2023-03-07; City Council; 11; Adopting a Utilities Reserve Policy

CA Review CKM
Meeting Date:

To:

From:

Staff Contact:

Subject:

Districts:

March 7, 2023
Mayor/President and City Council/Board Members
Scott Chadwick, City Manager /Executive Manager
Vicki Quiram, Utilities Director
vic
[email protected], 442-339-2722
Shoshana Aguilar, Senior Managemen t Analyst
shosh
[email protected], 760-814-0241
Ado
pting a Utilities Reserve Policy
All
Recommended Actions

1. Adopt a City Council resolution adopting a Utilities Reserve Policy for the wastewater enterprise fund

2. Adopt a Carlsbad Municipal Water District Board of Directors resolution adopting a Utilities Reserve Policy for potable water and recycled water enterprise funds Executive Summary
Staff have developed a Utilities Reserve Policy for the city’s wastewater funds and the Carlsbad Municipal Water District’s potable water and recycled water funds. Establishing these guidelines will ensure the stability of these essential funds and provide guidance to staff in managing each utility’s finances.

The potable water, recycled water and wastewater funds currently follow the policy for reserves that the City Council has adopted for the General Fund, which targets a year-end fund balance of no less than 40% of operating costs. However, this is not an official policy for the separate potable water, recycled water or wastewater enterprise funds.

These three enterprise funds1 rely solely on revenues generated by ratepayers provided wastewater services by the city and potable and recycled water by the Carlsbad Municipal Water District. These are essential functions, so continuity of service and financial viability must always be maintained. One component of meeting that obligation is the establishment of a robust reserve policy that will apply to each of these funds.

Under City Council Policy No. 1, the resolution adopting the proposed City Council policy requires four affirmative votes from the City Council members. The resolution approving the application of the proposed policy for CMWD utilities requires three affirmative votes of the CMWD Board members.
1 An enterprise fund is a separate financial reporting mechanism for which revenues and expenditures are segregated into a fund with financial statements separate from other governmental activities.

March 7, 2023
Item #11 Page 1 of 39

JOINT CIT Y CO U NCIL ,AND

CARLSBAD MU NIC I PA IL WATER DISTR ICT
Staff Report
Explanation & Analysis
Background
Staff made a presentation to the City Council and the CMWD Board on the status of wastewater and water funds in September 2021. As part of that presentation, staff reported on plans to create reserve policies for stronger long-term management of the city Utilities Department and CMWD’s enterprise funds. Carollo Engineers, the city and the district’s utilities rates consultant, was engaged to assist with development of the policy.

Properly designed utility reserve policies send a positive signal to ratepayers, investors, and regulatory and credit rating agencies that the city and the CMWD are committed to maintaining long-lasting fiscal strength. Strong and transparent financial policies, including maintaining prudent reserves for emergencies, rate stability, working capital and capital improvement program projects, are consistent with best practices in the utility industry and are important to the city and CMWD.

Such policies help to:
• Maintain the short-term and long-term financial health of each system’s utility • Maintain stable rates for customers and help ensure manageable rate increases • Fund unanticipated cost 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 and other credit ratings Reserve policies typically consist of multiple components based on five financial metrics:
• Operating/working capital
• Debt service
• Capital construction (five-year average)
• Emergency capital
• Rate stabilization fund
The sum of the component reserves should meet the overall reserve goal, typically between 180 and 365 days of operating costs. The appropriate target for days of cash on hand is unique to any utility, and should reflect its specific finances, physical system and risks.

Based on Standard and Poor’s 2021 Sector Summary for Municipal Water and Wastewater Utilities, agencies with ratings of BBB+ and above held an average cash on hand at a minimum of approximately 200 days. As a point of comparison, the city’s current practice of maintaining 40% of operating costs is equivalent to 146 days of operating costs.

The proposed policy recommends minimum and target levels for the unrestricted, undesignated reserves and discusses their use and replenishment. The reserve study details the long-term financial outlook through fiscal year 2034-35, as shown in Exhibit 3.

For wastewater, a lower percentage of the capital construction five-year average was used so that the reserve targets for wastewater are not over-inflated. This helps to keep the overall reserve target in alignment with the policy goals as well as to avoid undue pressure on wastewater rates. Because a greater share of wastewater revenue is generated through fixed charges, it is less sensitive to changes in demand and therefore the percentage for wastewater rate stabilization is lower than for potable water and recycled water.

March 7, 2023
Item #11 Page 2 of 39
Potable and recycled water
As shown in the potable water and recycled water graphs below, models show reserves will be above the targeted maximum through FY 2026-27 for potable water and through FY 2030-31 for recycled water. If the proposed policy is adopted, the following tables show that through those years, we will be spending down reserves to offset the percent of rate increases in future years.

After the initial use of existing reserve funds that exceed what is required by the policy, and depending on inflation and the cost increases of water from the wholesaler, rates would be set to assure that the total reserves would remain within the 180 days to 365 days range for the overall reserve goal.

The information presented for potable and recycled water below includes projected rate increases in future years between 2% and 6%. Following each new cost of service study, which is performed approximately every three years, staff will recommend rate increases for the next two or three years that reflect the updated projected cost to provide services to CMWD customers and keep the reserve within the targeted limits of the reserve policy. The next cost of service study update is expected to be completed in fall 2023.

March 7, 2023
Item #11 Page 3 of 39
Potable water - Days of cash on hand
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Wastewater
As staff reported to the City Council in 2021, the city’s wastewater enterprise fund was expected to see reserves drop below the minimum level desired due to the large amount of critically needed wastewater infrastructure improvements. On Jan. 11, 2022, the City Council approved rate increases of approximately 20% for each of three years in order to prevent a low- fund balance from occurring in fiscal years 2021-22, 2022-23 and 2023-24. The wastewater graph below assumes proposed rate increases in future years between 1% and 4%. However, with each new cost of service study, which is performed approximately every three years, staff will recommend rate increases that reflect the projected cost to provide services to wastewater customers and keep the reserve within the targeted limits.

The City Council will then have an opportunity to adjust rates to prevent reserves from dropping lower than the minimum target. The next proposed cost of service study is expected in fall 2023. Increases proposed will cover fiscal years 2024-25 and 2025-26, and the recommendation may be to increase rates over the 1% to 4% assumption shown in the graph in order to more quickly reach the minimum reserve in this fund. If the projections do not change and rate increases are kept between 1% and 4%, reserves may continue to decrease before beginning to rebound in FY 2028-29.

March 7, 2023
Item #11 Page 4 of 39
Recycled water - Days of cash on hand
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Procedures detailed in policy
The policy also includes procedures for the use and replenishment of reserves, reporting and oversight. The following paragraphs summarize procedures in the proposed policy:

• To the extent that unrestricted, undesignated reserves are above the minimum and below the target, the utility would seek the City Council or the CMWD Board’s approval to utilize those available funds to pay for capital projects, pay down unfunded liabilities, such as pension obligations, decrease outstanding debt or fund other strategic objectives. No other action would be required if reserves are between the minimum and maximum levels unless directed by the City Council or the CMWD Board. • Reserve levels below the minimum would leave the city or CMWD exposed to significant operational risks. Should a utility draw down reserves below the minimum level, it will implement plans to return reserves to the minimum level within a set timeframe. Such plans will be provided to the City Council or the CMWD Board for approval within 12 months of occurrence. As addressed above, the City Council will have an opportunity during the next rate study to decrease the anticipated exposure by adjusting rates. • Reserve levels will be monitored during the fiscal year and reported in annual financial reports and/or presentations. Reserve minimum and target levels will be analyzed annually, and an over/under reserve determination shall be made in conjunction with year-end financial results. These results will be reported to the City Council and the CMWD Board as part of the year-end financial report presentation. Should unrestricted designated or undesignated reserve levels need adjustment due to new risk factors or due to changes in the industry, these will be brought to the City Council and the CMWD Board as part of the year-end report.

