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HomeMy WebLinkAbout2009-06-16 PacketCITY OF UKIAH CITY COUNCIL AGENDA Adjourned Regular Meeting CIVIC CENTER COUNCIL CHAMBERS 300 Seminary Avenue Ukiah, CA 95482 June 1C, 2009 5:30 p.. 1. ROLL CALL 2. AUDIENCE COMMENTS O NON-AGENDA ITEMS The City Council welcomes input from the audience. If there is a matter of business on the agenda that you are interested in, you may address the Council when this matter is considered. If you wish to speak on a matter that is not on this agenda, you may do so at this time. In order for everyone to be heard, please limit your comments to three (3) minutes per person and not more than ten (10) minutes per subject. The Brown Act regulations do not allow action to be taken on audience comments in which the subject is not listed on the agenda. 3. PUBLIC HEARING - CONSIDERATION AND ADOPTION OF FISCAL YEAR 2009/2010 Review of General Budget Figures - Finance Director 4. ADJOURNMENT: TO ET AS THE UKIAH REDEVELOPMENT AGENCY UKIAH REDEVELOPMENT AGENCY MEETING 1. ROLL CALL 2. AUDIENCE COMMENTS ON NON-AGENDA ITEMS The Redevelopment Agency welcomes input from the audience. If there is a matter of business on the agenda that you are interested in, you may address the Agency when this matter is considered. If you wish to speak on a matter that is not on this agenda, you may do so at this time. In order for everyone to be heard, please limit your comments to three (3) minutes per person and not more than ten (10) minutes per subject. The Brown Act regulations do not allow action to be taken on audience comments in which the subject is not listed on the agenda. 3. PUBLIC HEARING - CONSIDERATION AND ADOPTION O FISCAL YEAR 2009/2010 BUDGET . ADJOURNMENT: T RECONVENE AST CI COUNCIL A. Adopt the 2009/2010 General Fund and Other Fund Budgets (except for Wastewater and Water) 6. RESOLUTION OF THE CITY COUNCIL OF THE CITY OF UKIA AUTHORIZING CONTINUED MUNICIPAL WASTEWATER WATER OPERATIONS PENDING ADOPTION OF FISCAL YEAR 2009-2010 BUDGET 7. ESTABLISH RATE STABILIZATION FUNDS FOR THE WATER AND WASTEWATER ENTERPRISES 8. ADJOURNMENT OF MEETING Please be advised that the City needs to be notified 72 hours in advance of a meeting if any specific accommodations or interpreter services are needed in order for you to attend. The City complies with ADA requirements and will attempt to reasonably accommodate individuals with disabilities upon request. Materials related to an item on this Agenda submitted to the City Council after distribution of the agenda packet are available for public inspection at the front counter at the Ukiah Civic Center, 300 Seminary Avenue, Ukiah, CA 95482, during normal business hours, Monday through Friday, 7:30 am to 5:00 pm. I hereby certify under penalty of perjury under the laws of the State of California that the foregoing agenda was posted on the bulletin board at the main entrance of the City of Ukiah City Hall, located at 300 Seminary Avenue, Ukiah, California, not less than 72 hours prior to the meeting set forth on this agenda. Dated this 11 th day of June, 2009. ;Linda C. Brown, City Clerk City o/ 'Zikiah ITEM NO.: 3 MEETING DATE: AGENDA SUMMARY REPORT June 16, 2009 SUBJECT: ADOPT BY RESOLUTION THE GENERAL FUND AND OTHER OPERATING FUND BUDGETS (EXCEPT FOR WASTEWATER AND WATER) FOR FISCAL YEAR 200912010 Background: Fiscal year 2008/2009 began with a sense of financial challenges. As the year progressed, both the City Council and City staff worked together to initiate steps to meet the financial challenges occurring in the worldwide, national, and state economies. Special meetings were held to review revenues and expenditures, to establish financial policies, and to adopt budget priorities. The City Council also approved establishment of a Capital Improvement Plan or CIP document. Progress has been made in the establishment of this document which will assist the City Council in establishing priorities for capital projects and expenditures. Capital projects are largely excluded from this FY 2009/2010 budget proposal. Projects that are to be undertaken, prior to establishment of the CIP, will be authorized by budget amendment during the approval and contract award process. In the face of sharply reduced revenues, particularly from sales tax and property taxes, the City Council authorized a study of future revenue and expenditure forecasts. This study is complete and informs the City Council, staff, and public that revenues will remain significantly reduced throughout the next three to five years. The study showed that expenditures anticipated for the general fund prior to the local and national economic downturn of 2008 and 2009 cannot be sustained. City staff has developed operational changes during early 2009 to face the new economic realities. These changes include workforce reduction for parking enforcement, animal control, code enforcement, reception duties, parks maintenance, budget support, risk management duties, as well as public safety operations. The operational changes