City of Sacramento
Budget and Audit Committee Report
915 I Street Sacramento, CA 95814
www.cityofsacramento.org
File ID: 2022-01967 12/6/2022 Discussion Item 6.
Department of Utilities Designated Reserve Fund Policy
File ID: 2022-01967
Location: Citywide
Recommendation: 1) Review the proposed Department of Utilities Designated Reserve Fund Policy; and 2) pass a Motion forwarding the policy to the City Council for approval.
Contact: William O. Busath, Director of Utilities (916) 808-1434, [email protected], Chuong (Ryan) Pham, Business Services Manager, (916) 808-8995, [email protected], Department of Utilities
Presenter: Chuong (Ryan) Pham, Business Services Manager, (916) 808-8995, [email protected], Department of Utilities
Attachments:
1-Description/Analysis
2-Department of Utilities Designated Reserve Policy Memo prepared by Fieldman Rolapp 3-Department of Utilities Designated Reserve Policy
Description/Analysis
Issue Detail: The Department of Utilities (DOU) staff is submitting the Designated Reserve Fund Policy (Policy) to the Budget and Audit Committee for review and recommendation to forward to the City Council for approval. DOU partnered with the City Treasurer’s Office to hire Fieldman, Rolapp, & Associates (Fieldman), who is the City’s primary municipal advisor, to help prepare the Policy. See Attachment 1 for the Fieldman’s Reserve Policy Memorandum for additional details regarding background, process, and recommendations.
DOU currently has two existing reserve fund practices: 1) Operating Reserve Fund and 2) Rate Stabilization Reserve, and desires to establish a third practice for a Capital Reserve. Creating a formal reserve fund policy demonstrates to bond investors, rating agencies, and other stakeholders, DOU’s sound financial acumen and also provides a firm foundation for financial creditworthiness and sustainability. In practicality, reserve funds provide sources of funding for situations when external
File ID: 2022-01967 12/6/2022 Discussion Item 6.
forces interrupt a well-thought-out plan for efficiently operating a public utility - such as the City’s Water, Wastewater, and Storm Drainage Systems under DOU’s management.
Operating reserves are established at prudent levels as a source of funding when expenses are greater than budgeted, or when revenues fall below expectations. DOU has maintained an Operating Reserve Fund minimum level of 120 Days of Working Capital (DWC) as an operating guideline and recommends formalizing this level through the adoption of the Policy.
Capital reserves can be used for: (i) rehabilitation and replacement projects; (ii) pay-go projects; (iii) as a source to provide immediate funding when a project needs to be accelerated, or for projects with cost overruns; and (iv) unplanned or emergency projects. Having established reserves funds is consistent with best practices of other municipal utilities and is consistent with recommendations of the Government Finance Officers Association and the American Water Works Association. The minimum target level for the capital reserve fund is to maintain an amount sufficient to fund major capital expenditures and/or replacement expenditures for each enterprise system over the next fiscal year. The targeted level is an amount sufficient to fund major capital expenditures and/or replacements for each system for the subsequent five fiscal years. Due to the nature of this fund, no maximum is established. At this time, the Capital Reserve will not be applicable to the Storm Drainage funds 6011 and 6021. The establishment of the 2022 Storm Drainage Property Fee fund 6021 is primarily for capital expenditures and associated future maintenance while the 6011 fund is primarily operations and maintenance funding with no capital expenditures. DOU will take steps to make contributions to this fund as necessary to meet future capital needs.
Rate stabilization reserves are required in accordance with debt covenants and can be used to strengthen debt service coverage in years when debt service coverage results are weaker than expected, or as a tool to smooth out rate increases. DOU has maintained a Rate Stabilization Reserve at 25% of the maximum annual debt service for each respective enterprise system’s debt obligations payable from revenues of the Water System, Wastewater System, and Storm Drainage System, as an operating guideline and recommends formalizing this target through the adoption of the Policy.
A summary table of the reserve funds can be seen below:
Reserve Fund Reserve Funding Levels
Minimum Target
1 Operating Reserve
(Unrestricted)
120 days of working capital
(as previously defined)
NA
2 Capital Reserve
(Unrestricted)
The amount necessary to
fund major capital and/or
replacement expenditures,
and emergencies over the
next fiscal year
The amount necessary to fund
major capital and/or
replacement expenditures,
and emergencies over the
next five fiscal years
3 Rate Stabilization
Reserve (Restricted)
NA 25% of the maximum annual
debt service for each
respective system
File ID: 2022-01967 12/6/2022 Discussion Item 6.
