HomeMy WebLinkAboutE-1.1. Request Authorization To Use Water Fund Capital Reserve and Perform Cost of Service StudySCHEDULED ITEM E-1
TO: HONORABLE CHAIRPERSON AND MEMBERS OF THE AZUSA UTILITY
BOARD
FROM: TIKAN SINGH, GENERAL MANAGER
DATE: MARCH 24, 2025
SUBJECT: REQUEST AUTHORIZATION TO USE $6 MILLION OF THE WATER FUND
CAPITAL RESERVE AND CONDUCT AN UPDATED COST OF SERVICE
STUDY
BACKGROUND:
The Utility Board adopted, via resolution, the current reserve policy for the Water Fund in
November 2014. The Reserve Fund adopted at that time was $19 million, composed of an
Operating Reserve, a Capital Reserve, and a Contingency Reserve. The adopted reserve
policy dictates a review of the current conditions.
RECOMMENDATION:
1) Authorize the use of $6 million of the water fund capital reserves to complete the South
Tank project and contingencies; and
2) Authorize staff to conduct an updated cost-of-service study.
ANALYSIS:
The existing components of the Reserve Policy are as follows:
1.Operating Reserve – The current policy provides for 90 days of operating cash flows.
Credit rating agencies prefer this amount. The Operating reserve is $4 million.
2.Capital Reserve – The capital reserve allocation sets aside money to carry out identifiable
capital projects when projects are not financed via bond issuances. The present policy prescribes
Approved
Utility Board
03/24/2025
Request Authorization of Water Fund Reserves and Cost of Service Study
March 24, 2025
Page 2
a Capital reserve of $10 million which is based on four years of capital spending at $2.5 million
per year.
3. Contingency Reserve—This section provides for contingencies such as reduced water sales
due to conservation or purchases of high-cost water during drought conditions. Presently, the
Contingency reserve is $5 million.
Utilize Water Reserves to Fund South Tank Capital Improvement Project
Azusa Light and Water (ALW) recommends that the Utility Board authorize using $6
million from the ALW water reserves to fund the South Reservoir Capital Improvement
Project and authorize staff to conduct an updated Cost of Service Study.
The Utility Board adopted the current reserve policy for the Water Fund via resolution in
November 2014. The Reserve Fund adopted at that time was $19 million,
The South Reservoir has reached the end of its useful life, and the State Department of
Drinking Water has mandated that it be replaced. On September 23, 2024, the Utility Board
implemented and awarded a capital improvement project to replace the South Reservoir.
This reservoir is essential for Water Operations—providing reliable and clean water to
customers, aiding in fighting fires, and storing emergency water.
Over the past two years, the Water Division has seen a significant reduction in revenues due
to lower water consumption and an increase in operational costs. This has decreased the
water reserve fund and the ability to fund capital projects. Revenues have decreased by
approximately $3 million from forecasts, and inflation of utility operating expenses has
increased by over $3 million just over the last year, ending FY 2024 with a reserve level of
$19.2 million.
Staff sought alternative revenue sources to fund the $11.3 million South Reservoir Capital
Improvement Project. ALW secured a grant of $3 million from the California Department of
Water Resources and a zero-interest loan of $3.4 million from the San Gabriel Valley
Municipal Water District. It is recommended that $6 million from the capital reserve section,
set aside for instances when bonds are not used, be allocated to complete the South Reservoir
Project and contingencies, thereby covering the remaining project costs.
Ratepayer Water Consumption Pattern Change and Cost of Service Analysis
Ratepayer water consumption patterns have changed. Water sales continue to shrink; in the
last two years, the water sales of 5,725,921 and 5,865,562 CCF in 2023 and 2024,
respectively, were the lowest in a decade. Unfortunately, the lower water sales translate to
lower revenues. Coupled with lower revenues, increased costs for both operating and
capital projects necessitate an updated cost of service analysis. The study will investigate
options for the water fund with the goal of maintaining the water fund reserve policy,
completing future capital infrastructure projects, including the Aspan Well rehabilitation,
and future revenue requirements. Therefore, Staff requests authorization to perform an
updated cost of service analysis.
10 years Water Sales/Billed Accounts
FY CCF Sales Billed Accounts
14-15 7,094,934 23,871
15-16 6,215,491 23,934
16-17 6,598,143 24,156
17-18 7,095,830 24,284
18-19 6,612,342 24,453
19-20 6,407,970 24,091
20-21 6,744,049 23,426
21-22 6,487,930 23,420
22-23 5,725,921 23,467
23-24 5,865,562 23,550
FISCAL IMPACT:
Using the $6 million capital reserves portion of the unrestricted cash reserves will decrease
the water fund cash reserves to a reserve level of around $13 million.
Reserve Type Current Policy With Use of $6M Cap Reserves
Operating Reserve 90 days / $4 million 90 days / $4 million
Capital Reserve $10 million $4 million
Contingency Reserve $5 million $5 million
Total $19 million $13 million
Request Authorization of Water Fund Reserves and Cost of Service Study
March 24, 2025
Page 4
Prepared by: Reviewed and Approved:
Danny Smith Melissa Barbosa
Utilities Admin & Finance Manager Asst. GM Water Operations
Reviewed and Approved: Reviewed and Approved:
Tikan Singh Sergio Gonzalez
General Manager City Manager
Attachments:
1) Water Reserve Policy November 2014