The General Fund of the District shall consist of a general
checking account, a bond principal and interest fund savings account,
a petty cash and change fund, a legal account with State of California
Local Agency Investment Fund and investments as may be authorized
by the Board. All accounts are managed by the Finance Department of
the City of Encinitas.
(Res. No. 2020-02, adopted 5/20/20)
A general interest-bearing savings (commercial) account shall
be maintained at a local bank. All moneys received from water sales
and services shall be deposited daily in this account. Funds shall
be transferred from this account to special accounts as needed.
(Res. No. 2020-02, adopted 5/20/20)
A general checking account shall be maintained at a local bank.
Except as provided in this section, no claim against the District
shall be paid by the Treasurer until allowed by the Board. All warrants
require two signatures; one of which must be a Board member and the
second may be the Treasurer, Finance Manager, Secretary, General Manager,
or a second Director. Warrants, authorized by the General Manager,
shall be paid after receipt of goods or services or as authorized
by agreements or contracts. The Board members present at the next
Board meeting shall review the paid warrants and indicate their approval
by motion or have entered in the minutes their dissatisfaction of
any such dispersal and directions for such future expenses.
(Res. No. 2020-02, adopted 5/20/20)
A petty cash and change fund shall be maintained at the City
Hall cashier station. The petty cash fund shall be reimbursed as required
but shall not contain more than $150.00. The change fund at the cash
register shall not exceed $150.00.
(Res. No. 2020-02, adopted 5/20/20)
The District’s cash management process will operate pursuant
to the City of Encinitas Investment Policy as described in its Administrative
Manual Admin Policy F019.
(Res. No. 2020-02, adopted 5/20/20)
Section 7.6.1.
Purpose. A key element of prudent
financial planning is to ensure that sufficient funding is available
for current operating, capital, and debt service needs. Additionally,
fiscal responsibility requires anticipating the likelihood of, and
preparing for, unforeseen events. The San Dieguito Water District
(District) will at all times strive to have sufficient funding available
to meet its operating, capital, and debt service obligations. Funds
will be accumulated and maintained to allow the District to fund expenses
in a manner that is consistent with short- and long-term planning
documents and to avoid significant rate fluctuations due to changes
in cash flow requirements.
The Board of Directors (Board) may designate specific reserve
accounts and maintain minimum reserve balances consistent with statutory
obligations that it has determined to be in the best interest of the
District. The Policy directives outlined in this document are intended
to ensure the District has sufficient funds to meet current and future
needs. The Board will review the level of reserves annually.
Section 7.6.2.
General Provisions. The District
will maintain reserves in designated accounts. The target reserves
balances are considered the minimum necessary to maintain the District’s
credit worthiness and adequately provide for:
(a)
Compliance with applicable statutory requirements.
(b)
Financing of future capital facilities.
(c)
Repair or replacement of existing assets.
(d)
Cash flow requirements.
(e)
Immediate increases in commodity (water) costs.
(f)
Sudden loss of revenue due to economic, regulatory, or weather conditions.
(g)
Contingencies or unforeseen operating or capital needs.
(h)
Economic uncertainties, local disasters, and other financial hardships
or downturns in the local or national economy.
|
The minimum target levels established for each reserve represents
the baseline financial condition that is acceptable to the District
from a risk management and financial planning perspective. Maintaining
reserves at appropriate levels is an ongoing business process that
consists of periodic assessment of revenues and expense levels. This
assessment includes (either alone or in combination with each other),
but is not limited to, a review of fees and charges, water demands,
capital appropriations and financing methods, rate of return on investments
and levels of expenses. Assessments may be performed at any time,
but are typically performed during the budget process or water rate
studies.
|
Section 7.6.3.
Reserves. The District shall maintain
three reserves.
(a)
Operating Reserve:
(1)
Definition: The Operating Reserve provides
working capital to pay for operating and maintenance expenses in the
event of an emergency or unforeseen event.
(2)
Minimum Target Reserve Level: The Operating
Reserve target reserve level shall be a minimum of 90 days (25%) of
future fiscal year operating expenses.
