City of Corona
Staff Report
400 S. Vicentia Ave.
Corona, CA 92882
File #: 22-0429
REQUEST FOR CITY COUNCIL AND
CORONA UTILITY AUTHORITY ACTION
DATE: 05/18/2022
TO: Honorable Mayor and City Council Members
Honorable President and Board Members
FROM: Utilities Department
SUBJECT:
Resolution approving Administrative Policy 01200.606 Reserve Policy for Utilities Department Operating Funds.
EXECUTIVE SUMMARY:
Administrative Policy 01200.606 establishes appropriate levels of financial reserves in the Water Utility Fund (570), Reclaimed Water Utility Fund (567), Sewer Utility Fund (572), and Electric Utility Fund (578). The policy also establishes a plan to build and replenish the reserves as needed and describes the conditions warranting the use of the reserve funds.
RECOMMENDED ACTIONS:
That the:
a. City Council adopt Resolution No. 2022-039, approving Administrative Policy 01200.606, Reserve Policy for Utilities Department Operating Funds. b. Corona Utility Authority review, ratify, and to the extent necessary, direct that the City Council take the above action.
BACKGROUND & HISTORY:
In 2021, an organizational, operational, and financial audit of the Department of Water and Power, now known as the Utilities Department (UD), was completed. The audit was completed by Raftelis Financial Consultants, Inc. The vendor was selected through a competitive bid process and was awarded the contract on June 17, 2020. The final report was issued in May 2021 and presented to the City Council at the June 23, 2021, Study Session.
During the audit, a financial assessment was completed of the water, sewer, reclaimed water, and City of Corona Page 1 of 3 Printed on 5/12/2022
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File #: 22-0429
During the audit, a financial assessment was completed of the water, sewer, reclaimed water, and electric utility funds. In addition to analyzing the operating budget for each utility, the working capital of each fund was examined. Working capital is the difference between current assets and current liabilities. According to the Government Finance Officers Association (GFOA), maintaining adequate levels of working capital ensures that the City can meet financial obligations or manage risks like revenue shortfalls or unanticipated expenses. Credit rating agencies also consider the availability of working capital when evaluating creditworthiness for enterprise funds.
One of the audit’s recommendations is to establish a working capital target policy for each utility enterprise fund. The City of Corona does not currently have a formal policy for working capital in the enterprise funds. The City does have a formal policy for the General Fund where the fund balance amount is targeted at 25 percent of annual operating expenses in that fund. Establishing a working capital target for enterprise funds is a best practice recommendation from the GFOA and will allow the utilities to have enough resources to manage any unforeseen expenses or reductions in revenue.
These targets do not need to be the same across all enterprise funds, but instead should consider billing cycles, demand for services, asset condition, expense volatility, potential impacts of natural disasters, and debt position for each fund.
ANALYSIS:
Based on recommendations from the UD audit, staff worked with the Finance Department and Legal & Risk Management Department to develop a reserve policy for the utility operating funds. The purpose of the policy is to maintain prudent levels of financial resources to protect utility customers against service disruption in the event of unexpected temporary revenue shortfalls or unpredicted one-time expenditures, and to maintain credit worthiness of the City and the UD. The policy also establishes a plan to build and replenish reserves as needed and describes the conditions warranting the use of reserve funds.
Target Reserve Amount
Commencing with Fiscal Year 2022, the target reserve amount for each of the UD Operating Funds shall be set at ninety (90) days of operating expenses for each fund plus the current annual depreciation amount for each fund. The target reserve amount for each of the UD Operating Funds will be adjusted with each rate study process and incorporate a five-year review of operating expenses and depreciation amounts. Depending on the fund, it may take time to hit the target reserve amount.
To build the target reserve amount, the UD shall annually contribute 10 percent of the difference between actual operating revenues and actual operating expenses for each of the UD Operating Funds at the beginning of each fiscal year until the target reserve amount is met. Operating revenues generally exceed operating expenses, which should allow the fund to contribute to the reserve account each year. Once the reserve amount reaches the target, the additional funds shall remain in fund balance and will no longer be contributed to reserves.
Permissible Use of the Reserve Funding
Reserve funding may be used for the following purposes subject to the prior approval of the City Council and Corona Utility Authority, as applicable:
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• As needed in the event of a declaration of a state or federal emergency or a local emergency as defined in Corona Municipal Code Section 2.52.020
• Emergency projects
• To fulfill debt obligations
• To phase in the impact of unforeseen cost increases, such as significant increases in imported water costs, wastewater treatment costs, changes in energy costs, and other significant expense fluctuations
• To address unexpected revenue shortfalls
Replenishment of Reserve Funding
Whenever reserve funding is used, as noted above, the UD shall replenish the balance by contributing 10 percent of the difference between actual operating revenues and actual operating expenses for the applicable UD Operating Funds until the target reserve amount is met.
The Finance Department and the Utilities Department recommend approval of Administrative Policy 01200.606 to establish the appropriate financial reserves for the Utilities Department Operating Funds.
FINANCIAL IMPACT:
The reserve policy will lower the available working capital in the Water Utility Fund (570), Reclaimed Water Utility Fund (567), Sewer Utility Fund (572) and Electric Utility Fund (578) by the amount of the annual reserve contribution up to the target reserve amount. Reserve funding will only be available for the purposes listed in the permissible use section above.
ENVIRONMENTAL ANALYSIS:
This action is exempt pursuant to Section 15061(b)(3) of the Guidelines for the California Environmental Quality Act (CEQA), which states that a project is exempt from CEQA if the activity is covered by the commonsense exemption that CEQA applies only to projects that have the potential for causing a significant effect on the environment. Where it can be seen with certainty that there is no possibility that the activity in question may have a significant effect on the environment, the activity is not subject to CEQA. This action is for approval of a financial reserve policy and there is no possibility that adoption of Resolution No. 2022-039 will have a significant effect on the environment. Therefore, no environmental analysis is required.
PREPARED BY: ERIN KUNKLE, BUSINESS SUPERVISOR
REVIEWED BY: TOM MOODY, DIRECTOR OF UTILITIES
Attachments:
1. Exhibit 1 - Resolution No. 2022-039
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