Services of the San Francisco Public Utilities Commission SFPUC Fund Balance Reserve Policy Revision:
Incorporate CleanPowerSF Fund Balance
Reserve Policy
Kristina Alagar Cordero
Director of Financial Planning
April 26, 2022
Agenda
1. Fund Balance Reserve Policy Background
2. Policy Revision Drivers:
i. CleanPowerSF program maturity
ii. 2022 Power Rate Study Recommendations
iii. Changing market conditions
3. Proposed Revision: Revise Existing Policy with
CleanPowerSF Reserve Policy
2 Fund Balance Reserve Policy
Background
• Established in 2017 after last drought
• Supports SFPUC Strategic Plan goal of financial
sustainability; financial best practices
• Provides consistency in decision-making
• Signals financial sustainability to rating agencies
and investors
• Continues reliable service and rate stabilization in
times of economic instability, drought, natural
disasters, etc.
3 Fund Balance Reserve Policy
Background (cont.)
• SFPUC Fund Balance Reserve Policy (2017):
• Minimum 90 days, 25% operations and
maintenance expenses
• CleanPowerSF Reserve Policy (2018):
• Operating Reserve Fund: 90 days operating
expenditures
• Rate Stabilization Reserve Fund: 15% annual
revenues
• CleanPowerSF specific policy needed as program
influenced by volatile power supply market and
susceptible to competitive pressures
4 Policy Revision Drivers
• CleanPowerSF program maturity driving change
• Simplify policy to single metric and document
• Set adequate reserves for expenditures, keeping in
mind volatile power supply cost
• Standardize timeframe of calculation
• Establish a minimum and a target that reflects best
practice for CCA programs
• 2022 Power Rate Study consultant benchmarked
against other Community Choice Aggregation (CCA)
programs
5 Policy Revision Drivers (cont.)
• Use one metric: percent of operating
expenditures
• Minimum: 150 days cash on hand (41% of
annual operating expenditures)
• Target: 180 days cash on hand (50% of annual
operating expenditures)
• Operating expenditures include operations and
personnel costs as well as power supply costs
• Evaluate quarterly
• At fiscal year-end, implement plan to replenish
reserves to target within three fiscal years if
reserves fall under target
6 Proposed Action Item
• Revise SFPUC Fund Balance Reserve Policy
(Resolution 17-0044)
• Incorporate CleanPowerSF Fund Balance
Reserve
• Replace CleanPowerSF Reserve Policy within
CleanPowerSF Business Practice Policies in
Resolution 18-0028
7 Services of the San Francisco Public Utilities Commission 8 Thank You!
DEPARTMENT
Financial Services
AGENDA NO.
13 MEETING DATE
April 26, 2022
AGENDA ITEM
Public Utilities Commission
City and County of San Francisco
Approve Revision to San Francisco Public Utility Commission Fund Balance Reserve Policy :
Regular Calendar
Project Manager: Charles Perl
Summary of
Proposed
Commission
Action:
Adopt revised SFPUC Fund Balance Reserve Policy incorporating a CleanPowerSF Fund Balance Reserve and replace the existing CleanPowerSF Reserves Policy.
Background:
Under San Francisco Charter Section 8B.125 , the San Francisco Public Utilities Commission (SFPUC) must prudently manage operations to protect ratepayer funds.
The SFPUC has a number of financial polic ies in place to support this mandate: See Commission Resolution No. 17-0044 Fund Balance Reserve Policy, Resolution No. 17- 0060 Debt Service Coverage Policy, Resolution No. 17-0061 Capital Financing Policy , and Resolution No. 17-0198 Ratepayer Assurance Policy in 2017. Financial policies represent agency best practices and support prudent financial management, reliable service, organizational accountability, consistent decision-making, and strong credit ratings.
Background
On February 28, 2017, byr Resolution No. 17-0044, this Commission adopted Fund Balance Reserve P olicy for all Enterprises. The policy provides that operating and capital budgets and rates are to be proposed “such that the Fund Balance Reserve totals a minimum of 90 days or 25% of Operations and Maintenance Expenses (including programmatic projects, and excluding debt service and revenue -funded capital) throughout the forecast period. Amounts in excess of the minimum will be considered for contingencies and rate stabilization.”
