CITY COUNCIL REGULAR MEETING AGENDA PACKET

Page 9 of 15 below, the Water Operating Fund ended FY 2023/24 with an operating fund balance of $7.5 million, which equals 20.9 percent of the Water and Recycled Water O&M Fund’s FY 2024/25 expenditure budget. The operating reserve policy adopted by the City Council on June 6, 2023, requires reserves equal to between 30.0 - 40.0 percent of operating expenses with a target of 35.0 percent, so the current 20.9 percent reserve level is significantly below the recommended target. On November 7, 2023, the City Council approved a rate increase for the following two years. The first increase was effective in January 2024, and the next increase will be effective January 2025. This increase will enable the City to continue maintaining and providing high quality Water/Recycled Water services and help replenish the reserve over time. The City will need to explore various debt financing options in the near future to address capital projects associated with potential new wells to mitigate PFAS impacts and to advance projects identified as necessary in the Water System Management Plan. Working toward a more financially sound position with adequate reserves will ensure the City can qualify for the most favorable financing options with the lowest borrowing rates. While new water source options are being explored, the City has been proactively working to address the near-term water capacity issues and identified necessary infrastructure improvement projects. To fund these improvements, the City Council approved the execution of a $19.0 million water revenue bond issuance at its May 7, 2024 meeting, and the sale was finalized in June 2024. While the Water & Recycled Water Operating Fund’s reserve level was not ideal, the Council-approved rate increases, as well as commitment from the City to continue to proactively address the water program, allowed the City to receive a favorable ‘AA’ bond rating. Water revenues were approximately $0.3 million or 0.9 percent less than the estimate included in the amended budget. While water revenues were higher by $0.4 million, recycled water revenues were lower by $0.7 million compared to the budget. On the expenditure side, water purchase costs from Zone 7 were approximately $0.1 million more than budgeted in FY 2023/24. Other operating expenses were also higher by about $0.4 million than budget, largely due to higher supplies and equipment costs. It should be noted the positive net income of approximately $0.1 million was only possible due to one-time transfers from both Water Capital and Recycled Water Capital Funds totaling $2.7 million. Without these non-traditional transfers, the Water & Recycled Water Operating Funds would be looking at a significant deficit of approximately $2.6 million for FY 2023/24. Additionally, each operating fund would normally contribute to its corresponding capital fund for various critical infrastructure repair and improvement projects, so the $2.6 million deficit would be much higher. Table 7. Water/Recycled Water O&M Funds – Amended Budget vs. Actual Page 238 of 658