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MEMO To: Mayor and Members of the City Council Dean Lotter, City Manager From: Dan Maiers, Finance Director Aak_" Date: October 10, 2008 Re: October 14`h City Council Worksession — 2009 Utility Rate Analysis The analysis of our utility rates has been updated. The analysis and the proposed rates for 2009 were discussed during the August 12`h City Council worksession. At that time direction was given to determine the most appropriate "minimum" cash balances which are needed for each utility fund. While contemplating this direction and its subsequent implementation, I found that it really results in a "target" cash balance and not a "minimum". If the objective of the City Council is to keep the cash balances at their respective "minimums", then the minimum really becomes the "target" and not a "minimum". While implementing this approach, each year rates would be adjusted up or down to anticipate that the ending cash balance needs to be at a certain level. If implemented in this manner, then the question exists if there are any tolerances in balances allowed. Year-end cash balance variances would result in rate adjustments. Rates would be extremely sensitive to annual changes in operations and cashflows and become quite volatile and unpredictable. Year-end cash balances on December 31 of each year can change simply by the amount of accounts payable or receivable at that date. I believe that this issue may have arisen because of concerns about projected cash balances significantly over the "minimums". Assuming this to be the case, then I suggest investigating an alternative approach. Instead of a "target", establish minimums and "ceilings". In other words, establish high and low parameters which are acceptable. Again some type of tolerances should be implemented with a long-term vision. The model has been updated to include a "ceiling" for projected cash balances to go along with "minimums". The "ceiling" has been calculated to be 100% of the subsequent year's debt service, plus 100% of the subsequent year's operating expenses less depreciation. Transfers out to Capital Projects Funds were also not included in the calculation. The "minimum" has been based on 100% of the subsequent year's debt service, plus 25% of the total operating expenses. The emphasis and goal of this model has been to ensure the long-term financial stability of the City's utility funds. The first priority is to keep a minimum balance of cash on hand to cover three months of operations and the next year's debt service obligations. • The second priority is to provide for a stable, dependable rate structure. The third is to