require reduction in service levels for these activities, as well as reduced administrative capacity for the support of overall city operations, with some nineteen full and part-time positions, citywide, frozen or laid off. The proposed budget includes 174 full-time positions, ten less than FY 2008/2009. In FY 1995/1996, the City had 161 full-time positions. Nine of the 13 additional positions since FY 1995/1996 were for utility departments. Continued on Page 2 Recommended Action(s): 1. Adopt by Resolution the General Fund and Other Operating Fund Budgets (except for Wastewater and Water) for Fiscal Year 2009/2010 Alternative Council Option(s): Citizens advised: Requested by: Prepared by: Jane Chambers, City Manager Coordinated with: Gordon`Elton, Finance Director Attachments: 1 Resolution to Adopt Budqet Approved: Chamber s, City Manager However, the new operations have been designed to provide the highest customer orientation and efficiency of service with the resources available. In many civic operations, as a result of the workforce reductions, the ability to fund secondary level assistance or back-up capacity for duties has been removed. The ability of city staff to absorb new work load or provide support to boards and commissions, has been significantly reduced. However, the priorities for service delivery to assist with local business development, redevelopment projects including housing, and services related to local and regional planning, contractors, business improvements and housing improvements have been retained and/or improved as part of the operational changes made in the FY 2009-2010 budget. This budget blends some measure of cautious optimism with the known economic reductions. The Police Department applied for federal grants to partially fund five police officer positions and a community service officer. The Police budget includes this revenue ($442,704) in anticipation of receiving these grants. The City expects to receive notification about the grants as early as July; however it may be as late as October. Recreation revenue is planned to show a modest increase in the new year. Uncertainties abound. The general economy of the nation, the state, the county, and the city is significantly less predictable than normal. The untenable financial condition of the California State Government is well known. Less certain is the actions the State will take in its attempts to match resources with expenditures. Looking at the approaches taken by the State over the past few years and the rhetoric coming from Sacramento, local governments, such as the City of Ukiah, should expect reductions in funding that comes from the State. Some may think the state should fix its own problems with its money and local government should operate with its own money. This concept sounds very good. However, the reality is many of the revenues that most consider belonging to local government, are subject to borrowing or redirection by the State. The State has the right to borrow property tax money that is dedicated to local government. Initially this may seem innocuous. What it actually means is that when the State borrows money from another government, that government does not have the money to fund operating expenses. Current discussion from the Capital indicates the State plans to borrow a quarter million dollars of the City of Ukiah's property tax money. This potential is not included in this budget document. Typically the proposed City budget includes all of the City's funds and is proposed for adoption with a single resolution. However, for FY 2009/2010, the City Council has agreed to consider these budgets at a later date. Both Water and Wastewater Enterprises are facing unprecedented challenges with reductions related to water supply issues, and therefore, the budgeting process for these enterprises has required additional staff time and resources. Consultation and consideration of Ukiah Valley Sanitation District board and staff is necessary for the Wastewater budget. Completion of rate studies to assist with the establishment of fees for both wastewater and water services for the next several years, is also part of the FY 2009/2010 budget process for these enterprises. These fee studies will include analysis of capital expenditures that are necessary to maintain the ability of the water and sewer operations to deliver services, with projects included in the CIP as it is developed. General - Revenue Total revenue is budgeted at $12,868,000. This includes $442,700 of anticipated grant funds and $2,153,000 of Measure "S" sales tax revenue. The revenue, excluding these two items ($10,272,000) is $19,000 more than the pre-Measure "S" revenue of fiscal year 2005/2006 ($10,253,000). The proposed revenue for fiscal year 2009/2010, excluding $442,700 of anticipated grant funds, is 5% less than the projected actual revenue for fiscal year 2008/2009 and 11% less than fiscal year 2007/2008 revenue. The good news is that it is only reduced by 11 Proposed expenditures are $13,701,000. This