer stabilization Reserve' (TSnr and the SYf>tem Improvement Reserve (SIR) in all enterprise funds, reflectin9 the change in the use of the reserves to a mechanism to stabili'Ze rates. The RSR was established ill June 1993 (CMR:263:93). The purpose of the RSR is to ensure funds are available to cover short-term situations when expenditures exceed revenues; to provide a depository of excess funds when expendituros are less than projected or revenues are higher than budgetedj and to plan for certain known future occurrences that are of a one-time nature, or if of an ongoing nature, to allo'''' the rates to ramp up over several years to cover the costs. The mechanisms for calculating the proposed minimum and maximum balances for the RSR are detailed in CMR:263: 93. It should CMR:240:94 2 ., '\ ;" L. v / o be noted that the minimum and maximum guidelines for the RSR are dependent upon' projected sales revenue. Each fiscal year, as sales revenue chanqos, the RSR ~in1mum and maximums change. Th-9 Eaergenoy Plant Replacement Reserve (EPR) is established by the City Charter for the .f.lectric, water I Gas, and wastewater Funds far ~npl~nned emergencies only. The Refuse and Storm Drainage Funds have no EPR. The Charter directs that EPR reserve balances are not to QXCQQd 5 percent of the net book value of the fixed assets of the fund. council also directed that the balBncs of the reserve should b6 equal' to an amount that covers the most expensive item of equipment 'Which, if lost, would cause interruption in the normal 4ctivlty of that utility. lIB req,dred by the City Charter, these funds are available for use only tor replacement or ernergancy ropairs ot damaged equipment; and such uses require special appropriation by Council. 'rbo calav.Qra9 ReslltJ:'ve was established in 1983 by Council resolution to fund obligations arising from the Calaveras 'Hydroelectric Project. The reserve WflS fully funded and is not..' being drawn down to pay Calaveras debt service requirements. The Supplomental Supply Reserve (SSR) was established in 1988 in the Gas FUnd, as a reservo for a limited gas supply and development pl.'ograJl, The lovel of the SSR 'Was established at $3.0 million, based upon the estimated cost of drilling sufficient wells to supply 1I.pproxirnately 10 percent of the City's gas requirements. This res-erve will allow the City to develop an optimum supply portfolio, recoqnizinq the balance between supply, reliability ann. price considerations. In 1993, when Council created the new RSR, it 1IIlso directed that tile interest earned by tho Gas SSR be allocated to the RSR. No annual addition is made to the SSR balance. 110 funds have been used from this reserve! to date. The L&n~f'.111 Closure/PoBt Closure Maiutenanca Reserve was estab ... lished In 1989-90 to fund landfill closure and post-closure ~aint~nance costs. In Ju~e 1993 (CMR:325:93), Council authorized the eliJeination of the Landfill Closure and Post-closure Maintenance Reserve and established a fully fUtlded liability as the financial assurance mechanism, required by the California Integrated waste Management Board (CIHMB) ~ The Water ReDouroea Boar4 Reserve was established in 1993 in the Refuse Fund, as required by the state W"ater Resources Control Board (SWRCB) I to show financial responsibility for potent.ial discharges from the landfill into the San FrQncisco Bay. CHR:240:94 3 \ o this analysis dOQS not covor -c~rtain other reserve:s: Encumbrances and Reap'pL'opriations, UndeI'ground Loan, Conservation Loan, and Debt Set-vice.-Whilo thoso rGA9t"vIOS are iMportant parts of each fund's operations, ttloy are already committe.d for a specific purpose. JUectrlc f.llllil Tho-Blectric :Fund RSR is projected to exceed the rna.xirnum balance at tho ~nd of tiscal year-1994-95. Under the new reserve policy adopted by Council liD desc:d.bod in Ct-ut:2-6.l:93, staff is required to return to council in tho Y'Etar f<:>llowinq the existence of the surplus to recom~ond disbufseRent of the surplus. Therefore, in ab3E1'I\CI) of dircctiQn fron Council to imMediately address the surplus, Utilities sta.ff plans to address this issue in the 1995 ... 