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17 AUDIT COMM RVW 09-16-96
AGEN DATE: SEPTEMBER 11, 1996 Inter-Com NO. 17 9-16-96 TO: HONORABLE M~YOR ~ MEMBERS OF THE CITY COUNCIL FROM: MAO~EN GALLOGLY: AUDIT COMMITTEE CHAIR REPORT ON AUDIT COMMITTEE REVIEW OF ISSUES R~ISED SUBJECT'. BY S~R~ PENN AND BERKLEE MAUGHAN RECOMMEND]~TION ' · · Receive and file Audit Committee Report. Allow the Audit Committee to work with staff to develop a permanent policy and procedure for making administrative transfers. BACKGROUND: The Audit Committee has Studied the issues raised by Mrs. Penn and Mr. Maughan in correspondence dated March 18, 1996 and May 23, 1996. Attached is a Staff Report prepared by the Finance Director with separate correspondence from the City Attorney. Staff's report restates each issue directly from the original memos presented to the City Council, followed by a specific response. The correspondence given to the Committee seems to focus on two primary concerns, a presumed restriction on the use of revenues generated by the debt surcharge in effect until September 1991, and the lack of documentation to support the transfers from the Water Enterprise to the General and Liability Funds. The Audit Committee has examined the report from staff and the documentation provided, and considered the verbal and written comments made by Mrs. Penn and Mr. Maughan. We have discussed the issues with the City Attorney and received input from the City's Auditors. At the Audit Committee meeting of August 14, 1996, the Committee further discussed these items, with input from Mrs. Penn and Mr. Maughan. Alan Watts represented the City Attorney's office at this meeting. Mr. Watts was the co-bond counsel on both Water bond issues in question. Mr. Watts stated that there were no legal restrictions on the use of the debt surcharge funds nor were there any intentions to place extraordinary impediments to their use. gONCLUSION: The Committee came to the conclusion that there was no basis to conduct a special audit to satisfy Mrs. Penn and'Mr. Maughan. In reaching its conclusion, the Audit Committee recognized that: the CitY, including the Water Company, undergoes an annual audit; the actions of staff as recorded on the books stood up under audit; Water Company payments of principal and interest to bondholders were reviewed by a bond trustee; and, the audit process is disruptive to staff activities so that additional audit work, beyond the annual certified audit, should be avoided unless there is a compelling reason to do so. The Committee did make a motion to recommend, to the City Council that a formal policy and procedures bedeveloped regarding administrative transfers between funds. In their memo from August 14, 1996, Mrs. Penn and Mr. Maughan raise additional concerns that are audit related. Their criticism of the Staff Report and the subsequent review by the Audit Committee seems to imply that the documents were not properly audited by the .Committee. The Committee's purpose is not to audit but to review the issues and'make a recommendation to the City Council to either pursue the issues by recommending additional audit work or, as in this case~ recommend that the Audit Committee perceives no compelling reason for further action. I will be available at the meeting to respond to questions from the City Council. ~aureen GalIogl~ Committee Chair Attachments RAN5 :Audi t3. Sep Finance Department DRAFT City of Tustin 300 Centennial Way Tustin, CA 92680 CITY OF TUSTIN AUDIT COMMITTEE MEETING AUGUST 14, 1996 COMMUNITY DEVELOPMENT CONFERENCE ROOM MINUTES Director (714) 573-3061 Secretary (714) 573-3060 Water Billing (714) 573-3075 FAX (714) 832-0825 Attending: · Maureen Gallogly, Chairperson Donnie L. Smith Walter Sullens Absent: Albert M. Shifberg-Mencher John R. Garner Staff: William A. Huston, city Manager Ronald A. Nault, Finance Director Larry Schutz, Asst. Finance Director Serene Tang, Senior Accountant' Robert Graham, Risk Manager Alan Watts, City Attorney Teresa Skaff, Secretary Guests: Berklee Maughan Sara Penn George Stewart I. The meeting was called to order at 4:00 p.m. by Ms. Gallogly. II. MINUTES It was moved by Sullens, seconded by Smith, to approve the minutes of the June 20, 1996 Audit Committee Meeting. Motion carried 3-0. III. RESPONSE TO WATER ENTERPRISE ISSUES Staff presented a summary of significant events in the Tustin Water System history and an analysis of the issues addressed by Sara Penn and Berklee Maughan at the previous meeting. Committee Member Smith requested that Mrs. Penn and Mr. Maughan re-state their purpose in raising these concerns. They replied that they are seeking documentation which proves any transfers from the Water System to the General Fund are reimbursements for actual costs, and not arbitrary figures or transfers of profits; they are asking for a schedule of the debt service surcharge collected in the ten years following the 1983 bond prospectus, which projected $8.5 million in revenue; and they would like proof that money paid into the Water System by non-Tustin residents is not ultimately used to benefit only City of Tustin residents. Committee Member Sullens stated he felt that Staff response'to the issues was adequate, their past actions had stood up under audit, and further investigation by the Audit Committee was not indicated. It was moved by Sullens to accept Staff's and the City Attorney's responses that what has been done to date is acceptable and within the rules and regulations. There was no second to the motion. Committee Chairperson Gallogly and Committee Member Smith stated their remaining concern to be the justification of the (inter-fund) transfers. It was moved by Committee Member Smith to accept Staff's report with the exception of looking into the transfers between the Water Fund and the General Fund, which does call for the development of some kind of cost allocation system, and recommend this to Council. This substitute motion was seconded by Committee Member Sullens. Motion carried 3-0. City Attorney Alan Watts clarified the legal opinions that, one, the Public Utilities Commission has no jurisdiction to set rates for a municipally owned water system and, two, as Tustin is a general law city, there is no state statute or City ordinance that limits or restricts the amount of the transfers. The City Council does have the authority to set these rates and determine the amounts of any transfers. iV. THE OCCRMA 1994-95 ANNUAL REPORT Staff presented the OCCRMA Annual Report and discussion followed regarding the formation of the Joint Powers Authority, status of the risk sharing pool, worker's compensation comparisons, evaluation of.actuarial projections, joint purchase of excess insurance, continuity of access to the market, and specific items in the 1994-95 report. -2- V. REVISED SPECIFICATIONS FOR AUDIT COMMITTEE RECRUITMENTS The Committee discussed the need to have a diverse mix of backgrounds among its members, including expertise in accounting, investment and management. Their recommendation is to evaluate which discipline(s) may be lacking when a vacancy does occur, and to recruit for those technical abilities they are especially interested in at that time to maintain the desired blend of qualifications in the membership. VI. POLICY'AND PROCEDURES MANUAL The completed draft of the manual has been distributed to the Committee and to the Auditors for their review and comments. Their recommendations will be incorporated into the document before final approval. VII. COMMITTEE CONCERNS Committee Member Smith discussed his visit with the Risk Manager at the City of Buena Park. He reported'on their City's employee safety program, which they say has helped to significantly reduce their general liability, and includes a video library that was recommended for use at the City of Tustin; staff will be advised of the availability of these training films through the City's OCCRMAmembership. The Buena Park Police Department has a permanent.gang suppression' detail.(three officers and one sergeant) which will continue to be funded because it is needed to "hold the line" againSt a serious gang problem in their area. The Tustin Police Department has formed a similar unit which the Council is expected to make permanent, and staff stated that State and Federal. funds are available for the program during its first three years. The City of Buena Park recently changed their computer system, going to all individual computers which are not networked and using the Microsoft office package. City of Tustin staff will be reporting on the activity of our own Computer Standards Committee at the next Audit Committee meeting. The City of Buena Park's sales tax revenue is running high, sixty percent of their budget, from their mall, car dealers and entertainment business at Knott's Berry Farm. Staff stated that City of Tustin sales tax revenue, is performing a little better than expected, with the possibility that thenew shopping center across Jamboree Road. may draw more business for the existing Tustin Market Place. --3--' Committee Member Sullens reported the conclusions of staff on handling the maintenance of the new City parks. The two major arguments against privatizing are: the City .cannot control who does the work, to ensure the safety of the grounds and equipment and the welfare of the children in the park areas; and, the City still has to employ crews of enough personnel to be available for emergency situation's. Mr. Sullens commended the City's common sense in recommending that care of all City parks remain in-house. Committee Member Smith requested the City consider implementation of a policy establishing inventory control and rolling stock maintenance programs. He feels the current fixed assets system allows too high a threshhold to guard against Significant losses in lesser value items of City property, and that service on City vehicles 'should be more closely monitored for safety as well. IX. ADJOURNMENT The meeting was adjourned at 5:55 p.m. by Ms. Gallogly. The next regular meeting of the Audit Committee is scheduled for October 17, 1996, at 4:00 p.m. 'Respectfully submitted, Ronald A. Nault Finance Director · RAN:ts AUD2:A~ tN|n. Aug --4-- Memorandum To: From: Date: Subject: City of Tustin Audit Comm3ttee Sara B. Penn & Berldee Maughan August 14, 1996 Issues Raised at Tustin City Council Meeting on 3/18/96 and Tustin Audit Committee Meeting on 6/20/96 The response of the City of Tustin contained in Exhibits A-P and a Memorandum prepared by Ronald A. Nault were received at 3:30PM on Monday, August 12, 1996. At that time we were advised that the meeting had been moved forward to Wednesday, August 14 from Thursday, August 15. Due to prior committments, there has not been adquate time to prepare a quality analysis of the City of Tustin's response. Further, there are missing documents contained in the Exhibits as follows: Exhibit C- Debt Service Schedules. When documents are taken out of context, the value of their information is dimished. Each schedule should be annotated as to its source and the complete document provided. Exhibit K-Excerpt from 1988 Governmental Accounting, Auditing and Financial Reporting is missing. Further, there is missing documentation to support assertions made in the Memorandum prepared by the City Attorney dated 7/18/96 as follows: "The City only used the proceeds of the debt service surcharge to retire the Water Corporation's debt." "As explained in the City's staff report, the entire proceeds of the debt service surcharge were used for these purposes." Nowhere in the documents do we find a schedule of actual debt' service surcharge that was collected from 1983-1993. Please provide this schedule(s). This schedule will also need to contain the appropriate prepartion initialling/dating and review initialing/dating. What is the source of the City Attorney's documentation to be able Memorandum to Tustin Audit Committee . August 14, 1996 Page 2 to make such an all-encompassing and absolute statement? We pointed out in the Memorandum presented at the June 20, 1996 Audit Committee Meeting that the 1983 Bond Prospectus projected $852,000 per year would be collected which would be $8,520,000 over the 10 year period. We requested that an actual computation be made. It is our understanding that no such computation was ever made. This cumulative number certainly has not been disclosed in the audited financial statements or the City of Tustin Staff Report dated 8/I/96. To re[iterate, the actual debt service revenue needs to be computed.and the debt service payments and interest need to be deducted from this figure to be able to make the statrnent as set out above. "It (the debt service surcharge) was not used to fund water operations." The schedules proving such an assertion are not included. Please provide these schedules. If the actual Debt Service Surcharge revenue is in excess of the debt service payments and interest and this excess was not used to fund water operations - then where is the money? "It(Debt Service Surcharge) was not used to reimburse the General fund for expenses incurred by water operations." "The proceeds of the 1983 debt service surcharge were used to retire debt, not to reimburse the General fund." How does the City Attorney know this? Please provide the appropriate documentation. "There was no surplus remaining for.reimbursements to the General Fund". Please provide the schedules and other documentation to support this assertion. "Instead, water operations, including General fund reimbursements were financed by other revenues of. the water corporation." "Expenditures for water operations includes reimbursements to the General Fund." What documentation does the City Attorney have to know how much and for what expenses the General Fund was reimbursed? It is our understanding that this file has been lost. Does the City Memorandum to Tustin Audit Committee August 14, 1996 Page 3 'Attorney have it? Reconstructions by City Staff for us, did not equal and fell. far short of mounts marked as transfers. Please provided the documentation for this assertion. "Operating revenues, from meter and commodity charges, and nonoperating revenues, from a special debt surcharge and interest earnings, are projected to meet all operating expenses, lease rental payments and obligations of Tustin Water Works assumed the the (Water) Corporation. The foregoing statements are consistent with what in fact occurred." This statement is contained in the 1983 bond issue .prospectus projections. No schedules applying the actual revenues enumerated above to actual operating expenses have been provided. Without such documentation this assertion has no validity. Please provide the schedule(s) that will prove this statement. Further, there is missing documentation to support assertions made in the Memorandum prepared by Ronald A. Nault dated 8/1/96 as 'follows: Page 3, 2nd Paragraph -"Revenue from the debt service surcharge was used to make the payments totaling $9.6 million on this debt." Page 4, 3rd paragraph-"The resources generated from debt service surcharges were used exclusively to pay all debt, principal and interest, of the Water System, it was not used to make transfers to the General Fund." Page 7, Paragraph 2 -"As previously indicated, the debt service surcharge was properly used." How does he know that the Revenue from the debt service surcharge was used for this purpose when he has not provided the actual amount of this Revenue for the period in question? Please provide the documentation for this assertion. Page 4, Paragraph 3 -"The transfer from the Water System to the General Fund is an allowable alternative to direct charging and is permitted in the current edition of Government Accounting, Auditing and Financial Reporting published by the The Government Finance Officers Association." Page 7, Paragraph 8 -"Operations. and maintenance expenses k Memorandum to Tustin Audit Committee August 14, 1996 Page 4 include transfers to the General fund to pay for 'the general administration and management of the Water Enterprise and transfers to the Liability fl2nd for risk management." No such literature is provided as discussed in the first quote. The original rationale to justify these transfers was detailed in computations based on department estimates of time and hourly rates. These computations have been lost. Now, the justification appears to be an unsubstantiated GFOA publication. The acknow- ledged authority for governmental accounting standards is the Govemment Accounting Standards Board (GASB). Please provide a copy of the GASB literature which substantiates this practice. The second quote appears to contradict the first quote. Explain. Page 6, Paragraph 1 - Escrow Agreement between the City, the Water Corporation and Bank of America. Please provide. Page 6, Paragraph 3 - Schedule of Principal Payments on 1983 Bonds, Interest on 1983 Bonds, Principal Payments on Tustin Water Works Bonds, Interest on Tustin Water Works Bonds and Developer Refunding Contract. Please provide documentation of amounts claimed by year that tie to the audited financials. Page 8, Paragraph 1 -"All revenues generated by the Water Enterprise are restricted to the Water fund to be used for any lawflal purpose of the Enterprise, which includes transfers between the Water. General and Liability funds." Please provide a copy of the document(s) that contains the language to support the underlined portion of your statement. Page 9, Paragraph 3 -"Debt surcharge revenue was depositd into a separate fund and was used to retire all the outstanding.debt of. the Water System consistent with existing debt service schedules." Please provide a copy of the analysis showing, . by year, the depQsits into this fund and its earnings. Risk Management alocation needs to be documented in writing. You have no basis for this allocation; there is no memorandum provided of any oral conversations. Please provide. The 1996 computation for reimbursed costs transfers needs to be docttmented. Please provide. Memorandum to Tustin Audit Committee August 14, 1996 Page 5 The memorandum by the City Attorney predominately contains assertions of fact that have absolutely no documentation. These assertions of "fact" are then used in Ron Nault's memorandum as a basis for his opinions and conclusions. The vadility of these "factual" representations cannot be relied on without the proper support. Once this documentation is made available, then it can be audited and conclusions properly drawn therefrom. To expect this committee and ourselves to blindly accept these statements, without proof, is to waive the fiduciary duty of this committee. Further, it is reasonable and customary to expect proof of statements made. We cannot reach closure on these matters without the necessary documentation. The concern is that the original outline of issues was made to City Council on March 18, 1996. Today is August 14, 1996 - almost five months later. There has been no numberial proof provided- only assertions that we are to believe without proof. We are astounded that City of Tustin officals are not aware of what is reasonable and customary in the way of documentation. We disagree with the conclusion drawn by Ron Nault's memorandum that what has been provided "should give a level of confidence to the Audit Committee that w/Il preclude the incurrence of additional expense caused by fiaxther research or a special outside audit of the financial records of the City as relates to the issues raised..." Therefore, we respectfully request the required documentation and a firm date when it will be made available. DATE: AUGUST 1, 1996 Inter-Com TO: FROM: SUBJECT: CITY OF TUSTIN AU ~ COMMITTEE RONALD. A. NAULT,~ I~~CTOR RESPONSE TO ISSUEE AD] DRESSED IN MEMORANDUM DISTRIBUTED BY MRS. PENN AND MR. MAUGHANAT THE 6-20-96 AUDIT COMMITTEE MEETING Mrs. Penn and Mr. Maughan have raised several issues regarding the Water System Rate Structure, specifically the debt surcharge which was in place from January 1983 to October 31, 1992. They have suggested that transfers made between the Water System and the General Fund were improper. Staff has prepared this report with input from the City Attorney and the City's Auditors. The report has been structured to provide background, discussion and a summary of the issues, followed by a restatement of each issue raised and staff's response. There is also an extensive number of exhibits attached which are referred to throughout the report. BACKGROUND: The City finalized the negotiations with the stockholders of the Tustin Water Works (TWW) and assumed operation of the Water System in November of 1980. The purchase price was $6,364,001 plus the liability for outstanding developer refunding contracts of $1,075,000. The total purchase price was $7,439,001. The City also assumed the obligation to pay principal and interest on $2,600,000 of outstanding Tustin Water Works bonds. The principal value of these bonds was deducted from the purchase price, leaving a net amount of $3,764,001 to be paid to the former owners. Interest on these assumed bonds was 8% through 1991 and 9.5% through 1993. The acquisition was in the form of an installment purchase with 1/25 of the principal payable each year over a period of three years plus interest ranging from 7.25% to 9.25%. In the third year a more permanent financing method was to be in place and the principal balance became' due to TWW stockholders. Prior to the issuance of bonds in 1983, the Water System was making annual principal and interest payments on the full $7,439,001 of debt. The purpose of the 1983 bond issue was to provide the permanent financing to meet the final payment due date consistent with the purchase agreement. At the time the bonds were issued, an analysis of the existing TWW Bonds was made but it was determined that because of the relatively'short remaining life of the bonds, it would not be financially advantageous to extend the maturities through a refinancing. In the fall of 1982 a Water System Financial Review and Rate Study was completed by James M. Montgomery, Consulting Engineers, Inc. A full copy of this report is attached as Exhibit H. This study introduced the concept of service and demand charges that were a fixed amount each billing period, they were in addition to the consumption or commodity charges. The service charges were directly related to the actual cost of meter reading, printing.and mailing of bills, reconciling payments and customer service. Demand charges related to the cost of capital improvements which could include debt service. A workshop was conducted with the City Council to allow the Consultant to present his recommendations and respond to questions prior to the .adoption of the new Rate Structure in Resolution No. 83-7. At the request of the City Council, Mr. Montgomery prepared a second report in December of 1982 to add the concept of a "sinking fund customer surcharge" to support the acquisition debt and the $900,000 TWW Bond principal due in 1985. This became the debt service surcharge. DISCUSSION: Staff has spent a considerable amount of time reviewing the issues raised by Mrs. Penn and Mr. Maughan, which included at least two meetings to review the City's general ledgers and financial reports for the past sixteen years. The points they have raised in their letters to the City Council and the Audit Committee can be summarized ~nto three questions: le Has the City properly restricted the use of the revenue generated by the debt surcharge that was adopted in 19837 · Has the City made transfers between the Water System and the General Fund in violation of Resolution No. 83-7 and the Official Statement for the 1983 bonds? · Has the city adequately documented the transfers that have been made between the Water System and the General Fund? - 2 - The first question posed by Mrs. Penn and Mr. Maughan assumes that $8.5 million of debt surcharge revenue was collected over a period of ten years but only $650,000 was applied to retire bond debt. They have implied that in excess of $7 million went to the General Fund instead of the retirement of debt. First, the purpose of the debt surcharge was to provide resources to meet the annual debt service requirements of the Water System. At the time that the surcharge was created in January of 1983, the debt on the books of the Water System consisted of the acquisition cost, outstanding Tustin Water Works Bonds, developer refunding contracts, and cash advances made by the General Fund to the Water System to cover short term cash flow need~. The 1983 Water Lease Revenue Bonds would not be issued until October of that year. During the period 1983-1993 referred to, the Water System paid $5.3 million of principal and interest on the 1983 Water Bonds, $3.6 million of principal and interest on the outstanding Tustin Water Works Bonds, and $672,-000 of outstanding principal on the developer refunding contracts. Revenue from the debt service surcharge was used to make the payments totaling $9.6 million on this debt. This is consistent with Resolution No. 83-7 and the Official Statement for the 1983 bonds. The second question posed assumes that use of the debt service surcharge proceeds are restricted. The statement is made by Mrs. Penn and Mr. Maughan that several documents specifically limit debt surcharge revenue to bonded debt service and, more specifically, retirement of the 1983 Bonds. This narrow interpretation is not supported by any of the documents which they'reference. While it was in place, income from the debt service surcharge was to be used to support all of the annual debt service of the Water System, which included the payment of principal and interest on all debt, not just the 1983 bond debt. The third question implies that more documentation was legally required to support the transfers between the Water System and the General Fund. It 'has been stated that a file containing documents which support the transfers has been lost; Staff acknowledges that internal working calculations to support annual budget allocations have not been located. The files contained several years worth of questionnaires and notes that were completed by departments contributing time to managing the Water System, such as Engineering, Finance, Public Works Administration, City Manager, City Council, etc. The files also contained hand calculations of cost based on hourly rates, etc. A memo from the City Manager to the Audit Committee is attached that gives more detail regarding the City's practice in making Water Fund transfers. In the City Attorney's view, City Council authorization of the transfers through the adoption of the annual budget is commonly done, is appropriate and does not violate any rule of law. - 3 - The questions raised by Mrs. Penn and Mr. Maughan are not substantiated based on the facts disclosed in all relevant documents. The concerns they have expressed regarding the debt surcharge are based on a narrow and incorrect reading of Resolution No. 83-7 and misinterpretation of City documents that they have reviewed. When created, the concept of the debt service surcharge may have created an expectation that the repayment of the Water System's debt would be accelerated, resulting in the reduction of future Water rates. It is probably unrealistic to expect that the Water System would be debt free after retirement of the 1983 bond issue. Issuance of debt to finance the ongoing capital improvement needs of a Water Utility is a common and cost effective means of generating the capital needed to improve and maintain a Water System. The value of the surcharge became obsolete when the City prepared a new financing plan in 1992, and adopted a new Rate Structure prior to issuing Certificates of Participation in 1993. A complete review of the documents addressed by Mrs. Penn and Mr. Maughan did not disclose any administrative, financial or legal irregularities'as they have implied. The resources generated from debt service surcharges were used exclusively to pay'all debt, principal and interest, of the Water System, it was not used to make transfers to the General Fund. There are no extraordinary restrictions on the use of revenues generated by the Water Rate Structure. The transfer from the Water System to the General Fund is an allowable alternative to direct charging and is permitted in the current edition of Government Accounting, Auditing and Financial Reporting published by the Government Finance officers Association. AUD2:Audit2. Jul - 4 - ISSUES RAISED AT THE MARCH 18, 1996 TUSTIN CITY COUNCIL MEETING REFERRED TO AUDIT COMMITTEE Staff has researched and prepared a response for each of the issues raised by Mrs. Penn and Mr. Maughan in the attached memorandum, Exhibit L, distributed at the Audit Committee meeting on June 20, 1996. The issues they have raised are in bold type and are followed directly by Staff's response. 1983 BOND ISSUE O Tustin City Council Resolution #83-? dated January 17, 19S3 authorized a Debt Service Surcharge ",for the purpose of retiring water bonds,, issued September 20, 1983. Resolution No. 83-7 (Exhibit A) was adopted January 17, 1983 and contains two references to surcharges, one on page 1 line 9 and another on page 2 line 15. The first reference is very general but the second states, "Debt Service surcharges can be used for annual debt service of outstanding Water Bonds or for annual acquisition debt service". The language in Resolution No. 83-7 is consistent with the recommendations made in the Water System Financial ReView and Rate Study prepared by James M. Montgomery Consulting Engineers in October, 1982. There is no reference whatsoever to the September 1983 Water Bonds, -(Exhibit H). For the purposes of the Montgomery study, the definition of Debt Service made on page 1-3 of the study says, "Debt Service is composed of repayment of acquisitiOn debt, repayment of the outstanding Tustin Water Works Bonds, repayment of outstanding developer refunding contracts and the interest cost related to the negative cash position in the City's General Fund". The monies raised by the surcharge were to be used to service all the debt of the Water Enterprise. During the 10 years since 1983 only $650,000 of the $4,500,000 bonds issued was paid off. Actually, $825,000 of principal of the 1983 bonds was paid off prior to the refunding in 1993; this is supported by Exhibit B. This exhibit is a Special Report dated April 21, 1993, prepared by Grant Thornton, Accountants and Management Consultants and included in the 1993 Certificates of Participation bond documents. It is a verification of the total amount required to redeem the outstanding 1983 bonds on the first available call date. Exhibit B-2 of the report certifies the outstanding principal at $3,675,000; interest due and call premiums which together become the amount due as of the call date. - 5 - The Sources and Uses of Funds Schedule, Exhibit A of the report, ties to the escrow agreement between the City, the Water Corporation and Bank of America, creating the escrow account that was used to call outstanding bonds maturing on or after October 1, 1994. Pursuant to the prospectus of the $4,500,000 bond issue ,,$852,000 per year are raised through a debt surcharge established by the Council to make water debt payments,', over 10 years this would be $8,520,000. Of this amount collected $650,000 was applied to the bond debt. What happened to the remaining millions? The attached debt service schedules, Exhibit C, are for the 1983 Revenue Bonds and the outstanding TWW Bonds. During the 10 years in question, the following principal and interest was paid from the debt service surcharge fund: Principal Payments on 1983 Bonds Interest on 1983 Bonds Principal Payments on Tustin Water Works (TWW) Bonds Interest on TWW Bonds $ 825,000 4,480,000 2,300,000 1,272,000 $8,877,000 * The obligation to repay $2,600,000 of outstanding bonds was assumed as part of the acquisition agreement. A principal payment of $300,000 was made in April 1981. In addition during the same period, the Water Enterprise repaid approximately $672,000 of. developer.refunding contracts. The attached pages from the Notes to Financial Statements, Exhibit D, are from the report dated as of 6-30-84. This Exhibit illustrates how the annual audit addresses bond debt service (long term debt). Any misuse of "restricted" funds and/or the failure of the City to meet its annual debt obligations would not only be detailed here, in the Notes to the Financial Statements, but would also be a significant event management letter comment. There have not been any auditor comments concerning the 1983 or 1993 bond issues. AUDIT ISSUE Pursuant to the 1983. Bond prospectus the Water Fund generated $8,520,000, which is double the amount of bonds issued. The actual amount collected, which should have been restricted for use in retiring the 1983 bond issue, needs to be confirmed. Please see the previ'ous response. - 6 - OBSERVATION The necessity of borrowing funds in 1993 to retire the unpaid portion - $3,850,000 - of the 1983 bond debt would not have arisen if the Debt Service Surcharge had been properly used to pay these bonds. A cursory review of the Notes to the Financial Statements and bond documents would indicate that this observation is in error, it does not take into consideration all the debt of the Water System supported by the debt surcharge. As previously indicated, the debt service surcharge was properly used. LEGAL ISSUE Is this appropriation of funds by the City of Tustin a violation of the security offering prospectus? The City has reviewed all the Pertinent documents and has determined that the City has not violated any disclosure provisions contained in the Official Statements pertaining to the sale of Water Bonds. A separate response from the City Attorney is attached, as are the final Official Statements for the 1983 and 1993 Bonds, (Exhibit E). 