Document Sample
CHAPTER Powered By Docstoc
					                                                                                          January 2005

 Section 13
 Financial Plan

13.1 Introduction
The effective implementation of a Water System Plan (WSP) is dependent upon accurately
developing a document that can be financially supported by the utility; will meet State and local
regulatory requirements; and provides the flexibility to deal with unforeseen changes.
This section presents a financial plan that reviews the sources of funds (revenues) and
applications of funds (expenses) for the City of Sunnyside’s (City) water system. The financial
plan includes projected operating and capital costs of the system for the six-year time horizon of
2005-2010. The revenues and expenses used in the financial plan were obtained from the City’s
2004 budget in conjunction with historical consumption information. The capital costs contained
within the financial plan utilize the Capital Improvement Plan (CIP) presented in Section 12.
The results of the financial plan outline the annual operating and capital needs of the water
system and determine if the current water revenues are sufficient to cover costs. This analysis is
not sufficient to provide a detailed review of cost of service or rate adjustment requirements,
however, the City may consider performing a rate review independent of this planning document
to address those issues.

13.2 Past Financial History
The past five years of financial information for the water utility were evaluated to gain an
understanding of the past performance of the utility, and at the same time, gain perspective of the
current financial status of the water utility.
Table 13-1 is a summary of a five-year financial history (2003 - 1999) for the City’s water
The utility has a strong financial position historically. As Table 13-1 illustrates, the utility’s
historical information shows that the utility is showing a positive cash flow for the historical test
period. The balances are used for capital improvements and reserves for future capital. While
some capital improvements are funded through low-interest loans and revenue bonds, resulting
in debt service payments, the utility also historically has funded a substantial level of capital
improvements through rates. Target levels for funding capital improvements for future years is
discussed below.

               Section 13 Financial Plan                                                         13-1
               City of Sunnyside Water System Plan
                                                                                                          January 2005

                                                        Table 13-1
                                       Water System Financial History (Thousand $)
                                                    City of Sunnyside
                                                   2003            2002         2001          2000         1999
Sources of Funds
   Rate Revenue                                  $1,414,608   $1,383,678   $1,377,251   $1,359,422   $1,378,984
   Other Revenue                                     30,231       42,293      306,868      165,287      132,082
 Total Revenue                                   $1,444,839   $1,425,971   $1,684,119   $1,524,709   $1,511,066

Applications of Funds
 Operating Costs
    Personnel & Benefits                           $458,106     $422,945    $404,240     $382,859     $372,993
    Supplies                                        139,820      127,653     110,629      132,052      137,988
    Other Services and Charges                      377,808      306,744     280,392      269,417      316,976
    Intergovernmental Services                       39,494       39,254      36,614       36,925            0
    Other                                            90,156       64,924      37,168       42,072       43,143
Total Operating Expenses                         $1,105,384     $961,520    $869,043     $863,325     $871,100
                                                               1,021,982     938,009
Total Transfers Out (In)                              $488          $909      $2,193         $213       ($7,401)

Debt Service                                      $293,187     $177,414     $190,398     $268,551     $344,591

Total Revenue Requirements                       $1,399,059   $1,139,843   $1,061,634   $1,132,089   $1,208,290

Balance For Capital/Reserves                       $45,780     $286,128     $622,485     $392,620     $302,776

           Section 13 Financial Plan                                                                               13-2
           City of Sunnyside Water System Plan
                                                                                       January 2005

13.3 Development of the Financial Plan/Revenue
The development of the six-year financial plan is intended to demonstrate the City’s ability to
meet its capital improvement and operating needs, while maintaining sufficient rate levels to
support those needs. In developing the financial plan fund balance and reserve levels are also
analyzed. The financial plan was developed to review the projected revenues and expenses of the
water system for 2005-2010. The City’s 2004 budget was used as the basis for the anticipated
revenues and expenses of the system. These revenues and expenses are escalated for future years
by estimates of inflation and growth, as described below.

