4 - Update on the Utility Financial Reserves Analysis and SurveyCITY OF BOULDER
WATER RESOURCES ADVISORY BOARD AGENDA ITEM
MEETING DATE: January 22, 2007
AGENDA TITLE: Update on the Utility Financial Reserves Analysis and Survey
PRESENTERS:
Ned Williams, Director of Public Works for Utilities
Carol Linn, Utilities Financial Manager
BOARD ACTION REQUESTED: None
EXECUTIVE SUMMARY:
The city has contracted with Red Oak Consulting to conduct a review of the various financial
reserves and reserve levels for each of the city's three utilities. This review includes
consideration of establishing a rate stabilization reserve for the water and/or wastewater utilities.
As part of this analysis, the consultants surveyed ten local and regional utilities on their reserve
policies and practices. John Gallagher and Andrew Rheem from Red Oak Consulting will be at
the Water Resources Advisory Boazd (WRAB) meeting to present the survey results and to
discuss the findings and considerations.
BACKGROUND:
The city owns and operates three utilities: water, wastewater and stormwater/flood management.
Each utility is financially self-supporting, deriving most of its revenues from monthly user rates
and plant investment fees. Each utility maintains separate cash reserves for emergencies, fund
stabilization, bonds and liabilities. The following table summarizes the current 2007 reserves
and reserve levels for each utility.
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Reserve Water Wastewater Stormwater
Appropriated Emergency Reserve - 3% of
o eratin bud et $330,000 $24Q000 $84,000
Unappropriated Emergency Reserve - minimum
20% of o eratin bud et lus interfund transfers 2,922,000 1,714,000 631,000
Bond Reserves - 1 ear avera e debt a ment 6,270,103 170,250 824,715
Reserve for Payroll Liabilities - per the Finance
de artment 755,049 629,721 186,977
Post-Flood Pro ert Ac uisition Reserve n/a n/a 1,050,000
Lakewood Pi eline Reserve 15,000,000 n/a n/a
TOTAL RESERVES $25,277,152 $2,753,971 $2,766,692
Both the appropriated and the unappropriated emergency reserves aze referred to as undesignated
reserves as they aze not designated for any specific purpose. The reserves for bonds, payroll
liabilities, post-flood property acquisition and Lakewood pipeline are designated for specific
purposes and are known as designated reserves.
The table below shows the 2007 undesignated reserves as a percentage of both budgeted
revenues and expenditures.
Water Wastewater Stormwater
Undesignated Reserves as a percent of 2007 13% 14% 12%
Bud eted Revenues
Undesignated Reserves as a percent of 2007 12% 14% 11%
Bud eted Ex enditures
ANALYSIS:
Red Oak surveyed the reserve policies and practices of ten other local and regional utilities. The
attached report contains the survey and supporting information for each participant as well
summaries of Boulder's current reserve policies, reserve practices of other communities and
proposed reserve policy practices for the city of Boulder.
All utilities surveyed maintain separate operating reserves which range from a funding level
equal to 30 days operating and maintenance (O&M) costs to 1 year O&M costs. Boulder's
cutrent operating reserve level equates to about 83 days of O&M and can be used far operating or
capital emergencies. This reserve also provides sufficient working capital to pay recurring O&M
throughout the year during cydical and/or seasonal revenue variations. Boulder also uses this
reserve for opezating and/or capital emergencies or to offset a shortfall in annual revenues.
One half of the communities surveyed maintain a separate reserve for capital expenditures.
Typically these reserves are established based on a percentage of historical annual replacement
expenses, annual depreciation expense or plant investment fee revenue. The reserve can be used
for capital expenditures in case of an emergency or if the utility experiences a revenue shortfall.
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A few communities also maintain debt service reserves beyond their legal bond covenants to
provide additional coverage for outstanding debt obligations.
For utilities with higher reserve targets, the operating reserve can also function as a revenue or
rate stabilization reserve to buffer against annual short-falls in actual revenues. A formal rate
stabilization reserve is not a common practice among the surveyed utilities. Only one of the
communities surveyed, Westminster, has an established rate stabilization reserve. Albuquerque
is planning to establish such a reserve in 2009. Rather than establishing a sepazate rate
stabilization fund most utilities implement the following practices:
• Higher operating or capital reserve levels
• Multi-year financial planning
• Levelized rate increases throughout the planning period
The aggregate effect of these practices can create a sufficient total reserve that provides indirect
rate or revenue stabilization without creating a separate reserve.
Attachment A provides a summary of the reserves survey results.
RECOMMENDATIONS:
Oneratin~ Reserves
The city's emergency reserves are primarily for operating emergencies and unforeseen operating
expenses. Red Oak believes the policy of maintaining these reserves at approximately 3 percent
of operating budget (11 days of O&M) for all three utilities is a sound practice and should be
continued.