Reserve Fund Reserve Funding Levels
Minimum Target
1 Operating Reserve
(Unrestricted)
120 days of working capital
(as previously defined)
NA
2 Capital Reserve
(Unrestricted)
The amount necessary to
fund major capital and/or
replacement expenditures,
and emergencies over the
next fiscal year
The amount necessary to fund
major capital and/or
replacement expenditures,
and emergencies over the
next five fiscal years
3 Rate Stabilization
Reserve (Restricted)
NA 25% of the maximum annual
debt service for each
respective system
Policy Considerations: The proposed Policy (Attachment 2) is consistent with the Council’s budget priority to adopt financially sound policies and procedures that are prudent and take into account long -term financial planning and stability. The proposed policy is also recognized as best practices by the Government Finance Officers and the American Water Works Associations.
Economic Impacts: Not applicable.
Environmental Considerations: Not applicable.
Sustainability: Not applicable.
Commission/Committee Action: Not applicable.
Rationale for Recommendation: Financial reserves strengthen the City’s financial status and provides valuable resources to minimize disruption in the event of temporary revenue shortfalls or unpredicted one-time expenditures. The purpose of the Policy is to establish the targeted levels of each reserve fund, a basic component of a financially strong public utility. Additionally, creating the Policy demonstrates to bond investors, rating agencies, and other stakeholders, DOU’s sound financial acumen and also provides a firm foundation for financial creditworthiness and sustainability.
Financial Considerations: Approval of the Policy allows for DOU to formalize the existing guidelines and practices for the operating and rate stabilization reserves and will create a capital reserve for better financial management of the Water, Wastewater, and Storm Drainage Systems. The DWC and capital reserves are unrestricted. The respective balances of the DWC and capital reserves represent a commitment that will be incorporated into the available fund balance calculation at the end of each fiscal year. DOU will provide the City’s Accounting Division the annual calculation for each reserve as part of the fiscal year budget development process. These reserves will be included in the rate modeling for future rate adjustments.
Local Business Enterprise (LBE): Not applicable.
MEMORANDUM
– 1 –
Date: October 4, 2022
To: DOU Executive Team
City of Sacramento
From: Anna Sarabian, Principal
Fieldman, Rolapp & Associates, Inc.
Robert Porr, Executive Vice President
Fieldman, Rolapp & Associates, Inc.
CC: Lora Carpenter, Vice President
Fieldman, Rolapp & Associates, Inc.
Chelsea Redmon, Assistant Vice President
Fieldman, Rolapp & Associates, Inc.
Re: Designated Reserve Policy
Origin
As municipa
l advisor to the City of Sacramento (“City”), Fieldman, Rolapp & Associates, Inc. (“Fieldman”) was requested to provide a scope of services and fee quote to the City Treasurer’s Office to prepare a long-range financial plan, including creating a reserve fund policy for the Department of Utilities (“DOU”). Fieldman’s team is comprised of Anna Sarabian, who is the engagement manager to the City, along with Chelsea Redmon, Assistant Vice President, who was one of the advisors to the City on its most recent Water and Wastewater Revenue Bond offerings. The existing Fieldman team is supplemented by Robert Porr, J.D., Executive Vice President and the Head of Fieldman’s Utility Practice, and Lora Carpenter, Vice President, the Utility Practice’s lead Quantitative Advisor.
Development of Methodology
With more than 20 years of experienc
e as an advisor and eight as an investment banker, Robert has worked with numerous clients, investors, credit rating agency analysts, insurance company analysts and reviewed numerous articles, materials and abstracts focused on reserves, and reviewed numerous reserve policies to arrive at a strong foundation for recommending the establishment and maintenance of a reserve policy and the inclusion therein of operating, rate stabilization and capital reserves. While there can be no assurance that a reserve policy will by itself result in a credit rating upgrade, the details of having a formal expansive policy informs the rating agencies that financial planning is at a high- level and that dollars are available to effectively manage the capital program in addition to operating revenues and expenses.