1993 BOND ISSUE Tustin City Council Resolution %92-110 dated September 21, 1992,' and Staff Report dated September 16, 1992, that accompanied this resolution, authorized increased rates to "maintain operations, and provide for capital improvements which would be financed through new bond debt,,. This is correct. Resolution #92-110, attached as Exhibit F, states in Section 6, "The study has determined that it has become necessary to adjust Water Service rates to maintain operations and to finance the recommended capital improvements;" It further states under Section 8 that "the revised rates as set forth herewithin are reasonable and are necessary to cover the costs of operations of the Tustin Water Service delivery for the next three years". AUDIT ISSUE These increased funds since November 1, 1992 (step increases again at November 1, 1993 and November 1, 1994) are restricted to bond debt retirement and operations in the water fund. Determine how much each year should have been restricted. Ail revenue generated by the Water Rate Structure is accounted for in the Water fund. Within the Water fund, exPenditures are made for operations and maintenance, capital improvements and debt service. Operations and maintenance expenses include transfers to the General fund to pay for the general administration and management of the Water Enterprise and transfers to the Liability fund for risk management. All revenues generated by the Water -- 7' -- Enterprise are restricted to the Water fund to be used for any lawful purpose of the Enterprise, which includes transfers between the Water, General and Liability funds. .0 The 1993 $11,500,000 bonds, issue (April 21, 1993) was restricted in use to paying off the 1983 bond debt of $3,850,000 and to provide for capital improvements of $7,650,000. Page Six of the Official Statement for the 1993 Water Bonds, (Exhibit E), details the use of bond proceeds to include deposits to the construction account, the escrow 'account and the reserve account. It also provides for underwriters discount and cost of issuance. The construction account deposit was $6,759,000. LEGAL ISSUE In the 1993 bond prospectus, this Debt service Surcharge is comingled with the Charges for Services revenue. Is this adequate disclosure? Resolution No. 92-110, a Resolution of the City Council of the City of Tustin Adjusting Water Service.Rates (Exhibit F), was adopted by the City Council on September 21, 1992. The new Water. Service Rates incorporated the recommendations contained in the July 1992 Water Rate Study and Financing Plan 'prepared by Bartle Wells Associates (Exhibit G). Consistent with recommendations originally made by the James M. Montgomery study in 1982, (Exhibit H), the new rate structure does away with the debt surcharge concept and re- establishes a structure of fixed charges and consumption charges which is the current Water industry practice. The Official Statement for the 1993 bonds (Exhibit E) addresses Water Rates on page 12. It describes the rate structure as approved in September of 1992, and goes further to say, "this approach is designed to reduce fluctuations in Water revenue and to recover a portion of fixed costs, such as debt service". Table 5 in the Official Statement details the Water Service Rates consistent with Resolution No. 92-110. There is no comingling of the debt surcharge, pursuant to Resolution No. 92-110, it was replaced by the fixed charge which is intended to only cover a portion of fixed costs including debt service. As previously discussed, the proceeds from the debt surcharge were not restricted to retiring only the 1983 bond debt but were applicable to all the existing Water System debt. As stated in the Financing Plan, the rate changes in 1992, 1993 and 1994 were intended to cover all Water System expenses including operations and debt service. Consistent with the 1983 and 1993 financing documents, the City has, in fact, properly restricted the use of its bond proceeds. - 8 - IN SUMMARY The $8,520,000 generated by the 1983 Debt Service Surcharge and the 1992, 1993, and 1994 rate increases are restricted to retiring the 1983 and 1993 bond issues. The 1983 fund restrictions are disclosed in the City's June 30, 1983 Financial Statements in Bill Huston,s and Ron Nault,s letter to the City Council. The 1993 fund restrictions are dlsclosed in the City,s June 30, 1993 Financial Statements in Ron Naultws letter to the City Council. The dollar amounts of these fund restrictions have never been disclosed in any audited financial statement. The outside auditors should be consulted on this matter. The use of the resources generated by the Water Services Rates, including the debt service surcharge, are consistent with the policy of the City Council, Resolutions adopted by the City Council, and all documents supporting the 1983 and 1993 bond issues. .Debt surcharge revenue was deposited into a separate fund and was used to retire all the outstanding debt of the Water System consistent with existing debt service schedules. The Notes to the Financial Statements for each year that the City has operated the Water System have disclosed the Water Enterprise long term debt in detail and recorded the annual reduction in principal on the debt. The City has met its obligations in a timely and efficient manner. Rating agencies, Standard and Poor's and Moody's, (Exhibit I), reviewed the City's financial records and proposed use of funds and rated the 1983 bonds A-, which are considered upper medium grade obligations. The ~1993 bonds were again reviewed by the rating agencies and rated AAA/AAA; there was an underlying rating of A from Standard and Poor's, by virtue of the insurance policY provided by the Municipal Bond Investors Assurance Corporation (MBIA), (Exhibit J). MBIA insured this bond issue after a thorough review of City financial records and bond documents. They issued Policy No. 13492 guaranteeing principal and interest payments to bond holders. This insurance carries an automatic rating of AAA, effectively reducing the interest the City would be required to pay, saving the City thousands of dollars over the life of the bonds. If there were any irregularities in how the City was utilizing Water System revenues, these agencies would have commented to that effect. If they existed, the issues raised by Mrs. Penn and Mr. Maughan would have been brought to the City's attention long before now given the scrutiny paid to the City's finahcial records and practices by financial advisors, bond underwriters, bond counsels, Standard and Poor's Corporation, Moody's Investors Service, Municipal Bond Investors Assurance Corporation, and outside auditing firms. - 9 - The foregoing restrictions mean that (1) on1¥ reimbursements of costs AND (2) transfers of monies above the debt retirement restrictions are allowable. The intent of both Resolutions No. 83-7 and No. 92-110 was to provide adequate resources from the Water Service Rates to meet existing debt service requirements, pay operating expenses, support ongoing capital improvements and provide for the reimbursement of costs to the General Fund. Transfers to the General Fund are operating expenses whether they are direct charges or transfers, as described in the 1988 edition of Governmental Accounting, Auditing and Financial Reporting (GAAFR). These restrictions are unique to the City of Tustin due to the Resolution language. AUDIT ISSUE It therefore becomes important to review the · C~ty s computation of reimbursed costs. These two issues have been answered in previous responses. Documentation of the computation of reimbursed costs has been lost per Ron Nault. However, Berklee Maughan was given a copy of the calculations pertaining to June 30, 1986. This is an indication of the methodology that had been used at that point. The lost documentation is a collection of notes and calculations used to estimate cost based on responses provided by various departments when asked to estimate the amount of time spent on the Water System. AUDIT ISSUE These computations can be reconstructed using the City,s methodology from the June 30, 1986 worksheet. It becomes very clear that this reconstruction is necessary when you look at these June 30, 1986 numbers. Of the $166,693 that was relmbursable, $425,000 was actually transferred - an excess of $258,307. This is more than 2% times, the amount due. Only if there were unrestricted funds available could the $258,307 be transferred pursuant to the above Resolutions. It has been established that the concept of restricted funds is not valid as implied in this and other issues raised by Mrs. Penn and Mr. Maughan. LEGAL ISSUE Does the City Council approval of the annual budgets, which included these transfers, void or negate the cash restrictions that accompanied the rate increases? Can the City Attorney give a legal opinion that the City, at any time, can void prior resolutions without going through the - 10 - resolution repeal process. Since they have not previously repealed these resolutions City Council has, perhaps unknowingly, violated these cash restrictions. Neither the City Attorney, the outside auditors, nor City Staff have brought to the attention of City Council, when approving these transfers, that they did not take into consideration the computation of these cash restrictions. The City Attorney will respond to this legal issue more specifically in her memo, but in general: Previous responses in this. memorandum have established there were no violations of implied "cash restrictions" either in the resolutions establishing rates or in other documents. There is not a resolution repeal process nor is there a need for one in this case. The resolutions changing rates' and the rate structure clearly state that as of a specific date the new water rates will be, etc. At that time the new rates "occupy the field" and the old rates are replaced by the new rates. Because there were no "violations of cash restrictions" there were no issues that needed to be brought to the attention of the City Council. In addition to the above, it has come to my attention in reviewing the transfers, that there were two components. In 1990, 1992, 1993, 1994 and 1995 the Water Fund contributed to the general liability fund. In the year ended June 30, 1995, it contributed $250,000 which is supposed to be 1/Z of the total premium. This comment is fairly accurate with the exception that the transfer from the Water Fund to the Liability Fund is not just half of the total premium. As a member of the Orange County Cities Risk Management Authority (OCCRMA), a Joint Powers Authority created in 1975 to provide access to various insurance markets to member cities, the City of Tustin is required to maintain a reserve in its Liability Fund that at a minimum equals three times its self insured retention. For the City of Tustin the reserve requirement is $750,000. In addition to the premiums that are transferred, an amount is also transferred from both the General Fund and the Water Enterprise to maintain these reserves at the designated levels. AUDIT ISSUE Does the City have an opinion letter from its risk management consultant that the water operation is 50% of the entire City of Tustin.s exposure to liability claims? The City does not have an opinion letter from its risk management consultant. Based on my experience and judgment, I have always felt that the "potential" for significant damage caused by any of - 11 - the Water System's above ground reservoirs, wells, and other system failures place the risk exposure on par with all other City operations. I have discussed this with the OCCRMA's Risk Manager and he expressed the opinion that the assumption was reasonable. AUDIT ISSUE The Redevelopment Agency does not contribUte to the general liability fund. Why is there no liability exposure for the Redevelopment Agency. The Redevelopment Agency basically acts as a conduit for resources to be made available to third parties to provide for public improvements and stimulate development, or redevelopment. For the most part the Redevelopment Agency does not own anything that would significantly expose it to risk. As. an example, while the Agency provided the resources to remodel the Civic Center, it does not own the buildings, etc. The Redevelopment Agency does not provide municipal services. Its activities are limited to funding capital improvement projects and economic development activities. Exposure on capital improvement projects is very limited because the contractor is required to assume liability during construction. An exception to the typical Agency transaction was the purchase of the Case Swayne property on Edinger just east of the Costa Mesa (55) freeway. The intent of the purchase was to acquire right of way for the ultimate extension of.Newport Avenue to Edinger. The Agency will hold the property for some period until the resources are available to complete the project. There is an existing building on the property which the Agency will be demolishing in the near future. Because the building will remain for such a short period, it does not have a material impact on the City's liability rates. The Agency has recently purchased the property at Sycamore and Newport Avenue, which includes a 6,000 square foot building. The property will be remodeled and converted into the Newport Family and Youth Center, using Redevelopment and CDBG federal funds. There will be a temporary period during the construction that the Agency will retain title to the site but upon completion of the project, it is anticipated that the Agency will transfer the proPerty to the City, effectively transferring the risk from the Agency to the City. The construction period is estimated to be less than 12 months and during this time the contractor will assume all liability for the property. Except for temporary periods there is nominal risk exposure to the Redevelopment Agency and it has very little, if any, impact on the general liability premiums of the City. To summarize, staff has responded to every issue raised by Mrs. Penn and Mr. Maughan and feels that the more significant issues regarding the use of the debt surcharge fund, and implied restrictions based on language in Official Statements and Rate Resolutions, have been addressed and, based on the facts, there are - 12 - no irregularities. The methods used and the factors taken into consideration in making the annual Water and Redevelopment Fund transfers to the General Fund are addressed in the City Manager"s June 18, 1996 memorandum to the Audit Committee, and attached as Exhibit M. It is a common practice of the City to measure the reasonableness of inter-fund transfers by comparing Tustin with other cities with Enterprise Funds. When making this comparison, it was found that the average transfer is about nine percent (9%). The City of Tustin transfers 8.2 percent. While not intended to justify the level of transfer, it does indicate that Tustin's transfers are reasonable when compared with other municipalities. Staff feels the attached documentation should give a level of confidence to the Audit Committee that will preclude the incurrence of additional expense caused by further research or a special outside audit of the financial records of the City as relates to the issues raised by Mrs. Penn and Mr. Maughan. AUD2:Auditl .Jul -- 13 -- LIST OF EXHIBITS Exhibit A Exhibit B Exhibit C Exhibit D Exhibit E Exhibit F Exhibit G Exhibit H Exhibit I Exhibit J Exhibit K Exhibit L Exhibit M Exhibit N Exhibit O Exhibit P City of Tustin Resolution No. 83-7 Special Report by Grant Thornton Debt Service Schedules 1983 Lease Revenue Bonds TWW Bonds as of 6-30-81 Installment Purchase, Tustin Water Works Notes. to Financial Statements Official Statements for 1983 Lease Revenue Bonds and 1993 Certificates of Participation City of Tustin Resolution No. 92-110 1992 Water Rate Study and Financing Plan 1982 Water System Financial Review and Rate Study Rating Agency Correspondence, 1983 & 1993 Bonds MBIA Correspondence, 1993 Bonds Excerpt from 1988 Governmental Accounting, Auditing and Financial Reporting Correspondence from Mrs. Penn and Mr. Maughan 6-18-96 Memo from City Manager to Audit Committee 6-18-96 Memo with Attachment from Finance Director to Audit Committee 7-18-96 Memo from City Attorney to Audit Committee Prior Period Allocation Spread Sheet AUD2:Exhibitl .Jut Exhibit A 1 2 3 4 5 6 7 8 9 10 11 12 . 13 14 15 2O 21 22 26 27 28 RESOLUTION NO. 83-7 A RESOLUTION OF THE CITY COUNC)L OF THE CiTY OF llJSTIN, ADJUSTING WATER SERVICE RATES The City Council of the city of Tustin does resolve as follows: WHERE~S, a complete study of the Tustin Water Service rate structure has been completed; and · WHEREAS, the rate structure has been modified to equitably assess the fixed cost of ithe Tustin Water Service; and WHEREAS, it has been determined, that it would be a cost benefit to the customers of the Tustin Water Service to provide debt service resources for existing water service bonds from a surcharge as opposed to refinancing said bonds and adjusting the water usage charges; and WHEREAS, the Tustin Water Service has experienced increased costs of operations; and WHEREAS, it has become necessary to adjust certain water service rates to recover the additional costs of operations; NOW, THEREFORE, the City Council'of the City of Tustin does hereby resolve as follows: A. Effective January 1, 1983, the adjusted monthly water usage rates and Charges are hereby established: Water Usage Charges: 1. 0 to'600 cubic feet. ' .$0.330 per 100 cubic feet 2. Over 600 cubic feet ................... 0.570 per 100 cubic feet Meter Charges: 3. Plus monthly service demand charge' based on meter size (except for meters serving more than one residential unit): , 5/8" x 3/4" meter .................... $ 1.24 3/4" mete~ ................ ' .... 1.86 1" meter ................. ~-- 3.09 1 1/2" meter .................... 6.18 2" meter .................... 9.88' 3" meter .............. ' ......18.52 4" mete r .................... 30.88 ' 6" me'er .................... 61.75 · Plus a monthly customer service cha~ge of $1.27 per meter 1 2 3 4 5 ? ~0 RESOLUTION NO. ~"-.7 page 2. Mul tipl e Residential · Charges: . 4. Plus monthly service demand charge for service where more than one residential unit is served by a meter: $1.00 per residential unit, plus $1~27 per each meter serving a group of multiple units. 5. Plus monthly debt service surcharges: ,. 11 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 B. 5/8" x 3/4" meter .................... $ 2.50 3/4" meter .................... 3.75 1" meter .......... - ......~ .... 6.25 1 1/2" meter ............... ~ ..... 12.50 2" meter .................... 2D.00 3" meter ........ ~-. .......... 37.50 4" meter ........... : ........ 62.5D 6" meter .................... 125.00 Multiple Residential Surcharges: 6. Plus monthly debt service surcharge for service where more than one residential unit is served by a meter: $2.D0 per .residential unit. . ~-' ~ .~ : :,~;.-.~,- .-.-.:...~... .... ~:.,..T.;.~' ~ .- .-~ ~-. .... -- ..o-.. ~..._,._. ~ ...... - ..._.,~....: .: ;..-.;:'~,2',,'.. ? '~.' Debt. service surcharges Can be used. for annual debt'.service-of..' · i: ...... ' outstandin~{I:'~"~t6~' bond~"b6'"'fdr'~"anS6al"-acqQiki tiOn'~'debt' service'2~''~' Monthly fire line and detector check valve charges: 4" fire service ............. $ 15.68 per service 5" fire service ............. 19.60 per service 6" fire service .... - ......... 23.52 per service 8" fire service ............. 31.36 per service 10" fire service .......... .... 39.20 per service 12" fire service ............. 47.04 per service C. Construction water from metered fire hydrants: All water sold ................... $ 0.39 per 100 cubic feet D;' Construction water from un-metered fire hydrants: All water sold ................... Minimum charge ..... ' ....... $ 0.1~1 per 100 gallons 5~60 per application .1 2 3 4 5 6 RESOLUTION NO. 83-7 page 3 E. 7 8 9 10 11 17 Water usage rates for un-metered developments during construction. For each commercial or industrial unit, or each-residential dwelling unit of a redevelopment ...... $ 10.00 for first two months 'of the construction and 5.00 for each addi- · ,. tional month or portion thereof. PASSED AND ADOPTED at a regular meeting of the City Council of the City of Tustin, held on the 17~' day of Janua~-~/ , 19 83 . ~icha'r'd B. Edg~r, M~o'r 18 19 2O 21 22 23 25 26 27 28 I · STATE OF C~IFORNIA ) CO~T~ OF O~NCE ) SS CITY OF TUSTIN ) MARY E. WYNN, City Clerk'and ex-officio Clerk of the City Council of the City of Tustin, California, does hereby certify that the Whole number of the members of the City Council of the City of Tustin is five; that the .above and foregoing Resolution No. 83-7 was duly and regularly introduced, passed and adopted at a · regular meeting of the City Council held on the 17th day of January, 1983, by the following vote: AYES : NOES : ABSENT: COUNCILPERSONS: Edgar, Kennedy, Greinke, Hoesterey, Saltarelli COUNCILPERSONS: None COUNCILPERSONS: None MARY E. WYNN, City~lerk City of Tustin, California Exhibit B CITY OF TUSTIN ORANGE COUNTY, CALIFORNIA SPECIAL REPORT April 21, 1993 500 Pillsbury Center Minneapolis, MN 55402-1459 612 332-0001 FAX 612 332-6361 April 21, 1993 City of Tustin 15222 Del Amo Avenue Tustin, California Mudge Rose Guthrie Alexander & Ferdon 333 South Grand Avenue, 21st Floor Los Angeles, California GrantThomton Accountants and Management Consultants The U.S. Member Firm of Grant Thornton International Rourke, Woodruff & Spradlin A Professional Corporation' 701 South Parker Street Orange, California Bank. of America National Trust and Savings Association Los Angeles, Calif0mia Battle Wells Associates 1636 Bush Street San Francisco, California $11,500,000 City of Tustin Orange County, California Water System Revenue Certificates of Pm'ficipation, 1993 Series Pursuant to the request of. Bartle Wells Associates (the "Financial Advisor") on behalf of the City of Tustin, California (the."City"), we have prepared certain mathematically accurate cal- culations relating to the issuance.of $11,500,000 City of Tustin, Orange County, California, Water System Revenue Certificates of Participation, 1993 Series, dated April 1, 1993 (the "Refunding Certificates").. The Refunding Certificates are to be isstled in part to provide funds to advance refund the out- standing Lease Revenue Bonds, Series A of the City of Tustin .Water Corporation as summarized below (referred to as the -'Refunded Bonds"): Original Principal Pr'mCipal Maturities Redemption I**ued Dated Refunded Refunded Date 10-1-93 to A $4,500,000 October 1, 1983 $3,675,000 10-1-03 10-1-93 City of Tustin, California Mudgc Rose Guthric Alexander & Ferdon Rourke, Woodruff & Spradlin Bank of America National Trust and Savings Association Battle Wells Associates April 21, 1993 Page 2 ' ESCROW A(~COI~ CASH SUFF~CFENCY [Exhibit B) The Financial Advisor provided us with certain information and assumptions relating to future escrow account cash receipts and disbursements. This information indicates that there will be sufficient cash available in the escrow account to pay the remaining debt service payments on the Refunded Bonds, assuming those bonds due on and after October 1, 1994 are assumed to be redeemed on October 1, 1993 at a redemption price of 1/4 of 1 percent, plus accrued interest, for each year or fraction thereof from the date fixed for redemption to the date of maturity, with the redemption premium not to exceed 2 percent. We independently calculated future escrow account cash receipts and disbursements using the following documents provided to us on behalf of the City: · Initial subscription letter, dated April 6, 1993, and final subscription forms used to acquire certain United States Treasury Securities - State and Local Government Series (the "SLGS") which, together with an initial cash deposit of $61.44, will be deposited into the escrow account on April 21, 1993; and · Official Statement and Bond Indenture for the Refunded Bonds insofar as the bonds are described as to the maturity and interest payment dates, principal amounts, interest rotes, and optional redemption date and prices. We compared the interest rate for the maturity of' the SLGS, as shown on the subscription forms, with the maximum allowable interest rates shown on the Department of Treasury, Bureau of Public Debt, SLGS Table (Form PD 4262) for use on April 6, 1993 and found that the interest rate was equal to the maximum allowable interest rate for that maturity. The terms (i.e. the par amount, interest rate, maturity date and issuance date) of the SLGS to be acquired on April 21, 1993, as summarized on Exhibit B-l, agree without exception to those terms set forth in the final SLGS subscription forms; and the terms of the Refunded Bonds, as summarized on Exhibit B-2, agree without exception with those terms set forth in the Official Statement and Bond Indenture for the Refunded Bonds. The infOrmation and assumptions provided tO us by the Financial Advisor and those calcula- tions performed by us as a part of our engagement to prepare the mathematically accurate computations contained 'in the attached Exhibits B through B-3 'reflect that the. anticipated receipts from the SLGS, together with an initial cash deposit.of $61.44, to be deposited into the escrow.'account on April 21, 1993, will be sufficient to pay, when .due, those remaining debt' service payments and redemption premiums related to the Refunded Bonds assuming those Refunded Bonds will be redeemed at the date and redemption prices as described in this report. City of Tustin, California Mudge Rose Guthrie Alexander & Fcrdon Rourke, Woodruff & Spradlin Bank of America National Trust and Savings Association Barfle Wells Associates April 21, 1993 Page 3 CALCULATION OF YIELDS (Exhibits B-1 and (~) The Financial Advisor provided us with information and assumptions used to calculate the yield on the SLGS and the Refunding Certificates. These calculations indicate that the yield on' the SLGS is less than the yield on the Refunding Certificates. These schedules were prepared based on the assumed settlement date of April 21, 1993 using a 360-day year with interest compounded semi.'-annually. The term 'yield', as used herein, means that yield which, when used in computing the present value of all payments of principal and interest to be paid or received on an obligation are equal to, in the case of the SLGS, the purchase price, and in the case of the Refunding Certificates, the issue price. We independently calculated the yield on (i) the Refunding Certificates using the Official Statement provided by the Financial Advisor insofar as the Refunding Certificates are described as to the maturity and interest payment dates, dated date, interest rotes and issue price to the public and (ii) the SLGS. The results of our calculations, based on the aforemen- tioned assumptions, are summarized, below: Yield Exhibit · Yield on SLGS 2.946446% B-1 · Yield on Refunding Certificates 5.540456% C Based on our independent calculation of the yields, it is our opinion that the schedules attached hereto summarizing the yields are arithmetically accurate. ., The results of our independent calculation of the proposed transactions are summarized in the accompanying exhibits. We relied solely on the information and assumptions provided to us by the Financial Advisor and limited our work to the preparation of arithmetically accurate computations. This report is issued solely for the information of, and assistance to, the addressees of this report. Our report is not to be quoted or referred to in any document, other than certain closing documents, without our prior written consent. The terms of'our engagement are such that we have no obligation to update this report because of events occurring, or data or information coming to our attention, subsequent to the date of Exhibit A City of Tustin Orange County, California SOURCES AND USES OF FUNDS April 21, 1993 'SOURCF_~: Principal amount of the Refunding Certificates Accrued interest Series 1983 Reserve Fund USES: Purchase price of SLGS Beginning cash deposit to escrow account Costs of issuance Accrued interest Construction Fund Debt Service Reserve Underwriters discount $11,500,000.00 38,763.89 450,000.00 $11,988,763.89 $ 3,843,800.00. 61.44 .184,138.56 38,763.89 6,755,000.00 1,052,000.00 115,000.00 $11,988,763.89 GRAArf THORNTON Exhibit B __ City of Tustin Orange County, California ES~OW ACCOUNT CASH FLOW. Debt service payment date Initial cash deposit on April 21, 1993 · 10-01-93. Total cash receipts from SLGS ~Exhibit B-l) t 3.894,094.81 $3,894,094.81 Remaining debt service payments on Refunded Bonds (Exhibit B-2) 3.894,156.25 $3,894,156.25 Cash $61.44 Exhibit B-1 City of Tustin Orange County, California CASH RF~EIFrS FROM AND YIET,D ON SLGS " Present value on Total April 21, 1993 Receipt Interest cash receipts using a yield of _ date rate Principal Interest from SLGS 2.946446% 10-01-93 2.93 % $3.843.800 $50,294.81 $3,894,094.81 $3,843,800.00 Purchase price of SLGS Conclusion $3.843.800.00 The sum of the present values of the future cash receipts from the SLGS, on April 21, 1993 using a yield of 2.946446 %, is equal to the purchase price.of the SLGS. GRAtv-I' THORNTON :Exhibit B-2 City of Tusfin Orange County, California REMAINING DEBT SERVICE PAYMENTS · ON THE REFUNDEr) BONDS Date 10-01-93 .. Principal Interest Redemption rate . Interest premium $3.675,000 (1) $168,218.75 $.50,937.50 Total remaining debt service payments $3,894,156.25 (1) · Refunded Bonds due on and after October 1, 1994 are assumed to be redeemed on Octo- ber 1, 1993 at a redemption price of 1/4 of 1 percent, plus'accrued interest, for each year or fraction thereof from the date fixed for redemption to the date of maturity, with the redemption premium not to exceed 2 percent. Actual principal mounts, maturity dates and interest rates are as follows: Redemption Maturity 'Principal Interest premium Redemption date amount rate '. percentage premium 10-01-93 $ 200,000 10-01-94 225,000 10-01-95 225,000 10-01-96 250,000 10-01-97 300,000 10-01-98 325,000 10-01~99 350,000 10-01-00 375,000 10-01-01 425,000 10-01-02 475,000 10-01-03 525.000 $3.675,000 · 8.75% - $- 9.00% .25 % 562.50 9.00% .50% 1,125.00 9.00% .75% 1,875.00 9.00% 1.00% 3,000.00 9.25 % 1.25 % 4,062.50. 9.25 % 1.50 %- 5,250. O0 9.25% 1.75% 6,562.50 9.25% 2.00% 8,500.00 9.25% 2.00% 9,500.00 9.25 % 2. O0 % 10,500. O0 $50,937.50 Exhibit C City of Tustin Orange County, California DEBT SERVICE RF_~IJ]llEMF_2qI~ AND YIELD 'ON THE REF[JNDING CERTIFICATES Page 1 of 2 Debt service _myment date 10-01-93 04-01-94 10-01-94 04-01-95 10-01-95 04-01-96 10-01-96 04-01-97 10-01-97 04-01-98 10-O 1-98 04-01-99 10-01-99 04-01-00 10-014)0 04-01-01 1 0-01-O 1 04-01-02 1 0-01-02 04-01-03 10-01-03 04-01-04 10-01-04 04-01-05 10-01-05 04-01--06 10-0 1-06 $11,500,000 issue dated April 1, 1993 Interest Total debt . Principal rate Interest $ervice $ - - $ 348,875.00 $ 348,875.00 275,000 8.20% 348,875.00 623,875.00 - - 337,600.00 337,600.00 300,000 8.20%' 337,600.00 637,600.00 - - 325,300.00 325,300.00 325,000 8.20% '325,300.00 650,300.00 - - 311,975.00 311,975..00 350,000 8.20% 311,975.00 661,975.00 - - 297,625.00 297,625.00 375,000 8.20% 297,625.00 672,625.00 - - 282,250.00 282,250.00 400,000 8.20.% 282,250.00 682,250.00 - - 265,850.00 265,850.00 425,000 8.209[ 265,850.00 690,850.00 - - 248,425.00 248,425.00 450,000 8.20% 248,425.00 698,425.00 - - 229,975.00 ~ 229,975.00 500,000 7.75 % 229,975.00 729,975.00 - - 210,600.00 210,600.00 525,000 5.20% 210,600.00' 735,600.00 - - 196,950.00 196,950.00 550,000 5.20% 196,950.00 746,950.00 - - 182,650.00 182,650.00 : 600,000 5.20% 182,650.00 782,650.00 - - 167,050.00 ~ '167,050.00 625,000 5.20 % 167,050. O0 ' 792,050. O0 - - 150,800.00 150,800.00 Present value on April 21, 1993 using a yield of · 5.540456% $ 340,503.14 592,490.69 311,974.48 573,320.69 · 284,620.41 553,641.22 258,444.40 533,607.10 233,443.67 513,355.69 209,610.00 493,008.35 186,930.46 472,671.97 165,388.02 452,440.23 144,962.19 447,728.54 125,689.16 427,182.91 111,291.20 410,704.10 97,721.44 407,446.37 84,621.75 390,409.90 72,327.30 City of Tustin Orange County, California DEBT SERVICE RF~UIREI~-N~ AND YIELD ON THE REFUNDING CERTIFICATES - CONTINU~-I) Exhibit .C Page 2 of 2 Debt service payment date 04-01-07 10-01-07 $11,500,000 issue dated April 1, 1993 Interest Principal rate Interest 675,000 5.20% $ 150,800.00 - - 133,250.00 04-01-08 725,000 5.20% 133,250.00 10-01-08 - - 114,400.00 '04-01-09 775,000 5120% 114,400.00 10-01-09 - - 94,250.00 04-01-10 825,000 5.20 % 94,250.00 10-01-10 - - 72,800.00 04-01-11 875,000 5.20% 72,800.00' 10-01-11 - - 50,050.00 04-01-12 10-01-12 925,000 5.20% 50,050.00 - - 26,000.00 04-01-13 1,000,000 5.20% 26~000.00 $11,500,000 $.8,093,350.00 The present value of the future payments is equal to: Principal amount of the Refunding Certificates Reoffering premium (Exhibit D) Accrued interest Total debt service 825,800.00 133,250.00 · ' 858,250.00 114,400.00 889,400,00 94,250.00 919,250.00 72,800.00 947,800.00 50,050.00 975,050.00 26,000.00 ,1,026,000.00 $19,593,350.00 Present value on April 21, 1993 using a yield of 5.540456% 385,397.11 60,510.88 379,238.78' 49,187.83 372,101.49 38,368.81 364,135.72 28,060.39 355,477.16 18,265.51 346,247.97 8,983.93 344,963.43 $.11,646,474.39 $11,500,000.00 107,710.50 38,763.89 $11,646,474.39 C.~._oonclusion The sum Of the present valUe of debt service payments to be made on the Refunding Certificates, on April 21, 1993 using a yield of 5.540456%, is equal to the issue price of'the Refunding Certificates2 City of Tustln Orange County, California REOiq~'ERING PREMIUM ON ~ REFUNDING CERTIFICATES Exhibit D Maturity date Principal Interest , amount rate Yield 4-01-94 $ 275,000 8.20% 3.40% 4-01-95 300,000 8.20% 3.75 % 4-01-96 325,000 8.20% 4.15% 4-01-97 350,000 8.20% 4.50% 4-01-98 375,000 8.20% 4.75 % 4-01-99 400,000 8.20% 4.95 % 4-01-00 425,000 8.20% 5.15 % 4-01-01 450,000 8.20% 5.30% 4-01-02 500,000 7.75 % 5.40% 4-01-03 525,~. 5.20 % 5.30 % 4-01-04 . 550,000 5.20% 5.40% 4-01-05 600,000 5.20 % 5.50 % 4-01-06 625,000 5.20% 5.60% 4-01-07 675,000 5.20% 5.65 % 4-01-08 725,000 5.20% 5.70% 4-01-09 775,000 5.20 % 5.75 % 4-01-10 825,000 5.20% 5.75 % 4-01-13 2,800,000_ 5.20% 5.70% · . $11.500,000 Initial public offering . price 104.421% 108.266% 111.112% 113.232% 115.040% 116.556% 117.613% 118.600% 116.493% 99.231% 98.360% 97.394 % 96.348% 95.694 % 95.011% 94.305 % 94.091% 94.083 % Reoffering premium (disCOunt) 12,157.75 24,798.00 36,114.00 46,312.00 56,400.00 66,224.00 74,855.25 83,700.00 82,465.00 (4,037.25) (9,020.00) (15,636.00) (22,825.00) (29,o65.5o) (36,17o.25) (44,136.25) (48,749.25) 1~165~676.00) $. 107,710.50 Exhibit C 0S33C-25 CITY OF TUSTtN WATER CORPORATION $4,500,000 LEASE REVENUE BONDS SCHEDULE OF LEASE PAYMENTS Fiscal Year Lease Payment Date Sept. ,21 Man 2i Total 1983/84 1984/85 1985/86 3986/87 1987/88 1988/89 1989/90 1990/91 1991/92 ].992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 $ -- $ 205,0OO 205,000 205,000 205,000 230,000 230,000 240,000 240,000 250,000 250,000 260,000 260,000 265,000 265;000 265,000 265,000 265,000 265,000 - 270,000 270,000 275,000 275,000 - 275,000 275,000 275,000 275,000 280,000 280,000 280,000 280,000 280,000 280,000 280,000 280,000 280,000 280,000 285,000 285,000 290,000 · . 290,000 -- $5,.255,500 $5,255,00-0 $ 205,000 4!0,000 435,000 470,000 490,000 510,000 525,000 530,000 530,000 535,000 545,000 550,000 550,000 '555,000 560,000 560,000' 560,000 560,000 565,000 575,000 299~ 000 CITY OF TUSTIN WATER SERVICE SERIES 1985 1989 1990 1991 1993 Schedule of Bond Debt Service As of June 30, 1981. RATE 8% 8% 8% 8% 9.5% PRI N C I PAL QUARTERLY ANNU.AL AMOUNT INTEREST INTEREST $ ~~-'~-$ 18,000 $ 72,000 300,000 6,000 24,000 300,000' 6,000 24,000 300,000 6,000 24,000 500,000 '11,875 47,500 TOTALS. $2,300,000 '$ 47,875 $ 191,500 Note. (1) .(2) Ail interest payments are payable at the end of each calendar quarter. 