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.