13.3.1 Sources of Funds

The first component of the financial plan is a review of the sources of funds of the water system.
The different revenues, or sources of funds, received from operations are:
   Rate revenues – water sales to customers;
   Other revenues – service repairs, fines and penalties, ancillary fees; and
   Interest Revenue –interest earnings on fund balance.

Projections for future year revenues were developed by applying a projected growth rate of 1
percent to 2004 budgeted rate revenue amounts. This more conservative growth rate is used for
purposes of projecting financial needs, rather than the planning and design growth rate of 2.5
percent. Other miscellaneous revenues, including investment interest, penalties and other
revenue, are projected to increase approximately 2 percent per year through 2010.

Rate revenues are projected to be $1.496 million in 2004. This includes 8 months of revenue for
the adjustment that was implemented in mid-March, 2004. The rate revenues of the City come
from retail sales to the residential, commercial, public agency and interdepartmental customers.
With growth applied at 1 percent per year, the rate revenue increases to $1.588 million by 2010.

Other revenues for 2004 total approximately $77,000, with a majority coming from investment
interest, penalties and sales of miscellaneous items and services. This figure remains steady
through the time period and is projected to be $80,000 by 2010.

The total revenue available to offset the operating and capital requirements of the water system
total $1.573 million in 2004 increasing to $1.668 million by 2010.

13.3.2 Application of Funds

Operating expenses, or the application of funds, are based on the 2004 budget. These expenses
are then projected for future years by applying escalation factors dependent upon the type of
expense being reviewed. The second part of the financial plan is a review of the applications of
funds. In developing the financial forecast, four main cost components were reviewed:

                Section 13 Financial Plan                                                     13-3
                City of Sunnyside Water System Plan
                                                                                        January 2005

   Operations and Maintenance (O&M) Expenses
   Taxes and Transfer Payments
   Debt Service
   Capital Improvements Funded From Rates

Operation and Maintenance Expenses

Using the 2004 budget as a starting point, expenses were categorized into four major subsections.
They are:
   Administration
   Maintenance
   Customer Service & Marketing
   Operations

Annual escalation factors were applied to the 2004 budget costs to obtain projected costs.
Escalation factors range from employee benefits at an average annual increase of 17 percent, to
miscellaneous items, materials and supplies at 2 percent, labor escalated at 4 percent and power
at 5 percent. Detailed escalation factors are provided in Appendix L, accompanied by a copy of
the financial plan. It should be noted that no other program cost increases, above budget year
2004 figures, were assumed as part of the projected costs. O&M expenses ranged from $1.0
million in 2004 to $1.3 million in 2010, including state utility taxes.

Taxes and Transfer Payments
The water system currently has tax obligations to the State and City in the form of excise taxes.
The state public utility tax is calculated as 5.029 percent of the water utility rate revenues. For
2004 these taxes/transfer payments total approximately $70,000 and increase to $80,000 by
2010. Projected taxes for the period assume constant tax rates over time.

Debt Service

There are currently three outstanding debt obligations for the City’s water system. The City has
a SEID loan. This is a pass-through loan, with the utility receiving revenue in the exact amount
of the payments for this private system loan. Therefore, this loan has no financial impact on the
utility. There is a 1993 bond issue, of which 35.18 percent of the benefit (and debt payments)
are attributed to the water utility. The 1996 bond issue is allocated 100 percent to the water
utility. The combined debt service on the existing debt averages approximately $405,000
between 2004 and 2007.       The City has structured the 1993 and 1996 bond issues such that
payments drastically decrease in 2008. Between 2008 and 2010 debt payments average
$146,000 per year.

The City will require additional bond issues in the future to meet the capital needs identified
earlier in this plan. The projected financial plan indicates a need for bond proceeds each year of
the projected 6-year period except for 2008 and 2009. Primarily this is due to the projects
identified within the capital plan. However, the need for bonds is also due, in part, to preserve
the City’s current reserve levels for unexpected occurrences. Because a majority of the utility’s
revenue is consumption based, and therefore dependent upon optimal weather conditions,

               Section 13 Financial Plan                                                       13-4
               City of Sunnyside Water System Plan
                                                                                          January 2005

maintaining adequate reserve levels has always been a priority for stable fiscal management of
the utility.