The SFPUC faces a number of risks to revenue stability, including multi -year rate packages, drought and weather variability, and highly volumetric rates. A strong Reserve Policy ensures that the SFPUC is able to weather financial volatility resulting from economic instability, drought, and natural disasters . Rating agencies and
investors consider strong reserve policies as a key component of financial
sustainability.
While CleanPowerSF operates under much of the same legal and policy framework as the SFPUC’s other utility services, the program is also uniquely reliant on a volatile power supply market and faces competitive pressures that reduce its flexibility for rate increases.
Moreover, CleanPowerSF’s credit impacts not only lending terms, but also third - party power supply contra cts, a key tool to mitigate market exposure. To manage these risks and reduce susceptibility to emergency rate increases, the Commission adopted a program-specific Reserve Policy within the CleanPowerSF Business Practice Policies Plan under Resolution No. 1 5-0267 and subsequently amended in Resolution No. 18-0028, with two components to the reserve policy: (1) an Operating Reserve Fund equal to 90 days of operating expenditures in alignment with the agency-wide policy and (2) a Rate Stabilization Reserve Fund equal to 15% of annual revenues.
This existing CleanPowerSF Reserve Policy is complex and based on two s eparate metrics: 90 days of expenditures and 15% of annual revenues. Expenditures are calculated on a fiscal year basis, whereas revenues are calculated on a trailing 12 - month basis. Furthermore, the existing policy was established during CleanPowerSF’s ea rly start -up phase of of operations, and an evaluation has been performed as part of the 2022 Power Rate Study to better reflect and account for a more mature and steady state program. The independent rate study consultant, NewGen Strategies & Solutions has engaged its subconsultant Bell Burnett & Associates to research and benchmark against Community Choice Aggregation programs’ reserve polic ies as well as evaluate and recommend a reserve policy for CleanPowerSF.
Proposed Updates to the SFPUC Fund Balance Reserve Policy This policy change seeks to amend the existing SFPUC Fund Balance Reserves Policy by adding a specific CleanPowerSF Fund Balance Reserve minimum and target with the goal of (1) simplifying the CleanPowerSF Reserve minimum and target for ease of calculation; ( 2) ensuring that adequate reserves are set aside for expenditures, keeping in mind of a volatile power supply budget; ( 3) standardizing the timeframe consistent with planning for the fiscal year; (4) benchmarking reserve policy of local Community Choice Aggregation Programs; and (5) folding a specific CleanPowerSF Reserve target into the SFPUC Fund Balance Reserves Policy applicable to all Enterprises and business lines. The new CleanPowerSF Fund Balance Reserve will replace the existing CleanPowerSF Reserve Policy.
Based on the background work from the consultant,the following policy changes are recommended:
1. Update the SFPUC Fund Balance Reserve Policy to f ormulate a specific CleanPowerSF Fund Balance Reserve range based on a days cash on hand of operating expenditures in lieu of a two -part policy . This single metric will standardize timeframe and simplify calculations to gauge compliance with policy.
2. Establish a minimum level for the CleanPowerSF Fund Balance equal to 150 days cash on hand ( five months, 41%) of annual operating expenditures. This level represents the minimum reserve level for basic operations and reflects best practice for Community Choice Aggregation Programs.
3. Establish a CleanPowerSF Fund Balance target equal to 180 days cash on hand (six months , 49%) of annual operating expenditures. The difference between the minimum and target represents funds available to use for large unexpected changes in revenues or expenses, particulary with a volatile
energy environment as well as for rate stabilization. This level reflects industry best practice for Community Choice Aggregation Programs.
4. Requirement to restore reserves to target of 180 days cash on hand ( six months, 50% ) of annual operating expenditures within three fiscal years should the Fund Balance Reserve fall below the minimum or target at fiscal year-end close.
Result of
Inaction:
If the proposal is not approved, the existing policies will remain in place and will result in complex and various timeframes of calculations as well as inconsistent representation of the program’s maturity and misalignment of CleanPowerSF reserves with best practices for Community Choice Aggregation Programs.
Recommendation: SFPUC staff recommends that the Commission adopt the attached resolution.
