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HomeMy WebLinkAbout04-19-23 F&A Committee Packet 1 OTAY WATER DISTRICT FINANCE AND ADMINISTRATION COMMITTEE MEETING and SPECIAL MEETING OF THE BOARD OF DIRECTORS 2554 SWEETWATER SPRINGS BOULEVARD SPRING VALLEY, CALIFORNIA BOARDROOM WEDNESDAY April 19, 2023 12:00 P.M. This is a District Committee meeting. This meeting is being posted as a special meeting in order to comply with the Brown Act (Government Code Section §54954.2) in the event that a quorum of the Board is present. Items will be deliberated, however, no formal board actions will be taken at this meeting. The committee makes recommendations to the full board for its consideration and formal action. AGENDA 1. ROLL CALL 2. PUBLIC PARTICIPATION – OPPORTUNITY FOR MEMBERS OF THE PUBLIC TO SPEAK TO THE COMMITTEE ON ANY SUBJECT MATTER WITHIN THE COMMIT- TEE'S JURISDICTION BUT NOT AN ITEM ON TODAY'S AGENDA DISCUSSION ITEMS 3. AUTHORIZE THE GENERAL MANAGER TO ENTER INTO AGREEMENTS FOR TERMS OF TWO-YEARS, PLUS THREE ONE-YEAR EXTENSION OPTIONS WITH INFOSEND TO PROVIDE BILL PRINT AND ELECTRONIC BILL PRESENTMENT SERVICES IN AN AMOUNT NOT-TO-EXCEED $1,475,000 ($295,000 ANNUALLY, INCLUDES AVERAGE ANNUAL PASS-THROUGH POSTAGE COSTS OF $195,000); AND WITH i3 VERTICALS, LLC TO PROVIDE ONLINE PAYMENT TRANSACTION PROCESSING SERVICES ESTIMATED TO BE $3,100,000 (APPROXIMATELY $620,000 ANNUALLY, AMOUNT BASED ON 1% OF TOTAL PAYMENTS) (CAREY) [5 minutes] 4. ADOPT RESOLUTION NO. 4424 TO UPDATE THE DISTRICT’S CODE OF ORDINANCES’ BOARD POLICY NO. 34, STAFF TRAVEL AND BUSINESS- RELATED EXPENSES POLICY, AND BOARD POLICY NO. 46, MEDIA RELATIONS POLICY (SEGURA) [5 minutes] 5. ADOPT RESOLUTION NO. 4427 TO AMEND POLICY NO. 25, RESERVE POLICY, OF THE DISTRICT’S CODE OF ORDINANCES (KOEPPEN) [5 minutes] 2 6. RECEIVE THE DISTRICT’S INVESTMENT POLICY, POLICY NO. 27 OF THE DISTRICT’S CODE OF ORDINANCES, FOR REVIEW AND RE-DELEGATE AUTHORITY FOR ALL INVESTMENT RELATED ACTIVITIES TO THE CHIEF FINANCIAL OFFICER, IN ACCORDANCE WITH GOVERNMENT CODE SECTION 53607 (FAKHOURI) [5 minutes] 7. ADJOURNMENT BOARD MEMBERS ATTENDING: Tim Smith, Chair Ryan Keyes All items appearing on this agenda, whether or not expressly listed for action, may be delib- erated and may be subject to action by the Board. The agenda, and any attachments containing written information, are available at the Dis- trict’s website at www.otaywater.gov. Written changes to any items to be considered at the open meeting, or to any attachments, will be posted on the District’s website. Copies of the agenda and attachments are also available by contacting the District Secretary at (619) 670- 2253. If you have any disability which would require accommodations to enable you to participate in this meeting, please call the District Secretary at 670-2253 at least 24 hours prior to the meeting. Certification of Posting I certify that on April 14, 2023, I posted a copy of the foregoing agenda near the regu- lar meeting place of the Board of Directors of Otay Water District, said time being at least 24 hours in advance of the meeting of the Board of Directors (Government Code Section §54954.2). Executed at Spring Valley, California on April 14, 2023. /s/ Tita Ramos-Krogman, District Secretary STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: May 3, 2023 SUBMITTED BY: Andrea Carey Customer Service Manager PROJECT: DIV. NO. All APPROVED BY: Joseph R. Beachem, Chief Financial Officer Jose Martinez, General Manager SUBJECT: Authorize the General Manager to Enter Into Agreements with InfoSend and i3 Verticals, LLC for Billing and Online Payment Services GENERAL MANAGER’S RECOMMENDATION: That the Board authorize the General Manager to enter into agreements for the terms of two-years, plus three one-year extension options with: 1)InfoSend to provide bill print and electronic bill presentment services in an amount not to exceed $1,475,000 ($295,000 annually, includes average annual pass-through postage costs of $195,000); and with 2)i3 Verticals, LLC to provide online payment transaction processing services estimated to be $3,100,000 (approximately $620,000 annually, amount based on 1% of total payments). COMMITTEE ACTION: See Attachment A. PURPOSE: Authorize the General Manager to enter into agreements with InfoSend for bill print and electronic bill presentment services, and with i3 Verticals, LLC for payment transaction processing services. AGENDA ITEM 3 ANALYSIS: The District generates approximately 53,500 bills each month (642,000 billings annually) for water and sewer services. Of these bills, approximately 31,000 are mailed to customers every month, while the remaining 22,500 bills are delivered electronically (e-bill). The District receives over 30,000 payments monthly via the website. InfoSend has been the District’s bill print provider since 2008 and its online payment provider since 2010. In 2013, the District entered into a five-year agreement with InfoSend to provide bill print, mailing services, online bill presentment, and web payment services to the District. This agreement was extended in 2018 for an additional five-year term. Over the past six months, staff has researched bill print and online payment service providers. Utilizing the piggyback option in the District’s Purchasing Policy, staff evaluated various other agencies’ request for proposals for similar services. Staff found the City of Yuba recently completed formal RFP, which mirrored the District’s requirements. Yuba received eight responses, and based on scores from a set of evaluations criteria such as price, ability to meet all requirements of the RFP, staffing qualifications, references, and additional service offerings, Yuba chose four vendors to give presentations. City staff narrowed the final evaluation down to two vendors: InfoSend and OSG Connect. The evaluation team ultimately chose InfoSend as they offered a more complete service package, had a stronger support team, had more favorable references, and had competitive pricing. The City of Yuba was happy with the service InfoSend was already providing to the City. The cost of implementation would be much lower as InfoSend was already the City’s bill print and presentment vendor. The City of Yuba also agreed to use InfoSend’s preferred payment processor, i3 Verticals, LLC. Based on the City of Yuba’s RFP and contract, plus an evaluation of the cost, complexity, and risk of changing bill print and online payment processing services, staff recommends remaining with InfoSend and entering into a new agreement. Since the size of the District is larger than the City of Yuba, staff was able to negotiate reduced pricing. For the new contract, InfoSend has increased the bill print cost by .0135 cents per bill, or 11% (approximately $600 per month), which is directly related to the increase in paper costs. In order to ensure our pricing with InfoSend is competitive in current market conditions, staff compared Otay’s pricing with other similarly sized agencies who recently entered into contracts with InfoSend such as the City of San Bernadino, City of Morgan Hills, and the City of Oceanside. Staff found the District’s pricing was the lowest. It should also be noted that 17 of the 24 San Diego County Water Authority member agencies use InfoSend for bill print services. Also weighing into the decision is the District’s plans to implement a new utility billing software system in the next three years. As part of that process, staff will be evaluating the online services provided by the new system; therefore, staying with the same service now avoids the potential cost of having to change billing vendors again in only a few years. For online payments, the cost for bill presentment is increasing approximately $1,000 per month (10% overall); of which $74 is due to increased maintenance fees, and the remainder being attributed to a one cent increase per online customer, and a two cent increase per payment transaction. This is the first price increase for online services since our last contract extension in 2018 and includes an upgrade to the existing online site. The upgraded site has additional functionality such as the ability to choose Spanish as the preferred language for the site, bill prints can automatically appear in Apple or Google wallet, and one-time payees can see a copy of their last bill and not just the amount due. InfoSend’s preferred payment processor is i3 Verticals, LLC. The payment processor verifies the credit card and banking information for each transaction and then wires funds daily to the District’s bank account. The District currently has a merchant agreement with Electronic Payment Exchange (EPX) to provide these services, but staff is recommending the District switch to i3 Verticals, LLC. Although the service fee from EPX is 2 cents per payment less than i3 Verticals, the service standard from EPX has gone down considerably over the past five years. As a preferred partner with i3 Verticals, LLC there is additional functionality within the InfoSend customer service portal which will save staff time with items such as returns and voids, pulling payment reports, and researching payments. Based on this, staff believes the additional $600 monthly cost (30,000 payments x $.02)from i3 Verticals, LLC will be offset by these staff time savings. The District has more than 30,000 customers paying in excess of $5.5 million monthly through InfoSend’s online site, which includes more than 19,500 who have selected automatic pay. A transition from InfoSend would result in these customers having to re-enroll in electronic services. The staff time and inconvenience to the customer would be great and most likely result in a drop-off in the number of electronic payments and those customers receiving an electronic bill. By continuing the relationship with InfoSend, the District’s customers will not be subject to a change in their online accounts or bill print delivery. Given the complexity and sensitive nature of these services, it is recommended that the General Manager enter into new agreements with InfoSend and i3 Verticals, LLC for a term of two years, plus three one-year extension options. After the initial two-year period, the District will have the option not to renew should opportunities, circumstances or business practices change. The agreements will run concurrently and expire at the same time. Both companies allow the District to terminate for cause at any time. FISCAL IMPACT: Joseph Beachem, Chief Financial Officer The annual cost for InfoSend services will be increasing approximately $7,200 annually to approximately $295,000 (includes pass-through postage costs of $195,000) and for i3 Verticals, LLC services it will be increasing approximately $12,000 annually to approximately $620,000 or 1% of the total payments received. The proposed FY 2024 budget is sufficient to cover these costs. STRATEGIC GOAL: Evaluate the most cost effective and efficient processes and tools to communicate service related issues to customers. LEGAL IMPACT: None. Attachments: A) Committee Action ATTACHMENT A SUBJECT/PROJECT: Authorize the General Manager to Enter Into Agreements with InfoSend and i3 Verticals, LLC for Billing and Online Payment Services COMMITTEE ACTION: The Finance and Administration Committee recommends that the Board authorize the General Manager to enter into agreements with InfoSend for bill print and electronic bill presentment services and with i3 Verticals, LLC for payment transaction processing services. NOTE: The “Committee Action” is written in anticipation of the Committee moving the item forward for board approval. This report will be sent to the Board as a committee approved item, or modified to reflect any discussion or changes as directed from the committee prior to presentation to the full board. STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: May 3, 2023 PROJECT: Various DIV. NO.ALL SUBMITTED BY: Adolfo Segura Chief of Administrative Services APPROVED BY: Jose Martinez, General Manager SUBJECT: ADOPT RESOLUTION #4424 TO UPDATE BOARD POLICIES #34, STAFF TRAVEL AND BUSINESS-RELATED EXPENSES POLICY”, AND #46, “MEDIA RELATIONS POLICY” GENERAL MANAGER’S RECOMMENDATION: That the Board adopt Resolution #4424 to update Board Policies #34, “Staff Travel and Business-Related Expenses Policy”, due to administrative language update and cleanup, and to revise from a Board policy to a Human Resources policy; and #46, “Media Relations Policy” due to minor language cleanup. COMMITTEE ACTION: See “Attachment A”. PURPOSE: To request that the Board adopt Resolution #4424 to update Board Policies #34, “Staff Travel and Business-Related Expenses Policy”, due to administrative language update and cleanup, and to revise from a Board policy to a Human Resources policy; and #46, “Media Relations Policy” due to minor language cleanup. ANALYSIS: The codification or organization of ordinances provides an essential framework of operating laws for an agency to function. The District’s code of ordinances contains forty-five (45) Board adopted policies that AGENDA ITEM 4 govern how the District operates. As a standard course of action, the District periodically reviews and updates its Board policies as needed. All departments are responsible for the periodic review of their respective policies and procedures. This review is necessary to ensure that District staff adhere to operating policies and procedures, and to streamline business processes whenever possible. Updates and revisions deemed appropriate at this time are detailed in the attached strike-through versions of the policies (see Exhibits 1 and 2). The proposed changes mainly indicate a refinement of language. Based on the above, it is recommended that the Board of Directors adopt Resolution #4424 in support of the proposed revisions and updates. FISCAL IMPACT: Joe Beachem, Chief Financial Officer None. STRATEGIC GOAL: Operate the District in a financially sustainable and transparent manner. LEGAL IMPACT: None. ATTACHMENTS: Attachment A – Committee Action Report Attachment B – Resolution #4424 Exhibit 1 – Board Policy #34, “Staff Travel and Business- Related Expenses Policy” Exhibit 2 – Board Policy #46, “Media Relations Policy” Attachment C - Recommended Updates/Revisions and Proposed Copy of Board Policy #34, “Staff Travel and Business-Related Expenses Policy” Attachment D - Recommended Updates/Revisions and Proposed Copy of Board Policy #46, “Media Relations Policy” ATTACHMENT A SUBJECT/PROJECT: ADOPT RESOLUTION #4424 TO UPDATE BOARD POLICIES #34, STAFF TRAVEL AND BUSINESS-RELATED EXPENSES POLICY”, AND #46, “MEDIA RELATIONS POLICY” COMMITTEE ACTION: The Finance and Administration Committee reviewed this item at a meeting held on April 19, 2023. The Committee supports presentation to the full Board for their consideration. NOTE: The “Committee Action” is written in anticipation of the Committee moving the item forward for Board approval. This report will be sent to the Board as a Committee approved item, or modified to reflect any discussion or changes as directed by the Committee prior to presentation to the full Board. 1 RESOLUTION NO. 4424 RESOLUTION OF THE BOARD OF DIRECTORS OF THE OTAY WATER DISTRICT TO REVISE BOARD POLICIES #34, “STAFF TRAVEL AND BUSINESS- RELATED EXPENSES POLICY”, AND #46, “MEDIA RELATIONS POLICY” WHEREAS, the Board of Directors of Otay Water District have established policies, procedures, ordinances, and resolutions for the efficient operation of the District; and WHEREAS, it is the policy of the District to establish procedures to review policies, procedures, ordinances, and resolutions periodically to ensure they are current and relevant; and WHEREAS, District staff has identified Board Policy #34, “Staff Travel and Business-Related Expenses Policy”, and #46, “Media Relations Policy” as requiring updates as per the attached strike-through copies. NOW, THEREFORE, BE IT RESOLVED that the Board of Directors of the Otay Water District amend the Board Policy indicated above in the form presented to the Board at this meeting. PASSED, APPROVED AND ADOPTED by the Board of Directors of the Otay Water District at a regular meeting held this 3rd of May 2023. __________________________ Board President ATTEST: ___________________________ District Secretary ATTACHMENT B OTAYOTAY WATERWATER DISTRICTDISTRICT BOARDBOARD OFOF DIRECTORSDIRECTORS POLICYPOLICY SubjectSubject PolicyPolicy NumberNumber DateDate AdoptedAdopted DateDate RevisedRevised STAFF TRAVEL AND BUSINESS RELATED EXPENSES POLICY 34 05/03/00 10/05/11 PagePage 11 ofof 99 PURPOSEPURPOSE To provide guidelines for compensation and the advancement and reimbursement of expenses when work duties require Otay Water District (“District”) Staff (“Staff”)to conduct District business away from their regular work site(s) and outside of San Diego County. BACKGROUND Employees of the District are called upon to travel or conduct business related meetings, conferences, training or functions away from their regular work site(s) and outside of San Diego County, in conjunction with their job functions. Federal and State laws permit and provide guidance for reimbursement of expenses and compensation to employees while traveling out of San Diego County on District business. POLICY The District will reimburse Staff for reasonable expenses incurred while out of San Diego County at District business related meetings, functions, conferences, training or traveling on District business, including lodging, meals, transportation, and related incidentals. The District will compensate non-exempt employees while traveling in accordance with District policy, applicable Memorandums of Understanding (“MOUs”), and federal and state laws. PROCEDURES A.Advances and Pre-payment of Otherwise Reimbursable Expenses Employees may request pre-payment of registration, transportation, and lodging, and may request an advance upon expected costs for meals, fuel for District or rental vehicles, public ground transportation, and taxis using the “Staff Travel Authorization Request” form (Exhibit A). Pre- payments and advances shall be limited to the employee’s expenses only. Advances for per diem meals shall not exceed the per diem allowance anticipated for the trip plus known costs of ground transportation. Advances should be requested in a timely manner to allow normal processing through accounts payable. EXHIBIT 1 OTAYOTAY WATERWATER DISTRICTDISTRICT BOARDBOARD OFOF DIRECTORSDIRECTORS POLICYPOLICY SubjectSubject PolicyPolicy NumberNumber DateDate AdoptedAdopted DateDate RevisedRevised STAFF TRAVEL AND BUSINESS RELATED EXPENSES POLICY 34 05/03/00 10/05/11 PagePage 22 ofof 99 B.Reimbursement of Expenses Each employee shall be reimbursed for travel expenses incurred while at authorized District business related meetings, functions, conferences, or training outside of San Diego County as follows: 1. Accountability Travel Expenses shall be budgeted by Staff as a part of the annual budget process. Any travel expenses approved with the budget shall be considered authorized for that fiscal year only. Travel expenses included in Capital Improvements Program (“CIP”) budgets are also considered authorized. Before the District expends any funds for authorized travel that involves lodging or public transportation expenses, the employee must complete a “Staff Travel Authorization Request” form (Exhibit A). The employee’s Department Chief shall approve the authorization form. When a Department Chief is traveling, the Assistant General Manager shall approve the authorization form. 2. Transportation The District will pay for reasonable transportation costs. Employees should endeavor to use the most appropriate mode of transportation given the purpose and nature of the trip. If for personal preference or for non-business related reasons the employee incurs additional travel expenses, the employee will be responsible for the additional expenses. a. Air Transportation The District will reimburse employees or pre-pay costs for economy (coach) class airfares. The District will endeavor to purchase airline tickets in advance, taking advantage of discounts and low airfares. Whenever possible, airline reservations shall be made to permit travel during normal business hours. b. Automobile 1. District Vehicle: Whenever travel by vehicle is most cost effective or practical, Staff OTAYOTAY WATERWATER DISTRICTDISTRICT BOARDBOARD OFOF DIRECTORSDIRECTORS POLICYPOLICY SubjectSubject PolicyPolicy NumberNumber DateDate AdoptedAdopted DateDate RevisedRevised STAFF TRAVEL AND BUSINESS RELATED EXPENSES POLICY 34 05/03/00 10/05/11 PagePage 33 ofof 99 shall endeavor to use a District vehicle. Staff must have a valid California driver’s license to operate a District vehicle. The District will reimburse employees for gasoline purchases with receipts while using a District vehicle; however, employees should ensure that the vehicle has sufficient fuel to reach the desired destination and return, or a full tank of fuel, before departing from the District offices. Employees must comply with the provisions of Board of Directors Policy No. 14, “Use of District Vehicles and Car Allowance” whenever an employee chooses to use a District vehicle while traveling. 2. Personal Vehicle: Employees must obtain permission from their Department Chief before using a personal vehicle in conjunction with District business. In situations where an employee uses a personal vehicle on District business, the employee must maintain a valid California Driver’s License and at least the minimum automobile insurance coverage required by the State of California, or make arrangements for a driver who meets the above requirements. Administrative Services Staff will verify that the employee has a valid California driver’s license. Employees may not use a personal vehicle that is not insured according to the policy. Employees shall attest to meeting the license and insurance requirements by completing an “Authorization to Drive a Privately Owned Vehicle on District Business” form upon hire or as required. If a personal vehicle is used, the employee will be reimbursed at the current maximum allowable tax-exempt reimbursement rate provided by the IRS. Employees who receive a monthly mileage allowance are not eligible to receive reimbursement for mileage. OTAYOTAY WATERWATER DISTRICTDISTRICT BOARDBOARD OFOF DIRECTORSDIRECTORS POLICYPOLICY SubjectSubject PolicyPolicy NumberNumber DateDate AdoptedAdopted DateDate RevisedRevised STAFF TRAVEL AND BUSINESS RELATED EXPENSES POLICY 34 05/03/00 10/05/11 PagePage 44 ofof 99 3. Rental Cars: The District will cover the expenses required for use of a rental car on District business. The maximum reimbursement for rental cars shall be based on the rate provided for a standard mid-sized car, unless there is a clear business need and it is approved by the General Manager or designee. Upgrades or additional cost features are the employee’s responsibility. c. Miscellaneous Transportation Whenever practicable, bus, taxi, rail, shuttle, etc. transportation may be used in lieu of, or in conjunction with, the modes listed above. 3. Meals and Lodging a. Meals and Beverages Whenever travel outside of San Diego County requires meals, an employee may receive the per diem allowance at the current Meal and Incidental Expenses (“M&IE”) rate for San Diego as determined by the U.S. General Services Administration. 1. Per diem: a. Full Day Allowance When an employee is traveling for a full day and no meals are provided by other sources, such as pre-paid registration, the per diem meal allowance shall be at the current Domestic Per Diem Rate for M&IE , or an amount that the General Manager deems reasonable for the occasion or circumstances. Taxes and gratuities are inclusive. b. Single Meal Allowance When an employee requires an allowance for a single meal while traveling, the per diem meal allowance shall be at the M&IE rate for breakfast, lunch, or dinner as determined by the U.S. General Services Administration, or amounts that the General Manager deems reasonable for the occasion or circumstances. Taxes and gratuities are inclusive. OTAYOTAY WATERWATER DISTRICTDISTRICT BOARDBOARD OFOF DIRECTORSDIRECTORS POLICYPOLICY SubjectSubject PolicyPolicy NumberNumber DateDate AdoptedAdopted DateDate RevisedRevised STAFF TRAVEL AND BUSINESS RELATED EXPENSES POLICY 34 05/03/00 10/05/11 PagePage 55 ofof 99 c. Partial Day Allowance When an employee will be traveling for a partial day or where a single meal is provided for by other sources such as pre- paid registration, the per diem allowance amount shall be at the M&IE rate for breakfast, lunch, or dinner as determined by the U.S. General Services Administration, or amounts that the General Manager deems reasonable for the occasion or circumstances. d. Receipts do not have to be submitted for per diem allowances. b. Lodging The District will reimburse employees or pre-pay accommodations in single rooms at conference facilities or in close proximity when applicable. In the absence of conference accommodations, normal single-room business, government or commercial class accommodation may be obtained. Under normal circumstances, lodging will not be reimbursed for the night before a conference starts or the night after it ends. However, in situations where available travel schedules would require the employee to leave home before 6:00 AM or return home after 12:00 AM, lodging for the night before or the night after will be reimbursable. With prior supervisory approval, if staying overnight, an extra night or over a weekend at a destination allows for a reduction of travel expenses, and the cost of accommodations is less than the savings realized by the documented reduced transportation expenses, the District may pre-pay or reimburse the employee for the extra night’s lodging. Only lodging expenses will be reimbursed in these situations. 4. Entertainment The District will not cover expenses incurred for recreation or entertainment. OTAYOTAY WATERWATER DISTRICTDISTRICT BOARDBOARD OFOF DIRECTORSDIRECTORS POLICYPOLICY SubjectSubject PolicyPolicy NumberNumber DateDate AdoptedAdopted DateDate RevisedRevised STAFF TRAVEL AND BUSINESS RELATED EXPENSES POLICY 34 05/03/00 10/05/11 PagePage 66 ofof 99 5. Incidental Expenses Unavoidable, necessary and reasonable authorized expenses will be fully reimbursed by the District. Some examples of allowable expenses are: a. Telephone Calls (Business): Calls placed by the employee to the District office or for the purpose of conducting District business. Business related calls should be itemized on the “Staff Expense Claim Form” (Exhibit B). b. Telephone Calls (Personal): One (1) brief personal call each day away from home, up to a $10 maximum per day. c. Telephone Calls (Local): Charges for local calls, for meal or transportation reservations, or for area information related to travel. d. Reasonable transportation to local restaurants and to optional functions that are a part of conference events. e. Reasonable gratuities. f. Parking fees. g. The following expenses are not reimbursable: 1. Alcoholic beverages; 2. Parking or traffic violations; 3. In-room movies; 4. Laundry service; and 5. Expenses incurred by spouses, family members, or guests. 6. Compensation for Non-Exempt employees Non-exempt employees traveling and staying overnight are normally authorized to work only the total number of hours they were regularly scheduled to work, exclusive of applicable travel time. However, all employees traveling and staying overnight are considered by the District to be on flexible schedules. OTAYOTAY WATERWATER DISTRICTDISTRICT BOARDBOARD OFOF DIRECTORSDIRECTORS POLICYPOLICY SubjectSubject PolicyPolicy NumberNumber DateDate AdoptedAdopted DateDate RevisedRevised STAFF TRAVEL AND BUSINESS RELATED EXPENSES POLICY 34 05/03/00 10/05/11 PagePage 77 ofof 99 During flexible schedules, employees’ starting time, meal period, rest periods, etc. are adjusted to accomplish work with minimal overtime. Should business require a non-exempt employee to travel, function attendance and travel hours are compensable pursuant to state law. These hours are considered regular work hours for purposes of calculating overtime. During all compensable hours, an employee is subject to any and all provisions of District Policies and Procedures. The following hours are compensable: a. Actual hours spent at meetings, conferences, or functions, excepting meals and special events of an entertainment nature held in conjunction with a function. b. Actual hours spent in transit, excepting hours spent in travel between the employee’s residence and the District. Any time spent in layover at a public transportation facility is also compensable as transit time, unless the employee chooses to participate in recreational activities during the layover. On the other hand, time spent taking a break from travel in order to eat a meal, sleep or engage in other personal pursuits not connected with traveling or making necessary travel connections, such as sightseeing, visiting friends and family, or other activites of a recreational or entertainment nature, are not compensable. 7. Employees’ Responsibility a. In situations where an employee can use the Petty Cash procedures for reimbursement of travel expenses, the employee may submit a “Petty Cash Order” form (Exhibit B) to be reimbursed. If expenses to be reimbursed are beyond the scope of the Petty Cash procedures, employees must submit a detailed “Staff Expense Claim Form” (Exhibit C). Petty Cash Orders and Expense Claim Forms should be supported by vouchers and itemized receipts of expenditures for which reimbursement is being requested. Receipts must be attached for all OTAYOTAY WATERWATER DISTRICTDISTRICT BOARDBOARD OFOF DIRECTORSDIRECTORS POLICYPOLICY SubjectSubject PolicyPolicy NumberNumber DateDate AdoptedAdopted DateDate RevisedRevised STAFF TRAVEL AND BUSINESS RELATED EXPENSES POLICY 34 05/03/00 10/05/11 PagePage 88 ofof 99 expenses with the exception of per diem meal allowance. If a receipt required for reimbursement is lost, the lost receipt must be noted on the “Staff Expense Claim Form” and approved for reimbursement before any payment can be made. Claim forms must be submitted within 14 calendar days after the expense was incurred. b. Expenses will not be reimbursed for meetings that have been pre-paid and not attended. Employees may be required to reimburse the District for any pre- paid expenses for any unexcused absence. The General Manager will determine if an absence from a pre-paid meeting is excused or unexcused. c. When two (2) or more employees combine an expense on one receipt, the employee requesting reimbursement should indicate on the “Staff Expense Claim Form” the identity of the other persons sharing expenses. d. Expenses incurred by spouses, family members, or guests are the responsibility of the employee. e. Any misrepresentation in connection with the petty cash order or reimbursement process will be grounds for discipline up to and including termination of employment. Attachments Exhibit A: “Staff Travel Authorization Request” Exhibit B: “Petty Cash Order” Exhibit C: “Staff Expense Claim Form” EXHIBITEXHIBIT AA OTAY WATER DISTRICT STAFF TRAVEL AUTHORIZATION REQUEST Employee Name: Date of Request: Name and Location of Function: Is Travel out of San Diego County? Yes No* (*not eligible for staff travel) Note: If you will be driving a District vehicle out of San Diego County or driving non- District personnel in a District vehicle or your private vehicle, you must obtain authorization by completing the “Vehicle Use Authorization Form Out of County and Transport Non-District Personnel” form. Date(s) function to be held: - Purpose of function: Sponsoring Organization: Request for Pre-Payment or Advance of Fees Related to the Function: Expense Type Not Needed Pre-Payment Requested Advance Requested Registration $ N/A Airline $ N/A Auto Rental $ N/A Fuel – for District or Rental Cars only**N/A $ Taxi / Shuttle**N/A $ Lodging $ N/A Meals – See Below N/A $ Other Expenses – Explain Below $ $ (**Advanced through petty cash. Please request these expenses at the conclusion of the trip if Total Pre-Payment Requested: possible.)Total Advance Requested: Lodging Preference: Explanation of Other Expenses: MEALS CALCULATOR Personal funds may be used in lieu of requesting advancement for meals. Meal per diem amounts are the same regardless of travel destination out of the County. How many meals does the function provide? (do not include in calculation below) (  x $36 = $ ) + (     x $18 = $ ) + (  x $12 = $ ) = $ Expected Expected Expected Total meal dinners lunches breakfasts advancement Employee Signature Date of Request (Staff Expense Claim form must be completed within 14 calendar days after return from travel.) For Office Use Only Below This Line Total Pre-Paid: $Total Advanced: $ Travel Approved by:Date: Rev. 9/11 EXHIBITEXHIBIT AA INSTRUCTIONS FOR PREPARATION OF STAFF TRAVEL AUTHORIZATION REQUEST FORM The District will reimburse for necessary expenses incurred while traveling outside of San Diego County at District business and related meetings, functions, training or traveling on District business including common carrier fares (economy class), automobile rental charges, District business telephone calls, one personal telephone call home each day ($10 maximum per day), lodging, baggage handling, parking fees, meals, gratuities, etc. Please review the “Staff Travel and Business Related Expenses Policy” to familiarize yourself with the District’s requirements. Transportation Employees should endeavor to use the most appropriate mode of transportation given the purpose and nature of the trip. The District will reimburse or pre-pay costs for economy (coach) class air transportation. Employees must obtain permission from their Department Chief or AGM before using a personal vehicle in conjunction with District business and complete the “Vehicle Use Authorization Form Out of County and Transport Non-District Personnel” form. Advances and Pre-payments Employees may request pre-payment of registration, transportation, and lodging, and may request an advance for expected costs for meals, fuel for District or rental vehicles, public ground transportation, and taxis using the “Staff Travel Authorization Request” form. It is recommended that expenses for fuel, taxi and shuttle be reimbursed at the conclusion of the trip if possible. Pre-paymentsPre-payments andand advancesadvances shallshall bebe limitedlimited toto thethe employee’semployee’s expensesexpenses only.only. AdvancesAdvances shouldshould bebe requestedrequested inin aa timelytimely mannermanner toto allowallow normalnormal processingprocessing throughthrough accountsaccounts payable.payable. Meals Advances for per diem meals shall not exceed the per diem allowance anticipated for the trip. Receipts should not be submitted for per diem meal allowances. If advancement for meal allowance is not requested, employee may use their personal funds to pay for meals and request the per diem allowance after the travel is completed by submitting the “Staff Expense Claim Form.” It is recommended that per diems for meals be reimbursed at the conclusion of the trip if possible. CalCard may not be used for meal per diems. Per diem meal allowance shall be at the Meals Incidental Expenses (“M&IE”) rate determined by the U.S. General Services Administration for San Diego, or amounts that the General Manager deems reasonable for the occasion or circumstances. Partial day's per diem allowance shall be at the M&IE rate for breakfast, lunch and dinner, or amounts that the General Manager deems reasonable for the occasion or circumstances. The per diem meal allowance is inclusive of and assumes expenses for taxes and gratuities. Where pre-paid registration includes meals, only meals that are not included in the registration will be provided as per diem meal allowance. Receipts Receipts must be attached for all expenses with the exception of per diem meal allowances. If a receipt required for reimbursement is lost, the lost receipt should be noted next to the expense, submitted to the Department Chief, and approved by the Department Chief before any reimbursement can be made. All receipts must have the nature of the expense and the business purpose noted on the receipt. Any receipts that include costs of personal travel (e.g., hotel receipt for employee and spouse) should identify what the cost would have been without personal travel (e.g., single room rate as opposed to double room rate). Staff Expense Claim Form Upon return from travel, if expenses were incurred that need to be reimbursed, the “Staff Expense Claim Form” must be submitted within 14 calendar days after the expense was incurred. Advances and pre-payments shall be deducted from expenses and reconciled with travel authorization forms where applicable. Department Chiefs, Assistant General Mangers or the General Manager may authorize Travel Authorization Request Forms. No information on the “Staff Travel Authorization Request Form” may be designated as confidential in nature. All expenses must be fully disclosed on the form. The following expenses are not reimbursable: a. Alcoholic beverages d. Laundry service b. Parking or traffic violations e. Entertainment or recreation c. In-room movies f. Expenses incurred by spouses, family members, or guests The Staff Travel Policy does not apply to meetings, conferences, training or functions attended in the County of San Diego. For expenses in the County of San Diego please coordinate reimbursements with your department. Rev. 9/11 EXHIBIT B PETTY CASH ORDER DATE NAME DEPT REQUEST REIMBURSEMENT FOR THE FOLLOWING EXPENSES: Project Subproject Activity Cost Type DESCRIPTION AMOUNT Total:0.00 PURPOSE OF EXPENDITURES DEPARTMENTAL APPROVAL CASH RECEIVED BY DATE NOTE: RECEIPTS MUST BE ATTACHED. FORM IS NOT TO BE USED FOR OVERNIGHT TRAVEL. EXHIBIT C OTAY WATER DISTRICT STAFF EXPENSE CLAIM FORM VendorVendor #:#: ______________________________________Date:Date: ________________________________________________________________ Pay to: Period Covered: Employee Number From:To: ITEMIZED REIMBURSEMENTS CLAIMED (Attach receipts for all expenses, except for per diem meal and beverage allowances.) DATE DESCRIPTION OF REIMBURSEMENT TOTAL REIMBURSABLE AMOUNT LESS AMOUNT PREPAID LESS AMOUNT ADVANCED TOTAL AMOUNT CLAIMED ACCOUNTACCOUNT CODINGS:CODINGS: ProjectProject SubprojectSubproject ActivityActivity CodeCode CostCost TypeType DepartmentDepartment 1)1) 2)2) 3)3) 4)4) For Travel Reimbursements: Nature of Travel:Date Travel Commenced Destination: Date Travel Terminated Total Mileage Claimed =Miles x $. Rate = $ Total Reimbursements Claimed:$ Employee Signature Date Approved by Date Rev. 4/10 EXHIBIT C INSTRUCTIONS FOR PREPARATION OF STAFF EXPENSE CLAIM FORM The necessary expenses incurred while traveling outside of San Diego County at District business related meetings, functions, training or traveling on District business including common carrier fares (economy class), automobile rental charges, District business telephone calls, one personal telephone call home each day ($10 maximum per day), lodging, baggage handling, parking fees, meals, gratuities, etc. will be reimbursed when documented on the Staff Expense Claim Forms. Receipts must be attached for all expenses with the exception of per diem meal allowances. If a receipt required for reimbursement is lost, the lost receipt should be noted next to the expense, submitted to the DepartmentChief, and approved by the Department Chief before any reimbursement can be made. All receipts must have the nature of the expense and the business purpose noted on the receipt. The District will not reimburse the cost of travel of a personal nature taken in conjunction with travel on official business. Per diem meal allowance shall be at the rate provided by the Meals Incidental Expenses (M&IE), or amounts that the General Manager deems reasonable for the occasion or circumstances. Partial day's per diem allowance shall be at the rate provided by M&IE for breakfast, lunch and dinner, or amounts that the General Manager deems reasonable for the occasion or circumstances. The per diem meal allowance is inclusive of and assumes expenses for taxes and gratuities of up to 15%. Where pre-paid registration includes meals, only meals that are not included in the registration will be provided as per diem meal allowance. Any receipts that include costs of personal travel (e.g., hotel receipt for employee and spouse) should identify what the cost would have been without personal travel (e.g., single room rate as opposed to double room rate). Mileage will be reimbursed for travel using personal vehicles only if a District vehicle is not available. In order to be reimbursed for mileage, employees must have a valid Driver’s License and current automobile insurance that meets or exceeds State minimum insurance requirements. Advances and pre-payments shall be deducted from expenses and reconciled with travel authorization forms where applicable. Department Chiefs or the General Manager may authorize Expense Claim Forms. Claim forms must be submitted within 14 calendar days after the expense was incurred. No information on the Expense Claim Form may be designated as confidential in nature. All expenses must be fully disclosed on the form. The following expenses are not reimbursable: a. Alcoholic beverages d. Laundry service b. Parking or traffic violations e. Entertainment or recreation c. In-room movies f. Expenses incurred by spouses, family members, or guests. g. Meetings, conferences, training or functions attended in the County of San Diego. Rev. 9/11 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised MEDIA RELATIONS POLICY 46 09/01/04 05/01/19 Page 1 of 4 PURPOSE To establish procedures to better inform the public, Otay Water District (District) customers, businesses and other stakeholders on water, sewer, and recycled water service, and other District- related matters by engaging in a defined and proactive media relations program. BACKGROUND The District recognizes an effective and quick way to communicate District policies and activities is by working in partnership with the news media. This policy requires that news media inquiries regarding the District and the District’s position on matters should be given high priority, and should be responded to as quickly and efficiently as possible. Every effort should be made to reasonably meet media deadlines and to ensure that all information released is accurate and is in compliance with laws and regulations concerning individual privacy and confidentiality. POLICY The General Manager’s office is responsible for the District's media relations program. To assist with this critical function, the District may retain media relations assistance to provide public, community and governmental relations services. All District employees should notify the General Manager, their department’s Chief or the General Manager’s Communications Officer about media inquiries. With regard to District media requests, the media representative shall contact the General Manager and/or the Communications Officer who is authorized to speak on behalf of the District. Because the media often work on deadlines, all departments should respond as soon as reasonably possible when the General Manager requests department information or a spokesperson for the media. Specific guidelines for responding to media requests regarding the District’s position on matters are as follow: DISTRICT SPOKESPERSONS Unless otherwise authorized, the District's only designated spokespersons to speak on behalf of the District are: President of the Board of Directors or Board members assigned EXHIBIT 2 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised MEDIA RELATIONS POLICY 46 09/01/04 05/01/19 Page 2 of 4 General Manager Designees authorized by General Manager as noted by General Manager’s memo. MEDIA INQUIRIES Any media inquiry received by other District staff regarding the District or the District’s position on a matter should be referred immediately to the General Manager through the Department Chief. An appropriate response to the media is: "I'm sorry; I don't have the full information regarding that matter. I will give your request to District management, and someone from the District will respond to you as soon as they are available." Any staff member should obtain the reporter's name, phone number or cell phone number, topic of the story and deadline. Staff in the General Manager’s office will make all reasonable efforts to coordinate a response with the General Manager and appropriate District staff. LITIGATION, PERSONNEL AND DISTRICT ELECTION ISSUES Generally, the business conducted by the District is public, and therefore, is public information. Inquiries regarding pending litigation, matters involving a significant exposure to litigation, certain personnel related information and District election information are exceptions. Inquiries regarding pending litigation or exposure to litigation and District election issues should be referred to the General Manager’s office. GENERAL OR ROUTINE ISSUES Calls from media should always be referred immediately to the General Manager’s office through the employee's Department Chief or supervisor. The General Manager’s office will coordinate a response, including designating a spokesperson. OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised MEDIA RELATIONS POLICY 46 09/01/04 05/01/19 Page 3 of 4 When the General Manager has designated a spokesperson to respond to specific questions from the media, the General Manager should be informed of the topic, the name of the reporter and the proposed date of airing or publication, either before or immediately following these interviews. DISTRICT-INITIATED INFORMATION The District also makes its own efforts to get in touch with the media. For the most part, this proactive media contact is initiated through the General Manager’s office. This includes issuing press releases and media advisories, and making personal contacts with reporters and editors for stories and other coverage. Departments seeking publicity for events or activities should contact the Communications Officer in the General Manager’s office as soon as possible to ensure the best media coverage of their activities. Department staff members shall not initiate news media contacts on behalf of the District before notifying the General Manager or Department Chief. CRISIS MANAGEMENT AND EMERGENCY/SERVICE OUTAGE ISSUES Because the Operations Department may be called upon to restore service due to outages, breakages or in other critical situations, their work is fundamental to the overall mission of the District. As a result, Operations personnel may be the only staff at the scene of an incident and may be called upon to address service restoration questions by the media. In these situations, all such inquires will be immediately referred to the Chief of Operations who will make every effort to ensure that all information released is accurate, relevant, and appropriate. Operations staff should notify the Chief of Operations immediately of any such media inquiry. The Chief of Operations will then take the lead for follow-up media communications and contact the General Manager and Communications Officer. Any media calls to other District staff regarding Operations matters should be referred immediately to the Chief of Operations, and General Manager’s Communications Officer. All information released directly to the media by Operations should be provided OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised MEDIA RELATIONS POLICY 46 09/01/04 05/01/19 Page 4 of 4 immediately to the General Manager's Communications Officer. During a crisis or major emergency, the District’s Standardized Emergency Management Plan Section 5.1-1 assigns responsibilities and procedures for handling media and customer information. To manage a crisis or a major emergency that may or may not consist of a service outage, the Communications Officer will work with the General Manager and designated Department Chiefs to assess if the situation requires outside services to assist with and/or manage the crisis. Each situation is unique and will be discussed on an as-needed basis. CONCLUSION Nothing in this policy should be construed as to restrict or preclude an employee of the District or a representative of the Otay Water District Employee Association (OWDEA) or other bargaining unit from communicating with the press on matters of public concern or on matters related to association and/or union activities. However, such communications should not be made during duty-time, nor be disruptive to the District’s operations, and should be clearly understood as not being made on behalf of the District or representing the District’s official position on such matters OTAY WATER DISTRICT BOARD OF DIRECTORSHUMAN RESOURCES POLICY Subject Policy Number Date Adopted Date Revised STAFF TRAVEL AND BUSINESS- RELATED EXPENSES POLICY 34 5/3/2000 10/5/11 4/5/2023 Page 1 of 9 Purpose To provide guidelines for compensation, and the advancement, and reimbursement of expenses when work duties require Otay Water District (“District”) sStaff (“Staff”)to conduct District business away from their regular work site(s) and outside of San Diego County. Background Employees of the District staff are called upon to travel or conduct business- related meetings, conferences, training, or functions away from their regular work site(s) and outside of San Diego County, in conjunction with their job functions. Federal and State laws permit and provide guidance for reimbursement of expenses and compensation to staffemployees while traveling outside of San Diego County on District business. Policy The District will reimburse sStaff for reasonable expenses incurred while outside of San Diego County attendingat District business- related meetings, functions, conferences, training, or while traveling on District business, including lodging, meals, transportation, and related incidentals. The District will compensate non-exempt staffemployees while traveling in accordance with District policy, applicable Memorandums of Understanding (“MOUs”), and federal and state laws. Procedures A.Pre-approval of Travel Arrangements Staff’sThe employee’s Department Chief and General Manager shall approve the authorization“Staff Travel Authorization Request” form prior to making any travel arrangements. When a Department Chief is traveling, the Assistant General Manager shall approve the authorization form. A. B.Advances and Pre-Ppayment of Otherwise Reimbursable Expenses B. ATTACHMENT C OTAY WATER DISTRICT BOARD OF DIRECTORSHUMAN RESOURCES POLICY Subject Policy Number Date Adopted Date Revised STAFF TRAVEL AND BUSINESS- RELATED EXPENSES POLICY 34 5/3/2000 4/5/2023 10/5/11 Page 2 of 9 Every effort shall be made to process payments using District funds or District credit card. StaffEmployees may request pre- payment of registration, transportation, and lodging, and may request an advance upon expected costs for meals, gasolinefuel for District or rental vehicles, public ground transportation, and taxis, or ride-sharing service using the “Staff Travel Authorization Request” form (Exhibit A). Pre-payments and advances shall be limited to the staffemployee’s expenses only. Advances for per diem meals shall not exceed the per diem allowance anticipated for the trip plus known costs of ground transportation. Advances shallshould be requested in a timely manner to allow normal processing through Aaccounts Ppayable. C. Reimbursement of Expenses StaffEach employee shall be reimbursed for travel expenses incurred while at authorized District business- related meetings, functions, conferences, or training outside of San Diego County as follows: 1. Accountability Travel eExpenses shall be budgeted by sStaff as a part of the annual budget process. Any travel expenses approved with the budget shall be considered authorized for that fiscal year only. Travel expenses included in Capital Improvements Program (“CIP”) budgets are also considered authorized. Before the District expends any funds for authorized travel that involves lodging or public transportation expenses, staffthe employee must complete a “Staff Travel Authorization Request” form (Exhibit A). The employee’s Department Chief and General Manager shall approve the authorization form. When a Department Chief is traveling, the Assistant General Manager shall approve the authorization form. 2. Transportation The District will pay for reasonable transportation costs. StaffEmployees shallshould endeavor to use the most appropriate mode of transportation given the purpose and OTAY WATER DISTRICT BOARD OF DIRECTORSHUMAN RESOURCES POLICY Subject Policy Number Date Adopted Date Revised STAFF TRAVEL AND BUSINESS- RELATED EXPENSES POLICY 34 5/3/2000 4/5/2023 10/5/11 Page 3 of 9 nature of the trip. If for personal preference or for non- -business- related reasons staffthe employee incurs additional travel expenses, theythe employee will be responsible for the additional expenses. a.Air Transportation a. The District will reimburse staffemployees or pre-pay costs for economy (coach) class airfares. The District will endeavor to purchase airline tickets in advance, taking advantage of discounts and low airfares. Whenever possible, airline reservations shall be made to permit travel during normal business hours. Every effort shall be made to ensure travel arrangements coincide with the start of the conference, training, or professional function. b.Automobile b. i.District Vehicle: Whenever travel by vehicle is most cost- effective or practical, sStaff shall endeavor to use a District vehicle. Staff must have a valid California driver’s license to operate a District vehicle. The District will reimburse staffemployees for gasoline purchases with receipts while using a District vehicle; however, employees staff should ensure that the vehicle has sufficient gasolinefuel to reach the desired destination and return, or a full tank of gasolinefuel, before departing from the District offices. Staff who are assigned a District vehicle may also use a District credit card to purchase gasoline. Employees Staff must comply with the provisions of Board of Directors Policy No. 14, “Use of District Vehicles and Car Allowance” whenever theyan employee chooses to use a District vehicle while traveling. If staff will be driving a District or private vehicle outside of San Diego County on District business, or will be transporting non-District staff (excludes contractors/consultants) in a District or private vehicle while conducting OTAY WATER DISTRICT BOARD OF DIRECTORSHUMAN RESOURCES POLICY Subject Policy Number Date Adopted Date Revised STAFF TRAVEL AND BUSINESS- RELATED EXPENSES POLICY 34 5/3/2000 4/5/2023 10/5/11 Page 4 of 9 District business, then they must obtain advanced approval from the Department Chief by completing the “Authorization to Drive A District or Private Vehicle Out of San Diego County or to Transport Non- District Staff in a District or Private Vehicle” form. i. ii.Personal Vehicle: Employees must obtain permission from their Department Chief before using a personal vehicle in conjunction with District business. ii.In situations where staffan employee uses a personal vehicle foron District business, theythe employee must shall attest upon hire or as required, to meeting the California license and minimum automobile insurance requirements, maintain a valid California Driver’s License and at least the minimum automobile insurance coverage required by the State of California, or must make arrangements for a driver who meets the above requirements. Human Resources Administrative Services staff Staff will ensure employees maintainverify that the employee has a valid California driver’s license. StaffEmployees may not use a personal vehicle that is not insured according to thise policy. Employees shall attest to meeting the license and insurance requirements by completing an “Drive a Privately Owned Vehicle on District Business” form upon hire or as required. If a personal vehicle is used, staffthe employee will be reimbursed for mileage at the current maximum allowable tax-exempt reimbursement rate provided by the IRS. StaffEmployees who receive a monthly carmileage allowance are not eligible to receive reimbursement for mileage nor will they be reimbursed for use of other forms of transportation (e.g., ride-sharing service) within the County. OTAY WATER DISTRICT BOARD OF DIRECTORSHUMAN RESOURCES POLICY Subject Policy Number Date Adopted Date Revised STAFF TRAVEL AND BUSINESS- RELATED EXPENSES POLICY 34 5/3/2000 4/5/2023 10/5/11 Page 5 of 9 iii.Rental Cars: Staff shall endeavor to use public transportation, taxi, or a ride-sharing service whenever possible. In the event that a rental car is needed for District business, Tthe District will cover the expenses, required for use of a rental car on District businessincluding gasoline. The maximum reimbursement for rental cars shall be based on the rate provided for a standard mid-sized car, unless there is a clear business need and it is approved by the General Manager or designee. Rentals for the use of recreation or sightseeing, and Upgrades or additional cost features, such as upgrades, are the staffemployee’s responsibility. c.Miscellaneous Transportation c. Whenever practicable, bus, taxi, rail, shuttle, or ride-sharing serviceetc. transportation may be used in lieu of, or in conjunction with, the modes listed above, unless staff receives a monthly car allowance. 3. Meals and Lodging a.Meals and Beverages a. Whenever travel outside of San Diego County requires meals, staffan employee may receive the per diem allowance at the current Meal and Incidental Expenses (“M&IE”) rate for San Diego as determined by the U.S. General Services Administration. i.1.Per diem: a.Full Day Allowance When staffan employee is traveling for a full day and no meals are provided by other sources, such as pre-paid registration, the per diem meal allowance shall be at the current Domestic Per Diem Rate for M&IE, or an amount that the General Manager deems reasonable for the occasion or circumstances. T(taxes and gratuities are OTAY WATER DISTRICT BOARD OF DIRECTORSHUMAN RESOURCES POLICY Subject Policy Number Date Adopted Date Revised STAFF TRAVEL AND BUSINESS- RELATED EXPENSES POLICY 34 5/3/2000 4/5/2023 10/5/11 Page 6 of 9 inclusive). b. Single Meal Allowance When staffan employee requires an allowance for a single meal while traveling, the per diem meal allowance shall be at the current Domestic Per Diem Rate for M&IE rate for breakfast, lunch, or dinner as determined by the U.S. General Services Administration, or amounts that the General Manager deems reasonable for the occasion or circumstances. (Ttaxes and gratuities are inclusive). c. Partial Day Allowance When staffan employee will be traveling for a partial day or where a single meal is provided for by other sources such as pre-paid registration, the per diem meal allowance amount shall be at the current Domestic Per Diem Rate for M&IE rate for breakfast, lunch, or dinner as determined by the U.S. General Services Administration, or amounts that the General Manager deems reasonable for the occasion or circumstances. d. Receipts do not have to be submitted for per diem allowances. b. Lodging The District will pre-pay or reimburse staffemployees or pre-payfor accommodations in single occupancy rooms at conference facilities, or within close proximity when applicable. In the absence of conference facility accommodations, normal single-room occupancy for business, government, or commercial class accommodation may be obtained. Under normal circumstances, lLodging will onlynot be reimbursed for the night before a conference starts or the night after it ends . However, in situations where availableif OTAY WATER DISTRICT BOARD OF DIRECTORSHUMAN RESOURCES POLICY Subject Policy Number Date Adopted Date Revised STAFF TRAVEL AND BUSINESS- RELATED EXPENSES POLICY 34 5/3/2000 4/5/2023 10/5/11 Page 7 of 9 travel schedules would require staffthe employee to leave home before 6:00 AM or return home after 12:00 AM, lodging for the night before or the night after will be reimbursable. With prior supervisory approval, if staying overnight, an extra night or over a weekend at a destination allows for a reduction of travel expenses, and the cost of accommodations is less than the savings realized by the documented reduced transportation expenses, the District may pre-pay or reimburse staffthe employee for the extra night’s lodging. Only lodging expenses will be reimbursed in these situations. 4.Entertainment 4. The District will not cover expenses incurred for recreation or entertainment. 5.Incidental Expenses Unavoidable, necessary, and reasonable authorized expenses will be fully reimbursed by the District. Some examples of allowable expenses are: a. Telephone Calls (Business): Calls placed by the employee to the District office or for the purpose of conducting District business. Business related calls should be itemized on the “Staff Expense Claim Form” (Exhibit B). b.Telephone Calls (Personal): One (1) brief personal call each day away from home, up to a $10 maximum per day. c.Telephone Calls (Local): Charges for local calls, for meal or transportation reservations, or for area information related to travel. a.Reasonable transportation to local restaurants and to optional functions that are a part of conference events. d. b.Reasonable gratuities. e. f.c. Conference or hotel pParking fees. g. Commented [JD1]: In June 2018, the Board approved updates to Board Policy #8. The changes to section 5 also apply to Policy #34. When the Board made the change to Policy #8, they indicated that it is old language, since everyone now has cell phones and that the District should not be paying $10 for a phone call. On 8/16/18, the HR Manager asked staff to make the changes and save them for the next time significant revisions to this policy are made (current update). OTAY WATER DISTRICT BOARD OF DIRECTORSHUMAN RESOURCES POLICY Subject Policy Number Date Adopted Date Revised STAFF TRAVEL AND BUSINESS- RELATED EXPENSES POLICY 34 5/3/2000 4/5/2023 10/5/11 Page 8 of 9 d.The following expenses are not reimbursable: h. i.Alcoholic beverages; ii. Parking or traffic violations; iii. In-room movies; iv. Laundry service; and v.Expenses incurred by spouses, family members, or guests. 6. Compensation for Non-Exempt Staffemployees Non-exempt staffemployees traveling and staying overnight are normally authorized to work only the total number of hours they were regularly scheduled to work, exclusive of applicable travel time. However, all staffemployees traveling and staying overnight are considered by the District to be on flexible schedules. During flexible schedules, staffemployees’s starting time, meal period, rest periods, etc. are adjusted to accomplish work with minimal overtime, if any. Should business require a non-exempt staffemployee to travel, function attendance and travel hours are compensable pursuant to state law. These hours are considered regular work hours for purposes of calculating overtime. During all compensable hours, staffan employee is subject to any and all provisions of District Policies and Procedures. The following hours are compensable: a.Actual hours spent at meetings, conferences, or functions, excludingexcepting meals and special events of an entertainment nature held in conjunction with a function. a. b.Actual hours spent in transit, excludingexcepting hours spent in travel between staffthe employee’s residence and the District. Any time spent in layover at a public transportation facility is also compensable as transit time, unless staffthe employee chooses to participate OTAY WATER DISTRICT BOARD OF DIRECTORSHUMAN RESOURCES POLICY Subject Policy Number Date Adopted Date Revised STAFF TRAVEL AND BUSINESS- RELATED EXPENSES POLICY 34 5/3/2000 4/5/2023 10/5/11 Page 9 of 9 in recreational activities during the layover. On the other hand, time spent taking a break from travel in order to eat a meal, sleep, or engage in other personal pursuits not connected with traveling or making necessary travel connections, such as sightseeing, visiting friends and family, or other activities of a recreational or entertainment nature, are not compensable. 7.Staff’sEmployees’ Responsibility 7. a.In situations where staffan employee can use pthe Petty Ccash procedures for reimbursement of travel expenses, theythe employee may submit a “Petty Cash FormOrder” form (Exhibit B) to be reimbursed. If expenses to be reimbursed are beyond the scope of pthe Petty Ccash procedures, staffemployees must submit a detailed “Staff Expense Claim Form” (Exhibit C). Petty Ccash Orders and staff eExpense cClaim Fforms shallshould be supported by vouchers and itemized receipts of expenditures for which reimbursement is being requested. Receipts must be attached for all expenses with the exception of per diem meal allowance. If a receipt required for reimbursement is lost, the lost receipt must be noted on the “Staff Expense Claim Form” and approved for reimbursement before any payment can be made. Claim forms must be submitted within 14 calendar days after the expenses arewas incurred. a. b.Expenses will not be reimbursed for meetings that have been pre-paid and not attended. StaffEmployees may be required to reimburse the District for any pre-paid expenses for any unexcused absence. The General Manager will determine if an absence from a pre-paid meeting is excused or unexcused. b. c.When two (2) or more employees combine an expense on one receipt, the employee requesting reimbursement shallshould indicate on the “Staff Expense Claim Form” the identity of the other staffpersons sharing expenses. c. OTAY WATER DISTRICT BOARD OF DIRECTORSHUMAN RESOURCES POLICY Subject Policy Number Date Adopted Date Revised STAFF TRAVEL AND BUSINESS- RELATED EXPENSES POLICY 34 5/3/2000 4/5/2023 10/5/11 Page 10 of 9 d.Expenses incurred by spouses, family members, or guests are the staff’s responsibility of the employee. d. e.Any misrepresentation in connection with the petty cash order or reimbursement process will be grounds for discipline up to and including termination of employment. Attachments: Exhibit A: “Staff Travel Authorization Request” Form and “Instructions for Preparation of Staff Travel Authorization Request Form” Exhibit B: “Petty Cash FormOrder” “Staff Expense Claim Form” and Exhibit C: “Instructions for Preparation of Staff Expense Claim Form” “Authorization to Drive A District or Private Vehicle Out of San Diego County or to Transport Non-District Staff in a District or Private Vehicle” Form EXHIBIT A OTAY WATER DISTRICT STAFF TRAVEL AUTHORIZATION REQUEST Employee Name:Date of Request: Name and Location of Function: Date(s) Function to be held: - Is travel out of San Diego County? Yes No* (*not eligible for staff travel) Note: If you will be driving a District vehicle out of San Diego County or driving non- District personnel in a District vehicle or your private vehicle, you must obtain authorization by completing the “Vehicle Use Authorization Form Out of County and Transport Non-District Personnel” form. Otherwise, please check the box below. I will be using my personal vehicle and not transporting non-District personnel. Purpose of function: Sponsoring Organization: Request for Pre-Payment or Advance of Fees Related to the Function: Expense Type Not Needed Pre-Payment Requested Advance Requested Registration $N/A Airline $N/A Auto Rental $N/A Fuel** (for District or Rental Cars only) N/A $ Taxi/Shuttle** N/A $ Lodging $N/A Meals** (see below) N/A $ Other Expenses (explain below) $$ **Advanced through petty cash. Please request these expenses at the conclusion of the trip if possible. Total Pre-Payment Requested: $ Total Advance Requested: $ Lodging Preference: Explanation of Other Expenses: MEALS CALCULATOR Personal funds may be used in lieu of requesting advancement for meals. Meal per diem amounts are the same regardless of travel destination out of the County. How many meals does the function provide? (do not include in calculation PLEASE USE THE LATEST STAFF TRAVEL AUTHORIZATION REQUEST FORM LOCATED IN SHAREPOINT IN THE DOCUMENT CENTER TAB OR CLICK HERE. EXHIBIT A below) ( x $28 = $ ) + ( x $16 = $ ) + ( x $15 = $ ) = $ Expected Expected Expected Total meal dinners lunches breakfasts reimbursement Employee Signature Date of Request OFFICE USE ONLY BELOW THIS LINE Total Pre-Paid: $ Total Advanced: $ Travel Approved by: Date: (Department Chief) Travel Approved by: Date: (General Manager) EXHIBIT A INSTRUCTIONS FOR PREPARATION OF STAFF TRAVEL AUTHORIZATION REQUEST FORM Staff Travel must be approved by Department Chief and General Manager The District will reimburse for necessary expenses incurred while traveling outside of San Diego County at District business and related meetings, functions, training or traveling on District business including common carrier fares (economy class), automobile rental charges, District business telephone calls, one personal telephone call home each day ($10 maximum per day), lodging, baggage handling, parking fees, meals, gratuities, etc. Please review the “Staff Travel and Business Related Expenses Policy” to familiarize yourself with the District’s requirements. Transportation Employees should endeavor to use the most appropriate mode of transportation given the purpose and nature of the trip. The District will reimburse or pre-pay costs for economy (coach) class air transportation. Employees must obtain permission from their Department Chief or GM before using a personal vehicle in conjunction with District business and if driving non-District personnel by completing the “Vehicle Use Authorization Form Out of County and Transport Non-District Personnel” form. Advances and Pre-payments Employees may request pre-payment of registration, transportation, and lodging, and may request an advance for expected costs for meals, fuel for District or rental vehicles, public ground transportation, and taxis using the “Staff Travel Authorization Request” form. It is recommended that expenses for fuel, taxi and shuttle be reimbursed at the conclusion of the trip if possible. Pre-payments and advances shall be limited to the employee’s expenses only. Advances should be requested in a timely manner to allow normal processing through accounts payable. Meals Advances for per diem meals shall not exceed the per diem allowance anticipated for the trip. Receipts should not be submitted for per diem meal allowances. If advancement for meal allowance is not requested, employee may use their personal funds to pay for meals and request the per diem allowance after the travel is completed by submitting the “Staff Expense Claim Form.” It is recommended that per diems for meals be reimbursed at the conclusion of the trip if possible. CalCard may not be used for meal per diems. Per diem meal allowance shall be at the Meals Incidental Expenses (“M&IE”) rate determined by the U.S. General Services Administration for San Diego, or amounts that the General Manager deems reasonable for the occasion or circumstances. Partial day's per diem allowance shall be at the M&IE rate for breakfast, lunch and dinner, or amounts that the General Manager deems reasonable for the occasion or circumstances. The per diem meal allowance is inclusive of and assumes expenses for taxes and gratuities. Where pre-paid registration includes meals, only meals that are not included in the registration will be provided as per diem meal allowance. Receipts Receipts must be attached for all expenses with the exception of per diem meal allowances. If a receipt required for reimbursement is lost, the lost receipt should be noted next to the expense, submitted to the Department Chief, and approved by the Department Chief before any reimbursement can be made. All receipts must have the nature of the expense and the business purpose noted on the receipt. Any receipts that include costs of personal travel (e.g., hotel receipt for employee and spouse) should identify what the cost would have been without personal travel (e.g., single room rate as opposed to double room rate). Staff Expense Claim Form Upon return from travel, if expenses were incurred that need to be reimbursed, the “Staff Expense Claim Form” must be submitted within 14 calendar days after the expense was incurred. Advances and pre-payments shall be deducted from expenses and reconciled with travel authorization forms where applicable. No information on the “Staff Travel Authorization Request Form” may be designated as confidential in nature. All expenses must be fully disclosed on the form. The following expenses are not reimbursable: a. Alcoholic beverages e.Entertainment or recreation b. Parking or traffic violations f.Expenses incurred by spouses, family members, or guests c. In-room movies g. Early check-in/priority boarding fees d. Laundry service This policy does not apply to meetings, conferences, training or functions attended in the County of San Diego. For expenses in the County of San Diego please coordinate reimbursements with your department. Rev. 12/17 EXHIBIT B PLEASE USE THE LATEST PETTY CASH ORDER FORM LOCATED IN SHAREPOINT IN THE SERVICE CENTER TAB OR CLICK HERE. PLEASE USE THE LATEST STAFF EXPENSE CLAIM FORM LOCATED IN SHAREPOINT IN THE SERVICE CENTER TAB OR CLICK HERE. INSTRUCTIONS FOR PREPARATION OF STAFF EXPENSE CLAIM FORM The necessary expenses incurred while traveling outside of San Diego County at District business related meetings, functions, training or traveling on District business including common carrier fares (economy class), automobile rental charges, District business telephone calls, one personal telephone call home each day ($10 maximum per day), lodging, baggage handling, parking fees, meals, gratuities, etc. will be reimbursed when documented on the Staff Expense Claim Forms. Receipts must be attached for all expenses with the exception of per diem meal allowances. If a receipt required for reimbursement is lost, the lost receipt should be noted next to the expense, submitted to the Department Chief, and approved by the Department Chief before any reimbursement can be made. All receipts must have the nature of the expense and the business purpose noted on the receipt. The District will not reimburse the cost of travel of a personal nature taken in conjunction with travel on official business. Per diem meal allowance shall be at the rate provided by the Meals Incidental Expenses (M&IE), or amounts that the General Manager deems reasonable for the occasion or circumstances. Partial day's per diem allowance shall be at the rate provided by M&IE for breakfast, lunch and dinner, or amounts that the General Manager deems reasonable for the occasion or circumstances. The per diem meal allowance is inclusive of and assumes expenses for taxes and gratuities of up to 15%. Where pre-paid registration includes meals, only meals that are not included in the registration will be provided as per diem meal allowance. Any receipts that include costs of personal travel (e.g., hotel receipt for employee and spouse) should identify what the cost would have been without personal travel (e.g., single room rate as opposed to double room rate). Mileage will be reimbursed for travel using personal vehicles only if a District vehicle is not available. In order to be reimbursed for mileage, employees must have a valid Driver’s License and current automobile insurance that meets or exceeds State minimum insurance requirements. Advances and pre-payments shall be deducted from expenses and reconciled with travel authorization forms where applicable. Department Chiefs or the General Manager may authorize Expense Claim Forms. Claim forms must be submitted within 14 calendar days after the expense was incurred. No information on the Expense Claim Form may be designated as confidential in nature. All expenses must be fully disclosed on the form. The following expenses are not reimbursable: a. Alcoholic beverages d.Laundry service b. Parking or traffic violations e. Entertainment or recreation c.In-room movies f. Expenses incurred by spouses, family members, or guests. Page 1 of 45 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject: MEDIA RELATIONS POLICY Policy Number Date Adopted Date Revised 46 9/01/04 5/01/194/5/23 PURPOSE To establish procedures to better inform the public, Otay Water District (District) customers, businesses and other stakeholders on water, sewer, and recycled water service, and other District-related matters by engaging in a defined and proactive media relations program. BACKGROUND The District recognizes an effective and quick expeditious way to communicate District policies and activities is by working in partnership with the news media. This policy requires that news media inquiries regarding the District and the District’s position on matters should be given high priority, and should be responded to as quickly promptly and efficiently as possible. Every effort should be made to reasonably meet media deadlines and to ensure that all information released is accurate and is in compliance with laws and regulations concerning individual privacy and confidentiality. POLICY The General Manager’s office is responsible for the District's media relations program. To assist with this critical function, the District’s General Manager’s staff may retainprovides media relations assistance to provide publicand public, community, and governmental relations, and other outreach services. Before responding to any media inquiries, Aall District staffemployees should notify the General Manager, their department’s Chief, and/or the General Manager’s Communications Officer about media inquiries. With regard toRegarding District media requests, if possiblee, all District staff shall direct the news media representative reporter/representative shall to contact the General Manager and/or the Communications Officer who is authorized to speak on behalf of the District. Because the media often work on deadlines, all departments should respond as soon as reasonably possible when the General Manager, Communications Officer, or Communications Assistant requests department information or via a news media reporter/representativespokesperson for the media. Specific guidelines for responding to media requests regarding the District’s position on matters are as follow: ATTACHMENT D Page 2 of 45 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject: MEDIA RELATIONS POLICY Policy Number Date Adopted Date Revised 46 9/01/04 5/01/194/5/23 DISTRICT SPOKESPERSONS All spokespersons noted below should have discussions orally or writtenvia email with the General Manager’s office and/or General Manager's designated staff to obtain the appropriate, accurate, and approved District-related facts and information about the topic or issue at hand before acting as a spokesperson to the media. Unless otherwise authorized, the District's only designated spokespersons to speak on behalf of the District are the following:  President of the Board of Directors or Board members as assigned  General Manager  Communications Officer  Other Ddesignees authorized by General Manager as noted by General Manager’s memoin writing. via email.  MEDIA INQUIRIES Any media inquiry received by other District staff regarding the District or the District’s position on a matter should be referred immediately to the General Manager through the Department Chief. An appropriate response to the media is: "I'm sorry; I don't have the full information regarding that matter. I will give your request to District management, and someone from the District will respond to you as soon as they are available." Any staff member should obtain the reporter's name, media organization, phone/cell number or cell phone number, email address, topic of the story, and the deadline. Staff in the General Manager’s office will make all reasonable efforts to coordinate a response with the General Manager and appropriate District staff. LITIGATION, PERSONNEL AND DISTRICT ELECTION ISSUES Generally, the business conducted by the District is public, and therefore, is public information. Inquiries regarding pending litigation, matters involving a significant exposure to litigation, Page 3 of 45 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject: MEDIA RELATIONS POLICY Policy Number Date Adopted Date Revised 46 9/01/04 5/01/194/5/23 certain personnel related information, and District election information are may be exceptions. If unknown, staff shall always verify with the General Manager’s Office. Known Iinquiries regarding pending litigation or exposure to litigation and District election issues should be referred to the General Manager’s office. GENERAL OR ROUTINE ISSUES Calls from the media should always be referred immediately to the General Manager’s office through the employee's Department Chief or supervisor. The General Manager’s office will coordinate a response with designated staff and/or Board members, including designating a spokesperson. When theThe General Manager’s office has designated a spokesperson to respond to specific questions from the media, the General Manager should shall be informed of the topic, the name of the reporter, news media organization, media/reporter contact information, and the proposed date of airing or publication, either before or immediately following these any interviews. DISTRICT-INITIATED INFORMATION The District also makes its own efforts to contactget in touch with the media. For the most part, this proactive media contact is initiated through the General Manager’s office. This includes issuing press news releases and media advisories, and making personal contactings with reporters and editors directly for stories and other coverage. Departments seeking publicity for events or activities should shall not contact the media or reporters directly. Rather, department staff shall contact the Communications Officer in the General Manager’s office as soon as possible to ensure the best media coverage of their activities. Department staff members shall not initiate any news media contacts on behalf of the District. Staff shall before first notifying the General Manager’s Office and/or Department Chief. If approved by the General Manager’s Office, the Communications Officer or General Manager’s designee, will then contact the media directly. CRISIS MANAGEMENT AND EMERGENCY/SERVICE OUTAGE ISSUES Page 4 of 45 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject: MEDIA RELATIONS POLICY Policy Number Date Adopted Date Revised 46 9/01/04 5/01/194/5/23 Because the Operations Department staff may be called upon to restore service due to outages, breakages, or in other critical situations, their work is fundamental to the overall mission of the District. As a result, Operations personnel may be the only staff at the scene of an incident and may be called upon to address service restoration questions by the media. In these situations, all such inquiresinquiries will be immediately referred to the Chief of Operations who will make every effort to ensure that all information released is accurate, relevant, and appropriate. Operations staff should notify the Chief of Operations immediately of any such media inquiry. The Chief of Operations will then take the lead for follow-up media communications and contact the General Manager and Communications Officer. If possible and time permits, the Operations Chief and/or Operations staff should coordinate messaging with the Communications Officer first, but if time does not allow, the Communications Officer should be notified as soon as possible. Any media calls to other District staff regarding Operations matters should be referred immediately to the Chief of Operations, and General Manager’s Communications Officer. All information released directly to the media by Operations should be provided immediately to the General Manager's Communications Officer. During a crisis or major emergency, the District’s Standardized Emergency Management Plan Section 5.1-1 assigns responsibilities and procedures for handling media and customer information. To manage a crisis or a major emergency that may or may not consist of a service outage, the Communications Officer will work with the General Manager and designated Department Chiefs to assess if the situation requires outside services to assist with and/or manage the crisis. Each situation is unique and will be discussed on an as-needed basis. CONCLUSION Nothing in this policy should be construed as to restrict or preclude an employee of the District staff, or a representative of the Otay Water District Employees’ Association (OWDEA) or other bargaining unit, from communicating with the press on matters of public concern or on matters related to the association and/or union activities. However, such communications should not be made during on-duty -time, nor be disruptive Page 5 of 45 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject: MEDIA RELATIONS POLICY Policy Number Date Adopted Date Revised 46 9/01/04 5/01/194/5/23 to the District’s operations, and should be clearly understood as not being made on behalf of the District or representing the District’s official position on such matters. STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: May 3, 2023 SUBMITTED BY: Kevin Koeppen, Assistant Chief of Finance PROJECT: DIV. NO. All APPROVED BY: Joseph R. Beachem, Chief Financial Officer Jose Martinez, General Manager SUBJECT: Adopt Resolution No. 4427 Amending Policy No. 25, the Reserve Policy, of the District’s Code of Ordinances. GENERAL MANAGER’S RECOMMENDATION: That the Board adopt Resolution No. 4427 amending Policy No. 25, the Reserve Policy, of the District’s Code of Ordinances. COMMITTEE ACTION: Please see Attachment A. PURPOSE: To present to the Board a revision of Policy No. 25, the Reserve Policy. BACKGROUND: Periodically District staff review the District’s policies for potential updates and revisions related to changes in the District’s operations and practices. ANALYSIS: Based on this current review, staff recommend several changes to the Reserve Policy. The recommended changes are to add clarity to the policy or to remove components of the policy which are no longer applicable under current District operations and practices. The following changes are being recommended: •Clarifying language is being added to Section 2.1b to reflectthat system fees are charged based upon both customer class and meter size. AGENDA ITEM 5 • Section 2.1g, Special Rates and Charges (Restricted), was added to reflect treatment of outside and interim users. Historically, these customers were a component of the temporary rate which was eliminated on January 1, 2024. There are 18 customers that are considered outside or interim users. • Sections 2.4c and 4.1 were amended to reflect the change in debt standards from Certificates of Participation (COPs) to Revenue Bonds. Industry standards have changed, resulting in the structuring of debt as COPs being replaced with Revenue Bonds. The modification to the policy reflects this change. In addition, Section 4.1c was modified to reflect the need to maintain debt reserve levels as contractually required under the debt agreements. • Section 3.0b was amended to remove references to temporary fees and sales as those were formerly a component of the temporary rate which was eliminated. • Section 3.1, Other Post Employment Benefits (OPEB)Fund, is being removed from the policy and from Diagram 3.6. While the District still has the OPEB plan, the fund referred to in the policy was applicable when the District’s OPEB funds were maintained within the District’s reserves. The District has transitioned the OPEB reserves to the California Employees Retirement Trust (CERBT) and this reserve is no longer applicable. • Section 3.2b was modified for the elimination of the temporary rate and the addition of Section 2.1g Special Rates and Charges. • Changes were made to Diagram 3.3 to reflect the latest allocation of capacity fees to the replacement and expansion reserve, which is based on the ratio of current economic dwelling units to ultimate economic dwelling units. • Removed references to Temporary Rates or 2x the water rates from language and tables. Temporary Rates and the use of 2x the water rates for temporary users (i.e., construction, interim, and outside users) were eliminated with the implementation of the January 1, 2023, rates. The rates charged to these customers are now categorized within the District’s prior existing customer classes or the construction class. FISCAL IMPACT: Joseph Beachem, Chief Financial Officer Amendments to the Reserve Policy do not have any financial impact. STRATEGIC GOAL: The District ensures its continued financial health through long-term financial planning and debt planning. LEGAL IMPACT: None. Attachments: A) Committee Action B) Resolution No. 4427 Exhibit 1 Strike-through Policy No. 25 Exhibit 2 Proposed Policy No. 25 ATTACHMENT A SUBJECT/PROJECT: Adopt Resolution No. 4427 Amending Policy No. 25, the Reserve Policy, of the District’s Code of Ordinances. COMMITTEE ACTION: Page 1 of 1 RESOLUTION NO.4427 A RESOLUTION OF THE BOARD OF DIRECTORS OF THE OTAY WATER DISTRICT AMENDING RESERVE POLICY NO. 25 OF THE DISTRICT’S CODE OF ORDINANCES WHEREAS, the Otay Water District Board of Directors have been presented with an amended Reserve Policy No. 25 of the District’s Code of Ordinances for the financial management of the Otay Water District; and WHEREAS, the amended Reserve Policy has been reviewed and considered by the Board, and it is in the interest of the District to adopt the amended Reserve Policy; and WHEREAS, the strike-through copy of the proposed policy is attached as Exhibit 1 to this resolution; and NOW, THEREFORE, BE IT RESOLVED, DETERMINED AND ORDERED by the Board of Directors of the Otay Water District that the amended Policy No. 25, incorporated herein as Exhibit 2, is hereby adopted. PASSED, APPROVED AND ADOPTED by the Board of Directors of Otay Water District at a board meeting held this 3rd day of May, 2023, by the following vote: Ayes: Noes: Abstain: Absent: ________________________ President ATTEST: ____________________________ District Secretary Attachment B Page 1 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 1.0 The District The Otay Water District is a California municipal water district, authorized in 1956 by the State Legislature under the provisions of the Municipal Water District Act of 1911. The District is a "revenue neutral" public agency; meaning each end user pays their fair share of the District's costs of water acquisition, construction of infrastructure, and the operation and maintenance of the public water facilities. The District provides water service within its boundaries, and provides sewer and recycled water service within certain portions of the District. As such, the District operates three distinct business segments: •Potable water •Recycled water •Sewer Each of these business segments has an identifiable customer base. In addition, the developer community, large and small, makes up a significant class of customers for each business segment. As a result, the District has four distinct customer service types: •Developers •Potable water users •Recycled water users •Sewer users The District has established practices and developed computer systems that have enabled the District to maintain a clear separation between the service costs relating to each of its four customer service types. Regardless of customer class, financial principles regarding cost allocation and fund accounting are fundamental to the District’s Reserve Policy. These principles are derived from the statements of the Governmental Accounting Standards Board (GASB), and from oversight and advisory bodies such as the California State Auditor, the Little Hoover Commission, and the Government Finance Officers Association (GFOA). These principles have significant impacts on how the finances of the District are organized and how financial processes work within the organization. Exhibit 1 Page 2 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 1.1 The District’s Use of Financial Resources All the District’s expenditures fall into two broad categories: operating costs and capital expenditures. The operating costs include costs relating to the purchase and delivery of potable and recycled water, and the transportation and treatment of sewage. The capital expenditures support the construction of infrastructure necessary to deliver services. The District uses various funds to support the operating and capital efforts. Operations and maintenance are financed only by rates and charges, also called pay-as-you-go, while capital infrastructure is financed using two financing methods: pay-as-you-go and debt issuance (requiring annual debt service). The Capital Improvement Program (CIP) and the two funding methods support the construction, betterment, and replacement of infrastructure in all three business areas: potable, recycled, and sewer. The District establishes different funds to track revenues allocated to different activities. Once established, each fund receives financial resources up to the levels defined in this policy. Every year, as a part of the annual budget process, the District’s rate model is updated for each fund with the current fund balances and the estimated revenues and expenditures for the next six years. The expenditure requirements and financial resources are then evaluated to ensure that the existing fund balances and additional revenues are sufficient within the current budget cycle and for the next five years to maintain target fund levels. If a deficit is identified, then options for transfers, shifting CIP projects, debt issuance(s), cost saving measures, and/or rate increases are evaluated. 1.2 The District’s Capital Improvement Program (CIP) The planning, design, and construction costs of all capital facilities within the three business segments are allocated to four cost types and corresponding fund categories: New Water Supply, Expansion, Replacement, and/or Betterment. The allocation to these four cost types is defined in the District’s Capital Improvement Program (CIP) and is determined by an engineering analysis that identifies which type of customer will benefit from each facility, planned or existing. The costs of the capital Page 3 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 improvements are borne by either existing users or by the developing areas, or by a combination of the two, as applicable. This Reserve Policy protects both the existing users and the developing areas from incurring unwarranted costs. Developing areas are not required to finance facilities that are replacement or betterment and established areas are not required to replace facilities before they are worn out because of new development. However, to ensure a fair allocation of costs, each facility has the potential to be classified into any or all of the four cost types. In addition to these cost types, there are occasional CIP projects that may be billable to a third party, if for example a third party requires a District facility be relocated. Paragraphs a through d, which follow, describe how the costs of capital facilities are financed through various fees. a. New Water Supply The portion of a new supply project that benefits new users is financed from the reserves in the New Water Supply Fund category. These reserves were primarily derived from proceeds of the new water supply fee. The New Water Supply Fund is restricted, meaning the amounts credited to this fund are accounted for separately and are used solely for the planning, design, and construction of new water supply expansion facilities. Debt financing may also be a temporary financial resource to finance new water supply projects. The District has a Debt Policy (Policy No. 45) that guides the debt issuance process. Any debt proceeds used for this purpose would be restricted in nature and tracked separately. General use reserves may also be placed in the designated New Water Supply Fund and used for water supply projects. Effective December 1, 2020, new water supply fee collection was discontinued. The New Water Supply Fund will continue to be used to fund qualified projects and to pay the proportionate share of debt service for new water supply projects until the monies in the fund are fully depleted. b. Expansion The portion of a CIP project that benefits new users is financed from the reserves in the Expansion Fund category. These reserves are primarily derived from proceeds of the “incremental” portion of the capacity fees collected within developing areas. Capacity fees are accounted for separately and used for the planning, design, and construction of expansion facilities. Additionally, Page 4 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 expansion may be financed by the “buy-in” portion of the capacity fee, which is restricted for CIP purposes, but not specifically for expansion. Debt financing can be a temporary financial resource for expansion projects. General use reserves may also be placed in the designated Expansion Fund and used for expansion projects. c. Replacement The portion of a CIP project that benefits existing users by replacing an existing facility is financed from the reserves in the Replacement Fund category. Replacement of facilities may be financed with proceeds from the “buy-in” portion of the capacity fees, general use reserves held in the designated Replacement Fund, and/or debt proceeds. The various funding sources available for replacement projects are anticipated to provide the necessary flexibility to begin projects while any necessary debt financing is being obtained. d. Betterment Facilities that improve reliability, meet new regulations, or create increased levels of service are considered betterment facilities that benefit existing users. The reserves in the Betterment Fund category are used to finance these projects or portions of projects. Proceeds of the “buy-in” portion of the capacity fees may also be used to finance betterment projects. General use reserves may be placed in the designated Betterment Fund and used for betterment projects. 1.21 Relocations Occasionally, a third party requires relocation of a District facility. If the District has a superior easement the third party will pay the relocation cost, but only to the extent that the District does not benefit from the relocation. When relocation is required, a CIP project may be created which is wholly or partially financed by a third party. On occasion, the District will require that its own facilities be relocated. Depending on the nature of the facilities, the financial resources for these projects could be from new water supply, expansion, replacement, betterment, and/or third-party financing. Each project is individually negotiated with the third party based on the facts and circumstances of the relocation. Occasionally, the District will improve the facilities that are being relocated. Page 5 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 When determining how to allocate costs to various funds the following guideline is suggested: if a project has more than five years of useful life remaining, an incremental cost view should be considered; if the project has less than five years of useful life remaining, a pro-rata cost approach should be considered. Also, the likelihood that the District will benefit from an asset’s life extension should be evaluated prior to allocating costs. 1.22 Oversizing If deemed reasonable by the District, in connection with the construction of backbone facilities, a developer may be required to oversize new facilities for future development. The developer is reimbursed for incremental oversizing costs as per Policy No. 26. These reimbursements are not available for the distribution system within a development which is an obligation of the developer. 1.23 Exclusion of Developed Areas from Expansion Costs Developed areas are assumed to have sufficient supply and capacity to meet their current requirements as provided by the developers. In addition, they are considered to have borne capital financial costs that are at least proportionate to the benefits they have received from capital facilities. Accordingly, no regional capital financing costs are allocated to these areas so that they will not incur any costs for newly developing areas, except for capital projects that produce district-wide benefit or cost savings. 1.24 Improvement Districts (IDs) Improvement Districts (IDs) are established to facilitate the financing of particular improvements by the specific beneficiaries. The District has a number of IDs that were established for General Obligation (GO) debt repayment. AllMost GO debt has been paid off and it is unlikely that the District will issue additional GO debt. IDs continue to be used for other purposes: 1) to distinguish sewer customers from water customers on the county tax roll; or 2) to place parcels on the county tax roll for the collection of availability fees. Over the years, the District moved to a district-wide perspective of financing improvements. This philosophy is evident by the district-wide capacity and annexation fees. The District also uses district-wide water rates. As time goes on, it is expected that IDs will continue to outgrow their purpose and their use will diminish. Page 6 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 1.3 The Purpose of the Policy Public entities accumulate and maintain reserves to ensure both financial stability and continuous availability of services. Financial stability and the resulting improved credit quality allow the public entity to weather times of uncertainty and the impact of negative events, both major and minor. Reserves allow for the ongoing maintenance of property and timely payment of expenses, even when such expenses exceed money available from a single fiscal period. Ultimately, the type and level of reserves are driven by the type and magnitude of uncertainty faced by the public entity. A “reserve” has a number of functions, as follows: • Working capital is required to ensure timely payment of obligations. • A buffer against volatility in revenues. • Liquidity is required to obtain other goods and services (e.g., bank services). • Designated money to protect creditors. • Money set aside to replace assets at the end of their useful lives. • Money set aside to repair or replace assets damaged or destroyed at unanticipated times. It is important to note that reserves, fund balance, and net assets are not the same. Fund balance and net assets are accounting terms and may not always be in the form of cash or liquid investments. Fund balances and net assets may not always be reserves unless a designation of all or a portion of fund balance is made. In addition, the term fund balance was replaced by net assets as codified by the Governmental Accounting Standards Board (GASB). In short, reserves are the liquid assets of the District, accumulated and maintained for application to finance contingent future activities, whether known or unanticipated, operating or capital in nature. The District’s Reserve Policy governs the Page 7 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 management and use of these financial resources. Few policies have a more significant impact on the financial health and stability of the District. This policy explains several key financial concepts used by the District and provides some background information on the overall strategies and practices utilized. The District has a fiduciary obligation to its customers, to manage and direct the use of public funds for the purpose of providing water and sewer services in an efficient and financially sound manner. 1.4 Policy Guidelines In 2000, the Little Hoover Commission reviewed the levels of reserve funds for special districts in California and prepared a report reflecting that special districts were accumulating unreasonable levels of funds. As a proactive response, the California Special Districts Association (CSDA) prepared Reserve Guidelines for its members. The Reserve Guidelines were significant in noting that reserve levels need to be in context of the organization’s overall business model and capital improvement plan. There are a number of potential events which the District should consider in the development of reserves: • Economic Uncertainty - performance of the regional economy and the impact of that performance on demand for water. • Weather - the amount of rainfall and the impact of weather on the availability and cost of water as well as the demand for water. • Government Mandates - the impact of federal and state regulations, particularly environmental regulations. • Tax Changes - limitations on the District’s taxing and spending powers through the passage of a voter referendum, the impound of District property taxes, the removal of the District’s power to levy property taxes, further increases to Educational Revenue Augmentation Fund (ERAF) contributions, or changes in calculation methodology. • Operating Costs - increases in operating and maintenance costs because of inflation, labor agreements, or other modifications. Page 8 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 • Force Majeure - unanticipated expenditures resulting from natural disasters or intentional acts. • Emergency Maintenance - unanticipated expenditures resulting from unexpected failure of assets (e.g., rupture in the primary transmission system). • Unexpected Variation in Cash Flow - the incidence of additional costs or decreased revenues that require short- term borrowing in the absence of sufficient financial resources. The California State Auditor has, in its oversight role, offered a number of quality recommendations for the development of reserve policies as outlined in its report entitled, “California’s Independent Water Districts: Reserve Amounts Are Not Always Sufficiently Justified, and Some Expenses and Contract Decisions Are Questionable,” dated June 2004, Report No. 2003-137. All of these recommendations have been incorporated into this policy in an effort to address key issues surrounding the management and use of District reserves. The detailed objectives as identified by the State Auditor are as follows: • Distinguish between restricted and unrestricted reserves. • Establish distinct purposes for all reserves. • Set target levels, including minimums and maximums, for the accumulation of reserves. • Identify the events or conditions that prompt the use of reserves. • Conform to plans to acquire or build capital assets. • Receive Board approval and that it is in writing. • Require periodic review of reserve balances and rationale for maintaining them. Yet, the State Auditor’s report acknowledges that the California Constitution (Article XIII B, Section 5) is vague in its provisions governing the accumulation and use of reserves.1 1 California State Auditor, Bureau of State Audits, “California’s Independent Water Districts: Reserve Amounts Are Not Always Sufficiently Justified, and Some Expenses and Contract Decisions Are Questionable,” dated June 2004, 2003-137; p. 8. Page 9 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 Specifically, the Constitution states that “each entity of the government can establish contingency, emergency, unemployment, reserve, sinking fund…or similar funds as it shall deem reasonable and proper.”2 Similarly, the State’s Water Code does not impose any requirements as to specific or recommended reserve fund levels. As a result, the public finance community has yet to settle on any real objective standards for the level of reserve funds appropriate for governmental enterprises. This lack of consensus as to specific standards is indicative of the wide variance of the financial and operations context for different districts and different contingencies justifying reserves. The Government Finance Officers Association (GFOA) in its “Recommended Practice on Appropriate Level of Unreserved Fund Balance in the General Fund” (2002) states that in establishing a policy governing the level of unreserved fund balance in the general fund, a government should consider a variety of factors. These include: • The predictability of its revenues and the volatility of its expenditures (i.e., higher levels of the unreserved fund balances may be needed if significant revenue sources are subject to unpredictable fluctuations or if operating expenditures are highly volatile). • The availability of resources in other funds as well as the potential drain upon general fund resources from other funds (i.e., the availability of resources in other funds may reduce the amount of the unreserved fund balance needed in the general fund, just as deficits in other funds may require that a higher level of unreserved fund balance be maintained in the general fund). • Liquidity (i.e., a disparity between when financial resources actually become available to make payments and the average maturity of related liabilities may require that a higher level of resources be maintained). • Designations (i.e., governments may wish to maintain higher levels of the unreserved fund balance to compensate for any portion of unreserved fund balance already designated for a specific purpose). 2 California Constitution, Article XIII B, Section 5. Page 10 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 In the preparation of this policy, each of the CSDA guidelines and the GFOA recommendations have been considered. In addition, all seven objectives provided by the State Auditor are specifically addressed for each reserve. The District wholly supports the State Auditor’s efforts to bring a high-level of quality to reserve governance and establish a standard of performance. The District recognizes that the customer pays for services provided. Quality management requires that periodic valuations be performed so that fees and charges can be set at appropriate levels to recover the cost of service. The District’s Reserve Policy has been drafted with consideration of the GFOA, CSDA, and State Auditor’s general guidelines as provided above. Additionally, the District has adopted the following principles in the management of its financial resources: • Reserves are held and used only for the purpose for which they are collected. This is done to maintain equity among customers. • Each of the service types is tracked separately so that expenditures and revenues can be monitored and evaluated for each customer type. This provides the District with the necessary information to appropriately charge for each of the services. • Separation of operations and maintenance from capital expenditures occurs within each of the service types. This is done because the financing of these expenditures is often on different timelines or use different reserves. • The District will hold its reserves at responsible and prudent levels. This policy sets minimum, maximum, and target levels for each of the various funds. This has been done so that the District can maintain reserves to meet the purpose for which the funds were established. The levels are set by reference to line items in the District’s financial statements and approved budgets. This allows reserve levels to adjust to the District’s changing financial circumstances. • Debt financing of facilities provides intergenerational equity and maintains rates at reasonable levels. This equity is accomplished with long-term financing which spreads the cost of facilities over the life of the facilities. The burden to pay for facilities is then paid by those who use Page 11 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 them. The District could amass significant reserves by pre- collecting financial resources in a Replacement Reserve Fund allowing the District to cash finance all replacements. However, this would require significant rate increases burdening the current customers and creating reserve levels difficult to defend to the ratepayers or other oversight entities. These concepts are fundamental to the way the District manages its funds and have a direct impact on the way rates and charges are set. The District performs annual budget evaluations and updates its rate model on an annual basis to monitor and adjust the various funds, expenditures, and revenue sources. The separation, tracking, and projecting of the various funds, expenditures, and expenditures revenue sources create the essential information necessary for the equitable rate structure maintained by the District. The annual review preserves the balance between services provided and the fees charged. This review also ensures that reserves will be available to continue to serve the District’s customers. Financial Sources 2.0 Developers a. Meter Installation Charges (General Use) Meter fees are charges collected for new water service connections. Fees vary depending upon meter size and type of service. The costs associated with meter installations are included in the Operating Expenses section of the budget. Developers finance these charges. b. Developer Deposits (General Use) These deposits are for the engineering and operations services provided to developers. They are tracked separately for each developer and any excess amount is returned to the developer. c. Water Annexation Fees (General Use) Annexation fees3 are collected as a condition of annexing into the District’s potable or recycled water facilities. Since the existing facilities have been built and maintained 3 Otay Water District Code of Ordinances, Section 9. Page 12 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 by developers or customers within the District, the annexation fee is calculated based on the present value of all property taxes (1% property tax and availability fees) paid by existing and prior customers. The annexation fee reimburses existing customers for past contributions so that all customers have contributed more equally to water facilities. Proceeds of annexation fees are unrestricted and may be used for any general fund purpose. d. Sewer Annexation Fees (General Use) A sewer annexation fee is collected when property is annexed into an improvement district (ID). Since the existing facilities have been built and maintained by developers or customers within a sewer ID, the annexation fee is calculated based on the present value of all availability fees paid by existing and prior customers. The annexation fee reimburses existing customers for past contributions so that all customers have contributed more equally to sewer facilities. Proceeds of the annexation fees are unrestricted and may be used for any general fund purpose. e. Water Capacity Fees (Restricted) Water capacity fees4 are based on the value of existing and future facilities divided by the number of existing and future equivalent dwelling units. This method of calculating capacity fees is called the combined method, where the “buy- in” portion of the capacity fee covers costs to repay existing customers for the facilities that they have built, and where the “incremental” portion of the capacity fee covers the cost of future expansion facilities. The “buy-in” portion of the capacity fee is restricted to pay for planning, design, construction, and financing associated with expansion, replacement, or betterment of facilities. The “buy- in” portion may be shifted back and forth between expansion, betterment, or replacement as the financing needs change. The “incremental” portion of the capacity fee is limited to planning, design, construction, and financing exclusively for expansion facilities (excluding new water supply expansion). 4 Otay Water District Code of Ordinances, Section 28 Page 13 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 f. Sewer Capacity Fees (Restricted) Sewer capacity fees are based on the value of existing and future facilities divided by the number of existing and future equivalent dwelling units. This method of calculating capacity fees is called the combined method, where the “buy- in” portion of the capacity fee covers costs to repay existing customers for the facilities that they have built, and where the “incremental” portion of the capacity fee covers the cost of future expansion facilities. The “buy-in” portion of the capacity fee is restricted to pay for planning, design, construction, and financing associated with expansion, replacement, or betterment of facilities. The “buy-in” portion may be shifted back and forth between expansion, betterment, or replacement as the financing needs change. The “incremental” portion of the capacity fee is limited to planning, design, construction, and financing exclusively for expansion facilities. For parcels within a sewer ID the calculation excludes the tax debt already paid by these customers, therefore producing a lower fee than for parcels outside of a sewer ID. The capacity fees are restricted to pay for planning, design, construction, and financing associated with the expansion, replacement, or betterment of facilities. Facility needs are based on projected land use planning. Changes in anticipated future land use occur and can alter projected facility requirements. Thus, both the anticipated facilities’ needs and their projected costs change over time as regulatory agencies make changes to land use. The District periodically reviews the capacity fee calculation to accommodate such variations. These fees are paid by developers. The District’s construction of infrastructure occurs prior to the addition of EDUs. This sequence serves two purposes: 1) it ensures that the District can serve the pending construction as it is completed; and 2) it is more efficient to oversize many facilities at the outset rather than build for the current need and then reconstruct when the future need is realized. As a result of this strategy, the District has financed construction with bond financing as the existing expansion reserves are depleted. Page 14 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 The water capacity fee is calculated based on the combined recycled and potable water systems’ needs. This methodology is used because the two water systems work hand-in-hand. All capacity fees can be used for either potable or recycled but must be tracked to distinguish between the “buy-in” and “incremental” portions as described above. So, while capacity fees are not restricted separately by potable and recycled, they are tracked separately. Diagram 2.0: Flow of Funds - Developer Sources 2.1 Customers/Users a. Uniform Rates and Charges (General Use) Charges to users for water, sewer, and recycled water are uniform throughout the District for similar customer types. b. Monthly System Fees (General Use) This is a fixed revenue source that is charged monthly. The amount of the charge is based on the customer class and meter size. c. Energy Charges (General Use) The energy pumping fee is a charge per unit of water for each 100 feet of lift, or fraction thereof, above the base elevation of 450 feet. This charge is placed on the monthly water bills of all water customers. Meter Installation Charges Developer Deposits Annexation Fees Capacity Fees Unrestricted and Undesignated (General Use) Funds Restricted Funds DEVELOPERS Page 15 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 d. Penalties (General Use) Penalties are added to the monthly water and sewer bills for late charges, locks, etc. e. Pass-through Fixed Charges (General Use) A fixed monthly charge to the District’s customers intended to collect sufficient funds to pass-through the increased fixed costs from the County Water Authority (CWA) and the Metropolitan Water District (MWD). f. Special Rates and Charges (General Use) In addition to the uniform water and sewer charges, the District has a special sewer rate for the Russell Square lift station. The Russell Square fee is for construction, installation, maintenance, or repair of the Russell Square lift station. This fee is collected in accordance with the Russell Square sewer charge. (See Code of Ordinances Section 53.03B.) g. Special Rates and Charges (Restricted) In addition to the uniform water charges, the District has a special rate charged to outside and interim users. Outside and interim users are charged an additional fee for temporary capacity. The fee is collected in accordance with outside and interim service agreements. (sSee Code of Ordinances Section 25.) g. Temporary Meter Fees (General Use/Restricted) Water charges, in lieu of capacity fees, are charged on temporary meters. This is done because temporary meters use system capacity but they are not charged a capacity fee. Temporary water use is charged at two times the water rate with the added charge placed in the Restricted Expansion Fund. The primary users of these temporary meters are developers; however, general customers also use these for various purposes. Diagram 2.1: Flow of Funds - Customer Sources Page 16 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 2.2 County-Collected Taxes and Fees a. General Levy Property Tax Receipts (1% Property Tax) (General Use) In 1978, Proposition 13 limited the levy of ad valorem property taxes on real property to one percent of the assessed value of such property. Subsequent legislation, AB 8, established that the receipts from the one percent levy were to be distributed to taxing agencies proportionate to each agency’s general levy receipts prior to Proposition 13. Taxes received are for general use. Spending limits for the District are governed by the 1979 passage of California Proposition 4, Limitations of Government Appropriations (GANN limit). Proposition 4 places an appropriation limit on most spending from tax proceeds. b. Availability Charges (General Use/Restricted) The District levies availability charges each year in developed and undeveloped areas. Current legislation provides that any amount up to $10 per parcel is general use and any amount over $10 per parcel is restricted to being expended in and for the improvement district (ID) within which it is collected. Accordingly, the District may use availability charges in excess of $10 toward costs of water and sewer facilities which are either, expansion, betterment, or replacement of facilities consistent with the purpose of the ID in which they are collected. This Uniform Rates and Charges Monthly System Fees Energy Charges 2x Water RatSpecial Rates Charges Pass –Through Fixed Charges Penalties Special Rates and Charges Restricted Funds Unrestricted and Undesignated (General Use) Funds CUSTOMERS / USERS Page 17 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 portion of the proceeds of availability charges is geographically restricted and restricted by purpose. As costs are incurred on these projects the respective IDs are charged, reducing the reserves. To the extent that availability charges are not used for the purpose for which they are collected, they must be returned to the property owners that paid them. The District has historically used these reserves for the betterment of capital facilities thus, the restricted reserves are accounted for in “sub- funds” of the Betterment Fund (See 2.1 f.). c. Improvement District General Obligation (GO) Bond Assessments (Restricted) The District has historically issued general obligation (GO) debt and established an ID for the repayment of that debt. When this financing method is used, the county tax roll can be used to collect special taxes or assessments within the ID to pay the debt obligation. The proceeds of the debt are restricted for the purpose as defined in the bond documents. Diagram 2.2: Flow of Funds – County Collection Sources 2.3 Miscellaneous Income a. Miscellaneous Rents and Leases (General Use) Revenues received from the rental and lease of District property are general use revenues. Not only are these periodic revenues, but there is also a one-time fee charged General Levy Property Tax Receipts Availability Charges General Obligation Bond Assessments Unrestricted and Undesignated (General Use) Funds Restricted Funds COUNTY COLLECTED TAXES AND FEES Page 18 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 with the setup of each new lease. The District incurs expenses related to these rents and leases. The one-time fees are calculated to recover the costs of setting up the leases. b. Sewer Billing Fees (General Use) Sewer billing fees are general use revenues. The District provides processing and billing services to the City of Chula Vista and bill and collect from their customers for sewer service. These fees are to recover the cost the District incurs to provide this service. c. Interest Income or Expense Allocation (General Use, Designated, and Restricted) Interest income (expense) will be allocated every month based upon each fund's month-ending balance. In this way, each fund receives credit for interest earned by that fund and each fund with a negative balance is charged for the use of the other fund’s reserves. Diagram 2.3: Flow of Funds – Miscellaneous Income Sources 2.4 Debt Issuance a. Loans (General/Restricted Use) As the District determines that additional financing is required for a particular purpose, the option of borrowing is considered. The determination to borrow is made as a part of the annual rate model update and is evaluated in accordance Miscellaneous Rents and Leases Sewer Billing Fees Interest Income or Expense Allocation Restricted Funds Designated Funds Unrestricted and Undesignated (General Use) Funds MISCELLANEOUS INCOME Page 19 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 with the Debt Policy before it is recommended to the Board for action. As an option to bond indebtedness, loans are available to satisfy short-term financing needs. These loans may or may not be contractually restricted for a particular purpose. b. General Obligation (GO) Bonds (Restricted) As the District becomes more developed it becomes less likely that general obligation debt will be used as it requires a vote of the public to be approved. Bond proceeds are restricted for the construction of those facilities identified in the GO bond issuance. Occasionally, specific portions of bond proceeds may be allocated for the repayment of the principal and interest, also called debt service, on these bonds. As the District determines that additional financing is required for a particular purpose, the option of debt issuance is considered. The determination to issue debt is made as a part of the annual rate model update and is evaluated in accordance with the Debt Policy before it is recommended to the Board for action. c. Certificates of Participation (COPs)Revenue Bonds (Restricted) General revenues of the District are pledged as security for Certificates of ParticipationRevenue Bonds (previously Certificates of Participation) indebtedness. If the District determines that additional financing is required for a particular purpose, the option of debt issuance is considered. The determination to issue debt is made as a part of the annual rate model update and is evaluated in accordance with the Debt Policy before it is recommended to the Board for action. This form of financing has become the industry’s preferred form of financing as it does not require a vote of the general public. Diagram 2.4: Flow of Funds – Debt Issuance Sources Page 20 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 2.5 Inter-fund Transfers Each year in the budgeting process, future fund balance levels are projected for the next six years. Based on these projections, transfers are recommended. Reserves may be transferred between Unrestricted or Designated Funds and the General Fund (see 4.0 “Funding Levels” and 4.1 “Fund Transfers”). Reserves may not be transferred to or from any of the Restricted Funds unless it is between two restricted funds with a shared purpose. Fund Types and Categories 3.0 General Funds a. Purpose The General Fund is neither restricted nor designated. The District maintains one General Fund for each business segment (water, sewer, and recycled). This fund holds the working capital and emergency operating reserves. While the General Fund has a short-term focus to finance the District’s annual operations, it is supported by the six- year rate model. This fund is primarily used to finance the operations of the District; however, it can be used for any District purpose. This fund can be used to supplement the District’s rates and charges and be a temporary source of revenue to balance the Loans General Obligation Bonds Certificates of Participation Revenue Bonds Restricted Funds Unrestricted and Undesignated (General Use) Funds DEBT PROCEEDS Page 21 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 Operating Budget. This fund can also be used to avoid spikes in the rates or significant and abrupt increases. It is an industry practice to have a fund that can be used to stabilize rates. This would only occur if there was a temporary need to use reserves to smooth out a rate spike or to ramp up what would otherwise be a dramatic rate increase. The General Fund also plays a role in the debt planning of the District. This fund is viewed by the debt markets as a commitment by the District to ensure financial stability of the rates and charges of the District. The District is anticipated to need a number of debt issuances over the years and this fund will help the District not only to stabilize rate fluctuations but also to access low cost financing for future projects. b. Sources The potable and recycled general funds receive Mmeter installation charges, special rates and charges temporary outside meter fees, uniform rates and charges, monthly system fees, energy charges, penalties, pass-through fixed charges, general levy property tax receipts, water annexation fees, availability charges, miscellaneous rents and leases, sewer billing fees, interest income or expense allocation, and loans, and a portion of the temporary outside water sales. The sewer general fund receives sewer charges, penalties, availability charges, sewer annexation fees, and interest income or expense allocation. c. Funding Levels I. Minimum Level – The minimum reserve level for each business segment of the General Fund is three months of operating budget expenses (evaluated separately for each segment). II. Maximum Level – The maximum reserve level for the General Fund is nine months of operating budget expenses. In the event that this fund exceeds the seven-month level, the excess will be evaluated or transferred to one or more of the designated funds. III. Target Level – The target level of reserves is three months of operating budget expenses. In the event that the fund drops below the target level, Page 22 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 rate increases or fund transfers would be considered. 3.1 Designated Other Post Post-Employment Benefits (OPEB) Fund a. Purpose Designated Other Post Post-Employment Benefits (OPEB) reserves are “general use” reserves that have been set apart by Board action to finance the medical benefits of qualified retirees as outlined in the District’s benefits plan. This fund is available to hold any Board designated OPEB funds. The District also has a trust at CalPERS, CERBT, and is restricted for the purpose of financing the OPEB liability. Money held in the CalPERS trust restricts the funds from any use other than OPEB. The two funds are considered jointly when looking at target reserve levels. Every two years, actuarial study is performed to update the annual financing requirements. Changes in the actuarial valuation may result from changes in benefit levels, employee population, health insurance costs, or general market conditions. b. Sources The OPEB liability may be financed by general use reserves coming from user rates and charges, either from an operating budget expenditure or from interfund transfers. Transfers of unrestricted reserves may come from the various designated funds or from the General Fund. As a part of the normal budget process, annual operating revenues have been sufficient to finance the ongoing needs of this designated fund. While debt financing is also an option, the District has only used user rates and charges to finance this fund. Page 23 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 I. Minimum Level – The minimum reserve level for this fund is equal to the District’s OPEB liability as determined by the actuarial study. When considering the reserve level of this fund, both the District held OPEB reserves and CalPERS held OPEB reserves must be considered jointly. II. Maximum Level – The maximum reserve level for this fund is equal to the District’s OPEB liability as determined by the actuarial study. In the event that the two funds, as described above, exceed the OPEB liability, the District will reduce the annual funding levels as defined by the actuarial study. III. Target Level – The target reserve level for this fund is equal to the District’s OPEB liability as determined by the actuarial study. In the event that the two funds, as described above, fall below the OPEB liability, the District will increase the annual funding levels as defined by the actuarial study. 3.23.1 New Water Supply Fund Category a. Purpose The New Water Supply Fund category is to finance the expansion portion of new water supply projects and is therefore to be paid by developers. When considering the reserve level of the New Water Supply category; the New Water Supply Fund, the New Water Supply Debt Fund, and the Designated New Water Supply Fund all work in concert and must be considered jointly. b. Sources The New Water Supply Fund received reserves only from the new water supply fee. Other funds within the new water supply category of funds received debt proceeds and general use reserves through a designation to this category. Effective December 1, 2020, the new water supply fee collection was discontinued. The New Water Supply Fund will continue to be used to fund qualified projects and to pay the proportionate share of debt service of new water supply projects until the monies in the fund are fully depleted. Page 24 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 Funding Levels c. Effective December 1, 2020, the new water supply fee collection was discontinued. The New Water Supply Fund will continue to be used to fund qualified projects and to pay the proportionate share of debt service of new water supply projects until the monies in the fund are fully depleted. Diagram 3.1: New Water Supply Fund Restricted Funds Unrestricted and Undesignated Funding Sources Designated New Water Supply Fund Designated Funds Expansion New Water Supply Fund Restricted Funds New Water Supply Debt Fund Restricted Funds New Water Supply Fund General Fund – Rates and Charges Debt Fund Page 25 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 Diagram 3.2: New Water Supply Fund Category 3.33.2 Expansion Fund Category a. Purpose The Expansion Fund category is to finance the expansion portion of capital projects and therefore is to be paid for by developers. When considering the reserve levels of the expansion category, the following funds work in concert and must be considered jointly: Expansion Fund, Expansion Debt Fund, Capital Improvement Fund, and the Designated Expansion Fund. Potable and recycled reserves are considered jointly while sewer is evaluated separately. Funding Source Debt Proceeds Restricted Funds Unrestricted and Undesignated Funding Sources Designated New Water Supply Fund Designated Funds Expansion New Water Supply Fund Restricted Funds New Water Supply Debt Fund Restricted Funds New Water Supply Fund New Water Supply Fund Category General Fund – Rates and Charges Debt Fund Page 26 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 b. Sources The Expansion Fund is financed by water charges in lieu of capacity fees (for temporary outside meters) and the “incremental” portion of the capacity fee and restricted special rates and charges. The other funds in this category may also be financed by debt proceeds, the “buy- in” portion of the capacity fee, and the general fund through a designation of reserves. c. Funding Levels I. Minimum Level – As the District matures, the CIP will move to purely replacement and betterment projects. As the District moves through this life cycle the need for expansion reserves will decrease and may be reduced to zero. II. Maximum Level – The maximum reserve level for the expansion category of funds is limited to five years of unfinanced expansion facilities as described in the District’s CIP Budget. To determine the unfinanced amount, the total financing needs must be reduced by the projected expansion revenues, bond financing, and any restricted or general fund revenues allocated to this fund category. If the combined expansion reserves exceed target levels, the District should consider reducing capacity fees, reallocating restricted or designated funds to meet other purposes, or shifting the timing of expansion projects. III. Target Level – The target level is six months of expansion expenditures. It is important that the expansion reserves remain at a minimum of six months of expansion expenditures. This reserve level allows the District the time necessary to issue additional debt without depleting expansion reserves. If the combined expansion reserves Page 27 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 drop below six months of expenditures this would trigger a transfer of general use reserves, a bond sale, an adjustment to the timing of expansion projects, or a reallocation of restricted reserves. Bond proceeds would be placed in the Restricted Bond Fund, transfers of general use reserves would be placed in the Designated Expansion Fund, and transfers of restricted reserves would be placed in the Expansion Capital Improvement Fund. d. d Page 28 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 Diagram 3.23: Expansion Fund Category (1) For Water Capacity Fees 31.2% goes into the Expansion Ffund and 68.8% goes into the Capital Improvement Fund. For Sewer Capacity Fees 100% goes into the Capital Improvement Fund. Fund, transfers of general use reserves would be placed in the Designated Expansion Fund, and transfers of restricted reserves would be placed in the Expansion Capital Improvement Fund. Page 29 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 Diagram 3.3: Expansion Fund Category (1) For Water Capacity Fees 32.4% goes into the Expansion fund and 67.6% goes into the Capital Improvement Fund. For Sewer Capacity Fees 100% goes into the Capital Improvement Fund. Unrestricted and Undesignated Funding Sources Expansion Fund Designated Funds Fund Restricted Funds Expansion Capital Improvement Fund Restricted Funds Expansioon Debt Fund Restricted Funds Restricted Funds Debt Capacity Fees (1) 2x Water RatesRestricte d Special Rates & Charges Funding Source General Fund – Rates and Charges Fund Capital Fund Bond Debt Expansion Fund Category Page 30 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 3.43.3 Replacement Fund Category a. Purpose The Replacement Fund category is to finance replacement projects. When considering the reserve levels of the replacement category of funds, the following funds work in concert and must be considered jointly: Debt Fund, Capital Improvement Fund, and the Designated Replacement Fund. The purpose of these reserves is to pay for the replacement of capital infrastructure and capital purchases. These reserves are not to be used for the replacement of non-capital items. With the District’s development of its financial systems and the greater need and ability to separate and track reserves, the replacement reserves have been separated into three funds: water, recycled, and sewer. Projects undertaken solely for the purpose of replacing major capital equipment or facilities, i.e., where the cost exceeds $10,000 for capital purchases or $20,000 for infrastructure items, generally these are not considered normal maintenance. When the cost is below $10,000, the costs are financed annually as operational maintenance. As charges are incurred on replacement projects the reserves are deducted from the respective Replacement Funds monthly. b. Sources The various funds in this category are financed by debt proceeds, the “buy-in” portion of the capacity fee, and general fund designations. c. Funding Levels I. Minimum Level – The minimum reserve level of this category of funds is 3% of the historical value of existing assets as identified in the District’s current financial statements. Potable, recycled, and sewer replacement are evaluated separately. II. Maximum Level – The maximum reserve level of this category of funds is 6% of existing assets. If the Page 31 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 combined replacement reserves exceed target levels, the District should consider transferring the “buy- in” portion of the capacity fee to meet other purposes. Another consideration would be to shift the timing of replacement projects. III. Target Level – The target reserve level of this category of funds is 4% of existing assets. In the event that the reserves fall below the recommended target level, the District should consider transferring the “buy-in” portion of the capacity fee. The District should also consider shifting the timing of replacement projects or issuing debt to support the planned level of facility replacement. The District will act based on the annual six-year rate model to ensure that at the end of that planning horizon the reserves exceed the minimum level and are approaching the target level. Page 32 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 Diagram 3.34: Replacement Fund Category (1) For Water Capacity Fees 68.87.6% goes into the Capital Improvement Fund. For Sewer Capacity Fees 100% goes into the Capital Improvement Fund. 3.53.4 Betterment Fund Category a. Purpose The Betterment Fund category is to finance the betterment portion of capital projects with a portion going to maintenance of the potable, recycled, and sewer systems. The District maintains separate Betterment Fund categories, one for each improvement district. An improvement district is a legally defined geographic area usually established for the purpose of bond financing of facilities. The betterment reserves within Unrestricted and Undesignated Funding Sources Designated Replacement Fund Designated Funds Replacement Capital Improvement Fund Restricted Funds Replacement Debt Fund Restricted Funds Restricted Funds Replacement Fund Category Debt Proceeds Capacity Fees (1) Funding Source General Fund – Rates and Charges Debt Fund Capital Improvement Fund Page 33 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 these funds are restricted by law for use within the improvement district in which the fees were collected (Water Code 71631.6). However, the legal restriction of this reserve depends upon the particular revenue source. (See Section 2.2 b. for a review of the availability fees). When considering the reserve levels of the betterment category of funds, the following funds work in concert and must be considered jointly: Betterment Fund, Debt Fund, Capital Improvement Fund, and Designated Betterment Fund. b. Sources The Betterment Fund category receives restricted revenues through improvement districts from the availability fees (the first $10 is unrestricted, while amounts over $10 are restricted) collected through the county tax roll. Betterment may also be financed by debt proceeds, the “buy-in” portion of the capacity fee, as well as the general fund through a designation of reserves. c. Funding Levels I. Minimum Level – As the District matures, the CIP will move to purely replacement projects. As the District moves through this lifecycle the need for betterment reserves will decrease and may be reduced to zero. II. Maximum Level – The maximum reserve level for the betterment category of funds is limited to five years of unfinanced betterment facilities as described in the District’s CIP Budget. To determine the unfinanced amount, the total financing need must be reduced by the projected betterment revenues, bond financing, and general fund designations. If this maximum is exceeded, then the District should evaluate reductions in the special water rates and availability fees, transferring designated reserves to meet other purposes, or shifting the timing of betterment projects. Page 34 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 III. Target Level – The target is six months of betterment expenditures. It is important that the betterment reserves remain at a minimum of six months of betterment expenditures. This reserve level allows the District the time necessary to issue additional debt without depleting betterment reserves. If the combined betterment reserves drop below six months of expenditures this would trigger a transfer of general use reserves, a bond sale, or an adjustment to the timing of betterment projects. Bond proceeds would be placed in the Betterment Bond Fund while transfers would be placed in the Designated Betterment Fund. Page 35 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 Fund Diagram 3.45: Betterment Fund Category Funding Source Availability Charges (1) Capacity Fees (2) Betterment Fund Category Availability Charges(1) Capacity Fees(2) Debt Proceeds Betterment Fund Category Betterment Fund Capital Improvement Fund Bond/Debt Fund Funding Source Restricted Funds Page 36 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 D e b t P r oceeds Restricted Funds Capital Improvement Fund Restricted Funds Betterment Debt Fund Restricted Funds Betterment Capital Improvement Fund Restricted Funds Betterment Fund Designated Funds Designated Betterment Fund Unrestricted and Undesignated Funding Sources Unrestricted and Undesignated Funding Sources The portion of charges over $10 per parcel is restricted. General Fund – Rates and Charges Bond Debt Betterment Fund General Fund – Rates and Charges Page 37 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 (1) The portion of charges over $10 per parcel is restricted. (2) For Water Capacity Fees 6768.68% goes into the Capital Improvement Fund. For Sewer Capacity Fees 100% goes into the Capital Improvement Fund. Betterment Capital Improvement Fund Designated Betterment Fund Page 38 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 Diagram 3.56: Fund Targets Fund or Fund Category Actions to Consider if below Target Target Maximum New Supply Fund Category New supply fee increase, bBond financing, or transfer to designated or CIFs Funds Total of all funds in fund category = six months of new supply capital expenditures Nexus of cost to fee Expansion Fund Category Capacity fee increase, bond financing, or transfer to designated or CIFs Funds Total of all funds in fund category = six months of expansion capital expenditures Nexus of cost to feeFive years unfunded needs Replacement Fund Category Bond financing, or transfer to designated or CIFs Funds Total of all funds in fund category = 4% of infrastructure 6% of infrastructureNexus of cost to fee Betterment Fund Category Bond financing, or transfer to designated or CIFs Funds Total of all funds in fund category = six months of betterment capital expenditures Five5 years unfunded needs Debt Reserve Fund Increase tax collection or rates One semi-annual payment Two semi-annual payments Rate Stabilization Fund Fund transfers from legally available funds The financial impact of two consecutive years of low winter water usage The financial impact of three consecutive years of low winter water usage General FundOPEB Fund Rate increase or fund transfersFund transfers Three months of operating budget expensesFull funding Nine months of operating budget expensesFull funding General Fund Rate increase or fund transfers Three months of operating budget expenses Nine months of operating budget expenses Page 39 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 Additional Restricted Funds 4.0 Capital Improvement Fund a. Purpose The Capital Improvement Fund’s (CIF) sole purpose is to track the “buy-in” portion of the capacity fee and to ensure these fees are expended solely for the purpose for which they were collected. In this case it is to pay for facilities that were in existence at the time this fee was established. These fees may be used for expansion, replacement, or betterment projects or any debt related to these categories. The water capacity fees may also be used for either the potable or the recycled systems. As capacity fees are collected, the “buy-in” portion of the fee is allocated as needed to one of three CIFs, one in each of the Expansion, Replacement, and Betterment Fund categories. These reserves are used to pay debt or offset any negative balance within these three categories of funds. For sewer, these fees fund the Expansion, Replacement, or Betterment Fund categories. These fees may not be used to finance the New Water Supply category, as there were no new water supply facilities in existence at the time the new methodology for capacity fees was established. b. Sources The “buy-in” portion of the capacity fee collected after June 30, 2010 for water or after September 30, 2014 for sewer. c. Funding Levels There are no minimums, maximums, or target levels for these reserves on an individual basis. The allocation of this fee to the various CIFs is dependent on the overall reserve levels within each fund category. 4.1 Debt Reserve Fund Page 40 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 a. Purpose The Debt Reserve Fund is established to hold the proceeds from the various debt issuances. There are two types of debt, General Obligation bonds and Certificates of ParticipationRevenue bonds. The proceeds are transferred to the New Water Supply, Expansion, Replacement, or Betterment Debt Funds as they are expended for various facilities within those fund categories. As repayment of the debt occurs, the balances within these individual funds are reduced so that the financial impact of issuing debt is tracked within the category for which the debt was issued. b. Sources Debt proceeds. c. Uses There are no minimums, maximums, or target levels for this fund on an individual basis. This fund is available on an as needed basis to fund CIP projects for new water supply, expansion, replacement, or betterment, or maintain levels defined within the District’s debt agreements. From a funding level perspective, these reserves are evaluated in the context of all the various funds within each fund category. 4.2 Rate Stabilization Fund a. Purpose The Rate Stabilization Fund is established for the purpose of minimizing rate increases in response to one-time events and therefore stabilizing the rates and charges imposed by the District to meet covenanted debt service coverage levels. The Rate Stabilization Fund is not intended to be used to offset regular rate increases needed to meet inflationary cost increases in operations. b. Sources The District may budget for Rate Stabilization Fund deposits from the Sewer Fund, amounts in excess of the annual debt service coming due and payable in the fiscal year, after payment of operating expenses. The allowable amount that may be deposited shall not be transferred prior to payment of the annual debt service obligation. c. Uses Page 41 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 There is no minimum level for this fund. The maximum level shall be equal to the financial impact of three (3) consecutive years of low winter water usage. The target level for this fund shall be equal to two (2) consecutive years of low winter water usage. For the purposes of calculating debt service, amounts transferred from the Rate Stabilization Fund to the Sewer Fund will constitute Gross Revenue in the fiscal year the transfer occurs. All interest Or other earnings on deposits in the Rate Stabilization Fund will be withdrawn at least annually and will be accounted for as operating revenue in the Sewer Fund. Fund Transfers 5.0 Funding Levels As described in the preceding sections, the District maintains reserves for its operating and capital activities. These reserves can be of three types: 1) undesignated or general use reserves, 2) designated, and 3) restricted for a specific purpose. The restricted reserves can be restricted geographically and/or by purpose. The District maintains various funds to track the various designations and restrictions. The source of the money for each fund was discussed along with the purpose, source of funds, and levels. Key characteristics of these funds are the target levels, minimums, and maximums. The funding levels must be viewed in the context of the economic environment, political environment, and in light of the District’s rate model. The District’s six-year rate model not only shows the current balance but also shows the trend of the fund balances. Often the trend of the fund is a greater indicator of financial stability than is the current balance. The rate model is updated each year with the budget process and evaluates each fund over the next six years. The rate model will take into account the general economic environment, looking at the development rate, supply rate increases, the possibility of raising rates, capital infrastructure spending, and strategic plan initiatives. The fund balances may at times be over or under the target amount. This is not only acceptable but Page 42 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 expected. The rate model provides an empirical estimate of the conformance between the projected District’s financial activities and the guidelines of this policy. 5.1 Fund Transfers Reserves within the District’s various designated funds come from interfund transfers of unrestricted general use reserves. It is important to note that the District has the ability to use general use reserves for any business purpose. General use reserves may be transferred to and from any unrestricted fund for any business need. Designated reserves are general use reserves which have been set aside for a specific purpose by Board action. These reserves can only be used for the purpose they were designated, or with Board action they may be used for any other business purpose. While general use reserves may be used for any restricted purpose, they may not be transferred to Restricted Funds due to the sensitivity of the tracking of restricted reserves. If reserves are needed for a restricted purpose, they are transferred to a Designated Fund within the fund category with that particular purpose. Reserves restricted to a fund category may only be used within that category and may not be transferred to another category. For example, the “incremental” portion of the capacity fee are restricted reserves for a specific purpose and may not be transferred to another category as no other category has the same purpose. However, the “buy-in” portion of the capacity fees are restricted for purposes that are shared by more than one category of funds and may therefore be transferred to a restricted fund within another fund category as long as it shares the same purpose. In many situations reserve transfers are expected as some fund categories will exceed their maximums or drop below their minimums. Only fund categories that are below the stated target are eligible to receive transferred reserves. Fund categories that exceed their maximums are first to be considered for transfers out, followed by funds that exceed their targets. Funds that exceed their minimums are also available for reserve transfers out, but only when other options are not available. The rationale for prioritizing reserve transfers is based on the immediacy of the need and the availability of reserves from other funding sources. For example, the General Fund is first to receive reserves when it drops below its target or minimum levels. Page 43 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 This is because of the immediate and ongoing nature of the expenditures that are served by this fund. The operation of the District is the first and foremost objective of the District. On the other end of the spectrum, the Replacement Fund has a long- term perspective and will be used to partially finance replacement assets for many years to come. Debt financing is available to respond to this long-term, foreseeable, and planned cash flow. This fund is less likely to have immediate needs and has other financing options. When making the determination of when transfers are necessary, all funds within a fund category work as a group. The combined balance of the restricted and designated funds are looked at when determining whether the fund category requires additional funding from the Restricted Capital Improvement Fund, Restricted Debt Fund, or the General Fund. Because the Capital Improvement Fund may finance expansion, replacement, or betterment, reserves may be transferred between these fund categories, but only back and forth within its own type of restricted fund. As an example, if during the rate model update process it was determined that the Expansion Funds (designated and restricted) would drop and stay below the minimum during the six-year planning horizon, this would trigger a bond saleissuance, a transfer of general use reserves, and/or a transfer of restricted reserves. If in the cash planning process, it was anticipated that the General Fund would remain above target during the planning horizon and that the trend did not present a problematic underfunded status, then General Fund reserves would be considered available for transfer prior to making proceeds available from a bond saleissuing debt. Also, if during this period the Betterment Fund category was anticipated to exceed its maximum, then reserves from either the Designated Betterment Fund, or the Capital Improvement Fund would be transferred to the corresponding Expansion Fund prior to a bond saleissuance. All funds are evaluated to determine which has the greatest need or availability of reserves before any reserve transfer recommendation is presented to the Board. Page 44 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 GLOSSARY The Reserve Policy contains terminology that is unique to public finance and budgeting. The following glossary provides assistance in understanding these terms. Annexation Fees: When water service is requested for land outside the boundaries of the District, the land to be serviced must first be annexed. For sewer service the land must be annexed into an improvement district within the District. Assets: Resources owned or held by Otay Water District that have monetary value. Availability Fees: The District levies charges each year in developed areas to be used for upgrades, betterment, or replacement and in undeveloped areas to provide a source of funding for planning, mapping, and preliminary design of facilities to meet future development. Current legislation provides that any availability charge in excess of $10.00 per acre shall be used only for the purpose of the improvement district for which it was assessed. Bond: A written promise to pay a sum of money on a specific date at a specified interest rate. The interest payments and the repayment of the principal are authorized in a District bond resolution. The most common types of bonds are General Obligation (GO) bonds and Certificates of Participation (COPs). These are frequently used for construction of large capital projects such as buildings, reservoirs, pipelines and pump stations. Capital Equipment: Fixed assets such as vehicles, marine equipment, computers, furniture, technical instruments, etc. which have a life expectancy of more than two years and a value over $10,000. Capital Improvement Program (CIP): A long-range plan of the District for the construction, rehabilitation and modernization of the District-owned and operated infrastructure. Page 45 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 CWA: The County Water Authority was organized in 1944 under the State County Water Authority Act for the primary purpose of importing Colorado River water to augment the local water supplies of the Authority's member agencies. The Authority purchases water from the Metropolitan Water District of Southern California (MWD) which imports water from the Colorado River and the State Water Project. Debt Service: The District's obligation to pay the principal and interest of bonds and other debt instruments according to a predetermined payment schedule. Expenditures/Expenses: These terms refer to the outflow of funds paid or to be paid for an asset, goods, or services obtained regardless of when actually paid for. (Note: An encumbrance is not an expenditure). An encumbrance reserves funds to be expended in a future period. Fund: An account used to track the collection and use of monies for a specifically defined purpose. Fund Balance: The current funds on hand resulting from the historical collection and use of monies. The difference between assets and liabilities reported in the District’s Operating Fund plus residual equities or balances and changes therein, from the results of operations. Interest Income: Earnings from the investment portfolio. Per District Policy Number 25, interest income will be allocated to the various funds each month based upon each fund’s prior month- ending balance. Late Charges/Penalties: Charges and penalties are imposed on customer accounts for late payments, returned payments, and other infringements of the District’s Code of Ordinances. 1% Property Tax: In 1978, Proposition 13 limited general levy property tax rates for all taxing authorities to a total rate of 1% of full cash value. Subsequent legislation, AB 8, established that the receipts from the 1% levy were to be distributed to taxing agencies according to approximately the same proportions received prior to Proposition 13. Page 46 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 511/43/ 203 Operating Budget: The portion of the budget that pertains to daily operations that provide basic governmental services. The operating budget contains appropriations for such expenditures as personnel, supplies, utilities, materials, travel and fuel, and does not include purchases of major capital plant or equipment which is budgeted for separately in the Capital Budget. The Operating Budget also identifies planned non-operating revenues and expenses. Revenue: Monies that the District receives as income. It includes such items as water sales and sewer fees. Estimated revenues are those expected to be collected during the fiscal year. Russell Square: A sewer lift station constructed in 1983 that serves four properties in the Russell Square Development. System Fees: Each water service customer pays a monthly system charge for water system replacement, maintenance, and operation expenses. The charge is based on the size of the meter and class of service. Tax Collection for Bond Debt: California Water Code Section 72091 authorizes the District, as a municipal water district, to levy ad valorem property taxes which are equal to the amount required to make annual payments for principal and interest on General Obligation bonds approved by the voters prior to July 1, 1978. Unit: A Unit of water is 100 cubic feet or 748 gallons of water. Water Rates: Rates vary among classes of service and are measured in Units. The water rates for residential customers are based on an accelerated block structure. As more Units are consumed, a higher Unit rate is charged. Effective in 2009, all non- residential customers are charged for water based on a tiered rate structure in which water rates are based on meter size and amount of Units consumed. Page 1 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 1.0 The District The Otay Water District is a California municipal water district, authorized in 1956 by the State Legislature under the provisions of the Municipal Water District Act of 1911. The District is a "revenue neutral" public agency; meaning each end user pays their fair share of the District's costs of water acquisition, construction of infrastructure, and the operation and maintenance of the public water facilities. The District provides water service within its boundaries, and provides sewer and recycled water service within certain portions of the District. As such, the District operates three distinct business segments: •Potable water •Recycled water •Sewer Each of these business segments has an identifiable customer base. In addition, the developer community, large and small, makes up a significant class of customers for each business segment. As a result, the District has four distinct customer service types: •Developers •Potable water users •Recycled water users •Sewer users The District has established practices and developed computer systems that have enabled the District to maintain a clear separation between the service costs relating to each of its four customer service types. Regardless of customer class, financial principles regarding cost allocation and fund accounting are fundamental to the District’s Reserve Policy. These principles are derived from the statements of the Governmental Accounting Standards Board (GASB), and from oversight and advisory bodies such as the California State Auditor, the Little Hoover Commission, and the Government Finance Officers Association (GFOA). These principles have significant impacts on how the finances of the District are organized and how financial processes work within the organization. Exhibit 2 Page 2 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 1.1 The District’s Use of Financial Resources All the District’s expenditures fall into two broad categories: operating costs and capital expenditures. The operating costs include costs relating to the purchase and delivery of potable and recycled water, and the transportation and treatment of sewage. The capital expenditures support the construction of infrastructure necessary to deliver services. The District uses various funds to support the operating and capital efforts. Operations and maintenance are financed only by rates and charges, also called pay-as-you-go, while capital infrastructure is financed using two financing methods: pay-as-you-go and debt issuance (requiring annual debt service). The Capital Improvement Program (CIP) and the two funding methods support the construction, betterment, and replacement of infrastructure in all three business areas: potable, recycled, and sewer. The District establishes different funds to track revenues allocated to different activities. Once established, each fund receives financial resources up to the levels defined in this policy. Every year, as a part of the annual budget process, the District’s rate model is updated for each fund with the current fund balances and the estimated revenues and expenditures for the next six years. The expenditure requirements and financial resources are then evaluated to ensure that the existing fund balances and additional revenues are sufficient within the current budget cycle and for the next five years to maintain target fund levels. If a deficit is identified, then options for transfers, shifting CIP projects, debt issuance(s), cost saving measures, and/or rate increases are evaluated. 1.2 The District’s Capital Improvement Program (CIP) The planning, design, and construction costs of all capital facilities within the three business segments are allocated to four cost types and corresponding fund categories: New Water Supply, Expansion, Replacement, and/or Betterment. The allocation to these four cost types is defined in the District’s Capital Improvement Program (CIP) and is determined by an engineering analysis that identifies which type of customer will benefit from each facility, planned or existing. The costs of the capital improvements are borne by either existing users or by the developing areas, or by a combination of the two, as applicable. Page 3 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 This Reserve Policy protects both the existing users and the developing areas from incurring unwarranted costs. Developing areas are not required to finance facilities that are replacement or betterment and established areas are not required to replace facilities before they are worn out because of new development. However, to ensure a fair allocation of costs, each facility has the potential to be classified into any or all of the four cost types. In addition to these cost types, there are occasional CIP projects that may be billable to a third party, if for example a third party requires a District facility be relocated. Paragraphs a through d, which follow, describe how the costs of capital facilities are financed through various fees. a. New Water Supply The portion of a new supply project that benefits new users is financed from the reserves in the New Water Supply Fund category. These reserves were primarily derived from proceeds of the new water supply fee. The New Water Supply Fund is restricted, meaning the amounts credited to this fund are accounted for separately and are used solely for the planning, design, and construction of new water supply expansion facilities. Debt financing may also be a temporary financial resource to finance new water supply projects. The District has a Debt Policy (Policy No. 45) that guides the debt issuance process. Any debt proceeds used for this purpose would be restricted in nature and tracked separately. General use reserves may also be placed in the designated New Water Supply Fund and used for water supply projects. Effective December 1, 2020, new water supply fee collection was discontinued. The New Water Supply Fund will continue to be used to fund qualified projects and to pay the proportionate share of debt service for new water supply projects until the monies in the fund are fully depleted. b. Expansion The portion of a CIP project that benefits new users is financed from the reserves in the Expansion Fund category. These reserves are primarily derived from proceeds of the “incremental” portion of the capacity fees collected within developing areas. Capacity fees are accounted for separately and used for the planning, design, and construction of expansion facilities. Additionally, expansion may be financed by the “buy-in” portion of the capacity fee, which is restricted for CIP purposes, but not Page 4 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 specifically for expansion. Debt financing can be a temporary financial resource for expansion projects. General use reserves may also be placed in the designated Expansion Fund and used for expansion projects. c. Replacement The portion of a CIP project that benefits existing users by replacing an existing facility is financed from the reserves in the Replacement Fund category. Replacement of facilities may be financed with proceeds from the “buy-in” portion of the capacity fees, general use reserves held in the designated Replacement Fund, and/or debt proceeds. The various funding sources available for replacement projects are anticipated to provide the necessary flexibility to begin projects while any necessary debt financing is being obtained. d. Betterment Facilities that improve reliability, meet new regulations, or create increased levels of service are considered betterment facilities that benefit existing users. The reserves in the Betterment Fund category are used to finance these projects or portions of projects. Proceeds of the “buy-in” portion of the capacity fees may also be used to finance betterment projects. General use reserves may be placed in the designated Betterment Fund and used for betterment projects. 1.21 Relocations Occasionally, a third party requires relocation of a District facility. If the District has a superior easement the third party will pay the relocation cost, but only to the extent that the District does not benefit from the relocation. When relocation is required, a CIP project may be created which is wholly or partially financed by a third party. On occasion, the District will require that its own facilities be relocated. Depending on the nature of the facilities, the financial resources for these projects could be from new water supply, expansion, replacement, betterment, and/or third-party financing. Each project is individually negotiated with the third party based on the facts and circumstances of the relocation. Occasionally, the District will improve the facilities that are being relocated. When determining how to allocate costs to various funds the following guideline is suggested: if a project has more than five years of useful life remaining, an incremental cost view should Page 5 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 be considered; if the project has less than five years of useful life remaining, a pro-rata cost approach should be considered. Also, the likelihood that the District will benefit from an asset’s life extension should be evaluated prior to allocating costs. 1.22 Oversizing If deemed reasonable by the District, in connection with the construction of backbone facilities, a developer may be required to oversize new facilities for future development. The developer is reimbursed for incremental oversizing costs as per Policy No. 26. These reimbursements are not available for the distribution system within a development which is an obligation of the developer. 1.23 Exclusion of Developed Areas from Expansion Costs Developed areas are assumed to have sufficient supply and capacity to meet their current requirements as provided by the developers. In addition, they are considered to have borne capital financial costs that are at least proportionate to the benefits they have received from capital facilities. Accordingly, no regional capital financing costs are allocated to these areas so that they will not incur any costs for newly developing areas, except for capital projects that produce district-wide benefit or cost savings. 1.24 Improvement Districts (IDs) Improvement Districts (IDs) are established to facilitate the financing of particular improvements by the specific beneficiaries. The District has a number of IDs that were established for General Obligation (GO) debt repayment. All GO debt has been paid off and it is unlikely that the District will issue additional GO debt. IDs continue to be used for other purposes: 1) to distinguish sewer customers from water customers on the county tax roll; or 2) to place parcels on the county tax roll for the collection of availability fees. Over the years, the District moved to a district-wide perspective of financing improvements. This philosophy is evident by the district-wide capacity and annexation fees. The District also uses district-wide water rates. As time goes on, it is expected that IDs will continue to outgrow their purpose and their use will diminish. Page 6 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 1.3 The Purpose of the Policy Public entities accumulate and maintain reserves to ensure both financial stability and continuous availability of services. Financial stability and the resulting improved credit quality allow the public entity to weather times of uncertainty and the impact of negative events, both major and minor. Reserves allow for the ongoing maintenance of property and timely payment of expenses, even when such expenses exceed money available from a single fiscal period. Ultimately, the type and level of reserves are driven by the type and magnitude of uncertainty faced by the public entity. A “reserve” has a number of functions, as follows: • Working capital is required to ensure timely payment of obligations. • A buffer against volatility in revenues. • Liquidity is required to obtain other goods and services (e.g., bank services). • Designated money to protect creditors. • Money set aside to replace assets at the end of their useful lives. • Money set aside to repair or replace assets damaged or destroyed at unanticipated times. It is important to note that reserves, fund balance, and net assets are not the same. Fund balance and net assets are accounting terms and may not always be in the form of cash or liquid investments. Fund balances and net assets may not always be reserves unless a designation of all or a portion of fund balance is made. In addition, the term fund balance was replaced by net assets as codified by the Governmental Accounting Standards Board (GASB). In short, reserves are the liquid assets of the District, accumulated and maintained for application to finance contingent future activities, whether known or unanticipated, operating or capital in nature. The District’s Reserve Policy governs the management and use of these financial resources. Few policies have a more significant impact on the financial health and stability of the District. This policy explains several key Page 7 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 financial concepts used by the District and provides some background information on the overall strategies and practices utilized. The District has a fiduciary obligation to its customers, to manage and direct the use of public funds for the purpose of providing water and sewer services in an efficient and financially sound manner. 1.4 Policy Guidelines In 2000, the Little Hoover Commission reviewed the levels of reserve funds for special districts in California and prepared a report reflecting that special districts were accumulating unreasonable levels of funds. As a proactive response, the California Special Districts Association (CSDA) prepared Reserve Guidelines for its members. The Reserve Guidelines were significant in noting that reserve levels need to be in context of the organization’s overall business model and capital improvement plan. There are a number of potential events which the District should consider in the development of reserves: • Economic Uncertainty - performance of the regional economy and the impact of that performance on demand for water. • Weather - the amount of rainfall and the impact of weather on the availability and cost of water as well as the demand for water. • Government Mandates - the impact of federal and state regulations, particularly environmental regulations. • Tax Changes - limitations on the District’s taxing and spending powers through the passage of a voter referendum, the impound of District property taxes, the removal of the District’s power to levy property taxes, further increases to Educational Revenue Augmentation Fund (ERAF) contributions, or changes in calculation methodology. • Operating Costs - increases in operating and maintenance costs because of inflation, labor agreements, or other modifications. • Force Majeure - unanticipated expenditures resulting from natural disasters or intentional acts. Page 8 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 • Emergency Maintenance - unanticipated expenditures resulting from unexpected failure of assets (e.g., rupture in the primary transmission system). • Unexpected Variation in Cash Flow - the incidence of additional costs or decreased revenues that require short- term borrowing in the absence of sufficient financial resources. The California State Auditor has, in its oversight role, offered a number of quality recommendations for the development of reserve policies as outlined in its report entitled, “California’s Independent Water Districts: Reserve Amounts Are Not Always Sufficiently Justified, and Some Expenses and Contract Decisions Are Questionable,” dated June 2004, Report No. 2003-137. All of these recommendations have been incorporated into this policy in an effort to address key issues surrounding the management and use of District reserves. The detailed objectives as identified by the State Auditor are as follows: • Distinguish between restricted and unrestricted reserves. • Establish distinct purposes for all reserves. • Set target levels, including minimums and maximums, for the accumulation of reserves. • Identify the events or conditions that prompt the use of reserves. • Conform to plans to acquire or build capital assets. • Receive Board approval and that it is in writing. • Require periodic review of reserve balances and rationale for maintaining them. Yet, the State Auditor’s report acknowledges that the California Constitution (Article XIII B, Section 5) is vague in its provisions governing the accumulation and use of reserves.1 1 California State Auditor, Bureau of State Audits, “California’s Independent Water Districts: Reserve Amounts Are Not Always Sufficiently Justified, and Some Expenses and Contract Decisions Are Questionable,” dated June 2004, 2003-137; p. 8. Page 9 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 Specifically, the Constitution states that “each entity of the government can establish contingency, emergency, unemployment, reserve, sinking fund…or similar funds as it shall deem reasonable and proper.”2 Similarly, the State’s Water Code does not impose any requirements as to specific or recommended reserve fund levels. As a result, the public finance community has yet to settle on any real objective standards for the level of reserve funds appropriate for governmental enterprises. This lack of consensus as to specific standards is indicative of the wide variance of the financial and operations context for different districts and different contingencies justifying reserves. The Government Finance Officers Association (GFOA) in its “Recommended Practice on Appropriate Level of Unreserved Fund Balance in the General Fund” (2002) states that in establishing a policy governing the level of unreserved fund balance in the general fund, a government should consider a variety of factors. These include: • The predictability of its revenues and the volatility of its expenditures (i.e., higher levels of the unreserved fund balances may be needed if significant revenue sources are subject to unpredictable fluctuations or if operating expenditures are highly volatile). • The availability of resources in other funds as well as the potential drain upon general fund resources from other funds (i.e., the availability of resources in other funds may reduce the amount of the unreserved fund balance needed in the general fund, just as deficits in other funds may require that a higher level of unreserved fund balance be maintained in the general fund). • Liquidity (i.e., a disparity between when financial resources actually become available to make payments and the average maturity of related liabilities may require that a higher level of resources be maintained). • Designations (i.e., governments may wish to maintain higher levels of the unreserved fund balance to compensate for any portion of unreserved fund balance already designated for a specific purpose). 2 California Constitution, Article XIII B, Section 5. Page 10 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 In the preparation of this policy, each of the CSDA guidelines and the GFOA recommendations have been considered. In addition, all seven objectives provided by the State Auditor are specifically addressed for each reserve. The District wholly supports the State Auditor’s efforts to bring a high-level of quality to reserve governance and establish a standard of performance. The District recognizes that the customer pays for services provided. Quality management requires that periodic valuations be performed so that fees and charges can be set at appropriate levels to recover the cost of service. The District’s Reserve Policy has been drafted with consideration of the GFOA, CSDA, and State Auditor’s general guidelines as provided above. Additionally, the District has adopted the following principles in the management of its financial resources: • Reserves are held and used only for the purpose for which they are collected. This is done to maintain equity among customers. • Each of the service types is tracked separately so that expenditures and revenues can be monitored and evaluated for each customer type. This provides the District with the necessary information to appropriately charge for each of the services. • Separation of operations and maintenance from capital expenditures occurs within each of the service types. This is done because the financing of these expenditures is often on different timelines or use different reserves. • The District will hold its reserves at responsible and prudent levels. This policy sets minimum, maximum, and target levels for each of the various funds. This has been done so that the District can maintain reserves to meet the purpose for which the funds were established. The levels are set by reference to line items in the District’s financial statements and approved budgets. This allows reserve levels to adjust to the District’s changing financial circumstances. • Debt financing of facilities provides intergenerational equity and maintains rates at reasonable levels. This equity is accomplished with long-term financing which spreads the cost of facilities over the life of the facilities. The burden to pay for facilities is then paid by those who use Page 11 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 them. The District could amass significant reserves by pre- collecting financial resources in a Replacement Reserve Fund allowing the District to cash finance all replacements. However, this would require significant rate increases burdening the current customers and creating reserve levels difficult to defend to the ratepayers or other oversight entities. These concepts are fundamental to the way the District manages its funds and have a direct impact on the way rates and charges are set. The District performs annual budget evaluations and updates its rate model on an annual basis to monitor and adjust the various funds, expenditures, and revenue sources. The separation, tracking, and projecting of the various funds, expenditures, and revenue sources create the essential information necessary for the equitable rate structure maintained by the District. The annual review preserves the balance between services provided and the fees charged. This review also ensures that reserves will be available to continue to serve the District’s customers. Financial Sources 2.0 Developers a. Meter Installation Charges (General Use) Meter fees are charges collected for new water service connections. Fees vary depending upon meter size and type of service. The costs associated with meter installations are included in the Operating Expenses section of the budget. Developers finance these charges. b. Developer Deposits (General Use) These deposits are for the engineering and operations services provided to developers. They are tracked separately for each developer and any excess amount is returned to the developer. c. Water Annexation Fees (General Use) Annexation fees3 are collected as a condition of annexing into the District’s potable or recycled water facilities. Since the existing facilities have been built and maintained by developers or customers within the District, the annexation fee is calculated based on the present value of all property taxes (1% property tax and availability fees) 3 Otay Water District Code of Ordinances, Section 9. Page 12 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 paid by existing and prior customers. The annexation fee reimburses existing customers for past contributions so that all customers have contributed more equally to water facilities. Proceeds of annexation fees are unrestricted and may be used for any general fund purpose. d. Sewer Annexation Fees (General Use) A sewer annexation fee is collected when property is annexed into an improvement district (ID). Since the existing facilities have been built and maintained by developers or customers within a sewer ID, the annexation fee is calculated based on the present value of all availability fees paid by existing and prior customers. The annexation fee reimburses existing customers for past contributions so that all customers have contributed more equally to sewer facilities. Proceeds of the annexation fees are unrestricted and may be used for any general fund purpose. e. Water Capacity Fees (Restricted) Water capacity fees4 are based on the value of existing and future facilities divided by the number of existing and future equivalent dwelling units. This method of calculating capacity fees is called the combined method, where the “buy- in” portion of the capacity fee covers costs to repay existing customers for the facilities that they have built, and where the “incremental” portion of the capacity fee covers the cost of future expansion facilities. The “buy-in” portion of the capacity fee is restricted to pay for planning, design, construction, and financing associated with expansion, replacement, or betterment of facilities. The “buy-in” portion may be shifted back and forth between expansion, betterment, or replacement as the financing needs change. The “incremental” portion of the capacity fee is limited to planning, design, construction, and financing exclusively for expansion facilities (excluding new water supply expansion). f. Sewer Capacity Fees (Restricted) Sewer capacity fees are based on the value of existing and future facilities divided by the number of existing and future equivalent dwelling units. This method of calculating capacity fees is called the combined method, where the “buy- in” portion of the capacity fee covers costs to repay 4 Otay Water District Code of Ordinances, Section 28 Page 13 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 existing customers for the facilities that they have built, and where the “incremental” portion of the capacity fee covers the cost of future expansion facilities. The “buy-in” portion of the capacity fee is restricted to pay for planning, design, construction, and financing associated with expansion, replacement, or betterment of facilities. The “buy-in” portion may be shifted back and forth between expansion, betterment, or replacement as the financing needs change. The “incremental” portion of the capacity fee is limited to planning, design, construction, and financing exclusively for expansion facilities. For parcels within a sewer ID the calculation excludes the tax debt already paid by these customers, therefore producing a lower fee than for parcels outside of a sewer ID. The capacity fees are restricted to pay for planning, design, construction, and financing associated with the expansion, replacement, or betterment of facilities. Facility needs are based on projected land use planning. Changes in anticipated future land use occur and can alter projected facility requirements. Thus, both the anticipated facilities’ needs and their projected costs change over time as regulatory agencies make changes to land use. The District periodically reviews the capacity fee calculation to accommodate such variations. These fees are paid by developers. The District’s construction of infrastructure occurs prior to the addition of EDUs. This sequence serves two purposes: 1) it ensures that the District can serve the pending construction as it is completed; and 2) it is more efficient to oversize many facilities at the outset rather than build for the current need and then reconstruct when the future need is realized. As a result of this strategy, the District has financed construction with bond financing as the existing expansion reserves are depleted. The water capacity fee is calculated based on the combined recycled and potable water systems’ needs. This methodology is used because the two water systems work hand-in-hand. All capacity fees can be used for either potable or recycled but must be tracked to distinguish between the “buy-in” and “incremental” portions as described above. So, while capacity fees are not restricted separately by potable and recycled, they are tracked separately. Page 14 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 Diagram 2.0: Flow of Funds - Developer Sources 2.1 Customers/Users a. Uniform Rates and Charges (General Use) Charges to users for water, sewer, and recycled water are uniform throughout the District for similar customer types. b. Monthly System Fees (General Use) This is a fixed revenue source that is charged monthly. The amount of the charge is based on the customer class and meter size. c. Energy Charges (General Use) The energy pumping fee is a charge per unit of water for each 100 feet of lift, or fraction thereof, above the base elevation of 450 feet. This charge is placed on the monthly water bills of all water customers. d. Penalties (General Use) Penalties are added to the monthly water and sewer bills for late charges, locks, etc. e. Pass-through Fixed Charges (General Use) A fixed monthly charge to the District’s customers intended to collect sufficient funds to pass-through the increased fixed costs from the County Water Authority (CWA) and the Metropolitan Water District (MWD). Meter Installation Charges Developer Deposits Annexation Fees Capacity Fees Unrestricted and Undesignated (General Use) Funds Restricted Funds DEVELOPERS Page 15 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 f. Special Rates and Charges (General Use) In addition to the uniform water and sewer charges, the District has a special sewer rate for the Russell Square lift station. The Russell Square fee is for construction, installation, maintenance, or repair of the Russell Square lift station. This fee is collected in accordance with the Russell Square sewer charge. (See Code of Ordinances Section 53.03B.) g. Special Rates and Charges (Restricted) In addition to the uniform water charges, the District has a special rate charged to outside and interim users. Outside and interim users are charged an additional fee for temporary capacity. The fee is collected in accordance with outside and interim service agreements. (See Code of Ordinances Section 25.) Diagram 2.1: Flow of Funds - Customer Sources 2.2 County-Collected Taxes and Fees a. General Levy Property Tax Receipts (1% Property Tax) (General Use) In 1978, Proposition 13 limited the levy of ad valorem property taxes on real property to one percent of the assessed value of such property. Subsequent legislation, AB 8, established that the receipts from the one percent levy were to be distributed to taxing agencies proportionate to Uniform Rates and Charges Monthly System Fees Energy Charges Special Rates Charges Pass –Through Fixed Charges Penalties Special Rates and Charges Restricted Funds Unrestricted and Undesignated (General Use) Funds CUSTOMERS / USERS Page 16 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 each agency’s general levy receipts prior to Proposition 13. Taxes received are for general use. Spending limits for the District are governed by the 1979 passage of California Proposition 4, Limitations of Government Appropriations (GANN limit). Proposition 4 places an appropriation limit on most spending from tax proceeds. b. Availability Charges (General Use/Restricted) The District levies availability charges each year in developed and undeveloped areas. Current legislation provides that any amount up to $10 per parcel is general use and any amount over $10 per parcel is restricted to being expended in and for the improvement district (ID) within which it is collected. Accordingly, the District may use availability charges in excess of $10 toward costs of water and sewer facilities which are either, expansion, betterment, or replacement of facilities consistent with the purpose of the ID in which they are collected. This portion of the proceeds of availability charges is geographically restricted and restricted by purpose. As costs are incurred on these projects the respective IDs are charged, reducing the reserves. To the extent that availability charges are not used for the purpose for which they are collected, they must be returned to the property owners that paid them. The District has historically used these reserves for the betterment of capital facilities thus, the restricted reserves are accounted for in “sub-funds” of the Betterment Fund (See 2.1 f.). c. Improvement District General Obligation (GO) Bond Assessments (Restricted) The District has historically issued general obligation (GO) debt and established an ID for the repayment of that debt. When this financing method is used, the county tax roll can be used to collect special taxes or assessments within the ID to pay the debt obligation. The proceeds of the debt are restricted for the purpose as defined in the bond documents. Page 17 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 Diagram 2.2: Flow of Funds – County Collection Sources 2.3 Miscellaneous Income a. Miscellaneous Rents and Leases (General Use) Revenues received from the rental and lease of District property are general use revenues. Not only are these periodic revenues, but there is also a one-time fee charged with the setup of each new lease. The District incurs expenses related to these rents and leases. The one-time fees are calculated to recover the costs of setting up the leases. b. Sewer Billing Fees (General Use) Sewer billing fees are general use revenues. The District provides processing and billing services to the City of Chula Vista and bill and collect from their customers for sewer service. These fees are to recover the cost the District incurs to provide this service. c. Interest Income or Expense Allocation (General Use, Designated, and Restricted) Interest income (expense) will be allocated every month based upon each fund's month-ending balance. In this way, each fund receives credit for interest earned by that fund and each fund with a negative balance is charged for the use of the other fund’s reserves. General Levy Property Tax Receipts Availability Charges General Obligation Bond Assessments Unrestricted and Undesignated (General Use) Funds Restricted Funds COUNTY COLLECTED TAXES AND FEES Page 18 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 Diagram 2.3: Flow of Funds – Miscellaneous Income Sources 2.4 Debt Issuance a. Loans (General/Restricted Use) As the District determines that additional financing is required for a particular purpose, the option of borrowing is considered. The determination to borrow is made as a part of the annual rate model update and is evaluated in accordance with the Debt Policy before it is recommended to the Board for action. As an option to bond indebtedness, loans are available to satisfy short-term financing needs. These loans may or may not be contractually restricted for a particular purpose. b. General Obligation (GO) Bonds (Restricted) As the District becomes more developed it becomes less likely that general obligation debt will be used as it requires a vote of the public to be approved. Bond proceeds are restricted for the construction of those facilities identified in the GO bond issuance. Occasionally, specific portions of bond proceeds may be allocated for the repayment of the principal and interest, also called debt service, on these bonds. As the District determines that additional financing is required for a particular purpose, the option of debt issuance is considered. The determination to issue debt is made as a part of the annual rate model update and is evaluated in accordance with the Debt Policy before it is recommended to the Board for action. Miscellaneous Rents and Leases Sewer Billing Fees Interest Income or Expense Allocation Restricted Funds Designated Funds Unrestricted and Undesignated (General Use) Funds MISCELLANEOUS INCOME Page 19 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 c. Revenue Bonds (Restricted) General revenues of the District are pledged as security for Revenue Bonds (previously Certificates of Participation) indebtedness. If the District determines that additional financing is required for a particular purpose, the option of debt issuance is considered. The determination to issue debt is made as a part of the annual rate model update and is evaluated in accordance with the Debt Policy before it is recommended to the Board for action. This form of financing has become the industry’s preferred form of financing as it does not require a vote of the general public. Diagram 2.4: Flow of Funds – Debt Issuance Sources 2.5 Inter-fund Transfers Each year in the budgeting process, future fund balance levels are projected for the next six years. Based on these projections, transfers are recommended. Reserves may be transferred between Unrestricted or Designated Funds and the General Fund (see 4.0 “Funding Levels” and 4.1 “Fund Transfers”). Reserves may not be transferred to or from any of the Restricted Funds unless it is between two restricted funds with a shared purpose. Loans General Obligation Bonds Revenue Bonds Restricted Funds Unrestricted and Undesignated (General Use) Funds DEBT PROCEEDS Page 20 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 Fund Types and Categories 3.0 General Funds a. Purpose The General Fund is neither restricted nor designated. The District maintains one General Fund for each business segment (water, sewer, and recycled). This fund holds the working capital and emergency operating reserves. While the General Fund has a short-term focus to finance the District’s annual operations, it is supported by the six- year rate model. This fund is primarily used to finance the operations of the District; however, it can be used for any District purpose. This fund can be used to supplement the District’s rates and charges and be a temporary source of revenue to balance the Operating Budget. This fund can also be used to avoid spikes in the rates or significant and abrupt increases. It is an industry practice to have a fund that can be used to stabilize rates. This would only occur if there was a temporary need to use reserves to smooth out a rate spike or to ramp up what would otherwise be a dramatic rate increase. The General Fund also plays a role in the debt planning of the District. This fund is viewed by the debt markets as a commitment by the District to ensure financial stability of the rates and charges of the District. The District is anticipated to need a number of debt issuances over the years and this fund will help the District not only to stabilize rate fluctuations but also to access low cost financing for future projects. b. Sources The potable and recycled general funds receive meter installation charges, special rates and charges, uniform rates and charges, monthly system fees, energy charges, penalties, pass-through fixed charges, general levy property tax receipts, water annexation fees, availability charges, miscellaneous rents and leases, sewer billing fees, interest income or expense allocation, and loans. The sewer general fund receives sewer charges, penalties, availability charges, sewer annexation fees, and interest income or expense allocation. Page 21 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 c. Funding Levels I. Minimum Level – The minimum reserve level for each business segment of the General Fund is three months of operating budget expenses (evaluated separately for each segment). II. Maximum Level – The maximum reserve level for the General Fund is nine months of operating budget expenses. In the event that this fund exceeds the seven-month level, the excess will be evaluated or transferred to one or more of the designated funds. III. Target Level – The target level of reserves is three months of operating budget expenses. In the event that the fund drops below the target level, rate increases or fund transfers would be considered. 3.1 New Water Supply Fund Category a. Purpose The New Water Supply Fund category is to finance the expansion portion of new water supply projects and is therefore to be paid by developers. When considering the reserve level of the New Water Supply category; the New Water Supply Fund, the New Water Supply Debt Fund, and the Designated New Water Supply Fund all work in concert and must be considered jointly. b. Sources The New Water Supply Fund received reserves only from the new water supply fee. Other funds within the new water supply category of funds received debt proceeds and general use reserves through a designation to this category. Effective December 1, 2020, the new water supply fee collection was discontinued. The New Water Supply Fund will continue to be used to fund qualified projects and to pay the proportionate share of debt service of new water supply projects until the monies in the fund are fully depleted. Page 22 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 Diagram 3.1: New Water Supply Fund 3.2 Expansion Fund Category a. Purpose The Expansion Fund category is to finance the expansion portion of capital projects and therefore is to be paid for by developers. When considering the reserve levels of the expansion category, the following funds work in concert and must be considered jointly: Expansion Fund, Expansion Debt Fund, Capital Improvement Fund, and the Designated Expansion Fund. Potable and recycled reserves are considered jointly while sewer is evaluated separately. b. Sources The Expansion Fund is financed by the “incremental” portion of the capacity fee and restricted special rates and charges. The other funds in this category may also be financed by debt proceeds, the “buy-in” portion of the capacity fee, and the general fund through a designation of reserves. Unrestricted and Undesignated Funding Designated New Water Supply Fund Designated Funds Expansion New Water Supply Fund New Water Supply Debt Fund New Water Supply Fund General Fund – Rates and Charges Debt Fund Restricted Funds Restricted Funds Restricted Funds Page 23 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 c. Funding Levels I. Minimum Level – As the District matures, the CIP will move to purely replacement and betterment projects. As the District moves through this life cycle the need for expansion reserves will decrease and may be reduced to zero. II. Maximum Level – The maximum reserve level for the expansion category of funds is limited to five years of unfinanced expansion facilities as described in the District’s CIP Budget. To determine the unfinanced amount, the total financing needs must be reduced by the projected expansion revenues, bond financing, and any restricted or general fund revenues allocated to this fund category. If the combined expansion reserves exceed target levels, the District should consider reducing capacity fees, reallocating restricted or designated funds to meet other purposes, or shifting the timing of expansion projects. III. Target Level – The target level is six months of expansion expenditures. It is important that the expansion reserves remain at a minimum of six months of expansion expenditures. This reserve level allows the District the time necessary to issue additional debt without depleting expansion reserves. If the combined expansion reserves drop below six months of expenditures this would trigger a transfer of general use reserves, a bond sale, an adjustment to the timing of expansion projects, or a reallocation of restricted reserves. Bond proceeds would be placed in the Restricted Bond Fund, transfers of general use reserves would be placed in the Designated Expansion Fund, and transfers of restricted reserves would be placed in the Expansion Capital Improvement Fund. Page 24 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 Diagram 3.2: Expansion Fund Category (1) For Water Capacity Fees 31.2% goes into the Expansion Fund and 68.8% goes into the Capital Improvement Fund. For Sewer Capacity Fees 100% goes into the Capital Improvement Fund. Page 25 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 3.3 Replacement Fund Category a. Purpose The Replacement Fund category is to finance replacement projects. When considering the reserve levels of the replacement category of funds, the following funds work in concert and must be considered jointly: Debt Fund, Capital Improvement Fund, and the Designated Replacement Fund. The purpose of these reserves is to pay for the replacement of capital infrastructure and capital purchases. These reserves are not to be used for the replacement of non-capital items. With the District’s development of its financial systems and the greater need and ability to separate and track reserves, the replacement reserves have been separated into three funds: water, recycled, and sewer. Projects undertaken solely for the purpose of replacing major capital equipment or facilities, i.e., where the cost exceeds $10,000 for capital purchases or $20,000 for infrastructure items, generally these are not considered normal maintenance. When the cost is below $10,000, the costs are financed annually as operational maintenance. As charges are incurred on replacement projects the reserves are deducted from the respective Replacement Funds monthly. b. Sources The various funds in this category are financed by debt proceeds, the “buy-in” portion of the capacity fee, and general fund designations. c. Funding Levels I. Minimum Level – The minimum reserve level of this category of funds is 3% of the historical value of existing assets as identified in the District’s current financial statements. Potable, recycled, and sewer replacement are evaluated separately. II. Maximum Level – The maximum reserve level of this category of funds is 6% of existing assets. If the Page 26 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 combined replacement reserves exceed target levels, the District should consider transferring the “buy- in” portion of the capacity fee to meet other purposes. Another consideration would be to shift the timing of replacement projects. III. Target Level – The target reserve level of this category of funds is 4% of existing assets. In the event that the reserves fall below the recommended target level, the District should consider transferring the “buy-in” portion of the capacity fee. The District should also consider shifting the timing of replacement projects or issuing debt to support the planned level of facility replacement. The District will act based on the annual six-year rate model to ensure that at the end of that planning horizon the reserves exceed the minimum level and are approaching the target level. Page 27 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 Diagram 3.3: Replacement Fund Category (1) For Water Capacity Fees 68.8% goes into the Capital Improvement Fund. For Sewer Capacity Fees 100% goes into the Capital Improvement Fund. 3.4 Betterment Fund Category a. Purpose The Betterment Fund category is to finance the betterment portion of capital projects with a portion going to maintenance of the potable, recycled, and sewer systems. The District maintains separate Betterment Fund categories, one for each improvement district. An improvement district is a legally defined geographic area usually established for the purpose of bond financing of facilities. The betterment reserves within Unrestricted and Undesignated Funding Sources Designated Replacement Fund Designated Funds Replacement Capital Improvement Fund Restricted Funds Replacement Debt Fund Restricted Funds Restricted Funds Replacement Fund Category Debt Proceeds Capacity Fees (1) Funding Source General Fund – Rates and Charges Debt Fund Capital Improvement Fund Page 28 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 these funds are restricted by law for use within the improvement district in which the fees were collected (Water Code 71631.6). However, the legal restriction of this reserve depends upon the particular revenue source. (See Section 2.2 b. for a review of the availability fees). When considering the reserve levels of the betterment category of funds, the following funds work in concert and must be considered jointly: Betterment Fund, Debt Fund, Capital Improvement Fund, and Designated Betterment Fund. b. Sources The Betterment Fund category receives restricted revenues through improvement districts from the availability fees (the first $10 is unrestricted, while amounts over $10 are restricted) collected through the county tax roll. Betterment may also be financed by debt proceeds, the “buy-in” portion of the capacity fee, as well as the general fund through a designation of reserves. c. Funding Levels I. Minimum Level – As the District matures, the CIP will move to purely replacement projects. As the District moves through this lifecycle the need for betterment reserves will decrease and may be reduced to zero. II. Maximum Level – The maximum reserve level for the betterment category of funds is limited to five years of unfinanced betterment facilities as described in the District’s CIP Budget. To determine the unfinanced amount, the total financing need must be reduced by the projected betterment revenues, bond financing, and general fund designations. If this maximum is exceeded, then the District should evaluate reductions in the special water rates and availability fees, transferring designated reserves to meet other purposes, or shifting the timing of betterment projects. Page 29 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 III. Target Level – The target is six months of betterment expenditures. It is important that the betterment reserves remain at a minimum of six months of betterment expenditures. This reserve level allows the District the time necessary to issue additional debt without depleting betterment reserves. If the combined betterment reserves drop below six months of expenditures this would trigger a transfer of general use reserves, a bond sale, or an adjustment to the timing of betterment projects. Bond proceeds would be placed in the Betterment Bond Fund while transfers would be placed in the Designated Betterment Fund. Page 30 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 Betterment Fund Diagram 3.4: Betterment Fund Category (1) The portion of charges over $10 per parcel is restricted. (2) For Water Capacity Fees 68.8% goes into the Capital Improvement Fund. For Sewer Capacity Fees 100% goes into the Capital Improvement Fund. Betterment Capital Improvement Fund Availability Charges(1) Capacity Fees(2) Debt Proceeds Betterment Fund Category Betterment Debt Fund Designated Betterment Fund General Fund - Rates and Charges Betterment Fund Capital Improvement Fund Bond/Debt Fund Funding Source Restricted Funds Restricted Funds Restricted Funds Unrestricted and Undesignated Funding Sources Restricted Funds Designated Funds Page 31 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 Diagram 3.5: Fund Targets Fund or Fund Category Actions to Consider if below Target Target Maximum New Supply Fund Category Bond financing, or transfer to designated or CIF Total of all funds in fund category = six months of new supply capital expenditures Nexus of cost to fee Expansion Fund Category Capacity fee increase, bond financing, or transfer to designated or CIFs Total of all funds in fund category = six months of expansion capital expenditures Five years unfunded needs Replacement Fund Category Bond financing, or transfer to designated or CIFs Total of all funds in fund category = 4% of infrastructure 6% of infrastructure Betterment Fund Category Bond financing, or transfer to designated or CIFs Total of all funds in fund category = six months of betterment capital expenditures Five years unfunded needs Rate Stabilization Fund Fund transfers from legally available funds The financial impact of two consecutive years of low winter water usage The financial impact of three consecutive years of low winter water usage General Fund Rate increase or fund transfers Three months of operating budget expenses Nine months of operating budget expenses Additional Restricted Funds 4.0 Capital Improvement Fund a. Purpose The Capital Improvement Fund’s (CIF) sole purpose is to track the “buy-in” portion of the capacity fee and to ensure these fees are expended solely for the purpose for which they Page 32 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 were collected. In this case it is to pay for facilities that were in existence at the time this fee was established. These fees may be used for expansion, replacement, or betterment projects or any debt related to these categories. The water capacity fees may also be used for either the potable or the recycled systems. As capacity fees are collected, the “buy-in” portion of the fee is allocated as needed to one of three CIFs, one in each of the Expansion, Replacement, and Betterment Fund categories. These reserves are used to pay debt or offset any negative balance within these three categories of funds. For sewer, these fees fund the Expansion, Replacement, or Betterment Fund categories. These fees may not be used to finance the New Water Supply category, as there were no new water supply facilities in existence at the time the new methodology for capacity fees was established. b. Sources The “buy-in” portion of the capacity fee collected after June 30, 2010 for water or after September 30, 2014 for sewer. c. Funding Levels There are no minimums, maximums, or target levels for these reserves on an individual basis. The allocation of this fee to the various CIFs is dependent on the overall reserve levels within each fund category. 4.1 Debt Reserve Fund a. Purpose The Debt Reserve Fund is established to hold the proceeds from the various debt issuances. There are two types of debt, General Obligation bonds and Revenue bonds. The proceeds are transferred to the New Water Supply, Expansion, Replacement, or Betterment Debt Funds as they are expended for various facilities within those fund categories. As repayment of the debt occurs, the balances within these individual funds are reduced so that the financial impact of issuing debt is tracked within the category for which the debt was issued. b. Sources Debt proceeds. Page 33 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 c. Uses There are no minimums, maximums, or target levels for this fund on an individual basis. This fund is available on an as needed basis to fund CIP projects for new water supply, expansion, replacement, betterment, or maintain levels defined within the District’s debt agreements. From a funding level perspective, these reserves are evaluated in the context of all the various funds within each fund category. 4.2 Rate Stabilization Fund a. Purpose The Rate Stabilization Fund is established for the purpose of minimizing rate increases in response to one-time events and therefore stabilizing the rates and charges imposed by the District to meet covenanted debt service coverage levels. The Rate Stabilization Fund is not intended to be used to offset regular rate increases needed to meet inflationary cost increases in operations. b. Sources The District may budget for Rate Stabilization Fund deposits from the Sewer Fund, amounts in excess of the annual debt service coming due and payable in the fiscal year, after payment of operating expenses. The allowable amount that may be deposited shall not be transferred prior to payment of the annual debt service obligation. c. Uses There is no minimum level for this fund. The maximum level shall be equal to the financial impact of three (3) consecutive years of low winter water usage. The target level for this fund shall be equal to two (2) consecutive years of low winter water usage. For the purposes of calculating debt service, amounts transferred from the Rate Stabilization Fund to the Sewer Fund will constitute Gross Revenue in the fiscal year the transfer occurs. All interest Or other earnings on deposits in the Rate Stabilization Fund will be withdrawn at least annually and will be accounted for as operating revenue in the Sewer Fund. Page 34 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 Fund Transfers 5.0 Funding Levels As described in the preceding sections, the District maintains reserves for its operating and capital activities. These reserves can be of three types: 1) undesignated or general use reserves, 2) designated, and 3) restricted for a specific purpose. The restricted reserves can be restricted geographically and/or by purpose. The District maintains various funds to track the various designations and restrictions. The source of the money for each fund was discussed along with the purpose, source of funds, and levels. Key characteristics of these funds are the target levels, minimums, and maximums. The funding levels must be viewed in the context of the economic environment, political environment, and in light of the District’s rate model. The District’s six-year rate model not only shows the current balance but also shows the trend of the fund balances. Often the trend of the fund is a greater indicator of financial stability than is the current balance. The rate model is updated each year with the budget process and evaluates each fund over the next six years. The rate model will take into account the general economic environment, looking at the development rate, supply rate increases, the possibility of raising rates, capital infrastructure spending, and strategic plan initiatives. The fund balances may at times be over or under the target amount. This is not only acceptable but expected. The rate model provides an empirical estimate of the conformance between the projected District’s financial activities and the guidelines of this policy. 5.1 Fund Transfers Reserves within the District’s various designated funds come from interfund transfers of unrestricted general use reserves. It is important to note that the District has the ability to use general use reserves for any business purpose. General use reserves may be transferred to and from any unrestricted fund for any business need. Designated reserves are general use reserves which have been set aside for a specific purpose by Board action. These reserves can only be used for the purpose they were designated, or with Board action they may be used for any other business purpose. While general use reserves may be used for any restricted purpose, they may not be transferred to Restricted Page 35 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 Funds due to the sensitivity of the tracking of restricted reserves. If reserves are needed for a restricted purpose, they are transferred to a Designated Fund within the fund category with that particular purpose. Reserves restricted to a fund category may only be used within that category and may not be transferred to another category. For example, the “incremental” portion of the capacity fee are restricted reserves for a specific purpose and may not be transferred to another category as no other category has the same purpose. However, the “buy-in” portion of the capacity fees are restricted for purposes that are shared by more than one category of funds and may therefore be transferred to a restricted fund within another fund category as long as it shares the same purpose. In many situations reserve transfers are expected as some fund categories will exceed their maximums or drop below their minimums. Only fund categories that are below the stated target are eligible to receive transferred reserves. Fund categories that exceed their maximums are first to be considered for transfers out, followed by funds that exceed their targets. Funds that exceed their minimums are also available for reserve transfers out, but only when other options are not available. The rationale for prioritizing reserve transfers is based on the immediacy of the need and the availability of reserves from other funding sources. For example, the General Fund is first to receive reserves when it drops below its target or minimum levels. This is because of the immediate and ongoing nature of the expenditures that are served by this fund. The operation of the District is the first and foremost objective of the District. On the other end of the spectrum, the Replacement Fund has a long- term perspective and will be used to partially finance replacement assets for many years to come. Debt financing is available to respond to this long-term, foreseeable, and planned cash flow. This fund is less likely to have immediate needs and has other financing options. When making the determination of when transfers are necessary, all funds within a fund category work as a group. The combined balance of the restricted and designated funds are looked at when determining whether the fund category requires additional funding from the Restricted Capital Improvement Fund, Restricted Debt Fund, or the General Fund. Because the Capital Improvement Fund may finance expansion, replacement, or betterment, reserves may be transferred between these fund categories, but only back and forth within its own type of restricted fund. Page 36 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 As an example, if during the rate model update process it was determined that the Expansion Funds (designated and restricted) would drop and stay below the minimum during the six-year planning horizon, this would trigger a bond issuance, a transfer of general use reserves, and/or a transfer of restricted reserves. If in the cash planning process, it was anticipated that the General Fund would remain above target during the planning horizon and that the trend did not present a problematic underfunded status, then General Fund reserves would be considered available for transfer prior to issuing debt. Also, if during this period the Betterment Fund category was anticipated to exceed its maximum, then reserves from either the Designated Betterment Fund, or the Capital Improvement Fund would be transferred to the corresponding Expansion Fund prior to a bond issuance. All funds are evaluated to determine which has the greatest need or availability of reserves before any reserve transfer recommendation is presented to the Board. Page 37 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 GLOSSARY The Reserve Policy contains terminology that is unique to public finance and budgeting. The following glossary provides assistance in understanding these terms. Annexation Fees: When water service is requested for land outside the boundaries of the District, the land to be serviced must first be annexed. For sewer service the land must be annexed into an improvement district within the District. Assets: Resources owned or held by Otay Water District that have monetary value. Availability Fees: The District levies charges each year in developed areas to be used for upgrades, betterment, or replacement and in undeveloped areas to provide a source of funding for planning, mapping, and preliminary design of facilities to meet future development. Current legislation provides that any availability charge in excess of $10.00 per acre shall be used only for the purpose of the improvement district for which it was assessed. Bond: A written promise to pay a sum of money on a specific date at a specified interest rate. The interest payments and the repayment of the principal are authorized in a District bond resolution. The most common types of bonds are General Obligation (GO) bonds and Certificates of Participation (COPs). These are frequently used for construction of large capital projects such as buildings, reservoirs, pipelines and pump stations. Capital Equipment: Fixed assets such as vehicles, marine equipment, computers, furniture, technical instruments, etc. which have a life expectancy of more than two years and a value over $10,000. Capital Improvement Program (CIP): A long-range plan of the District for the construction, rehabilitation and modernization of the District-owned and operated infrastructure. Page 38 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 CWA: The County Water Authority was organized in 1944 under the State County Water Authority Act for the primary purpose of importing Colorado River water to augment the local water supplies of the Authority's member agencies. The Authority purchases water from the Metropolitan Water District of Southern California (MWD) which imports water from the Colorado River and the State Water Project. Debt Service: The District's obligation to pay the principal and interest of bonds and other debt instruments according to a predetermined payment schedule. Expenditures/Expenses: These terms refer to the outflow of funds paid or to be paid for an asset, goods, or services obtained regardless of when actually paid for. (Note: An encumbrance is not an expenditure). An encumbrance reserves funds to be expended in a future period. Fund: An account used to track the collection and use of monies for a specifically defined purpose. Fund Balance: The current funds on hand resulting from the historical collection and use of monies. The difference between assets and liabilities reported in the District’s Operating Fund plus residual equities or balances and changes therein, from the results of operations. Interest Income: Earnings from the investment portfolio. Per District Policy Number 25, interest income will be allocated to the various funds each month based upon each fund’s prior month- ending balance. Late Charges/Penalties: Charges and penalties are imposed on customer accounts for late payments, returned payments, and other infringements of the District’s Code of Ordinances. 