96 budget procQss. once the true l!'Jaqn1tuda of tho projected surplus is kno'Wn. The-Calavol'as Reserve is proposed to be drawn do\m by $2.8 million l as defined by Council-approved polic)'. Due to tho decline in interest earnihqsl tho c.llav(1oras Reserve nay be drawn down faster then projected. Staff will continue to nonitar thQ rese~ve. 'l'he reserves in the c~s fund l"emain within Council quidelines. 11 6.7 parcent ratn increase is p~oposed for 1994-95. The Gas FUnd procc9s inC'>ludoG the scheduling of rate increases evory other year. With the r.ate incroase, the: roso:rv~s 'Will be drawn down slightly. The balance 1n the 'Gas Fund R~R at the ond of 1994-95 is projected to l?e approxi~ately l:Iid~tty between the minimum ftnd maximum gu idel1 nos. No adjustment in the SSR is requested. An 18 percent rate incrt)aso has been proposed for the RefUse FUnd in 1994-95. Toe rate increase is required to tund the first full year of both SMaRT Station payments and the San Jose landfill tax. The SMaRT Station charges have increased because there is now source separation at the SMaRT station. FlnallYI sales in 1993-94 have been lower" than anticipated as "customers switched to fewer cans and increased recycling in reaction to rate increases. The projected b"~lance at the close' of 1994-95 in the Refueo Fund RSR wiLt be $2.3 mUlion. This.\s approximately midway between the CKR'240'94 /! minimum RSR guideline of ~1,7 million and the maximum 9uideline of $3.4 l1Iillion. The 1994-95 budget includes funding of $118,000 to the Water Resoutces Board Reserve, liS required by the SI'me8, to show financial responsibility for potential discharges fL"Om the landfill into the San Francisco Bay. Storm prainage The storm Drainage FUnd proposed 1994-95 budget inoludes 8; propoaod rate increase of 31 percent ($1.00 per Ronth per housnholdl. This is the first rate increasQ. fo):" thEi storll'l Drai,. Ut.ility pineo 1990. Staff has been discussing with council tho long-tern options for the storm O!."ain infrastructu~.e plan. Tlto P:roposed 1994-95 Budget. includes an estimated bond salo of $9.2 =01100 to fund tho noxt three years I infrastructure-wOl;>k. The RSR is not currently beinq funded by thee rates, As the infrastructure work is conpleted, the RSR .. ill be t\lndod throu9h the rate basc. The RSR target fot' t.he Starn Drain Fund 1s $500,000. When bonds are sold, the pt'ocoeds 'Wi 11 be held in the RSR until the next phl'lse of capita 1 projects are cOI'lpleted over thu next three years. During that ti~e, therefore, the RSR, with tho bond proceeds, will be ovor tho $500,000 tar~et. ~~9l1ectlon lio rate increase has been P:t.'oposed for tho wastewater Colloctioll Fund. 1\ 9.9 percent rate increaso 'Was approved for 1993-94. At the time the budget was adopted fo'r 1993"94, stafr notified Council that a rate increase was ~lso 8nticipat~d for 1994-95. The tat~ increases, spread over two years, were antICipated to !lmd the: Wastewater Collection reSfirves for tho implementation ()f the infrastructure program in 1994-95. The 'anticipated rate incroQ:a~a is not required in 1994-95 duo to the health of tho resorves, b~cause of strong sales, tied to increased water usago, In 1994-95, the proposed budget includos a uso of the RSR ot $239,000. With this, the RSR is projocted to be $5.4 million at the close. of 1994 .. 95. The RSR balanc~ will be slightly belo'W the maximum guideline of $5.5 ~illion. Wastewater Treatrn~ The proposed 1994-95 budget for tho Wastowatel.~ Treatment Fund needs to be adjusted to include $68,000 funding to the Emerqency Plant Replacement Reserve and funding of the RSR of $155,000. The funding of the RSR will bring the RSR over tha MaxiThum guideline. Ctm:240:94 5 'C. t , i \'. i . I .- I f': i/, .' .\" o The Proposed 1994-95 Buctget shows a substantially larger funding of the EPR. After further analys~s, staff believAs that such funding would violate the Charter provisions on the EPR. Therefore, staff will adjust the funding when the Proposed Budget, with amendments, is brought to Counci 1. ' The Regional water Quality Control Plant (RWQCP) is 22 yoars old. Staff believes it is titne for the wastewater Treatment Fund to begin to establish appropriate reserves, to allow for immediate correction of any problems that, might arise related to the infrastructuro of the Plant. The RWQCP proximity to the Eay, and the environmental issues associated 'with the running