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BIRCH BAY WATER & SEWER DISTRICT

Financial Management Policy Statement

The following policies are intended to give direction to planning decisions and help ensure that the District provides for adequate wastewater and potable water services to all customers efficiently, reliably and at the lowest possible cost consistent with prudent utility management.

    1. General Rate and Financial Management Policies
      1. Rates will be adopted as a part of the District’s annual budget process. Rates will be reviewed annually and adjusted as appropriate. As part of that process, a ten year revenue forecast (Revenue Model) should be used for financial planning purposes. The “model” projects the annual rate increase needed, on a level basis, to meet all operating and capital funding requirements over the ten year period while moderating the need for large rate adjustments in a single year.
      2. Rates will be set at levels which will generate revenue sufficient to ensure payment of all operating and maintenance expenses and debt service, to ensure compliance with all applicable covenants to bond holders, and to meet such additional requirements as set forth in these policies.
      3. In the event of lower than projected revenue, the District has established a Rate Stabilization Fund to allow for the District to meet its policy on debt service coverage. The Rate Stabilization Fund includes a minimum balance equal to at least 50% of the annual debt service coverage amount.
      4. Generally, rates charged for each class of customer will be set to reflect the cost of supplying service to that class. Rates that are out of balance with respect to costs may be adjusted over a multi—year period to avoid disruption to any class of ratepayers.
      5. The operating and maintenance budget will be set at a level sufficient to maintain facilities in good condition, provide sufficient staffing to ensure safe and continuous operation, and carry out the operations and programs necessary to meet all permit requirements.
      6. Necessary appropriations for annual debt service requirements will be included in the annual budget.
      7. The District will exercise responsible cost control of administrative overhead expenses consistent with industry standards.
      8. Operating surpluses (after payment of debt service and any required deposits into the Bond Reserve Account) will be applied to the Operating Reserve, Re-Use Reserve, and Capital construction.
      9. Major capital investments and other commitments that would significantly affect costs or rates for Utility services will be evaluated using the Revenue Model. Such evaluations will address both short- and long-term impacts on costs and revenues, and address risks and uncertainties associated with the investments.
      10. The District requires development projects to complete the infrastructure improvements necessary for new connections, both local facilities and general system upgrades, at the developer's expense and risk.
      11. Under state law, the District is allowed to collect a connection or general facilities charge from new connections. The District's policy is to develop this charge based on the value of the existing system less contributions and grants, including 10 years of interest, plus the estimated cost of capacity-related projects planned within 10 years. In addition, the District periodically updates the charge (bi-annually at least) to reflect recent trends in growth and construction cost and changes to the 10-year capital improvement plan.
      12. The District will not approve any construction contract unless it has sufficient monies in its pay—as—you—go construction fund or bond funded construction fund, which together with approved grants or loans, is sufficient to pay for the amounts expected to become due under the contract.
      13. When a capital project is funded from both rates and bond proceeds, the District will maintain records to allow a separate accounting of the expenditure of bond proceeds. Bond proceeds will be spent before drawing upon other available cash. The acquisition of grants or loans will not be assumed in the rate planning process.
      14. Debt will not be used to finance operating and maintenance requirements.
    2. Management Policies for Debt Obligations
      1. Capital projects financed through debt issuance will not be financed for a term longer than the expected useful life of the project assets.
      2. Capital financings will be designed to minimize the cost of funds, ensure equity over time among ratepayers, and provide for the timely completion of capital facilities.
      3. While both debt and pay-as-you-go financing may be used to finance utility capital needs, the debt-financing component will be managed to minimize annual volatility in rate requirements.
      4. The District has a goal of paying for a minimum of 20 percent of the capital program with cash from rates and charges over the long run. As a rule, the District’s baseline level of capital expense for routine replacements, refurbishments, and capital outlay will be funded with cash.
      5. With respect to any issuance of debt, alternative issuance timing and amortization structures will be analyzed to ensure the most cost—efficient financing, given prevailing market conditions at the time of sale.
      6. The District will set rates sufficient to provide debt service coverage in excess of the legal minimums. Rates will be set so that the debt service coverage ratio on the Utilities’ senior lien debt, not including connection charge revenue, shall be at least 1.25.
      7. The amount and timing of any future debt offerings will be planned to comply with the additional bonds test and rate covenants for its senior lien bonds, as well as with these financial policies.
      8. The District will maintain regular communication with rating agencies that rate the bonds and will update the agencies in the event of material adverse changes in its business position.
    3. Management Policies for District Funds
      1. To accommodate periodic unanticipated or unforeseen needs, the District will maintain at all times an Operating Reserve equal to at least 180 days of utility operating costs.
      2. The District will set rates as described in 1A above, primarily as a means of managing potential volatility in rates. The ”level rate increase“ projected by the “model” is intended to stabilize rates and mitigate the need for large changes in rates from one budget year to the next.
      3. District funds, including all reserve funds established by this policy statement and any bond proceeds, will be invested according to the following. The District will invest its funds in a manner that preserves capital and ensures the protection of investment principal, allows for its liquidity needs, and achieves the highest investment return consistent with the primary objectives of safety and liquidity.

Approved: April 7, 2008

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