March 7, 2023
Item #11 Page 5 of 39
Wastewater-Days of cash on hand
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There is no immediate fiscal impact from approving this policy.

The Water, Sewer and Recycled Water Reserve Study dated January 2023, which is provided as Exhibit 3, projects what the reserve will be based on actual expenditures through FY 2021-22 and the FY 2022-23 budget.

The potable water, recycled water and wastewater financial models will be updated to account for the policy targets, if they are adopted. A combination of the reserve requirements and the anticipated revenue based on approved rates will be used to inform operational and capital budgeting for FY 2023-24 and FY 2024-25. Staff will present the City Council with possible new rates to support the policy in our report on the next rate study.

Options
Staff provide the following options for consideration by the City Council and the CMWD Board:

1. Adopt resolutions establishing the proposed Utilities Reserve Policy for potable water, recycled water and wastewater enterprise funds
Pr os:
• Ensures the fiscal stability of the potable water, recycled water and wastewater funds and guides staff in the management of each utility’s finances • Maintains stable rates for customers and helps ensure manageable rate increases
• Ensures funds exist for system improvements
• Ensures cash exists for timely payment of bills
• Acts as a significant positive credit factor in bond and other credit ratings Cons:
• None identified

2. Do not adopt resolutions establishing the Utilities Reserve Policy for potable water, recycled water and wastewater enterprise funds
Pr os:
• The City Council and the CMWD Board could request staff return with different reserve levels than those proposed
Co ns:
• Delays adoption of a Utilities Reserve Policy, which could result in additional consultant expenses
Staff recommend Option 1 for the City Council’s and the CMWD Board’s approval.

Next Steps
Once adopted, the policy will be implemented by staff. It will be used to inform future updates to the cost-of-service studies.

Environmental Evaluation
This action does not require environmental review because it does not constitute a project within the meaning of the California Environmental Quality Act under California Public Resources Code Section 21065 in that it has no potential to cause either a direct physical change or a reasonably foreseeable indirect physical change in the environment.

March 7, 2023
Item #11 Page 6 of 39
Exhibits

1. City Council resolution

2. Carlsbad Municipal Water District Board of Directors resolution

3. Water, Sewer and Recycled Water Reserve Study dated January 2023

March 7, 2023
Item #11 Page 7 of 39
RESOLUTION NO. 2023-0 7 4

A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD,

CALIFORNIA, ADOPTING A UTILITIES RESERVE POLICY FOR THE

WASTEWATER ENTERPRISE FUND
WHEREAS, the City Council of the City of Carlsbad, California believes financial policies are central to a strategic, long-term approach to financial management; and WHEREAS, the City Council desires to establish a Utilities Reserve Policy for the wastewater enterprise fund to further support the city's other financial management policies; and WHEREAS, the Policy, as it applies to potable water and recycled water enterprise funds, was approved by the Board of Directors of the Carlsbad Municipal Water District of the City of Carlsbad on March 7, 2023 by Resolution No. 1700; and
WHEREAS, the Utilities Reserve Policy will inform the future cost-of-service studies, rate setting, and budgetary decisions for the wastewater enterprise fund.

NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as follows:

1. That the above recitations are true and correct.

2. That the City Council adopts the Utilities Reserve Policy provided in Attachment A.

PASSED, APPROVED AND ADOPTED at a Joint Meeting of the City Council of the City of Carlsbad and the Board of Directors of the Carlsbad Municipal Water District of the City of Carlsbad on the 7th day of March, 2023, by the following vote, to wit:

AYES:

NAYS:

ABSTAIN:

ABSENT:

Blackburn, Bhat-Patel, Acosta, Burkholder, Luna.

None.

KEITH BLACKBURN, Mayor
�
SHERRY FREISINGER, City Clerk
(SEAL)
Exhibit 1
March 7, 2023 Item #11 Page 8 of 39
City Council

POLICY STATEMENT
Subject: Utilities Reserve Policy
Purpose
Policy No. 96
Date Issued March 7, 2023
Resolution No. 2023-074
The Utilities Reserve Policy is designed to establish guidelines to ensure the fiscal stability of the potable water, recycled water and wastewater funds and provide guidance to staff in the management of each utility's finances.1
Background
Properly designed utility reserve policies send a positive signal to ratepayers, investors and regulatory and credit rating agencies that the city and the Carlsbad Municipal Water District, or CMWD, are committed to maintaining long-lasting fiscal strength. Strong and transparent financial policies, including maintaining prudent reserves for emergencies, rate stability, working capital and capital improvement program, or CIP, projects, are consistent with best practices in the utility industry and are important to the city and the CMWD as it helps to:
• Maintain the short-term and long-term financial health of each system's utility • Maintain stable rates for customers and help ensure manageable rate increases • Fund unanticipated cost 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 and other credit ratings Reserve policies typically consist of multiple components set based on operational, capital and financial metrics. The sum of the component reserves should meet the overall reserve goal, typically between 180 and 365 days of operating costs. The appropriate target for days of cash on hand is unique to any utility and should reflect its specific finances, physical system and risks.

Based on the Standard and Poor's 2021 Sector Summary for Municipal Water and Wastewater Utilities, agencies with ratings of BBB+ and above held average cash on hand at a minimum of approximately 200 days.

Statement of policy
SECTION 1: MINIMUM AND TARGET RESERVES
Each utility should have sufficient unrestricted, undesignated reserves to maintain or improve its credit ratings, ensure that operating and maintenance costs will be paid in a timely manner, pay debt service obligations, and invest in needed capital improvements and equipment 1 The policy, as it applies to potable water and recycled water funds, was approved by th� Board of Directors of Carlsbad Municipal Water District of the City of Carlsbad on March 7, 2023 by Resolution No. 1700.

Attachment A
March 7, 2023 Item #11 Page 9 of 39
Utilities Reserve Policy
March 7, 2023

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replacement on a timely basis. In addition, each system utility should maintain sufficient reserves to minimize rate increases due to market volatility, weather impacts on demands, emergencies (such as natural disasters), and regulatory changes. The table below summarizes the desired reserve levels for each category
Table 1 Minimum and Target Reserves

PROPOSED MINIMUM AND TARGET RESERVES
Reserve
metric
Operating
(working
capital)
Days of
operating
costs
Debt service
Percent of
annual debt
service
Potable water and recycled water
Minimum 90 100%
Target 120 100%
Wastewater
Minimum 90 100%
Target 120 100%
Capital
construction
5-year average
Percent of 5-year
rolling average of
annual spending
on capital
improvement
projects
50%
100%
25%
50%
SECTION 2: OPERATING (WORKING CAPITAL)
Emergency
capital
Percent of
system
replacement
value

0.5%
1%

0.5%
1%
Rate
stabilization
fund
Percent of
rate
revenues
10%
20%
5%
10%
The operating or working capital reserve component provides a source of funds to manage normal monthly changes in revenues or expenses. It ensures sufficient resources to pay budgeted operating and maintenance expenses, including power supply costs, recognizing the timing differences between payment of expenditures and receipt of revenues. Minimum and target levels for the operating reserve component are set based on operating costs, specifically a number of days' worth of operating and maintenance expenses as described below.