1981 Series, 5½% Bonds in the amount of $300,000 matured and redeemed as of March 31, 1981. Debt Service on Purchase of Tustin Water Works Purchase price $3,764,001 Net~of outstanding bonds ($2,600,000) Nov. 1981 Principal @ 1/25 purchase price Interest @ 7.25% $147,826' 269,195 $417,021 Nov. 1982 Principal @ 1/25 purchase pri6e Interest @ 8.25% $~47,826 290,559 $438,385 Nov. 1983 Principal @ 1/25 purchase price Interest @ 9.25% $147,826 312,105 $459,931 At this time the balance is to be paid: Principal equal over balance of payments (1/25) Interest at average of prior 3 years bond rate. Let's assume 10.5% . · *Allowance for cash distribution at mid-year.. NOt, City of Tustin Financial Statements (Cont.. Exhibit D Year Ending June 30 General Tax Capital ized Obl i 9ati on Bonds A11 ocati on Bonds Lease Obl i 9ati ons Total 1985 . $' i70,925 $ 883,884 $12,401 $ 1,067,210 1986 175,775 881,327 12,401 1,069,503 1987 169,550 B87,996 1,033 1,058,579 1988 164,520 888,696 - 1,053,216 1989 158,160 895,771 '- '1,053,931 Thereafter 852,930 17,085,613 - 17,938,543 $i,691,860 $21,523,287 $25,835 $23,240,982 $3,168,321 is available in the Debt Service Fund to service the general obligation · and tax allocation bonds. The capitalized lease is serviced by General Fund revenues. The following is a summary of the long-term debt of the Water Enterprise Fund for the year ended June 30, 1984. Balance July 1, 1983 New Debt Incurred Debt retirement $6,428,776 4,514,194 (3,541,711) Balance June 30, 1984 $7,401,259 Water Enterprise Fund long-term-debt 'is comprised of the following- $2,300,000 Tustin Water Works Bonds payable with interest between 8.0% and 9.5%. Interest payable quarterly. Principal of $gDO,DO0 due in 1985, $30D,OOD due in 1989, 1990, and 1991, and $500,000 due in 1998. $2,300,000 $4,500,000 City of Tustin Water Corporation lease revenue bonds'with interest between 7.5% and 12% due in annual installments of $50,000 to $525,000 through October.i, 2003.~ $4,500,000 Construction contracts advances payabl~ at the rate of 22% of gross water sales made through the related facility. sso,B2z Long-term portions of compensated absences. The City's policies relating to compensated absences are described in Note i of the Notes to Financial Statements. 50,438 Less current portion 7,401,259 (985,000) Total $6,416,259 The annual requirements to amortize all' debt outstanding included in the wate~ - Enterprise Fund other than compensated absences as of June 30, 1984, including interest payments of $6,541,625 are as follows- City of Tustin Notes to Financial Statements (Cont.) Year Ending Tustin WaterWorks Bonds .... Payable 1985 $1,055,500 1986 119,500 1987 119,500 1988 119,500 1989 419,500 Thereafter 1,362,000 $3,195,500 Water Corporation Bonds _Payable $ 407,875 407,875 454,875 472,375 489,125 7,914,000 $10,146,125 Constructi on Contracts Advances Payable Total $ 85,000 80,000 75,000 70,000 65,0O0 175,821 $ 1,548,375 607,375 649,375 661,875 973,625 9,451,821 $550,82-1 ' $13,892,446 8. 'Interfund Receivables/PaYables Fund General Fund Federal Revenue Sharing Special Revenue Fund Park Development Special Revenue Fund South Central Area Capital Projects Fund Town Center Area Capital Projects Fund Water Enterprise Fund Totals I nterfund Receivables $ 590,438 29,625 i05,182 I nterfund Payables $105,182 15,084 131',035 60,379. 413,565 $ 725,245 $725,245 9. Deferred Compensation The City has made available to its employees a deferred compensation plan, whereby employees authorize the City.to defer a portion of their salary to be deposited in ~individual' investment accounts. There are's~veral options, available for employees to invest including annuities, life insurance, savings accounts and mutual, funds. Funds may be withdrawn by participants upon termination of employment, retirement, or certified emergency. The City makes no contribu'tion under the plan. As of June 30, 1984, the deferred compensation liability 'included in the General Fund was $673,350. The City plans to report deferred compensation inca .trust or an agency fund upon final, determination by the Governmental Accounting Standards Board.' lO. Pension Plan The City is a participant in the Public Employees' .Retirement System {PERS) of the State of California covering all of the City's permanent employees. Contributions to the system' are based on rates set by PERS based on certain actuarial assumptions, such as length of employment, estimated salary rates, Exhibit E City of Tustin Orange County, California $11,500,000 Water System Revenue Certificates of participation 1993 Series Sale Date' April 5, 1993 Bartle Wells Associates Official Statement $11,500,000 City of Tustin Orange County, California Water System Revenue Certificates of Participation, 1993 Series New Issue Sale Date: April 5, 1993 Ratings: Moody's Investors Service Aaa* Standard & Poor's Corporation AAA*. *MBIA Insured The certificates of participation described in this Official Statement represent the direct and proportional interests of the registered owners in purchase payments to be made by. the City of Tustin (the "City") under an Installment Purchase Agreement dated as of April 1, 1993 between the City, the purchaser, and the City of Tustin Water Corporation (the "Corporation"), the seller. The Corporation has assigned its interest in the purchase payments to Bank of America National Trust and Savings Association, Los Angeles, as trustee. Proceeds of the Certificates will be used to finance construction of water system improvements, repay a loan to Orange County Water District, reimburse the City for a part of that loan which it has paid, and refund all of the outstanding lease revehue bonds of the Corporation. The Certificates are payable from net water revenues. Certificates Dated: April 1, 1993 Denomination: $5,000 or integral .multiple thereof Due: April 1, as shown below: Year Amount Rate Yield Year Amou n t Rate Yield 1994 $275,000 8.20% 3.40% 2004 $ 550,000 5.20% 5.40 1995 300,000 8.20 3.75 2005 600,000 5.20 5.50 1996 325,000 8.20 ' 4.15 2006 625,000 5.20 5.60 1997 350,000 8.20 4.50 2007 675,000 5.20 5.65 1998 375,000 8.20 4.75 2008 725,000 5.20 5.70 1999 400,000 8.20 4.95 2009 775,000 5.20 '5.75 2000 425,000 8.20 5.15 2010 825,000 5.20 5.75 2001 450,000 8.20 5.30 2013 2,800,000 5.20 5.70 2002 500,000 7.75 5.40 2003 525,000 5.20 5.30 The Certificates will be issued as fully registered certificates and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"). DTC will act as securities depository for the Certificates. Individual purchases of the Certificates will be made in book-entry form only, in principal amounts of $5,000 or any integral multiple thereof. Payments of principal of, prepayment price, if applicable, and interest on the Certificates are to'be made to purchasers by DTC through the DTC participants (as such term is herein defined). Purchasers will not receive physical delivery of Certificates purchased by them. Interest is payable semiannually on April 1 and October 1, beginning October 1, 1993, by check or draft mailed to the registered owner. The Certificates are subject to prepayment prior to maturity as set forth herein. The obligation of the City to make purchase payments does not constitute a debt of the State of California or of any other political subdivision of the State, within the meaning of any constitutional or statutory limitation. The Certificates are offered when, as, and if issued, subject to the legal opinion of Mudge Rose Guthrie Alexander & Ferdon, Los Angeles, California, and Rourke, Woodruff & Spradlin, Orange, California, co-special counsel, approving the validity of the Certificates and stating that, under existing law, the portion of each purchase payment designated as and comprising interest is exempt from personal income taxes of the State of California and, assuming compliance with the tax covenant described herein, is excluded from gross income for federal income tax purposes and is not a specific preference item for purposes of the federal alternative minimum tax. See, however, "Tax Exemption" herein regarding certain other tax consid- erations. This Official Statement is deemed final by the City as of the .date hereof for purposes of compliance with Rule 15c2-12 of the Securities and Exchange Commission. This page contains certain information for quick reference only. It is not a summary of this iss~ae. Investors must read the entire Official Statement to obtain information essential to making an informed investment decision. This Official Statement is dated April 5, 1993. Santa Barbara Ventura Santa Monica Los Angeles Long Beach PACIFIC OCEAN San Bernardino Riverside San Clemente L Carlsbad San Diego The City of Tustin is located in central Orange County, California, adjacent to the cities of Orange, Santa Ana, and Irvine. The City had a 1992 population of 54,700. Tustin Water Service operates the water system that serves a portion of the City and adjacent area. Proceeds of the 1993 Certitlcates will b.e used to design and construct water system improvements, repay a loan from Orange County Water District, and refund outstanding lease revenue bonds of the City of Tustin Water Corporation. Official Statement City of TUstin 15222 Del Arno Avenue Tustin, California 92680 City of Tustin City CounCil Leslie Anne Pontious, Mayor Jim Potts, Mayor Pro Tern Charles E. Puckett Thomas R. Saltarelli Jeffery M. Thomas City of Tustin Water Corporation H. Rex Combs, Jr., President Lloyd W. Robbins, Secretary Dee Ann Hunter Walter S. Kowalik Thomas D. Mulcahy City Staff William Huston, City Manager James G. Rourke, City Attorney Ronald A. Nault, Finance Director Robert S. Ledendecker, Public Works Director Gary Veeh, Manager, Tustin Water Service Professional Services Mudge Rose Guthrie Alexander & Ferdon, Los Angeles, Co-Special. Counsel Rourke, Woodruff & Spradlin, Orange, Co-Special Counsel Bartle Wells Associates, San Francisco, Financial Advisor Bank of America National Trust and Savings Association, Los Angeles, Trustee This Official Statement provides information about the City, its water system, and the Certificates and includes: 1. data supplied by the city of Tustin and others, as indicated herein; 2.' estimates or projections which may or may not be realized and which should not be construed as assertions of fact; and 3. summaries and descriptions of legal and finandal docu- ments, or their contents, which do not purport to describe such documents completely and which are made expressly subject to the full provisions of the documents cited. This Official Statement does not constitute a recommendation, express Or implied, to purchase or not to purchase these Cer- tificates or any other previous obligations of the City. Prepared on behalf of the City by: Bartle Wells Associates Independent Public Finance Advisors 1636 Bush Street, San Francisco 94109 Tel. 415/775-3113 Fax 415/775-4123 Contents Basic Documents Introduction The Certificates Security for the Certificates Reserve Account Rates and Charges Flow of Funds ' Estimated Sources and Uses of Funds Plan of Refunding Verification Book-Entry-Only System Legal Opinion Tax Exemption Closing Documents Miscellaneous Ratings City of Tustin Water Corporation Tustin Water Service Water Supply and Use Water Customers Water Rates Capital Improvement Program Certificate Project Water Finances Water Debt Projected Revenues and Expenses Funding for Additional Projects 1 3 5 5 6 6 6 6 6 6 7 7 8 9 9 9 10 11 11 12 12 12 14 14 16 17 18 The City of Tustin Municipal Government City of Tustin General Fund Direct and Overlapping Bonded Debt Assessed Valuation Tax Levies and Delinquencies Population Construction Activity Housing 20 20 21 22 22 25 27 27 '27 Retail Trade Income 27 28 Employment Transportation Community Facilities 28 28 29 The Installment Purchase Agreement Purchase Payments Revenues Additional Purchase Payments Optional Prepayment Maintenance and Insurance Covenants of the City Defaults and Remedies 30 30 30 31 31 31 31 32 Trust Agreement Application of the Proceeds Purchase Payment Account Reserve Account Construction Account Payments of 1993 Certificates Covenants Events of Default and Remedies Amendments 33 33 33 33 34 34 34 34 35 Basic Documents The following basic documents regard the City of Tustin Water System Certificates of Participation, 1993 Series. Installment Purchase Agreement: An agreement be-. tween the City of Tustin Water Corporation (the "Corporation") and the City of Tustin (the "City") for the Corporation to sell the Corporation's existing water system to the City. In turn the City agrees to make purchase payments to the Corporation over a 20-year term. The City, as agent of the Corporation, is responsible for improvements to the Water sys- tem. The Installment Purchase Agreement describes the purchase and sale of the water system, the crea- tion of specific funds and accounts, flow of reve- nues, security for the purchase payments, covenants of the City, and events of default and remedies. Trust Agreement: An agreement among the Corpo- ration, Bank of America National Trust and Savings Association (the "Trustee"), and the City, under which the Trustee agrees to execute and deliver the Certificates and to establish the Project Trust Fund, within which the Purchase Payment Account and Reserve Account are established. The agreement sets forth the funds into which the proceeds of the Certificates will be deposited. It also specifies terms and conditions of the Certificates and the establish- ment and use of funds, covenants of the City, events of default, and remedies. Assignment Agreement: An agreement entered into between the Corporation and the Trustee, under which the Corporation assigns its rights and inter- est in the Installment Purchase Agreement to the Trustee, including the fight to receive purchase pay- ments from the City. Escrow Agreement: An agreement among the City, the Corporation, and Bank of America National Trust and Savings Association (the "Escrow Bank"), under which the Escrow Bank establishes an Escrow Account pledged and assigned to pay principal and interest on the refunded bonds due on the redemp- tion date and the redemption price on that date. The Escrow Account is established by the deposit of moneys received from proceeds of the sale of the Certificates and the transfer of moneys in the origi- nal Reserve Fund. The agreement provides for the use and investment of the Escrow Account moneys, responsibilities and duties of the Escrow Bank, and amendments to the agreement. Copies of the complete documents are available from Bar- tle Wells Associates prior to the delivery of the Certifi- cates and from the City thereafter. Top left: Steelcase, Inc., is Tustin Water Service's largest water user and a major employer in the City of Tustin. Above: Ricoh Electronics is the largest private employer in the ' Cit')., of Tustin. Top Right: The treatment plant, constructed with Orange Count), Water District (OCWD), removes nitrates from groundwater from two wells at Tustin Water Service's Main Street location. The nitrate removal plant consists of two parallel treatment processes- reverse osmosis and ion exchange. A portion of the 1993 Certifi- cates will be used to repay a loan from OCWD for this desalter. (Photos by Gaw. Veeh, Tustin Water Sen,ice.) Introduction Issuer: The City of Tustin is a general law dry in- corporated in 1927. It is located in central Orange County, California, about 37 miles southeast of Los Angeles and 88 miles north of San Diego. Tustin is bounded by Orange on the north, Santa Ana on the west, and Irvine on the south. The City operates under the coundl-manager form of government. Tustin Water Service (TWS) is the City's water de- partment and provides water service to about 13,550 .accounts of which about 9,000 .are within the City. TWS serves a portion of the City; the balance of customers in the City receive water service from the Irvine Ranch Water District. TWS's service area is essentially developed, and the number of cus- tomers and water use are stable. The system sells about 5 million hundred cubic feet of water annual- ly. Water comes from two sources: imported water and groundwater from local wells. Groundwater av- erages about 70 percent of the current water supply, with the remaining 30 percent from imported water. Projects are being developed to allow the City to in- crease its use of groundwater, which is less expen- sive than imported water, to 95'percent of water use by 2000. Purpose: The proceeds of the Certificates will be used, together with other moneys, for the following purposes: to finance design and construction of water system improvements, to defease all of the outstanding lease revenue bonds of the City of Tus- tin Water Corporation, to repay a loan from the Orange County Water District, to reimburse certain funds advanced by the City, and to establish a Re- serve Account and pay the costs of issuing the Cer- tificates. The City is undertaking a program of water sys- tem improvements, the initial phase of which will be financed with proceeds of the Certificates. The facilities are designed to increase and upgrade water storage reservoirs and to increase the City's ability to use groundwater. Distribution system im- provements are also included in the program. Security: Each Certificate represents a direct and proportional interest in the right to receive pur- chase payments made by the City under the Install- ment Purchase Agreement. The purchase payments are payable from net water revenues. Net revenues consist of gross revenues from the water service charges and all other income derived by the City from ownership, operation, use, or service of the water system, less maintenance and operation ex- penses of the water system. The Install~nent Purchase Agreement establishes a flow of gross, revenues of the water system. Gross revenues are used, first, to pay operation and main- tenance expenses, second, to pay purchase pay- ments, and then, any surplus money may be used for any lawful purpose of the 'City. Each month the City must pay into the Qualified Obligation Ac- count, held by the City Treasurer, one-sixth of the next interest payment and one-twelfth of the next principal payment. Amounts in the Qualified Obli- gation Account sufficient to pay semiannual interest and principal will be transferred to the Trustee on or before each April 1 and October 1. The City covenants to prescribe, revise, and col- lect charges for the services and facilities of the water system in each fiscal year sufficient that net revenues will be at least equal to 1.2 times purchase payments and 1.0 times all other payments required to be made from gross revenues in that fiscal year. Rates currently in place are expected to provide coverage of 2.44 times purchase payments in 1993/94. The obligation of the City to make purchase pay- ments from water revenues is absolute and uncon- ditional, and shall not be abated, rebated, set off, reduced, terminated, Or otherwise modified in any way while any purchase payments remain unpaid. In addition to other security, a Reserve Account equal to the least of 10 percent of the proceeds of the Certificates, maximum annual purchase pay- ments, or 125 percent of average annual purchase payments will be established from proceeds of the Certificates. Finances: The water fund budget for 1992/93 totals $9 million, made up of $4.5 million of operating costs, $4.5 million in capital, debt service, and transfers. Revenues are derived primarily from water charges. These water charges are expected to total $5.4 million in 1992/93. The City Council adopted water rates in September 1992 which in- clude annual increases effective November 1, 1992, 1993, and 1994. Under the current rates, a typical residential customer with a 5/8-inch meter using 40 hcf of water in a bimonthly billing period has a bi- monthly bill of $42. The largest water customer is the Steelcase Inc., which accounts for about 2.5 per- cent of total water usage. The Region: Tustin covers about 11.2 square miles in central Orange County, and has a population of 54,700 according to the California Department of Fi- nance. Median effective household buying income in the City was $39,296 in 1991. Tustin is primarily a reSidential and commercial community, with some local employment. The City's largest employer is the Marine Corps Air Sta- tion, with 4,000 civilian and military employees. The air station is scheduled to close in 1997, but its housing will remain in use by Marine. Corps per- sonnel. Other employers of over 1,000 include Ricoh Electronics, Steelcase Inc., Tustin Unified School District, and MAI Basic Four, Inc. The City is in- cluded in the Anaheim-Santa Aha-Garden Grove Metropolitan Statistical Area, which encompasses all of Orange County. The unemployment rate in Orange County as of October 1992 was 6.6 percent, which was lower than the 9.3 percent rate for the State of California and the 6.8 percent rate for the United States. This introduction is not a summary of the Official State- ment. Information presented in this section is treated more completely in the Official Statement, which should be read in its entirety. The Official Statement speaks only as of its date. Basic documents referred to in the Official Statement are available from the financial advisor prior to the closing and from the City thereafter. ' The Certificates Description of the Certificates Name: $11,500j000 City of Tustin Water System Revenue Certificates of Participation 1993 Series Date: April 1, 1993 Denomination: $5,000 or any integral multiple thereof- Interest: Interest is payable semiannually on April 1 and October 1, beginning October 1, 1993 Optional Redemption: Certificates maturing 1994 through 2003 are not callable. Certificates maturing 2004 through 2013 are callable at the option of the City as a whole or in part as selected by the City in integral multiples of $5,000 on any date on or after April 1, 2003, together with accrued interest there-' on. The prepayment price is expressed as a percent- Installment Payment Schedule: Year October 1 Ending Interest April 1 Payment age of the principal amount of Certificates to be prepaid as follows: Prepayment Prepayment Date Price April 1, 2003 through March 31, 2004 ...... 102% April 1, 2004 through March 31, 2005 ...... 101 April 1, 2005 and thereafter ............... 100 ii i Mandatory Redemption: Certificates maturing on April 1, 2013 (except $1,000,000 principal amount then scheduled to be paid at maturity) must be called annually by lot beginning April 1, 2011, in integral multiples of five. thousand dollars ($5,000), at a prepayment price equal'to the principal amount plus accrued interest to the prepayment date, with- out premium. Such Certificates as have been called will be redeemed from a mandatory sinking fund. Deposits to this fund must be made on or before each April 1, beginning April 1, 2011. Annual de- April 1 Total Interest Principal Total Annual Payment Payment Payment Payment 1994 ................. i ................ ' 1995 .................................. 1996 .................................. 1997 .................................. 1998 .................................. 1999 .................................. 2000 .................................. 2001 .................................. 2002 .................................. 2003 .................................. 2004 .................................. 2005 ................................ '.. 2006 .................................. 2007 ................................... 2008 .................................. 2009 .................................. 2010 .................................. 2011 ............................. ..... 2012 .................................. 2013 .................................. $ 348,875 337,600 325,300 311,975 297,625 282,250 265,850 248,425 229,975 210,600 196,950 182,650 167,050 150,800 133,250 114,400 94,250 72,800 50,050 26,000 Totals ................................. $4,046,675 $ 348,875 $ 275,000 $ 623,875 337,600 300,000 637,600 325,300 325,000 650,300 311,975 350,000 661,975 297,625 375,000 672,625 282,250 400,000 682,250 265,850 425,000 690,850 248,425 450,000 698,425 229,975 500,000 729,975 210,600 525,000 735,600 196,950 550,000~ 746,950 182,650 600,000~ 782,650 167,050 625,000~ 792,050 150,800 675,000~ 825,800 133,250 725,000" 858,250 114,400 775,000" 889,400 94,250 825,000~ 919,250 72,800 875,0001:2 947,800 50;050 925,000~.2 975,050 26,000 1,000,000~.2 1,026;000 $4,046;675 $11,500,000 $ 972.750 975.200 975.6O0 973.950 970.250 964.500 956.700 946.850 959.950 946.200 943.900 965.300 959.100 976.600 991.500 1,003,800 1,013,500 · 1,020,600 1,025,100 1,052,000 $15,546,675 . $19,593,350 I - Callable ~n any date on or after April 1, 2003. 2 - Certificates maturing 2013 to be rt~eemed from required sinking fund del~sits which commence April 1, 2011. ii posits will be in amounts sufficient to fund the call of the following Certificate amounts, unless reduced from previous optional or mandatory calls: Call Date Principal April 1 Amount 2011 ............................... $ 875,000* 2012 ............................... 925,000* 2013 ,. ............................. 1,000,000' *Callable by lot from all Certificates maturing April 10 2013. Security for the Certificates Each Certificate represents a proportional undivided interest in the right to receive purchase payments made by the City under the Installment Purchase Agreement. In the assignment agreement, the Cor- poration assigns its rights to.receive purchase pay- ments to the Trustee for the benefit of the owners of the Certificates. The obligation of the City to make purchase pay- ments from water revenues is absolute and uncon- ditional. The City may not discontinue or suspend any purchase payments whether or not the project is operable or has been completed or for any cause whatsoever. Reserve Account The Reserve Account established by the Trust Agreement is required to be funded in an amount equal to the least of 10 percent of the proceeds of the Certificates, maximum annual purchase pay- ments, or 125 percent, of average annual purchase payments. The Reserve Account will be held by the Trustee. Prior to completion of the project, interest earned on the Reserve Account in excess of the re- serv~ requirement will be transferred to the Con- struction Account on the first business day of each 'month; after completion of the project, such interest earned will be transferred to the Purchase Payment AccOunt on each purchase.payment date. Rat'es and Charges The City covenants in the Installment Purchase Agreement that it .will prescribe, revise, and collect charges for the services and facilities of the water system in each fiscal year sufficient that net reve- ·nues will be at least equal to 1.2 times purchase' payments and 1.0 times all other payments required to be made from gross revenues in that fiscal year. Flow of Funds The Installment Purchase Agreement' establishes the following requirements for the application of gross revenues. Gross revenues of the water system are deposited by the City as received in the Revenue Fund and, by the twentieth day of each month, will be allocated to the following accounts and funds in the priority indicated: [] First, to the Maintenance and Operation Account, an amount sufficient to pay maintenance and op- .eration expenses; [] Second, to the Qualified Obligations Account, an amount equal to the sum of 1/12 of the next suc- ceeding principal component and 1/6 of the next . succeeding interest payment; and [] Then, to the Surplus Revenue Account;' all mon- eys in the Surplus Account may be used for any lawful purpose of the City. Estimated Sources and Uses of Funds The proceeds of the Certificates, excluding 'ac- crued interest and together with certain other funds, will be allocated as shown below to pay the design and construction costs of water system im- provements, defease all of the outstanding Corpora- tion lease revenue bonds, repay a loan from Orange County Water District, reimburse certain funds ad- vanced by the City, establish a Reserve Account, and pay the costs associated with issuance of the Certificates. Sources of Funds Principal amount of Certificates ...... $11,500,000 Reserve fund, Corporation bonds .... 450,000 Total sources of funds ............... 11,950,000 Uses of FUnds Construction Account deposit ........ 6,759,000 Escrow Account deposit .............. 3,844,000 Reserve Account deposit ............ 1,052,000 Underwriter's discount allowance (1%) ' . 115,000 Issuance cost allowance ............. 180,000 Total uses of funds ................. $11,950,000 Plan of Refunding Prior to or concurrent .with the delivery of the Certif- icates, the Corporation will enter into an Escrow Agreement with respect to its outstanding bonds (the "Bonds"). Under the Escrow Agreement, a por- tion of the proceeds of the CertifiCates paid to the Corporation by the City to purchase the water sys- tem pursuant to the Installment Purchase Agree,- ment, together with other moneys,, will be deposited into an Escrow Account to be held by the Escrow Bank. Moneys in the Escrow Account will be used to purchase non-callable direct obligations of the United States of America. Such securities held in trust in the Escrow Account, includin§ sub- sequent investment earnin§s there[rom, will be in an amount suffident to pay principal and interest on the Bonds due on October 1, 1993 and to redeem the outstanding Bonds on October 1, 1993. When the Bonds are retired or redeemed, the Es- crow Bank will be required immediately to transfer to the City any moneys remaining in the Escrow Account and submit a final report with respect to the Bonds to the City. Moneys deposited in the Escrow AccoUnt to re- fund the Corporation's Bonds in no way secure the Certificates. Verification Grant Thornton an independent firm of certified public accountants, will verify certain mathematical computations as to the sufficiency of the refunding securities deposited into the Escrow Account to pay, when due on October 1, 1993, designated for pay- ment or prior redemption, the principal of, interest on, and premiums in connection with the Bonds, and as to the yield on the Certificates and the re- funding securities purchased with proceeds of the Certificates and deposited in the Escrow Account. Book-Entry-Only System The Depository Trust Company (DTC), New York, New York, will act as securities depository for the Certificates. The ownership of one fully registered Certificate for each maturity as set forth on the cov- er page hereof, each in the aggregate principal amount o£ such maturity, will be registered in the name of Cede & Co., as nominee for DTC. DTC is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Com- mercial Code, and a ,'clearing agency" registered pursuant to the provisions of Section 17A of the Se- curities Exchange Act of 1934, as amended. DTC was created to hold securities of its participants (the "DTC Participants") and to facilitate the clearance and settlement of securities transactions among DTC Participants in such securities through elec- tronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need of physi- cal movement of securities certificates~ DTC Partici- pants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organization, some of whom (and/or their rep- resentatives) own DTC. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Partici- pant, either directly or indirectly (the "Indirect Par- ticipants''). The DTC Participants shall receive a credit bal- ance in the records of DTC. The ownership interest of each actual purchaser of each Certificate (the "Beneficial Owner") will be recorded through the records of the DTC Participant. Beneficial Owners are expected to receive a written confirmation of their purchase providing details of the Certificate acquired. Transfers of. ownership interests in the Certificates will be accomplished by book entries made by DTC and, in turn, by the DTC Participants who act on behalf of the Beneficial Owners. Benefi- cial Owners will not receive Certificates represent- ing their ownership interest in the Certificates, except as specifically provided in the Trust Agree- ment. DTC may determine to discontinue providing its service with respect to the Certificates at any time by giving notice to the City and discharging its re- sponsibilities with respect thereto under applicable law. Under such circumstances, Certificates are re- quired to be delivered as described in the Trust Agreement. The Beneficial Owner, upon registra- tion of Certificates held in the Beneficial Owner's name, will become the registered owner of the Cer- tificates. The City may determine that continuation of the system of book-entry transfer through DTC (or a successor securities depository) is not in the best in- terests of the Beneficial Owners. In such event, .Cer- tificates will be delivered as described in the Trust Agreement. Conveyance of notices and other communications by DTC to DTC' Participants, by DTC Participants to Indirect Participants, and by DTC Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory and regulatory requirements as may be in effect from time to time. Principal and interest payments on th~ Certifi- cates will be made to DTC or its nominee, Cede & Co., as registered owner of the Certificates. Upon receipt of moneys, DTC's current practice is to im- mediately credit the accounts of the DTC Partici- 'pants in acCordance with their respective holdings shown on the records of DTC. Payments by DTC Participants and Indirect Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is now the case with municipal securities held for the accounts of cus- tomers in bearer form or registered in "street name," and will be the responsibility of such DTC Participant or Indirect Participant and not of DTC, the paying agent or the City, subject to any statuto- ry and regulatory requirements as may be in effect from time to time. Legal Opinion Legal matters incident to the authorization, issu- ance, and sale Of the Certificates are subject to the unqualified approving opinion of Mudge Rose Guthrie Alexander & Ferdon, Los Angeles, Califor- nia, and Rourke, Woodruff & Spradlin, a Profes- sional Corporation, Orange, California, co-special counsel. Said opinion will be delivered at the time of delivery of the Certificates. The legal opinion of co-special counsel is not intended to be nor is it to be interpreted or relied upon as a disclosure docu- ment or a disclosure opinion or an express or im- plied recommendation as to the investment quality of the Certificates. For a further description of the opinion of co-special counsel, see "Tax Exemption." James G. Rourke, Esq., of Rourke, Woodruff & Spradl!n, serves as City Attorney to the City. Cer- tain legal matters will be passed upon for the City and the Corporation by the City Attorney. Tax Exemption The Internal Revenue Code of 1986, as amended (the "Code"), establishes certain requirements which must be met subsequent to the initial execu- tion and.delivery of the Certificates for the interest component of purchase payments received by the owners of the Certificates to be and remain ex- cluded from gross income for federal income tax purposes. Noncompliance with such requirements could cause the interest component of purchase payments received by the owners of the Certificates to be included in gross income for federal income tax purposes retroactive to the date of initial execu- tion and delivery of the Certificates. The City has covenanted in the Installment Purchase Agreement- and the Trust Agreement to maintain the exclusion of the'interest component of purchase .payments re- ceived, by the owners of the Certificates from gross income for federal income tax purposes pursuant to 'Section 103(a) of the Code. ' ~ In .the opinion of Mudge Rose Guthrie Alexander & Ferdon, Los Angeles, California, and Rourke, Woodruff & Spradlin, a Professional Corporation, Orange, California, co-special counsel, under exist- ing law, interest on the Certificates is exempt from personal income taxation of the State of California and, assuming compliance with the aforementioned covenant, the interest component of purchase pay- ments received by the owners of the Certificates is excluded from gross income for federal income tax purposes. Co-special counsel are also of the opinion. that the Installment Purchase Agreement and, therefore, the Certificates, do not represent an in- terest in "specified private activity bonds" within the meaning of Section 57(a)(5) of the Code and, therefore, the interest component of purchase pay- ments received by the owners of the Certificates will not be treated as a specific preference item for purposes of computing the alternative minimum tax imposed by Section 55 of the Code. The interest component of purchase payments with respect to Certificates received by corporations will, however, be taken into account in determining the alternative minimum tax imposed by Section 55 of the Code on 75 percent.of adjusted current earnings over alter- native minimum taxable income (determined with- out regard to this adjustment and the alternative tax · net operating loss deduction). Co-special counsel have not undertaken to advise in the future whether any events after the date of execution and delivery of the Certificates may affect the tax Status of the interest component of purchase payments received by the Certificate owners. Fur- thermore, co-special counsel, express no opinion as to any federal, state, or local tax law consequences with respect to the Certificates or the interest com- ponent of purchase payments received by owners of the Certificates if any action is taken with respect to the Certificates or the proceeds thereof upon the advice or approval of counsel other than co-special counsel. Finally, no assurance can be given that fu- ture legislation, or amendments to the Code, if en- acted into law, will not contain provisions which would directly or indirectly reduce the benefit of the exclusion of the interest component of purchase payments received by the Certificates owners from gross income for Federal income tax purposes,. Although co-special counsel will render, at the time of delivery of the Certificates, an opinion that the interest component of purchase payments re- ceived by the owners of the Certificates is excluded from gross income for Federal income-tax purposes, an owner's Federal tax liability may be otherwise af- fected by the ownership or disposition of the Certif- icates. The nature and extent of such other tax consequences will depend on the owner's other items of income or deduction. Without limiting the generality of the foregoing, prospective purchasers of the Certificates should be aware that (i) Section 265 of the Code denies a deduction for interest on indebtedness incurred or continued to purchase or carry the Certificates or, in the case of a financial institution, that portion of an owner's interest ex- pense allocated to the interest component of pur- chase payments, (ii) with respect to insurance companies subject to the tax imposed by Section 831 of the Code, Section 832(b)(5)(B)(i) reduces the deduction for loss reserves by-15 percent of the sum of certain items, including the interest component of purchase payments, (iii) the interest component of purchase payments earned by some corporations could be subject to the environmental tax imposed by Section 59A of the Code, (iv) the interest compo- nent of purchase payments earned by certain for- eign corporations doing business in the United States could be subject to a branch profits tax im- posed by Section 884 of the Code, (v) passive in- vestment income, including the interest component of purchase payments, may be subject to Federal in- come taxation under Section 1375 of the Code for Subchapter S corporations that have Subchapter C earnings and profits at the close of the taxable year if greater that 25 percent of the gross receipts of such Subchapter S corporation is passive investment income, and (vi) Section 86 of the Code requires re- cipients of certain Social Security and certain Rail- road Retirement benefits to take into account, in determining the taxability of such benefits, receipts or accruals of the interest component of purchase payments. Co-special counsel have expressed no opinion regarding any such other tax consequences. Closing Documents At the time of delivery of the Certificates, the fol- lowing documents will be furnished: · Signature and No-Litigation Certificates: Certifi- cates of the City and the Corporation stating that the signatures on the Installment Purchase Agree- ment and the Trust Agreement are authentic and duly authorized and .that no litigation is pending, threatened, or in progress affecting the.validity of the Certificates. · Certificate Concerning Official Statement: A cer- tificate, signed by a responsible official represent- ing the City, to the effect that to the best of his or her knowledge and belief, and after reasonable in- vestigation: (a) neither the Official Statement nor any amendment or supplement thereto contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (b) since the date of the Official Statement no event has occurred which should have been set forth in an amendment or supplement to the Official Statement which has not been so set forth;and (c) there has been no material adverse change in the operation or financial affairs of the City since the date of such Official Statement. Non-Arbitrage Certificate: A certificate of a re- sponsible officer of the Cty certifying that, on the basis of the facts, estimates, and circumstances in effect at the time of delivery of the Certificates, it is not expected that the proceeds of the Certifi- cates will be used in a manner that will cause the Certificates to be arbitrage bonds within the meaning of the Code. Receipt for Certificates: The receipt of the City showing that the purchase price of the Certifi- cates including interest accrued to the date of de- livery (if any), has been received by the City and/ or the Trustee. Miscellaneous The quotations from, and summaries and explana- tions of the Installment Purchase Agreement, the Trust Agreement, the Certificates, and other stat- utes and documents referred to herein do not pur- port to be complete, and reference is made to such documents and statutes for full and complete state- ments of their provisions. This Official Statement is submitted only in con- nection with the sale of the Certificates by the City. All estimates, assumptions, statistical information, and other statements contained herein, while taken from sources considered relia, ble, are not guaranteed by the Corporation or the City. The information contained herein should not be construed as repre- senting all conditions affecting the Corporation, the City, Tustin Water Service, or the Certificates. All information contained in this Official Statement per- taining to the City and the Corporation has been furnished by the City and the Corporation, and the execution and delivery of this Official Statement has been duly authorized by the City. /s/ Leslie Anne Pontious Mayor 10 City of Tustin Water Corporation City Of Tustin Water Corporation was incorporated ' on March 3, 1980 under the nonprofit corporation law of the State of California. Its purpose is to pro- vide financial assistance to the City by acquiring, constructing, and operating or providing for the op- eration of water fadlities. The Corporation has no capital stock or stockholders, but has irrevocably dedicated' all of its property and assets to the City. In 1983 the Corporation issued $4.5 million Lease Revenue Bonds, Series A, the outstanding balance of which are being refunded with this issue. Pro- ceeds of the Bonds were used to acquire water facil- ities of Tustin Water Works, a private company, and to reimburse the City for money advanced to the Corporation. Pursuant to a lease between the City and the Corporation, the City makes annual lease payments to the Corporation, which are used to pay debt service on the Bonds. The lease will termi- nate upon defeasance of the Bonds. Proceeds of the Certificates will be used, among other purposes, to purchase the water system from the Corporation. The Corporation has a five-member board of di- rectors appointed by the Tustin City Council. · H. Rex Combs, Jr., President, has served on the · Corporation board since 1989 and has lived in the area for 10 years. He is. employed as a munidpal industry valve products specialist. Mr. Combs is a member of the Marine Base Closure Task Force. He is past president of the board of directors of the Tustin Meadows Community Association, where he is still a board member. Lloyd W. Robbins, Secretary, has lived in the Tus- tin area for over 20 years. He has served on the Corporation board since 1981 and is a manager of a homeowners' association. Mr. Robbins is a mem- ber of the City of Tustin Planning Commission. Dee Ann Hunter has se~ed on the Corporation board for one year. She has lived in the area for five years and is a preschool owner and director. Ms. Hunter is a member of the Board of Directors of the Tustin Chamber of Commerce. · Walter S. Kowalik is a mechanical engineer and has been a resident of the area for over 20 years. He has served on the Corporation board for eight years. · Thomas D. Mulcahy is a certified public accoun- tant (CPA). He began his service on the board in 1990. He is a past director of the National Assod- ation of Accountants. Mr. Mulcahy is a member of the California CPA society, the World Trade Cen- ter Association, and the Panel of Arbitrators of the American Arbitration Assodation. 11 Tustin Water Service Tustin Water Service (TWS), a department of the City, provides water service to most of Tustin as well as an area outside the City limits. The water system was begun as Tustin Water Works, a private- ly owned water utility, and was acquired in 1980. TWS has operated the water system since that time. The water system's facilities include transmission and distribution lines, storage reservoirs, and wells. The City has recently completed, in conjunction with Orange County Water District, a desalter which removes excess nitrates from groundwater. This facility is helping the City toward its goal of in- creasing the use of groundwater and reducing reli- ance on more expensive imported water. Water Supply and Use TWS has two sources of water: imported water and groundwater. In a typical year, about 30 percent of' TABLE 1 · Tustin Water Service Water Supply and Use (hcf) 1989/90 1990/91 1991/92 Water Supply Purchased ..... 3,470,836 Pumped ....... 2,378,249 Total supply ... 5,849,085 2,525,203 1,308,368 2,977,013 3,655,337 5,502,216 4,963,705 Water use ..... 5,425,489 5,066,520 4,685,560 Source: City of Tustin Water Service. the City's water is imported and supplied by the Metropolitan Water District through East Orange County Water District. The remaining 70 percent comes from City-owned wells. Actual water supply from each source varies from year to year. Table 1 shows TWS's water supply and use for 1989/90 through 1991/92. The amounts in the table are in hundred cubic feet (hcf), which is TWS's basic billing unit. Supply and use have varied over the last three fiscal years due to conservation during drought conditions. Water consumption is expected to re- main at about 5 million hcf annually. Over one-half of the annual water sales are to sin- gle-family residences. Other customer classes in- clude multiple-family, commercial, industrial, public agencies, and landscaping. Table 2 shows annual water sales for 1989/90, 1990/91, and 1991/92 by cus- tomer class. TWS stores water in five reservoirs, and the exist- ing water storage capacity is 10.9 million gallons. TWS plans to increase storage capacity to 22.9 mil- lion gallons in order to satisfy operating, fire, and emergency storage requirements, as discussed in the section titled "Capital Improvement Program." Through well improvements included in the capi- tal improvement program, the City anticipates in- creasing its reliance on groundwater from the current level of 70 percent to 95 percent by 2000. The remaining 5 percent would be imported. The City's goal is to lessen its dependency on imported water, because groundwater is expected to be less costly and more reliable. TABLE 2 · Tustin Water Service Annual Water Sale's (hcf) User 1989/90 1990/91 1991/92 ~ercent Of Total 1992 Sales Single-family ................................................ 2,987,612 Multiple-family .............................................. 1,241,878 Commercial ................................................. 566,446 Industrial ................................................... 210,940 Public agencies .............................................. 240,770 Landscaping ................................................ 154,709 Nursery & farms ...................................... ' ...... 23,134 Totals ...................................................... 5,425,489 2,782,959 2,384,508 1,189,976 1,248,737 562,706 520,509 182,515 189,469 191,869 192,909 143,191 143,407 13,304 6,021 5,066,520 4,685,560 51% 27 11 4 4 3 100% Source: Tustin Water Service Water Customers TWS serves approximately 13,500 water consumers, of which about 9,000 are within the City and the re- maining 4,500 are outside. The service area is fully developed, and the number of water customers has been essentially stable since 1980. No significant growth within the TWS service area is anticipated. The areas of the City not served by TWS receive water service from Irvine Ranch Water Di. strict, a public agerlcy. Table 3 shows the active service connections by customer class. About 85 percent of the total cus- tomers are single-family residential. TABLE 3 ~' Tustin Water Service Active Service Connections by Customer Class, 1991/92 Single-family ........................... 11,505 Multiple-family ,. ........................ 881 Commercial ............................. 771 Industrial ' 53 Public agencies ......................... ~ 89 Landscaping ...~ ....................... 187 Nursery & farms ....................... 7 Subtotal ............................... 13,493 Fire ' 144 Total .13,637 Source: Tustin Water Service. TABLE 4 · Tustin Water Service Largest Water Users, 1991/92 . Consumption Customer (hcf) Steelcase Inc ....... ~ ................ Tustin Unified School District ......... City of Tustin ....................... Regency West ....................... S. F. Shea Apartments ............... Park Place Apartments ............... Total ............................... 115,72i 94,216 42,017 39,064 37,271 6,126. 334,415 Source: Top 100 user report dated February 2, 1993. Steelcase, Inc., is the largest water customer, fol- lowed by Tustin Unified School District, with about 2.5 and 2 percent of total water usage, respectively. The six largest consumers in terms of annual water use are listed in Table 4. The top 100 users account for about one-quarter of total water consumption. Water Rates In September 1992 the City Council approved new water rates, which appear in Table 5. The City Council adopted water charges for three fiscal years, 1992/93, 1993/94, and 1994/95. The first rate change became effective in November 1992 for ' water used beginning in September 1992, and fu- ture rate changes will occur on November 1, 1993 . and NOvember 1, 1994. The new water rates were based on a Water Rate Study and Financing Plan pre- pared by Bartle Wells Assodates in July 1992. The water rate structure consists of meter charges and volume charges. Meter charges vary by size of meter and are designed tO generate about one-third of the annual revenue. This approach is designed to reduce fluctuations in water revenue and to recover a portion of fixed costs, such as debt service. All single-family residential customers have a 5/8-inch meter, and it is the most common meter size in the water system. Volume charges consist of ascending block rates per hcf of water consumption. The rate structure is designed to encourage conservation through the use of ascending block rates, that is, as a customer's water use increases, the rate for additional water also increases. Four block rates are employed; the initial rate applies to minimum "lifeline" usage. The blocks at 40 and 60 hcf are based on average resi- dential usage for 5/8-inch and 1-inch meters, respec- tively. A typical residential customer with a 5/8-inch'me- ter using 40 hcf of water in a bimonthly period has a current bimonthly bill of $42.00. This bill is based on the recently approved water rates for 1992/93. The bill for the same usage under prior rates was $35.89. The new water rates increase the bimonthly bill for a typical residential customer by 17 percent from the prior level. Capital Improvement Program The City's water supply' and storage facilities were originally constructed by the privately owned Tustin Water Works in the 1960s. In October 1990, Daniel 13 Boyle Engineering prepared a Water System Storage Evaluation Study, which identified numerous short- comings in the City's water storage system. The shortcomings were categorized into two major groups: (1) structural deficiencies and (2) inade- quate storage volume. The engineering report rec- ommended improvements to existing storage facilities, drilling of two new wells and construction of a new reservoir. In response to the recommendations made in the Daniel Boyle report, the City staff developed a. schedule of proposed capital improvement projects. The City staff also prepared a schedule of proposed distribution system improvements. Reservoir improvements consist of the following: · Main Street Reservoir: Design and construct a new 2,2-million-gallon Main Street reservoir. · Rawlings Reservoir: Rehabilitate existing reservoir by constructing new retaining walls, install access stairway, and conducting a structural analysis of roof and support system; repair roof or expand reservoir. · Foothill Reservoir: Remove topsoil and Conduct structural analysis and site ~valuation of existing reservoir. Design and construct replacement reser-' voir.. · Simon Reservoir: Remove topsoil and conduct structural analysis. Design and replace roof. Other capital improvements include construction of a Zohe II booster pump station, purchase of portable generator at the Columbus Tustin well, and new wells and a desalter project on existing wells. The well projects are designed to enable the City to increase its use of groundwater from the current average of 70 percent of annual water sup- ply. to 95 percent of water supply by 2000. This will lower the cost of water because the cost of ground- water is substantially below the cost of imported water, the City's alternate water source. The City also has an ongoing capital improvement program (CIP) for the water distribution system. The CIP projects include replacement and installation of water mains, hydrants, services, and related land- scaping. Table 6 lists the capital projects and their costs for supply, storage, and distribution systems for 1992 through 1996. A portion of these capital projects will be financed by the Certificates. TABLE 5 · Tustin Water Service Water Rates Meter Size Bimonthly Charge 1992/93 1993/94 1994/95 5/8" x 3/4" . ............................................................. $ 11.00 1" . ..................................................................... 27.50 1-1/2" 55.00 2" 88.00 3" . ..................................................................... 165.00 4" . ..................................................................... 275.00 $ 13.00 $ 16.00 32.50. 40.00 65.00 80.00 104.00 128.00 195.00 240.00 325.00 400.00 6" . ..................................................................... 550.00 650.00 800.00 Multiple dwelling units ................................................... 80% of the 5/8" meter charge per unit Rates per hcf Water Volume Block Use 1992/93 1993/94 1994/95 1-. ........................................ ................ 0-6 hcf $0.35 2 ......................................................... 7-40 hcf 0.'85 3 ......................................................... 41-60 hcf 1.00 4 ......................................................... Over 60 hcf 1.10 $O.35 $O.35 0.97 1.12 1.10 1.20" 1.20 1.32 Source: City of Tustin 14 TABLE 6 · Tustin Water Service Capital Project Costs, 1992-1996 1992/93 1993/94 1994/95 1995!tk, Reservoirs: Main Street ........................ ' ................ Rawlings ..................................... ' ..... Foothill ............................................ Simon ............................................. Total reservoirs ....................................... Zone II booster station ................................ Portable generator at well ............................. Distribution system improvements ..................... Total ................................................ $ 160,000 $ 600,000 $2,700,000 $ 860,(~k~ 367,300 500,000 -- -- 110,000 -- m 150,0(~ 35,000 m ~ -- 672,300 1,100,000 2,700,000 1,010,000 ~ 275,000 -- -- 120,000 ~ ~ ~ 1,019,600 2,365,000 1,475,000 1,000,000 $1,811,900 $3,740,000 $4,175,000 $2,010,0t~ Source: Tustin Water Service · Certificate Project Proceeds of the Certificates will be used, among. other purposes, to finance the design .and construc- tion of certain supply, storage, and distribution im- provements identified in the capital improvement program. Table 7 summarizes Project cost estimates for the projects to be funded from the Certificates. The project elements include the following. · Design and site planning for the Main Street res- ervoir · Design and construction of improvements at the Rawlings reservoir TABLE 7 · Tustin Water Service 1993 Project Cost Estimate Reservoirs: Main Street ....................... $ 760,000 Rawlings '. ........................ 867,000 Foothill .......................... 110,000 Simon ........................... 35,000 Total reservoirs ..................... Zone II booster station ................ Main Street nitrate plant loan repayment ....... i...- ........ Portable generator at Columbus-Tustin well .............. Distribution system improvements .... Total project cost 1,772,000 275,000 1,388,000 120,000 3,385,000 ................... $6,940,000 Source: Tustin Water Service · Structural analysis and site evaluation at the Foothill reservoir. · Structural analysis aod site plan at the Simon res- ervoir · Site evaluation for the Zone II booster station · Purchase of.portable generator at the Columbus Tustin well · Design and construction of water mains and relat- ed distribution facilities The above project elements are being designed. For distribution system facilities the City plans to award design contracts to outside consultants during April through June 1993 and anticipates completion of construction of the CIP distribution facilities by vember 1994. The project also includes repayment of a loan from Orange County Water District, the proceeds which were used to finance a desalter on the Main Street wells. Water Finances The City of Tustin accounts for water service opera- tions as a water enterprise fund. Financial data, such as balance sheet, revenue and expense state- ment, and cash flow statement, are prepared for the water enterprise fund as part of the comprehensive annual £mandal report for the City. The water enterprise fund accounts for operations that are financed in a manner similar 'to private business enterprises in that the costs of providing service to the general public are recovered through user charges. Finandal statements for the enterprise fund use the accrual basis of accounting; in which revenues are recognized when earned and expenses 15 are recorded when the liability is incurred. Property and equipment acquired by the enterprise fund are capitalized at cost at time of purchase. Assets ac- quired from gifts or contributions are recorded at fair market value at the time received or, in the case of water distribution assets, at the City Council ac- ceptance date. Depreciation on water system assets is calculated with the straight-line method over the estimated useful lives. Table 8 shows the revenues, expenses, and changes in retained earnings for fiscal years 1990 through 1992. Charges for service include all water sales revenue and all water charges. Operating rev- enues from water charges decreased over the last three fiscal years. This decrease has been due to mandatory rationing in the spring of 1991 and vol- untary conservation since that time, which resulted in decreases in water sales. The City has adopted rate increases, which are described under "Water Rates." In 1992, nonoperating revenues included an inter- governmental grant of $473,022 from Caltrans for reimbursement of City expenditures for water im- provements in conjunction with freeway construc- tion. Table 9 shows cash flows for fiscal years 1990 through 1992. Net cash provided by operating activ- ities has increased from 1990 to 1992. However, uses of cash flow have increased more than annual net cash from operation, as cash has been applied TABLE 8 [] Tustin Water Service Statement of Revenues, Expenses, and Changes in 'Retained Earnings, June 30 Operating Revenues Charges for services .......................................... $ 5,477,119 Operating Expenses Personal services Purchased water & power ..................................... Maintenance & operations .................................... · Depreciation & amortization .................................. Other ............................................... i ....... Total operating expenses ...................................... $ 5,076,853 $ 4,867,984 563,149 1,010,692 1,109,029 1,534,617 1,121,425 876,781 1,297,922 1,328,268 1,300,226 322,729 350,069 382,752 102,641 468,359 . 85,919 3,821,058 Operating income ............................................ 1,656,061 Nonoperating Revenues (Expenses) Interest income ...................................... ' ........ Interest expense ............................................... Loss from sale of assets ....................................... Intergovernmental grants ..................................... Total nonoPerating revenues (expenses) ... ...................... Operating transfers out ....................................... 4,278,813 3,754,707 798,040 1,113,277 448,394 406,047 415,724 (451,333) (416,425) (359;836) (1,394) · (56,272) (118,199) -- t 473,022 Net income .................................................. (4,333) (66,650) 410,711 (375,000) (389,000) (558,000) 1,276,728 342,390 965,988 Retained earnings: Beginning of year .......................................... 9,270,195 End of year ................................................ $10,546,923 10,546,923 10,889,313 $10,889,313 $11,855,301 Source: Prepared by Battle Wells Associates from financial statements of the City. 16 to the acquisition and construction of capital im- provements. Table 10 shows the 1992/93 water fund budget.. adopted by the City Council. The budgeted amount shown in this table for water charge revenue does not reflect the rate increases the Council approved in September 1992. Total revenues do, however, in- clude all other sources, which consist of meter charges, demand charges, and other fees. The new- ly enacted water rates are expected to increase water revenues in 1992/93 to about $5.4 million. Water fund expenses include an $88,000 increase in fees and charges from East Orange County Water District and Orange County Water District. These districts increased their charges to make up for loss- es of property tax revenue as a result of provisions of the California State budget. Table 11 is the water fund balance sheet as of June 30, 1990 through 1992. Water Debt The City of Tustin Water Corporation issued $4.5 million of lease revenue bonds in 1983 for expenses related to the acquisition of Tustin Water Works; the water system was leased to the City. Water reve- nues are applied to lease payments to the Corpora- tion. A portion of the proceeds of the Certificates will be used to purchase the water system from the Corporation. The Corporation will apply a portion of the proceeds of the Certificates to refund all of the outstanding bonds. TABLE 9 · Tustin Water Service Statement of Cash Flow, June 30 Cash Flows from Operating Activities 'Operating income ........... :... ..................... ' ............ $1,656,061 Adjustments to reconcile operating income to net cash proxdded by operating activities: Depreciation & amortization ................................... Loss on sale of assets .......................................... Intergovernmental grants ...................................... Change in assets & liabilities ................................... Total adjustments ........................................ . ....... $ 798,040 $1,113,277 322,729 350,069 382,752 (1,394) (56,272) (118,199) __ m 473,022 (312,970) 224,349 (62,650) Net cash provided by operating activities .......................... Operating transfer out to other funds ............................. 8,365 518,146 674,925 1,664,426 1,316,186 1,788,202 '(375,000) (389,000) (558,000) Cash Flows from Capital and Related Financing Activities Decrease in long-term debt ....................................... (118,049) Interest expense ................................................. (451,333) Acquis.ition and construction of capital assets ....................... (490,487) Net cash used for capital and related financing activities ............ (1,059,869) Interest income . ..'. .............................................. 448,394 · , Net increase (decrease) in cash and cash equivalents ................ 677,951 Cash and cash equivalents: Beginning of year ........... . ..................... ' ............. 5,562,016 End of year ................................................... $6,239,967 (443,372) (140,201) (416,425) (359,836) (657,057) (1,479,260) (1,516,854) (1,979,297) 406,047 415,724 (183,621) (333,371) 6,239,967 6,056,346 $6,056,346 $5,722,975 Source: Prepared by Battle Wells Assodates from finandal statements of the City. TABLE 10 · Tustin Water Service 1992/93 Adopted Budget Revenue Water charges ....... ~ ............. Interest income .................... All other sources ................... Capital improvement fund .......... Total revenue .......... · ............ Expenditures Operating: Personnel ....................... Purchased water ................. Maintenance and operations ...... Other .............. : ............ Total operating .................. Capital: Supply and storage .............. Distribution CIP ................. Total capital ....................... Debt service ....................... Transfers .......... : ............... Total expenditures ................. $4,969,000 77,400 3,571,841' 388,000 9,006,241 1,100,209 1,166,000 1,986,932 269,605 4,522,746 1,636,500 1,518,995 3,155,495 560,000 768,000 $9,006,241 *Includes application of $1.4 million of fund balance. Source: City of Tustin, Program and Financial Plan for 1992/93~ The City has also entered into lease purchase agreements with Orange County Water District (OCWD) for desalters. A portion of the proceeds of the Certificates will be used to repay the balance of the amount owed under the agreement related to the Main Street desalter. An additional desalter is under development, and lease payments in connec- tion with this desalter are expected to begin in 1994/95. The City expects to finance new wells with low- cost loans through OCWD's conjunctive use pro- gram. This program provides low-interest loans to finance construction or rehabilitation of wells in or- der to promote greater conjunctive use of imported and local water supplies. Prospective partidpants must satisfy certain criteria. Under the program, OCWD will make loans to water producers at an in- terest rate of 3.5 percent for a term of up to 20 years. OCWD's funding limits are $750,000 per well and three.wells per participant. The City has ap- plied to OCWD for funding of its well projects. Projected Revenues and Expenses Table 12 projects revenues and expenses for TWS for 1992/93 through 1997/98. The table shows all op- erating revenues and expenses, expected purchase payments for the Certificates and future issues, capital expenditures, consideration of transfers to other funds, and coverage ratios. The assumptions and calculations used in the table are detailed as follows. Beginning Balance: A beginning balance in the water fund is shown for each fiscal year; the July 1, 1992 balance is the sum of the amounts available in the City's water fund at the start of the current fis- cal year. Water Charges: The 1992/93 revenue from water charges take into account the new rates the City Council approved in September 1992, which went into effect in November 1992. Revenues for 1993/94 and 1994/95 are based on the rates approved by the City Council for those two fiscal years. Future reve- nues are increased as necessary to produce water revenue to cover all projected expenses and satisfy coverage ratios and fund balance requirements. Interest Income: Interest income is calculated on each fiscal year's average balance at an assumed in- vestment rate of 5 percent. O&M Expenses: O&M expenses include the costs for personnel, water supply, facilities maintenance, and other miscellaneous items. The O&M costs for 1992/93 are based on six months of actual operation and maintenance of the water system during 1992/93. For future years, water supply costs are based on TWS's forecasts of expected increases in costs for groundwater and imported water. All oth- er O&M expenses are escalated at 5 percent per year. Debt Service: Projected debt service includes ex- pected purchase payments on the Certificates, re- payment of loans to OCWD, and purchase pay- ments on future certificate issues in 1994/95 and 1996/97. The actual timing and size of future certifi- cate issues will depend on actual project costs and construction scheduling. All purcha, se payments are based on a 20-year term and an interest rate of 6.5 percent. The OCWD loans finance the three new wells and an additional desalter. Capital Expenditures: Capital expenditures include the project to be financed with the Certificates, oth- er capital items budgeted for 1992/93, and future capital improvements to reservoirs, wells, and dis- 18 tribution facilities. In April 1993, the City will use proceeds of the Certificates to pay OCWD the bal- ance remaining on the loan associated with the ni- t-rate plant and reimburse other City reserves used to make the initial payment in October 1992. Transfers to Other Funds: Transfers to the general fund are based on the 1992/93 budget, plus 5 per- cent per year. Ending Balance: The ending balance is calculated as a fiscal year's total revenue less total expenses and then added to that year's beginning balance. The City has adopted a policy of maintaining a balance in the water fund of not less than 5 percent of an- nual operating expenses plus 10 percent of plant · value~ The ending balances shown in the table satis- fy this policy. Coverage Ratios: Table 12 shows coverage ratios for the Certificates as well as additional parity certifi- . cates when issued. The coverage ratios in the table range from a low of 1.78 times in 1994/95 to as high of 2.64 times in 1995/96. Funding for Additional Projects The financing plan approved by the City Council anticipates the need for additional borrowing for · the projects shown for 1994/95 and 1996/97 in Table 12 through the issuance of additional certificates. TABLE 11 [] Tustin Water Service Balance Sheet, June 30 1990 1991 1992 Assets Current assets: Cash & investments ........................ i ................ $ 5,594,597 Accounts receivable ......................................... Deposits ................................................... ~ Total current assets ............................................ Restricted assets .............................................. Property, plant & equipment (net) .......................... ' .... Total assets ................................................... 1,026,046 6,620,643 645,37O 9,469,183 16,735,196 Liabilities & Fund Equity Current liabilities: Accounts payable & accrued expenses ......................... Due to other funds ........................................... Deposits .~ ............................. '. ....-. .............. · Current portion of long-term debt ............................ Total current liabilities ......................................... Long-term debt, net of current portion .......................... Total liabilities ................................................ 448,116 200,000 44,370 500,345 1,192,831 3,811,520 5,004,351 Fund Equity Contributed capital ........................................... : 1,183,922 Retained earnings: --., Reserved for debt service ...... ..................... · ......... 854,628 Unreserved ............................................. '.' .... 9,692,295 · . Total fund equity _. ........................... :..: ............... 11,730,845 Total-liabilities & fund equity $16,735,196 $ 5,356,467 731,036 18,400 6,105,903 699,879 9,960,568 16,766,350 372,581. 210,234 57,410 182,529 822,754 3,685,964 4,508,718 1,368,319 ,' 699,879 10,189,434 12,257,632 $16,766,350 $ 4,968,687 777,945 33,000 5,779,632 754,288 11,081,819 17,615,739 594,104 44,980 201,103 840,187 · 3,527,189 4,367,376 1,393,062 754,288 1!,101,013 i3,248,363 $17,615,739 Source: Prepared'by Bartle Wells Associates from audited fir~ancial statements of the City. TABLE 12'- City of Tustin Water Service Revenue and Expense Projections 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 Beginning balance, July 1 $ 4,889,000 $ 6,145,000 $ 3,016,000 $ 4,624,000 $ 3,570,000 $ 7,747,000 Revenue Water charges .... ...... Interest income ......... Capital: Caltrans repayments '.. COP proceeds - construction ........ Total revenue ........... Expenses O&M expenses: Personnel ............ Water supply ......... Facilities O&M ....... Other operating ...... Total O&M expenses .... Net revenue ............ Debt service: Prior bonds .......... 1993 COPs ........... Future COPs ......... OCWD loan: wells .... OCWD loan: desalter Total debt service ....... Capital expenditures: Supply and storage ... Distribution CIP ...... OCWD Nitrate Plant .. Refundable advances .... Total capital expenditures' Transfer to. other funds .. Total expenses .......... Ending balance,. June 30 5,433,000' 503~0002 322,000 6,729,000 6,451,000' 7,350,000' 9,450,000 9,850,000 10,650,000 276,000 229,000 191,000' 205,000 283,000 6,195,000 -- 5,753,000 12,987,000 6,727,000 13,774,000 .9.,641,000 15,808,000 10,933,000 1,058,000 1,111,000 1,167,000 1,225,000 1,286,000 1,350,000 2,648,000 2,145,000 2,430,000 2,943,000 3,177,000 3,336,000 656,000 689,000 723,000 759,000 797,000 837,000 270,000 284,000 298,000 313,000 329,000 345,000 4,632,000 4,229,000 4,618,000 5,240,000 5,589,000 5,868,000 1,626,000 2,498,000 2,961,000 4,401,000 4,466,000 5,065,000 1,023,000 1,030,000 1,035,000 1,039,000 1,04i,000 -- 635,000 635,000 1,225,000 1,225,000 53,000 106,000 ' 132,000 158,000 158,000 -- 750,000 750,000 750,000 750,000 560,0O0 560,000 1,076,000 2,521,000 2,552,000 3,172,000 3,174,000 1,839,000~ 1,375,000 2,700,000 1,010,000 839,000 2,616,000 2,539,000~ 2,365,000 1,476,000 1,000,000 1,094,000 1,149,000 1,388,000 ..... 5,000 5,000 5,000 5,000' 5,000 2,000 5,771i000 3,745,000 4,181,000 2,015,000 1,938,000 3,767,000 768,000 806,000 846,000 ' -888,000 932,000 979,000 11,731,000 9,856,000 12,166,000 ~0,695,000 11,631,000 13,788,000 $ 6,145,000 $ 3,016,000 $ 4,624,000 $ 3,570,000 $ 7,747,000 $ 4,892,000 2.44 1.78 2.64 1.97 2.24 Coverage ratio for COPs n/a 1 - Includes estimated revenue due to the rate increases adopted by the City Council. 2 - Interest income for 1992/93 includes one-time refund from fiscal agent. 3 - Includes 1992/93 budget CIP program. Source: Prepared by Battle Wells Associates. __ 18 tribution facilities. In April 1993, the City will use proceeds of the Certificates to pay OCWD the bal- ance remaining on the loan associated with the ni- trate plant and reimburse other City reserves used to make the initial payment in October 1992. Transfers to Other Funds: Transfers to the general fund are based on the 1992/93 budget, plus 5 per- cent per year. Ending Balance: The ending balance is calculated as a fiscal year's total revenue less total expenses and then added to that year's beginning balance. The City has adopted a policy of maintaining a balance in the water fund of not less than 5 percent of an- nual operating expenses plus 10 percent of plant value~ The ending balances shown in the table satis- fy this policy. . Coverage Ratios: Table 12 shows coverage ratios for the Certificates as well as additional parity certifi- cates when issued. The coverage ratios in the table range from a low of 1.78 times in 1994/95 to as high of 2.64 times in 1995/96. Funding for Additional Projects The financing plan approved by the City Council anticipates the need for additional borrowing for . the projects shown for 1994/95 and 1996/97 in Table 12 through the issuance of additional certificates. TABLE 11 · TUstin Water Service Balance Sheet, June 30 Assets Current assets: Cash & investments ......................................... $ 5,594,597 Accounts receivable ......................................... Deposits ................................... : ............... - Total current assets ............................................ Restricted assets .............................................. Property, plant & equipment (net) .............................. Total assets · 1,026,046 $ 5,356,467 $ 4,968,687 731,036 777,945 18,400 33,000 6,620,643 6,105,903 5,779,632 645,370 699,879 754,288 9,469,183 9,960,568 11,081,819 Liabilities & Fund Equity Current liabilities: Accounts payable & accrued expenses ......................... . Due to other funds .......................................... Deposits .: ............................. '. ....: .............. · Current portion of long-term debt ............................ Total current liabilities · Long-term debt, net of current portion .......................... Total liabilities. ...................... : ................. , ...... 16,735,196 16~766,350 17,615,739 448,116 372,581. 594,104 200,000 210,234 -- 44,370 57,410 44,980 500,345 182,529 201,103 1,192,831 822,754 840,187 3,811,520 3,685,964 . 3,527,189 5,004,351 4,508,718 4,367,376 Fund Equity Contributed capital ' 1,183,922 Retained earnings: · --.,. · Reserved fOr debt service · ' · 854,628 Unreserved · ' ' ' 9,692,295 · , Total fund equity_ ........................... . .................... 11,730,845 Total-liabilities & fund equity $16,735,196 1,368,319 1,393,062 · 699,879 754,288 10,189,434 1!,101,013 12,257,632 13,248,363 $16,766,350 $17,615,739 Source: Prepared'by Bartle Wells Associates from audited financial statements of the City. TABLE 12 · City of Tustin Water Service Revenue and Expense Projections 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 Beginning balance, July 1 $ 4,889,000 $ 6,145,000 $ 3,016,000 $ 4,624,000 $ 3,570,000 Revenue Water charges .......... Interest income ......... Capital: Caltrans repayments '.. COP proceeds - construction ........ Total revenue ........... $ 7,747,000 5,433,000~ 6,451,0002 7,350,000~ 9,450,000 9,850,000 10,650,000 503,0002 276,000 229,000 191,000' 205,000 283,000 322,000 6,729,000 -- 6,195,000 -- 5,753,000 Expenses O&M expenses: Personnel ............ Water supply ......... Facilities O&M ....... Other operating ...... Total O&M expenses .... 12,987,000 6,727,000 13,774,000 9,641,000 15,808,000 10,933,000 1,058,000 1,111,000 1,167,000 1,225,000 1,286,000 2,648,000 2,145,000 2,430,000 2,943,000 3,177,000 656,000 689,000 723,000 759,000 797,000 270,000 284,000 298,000 313,000 329,000 4,632,000 4,229,000 4,618,000 5,240,000 5,589,000 Net revenue ............ 1,626,000 2,498,000 2,961,000 4,401,000 4,466,000 1,030,000 1,035,000 1,039,000 635,000 635,000 1,225,000 106,000 132,000 158,000 750,000 750,000 750,000 560,000 1,076,000 2,521,000 2,552,000 3,172,000 Debt service: Prior bonds .......... 560,000 -- 1993 COPs ........... -- 1,023,000 Future COPs ......... -- -- OCWD loan: wells .... ~ 53,000 OCWD loan: desalter ~ ~ Total debt service ....... Capital expenditures: Supply and storage ... Distribution CIP ...... OCWD Nitrate Plant .. Refundable advances .... 1,839,0003 1,375,000 2,700,000 1,010,000 839,000 2,539,0003 2,365,000 1,476,000 1,000,000 1,094,000 1,388,000 .... 5,000 5,000 5,000 5,000' 5,000 5,771i000 3,745;000 4,181,000 2,015,000 1,938,000 Total .capital expenditures Transfer to. other funds .. 768,000 806,000 846,000 ' -888,000 932,000 Total expenses · 11,731,000 9,856,000 12,166,000 10,695,000 11,631,000 $ 6,145,000 $ 3,016,000 $ 4,624,000 $ 3,570,000 $ 7,747,000 n/a 2.44 1.78 2.64 1.97 Ending balance, June 30 Coverage ratio for COPs 1 - Includes estimated revenue due to the rate increases adopted by the City Council. 2 - Interest income for 1992/93 includes one-time refund from fiscal agent. 3 - Includes 1992/93 budget CIP program. Source: Prepared by Battle Wells Associates. __ 1,350,000 3,336,000 837,000 345,000 5,868,000 5,065,000 1,041,000 1,225,000 158,000 750,000 ~,174,000 2,616,000 1,149,000 2,000 2,767,000 979,000 12,,788,000 $ :,892,000 2.24 20 The City of Tustin Tiw following economic and financial data is presented for information only. The Certificates are not a debt of the City of Tustin or the Corporation and are secured by a pledge of net zoater revemies. 'The City of Tustin covers approximately 11.2 square miles in central Orange County in southern California. Tustin is bounded by the Cities of Orange to the north, Santa Aha to the west, and Irvine to the south. The City is approximately 37 miles southeast of Los Angeles and 88 miles north of San Diego. It has a temperate climate with a mean average temperature of 67 degrees and aver- age annual rainfall of 14.5 inches. The City of Tustin was founded in 1868 by Co- lumbus Tustin, when he and his partner, Nelson Stafford, purchased 1,300 acres of Rancho Santiago de Santa Ana, originally a Spanish land grant. Tus- tin and Stafford divided their purchase, and Tustin started Tustin City on his portion. The orange industry (hence the name of the county) in Tustin began in 1875, when the first size- able grove was planted. Tustin was soon surround- ed by orange, walnut, and apricot orchards. Between 1900 and 1950 the orange groves gradually took over from the other crops and processing citrus fruits was the City's primary industry. In the 1950s Tusfin's urban development began in earnest. The City became primarily a residential and commercial community, which is its current development. Municipal Government Tustin is a general law city, incorporated on Sep- tember 21, 1927. The City operates under a council- manager form of government. Five City Council members are elected at large for overlapping four- year terms; the Council elects one of its member as mayor. The City. Manager is appointed by the Council and serves as the administrative head of the City. The City Manager implements Council di- rectives and policies and manages the oper.ational functions of the City. The City staff is organized into departments, which provide police, community development, maintenance, general administration, community service, and capital improvements. The City has 250 full-time positions. Tustin Water Service has 21.5 full-time staff. Biographical information of members of the City Coundl and senior management follows. City Council: · Leslie Anne Pontious, Mayo~; has served on the City Council for three years. Her term ends in 1994. She is a travel agent and has lived in the Tustin area for 17 years. Ms. Pontious has been a member of the Tustin Planning Commission and in 1992 was the Soroptomist Woman of the Year. Jim Potts, Mayor P~v Tern, has lived in Tustin since 1988 and has served on the City Council for two-and-one-half years. His term ends in 1996. He is a public safety supervisor for the City of Irvine and co-owns a manufacturing corporation. Mr. Potts is the City's representative to the League of California Cities and the Santa Ana/ Tustin Joint Powers Agency. Charles E. Puckett has been a council member for two and one-half years. He has served as mayor and was Tustin's "Man of the Year" in 1986. Mr. Puckett's term ends in 1994. He has lived, in the area for 18 years and is a senior development manager for Hunt-Wesson, Inc. He is a director of the Orange County Sanitation Districts, Chairman of District No. 7, and Chairman of the Fiscal Poli- cy Committee. Thomas R. Saltarelli is a lawyer and his firm, Sal- tarelli & Steponovich, specializes in business and real estate litigation. He has lived in the area for 23 years and his term on the council ends in 1996. Jeffery M. Thomas has .served one year on the City Council; his term ends in 1996. He has lived in the area for three years and is in sales, lie is a member of the Regional Council for Southern Cal- ifornia Association of Governments and serves on the board of directors of the Tustin Community Foundation. In 1992 Mr. Thomas was listed in Who's Who in Finance and Industry. Staff: · William Huston, City Manager, has been with the City of Tustin for 11 years. He has 10 years of ad- ditional experience with two other cities; at the City of Simi Valley, he was assistant to the City Manager, and at the City of Millbrae, he was City Administrator. Mr. Huston has lived in the Tustin area for 11 years. Robert S. Ledendecker, Public Works Director, has been with the City since 1973. He is a civil engi- neei', with a bachelor of science in dvil engineer- ing for the University of'Southern California. Mr. 21 .Ledendecker has previously worked for the City of Orange for nine years. He has lived in the Tus- tin area for 25 years. City of Tustin General Fund For financial reporting purposes, the City of Tustin has adopted the provisions of Statement No. 1 of the Governmental Accounting Standards Board and follows the generally accepted accounting principles applicable to state and local governments. The City groups its accounts according to types of funds. For governmental funds the City uses a modified accrual basis of accounting. Under this method, rev- enues are recorded when measurable and available to finance expenditures of the current period. Ex- penditures, other than principal and interest on I TABLE 13 · City of Tustin General Fund Income Statement, June 30 long-term debt and employee-compensated ab- sences, are recorded when the liability is incurred. The City's funds and account groups are indepen- dently audited each year. Table 13 summarizes the revenues, expenditures, and changes in fund balances for general fund for fiscal years 1990, 1991, and 1992. The general fund's largest revenue source has been sales taxes. In 1992, sales taxes revenue was approximately 40 percent of total r~venues. In 1990, it was 36 percent of total revenues. City Council policy calls for a general fund balance of 15 percent of operating expenses. The projected June 30, 1993 balance is 14.4 percent. Certain revenues to local governments decreased in 1992/93 due to provisions of the 1992/93 Califor- nia State budget. The City's net general fund oper- 1990 1~1 1~2 Revenue Property taxes ............................................... $ Sales taxes ................................................... Other taxes .................................................. Licenses; fines, interest & rentals .............................. Intergovernmental revenue .................................... Charges for services ........................................ ... Developer fees ............................................... Other ....................................................... Total revenue ................................................. 4,021,072 $ 4,556,781 $ 4,890,189 8,119,088 9,300,457 9,178,468 1,497,115 2,163,086 1,104,250 2,432,891 2,099,949 1,567,891 2,185,001 2,726,690 2,385,880 - 1,525,193 1,531,978 1,724,155 -- -- 1,184,516 2,812,162 2,085,613 1,743,108 22,592,522 24,464,554 23,778,457 Expenditures General government .......................................... Public safety ................................................. Public works ................................................. Community services .......................................... Nondepartmental ............................................ Capital expenditures .......................................... Total expenditures ............................................ 3,187,811. 2,771,785 2,784,922 9,247,518 10,647,621 11,982,825 4,654,133 5,471,841 5,440,981. 971,579 914,022 1,107,690 770,391 1,237,946 1,296,116 -- -- 1,184,516 18,831,432 Excess (deficiency) ........ ' .................................... 3,761,090 Other financing sources (uses) ................................. (4,553,834) Excess (deficiency) ............ .. ............................... (792,744) Fund balance: Beginning of year .......................................... 9,074,424 End of year .............................. '. ................. $ 8,281,680 21,043,215. 23,797,050 3,421,339 (18,593) (2,511,852) (1,554,984) 909,487 (1,573,577) 8,281,680 9,191,167 $ 9,191,167 $ 7,617,590 Source: Prepared by Bartle Wells Associates from audited financial statements of the City. ! ating revenue declined by $1,065,000, or 5 percent, due to State-imposed jail booking fees and property tax collection fees and the loss of one-half of traffic fine revenue and 9 percent of property tax revenue. An additional $698,000 in tax increment revenue was lost by the Redevelopment Agency. The Gover- nor's preliminary proposal for the 1993/94 budget would result in the City's loss of $1 million (22 per- cent) of property tax revenue and a further undeter- mined loss in Redevelopment Agency tax increment revenue. These projected revenue losses may im- pact the City's ability to continue its present levels of service. The City's general fund accounts for all financial resources not accounted for in other funds. Table 14 compares the general fund's balance sheet for June 30, 1990, 1991, and 1992. Direct and Overlapping Bonded Debt Table 15 details direct and overlapping debt for the City of Tustin as of April 2, 1993. The table shows the outstanding Corporation lease revenue bonds to be refunded. Assessed Valuation Property taxes in California are levied according to Article XIIIA of the State Constitution. Property is assessed at 100 percent of full cash value. It is as- sessed at its market value when constructed or upon change of ownership. If real Property is im- proved, assessed value may increase relative to the TABLE 14 [] City of Tustin General Fund Balance Sheet, June 30 Assets Cash and investments ......................................... $ 5,697,427 Taxes receivable ............ ' ................................... Accrued interest receivable ..................................... Accounts receivable ...' ........................................ Due from other governmefits ........... ~ ....................... Due from other funds ......................................... Advance to other funds ........................................ Deposits ..................................................... Total assets ................ ' .....~ ................ : ............ $ 7,544,329 $ 8,157,601 675,310 890,671 746,510 31D,808 270,931 270,856 198,977 191,895 192,371 75,184 154,129 72,242 3,503,267 2,562,989 675,954 2,012,000 2,052,000 3,152,000 -- 284,250 277,623 12,472,973 13,951,194 13,545,157 Liabilities and Fund Balance Liabilities: Accounts payable ........................................... Due to other funds ........................................... Deposits ................................................... Deferred revenue ............................................ 1,794,129 '2,140,485 1,892,059 w 67,053 1,185,758 2,279,377 2,400,486 2,420,128 117,787 152,000 429,622 Total liabilities ..... · ........................................... Fund balance: Reserved for long-term receivables ............................ Unreserved: - Designated for capital outlay ............................. - Designated for self-insurance ............................. - Designated for. contingencies ......................... ' .... - Undesignated ...................... '.. .................... Total fund balance ............................................ 4,191,293 4,760,024' 5,927,567 2,012,000 2,052,000 3,152,000 2,258,086 2,608,668. 2,936,876 1,029,714 1,251,077 1,219,029 -- 909,487 309,685 2,981,880. 2,369,935 -- 8,281,680 Total liabilities & fund balance' . ~ ................................ $12,472,973 9,191,167 7,617,590 $13,951,19~ '$13,545,157 Source: Preparc'cl by Bartle Wells Associates from audited financial statements of the City. TABLE 15 [] City of Tustin Direct and Overlapping Bonded Debt Percent Debt Applicable 4/5/93 2.042% $ 20,012 2.042 5,827,061 2.044 67,145 0.411 2,728,814 3.126 2,849,505 5.674 1,548,435 100.000 14,800,000 10.212 10,212 0.300 46,170 0.760 273,220 various 3,450 100.000 300,000 100.000 3,675,000~ 1.904 1,875,440 various 184,343 12.033 2,582,311 3.047 3,893,121 28.773 925,052 10.201 6,120,600 various 38,369,840 100.000 128,653,198 'Orange County .............................. -..' ........................... Orange County building authorities ........................................ Orange County Flood Control District ...................................... Metropolitan Water District ................................................ MWD of Orange County Water Facilities Corporation ........................ Saddleback Community College District COPs ............................... Tustin Unified School District CFD No. 88-1 ....................... i ......... Tustin Union High School District .......................................... Irvine Unified School District .............................................. Irvine Unified School District CFD No. 86-1 ................................. Other school districts and authorities ....................................... City of Tustin ...................... , ..................................... City of Tustin Water Corporation ........................................... Orange County SD Nos. 1, 2, 3, 5, 6, 7, and 11 COPs ........... ' ............. Orange County SD Nos. 1 and 14 COPs .................................... Orange County SD No. 7 COPs ............................................ Orange County Water District COPs ........................................ East Orange' County Water District COPs ................................... Irvine Ranch Water District COPs Irvine Ranch Water District improvement districts ............................ City of Tustin 1915 Act Bonds .............................................. Total gross direct and overlapping .bonded debt .............................. Less: MWDOC Water Facilities Corporation (100% self-supporting) ........ -t--- Clty of Tustin Water Corporation (100% self-supporting) ................ Total net direct and overlapping bonded debt ................................ $214,752,929-'. 2,849,505 3,675,O0O $208,228,424 Ratios to Assessed Valuation ($3,244,9225,61 Gross direct debt ($3,975,000) ............................................................ Net direct debt ($300,000) ........ : ....................................................... Total gross debt ............. ~ ................................ ' ........................... Total net debt ................................................ · ........................... 0.12% 0.01 6.62 6.42 1 -To be refunded with Certificates. 2 - Excludes revenue, mortgage revenue, and tax allocation bonds; and non-bonded capital lease obligations and Certificates to be sold. Source: Compiled in cooperation with California Municipal Statistics, lnc2 24 TABLE 16 [] City of Tustin Assessed Value of Taxable Property Fiscal Real Personal Percent Year Property Property Total Change 1987/88 ................. : .................... 1988/89 ...................................... 1989/90 ...................................... 1990/91 ...................................... 1991/92 ......................... . .......... '... $1,847,958,123 $192,285,868 $2,040,243,991 -- % 2,183,696,494 301,646,937 2,485,343,431 21.82 2,413,175,256 329,176,611 2,742,351,867 10.34 2,560,822,523 350,402,084 2,911,224,607 6.16 2,612,038,983 357,410,126 2,969,449,109 .2.00 Source: Orange County Assessor's Office. TABLE 17 [] City of Tustin Principal Taxpayers, June 30, 1992 Taxpayer Type of Business Percent 1992 of Total. Valuation Valuation The Irvine Company ................... residential and commercial property ..... $276,139,'578 Steelcase .............................. manufacturing ......................... Basic Four Corporation ................. manufacturing '. ....................... Larwin Square Ltd ................ . ..... commercial property ................... Eddy & Violet Meredith ................ commercial property ................... Malta Properties Inc .................... commercial property ................... Fireman's Fund ........................ office/commercial ...................... Courtyard Center ...................... commercial property ............... .... Tustin Business Venture ................ commercial property ................... Reef IV, Inc ............................ commercial property ................... 90,528,010 41,190,974 20,203,470 1,077,591 1,050,076 964,785 820,751 718,343 636,581 Totals · $433,330,159 9.30% 3.05 1.39 0.68 0.04 O.O4 0.03 0.03 O.02 0.02 14.59% Source: Orange County Assessor's Office. TABLE 18 · City of Tustin Property Tax Levies and Collections Percent Fiscal Total Current'Tax of Levy Year Tax Levy Collections Collected Delinquent Tax Collections 1987/88 ................... : ...................... ; ...... $6,785,490 $6,529,677 1988/89 ..... · ............................. , ............... '7,139,369 6,803,105 1989/90 ................................................. 8,094,978 · 7,910,339 1990/91 ..., ..................................... : ........ 9,269,103 9,080,606' 1991/92 ................... : ............: ................. 9,704,763 9,500,394 96.23% 95.29 95.18 97.97 97.89 $ 58,431 87,918 81,833 78;932 167,617 Source: Orange County Auditor-Controller's Office. Includes assessments for Assessment Districts Nos. 85-1 and 86-2. 25 improvement. The value .of property that does not change ownership may be adjusted annually by not more than 2 percent. A county assessment roll does not. purport to be proportional to market value. California law also provides property tax exemp- tions for' owner-occupied residences and for busi- ness inventories. Revenues lost to public agencies due to these two exemptions are fully reimbursed by the state. · California counties, such as Orange County, levy a general property tax of 1 percent of assessed val- uation. The levy is allocated to the county, cities, and special districts in accordance with state law. Property taxes greater than the 1 percent levy may be levied on properties in individual jurisdictions to pay debt service on general obligation bonds and for certain other voter-approved purposes. In accordance with California law, the Orange County Tax Collector collects taxes and periodically remits them to Tustin, according to an established schedule. Table 16 shows assessed value of taxable property within the City for 1987/88 through 1991'/92. Data is shown for real and personal property. Total as- sessed value grew from $2.0 billion in 1987/88 to $3.0 billion in 1991/92, at an average annual growth rate of 11 percent. Table 17 lists the principal taxpayers for June 30, 1992. The Irvine Company was the largest property owner in the City, with property valued at almost 10 percent of the City's total assessed valuation. The TABLE 19 · Population ten largest taxpayers account foi' 15 percent of the City's assessed valuation for fiscal year 1992. Tax Levies and Delinquencies Table 18 shows for the City a five-year history of tax levies, tax collections, percent of levy collected and delinquent tax collections. For each of the last five fiscal years, tax delinquencies have been less than 5 percent of the tax levy. Property tax revenue is recognized in the fiscal year for which taxes have been levied. The property tax calendar is as follows: One-half of taxes are due on November 10 and become delinquent on December 11. The second half is due on February 10 and are delinquent on April 11. A 10 percent penalty is added to any late payment. On June 30, delinquent properties are sold to the State. Property owners may redeem property upon pay- ment of delinquent taxes and penalties. Properties sold to the State incur a redemption penalty of 1.5 percent of the taxes due per month. Properties may be redeemed under an installment plan by paying current taxes plus 20 percent of delinquent taxes for five years. Interest accrues at 1.5 percent per month on the unpaid balance. If no payments have been made on delinquent taxes at the end of five fiscal years, the property is deeded to the State. Such properties may thereafter be conveyed by the county tax collector as provided by law. Y~ar Orange Population' County City of Tustin Percent Percent Change' ' 'Population Change 1980 ......................................................... 1981 ......................................................... 1982 ................................................... ' ...... 1983 ......................................................... 1984 ......................................................... 1985 ................................... : ..................... 1986 .......... : ............................................... 1987 ......................................................... 1988 ......................................................... 1989 ......... . ................................................ 1990 ......................................... · ................ 1991 ............................... . .......................... 1992 2 ........................................................ 1,931,570 1,951,300 2,002,200 2,036,400 2,066,500 2,088,400 2,145,700 2,193,600 2,238,700 2,280,400 2,410,556 2,453,300 2,512,200 1.0 2.6 1.7 1.5 1.1 2.7 2.2 2.1 1.9 5.7 1.8 2.4 32,073 37,264 16.2 · 38,650 3.7 40,200 4.0 40,250 0.1 40,800 1.4 42,750 4.8 43,100 0.8 45,750 6.2 46,800 2.3 50,689 8.3 52,100 2.8 54,700 5.0 Source: U.S. Census and State Department of Finance. · 26 TABLE 20 · City of Tustin Construction Activity Fiscal Year 1988 1989 1990 1991 1992 Permit Valuation ($000) Commercial construction .......................... Residential construction ........................... Total ............................................ $ 34,580 $ 67,982 $ 75,360 $ 15,081 $ 13,929 80,732 91,823 90,023 130,225 115,684 $115,312 $159,715 $165,383 $145,306' $129,613 Number of Permits Commercial ....................................... 98 114 Residential ....................................... 422 533 Tota1 ............................................ 520 647 127 318 225 52O 995 876 647 1,313 '1,101 SourCe: City of Tustin Community Development Department. TABLE 21 · East .Orange CountY* Housing Sales 1990 1~1 1~2 Number of Sales - Single-family residences 'Condominiums ....................................................... Total ................................................................. Median Sales Price Single-family residences ............................ ................... Condominiums ........................................................ Overall median ....................................................... 2,088 1,920 2,165 '1,022 814 670 3,110 2,734 2,835 $218,333 $219,875 $221,675 131,866 132,958 141,408 186,750 191,608 199,775 *East Orange Count), includes the Cities of Tustin, Orange, and Santa Aha. Source: East Orange Association of Realtors. TABLE 22 · City of Tustin Taxable Sales and Trade Outlets · . 1987 1988 1989 1990 1991 Taxable Sales ($000) Retail stores ................... : .................. $362,049 AlI other outlets .................................. 194,532 Total $556,581 Sales Tax Permits Retail stores ' 507 Ail other outlets .................................. 1,124 Total ............................................ 1,631 $384,231 $507,285 . $599,950 $615,733 183,962 210,716 194,725 191,478 $568,193 $718,001' $794,675 ,$807,211 537 566 627 635 1,144 1,190 1,~ 1,179 1,681 1,756 . 1,849 1,814 Source: State Board of Equalization. 27' Population Tustin grew along with all of Orange County dur- ing the economic boom of the 1960s. From a popu- lation of 2,006 in the 1960 U.S. census, the City grew to 21,178 in 1970, 32,073 in 1980, and 50,689 in 1990. According to State Department of Finance estimates, Tustin's population in 1992 was 54,700. The 1992 population estimate represents a 70 per- cent increase from 1980, or an average annual in- crease of 6 percent. Table 19 shows the City's and Orange County's population from 1980 through 1992 and each year's percentage change. Tustin's population is approximately 2 percent of the total population of Orange County. As Table 19 indicates, Tustin's annual percentage changes were greater than for the county as a whole in almost all years. Orange County's population increased 30 percent from 1980 to 1992, an average annual in- crease of 2.5 percent. Over the same period, Tustin grew at a faster rate of 4.6 percent' per year. Construction Activity Table 20 presents the construction activity within Tustin for the fiscal years 1988 through 1992. The value of building permits increased from 1988 through 1990 for commercial and residential con- struction. They decreased in 1991 and 1992, reflect- lng the economic downturn occurring throughout the U.S. " Housing According to the Tustin Chamber of Commerce, there were approximately 20,200 households in Tus- tin in 1991. About 40 percent of homes are owner- occupied. Data on housing sales and median sale price is not available specifically for Tustin. Data is, how- ever, compiled for eastern Orange County, which includes Tustin as well as the cities of Orange and Santa Ana. Table 21 shows number of housing sales and median sales prices for 1990, 1991, and 1992 for east Orange County. Sales of single-family residences were 2,088 in 1990 and 2,165 in 1992. The median sales price of single-family residences increased from $218,333 in 1990 to $221,675 in 1992. Retail Trade Taxable sales have increased from 1987 through 1991, as shown in Table 22. Approximately three- quarters of the sales are made by retail stores. Re- tail sales tax permits have also increased from 507 in 1987 to 635 in 1991. TABLE 23 [] Median Household Effective Buying Income 1987 1988 198~ 1990 1991 City of Tustin ......................................... $ n/a Orange County ....................................... 