City of Sacramento
Budget and Audit Committee Report
915 I Street Sacramento, CA 95814
www.cityofsacramento.org
File ID: 2024-00904 5/7/2024 Consent Item 2.
Revised Department of Utilities (DOU) Designated Reserve Fund Policy and Fund Amendments
File ID: 2024-00904
Location: Citywide
Recommendation: 1) Review the proposed amended Department of Utilities Designated Reserve Fund Policy; and 2) Pass a Motion forwarding the policy to City Council for approval.
Contact: David Levine, Program Manager, (916) 808-6213, [email protected]; Chuong (Ryan) Pham, Business Services Manager, (916) 808-8995, [email protected]; Pravani Vandeyar, Director, (916) 808-3765, [email protected], Department of Utilities Presenter: None.
Attachments:
1-Description/Analysis
2-Department of Utilities Designated Reserve Fund Policy [Clean] 3-Department of Utilities Designated Reserve Fund Policy [Redline] Description/Analysis
Issue Detail: The Department of Utilities (DOU) staff is submitting an amended Designated Reserve Fund Policy (Policy) to the Budget and Audit Committee for review and recommendation to forward to the City Council for approval.
On January 24, 2023, the City Council approved a formalized Policy for DOU by passing Motion No. 2023-0028, which established an unrestricted Capital Reserve Fund to fund major capital and replacement expenditures and emergencies. The Policy also established targeted levels of the Capital Reserve Fund, as well as the existing unrestricted Operating and restricted Rate Stabilization Reserves.
As part of the issuance of the 2023 Water Revenue Refunding Bonds, the bond underwriter of that refinancing informed DOU that the restricted Rate Stabilization Reserve was no longer required and could be eliminated without impairing the credit ratings of the Water or Wastewater Revenue Bonds.
The recommended Policy includes a revision to the Rate Stabilization Reserve requirements as well
File ID: 2024-00904 5/7/2024 Consent Item 2.
as other miscellaneous edits.
Attached to this report are both clean and redlined versions of the proposed Policy.
Policy Considerations: The proposed Policy amendments and designated reserve fund adjustments are consistent with the Council’s budget priority to adopt financially sound policies and procedures that are prudent and consider long-term financial planning and stability. Financial reserves strengthen the City’s financial status and provide valuable resources to minimize disruption in the event of temporary revenue shortfalls or unpredicted one-time expenditures, which will benefit constituents who receive service from one or more of the three enterprise systems.
Economic Impacts: Not applicable
Environmental Considerations: Approval of the recommendation is not a “project” subject to the California Environmental Quality Act (CEQA) because it: (a) has no potential to cause a significant effect on the environment; (b) approves a continuing administrative activity (general policy and procedure making) and is thus excluded from the definition of a “project”; and (c) concerns governmental fiscal activities that do not involve any commitment to any specific project that may result in a potentially physical impact on the environment. [14 Cal. Code Regs. § 15061(b)(3), 15378 (b)(2), 15378(b)(4), and 15378(b)(5)]. As a result, the activity is not subject to CEQA. [14 Cal. Code Regs. § 15060(c)(2)(3)].
Sustainability: Not applicable.
Commission/Committee Action: Not applicable.
Rationale for Recommendation: In 2013, DOU established a Rate Stabilization Reserve fund for both Water and Wastewater to bolster the inaugural credit ratings of the two enterprise systems since neither had issued debt previously in the public market.
Since that time, DOU has issued several additional series of new-money and refunding Water and Wastewater Revenue Bonds, and now has a well-established credit history in the public bond market.
As part of formal rating agency surveillance efforts in recent months, rating agencies were informed that DOU may eliminate the Rate Stabilization Reserve funds. The rating agencies felt that if the Rate Stabilization Reserves were eliminated there would not be an impairment to the credit ratings of either enterprise system due to DOU’s strong operations and management, and strong financial metrics of both enterprise systems. Based on this feedback, the City Treasurer’s Office supports DOU staff recommendations. The language in the policy for the Rate Stabilization Reserve has been modified to allow for future reserves if warranted and beneficial in the issuance or incurrence of future debt obligations.
File ID: 2024-00904 5/7/2024 Consent Item 2.
Financial Considerations: Should the proposed Policy be approved by the City Council, existing restricted Water and Wastewater Rate Stabilization Reserve fund balances will be recommended for transfer to the unrestricted Capital Reserves for each fund, making additional financial resources available to fund capital projects due to emergencies such as capital infrastructure failure, natural disaster, financial crisis, various economic uncertainties, financial hardships, loss of significant revenue sources or local, regional, and national disasters. If approved, the fiscal year 2023/24 Rate Stabilization and Capital Reserves will be adjusted as shown below.
Current Amended
Water (Fund
6005)
Wastewater
(Fund 6006)
Water (Fund
6005)
Wastewater
(Fund 6006)
Rate Stabilization
Reserve
$8,379,865 $1,173,957 $0 $0
Capital Reserve $23,234,517 $2,156,000 $31,614,382 $3,329,957 Local Business Enterprise (LBE): Not applicable.
DESIGNATED RESERVE FUND POLICY 1 of 6
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 achieve DOU’s strategic objectives, and transparency, communicating to external stakeholders (including, but not limited to constituents/rate payers, the Utilities Rate Advisory Commission, rating agencies, and investors), identifying DOU’s needs, and how those needs will be met.
Designated Reserves (“ Reserves”) provide funding for scheduled and unscheduled expenses including operations and maintenance, debt service (if any), emergencies, capital improvements, repair and replacement, and 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, credit 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 expenses, 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, but not limited to costly regulatory requirements.