(3)
Use: The Board may authorize the use of Operating
Reserve funds upon request of staff in response to temporary cash
flow deficiencies related to unplanned operations and maintenance
expenses.
(b)
Capital Replacement Reserve:
(1)
Definition: The Capital Replacement Reserve
provides working capital to ensure that funding is available for capital
projects in the event of an emergency or sudden loss of funding.
(2)
Target Reserve Levels: The Capital Replacement
Reserve shall have minimum and maximum target reserve levels. The
minimum target reserve level shall be one times the future five-year
average of annual capital appropriations (expenses). The maximum target
reserve level shall be two times the future five-year average of annual
capital appropriations (expenses). If at any time the Capital Replacement
Reserve exceeds the maximum target reserve level, funds from this
reserve shall be transferred to either the Operating or Rate Stabilization
Reserves.
(3)
Use: The Board may authorize the use of Capital
Replacement Reserve funds upon request of staff in response to emergency
capital project needs or a sudden loss of funding for previously budgeted
capital projects.
(c)
Rate Stabilization Reserve:
(1)
Definition: The Rate Stabilization Reserve
provides working capital to help mitigate the need for immediate water
rate increases due to sudden loss of revenues from water demand reductions
or sudden increases in water purchase costs.
(2)
Minimum Target Reserve Level: The Rate Stabilization
Reserve target reserve level shall be a minimum of 15% of future fiscal
year water rate (commodity) and service charge (fixed) revenue.
(3)
Use: The Board may authorize the use of Rate
Stabilization Reserve funds upon request of staff to allow for absorbing
temporary rate fluctuations resulting from short-term reductions in
revenues or increases in expenses.
|
Each of the above defined reserves shall be considered “unrestricted,”
as follows:
|
|
Unrestricted reserves have no externally imposed use restrictions.
The use of unrestricted reserves is at the discretion of the Board.
Unrestricted reserves are designated for a specific purpose, which
is determined by the Board. The Board also has the authority to redirect
the use of these funds as the needs of the District change.
|
Section 7.6.4.
Funding Sources and Review. At
the end of each fiscal year, the District shall perform a year-end
cash flow and working capital analysis as part of its year-end financial
results reporting. This analysis provides the amount working capital,
by Fund, that the District has available for use in its reserves at
the end of the fiscal year.
Both the Operating Reserve and the Rate Stabilization Reserve
shall be funded through cash accounts in the District’s Operating
Fund. The Capital Replacement Fund shall be funded through cash accounts
in the District’s Capital Replacement Fund.
The funding priority of the District’s reserves shall
be as follows:
(a)
Operating Reserve.
(b)
Capital Replacement Reserve.
(c)
Rate Stabilization Reserve.
|
In the event that at the end of the fiscal year, the District
does not have enough available working capital to fully fund all three
of its reserves to their respective minimum target levels, the Operating
Reserve shall be funded first, the Capital Replacement Reserve funded
to its minimum target level second, and the Rate Stabilization Reserve
funded third. At such time that it is determined that reserves are
funded below their minimum target levels, staff shall recommend a
financial plan to the Board which shall replenish reserves to their
minimum target levels, potentially through reductions in expenses
or increases in revenues.
|
|
Transfers between funds may be necessary at the end of the fiscal
year to fund the reserves to their minimum target levels (or in the
event the Capital Replacement Reserve exceeds its maximum target level).
Transfers shall be performed administratively as part of the District’s
fiscal year-end process.
|
|
In the event that the District has working capital available
in excess of the amount required to fund reserves at their minimum
target levels, the District’s reserves may be funded at above
their minimum target levels to further ensure the financial stability
of the District. Alternatively, the Board, upon staff recommendation,
may approve the use of excess reserve funds for purposes including,
but not limited to, minimizing future water rate increases, funding
capital projects or purchases, or paying down liabilities, which may
result in strategic benefits for the District and its ratepayers.
|
Section 7.6.5.
Delegation of Authority. The Board
of the San Dieguito Water District has the sole authority to amend
or revise the District’s Reserve Policy. Through approval of
this policy, the Board has established written procedures for staff
to follow in the management of the District’s reserve funds.