includes expenditure of $442,700 of anticipated grant funds and addition of parking enforcement staffing in the Police Department. This is a reduction of $534,000 from the 2008/2009 budget. Public Safety is the only functional area with increased expenses ($271,000). Part of this increase is from the addition of animal control, code enforcement, and parking enforcement responsibilities to the department by the addition of two Community Service Officer positions. This is offset by the reductions of two fulltime positions in 2008/2009 (Planning and Community Services) and one full- time and one part-time position in the Parking Enterprise fund in 2009/2010. The parking enforcement costs are also offset by revenue from the Parking Enterprise Fund of $103,000. Fund Balance The City began fiscal year 2008/2009 with a Fund Balance of $2,857,000. The approved FY 2008/2009 budget reduced this amount by $803,000. However, when it became apparent that significant revenue reductions would occur in FY 2008/2009 ($489,000), expenditure-reduction actions were implemented. Work force reduction and a 5% pay reduction for all full time employees for the final quarter of FY 2008/2009 resulted in cushioning the overall fund balance loss. Some $343,000 in savings was made. The net result is a projected $949,000 Fund Balance reduction leaving a balance of $1,908,000 at June 30, 2009. This proposed budget includes expenses of $833,000 in excess of revenue. This amount is proposed for reduction with a transfer of accumulated interest income of $315,000 from the Special Projects Fund #699 and $40,000 from Equipment Replacement Fund #698 to partially fund Police vehicle purchases included in this budget. These are one-time transfers to assist in offsetting costs for a single year. After these transfers, the net reduction in Fund Balance is $478,000. The resulting fund balance, at June 30, 2010 is projected to be $1,429,000. This amount excludes the amount in the Special General Fund #110 and the General Fund Reserve #115 accounts, which may become necessary to consider using should the proposed Police grants not be received. Much remains fluid for the FY 2009/2010 year, and it is clear by the fact that FY 2009/2010 expenditures exceed anticipated revenues by $833,000 that a structural imbalance between revenues and expenditures remains to be resolved. Without the actions already taken, the deficit for FY 2009/2010 would have exceeded $2 million, and eliminated remaining reserves. One-time resources are being used to offset the deficit for 2009/2010, and to give city staff a chance to absorb the work force reductions and significant operational changes already made. Given the overall revenue and expenditure projections indicated for the next five years in the study conducted by Government Financial Services (GFS), further reductions in the General Fund budgets will be necessary to achieve sound financial balance, unless revenues begin to recover more quickly than currently anticipated. The City Manager will meet and confer with all labor groups prior to a scheduled cost of living increase for October, 2009, in a joint effort to mitigate financial impacts of current labor agreements and to forestall the need for further work force reductions and/or pay reductions and furloughs in the face of continuing revenue loss. Other Funds The operating budget of $13,899,000 consists primarily of $9,152,000 for the purchased power cost. Additionally capital projects of $9,300,000 are included. Unless additional funding is generated by borrowing or consumer rates, the Electric Utility reserves will be reduced from $14.5 million to $5 million. This includes the balance in the rate stabilization fund. Airport The primary revenue and expense of the airport operation is the purchase and sale of fuel. This budget anticipates a reduced level of both purchases and sales. Golf The Golf revenue ($1,062,100) is projected to exceed expenses ($1,058,828) by $3,272. This net income will reduce the Fund Balance Deficit from $125,260 to $121,988. Additional steps are necessary to eliminate this deficit in the future. The Golf Enterprise budget includes a payment of $68,494 for the refinancing of the property purchase that expanded the course from nine holes to eighteen holes and $24,338 for the golf equipment loan from the Liability Insurance Fund in 2008. Conference Center The Conference Center revenues ($315,100) are budgeted at $1,500 more than expenses ($315,600). The Conference Center Fund Balance is projected at $42,483 at June 30, 2010. Summary Fiscal threats and challenges will continue throughout the fiscal year 2009/2010. The proposed budget is only the beginning of financial planning for this year and into the future. The imbalance of resources and expectations, of revenues and expenses, and of desires and capacities requires continuing modifications to the City's operational plans. While the Fund Balance is sufficient in the General Fund at the moment, the potential impacts of State reductions of budgeted revenues