Meeting debt service coverage requirements has been a challenge for the City in recent years.
Three rate adjustments were implemented within the last year in order to meet the 1.4 coverage
requirement of existing debt obligations. Debt service coverage is a financial measurement of an
entity’s ability to repay debt. A debt service coverage ratio is a comparison of net income before
debt service payments to the total debt service on revenue bonds. The calculated debt service
coverage ratio for the City’s water utility in 2004 is 1.40.

The financial plan indicates additional adjustments are necessary through 2007 to meet debt
service requirements. This accelerates the overall adjustment needs into the first three years of
the financial plan. Meeting the coverage requirements also ensures adequate funding available
for capital projects. Once the bond principal payments reduce in 2008, due to the structure of the
bonds on both outstanding water utility issues, meeting coverage is more than adequate.

Capital Improvement Projects from Rates

Capital improvement projects are related to the infrastructure of a utility. Capital improvement
projects are generally divided into two categories: capital improvements related to renewal and
replacements of existing plant and depreciated facilities, and growth related projects including
system expansion and upgrades to accommodate new customers.

The City has had strong reserve funding available, which has helped defray any revenue
shortfalls due to planned and unanticipated capital improvements. It is anticipated that the City
will continue to maintain reserve balances. Therefore, the City will need to fund needed capital
improvements by issuing new debt most of the years within the six-year time period 2004 to
2010, as described previously.
This financial analysis assumes that the City will fund existing capital projects, that is, renewals
and replacement projects, at a rate greater than twice annual depreciation expense throughout the
planning period. Depreciation is used as a benchmark for funding capital projects in an attempt
to reflect the replacement cost of the depreciated facilities. The City’s budget reflects that the
annual depreciation expense in 2003 was $60,000. In 2005, funding for replacement capital is
established at $120,000, according to the capital plan section of this Comp Plan. Through 2007
each year increases slightly, totaling $155,000 by 2007. Beginning in 2008, with the reduction
in debt service payments, a larger amount of funding is available for capital financing. However,
this level of funding begins to reduce by 2010, as inflationary pressures require more resources.

This financial plan has incorporated the capital projects outlined in Section 12 of this Plan.
If the City later determines that capital improvement projects other than those listed in the CIP
are required and the reserve fund accumulations are not capable of satisfying the additional
projects, the City may need to consider finding other funding sources, including additional debt
and rate adjustments to meet debt payments. Other possible funding sources are further
described below.

               Section 13 Financial Plan                                                         13-5
               City of Sunnyside Water System Plan
                                                                                                 January 2005

 13.3.3 External Sources of Funds for Capital Projects

 The City has the ability to apply for grant and loan funds available to public entities for water
 system projects. Table 13-2 provides a summary of the contacts for various funding agencies.
 These sources rarely provide full funding of a construction project. The City would need to
 supplement these funds with other funding sources to ensure that implementation of the
 recommended capital improvement projects can occur.

                                               Table 13-2
                                        Funding Agency Contacts
                                           City of Sunnyside
     Program                       Address             Phone               Fax               Internet
Centennial Clean         Department of Ecology         (360) 407-6566 (360) 407-6426
Water Fund               P.O. Box 47600
                         Olympia, WA 98504-7600
Drinking Water State     Department of Health          (360) 236-3095 (360) 236-2253
Revolving Fund           DWSRF
                         PO Box 47822
                         Olympia, WA 98504-7822
Public Works Trust     Public Works Board              (360) 586-7186 (360) 664-3029
Fund                    P.O. Box 48319
                       Olympia, WA 98504-8319
USDA Rural              Rural Utilities Service        (360) 704-7764 (360) 704-7775
Development             USDA, Rural Development
                        1835 Black Lake Blvd.
                        Suite C
                        Olympia, WA 98512-5716
                         Infrastructure Assistance     (360) 725-5002        
Database (over 200
                         Coordinating Council (IACC)
funding programs)

 Department of Ecology

 The Centennial Clean Water Fund (CCWF) is available to local governments and tribes for
 measures to prevent and control water pollution. Both grants and loans are available on a yearly
 funding cycle.

