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MINUTES OF THE BOARD OF DIRECTORS ________________________________________________________________ SPECIAL MEETING September 28, 2016 The following were present:
DIRECTORS: SANDS FIGUERS DIRECTORS ABSENT:
ZONE 7 STAFF: JILL DUERIG, GENERAL MANAGER
LINDA VAN BUSKIRK, BOARD SECRETARY Item 1 - CALL TO ORDER / PLEDGE OF ALLEGIANCE President Quigley called the meeting to order at 5:01 p.m. Item 2 - Pledge of Allegiance President Quigley led the Salute to the Flag. Item 3 - There were no public comments at this time. [NOTE: Directors Figuers and Palmer arrived at 5:02 p.m.] Item 4 - Mr. Osborn Solitei, Assistant General Manager, Finance, gave a detailed presentation on the Proposed Reserve Policy which highlighted what reserves are, the purpose of and proposed changes to the Interim Reserve Policy, policy compliance, Fund 100 - Water Enterprise Cash Balance History, credit rating criteria, debt coverage requirements and retailer's/other local water Agency's reserves for comparison. The Proposed Reserve Policy had been presented to the Finance Committee on September 8, 2016. A meeting with the retailers was also held on September 15, 2016 to discuss the Reserve Policy impact on rates. Mr. Solitei then responded to questions and comments from the Board. Director Figuers suggested clarifying which Consumer Price Index (CPI) is used to determine when the Rate Stabilization Reserve is used. He objected to the vagueness of the Rate Stabilization Reserve identified on page 7 of the Reserve Policy. Ms. Duerig commented that the CPI is just one factor used to determine whether the Rate Stabilization Reserve should be used. Director Figuers suggested going back to when the Board set precedent in FY 94-95 when the Agency committed $3M of reserves from the General Fund to mitigate the impact of drought on water rates. It was then planned that the funds would be returned to the General Fund over a period of approximately six years. There was also a recommendation of the Finance Committee on August 21, 1991 that in order to meet the Agency's financial needs, the reserve fund usage would be repaid in a three to five-year period. Director Figuers stated he is not in favor of this proposed policy because it states that the replenishment period is only two years. Mr. Solitei responded that Fund 100, the Water Enterprise Fund, minimum reserve requirement per the Proposed Reserve Policy is $16.6M for FY 2016-17 and we are projecting the reserve balance to be $9.4M per the rate study, so we are not raising rates to get to $16.6M. For FY 2017-18 we will still be under by $1.2M. Our minimum reserve requirement for Fund 100 per the Proposed Reserve Policy is $17.8M for FY 2017-18 and we are projecting the reserve balance at $16.6M per the rate study. He reminded the Board that we have an unaudited reserve balance of $5.8M in Fund 100 as of June 30, 2016. We have used $25.7M in Fund 100 reserves since FY 2013-14. If you leave everything as is and don't receive any more revenue, you will spend more than you have in reserves. We want to get away from that to be financially stable. This is what staff discussed with the retailers, and the retailers have expressed their agreement with this approach. We are not going to $16.6M in one step. We are taking baby steps. Slide 5 shows why we need reserves; reserves have helped this Agency get through the drought. You can see we used $25.7M of Fund 100 reserves. If we did not have $31.5M in Fund 100 in FY 2013-14, we would have to borrow money at a very expensive rate. Our proposal is to help stabilize the Agency as we move forward. Director Ramirez Holmes expressed concern over the two-year timeline to replenish the reserves. Her recommendation is that they should be built up over time. She also asked when the Drought Contingency reserve was last used. She then asked if we are at the minimum reserve level for the Operating and Emergency reserves. Mr. Solitei responded that yes, the Operating and Emergency Reserves are at the minimum reserve level; however, we have to look at the bigger picture. The Agency's unaudited actual for Fund 100 at the end of FY 2015-16 is $5.8M in total. Mr. Solitei advised that this is not something he can recommend as a healthy balance. A comparison was made between what other retailers have in reserves - in their own water funds - and the totality of what Zone 7 has. The Fund 100 unaudited cash balance at the end of FY 2015-16 was $1.4M and that is payroll for one month only. Mr. Solitei stressed that he does not want the Agency to be at this level. He asked for the opportunity to go to $17.8M for FY 2017-18; the minimum level we need to weather the storms and to prepare for an emergency. He reiterated that staff's recommendation is for the Board to approve the Proposed Reserve Policy. He also stated that the Drought Contingency Reserve was last used in the past two years as it was completely depleted. Before that, it had not been used within the last decade. Director McGrail asked what the bottom line in dollars and cents will be for the Agency's constituents. Mr. Solitei responded that this will be discussed in Item 5, but that the rate increase will come out to be approximately $5 more per month for the average customer. Director McGrail discussed the importance of implementing ozone at the water treatment plants. He stated that as much as he does not think the Agency should be banking other people's money, if that is what the Agency needs to ensure safe water for the people of the Tri-Valley, then he will follow that lead. Director Greci complimented Mr. Solitei on his very clear presentation. He is in favor of reserves and stated they are necessary especially in case of a major catastrophic event in order to fix what has broken. Director Stevens expressed support for replenishing reserves over a two-year period, stating that 5-6 years is too long and