may significantly reduce our reserves. Even if this reduction does not occur, the economic recovery picture indicates funding for continuing operations at the proposed level is not likely. Additional reductions are necessary if a structural balance between resources and activities is desired. City staff is actively engaged in analyzing and pursuing additional operational and expenditure changes and recommendations to City Council in order to assure the fiscal future of the City. It is important that I express my sincere appreciation to all who have worked so hard to produce this document. It represents a joint effort by departments, across the board with active participation on many levels. It most especially represents the efforts of the executive management team, who worked together with me to meet the challenges, demands, and changes coming in wave after wave, throughout the entire year. Given the amount of real operational change that is contained herein, along with the reality of reduced wages and increased workload absorbed by this organization, I want to commend all of the employees of the City of Ukiah for their daily efforts and good will. They are truly dedicated to public service, and have remained focused on that public service throughout this difficult time. I am aware of many employees who are going through the same financial difficulties as many residents, either through a partner's job loss, housing value loss, and/or mortgage difficulty. All of the labor groups worked with me to resolve the 5% salary reduction issue quickly and responsively even through for many, this was an additional hardship to endure. I appreciate the assistance throughout this difficult year, of Finance Director Gordon Elton. We have all relied on his depth of knowledge about the financial system, to produce this document, as well as to navigate the difficult forecasting and management of the City's financial resources in such unprecedented times. I look forward to working together with him, the City Council, the executive management team, and all employees, to assure that the Ukiah community receives services on a sound financial and operational basis. 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Traditionally, the City Council conducts hearings on its Wastewater and Water Budget for the fiscal year in June in order to approve this portion of the Budget together with the General Fund Budget before the beginning of the fiscal year on July 1; and 2. Due to the recent new restructuring of the Ukiah Valley Sanitation District with a Board of Directors now in place resulting from the November 2008 elections, together with the complexity of joint issues that need to be resolved prior to arriving at a new budget for the 2009/2010 Fiscal Year, the City cannot schedule Budget Hearings for the Wastewater and Water Budget prior to the beginning of the fiscal year; and 3. The Budget hearings are anticipated to be scheduled in July and should result in adoption of the 2009-2010 Wastewater and Water Fiscal Year Budget in July 2009; and 4. Pending approval of the Budget for the 2009-2010 Fiscal Year, City staff may continue to process warrants and issue checks for the conduct of City Wastewater and Water functions; NOW, THEREFORE, BE IT RESOLVED: City staff shall continue to process warrants in accordance with law. 2. In certifying the availability of funds to pay demands, the official submitting the demands may rely on the financial information, consistent with the 2008/2009 adopted Budget. 3. The Finance Director may draw warrants or checks in payment of certified payroll and other demands and certify that they comply with the proposed Budget, subject to final ratification by the City Council after the final Budget is adopted for Fiscal Year 2009-2010. As so certified, said warrants and checks shall be deemed to comply with Government Code Section 37208 and may be presented to the City Council for ratification after they have been issued. 4. This resolution shall terminate upon adoption of the Budget for Fiscal Year 2009/2010. PASSED AND ADOPTED this 16TH day of June, 2009, by the following roll call vote: AYES: NOES; ABSTAIN: ABSENT: ATTEST: Philip E. Baldwin, Mayor Linda C. Brown, City Clerk ITEM NO.: MEETING DATE: c~ : y syi- ~z~~_z~F AGENDA SUMMARY REPORT 7 June 16, 2009 SUBJECT: ESTABLISH RATE STABILIZATION FUNDS FOR THE WATER AND WASTEWATER ENTERPRISES SUMMARY: Rate Stabilization Funds are a tool that may serve multiple purposes. One purpose may be stabilization of the rates and charges imposed with respect to the Water and Wastewater systems. Another purpose may be designating revenue to meet exceptional or unusual expenditures not otherwise contained in a budget or anticipated in the normal operation of the enterprise. Another purpose may be to provide a source of revenue for transfer to the Operating Fund for use in meeting the bond requirement to generate "Gross Revenue" and "Net Revenue" each year. DEFINITIONS: See attached Accounting policies for definitions. DISCUSSION: The