HomeMy WebLinkAboutStaff Report 320:01
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May 24, 1990
TIlE 1!ONORABLE CITY COUNCIL
Polo Alto, California
BUOGfT
Attention: Finance and PUblic Works Committee
Review at Enterprise Fund, Retained EArnings
Members of the council:
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At the request of the Finance and PUblic Works committee. staff
has prepare~ this report to advise Council of the status of the
Enterprise Funds Reserves. Staff also requests Council a~roval
of a reviled ~fuse Fund System Improvement Reserve Policy.
Bac:;kground
As of June 30. 1989. ~eservea ~etalned Earnings for the Eler.tric.
Water, Ga&, Wast~.ater, Refuse and sto~ crainaqe Funds was $58.8
.11110n. These reserves are the Emergency Plant Replacement
Reserves ($3.3 million); system Improvement Reserves ($19.0
.1Ilion); Transfer Stabillzation Reserves ($12.2 .lllion);
calaveras Reserve (,21.1 .llIIon); and Gas supplemental Supply
~eserve ($3.~ .illion).
Emergency Plant Replacement Reserve
Established for the Electric, Water, Gas. and Wastewater FUnds as
set forth by the City Charter for unpl~nned emergencies only.
The Refuse and StOr!l Drainaqe Funds have no hergency Plant
Replacement Reserves at this time.
System Improvement Reserve
The System I.provement Reserves bave been established by council
in all Enterprise Funds by aotions and resolutions to permit
larqe planned expenditures. and to provide financial resources
for participation in potential supply alternatives as the:r~ arise.
Transfer Stabilization Reserve
The Electric, Water and Gas Transfer Stabilization Reserves were
establi5h~ by Council Resolution in 1985. Each reserve was
established to insure that prudent transfer levels are provided
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for 8S deteralne~ by the enterprise .etbodoloqy for the Electric,
Water and Gas Funds. The Wastewater, Refuse and storm Orainaqe
funda do not pr~}ide a transfer on equity to the General Fund and
do not require the .stablishaent of this reserve.
Calaveras Reserve
Establisbed in 1983 by a City council Resolution to provide funds
tor debt Obli9ations arising from the Calaveras Hydroelectric
Project.
Gas Supplemental Supply Reserve
Established in 1988 by City council action to provide for a
l1aited qas supply and development proqram~
Piscussion
As DOte~ above# reserves are establi.hed for the separate
Enterprise funds. Following are stafffs review of the policies
for reserved retained earnings. reviev of the projected balances
of these reserves, and a revision of the Refuse System
Improvement Reserve Policy.
EmergencY Plant Replacement Reserves
Background and Analysis
Emergency Plant Replacemen~ 'reserves tor the Ele~trlc. Water, Gas
and Wastewater Funds are maintained in accordance with the city
Charter. The Refuse and Stor-. DraInage Funds 40 not have
~erqency Plant Replacement Reserves. Maximum re~erve balances
are not to exceed 5 percent of the net book value of tbe fixed
assets or the fund. Funding Is not require;:3 annlJally, but if
fundiD; occurs, it .ay not exceed 10 percent of the capital
additions for that year. As required by the City charter, these
funds are available for use only fDr replacement or emerqency
repairs of damaged equipment and such uses require special
appropriation l:Iy the council.
In 19S8, council approved .rnimum funding to be maintained at a
level equal to 5 percent of the annual increase in ~he net book
value of the ti~ed assets in that tund. Council also approved
tba~ the balance of the reserve should be equal to an a~ount that
covera the most expensive item of equipment which, if lost. ~ould
cause interruption in tbe noraal acti~ity of that utility.
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Systep Improvement Reserye -water
Background And AnAlysis
An increment of 3.5 cents per oct aold is ~llocated to this
reserve as well as the interest allocated to the balance. The
balance as of June 30, 1990 1 yill be approximately $390,000. In
1988, Council approved a fund balance target be maintained at iI!l
level of 110 percent of the rollowing year's eIP. This target
level provIdes adequate funds to continue capital/infrastru~ture
~ork planned for the upcoming years plus iI!l 10 percent increment
tor unexpected projects that .ay develop (luring tbe year.
