(A) All future financial actions taken by the Joint Water/Sewer Fund and Refuse Fund be taken in conformance with the Financial Management and Rate Setting Guidelines, attached to Resolution No. 167-1986.
(B) This section shall become effective upon adoption and be applicable to the fiscal year 1988 and subsequent budgets.
(C) Definitions.
A or A-. A Moody's credit rating, or equivalent, for a bond which is considered an “upper medium” grade credit risk.
AA or AA-. A Moody's credit rating, or equivalent, for bond which is considered an “excellent” grade credit risk.
DEBT SERVICE COVERAGE. Income available for debt service divided by total debt service for the same period.
FAIR MARKET VALUE. The price an asset would bring if well advertised and sold competitively in the open market.
INCOME TRANSFER PAYMENT. Use of governmental revenues, derived from one sector of the population or the population in general, to provide economic support for another group or classification of citizens.
INTERGENERATIONAL EQUITY. The concept that presumes users of utility services from one generation or period will not be required to invest any more than is required to maintain services of adequate quality and reliability for their own use; and that future users of that same service will not be burdened with costs which represent costs of doing business from an earlier period.
INTERCLASS SUBSIDIZATION. A circumstance where one group or classification of customers is supporting the cost of providing services to another group by being required to pay more than their fair share of costs.
INTRACLASS SUBSIDIZATION. Refers to an instance where one subset of a class customers is subsidizing the cost of service to others within their same group.
LONG TERM DEBT. Debt with a maturity of more than one year after the date of issuance.
(D) Financial management and rate setting guidelines.
(1) Financial management.
(a) Accounting practices applied to enterprise funds must make it possible to determine whether they are operated at a profit or loss similar to comparable private enterprises;
(b) All services rendered by an enterprise fund to other funds of the city shall be billed for on the same basis that other users are charged, and all services received by the enterprise fund from other funds shall be paid for on the same basis that other users are charged;
(c) Enterprise funds must be reimbursed, at book value, for assets transferred to other city purposes; and at book or market value, which ever is higher, for assets sold for private use;
(d) A ceiling shall be established with respect to the maximum amount of annual revenue from utility expansion charges that will be treated as recurring income for the purpose of establishing rate requirements for the Joint Water/Sewer Fund. The amount of this ceiling shall be established on the basis of a study to be provided by the Fund for Council approval during its fiscal year 1988 budget hearing. The amount of this ceiling will be determined as a fixed amount, to be updated annually;
(e) Operating income should be sufficient to:
1. Ensure payment of obligations on a current basis, including adequate maintenance and repair;
2. Maintain credit ratings of “AA-” for the Joint Water/Sewer Fund and “A” for the Refuse Fund; and
3. Provide for minimum working capital balances and contingency reserves.
(f) Cash and investments in excess of the level required to maintain minimum working capital balances should be used for capital expenditures and maintenance of contingency reserves, as required;
(g) In addition to the maintenance of minimum working capital balances, contingency reserves will be appropriated and maintained at a level sufficient to provide for unanticipated, non-recurring events or emergencies. The amount of this reserve shall be established on the basis of a liability study to be provided by the departments for Council approval during its fiscal year 1988 budget hearing. The amount of the appropriation will be determined as a fixed amount, to be updated annually, or as a percent of projected annual operating revenues;
(h) Minimum annual operating fund transfers to the departments' capital improvement programs will be established. The amount of these appropriations shall be established on the basis of a cost/benefit study to be provided by the departments for Council approval during its fiscal year 1988 budget hearing. The amount of these appropriations will be determined as a fixed amount, to be updated annually, or as a percent of property and equipment in service, as of June 30 of the immediately preceding fiscal year;
(i) Operating transfers to capital will be included in a fund's cost base for the purpose of establishing rates;
(j) Long term debt will be executed only for the purposes of capital acquisition, including water rights purchases, replacement and refurbishment of plant;
(k) The Administration shall propose policies and procedures by which debt issued to finance enterprise fund capital projects will be sized and timed to meet annual capital improvement program cash flow requirements, rather than total project appropriations;
(l) The Administration will recommend to the Council increases in charges for services, or other effective measures, if prospective debt service coverage tests for proposed and outstanding bonds will not be met within the planning horizon of the departments' annual combined rate and budget proposal;
(m) Long term debt will not extend past the expected useful life of the facilities financed, and will not be so high relative to total operating expenses as to jeopardize a fund's credit rating;
(n) The impact on rates for existing customers from an expansion of services will be minimized. For this purpose, policies shall be established for the recovery of just and reasonable costs from those parties causing or directly benefiting from system expansion and growth. Existing policies together with any proposed changes, in this regard, will be summarized and provided by the departments for Council review during the fiscal year 1988 Budget Hearing.
(2) Rate design.
(a) Both inter- and intraclass subsidization should be minimized. Optimally, a customer or class of customers benefiting from a service should pay the full cost of such service, no more, no less. Generally, rates representing fully allocated costs of service should be maintained for all services in order to send clear economic signals regarding the cost and efficient use of those services. Where differences among users are significant and determinate, charges should, to the extent possible, reflect differences in the cost of providing service;
(b) Intergenerational equity should be maintained. Future rate payers should not be expected to pay for costs incurred to serve current customers and vice versa;
(c) City residents should not subsidize enterprise fund services provided to entities outside of the incorporated city limits and vice versa. However, the city reserves the right to earn a fair economic return on its capital investment to serve those entities, as compensation for financial risk incurred as a result of providing those services. A minimum charge of a 5% return on the investment allocated to provide such service is hereby established. Higher rates of return are permitted, if justified by prevailing market rates of interest and/or the value of service to those customers;
(d) Revenue stability should be protected. Rate adjustments should be adopted regularly, in small increments, in order to avoid revenue losses associated with reduced demand for services which can be precipitated by large, infrequent rate adjustments;
(e) When special situations require that factors other than the cost of service be considered in the final determination of rates, steps should be taken to minimize any discriminatory effect:
1. Concerns for the socio-economic impact of charges for services on individuals can best be resolved through the implementation of explicit, specifically targeted income transfer payments or credits which are to be reimbursed by the General Fund (as is the current practice for both the Water and Refuse Funds); and
2. Presentation of all annual budget/rate proposals shall include historical tables which show average bills and actual costs per unit of service. Comparative data from similar communities should also be provided, as available. Also, a department requesting a rate change must indicate likely effects of the new rates on the relative level of utilization of service by class of customer, and assuming utilization remains unchanged, calculate the percentage changes in average monthly billings and marginal rates to be paid for each class of service; and
3. Every request for a rate adjustment should also be accompanied by a qualitative assessment, where possible, of the impact of the rate change on incentives and disincentives to: conserve water, recover resources, and utilize city services instead of other alternatives such as using well water, septic tanks and disposing of wastes illegally.
(3) Financial performance ratios. The Joint Water/Sewer Fund and the Refuse Fund will also annually report their performance with regard to the following ratios over a five year period ending with the projected budget year, as part of each year's combined budget and rate proposal to the Council:
ENTERPRISE FUND FINANCIAL PERFORMANCE INDICATORS
Category Description
Liquidity a. Debt service coverage
b. Working capital as % of operating income
c. Liquid assets/current liabilities
d. Current assets/net assets
Leverage a. Long-term debt as % of net assets
b. Annual debt service as % of total expenses
Activity a. Operating ratio, i.e., total income/total operating expenses
(Res. 167-1986, approved 11-19-86)