65B - PROPOSED WATER AND SEWER RATE ADJ

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City of Santa Ana, CA I WATER RATE STUDY Executive Summary This report was prepared for the City of Santa Ana (City) to document a multi -year financial plan, the cost of service analysis and the design of a rate structure for the City's Water Enterprise. The specific goals of the study were to: • Review and evaluate existing policies and procedures affecting utility rates; • Evaluate the adequacy of projected revenues under existing rates to meet projected revenue requirements; • Develop a Rehabilitation and Replacement (R &R) Program that will identify major capital expenditures for the Water system; • Create a sound financial plan for the Water Enterprise covering a five -year study period for both ongoing operations and planned capital improvements; • Allocate projected Fiscal Year (FY) revenue requirements to the various customer class in accordance with the respective service requirements; and • Develop a suitable rate schedule that produces revenues adequate to meet financial needs while recognizing customer costs of service and local and state policy considerations such as Proposition 218 and Senate Bill x7 -7 (SBx7 -7). SUMMARY OF FINDINGS AND RECOMMENDATIONS A number of factors influence the financial condition of the Water Enterprise. Rates charged for service at a minimum should be adequate to cover operating and repair and replacement costs and to meet outstanding debt covenant requirements. Sound financial operations also include maintaining a capital reserve to address unplanned and emergency capital requirements. Financing major capital expenditures is dependent upon the policies and practices of the City. Cash financing capital expenditures minimizes the cost of the improvements. While debt financing increases the cost, it spreads those costs over the life of the facility, allocating the costs to the actual users of the facility. Changes in the financing of capital expenditures may affect the financial condition of the Water Enterprise and any necessary rate adjustments. The City of Santa Ana has engaged Black & Veatch to review the financial condition of the Water Enterprise, to conduct a cost of service analysis, and to design water rate schedules that address cost -of- service and revenue stability issues. This is the City's first comprehensive review of needs since 1995. Summarized herein are the principal findings and recommendations of the study. Guiding Principles It is the intent of the City to operate its Water Utility as business enterprises. As part of this philosophy, the City asked Black & Veatch to provide comments and recommendations on the following guiding principles: • Should the Water Utility be operated as a "neutral" enterprise? In general, enterprise funds are defined as self- supporting entities. These funds have separate revenue streams based on provided services, which allows them to have the capacity to issue revenue - backed bonds and generate sufficient revenues to cover operational and capital costs. Although city enterprises BLACK & VEATCH I Executive Summary 65B -13