minutes

Budget Workshop

Governing Board of Sweetwater Authority

June 14, 2007

The Governing Board of Sweetwater Authority held an adjourned meeting on Thursday, June 14, 2007 at the Sweetwater Authority Administrative Office, 505 Garrett Avenue, Chula Vista, California. Chair Beauchamp called the meeting to order at 1:30 p.m.

• ROLL CALL

Directors Present: Alkire, Beauchamp, Doud, Morrison*, Pocklington, Thomas, and Welsh

Directors Absent: None

Others Present: General Manager/Treasurer Bostad, Operations Manager Rogers, Legal Counsel Cowett*, Treasurer Delegatee Farrow, and Board Secretary Schoonderwoerd. Staff members: Rick Alexander, Janet Gonzalez, Scott McClelland, Bill Olson, George Silva, Jim Smyth, and Tom Woodrum.

• PLEDGE OF ALLEGIANCE TO THE FLAG
Director Beauchamp conducted the pledge of allegiance to the flag.

• OPPORTUNITY FOR PUBLIC COMMENT (Government Code Section (54954.3)
There were no members of the public present.

ACTION CALENDAR ITEMS

1. BUDGET WORKSHOP
Consideration of Proposed Fiscal Year 2007-08 Budget

Director of Finance Farrow opened her presentation by saying that the budget process began in January 2007 as staff projected where we were going to be at the end of the 2006-07 fiscal year based on year-to-date actuals. Staff met with the Finance Committee on two occasions to review the budget. The 2007-08 budget is impacted in three critical areas: there are no local surface water supplies in the reservoirs, which means an increase in imported water requirements; 30 percent of our water resources come from desalination and wells, and 70 percent of our production will rely on imported water; and purchasing 11,000 acre-feet of raw water over 12 months will mean a $3.4 million increase in purchased water costs, which is approximately 60 percent of the overall increase in operating expenses. Water purchase, power, chemicals, fuel, salary, and benefits make up approximately 90 percent of the operating expenses. Given these conditions, Ms. Farrow then reviewed the major deferrals that were necessary to balance the budget. It was necessary to cut $5.3 million in capital investments, nearly $2.4 million of which are contract Pipeline Replacements. Also, the Vehicle Replacement Program was cut for the first time. The Loveland Dam stair repairs and the coating repairs to the National City Wells and O.D. Arnold Tanks were also deferred. The Board discussed the planned deferrals and their impact on the proposed budget. General Manager Bostad and Operations Manager Rogers reiterated that all deferrals are prioritized with the various department heads to insure that decisions are soundly based.

In order to give the Board a clear understanding of the direction being taken with Reserves, Ms. Farrow then reviewed some of the more significant changes in the Reserve Budget. As of June 2007, including the Bond Required Reserves, total Reserves for the current budget year are $37,985,208. The last rate increase was affected by the approximately $6 million that was transferred out of Reserves; a larger rate increase would have been necessary without that transfer. Ms. Farrow continued by explaining that the Reserve adjustment increases or decreases are items that have an effect or impact on the Reserves as a result of the current fiscal year actuals. In the Bond Required Reserves, the Maintenance and Operating Account requires that 1/12 of the operating expenses be maintained as a Reserve. In order to adjust this, it was necessary to increase the Maintenance and Operating account by $1,292,900. The 1994/2005 Bond Reserve Account, another part of the bond covenant representing one year of debt service, can be reduced by $21,576. The Special Reserves are expended by Board action. In the Repair and Replacement Reserve Account, $537,685 has been spent to date to keep the system operating. Interest was earned on investments for the Vista Del Lago, Administration and Operations Center Office, Source of Water Supply, Power Rate Stabilization, and the Perdue Plant Upgrade Reserves and will be applied back to the Reserve. Ms. Farrow stated that this is the first year that this has been done, which is a good thing. The investments are earning roughly $1.6 million per year, and the proportionate interest is being assigned to each of those Reserves. In response to an inquiry from Director Doud, Ms. Farrow stated that of the $6 million transferred out of Reserves last year, $2.8 million was allocated for the Perdue Plant Upgrade. It was decided not to move forward with the membrane plant portion of the project, so the $1,870,541 being put back into the Reserve is a combination of interest earned as well as monies not expended. In the PARS Retiree Defined Benefit 401(a) Fund, $24,900 represents the amount necessary to be able to fund any employee 55 years or older planning to retire. Those funds are moved into the defined benefit plan when they retire. Recently, the Board approved additional budget funding of $333,400 for the Retiree Health Care Fund, which was required to bring us into compliance with the cash subsidy portion of GASB 45. This brings the total Reserve adjustment increase to $3,166,280, and the total adjusted 2006-07 Reserves as of June 30, 2007 to $41,151,488. Director Pocklington commented that MWD continues to pay for a supplementary insurance program after age 65. Mr. Bostad stated that the Authority’s PARS program has been designed to help assist employees to deal with supplementary insurance to Medicare post age 65.

