HomeMy WebLinkAboutReso 46-18 Enterprise Fund Accumulation ReserveRESOLUTION NO.46-18
RESOLUTION OF THE CITY COUNCIL
OF THE CITY OF MORRO BAY, CALIFORNIA,
APPROVING AN ENTERPRISE FUND ACCUMULATION RESERVE POLICY
THE CITY COUNCIL
City of Morro Bay, California
WHEREAS, the City of Morro Bay maintains accumulation funds for the water and sewer
enterprise funds; and
WHEREAS, those accumulation funds were established as savings funds for capital projects
and operational needs; and
WHEREAS, staff recommends the City Council adopt the proposed Enterprise Fund
Accumulation Reserve Policy, which demonstrates the City's commitment to fiscal responsibility and
prudent management and is consistent with Government Accounting Standards.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Morro Bay, California,
the "Enterprise Fund Accumulation Reserve Policy," as set forth in Exhibit A, attached hereto and
incorporated herein, is hereby approved.
PASSED AND ADOPTED by the City Council of the City of Morro Bay at a special meeting
thereof held on the 131h day of June 2018, by the following vote:
AYES:
NOES:
ABSENT:
ATTEST:
Irons, Davis, Headding, Makowetski, McPherson
None
None
LORI M. KUDZMA, Deputy City Clerk
01181.0001/480959.1
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Policy Statement
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COUNCIL POLICY
ENTERPRISE FUND ACCUMULATION RESERVE POLICY
The City of Morro Bay (City) Public Works Department, Water and Sewer Divisions, are
responsible for the collection and treatment of wastewater for over 5,000 customers within City
limits and delivery of potable water to a similar number of customers.
The City Council sets legislative financial management policies, as recommended by staff and
advisory committees. This Accumulation Reserve Policy ("Policy") is designed to establish
guidelines to ensure fiscal stability of the Water and Sewer Enterprise Funds and provide guidance
to staff in the financial management of the water and sewer Divisions.
Purpose
A properly designed reserve policy is not only a financial best practice, but also sends a positive
signal to ratepayers, investors, regulatory, and credit rating agencies the City is committed to
maintaining the long -run fiscal strength of the Water and Sewer Divisions. Strong and transparent
financial policies, including maintaining prudent reserves for emergencies, rate stability, working
capital, and capital improvements, are consistent with Government Accounting Standards and are
important to the Water and Sewer Divisions as they help to:
• Maintain the short-term and long-term financial health of the Water and Sewer Enterprise
Funds
• Maintain stable rates for customers and help ensure manageable rate increases
• Fund unanticipated expenditure contingencies
• Ensure funds exist for system improvements
• Ensure cash exists for the timely payment of bills
• Act as a significant positive credit factor in bond ratings
Definitions
The Water and Sewer Accumulation Reserves will be classified as Unrestricted-Undesignated
Reserves. Those reserves may be used for any lawful purpose, as approved by the City Council,
and have not been designated for specific capital and operating needs. The following Unrestricted-
Undesignated Reserve Policy addresses the levels, use, and replenishment of those types of
unrestricted reserves. The Accumulation Reserves will be accounted for within fund balances held
in the Water and Sewer Accumulation Funds.
Unrestricted -Undesignated Reserve Policy
The Water and Sewer Divisions will have sufficient Unrestricted-Undesignated cash accumulated
to maintain or improve its credit ratings, ensure operating and maintenance costs will be paid in a
timely manner, pay debt service obligations, invest in needed capital improvements and equipment
replacement and other uses on a timely basis. In addition, the Water and Sewer Enterprise Funds
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will maintain sufficient cash accumulation to minimize rate increases due to market volatility,
weather impacts on demands, contingencies, and regulatory changes.
This Accumulation Reserve Policy outlines the appropriate types and target (minimum and
maximum) levels of several reserve components, based on operational benchmarks, (as
prescribed below) that combine the overall Unrestricted-Undesignated Accumulation Reserve
target.
Operating/Maintenance (Working Capital)
The Operating/Maintenance component of this accumulation reserve is intended to ensure
sufficient resources to pay budgeted operating and maintenance expenses, recognizing the timing
differences between payment of expenditures and receipt of revenues. It also provides a source of
funding to allow the Water and Sewer Divisions to operate during short term fluctuations in
revenues and/or expenditures.
Minimum Level: Equal to twenty five percent of annual on -going operating and
maintenance expenses based on the most recent adopted budget.
Target Level: Equal to thirty five percent of annual on -going operating and
maintenance expenses based on the most recent adopted budget.
Example:
FY 2018/19 Sewer Revenue Fund Total Expenditures $3,122,751
(on -going annual expenditures)
Target Level 35%: x0.35
Target Cash Accumulation $ 1,092,963
Debt Service
The Debt Service component of this accumulation reserve is intended to ensure the ability to make
debt service payments in an extreme event that may impact the Water and/or Sewer Divisions'
ability to provide services, thus impacting revenues at a time when critical infrastructure repairs are
needed to restore systems. It is intended to prevent an event where the Water and/or Sewer
Divisions would be unable to pay their debt service obligations during such emergencies, or
extreme market disruptions. Debt service reserve will be held in accordance with any legal and/or
reserve requirements associated with the debt issuance.
Rate Stabilization
The Rate Stabilization component of this accumulation reserve is intended to help minimize
significant potential fluctuations in the Water and Sewer rates for the system operations. This
policy establishes a baseline target for the Rate Stabilization component in an amount equal to 5%
of the prior fiscal year's water and sewer service revenues only. The funding level of this reserve
can go up or down depending on the year to year changes in the service revenues. The Rate
Stabilization component can be treated as a coverage stabilization tool enabling transfers into and
out of the Water and Sewer Revenue Funds, as determined necessary by the Finance Director,
after consultation with recommendation of the Water and Sewer Divisions' personnel and Public
Works Director.
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The Water and Sewer Divisions will treat the minimum levels as practical reserve floors and allow
reserves to increase or decrease within the minimum and target levels, as approved by City
Council during the annual budget process or as needed by the Finance Department.
To the extent Unrestricted-Undesignated Accumulation Reserves are above the target levels, the
Council has the flexibility to direct staff to utilize those available funds to pay for capital projects
(reducing the need for future debt), pay down liabilities and/or buy -down outstanding debt, or
reduce rates.
Reserve levels below the minimum target reserves would leave the Water and Sewer Divisions
exposed to operational risks. If the Water and Sewer Divisions draw down the reserves below the
minimum targeted level, then the Water and/or Sewer Divisions, in conjunction with the Finance
Department will implement plans to return cash accumulation reserves to their minimum target
levels within three years and subject to approval by City Council.
Reporting and Oversight
Accumulation Reserve Levels will be monitored during the fiscal year and reported in the quarterly
financial reports, as provided by the Finance Department, Accumulation Reserve minimum and
target levels will be analyzed annually by the Water and Sewer Divisions and an over/under
reserve determination shall be made in conjunction with year-end financial results. Those results
will be reported to the City Council as part of the year-end financial report presentation. If
Unrestricted-Undesignated Accumulation Reserve levels need adjustment due to new risk factors
or changes in the industry, that information will be brought to the City Council as part of the year-
end report or sooner, as determined by the Finance Department, in conjunction with the Water
and/or Sewer Divisions as needed.
This Policy will be reviewed during the City's annual budget process, and updated, if needed, as a
result of material changes in the risk exposures or new conditions that required changes in this
Policy.
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