CITY COUNCIL WORKSHOP AGENDA PACKET

Page 3 of 10 by the City Council, staff will proceed to the Documentation and Adoption phase, which includes documenting the rate study methodology and presenting a final report to be considered by the City Council in June, conducting the ratepayer notification process from July-September, and recommending City Council approval for final water rates adoption in October 2025. DISCUSSION Financial Plan Analysis Assumptions The financial plan analysis made two major assumptions from the recent City year-end report on the water fund reserve target and the industrial standard practice of debt coverage requirements. The operating reserve policy adopted by the City Council on June 6, 2023, requires reserves between 30.0-40.0 percent of operating expenses with a target of 35.0 percent. The current 20.9 percent reserve level is significantly below the recommended target. In the financial plan analysis, staff set an operating and capital reserve target of 35 percent of annual operating expenses aligned with the City Council's direction; this is equivalent to about $15 million. The purpose of the reserve fund is to set aside funds to pay for unexpected operating costs, cost increases, emergencies and similar unexpected, unplanned costs. The financial plan also assumed a minimum of 125 percent of annual debt service. Under this assumption, the net revenue must be 1.25 times the annual debt service. This goal aims to avoid technical default, maintain debt rating, and preserve the ability to issue debt in the future. Similar to other water retailers, the City could elect to choose its own internal policy of 150, 175, or 200 percent to secure better bond ratings and interest rates; however, collectively WRE, staff and the Water Advisory Group recommend 125 percent, based on where the water fund is currently and industry standard. Implementation Scenarios and Analysis Results The financial plan analysis conducted is driven by the needs identified and cost estimated in the WSMP. Three implementation scenarios were analyzed in this process: Stabilize, Enhance and Accelerate. The scenarios represent three levels of investment in the City’s water system to enhance water service level reliability, rehabilitate aging infrastructure, improve distribution system and fire flow capacity, etc. The three proposed financial plan scenarios evaluate various levels of rate revenue adjustments and capital financing strategies, including potential debt financing. These scenarios are designed to ensure the water enterprise meets its financial performance targets, funds essential system improvements, and supports the selected WSMP CIP alternative. As an overview, the 5-year WSMP costs for each scenario are: • Stabilize: reduced near-term costs, deferred projects for infrastructure rehabilitation, higher long-term costs – $63.0 million • Enhance: slightly reduced near-term costs, deferred some projects for infrastructure rehabilitation, higher long-term costs – $73.2 million • Accelerate: invest in infrastructure rehabilitation, increased near-term costs, lower long- term costs, more difficult for staff to implement – $108.0 million Page 5 of 27