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1 | P a g e TO: Robert Nilles Deputy City Manager/Finance Director FROM: Kevin Burnett, Willdan Financial Services DATE: February 18, 2021 SUBJECT: Model Review - Final The City of El Mirage (City) retained Willdan Financial Services (Willdan) to complete a utility rate study in fiscal year (FY) 2019-20. A component of the utility rate study was to provide the City with the rate models developed over the course of the study such that the City could update the financial plans in the future. The City has completed their financial plan update which was reviewed by Willdan. The balance of this memorandum summarizes our review. Water Model The water utility has two financial metrics or targets that the City strives to achieve every year. The first is debt service coverage (a legal requirement) which dictates that the City must have $1.20 of net revenues (revenues less operations and maintenance expense) for every $1.00 of annual debt service. The second is a cash reserve target (a City goal) of cash reserves equivalent to at least 90 days of operations and maintenance expense in to manage cashflows (situations where expenses are incurred prior to revenues being received). The City’s projections for FY 2021-22 do not anticipate a rate revenue increase. Based on our review of the City’s update, we concur that a rate revenue increase is not required. The debt service coverage exceeds the 1.20 requirement and the cash balance is projected to exceed the 90-day requirement for FY 2021-22. The current capital improvement program anticipates large expenditures in FY 2027-28, which results in the cash reserve target not being met in that year. However, that is several years into the future and assumptions will change between now and then, while the City will continue to update the financial plan and make adjustments as needed. Sewer Model The sewer utility has the same two financial metrics or targets that that City strives to achieve every year. A rate revenue increase for the sewer utility is not anticipated for FY 2021-22. Debt service coverage exceeds the 1.20 requirement and the cash balance is projected to exceed the 90-day requirement for FY 2021-22. Over time the operations and maintenance costs are projected to increase at a higher rate than annual revenue increases from system growth alone. As such, the fund balance is drawn down over time (to less than target reserves) and by FY 2028-29 the debt service coverage requirement is not met. The financials should be monitored on an ongoing basis with adjustments to rates being made as necessary as projections of revenues and expenses are refined and updated. This does not, however, require an immediate increase and Willdan is in agreement with the City’s plan to keep rates at the current level for FY 2021-22. Sanitation Model The sanitation fund does not have any outstanding debt and therefore does not have a debt service coverage requirement that must be met. With a more stable cashflow than water and sewer the cash reserve target for the sanitation fund is 60 days rather than 90 days. 2 | P a g e Even with a lower cash reserve target a rate revenue increase is needed in FY 2021-22 to maintain the financial integrity of the fund to meet the reserve policy. The recommended 40% rate revenue increase (based on current projections) appears to be sufficient to maintain adequate cash reserves through the end of FY 2028-29. As actual revenue and expense data is obtained and the financial plan is updated, the need for revenue increases between now and FY 2029-30 may change, and the City should implement rate revisions as appropriate. Conclusions Based on the review of the three financial models it is our opinion that the City has appropriately updated the model with actual information for past years, and has made reasonable assumptions and projections for future year revenues and expenses based on available data today. We further agree with the rate recommendations that the City has identified in the models for the upcoming fiscal year.