37,532 California average ..................................... 30,537 U.S. average .......................................... 25,888 $ n/a $ n/a $36,198 $39,296 37,096 37,614 41,179 46,655 30,008 30,713 33,342 36,943 24,488 25,976 27,912 32,072 Source: Sales'and Marketing Management, "Survey of Buying Power." TABLE 24 [] Orange County Employment and Unemployment (in thousands) 1987 1988 1989 1990 1991 1992' Civilian labor force ............................ 1,294.2 Employment .................................. 1,252.0 Unemployment ............................... 42.2 Unemployment rate .................... . ....... 3.3% 1,396.7 1,409.9 1,371.4 1,345.8 1,364.7 1,328.9 1,368.4 1,326.4 1,281.5 1,274.7 40.8 41.5 45.0 64.3 90.0 3.0% 2.9% 3.3% 4.8% '6.6% *Data for October 1992 only; all other data are annual averages. Source: State Employment Development Department. _ 28 The primary retail area is located in central Tustin and includes commercial property owned by Larwin Square Limited, the fourth-largest taxpayer in Tustin. Income Table 23 compares median household effective buy- in§ income (EBI) for the City of Tustin, Orange Count),, the State of California, and the U.S. Sales and Marketing Management magazine reports EBI for different cities and counties, within the U.S. The magazine defines EBI as personal income less per- sonal tax and non-tax payments, such as social se- curity deductions, and is often referred to as disposable or after-tax income. Tustin's EBI in- creased by almost 10 percent between 1990 and 1991. Employment Employment data is not available for the City; infor- mation is, however, available for Orange County. Tustin is included within the Anaheim-Santa Ana- Garden Grove Metropolitan Statistical Area (MSA), which encompasses all of Orange County. Table 24 shows data on employment and unemployment in Orange County. While the unemployment rate for Orange County increased from 1990 to 1992, it re- mained lower than for all of California and the U.S. For example, the October 1992 unemployment rate for Orange County was 6.6 percent, but for Califor- nia it was 9.3 percent and for the U.S. it was 6.8 percent. Table 25 shows wage and salary employment in Orange County by major industry: agriculture, goods-producing, and service-producing. Most em- ployment in Orange County is related to the service in. dustry and its relative percentage has been in- . creasing. Agriculture and manufacturing employ- meht has declined, while service employment has grown over the 1987-1992 period. Table 26 lists major employers within Tustin. The Marine Corps Air Station is the City's largest em- ployer, with 4,000 employees. The air station's pop- ulation is approximately 1,250 personnel. The air station is scheduled to be closed in 1997, but its housing will remain. The City and the federal gov- ernment are studying what to do with the property. Transportation Interstate 5 and State Route 55 both pass through Tustin. Three other freeways are within five miles of the City. Orange County (John Wayne) Airport is located five miles from Tustin. Eleven scheduled airlines provide daily service. Santa Fe Railroad provides freight service through Tustin on scheduled daily stops, and an Amtrak passenger station is located two miles away in Santa Ana. Orange County Tran- sit provides bus service within Tustin. TABLE 25 · Orange County Wage and Salary Employment by Industry (thousands) 1987 1988' 1989 1990 1991 1992' 8.6 8.2 7.8 6.6 7.1 4.7 ..... 248.8 258.9 256,6 250.3 236.4 ?~.1 65.2 - 69.0 73.8 67.5 56.2 52.0 Agriculture .................................... Go~)ds-producing industries: Manufacturing ........................ ....... Mining & construction ........................ Total .......................................... Service-producing industries: Retail trade .......... ....' ...... ' .............. 'Services .2 '..' ........ .'. '. ........................ Go~,ernm~nt .................................... Other .... ' ............ : ....... '. '.' ..... [ ...' ..... Total .......................................... Total, all industries ............... ' ............... 314.0 327.9 330.4 317.8 292.6 '274.i 20g.5 215.2 '220.5 219.3 203.3 193'.3 266.5 289.0 310.0 322.4 322.2 322.'8 114.8 117.8 t20.5' 126.1 128.7 128.5 190.1 199.6 209.1 219.4 212.8 211.3 777.9 821.6 860.1 887.2 867.0 855.9 1,100.5 1,157.7 1,198.3..1,211.6.' 1,166.7 1,134.7 *Data for October 1992 only; all other data are annual averages. Source: State Empk)yment Development Department. 29 TABLE 26 · City of Tustin Largest Employers Employer Employment Marine Corp Air Station .............. 4,000 Ricoh Electronics ..................... 1,300 Steelcase Inc ......................... 1,221 Tustin Unified School District ......... 1,100 MAI Basic Four, Inc ................... 1,010 Silicon Systems Inc ................... 825 Healthcare Medical Center ............ 484 LH R~search, Inc ..................... 400 CMS Enhancements Inc ............... 400 CAL-TECH Cabinet, Inc .............. 380 Universal Building Maintenance ....... 350 Dynachem Electronic Materials ........ 350 Cherokee International, Inc ............ 300 City of Tustin ..... . ................... 250 E1 Dorado Bank ...................... 200 KTBN Channel 40 - Trinity ......... ~.. 179 Safeguard Business Systems, Inc ....... 175 Fireman's Fund Insurance Co .......... 170 Williamson & Schmid ................ 160 Ricoh Corporation ................... 140 Consolidated Beverage DistribUtors .... 104 Source: Tustin Chamber of Commerce, 1992. Community Facilities · TUstin Unified School District provides primary and secondary public education through nine elemen- tary schools, three middle schools, and three senior high schools. In addition, the district includes 20 parochial and private schools. Regarding higher ed- ucation, the Saddleback Junior College District in- cludes Tustin, the University of California at Irvine is located seven miles from Tustin, and California State University at Fullerton is nearby. The City's police department provides police ser- vices, and the County of Orange provides fire pro- tection and prevention. Sanitation District No. 7 of Orange County supplies sewer service. Southern California Edison provides electric pow- er, and Southern California Gas Company supplies natural gas within the City. Pacific Bell provides "local" telephone service. 30 The Installment Purchase Agreement The Installment Purchase Agreement, dated as of April 1, 1993, is between the City of Tustin Water Corporation (the "Corporation',), a California non- profit public benefit corporation, as seller, and 'the City of Tustin (the "City"), as purchaser. Under the agreement the Corporation agrees to sell to the City and the City agrees to pUrchase the project at .the purchase price, payable in installments. Title to the prbject passes when the City takes physical posses- sion thereof. The Corporation appoints the City as its agent for the purpose, of acquisition and construction of the improvements financed from proceeds of the Certif- icates, and the City agrees to enter into such con- tracts as may be necessary, as agent for the .Corporation, to provide for the acquisition and con- st-ruction of such improvements. The Corporation shall be under no liability whatsoever for the pay- ment of any costs or expenses incurred by the City for the acquisition and construction of the project and that all 'suCh costs and expenses shall be paid by the City. The City has the right to make any changes to the composition and description of the project or any component of the project, whenever the City deems such changes to be necessary and appropri- ate, provided that any such change does not alter the essential nature of the project or impair the abil- · ity of the City to make purchase payments. More- over, prior to expending any moneys h'om the Construction Account with respect to any change to the project, the City will file with the Corporation and the Trustee a revised project description reflect- ing such change and a certificate stating such change is .necessary and appropriate, does not im- pair the essential nature of the project, and does not impair the ability of the City to make purchase payments. The City is responsible for the letting of ~ontracts for the acquisition and construction of the capital improvements financed from the proceeds of the 1993 Certificates and the supervising of the acquisi- tion and construction of these improvements. The City will use its best efforts to cause their comple- tion and acquisitiOn on or before November 1, 1994. Purchase PaYments The amount to be paid by the City to the Corpora- tion is the sum of the principal amount of the City's obligation under the Installment Purchase Agree- ment plus the interest to accrue on the. unpaid bal-. ance of such principal amount over the term of the agreement plus any prepayment premiums. The principal component of the purchase price is pay- able annually on April 1, beginning April 1, 1994, and the interest component will be paid semian- nually on April 1, and October 1, beginning on October 1, 1993.The City agrees to pay the purchase price for the project by making purchase payments to the Trustee, as assignee of the Corporation, for deposit in the Purchase Payment Account held by the Trustee. The Corporation is not obligated to pay purchase payments or the principal, premium, or interest on the Certificates. The obligation of the City to make the purchase pay- ments is absolute and unconditional and shall not be abat- ed, rebated, set off, reduced, abrogated, terrninated, waived, diminished, or postponed while any purchase payments remain unpaid, regardless of any contingency, act of God, or event or cause whatsoever. Revenues The City is obligated to make purchase payments solely from the gross revenues in the Qualified Ob- ligation Account. Gross revenues mean all rates, fees, and charges providing water service to per~ sons and real property and all other fees, rents, and charges, and other income derived by. the City from the ownership, operation, use, or services of the water system. The following funds and accounts are created, each of which is to be held by the City treasurer. · Water System Revenue Fund (Revenue Fund) "Water SYstem Maintenance and Operation Account (M&O Account) · Qualified Obligations Account · Water System Surplus Revenue Fund (Surplus Fund) The treasurer shall deposit the gross revenues of the water system as received in the Revenue Fund. On or before the twentieth day of each calendar month, the City Finance Director shall withdraw the entire amount on deposit in the Revenue Fund and shall allocate it in the indicated priority to the following accounts and funds: First, to the M&O Account, an amount sufficient for payment of maintenance and operation expenses as such expenses become due and payable; Second, to the Qualified Obligation Account, an amount Of qualified obligation debt service with re- spect to such month (1/6 of the next interest pay- ment and 1/12 of the next Principal payment) or the entire amount of gross revenues available for trans- fer, whichever is less; and · 31 Third, all remaining gross revenues to the Sur- plus Revenue Fund to be used for any lawful pur- pose of the City, provided that all money on deposit in the Surplus Fund shall be transferred as needed to the Qualified Obligations Account in the amount necessary to make up any deficiency. The purchase payments are secured by a pledge~ charge, and lien on the gross revenues in the Quali- fied Obligation Account and shall be paid from gross revenue in this account unless otherwise paid from other sources of legally available funds. Pur- chase payments and all other payments with re- spect to the Qualified Obligations Account are equally secured by the gross revenues in the Quali- fied Obligations Account without priority. The gross revenues in the Qualified Obligations Account are held in trust for the benefit of the Certificates and other qualified obligations. The obligation of the City to make purchase pay- ments is not in any way to be construed to be a debt of the City, the State of California, or any po- litical subdivision, nor shall it constitute a pledge of general revenues, funds, or moneys of the City, or an obligation of the City to levy or pledge any form of taxation. The City covenants to take such action as may be, necessary to include and maintain the applicable purchase payments and 'additional purchase pay- ments in its budgets for the appropriate fiscal year. Additional Purchase Payments The City shall also pay additional purchase pay- ments to the Corporation, the Trustee, or the U.S. Treasury Department, as follows: 1. all taxes and assessments charged to the Corpo- ration or the Trustee; 2. any taxes imposed on the sale, resale, use, pos- session, or ownership of the project; 3. al,1 reasonable fees, charges, and expenses of the Trustee; 4. reasonable fees incurred by the Corporation or the Trustee to prepare audits, financial state- ments, and reports required under the Install- ment Purchase Agreement or the Trust Agreement; 5. reasonable costs of the Corporation associated with the Installment Purchase Agreement or the Trust Agreement; and 6. any amount required to be paid by the U.S. Treasury Department. Optional Prepayment The City has the option to prepay the principal amounts of the 1993 purchase payments on or after April 1, 2003. If the City prepays in part but not in whole, the City shall designate which principal amounts are being prepaid and the interest compo- nent of the remaining 1993 purchase payments shall be correspondingly' reduced. Certificates to be prepaid by optional prepayment (as well as by mandatory prepayment for the Certi- ficates maturing April 1, 2013) shall be selected by . lot within a maturity. Maintenance and Insurance The City will operate and maintain the water sys- tem in good working order and repair and will from time to time make all necessary replacements, re- pairs, and renewals. At all times, the City will maintain insurance on the water system as is cus- tomarily maintained by similar water systems. The · City shall also maintain worker's compensation, lia- bility, and property damage insurance. The City may provide any required insurance through a self- insurance program or as part of any blanket cover- ages maintained by the City. Covenants of the City Limitation on Encumbrances or Sale: The City will not cause an encumbrance on the water system which impairs the ability of the City to comply with the rates and charge covenant set forth below. The City also will not sell all or part of the water system if it impairs the City's ability to comply with the rates and charge covenant set forth below. Rates and Charges: The City shall revise and collect such charges for services and facilities of the water system, so that, in each fiscal year, the net revenues shall at least equal the sum of: 1. 1.20 times the amount of the qualified obligation debt service for that fiscal year; and 2. 1.00 times all other payments required to be made from gross revenues in that fiscal year. Accounting Records: The City will keep .proper ac- counting records that are prepared in accordance with generally accepted accountin~ principles. Tax Covenants: The City covenants that it will take no action to jeopardize the exclusion from gross income for Federal income tax pUrposes of the inter- est portion of the purchase payments. 32 Limits on Additional Bonds and Obligations: The City will not issue additional parity bonds or obliga- tions secured by gross revenUes unless one of the two following conditions is satisfied. 1. Net revenues for the most recently audited fiscal year plus, at the option of the City, an allowance for any increase in water charges made prior to the initial delivery of such bonds or obligations ' in an amount equal to 95 percent of the amount by which net revenues would have increased if the increased rates had been in effect for the en- tire fiscal year are at least 1.20 times the average annual debt service on all bonds and obligations outstanding immediately subsequent to the deliv- ery of such bonds or obligations. 2. The estimated net revenues for the first fiscal year following the estimated completion date of the portion of the project to be financed with the proceeds of such bonds or obligations plus, at the option of the City, an allowance for estimat- ed revenue arising from any increase in rates and charges for service from the water system are at least 1.20 times the average annual debt service on all bonds and obligations outstanding immediately subsequent to the delivery of such bonds or obligations. The City may refund the outstanding qualified obli- gations if either the total qualified obligation debt service will not be increased in any fiscal year, or the net revenues as described in Item 1 above is at least 1.20 times the qualified obligation debt service in the next fiscal year. Defaults and Remedies The following events shall be an event of default: · The City fails to pay in full any purchase payment or additional purchase payment. · The City fails to observe or perform any covenant, condition, agreement, or provision in the Install- ment Purchase Agreement. · The City fails to perform or observe any covenant, condition, agreement, or obligation contained in the Trust Agreement. · The City files for voluntary bankruptcy, or a court declares the City insolvent, bankrupt, or approves a petition filed against the City seeking reorgani- zation of the City. · Any court assumes custody or control of the City, and such custody or control is not terminated within 60 days. If an event of default has occurred, the Corporation or the Trustee may take whatever action, as may appear necessary or desirable, to collect purchase payments, additional purchase payments, and any other payments due. 33 Trust Agreement The Trust Agreement, dated as of April 1, 1993, is by and among the City of Tustin Water Corpora- tion, Bank of America National Trust and Savings Association, and the City of Tustin. The agreement sets forth the terms and conditions of the Certifi- cates, establishment and use of funds, permitted in- vestments, covenants of the City, and remedies available to the Trustee and the owners of the Certif- icates. It provides for amendments to the agreement and for termination of the agreement upon defeas- ance. Application of the Proceeds The Trustee will deposits the proceeds of the Certificates as follows: 1. to the Purchase Payment Account, the accrued interest; 2. to the Reserve Account, an amount equal to the least of maximum annual purchase payments, 10 percent of the proceeds, or 125 percent of aver- age annual purchase payments; 3. to the Escrow Account, along with the 1983 Re- serve Account, an amount to acquire United States obligations, so the principal and interest, when due, will provide sufficient moneys to pay the principal and interest due and the redemp- tion price on October 1, 1993, on $3,675,000 out- standing City of Tustin Water Corporation Lease Revenue Bonds, Series A; and 4. to the City for deposit in the Construction Ac- count, the balance of the proceeds. Purchase Payment Account The Trustee shall withdraw moneys from the Pur- chase Payment Account to make principal, interest, or premium, in any, payments. The Trustee shall deposit in the Purchase Pay- ment Account the following: · the accrued interest on the Certificates; · purchase payments made by the City; · any transfers from the Construction Account; · any transfers from the Reserve Account; · payments from the City for premiums on prepay- ment of any Certificates; and · any other moneys received by.the Trustee pur- suant to the Installment Purchase Agreement for deposit in the Purchase Payment Account. The Trustee shall withdraw moneys from the Pur- chase Payment Account at such times and in such amounts as are necessary to pay principal compo- nents, interest components, or premium, if any, as due. After the completion certificate is filed on the project, if, on the day after a purchase payment date, (i) all principal, interest, and premium pay- ments due on such date have been paid, (ii) there are moneys on deposit in the Pu'rchase Payment Ac- count, other than that required for prepayment of Certificates, and (iii) the amount in the Reserve Ac- count is less than the reserve requirement, then the Trustee shall transfer from the Purchase Payment Account to the Reserve Account, the lesser of (1) an amount to make the amount in the Reserve Account equal the reserve requirement or (2) all amounts on dePosit in the Purchase Payment Account.. If there are still moneys on deposit in the Pur- chase Payment Account other than that required for prepayment of Certificates and other than excess Construction Account moneys that had been trans- ferred to the Purchase Payment Account, the Trus- tee shall (i) at the request of the City, transfer such funds to the City or (ii) apply such moneys to re- duce the next purchase payment payable by the city. Reserve Account The Trustee shall deposit in the Reserve Account the following amounts: · On the delivery date, an amount equal to the re- serve requirement from the proceeds of the Certificates; · From time to time, any purchase payment or por- tion thereof, made after the appropriate purchase payment date, in an amount equal to the amount transferred from the Reserve Account to the Pur- chase Payment Account on such purchase pay- ment date; · From time to time, moneys from the Purchase Payment Account as described above under the heading "Purchase Payment Account." If the amount in the Purchase Payment Account is less than the principal component or interest com- ponent due on a purchase payment date, then the Trustee shall transfer from the Reserve Account to the Purchase Payment Account an amount sufficient to pay the principal and interest components. Until the completion certificate is filed for the project, the investment income earned on the Re- serve Account in excess of the reserve requirement will be transferred by the Trustee to the Construc- tion Account. After the'completion certificate is 34 filed, the Trustee shall transfer any investment in- come in excess of the reserve requirement to the Purchase Payment Account on each purchase pay- ment date. Construction Account The costs of the project are to be' paid from the amounts on deposit in the Construction Account. Costs of issuance are also be paid. from amounts on deposit in the Construction Account. To the extent other moneys are not available: amounts in the Construction Account shall be withdrawn and transferred to the Trustee for deposit in the Pur- chase Payment Account and applied to the payment of principal and interest on the Certificates. After the completion certificate is filed for the project, any moneys held in the Construction Account and not required for the payment of any remaining part of the costs of the project, shall be transferred to the Trustee for deposit in the Reserve Account, if' the balance therein is less than the reserve require- ment, and, thereafter at the direction of the City, can be used to expand and improve the project, the water system or transferred to the Purchase Pay- ment Account. Prepayment of 1993 Certificates The Certificates maturing on or after April 1, 2004 are subject to optional prepayment at any time on or after April 1, 2003 in multiples of $5,000, at a price equal to the principal component with appli- cable premium and the interest components due on the prepayment date, plus accrued interest. The prepayment pr!ce (expressed as a percentage of the total principal amount prepaid) is set forth below: Prepayment Prepayment Date Price April 1, 2003 through March 31, 2004 ...... 102% April 1, 2004 through March 31, 2005 ...... 10! April 1, 2005 and thereafter ............... 100 In the case of prepayment of less than all 'outstand-. lng Certificates, the Trustee will select the Certifi- · cates to be prepaid in accordance with the Installment Purchase .Agreement. .. Covenants .. The City and Corporation agree each Will observe and perform at all times all of its covenants, under- takings, and agreements contained in the Trust Agreement and the Installment Purchase Agree- ment. The obligation of the City to make the purchase payments is a legal, valid, and binding obligation of the City. Neither the Corporation, the City, nor the Trustee shall extend the payment dates of any of the pur- chase payments, the maturity of the Certificates, or the time of payment of any interest.The Corpora- tion and the City each covenant that in order to maintain the exclusion from gross income for feder- al income tax purposes of the interest component of the purchase payments, each will satisfy the provi- sions of the Internal Revenue Code of 1986, as amended, to maintain such exclusion. The Corpora- tion and the City each covenant that no part of the proceeds of the Certificates shall be used to acquire any "investment prOperty'' and that it shall not take any action that would cause the obligation repre- sented by the Installment Purchase Agreement to be an "arbitrage bond," within the' meaning of the Code. The Trustee shall keep proper accounting records and statements in which complete and correct en- tries shall be made of all transactions related to the Certificates and such records shall be available for inspection by the Corporation, the City, and any owner, Or his or her agent, of outstanding Certifi- cates representing at least 25 percent of the aggre- gate unpaid principal amount. The City 'shall file and keep all documents as may be required by law in order to maintain the Install- ment Purchase Agreement and the Trust Agree- ment. The Trustee shah enforce 'and take all necessary actions to protect and preserve the rights and inter- ests of the Trustee and the owners of the Certifi- .cates. Events of Default and Remddies If an event of default occurs under the Installment Purchase Agreement, the Trustee sl~all prOtect arid. enforce its rig~ht.s and the rights of the Certificates' owners. All moneys received by .the Trustee pur- suant to remedies of any event of default are a.p- plied, after pa~mefit of all fees and 'expenses 'of the" Trustee, to the payment of, in the following or~ler: (1) all inteitest components due; (2) the. principal components in the .order of their due dates, with in- terest on the overdue principal component; and (3) if there is any remainder, the City. Amendments The Trust Agreement may be modified or amended at any time by a Supplemental Trust Agreement,.. without the consent of any owners, to correct any defec~ or inconsistency in the agreement, to clarify it, to issue additional certificates, or to make any other modification or amendment if, in the opinion of counsel, such amendment or modification does not materially adversely affect the fights of the owners of the Certificates. Any other modification or amendment requires written consent of at least of the owners of a majority of the aggregate princi- pal amount of the outstanding Certificates. No such modification or amendment shall permit a change in the terms of prepayment or maturity of the prin- cipal component represented by any outstanding Certificates or of any interest component or a reduc- tion in the principal component or the prepayment price or in the interest rate without the consent of the owner of such Certificate, or shall reduce the percentages or otherwise affect the classes of Certif- icates the consent of the owners of which is re- quired to effect any such modification or amend- ment without the consent of the owners. No modif- ication or amendment shall change or modify any of the fights or obligations of the Trustee without its written consent. 36 THE MUNICIPAL BOND INVESTO~ ASSURANCE CORK)i:tATION INSURANCE POLICY The following information has been furnished by Municipal Bond Investors Assurance Corporation (the "Insurer") for use in this Official Statement. The Insurer's policy unconditionally and irrevocably guarantees the full and complete payment required to be made by or on behalf of the Issuer to the Paying Agent or its successor of an amount equal to (i) the princi- pal of (either at the stated maturity or by an advancement of maturity pursuant to a mandatory sinking fund payment) and .interest on, the Bonds as such payments shall become due but shall not be so paid (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a man- datory sinking fund payment, the payments guaranteed by the Insurer's policy shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration); and (ii) the reimbursement of any such payment which, is subsequently recovered from any owner of the Bonds pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such owner within the meaning of any applicable bankruptcy law (a "Preference"). The Insurer's policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Bond. The Insurer's policy does not, under any circumstance, insure against loss re- lating to: (i) optional or mandatory redemption (other than mandatory sinking fund redemptions); (ii) any pay- ments to be made on an accelerated basis; (iii) payments of the purchase price of Bonds upon tender by any owner thereof; or (iv) any Preference relating to (i) through (iii) above. The Insurer's policy also does not insure against nonpayment of principal of or interest on the Bonds resulting from the insolvency, negligence or any other act or omission of the Paying Agent or any other paying agent for the Bonds. Upon receipt of telephonic or telegraphic, notice, such notice subsequently confn-rned in writing by regis- tered or certified mail, or upon receipt of written notice by registered or certified mail, by the Insurer from the Paying Agent or any owner of a Bond the payment of an insured amount for which is then due, that such required payment has not been made, the Insurer on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with Citibank, N.A., in New York, New York, or its successor, sufficient for the payment of any such insured amounts which are then due. Upon presentment and surrender of such Bonds or presentment of such other proof of owner- ship of the Bonds, together with any appropriate instruments of assignment to evidence the assignment of the insured amounts due on the Bonds as are paid by the Insurer, and appropriate instruments to effect the appoint- ment of the Insurer as agent for such owner of the Bonds in any legal proceeding related to payment of insured amounts on the Bonds, such instruments being in a form satisfactory to Citibank, N.A.~ Citibank, N.A. shall dis- burse to such owners or the Paying Agent payment of the insured amounts due on such Bonds, less any amount held by the Paying Agent for the payment of such insured amounts and legally available therefor. The insurer is the principal operating subsidiary of MBIA Inc., a New York Stock Exchange listed com- pany. MBIA Inc. is not obligated to pay the debts of or claims against the Insurer. The Insurer is'a limited- liability corporation rather than a several-liability association. The Insurer is domiciled in the State of New York and licensed to do business in all 50 states, the District of Columbia, and the Commonwealth of Puerto l~ico. As of December 31, 1991, the Insurer had admitted assets of $2.0 billion (audited), total liabilities of $1.4 billion (audited), and total capital and surplus of $647 million (audited) d~termined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. As of September 30, 1992, the Insurer had admitte'd assets of $2.3 billion (unaudited), total liabilities of $1.6 billion (unaudited), and total capital and surplus of $753 million (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. Copies of the Insurer's year-end financial statements prepared in accordance with statutory accounting practices are available from the Insurer. The address of the Insurer is 113 King Street, Arrnonk, New York 10504. Moody's Investors Service rates all bond issues insured by the Insurer "Aaa" and short-term loans '~ilG 1," both designated to be of the highest quality. Standard & Poor's Corporation rates all new issues insured by the Insurer "AAA" Prime Grade. The Moody's Investors Service rating of the Insurer should be evaluated independently of the Standard & Poor's Corporation rating of the Insurer. No application has been made to any other r. ating agency in order to obtain additional ratings on the Bonds.' The ratings reflect the respective rating agency's current assessment of the creditworthiness of the Insurer and its ability to pay claims on its policies of insurance. Any further expla- nation as to the significance of the above ratings may be obtained only from the applicable rating, agency. The above ratings are.not recommendations to buy, sell, or hold the'Bonds, 'and such ratings may be sub- ject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of either or both ratings may have an adverse effect on the market price of the Bonds. In the event the'Insurer were to become insolvent, any claims arising under a policy of financial guaranty insurance are excluded from coverage by the California Insurance Guaranty Association, established pursuant to Article 14.2 (commencing with Section 1063) of Chapter 1 of Part 2 of Division 1 of the California Insurance Code. Exhi bit E City. of Tustin Water Corporation City of Tustin Orange County, California $4,500,000 Lease Revenue Bonds Series A Sale: September 20, 1983 Bartle Wells AssOciates PRELIMINARY OFFICIAL STA · r..MENT NEW ISSUE SALE DATE: September 20, 1983 CITY OF TUSTIN WATER CORPORATION CITY OF TUSTIN ORANGE COUNTY, CALIFORNIA $4,500,000 Lease Revenue Bonds, Series A The Series A Bonds are special obligations.o£ the City of Tustin Water Corporation, a California nonprofit public benefit corporation. The primary source for payment of the Series A Bonds will be lease rentals payable by the City of Tustin for use of the water system. The Corporation does not have taxing power, and neither the full faith and credit nor the taxing power of the City of Tustin, the State of California, or any political subdivision thereof is pledged to the payment of the Series A Bonds. BONDS DATED: October 1, 1983 DENOMINATION: $5,000 or integral multiple DUE: October 1, as shown below: Yield or Year Amount - Rate Price 1986 ............ $ 50 1987 .... . ........ 75 1988 ............ 100 1989 ............ 125 1990 · .' .......... 150 1991 ............ 150 · 1992 ............ 175 1993 ............ 200 1994 ............ 225. 000 000 000 000 000 000 000 000 000 % % CREDIT RATINGS: Standard & Poor's Corporation: Moody's Investors Service' 'Year Amount Rate Yield or Price 1995 ............ $225,000 1996 ............ 250,000 1997 ............ 300,000 1998 ......... '... 325,000 1999 ............ 350,000 2000 ............ 375,000 2001 ............ 425,000 2002 ............ 475,000 2003 ............ 