Council also approved lower and upper levels of the reserve be
established at 75 percent and l~O percect of the following year's
CIP respectively. The recommended SIR levels and projected
reserve balances as of ,june 30, 1991 and. Ju,ne 30, 1992 are as
follOWS:
1990-91
SIR Levels
'91-92 elrl
$1,124,000
1,649 .. 000
2 .. 249.0CJ.()
1990-91
Projected
SIR Balance
$25-0,000
1991-92
SIR Levels
122-93 elP)
$ 857.0<lO
.1 .. 257,0.00
1 .. 1'14,00'0
U91-92
Projected
SIR Balance
$505.000
For 1990-91, the ending projected balance is significantly below
the recommended range calculated on the lower and upper Ii_its.
For 1991-92 .. the estimated balance is also below the recommended
range.
Staff had planned an increase in the SIR balance for 1990-91,
Which had been inco~rated in the rates to City CUstomers .. but
the continuing vater cri~is viII absorb the planned incre~se and
cause a further decline in the reserve balance for 1990-91.
System Improvement Reserve -Cas
Background and Analysis
An increment of 2.75 cents per thera sold is allocated to this
reserve as well as the interest allocated to the balance. The
balance as of June 30. 1990, will be approximately $2.0 million.
In 1988. Council approved a fund balance target ~e maintained at
a level or 110 percent o~ the follOWing year's CIP. Thi~ target
level provides adequate tunas to continue capital/infrastructure
work planned for the upooDlng years plus a 10 percent increment
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Propgsed Emergency Plant Replacement Leyels tor 1990-91 and 1991-92
Estiaated Cur-rent IIost Proposed Proposed
06/30190 Fixed Assets Expensive 1990-91 1991-92
Balance 5\ NBY Limit Limit Balance BalarlCe
Electric $1.732,().OoC $3 .. 030,1.50 $2., 90<0,,0.00 $1 .. 801,,000-$1,812" 0'0'0
Water 418.000 807,(;00 775,000 461, c>oo 503,00'0
Gas 4CO"OGO 591,000 350,0,0.0 432,00.0 416.~'OO
Wag.tevater 912,0<).0 2. 321"O<l'O 1.185,,000 986,000 1,060,00'0
75'
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System Improvement Reserve -El~ctric
i\ackaround and Analysis
One sill per non-baseline XWH is allocated to this reserve as
well as the interest allocated to the balance~ The balance as of
June 30. 1990. vill be appro~imately $4.1 .illion. In 1988.
Council approved a fund balance target be maintained at a level
of 110 percent of the folloving year's projected CIP. This
t.arqet level 1'5 recolUlendeCi to provide adequate funds to contin.ue.
capital/infrastructure work planned for the upco~ing years plus a
10 percent incre.ent for unexpected projects that .ay develop
durinq the year. Also approved were lower and upper levels of
the reserve be established at 75 p1!'rcent and 15-0 percent of the
following year's CIP respectively. The recommended SIR levels
and projected reserve balances as of June 30, 1991 and June 30,
1992 are as follows:
1990-91 1990-91 1991-92 1991-92
SIR Levels ProjectecS SIR Levels Projected
{U-92 CUI SIR Balance (92-93 elP) SIR Balance
$ 5 ... 326., O!)O $ 5,4J2,Ooo
'1.81.1,000 $6,096,000 '1 ... 967 1 000 $7.527,0.0'0
10 .. 651, SOC 10 .. 865,(100
Tbe projected reserve balances for 1~~O-91 and 1991-92 ere within
the ranqes recoWilended.
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tor unexpected project. that .ay develop during the year~
Counc1l a1ao approved lower and upp«r levels of the r •• erve be
•• tabllsh.~ .~ 75 percent and l~O ~rcent of next year'. elP
re.pectively. Tbe recommende~ SIR levels and projected reS.rve
balances as of June 30, 1991 and June 30. 1992 are .a follows:
1990-91 1990-91 1991-92 1991-U
SIR Levels Proj .. cted SIR Levels Projected
("-92 elP) SIR Bala.nce (92-93 exp, SIR Balance
$1,,024 .. 00-0 $1,815.000
1,5-02,,000 $3.279,000 2,,662,000 $2,886 41 0(10
2.048,,000 3.630",000
For 1990-91, the endinq projected balance is above the approved
criteria. However. in 1991-92" approKimately $1.7 Billion of the
reServe will be used to aitigate the rate increase require~ by a
larger CIP and commodity rate increase frou PG&E. In 1991-92.
the estimated SIR balance is within the recommended range.
aystell r_~rQvement Reserve -Wastewater
Background and AnalYSis
All retained sarnings not allocated to other reserves, are placed
in the SIR. in tha Wastew-ater Fund.. The balarK:e as of June 30.
1990, will be approxl.ately S2.062,000.