Attachments: 1. CleanPowerSF Reserve Policy Memo
2. Revised SFPUC Fund Balance Reserve Policy
PUBLIC UTILITIES COMMISSION
City and County of San Francisco
RESOLUTION NO.:
WHEREAS, The San Francisco Public Utilities Commission (SFPUC), pursuant to San Francisco Charter Section 8B.125, must establish “rates, fees and charges at levels sufficient to improve or maintain financial condition and bond ratings at or above levels eq uivalent to highly rated utilities of each enterprise under its jurisdiction, meet requirements and covenants under all bond resolutions and indentures… and provide sufficient resources for the continued financial health (including appropriate reserves), operation, maintenance and repair of each enterprise, consistent with good utility practice”; and WHEREAS, Under ecommendations by the Government Finance Officers Association (GFOA), governmental entities such as the SFPUC should develop financial policies to guide the creation, maintenance, and use of resources for financial stabilization purposes; and WHEREAS, As one component of sound financial policy recommended by the GFOA , governmental entities should maintain a prudent level of financial resources t o protect against reducing service levels or raising rates of fees because of temporary revenue shortfalls or unpredicted one-time expenditures; and
WHEREAS, The Commission had previously approved the Fund Balance Reserve Policy in February 2017 which esta blishes a minimum 90 days or 25% of Operations & Maintenance Expenses for each Enterprise throughout a forecast period; and WHEREAS, The Commission had previously approved in Resolution No. 18 -0028 the CleanPowerSF Reserve Policy in the CleanPowerSF Busin ess Practice Policies , and staff has recently completed an evaluation of this policy as part of the 2022 Power Rate Study and revised as necessary; and
WHEREAS, Staff has presented this Commission with recommended changes to the Fund Balance Reserve Policy; and
WHEREAS, The proposed Fund Balance Reserve for CleanPowerSF would est ablish a minimum equal to 150 days cash on hand (or 41%) of annual operating expenditures and a target equal to 180 days cash on hand (or 49%) of annual operating expenditures; and
WHEREAS, The proposed Fund Balance Reserve would require CleanPowerSF to build- back to target of 180 days cash on hand (or 49%) of annual o perating expenditures within three years should it fall below the minimum or target at fiscal year-end close; now, therefore, be it RESOLVED, That the Commission hereby approves the revisions to the SFPUC Fund Balance Reserve Policy to include the CleanPowerSF Fund Balance Reserve , replacing the CleanPowerSF Reserve Policy approved by the Commission in Resolution No. 18 -0028, on file with the Commission Secretary.
I hereby certify that the foregoing resolution was adopted by the Public Utilities Commission at its meeting of April 26, 2022.
Secretary, Public Utilities Commission
SAN FRANCISCO PUC – RESERVE POLICY CONSIDERATIONS 1
MEMORANDUM
TO: Erin Franks, San Francisco PUC Rates Administrator
FROM: Bell Burnett & Associates (BB&A)
DATE: August 18, 2021
RE: CleanPowerSF Reserve Policy
Bell Burnett & Associates ( “BB&A”) in coordination with NewGen Strategies and Solutions, LLC (“NewGen”) and in support of the 2021 Power Rates Study (Study), has developed the enclosed memo regarding CleanPowerSF’s (“CPSF”) Reserve Policy. The purpose of this memo is to outline certain considerations that the San Francisco Public Utilities Commission (“SFPUC”) may want to evaluate in connection with the liquidity reserve for CPSF.
Executive Summary
BB&A recommends that CPSF consider adopting a new Reserve Policy that identifies a minimum liquidity threshold along with a targeted liquidity level to be achieved over time. Maintaining sufficient liquidity is lynchpin of the enterprise’s future credit rating and key component of promoting long-term fiscal stability and flexibility . The objective of these changes is to simplify the existing Reserve Policy, reducing the existing two reserves into a single one. It is further intended to be consistent with existing SFPUC policies , targeting 25% of operating expenses, while meeting the requirements and expectation of both internal and external stakeholders.
BB&A recommends a minimum liquidity threshold of 90 days of operating expenses with a longer-term target of 180 days, and that the SFPUC should adopt a ten- year plan that funds the reserve target over a period of three to five years.
Reserve Policy Objectives
The SFPUC’s existing Reserve Policy for CPSF bifurcates liquidity into two categories: i) operating reserve equal to 90 days of operating expenses and ii) contingency/rate stabilization reserve equal to 15% of operating revenues. The objective of the Reserve Policy states:
“The SFPUC will prudently manage CleanPowerSF operations in a manner that supports its long-term financial independence and stability, provides sufficient financial capacity to bridge
SAN FRANCISCO PUC – RESERVE POLICY CONSIDERATIONS 2
shortfalls in cash flow and covers unanticip ated expenditures, while at the same time reduces susceptibility to emergency rate increases due to revenue shortfalls and considers ratepayer impact and fairness.”
