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City CouncilAugust 6, 2024Riverside Public UtilitiesCASH RESERVE POLICY RiversideCA.gov2
POLICY HISTORY2016
• The approved policies documented and adopted financial goals for RPU utilities and established policies for long-term, as well as day-to-day operations of both utilities. • The policies cover areas including financial reporting, cash reserves, operating and capital budgeting, debt management, investments, risk management, financial planning, and others.2017 • Approved the Dark Fiber Leasing Program, established uniform lease rates for the use of the dark fiber infrastructure, physical and cyber security policies, a master fiber lease license agreement, and a new cost center within the Electric Fund for related expenses • Approved the Dark Fiber designated reserve fund for leased fiber activities2018 • City Council approved rates that include the use of a Line of Credit (LOC) as part of the 5-Year Rate proposal to keep utility rates as low as possible. • Utilizing a LOC reduced the electric and water rates by approximately 1% and 3%, respectively. • Approved the LOC into RPU’s fiscal policies 7/25/2024
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POLICY HISTORY2020
• The Board received an update on the Riverside Public Utility’s Cash Reserve Policy, funds and use of funds. • At this meeting, the Board requested a comparative analysis of RPU’s cash reserve policies and the credit ratings compared to other similarly sized utility organizations in the region as well as an analysis of potential impacts of the Covid-19 pandemic to RPUs cash reserve.2021 • Approved the updated RPU Fiscal Policies and Cash Reserve Policy including:• the increase in annual funds to the SONGS Additional Decommissioning Liability Reserve; • the removal of calculation of operating and maintenance expenses from the Undesignated Reserves for Working Capital; • Revised the calculation to include a three-year average for Undesignated Reserves for System Improvement Capital;• the removal of capital improvement expenditures funded with restricted or designated reserves from Undesignated Reserves for System Improvement Capital; and• updated definitions to simplify reserve terminology RiversideCA.gov4
POLICY HISTORY2022
• On January 10, 2022, the Board received the introduction on how Riverside Public Utilities uses bond financing and the role of the fiscal policy. • On August 8, 2022, the Board created an ad hoc committee to review and evaluate the Public Utilities Department and the City fiscal policies related to the use of bond financing to fund internal staff labor used to design, construct, and administer capital projects, and report back to the Board.• On November 28, 2022, and December 13, 2022, the Board of Public Utilities and City Council received an update on the SONGS 2020 Decommissioning Cost Estimate (DCE) and approved transferring $9.7M to the Restricted Decommissioning Fund for SONGS.2023 • On May 8, 2023, the Board received a report from the Ad Hoc Committee regarding the Committee’s review, evaluation, and recommended changes to fiscal policies related to the use of bond financing to funding internal staff labor used to design, construct, and administer capital projects. After the discussion with Ad Hoc Committee, the Board did not make recommendations to the fiscal policies. • On June 26, 2023, the Board received an update on the Riverside Public Utility’s Cash Reserve Policy, as it related to the Water and Electric Five-Year Rate plans. 7/25/2024
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PURPOSE OF THE RESERVE POLICIESProperly designed reserve policies send a positive signal toratepayers, investors, and regulatory and credit rating agenciesthat the Board and City Council are committed to maintainingthe long-term fiscal strength of RPU.Strong and transparent financial policies, including maintainingprudent reserves for emergencies, rate stability, working capital,capital improvements and debt service, are consistent with bestpractices in the utility industry.
