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INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 7023
To the Mayor and Members of the City Council May 28, 1985
S Rip,
X Subject: WATER AND SEWER FISCAL POLICY — FOLLOW-UP
At the May 14, 1985, Pre-Council meeting, the Water Department presented two
Informal Reports, No. 7021 and 7020, concerning fiscal management strategies.
This report responds to questions raised at that time.
Water and Sewer Fiscal Policy
Some Council members expressed concern that it may be premature to endorse a
1.,olicy where the budgetary impact is unknown. Specific information concerning
he effects of the recommended ratios and the reserve fund were requested and
and presented herein.
However, some caution should be applied in the review of the information presented.
The Water Department's proposed 1985/86 budgetary figures are preliminary, and
may be further refined upon final review by Management Services and the City
Manager's Office. Also, much of the information is based on historical data to project
financial positions at a future time, and is therefore subject to some variation.
The proposed Water and Sewer Fiscal Policy has been presented at this point of
the budgetary process to highlight some of the issues to be considered. The policy
is designed to provide a framework to guide staff in budget preparation and rate
analysis. It is emphasized that Council prerogative on budget and rate review matters
would not be compromised with the endorsement of the water and sewer fiscal policy.
The following underscored items included in the proposed Water and Sewer Fiscal
Policy are reviewed for fiscal implications:
Operating Reserve Account - Prior to the Series 1984 Refunding Bond issue in
early 1984, a special account in the Water and Sewer Operating Fund, the Operation
Reserve Account, was required by the First Issue Bond Ordinance. This requirement,
and other restrictive covenants, was eliminated by the refunding bond ordinance.
Prior to 1984, the Operating Reserve Account was required to exceed 25% of the
total amount of the operating expenses of the system for a 12 month period ending
on the next preceding September 30. In the proposed fiscal policy, a similar account
would be created, but at a lesser level (20%) than previously required, and in an
unrestricted account, offering greater flexibility in managing and using those funds.
A prudent level of operating reserves could be maintained under the fiscal policy
for protection against unexpected occurances, yet the City Council would not be
restricted by ordinance to maintain the account at a fixed percentage or to restore
the account, after use, by an established formula.
In the 1984/85 Water and Sewer budget, $39,398,833 was established to cover the
operating expenses of the system. For purposes of the bond ordinance and the
proposed fiscal policy, these operating expenses are defined as the reasonable and
proper expenses of operating and maintaining the system, including salaries, labor,
materials, repairs and extensions necessary to enable the system to render proper
service, but do not include any capital expense contained in the operating budget.
00 In 1985/86, the proposed operating expense is $47,511,885. A 20% reservation of
prior years' earnings to establish a operating reserve account would therefore amount
to $9.5 million for the 1985/86 budget cycle.
- ISSUED BY THE CITY MANAGER — FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS NO. 7023 - p.2
To the Mayor and Members of the City Council May 28, 1985
Subject: WATER AND SEWER FISCAL POLICY — FOLLOW-UP
aa
Water and Sewer Capital Improvement Program - The proposed fiscal policy
recommends that current revenues be used to fund capital replacement and
rehabilitation projects each year in an amount approximately equal to the depreciation
experienced in the water and sewer capital facilities. For the fiscal year ending
September 30, 1984, water and sewer depreciation expense was $8,342,556. In the
current year, $6.6 million is budgeted for replacement and rehabilitation projects.
Assuming the 1983184 depreciation expense reasonably reflects 1985 depreciation,
funding for rehabilitation work for the current year is approximately $1.7 million
less than the suggested target.
Net Revenues Available for Debt Service - The proposed fiscal policy restates
the bond ordinance requirement that water and sewer rates be set to generate "net
revenues available for debt service" equal to 110% of-the highest future year debt
service requirement. For the fiscal year ending September 30, 1984, the maximum
annual principal and interest requirement for existing Water and Sewer Revenue
Bonds will occur in 1987 in the amount of $15,149,590. Net revenues available for
debt service for the past year was $33,216,294 for a coverage of 2.19. This figure
is somewhat misleading, however, since it excludes all Character 04 (capital outlay)
expense, and other capital items funded in the operating budget. Deducting these
amounts from the "Net revenue available..." results in a balance of $16,462,823
which is 109% of the highest future year debt service requirement.