Minimum Level
Potable Water and Recycled Water: Equal to 90 days of operating and maintenance expenses based on the most recent adopted budget.

Wastewater: Equal to 90 days of operating and maintenance expenses based on the most recent adopted budget.

Target Level
Potable Water and Recycled Water: Equal to 120 days of operating and maintenance expenses based on the most recent adopted budget.

Wastewater: Equal to 120 days of operating and maintenance expenses based on the most recent adopted budget.

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Events or Conditions Prompting Use of the Operating Component The operating reserve component may be routinely used to cover temporary cash flow deficiencies caused by timing differences between receipt of revenues and incurring expense obligations and unexpected increases in operating expenses or decreases in revenues.

SECTION 3: DEBT SERVICE
The debt service reserve component ensures ability to make debt service payments in an extreme event that may impact the ability to provide services, thus impacting revenues at a time critical infrastructure repairs are needed to restore systems. The debt service reserve is intended to prevent an event in which the city and/or the CMWD would be unable to pay its debt service obligations during such emergencies, or extreme market disruptions. The minimum and target levels for the debt service reserve are set based on a percentage of the amount of debt service to be paid in a given fiscal year. Due to the strong negative implications of missed debt service payments, both the minimum and target levels are equal to 100% of the maximum annual debt service in the current fiscal year.

Minimum Level
Potable Water and Recycled Water: 100% of the maximum annual debt service payment in the current fiscal year.

Wastewater: 100% of the maximum annual debt service payment in the current fiscal year.

Target Level
Potable Water and Recycled Water: 100% of the maximum annual debt service payment in the current fiscal year.

Wastewater: 100% of the maximum annual debt service payment in the current fiscal year.

Events or Conditions Prompting Use of the Debt Service Component The debt service reserve may be utilized in the event that one of the utilities is otherwise unable to pay its debt service obligations. It is not anticipated that the city and/or the CMWD would ever utilize these reserves absent a significant disaster or extreme market disruption.

SECTION 4: CAPITAL CONSTRUCTION
The capital construction reserve component provides funds to ensure continuity of construction over fiscal years as well as a source of funds to complete in-progress projects in the event that their intended funding source becomes unavailable during the course of construction. The capital construction reserve is set as a percentage of the forward-looking five year rolling average Utilities Department and CMWD CIP budget.

The capital construction minimum and target levels for wastewater are inclusive of the city's Encina Wastewater Authority (EWA) costs as EWA does not plan to hold reserves internally.

EWA provides wastewater treatment for the City of Carlsbad and operates the Carlsbad Water Recycling Facility. Due to the proportionally higher CIP costs for the wastewater fund (as compared to the potable water and recycled water funds), a lower percentage minimum and target values are used for wastewater. This helps to keep the overall reserve target in alignment with the Policy goals as well as to avoid undue pressure on wastewater rates.

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Minimum Level
Potable Water and Recycled Water: 50% of the projected five-year rolling average annual CMWD CIP expenditures for the potable water utility or recycled water utility.

Wastewater: 25% of the projected five-year rolling average annual Utilities Department CIP expenditures for the wastewater utility.

Target Level
Potable Water and Recycled Water: 100% of the projected five-year rolling average annual CMWD CIP expenditures for the potable water utility or recycled water utility.

Wastewater: 50% of the projected five-year rolling average annual Utilities Department CIP expenditures for the wastewater utility.

Events or Conditions Prompting Use of the Capital Construction Component The capital construction reserve component may be used to fund capital expenditures during the year as funding resources are acquired (e.g., bond proceeds, capital contributions, revenues, etc.) or to fund projects in the event that their intended funding source is no longer available.

SECTION 5: EMERGENCY CAPITAL
The emergency capital reserve component provides funds to ensure ability to repair the system after an emergency or natural disaster such as a flood or an earthquake. It is set based on a percentage of the estimated replacement value of each utility's system. The replacement values used for this analysis are determined by adjusting the original cost of each utility's assets (from the city and the CMWD's fixed asset records) to current fiscal year dollars using the regional Engineering News-Record Construction Cost Index.

Minimum Level
Potable Water and Recycled Water: Equivalent to 0.5% of the replacement value of depreciable capital assets for the potable and recycled water systems. Based on the 2019 Asset Management Plan, the replacement value of the potable water system is currently estimated at $1.S billion, yielding a minimum reserve balance of $7.S million, and the replacement value of the recycled water system is currently estimated at $346 million, yielding a minimum reserve balance of $1.7 million.

Wastewater: Equivalent to 0.5% of the replacement value of depreciable capital assets for the wastewater system. Based on the 2019 Asset Management Plan, the replacement value of the wastewater system is currently estimated at $780 million, yielding a minimum reserve balance of $3.9 million.

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Target Level
Potable Water and Recycled Water: Equivalent to 1% of the replacement value of depreciable capital assets for the potable and recycled water systems. Based on the 2019 Asset Management Plan, the replacement value of the potable water system is currently estimated at $1.5 billion, yielding a minimum reserve balance of $15.0 million, and the replacement value of the recycled water system is currently estimated at $346 million, yielding a target reserve balance of $3.5 million.

Wastewater: Equivalent to 1% of the replacement value of depreciable capital assets for the wastewater system. Based on the 2019 Asset Management Plan, the replacement value of the wastewater system is currently estimated at $780 million, yielding a target reserve balance of $7.8 million.

Events or Conditions Prompting Use of the Emergency Capital Component The emergency capital reserve component may be used in an emergency event requiring the need to fund necessary capital expenditures (e.g., natural disaster causing significant damage to the distribution or collections system).

SECTION 6: RATE STABILIZATION
The rate stabilization reserve component provides a source of funds to smooth rates or avoid rate increases in the event of short- or mid-term disruptions to revenues such as drought related demand reductions. The minimum and target levels are set based on a percentage of expected user rate revenues. The selected percentages reflect the revenue risk associated with potential decreases in water demands. The potential demand decreases assumed for each reserve level are informed by an analysis of customer usage data and the CMWD drought response plan.

Minimum Level
The percentage assumptions for the minimum levels are set to provide sufficient reserve funds to cover a demand reduction of approximately 15%, which is the average of the conservation targets for drought response levels 1 and 2 as described in the Drought Response Plan. Because a greater share of wastewater revenue is generated through fixed charges, they are less sensitive to changes in demands; therefore, the percentage for wastewater is lower than for potable water and recycled water.

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Potable Water and Recycled Water: Equal to 10% of budgeted rate revenues in each fiscal year.

Wastewater: Equal to 5% of budgeted rate revenues in each fiscal year.

