1 Sonoma Water FY 26/27 Water Transmission Budget Review Finance Subcommittee Questions - Responses
Questions:
1. Page vii: Clarify “Unspent budget is rolled forward to subsequent budget years to avoid being included in the rate calculation more than once.” Does this apply only to certain types of expenses? It seems this treatment would depend on the nature of the expense.
You are correct. This statement was meant to convey that unspent budget related to “nonroutine projects” (which includes studies, planning, design, and construction) is generally rolled. The Beginning and Ending Cash Summary Tables in the Draft Budget Package (starting on page 15) have a 25/26 Estimated Column, a 25/26 Adopted Budget, and a 26/27 Requested Budget. The Estimated Column is the adjusted budget for all projects including budget that was rolled forward. Unspent budget is rolled forward to subsequent budget years to avoid being included in the rate calculation more than once. Project managers take the adjusted budget into account in preparing their budget submittals for the following year so rolled funds are not double counted.
Unspent budget related to routine maintenance related expenses are generally not rolled to the subsequent year.
The statement has been clarified in the packet to say “non-routine projects”.
2. Page xvii: In some cases, the capital project’s summary amounts differ from the 2027 totals shown on the Long-Range Financial Plan. Some are shown higher on the capital projects summary, and some are lower. For example, the Wilfred Booster station has $548,910 on page xvii and is $426,340 on the Long-Range Financial Plan document. Can you please explain the differences between the two schedules?
Listed capital project amounts will differ between the FY26/27 budget and the Long-Range Financial plan as they represent different views of the same projects. The budget book lists previously unbudgeted project needs (anticipated spend during the budget year minus estimated PY unspent budget that will be rolled forward). The long-range financial plan represents anticipated FY spend net of grant funding. Therefore, if a project has estimated roll forwards the budget book would generally be less than the LRFP. If a project has grant funding, it’s possible that the LRFP would have a lower amount than the budget book which would also include the offsetting revenue.
3. Page 9: Water Deliveries: In FY 24/25 SW compared the 3-year average vs the past 12 months and used the higher of the two volumes for the budget. Is this same option available for FY 26/27 and if so, how would that change the O&M rate calculation? 2 The terms of the Restructured Agreement for Water Supply require that budgeted deliveries be the lesser of the preceding twelve months of water delivered, or the average annual amount of water delivered during the preceding 36 months.
This requirement is to ensure Sonoma Water can meet its obligation to set rates at an amount that covers the projected costs for the following year. Sonoma Water must also generate sufficient revenue to cover debt obligations and maintain a debt coverage ratio as stipulated in outstanding bond issuances.
The Restructured Agreement for Water Supply does allow that “If because of drought or other water-supply reduction, state or federal order, or other similar condition, the Agency anticipates that any such quantities will not be predictive of future usage, the Agency may use a different amount with the prior approval of the Water Advisory Committee.” In FY24/25, SW determined that the historic drought and mandated state conservation measures deliveries were historically low for the preceding 12-month period. The spring 2023 landslide that curtailed use of the North Marin Aqueduct also contributed to the reduction in deliveries. Those two conditions and subsequent analysis gave Sonoma Water confidence that the 12-month deliveries were not “predictive of future usage”.
Qualifying conditions to deviate from the prescribed formula are not evident to Sonoma Water this year. See page iii-iv of the budget packet. Historical trends continue to show flat or negative growth. Note that year-to-year differences in actual deliveries did show positive growth in the 3-year and 10-year periods, but this is skewed by the fact that both FY15/16 and FY22/23 set records as our two lowest delivery years on record, meaning the 3- year and 10-year figures have abnormally low starting points.
Based on this info Sonoma Water does not intend to seek WAC approval to deviate from the usual calculation.
4. Page 6: O&M Rate Computation: Please provide the sources for the inputs used in the O&M rate calculation. Using the inputs as listed, my calculation results in $1,110.16, not $1,114.73.
Thank you to Julie for catching this discrepancy. An error was introduced into the formula by accident this FY resulting in a deviance between the simplified calculation shown on the page and the calculation to the side that populated the rate. This has been fixed and we have confirmed that the numbers now result in the correct calculation. Fixing this error did result in a slight decrease in the O&M Rate.
5. Page 15 – If actual revenues for FY 25/26 are higher than estimated how does this impact the budget and rates.
Sonoma Water considers available fund balance during the annual budgeting process and utilizes fund balance when prudent. If revenues come in higher than estimated in FY25/26 the additional amount would be available to offset future year rate increases. FY26/27 rates 3 will already be set so the overages that fall into fund balance could be a factor in rate setting for FY27/28, although these funds could also be utilized to replenish our 3-month operating reserve (see answer to question 9 below) so it is fully funded.
6. Page 16 - FY 25/26 expenses are estimated to be $10M higher than budget. How does that impact the budget and rates?
FY25/26 expenses are estimated to be roughly $10M more than Adopted Budget. Adjusted budget is roughly $10.5M more than Adopted Budget due to the PY roll forwards and Budget Resolutions approved during the year. The Estimated Column includes costs anticipated against the Adjusted Budget, which is why it is more than Adopted.