(Res. No. 2020-02, adopted 5/20/20)
This section sets forth policies to guide and support the development
and implementation of the District’s annual budget.
Section 7.7.1.
Balanced Budget. The District will
maintain an annual balanced budget. This means that:
(a)
Operating revenues are equal to or exceed operating expenses. User
fees and charges will be evaluated and set via the Long Range Financial
Plan.
(b)
Capital expenses will be based on the District’s 7 Year Capital
Improvement Program as well as its Long Range Financial Plan and will
be funded through either internal funding or debt financing.
(c)
Reserve fund balances must meet minimum policy levels.
|
Under this policy, operating revenues in certain years can fall
short of operating expenses as long as there is sufficient beginning
balance in the District’s reserve funds that can be utilized
to avoid unacceptable rate increases and fund unanticipated operating
and capital expenses, while ensuring that at the same time the ending
fund balance will meet minimum policy levels. In the event that a
budget shortfall is expected to continue beyond one year, the planned
use of reserves must be developed as part of a corresponding strategic
financial plan to close the gap through revenue increases and/ or
expense decreases.
|
|
Any year end operating surpluses will revert to unappropriated
balances for use in maintaining reserve levels set by policy and will
be available for capital projects and/or “one-time only”
expenses.
|
|
Maintaining a balanced budget will ensure that revenues are
sufficient to cover operating and maintenance expenses, fund debt
service, maintain liquidity reserve levels, and pay capital expenses.
|
Section 7.7.2.
Budget Document. The budget will
serve as the annual financial plan for the District. It will represent
the annual policy document of the Board of Directors for implementing
Board goals and objectives. The budget defines the resources necessary
to accomplish Board-determined service levels.
The General Manager shall annually prepare and present a proposed
budget to the Board of Directors no later than the regular Board meeting
in May of each year; and the Board will adopt such budget no later
than June 30 of each year. Funds may not be expended or encumbered
for the following fiscal year until the budget has been adopted by
the Board.
The District’s budget will be presented by department,
with a logical breakdown of programs and proposed expenses. A budget
document will be presented for discussion and review by the Board
and the public. This document will focus on policy issues and will
summarize expenses at the personnel, operating and maintenance, and
capital levels.
Section 7.7.3.
Budget Process. The District’s
budget schedule consists of the following steps:
Section 7.7.4.
Budget Control and Accountability.
Budget control is maintained at the departmental level. The General
Manager has the authority to approve appropriation transfers between
programs or departments. In no case may total expenses of the District
exceed what is appropriated by the Board, without a budget adjustment.
Budget accountability rests primarily with the General Manager of
the District.
Section 7.7.5.
Budget Adjustments. During the
year, if projects or expenses are needed that fall outside the adopted
budget, the item(s) will be placed on the next Board meeting agenda.
The Board will consider the allocation of additional funds from the
Operating Reserve Fund to cover the costs, if approved. Annually,
staff prepares a quarterly budget status report for the Board. At
this point, if there are any budget adjustments that merit consideration,
they will be presented at the Board meeting to be approved by the
Directors. Funds are then allocated from the Reserve Fund to be used
for those specific requests for the remainder of the fiscal year.
Section 7.7.6.
Capital Plant and Equipment. The
annual budget will provide for adequate maintenance and replacement
of capital assets. The District will develop an annual seven-year
plan for capital expenses, including equipment and improvements. All
capital improvements will be made in accordance with an adopted and
funded capital improvement program. Cost tracking for components of
the capital improvement program will be updated regularly to ensure
project completion within budget and established timelines. The development
of the capital improvement budget will be coordinated with the development
of the operating budget. It is the District’s objective to maintain
all of its assets at a level adequate to protect the District’s
capital investments and minimize maintenance and replacement costs.
(Res. No. 2020-02, adopted 5/20/20)
Section 7.8.1.