 CCWF is the largest State grant program for water projects. It provides grants for planning,
 design, and construction of facilities and other activities related to water quality. In 1996 the
 CCWF changed its application process and eligibility criteria. The primary focus of the program
 is pollution prevention and funding projects with a quantifiable water quality benefit. Interest
 rates are 0.5 percent for loans up to five years while those over five years but less than 20 years
 have a 1.5 percent rate. Grant funding of 50 to 75 percent of a project is available depending on
 the type of project.

                     Section 13 Financial Plan                                                          13-6
                     City of Sunnyside Water System Plan
                                                                                      January 2005

Funding from this program is not available to provide excess capacity, but must be used to meet
existing residential needs. Funding can also not be used to provide a source of supply. Funds
are available to protect a source of water supply, as well as funding of water conservation or
water reuse projects, if they can be shown to be the cost-effective alternative to solve a water
quality problem. Grants and loans from this program are also available for the wellhead
protection activities.

Another source of Washington Department of Ecology (Ecology) grant funding provided by the
Remedial Action grant program is normally used only to mitigate contamination events.

Washington Department of Health

In August 1996 Congress reauthorized the Safe Drinking Water Act (SDWA) and appropriated
funding for states to develop their Drinking Water State Revolving Fund (DWSRF) loan
programs. Each state receives annual allocations in the form of a capitalization grant. In
Washington State, the DWSRF is jointly managed by the Department of Health (DOH), Division
of Drinking Water, the Public Works Trust Fund Board (Board), along with its partner, the
Department of Community, Trade and Economic Development.

DWSRF loans are available to all community public water systems, and non-profit, non-
community public water systems, except federally owned and State-owned systems. The loans
may be used to address SDWA health standard violations, replace infrastructure for SDWA
compliance, or consolidate supplies and acquire property if needed for SDWA compliance.

The interest rates on DWSRF loans ranges from 0 percent to 2.5 percent with a 2 percent loan
fee on all loans. The interest rate is dependent on the economic situation of the area. If 51
percent of the area’s households are below the medium income then the loan repayment period is
30 years, otherwise, they are 20-year loans or the life of the project, whichever is less.

Public Works Trust Fund
The PWTF loan program is set up by the Legislature to assist cities, towns, counties, or special
districts with funding for different types of public works projects. The projects can include
streets, roads, drainage systems, water systems, and sanitary sewer systems. The emphasis of
allocating funds for water and sewer systems is based on replacement and/or repair of existing
systems. Funds are not allocated to install new water systems. Rather, funds are granted to
rehabilitate or replace existing systems serving an existing population.
The loans are issued at up to 2 percent interest rate for a maximum term of 20 years for
applications requesting 95 percent project funding. The interest rate decreases to 0.5 percent
when municipalities provide at least 15 percent of the project funding. Debt service coverage is
not imposed on the PWTF loan.

U.S. Department of Agriculture, Rural Development
Loan funds are available through rural development (RD) for the preliminary engineering,
design, construction, and start-up of new water system facility projects. The application process
allows for a thorough review of the engineering, environmental, and financial impacts of

              Section 13 Financial Plan                                                      13-7
              City of Sunnyside Water System Plan
                                                                                          January 2005

proposed projects before extending a loan offer. The RD loan program offers interest rates lower
than municipal bonds and up to a 40-year term.

Infrastructure Assistance Coordinating Council

There are numerous other programs with funding available for various other aspects of water
utility capital projects. The Infrastructure Assistance Coordinating Council (Council) provides
resources and conferences on the available funding sources. This Council is comprised of State
and local organizations whose function is to provide funding for infrastructure repair and
development. The purpose of the Council is to assist local governments in coordinating funding
efforts for infrastructure improvements. This is an important resource as the Council will be
aware of any new funding opportunities that may arise.
While the above list of possible grant and loan opportunities for the City is not exhaustive, it
does highlight the most probable outside funding sources, excluding revenue bonds, available to
the City for its water capital improvement needs.
Other outside funding sources available to offset capital costs include contributions received
from new water connections, existing reserves and new revenue bond proceeds.

