65B - PROPOSED WATER AND SEWER RATE ADJ

Home Browse Search

City of Santa Ana, CA I SEWER RATE STUDY provide distinct services to its ratepayers, they are also dependent on services provided by General Fund operations. For example, most wastewater departments share human resources, finance, and legal services with other city departments. As such, it is a common practice to allocate shared General Fund costs to all benefiting departments. With respect to the City, the Wastewater Enterprise Fund currently pays its proportionate portion of allocated General Fund costs as determined through the City's indirect cost allocation model. These General Fund costs are business costs that allow the utilities to provide services to the City's residents. • What is a prudent level of operating reserves? The City is formulating a formal operating reserve policy. In light of this, Black & Veatch recommends that the City establish a 90 -days target for an operating reserve. This benchmark is a typical one used by many utilities, including many of the City's surrounding communities. The recent collapse of the nation's financial markets, coupled with the uncertainty of Southern California's water supply situation has led to a change in this benchmark level. Ratings agencies such as Moody's and Standard's & Poor's are now suggesting that utilities have operating reserves between 180 and 360 days' worth of operating expenses. An alternative reserve policy approach is to maintain approximately 90 days of operating expenses together with a $500,000 to $1,000,000 emergency reserve. Higher reserve levels helps the City attain better bond ratings, which in turn, leads to lower borrowing costs. Black & Veatch's proposed long -term financial plan provides a path for meeting the 90 -day operational level and establishing a $1,000,000 emergency reserve. • What is an appropriate level for capital reserves? In general, sewer utilities tend to underfund capital reserves, such as those for rehabilitation and replacement (R &R). It has only been within the last decade or so that agencies are seeing the ramifications of not having adequate R &R reserves on hand to address aging infrastructure needs. In the absence of a depreciation study or condition assessment, a general guideline is for utilities to set aside an amount equivalent to one year of depreciation expense. This reserve amount calls for a physical transfer of cash to a reserve account — it is not the same as the depreciation expense recorded on the Income Statement. The latter is not a cash requirement, unlike the former situation. Black & Veatch recommends that as the Sewer Utility becomes financial stable, R &R reserve funds should be established and funded. As cash is available, the annual funding level should eventually equal one -year of depreciation expense (approximately $500,000). Sewer Enterprise Capital Program Figure ES 1 illustrates the distribution of the City's sewer mains by installation decade. The mains included in the analysis are the City's collection system and do not include Orange County Sanitation District (OCSD), other agency, or private sewer lines. As seen from the figure, over 86 percent of the City's sewer mains were installed pre 1980 and about 90 percent of the lines are over 50 years of age. From Figure ES 1 it is clear that the City will soon face a major reinvestment period as sewer mains reach the end of their useful life. In the absence of any condition assessments, the industry standard for main replacement is 1 percent of the system per year. If we apply this approach to the City's system, the result is an annual replacement rate of 4 miles of mains. The City is currently replacing at a rate of 0.1 percent (0.38 miles). BLACK &VEATCH I Executive Summary 65B -168 9