75A - PH - WATER AND SEWER RATES

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2019 Water, Recycled Water, and Sewer Rate Study 2. Financial Plan should maintain a DCR greater than 1.50 times annual debt service. As such, the Stantec team ensured that a DCR of at least 1.50 was maintained throughout the projection period to enable the City to access favorable terms from the debt market, should the need arise. The forecasted debt service for the AMI project is provided in Row 18 of Schedule 5 (Appendix A). 2.2.10 Reserve Targets Targeted cash reserves for utilities are balances retained for specific cash flow needs. The policy target for reserves is an important component when developing a multi -year financial plan as utilities rely on the reserves for financial stability. Credit rating agencies evaluate utilities in part on their adherence to formally adopted reserve targets, and lending agencies require utilities to maintain specific debt reserves for outstanding loans. While the City has not adopted a formal reserves policy for either enterprise, the City's Finance Department, in practice, has been following the reserve targets established by the 2014 Comprehensive Water Rate Study Update. The current Study expands upon the same recommendations, and recommends the following reserve policies: • An Operating & Maintenance Reserve sets a target minimum balance equal to 90-days (3 months) of annual operating expenses. This reserve ensures continuity of service regardless of short-term changes in cash flow or sudden increases in operating costs. Because this reserve target is set relative to the City's operating budget, the target will change as the expenses change. The Water Enterprise FY 2018/19 budget for O&M expenses totals $50.4 million, resulting in an Operating Reserve balance of about $12.4 million. The Sewer Enterprise FY 2018/19 budget for O&M expenses totals $5.0 million, resulting in an Operating Reserve balance of about $1.2 million. • An Emergency Reserve establishes a reserve for the urgent repair of a piece of infrastructure that fails unexpectedly. The previous rate study recommended a $1 million reserve be set aside for each enterprise. This report recommends increasing these reserves based on the value of a critical piece of infrastructure. A reserve of $4 million is recommended for both the Water and Sewer Enterprises, which is approximately the cost of replacing a production well or a pump station. It is recommended that the Emergency Reserve be adjusted annually to track with the Construction Price Index (CPI). • Repair, Renewal, and Replacement (3R) Capital Reserve is currently set at one year of annual depreciation of capital assets. Given that the purpose of the 3R capital reserve is to smooth out volatility in capital spending, this Study recommends modifying the 3R Capital Reserve to be equal to 50% of the average capital spending over the respective Enterprise's 10-year capital spending projections. This updated approach would establish a Water 3R Capital Reserve of $6.6 million in FY 2019/20 and a Sewer 3R Capital Reserve of $3.1 million in FY 2019/20. While this report has made projections of how the 3R Capital Reserve may increase over time (tracking with City of Santa Ana Stantec 114