official statements, offering the Water and Wastewater bonds for sale, contained the authorization to create a Rate Stabilization Fund. The Local Agency may deposit amounts in the Rate Stabilization Fund from any source of legally available funds, including Net Revenues which are released from the pledge and lien which secures the Installment Payments and any Parity Debt., as the Local Agency may determine. The Official Statements further authorize withdrawals from the Rate Stabilization Funds, for the purpose of paying debt payments. Additional language states that transfers from the Rate Stabilization Funds will constitute Gross Revenue, unless otherwise provided therein. It the section titled "Rate Covenant", rates, fees and charges will be fixed to yield Gross Revenue (excluding any amounts derived from a Rate Stabilization Fund) sufficient to pay all operation and maintenance costs, all installment payments, any required additions to the Reserve Fund held by the Trustee, and payment of all other obligations. The final statement says: "For purposes of the Net Revenue Covenant described in this paragraph, any amounts transferred from a Rate Stabilization Fund to the related Water/Wastewater Fund will be included in the calculation of Gross Revenues and Net Revenues". There appears to be a conflict between these two sections, relating to the use of transfers from the Rate Stabilization Fund, in the (Continued on Page 2) Recommended Action(s): Establish Rate Stabilization Funds for the Water and Wastewater Enterprises effective the beginning of fiscal year 2008/2009. Alternative Council Option(s): Do not authorize creation of Rate Stabilization Funds for the Water and Wastewater Enterprises. Citizens advised: None Requested by: Director of Finance Prepared by: Gordon Elton, Director of Finance Coordinated with: Jane Chambers, City Manager Attachments: 1. Accounting Police #31 - Rate Stabilization Fund - Wastewater Enterprise 2. Accounting Police #32 - Rate Stabilization Fund - Water Enterprise Fiscal Impact: _ F-1 Budgeted FY 08/09 New Appropriation ® Not Applicable Budget Amendment Required Z-1~147 A WL Approved: _ 11~~ 6- J&6hambers, City Manager Rate Stabilization Funds creation (continued) calculation of the Gross Revenue. Legal review will be necessary to clarify this point. It is clear that transfers from the Rate Stabilization Fund are included in the calculation of the Net Revenue. Transfers from Rate Stabilization Funds have the potential to reduce "rate increases otherwise necessary to meet Gross Revenue and Net Revenue obligations. The intent of establishing the proposed funds is maximizing the potential compliance with the bond covenants at the least cost to the ratepayers. ACTION PLAN: 1) Request a similar action from the Ukiah Valley Sanitation District pertaining to their Wastewater Funds. 2) Request legal review of the use of Rate Stabilization Fund transfers in calculation of Gross Revenue. 3) Identify amounts eligible for transfer to the Rate Stabilization Funds. 4) Prepare a schedule of transfers to the Rate Stabilization Funds. 5) Include the schedule of transfers to and from, if any, the Rate Stabilization Funds in the budget presentation for the Water and Wastewater Enterprise budget hearings. RECOMMENDATIONS: 1) It appears advantageous, to the City, to implement a Rate Stabilization Fund to assist in meeting the "Net Revenue" test whether or not transfers from a Rate Stabilization Fund assist with meeting the "Gross Revenue" test. Therefore staff requests 2) Authority to establish Rate Stabilization Funds as defined in the Water and Wastewater financing documents. Furthermore staff requests authority to establish the Rate Stabilization Funds as of the beginning of the current fiscal year. 2 Accounting Policy: #31 Rate Stabilization Fund - Wastewater Enterprise Attachment #1 Prepared by: Gordon Elton, Finance Director Dated: June 11, 2009 Approved by: Pending Council Action Date: Concept Rate stabilization funds are generally created for the purpose of stabilizing the rates and charges imposed by the local agency on the customers of the agency. Additionally, the agreements related to the 2006 Water and Wastewater Revenue Bonds, Series A, which funded various improvements, upgrades and expansion of the sewer collection and treatment system, included specific language related to a rate stabilization fund. Specifically, the local agency is allowed to withdraw amounts from the Rate Stabilization Fund and deposit them in the Wastewater Fund for the purpose of paying the installment payments on any debt. Amounts so transferred will constitute Gross Revenues for the fiscal year and will be applied for the purposes of the Wastewater Fund (paraphrased from page 13, Wastewater Revenue Bonds, Series A Official Statement). Definitions "Gross Revenue": all gross charges (including surcharges, if any) received for, and all other gross income and receipts derived by the Local Agency from, the ownership and operation of the Water/Wastewater system or otherwise