Target Level
The percentage assumptions for the minimum levels are set to provide sufficient reserve funds to cover a demand reduction of approximately 30%, which is the average of the conservation targets for drought response levels 2 and 3 as described in the Drought Response Plan. That reduction would reflect usage roughly equivalent to the average usage in the three lowest demand months of the year. Because a greater share of wastewater revenues is generated through fixed charges, they are less sensitive to changes in demands; therefore, the percentage for wastewater is lower than for potable water and recycled water.

Potable Water and Recycled Water: Equal to 20% of budgeted rate revenues in each fiscal year.

Wastewater: Equal to 10% of budgeted rate revenues in each fiscal year.

Events or Conditions Prompting Use of the Reserve
The rate stabilization reserve component may be used to cover unexpected changes in operating revenues and changes in operating costs to reduce year-over-year volatility in needed rate increases.

Procedure
SECTION 1: USE AND REPLENISHMENT OF RESERVES
The city or the CMWD's potable water, recycled water and wastewater utilities will treat the minimum reserve levels as practical reserve floors and allow reserves to increase or decrease as necessary within the minimum and target levels prescribed above.

To the extent that unrestricted, undesignated reserves are above the minimum level and below the target level, the utility has the flexibility to utilize those available funds to pay for capital projects (reducing the need for future debt), pay down unfunded liabilities such as pension obligations, decrease outstanding debt or fund other strategic objectives. No other action would be required if reserves are between the minimum and target levels unless directed by the City Council or the CMWD Board.

If reserve funds exceed the target level, the utility would seek the City Council or the CMWD Board's approval to use the excess to finance capital improvements on a pay-as you-go basis, pay down existing debt, offset other long-term liabilities such as pension obligations, reduce rates or for other strategic purposes.

Reserve levels below the minimum targeted reserves would leave the city and/or the CMWD exposed to significant operational risks. Should a utility draw down reserves below the minimum levels, it will implement plans to return reserves to their minimum levels within a set timeframe. Such plans will be provided to the City Council and/or the CMWD Board for approval within 12 months of occurrence.

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SECTION 2: REPORTING AND OVERSIGHT
Reserve levels will be monitored during the fiscal year and reported in annual financial reports and/or presentations. Reserve minimum and target levels will be analyzed annually, and an over/under reserve determination shall be made in conjunction with year-end financial results.

These results will be reported to the City Council and the CMWD Board as part of the year-end financial report presentation. Should unrestricted designated or undesignated reserve levels need adjustment due to new risk factors or due to changes in the industry, these will be brought to the City Council and the CMWD Board as part of the year-end report.

The Policy will be reviewed annually and updated (at a minimum once every three years) if there are material changes in the risk exposures or new conditions that require changes in reserve levels.

March 7, 2023 Item #11 Page 15 of 39
RESOLUTION NO. 1700

A RESOLUTION OF THE BOARD OF DIRECTORS OF THE CARLSBAD

MUNICIPAL WATER DISTRICT OF THE CITY OF CARLSBAD, CALIFORNIA,

ADOPTING A UTILITIES RESERVE POLICY FOR POTABLE WATER AND

RECYCLED WATER ENTERPRISE FUNDS
WHEREAS, the Carlsbad Municipal Water District, or CMWD, Board believes financial policies are central to a strategic, long-term approach to financial management; and WHEREAS, the CMWD Board desires to establish a Utilities Reserve Policy for potable water and recycled water enterprise funds to further support the District's other financial management policies; and
WHEREAS, the Policy, as it applies to the wastewater enterprise fund, was approved by the City Council of the City of Carlsbad on March 7, 2033 by Resolution No. 2023-076; and WHEREAS, the Utilities Reserve Policy will inform the future cost-of-service studies, rate setting and budgetary decisions for the potable water and recycled water enterprise funds.

NOW, THEREFORE, BE IT RESOLVED by the Board of Directors of the Carlsbad Municipal Water District of the City of Carlsbad, California, as follows:

1. That the above recitations are true and correct.

2. That the CMWD Board adopts the Utilities Reserve Policy provided in Attachment A.

PASSED, APPROVED AND ADOPTED at a Joint Meeting of the Carlsbad Municipal Water District Board of Directors of the City of Carlsbad and the City Council of the City of Carlsbad on the 7th day of March, 2023, by the following vote, to wit:

AYES:

NAYS:

ABSTAIN:

ABSENT:

Blackburn, Bhat-Patel, Acosta, Burkholder, Luna.

None.

KEITH BLACKBURN, President
�
/ __... :;;-HERRY FREISINGER, Secretary
1( "(SEAL)
Exhibit 2
March 7, 2023 Item #11 Page 16 of 39
City Council

Attachment A
March 7, 2023 Item #11 Page 17 of 39
Utilities Reserve Policy
March 7, 2023

Page 2 ends

0.5%
1%

Minimum Level
Potable Water and Recycled Water: Equal to 90 days of operating and maintenance expenses based on the most recent adopted budget.

Wastewater: Equal to 90 days of operating and maintenance expenses based on the most recent adopted budget.

Target Level
Potable Water and Recycled Water: Equal to 120 days of operating and maintenance expenses based on the most recent adopted budget.

Wastewater: Equal to 120 days of operating and maintenance expenses based on the most recent adopted budget.

March 7, 2023 Item #11 Page 18 of 39
Utilities Reserve Policy
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Minimum Level
Potable Water and Recycled Water: 100% of the maximum annual debt service payment in the current fiscal year.

Wastewater: 100% of the maximum annual debt service payment in the current fiscal year.

Target Level
Potable Water and Recycled Water: 100% of the maximum annual debt service payment in the current fiscal year.

Wastewater: 100% of the maximum annual debt service payment in the current fiscal year.

The capital construction minimum and target levels for wastewater are inclusive of the city's Encina Wastewater Authority (EWA) costs as EWA does not plan to hold reserves internally.

March 7, 2023 Item #11 Page 19 of 39
Utilities Reserve Policy
March 7, 2023

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Minimum Level
Potable Water and Recycled Water: 50% of the projected five-year rolling average annual CMWD CIP expenditures for the potable water utility or recycled water utility.

Wastewater: 25% of the projected five-year rolling average annual Utilities Department CIP expenditures for the wastewater utility.

Target Level
Potable Water and Recycled Water: 100% of the projected five-year rolling average annual CMWD CIP expenditures for the potable water utility or recycled water utility.

Wastewater: 50% of the projected five-year rolling average annual Utilities Department CIP expenditures for the wastewater utility.

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Utilities Reserve Policy
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Utilities Reserve Policy
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Potable Water and Recycled Water: Equal to 10% of budgeted rate revenues in each fiscal year.

Wastewater: Equal to 5% of budgeted rate revenues in each fiscal year.

Potable Water and Recycled Water: Equal to 20% of budgeted rate revenues in each fiscal year.

Wastewater: Equal to 10% of budgeted rate revenues in each fiscal year.

March 7, 2023 Item #11 Page 22 of 39
Utilities Reserve Policy
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The Policy will be reviewed annually and updated (at a minimum once every three years) if there are material changes in the risk exposures or new conditions that require changes in reserve levels.