Policy Statement. This policy documents
the District’s goals for the use of debt instruments and provides
guidelines for the use of debt for financing the District infrastructure
and project needs. The District’s overriding goal in issuing
debt is to respond to and provide for the infrastructure and capital
project needs of its customers while ensuring that debt is issued
and managed prudently in order to maintain a sound fiscal position
and protect credit quality. The District issues debt instruments,
administers District-held debt proceeds and makes debt service payments,
acting with prudence and diligence, and attention to prevailing economic
conditions.
The District will endeavor to pay for all infrastructure and
other projects from a combination of current revenues, available reserves,
and prudently issued debt. The District believes that debt can provide
an equitable means of financing projects for the District’s
customers and provide access to new capital needed for infrastructure
and project needs. Debt will be used to finance projects if it: (i)
meets the District’s goal of equitable treatment of all customers,
both current and future; (ii) is the most cost-effective means available
to the District; and (iii) is fiscally prudent, responsible, and diligent
under the prevailing economic conditions.
The District’s debt management policy is designed to:
(a)
Establish parameters for issuing debt;
(c)
Document the objectives to be achieved by staff both prior to issuance
and subsequent to issuance;
(d)
Promote objectivity in the decision-making process; and
(e)
Facilitate the financing process by establishing important policy
decisions in advance.
|
The District will adhere to the following legal requirements
for the issuance of public debt;
|
|
(a)
|
The State law which authorizes the issuance of the debt;
|
|
(b)
|
The Federal and State laws which govern the eligibility of the
debt for tax-exempt status;
|
|
(c)
|
The Federal and State laws which govern the issuance of taxable
debt;
|
|
(d)
|
The Federal and State laws which govern disclosure, sale and
trading of the debt.
|
Section 7.8.2.
General Provisions. The District
will provide for a periodic review of its financial performance, and
review its performance relative to the financial policies outlined
herein. These financial policies will be taken into account during
the capital planning, budgeting, and rate setting process.
Necessary appropriations for annual debt service requirements
will be routinely included in the District’s annual budget.
The District will maintain proactive communication with the
investment community, including rating agencies, credit enhancers,
and investors, to ensure future capital market access at the lowest
possible rates.
The District utilizes an Asset Management Master Plan to determine
its long-term infrastructure and other project needs for the next
10 years. The District evaluates each project in relation to established
levels of reserves, current rate structure, expected asset life/replacement
timeline, and available revenue sources to ensure that adequate financial
resources are available to support the District’s financial
obligations.
The District’s Debt Management Policy, Budget Policy,
Reserve Policy and Investment Policy are integrated into the decision-making
framework utilized in the budgeting and capital improvement planning
process. As such the following principles outline the District’s
approach to debt management.
(a)
The District will evaluate funding for each capital project on a
case-by-case basis. The District will assess whether to pay for such
projects from current revenues and available reserves prior to or
in combination with the use of debt.
(b)
The District will issue debt only in the case where there is an identified
source of repayment. Bonds will be issued to the extent that: (i)
projected existing revenues are sufficient to pay for the proposed
debt service together with all existing debt service covered by such
existing revenues; or (ii) additional projected revenues have been
identified as a source of repayment in an amount sufficient to pay
for the proposed debt.
(c)
Debt issuance for a capital project will not be considered unless
such project has been incorporated into the Asset Management Master
Plan.
(d)
User fees and water rates will be set at adequate levels, which are
fair and nondiscriminatory and comply with State law, to generate
sufficient revenues to pay all operating and maintenance costs, to
maintain sufficient operating reserves, and to pay debt service costs.
Section 7.8.3.
Conditions for Debt Issuance. The
following policies formally establish parameters for evaluating, issuing,
and managing the District’s debt. The policies outlined below
are not intended to serve as a list of rules to be applied to the
District’s debt issuance process, but rather to serve as a set
of guidelines to promote sound financial management.
Before issuing debt, the District will evaluate the availability
of grants and low interest loans before accessing the capital markets.