In 1988, council approved a tarqet balance be maintained at a
level of 110 percent of the follOWing year's CIP~ Tbis target
level provIdes adequate funds to continue capital/infrastructure
work p1anned for the upcominq year plus a 10 percent increment
for unexpected projects that may devel~ during the year.
council als-o approved. lover aM upper l~vels of this reserve be
established at '5 percent and ISO percent of next year's elP
respectively.. The recommended SI~ levels and projected reserve
balances as of June 30, 1991 and June 30. 1992 are as follows~
1990-91 1990-91 1991-92 1991-92
SIR Levels Projected SIR. Levels Projected
/91-92 elP) SIR Balance '92-93 CIPl SIR Ba'aljce
$1.283,000 $1£815,000 $1,3-55,00.Ct $1,478,000
1.882.000 l,987,OOQ-
2,567.0(1'0 2,110,050
For 1990-91 and 1991-92. the ending projected balance is within
the recoamended range.
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Landfill Closure/Post C~ure Maintenance Reserve
rhla nev Reserve vu •• t up duri"9 1989-9" to fund l=<lfill
closure and post-clo8ure .aintenance costs. as .andated by St~te
lav. rhe Reserve 1. tarqeted at $6.8 .illlon by 1999, an4 will
'be f\lnded t.hr0U9h annual pay:lllent.a.
System Iaproyement Reserye -Rtfuse
)ackground and ADalysis
The: SIR. of the Refuse FUnd is. ut.ilized t.o pro-d.d.e furtds ter
unbudqeted, eaergency expenses; a cushion tor rates so that
year-to-year fluctuations in capital or Gther expenses 40 not
result in rate gyrations. and large known future year expenses.
All retained earnings not allocated to ctber reserves are place~
in the SIR~ The balance as of June 30~ 1990 will be
approxi.ately $6.0 .tllion.
Reoopendation
Staff recommends that Council adopt a System r~provement Reserve
Policy for the Refuse Fund Wbich targets the reserve balance at
approximately $2~O .illion~ Tbis amount would cover emergency
.quipment purc~~ses~ hiqher than bUdgeted contract retuse
collectIon eost.~ and. <me year's cOIlUIittaent of Cunds to the
Refuse Clo5ure/Post-Closure Maintenance Reserve, as .andated by
state lav. This recommended level is lower than previously
recommended to Council, as a new designated Landfill Closure
Reserve viII fund future landfill closure and post-closure
maintenance costs.
o One year's tUndinq for the Refuse
Closure/Post-Closure Xaintenance Reserve
25\ of the annual cost of tbe Refuse
collection contract with PASCO
o Cost of one landfill bulldozer Z7S.000
Subt<>tal $2~040 ... CCO
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1990-91
Projecte.i
SIR Bal,nc@
$2,300,00<>
1991-92
Projected
SIR Balance
$1 .. 600 , 00<)
In 1990-91 approximately $3.1 _lliion of the Refuse SIR Reserie
balance ~ill be utilize~ as a source of funding to mitigate the
need tor a rate increase. A rate increase is proposed tor 1991-
92 and future increases are projected for several years
thereafter to .eet long term hauling Obligations.
System Iaproveaent Reserve -storm prainage
BAckground And Analysis
All retained earnings not allocated to other reserves, are placed
in the SIR as well as the interest allocated to the balance.
council approved staffra r~endation5 for a Storm Drainage
FUnd iI1plementation plan in August 1989 (CMR:407:9). Staff
proposed a. System Improvement Reserve target .of $500,000 to be
bUilt up over time. The balance as of June 30, 19~01 will be
approximately $223,000. The projected SIR balance is $280,000 in
1990-9l, and $343,000 in 19~1-92.
Transf~r stabili&ation Reserve -Electric
Background .nd AnalYSis
All retained earnings not allocated to any other reserves are
placed in the TSR. Interest allocated to the balance is credited
to the reserve. In 1988, Council approved a .inimum and &aximum
balance be Zdintained at a level of the follOWing year's general
fund return on equity transfer and 20 percent of tbe following
year's sales revenue respectively. The recommended minimum and
.axisum TSR levels and projected TSR balances as of June 30, 1991
arA June 30, 1992 are as follows:
1990-91
tsR Limits
$ 6,498,000
13,04',()oO.O
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1990-91
Pro1ected
lSi Balance
$6,&38,000
1991-92
TSR Lilllits
$ 6,846, OO<J
14,24S,(XlO
1991-92
projected
fSR 8ala~
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In 1990-91, the ending projected balance is below the a1nimum
reserve target balance. For 1991-92 the estimated balance is
also belov the TSR Ii.its. staff has proposed in the 1990-91 and
1991-92 budq.t$~ L~inq ~pprc~i=ately $2.~ million of the TSR
Reserve balance in each year to help ~ittqate rate increases.