Owner's Equity - This measure is defined as the amount of the interest of the owners
of an enterprise. The equity section of the balance sheet reports the various sources
of capital provided by grants and developers (contributed capital) and the amount
of internally generated resources retained by the enterprise (retained earnings).
Shown below is a listing of equity as a percentage of total assets:
Year Water/Sewer Equity Total Assets Equity %
1976 $200,470,059 $250,115,326 84.8
1977 $223,652,808 $274,836,385 86.2
1978 $256,410,046 $290,975,246 88.1
1979 $267,322,466 $305,591,579 87.5
1980 $280,260,052 $316,100,725 88.7
1981 $293,753,343 $337,545,364 87.0
1982 $305,676,137 $358,014,249 85.4
1983 $309,804,101 $383,025,007 80.9
1984 $345,781,599 $439,604,450 78.7
For FY 85186 budgetary purposes, a minimum owner's equity ratio of 60% (proposed
in the fiscal policy) would have no impact inasmuch as a 78.796 ratio existed in 1984.
Summary The table presented below places the proposed fiscal policy in perspective
with the preliminary Water and Sewer budget request:
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No 7023 - p.3
May 28, 1985
t Rif To the Mayor and Members of the City Council
X Subject: WATER AND SEWER FISCAL POLICY — FOLLOW-UP
WATER SEWER TOTAL
F.Y. 1985 Approved Bugget $40,320,054 $31�6441428 71,964,482
"USE OF FUNDS" - FY 1986
1. FY 1986 Budget Request $49,583,704 $34,886,941 $84,470,645
2. Establish Operating Reserve $ 6,100,000 $ 3,400,000 $ 9,500,000
3. Additional depreciation
replacement $ 850,000 $ 850,000 $ 1,700,000
4. Total funds required $53,533,704 $39,136,941 $95,670,645
5. Retail Service revenues $35,237,959 $19,321 ,908 $54,559,867
with existing rates
6. Interest income 1,000,000 1,000,000 2,000,000
7. Other income 7,308�267 12,227,239 19,535,506
8. Projected income $43,546,226 $32,549,147 $76,095,373
9. Cash & Investments $ 6,942,798 $ 4,628,532 $11,571,330
(less current liabilities
million working capital
for start of FY 86)
10.Total funds available $50,489,024 $37,177,679 $87,666,703
11. Total Funds needed $ 6,044,680 $ 1,959,262 $ 8,003,942
These numbers indicate that in FY 1986 a 17.2% and 10.1% retail rate increase would
be needed for water and sewer services, respectively, based on the following
a. An operating reserve of $9.5 million is established;
b. Water and sewer replacement projects are funded with an additional $1.7
million in FY 86; and
c. Prior years' earnings totaling $11.5 million are available to be carried forward
to FY 86 and appropriated or applied as indicated above.
Attachment I presents water and sewer rate adjustments adopted by Council since
FY 81.
- ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 7023 4
.IT I.,,
To the Mayor and Members of the City Council May 28, 1985
4
Subject: WATER AND SEWER FISCAL POLICY — FOLLOW-UP
1073
CAPITAL RECOVERY FEE
Following the directions of City Council, Water Department staff began negotiations
with a number of engineering consulting firms to conduct a study of water and sewer
capital recovery fees. A joint venture between David M. Griffith and Associates
and CH2M-Hill has proposed a cost-effective approach to developing a capital
recovery fee system. It is anticipated that the study will be completed over
approximately six-months, and will incorporate participation from an appointed
committee of citizens. Attachment 11 details the timetable for the system
development charge study.
The capital recovery fee study will present an opportunity to revise existing water
and sewer development policies. By necessity, the study will closely analyze existing
water and sewer development policies in order to recommend changes to these policies
needed to correspond with the implementation of a capital recovery fee schedule.
Reduction of the construction time period covered by CFA's from five to two years
will be examined, in conjunction with on-site and approach oversizing of mains.
Accordingly, unless directed otherwise by the Council, the CFA contract term will
remain at 5 years pending recommendations from the City Council.
A ouglas Harman
.
City Manager
DH:hl
Attachments
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS