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CC RESOLUTION 3938RESOLUTION NO. 3938 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF EL SEGUNDO, CALIFORNIA AMENDING THE RECLAIMED AND POTABLE WATER RATE STUDY DATED JUNE 10, 1994 WHEREAS, the City has caused to be prepared a Reclaimed and Potable Water Rate Study dated June 10, 1994; and WHEREAS, on June 21, 1994 the City Council approved said Reclaimed and Potable Water Rate Study, including recommendations concerning a Cash Reserve Policy; and WHEREAS, the City Council of the City of El Segundo is desirous of maintaining the City Water Utility System on a business basis, thereby preventing the City general taxpayer from having to subsidize said System; and WHEREAS, the City Council also is desirous of assuring the long term financial and physical viability of the said City Water Utility System, while at the same time ensuring that Water Fund Reserves are not excessive and thereby raising water rates unnecessarily. NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF EL SEGUNDO, CALIFORNIA, DOES RESOLVE AS FOLLOWS: • SECTION 1. The City Manager is directed to take such action as is necessary to eliminate the need for the $1 million FEMA seed money currently in the Water Fund Reserve and to readjust future Water Fund increases to reflect that reduction, contingent upon the City maintaining at least $10 million in the uncommitted General Fund Reserves, all as in the manner stated in the "Proposal to Reduce Planned Increases in Water Rates" submitted by Mayor Pro Tem Weston at the August 15, 1995 meeting of the El Segundo City Council, attached hereto as Exhibit A. SECTION 2. The City Clerk shall certify to the passage and adoption of this resolution; shall enter the same in the book PWCON460.RSO (8/30/95) - 1 - E • of original resolutions of said City; and shall make a minute of the passage and adoption thereof in the records of the proceedings of the City Council of said City, in the minutes of the meeting at which the same is passed and adopted. PASSED, APPROVED AND ADOPTED this 5th day of September, 1995. Carl Jacobso , Mayor of the Cit of El Segundo, California ATTES�s 2 At ndy MW sen _ , /City Clerk ( SEAL) PWGON460.R50 (8/30/95) - 2 - AGENDA ITEM SUBMITTED BY LIAM WESTON PROPOSAL TO REDUCE PLANNED INCREASES IN WATER RATES BACKGROUND In May of last year the City Council received a water rate study and later increased water rates (based on findings from the study) on a regular schedule for the following five years. The increases were required since the city was spending more money to purchase and deliver the water than residents and business were paying. This deficit spending had consumed the water fund reserve which left the City Council with no alternatives but to increase the rates. Nonetheless, the consultant's report on the water rates also required the water fund build a reserve of approximately $3.5 million. Apparently, there is a standard formula used to . calculate what amount of money should be in the reserve for cash flow, rate stabilization and "seed" money in the event of a natural disaster. The consultant, without regard to our general fund reserves, recommended that $1 million be collected from the water users and saved in case of a large natural disaster. This money, according to the report, could than be accessed temporarily for emergency repairs until FEMA provided the federal assistance common with such catastrophes. Since the proposed use of this money would only be temporary, it is really a short-term emergency loan fund and not required for the daily operation of the water department. EXAMPLE For example: If the City of Hawthorne is hit by an earthquake or other natural disaster, they would be eligible for FEMA money to repair basic services to residents and businesses. However, there is a lag time between the appropriate authority declaring the city a . disaster area and the federal check arriving in the mail. The "emergency fund" would be available until the money arrives to replenish the fund and pay for the repairs. If you assume what the report says is true, then the money is really only saved to enable the city an emergency interim funding mechanism until federal assistance becomes available. El Segundo, however, has sufficient reserves already in the general fund and also a credit worthiness which provides either a temporary loan from the city or a bank in such an emergency. In addition, rate stabilization money ($2.3 million) would certainly be available provided this natural disaster doesn't occur after a long and severe drought. The consultant failed to consider the above mentioned three alternatives. Instead, we are simply adding an additional $1 million in taxes to our water users that really is not required to provide the service. EXHIBIT "A" 1 (l 06 • ALTERNATIVES As in this example, the consultant's solution is appropriate where a city may not have the credit to qualify for a short-term loan nor adequate savings to advance money before receiving the reimbursement. For the City of El Segundo $1 million is less then 1 /10 of our uncommitted reserves. Even with the incredible strain such a disaster would have on this reserve, at least another $10 million would be available to the City Council from the committed reserves for replacing damaged equipment such as police and fire vehicles. The three alternatives currently available to the water fund in a disaster are; 1. Provide a temporary loan from general fund. 2. Utilize the "rate stabilization" reserve. 3. Take out a short-term loan for the water fund until FEMA relief money arrives. '', • OTHER EXCESS RESERVE GOALS In addition to the $1 million disaster loan money, the water fund reserve is proposed to accumulate another $2.3 million for "rate stabilization." The purpose of this fund is to have monies available if there is a drought and people use less water thus reducing the anticipated revenue for that particular year. The problem is this calculation doesn't account for the fact that El Segundo's largest water consumer, Chevron, is now heavily dependent on reclaimed water and thus no longer effected by drought conservation requirements. A portion of this money could be used for "seed" money in the event of a natural disaster. ACTION REQUESTED I request the City Council direct staff to bring back to the City Council a resolution to: • 1) Eliminate the need for the $1 million FEMA "seed" money in the water fund reserve and .readjusts future increases accordingly to reflect the reduction. a) This would be contingent on the city maintaining at least $10 million in uncommitted reserves. 2) Require staff to report back to Council no later then 12/35 on the requirement of $2.3 million rate stabilization with a plan to scale back this amount and suggest a revised schedule of future water increases. 3) Provide these calculations and services in house without hiring outside consultants. ill \J • Cash Reserve Policy Discussion. Cash reserves consist of the excess of current assets over current liabilities, plus other investments, excluding encumbered funds earmarked for capital investment. It is recommended that rates be established to provide approximately the accepted level of cash reserves at the end of a planning period — say 5 years, or at June 30, 1999. Components of cash reserves are: Working cash — about two months O &M expenses excluding purchased water cost, or $300,000, Emergency reserve of about $1 million to provide "seed" money in the event of a natural disaster before Federal (FEMA) funding becomes available, and Drought contingency or rate stabilization reserve (Council should not be placed in the position where it has to increase rates because customers are complying with a mandatory water.conservation plan) of about 25 Percent of annual user charge revenue, or $2.3 million. Curr nt poli �. No statement as to current policy. Recommendation, End result is that cash reserves of about $3.5 million are recommended. Because the timing of rate increases also depends on annual capital improvement expenditures, it may be difficult to achieve precisely the recommended cash reserve level five years in the future. We consider the recommended and estimated rate increases over the next five years to comply with our recommendation, even though it is projected in the cash flow model (Table 3, above) that cash reserves at June 30, 1999 (end of the five year rate planning cycle) are only about $3.1 million. Over years 6 through 10 (July. 1, 1999 through June 30, 2004) that portion of the cash flow model not reproduced in this report shows cash reserves building up to levels somewhat greater than $3.5 million. Again, we consider this to be acceptable, because the Capital Improvement Program after 4 years (Appendix Table 11) only identifies those capital improvements — main replacements — which can be forecast far in advance. Most assuredly, there will be additional capital improvement requirements which become known as the turn of the century approaches, and cash reserves w not build as fast as the model forecasts, ill BROWN -- AND CALDWELL Ali .*y o2 , ,ggcl Water Rate Study �IBIT "A ". Page 12 112 0 STATE OF CALIFORNIA ] COUNTY OF LOS ANGELES ] SS CITY OF EL SEGUNDO ] I, Cindy Mortesen, City Clerk of the City of El Segundo, California, DO HEREBY CERTIFY that the whole number of members of the City Council of the said City is five; that the foregoing resolution, being RESOLUTION NO. 3938 was duly passed and adopted by the said City Council, approved and signed by the Mayor or said City, and attested by the City Clerk of said City, all at a regular meeting of the said Council held on the 5th day of September, 1995, and the same was so passed and adopted by the following vote: AYES: Mayor Jacobson, Mayor ProTem Weston, Councilman Switz, Councilman Robbins, and Councilwoman Friedkin. NOES: None ABSENT: None ABSTENTION: None NOT PARTICIPATING: None WITNESS MY HAND THE OFFICIAL SEAL OF SAID CITY this day of September, 1995. 0 JINDY TEiEN3 City Clerk of the City of El Segundo, California (SEAL)