Moving on to the 2007-08 Reserve Budget Transfer, Ms. Farrow explained the purpose of the Repair and Replacement Reserve to the Board. Every year, unexpected expenses and capital contingencies are taken from that Reserve. At the end of the year, it is replenished from the General Fund. Theoretically, the Repair and Replacement is not a Reserve, it is a capital contingency. It is proposed to pull that out of the Reserves since it is replenished every year. An historical analysis was conducted, which found that, instead of $1.3 million, the needs are only $900,000. Staff suggests eliminating this as a Reserve but having it remain as a contingency. The budget contains a $500,000 capital contingency, and $400,000 as an expense contingency. If additional funding is needed for unexpected items, it will be presented to the Board through committees for funding out of the capital contingency or the expense contingency; therefore, these funds would not be spent without Board approval. Essentially, this reduces the amount in the Reserves, but puts it into respective expense and capital budgets.

*NOTE: Director Morrison entered the meeting at 1:52 p.m.

Regarding the Perdue Plant Upgrade (2002 Bond Set-Aside), staff suggested using the balance of those funds to create two Reserves. One Reserve would be the Perdue Conventional Upgrade with a starting balance of $14,339,841. The other Reserve would be the Grant Funding Reserve of $9,165,615. This Reserve would be used for up-front funding, which will later be reimbursed. For example, on the $11 million Desalination Facility Expansion project, $6 million must be spent before any of those funds can be reimbursed. In order to accomplish that without putting the burden on ratepayers, it is proposed that part of that Grant Funding Reserve not needed for the membrane plant be used as these projects are built. As reimbursements are received, those funds will go back into the Grant Funding Reserve to build it back up. After three to four years, all of these projects will be complete, and the Grant Funding Reserve will be back at $9 million, plus interest. Those monies will be available for the remaining project or whatever the Board decides to do with that Reserve.

Director Pocklington requested an update on the Perdue Plant Upgrade. Mr. Bostad explained that moving forward on the membrane improvements has been deferred. We have already moved forward with chlorine dioxide, which allows us to meet the state drinking water requirements for disinfected byproducts. The issue now is determining what components within the treatment plant need to be upgraded to ensure the plant’s reliability and to continue plant improvements as needed. That capital improvement process is being slowed down and efforts based on the three Proposition 50 grants primarily focusing on the Reynolds Desalination Plant are being ramped up. Director Doud inquired whether the membranes will be deferred or eliminated. Mr. Bostad explained that the plan is to defer instead of eliminate, as he still believes that membrane technology is a very promising technology that will continue to be developed and will likely be used at some point in the future; it is just not something that needs to be implemented within the next few years. Director of Engineering Smyth added that Montgomery Watson has been asked to assist in moving in a more conventional direction, and a report identifying the necessary improvements is approximately 50 percent complete. Among those improvements are the chemical system and removal of the septic system. That design is about 30 percent complete, we should be out to bid next year, and construction will be a two-year project. Ms. Farrow added that $1.8 million of the $26 million being split into two components will be used in fiscal year 2007-08 to rebuild that plant.

The Investment Portfolio as of May 31, 2007 equaled a total of $41,151,488. A recap of Reserve transfers indicated $1,850,000 for the Perdue Conventional Upgrade; $1,350,000 for Grant Funding for the Richard A. Reynolds Phase II project; $762,315 for the reclassified Repair and Replacement Reserve; and $284,385 to cover the budget shortfall will transfer out of the Grant Funding; for a total of $4,246,700 in 2007-08 Reserve Budget Transfers. In response to an inquiry from Director Doud, Ms. Farrow confirmed that the grant projects include Title 16 funds, but that it is not very clear whether or not the Title 16 grant program will continue. This is why setting up the Reserve funding is helpful. In response to an inquiry from Chair Beauchamp on use of the bond funds, Mr. Bostad pointed out that the purpose of the 2002 Bond was not specifically to build a membrane plant; it was to build capital improvements to the system, and bond counsel informs us that the bond requirements are being met. Currently, we have $26.9 million in the Reserve for the Perdue Plant Upgrade, leaving a $6 million shortfall if we had continued with the membrane project. In order to have adequate funding for the Proposition 50 projects including the Reynolds Desalination Facility Expansion, Feasibility of Otay River GW Desalination Plant, and the South County Regional Brine Line some radical shifts had to be taken. This provides the Board with additional choices to allow for continued exploration of new sources and to improve our local resource reliability position without sacrificing our ability to treat water at the Perdue Plant. Director Doud inquired whether staff had researched grant money for brine line from the Bureau of Reclamation. Mr. Bostad responded that staff attended a meeting at the Bureau office in Temecula yesterday, and there is discussion now on feasibility studies for brine service in Southern California. CWA has just released its request for proposals to study the brine line alternative in South Bay, so there are actually two efforts going on.

