MINUTES OF THE ADMINISTRATIVE AND FINANCE COMMITTEE MEETING
August 10, 2006
CALL TO ORDER / ROLL CALL
Chair Dixon called the Special Administrative and Finance Committee meeting to order at 1:35 p.m. Committee members present were Chair Dixon, Vice Chair Dailey and Directors Bowersox, Brammell, Johnson, Knutson, Muir*, Steiner, Watton and Williams. Committee members absent were Vice-Chair Tu, Directors Parker and Price, and Representative Slater-Price. Also present were Directors Croucher, Lewanski, Lewinger, Loveland, Pocklington, Saunders and Sundrum. At that time there was a quorum of the Committee. Staff present was General Manager Stapleton, General Counsel Hentschke, Deputy General Manager Lanspery, Director of Finance/Treasurer Brust, Director of Water Resources Weinberg, Deputy Director of Finance Sandler and Controller Wade.
* Director Muir arrived at 1:50 p.m.
ADDITIONS TO AGENDA
There were no additions to the agenda.
PUBLIC COMMENT
There were no members of the public who wished to address the Committee.
Presentation on proposed reserve policy modifications. (Rate Model Work Group)
Mr. Sandler outlined the Rate Model Work Group’s (RMWG) recommendations and recognized the members of the RMWG. He also recognized the financial advisors that assisted: David Brodsly of Kelling, Northcross & Nobriga and Rich Morales of Wedbush Morgan Securities. He gave a brief history of the RMWG and described the process that they went through to reach their recommendations. Mr. Sandler outlined the risks that were taken into consideration. Director Lewinger asked if it was a fair analysis to say that the capacity charge revenue risk is different from the other risks in so far as the capacity charge revenue is a zero sum game. He said under this risk, you will collect the money at some time; you just do not know what year you will collect it in so the risk is cash flow in any one year. He further stated that with the other risks involving hydrology and interest rates, you have no guarantee of ever getting the money back. Mr. Sandler responded that it made sense with respect to developer behavior; however, it is possible that economic growth may not materialize with what was forecasted. Director Johnson asked if population drop was a possible fifth risk? He wondered if people leaving California because of the high cost of living would be a risk because of loss of revenue. Ms. Brust responded that it was possible if some of the plants were being built and you have idle production or unused assets. However, she explained that the meters that we have are typically new developments. If someone is leaving an already existing structure and there are no modifications that does not have as much of an impact on us. Certainly, population is going to have an impact on the water demand.
Mr. Brodsly presented comparable agency information that was taken into consideration.
Mr. Sandler then presented the RMWG recommendations and explained how the recommendations were developed. In particular, a modification to the Rate Stabilization Fund to protect the Water Authority against two and one-half years of wet weather and increasing the Debt Service Coverage Ratio policy from 1.2 times to 1.5 times. He described the benefits and potential impacts of the proposed policies, and reviewed items for future consideration.
Director Steiner asked Mr. Brodsly if he was comfortable that the proposed changes could change his thought process concerning the Water Authority’s rating. Mr. Brodsly responded that he was. He stated that the fact that the Water Authority makes the changes now would be seen very significantly as an act of proactive planning and movement. He stated that going from 1.2 times to 1.5 times is something that does measure significantly in the eyes of rating agencies.
Director Muir asked if the RMWG considered the California Supreme Court Ruling on Bighorn 218. He also asked why the Water Authority would not fall within 218 as it related to rate increases. Mr. Hentschke responded that the Water Authority does not fall within 218 because its rates and charges are not levied on parcels or on persons as an incident of property ownership. Director Brammell asked if the Board could get some additional information on 218. Mr. Hentschke indicated that he would be dialoging with other agencies and would try to have a report at the August Board meeting.
Director Watton asked if the CIP overruns were included in the analysis. Ms. Brust responded no, that there was no new data at this point. Director Watton inquired if the MWD rate model was included. Ms. Brust responded that the MWD rate projections were included.
Director Lewinger asked how much of the $31 was related to wet weather protection and how much was related to the bond coverage going from 1.2 times to 1.5 times. Mr. Sandler responded that it is difficult to segregate; however, he stated that in the early years the rate impact tended to be driven more by building the rate stabilization fund to two and one-half years and in the outer years, the impact is more the coverage.