at the Plant could present problems if a malfunction were to occur in the Plant. staff, therefore, is proposing to allow the RSR to remain over the maximum guideline in the short term to allow staff to immediately mitigate any situations that night arise with the equipment at the RWQCP. Within the next year I staff is proposing to return to Council with a recommendation regarding the appropriate long-term reserves for the Wastewater Treatment Fund. staff may nH-:Ol'T1.rnend the establishment of a new resct've to fund long-term capital improvements for the RWQCP. The proposed 1994-95 budget, including a proposed 15 percent rate decrease, provides for funding of the RSR by $407,000. The 1994-95 closing balance in the RSR is projected to be at approximately the midpoint between the minimum and maximum guidelines. The budget inclUdes an assumption that the wholesale cost of 'lrfat~!r purchased from San Francisco Water Depi1rtment. (SFWD) \1ill increase by 10 percent. Final action on this matter by SFWD will not occur until June of this year, and depending on the action that is taken, it may be necessary to adjust the proposed rate decrease. The 1993-94 projected ending ba.lance for the Water RSR is sig .. nificantly higher than anticipated when the 1993-94 budget was adopted, due to several occurrences. Savings are projected in the oper?-ting budget due to more careful monitoring of actual needs and expenditures. conclusion The Electric and wastewater Treatment l:eserves ar.e projected to be above the reconunended guidelines., Staff will return to Council in the next year with recommendations rcqardinq the appropriate 10n9- term reserves for the. WasteKater Treatment Fund and possible disbursements of any excess funding in the Electric Fund reserves. The Calaveras Reserve may haVe to be drawn down more quickly than originally planned, due to a decrease in interest earnings. Finally, the reserve funding in the storm Drainage Fund assumes the CHR:240:94 6 l'. s_ale of bonds to finance th.e next three years of infrastructure 1I,'ork, as proposed in the 1994-95 PreLi.minary Budget. Respectf 1Jlly submitted, VM~ ffw..~1fcrY\ VIRGINIA HARRINGTON Senior Financial An~ly6t '12~ (,\n~~C~~!~~f -_ ~~F?oo:~rr=) ~y Managor L Attachment: Table 1 -Summary of Utility Funds Reserves Related Staff Reports: CHR:240:94 CMR:263:93 CMR: 325:93 7 , , "'\' ) , ELECTRIC fUND Eml1fgency Plan! ReplaCOOl<lnl R~le SlabilzsliOO Reserve Calaveras AB 7M ResMio 8ubl0l81 GAS FUND Emorgoocy Planl Replacemenl Hale SI"btl,alion H"sorv6 Gas Supplemenlal Supply AB 702 Heservo Sublotal REFUSE FUND Rele SlabilzAlion R6s.rve Waler Resourws Boord AB 702 Resl1fVe Subtotal STORM DRAIN FUND Rale $Iabilzalion Reserve AB 702 ReseIVo Sublotal WASTEWATER COLLECTION fUND Emergency Planl Repla<:emenl Rate Siabilzation Reserve AB 702 ReseIVe Subtotal ;; TABLE 1 SUMMARY OF UTILITY FUNDS RESERVES PROJECTED ENDING BALANCE 6130194 1,998 27,079 113,492 440 48,009 564 6,795 3,092 158 10,609 1,737 118 133 1,988 (55) 29 (26) 329 5,601 71 6,001 ,'lo , ,.' ' . ~ 1994·95 PROPOSED CHANGES 74 801 (2,842) o (1,967) 30 (1,230) o o (1,200) 607 118 o 725 6,296 o 6,296 . 7 (239) o (232) PROJECTED ENDING BALANCE 2,072 27,880 15,650 440 46,042 594 5,565 3,092 158 9,409 2,344 236 133 2,713 6,241 29 6,270 336 5,362 71 5,769 MINIMUM BALANCE 12,950 3,791 1,677 500 2,754 MAXIMUM BALANCE 3,045 25,900 797 7,583 3,353 834 5,508 ". TABLE 1 SUMMARY OF UTILITY FUNOS RESERVES PROJECTED 1994·96 PROJECTED MINIMUM MAXIMUM ENDING PROPOSED ENDING BALANCE BALANCE BALANCE CHANGES BALANCE 8130194 WIISTEWATER TREATMENT FUND Emergency Plant Replacemool 879 68 947 1,473 Rate Stabilzation Reservo 3,203 155 3,358 1,547 3,094 AB 702 Re serve 315 0 315 Subtotal 4,:>97 223 4,620 ~ WATER FUND Emergency Plant Replacemenl 58? 65 652 784 Rele Stabilz.1 ion Reservo 6,171 401 6,578 4,139 8,277 AB 702 Reserve 140 0 140 Sublolal 6,698 472 7,370 TOTA!. Emergency Planl Replacem"nl 4,357 244 4,601 R.ta Stabilzallon He.erva 50,&31 6,797 57,328 Calaveras 18,492 (2,842) 15,650 Gas Supplementel Supply. 3,092 0 3,092 Waler Resowoos Board 118 118 236 AB 702 Resetve 1,286 0 1,286 ~ TOTAL 76,472 4,199 80,671 (1) The net char!(l8 in reserves Ie tha lolal differenCB betweon revenues and expenses (incllJding transfers 10 and from other tunds).