“Prudent reserve policies are critical to securing favorable commercial terms from both third - party service providers and lenders and to the development of a future stand-alone CPSF credit rating.”
“Consistent with this policy and with the San Francisco Ch arter, the SFPUC will adopt budgets and establish rates for CPSF that provide for adequate ratepayer protection in the form of an Operating Reserve Fund and a Contingency/Rate Stabilization Reserve Fund.” These stated objectives remain applicable and prudent for CPSF. At the same time, it is also worth noting that, unlike the other enterprise funds of the SFPUC, CPSF operates within a competitive environment. Any Reserve Policy, including minimum and target liquidity levels, must also be evaluated within the context of maintaining competitive rates. This counterbalance will intrinsically put pressure on the ability to fund reserves, but in our estimation, having robust reserves is critically important to CPSF’s long-term financial stability, particularly in today’s power market. The question becomes at what level and over what time period should reserves be funded. In determining potential reserve targets, there are several key objectives to keep in mind.
• First, reserves should be set at a level that is affordable for and fair to ratepayers. If reserves are deemed to be in excess of necessary levels, then they should be returned to ratepayers in the form of reduced rate increases.
• Second, reserves should be set at a level that promote s and enhances the enterprise’s long-term fiscal stability, including the protection of its credit rating (s) now and in the future.
• Third, reserves should be set at a level using a simple and straight forward methodology that is transparent to internal and external stakeholders and is readily calculable by the SFPUC.
Methodology and Sizing
Consistent with most public power utilities in California, BB&A recommends that CPSF consider adopting a new Reserve Policy that contains a single reserve based on total annual operating expenses. This Reserve Policy would contain both a minimum liquidity threshold of 90 days and a targeted liquidity threshold of 180 days of annual operating expenses. The SFPUC would further agree to adopt a ten-year plan that funds the reserve target, ideally, in three years but in no event, not in excess of five years. In making this recommendation, we have looked at other CCA programs, prudent utility practices, and debt rating agency expectations.
SAN FRANCISCO PUC – RESERVE POLICY CONSIDERATIONS 3
In looking at other CCA programs, we would highlight that there are significant limitations in this approach given the variability among different CCA programs. It is challengin g to see any program as truly comparable since: i) these entities are in large part unrated by debt rating agencies, ii) these programs are at different points in time in their roll- out and maturity, iii) the size and scale of the programs differ significa ntly including meaningfully different operating profiles and approach and iv) CPSF is a single entity under the auspices of the SFPUC and the City and is not part of a Joint Power Agency (JPA).
Notwithstanding these differences, it is possible to get a sense of how other programs are setting their reserves. For the most part, minimum reserves are in the 90-day range with targets ranging from 40% to 60% of operating expenses. Interestingly and not totally unexpected, it is the smaller programs that tend to show strong liquidity metrics, driven in part by smaller operating expenses, while larger programs may naturally take longer to reach targeted levels given the larger absolute reserve requirements. These comparables are detailed in Exhibit I and are summarized by size below.
While these comparables provide some check on the reasonableness of the proposed funding level, what may be more illustrative and important is the views of external stakeholders, including credit providers and the rating agencies. H aving access to external li quidity is a prudent utility practice and one that is employed by the SFPUC for the both the water and sewer enterprise funds. Reserves are an important component of a bank’s internal credit review.
Similarly, the rating agencies have an important role to play in the future of CPSF. Ratings drive the SFPUC’s cost of external liquidity as well as the cost of any long -term borrowing for capital expenditures, if ever needed. Protecting and even enhancing CPSF’s rating(s) should be a key objective in setting the Reserve Policy. While we understand that rate competitiveness may arguably be the most important business consideration, the potential deterioration of CPSF’s credit profile as evidenced by materially declining reserves would undermine the CPSF’s long- term fiscal stability. The CPSF is, and will continue to be, a market participant by its nature, whether in financing or power purchases, and ratings are one of the clearest signals to potential counterparties as to the financial wherewithal of the agency. While liquidity is only one credit metric, it is a very important consideration for credit quality.