Ms. Farrow gave a summary of the Source of Funds and Use of Funds. Under Use of Funds, Operating Expenses equal $34,368,600, the annual Debt Service (P&I) amount is $4,789,400, and Capital Investments are $4,553,500, for a total of $43,711,500. The Source of Funds shows Revenue equaling $39,821,400. Staff is requesting a Reserve Transfer of $2,896,700 from the Board to bring the total Source of Funds to $42,700,000. This does not include a rate increase, but is based on rates currently in effect. This leaves a funding shortfall of $993,400, which staff is proposing can be closed by a 5.9 percent proposed rate increase or adjustment effective January 1, 2008.

Ms. Farrow moved into a summary of the Operating Budget, and stated that Operating Expenses represent roughly 84 percent of the budget. This is important because, once our water production/source is identified, we are going to be purchasing 12 months worth of water for 70 percent of our needs. Once this is established, we will know our costs for power, chemicals, and fuel. Salaries and benefits make up the rest of the 84 percent. Once Other Operating Expenses, such as liability insurance, legal fees, workers compensation, etc. are added, the total Operating Expenses equal $34,368,000. The difference between the Total Operating Expenses and the Revenue of $39,821,400 leaves a Net Operating Income of $5,452,800. The Debt Service is $4,789,400, which leaves $663,400 to fund approximately $4.5 million in Capital Investment projects. Mr. Bostad emphasized to the Board that the variability of water purchases is critical to the budget. We are paying $8.9 million to buy more water, which we would not have to spend if we had local water, and this has a significant impact on the funds available for Capital Investments. In response to a question from Director Pocklington regarding availability of water from MWD in another dry year, Mr. Bostad stated that the budget was based upon an annual consumption of about 24,000 acre-feet of water. Approximately 30 percent of that need is supplied by the National City Wells and the Reynolds Desalination Facility. We have tried to optimize the remaining 70 percent as much as possible on discount water, which is primarily Seasonal Storage Operating Agreement (SSOA) water. We have not been able to get enough SSOA water due to constraints in the system, but we have tried to optimize on that. Since placing our projections on water in this budget, CWA has been talking to MWD about finding some pre-delivery water that may be out there called “opportunistic water.” In the event that water is available to us, Mr. Bostad said terms of an agreement are being discussed with CWA, based on CWA Board approval. Mr. Rogers reiterated that this budget is based on a normal year of consumption, that it is possible for problems to arise, and staff will come back to the Board for decisions on how to proceed in that event.

Ms. Farrow moved into an overview of Capital Investments, stating that initial requests totaled $10,942,900. Capital Investments with partial reimbursements equal $292,500. An early conservative number for Authority land to be sold to CalTrans is a minimum of $1,348,000. This brings the initial total for Capital Investments to $9,887,400. Deferred Capital Investments equal $5,333,900, which leaves an adjusted total Capital Investments of $4,553,500. Director Thomas inquired whether a favorable outcome with the CalTrans judgment would mean that the deferred Capital Investments would be reconsidered.
Mr. Bostad responded that this is considered one-time money, and it will likely be put in an immediate one-time Reserve. Rather than automatically come back to the deferred projects, the discussion on how best to use those funds would be brought to the Board. Ms. Farrow then reviewed the Proposed Capital Investment Projects, noting that the major projects are the Robert A. Perdue Plant Improvements and the Pipeline Replacement Program.