Some of the policies (all with capital reserves) Robert has been involved in creating are for the following utilities:
MEMORANDUM
- 2 -
Cucamonga Valley Water District (AA+/AA+)
Marina Coast Water District (AA-)
Merced Irrigation District Water (A+) / Electric (A+)
Mesa Water District (AAA/AAA)
Monte Vista Water District (AA)
Orange County Water District (Aa1/AAA/AAA)
Rancho California Water District, (AAA/AAA)
San Bernardino Valley MWD (AAA)
Santa Ana Watershed Project Authority (AAA)
Santa Clarita Valley Water Agency (AA/AA)
Silicon Valley Clean Water (AA/AA)
Upper San Gabriel Valley MWD (only SRF debt outstanding) Westlands Water District (A+/A+)
Western Municipal Water District (AAA/AAA)
Yorba Linda Water District (AA+/AA+)
In addition to our experience, we have further reviewed reserve policies, abstracts, summaries, cost of service studies and other materials related to our advice in connection with the reserve policy for DOU. Each of the agencies mentioned below have reserve policies that fund capital reserves.
City of Bellevue, Washington – could not locate utility rating City of Chula Vista – could not locate utility rating
Riverside Public Utilities, (AA+/AA+)
San Francisco Public Utilities, Power (AA/A-)
San Diego County Water Authority (Aa2/AAA/AA+)
City of Virginia Beach, Virginia (Aa1/AAA/AAA)
In the course of our experience creating reserve policies and through its work with many of its 60 utility clients, Fieldman’s Utility Practice has developed a financially sound philosophy that balances between issuing debt and paying for capital with cash . That balance for each client lies in the details of each client’s CIP, political environment, rate structure and credit ratings, among other matters. We base our recommendations upon years of experien ce working with water and wastewater agencies throughout California during difficult and good time s. The global objective is to be able to have multiple resources available for capital so that cash can be used alongside debt to avoid excessive uses of debt, avoid downward pressure on rating s , o r m i t i g a t e w h e n i n t e r e s t r a t e s a r e unattractive. Whether during the Great Recessi on and the resulting market shutdown in 2008, or Governor Brown’s executive order restricting wa ter usage in 2015, or recent costly regulatory requirements, utility clients using a multi-pronged a pproach to capital funding were better prepared to execute their capital programs. We typically ta ilor reserve target levels so that immediate rate increases are unnecessary, as is the case with DOU, or within very modest (e.g. 2% - 3% per year) rate increases. It should be noted that two outside resources support our recommendations: the Government Finance Officers Association (“GFOA”) recommends as a Best Practice that agencies with enterprise funds maintain a capital rese rve. The American Water Works Association recommends capital reserves for purposes of funding new capital and rehabilitation and replacement.
MEMORANDUM
- 3 -
Process and Recommendation
Creating a reserve policy demonstrates to invest ors and rating analysts sound financial acumen, flexibility, and management and also provides a firm foundation for financial creditworthiness and sustainability. In practicality reserves provide sources of funding (“rainy day funds”) for times when external forces interrupt a well thought out plan fo r efficiently operating a public utility. Operating reserves are established at prudent levels as a source of funding when expenses are greater than budgeted, or when revenues fall below expectati ons. Rate stabilization reserves can be used to strengthen debt service coverage in years when results are weaker than expected, or as a tool to smooth out rate increases. Capital reserves can be used for (i) rehabilitation and replacement projects; (ii) pay- go projects; (iii) as a source to provide immediate fu nding when a project needs to be accelerated, or for projects with cost overruns; and (iv) projects that may not be suitable for debt – for example projects with short useful lives. DOU has two exis ting reserve practices and desires to establish a designated reserve funds policy.
In addition to formalizing the two reserves (days of working capital and rate stabilization reserve) that DOU already has in practice, Fieldman’s independent recommendation to DOU was to include the Capital Reserve into the Designated Reserve Policy (“Policy”) to provide the DOU with flexibility to fund approved budgeted pay-go projects for ensuing Fiscal Years so that amounts would be set aside and readily available for meeting estimated costs. The Policy also gives DOU the ability to fund future projects from free cash flow that may be unsuitable for debt funding (assets with short useful lives or relatively minor costs) by contributing annual amounts. The Policy allows DOU to fund projects that are not funded with debt proceeds, giving DOU the flexibility to fund pay-go projects as determined through sound operational, engineering and financial planning. f
While many utilities may prefer capital reserve levels greater than one year, based upon our experience and input from DOU staff, Fieldman is comfortable with the use of one year as a minimum targeted level for the capital reserve. We note however, th at under the current forecast the funding of the Capital Reserve to an amount equal to three years of pay-go expenditures can be accomplished without any increase to rates for the Water and Wastewater Enterprises.
