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City of Pleasanton Water Rate Study 2. Revenue Requirement Projection 2. REVENUE REQUIREMENT PROJECTION To determine whether additional rate revenue is required, projected operating and capital expenses were compared with projected revenue from current rates. Any surpluses and deficits are then applied to the reserve funds. Rates were then increased so that the expenses were covered and reserves were not diminished. 2.1. EXPENSE AND REVENUE PROJECTIONS The City's FY 2009 -10 budget served as the basis for determining the revenue requirement for FY 2010 -11, the year for which rates were designed. The O &M expenses were projected using appropriate escalation factors, other known cost increases, and growth in consumption and customer accounts. Capital expenses were based on the City's current capital improvement program. In addition to the City's budgeted expenses, the revenue requirement includes transfers to the Repair and Replacement Reserve. Figure 2 summarizes actual and estimated expenditures since FY 2005 -06 through the FY 2009 -10 and also shows the changes from FY 2005 -06 to FY 2009 -10 and to FY 201 -11. The following trends are noteworthy for the period ending with FY 2009 -10: Zone 7 water purchases The cost of water from Zone 7 has grown 41% since 2005. This increased cost reflects a 49% increase in Zone 7's rates and a 1.3% reduction in purchased water. Pleasanton O &M and Capital expenses An overall increase of 7% is the combination of a 28% increase in O &M and a 31% decrease in capital funding. A 7% increase is below the rate of inflation for the period. Revenue requirements The combination of Zone 7 and local costs has increased 20 Rate revenue Rate revenue increased 7 which is attributable to growth (water sales increased 3.9% and customer accounts increased 7.9 Deficits The Water Fund has been in a growing deficit position since FY 2006- 07. Reserves The fund balance for the Operating Reserve dropped 47 Figure 2 summarizes the projected revenue requirements, revenue from current rates (i.e., without any rate increases), annual surpluses and deficits, and the fund balance for the combined operating and capital reserves (excluding the bond fund). Figure 2 also shows the projected revenue increases to offset future deficits so that the fund balance is maintained at an adequate level. The revenue increases would ordinarily be applied across the -board to the current meter and consumption charges to generate the additional revenue. However, the City intends to adjust the rate structure to ensure that each customer class is paying its March 18, 2010 Page 8 HF &H Consultants, LLC