SAN FRANCISCO PUC – RESERVE POLICY CONSIDERATIONS 4
In December 2020, Moody’s provided an issuer credit rating of A2 for CPSF. Moody’s highlighted a number of strengths and considerations in reaching this rating, including the underlying strength of the City as a service territory. The rating is below the AA category ratings of the other City enterprise funds, which is to be expected given the newness of the CPSF enterprise fund and the competitive landscape ; however, liquidity was also noted as a particular metric with a potential impact on the rating depending on future liquidity levels. Moody’s did note the benefit of the overall liquidity of the City, highlighting “access to the City of San F rancisco's sizeable Treasury pool in an emergency situation,” but also specifically stated:
1. Factors that could lead to an upgrade
o Strengthening of liquidity position, through continued trend of sound financial operations and meeting forecasted expectations
2. Factors that could lead to a downgrade
o Significant and permanent load loss, impacting CleanPowerSF’s ability to remain competitive and negatively impacting ability to maintain or increase current liquidity level going forward
o Reluctance or lack of willingness to raise rates such that liquidity profile weakens
Moody’s went on to note : “Per unaudited FY 2020 financial statements, as of June 30, 2020, CleanPowerSF had an estimated $84 million in unrestricted cash, or 156 [Days Cash on Hand] DCOH. As of September 2020, the unrestricted cash balance increased to approximately $98.3 million. CleanPowerSF expects to build up unrestricted cash to $114 million, or around 184 days, by FY 2024. From FY 2025 onward, CleanPowerSF forecasts DCOH will be above 200 days and eventually reach 313 days by FY 2030. While CPSF can draw from reserves to stabilize rates and promote short-term rate competitiveness, their forecast does not currently anticipate having to dip into reserves as a result of load declines from coronavirus’ related shutdowns, or bad receivables. The strengthening of liquidity could lead to positive pressure on the rating should CleanPowerSF exceed its forecasted goals. CleanPowerSF's internal liquidity target is three months’ operating expenses and 15% of trailing twelve months' revenue.” There are several key observations from this commentary. First, Moody’s is using unrestricted cash for this calculation, which may not be how the SFPUC calculates available reserves for CPSF.
Second, there is a clear expectation that there will be at least 150 days of cash on hand. To maintain its current credit rating, SFPUC should likely set the range between any minimum reserve and the target level comfortably within this expectation. In other words, if the SFPUC sets a minimum of 90 days for reserves, the targeted range should be at or incrementally higher than the 150 days, such as 180 days. Finally, this commentary would also suggest that if the actual reserves are significantly below the 150 days (even if the policy minimum is 90), then this could lead to adverse rating action. This is a very important distinction because the policy may not be as important as the actual reserves as a credit and rating agency matter.
We would also note that 90 days of operating expenses as a minimum is less than the existing policy that also incorporates 15% of operating revenues. We believe that 90 days is at the low SAN FRANCISCO PUC – RESERVE POLICY CONSIDERATIONS 5
end of the range that would be acceptable for a public power utility with considerable operating history. Standard & Poor’s has typically stated that AA category utilities must have a policy of at least 90 days of operating expenses. While the water and sewer enterprise funds are certainly more mature, and there is no need unto itself for CPSF to have AA ratings at this point, these enterprise funds also generally maintain liquidity substantially in excess of this m inimum. If anything, we would prefer the CPSF minimum to be incrementally higher, but we are also trying to balance the need to maintain competitive rates. Regardless of where the minimum is set, the question will be where the actual reserves will be and how close actual reserves are to the targeted levels. As a utility best practice, we would recommend actual reserves that are set above the minimum threshold if at all possible. Moody’s has already noted their expectation, and we believe that setting reserves at levels that will help or even enhance the rating over the long-term is a prudent strategy.
Conclusion
BB&A recommends a minimum liquidity threshold of 90 days of operating expenses and a target of 180 days. These reserve levels are supported b y comparable agencies and consistent with external stakeholder expectations, including those of Moody’s . We would not recommend a minimum reserve level under 90 days. That said, what is most important is not the minimum reserve but the targeted levels and the corresponding actual results. Maintaining sufficient liquidity is lynchpin of the enterprise’s future credit rating and key component of promoting long- term fiscal stability and flexibility. Events over the past year have certainly suggested that there is meaningful unpredictability in the power industry, and maintaining sufficient liquidity is very much a prudent utility practice. We recommend that the SFPUC develop a target and actionable plan to get to 150-180 days of operating expenses within a three to five-year time timeframe.