Note that two projects account for the majority of the difference between adopted and adjusted budget on this sheet. The figures below represent roll forwards from FY24/25 to FY25/26:
• Cathodic Protection - $2.8M (Phase 1 was awarded July 2025 and completion is anticipated in June 2026)
• Tank Recoating Program - $5.5M (Ralphine Tank No. 1 is currently out to bid, the roll forward included funds for this tank and also includes funds used for rate smoothing)
7. Page 16 - The estimated actuals for FY 25/26 show $17.3M in consultant expenses (account 51803). In the FY 25/26 budget, the FY 24/25 estimated actuals for this account were $19.6M, while the actual reported amount was only $7.2M. Please explain these significant swings? I can see why this was confusing. The Estimated Column and PY Actuals Column are used for varying purposes and are therefore show certain data differently.
The PY actuals column only shows actual expenditures which excludes fund encumbered but not spent (change in encumbrances is factored in under the adjustments section at the bottom of the sheet for fund balance purposes) and excludes funds that will be rolled forward so they don’t hit the rate a 2nd time.
The Estimated Column includes adopted budget, budget roll forwards, and budget resolutions adopted during the fiscal year, with adjustments made based on estimates at calculated in January. This is to ensure we are properly calculating beginning and ending fund balances and to ensure we are not double counting funds that are rolled forward.
Therefore, the FY24/25 actuals column will not match what was in the FY24/25 estimated column from the prior year. I have provided a calculation to show how this works under question 8 below as it was easier to run the calculation on encumbrances for all of Services and Supplies rather than just one account number.
4 8. Page 16 - Total FY 24/25 actual expenses were $41.4M, yet the FY 25/26 budget listed FY 24/25 estimated actuals at $53.4M. If FY 25/26 estimated actuals show similar variance, could this result in an overallocation for FY 26/27 if actuals are used to set next year’s expenses.
Similar to above, the PY actuals column only shows actual expenditures which excludes fund encumbered but not spent (change in encumbrances is factored in under the adjustments section at the bottom of the sheet for fund balance purposes) and excludes funds that will be rolled forward so they don’t hit the rate a 2nd time.
Based on this knowledge we believe our estimate was very close to the amount of budget that was utilized and thus not available for use in the following years budget process.
9. Page 17 – The FY 26/27 ending fund balance is projected to be under target by $929K while last year the FY 25/26 budget showed a fund balance shortfall of $3.9M. Is there a defined tolerance level for this deficit? If so can it be applied to reduce the FY 26/27 rates? Ideally, we wouldn’t be showing any shortfall. The O&M fund has a prescribed 3-month reserve policy. Several years of under budget deliveries caused the funds to dip below that threshold and rebuilding it is difficult due to the nature of our rate setting formula as prescribed by the Restructured Agreement. The primary method we have to replenish our operating reserve is to bank revenue overages in years when we have deliveries above budget, which in recent times only occurred in FY24/25 (see figures on pages vi-viii). This allowed us to reduce the shortage from $3.9M to $929k in the FY26/27 budget book.
We were able to drop below the 3-month reserve during the past few years by utilizing the $4.125 M prudent reserve. The 2008 WAC Resolution states that “The Prudent Reserve balance shall be used for meeting catastrophic losses resulting from natural disaster(s) and/or reduced revenues from unanticipated reduction in water deliveries, including variations in water sales revenue due to fluctuations in weather”, so its use was permissible.
If we rely on the prudent reserve to backstop our operating reserve outside real emergency situations it will not be sufficient to cushion us during another large drought or other emergency.
I have briefly expressed my concerns at the TAC-Ad-Hoc level that the prudent reserve should be modified to (a) be counted as operating revenue for debt coverage purposes, and Source
1 Actuals $ 41,384,146.00 FY26/27 Budget Book Page 16; FY24/25 Actuals Column 2 Change in Encurnaces $ 2,262,025.00 FY26/27 Budget Book Page 17; Outstanding Encumbrances - Net Change 3 Q1 CBAs (Roll-forwards $ 10,307,301.00 SW Accounting Software - But this amount is included in the FY25/26 Estimated Column 4 Total $ 53,953,472.00 Formula (sum of rows 1,2,3)
5 PY Estimated Amount $ 53,388,446.00 FY25/26 Budget Book, Page 17, FY24/25 Estimated Column 6 Difference $ 565,026.00 Formula (row 4 minus 5)
5 (b) that the amount should be revisited as 1-month of operating expenses is likely insufficient.
Sonoma Water is currently investigating whether changes can be made to the prudent reserve that would allow it to be counted as operating revenue for debt service purposes and as part of that process the level of the reserve will also be analyzed. These changes are dependent on retiring some older debt (so a majority of the debt holders have a clause allowing a rate stabilization mechanism) and WAC approval so the earliest it would be considered is probably in the FY27/28 budget setting process.