It is our recommendation that the Designated Rese rve Policy be advanced for consideration by the City Council. Having the Designated Reserve Poli cy approved by the City Council will bolster the credibility and decision making of the City, in particular DOU, for the benefit of internal and external stakeholders – including but not limited to, the Water Committee, the Utilities Rate Advisory Committee, rating agencies, investors, and constituents. Furthermore, having the Designated Reserve Policy approved by the City Council will affirm th e strong management and financial leadership of DOU.
DESIGNATED RESERVE FUND POLICY 1 of 7
DESIGNATED RESERVE FUND POLICY
1.0 INTRODUCTION
This Reserve Fund Policy (the “ Policy”) has been developed with the objective to serve as a roadmap in maintaining prudent management of the finances related to the operations of the City of Sacramento’s Water, Wastewater, and Storm Drainage Systems managed by the Department of Utilities (the “ DOU”) by establishing and maintaining prudent reserve funds. It provides guidance to internal stakeholders on how to achie ve DOU’s strategic objectives, and transparency, communicating to external stakeholders (including, but not limited to constituents/rate payers, the Utilities Rate Ad visory Commission, rating agencies, and investors) DOU’s needs and how those needs will be met.
Designated Reserves (“ Reserves”) provide funding for scheduled and unscheduled expenses including operation s and maintenance, debt service (if any), emergencies, capital improvement s, repair and replacement, a nd for the stabilization of rates. This Policy describes the prudent reserve fund needs, identifies the sources of funding for such reserves, and recommended target amounts for the reserve funds. Reserves are highly regarded by credit rating agencies, cred it providers and bond investors. Although there are numerous methods to establish reserve funding levels, the DOU tends to lean on the metrics utilized by the credit rating agencies, which provide guidance on liquidity and provide peer review through the assignment of high investment-grade credit ratings for various Water and Wastewater System Revenue bond issues. The monies to fund the reserves should come from revenues of DOU’s operations of the three enterprise utility systems after operating expense s, including debt service obligations, are met. The balances of the operating and capital reserve funds are not reported in the City’s Annual Comprehensive Financial Report (“ACFR”) as for the applicable Enterprise Fund, as they are unrestricted . The respective balances of the operating and capital reserve funds represent a commitment that will be incorporated into the calculation of the Available Fund Balance (“AFB”), thus reducing the depiction of the AFB at the end of each fiscal year.
2.0 STATEMENT OF PURPOSE
The purpose of this Policy is to ensure the DOU’s ongoing fiscally sound financial management of the Water, Wastewater, and Storm Drainage Systems and to have sufficient funding available to meet its operating, capital and debt service , if any, obligations. This Policy establishes the level of reserves necessary for maintaining the sustainability, creditworthiness, and credit ratings for the enterprise utility systems under DOU’s management and for adequately providing for unforeseen circumstances such as:
• Cash flow requirements and working capital.
• Economic uncertainties and other financial hardships, including performance of the regional and local economies.
• Infrastructure replacements.
• Emergency repairs.
• Loss of significant revenue sources due to variations in operations resulting from, among other things, variable weather conditions or conservation. • Unfunded mandates including costly regulatory requirements.
DESIGNATED RESERVE FUND POLICY 2 of 7
3.0 TYPES OF RESERVES
The establishment of reserve funds is in the best interest of the DOU. Traditional reserve policy categories are typically classified as follows:
Reserve funds are established utilizing the following criteria:
• Distinguish between restricted and unrestricted amounts. • Contain a defined and distinct purpose.
• Contain a minimum funding level or a target funding level. • Identify events or conditions that prompt the allowable use of the reserves. • Identify the requirements that must be met to use the funds. • Provide a mechanism to initially fund and to replenish reserves to approved levels through the City’s Yearend Accounting Process.
• Establish a priority for funding from net cash from operations. • Establish that b alances should be maintained in amounts sufficient to meet minimum reserve targets in cash and/or cash equivalents. • At a minimum, during the budget process, review the current and five -year projected reserves to ensure that they are appropriate. • Balances of the operating and capital reserve funds are not reported in the City’s ACFR, as they are unrestricte d. The respective balances of the operating and capital reserve funds represent a commitment that will be incorporated into the calculation of the AFB, thus reducing the depiction of the AFB at the end of each fiscal year.