Cunently, the city's operating reserves are primarily for operating emergencies and unforeseen
operating and capital expenses. As such, the policy of maintaining these reserves at a minimum
of 20 percent of operating budget (73 days of O&M) is generally consistent with general industry
standards and with the practices of surveyed utilities for wastewater and stormwater utilities.
Red Oak recommends that the water utility operating reserve be increased from 20 to 25 percent
(91 days) of the operating budget or an increase of $730,000 to the projected year-end 2007
minimum balance. A higher reserve level for the water utility is consistent with general industry
standards as water sales revenues are more volatile than wastewater or stormwater sales revenues
due to fluctuations in irrigation-related water demands.
Red Oak also recommends that the designated purpose of the utilities' operating reserves be
modified so that it is restricted primarily for operating emergencies and unforeseen operating
expenses.
Capitai Reserves
Red Oak proposes that the city consider formally creating a capital reserve for each of its utilities
to meet capital emergencies, unforeseen capital expenditures and to insulate near-term capital
operations from unanticipated short-falls of revenues. The practice of the surveyed utilities with
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capital reserves is to set the minimum amount on the basis of annual replacement expenses,
annual depreciation expense, or level of plant investment fees.
Since the city's utilities are mature with modest growth expected, the capital reserve should
relate to assets already acquired. Red Oak proposes capital reserves be established that are at
least 50 percent of annual renewal, replacement and other types of recurring capital costs. The
basis for determining annual renewal, replacement and recurring costs can be any of the
following:
^ Historic renewal, replacement and recurring capital costs
^ Future renewal, replacement and recuiring capital costs
^ 5-Year average of either historic or future replacement and recurring capital costs
Whichever measure is chosen, it should be representative of ongoing capital replacements in
current dollars. The primary purpose of this reserve is to provide sufficient funds should the
need arise for an emergency unplanned capital replacement above the emergency reserve and/or
insulate capital replacement projects from near-term fluctuations in revenue.
Rate Stabilization Reserve
Red Oak does not believe that the city should establish a formal rate stabilization reserve far
three primary reasons.
First, the adopted water budget based rate structure was established whereby a portion of
projected Tier 5 rate revenue is above the water utility revenue requirements. This policy by
itself includes a level of conservatism that protects the water utility if actual water sales revenues
are less than projected
Second, the proposed increase to the water utility operating reserve increases the level of security
providing additional protection against unanticipated reductions in water sales revenues.
Lastly, the existing and proposed reserves should not be viewed in isolation regazdless of the
designated purpose of each reserve. Rather it is the total reserve resulting from the sum of all
reserves which protects each utility from near-term short falis in sales based revenues.
Red Oak believes a formal rate stabilization reserve in addition to the current and proposed
reserves is not necessary as the total reserve already functions as an indirect rate stabilization
reserve.
NEXT STEPS:
Any changes to the current reserve practices will be incorporated into the utility fund financials
and brought forward to the WRAB in May and June as part of the 2008 budget process.
Attachment A: Summary of Reserves Survey
Attachment B: Report: Utility Reserves Analysis and Survey prepared by Red Oak Consul[ing
Page 4
Attachment A
Debt Service
Reserve Rate
Oceratine Above Le¢al Stabilization Other
Utilit Reserves Ca ital Reserves Covenants Reserve Reserve
Albuquerque Will be
Bemalillo Co~nry es[ablished m
Water Utdity $2,000,000 2009 from
Authority, NM 360 days O&M sulplus revenues
formerly used
for debt service
Arvada, CO
90 days O&M 1 yeaz debt
service
Boulder, CO Operatmg reserve
of 20% (73 days V acation !
O&M) of Sick / Bonus
operating budget Liabiliry;
plus emergency Post-Flood
reserve of Property
approximately 3% Acquisinon
Q 1 days O&M) of
o eratin bud et
Denver Water, CO Renewal &
Replacement = l year debt Self Insuiance
90 days O&M 50% of Annual service Reserve
R&R
FoR Collins
CO H'W Bond Capital Art in Pubhc
, S%o of operating Reserve = 25% of Places
revenue p&M Reserve
Greeley, CO New Construction
Capital = 50% of
annual PIF
90 days O&M revenue;
Replacement
Cap~tal Fund =
50% of annual
de reciation
Longmont, CO Water = 90 days
O&M;
W W = 90 days
O&M;
Storm W ater = 60
da s O&M
San Antomo Water 60 days O&M
Systems, TX
Thomton, CO Water = I80 days ~yatet = l month of
O&M; $3,000,000 debt serv~ce;
W W= 90 days 4 months of
O&M ~.y = g~50,000 notes payable
a ment
Tucsou Water, AZ 10% of annual
water sales
Westminster, CO W ater = 45 ro 60 Ranges from Water =25% of
days O&M;
$S,OOQ000 to water revenue;
W W= 30 to 45 ~y = 5% oC
60% of 5-year CIP
da s O&M ~yW revenue