The E2.5 .illi~. has been deducted from the projected reserve
balance figures in both years.
Transfer Stabilization Reserve -Water
Background And AnAlysi"
All retained earninqs not allocated to any other reserves are
placed in the TSR. Interest allocated to the balance is credited
to the reserve. In 1988 cou'n<::il approved a ainhn.lDl and aaJti:mUlll
balance be maintained at a level of tbe following year's qener~l
fund retu~n on equity transfer and 20 percent of the next year's
sales revenue respectively_ The recommended .inimum and maximum
TSR levels and projected TSR balances as of June lO, 1991 and
June 30, 1992 are as follo~s:
1990-91
TiR Li.its
1990-91
Projected
TSR Balance
$254,0'0'0
1991-92
TSR Limits
$1 .. 80B,O'O'!)
2 .. 676,,0-00
1991-92
Projected
SIB Ba~
$586.(HH~
In 1990-91 and 1991-92 the ending p~ojected balances are
.ignificantly below the ainimum reserve targets establisbe~~ The
low reserve balances are because of increased expenses due to
increased wholesale prices to Palo Alto, and ~s~rvation
expenditures resulting from the water crisis~
Transfer Stabilizatipn Reserve -~
lac~around and Analysis
All ret.ained earnings not allocated to any o,ther reserves. are
placed in the TSR~ Xnterest allocated to ~he balance is credited
to the reserve. In 1988, Council approved a aini.um and .a~imum
bala~e be .aintained a~ a level of the following year's general
fund return on equity transfer and 20 percent o. the following
year's sales revenue respectively. The recommended aini~UD and
.axiaum TSR levels and projected TSR balances as of June 30. 1991
and June 3e, 1992 are as follows:
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1990-91
ISB Li.its
$1.444,000
),.765,000
1990-91
projected
TSR BAlance
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1991-92
TSI Lia1ts
$1, 610,-o,0{)
4,149,00-0
1991-U
Projected
iSH blance
For 1990-91,. the reserve balance is below the .ini~UD level
criteria due to approximately $1~9 million of this reserve used
to aitigate Gas FUnd rate increases~ The 1991-92 reserve balance
is within the minimum and maximum levels.
Calaveras Reserve -Electric
Background and. Analysis
Three .ills per non-baseline KWH of electricity sold is allocated
to this reserve as well as the interest allocated to the balance~
The allocation viii stay in effect thrOUgh June 30, 1991, vben
the first debt servIce payment will be requlred~ From that point
on, the reserve viII only 9row by the interest allocated to its
cash balance and three .111s per non-baseline KWH will be
incorporated into tbe rates.
The reserve balar~ is projected to be approximately $29.6
million as of June 1, 1991~ Staff has recommended tbat the
reserve be drawn down over a number Qf years to minimize rate
increases associated with the debt service requirements. The
reserve is expected to be depleted approximately in the 1990-
200] timeframe. (Sae attaChment l~J
SUpplemQDtal Supply Reserve -Cas
In 1988, Council approved the establishment of a reserve tor a
Ii.ited qas supply and development program (GSR}~ The level of
the CSR vas established at $).0 .illion, based upon the estimated
cost Qf drilling sufficient wells to supply approximately ten
percent of the City'. qas requirements. This reserve ~ill allow
the City to develop an optimum supply portfolio recognizing the
balance between supply. reliability and price conslderations~
Interest allocated to the balance is to be credited to the
reserve and is the only annual addition to the reserve balance.
XO funds bave been used from this reserve to date. The reserve
balances for 1990-91 and 1991-92 are $),686,000 and $),S~4,000
respect i vel y ..
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M05t of thIs reserve report is for infora&tion purposes to the
C0W1C11. St.aff recommends council approve 'the revised Rese.rve
Pollcy for the Refuse System laprovement Reserve to ~arget the
rea.rve balance at .pproxi.a~ely $2.0 .111ton.
Reapectfully sUbaitted,
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L. Lt(' ..('7-~ )-Jlttf'-A
ELUIISE'l'lI L. BAJITl!1:!I
supervisor, Utilities financial Services
I. ! / ._ .... 6~'L~ YOOlIci
Director of Utilities
Wi lU.Wn. S-rw;-
WILLIAM' ZJUlEl/
City I!anaqer
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