Unrestricted
• Operating Reserves
• Capital Reserves (excluding bond funded)
Restricted
• Bond Debt Service Reserves funded at levels governed by the respective legal documents
• Rate Stabilization Reserves
• State Revolving Fund (SRF) Loan Debt Service Reserve funded at levels governed by the respective legal documents
3.1 Operating Reserve Fund (Unrestricted)
These funds are maintained to safeguard the financial viability and stability of the Water, Wastewater, and Storm Drainage Systems funded from revenues. The DOU maintains the Operating Reserve of each enterprise system to safeguard against unexpected and significant fluctuations in operating revenues and expenses due to unforeseen events. DOU Operating Reserves are typically established based on the number of days of working capital (“DWC”), which has
DESIGNATED RESERVE FUND POLICY 3 of 7
been a calculation inclusive of debt service , general fund tax, and operating expenditures net of amortization and depreciation. DOU recognizes that including debt service and the general fund tax in the DWC calculation is a conservative methodology for decision -making purposes . However, moving forward, the calculation will be consistent with how rating agencies and bond investors evaluate this financial metric – where debt service and the general fund tax are excluded from the DWC calculation. This calculation demonstrates the number of days each enterprise system can fulfill operating obligations in the event of total revenue loss.
Actual funding targets for the Operating Reserve Fund depend on numerous variables, including but not limited to the timing of revenue receipts; the timing of expenses; the variability of supply and demand, etc. Earnings from the investment of funds on deposit in the Operating Reserve Fund shall remain therein; upon reaching the recommended level amounts, earnings can be re-allocated amongst the reserve funds in the Policy based on priority.
Recommended Level –The Operating Reserve Fund shall have a minimum level of 120 DWC.
Replenishment – If at any time the amount on deposit declines below 120 DWC, the DOU will take steps to restore the amount on deposit using available fund balance within one year of the date of the identified shortfall.
Source of funding: Revenues and su rplus funds of the Water, Wastewater, and Storm Drainage Systems.
3.2 Capital Reserve Fund
The DOU seeks to maintain a Capital Reserve Fund each in the Water, Wastewater, and Storm Drainage Systems to provide funding for major capital expenditures and/or replacement expenditures plus an amount for related contingencies and emergencies. This type of reserve is established to ensure that proper balances are maintained, and projects are appropriately planned in consideration of regulatory requirements, rate impacts, creditworthiness and any unforeseen capital emergencies.
Solely for the purposes of calculation, the DOU will take into account all amounts currently available from any debt financing for capital purposes as a separate funding source for those projects and include only non-debt funded capital projects in the Cap ital Reserve Fund . Nothing herein will alter, amend or change the treatment of, or accounting for debt proceeds as prescribed in the governing documents of such debt. Earnings from the investment of funds on deposit in the Capital Reserve Fund shall remain within the fund of origin.
Recommended Target Levels – It is recommended that the DOU seek to maintain a minimum amount sufficient to fund major capital expenditure s and/or replacement expenditures for each enterprise system, not funded with debt proceeds, and emergencies over the next fiscal year. The targeted level is an amount sufficient to fund major capital expenditures and/or replacements for each
DESIGNATED RESERVE FUND POLICY 4 of 7
enterprise system, not funded with debt proceeds , for the subsequent five fiscal years. Due to the nature of this type of fund, no maximum is established. At this time, the Capital Reserve will not be applicable to the Storm Drainage funds 6011 and 6021. The establishment of the 2022 Storm Drainage Property Fee fund 6021 is primarily for capital expenditures and associated future operations and maintenance, while the 6011 fund is primarily for operations and maintenance funding with no capital expenditures.
Replenishment – If at any time the amount on deposit declines below the targeted level of one year, the DOU will utilize available fund balance to restore the amount on deposit. At no time will the capital reserve receive funding from fund balance if it would trigger a rate increase for the applicable enterprise fund. The replenishment of the Capital Reserve will take place as soon as practically possible, based on availability of funding.
The DOU will make deposits utilizing annual realized budget savings until the five- year target is met . Deposits will be made throu gh the City’s annual year -end process once the ACFR is approved by City Council for the applicable Fiscal Year.
Authorization – The City Manager or the City Manager’s designee is authorized to approve the use of funds for expenditures caused by unforeseen circumstances in accordance with the approved annual budget resolution and city code.
Source of funding: Revenues of the Water, Wastewater, or Storm Drainage Systems.