525,000 % % The Series A Bonds are fully registered bonds, with provision for registration transfer. Principal is payable annually beginning October 1, 1986, at the principal corporate office of the Trustee, Security Pacific National Bank, Los Angeles, and at the office of the Co-Paying Agent in New York City. Interest is payable semiannually on April 1 and October 1, be~nning April 1, 1984, by check or draft mailed to the registered owner. Series A Bonds matu'ring on or before October 1, 1993 are not callable prior to maturity. Series A Bonds maturing on or after October 1, 1994 are callable at the'Corporation's option on any interest payment date on Or after October 1, 1993 pursuant to terms stated in the Indenture, including paymeht of a premium. The Series A Bonds are offered for delivery when, as, and if issued, subject to the legal opinion of Mudge Rose Guthrie Alexander & Ferdon, Los Angeles, California, and Rourke & Woodruff, Santa Ana, California, Co-Bond Counsel, approving the validity of the Series A Bonds and stating that interest on the Series A Bonds is exempt from Federal income taxes and from State o£ California personal income taxes under existing statutes, regulations, rulings and court decisions. ' ' Terms and conditions of the ol~ering are [ully set forth in the Notice Inviting Bids. Bids wilt be received on Tuesday, September 20, 1983 at the offices of Mudge Rose Guthrie Alexander & Ferdon, Suite 3166, 333 South Grand Aven. ue, Los Angeles, California 90071, up to and including II:O0 a.m. Los Angeles Time. Bids will not be accepted for less than 98 percent of par value. Following acceptance of a bid, information on interest rates and reo~ering prices will be imprinted in the spaces above. This page supplements the accompanying Official Statement dated August 26, I983. ~San PACIFIC OCEAN San Bernardino The City of Tustin is located in Central Orange County, California~ adjacent 'to the Cities of Orange, Santa Ana, and Irvin¢. Tusfin has a 1983 population of 40,000. Proceeds of the City of Tustin Water Corporation ' Series A Bonds will be used to complete the acquisition of Tustin Water .Works, a privately held water utility previously responsible for water servie~ in the City. The Series A Bonds are secured by lease payments from the City of Tustin for use of the water system. .. : . -" .~. .... :'- . ':,.~' ~. . . "' -.i -;~ ~.'. ~. - . . · OFFICIAL STATEMENT' CITY OF TUSTIN WATER CORPORATION CITY OF TUSTIN ORANGE COUNTY, CALIFORNIA 300 Centennial Way Tustin, CA 92680 Incorporated March 3, 1980 BOARD OF DIRECTORS Jerry Weil, President Walter J. Fredriksen Len Miller William A. Moies H Lloyd W. Robbins TUSTIN CITY COUNCIL Ronald B. Hoesterey, Mayor Richard B. Edgar Frank N. Greinke Ursula E. Kennedy Donald J. Saltarelli PROFESSIONAL SERVICES Mudge Rose Guthrie Alexander & Ferdon, Los Angeles and Rourke & Woodruff, Santa Aha, Co-Bond CoUnsel Security Pacific National Bank Trustee and Paying Agent Bartle Wells Associates, San Francisco, Financing Consultant . This Official Statement provides information about the issuer, its bonds, and the city. The' Official Statement includes: 1. Data supplied by the issuer, the·city, and by others, as indicated herein; 2. Estimates or projections which may or may not be' realized and which should not be construed as assertions of fact; and 3. Summaries and descriptions of legal and financial documents, or their contents, which do not purport to describe Such docUments completely and which 'are made expresslY subject.to the full provisions of the doctiments cited. " This Official Statement does' not ~6nstitute a recom- . mendation, express or implie~d, to purchas~ or not. tO _ purchase thes~ b6nds 'br' any Other i:/fevious bonds of the issuer ..... : 2... " ' _ . The date 'of this Official statement is Au~st 26, 1983. · . - . . ~ ,' ~ '~ .:.:.: Prepared onbehalf ~ff [he issuer by: . ·'"!'i ' BARTLE WELLS ASSOCIATES Municipal Financing Consultants" .. -~. 1636 Bush Street, San Francisco 94109 ' (415) 775-3113 111 CONTENTS iv Page INTRODUCTION ........................ 1 THE BONDS ............................ Sale of the Bonds Legal Opinions ........................... Credit Ratings ........................ :.. Closing Documents ........................ THE CORPORATION .................... City of Tustin Water Corporation ............ The System .............................. THE INDENTURE ....................... 5. Trustee ' 5 Funds .. ..... " 5 ApplicatiOn of Series'A Bond Proceeds ........ 6 Additional .Bonds " ' " ' 6 Refunding Bonds '. ..... -.'..:..:...:: ....... 6 Cash Flow .................. , ,. ..... .. '... 7 Investment of Funds 7 CdVenants .' .' ::.'.".. :'. .... '~..'.. i'... ......... 8 · Limitation .of Bondowners' Right to Sue 8 .. . Modification ..... ' ~'' ·....-. . 8 Default' ' - 8 THE'LEASE "" ' 9 Term and Rent ........................... 9 Maintenance and Utilities -' ' ' ' ' - .. 9 Operation of System ~ i' ~: .'.:-... ~ ','..' .... :.. ~..' ~--. 9 City's BudgetS and Appropriations ............ . 9 Improvements ' "- ..... 9 Casualty Insurance ........................ 9 Liability and Property Damage Insurance ...... 10 Page Rental Interruption Insurance ............... 10 Self-Insurance ............................ 10 Insurance Proceeds' . ....................... 10 Eminent Domain or Destruction ............. 10 Breach of Lease ................... ' 10 Assignment .............................. 10 Net Lease ............................... 10 CITY ORGANIZATION AND FINANCES ... 11 Funds and Accounts ....................... 12 Financial Statements ................ .... .... 12 Budgetary Process ........................ 14 Water Ent. erprise Fund Finances ............. 14 Water Rates ............................. 16 Water Supply ................. : .......... 16 Cost of Purchased Water ................... 16 Projected Water Revenues and Expenses 17 Assessed Valuation .......... .............. 17 Tax Levies and Delinquencies ...: ............ 19 Outstanding Debt ........ ; ................ 19 Constitutional Amendments Affecting City Revenues ......................... 21 City Pensions ' ' . 21 Labor Relations ' 21 ., CITY OF TUSTIN 22 General ...... ' ................... ' ........ 22 ' 22 Population and Income ............... . ..... Employment . .................... ' ......... 23 Transportation ...' ..................... .... 23 Building Activity ......................... 24 Retail Trade ............................. 24 Community, Facilities 2:: INTRODUCTION Issuer: The City of Tustin Water Corporation, City of Tustin, Orange County, California, a California non- profit public benefit corporation. The Series A Bonds are issued under California law pursuant to an Inden- ture between the Corporation and Security· Pacific National Bank, Trustee, and a Lease between the City and the Corporation. On November 1, 1980, the Corporation acquired the water system of the Tustin Water Works. The City has operated the water system since that time. Purpose: Proceeds of the $4,500,000 Lease Rev- enue Bonds, Series A, will be used to complete the acquisition payments to the stockholders, create a bond reserve fund of $450,000, and reimburse the City for the payment of certain obligations of Tustin Water Works. Security: The Series A Bonds are secured by lease rental payments, from 'the City of Tustin for the use of the water system. The City agrees to operate and main- tain.the system and. to budget annually the required lease rental payments. Lease rental payments are special obligations of the City of Tustin, payable from any unrestricted funds available tO the City. The Series A Bonds are not ge. neral obligations of the City of Tustin. · . - : Th~ System;.. The water system serVes about 14,000 customers, mostly residential, about h'alf of which are located within the City of Tustin. The system ha~ had a v. ery lqw growth rate in. recent years. ~' · '- ' .... Rev'enue and E~'~)enseS:.. Operating revenues; from meter 'and :commodity'.charges;:;and nOnopemfing rev- enues,, f~:°m a special deb{ surcharge and interest earn- ings, are projected to meet all operating expenses, lease rental payments, and obligations 'of Tustin Water Works assumed, by the Corporation. Water rates were last in- creased in January 1'983. Revenues in 1983/84 are expected to total about $4,300,000". Annual net lease payments by the City after reserve fund earnings are expected to increase from $400,000 to about $500,000 per 3'ear after five years. Ecor~omic Factors: The City of Tustin, ,with a pop- ulation of 40,000, was .incorporated as a general law city on September 21, 1927. Tustin adjoins the City of Santa Aha, county seat of Orange County, California. In 1982/83, the City had total general fund revenues of about $8,200,000 and a General Fund balance of $3,680,000, not including water enterprise funds. The 1983/84 assessed value of property in the City is $1,345,397,097, an increase of about $76,863,000 over the previous year. Tustin and the area outside the City served by its water system are largely residential. Centrally located in Orange. County, the City's 1982 taxable sales totaled $.336,164,000. Unemployment in Orange· County in 1982 was 7.2 percent. Median family income in the CoUnty wa~ $30,126, 37 percent above the national aVerage and 24 percent above' tlle California average. _ A?ailability o! Documents:. CopieS.of the Notice In- Viting Bids, Bid Form," Idease; and Indenture will be · . available, Upon written request, from~ Bartlff~ Wells Associates at 1636 Bush Street, san .FranCisc6~Cali- fornia'941091.pH0,r ,ti)' delivery of the Series A Bonds. · : o- This introduction is not'a sum.mary o! ,this Official Statement;"the Indenture,' or the Lease. Information. presented in this section is treated more completely else- where in thiJs Official Statement, which should be read .. in its entirety. THE BONDS Description: $4,500,000 City of Tustin Water Corporation Lease Revenue Bonds, Series A Dated: October 1, 1983 Denomination: $5,000 or integral multiple Estimated Annual Series A Bond Service: _ Year Interest Piincipal. Ending Estimated Maturing Oct. 1 @ Estimated Total 10%~ Oct. 1 ' Bond Service 1984 ..... $ 4~0,000' $ -- $ 1985 · . 450,000 ' ' 1986 ........ 450,000 50,000 . 1987 ..... ' 445,000. 75,000 1988 ..... 437,500 100,000 1989 ,. .... 427,500 125,000 1990 ..... 415,000 150,000 1991 ..... 400,000' 150,000 · 1992 ..... 385,000 ' 175,000 1993 ..... 367,500 200,000 1994 ..... 347,500 225,000® - 1995 ...... -- 325,000 225,000® 1996 ..... 302,500 250,000(3:) 1997' - ' 277,500 - 300,000® . · 1998 .. .... :-..:' 1999- ':.. "~i:. 2000 ~.+..,-.; '..- · 2001 247,500 '- 325,000~ "' 215,000"-':350,000®' :' 180,000 ':'. 375,000® :".'"-' 142,500 ,:', 450,000 450,000 500,000 520,000 537,500 552,500 565,000' 550,000 560,000 567,500 572,500 550,000 552,500 577,500 572,500 565;000 555,000 567,500 2002 .... ~ 100,000"':- 475,000(3:) 575,000 _:~.~ 2003.. ..... ~ ~-. 52,500 ....... 525,000®:: ,..':.577,500 :.. :! i::-,;-T6ta!s:5:."~' $6,41:7,500;:. $4,500,000': $10,917,500 2 ' ~ :~ ............... ,;~ ~,;~,,_ ~.ir .....,. ,::. · ~ Bond interest 'has beeh"i~ii~;ifed'ai'ifie 'ann~al~ate :shown. Actual --. :- coupon rates will be set by competi.tive, bid, and are'likely to vary from the annual rate. estimated. As a result, both interest and bond "service are expected to differ from the amounts estimated. ® Callable on any interest payment date on or after October 1, 1993. ! '.,:/~'Ir~te%~t: lnte_reS,t is-pay~able'~einhinn~ali3/~iX';~pril 1 'a~d 0Cio~)er 1~- ~eg~ning Ap~ '1~"'1984'; _:;:¥.'~..'~:::~.~:..~,~::~ ~.~,--.~: ...-. .... ~-:~ -:. :,::. ;;~,~ .... -.-; ': ..... , ... -_ ~::>. Rede. mb{ion:. ;.'.~Cfics'., A:~,. ~0.gds ?.maturing.- 1986 through 1993 ($1,025,000'principal amount), not ca~- able. Series A Bonds maturing 1994 ~rough 2003 ($3,475,000 principal amount) callable at thc option of thc Corporation as a whole or in part on any interest payment date on or after October 1, 1993, in inverse order of maturity, and by lot within each maturity. Premium is one-quarter of 1 percent for each year or portion of a year from date of redemption to date of maturity, but not more than 2 percent. Registration: The Series A Bonds-are issued as fully registered bonds with provision for transfer. Payment:- Interest is payable by check mailed to the registered bondowner; principal is payable at the Corporate Agency Division of Security Pacific National Bank, Los Angeles, or. at the. Co-Paying Agent in New York City. Tax-Exempt Status: In the opinion of Co-Bond Counsel, interest on the Series A Bonds is exempt from Federal income taxes and from State of California per- sonal income taxes under existing statutes, regulations, rulings and court decisions. . . . . '. Authority~.]or Issuance:· Thc Scrics'A~ Bbnds arc special obligations of thc.:Corpdration" iss?ied ~m'suant to thc Nonprofit 'Public B~ncfit C0rp-6i-atiofi'L~'w'bf thc State of California,' payable' from revenues derik;~d' f/om the City Uhdcr thc Lca~:':Thi~ '- ~''' ""' Corporation h~is 'riO' tax-. ._ ing'pdwer?.Term's--of, the' Seriei:.A.. Bbfids' ai-~ i~t: f~rth in the Indenture. The'Indenture and Lease are discussed.._ :" in ~rcatcr'detail in later s'~cti0n'~':,of.this Official State-- sss~t~t._ .' . "' "::'~' ';': '"-~' .~'~ ~ .... "'~k" '"'~-":'"'~-'~ :~-,~""? :' .... ........ -! ~ .... 7- ~. -'."' ~-:~.--'- ~ t~, :,~"~'~ : .-,. ,.s J[ ,.t.~..,: , ;. -_,~.. ,,~..~..~....- · · " "'" . ' .,' .'" d7 ' '.: .-.'.T '--- · · - --~,i: ,~'' ' · Purpose: Series A..Bond pr .ogccds.wflI.'bi~' used to finance ~osts'of acquisition of water fac~tics by thc "Corporation., Thc system has bccn :o.~ncd by..the COrpo- rauon' and'bperatcdby the City'of. Tt/stin since N'~cm; -"-~"" ";'" ~ ' "'~f' ';~':!: '!" :'7%;'~ bcr 1; 1980.'.., ...'.- ': ':;:: .'-- ...... ; ;:.,-,:r-,: :- ....'" '-' .. ~ me - --~4 · .-'-;. ',' :..::~:-. ,::... ..... ~ .; &,,;.::;',-:.:¥': :'., :.?: ?:, ~,.-- ;;; ,r,:,. ,...' · . ..-..-i:-7..:. .... .- ~-'- -Security;' r.: Th~' Series~'~A!': Bofids': are "s,.cc.urc. d:: bY: pledge of revcn'Uc~ of the C0i'porati(~n derived pi-imarily from' semiannual rental payments made by thc City pursuant to the Lease for the use oI the water system. Rents are established pursuant to the Lease in an amount designed to be sufficient to pay all Series A Bond interest and principal and all incidental expenses of the Corporation and the Trustee. The City agrees in the Lease to operate and maintain the system and to budget annually the required rentals. The Series A Bonds are not obligations of the City of Tustin. All rental payments are paid to the Trustee and are deposited by the Trustee in the Revenue Fund and transferred from the Revenue Fund to the Interest Fund, Principal Fund, Reserve Fund, and Additional Rent Fund, all in accordance with the terms of 'the Indenture. Additional and Re]unding Bonds: Additional and refunding Bonds may be issued as provided in the Indenture, but are not currently planned for issuance. SALE OF THE BONDS The initial offering (~f the Series A Bonds is made in accordance with the Notice Inviting Bids. Matters dis- 'cussed herein are expressly subject to the terms and conditions of said Notice, to which reference should be made for further'detail. LEGAL OPINIONS .The opinion of Mudge Rose Guthrie Alexander & Ferdon, Los Angeles, California, and Rourke & Wood- ruff, Santa Ana, California, Co-Bond Counsel, will be delivered to the purchaser of the Series A Bonds, at the expense of the Corporation, upon delivery thereof, approving the validity of the Series A Bonds and stat- ing that interest on the Series A Bonds is exempt from Federal income taxes and from State of California per- sonal income taxes under existing statutes, regulations, rulings and court decisions. The legal opinion is only as to legality and is not intended to be nor is it to be interpreted or relied upon as a disclosure document or an express or implied recommendation, as to the investment quality of the Series A Bonds. Certain legal matters wiil be passed upon for the City and the Corporation by Rourke & Woodruff, Sahta Ana, California. CREDIT RATINGS Moody's .!nvesto.rs..Service,.. In..c., and Standard & Poor's Corporation, have.' given the series 'A Bonds the rati.n~ shown on the cover of. the Official' State'n~nt. Such rating~' reflect only the. view'0f such organizations, and an explanation of the significance of such ratings may. be' obtained from them as follows: MOody's In- vestors Service, Inc., 99 Church Street, New York, New .. . York 10007, (212) 553-0300; Standard & Poor's Cor- pora'tioga, 25 Broadway, New York, New York 10004, (212) 248-2525. There is no assurance that either of such ratings will continue for any given period of time or that it will nOt be revised downward or with- drawn entirely by the rating agency that issued it, if in the judgment of such rating agency circumstances so warrant. Any such downward revision or withdrawal of either of such ratings may have an adverse effect on the market price of the Series A Bonds. CLOSING DOCUMENTS A't the time of delivery of the Series A Bonds to the successful bidder, the issuer will furnish the following documents among others: · No-Litigation Certificate: A certificate of counsel the Corporation certifying that there is no direct liti- gation pending affecting the validity of the Series A Bonds. · Signature Certificate: A certificate of the appropri- ate officers of the Corporation and of the Trustee, respectively, indicating that they have signed the Series A Bonds by facsimile signature (in the case of the Corporation) or by manual signature (in the case of authentication by the Trustee) and that they were duly authorized to so execute or authenticate the same. · · TruStee's and Treasurer's Receipts: The receipts of' the Trustee and the Treasurer of the Corporation showing that the purchase price of the Series A Bonds, including accrued interest to the date of delivery, has been received by the CorporatiOn and the Trustee, respectively. · Certificate Concerning Official Statement: A certifi- cate of appropriate officers of the Corporation and the City, respectively, to the effect that to the best of such officers' knowledge and belief, and after rea- sonable investigation, (a) neither the Official State- ment nor' any amendment, or supplement thereto contains any untrue statement of a material fact or omits to state anY material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; and (b) since the date of the Official Statement no event has oc- curred which should have been set forth in an amend- ment or supplemerit to the Official Statement which has not been set 'forth in such an amendment or · supplement, · Opinion oi Counsel to'corpOration: An opinion of Rourke & Wood~'Uff, counsel to the Corporation, that the' activation·'~nd certain SubSequent procedures of the Co~oraticm have been taken in accordance with all applicable laws. · Arbitrage Certificate: A certificate of a responsible Officer of the Corporation certifying that' on the basis of the facts, estimates, and circumstances in effect at the time of delivery of the Series A Bonds, it is not expected that the proceeds of the Series A Bonds will be used in a manner that will cause the Series A Bonds to be arbitrage bonds. THE CORPORATION' CITY OF TUSTIN WATER CORPORATION The City of Tustin Water Corporation was formed March 3, 1980 under the Nonprofit Public Benefit Cor- poration Law of the State of California for the purpose of providing financial assistance to the City by acquir- ing, constructi.ng, and operating, or providing for the operation of, water facilities, including water trans- mission pipelines, appurtenances, works, and related facilities for the use, benefit, and enjoyment of the public. The Corporation is specifically empowered to acquire water facilities, to lease the same to the City, and to issue bonds, notes and other evidences of in- debtedness. The Corporation has no capital stock or stockholders, but has irrevocably dedicated all of its property and assets to the' City. · THE SYSTEM Proceeds. of the Series A Bonds Will be used to finance the acquisition of the assets of Tustin Water Works (TWW), a-prigately held water service utility previously responsible for water service in the City of Tustin and some adjacent unincorporated areas... The system consists of facilities for the production, storage, tra. nsmission, and distribution 'Of water. The system has a maximum~pumping capaciiy of 12.5 million gallons per'day,'i with ayerage consumption of 9.1. million gallonspef day.-'- -- .' ::-'-: ...... :' _ The City of Tusfin has operated the 'sYstem of. the Tustin Water Works since November. 1, 1980 under an agreement, wi.th, the stockholders and the Corpora- tion.: :-:: :._:::,.~.~: :. ' i. ~ '. :-..::.. :":'~. .'-' "' :: The water system' serves about 14,000 '"meters, of which 95 percent are residential. Average monthly con- sumption in 1981/82 was about 30 hundred cubic feet (hcf) per service. Residential serVice represents about 84 percent of all water consumption. Approximately 50 percent of the system's customers lie outside the City's incorporated boundaries in pre- dominantly residential neighborhoods, and parts of the incorporated City limits are served by other water purveyors. The City of Tustin Water Corporation agreed as of March 3, 1980 to purchase the system for a net pur- chase price of $3,695,650, to assume developer refund contracts and to assume the outstanding "IWW' debt of $2,600,000. Under the agreement, the Corporation agreed to make three annual payments of one-twenty- fifth of the purchase balance plus interest. The balance is due and payable prior to November 1, 1983. Series A Bond proceeds will be used, in conjunction with water revenues accumulated for this purpose, to provide long- term financing for the balance of the purchase price, $3,687,340 as of October 1983. . In addition to providing acquisition funds, the Series A Bond proceeds will be used to reimburse the City for $300;000 advanced to the Corporation to pay TWW bonds dUe in April 198I..Rema!ning Series A Bond pr'b~eeds' Will be used to establish' a Reserve Ffind and pay Series A Bond issuance costs.' Table I summarizes the application of Series A Bond proceeds. ' ...._ "- ! i .... ... . .. .... ''..: '! .-.. - ..~:~:.~:..~;:. . TABLE I ....... ..... ...... ' ...... ., ...... -... Cl'i'~i. oF TUSTIN:i'w.~TER' 'cORpORA;rl'~N;': ."~ SERIES; A 'BOND PROCEEDS AcquiSiti0h:cost '-'--' .... :~:"'" "' ..... $3,500,000. 'ReimbUrsement to City''~ · -~' .... ' ' ..... ..... ,..:. :.':.;:' :.::'".~:,., 300,000. Reserve fund ". ~ .:: -'., ,.:..:.. :-. :.'-."..'......-:. - '.450,000 ' Issuance costs,'-' ' ' ' "250,000.. '~' .Total Bond Issue ' $4,500,000 Note: City of Tustin has operated the system since November 1, 1980. THE INDENTU, ...; The following summary is a brief outline of certain important provisions to be contained in the Indenture and is not to be considered a full statement thereof. Reference is made to the Indenture for full details of all of the terms of the Bonds, the application of reve- nues therefor, and the security provisions appertaining thereto. All bonds issued under the Indenture, including the Series A Bonds, are collectively referred to herein as the Bonds, TRUSTEE · Security Pacific National Bank, Los Angeles, Cali- fornia, is the Trustee~ In addition to holding and administering the various Funds, the Trustee will invest the moneys so held, will be the bond registrar and will authenticate all Bonds. The Trustee has the .right to rely upon certain docu- ments, to acquire any of the Bonds, and to be compen- sated or indemnified by the Corporation for its expenses of administration and for any loss, liability, expense or advance incurred or made without grqss negligence or bad faith in connection with its administration under the [Indenture. Such compensation or indemnification, if unpaid, shall have priority over the Bonds in respect of property and moneys held or collected by the Trustee, except moneys held for the benefit of holders of particular Bonds. The Trustee is not required to expend or risk its own .funds or otherwise incur personal financial liability if there are reasonable grounds for believing that the repayment of such funds or adequate indemnity against sfich risk or liabilitY is no~ reasonably assured to it. ' .- . 17~: ~ ~ '. In addition to. the'duties. previously discussed, 'the Trustee has the duty to keep and maintain certain rec- ords, and to exercise certain standards of Care as pro- vided in the Indenture, - - .- . ..; :/':":':- ' ... .. ... :-i.:,./: FUNDS' - '::- · . The Indenture requires the Trustee to establish there- under six separate funds, namelythe ConstruCtion Fund, the Revenue FUnd, the Res6rve Fund,':-''ttie Interest Fund, the Principal. FUnd 'aiid; the Additional .Rent Fund, 'as 'more· fully, descrit~ed in the' f~llowing para- . . graphs. Any moneys in'any of the Funds may be in- vested by the Trustee SubjeCt to' 'restriCtions in the Indenture. Any interest, profit or loss on such invest- ments shall be credited or charged to the ~:espective Funds from which such investments are made. Revenue Fund. APPLICATION OF SERIES A BOND PROCEEDS The proceeds received by the Corporation from sale of the Series A Bonds shall be deposited by the Trustee as follows: Into the Resei've Fund an amount equal to ten percent (10%) of the original aggregate principal amount of the Series A Bonds. Into the Interest Fund all accrued interest received upon sale of the S~/ries A Bonds. Into the Construction Fund the proceeds remain- ing after the above applications. The moneys in the Reserve Fund shall be applied solely to pay interest on the Bonds as it shall become due and payable, or for the purpose of paying the principal of the Bonds at their maturities, when there are no moneys available for such purposes in the Inter- est Fund, the Revenue Fund or the Principal Ffind, respectively. An amount equal to ten percent (10%) of the original aggregate principal amount of the Bonds. shall be maintained in the Reserve Fund and any moneys in excess of said amount shall be transferred semi-annually to the Revenue Fund. Th.e moneys in the Construction Fund shall be ap- plied to the payment of costs of acquisition, construc- tion, completion, improvement or expansion of the System and of expenses incidental thereto, ificluding surveys, preparation of plans and specifications, financ- ing costs, the balance of the purchase price of the System payable to the sellers thereof, advances here- tofore made to or on behalf of the Corporation by the City for the purpose of paying bonded indebtedness assumed or incurred, by the Corporation, acquisition of lands and other property, engineering, inspection and administrative costs, the cost of furniture, fixtures or necessary apparatus for the System, legal fees and expenses incurred by, or to be paid by, the Corporation, the fee of the financial consultants to the City and the C.0rporati?n; the initial fees and expenses of the Trus- tee and expenses in connection' with the preparation, issuance and delivery of the Bonds. . When all costs and charges properly Payable' from ihe Construction Fund have been paid, the corporation shall delivdr to the Trustee'an appropriate.certificate of the Corporation, whereupon any' remaining balance in the Construction Fund shall be transferred to the . .. ,-. ~ ......... :---: ........ .! ..."i '': :i. '...: '..--:-!...- (The. CorPoration. rhay.' issue arid th~'i Trustee. shall :.delivei-: additional Bondi~ pursuant to a supplemental indenture without the consent of the bondowners, upon compliance by the Corporation with the following con- ditions, which are conditions precedent, to the issuance of such additional Bonds: The additional Bonds shall be issued for the sole purpose of constructing additions, betterments, extensions, replacements or improvements to the System. Principal maturities and/or mandatory'sinking fund payments sufficient in amount to retire all of the additional Bonds on or before their respective maturity dates shall be established for each series of additional Bonds. The amount then in the Reserve Fund is not less than the amount required and, upon issuance of additional Bonds, will include an amount equal to ten percent (10%) of the .original aggregate prin- cipal amount of all Bonds outstanding under the Indenture, including the additional Bonds proposed to be issued. The additional Bonds shall be equally and ratably secured with any other Bonds outstanding under the Indenture. Principal shall be payable on October 1 and inter- est on April 1 and October 1. The Lease will be amended to adjust the rentals thereunder to an amount sufficient to service both the outstanding Bonds and all additional Bonds, and to make such other revisions as are necessitated by the issuance of the additional Bonds. The Corporation shall approve the issuance of the additional Bonds and certify that there is not then existing a default under the Indenture. REFUNDING BONDS The Corporation may issue and the Trustee shall deliver, pursuant to a supplemental indenture, refund- ing Bonds to refund any outstanding Bonds, without the consent of. the bondowners, upon compliance by the Corporation with the following conditions, which are conditions precedent to the issuance of such refunding . Bonds: Principal maturities and/or mandatory sinking fund payments sufficient in amount to retire all of the refund- ing Bonds on or before their respective maturity dates shall be established for. each series of refunding Bonds. The amount then in the ReserVe Fund is not less than the amount requi~?ed and, upon issuance of refund- ing Bonds, will include an amount equal to ten percent (10%) of the original aggregate principal amount of the Bonds outstanding, including the refunding ~onds. The refunding Bonds shall be equally and ratably secured with all Bonds outstanding under thC.Indenture. Principal shall be payable on October 1 and interest on April 1 and October 1. The Lease will be amended to adjust the rentals thereunder to an amount sufficient to service all Bonds outstanding under the Indenture, including the refund- ing Bonds proposed to be issued, but excluding the Bonds to be refunded and thereby released, and to make such other revisions as are necessitated by the issuance of the refunding Bonds. The Corporation shall approve ,ne issuance of the refunding Bonds, shall direct the Trustee to redeem the Bonds to be rcfunded and shall certify that there. is not then existing a default under the Indenture. Notice, as provided in the Indenture, shall be given to the owners of the Bonds to be refunded. The proceeds of the refunding Bonds shall be suffi- cient, together with other moneys available to the Trustee for such purpose' and together with earnings on the proceeds and such other moneys, to pay when due all interest, principal and premium, if any, on the Bonds to be refunded, all expenses.of the refunding, and interest, if any, due on the refunding Bonds before the Lease is adjusted to provide for such interest. CASH FLOW All of the Revenues received by the Corpor.ation are irrevocably pledged to the punctual payment of the principal of and interest and premium, if any, on the Bonds, and Revenues shall not be used for any other purpose except that out of Revenues there may be apportioned and paid such sums, for such purposes, as are expressly permitted by the terms of the Indenture, as set forth briefly below. Said pledge shall constitute a lien on the Revenues for the payment of the Bonds in accordance with the terms thereof. All Revenues shall be paid directly to the Trustee for credit to the Revenue Fund. There shall also be deposited in the Revenue Fund from time to time such amounts required to be transferred and deposited therein from the Construction Fund and the Reserve Fund. The Trustee shall transfer from the Revenue Fund the following 'amounts and deposit same in the following Funds in the following order: · (1). Interest Fund. Qn or before each interest payment date for any series of Bonds, the Trustee shall deposit in the Interest Fund a sum sufficient, together with the balance then on hand in said Fund, to pay the interest becoming due on the Bonds on such interest payment date. No payment need be made into the Interest Fund if the amount contained therein is at least equal to the interest to become due during the next ensuing 12 months on all outstanding Bonds. Moneys .in the Interest Fund shall be used solely for the purpose of pay- ing the interest on the Bonds as it shall become due and payable. (2) Principal Fund. On or before each prin- cipal installment date, the Trustee shall deposit in the Principal Fund an amount equal to.the principal amount of Bonds becoming due'and payable on such date. Mone/,s in the Principal Fund shall be used by the Trustee for the purpose of paying the principal of the .Bonds as they become due and payable. · (3) Reserve t-und. The Trustee shall deposit in the Reserve Fund stich amounts as may be necessary to maintain on deposit in the Reserve Fund an amount equal to ten percent (10%) of the original aggregate principal' amount of each series of Bonds then outstanding. The moneys in the Reserve'Fund shall be applied solely to pay interest on the Bonds as it shall become due and payable, or for the purpose of paying the principal of the Bonds at their matu- rities, when there are no moneys available for such purposes in the Interest Fund, the Revenue Fund or the Principal Fund, respectively. '(4) Additional Rent Fund. The Trustee shall deposit in the Additional Rent Fund certain addi- tional rentals paid by the City over and above those i'equired for the payment of principal of and interest and premium, if any, on the Bonds. Moneys in the Additional Rent Fund' shall be disbursed for .pay- ment of all taxes or assessments charged to the Cor- poration, and for payment of administrative and other costs and expenses of the Corporation. Any moneys in the Revenue Fund on any April 10 or October 10 and not then required for the aforesaid purposes shall be applied by the Trustee in the fol- lowing order of priority: (i) so long as there is not then existing a default under the Indenture, to refund to the City such portion as the City shall request of the most recent semiannual payment of Base Rent (as defined in the Lease); and (.ii) to the purchase or re- demption of the Bonds, provided that Bonds shall not be purchased' at a price in excess of their then redemp- tion price, or in excess of the maximum redemption price if the Bonds are not at the time subject to redemp- tion. INVESTMENT OF FUNDS Any moneys in any of the Funds established by the Indenture may be invested by the Trustee (to the extent permitted by applicable law) in (a) direct obli- gations of the United States of America, direct obliga- tions of the State of California, or obligations the prin- cipal and interest of which are guaranteed by the United States of America or the State of California, (b) any bond, debenture, note, participation or other similar obligation issued by any one or a combination of.the following Federal agencies: Government Na- tional Mortgage AsSociation, Federal Land Banks, Fed- eral Home .Loan Banks, Federal Intermediate Credit Banks, Banks for Cooperatives, Tennessee Valley Authority, Farmers' Home Administration and Export- Import Bank, (c) any. bond, debenture, note, partici- pation' or other similar obligation issued by the Fed- eral National Mortgage Association to the extent such obligations are guaranteed by the Governinent National Mortgage Association, and (d) any other obligation of the United States of America or any Federal agency. In lieu of the investments of monies in obligations · authorized above, the Trustee may deposit monies from any Fund established by the Ifidenture in interest- bearing time deposits, or shall make other similar investment arrangements, including, but not limited to, repurchase agreements covering obligations of issuers enumerated as authorized investments above, with itself, a' member bhnk Or banks of the Federal ReserVe System or banks the deposits of which are insured by the Federal Deposit Insurance Corporation or Federal Saving and Loan Insurance Corporation, or securities dealers approved by a Responsible Officer of the Trustee; provided, that all monies in each such interest, bearing time deposit or other similar investment ar- rangement shall be continuously and fully secured by obligations of issuers enumerated as authorized for investments above, of a market value equal at all time to the amount of the deposit or of the other similar investment arrangement. COVENANTS The Corporation will at all' times cause the City, as lessee, to carry at its own expense, either separately or as part of the comprehensive insurance otherwise car- ried by the City, insurance of the kind, in the form, and in the amounts required by the Lease, as discussed under "Lease." The Corporation will keep proper books and records and will furnish, not more than 120 days after· the close of each fiscal year of the Corporation, to each bondowner so requesting, a Complete financial state- ment certified by an independent certified public ac- countant or firm of certified public accountants. The Corporation will not suffer or permit any default to ~occur under the Indenture, but will faithfully ob- serve and perform' all the covenants thereof. The Cor- poration will maintain the System or cause same tO be maintained in good repair, working order and condition. .. · · LIMITATION OF BONDOWNERS' , R. IGHT'TQ SUE . NO bohdc~wner ~l~all have the right to institute any SUit, .ac.tio, n.'