Operating and CIP Budget Fiscal Year 2015-16

 CITY OF MORGAN HILL  FY 15-16  OPERATING AND CIP BUDGET  CITY OF MORGAN HILL  FY 15-16  OPERATING AND CIP BUDGET  CITY OF MORGAN HILL  FY 15-16  OPERATING AND CIP BUDGET  CITY OF MORGAN HILL  FY 15-16 OPERATING AND CIP CITY OF MORGAN HILL  FY 15-16  OPERATING AND CIP BUDGET  CITY OF MORGAN HILL  FY 15-16  OPERATING AND CIP BUDGET  CITY OF MORGAN HILL  FY15-16  OPERATING AND CIP BUDGET  CITY Conversely, the majority of the water operation costs for delivering high quality drinking water in the City are fixed costs, which only vary slightly based on actual water consumption. Variable costs fluctuate on the amount of water used and they include the groundwater production charge paid to the Santa Clara Valley Water District (District) and electricity used. As has been well documented locally and throughout the State, water supply has significantly decreased due to the drought conditions and immediate water reduction has been mandated. As a result, the City’s Water Fund has been significantly impacted because the Morgan Hill community has been a leader in reducing consumption by 20 percent compared to 2013. For FY 15-16, the Morgan Hill community will be required to reduce another 10 percent. From a fi- nancial perspective this equates to over a 25 percent reduction in water sales revenue. As previously discussed, since the majority of costs are fixed, the City will be required to utilize over $1.4 million of its $2.7 million fund balance to cover operating expenses. This is on top of $500,000 of fund balance required in FY 14-15. As is apparent, this trend cannot continue and immediate changes to the City’s water rate structure and rates must be implemented prior to the fund exhausting its reserves in FY 17-18. To address this serious issue, the City initiated a water rate study that will lead to a Proposition 218 election in 2015. The goal is to develop a financial plan and strategy that ensures customer rates are set at a level that ensures both financial and environmental sustainability. In addition, the Council’s adopted financial policy requires the Water Fund to maintain a reasonable level of reserves equivalent to 25 percent of the appropriated operating budget necessary for the financial stability of the water system as well as for emergency operation and capital needs. Additionally, the covenants of the water debt service require that the annual net operating revenue (total revenue less operating ex- penses) must be sufficient to pay its debt service 1.25 times over. The rate study will also evaluate wastewater rates since this fund is also anticipated to require use of its fund balance to support operations during the entire 5 year forecast. However, unlike the water fund, the wastewater fund has ap- proximately $4.5 million in reserves to assist in the short-term. Also, unlike the water fund, the drought conditions have had a minimal impact on the wastewater fund because rates are set from a three month average of water con- sumption during the winter months, which is typically the lowest period of water consumption. With that being said, it will be important for the City to closely monitor this if drought conditions continue.

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