13.3.4 Internal Sources of Funds
The previous section discussed external sources of funds. The City can also consider
adjustments to existing reserve funds, connection charges, or other installation fees. These are
options available to the City for offsetting some of the funding requirements of the capital plan.

13.4 Summary of the Financial Projections
A summary of the financial plan and resulting financial status of the water system is provided in
Table 13-3. This is an abbreviated summary of the actual detailed analysis, which is provided in
Appendix L.
As can be seen from Table 13-3, the financial plan shows that existing rates are insufficient to
fund the City’s anticipated operating and capital needs by 5.0 percent to 21.3 percent for 2004
through 2010. The analysis indicates that the greatest adjustment will be needed in 2006 to fund
capital improvements. Future year adjustments appear to be necessary primarily due to cost
increases. The City does not experience major growth on the water system. However,
inflationary increases are projected on expenses. These inflationary increases on expenses
surpass the expected growth in revenue. The City will need to adjust rates to accommodate the
increase in general operations and maintenance costs, meet debt service coverage requirements,
and also to provide adequate funding of the capital program.

It is important to note that the financial plan presented in this section is predicated upon an
assumed level of growth on the system (1.0 percent per year). Should this growth increase, slow
down, or not occur, the level of rate adjustment required will be impacted.

A key indicator of financial health and viability is a utility’s reserve levels. A reasonable reserve
balance for an O&M reserve, or operating reserve, is 45 days of O&M and taxes expense. For
the City, that minimum balance would equate to approximately $145,000 in the first half of the

               Section 13 Financial Plan                                                         13-8
               City of Sunnyside Water System Plan
                                                                                      January 2005

review period, and increasing to $165,000 by 2010. With the adjustments projected, the City
will generate adequate revenue to meet this reserve level.

The City also reserves funds for capital needs. As described previously, the City’s maintains the
reserve at a level adequate to handle unexpected occurrences, including unforeseen cash flow
fluctuations. In 2004 this reserve has approximately $880,000 and grows slightly over the
review period to $925,000 by 2010. Sound financial policies indicate that a fund balance equal
to an average year’s worth of capital projects is a healthy reserve amount. The City’s reserve
level is more than adequate to meet this target.

              Section 13 Financial Plan                                                      13-9
              City of Sunnyside Water System Plan
                                                                                                                                                             January 2005

                                                              Table 13-3
                                                         CITY OF SUNNYSIDE
                                              PRELIMINARY WATER UTILITY FINANCIAL PLAN
                                           SUMMARY OF SOURCES AND APPLICATIONS OF FUNDS

                                                Budget                                              Projected
                                                  2004                 2005               2006             2007                 2008               2009               2010
   Present Rate Revenues                   $1,496,345         $1,511,308         $1,526,422         $1,541,686         $1,557,103         $1,572,674         $1,588,400
   Miscellaneous Revenues                        76,850             72,346             71,524             85,674             87,117             86,831             79,870
                                           ----------------   ----------------   ----------------   ----------------   ----------------   ----------------   ----------------
TOTAL SOURCES OF FUNDS                     $1,573,195         $1,583,655         $1,597,945         $1,627,360         $1,644,220         $1,659,504         $1,668,270

TOTAL O&M EXPENSE                            $939,470           $997,718         $1,042,413         $1,089,112         $1,139,007         $1,192,432         $1,249,769

TOTAL TAXES/TRANSFERS                          $70,000            $76,004            $76,764            $77,531            $78,307            $79,090            $79,881

