Item 8C~+•
AGENDA ITEM #8C
JULY 12, 2004
CITY OF ATLANTIC BEACH
CITY COMMISSION MEETING
STAFF REPORT
AGENDA ITEM: Establishment of a Water and Sewer Utility "Rate Stabilization
Fund"
SUBMITTED BY: Nelson Van Liere, Finance Director
DATE: July 3, 2004
BACKGROUND: For many years, the City has benefited form a large balance in the
Bond Constriction fund borrowed for the purposes of completing
large water, sewer and storm water capital projects. Having those
funds for capital allowed the utility to build good operating
reserves for future use. The borrowed funds have now all been
spent and again it is time to rely on the revenues of the utility to
keep up with inflation, unexpected point repairs and system
improvements as needed. Until now, the revenues of both the
water and sewer utilities have been sufficient to absorb the rising
costs of doing business while preserving a healthy 25% reserve in
cash for unexpected costs.
One of the conditions of the debt the City acquired for the utilities
was that we would ensure our bondholders that our rate structure
would generate enough net revenue to cover our debt service
payments by at least 105% to 110%. Working with the auditors
this past year, we were able to meet this coverage ratio by an
extremely small margin of only about $25,000. While generating
more revenues and or reducing operating expenses is the proper
way to make sure that the City continues to meet coverage and
thereby protect our good credit and bond ratings, there is one
measure we can take to give temporary security against failing to
meet coverage that can be done.
The provisions of the bonded debt allow the City at the City
Commission's discretion to establish a "Rate Stabilization Fund".
This action would simply take some of the accumulated earnings
of prior years now designated as operating reserves and further
restrict them in an account called a rate stabilization fund. The
purpose of this account is to set these earnings aside for a year
such as this where net revenues by themselves maybe insufficient
to meet the coverage ratios. The use of this fund to meet coverage
ratios is temporary, until the City can generate enough funds to
replace them. It would be the City's obligation to replenish this
reserve as soon as feasible by addressing utility revenues and the
cost of doing business during the budget process. The creation of
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AGENDA ITEM #8C
JULY 12, 2004
this account will not only benefit the City now in this time of
~. struggling performance, but will also contribute to maintaining a
healthy fiord balance in the firture.
BUDGET: A budget impact would arise only if the utility failed to meet our
bond coverage ratios and the City drew down the balance of this
account. The City would then subsequently budget to replenish the
fund.
RECOMMENDATION: That the City Commission give authorization to the Finance
Director to establish a "Rate Stabilization Fund" from the fund
balances of the water and sewer fiords in the amounts of $200,000
each.
REVIEWED BY CITY MANA ~ ^~~-~.
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