March 7, 2023 Item #11 Page 23 of 39
and
Carlsbad Municipal Water District
Water, Sewer, and Recycled Water Reserve Study

DRAFT RESERVE POLICY
FINAL | January 2023
Exhibit 3
March 7, 2023
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{city of
Carlsbad
WATER, SEWER, AND RECYCLED WATER RESERVE STUDY | CITY OF CARLSBAD & CARLSBAD MUNICIPAL WATER DISTRICT FI NAL| JANUARY 2023 | i
Contents
Section 1 – Introduction 1

1.1 Utility Reserve Policy Considerations 1
Section 2 – Proposed Unrestricted, Undesignated Reserves 3

2.1 Summary Reserve Policy Recommendations 3

2.2 Operating (Working Capital) 3

2.3 Debt Service 4

2.4 Capital Construction 5

2.5 Emergency Capital 5

2.6 Rate Stabilization 6
Section 3 – Potential Reserve Procedures 8

3.1 Procedures for the Use and Replenishment of Reserves 8

3.2 Procedures for Reporting and Oversight 9
Section 4 – Projected Reserve Performance 10
Section 5 – Conclusion 14
Tables
Table 1 Minimum and Target Reserves 3
Table 2 Projected Rate Revenue Increases 10
Figures
Figure 1 Minimum and Target Levels for Total Reserves Projection – Potable Water 10 Figure 2 Minimum and Target Levels for Total Reserves Projection – Recycled Water 11 Figure 3 Minimum and Target Levels for Total Reserves Projection – Sewer 12 March 7, 2023
Item #11 Page 25 of 39
WATER, SEWER, AND RECYCLED WATER RESERVE STUDY | CITY OF CARLSBAD & CARLSBAD MUNICIPAL WATER DISTRICT FINAL| JANUARY 2023 | 1
Section 1

INTRODUCTION
The City of Carlsbad (City) and the Carlsbad Municipal Water District (CMWD) provide potable water and recycled water service to approximately 28,900 connections and sewer service to approximately 26,600 accounts. Potable and recycled water services are managed by the CMWD while sewer services are provided through the City’s Utilities Department. All services fall under the purview of the Public Works Branch of the City and ultimately the Carlsbad City Council and/or the CMWD Board of Directors.

The City Council suggests financial management policies for City funds including the utility funds. Currently, the potable water, recycled water, and sewer funds follow the policy that the City Council has adopted for the General Fund, which targets a year-end funds balance of no less than 40% of operating costs. However, this is not an official policy for the separate potable water, recycled water, or sewer funds.

As essential functions, continuity of service and financial viability must always be maintained for the City and the CMWD’s utilities. One component of meeting this requirement is the establishment of a robust reserve policy. The Utility Cash Reserve Policy (Policy) described in this memorandum is designed to establish guidelines to ensure the fiscal stability of the potable, recycled water, and sewer funds and provide guidance to staff in the management of each utility’s finances.

1.1 Utility Reserve Policy Considerations
Properly designed utility reserve policies send a positive signal to ratepayers, investors, and regulatory and credit rating agencies that the City and the CMWD are committed to maintaining long-lasting fiscal strength. Strong and transparent financial policies, including maintaining prudent reserves for emergencies, rate stability, working capital and capital improvements, are consistent with best practices in the utility industry and are important to the City and the CMWD as it helps to:
• Maintain the short-term and long-term financial health of each system’s utility. • Maintain stable rates for customers and help ensure manageable rate increases. • Fund unanticipated cost 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 and other credit ratings.

Reserve policies typically consist of multiple components set based on operational, capital, and financial metrics. The sum of the component reserves should meet the overall reserve goal, typically between 180 and 365 days of operating costs. The appropriate target for days of cash on hand is unique to any utility and should reflect its specific finances, physical system, and risks. Based on the Standard and Poor’s 2021 Sector Summary for Municipal Water and Wastewater Utilities, agencies with ratings of BBB+ and above held average cash on hand at a minimum of approximately 200 days. As a point of comparison, the City’s current practice of maintaining 40% of operating costs is equivalent to 146 days of operating costs.

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WATER, SEWER, AND RECYCLED WATER RESERVE STUDY | CITY OF CARLSBAD & CARLSBAD MUNICIPAL WATER DISTRICT FINAL| JANUARY 2023 | 2
Utilities may implement multiple types of reserves, including restricted reserves, unrestricted designated reserves, and unrestricted undesignated reserves. Unrestricted, undesignated reserves may be used for any lawful purpose and have not been designated for specific capital and operating purpose because rate-funded reserves are not restricted for specific uses other than the normal restrictions on rate revenues. In contrast, for example, reserves funded with connection fees would be restricted for appropriate uses. This Policy recommends minimum and target levels for the unrestricted, undesignated reserves, discusses their use and replenishment, and details a long-term financial outlook from Fiscal Year Ending (FYE) 2022 through FYE 2035.

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WATER, SEWER, AND RECYCLED WATER RESERVE STUDY I CITY OF CARLSBAD & CARLSBAD M UNICIPAL WATER DISTRICT Section 2

PROPOSED UNRESTRICTED, UNDESIGNATED

RESERVES
The proposed unrest ricted, undesignated reserve policy outli nes the min imum and target levels of the appropriate t ypes of unrestricted, undesignated reserve compo nents .

Under the proposed reserve policy, each utilit y would have sufficient unrestricted, undesig nated reserves to mainta in or impro ve its credit ratings, ensure that operating and mainte nance costs will be paid in a timely manner, pay debt service obligat ions, and invest in needed capita l impro vements and equipment replacement on a timely basis. In additio n, each system utilit y would mainta in sufficient reserves to minimize rate increases due to market volatility, weat her impacts on demands, emergencies (such as natu ral disasters), and regulatory changes.

2.1 Summary Reserve Policy Recommendations
Table 1 Minimum and Target Reserves
I
Operating I I Capital I I Rate (Working Debt Service Construction Emer~ency Stabilization . Capital Capital) 5-Yr Avg Fund Days of Percent of Percent of 5- Percent of
Reserve Metric Operating Annual Debt Year Rolling S ystem Percent of Rate Costs Service Average Replacement Revenues
Annual CIP Value
Potable Water and Recycled W ater
Minimum 90 Days 100% 50% 0.5% 10%
Target 120 Days 100% 100% 1% 20%
Sewer
Minimum 90 Days 100% 25% 0.5% 5%
Target 120 Days 100% 50% 1% 10%

2.2 Operating {Working Capital}
The operati ng or working capita l reserve component provides a source of funds to manage norma l monthly changes in revenues or expenses. It ensures sufficie nt resources to pay budgeted operati ng and maintena nce expenses, including power supply costs, recognizing the timing differe nces betw een payment of expendit ures and receipt of revenues. Minimum and target levels for the operating reserve component are set based on operat ing costs, specifically a number of days' worth of operat ing and mai ntena nce expenses as described below.

FINAL I JANUARY 2023 I 3
WATER, SEWER, AND RECYCLED WATER RESERVE STUDY | CITY OF CARLSBAD & CARLSBAD MUNICIPAL WATER DISTRICT FINAL| JANUARY 2023 | 4
Minimum Level
Water and Recycled Water: Equal to 90 days of operating and maintenance expenses based on the most recent adopted budget.

Sewer: Equal to 90 days of operating and maintenance expenses based on the most recent adopted budget.