   Capital Improvements - Infrastructure     $436,000           $689,000         $1,150,900           $646,608           $476,227           $241,061           $680,713
   System Management Plans                       33,000           121,600                     0           32,800              3,400           243,001            188,700
   Construct/Future Water Reserve                 8,000              8,240              8,487              8,742              9,004              9,274              9,552
   Less: Outside Funding                       367,000            698,840         1,019,387             533,150            100,914            103,336            538,965
                                           ----------------   ----------------   ----------------   ----------------   ----------------   ----------------   ----------------
TOTAL CIP FROM RATES                         $110,000           $120,000           $140,000           $155,000           $387,717           $390,000           $340,000

DEBT SERVICE                                 $440,818           $471,233           $553,404           $594,305           $338,185           $337,272           $377,262

TOTAL REVENUE REQUIREMENTS                 $1,560,288         $1,664,955         $1,812,581         $1,915,949         $1,943,215         $1,998,794         $2,046,911

Balance/(Deficiency) Before Added Taxes        $12,907           ($81,300)        ($214,636)         ($288,589)         ($298,995)         ($339,289)         ($378,641)

Plus: Additional Taxes w/ Rate Increase               $0           $4,301            $11,354            $15,266            $15,817            $17,948            $20,030

Net Balance/(Deficiency) of Funds              $12,907           ($85,601)        ($225,990)         ($303,855)         ($314,812)         ($357,237)         ($398,671)

RATE ADJUSTM'T AS A % OF RATE REV                  -0.9%               5.4%             14.1%              18.7%              19.2%              21.6%              23.8%

                Section 13 Financial Plan                                                                                                                            13-10
                City of Sunnyside Water System Plan
                                                                                         January 2005

13.5 Review of the Existing Water Rates
The City’s current rates were adopted in 2004. Currently, the City has both a flat rate for service
and a metered rate for usage. For the purposes of this overview, the rates established in the
Chapter 13.20– Water - Service Charges will be presented. Table 13-4 shows the current
adopted water rates for the City.

                                         Table 13-4
                              Overview of Current Water Rates
                                     City of Sunnyside
                                Metered Rates                          Inside City

                             ¾”                                     $9.45
                             1”                                     12.90
                             1 ½”                                   19.78
                             2”                                     29.23
                             3”                                     55.01
                             4”                                     92.54
                             6”                                    185.65

                   Consumption Charges: Per Hundred Cubic Feet (CCF)
                            First 300 CF (Minimum)                     $1.39
                            301 – 1,200 CF                              1.39
                            1,201 – 3,500 CF                            1.03
                            3,501 – 5,000 CF                            0.88
                            5,001 – 50,000 CF                           0.69
                            50,001 – 150,000 CF                         0.62
                            Over 150,000 CF                             0.48

The City’s rate structure consists of monthly meter charge plus a consumption charge. This
consumption charge is structured to decline as usage increases. This is referred to as a declining
block rate structure. The typical monthly bill for a City residential customer, with 1,000 cubic
feet of usage (10 CCF) would be $23.35 per month.

Overall, the City’s rate structure appears to be contemporary in nature with the use of meter
charges increasing with the size of meter, and the use of a consumption charge. However,
declining block rates are not generally considered to promote conservation. The City is currently
undertaking a review of the rate design in a separate rate study and is considering an adjustment
to this rate structure.

13.6 Overview of Future Water Rates
Based upon the results of the financial analysis, the City will require some adjustments in rates in
future years to meet the on-going needs of the water utility system, as identified within this

               Section 13 Financial Plan                                                       13-11
               City of Sunnyside Water System Plan
                                                                                       January 2005

document. Additionally, the City is reviewing its current rate design and, under the separate rate
study, will be considering options to move toward a rate structure that promotes conservation of
the resource.

13.7 Summary
The financial plan results presented in this section indicates that water rates for the six-year
projected time horizon of 2005 to 2010 will need to be adjusted to provide adequate funding of
O&M, capital, and debt service coverage requirements. The City has been proactive in its
financial management in the past. It has demonstrated its commitment to responsible
management of the utility with the recent rate adjustments it has implemented. Continued fiscal
management will enable the water utility to operate on a financially sound basis.

               Section 13 Financial Plan                                                     13-12
               City of Sunnyside Water System Plan

Shared By: