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HomeMy WebLinkAboutPolicy 25 - Reserve PolicyPage 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. 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 Meter Installation Charges Developer Deposits Annexation Fees Capacity Fees Unrestricted and Undesignated (General Use) Funds Restricted Funds DEVELOPERS 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). 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 Uniform Rates and Charges Monthly System Fees Energy Charges Special Rates and Charges Pass –Through Fixed Charges Penalties Special Rates and Charges Restricted Funds Unrestricted and Undesignated (General Use) Funds CUSTOMERS / USERS 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 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 General Levy Property Tax Receipts Availability Charges General Obligation Bond Assessments Unrestricted and Undesignated (General Use) Funds Restricted Funds COUNTY COLLECTED TAXES AND FEES 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. 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 Miscellaneous Rents and Leases Sewer Billing Fees Interest Income or Expense Allocation Restricted FundsDesignated Funds Unrestricted and Undesignated (General Use) Funds MISCELLANEOUS INCOME 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. c.Revenue Bonds (Restricted) 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 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. Fund Types and Categories 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 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. c.Funding Levels 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 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 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 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. c.Funding Levels 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 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 FundRestricted Funds Restricted Funds Replacement Fund Category Debt Proceeds Capacity Fees (1)Funding Source General Fund – Rates and Charges Debt FundCapital 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.