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PURPOSE OF THE RESERVE POLICIESThe policies are essential to the long-term financial healthof RPU to:Maintain the short-term and long-term financial health of RPU.Maintain stable rates for customers and help ensuremanageable rate increases.Fund unanticipated cost contingencies.Ensure funds exist for system improvements.Ensure cash exists for the timely payment of bills.Act as a significant positive credit factor in bond ratings. 7/25/2024
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RESERVE ACCOUNT BALANCESSchedules of Cash and Cash Equivalents – Electric UtilityUnaudited March 31, 2024Audited June 30, 2023Unrestricted cash and cash equivalents:$ 136,848,000$ 137,911,000Undesignated reserve4,948,0004,948,000Customer deposits reserve2,287,0002,287,000Capital repair and replacement reserve91,919,00087,127,000Electric reliability fund reserve2,113,0002,113,000Mission Square improvement fund reserve10,294,0008,644,000Additional decommissioning liability reserve4,801,0004,801,000Dark Fiber Reserve$ 253,210,000$ 247,831,000Total unrestricted cash and cash equivalentsLegally restricted cash and cash equivalents:$ 21,560,000$ 19,292,000Reserved for debt service132,418,0000Reserved for bond construction36,218,00021,707,000Reserved for regulatory requirements4,670,0003,795,000Reserved for low carbon fuel standard31,351,00029,152,000Reserved for Public Benefit Programs$ 226,217,000$ 73,946,000Total legally restricted cash and cash equivalents$ 479,427,000$ 321,777,000Total cash and cash equivalents RiversideCA.gov8
RESERVE ACCOUNT BALANCESSchedules of Cash and Cash Equivalents – Electric Utility (continued)Unaudited March 31, 2024Audited June 30, 2023Legally restricted cash and investments at fiscal agent:$ 44,006,000$ 47,110,000Reserved for decommissioning liability13,000224,000Reserved for other cash at fiscal agent010,801,000Reserved for debt service$ 44,019,000$ 58,135,000Total legally restricted cash and investments at fiscal agent$ 523,446,000$ 379,912,000Total unrestricted and restricted cash 7/25/2024
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RESERVE ACCOUNT BALANCESSchedules of Cash and Cash Equivalents – Water UtilityUnaudited March 31, 2024Audited June 30, 2023Unrestricted cash and cash equivalents:$ 41,778,000$ 39,071,000Undesignated reserve663,0001,013,000Recycled water cash reserve5,986,0005,926,000Property reserve802,000803,000Customer deposits reserve2,378,0002,378,000Capital repair and replacement reserve$ 51,607,000$ 49,191,000Total unrestricted cash and cash equivalentsLegally restricted cash and cash equivalents:$ 9,959,000$ 8,933,000Reserved for debt service42,253,00055,472,000Reserved for bond construction3,588,0003,545,000Water Conservation Programs$ 55,800,000$ 67,950,000Total legally restricted cash and cash equivalents$ 107,407,000$ 117,141,000Total cash and cash equivalentsLegally Restricted cash and investments at fiscal agent:676,00016,000Other cash at fiscal agent$ 676,000$ 16,000Total cash and investments at fiscal agent$ 108,083,000$ 117,157,000Total unrestricted and restricted cash RiversideCA.gov10
RESERVE CATEGORIES1. Restricted Reserves are established and utilized for narrowly defined purposes as specified by legal restrictions, bond covenants, and other regulations or ordinances. 2. Designated Reserves are that portion of unrestricted reserves that meet specific purposes set aside by the Board and City Council. Designated reserve funds ensure stable service delivery, meet future needs, and protect against financial instability. Designated reserves may be held for specific capital and operating purposes.3. Undesignated Reserves are the remaining unrestricted reserves that may be used for any lawful purpose and have not been designated for specific capital and operating purposes; however, maintaining a proper level of undesignated reserves is critical to ensure the utility can meet its fluctuating cashflow demands and mitigate financial volatility. 7/25/2024