arising from the Water/Wastewater system, including but not limited to (a) connection charges, (b) any amounts transferred to the Water Fund/wastewater Fund from a Rate Stabilization Fund in accordance with the Installment Sales Agreement, and (c) investment earnings on amounts held in the Water Fund/Wastewater Fund or in any other fund established with respect to the Water/Wastewater system. Gross Revenues do not include (i) refundable deposits made to establish credit, (ii) the proceeds of any ad valorem property taxes, and (iii) the proceeds of any special assessments or special taxes levied upon real property within the improvement district served by the Local Agency for the purpose of paying special assessment bonds or special tax obligations of the Local Agency relating to the Water/Wastewater system. "Net Revenues": for any period, an amount equal to all of the Gross Revenues received during such period minus the amount required to pay all Operation and Maintenance costs becoming payable during such period. "Operation and Maintenance Costs" means the reasonable and necessary costs paid or incurred by the City for maintaining and operating the Wastewater System, determined in accordance with generally accepted accounting principles, including but not limited to (a) all reasonable expenses of management and repair and other expenses necessary to maintain and preserve the Wastewater System in good repair and working order, and (b) all administrative costs of the City that are charged directly or apportioned to the operation of the Wastewater System, such as salaries and wages of employees, overhead, taxes (if any) and insurance. "Operating and Maintenance Costs" do not include (i) administrative costs of the Certificates which the City is required to pay hereunder, (ii) payments of debt service on bonds, notes or other obligations issued by the City with respect to the Wastewater System, (iii) depreciation, replacement and obsolescence charges or reserves therefor, and (iv) amortization of intangibles or other bookkeeping entries of a similar nature. "Rate Stabilization Fund": means any fund established and held by the City as a fund for the stabilization of rates and charges imposed by the City with respect to the Wastewater System #31 Rate Stabilization Fund - Wastewater Enterprise (continued) Attachment #1 Funding Deposits into the fund may be made from any source of legally available funds, including but not limited to Net Revenues which are released from the pledge and lien which secures the installment payments and any parity debt, as the local agency may determine. Annually review potentially available funds for deposit into the rate stabilization fund. Use Budget withdrawals from the fund as necessary to meet bond requirements or other needs of the local agency during the standard budget process. Transfer additional amounts from the fund to meet changing requirements during the year, i.e. expense variances during the year that would result in noncompliance with the Rate Covenant of the bond agreements. Additional Information In the Installment Sales Agreement, the local agency agreed to two revenue tests, a Gross Revenue test and a Net revenue test. Combined these two tests are referred to as the Rate Covenant. The Gross Revenue test requires the local agency to collect rates, fees, and charges (excluding withdrawals from the Rate Stabilization Fund) sufficient to pay for operation and maintenance costs, debt payments, any necessary additions to the Reserve Fund held by the Trustee, and payments necessary to meet other obligations of the agency. The Net Revenue test requires the local agency to collect rates, fees, 'and charges (including withdrawals from the Rate Stabilization Fund) sufficient to yield Net Revenues equal to at least 120% of the annual debt payment. Net Revenues means Gross revenues minus operation and maintenance costs. Operation and Maintenance Costs mean the reasonable and necessary costs paid or incurred by the City for maintaining and operating the Wastewater System, including all reasonable expense of management and repair and other expenses necessary to maintain and preserve the Wastewater System in good repair and working order; all administrative costs of the City that are charged directly or apportioned to the operation of the Wastewater System, such as salaries and wages of employees, overhead, taxes and insurance. Attachment #2 Accounting Policy: #32 Rate Stabilization Fund - Water Enterprise Prepared by: Gordon Elton, Finance Director Dated: June 11, 2009 Approved by: Pending Council Action Date: Concept Rate stabilization funds are generally created for the purpose of stabilizing the rates and charges imposed by the local agency on the customers of the agency. Additionally, the agreements related to the 2005 Water and Wastewater Revenue Bonds, Series A, which funded various improvements, upgrades and expansion of the sewer collection and treatment system, included specific language related to a rate stabilization fund. Specifically, the