Target Level
Water and Recycled Water: Equal to 120 days of operating and maintenance expenses based on the most recent adopted budget.

Sewer: Equal to 120 days of operating and maintenance expenses based on the most recent adopted budget.

2.3 Debt Service
The debt service reserve component ensures ability to make debt service payments in an extreme event that may impact the ability to provide services, thus impacting revenues at a time critical infrastructure repairs are needed to restore systems. The debt service reserve is intended to prevent an event in which the City and/or the CMWD would be unable to pay its debt service obligations during such emergencies, or extreme market disruptions. The minimum and target levels for the debt service reserve are set based on a percentage of the amount of debt service to be paid in a given fiscal year. Due to the strong negative implications of missed debt service payments, both the minimum and target levels are equal to 100% of the maximum annual debt service in the current fiscal year.

Minimum Level
Water and Recycled Water: 100% of the maximum annual debt service payment in the current fiscal year.

Sewer: 100% of the maximum annual debt service payment in the current fiscal year.

Target Level
Water and Recycled Water: 100% of the maximum annual debt service payment in the current fiscal year.

Sewer: 100% of the maximum annual debt service payment in the current fiscal year.

Events or Conditions Prompting Use of the Debt Service Component The debt service reserve may be utilized in the event that one of the utilities is otherwise unable to pay its debt service obligations. It is not anticipated that the City and/or the CMWD would ever utilize these reserves absent a significant disaster or extreme market disruption.

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2.4 Capital Construction
The capital construction reserve component provides funds to ensure continuity of construction over fiscal years as well as a source of funds to complete in-progress projects in the event that their intended funding source becomes unavailable during the course of construction. The capital construction reserve is set as a percentage of the forward-looking five-year rolling average Utilities Department and CMWD capital improvement program (CIP) budget.

The capital construction minimum and target levels for sewer are inclusive of the City’s Encina Wastewater Authority (EWA) costs as EWA does not plan to hold reserves internally. EWA provides wastewater treatment for the City of Carlsbad and operates the Carlsbad Water Recycling Facility. Due to the proportionally higher CIP costs for the sewer fund (as compared to the potable water and recycled water funds), a lower percentage minimum and target values are used for sewer. This helps to keep the overall reserve target in alignment with the Policy goals as well as to avoid undue pressure on sewer rates.

Minimum Level
Water and Recycled Water: 50% of the projected five-year rolling average annual CMWD CIP expenditures for the potable water utility or recycled water utility.

Sewer: 25% of the projected five-year rolling average annual Utilities Department CIP expenditures for the sewer utility.

Target Level
Water and Recycled Water: 100% of the projected five-year rolling average annual CMWD CIP expenditures for the potable water utility or recycled water utility.

Sewer: 50% of the projected five-year rolling average annual Utilities Department CIP expenditures for the sewer utility.

2.5 Emergency Capital
The emergency capital reserve component provides funds to ensure ability to repair the system after an emergency or natural disaster such as a flood or an earthquake. It is set based on a percentage of the estimated replacement value of each utility’s system. The replacement values used for this analysis were determined by adjusting the original cost of each utility’s assets (from the City and the CMWD’s fixed asset records) to current (FY 2022) dollars using the regional Engineering News-Record Construction Cost Index.

While an annual evaluation of the system replacement value is not necessary for setting the minimum and target reserve levels, the replacement value should be adjusted annually (between evaluations) to account for cost inflation. The analysis completed for this memorandum applies a 3.5% annual escalation factor to the replacement value to match the construction cost inflation factor utilized in the City and the CMWD’s most recent rate studies.

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WATER, SEWER, AND RECYCLED WATER RESERVE STUDY | CITY OF CARLSBAD & CARLSBAD MUNICIPAL WATER DISTRICT FINAL| JANUARY 2023 | 6
Minimum Level
Water and Recycled Water: Equivalent to 0.5% of the replacement value of depreciable capital assets for the potable and recycled water systems. Based on the 2019 Asset Management Plan, the replacement value of the potable water system is currently estimated at $1.5 billion, yielding a minimum reserve balance of $7.5 million; and the replacement value of the recycled water system is currently estimated at $346 million, yielding a minimum reserve balance of $1.7 million.

Sewer: Equivalent to 0.5 percent of the replacement value of depreciable capital assets for the sewer system. Based on the 2019 Asset Management Plan, the replacement value of the sewer system is currently estimated at $780 million, yielding a minimum reserve balance of $3.9 million.

Target Level
Water and Recycled Water: Equivalent to 1% of the replacement value of depreciable capital assets for the potable and recycled water systems. Based on the 2019 Asset Management Plan, the replacement value of the potable water system is currently estimated at $1.5 billion, yielding a minimum reserve balance of $15.0 million; and the replacement value of the recycled water system is currently estimated at $346 million, yielding a minimum reserve balance of $3.5 million.

Sewer: Equivalent to 1% of the replacement value of depreciable capital assets for the sewer system. Based on the 2019 Asset Management Plan, the replacement value of the sewer system is currently estimated at $780 million, yielding a minimum reserve balance of $7.8 million.

2.6 Rate Stabilization
The rate stabilization reserve component provides a source of funds to smooth rates or avoid rate increases in the event of short- or mid-term disruptions to revenues such as drought-related demand reductions. The minimum and target levels are set based on a percentage of expected user rate revenues. The selected percentages reflect the revenue risk associated with potential decreases in water demands. The potential demand decreases assumed for each reserve level are informed by an analysis of customer usage data and the CMWD drought response plan.

Minimum Level
The percentage assumptions for the minimum levels are set to provide sufficient reserve funds to cover a demand reduction of approximately 15%, which is the average of the conservation targets for drought response levels 1 and 2 as described in the drought response plan. Because a greater share of sewer revenue is generated through fixed charges, they are less sensitive to changes in demands and therefore the percentage for sewer is lower than for potable water and recycled water.

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WATER, SEWER, AND RECYCLED WATER RESERVE STUDY | CITY OF CARLSBAD & CARLSBAD MUNICIPAL WATER DISTRICT FINAL| JANUARY 2023 | 7
Water and Recycled Water: Equal to 10% of budgeted rate revenues in each fiscal year.

Sewer: Equal to 5% of budgeted rate revenues in each fiscal year.

Target Level
The percentage assumptions for the minimum levels are set to provide sufficient reserve funds to cover a demand reduction of approximately 30%, which is the average of the conservation targets for drought response levels 2 and 3 as described in the drought response plan. That reduction would reflect usage roughly equivalent to the average usage in the three lowest demand months of the year. Because a greater share of sewer revenues is generated through fixed charges, they are less sensitive to changes in demands and therefore the percentage for sewer is lower than for potable water and recycled water.

Water and Recycled Water: Equal to 20% of budgeted rate revenues in each fiscal year.

Sewer: Equal to 10% of budgeted rate revenues in each fiscal year.

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WATER, SEWER, AND RECYCLED WATER RESERVE STUDY | CITY OF CARLSBAD & CARLSBAD MUNICIPAL WATER DISTRICT FINAL| JANUARY 2023 | 8
Section 3

POTENTIAL RESERVE PROCEDURES
Along with component minimums and targets, most reserve policies for public utilities include procedures related to the use and replenishment of reserves, reporting and oversight, and updates to reserve metrics, minimums, or targets.