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RESTRICTED RESERVESWaterElectricDefinitionRestricted ReserveXRiverside owns 1.79% of SONGS Units 2 & 3, within Camp Pendleton, that was permanently retired on June 7, 2013. This reserve was established in June 2017, for the Riverside’s share of the decommissioning cost obligations that are held with the trustee for the decommissioning costs. San Onofre Nuclear Generating Station (SONGS) DecommissioningXFunds set aside for regulatory requirements for greenhouse gas allowances and low carbon fuel standard proceeded as legally restricted for specific purposes.Regulatory Requirements Reserve (Cap and Trade auction proceeds)XXFunds restricted by bond covenant, allowable only for qualified approved capital projectsUnspent Bond Proceeds to Fund Capital ProjectsXXThis reserve is set aside for future bond payments that are governed by bond covenants.Bond Redemption Reserve (Debt Service)XAssembly Bill 1890, adopted in 1996, monthly surcharge of 2.85% of the total electric charge to be used for low-income customer assistance, energy efficiency and conservation programs, renewable resources and energy research and development.Electric Public Benefits FundXMay 2004 City Council approved 10-year monthly surcharge of 1.5% of the total water charge to provide financing to create and encourage water conservation and efficiency programs, renewed March 2014.Water Conservation Fund RiversideCA.gov12
DESIGNATED RESERVESWaterElectricDefinitionDesignated ReserveXXMonies held on behalf of RPU’s customers as required to be utilized if a customer fails to pay their utility bill.Customer DepositsXEstablished in June 1998, and updated March 2016 to accumulate extra funds held at the City (not with the SONGS trustee) for the uncertainty of costs associated with the SONGS Decommissioning activities. Additional Decommissioning LiabilityXEstablished in December 2007 to fund the debt service and capital expenditures for construction of internal electric generation and purchase of state transmission grid capacity, annual repair and improvements to internal generation facilities, and fund internal RPU sub-transmission system upgrades for RTRP improvements. The funds are received from retail customers through the Reliability Charge on each monthly bill.Electric ReliabilityXEstablished June 2015 to accumulate funds for major improvements to the Mission Square facility; funded by an annual contribution equal to 2% of the building value up to a maximum reserve equal to 25% of the building value.Mission Square ImprovementXXEstablished March 2016 to accumulate amounts for repairs and replacement of facilities, vehicles, and technology outside of the Capital Improvement Program.Capital Repair/ReplacementXEstablished June 2014 to set aside funds for a recycled water program. Funding was from a legal settlement from the City.Recycled WaterXEstablished July 2005 to accumulate all proceeds from surplus property sales to be used in the future for the purchase of property needed for operations, or for other long-term capital assets/projects. Funding is from proceeds from the sale of surplus property.PropertyXEstablished July 2017 to accumulate proceeds from fiber leasing activity and account for expenditures of the dark fiber program.Dark Fiber 7/25/2024
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UNDESIGNATED RESERVESWaterElectricDefinitionUndesignated ReserveXXEnsures 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.Operating (Working Capital)XXMitigates rate shock due to temporary and transitional regulatory changes, loss of a major resource, sharp demand reduction or market volatility.Rate StabilizationXXProvides funds to ensure ability to repair system after an emergency or natural disaster such as a flood, earthquake or major windstormEmergency CapitalXXProvide funds to ensure continuity of construction over fiscal years to be reimbursed by bond proceeds or other resources.System Improvements CapitalXXEnsures ability to make debt service payments in an extreme event that may impact RPU’s 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 where RPU would be unable to pay its debt service obligations during such emergencies, or extreme market disruptions.Debt Service RiversideCA.gov14
WITHDRAWAL AND REPLENISHMENT OF RESERVES 1. RPU treats the targeted reserves as practical minimums and allow reserves to increase or decrease as necessary within the minimum and maximum prescribed levels. 2. To the extent that undesignated reserves are above the target and below the maximum, the Board and City Council have the flexibility to direct staff to:a. utilize those available funds to pay for capital projects (reducing the need for future debt),b. pay down unfunded liabilities such as pension obligations, c. defease outstanding debt, or d. fund other strategic objectives. 3. No other action by RPU would be required if reserves are between the minimum and maximum level unless directed by the Board and City Council. 4. Reserve levels below the minimum targeted reserves will leave RPU exposed to significant operational risks. Should RPU draw down reserves below the minimum targeted level, RPU will implement plans to return reserves to their minimum targeted levels within three years. Such plans will be provided within 12 months. 7/25/2024
