The Board of Directors does hereby elect to:
(A) Transfer $644,682 from the Rate Stabilization Reserve to the Capital Improvement Reserve;
(B) Amend the Reserve Policy to delete the Rate Stabilization Reserve; and
(C) Amend the Reserve Policy to add the Defend or Managed Retreat Restricted Reserve.
Reserve Policy
The purpose of the Carmel Area Wastewater District’s (CAWD) Reserve Policy is to ensure that the District will at all times have sufficient funding available to meet its operating, capital, and debt service cost obligations. Reserves will be managed in a manner that allows the District to fund costs consistent with its annually updated Capital Improvement Program and Long-Term Financial Plan, as well as other long-term plans while avoiding significant rate fluctuations due to changes in cash flow requirements. Operating reserves will be maintained at a minimum level of twelve months of budgeted operating costs or consistent with the currently approved Operating Budget (less Reclamation).
This policy establishes the level of reserves necessary for maintaining the District’s credit worthiness and for adequately providing for:
• Infrastructure replacement;
• Economic uncertainties and other financial hardships;
• Loss of significant revenue sources, such as property tax; receipts or connection fees;
• Local disasters or catastrophic events;
• Future debt or capital obligations;
• Cash flow requirements; and
• Unfunded mandates, including regulatory requirements.
The Reserve Policy covers all reserve funds of the District. At the end of each fiscal year compliance with the Reserve Policy will be reported to the District’s Board of Directors as part of each Fiscal Year-End Financial Report.
Reserve Fund Types
There are three major types of reserve funds:
• Legally Restricted Reserves – have restrictions imposed by an outside source, such as bond covenants, contractual obligations, etc.
• Board Designated Reserves – are set aside for a specific purpose as determined by the Board of Directors. The Board of Directors has the authority to redirect the use of these reserves as the needs of the District change.
• Unrestricted Reserves – are planned for use in each update of the Capital Improvement Program and Long-Term Financial Plan to assist in providing for minimal orderly rate adjustments consistent with the Board’s Rate Setting Policy
CAWD Reserve Fund Specific Purposes
Legally Restricted Reserves
• Bond Reserve Fund: This fund is governed by legal bond covenants for the District’s Highlands Project bonds (CSCDA Water & Wastewater Revenue Bonds Series 2004A). Bond covenants require that this fund be maintained at $238,822.50, or the amount required equal to the maximum annual Installment Payment payable on said bond.
These funds are held by the bond trustee during the term of the bonds and are to be used in the event that the District is unable to meet its required semi-annual debt service obligation. The Reserve account, according to covenants, must be available only to cover a deficiency in the Installment Payments under the Installment Purchase Agreement.
Board Designated Reserves
• Capital Improvement Reserve: This fund is to fund capital projects as planned in the Capital Improvement Program and capital budget. This fund is applied to the Long-Term Financial Plan and Replacement Cost Plan. All connection fees, property taxes and interest income revenue is presently deposited into this fund. A key objective for accumulating capital reserves is to minimize external borrowing and interest expense.
Annually an amount equal to current year capital budget is transferred from this fund to the Capital Fund.
Recommendation: This fund will accumulate sufficient funds to cover District’s Long-Range Financial Plan.
• Compensated Accrual Reserve: This fund is used to pay the District’s accrued vacation liability. District policy allows employees to accrue a maximum of 320 hours vacation time. Vacation accruals are paid to employee upon separation.
Recommendation: This fund will be sufficient to cover compensated absences liability as reported in annual financial statement.
• Defend or Managed Retreat Restricted Reserve: created in 2017 to address the future needs of the District in response to potential sea level rise issues. The Board determined that the Budget Committee would review annually and make a recommendation as part of the budget process to the full board as to funding.
Resolution 2017-09 refers to a funding goal of $15M over 15 years.
Unrestricted Undesignated Reserves
• Capital Fund: Will be drawn down annually to pay for budgeted capital expenditures. It is replenished annually in amount equal to capital budget to meet the next year budgeted capital requirements.
Recommendation: This fund will maintain a balance in funds equals to or sufficient to cover current year capital budget. Any funds in excess of current year capital budget will be transferred to the Capital Improvement Reserve annually, unless prior Board action is given to utilize for other purposes.
• O&M Fund: This fund contains all operating and non-operating revenues not specifically allocable to other funds which may be used for general purposes of the District. All operating and non-operating expenses identified in the budget are financed from this fund.
Recommendation: Maintain a minimum balance of approximately 100% of the total annual operating budget. This balance will fluctuate from month to month. However, the year-end objective is to achieve a balance that at a minimum is 100% of upcoming year operating budget. Any funds in excess of 100% of said operating budget will be transferred to the Capital Improvement Reserve annually, unless prior Board action is given to utilize for other purposes.
The policy requires coverage of a minimum of 100% of the total annual operating budget because (a) the District utilizes the property tax rolls to bill for sewer service and therefore is only able to submit rate changes once a year, and (b) covering 100% of the annual operating budget is a conservative position and ensures that, should the District need to borrow, lenders will look favorably on its operating position.
One-time and Unpredictable Revenues
One-time revenues, except when immaterial, should be allocated to the source of the revenue or refunded expenditure or, if not directly allocable, to the rate stabilization fund. Nonrecurring revenues shall not be used to initiate new programs which result in ongoing expenditures without specific notification to and approval by the Board of Directors.
Reserve Fund Transfers
Non-emergency Reserve transfer requested must be submitted to the Board of Directors prior to any expenditure. Reserve transfers will be controlled by specific Board resolutions or identified as part of the approved annual Budget.
Emergency Reserve Expenditures
As referenced in the District’s Purchasing Policy,
“An emergency is defined as a breakdown in machinery or equipment or disaster, including but not limited to a flood, storm or other disaster resulting in the interruption of an essential service, or a distinct threat to public health, safety, or welfare. In the case of an emergency requiring the immediate purchase of supplies, materials, equipment or contractual services, the General Manager may authorize his designee to secure in the open market, at the lowest obtainable price, any supplies, materials, equipment, or contractual services required, regardless of the amount of the expenditure.
During an emergency, the using department may purchase any supplies, materials, equipment, or contractual services. This may be done only after the Department Head has concluded that the purchase is essential to prevent delays which may affect the health or safety of citizens. The head of the using department shall, as soon as possible, provide a completed purchase requisition to the Finance Department.
In the case of a disaster, nothing contained in this document shall limit the authority of the General Manager to make purchases and take such other emergency steps as are, or may be, necessary to maintain operations. The General Manager shall report to the Board of Directors all actions taken on an emergency basis after the fact, preferably at the next Board meeting.”
In addition to reporting on actions taken during an emergency, said report will include comments as to impact on reserve levels and plan to replenish or recover said reserves if necessary.
Procedures for Monitoring Reserve Levels
The Reserve levels are reported monthly to the Board of Directors as part of the Cash Report. In addition, there shall be a report made:
• Board of Director’s deliberation of budget (annual or bi-annual)
• Board of Director’s deliberation of a service charge rate increase (annual or bi-annual)
• When a major change in conditions threatens the Reserve levels established within this policy
(Res. 2010-05, passed 3-25-2010; Res. 2013-16, passed 6-27-2013; Res. 2015-09, passed 3-26-2015; Res. 2018-22, passed 6-28-2018)