Zone 7 Meeting - June 1, 2022
4. Proposed Two-Year Budget: Fiscal Years 2022-23 & 2023-24 MINUTES OF THE BOARD OF DIRECTORS ZONE 7 ALAMEDA COUNTY FLOOD CONTROL AND WATER CONSERVATION DISTRICT SPECIAL MEETING June 1, 2022 The following were present: DIRECTORS: DENNIS GAMBS LAURENE GREEN ANGELA RAMIREZ HOLMES SARAH PALMER OLIVIA SANWONG MICHELLE SMITH MCDONALD DIRECTORS ABSENT: SANDY FIGUERS ZONE 7 STAFF: VALERIE PRYOR, GENERAL MANAGER OSBORN SOLITEI, TREASURER/ASSISTANT GENERAL MANAGER - FINANCE JARNAIL CHAHAL, ENGINEERING MANAGER RHETT ALZONA, PRINCIPAL ENGINEER KEN MINN, GROUNDWATER RESOURCES MANAGER ELIZABETH FOSS, FINANCIAL ANALYST JAVIA GREEN, FINANCIAL ANALYST ALEXANDRA BRADLEY, COMMUNICATIONS SPECIALIST AMANDA ROGERS, ADMINISTRATIVE ASSISTANT COUNSEL: REBECCA SMITH, DOWNEY BRAND Item 1 - President Ramirez Holmes called the meeting to order at 6:01 p.m. Item 2 - Item 3 - 3. Public Comment - There were no comments from the public. Item 4 - 4. Proposed Two-Year Budget: Fiscal Years 2022-23 & 2023-24 Osborn Solitei, Treasurer/Assistant General Manager - Finance, noted the following change to the supplement: For Fund 200, the grant amount for the Flood Management Plan, Phase 2, has changed from $698,000 to $2.1 million. This affected most of the tables in red. Mr. Solitei then introduced Elizabeth Foss, Financial Analyst. Ms. Foss's presentation included the Agency's budget process and overview, the current drought and its economic impacts, cost management efforts by the staff, a macro view of the proposed two-year budget and assumptions, a detailed breakdown of the proposed budget by operating and capital funds, and next steps. Director Smith McDonald arrived at 6:11 p.m. Staff answered Director Gambs' questions about how and what capital projects were reprioritized. Ms. Foss gave an explanation about the frequent condition assessments of facilities and equipment and how, based on these assessments, resources are allocated to higher priority projects. Projects such as some Mocho Groundwater Demineralization Plant (MGDP) projects and the replacement of the electrical system for the Mocho 2 building were mentioned and Rhett Alzona, Principal Engineer, went into more detail about why the MGDP emergency generator and variable frequency drives (VFD) replacement and the electrical systems at Mocho 2 could be deferred. He discussed the study regarding potential Perfluorooctane sulfonic acid (PFOS) discharge regulations and the Dougherty Reservoir power study. He also mentioned the need to plan for sludge drying beds at the Patterson Pass plant. Valerie Pryor, General Manager, explained that with the completion of the Del Valle and Patterson Pass projects, Zone 7 is coming to the end of an intense construction phase and are now going into a planning and preliminary design phase. This will make it a bit easier to reduce the capital budget. Also, because of very high supply chain costs right now, they propose slowing down and being in the design and preliminary planning phase for a year or two. Director Green noted the optimistic outlook of investment earnings and asked how that was decided, especially with a recession discussion looming. Mr. Solitei replied that they are seeing an uptick on investments. The Agency's interest rates, or yield, are increasing because the Fed is increasing rates. This is a projection of one year. They did not see any slowdown yet. Director Green asked how the budget would change if the conservation rate changed. Mr. Solitei responded that conservation rates affect the Agency on a calendar year basis because that is how rates are collected, increased, or decreased. A change in the conservation rate would definitely change the budget. If there is a conservation of another 5%, the Agency will be operating on a deficit on a year-to-year basis. If that happens, there is $3.8 million of unallocated fund balance to rely on. Director Sanwong asked if the $6.7 million in grant funding was all for flood related projects. Ms. Foss replied that it is strictly for flood, and it is incorporated in there because the grants have already been applied for. Director Sanwong asked if staff is looking into funding for Per- and Polyfluoroalkyl Substances (PFAS) treatment from the State. Ms. Pryor responded that they have signed onto some coalition letters requesting funding from the State budget. They are partnering with the Association of California Water Agencies (ACWA) and California Municipal Utilities Association (CMUA) and are all advocating for PFAS funding in the State budget. Director Sanwong inquired about the projected 