SAN FRANCISCO PUC – RESERVE POLICY CONSIDERATIONS 6
Exhibit I
FUND BALANCE RESERVE POLICY
The San Francisco Charter Section 8B.125 requires the SFPUC to be a financial steward by establishing “rates, fees and charges at levels sufficient to improve or maintain financial condition and bond ratings at or above levels equivalent to highly rated utilities of each enterprise under its jurisdiction, meet requirements and covenants under all bond resolutions and indentures… and provide sufficient resources for the continued financial health (including appropriate reserves), operation, maintenance and repair of each enterprise, consistent with good utility practice.” To most effectively meet this requirement, the SFPUC will utilize financial policies that foster financial stability, support fiscal discipline, and maintain credit ratings at or above levels equivalent to highly rated utilities. Institutionalized policies signal to rating agencies and the capital markets that an entity is well managed and committed to prudent financial practices.
The SFPUC faces a number of risks to revenue stability, including multi-year rate packages, drought and weather variability, and highly volumetric rates. To manage these risks and reduce susceptibility to emergency rate increases, the SFPUC will ensure adequate ratepayer protection in the form of a Fund Balance Reserve. For each enterprise, the SFPUC will adopt budgets and establish rates to maintain undesignated fund balances that provide sufficient capacity to bridge shortfalls in cash flow and cover unanticipated expenditures, while also considering ratepayer impact and fairness in compliance with the San Francisco Charter.
Specifically, for the time period covered in the SFPUC's Charter-mandated 10-Year Financial Plan, operating and capital budgets and rates will be proposed for adoption such that the Fund Balance Reserve totals a minimum of 90 days or 25% of Operations & Maintenance Expenses (including programmatic projects, and excluding debt service and revenue-funded capital) throughout the forecast period. Amounts in excess of the minimum will be considered for contingencies and rate stabilization.
In the event that Fund Balance Reserve exceeds 250 days or 68% of Operations & Maintenance Expenses, this fact will be brought to the Commission during the subsequent biannual budget process for consideration for uses, including:
• The reduction of future customer rate increases,
• Management of unanticipated one-time events (such as an earthquake or disaster), or any ongoing impairment to revenues (such as a drought or economic downturn), or • Revenue-funded capital projects, which will reduce projected future debt issuance.
To monitor compliance with this policy, SFPUC Finance staff will present this metric to the Commission as part of the annual 10-Year Financial Plan and Quarterly Budget Status Report.
CLEANPOWERSF FUND BALANCE RESERVE
While CleanPowerSF operates under much of the same legal and policy framework as the SFPUC’s other utility services, the program is also uniquely reliant on a volatile power supply market, and faces competitive pressures that reduce its flexibility for rate increases. Moreover, CleanPowerSF’s credit impacts not only lending terms, but also third-party power supply contracts, a key tool to mitigate market exposure. In the case of CleanPowerSF, the reserves need to be higher than in other Enterprises to account for the increased financial pressures and need for rate stabilization faced by power supply market volatility impacting open positions.
Consistent with this policy and with the San Francisco Charter, the SFPUC will adopt budgets and establish rates for CleanPowerSF that provide for adequate ratepayer protection in the form of a Fund Balance Reserve.
This Fund Balance Reserve for CleanPowerSF will be established at the following funding levels to mitigate short-term, unanticipated loss of revenues or increase in expenses; stabilize rates; and support the growth of the program:
• Operating Reserve Fund Minimum: equal to 150 days cash on hand (or 41%) of annual operating expenditures; and
• Operating Reserve Fund Target: equal to 180 days cash on hand (or 49%) of annual operating expenditures.
“Operating expenditures” are defined as all expenses in annual funds, including both operations and maintenance and personnel costs, as well as power supply costs and related expenditures, but excluding contributions to the reserve fund. The Fund Balance Reserve will be evaluated at least quarterly; the days cash on hand for Fund Balance Reserve minimum and target will be calculated using an annual basis of the twelve months operating expenditures in the fiscal year.
To allow for rate stabilization, budgets and rates may be set to draw down the Fund Balance Reserve to a minimum of 150 days cash on hand; further reductions should only occur due to unanticipated expenditure or revenue changes during the fiscal year. If the Fund Balance Reserve ends the fiscal year below the target of 180 days cash on hand, budgets and rates must be set to build back up to the target within three fiscal years.