Director Lewinger asked if anyone looked at the cost that the rate payers will incur by going from 1.2 times to 1.5 times versus simply buying insurance at the time we go out for debt. Mr. Brodsly responded that all you are doing with reserves is collecting money earlier that you eventually would have to collect anyway and the goal is more stability. He further stated that in terms of the rating, to the extent that your credit is better, your cost of bond insurance goes down, so much of your debt will probably be insured anyway. By saving the money and reserving you have the benefit of risk mitigation and you have on-going savings in the cost of capital. Ms. Brust stated that the last few bond issues were AAA insured because the Water Authority had a clause in the bond issue that allowed the bidder to insure it. She stated that the insurance allows us to sell a higher quality bond to the investors; it does not protect our credit rating. Director Lewinger asked if the increase in cost of going from 1.2 times to 1.5 times should be offset by savings in issuing debt. Mr. Brodsly responded yes.
Director Pocklington asked how many dollars the Water Authority has in reserve today compared to the goal amount. Ms. Brust responded that the Water Authority currently has approximately $230 million in total reserves, and that the new policies would add about $15 million to the rate stabilization fund by 2010. Director Pocklington asked if the rate increase is less than 1% per year over the two and one-half years. Ms. Brust responded that it is actually phased in over three years and is right about 1% per year. She stated that in the last few years we have had significant reserve reduction. With the current policy we have a minimum of $19 million and the maximum is $96 million; however, the projection is $34 million. The Water Authority is far from the maximum. In the last two years, the Water Authority has stopped budgeting at the maximum. She indicated that the Water Authority is below where it should be.
Director Brammell expressed his concern with the Water Authority being a CIP-driven agency. He stated that perhaps there are opportunities to reduce the CIP such as the desal project. He stated that he is supportive of raising the rates with the understanding that we are going to cash fund more projects and service debt faster.
Director Muir asked where the Little Hoover Commission stands relating to this. Ms. Stapleton responded that there has been no activity of the Little Hoover Commission since the original report came out.
Director Dailey moved, Director Brammell seconded, and the motion carried unanimously to recommend the approval of the Rate Model Work Group recommendations to the full Board of Directors.
Director Lewinger commented that he thought a financial analysis had been done in the past on how much money should be brought in by current rate payers and how much money should be brought in by future rate payers; he wondered if based on the action just taken, we should take another look at that study and the general finances of the Water Authority to see if we are still in balance. Ms. Brust responded that the Water Authority is at 13% overall cash funding and this action would take us to 21%. She stated that many of our comparable agencies are higher than us; 20% to 30% is the industry standard.
Discussion on the Fiscal Year ended June 30, 2006 audit plan and auditors’ scope of work.
Debra Harper of Lance, Soll and Lunghard, LLP, outlined the upcoming audit plan and scope of work. She mentioned that the Board should bring any concerns to the auditor’s attention that would require a special audit. She also reviewed new pronouncements that will be implemented in the current fiscal year and upcoming pronouncements to be implemented in fiscal year ending June 30, 2008.
Director Johnson expressed concern about accounting problems at the city of San Diego. He asked if a similar situation could happen at the Water Authority. Ms. Harper responded that there is always the possibility for that to happen anywhere; however, she commented that the Water Authority is very different from the city of San Diego. She stated that the auditors have an obligation to submit management comments and give recommendations. Director Lewinger stated that he understood the OPEB programs have to be implemented by June 30, 2008. He asked if there were any benefits or risks with implementing it sooner than June 30, 2008. Ms. Harper responded that it would depend on whether or not you plan on funding it. She said that if you decide to fund it, the cash flow would be out sooner; however, if you do not decide to fund it there would be no benefit. He asked if you would want to do an actuarial analysis now to decide whether or not we want to fund it. Ms. Brust responded that funding is in the Water Authority budget for 2007 for the actuarial analysis and an RFP is planned for the fall after the completion of this audit.
Adjournment
There being no further business to come before the Administrative and Finance Committee, Chair Dixon adjourned the meeting at 3:40 p.m.
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Jesse Dixon, Chair
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