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REPORTING AND OVERSIGHT 1. Reserve levels are monitored throughout the fiscal year and reported in the monthly and quarterly financial reports. 2. Reserve target (minimum) and maximum levels are analyzed annually and an over/under reserve determination is made in conjunction with year-end financial results. 3. These results are reported to the Board and City Council as part of the year-end financial report presentation. 4. Should designated or undesignated reserve levels need adjustment due to new risk factors due to changes in the industry, these will be brought to the Board and City Council as part of the year-end report. 5. The Policy is to be reviewed annually and updated (at a minimum of 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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MINIMUM RESERVE TARGET CALCULATIONS
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MINIMUM RESERVE TARGET CALCULATIONS
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ELECTRIC UNDESIGNATED TARGET MINIMUM$53 $55 $52 $54 $54 $54 $41 $40 $43 $47 $48 $48 $12 $13 $14 $15 $17 $17 $22 $29 $31 $33 $34 $35 $28$34$33$35$42$42$155 $170 $174 $184 $195 $196 $- $50 $100 $150 $200 $250FY 22-23 Actual FY 23-24 Projected FY 24-25 Projected FY 25-26 Projected FY 26-27 Projected FY 27-28 Projected(in millions)OperatingRate StabilizationEmergency CapitalSystem Improvements CapitalDebt Service 7/25/2024
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$137.9$114.5$107.8$111.3$167.3$209.3$35.0$35.0$35.0$35.0$35.0$35.0$0$50$100$150$200$250$300FY 22-23 ActualFY 23-24ProjectedFY 24-25ProjectedFY 25-26ProjectedFY 26-27ProjectedFY 27-28Projected (in millions)Undesignated Cash ReservesLine of CreditTarget MinimumELECTRIC UNDESIGNATED CASH RESERVES RiversideCA.gov20
WATER UNDESIGNATED TARGET MINIMUM$8 $8 $9 $9 $10 $10 $5 $6 $6 $7 $7 $8 $7 $8 $8 $8 $9 $9 $13 $17 $18 $19 $20 $19 $13 $13 $14 $17 $17 $19 $47 $53 $56 $60 $63 $65 $- $10 $20 $30 $40 $50 $60 $70FY 22-23 Actual FY 23-24 Projected FY 24-25 Projected FY 25-26 Projected FY 26-27 Projected FY 27-28 Projected(in millions)OperatingRate StabilizationEmergency CapitalSystem Improvements CapitalDebt Service 7/25/2024
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$39.1$27.9$31.9$38.7$43.7$54.2$25.0$25.0$25.0$28.0$28.0$28.0$0$10$20$30$40$50$60$70$80$90FY 22-23ActualFY 23-24ProjectedFY 24-25ProjectedFY 25-26ProjectedFY 26-27ProjectedFY 27-28Projected (in millions)Undesignated Cash ReservesLine of CreditTarget MinimumWATER UNDESIGNATED CASH RESERVES RiversideCA.gov22
UPDATE TO CASH RESERVE POLICY
DesignatedReserves:Additional Decommissioning Liability Reserve(electric fund only)1. Reflects decrease in annual funding from $2.0M to $1.0M beginning in fiscal year 2024/25.2. In 2002, transferred $9.7M to the Restricted Decommissioning Fund for SONGS to arrive at$55M and 100% funded3. Additional Decommissioning Liability Reserve held at the City has a balance of $10.3M4. Reduction manages affordability and keeps rates low, and will be reviewed when theSONGS Decommissioning Cost Estimates are updated. 7/25/2024
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High Performing Government:Goal 5.4. Achieve and maintain financial health by addressing gaps betweenrevenues and expenditures and aligning resources with strategic priorities toyield the greatest impact.Infrastructure, Mobility & Connectivity:Goal 6.2. Maintain, protect and improve assets and infrastructure within theCity’s built environment to ensure and enhance reliability, resiliency,sustainability, and facilitate connectivity.Cross-Cutting Threads
STRATEGIC PLAN ALIGNMENT
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That the City Council approve the updated Riverside Public Utilities Cash Reserve Policy to reduce the annual funding to the SONGS Additional Decommissioning Liability Reserve.RECOMMENDATIONS