would not be the right thing to do during unpredictable times when we may be facing another prolonged drought. The Proposed Reserve Policy is a culmination of many opinions of consultants who are financial experts and meetings with the retailers who are in the game along with us. He respects the opinions of the experts, and trusts the judgment of Zone 7 Staff. He stated he is in favor of the policy. President Quigley stated the minimum/target/maximum resonates with him and makes sense. He expressed appreciation for the staff presentation stating it is transparent to the rate payers. He is in favor of replenishing the reserves quickly. He added the Retailers have given their approval. Director Figuers stated he does not like the Reserve Policy, and prefers a surcharge, suggesting that reserves created the need for stealthy rate increases vs. a rate surcharge that is clearly stated in a budget, and then when it ends, it is removed. He is fully in favor of reserves that are transparent to the public. Director Palmer said she is in favor of a robust reserve policy, so she is okay with the Proposed Reserve Policy. President Quigley asked for comments from the audience. Mr. Alan Burnham, a resident of Livermore, stated that the community needs safe water. He suggested the reason Fund 100 is depleted is because people were told not to use water. If the Agency's policy is to tell the public not to use water, the revenues will be reduced. Mr. Joseph Cunningham, a resident of Pleasanton, brought a copy of his water bill to the Board's attention and described how it has been increasing each month. He would like to know how much the rate increase is going to be, because he is concerned with rate increases. Ms. Duerig and members of the Board suggested that since his month-to-month amount is based on volume of water used, and the rate Zone 7 charges has not changed since January 1, he may have an undetected leak. Mr. Leonard Olive from the City of Pleasanton gave Mr. Cunningham his business card and offered to have Pleasanton staff go over his bill to help him understand his bills. Mr. Brent Cromar, a resident of Pleasanton, asked the Board not to raise rates for CY 2017. Instead, he suggested market smart consumption by customers for more revenue to Zone 7. If rates are raised, he would like to see the City of Pleasanton hire a consultant to do a study on additional water sources to install their own water treatment plant. Mr. John Archer with Dublin San Ramon Services District (DSRSD) thanked Zone 7 staff. He expressed support for reserves in general. After looking at their own reserves, DSRSD realizes we are all in the same boat. They had to raise rates in FY 2012-13 to make their own reserves healthier. He suggested two to three years to replenish reserves. DSRSD's customers are noticing the combination of higher consumption and higher rates, which equal higher bills. Mr. Leonard Olive with the City of Pleasanton reiterated what Mr. Archer of DSRSD said. He added that Pleasanton's Finance Director attended the meetings held to discuss this and she was impressed with how effective and conclusive Zone 7 staff was in conveying the issues. She then expressed 100% buy-in. Director Stevens moved to approve Item 4 and Director Greci seconded the motion. The item was passed by a roll call vote of 5-2, with Directors Figuers and Ramirez Holmes voting no. Resolution No. 16-166 Approved the Reserve Policy Item 5 - Mr. Osborn Solitei, Assistant General Manager, Finance, gave a detailed presentation entitled "Zone 7 Water Agency Wholesale Water Rate Study - 2017 Proposed Rates" in conjunction with Mr. Sanjay Gaur and Mr. Habib Isaac of Raftelis Financial Consultants, Inc. Mr. Solitei and the consultants then responded to questions and comments from the Board. Director Greci asked what the difference will be between the $11.00 meter charge and a volumetric amount and if those will balance out. He expressed concern that a percentage rate increase at 10% plus another surcharge and then a meter charge will be a significant increase to the average customer's monthly cost. Mr. Isaac responded that as long as the customer is using the same amount of water assuming they are using 10 hundred cubic feet (CCF), the impact to their bottom line is a $5.00 increase to their monthly bill. Mr. Solitei added that the current treated water rate is $3.15/CCF. A household using 10 CCF would see an increase of approximately $4.80 rounded up to $5.00 for each household. Discussion ensued regarding ways to allocate the proposed fixed charges. Director Figuers suggested that Staff use acre feet instead of cubic feet when presenting information on rates in order to make comparing with historical data easier. In response to his question about the reason for using a two-year rolling average, Mr. Gaur stated that the two-year average will more closely reflect today's usage. Ms. Duerig added that after discussions with the retailers it was felt that the two-year average was more reflective of recent usage patterns, especially after a lot of permanent recycled water pipelines have gone in. The general consensus of the retailers was to use a two-year rolling average with an update every year. In response to Director Ramirez Holmes' questions regarding the temporary surcharge being used to replenish reserves, Mr. Solitei responded that the temporary surcharge is being used to replenish reserves. Director Ramirez Holmes stated that according to the 4th Quarter FY 2015-16 Revenue and Expense report, Fund 100 revenues were down $5M, but expenses were also down $5M, so they offset each other. Director Ramirez Holmes remarked that the FY 2016-17 annual budget is projecting surplus in Fund100. Mr. Solitei responded that when the Board approved the Fund 100 budget, it was already anticipated that $8M in reserves would be used. With conservation levels at 42%, revenues were $5M less than budgeted and the