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BACKGROUND On August 29, 2011 and September 13, 2011 Zone 7 Finance Committee held public meetings during which Zone 7 staff discussed and reviewed their budget forecast for 2012. They also presented three water rate alternatives that they were planning to present to the Board. A summary of the three alternatives is as follows: Alternative 1- Revenue covers Operating Expenses and Asset Management Program (AMP) Funding with no use of reserves after 2012. This alternative includes a rate increase of 10% in 201? with a cumulative 37% increase projected through 2016. This alternative does not affect the Zone's current fund balances after 2012 and does not use its rate stabilization reserve of $5 million. Alternative 2- Use of Reserves. This alternative includes a rate increase of 5% in 2012 with a cumulative 37% increase projected through 2016. This alternative uses approximately $6 million of Reserve funds spread over the next five years and does not use its rate stabilization reserve of $5 million. Alternative 3- Midpoint between Alternate 1 and 2. This alternative includes a rate increase of 7.5% in 2012 with a cumulative 37% increase projected through 2016. This alternative uses approximately $3 million of Reserve funds spread over the next five years and does not use its rate stabilization reserve of $5 million. During these meetings the 'Ill-Valley Water Retailers argued for a zero-percent option however, the Finance Committee opted to recommend Alternative 3 with a 5% increase to the Board. At the September 21, 2011 Public Board Meeting, the Directors agreed to schedule a Special Board Meeting prior to the October 19, 2011 Rate Adoption Meeting to clarify the reserve policy levels and AMP funding drivers for the proposed rate increases. City staff will continue to stress the importance of holding increases down during the current economic difficulties. DISCUSSION City staff values its relationship with the Zone 7 Board and agency staff and supports its approach to maintain a balance between controlling costs and the difficult state of the current economy. Further, while staff recognizes the pros and cons of all three water rate alternatives, it is important that any new rate schedule reflect both Zone 7's economic realities and the region's overall financial conditions. As a result, staff is recommending a Zero-Percent Rate Increase in 2012. Sub itfedrb Fiscal review Approve by: Daniel Srr}lth Emily Wagner Nelson Fialho Director, Finance Director City Manager Operations Services Department Attachment: 1 . Resolution Page 2 of 2