6% for water rate increases and whether a few other scenarios had been run with other numbers. Ms. Foss replied that they did run other scenarios. They landed on the 6% because they were trying to balance the use of their unallocated fund balances from the current year with rate increases. They tried to maximize as much as they could of the unallocated fund balance, while still projecting a need for rate increases. They looked at not raising the rates and they looked at increments of 1% and found that the change in fixed rate from 42.5% to 45% provides about $800,000 in additional revenue. Every 1% increase is about $200,000 in additional revenue. Director Sanwong asked for a review of the three reserve funds within Fund 100. Ms. Foss explained that there is the operating reserve, that has a minimum target and maximum. The minimum is set at 60 days of the budgeted operating expenses, the target is 90 days and maximum is 120 days. There is an emergency reserve that has a minimum of 2% of the Agency's water enterprise assets. The target is 2.5% and the maximum is 3%. Finally, there is a reserve for economic uncertainties where the minimum is set at 10% of budgeted volume-based water sales. The target is 15% of the sales and the maximum is 20% of the sales. The Agency is currently funded at all the target levels. President Ramirez Holmes inquired about the purpose of the economic uncertainties fund. She felt that the Agency was there. Ms. Pryor pointed out that it was for any economic uncertainty, which gives the Agency the latitude to use if for any economic uncertainty, whether it is drought, recession, or some other sort of emergency. President Ramirez Holmes stated that she would like it used. Mr. Solitei explained that with the uncertain cost of water, having a cushion does help, but it is at the Board's discretion. Director Palmer asked why staff thought that water costs would go down. Ms. Foss replied that it is just a projection based on water models and what the State Water Project says. Director Palmer recommended exercising caution because she does not see that happening based on what she has read. Director Smith McDonald wanted to clarify to the public that tonight's meeting is not a decision on rates. This is a budget conversation and the rate setting process happens later. President Ramirez Holmes asked at what point Los Vaqueros and the Delta conveyance move off water rate funding to something else in terms of debt funding or property taxes. Ms. Pryor explained that Delta conveyance funding is provided from water rates through calendar year '24. Los Vaqueros and Delta conveyance are still in the planning, design, and permitting phases. The Board still must make the final decision on those projects. And that would be the time to analyze the appropriate long-term funding mechanism. Ms. Foss continued her presentation, covering the two remaining operating funds, Fund 110 and Fund 200. President Ramirez Holmes questioned the need to increase property taxes when the Agency has exceeded its maximum target level for Fund 110 in the reserves. Ms. Foss replied that the increase is just an assumption to keep up with rising costs. Ms. Pryor noted that the State Water Project costs are going up more than inflation, so they were anticipating large cost increases. And this particular reserve fund provides cash flow for property tax payments. The reason why it is at 100% of the following year's projected expenses, is that most of these payments get made in January, but property taxes are not collected until December and April, so this fund balance is cash flow to a large extent. President Ramirez Holmes questioned whether some of the capital projects would be debt financed in the next two-year budget cycle. Mr. Solitei replied that they have already applied for a loan for PFAS. Other projects not identified yet are going to be debt financed. President Ramirez Holmes asked how many pensions would be in Fund 200. Mr. Solitei responded that approximately 10% of the workforce is funded out of 200. President Ramirez Holmes noted that the policy does not say anything about Fund 200, which should be corrected and clarified. She added that, given the surplus, she would like to see the Agency contribute to the pension fund. Mr. Solitei said that they will bring it to the Finance Committee. Director Gambs asked if the property tax override in Fund 110 is purely for funding State Water Project costs. Ms. Foss confirmed that it is strictly for State Water Project debt obligations. Director Gambs asked what happens if the Agency does not set the property