year ended with $5.8M in the fund balance, so we are using a lot of reserves. Mr. Isaac added that the challenge is the interrelationship between sales and ending fund balance. Without the temporary surcharge and the projected 30% increase in water deliveries for FY 2016-17, is there sufficient money in the bank for future risks that the Agency may face? He stated no. The Agency is exposed to a lot of risk. Because of that, by having the temporary surcharge, the Agency can replenish its reserves in order to withstand another risk that may occur. Director Ramirez Holmes asked how the fixed/variable rate restructuring will affect future plans and the impact on rates. How much money will be received from this restructuring? How much will be received from a temporary surcharge? What is the value of the water rate increase? She suggested that at the next meeting Staff provide more information. How will this affect the customers' bill? This is what the customers want to know. Ms. Duerig replied that the shift in structuring is intended to have no impact on the average user. It will have varying impacts on people who have a higher than average usage or a lower than average usage. The average household who is using 10 CCF should not see a change to their bill due to the change in structure. Director Stevens expressed his support of the plan. He suggested that next time Staff present the rate increase information first and then present the rate restructuring with the fixed and variable components. He also stated that we should recover more revenue through the fixed rate, like 60-70%. Best Management Practices suggest that no more than 40% of revenue is recovered through a fixed rate. He then asked if we can keep the surcharge the same as it is now. Mr. Solitei responded by saying that Staff will look into that. Director Palmer added that in the interest of transparency, understanding how this is being done is important. President Quigley agreed that from a transparency standpoint the numbers should be welldefined for the public. He applauded Staff for bringing in the retailers early to discuss this. He added that it is imperative to have the rates cover costs. Director McGrail applauded Staff for dealing with the fixed costs. He added that the study was very well thought out and he concurs with it. He understands the study and approves of it. The bottom line of $4.80 per family in order to have good, clean, sustainable water and to keep the lights on in this building is not that much and will be helpful for all involved. Director Figures asked Staff to summarize additional calculations, such as calculating the temporary surcharge over two years and to show what the affects would be if the surcharge was over three to five years. President Quigley asked for comments from the audience. Mr. Alan Burnham, a resident of Livermore, expressed concern that this system penalizes those who conserve the most by having them subsidize the higher users. He suggested the rates be completely reworked into a tiered structure. He stated that basing it on peak demand is unfair. Mr. Solitei responded saying that after discussions with the Retailers, we are not using peak usage, but instead a rolling two-year average usage. Mr. Leonard Olive with the City of Pleasanton stated that generally speaking the City of Pleasanton is in favor of the rate increase and that a letter from the City Manager may be forthcoming in support of the rate study. He stressed that it is difficult for retailers to pass fixed costs on to the consumers, and suggested going back to the drawing board to utilize a volumetric system. He suggested that the options presented are bookends of what is available. A decision must be made as to whether the wholesale rate will have a fixed component or not. Mr. John Archer with DSRSD expressed appreciation to Zone 7 staff for listening to retailer's comments and opinions. DSRSD supports using the two-year rolling average usage. He reiterated that DSRSD understands Zone 7's need to have fixed costs, but added that if DSRSD adds that on to their already high fixed costs, this would put them up to 38%. He asked for flexibility in passing these costs through. Ms. Helen Ling with the City of Livermore expressed Livermore's appreciation for having the opportunity to work closely with Zone 7 staff on the Rate Study. She suggested that charging for water strictly on a volumetric basis could cause problems and many water agencies face the same challenge. Getting customers to understand that clean, safe water is an inexpensive valuable resource available to them 24/7 by comparison to how much they pay for their cell phone or cable bills or their Starbucks coffee is important. It costs money to have access to clean, safe water. She said the City of Livermore supports Zone 7 staff's recommendation. She also stated that how the Retailers pass along Zone 7's fixed and variable charge is the Retailers' decision and it is not the Zone 7 Board's problem. Mr. Brent Cromar, a resident of Pleasanton, expressed appreciation that Zone 7 mailed invitations to the community about the upcoming public meetings on water rates. He stated that, should Zone 7 raise rates as of January 2017, the first thing customers will do after seeing their bill so high will be to turn down the water usage, which will drop the Agency's revenues. He reiterated his earlier suggestion of encouraging market smart consumption by customers for more revenue to Zone 7. Zone 7 should be telling consumers to use more water, which will increase revenues. He further stated that units in acre feet or CCFs are not something the average customer understands; however gallons are something everyone understands. President Quigley suggested that Staff give the public a figure on the cost per gallon. Item 6 - Verbal Reports None. Item 7 - The meeting was adjourned at 7:56 p.m.
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