3.1 Procedures for the Use and Replenishment of Reserves Procedures for the use and replenishment of reserves may lay out how reserve funds can be used if they exceed the minimum or target values, what authorization is needed to use the funds, and what steps must be taken if reserves fall below the minimum or above the target. The specific procedures used vary by agency particularly on the level of involvement of the governing body in reserve decisions and the types of authorizations required to make reserve-related decisions. In developing the specific reserve policy that is presented to the City Council and the CMWD Board of Directors, the City and the CMWD should tailor the procedures to best match how it wishes to manage the finances of the utilities and the reserves. One example of potential procedural language is shown below.

Use and Replenishment Example:
“The City or the CMWD’s potable water, recycled water, and sewer utilities will treat the minimum reserve levels as practical reserve floors and allow reserves to increase or decrease as necessary within the minimum and target levels prescribed above.

To the extent that unrestricted, undesignated reserves are above the minimum and below the target, the utility has the flexibility to utilize those available funds to pay for capital projects (reducing the need for future debt), pay down unfunded liabilities such as pension obligations, decrease outstanding debt, or fund other strategic objectives. No other action would be required if reserves are between the minimum and maximum levels unless directed by the City Council or the CMWD Board of Directors.

If reserve funds exceed the target level, the utility would seek City Council or CMWD Board of Directors approval to use the excess to finance capital improvements on a pay-as-you-go basis, pay down existing debt, offset other long-term liabilities such as pension obligations, reduce rates, or for other strategic purposes.

Reserve levels below the minimum targeted reserves would leave the City/CMWD exposed to significant operational risks. Should a utility draw down reserves below the minimum targeted level, it will implement plans to return reserves to their minimum targeted levels within a set timeframe. Such plans will be provided to the City Council or the CMWD Board of Directors for approval within 12 months of occurrence.”
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3.2 Procedures for Reporting and Oversight
Some agencies’ reserve policies have provisions related to monitoring, reporting, and modifying reserves. If the City or the CMWD wishes to include such provisions in its reserve policy, it can tailor them to fit within the financial reporting and management procedures that are already in place to minimize additional administrative effort. One example of potential procedural language is shown below.

Reporting and Oversight Example:
“Reserve levels will be monitored during the fiscal year and reported in annual financial reports or presentations. Reserve minimum and target levels will be analyzed annually, and an over/under reserve determination shall be made in conjunction with year-end financial results.

These results will be reported to the City Council and the CMWD Board of Directors as part of the year-end financial report presentation. Should unrestricted designated or undesignated reserve levels need adjustment due to new risk factors or due to changes in the industry, these will be brought to the City Council and the CMWD Board of Directors as part of the year-end report.

The Policy will be reviewed annually and updated (at a minimum once every three years) if there are material changes in the risk exposures or new conditions that require changes in reserve levels.”

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WATER, SEWER, AND RECYCLED WATER RESERVE STUDY I CITY OF CARLSBAD & CARLSBAD MUN ICIPAL WATER DISTRICT Section 4

PROJECTED RESERVE PERFORMANCE
The following figures show the projected reserve performa nce of each utility over the next 10 years. The projections were completed using the rate mode ls developed for the 2021 rate study, assuming the long te rm rate revenue increases shown in Table 2. Because each system has different capital needs to maintain or expand its infrastructure, t he reserve performa nce as compared to the proposed policy minimum and targets differs across each utility.

Table 2 Projected Rate Revenue Increases
I

FYE I FYE I FYE I FYE I FYE I FYE I FYE I FYE I FYE I FYE I FYE I FYE I FYE I FYE SyStem 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Potab le 2.0% 2.0% 2.0% 2.0% 2.0% 6.0% 6.0% 6.0% 6.0% 6.0% 5.5% 5.5% 5.5% 5.5% W ater Recycled 4.0% 4.0% 4.0% 4.0% 4.0% 3.0% 3.0% 3.0% 3.0% 3.0% 5.0% 5.0% 5.0% 5.0% W ater Sewer 20.0% 20.0% 20.0% 4.0% 4.0% 3.0% 3.0% 3.0% 3.0% 3.0% 1.0% 1.0% 1.0% 1.0% The following figures present each system 's performance project ions based on the minimum and ta rget levels for each reserve discussed above. These minimum and target levels are flexible depend ing on the City or t he CMWD's needs and should be considered a start ing point estab lished from other agency averages.

The water ut ility would maintain reserve above t he minimum through FYE 2029 as shown in Figure 1. The same figure indicates that the potab le wate r utility will retain ta rget level reserves until FYE 2026 as it draws down reserves for capital investment in infrastructure, long-te rm projections show the reserves exceeding the minimum level by FYE 2035.

V,
C
0 ~
Figure 1
$120
$100
s8o
s6o
s40
$20
$-
Total Potable Water Reserves

FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 - Modeled Reserve Balance - Total - Target - - Minimum
Minimum and Targe t Levels for Tot al Reserves Projection - Pot able Water FINAL I JANUARY 2023 I 10
March 7, 2023
Item #11 Page 36 of 39

WATER, SEWER, AND RECYCLED WATER RESERVE STUDY I CITY OF CARLSBAD & CARLSBAD MUN ICIPAL WATER DISTRICT Afte r the initial spend-down for cash fu nding of capita l, the pot able wate r utility's t ota l reserves wou ld rema in within the 180 days to 365 days of cash on hand range for t he ove rall reserve goa l as shown below in Figure 2.
1000 Days
900 Days
800 Days
700 Days
600 Days
500 Days
400 Days
300 Days
200 Days
100 Days
Days
Potable Water - Days Cash on Hand

FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 - Modeled Days Cash Target Days Cash Goal - - Minimum Days Cash Goal Figure 2 Projected Reserves as Days of Cash on Hand - Potable Water The recycled wat er ut ility wou ld maintain t he reserves above the target level through FYE 2028 and above the m inimum level thro ugh FYE 2035 as show n in Figu re 3. The increase in reserves fo r FYE 2023 results from expected St ate Revolving Fund loan draws to reimburse for projects t hat were prev iously cash funded as well as gran t receipts for capita l projects .

V,
C
0 ·-
~
Figure 3
$25
$20
us
$10
ss
$-
---
I

FYE FYE
2022 2023
Total Recycled Water Reserves

FYE FYE
2024 2025
FYE
2026
-------------------·
HIUI

FYE FYE FYE FYE FYE FYE FYE FYE FYE
2027 2028 2029 2030 2031 2032 2033 2034 2035
- Modeled Reserve Balance - Total - Target - - Minimum
Minimum and Target Levels for Total Reserves Project ion - Recycled Water FINAL l JANUARY 2023 l 11
March 7, 2023
Item #11 Page 37 of 39

WATER, SEWER, AND RECYCLED WATER RESERVE STUDY I CITY OF CARLSBAD & CARLSBAD MUN ICIPAL WATER DISTRICT Afte r the initial spend-down for cash fu nding of capita l, the recycled wate r utility's tota l reserves wou ld rema in within the 180 days to 365 days of cash on hand range for t he ove rall reserve goa l, as shown in Figure 4.
1200 Days
1000 Days
800 Days
600 Days
400 Days
200 Days
Days
,,,~" Recycled Water - Days Cash on Hand
!o°><:)
,,_o :A"
<J"'
~
~

FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 - Modeled Days Cash Target Days Cash Goal - - Minimum Days Cash Goal Figure 4 Projected Reserves as Days of Cash on Hand - Recycled Water Due t o the large amount of anticipated investme nts in the sewer infrastr uct ure using cash-fu nded capital, the City is proj ect ed to draw sewe r reserves below the minimum level st arting in FYE 2023, as show n in Figure 5. Reserves wou ld continue t o decrease thro ugh FYE 2026 befo re beginning to rebound . Long -term proj ections show reserves exceed ing the m inimum by FYE 2033.