local agency is allowed to withdraw amounts from the Rate Stabilization Fund and deposit them in the Water Fund for the purpose of paying the installment payments on any debt. Amounts so transferred will constitute Gross Revenues for the fiscal year and will be applied for the purposes of the Water Fund (paraphrased from page 14, Wastewater Revenue Bonds, Series A Official Statement). Definitions "Gross Revenue": all gross charges (including surcharges, if any) received for, and all other gross income and receipts derived by the Local Agency from, the ownership and operation of the Water/Wastewater system or otherwise arising from the Water/Wastewater system, including but not limited to (a) connection charges, (b) any amounts transferred to the Water Fund/wastewater Fund from a Rate Stabilization Fund in accordance with the Installment Sales Agreement, and (c) investment earnings on amounts held in the Water Fund/Wastewater Fund or in any other fund established with respect to the Water/Wastewater system. Gross Revenues do not include (i) refundable deposits made to establish credit, (ii) the proceeds of any ad valorem property taxes, and (iii) the proceeds of any special assessments or special taxes levied upon real property within the improvement district served by the Local Agency for the purpose of paying special assessment bonds or special tax obligations of the Local Agency relating to the Water/Wastewater system. "Net Revenues": for any period, an amount equal to all of the Gross Revenues received during such period minus the amount required to pay all Operation and Maintenance costs becoming payable during such period. "Operation and Maintenance Costs" means the reasonable and necessary costs and expenses paid by the City for maintaining and operating the Water System, including but not limited to (a) costs of acquisition of water to be supplied by the Water System, (b) costs of electricity and other forms of energy supplied to the Water System and (c) the reasonable expenses of management and repair and other costs and expenses necessary to maintain and preserve the Water System in good repair and working order. "Operating and Maintenance Costs" does not include (i) Debt service payable on obligations incurred by the City with respect to the Water System, including but not limited to the Installment Payments and any Parity Debt, (ii) depreciation, replacement and obsolescence charges or reserves therefor, (iii) amounts payable as administrative costs of #32 Rate Stabilization Fund - Water Enterprise (continued) Attachment #2 the City including costs attributable to the use of City-owned assets, and (iv) amortization of intangibles or other bookkeeping entries of a similar nature. "Rate Stabilization Fund": means any fund established and held by the City as a fund for the stabilization of rates and charges imposed by the City with respect to the Wastewater System Funding Deposits into the fund may be made from any source of legally available funds, including but not limited to Net Revenues which are released from the pledge and lien which secures the installment payments and any parity debt, as the local agency may determine. Annually review potentially available funds for deposit into the rate stabilization fund. Use Budget withdrawals from the fund as necessary to meet bond requirements or other needs of the local agency during the standard budget process. Transfer additional amounts from the fund to meet changing requirements during the year, i.e. expense variances during the year that would result in noncompliance with the Rate Covenant of the bond agreements. Additional. Information In the Installment Sales Agreement, the local agency agreed to two revenue tests, a Gross Revenue test and a Net revenue test. Combined these two tests are referred to as the Rate Covenant. The Gross Revenue test requires the local agency to collect rates, fees, and charges (excluding withdrawals from the Rate Stabilization Fund) sufficient to pay for operation and maintenance costs, debt payments, any necessary additions to the Reserve Fund held by the Trustee, and payments necessary to meet other obligations of the agency. The Net Revenue test requires the local agency to collect rates, fees, and charges (including withdrawals from the Rate Stabilization Fund) sufficient to yield Net Revenues equal to at least 120% of the annual debt payment. Net Revenues means Gross revenues minus operation and maintenance costs. Operation and Maintenance Costs mean the reasonable and necessary costs paid or incurred by the City for maintaining and operating the Wastewater System, including all reasonable expense of management and repair and other expenses necessary to maintain and preserve the Wastewater System in good repair and working order; all administrative costs of the City that are charged directly or apportioned to the operation of the Wastewater System, such as salaries and wages of employees, overhead, taxes and insurance. 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