DESIGNATED RESERVE FUND POLICY 2 of 6
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:
• Delineate between restricted and unrestricted amounts. • Identify a defined and distinct purpose for the reserve. • Establish 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 year-end accounting process.
• Establish a priority for funding from net revenues from operations. • Establish that balances 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 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 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 operating expenses due to unforeseen events. DOU Operating Reserves are typically established based on the number of days of working capital (“DWC”), which has 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 DESIGNATED RESERVE FUND POLICY 3 of 6
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.
Authorization – In the unlikely event of total revenue loss, t he City Manager or the City Manager’s designee is authorized to approve the use of funds for operating expenditures should there be insufficient available fund balance in any of the three enterprise systems under DOU’s management – in accordance with the approved annual budget resolution and City Code.
Furthermore, DOU staff will be authorized to continue to evaluate and seek authorization to implement, and/or accelerate any plan for rate increases to ensure the sufficiency of revenues and fund balance in any of the three enterprise systems to meet required covenants.
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 surplus 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 Capital 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.
DESIGNATED RESERVE FUND POLICY 4 of 6
Recommended Target Levels – It is recommended that the DOU seek to maintain a minimum amount sufficient to fund major capital expenditures 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 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 five years, 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 the availability of funding.
The DOU will make deposits utilizing annual realized budget savings until the five- year target is met. Deposits will be made through 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 debt. 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 the 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)
DESIGNATED RESERVE FUND POLICY 5 of 6
This type of reserve is designed to aid 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 the 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 Stabilization Reserve shall be in accordance with the governing legal documents associated with outstanding debt.
Recommended Target Levels – The targeted level, when required, is equal to 25% of the maximum annual debt service for debt obligations associated with each of the three enterprise payable from revenues of the Water System, Wastewater System, or Storm Drainage System as applicable otherwise, the level is zero. Pursuant to the governing legal documents, any amounts transferred to the Rate Stabilization Reserve shall reduce the revenues by the amount so transferred 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 DOU’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. In the event there are no governing legal documents, the funds will be moved to the available fund balance of the applicable fund and the balance of the reserve will be zero.
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 SRF Loans. The use of these proceeds is restricted by conditions set forth in the respective legal documents providing for the issuance 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 impair 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 6
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.
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)
The amount is set at zero when
there are no governing legal
documents requiring the
reserve.
25% of the maximum annual
debt service for each respective
system, when applicable.
DESIGNATED RESERVE FUND POLICY 1 of 6
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 achieve DOU’s strategic objectives, and transparency, communicating to external stakeholders (including, but not limited to constituents/rate payers, the Utilities Rate Advisory Commission, rating agencies, and investors)), identifying DOU’s needs, and how those needs will be met.
Designated Reserves (“ Reserves”) provide funding for scheduled and unscheduled expenses including operations and maintenance, debt service (if any), emergencies, capital improvements, repair and replacement, and 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, credit 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 monie s to fund the reserves should come from revenues of DOU’s operations of the three enterprise utility systems after operating expenses, 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 Fundenterprise 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, but not limited to costly regulatory requirements.
DESIGNATED RESERVE FUND POLICY 2 of 6
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:
• DistinguishDelineate between restricted and unrestricted amounts. • ContainIdentify a defined and distinct purpose for the reserve. • ContainEstablish 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 Processyear-end accounting process. • Establish a priority for funding from net cashrevenues from operations. • Establish that balances 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 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 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 operating 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 6
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.
Authorization – In the unlikely event of total revenue loss, t he City Manager or the City Manager’s designee is authorized to approve the use of funds for operating expenditures should there be insufficient available fund balance in any of the three enterprise systems under DOU’s management – in accordance with the approved annual budget resolution and City Code.
Furthermore, DOU staff will be authorized to continue to evaluate and seek authorization to implement, and/or accelerate any plan for rate increases to ensure the sufficiency of revenues and fund balance in any of the three enterprise systems to meet required covenants.
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 surplus 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 Capital Reserve Fund. Nothing herein will alter, amend or change the DESIGNATED RESERVE FUND POLICY 4 of 6
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 expenditures 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 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 yearfive years, the DOU will utilize available fund balance to restore the amount on deposit. At no time will the capital reserveCapital 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 the availability of funding.
The DOU will make deposits utilizing annual realized budget savings until the five- year target is met. Deposits will be made through 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 securitiesdebt. 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 the 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 DESIGNATED RESERVE FUND POLICY 5 of 6
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 This type of reserve is designed to aid 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 the 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 Stabilization Reserve shall be in accordance with the governing legal documents associated with outstanding debt.
Recommended Target Levels – The targeted level, when required, is equal to 25% of the maximum annual debt service for each respective system’s debt obligations associated with each of the three enterprise payable from revenues of the Water System, Wastewater System, andor Storm Drainage System, as applicable otherwise, the level is zero. Pursuant to the governing legal documents, any amounts transferred to the Rate Stabilization Reserve shall reduce the revenues by the amount so transferred 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 DOU’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. In the event there are no governing legal documents, the funds will be moved to the available fund balance of the applicable fund and the balance of the reserve will be zero.
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 issuance 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 DESIGNATED RESERVE FUND POLICY 6 of 6
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 threatenimpair 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 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 operatingOperating and capital reserve funds Capital Reserve Funds are not reported in the City’s ACFR, as they are unrestricted. The respective balances of the operatingOperating and capital reserve funds 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.
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)
NAThe amount is set at zero
when there are no governing
legal documents requiring the
reserve.
25% of the maximum annual
debt service for each respective
system, when applicable.