Total Sewer Reserves
V, s30
C
0 $25
~
$20
sis
$10
ss
$-
-----, - -- - - -----
I ■ -- -.111

FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 - Modeled Reserve Balance -- Target - - Minimum
Figure 5 Minimum and Target Levels for Total Reserves Projection - Sewer FINAL I JANUARY 2023 I 12
March 7, 2023
Item #11 Page 38 of 39

WATER, SEWER, AND RECYCLED WATER RESERVE STUDY I CITY OF CARLSBAD & CARLSBAD M UNICIPAL WATER DISTRICT Expressed as days of cash on hand, sewer reserves would be drawn down to a minimum of 33 days in FYE 2026 before rebound ing over the next severa l years. Tota l days of cash on hand would meet the overall policy goa l of 180 days start ing in FYE 2029. Projected sewer rese rves as days of O&M are shown in Figure 6. 700 Days
600 Days
500 Days
400 Days
300 Days
200 Days
100 Days
Days
Sewer - Days Cash on Hand

FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 - DaysCash Target Days Cash Goal - - Minimum Days Cash Goal Figure 6 Projected Reserves as Days of Cash on Hand - Sewer FINAL I JANUARY 2023 I 13
WATER, SEWER, AND RECYCLED WATER RESERVE STUDY | CITY OF CARLSBAD & CARLSBAD MUNICIPAL WATER DISTRICT FI NAL| JANUARY 2023 | 14
Section 5

CONCLUSION
This Policy provides direction to the water, recycled water, and sewer utilities’ management and staff for decisions and recommendations related to the financial profiles of each utility.

In its most abbreviated form, this Policy sets targets for reserve balances based on the risk profiles of the potable water, recycled water, and sewer utilities and establishes tolerable maximums. This Policy also provides recommended actions when reserves deviate from the target levels.

March 7, 2023
Item #11 Page 39 of 39
Utilities Reserve Policy
Vicki Quiram, Utilities Director/General
Manager
Shoshana Aguilar, Senior Management
Analyst
Utilities Department
March 7, 2023
Ccarlsbad { City of
Municipal Water District Carlsbad

PROPOSED ACTIONS
ITEM 11: UTILITIES RESERVE POLICY

1. Adopt a City Council resolution adopting a Utilities Reserve Policy for the wastewater enterprise fund

2. Adopt a Carlsbad Municipal Water District Board of
Directors resolution adopting a Utilities Reserve Policy for potable water and recycled water enterprise funds
Ccarlsbad { City of
Municipal Water District Carlsbad

BACKGROUND
• Council has set a sound reserve policy for the General Fund.
• Water and wastewater utilities are managed as
enterprise funds that are fully funded by ratepayers
and do not use any General Fund dollars.
• It is best practice for utilities to operate with their own reserve funds and these funding goals need to
be established using best practices specific to utilities.

ITEM 11: UTILITIES RESERVE POLICY
Ccarlsbad { City of
Municipal Water District Carlsbad

BACKGROUND
• Reserves are needed to maintain smooth rates in the face of unforeseen circumstances and costs out of our control.
• Should not be too high or too low.
• Half of the operating budget is dependent on expenses such as the cost of water and the contracted costs to treat
wastewater.
• Any problems with our system can affect public health and the environment.

ITEM 11: UTILITIES RESERVE POLICY
Ccarlsbad { City of
Municipal Water District Carlsbad

RESERVE POLICY BENEFITS
ITEM 11:UTILITIES RESERVE POLICY
Maintain the short and long-term financial
health of each utility
Maintain stable rates for customers
Fund unanticipated cost contingencies
Ensure funds exist for timely payment of
bills and system improvements
Act as a significant positive credit factor in
bond and other credit ratings

EXPLANATION & ANALYSIS
ITEM 11: UTILITIES RESERVE POLICY
• Utilities reserve policies typically consist of
multiple components set based on operational,
capital and financial metrics.
• Standard and Poor’s looks for strongly rated
agencies to hold an average cash on hand
minimum of approximately 200 days.

Ccarlsbad { City of
Municipal Water District Carlsbad

RESERVE POLICY COMPONENTS
ITEM 11:UTILITIES RESERVE POLICY
Operating/working capital (days
cash on hand)
Debt service
Capital construction
Emergency capital
Rate stabilization
$

FUND USES WITH A RESERVE

POLICY IN PLACE
• If reserve funds exceed the target level, staff would seek City Council or Board approval to use the excess
for expenses such as capital improvements or offsetting future rate increases.
• Council could also correct low reserves via rate
increases or spending changes.
• If a reserve policy is adopted, we will update our
financial models, which will inform future rate
increases.

ITEM 11: UTILITIES RESERVE POLICY
Potable Water
365 Days
180 Days
Days
100 Days
200 Days
300 Days
400 Days
500 Days
600 Days
700 Days
800 Days
900 Days
1000 Days
FYE 2022 FYE 2023 FYE 2024 FYE 2025 FYE 2026 FYE 2027 FYE 2028 FYE 2029 FYE 2030 FYE 2031 FYE 2032 FYE 2033 FYE 2034 FYE 2035 Potable Water - Days Cash on Hand
Modeled Days Cash Target Days Cash Goal Minimum Days Cash Goal ~<, ~<, ~<,
"?'
~<,
~<,
"''l> ~",,
"''l> ~<,
~<,
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Recycled Water
365 Days
180 Days
Days
200 Days
400 Days
600 Days
800 Days
1000 Days
1200 Days
FYE 2022 FYE 2023 FYE 2024 FYE 2025 FYE 2026 FYE 2027 FYE 2028 FYE 2029 FYE 2030 FYE 2031 FYE 2032 FYE 2033 FYE 2034 FYE 2035 Recycled water - days cash on hand
Modeled Days Cash Target Days Cash Goal Minimum Days Cash Goal -
Wastewater
365 Days
180 Days
Days
100 Days
200 Days
300 Days
400 Days
500 Days
600 Days
700 Days
800 Days
FYE 2022 FYE 2023 FYE 2024 FYE 2025 FYE 2026 FYE 2027 FYE 2028 FYE 2029 FYE 2030 FYE 2031 FYE 2032 FYE 2033 FYE 2034 FYE 2035 Wastewater - days cash on hand
Days Cash Target Days Cash Goal Minimum Days Cash Goal
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PROPOSED ACTIONS
ITEM 11: UTILITIES RESERVE POLICY

1. Adopt a City Council resolution adopting a Utilities Reserve Policy for the wastewater enterprise fund

Carlsbad City CouncilMarch 7, 2023

Carlsbad City Council
March 7, 2023