65B - PROPOSED WATER AND SEWER RATE ADJ

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36 SEWER RATE STUDY I City of Santa Ana, CA The projected wastewater revenue under existing rates represents service, commodity, and strength charges at current rate levels that are subject to rate adjustments. Based on the existing revenue indicated, additional annual revenue adjustments are necessary to meet operating fund requirements and fiscal policy objectives. Adjustments are typically assumed to become effective July 1 of each fiscal year, except for FY 14/15, which assumes a March 1, 2015 effective date. Initial analyses indicate that rate increases are needed for the next five years as shown on Lines 2 through 6. Any changes to the capital- financing policies and /or CIP may alter these results since the operating fund helps supplement funds for traditional repair and replace projects. The resulting dollar impact of the proposed revenue adjustments are illustrated on Line 7. In addition to rate revenue, other operating and non - operating charges contribute to the income of the Sewer Enterprise. Typically, these revenue sources are minimal and volatile and are thus considered a constant in the revenue projections. A non - operating source includes interest income from the operating fund. Interest income is calculated using an interest rate of 1 percent in order to be conservative. Projected total O &M expense is shown on Line 13. The 0 &M expenses shown represent expenses associated with operating the wastewater system. Routine capital outlays are on Line 14. Under the proposed CIP scenario, Black & Veatch is proposing to cash - finance all R &R activities. As a result, no additional debt service is on Line 16. In the event that the City wishes to debt finance all or part of the CIP, all proposed bond issues are forecasted with 20 -year terms at an initial 5.5 percent. To date, the Sewer Enterprise has no outstanding bond debt obligations. Although the City transfers 5 percent of user charge revenues to the NPDES Fund prior to all other obligations, Black & Veatch is showing the NPDES Fund transfer on Line 17 to illustrate this activity. Funds transferred to the capital fund are used for capital projects and are shown on Line 18. Lines 21 through 23 summarize the impact to the ending fund balance for the Sewer Enterprise. A minimum target of 25 percent of 0 &M expenses plus any encumbrances serves as the minimum level of working capital that the Sewer Enterprise sets to have on hand for operational purposes. Finally, if debt exists, the debt service coverage ratio calculation is shown on Line 25 for relevant years. Summary of Revenues, Expenditures, and Obligations To maintain financial viability as an enterprise fund, the Sewer Enterprise's annual revenues must be sufficient to satisfy three elements: 1. Adequate cash flow to cover 0 &M, capital and debt obligations 2. Meet debt service coverage (DSC) covenants 3. Maintain reserve funds Long -term financial viability requires meeting all three elements. The need for revenue adjustments is either "cash flow' driven or "debt service coverage" driven depending on which of the first two elements creates the larger adjustment. Based on the analyses of revenues and revenue requirements, the Sewer Enterprise is a "cash- flow" driven. Whether cash -flow or coverage driven, it is clear that in order for the Sewer Enterprise to 65B -195 NOVEMBER 2014