10. Page 19 – Collector Well 2 – Pump 4 replacement $850K. Why isn’t this classified as Capital? Sonoma Water follows County of Sonoma Fiscal Policy FA-1. In consultation with the Auditor-Controller-Treasurer-Tax Collector (ACTTC) office and outside auditors, we have historically treated pump replacements as maintenance. Sonoma Water last reviewed this policy in 2024/2025 and determined that we are treating these expenses properly as maintenance.
11. Page 27 – District Operations Chgs (account 51917) is showing FY 24/25 actuals of $1.9M while the prior budget showed estimates of $5.9M. How do these large variances impact the rates from year to year?
Similar to the answers in questions 8 & 9, the difference between actual and estimated columns is tied to encumbrances and budget roll forwards. There are no encumbrances in account 51917, but we did roll forward $2.4M in account 51917 tied to the Dry Creek Habitat Enhancement Project. These funds were related to Mile 6 (budgeted as a combination of labor, contract services, and ROW) which has seen delays and for which we may seek an alternative solution.
Each year we roll forward funds tied to the project, so they do not hit the rate twice. We review Fund balances annually and utilize it, when possible, to offset the rate increase.
Note that the Corp could also ask us to cut them a check for our portion of the total Dry Creek project cost share not yet expended and although it is unlikely to occur, we factor this into our analysis of fund balance to ensure we will have enough capacity should that situation come to fruition. Note that we utilized $2.4M in Fund balance in the FY26/27 budget to reduce the rate increase (page viii).
12. Pages 43-50 – Why are there balances remaining in the revenue bond accounts? I would expect these funds to be fully expended and/or transferred into another fund? Per the terms of our Master Bond Ordinance, we must collect 115% of the annual debt service payment for each bond issue. This is being done to ensure that Sonoma Water has capacity to make debt payments in the event that revenue falls short due to deliveries coming in under budget. If we can’t make our debt payments or we don’t meet our bond covenants, the Restructured Agreement provides that the Water Contractors shall make payments to Sonoma Water to resolve the situation at year end, so this term benefits 6 Sonoma Water and the Water Contractors as it aims to prevent that scenario from occurring.
The money collected is deposited into the individual bond funds as debt payments are made from those funds.
We maintain small fund balances in all active bond funds due to timing of payments which don’t align with the seasonality of deliveries and as a contingency for the scenario where we may come in more than 15% under budgeted deliveries. This saved us a few years ago when we had our lowest year of deliveries on record and we were barely able to make our debt service payments. We review fund balances for the bond funds annually and make transfers when appropriate to the capital funds, so the extra money collected is used for its intended purpose on capital projects. See page 56 which shows the transfers out of the various bond funds.
13. Pages 54-55 – What is the current Revenue Bond Debt Coverage ratio? Page 139 of the SW FY 24/25 ACFR shows historical ratios ranging from 1.56 to 3.45 for FY15 through FY19. Because the debt coverage requirement is referenced as support for the proposed rate increase, it would be helpful to see the ratios for the most recent five years? The most recent ACFR shows historical Debt ratios ranging from 1.26 to 3.99 during the previous 5 years. Note that our current projections (currently being updated for bond issuance) show FY25/26 ratio in the 1.6 neighborhood. Note that by design our projections are on the conservative side and actuals generally come in higher than projected. See chart below:
7 14. Pages 54-55 – Are the assumptions for the 2026 Revenue Bonds the same as last years? Bond principle $35,250,000, 20 year, Interest rate 4.3%. Since these bonds were scheduled to be issued in 2025 how is the rate adjusted for the delay?
Current assumptions are for a $32.96M 20-year bond with an interest rate 4.3%. The principal amount may be reduced slightly due to the recent addition of 300k in revenue from PWRPA P-3 funds for the Warm Springs Dam Hydro Project. We have consulted with Bond Council, and they believe that our 4.3% interest rate is still a good estimate and is likely on the conservative side based on recent comparable bond sales. Debt service calculations for the 2026 bonds in future years will be based on actual bond terms once the sale is completed in May 2026.
15. Page vi Please express drop in O&M also as a percentage (~2.3%) of the overall O&M budget.
Stated as $1.7 million?
The $1.7M reduction equates to a 2.9% decrease. We have added this to the budget packet.
16. Is the $450k reduction in tank recoating an intentional cut in spending or a reflection of the constraints of delivering projects? Also, helpful to show as percentage of program and what impacts this has on the program?
The reduction is an intentional cut in the budget but not spending during the fiscal year. The Tank Rehabilitation Program was originally designed and budgeted with a smoothing factor to avoid rate spikes as the program includes varying annual expenses due to the size and number of tanks scheduled each year. We have tapped a portion of this smoothing mechanism in prior years as one way to reduce prior year rate increases. Based on the status of the program including the funds previously budgeted and intentionally rolled from prior years, as well as the current schedule, we felt comfortable reducing the ask this fiscal year. This means that 450k originally intended to be budgeted this FY and rolled to the next for rate smoothing will instead be included in a future year budget.
17. Page vi. 40.37 percent decrease in Capital spending. What is the 10 year trend in capital spending? Not uncommon to follow high spending years with a drop-off (i.e. save up and spend) We are putting together a table showing this data. We will distribute it once it is available.