1% Property Tax: In 1978, Proposition 13 limited general levy property tax rates for all taxing authorities to a total rate of 1% of full cash value. Subsequent legislation, AB 8, established that the receipts from the 1% levy were to be distributed to taxing agencies according to approximately the same proportions received prior to Proposition 13. Page 39 of 39 OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject RESERVE POLICY Policy Number 25 Date Adopted 2/10/93 Date Revised 5/3/23 Operating Budget: The portion of the budget that pertains to daily operations that provide basic governmental services. The operating budget contains appropriations for such expenditures as personnel, supplies, utilities, materials, travel and fuel, and does not include purchases of major capital plant or equipment which is budgeted for separately in the Capital Budget. The Operating Budget also identifies planned non-operating revenues and expenses. Revenue: Monies that the District receives as income. It includes such items as water sales and sewer fees. Estimated revenues are those expected to be collected during the fiscal year. Russell Square: A sewer lift station constructed in 1983 that serves four properties in the Russell Square Development. System Fees: Each water service customer pays a monthly system charge for water system replacement, maintenance, and operation expenses. The charge is based on the size of the meter and class of service. Tax Collection for Bond Debt: California Water Code Section 72091 authorizes the District, as a municipal water district, to levy ad valorem property taxes which are equal to the amount required to make annual payments for principal and interest on General Obligation bonds approved by the voters prior to July 1, 1978. Unit: A Unit of water is 100 cubic feet or 748 gallons of water. Water Rates: Rates vary among classes of service and are measured in Units. The water rates for residential customers are based on an accelerated block structure. As more Units are consumed, a higher Unit rate is charged. Effective in 2009, all non- residential customers are charged for water based on a tiered rate structure in which water rates are based on meter size and amount of Units consumed. STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: May 3, 2023 SUBMITTED BY: Eid Fakhouri, Finance Manager PROJECT: DIV. NO. All APPROVED BY: Kevin Koeppen, Assistant Chief of Finance Joseph R. Beachem, Chief Financial Officer Jose Martinez, General Manager SUBJECT: Annual Review of the Investment Policy (Policy No. 27) of the District’s Code of Ordinances and the Re-delegation of Authority for All Investment Related Activities to the Chief Financial Officer GENERAL MANAGER’S RECOMMENDATION: That the Board receives the District’s Investment Policy (Policy No. 27) of the District’s Code of Ordinances for review and re-delegate authority for all investment related activities to the Chief Financial Officer, in accordance with Government Code Section 53607. COMMITTEE ACTION: See Attachment A. PURPOSE: Government Code Section 53646 recommends that the District’s Investment Policy be tendered to the Board on an annual basis for review. In addition, Government Code Section 53607 requires that for the Board’s delegation of investment responsibilities to the Chief Financial Officer to remain effective, the governing board must re- delegate authority over investment activities on an annual basis. ANALYSIS: The primary goals of the Investment Policy are to assure compliance with the California Government Code, Sections 53600 et seq. The primary objectives, in priority order, of investment activities are: AGENDA ITEM 6 1. Protect the principal of the funds. 2. Remain sufficiently liquid to enable the District to meet all operating requirements which might be reasonably anticipated. 3. The District’s return is a market rate of return that is commensurate with the conservative investments approach to meet the first two objectives of safety and liquidity. The government code restricts local agency investment options to a conservative list of investments, including: Federal Treasuries, Federal Agencies, Callable Federal Agencies, the State Pool, the County Pool, and high-grade corporate debt. Each year, staff reviews legislative updates to ensure our Investment Policy reflects the most recent and relevant updates approved by the California State Legislature. During this year’s policy review, there were no relevant legislative changes that affect our Investment Policy. On an annual basis, staff submits the Investment Policy to our list of Broker/Dealers for their professional review and to ensure they acknowledge and understand the District’s Investment Policy. This year, District Brokers/Dealers did not recommend any changes be made to our Investment Policy. Because of the District’s adherence to a conservative range of authorized investments, we have been able to maintain a healthy and diversified portfolio that meets our overall investment objectives and supports our long-term financial plans. The current policy is consistent with the current law and the overall objectives of the policy are being met; therefore, there are no recommended changes to the District’s Investment Policy at this time. FISCAL IMPACT: Joe Beachem, Chief Financial Officer None. STRATEGIC GOAL: Demonstrate financial health through formalized policies, prudent investing, and efficient operations. LEGAL IMPACT: None. Attachments: A) Committee Action B) Policy No. 27 C) Presentation Slides ATTACHMENT A SUBJECT/PROJECT: Annual Review of the Investment Policy (Policy No. 27) of the District’s Code of Ordinances and the Re-delegation of Authority for All Investment Related Activities to the Chief Financial Officer COMMITTEE ACTION: The Finance and Administration Committee recommend that the Board review the Investment Policy (Policy No. 27) of the District’s Code of Ordinances and re-delegate authority for all investment related activities to the Chief Financial Officer. NOTE: The “Committee Action” is written in anticipation of the Finance and Administration Committee moving the item forward for Board approval. This report will be sent to the Board as a committee approved item, or modified to reflect any discussion or changes as directed from the committee prior to presentation to the full board. OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 1 of 17 1.0 POLICY It is the policy of the Otay Water District to invest public funds in a manner which will provide maximum security with the best interest return, while meeting the daily cash flow demands of the entity and conforming to all state statues governing the investment of public funds. 2.0 SCOPE This investment policy applies to all financial assets of the Otay Water District. The District pools all cash for investment purposes. These funds are accounted for in the District’s audited Comprehensive Annual Financial Report (CAFR) and include: 2.1) General Fund 2.2) Capital Project Funds 2.2.1) Designated Expansion Fund 2.2.2) Restricted Expansion Fund 2.2.3) Designated Betterment Fund 2.2.4) Restricted Betterment Fund 2.2.5) Designated Replacement Fund 2.2.6) Restricted New Water Supply Fund 2.3) Other Post Employment Fund (OPEB) 2.4) Debt Reserve Fund Exceptions to the pooling of funds do exist for tax-exempt debt proceeds, debt reserves and deferred compensation funds. Funds received from the sale of general obligation bonds, certificates of participation or other tax-exempt financing vehicles are segregated from pooled investments and the investment of such funds are guided by the legal documents that govern the terms of such debt issuances. 3.0 PRUDENCE Investments should be made with judgment and care, under current prevailing circumstances, which persons of prudence, discretion and intelligence, exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. Attachment B OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 2 of 17 The standard of prudence to be used by investment officials shall be the “Prudent Person” and/or "Prudent Investor" standard (California Government Code 53600.3) and shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. 4.0 OBJECTIVE As specified in the California Government Code 53600.5, when investing, reinvesting, purchasing, acquiring, exchanging, selling and managing public funds, the primary objectives, in priority order, of the investment activities shall be: 4.1)Safety: Safety of principal is the foremost objective of the investment program. Investments of the Otay Water District shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, the District will diversify its investments by investing funds among a variety of securities offering independent returns and financial institutions. 4.2)Liquidity: The Otay Water District’s investment portfolio will remain sufficiently liquid to enable the District to meet all operating requirements which might be reasonably anticipated. 4.3)Return on Investment: The Otay Water District’s investment portfolio shall be designed with the objective of attaining a benchmark rate of return throughout budgetary and economic cycles, commensurate with the District’s investment risk constraints and the cash flow characteristics of the portfolio. 5.0 DELEGATION OF AUTHORITY Authority to manage the Otay Water District’s investment program is derived from the California Government Code, Sections 53600 through 53692. Management responsibility for the investment program is hereby OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 3 of 17 delegated to the Chief Financial Officer (CFO), who shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials and their procedures in the absence of the CFO. The CFO shall establish written investment policy procedures for the operation of the investment program consistent with this policy. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the CFO. 6.0 ETHICS AND CONFLICTS OF INTEREST Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the General Manager any material financial interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the District. 7.0 AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS The Chief Financial Officer shall maintain a list of District selected financial institutions and security broker/dealers authorized and approved to provide investment services in the State of California. Investment services include the buying or selling of permissible investments such as treasuries, government agencies, etc. for delivery to the custodian bank. These may include “primary” dealers or regional dealers that qualify under Securities & Exchange Commission Rule 15C3- 1 (Uniform Net Capital Rule). No public deposit shall be made except in a qualified public depository as established by state laws. All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the District with the following, as appropriate: OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 4 of 17 Audited Financial Statements. Proof of Financial Industry Regulatory Authority (FINRA) certification. Proof of state registration. Completed broker/dealer questionnaire. Certification of having read the District’s Investment Policy. Evidence of adequate insurance coverage. An annual review of the financial condition and registrations of qualified bidders will be conducted by the CFO. A current audited financial statement is required to be on file for each financial institution and broker/dealer through which the District invests. 8.0 AUTHORIZED AND SUITABLE INVESTMENTS From the governing body perspective, special care must be taken to ensure that the list of instruments includes only those allowed by law and those that local investment managers are trained and competent to handle. The District is governed by the California Government Code, Sections 53600 through 53692, to invest in the following types of securities, as further limited herein: 8.01)United States Treasury Bills, Bonds, Notes or those instruments for which the full faith and credit of the United States are pledged for payment of principal and interest. There is no percentage limitation of the portfolio which can be invested in this category, although a five-year maturity limitation is applicable. 8.02)Local Agency Investment Fund (LAIF), which is a State of California managed investment pool, may be used up to the maximum permitted by State Law (currently $75 million). The District may also invest bond proceeds in LAIF with the same but independent maximum limitation. 8.03)Bonds, debentures, notes and other evidence of indebtedness issued by any of the following government agency issuers: OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 5 of 17 Federal Home Loan Bank (FHLB) Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac") Federal National Mortgage Association (FNMA or "Fannie Mae") Government National Mortgage Association (GNMA or “Ginnie Mae”) Federal Farm Credit Bank (FFCB) Federal Agricultural Mortgage Corporation (FAMCA or “Farmer Mac”) There is no percentage limitation of the portfolio which can be invested in this category, although a five-year maturity from the settlement date limitation is applicable. Government agencies whose implied guarantee has been reduced or eliminated shall require an “A” rating or higher by a nationally recognized statistical rating organization. 8.04)Interest-bearing demand deposit accounts must be made only in Federal Deposit Insurance Corporation (FDIC) insured accounts. For deposits in excess of the insured maximum of $250,000, approved collateral shall be required in accordance with California Government Code, Section 53652. Certificates of Deposit (CD) will be made only to the FDIC-insured limit of $250,000. Investments in CD’s are limited to 15 percent of the District’s portfolio. 8.05) Commercial paper, which is short-term, unsecured promissory notes of corporate and public entities. Purchases of eligible commercial paper may not exceed 2 percent of the outstanding paper of an issuing corporation, and maximum investment maturity will be restricted to 270 days. Investment is further limited as described in California Government Code, Section 53601(h). Purchases of commercial paper may not exceed 10 percent of the District’s portfolio. 8.06)Medium-term notes defined as all corporate debt securities with a maximum remaining maturity of five years from the settlement date or less, and that meet the further requirements of California Government Code, Section 53601(k). Investments in medium-term notes are limited to 10 percent of the OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 6 of 17 District’s portfolio and no more than 2 percent of the outstanding medium-term notes of any single issuer. 8.07)Money market mutual funds that invest only in Treasury securities and repurchase agreements collateralized with Treasury securities, and that meet the further requirements of California Government Code, Section 53601(l). Investments in money market mutual funds are limited to 10 percent of the District's portfolio. 8.08)The San Diego County Treasurer’s Pooled Money Fund, which is a County managed investment pool, may be used by the Otay Water District to invest excess funds. There is no percentage limitation of the portfolio which can be invested in this category. 8.09)Under the provisions of California Government Code 53601.6, the Otay Water District shall not invest any funds covered by this Investment Policy in inverse floaters, range notes, interest-only strips derived from mortgage pools, or any investment that may result in a zero-interest accrual if held to maturity. Also, the borrowing of funds for investment purposes, known as leveraging, is prohibited. 9.0 INVESTMENT POOLS/MUTUAL FUNDS A thorough investigation of the pool/fund is required prior to investing, and on a continual basis. There shall be a questionnaire developed which will answer the following general questions: A description of eligible investment securities, and a written statement of investment policy and objectives. A description of interest calculations and how it is distributed, and how gains and losses are treated. A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited. A description of who may invest in the program, how often, and what size deposits and withdrawals are allowed. A schedule for receiving statements and portfolio listings. Are reserves, retained earnings, etc., utilized by the pool/fund? OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 7 of 17 A fee schedule, and when and how is it assessed. Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds? 10.0 COLLATERALIZATION Collateralization will be required on certificates of deposit exceeding the $250,000 FDIC insured maximum. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 102% of market value of principal and accrued interest. Collateral will always be held by an independent third party with whom the entity has a current custodial agreement. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to the entity and retained. The right of collateral substitution is granted. 11.0 SAFEKEEPING AND CUSTODY All security transactions entered into by the Otay Water District shall be conducted on a delivery-versus-payment (DVP) basis. Securities will be held by a third-party custodian designated by the District and evidenced by safekeeping receipts. 12.0 DIVERSIFICATION The Otay Water District will diversify its investments by security type and institution, with limitations on the total amounts invested in each security type as detailed in Paragraph 8.0, above, so as to reduce overall portfolio risks while attaining benchmark average rate of return. With the exception of U.S. Treasury securities, government agencies, and authorized pools, no more than 50% of the District’s total investment portfolio will be invested with a single financial institution. 13.0 MAXIMUM MATURITIES To the extent possible, the Otay Water District will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the District will not directly invest in securities maturing more than five years from the settlement date of the purchase. However, for time deposits with banks or savings and OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 8 of 17 loan associations, investment maturities will not exceed two years. Investments in commercial paper will be restricted to 270 days. 14.0 INTERNAL CONTROL The Chief Financial Officer shall establish an annual process of independent review by an external auditor. This review will provide internal control by assuring compliance with policies and procedures. 15.0 PERFORMANCE STANDARDS The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow needs. The Otay Water District’s investment strategy is passive. Given this strategy, the basis used by the CFO to determine whether market yields are being achieved shall be the State of California Local Agency Investment Fund (LAIF) as a comparable benchmark. 16.0 REPORTING The Chief Financial Officer shall provide the Board of Directors monthly investment reports which provide a clear picture of the status of the current investment portfolio. The management report should include comments on the fixed income markets and economic conditions, discussions regarding restrictions on percentage of investment by categories, possible changes in the portfolio structure going forward and thoughts on investment strategies. Schedules in the quarterly report should include the following: A listing of individual securities held at the end of the reporting period by authorized investment category. Average life and final maturity of all investments listed. Coupon, discount or earnings rate. Par value, amortized book value, and market value. Percentage of the portfolio represented by each investment category. OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 9 of 17 17.0 INVESTMENT POLICY ADOPTION The Otay Water District’s investment policy shall be adopted by resolution of the District’s Board of Directors. The policy shall be reviewed annually by the Board and any modifications made thereto must be approved by the Board. 18.0 GLOSSARY See Appendix A. OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 10 of 17 APPENDIX A: GLOSSARY ACTIVE INVESTING: Active investors will purchase investments and continuously monitor their activity, often looking at the price movements of their stocks many times a day, in order to exploit profitable conditions. Typically, active investors are seeking short term profits. AGENCIES: Federal agency securities and/or Government-sponsored enterprises. BANKERS’ ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer. BENCHMARK: A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average duration of the portfolio’s investments. BROKER/DEALER: Any individual or firm in the business of buying and selling securities for itself and others. Broker/dealers must register with the SEC. When acting as a broker, a broker/dealer executes orders on behalf of his/her client. When acting as a dealer, a broker/dealer executes trades for his/her firm's own account. Securities bought for the firm's own account may be sold to clients or other firms, or become a part of the firm's holdings. CERTIFICATE OF DEPOSIT (CD): A short or medium term, interest bearing, FDIC insured debt instrument offered by banks and savings and loans. Money removed before maturity is subject to a penalty. CDs are a low risk, low return investment, and are also known as “time deposits”, because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from a few months to several years. COLLATERAL: Securities, evidence of deposit or other property, which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies. COMMERCIAL PAPER: An unsecured short-term promissory note, issued by corporations, with maturities ranging from 2 to 270 days. OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 11 of 17 COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report for the Otay Water District. It includes detailed financial information prepared in conformity with generally accepted accounting principles (GAAP). It also includes supporting schedules necessary to demonstrate compliance with finance-related legal and contractual provisions, extensive introductory material, and a detailed statistical section. COUPON: (a) The annual rate of interest that a bond’s issuer promises to pay the bondholder on the bond’s face value. (b) A certificate attached to a bond evidencing interest due on a set date. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DEBENTURE: A bond secured only by the general credit of the issuer. DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: delivery versus payment and delivery versus receipt. Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities. DERIVATIVES: (1) Financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or (2) financial contracts based upon notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities or commodities). DISCOUNT: The difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount. DISCOUNT SECURITIES: Non-interest bearing money market instruments that are issued at a discount and redeemed at maturity for full face value, e.g., U.S. Treasury Bills. DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns. OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 12 of 17 FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to various classes of institutions and individuals, e.g., S&L’s, small business firms, students, farmers, farm cooperatives, and exporters. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures deposits in member banks and thrifts. FEDERAL FARM CREDIT BANK (FFCB): The Federal Farm Credit Bank system supports agricultural loans and issues securities and bonds in financial markets backed by these loans. It has consolidated the financing programs of several related farm credit agencies and corporations. FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open-market operations. FEDERAL AGRICULTURAL MORTGAGE CORPORATION (FAMC or Farmer Mac): A stockholder owned, publicly-traded corporation that was established under the Agricultural Credit Act of 1987, which added a new Title VIII to the Farm Credit Act of 1971. Farmer Mac is a government sponsored enterprise, whose mission is to provide a secondary market for agricultural real estate mortgage loans, rural housing mortgage loans, and rural utility cooperative loans. The corporation is authorized to purchase and guarantee securities. Farmer Mac guarantees that all security holders will receive timely payments of principal and interest. FEDERAL HOME LOAN BANK (FHLB): Government sponsored wholesale banks (currently 12 regional banks), which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC or Freddie Mac): A stockholder owned, publicly traded company chartered by the United States federal government in 1970 to purchase mortgages and related securities, and then issue securities and bonds in financial markets backed by those mortgages in secondary markets. Freddie Mac, like its competitor Fannie Mae, is regulated by the United States Department of Housing and Urban Development (HUD). OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 13 of 17 FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA or Fannie Mae): FNMA, like GNMA was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae is a private stockholder-owned corporation. The corporation’s purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA’s securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven-member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks that are members of the system. FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC. (FINRA): An independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly. It is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry. FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD). GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): A government owned agency which buys mortgages from lending institutions, securitizes them, and then sells them to investors. Because the payments to investors are guaranteed by the full faith and credit of the U.S. Government, they return slightly less interest than other mortgage-backed securities. INTEREST-ONLY STRIPS: A mortgage-backed instrument where the investor receives only the interest, no principal, from a pool of mortgages. Issues are highly interest rate sensitive, and cash flows vary between interest periods. Also, the maturity date may occur earlier than that stated if all loans within the pool are pre-paid. High prepayments on underlying mortgages can return less to the holder than the dollar amount invested. INVERSE FLOATER: A bond or note that does not earn a fixed rate of interest. Rather, the interest rate is tied to a specific interest OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 14 of 17 rate index identified in the bond/note structure. The interest rate earned by the bond/note will move in the opposite direction of the index. An inverse floater increases the market rate risk and modified duration of the investment. LEVERAGE: Investing with borrowed money with the expectation that the interest earned on the investment will exceed the interest paid on the borrowed money. LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow and reasonable size can be done at those quotes. LOCAL AGENCY INVESTMENT FUND (LAIF): The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment. MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold. MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase/reverse repurchase agreements that establish each party’s rights in the transactions. A master agreement will often specify, among other things, the right of the buyer-lender to liquidate the underlying securities in the event of default by the seller borrower. MATURITY: The date upon which the principal or stated value of an investment becomes due and payable. MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper, bankers’ acceptances, etc.) are issued and traded. MUTUAL FUNDS: An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. Mutual funds raise money by selling shares of the fund to the public. Mutual funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 15 of 17 various investment vehicles, such as stocks, bonds, and money market instruments. MONEY MARKET MUTUAL FUNDS: An open-end mutual fund which invests only in money markets. These funds invest in short term (one day to one year) debt obligations such as Treasury bills, certificates of deposit, and commercial paper. PASSIVE INVESTING: An investment strategy involving limited ongoing buying and selling actions. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance, and typically don’t actively attempt to profit from short term price fluctuations. Also known as a buy-and-hold strategy. PRIMARY DEALER: A designation given by the Federal Reserve System to commercial banks or broker/dealers who meet specific criteria, including capital requirements and participation in Treasury auctions. These dealers submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission registered securities broker/dealers, banks, and a few unregulated firms. PRUDENT PERSON RULE: An investment standard. In some states the law requires that a fiduciary, such as a trustee, may invest money only in a list of securities selected by the custody state—the so-called legal list. In other states the trustee may invest in a security if it is one which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital. PUBLIC SECURITIES ASSOCIATION (PSA): A trade organization of dealers, brokers, and bankers who underwrite and trade securities offerings. QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption from the payment of any sales or compensating use or ad valorem taxes under the laws of this state, which has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection Commission to hold public deposits. OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 16 of 17 RANGE NOTE: An investment whose coupon payment varies and is dependent on whether the current benchmark falls within a pre-determined range. RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond the current income return. REGIONAL DEALER: A securities broker/dealer, registered with the Securities & Exchange Commission (SEC), who meets all of the licensing requirements for buying and selling securities. REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security “buyer” in effect lends the “seller” money for the period of the agreement, and the terms of the agreement are structured to compensate him for this. Dealers use RP extensively to finance their positions. Exception: When the Fed is said to be doing RP, it is lending money that is increasing bank reserves. SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank’s vaults for protection. SECONDARY MARKET: A market made for the purchase and sale of outstanding securities issues following their initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SEC RULE 15C3-1: See Uniform Net Capital Rule. STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB, FNMA, FAMCA, etc.), and Corporations, which have imbedded options (e.g., call features, step-up coupons, floating rate coupons, derivative-based returns) into their debt structure. Their market performance is impacted by the fluctuation of interest rates, the volatility of the imbedded options and shifts in the shape of the yield curve. OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY Subject Policy Number Date Adopted Date Revised INVESTMENT POLICY 27 09/15/93 05/05/21 Page 17 of 17 TREASURY BILLS: A non-interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months, or one year. TREASURY BONDS: Long-term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of more than 10 years. TREASURY NOTES: Medium-term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities from two to 10 years. UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities, one reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash. YIELD: The rate of annual income return on an investment, expressed as a percentage. (a) INCOME YIELD is obtained by dividing the current dollar income by the current market price for the security. (b) NET YIELD or YIELD TO MATURITY is the current income yield minus any premium above par or plus any discount from par in purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond. INVESTMENT POLICY No. 27 April 19, 2023 Attachment C Eid Fakhouri, CPA Finance Manager POLICY REVIEW Purpose: Annual Investment Policy Review California Government Code Section 53646 Delegation of InvestmentAuthority Chief Financial Officer California Government Code Section 53607 INVESTMENT OBJECTIVES To safeguard principal, maintain liquidity, and to achieve a market investment return. Fund Objectives (in order of priority) Safety Liquidity Yield POLICY CHANGES Annual Legislative Review No Recommended Changes California State Treasurer No Changes in LAIF Limit, currently set at $75M. DELEGATION OF INVESTMENT AUTHORITY Re-delegate authority for all investment related activities to the Chief Financial Officer in accordance with Government Code Section 53607. BOARD ACTION The action we are requesting today is to review and receive the 2023 Investment Policy No. 27 and to request the Re-delegation of authority for all investment activities to the District’s Chief Financial Officer. Questions?