In issuing debt, the District objectives will be to:
|
(1)
|
Achieve the lowest cost of capital.
|
|
(2)
|
Ensure ratepayer equity.
|
|
(3)
|
Maintain high credit ratings and access to credit enhancement.
|
|
(4)
|
Preserve financial flexibility.
|
(a)
Standards for Use of Debt Financing. When
appropriate, the District will use long-term debt financing to achieve
an equitable allocation of capital costs/charges between current and
future system users, to provide more manageable rates in the near
and medium term, and to minimize rate volatility.
The District shall not construct or acquire a facility if it
is unable to adequately provide for the subsequent annual operation
and maintenance costs of the facility throughout its expected life.
Capital projects financed through debt issuance will not be
financed for a term longer than the expected useful life of the project.
(b)
Financing Criteria. Each debt issuance should
be evaluated on an individual basis within the framework of the District’s
long-term financial plan, as well as within the context of the District’s
overall financing objectives and current market conditions.
The District will evaluate alternative debt structures (and
timing considerations) to ensure the most cost-efficient financing
under prevailing market conditions.
(1)
Credit Enhancement. The District will consider
the use of credit enhancement on a case-by-case basis. Only when clearly
demonstrable savings can be realized shall credit enhancement be utilized.
(2)
Cash-Funded Reserve vs. Surety. The District
may purchase a surety policy or replace an existing cash-funded debt
service reserve fund when deemed prudent and advantageous.
The District may permit the use of guaranteed investment agreements
for the investment of reserve funds pledged to the repayment of any
District debt when it is approved by the Board of Directors.
(3)
Call Provisions. In general, the District’s
securities should include optional call provisions. The District will
avoid the sale of non-callable, long-term fixed rate bonds, absent
careful evaluation of the value of the call option.
(4)
Additional Bonds Test/Rate Covenants. The
amount and timing of debt will be planned to comply with the additional
bonds tests and rate covenants outlined in the appropriate legal and
financing documents, and these policies.
(5)
Short-Term Debt. The District may utilize
short-term borrowing to serve as a bridge for anticipated revenues,
construction financing or future bonding capacity.
(6)
Use of Variable Rate Debt. The District will
not issue variable interest rate debt unless: (i) the proposed debt
(a) can be converted to a fixed rate, or (b) is hedged (the District
has an offsetting position, or investment to insulate itself from
adverse interest rate changes either for an interim period, or to
maturity) by use of a put-type mode, swap agreement or hedging mechanism
(e.g., interest rate cap); or (ii) all outstanding (un-hedged) variable
rate debt, including the proposed new variable debt, does not exceed
100% of the District’s “hedge position” in aggregate.
For this purpose, the District’s hedge position will be calculated
as the District’s unrestricted cash reserves multiplied by 150%.
(7)
Investment of Bond Proceeds. Bond proceeds
will be invested in accordance with the permitted investment language
outlined in the bond documents for each transaction, unless further
restricted or limited in the District’s Investment Policy. The
District will seek to maximize investment earnings within the investment
parameters set forth in the respective debt financing documentation.
The reinvestment of bond proceeds will be incorporated into the evaluation
of each financing decision; specifically addressing arbitrage/rebate
position, and evaluating alternative debt structures and refunding
savings on a “net” debt service basis, where appropriate.
(c)
Refinancing Outstanding Debt. The Treasurer
shall have the responsibility to evaluate potential refunding opportunities.
The District will consider the following issues when analyzing potential
refinancing opportunities:
(1)
Debt Service Savings. The District shall establish
a target savings level equal to three percent of the par of debt refunded
on a net present value (NPV) basis. This figure will serve only as
a guideline; the District shall evaluate each refunding opportunity
on a case-by-case basis. In addition to the savings guideline, the
following shall be taken into consideration:
(2)
Restructuring. The District may seek to refinance
a bond issue on a non-economic basis, in order to restructure debt,
to mitigate irregular debt service payments, accommodate revenue shortfalls,
release reserve funds, or comply with and/or eliminate rate/bond covenants.
(3)
Term/Final Maturity. The District may consider
the extension of the final maturity of the refunding bonds in order
to achieve a necessary outcome, provided that such extension is legal.
The term of the bonds should not extend beyond the reasonably expected
useful life of the asset being financed. The District may also consider
shortening the final maturity of the bonds. The remaining useful life
of the assets and the concept of inter-generational equity should
guide these decisions.
