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RESERVES On April 17, 2013, the Zone 7 Board adopted an interim reserve policy (Resolution No. 13-4265). The purpose of the policy was to ensure the Agency's ability to respond to changes in the economic environment and service demands with minimal impact on its customers while maintaining the financial integrity of the Agency. The policy also established minimum and maximum limits attributed to each reserve based on commonly exercised best practices from among industry peers. For Fund 100, the interim policy added a Drought Contingency Reserve and redefined the Rate Stabilization Reserve and its usage. At the end of FY 2012-13, reserves within Fund 100 reached $31.5M. During the drought $26M of reserves were used, leaving the fund with a balance of$5.4M at the end of FY 2015-16. The financial impacts of the drought provided the agency with a test case to review and revise the Interim Reserve Policy. On September 28, 2016, the Board adopted Resolution No. 16-166 approving a Final Reserve Policy. The revisions to the policy mostly impacted Fund 100. These revisions are summarized the table below. Rc.cl e Former Policy :1do ted Policy Minimum 32 days of operating expenses 60 days of operating expenses Operating Target 60 days of operating expenses 90 days of operating expenses Maximum 90 days of operating expenses 120 days of operating expenses Minimum 1%of Water Enterprise assets 2%of Water Enterprise Assets Emergency Target 2%of Water Enterprise assets 2.5%of Water Enterprise Assets Maximum 3%of Water Enterprise assets No change Drought Minimum 7%of budgeted water sales 5%of budgeted water sales Contingency Target no target 10%of budgeted water sales Maximum 7%of budgeted water sales 20%of budgeted water sales Minimum 6%of budgeted water sales 10%of budgeted water sales Rate Stabilization Target $6.8M 15%of budgeted water sales Maximum no maximum 20%of budgeted water sales In November 2014, the American Water Works Association published an article, "Why Water Agencies Need Reserves" by Sanjay Gaur, Johnathan Cruz and Drew Atwater. This article discusses the many challenges faced by water agencies, including mandated conservation, drought, aging infrastructure and regulatory requirements related to water quality. These challenges underscore the need to have a formal reserve policy in place.A formal reserve policy is beneficial because it can help ensure that adequate cash is on hand to meet working capital needs and cope with revenue shortfalls, and achieve or maintain a strong credit rating for future debt issues. A very strong cash position and prudent financial policies were cited as reasons why the agency received strong credit ratings. It is therefore prudent for the Agency to maintain or improve its financial position. DISCUSSION AND ANALYSIS: On September 19, 2018 staff presented two additional rate scenarios which included funding for water supply reliability projects ranging from $9M to $15.2M through FY 2021-22. Staff has taken a closer look at the proposed funding of future water supply reliability projects and recommends reducing the amount to$3M over the next four years until more information is available. 6