Ms. Farrow then opened the floor for discussion and questions from the Board regarding details on individual projects. Director Pocklington expressed his concerns regarding the potential of having another dry year, and stated that he was pleased with staff’s approach to this problem. He also asked about increasing production at the Reynolds Desalination Facility, and Mr. Bostad stated that the 12-month design period approved by the Board to expand that facility puts us on a fast track to meet the Proposition 50 requirements. Staff is also putting time into supporting and developing mechanisms to help ensure that the Poseidon Project moves forward, because that will provide us with another 10 percent of drought-resistant supply. He added that staff is also very concerned about back-to-back dry years, and that is why the creativity of this Reserve approach allows us to have funds available in the event we need to accelerate local production alternatives. Mr. Rogers noted that the Finance Committee discussed whether this budget needed to be so austere, but facing another dry year or more and the reality that it will likely get worse before it gets better, some things have been taken out that never were before. It is necessary to look ahead to when we may need those Reserves. The Board agreed that this was a sound approach. Director Thomas noted that she feels strongly that the Reynolds Facility video surveillance system project should be included. She also inquired about funding available from the federal government to address security measures. Mr. Bostad responded that we have received grant funding in the past from the federal government for security issues, but there are no current funds available. Mr. Rogers added that those kinds of grants are not available to us because our agency is not substandard, and that those funds are given to depressed agencies.

Director Beauchamp stated that we have no choice but to set the budget based on the possibility of receiving no rainfall, but he was concerned about the effects on the budget if we receive an unexpected rainfall. Director Pocklington believed that if we reached such a scenario, it will be a crisis throughout Southern California that people will identify with and understand that conservation and the cost of water will be major issues to deal with.
Mr. Bostad assured the Board that we are moving forward with a balanced approach and that we have some reserve capacity to make additional decisions. He believes it does not make sense to have 100 percent of our supplies local. We have a significant investment in the regional system, and we need to take advantage of that in unique ways because we have a treatment plant and storage reservoirs.

*NOTE: Counsel Cowett entered the meeting at 2:39 p.m.

Director Beauchamp noted that the effects of conservation have not been considered in the budget. Ms. Farrow pointed out that, in response to the impending state-wide drought condition, there is a probability that our revenues will be impacted by a voluntary conservation of 10 percent, and this is not factored in the projected 2007-08 sales revenues. The net effect of a 10 percent voluntary cutback could be a $1.2 million reduction in our source of funds, which is sizeable and something to be aware of. The Board discussed the ramifications on the budget in this event. If conservation efforts show a trend throughout the year, staff will come to the Board to discuss another strategic plan. Mr. Bostad added that
Ms. Farrow is working with a rate consultant on the rate structure, which is being looked at from a fixed and variable perspective. Director Pocklington stated that Sweetwater Authority is doing its job regarding conservation and the sentiment at CWA is to stay with voluntary conservation without talking about mandated percentages. Staff then fielded questions from the Board regarding details on various proposed and deferred Capital Investment projects.

Director Pocklington made a motion, seconded by Director Doud, that the Governing Board adopt the 2007-08 Budget as presented by Resolution 07-11; that the Board conduct a Public Hearing in accordance with Proposition 218 to consider the adoption of a 5.9 percent rate increase effective January 1, 2008; and that the Board authorize a transfer of $2,896,700 from the Reserves. Counsel Cowett reiterated Proposition 218 noticing requirements, and the Board discussed the various timing issues in holding the Public Hearing. Director Thomas voiced concern over holding a Public Hearing during the holiday season. The date of the Public Hearing will be determined at a later date. The motion carried.

Upon said motion, the following Resolution:

RESOLUTION 07-11

RESOLUTION OF THE GOVERNING BOARD OF SWEETWATER AUTHORITY
ADOPTING A BUDGET FOR THE FISCAL YEAR 2007-2008

was passed and adopted by the following vote to wit:

Ayes: Directors Alkire, Beauchamp, Doud, Morrison, Pocklington, Thomas,
and Welsh
Noes: None
Absent: None
Abstain: None

2. DIRECTORS’ COMMENTS

Director Pocklington commented that each year the budget process gets tougher, he commended staff on a great job, and he hopes it rains this summer.

Director Thomas agreed that staff and the Committee did an excellent job with the budget.

Director Morrison gave kudos to Ms. Farrow. Ms. Farrow thanked staff and said she could not have done it without them.

Director Doud commended the Committee and staff for a job well done.

3. ADJOURNMENT

With no further business before the Board, Chair Beauchamp adjourned the meeting at 3:09 p.m.

R. Mitchel Beauchamp, Chair

Attest:

Rita Schoonderwoerd, Board Secretary