taxes high enough. Mr. Solitei replied that the balance of what will be paid to the Department of Water Resources (DWR) will come from the reserves. Director Gambs asked what happens if the Agency exceeds the reserve amount. Mr. Solitei replied that the Board would have to borrow money from another fund to pay. Director Gambs asked if that fund could be repaid back by raising property taxes in the future. Mr. Solitei replied yes and that the fund would have to be repaid with interest. Ms. Foss continued her presentation, covering capital Funds 120, 130, and 210. She stated that the next steps are to bring the budget for formal adoption on June 15; and then in late June, they will submit budgets for Funds 100, 110, and 200 to the county to be approved at their Board of Supervisors meeting. Director Palmer warned about assuming that costs will go down. President Ramirez Holmes recapped four things she would like to see the Board do: 1) Fund the reserve for economic uncertainties at the minimum level and use some of that money because she felt they were in a period of economic uncertainty; 2) Reconsider the assumption of the 6% rate increase in light of an unallocated fund balance in the next two years; 3) Contribute to the pension trust fund for this year since there is a surplus; and 4) Since $2 million is anticipated in the property tax increase for Fund 110, use the excess reserve instead, which still gives an excess reserve of $15 million. Ms. Foss clarified that they were not projecting a surplus but are projecting a deficit in the third quarter this year. There is an unallocated fund balance of $8 million. President Ramirez Holmes asked for clarification. Ms. Foss explained that the unallocated fund balance projected for the end of this year will be used to cover the deficit that they are projecting next year, therefore, reducing the unallocated fund balance from $8 million down to $3 million. The unallocated fund balance has been declining over time because the Agency is using it to cover its deficits each year. Ms. Pryor added that in layperson's terms, the bills are exceeding the income, and the Agency is drawing down on savings to make that up. Director Palmer felt that showing a decrease or an increase in the deficit, and a decrease in those funds over time would be a very useful thing for everyone to see. She also suggested adding asterisk notes that indicate if the fund could be used to take away the deficit or reduce the deficit. Director Sanwong agreed and suggested including the minimum and maximum targets in the presentation. Director Green agreed with funding the pension liability. She felt that 10% conservation is not enough. She also had mixed feelings about funding reserves for economic uncertainties at a minimum. While there were some economic uncertainties, she was not sure we were done with them. She preferred a little bit of a cushion. She also pointed out that if this had gone through the Finance Committee, more clarity would have been offered. Director Gambs stated that the budget is a living document that goes through constant changes. He mentioned that the Economic Uncertainty Fund Policy needs to go to the Finance Committee and come back with a recommendation for a change. He questioned why water rates were shown as lower in subsequent years than they are now. Mr. Solitei explained that there is an assumption of 10% versus 15% conservation so more water is being sold. Also, they do not know what transfers they will get. These are just assumptions. President Ramirez Holmes agreed that the budget is a living document, and there are some changes that can be made, but it is also the Agency plan and a statement of its values. She felt that any excess funds should be used to smooth out the future. Director Sanwong added that the assumptions that they place into the plan are very important in terms of how the Agency presents itself and how it is going to operate. The purpose of the workshop is to share some of their feedback in terms of what assumptions they would like to see in the final proposals as they put together this plan. Mr. Solitei reviewed the Board's suggestions and noted that the pension policy would have to be changed since the policy dictates the contribution amount. President Ramirez Holmes asked for more clarity regarding the operating deficit versus the unallocated fund balances. Mr. Solitei stated that they are going to provide a table for how much reserves are required. Item 5 - 5. Verbal Reports - none. Item 6 - 6. Adjournment - President Ramirez Holmes adjourned the meeting at 7:49 p.m. |