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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.