CITY COUNCIL WORKSHOP AGENDA PACKET

Page 4 of 10 Further details on each scenario are described below. No Revenue Increases Scenario As a reference point, the financial plan also includes a No Revenue Increases scenario. This scenario illustrates the financial implications of maintaining current rate revenues without adjustments while implementing the CIP in the Stabilize scenario described further in this report. It serves as a baseline to assess the City’s ability to fund operating and capital expenses, meet debt coverage requirements, and maintain adequate reserve balances over the long term. The No Revenue Increases scenario assumes no water rate adjustments and only implements the minimum capital improvements necessary to stabilize the water system over a 20-year period. This scenario does not include any additional debt issuance. Based on the financial analysis, the following key findings were observed: • Revenue Requirement: Without an increase in rate revenue, the City will experience an operating deficit starting in FY 2026/27 • Fund Balance: The water enterprise fund balance is projected to become negative beginning in FY 2026/27 without a rate adjustment • Debt Coverage: The City will be in technical default starting in FY 2026/27, failing to meet minimum debt coverage requirements • Capital Projects: All water system capital improvement projects (CIP) would need to be cash-funded, limiting the City's ability to address necessary system upgrades. As shown in Figure 1 below, and in Attachment 1, the analysis indicates that a rate increase is essential to prevent operating deficits, maintain adequate reserve balances, and meet the City's debt coverage requirements. Figure 1 – No Revenue Increases Model Results Proposed Approach to Address Financial Shortfalls To avoid financial deficits in FY 2026/27, the City must increase total water and recycled water Page 6 of 27