3.3 Bond Debt Service Reserve Fund (Restricted)
This fund is established pursuant to the applicable legal documents associated with the outstanding debt and is initially funded with bond proceeds . The use of these proceeds is restricted by conditions set forth in the respective legal documents providing for the issuance of the corresponding securities. These funds are usually held by a trustee.
Recommended Target Levels – The management and funding of the Bond Debt Service Reserve Fund shall be in accordance with the legal documents associated with outstanding debt. The debt service reserve requirement is established by the respective Indenture at the time of issuance. This amount may be recalculated as the obligations are paid down or defeased. Any interest earnings on amounts on deposit in the bond debt service reserve fund can be used to pay debt service on the corresponding outstanding obligations.
3.4 Rate Stabilization Reserve (Restricted)
These funds are maintained to provide the DOU with the ability and flexibility to avoid sharp increases in customers’ utilities rates or to smooth out rate increases over an extended time frame. Additionally, this type of reserve is designed to aid
DESIGNATED RESERVE FUND POLICY 5 of 7
DOU in complying with its rate covenants by providing revenues for fiscal years where revenues are inadequate. This type of reserve can be targeted consistent with maintaining current bond rating category and credit outlook or debt requirements. Earnings from the investment of funds on deposit in the Rate Stabilization Reserve shall remain therein. Management of the Rate Stabil ization Reserve shall be in accordance with the governing legal documents associated with outstanding debt.
Recommended Target Levels – The targeted level is equal to 25% of the maximum annual debt service for each respective system’s debt obligations payable from revenues of the Water System, Wastewater System, and Storm Drainage System, as applicable . Pursuant to the governing legal documents, any amounts transferred to the Rate Stabilization Reserve shall reduce the revenues by the amount so transferre d and any amounts transferred from the Rate Stabilization Reserve shall count as revenues for the respective Water, Wastewater, or Storm Drainage Systems, as applicable, for any fiscal year.
Authorization – Upon the approval by the City Council of the D OU’s budgeted amounts to be used to offset any utilities rate increase, such amounts shall be transferred to the respective Water, Wastewater, or Storm Drainage Funds.
Allocations to or from the Water, Wastewater, or Storm Drainage Funds shall be made before the end of the ninth month after the close of each fiscal year, in accordance with the governing legal documents.
Source of funding: Revenues and/or surplus funds of the Water, Wastewater, and Storm Drainage Systems.
3.5 State Revolving Fund (SRF) Debt Service Reserve Fund (Restricted)
This fund is established pursuant to the applicable legal documents associated with the respective outstanding government debt, such as the SRF Loans. The use of these proceeds is restricted by conditions set forth in the respective legal documents providing for the is suance of the corresponding obligations. These funds can be held by the City or with the Fiscal Agent.
Recommended Target Levels – The management and funding of the SRF Debt Service Reserve Fund shall be in accordance with the legal documents associated with the outstanding SRF loan. The debt service reserve requirement is established by the respective legal document at the time of issuance.
4.0 REPORTING
In conjunction with the annual budget process, staff will prepare a reserve fund analysis, showing reserve amounts and targets for each type of reserve fund. If staff identifies any major change in conditions which may threaten reserve fund levels, the City Manager or the City Manager’s designee will provide an analysis to the City Council. When applicable, this analysis would include an explanation of
DESIGNATED RESERVE FUND POLICY 6 of 7
why reserve levels are below targeted levels and/or a recommended course of action to improve reserve levels. If the review results in changes to the policy, the DOU will return to City Council to seek approval.
Reserve balances for the operating and capital reserve funds are not reported in the City’s ACFR, as they are unrestricted. The respective balances of the operating and capital reserve funds represent a commitment that will be incorporated into the calculation of the AFB, thus reducing the AFB at the end of each fiscal year.
DESIGNATED RESERVE FUND POLICY 7 of 7
The following table illustrates the Reserve Fund Policy target levels based on priority:
Reserve Fund Reserve Funding Levels
Minimum Target
1 Operating Reserve (Unrestricted) 120 days of working capital (as previously defined)
NA
2 Capital Reserve (Unrestricted)
The amount necessary to
fund major capital and/or
replacement expenditures,
and emergencies over the
next fiscal year
The amount necessary to fund
major capital and/or
replacement expenditures, and
emergencies over the next five
fiscal years
3 Rate Stabilization Reserve
(Restricted) NA
25% of the maximum annual
debt service for each
respective system