(4)
Economic vs. Legal Defeasance. When evaluating
an economic versus legal defeasance, the District shall take into
consideration both the financial impact on a net present value basis
as well as the rating/credit impact. The District shall take all necessary
steps to optimize the yield on its refunding escrows investments and
avoid negative arbitrage.
(d)
Outstanding Debt Limitations. Prior to issuance
of new debt, the District shall consider and review the latest credit
rating agency reports and guidelines to ensure the District’s
credit ratings and financial flexibility remain at levels consistent
with the most highly-rated comparable public agencies.
(e)
Method of Issuance. The District will determine,
on a case-by-case basis, whether to sell its bonds competitively or
through negotiation.
(1)
Competitive Sale. In a competitive sale, the
District’s bonds shall be awarded to the bidder providing the
lowest true interest cost (“TIC”), as long as the bid
adheres to requirements set forth in the official notice of sale.
(2)
Negotiated Sale. The District recognizes that
some bond issues are best sold through negotiation with a selected
underwriter. The District has identified the following circumstances below in which this would likely be the case:
(i)
Issuance of variable rate or taxable bonds.
(ii)
Complex structures or credit considerations (such as non-rated
bonds), which require a strong pre-marketing effort. Significant par
value, which may limit the number of potential bidders, unique/proprietary
financing mechanism (such as a financing pool), or specialized knowledge
of financing mechanism or process.
(iii)
Market volatility, such that the District would be better served
by flexibility in the timing of its sale in a changing interest rate
environment.
(iv)
When an underwriter has identified new financing opportunities
or presented alternative structures that financially benefit the District.
(v)
As a result of an underwriter’s familiarity with the project/financing,
that enables the District to take advantage of efficiency and timing
considerations.
(3)
Private Placement. From time to time the District
may elect to issue debt on a private placement basis. Such method
shall be considered if it is demonstrated to result in cost savings
or provide other advantages relative to other methods of debt issuance,
or if it is determined that access to the public market is unavailable
and timing considerations require that a financing be completed.
(f)
Market Communication, Debt Administration and Reporting
Requirements.
(1)
Rating Agencies. The Treasurer shall be responsible
for maintaining the District’s relationships with Standard &
Poor’s Ratings Services, Fitch Ratings and Moody’s Investment
Service. The District may, from time to time, choose to deal with
one, two, or all of these agencies as circumstances dictate. In addition
to general communication, the Treasurer shall: (1) meet with credit
analysts at least once each fiscal year; and (2) prior to each competitive
or negotiated sale, offer conference calls with agency analysts in
connection with the planned sale.
(2)
Observance of Debt Covenants. The Treasurer
shall periodically, and at least annually, ensure
the District is—and is expected to remain—in compliance
with all legal covenants for each debt issue.
(3)
Board Communication. The Treasurer shall include
in an annual report to the Board of Directors feedback from rating
agencies and/or investors regarding the District’s financial
strengths and weaknesses and recommendations for addressing any weaknesses.
(4)
Continuing Disclosure. The District shall
remain in compliance with Rule 15c2-12(b)(5) by filing its annual
financial statements and other financial and operating data for the
benefit of its bondholders as covenanted in each debt issue’s
Continuing Disclosure Agreement.
(5)
Record-Keeping. A copy of all debt-related
records shall be retained at the District’s offices. At minimum,
these records shall include all official statements, bid documents,
bond documents / transcripts, resolutions, trustee statements, leases,
and title reports for each District financing (to the extent available).
To the extent possible, the District shall retain an electronic copy
of each document—preferably in pdf format.
(6)
Arbitrage Rebate. The use of bond proceeds
and their investments must be monitored to ensure compliance with
all Internal Revenue Code Arbitrage Rebate Requirements. The Treasurer
shall ensure that all bond proceeds and investments are tracked in
a manner which facilitates accurate calculation; if a rebate payment
is due such payment is made in a timely manner.
(Res. No. 2020-02, adopted 5/20/20)
