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36 <br />WATER RATE STUDY i City of Santa Ana, CA <br />Projected total 0 &M expense is shown on Line 13. The O &M expenses shown represent expenses <br />associated with operating the water system minus the water purchases. Since water purchases <br />represent a significant amount of 0 &M expense when utilized, it is recommended that it be extracted <br />from O &M expenditures to demonstrate the significance. Routine capital outlay is shown on Line 15. <br />Routine capital outlay is typically set aside to purchase minor equipment, less than $5,000, such as <br />furniture, parts, and minor equipment. <br />Debt service on proposed bond issues is shown on Line 17. All proposed bond issues are forecasted with <br />20 -year terms at an initial 5.5 percent. To date, the Water Enterprise has one outstanding bond debt <br />obligation and one long -term note. There is a one -time debt payment in FY 14/15 that represents the <br />defeasance of the 2004 Water Revenue Bonds. Transfers to the capital fund are shown on Line 19. Funds <br />transferred to the capital fund are used for capital projects. Line 20 shows the transfer payment to cover <br />the Water Enterprise's share of the National Pollutant Discharge Elimination System (NPDES) MS -4 <br />requirements. <br />Lines 23 through 25 summarize the impact to the ending fund balance for the Water Enterprise. A <br />minimum target of 25 percent of 0 &M expenses plus any encumbrances serves as the minimum level of <br />working capital that Water sets to have on hand for operational purposes. In addition to the minimum <br />target of 25 percent of O &M expenses, Black & Veatch recommends that the City set aside $1 million for <br />an emergency fund. The initial funding level of the emergency reserve represents the approximate cost <br />for repairing a major main break. Given the number of mains that are in immediate need of <br />replacement, Black & Veatch believes that establishing an emergency reserve fund is a prudent <br />measure. Although it is not shown on Tables 8 and 9 for the Study Period, Black & Veatch also <br />recommends that as funds become available, the City should establish an R &R fund to address future <br />replacement needs. Annual funding levels for this reserve should increase to reach a minimum level <br />equivalent to one - year's depreciation expense. <br />Summary of Revenues, Expenditures, and Obligations <br />To maintain financial viability as an enterprise fund, the Water Enterprise's annual revenues must be <br />sufficient to satisfy three elements: <br />1. Adequate cash flow to cover 0 &M, capital and debt obligations <br />2. Meet debt service coverage (DSC) covenants <br />3. Maintain reserve funds <br />Long -term financial viability requires meeting all three elements. The need for revenue adjustments is <br />either "cash flow" driven or "debt service coverage" driven depending on which of the first two <br />elements creates the larger adjustment. <br />Based on the analyses of revenues and revenue requirements, it is evident that the Water Enterprise <br />needs are "cash- flow" driven and a rate revenue increase is needed in order to meet revenue <br />requirements and working capital reserve as a standalone enterprise. As shown in Figure 5, should the <br />City elect to maintain the status quo (no rate increases), the Water Enterprise runs into a significant cash <br />deficit position by the end of the 5 -year period. <br />M �l m• <br />NOVEMBER 2014 <br />