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City of Pleasanton Water Rate Study 2. Revenue Requirement Projection proportionate share and that customers within each class are paying their proportionate shares. 2.2. REVENUE REQUIREMENTS The deficits in Figure 2 indicate a widening gap between expenses and revenues. Closing this gap by decreasing expenses is difficult because the single largest cost, Zone 7 water purchases (64% of the total revenue requirement), is a pass- through cost that is not controlled by the City. The remaining 32% for the local City O &M and capital expenses has only increased at sub inflation rates over the last five years. Further local cost reductions are no longer possible without significant reductions in service levels. With little opportunity to reduce costs, revenues must increase. City staff identified two areas to increase non -rate revenue. First, the General Fund will provide $330,000 annually to reimburse for the senior /low- income discount in water bills. Second, the City will recover more revenue from its backflow prevention program. City staff also identified one area where it was under collecting revenue from approximately 1,350 accounts with 1" services that were being charged for 5/8" services; this correction will generate $250,000 annually. The addition of $580,000 annually from the foregoing three areas is not sufficient to cover the deficit. An additional revenue increase of 21% is sufficient to nearly match the revenue requirement with revenue in FY 2010 -11, which is the first time this has occurred since FY 2005 -06. This revenue increase brings rate revenue on par with the revenue requirements, but does restore the fund balance to previous levels. With a higher revenue increase, reserves could be replenished and funding for the capital improvement program increased to previous levels. However, at this time, the magnitude of the recommended rate increase is such that City staff prefer to moderate increases through FY 2014 -15. After the recommended increase for FY 2010 -11, City staff proposes annual increases based on two components. 1. Costs associated with Zone 7 purchases will be adjusted equal to increases in Zone 7's annual rate increases, which are determined on a calendar year basis. Zone 7's current rate projections are shown in Figure 2 2. 2. All other costs, which are associated with the City's local O &M and capital expenditures, will be adjusted based on the CPI. March 18, 2010 Page 9 HF &H Consultants, LLC