~:' pi'0ceeding at law or in equity, for the execution of any ti-ust or powe. r of the Indenture or for 2iny"r~medy'~vith re~peet to an event, of 'default there- fihde~'U~ess' such owner shall (among other' require- men. ts)~. ha~ giVen the .Tru'Si~e': Written' notice .. of the °dCfi.ri:~fiCe' of an event 'of d~fai21i'and the 0Wners of at [east 25%;in:-agg~gai~iprin.cipal amount. of the Bonds then ou.t~{'a.n'dlng 'shall ha~,e'made Wri{ten'requesi upon th~ '.Tfii~te~.:io'"~er'ci~e the P°We~-s' granted by ..the Ifldefi£ur~'~'i t°. k~'t{t~ie' such action, suit Or Pro~eeding inffs'"'" "'" ...... :'" :" :' " ': " ":' ~ own'name: .... . ' ' · :-(," .':~k- ,-_ ::.'~ :';' _.'~ :. ~' ' -2 . .-~. .. MODIFICATION , i:, 5::: 'f'..i-"'" :." · :-. ~'--[I,--'',-'- '..--'- ( .- - '"'-. : '' WithOut'. coffsent of the bondowne~S, the'Corporation from time to time may ~nter into indentures supple- mental to the .Indenture for any one or more or all of the following purposes: (1) to add to the covenants of the Corporation thereafter to be observed or to surrender any right or power conferred upon the Cor- poration by the Indenture, provided that no such change shall adversely affect the interest of the bond- owners; (2) to evidence the succession of another cor- poration to the Corporation, and the'assumption by such successor of the covenants of, the Corporation in the Bonds and in the Indenture; (3) to make provi- sion for the purpose of curing any ambiguity or cor- recting any defective provision of the Indenture, pro- vided such action shall not-adversely affect the interest of the bondowners; (4) to modify, amend or supple- ment the Indenture in such manner as to permit the qualification thereof under the Trust Indenture Act of 1939 or similar federal statute, provided such ag:tion shall not adversely affect the interest of the bondown- ers; or (5) to issue additional Bonds or refunding Bonds as discussed above. With the consent of the owners of not less than two- thirds in aggregate principal amount of the Bonds .at the time outstanding, the Corporation may enter into indentures supplemental to the Indenture for the pur- pose of adding any provisions to or changing in any manner or eliminating any of the provision~ of the Indenture; provided, however, that no such supple- mental indenture shall'(1) extend the maturity of the Bonds 'or reduce the rate of interest thereon or extend the time of payment of interest, reduce the amount of principal thereof or reduce any premium payable on the redemPtion of the Bonds, or .(2) reduce the afore- said percentage of owners of the Bonds required to approve any Such supplemental indenture, or (3) per- mit the creation of any lien on the trust estate prior to or on a parity with the .lien of the Indenture, or (4)'deprive the bondowners of the lien created by the Indenture, without the consent of the owners of all of the Bonds then outstanding. DEFAULT ~ . · The following eVents~· among others as set forth in the Indenture, .constitute events of'default. Under the IndentUre: (1) default in the. punctua'l"p~yment' of'the prineipal of or interesi on any Bond; (2)..default by the City in any material r~.spect i~a' any'Covenant 'of the Lease; (3) default, continuing for .60. days'i..aftir' n~.tice thereof, by the .Corporation in any' e0venaht of' the Indentu~re;. 'and.. (4) expiration-:of th.~'' tei-m · of ~e eorp0rate, ex!s. tenc~.' of the Corporation~:.If any event of. default shall occur..an, d'eon .finue,. then...th¢ :TrUstee may, and uPOn th_~. ~ritten request, of. the.Owners of a 'majority in. aggr. egate./)rinelpal arnounf 0f the- Bonds at the 'time ou.tstanding.shaIl, (i) declare the principal of and the interest on all outstanding Bonds to. be. due and payable immediately, and (ii) institute legal pro- eeedings to enforce the rights of the bondowners. · . THE LEASE The following is a brief outline of certain provisions to be contained in the Lease of the System between the Corporation, as lessor, and the City, as lessee, and is not to be considered a full statement pertaining thereto. TERM AND RENT The leased properties to be covered by the Lease include ali of the real and personal property of the Corporation and generally consist of the System. The term of the Lease is for a period commencing on the date of recordation of the Lease in the office of the Orange County Recorder and ending October 1, 2003. The City will agree to pay rent ("Base Rent") for the use of the System to the Trustee on behalf of the Cor- poration, its successors or assigns, semiannually in advance. Base Rent payments will be made semiannu- ally on the 21st day of March and September, begin- ning March 21, 1984. Base Rent is computed to pro- vide sufficient funds to the Corporation for the payment of principal and interest on the Series A Bonds when due. The exact amount of Base Rent will be computed on the basis of bids received for the Series A Bonds. The City will also pay as additional rent such amounts in each year as shall be required to pay all taxes and assessments charged to the. Corporation, all expenses incidental to the issuance of the 'Series A Bonds and all necessary operating expenses of the Corporation. MAINTENANCE AND UTILITIES Under the terms of the Lease, the City will agree to pay all utility charges, maintenance and repair costs of the System. OPERATION OF SYSTEM So long as the City is n6t in default under the Lease, the City shall have the right to operate the System with- out hindrance or interference from the Corporation and, subject to the terms and conditions of the Lease, shall have the right of absolute management and control of the SYstem. So long as the City is not in default under the Lease, the City shall levy rates for the use of water and collect all charges resulting therefrom and all other revenues which it derives from or in cot nection with its operation of the System. The City shall maintain the Systefla in good repai and working order, and shall operate the same eco- nomically, efficiently and with due regard for the safety, convenience and welfare of the general pUblic and of the employees and customers of the System. CITY'S BUDGETS AND APPROPRIATIONS The City will covenant to take such action as may be necessary to include ali payments of rent in its annual budget and further covenants to make the neces- sary annual appropriations for all such payments of rent. Said covenant on the part of the City 'will be deemed to be and be construed to be duties imposed by law and it will be the duty of each and every public official of the City to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform the covenants and agreements in the Lease agreed to be carried out and performed by the City. However, all covenants and obligations of the parties to the Lease shall be deemed covenants and obligations of the parties in an official capacity, and no recourse shall be had for the payment of rent in a personal capacity against any member, officer, director, employee or agent of the parties. The obligation of the City to pay rent under the Lease shall not constitute a debt of the City within the meaning of any applicable statutory or constitutional limitation. Under no circumstances shall the City be obligated to make any payments Under the Lease except from funds of the City legally available therefor. IMPROVEMENTS The City may make alterations, improvements or extensions to the System, provided that such are deemed necessary or beneficial for the use of the System. CASUALTY INSURANCE The City will agree to procure and maintain through- out the term of the Lease policies of insurance against loss or damage by fire, with extended coverage endorse- ment and replacement cost endorsement. Said extended 10 coverage endorsement must cover loss or damage by explosion, vandalism, malicious mischief and such other hazards as are normally covered by such endorsement. LIABILITY AND PROPERTY DAMAGE INSURANCE The City will agree to procure and maintain through- out the term of the Lease comprehensive insurance policies protecting the Corporation and its agents against loss or liability for damages for personal injury, death or property damage occasioned by reason of the operation by the 'City of the System, with minimum liability limits of $200,000 for personal injury or death of each person and $2,000,000 for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of $50,000 for damage to property resulting from each accident (or such greater minimum amounts thereof as the C!ty may prescribe). RENTAL INTERRUPTION INSURANCE The City will procure and maintain throughout the term of the Lease rental insurance to cover loss, total or partial, of the use of the System as a result of any fire, explosion, vandalism, malicious mischief, other hazards normally covered by extended coverage endorsement, earthquake and sprinkler leakage in such amounts that, in case of a loss of the use of the System or any ma- terial part thereof, the proceeds will be sufficient to pay the rent for a period of not less than 12 months. The Trustee will be entitled to said insurance proceeds, to be used as provided in the Indenture. SELF-INSURANCE Notwithstanding the above, the City may self-insure (provided that there are maintained such related reserves as are normally maintained with respect to any such self-insurance) against any of the above risks. Any insurance policies may be written with such deduct- ible amounts (not to eXcecdl for. each occurrence, $100,000) as the City may deem advisabl~ in its business cliserfition,' prbvided that the city' maintains such adequate reserves tis may be neCessary to defray any such deductible amounts. ., all of the System is taken under the power of eminent domain, then the Lease shall continue in full force and effect. However, there shall be a partial abatement of rent to be a~eed upon by the City and the Cor- poration; provided, that no such partial abatement shall cause the rent to be less than the amount required for the payment and retirement of the Bonds, after appli- cation of any award made in eminent domain proceed- ings. Any such award shall be paid to the Trustee under the Indenture, unless the Indenture shall have been discharged, in which case any such award shall be paid to the Corporation. During any period in which by reason of any damage or destruction (other than by eminent domain) there is a substantial interference with the use and occupancy of the System by the City, the rent under the Lease shall be abated in the proportion which the initial cost of that portion of the System rendered so untenantable bears to the initial cost of the entire System, provided that the City shall have complied with its covenant to procure rental interruption insurance~: as described above. Such abatement shall continue until the sub- stantial completion of repair or reconstruction of th~. System and the Lease shall continu~ in full force and effect. BREACH OF LEASE If the City shall default in any material respect in any of its obligations to the Corporation under the. Lease, the Corporation will have the right to re-enter or re-let the System on Such terms as it may deem advisable, and if a sufficient sum shall not be thus realized to pay the full amount of rent due the Corporation, then the City shall be liable to the Corporation for the 'amount of any deficiency arising' out of such re-letting, and the Corporation may bring an action therefor. In the event the Lease is terminated on account of default by the City,-notwithstanding any re-entry or re-letting, the City agrees to pay all costs, loss or damage howsoever occurring. ASSIGNMENT :' ' .... · - Without the prior written consent of the Corporation, neither the. Lease nor any interest of the City shall be mortgaged, pledged, assigned or transferred by the city. The City will at all times remain liable for the INSURANCE PROCEEDS.. :( ~.:: . '...'~ :~ performance of all the 6ovenants and ~onditi6ri~ 6n its )!/;i~h¢:'pib~.eeds!'0i i~;sixra~c~:~r-~iv~d by-.'.th~'TrUstee ~ part to be performed, nOtwithstanding any assigning, from fire and extended Coverag~'P°licies may be used tra.n, iferdng 9 ..- . ,, ~ ~. %- '.~,. . ~'- ~ ,~ ~.. ..... .*, to repair and rebuild the Syst. em or to retire the Bonds, '" ' '""i~' '" .... ' :~:: ~'.:.'-.':'} :-"- i:.'-' ,' ~'.::'::-" ~:i'..-.z:,-' ::~' : :. . ... . ., ':~ .:.. ,. · provided in the IndentUre. - ' '..-< ........ ;::- NET as '.EMINE~ DOMAllq 'OR DESTRUCTION ' · - ';.' ' - .' .'i~ ~' '..?, ~. f, '. ..':' ' , : . -: 'The Lease shall terminate if all of the System is taken under the power of eminent domain. If less than . The Lease shall be. construed to be a "net lease', and the City agrees that· the rentals shall· be an absolute net retUrn to the iCorporafion; .free and clear of any expenses or charges whatsoever. CITY ORGANIZATION AND FINANCES ' ' The City of Tustin is 'a general law city, incorporated September 21, 1927. The City operates under a council- manager'form of government. Five City Council mem- bers are elected at large for staggered four-year terms; the Mayor is appointed from the City Council. The City Manager is appointed by the Council and serves as the administrative head of the City. The City Manager implements Council directives and policies and man- ages the operational functions of the City through the various department heads. Wn, L~A~ B. Hus'roN was appointed first City Man- ager on September 1, 198i. Prior to his appointment as City Manager of Tustin, Mr. Huston was City Administrator of Millbrae, California. The current members of the City Council are: RONALD B. HOESTEREY, Mayor, was elected to the City Council in 1'980. He is the western regional'man- ager of an energy management contr°ls company and President of the Board. of Directors for Public Agency Data Systems. J~c~^aD B. ED~^v, was .elected to the City Council in 1974 and has ser/,ed two terms as Mayor. He has also served On the Tustin Parks and Recreation Com- mission a'nd the Planning Commission. H~ is the man- ager of the Electronic Standard Stock program at TRW Defense Space Systems. ..... Fy, AN[ G~z~N[z was .elected to. the City Council · .. "i~:~ .~. in April 1982. He has been active in the Tustin Chain- ber 6f Commerce, including serving as President, and ': ~ ?~' ~ has worked on a variety' of civic committees and eom- . . _' .... .~. missions. He owns the Southern Counties Oil Company. .......... U~su[.A K~NNZD¥ is Tustin's first woman City Coun- ..'.':../i" 'cil member, first .elected in 1978, and is now the Mayor ' :·'"Pro Tern. She is a pe.rsonneI consult'afit for Abigail "~ ~:_. Abbott Personnel Services and owns a freelance writing ".. :.~ ~. business.. ' ~:' .~-.::. ~;~:. DONALD J. SALTARELLI was first" elected- to the _ ._City Council in 1972, and has served.continuously since '~' '-:" then, including three terms as Mayor. He is. currently · . · '-" """ a'-~ember of the Local. Agency Formation Commission ..... of Orange Couhty'..: He 0~vns' the'~ Saltarelli Realty ~ -- Company. - 11 'FUNDS AND ACCOUNTS Tustin's operations are conducted through seven groups of funds. The various funds are grouped by type in the City's financial statements as follows: · General Fund: To account for all financial resources except those required to be accounted for in another fund.. * Special Revenue Fund: To account for the pro- ceeds of specific revenue sources (other than special assessments) or to finance specified activities as required by law or administrative regulations. Special revenue funds include the Federal Revenue Sharing Fund, the Gas Tax Fund, the Beautification Fund, and the Park Development Fund. · Debt Service Fund: To account for the payment of principal and interest on the 1971 park bonds and the 1973 civic center, bonds and the accumulation of reserves therefor. · Capital Projects Fund: To account for the receipt and disbursement of moneys used for financing capital expenditures. · Water Enterprise Fund: To account for the City's water operations. · General Fixed/tssets Account Group: To maintain · control and cost information on capital assets owned by the City. · Long-Term Debt Accounts Group: To record the outstanding principal balance of bonds backed by the full faith and credit of the City and bonds issued by the Tustin Community Redevelopment Agency2 FINANCIAL STATEMENTS The City is audited annually by an independent au- ditor. The Water Enterprise Fund is maintained on an accrual basis of accounting. The other governmental funds are maintained on the modified accrual basis of accounting. Under this accounting method, revenues are recorded as received in cash, except that revenues 12 TABLE 2 CITY OF TUSTIN GENERAL FUND REVENUES AND EXPENDITURES 1979/80 1980/81 )981/82 Revenues 1982/83 Property taxes Sales taxes Other taxes Licenses and permits ......................... Fines and forfeitures Interest and rentals ....... ..................... Intergovernmental revenues Charges for services Sales of property.. ........................... Other ....... ....... - ...... . ............... ~.. TOtal Revenues Expenditures $ 949,540 3,372,306 546 655 184 807 21 149 .502 255 834 287 250.180 439.415 81 796 $7,182,390 ' General govb'rnment :'i'~'..-' ::..:...' .... i ~. :-... :.; -$ 868,939 Public safety ;'.. ;.:: :..'..-..':..' ........... '...'.- 2,679,504 Public works-, ' ' ' .... RecreatiOn .- :-. .............' ....... .........' 1,365,644 · ............. : ........ '-: ........ '.' 295,660 capital eXpbnditures: ~ ...... ','--'-' ...... :-'... :..: .' 934,055 Othe'r nond?Pa :.rCn' enta! "5. ;.i'~.:': ....... ~. :': ...... ~.: 1,267,927 Total ExpenditUres '~. :':......'~ .'....-'..'.' .... ... i... ~'.': .'. $7,411,729 ". .',".'. ::.r - ' . ;.:.....- Excess'(geficiency) -".-::. ~.-.-.-... i.:'...'. :'...':....,..' $ (229,339 Operating· transfers ' ,358,117 F-xcess (Defi.cienCY) - $ 128,778 Fund Balance, July I '~": '~-~'.. :':i~ i'--;':--'i '.. i.::'..'i:. -"$21584,673 . Fund Balance, June 30 '· .... $2,713,451 ~ , Source:" Prepared by Bartle.WeUs Rss~'ciates from financial st;tements of the city. $1,200,779 3,372,528 568,545 179,700 33,542 576,888 1,530,561 260,312 7,092 107,018 $7,836,965 $1,055,648 3,148,238' 1,600,240 327,615 1,452,1 64' 772,679 $8,356,584 $ (519,619) 631,592 $ 111,973 $2,713,451 $2,825,424 $1,394,362 3,848,126 522,880 232,820 286,267 734,323 812,780 .308,444 30,067 396,768 $8,566,847· $1,035,938 3,912,2-17 '1,755,105 419,596 255,566 814,923 $8,193,345 $ 373,502 197,037 $ 570,539 $:~,825,424 $3,395,964 $1,629,309 3,469,516 595,024 190,037 328,016 419,182 769,473 452,901 12,791 · 376,135 $8,242,384 $ 985,731 3,958,928 2,016,121 403,515 171,077 608,690.. $8,144,062 $ 98,322 187,376 $ 285,698 $3,395,964 $3,681,662. · TABLE 3 CITY OF TUSTIN GENERAL FUND BALANCE SHEET 198D June 30 1981 1982 1983 Assets Cash and short-term investments ..................... $3,319,972 Taxes receivable .................................. 206,316 Interest receivable ................................. 81,228 Due from other governments ......................... 48,244 Other receivables ................................... 61,333 Deposits and other assets ........................... 37,288 Long-term investments ............................. 191,856 Note receivable ................................... -- Due from other funds .............................. -- Total Assets .................................... $3,946,237 Liabilities and Fund Equity Liabilities: Accounts payable and accrued expenses ............. $ 858,841 Deposits ...................................... 182,089 Deferred compensation payable ..................... 191,856 Total Liabilities ....... ' ............................ $1,232,786 Fund equity--Fund balances for: Advances to redevelopment agency .................. $1,1 25,000 Contingencies .................................. 1,421,076 Capital outlay ...................... : ........... 167,375 Self-insurance .................................. ' -- Total Fund Equity ................................ $2,713,451 Total Liabilities and Fund Equity ..................... $3,946,237 Source: Prepared by Battle Wells Associates from financial statements of the city. $1,114,690 227,289 65,135 164,764. 134.979 52,288 254,452 1,1 25,000 538,167 $3,676,764 $ 426,885 170,003 254,452 $ 851,340 $1,125,000 1,522,759 177,665 $2,825,424 $3,676,764 906,649 447,452 54,874 263,234 85,178 353,182 2,445,773 $4,556,342 $ 644,970 162,226 353,182 $1,160,378 $1,575,000 643,710 846,609 330,645 $3,395,964 $4,556,342 $3,117,877 295,088 95,352 41,807 77,944 506,857 904,054 $5,038,979 $ 672,997 177,463 506,857 $1,357,317 1,842,792 1,148,759 690,111 $3,681,662 $5,038,979 13 which are both measurable and available as a resource to finance operations of a current year are accrued, and revenues of a material amount not received at the nor- mal time of receipt are accrued or deferred as appro- priate. Expenditures are recorded on an accrual basis except that disbursements for inventory-type items are considered expenditures at the time of purchase, expen- ditures are not divided between years by the recording of prepaid expense, and interest on a general obli- gation bond is recorded as an expenditure on its due date. Table 2 summarizes General Fund revenues and expenditures since 1979/80. The City's largest source of revenues has consistently been sales tax revenues. In I982/83 sales taxes accounted for 42 percent of General Fund revenues and property taxes were 20 percent. Sales tax revenues in 1982/83 declined by appi'oximately 10 percent from the level of the preced- ing year. The largest expenditure categorieS; are public safety---fire and police--and public works. Table '3 presents the City's General Fund balance sheet as of June 30, 1980-1983. Table 4 summarizes the City's proposed General Fund .budget for 1983/84. The General Fund is $9.2 million, a 2.5 percent increase over the 1982/83 budget. TABLE 4 CITY OF TUSTIN 1983/84 GENERAL FUND PRELIMINARY BUDGET Revenues and Interfund Transfers Property taxes ......................... $1,807,700 Sales taxes .......................... 4,240,500 Other taxes .......................... 489,000 Licenses and permits .................. 427,500 Fines and. forfeitures ...................271,000 Interest and rentals .................... 383,872 Intergovernmental revenues ............. :776,605 Charges for services ................... 369,207 Sale of property ....................... ' 10,645 Other .............................. 3,820 .. Interfund transfers ..................... 510,000 $9,289,849 Expenditures General government .................... $1 ,:169,224 Public safety ......................... 5,009,259 Public works ........ 'i ................ 2,446,650 Recreation ........................... 487,565 Nondepartmental ...................... 130,250 $9,242,948 Source: City 'Finance Department. TABLE 5 CITY OF TUSTIN WATER ENTERPRISE FUND REVENUES, EXPENSES, AND CHANGES IN RETAINED EARNINGS 1980/81 '1981/82 1982/83 14 Operating Revenues Charges for services ' $1,401,568 Other ' 3,624. Total ...... : .................................... .... $1,405,1 92 OPerating Expenses Personnel services $ 296,151 Maintenance and op~a'tio'n~"iiiiiiiiiiiiii:ii:i:iiii'iii:i 211,282 Cost of purchased water and power ........................ 717,184 Depreciation 140,798 Total :: $1,365,41 5 Operating Income $ 39,777 Nonoperating Revenue (Expenses) MiscellaneoLJs income '. ':.. ~ ................ :. '.:.. .......... -Interest expense ...-.. ........... .~. .............. ......... Totai' ' ' · -'Net 'Income Retained earnings, June 30 Source: Prepared by Battle Wells Associates from financial statement's of the issuer. ! $2,956,427 22,606 $2,979,033 $ 467,487 627,807 1,130,163 211,196 $2,436,653 $ 542,38O 7,151 ::~:"". $" 1'6,040 (314,246) (544,670) (307,095) $ (528,630) (267,318) $. 13,750 (267,318 ) $ (253,568) $3,614,214 8,800 $3,623,014 $ 441,928 484,201 1,303,884 206,922 $2,436,935 .$1,186,079 . - . ~ .... "$..32,089 ...... (543,754) $ (511,665) $ 674,423 · $ 420,855 BUDGETARY PROCESS ' ' Each year the City Council adopts a budget which- pro{,ides for the general operations of the City. Budgets are prepared on the modified accrual bas~s of account- ing. An encumbrance system is used by management to assist in controlling expenditures and enforcing revenue provisions. Unexpended and unencumbered appropria- tions of the governmental funds automatically lapse at the end of the fiscal year. The City follows these procedures' in establishing the budgetary data reflected in the financial statement~: 1. DUring April, the City Manager submits to the City Council a proposed operating budget for the fiscal · year ,commencing the following July 1. The..operat- ing budget includes proposed expenditures and the · .i. :'.. ~. . . means' of financing them .... :.- .... -. -: . 2. i'P~t~l'i~i, hearings are Conducted at City Council · . . 'me, etings to obtain taxpayer comments prior.to' and · : after April. · . , 3. :iThe.budget is 'enacted, usually prior to July--I,' -.'t]iz:0i~gh passage of an appropriation're~Oluti0ri. 4. ~The'Cit371.Manager is authorized to transfer bud- . p :. ,'.~ ,, :, - geted _a.m°unts within any fund. However,.. any.,'- '.reyi~;ions that alter the total expenditt~:r~s' 'fa'n~i:'must be approved by the City Co~ifi'cil. ' [{CC;': ,~, ...... : .....-~.,.:' .,, L-,~J:.,."-: ,', _ . . WP{_TER jENT]~RPRISE FUND FINANCES .... T_U%ti'n'"~.~yo.unts for the water operations in the Water Enterprise Fund. The Fund is maintained on'the ace.r.u..a!.basi.s.. Of. accounting;~ Table 5 summarizes rev2- enue, expenses, and retained earnings for the Water Enterprise Fund since the City's assum, ption of water system operations. Th~ largest expense is th~'~cost of purchased water. Tustin purchases the majority Of its water from East Orange County Water District. The 1983/84 budgeted .pri.ce of such water purchases is $190 per' acre-foot. Net income of the Fund in 1982/83 was $674,423, up from $13,750 in 1981/82. The Water Enterprise Fund budget for 1983/84 is shown in Table 6. Revenues are derived almost entirely from water sales. Tables 7 and 8' present the Water Enterprise_FUnd's balance sheet for June'30, 1981- 1983 and statement of changes in financial position. · TABLE"6 '::". '.' ~-' CITY: OF~TUSTIN: WATER ENTERPRISE-FUND 1983/84 BUDGET .... ° . ........ . :', : 'i , ' ' i. Water sales'..-}: .','i'R':iS':.:':'. 1'!'?'!".~":.~"':!!'1'.i.'~,21~i'1~'1~(~'i!,'' ': Street and Chrb'permits={ .i;'. ;k~. [: ;<"Y i '.. ! l~. {:'::!~ 7,000};}' · MiscellaneoUs ;.'-:':-.:,'.'-.:,. :!}. :::'.'{{~.'::;A, .;:.: V'~: :'.? §0,000'-"i. ':' i-' ~ '~"~. _~.' T(~t&'I"i~V~i~U~' ~{.:';;-:'i :.2.;..i :{:. ?!J:.~::_'-$4,380,000!''' -" '; :.: -.... ~.. ,: ",. 3,' :.,,~ ~, ~ ,.." ,,...-.-:k'-!.:: :.!-}: '{-; ~-. -':-. ', :;- -:..~" ,':':- Expenditures: -.~ .. ', ';:3-:~' '-:.:/;',"<":,','"'::3" ':-;' '.: ~'; ';'"-"'; "Pers0n~el--e":.' :d:{ '!;.-'{~ ~ .":.' i'-: ? .' ': { :';'?~;2~ ~ "',:.:'-,_ $ ;' ~ 9~ i ~{I~3 Supplies and services ........... i-;".-i 7"': 3;161,595' ~'- ~: Capital outlay:... ::.;.,. :(.::R'.. ,.-.:. ~,: :'i. c~':?.::~..? 14,600 -: / Capital improvements '....x:. ,';,': '.~'.;7~-'i ~'.' !"-'. :162,500~ ;'. -" '- ;'i. !"i-.-';': Source: City of Tustin 1983/84 BudgeL ' :"-:":": TABLE 7' CITY OF TUSTIN WATER ENTERPRISE FUND BALANCE SHEET 1981 June 30 1982 1983 Assets Cash and short-term investments ............................... Accounts receivable ........................................ Deposits and other assets ..................................... Net property, plant and equipment ............................... Total Assets ................................................ Liabilities and Fund Equity Liabilities: Accounts payable and accrued expenses ....................... Due to other funds ........................................ Deposits ................................................ Long-term debt ....... . ................................... Total Liabilities ............................................. 479,713 3,158 6,992,796 $7,475,667 $ 278,614 538,167 23,080 6.903,124 $7,742,985 Fund equity: Retained earnings (deficit) '. .................................. (267,318) Total Liabilities and Fund Equity ................................ $7,475,667 'Includes $323,500 reserved for debt retirement. Source: Prepared by Battle Wells Associates from financial statements of the issuer. TABLE 8 CITY OF TUSTIN WATER ENT. ERPRISE FUND STATEMENT OF CHANGES IN FINANCIAL POSITION 1980/81 516,984 3,158 6,803,736 $7,323,878 $ 276,557 635,486 23,836 6,641,567 $7,577,446 (253,568) $7,323,878 1981/82 $ .323,500 610,.004 92,380 6,949,404 $7,975,288 422,626 713,565 25,710 6,392,532 $7,554,433* 42O,855 $7,975,288 1982/83 Sources of Working Capital Operations: Net income (loss) ........................................... $(267,318) · Add item not requiring working 'capital: --Depreciation ........................................... 140,798 Working Capital Provided by (Applied to) Operations .................. $(126,520) Decrease in other assets .........'. .............................. $ m Uses of Working Capital Acquisition of Tustin Water Works assets .......................... - $ 195,185 Payment on long-term debt.., .................................... 300,000 Purchase of property, plant, and equipmentmnet of abandonment ........ m Net Decrease in Working Capital .................................. $ (621,705) Elements of Increase (Decrease) in Working Capital Current assets: Cash and short-term investments ............................... $ -- Receivables: --Customers, billed ........................................ 261,777 --Customers, unbilled ...................................... · 148,374 --Others ........... : .................................... 69,562 Total Current Assets .............................. . ............. $ 479,713 Current liabilities: Current portion of long-term debt ............................. $(261,557) Accounts payable ............................................ (99,151) Accrued expenses ................................... ........ (179,463) Customer deposits ...'.... .................... ~ ................ (23,080) Due to other funds .............................. : ........... (538,167) Net Increase (Decrease) in Working Capital ........................ $(62!,705) Source: Prepared by Battle Wells Associates from financial statements of the issuer. i i i $ 13,750 211,1 96 $224,946 w 262,377 22,136 $(59,567) .21,158 9,650 6,463 $ 37,271 $ (820) 35,550 (36,372) (756) (94,440). $(59,567) $674,423 206,922 $881,345 $ 317 208,448 352,590 $320,624 $323,500 68,640 100,405 13,514 $506,059 $ 40,587 (117,526) (28,543) (1,874) (78,079) $320,624 16 Table 9 shows the remaining outstanding Tustin Water Works bonds assumed by the Corporation. As part of the purchase agreement, the City of Tustin Water Corporation assumed $2.6 million of outstanding TWW bonds. The City then paid $300,000 due in April 1981: Interest on the TWW bonds is payable quarterly on the last day of each calendar quarter. Obligations to be paid from water revenues also in- clude refunding contracts assumed in the acquisition of TWW. Under Public Utilities Commission rules, a pri- vate Water utility may receive advances from a de- veloper for construction of facilities and provide the developer with a 20-year refunding contract. The terms of such a Contract limit annual payments to 22 percent of the gross revenue received from the facilities con- ·structed with the advance until the original amount is repaid, but not to exceed 20 years in t~'rm. Frequently the full amount is not repaid within the 20-year limit. As of April .30, 1982, such contracts had an outstand- ing total balance of $654,135. Actual refunds totaled $111,537 in 1981 and $78,733 in 1982, and are budgeted at $85,000 in 1983/84. Additionally,' there is a possibility of assertion of additional federal income taxes relating to the acquisi- tion of the System. The additional taxes, if asserted, would approximate $356,000 plus interest and penal- ties, if any. The City Attorney believes there is a pos- sibility of such assertion, but that the likelihood of a claim arising, is less than probable. TABLE 9 CITY OF TUSTIN' OUTSTANDING'WATER DEBT TUSTIN WATER WORKS BONDS ASSUMED Annual Maturity Interest Interest Date · .Principal Rate Payment 1/ 9/85. ....... . $ 900,000. 8.0% 5/24/89 ........ 300,000 8.0 , 11/20/90 ........ 300,000 8.0 3/23/91 "- 300,000 8.0- 6/16/93 ' .500,000' 9.5 ?.):.'~ ~. . $2,300,000 ..:,~.. $ 72,000 24,000 24,000 24,000 47,500 '$191,500 WATER. RATES,- '" · . . . :. ---. Th~' City' cstablisfi~j~and collCc~7'~;atCr rates and 'charges 'for service.: '.T~.~- City has [,u~ 36wet t6 establish wateri~t.es, 'and its' rates are not subj.ect 'to review' or approVal by any other · . · . Tustin's basic water rates consist of three com- ponents- · Water usage rates · Meter charges · Debt surcharge Additional charges have been established for con- struction water and fire services. Each customer pays a meter charge and a debt sur- charge, both based on meter size, and a commodity charge. The water bill includes commodity charges per hundred cubic, feet of water used. Water customers are billed by the City every .two months. Uncollectible accounts are less than one-half of 1 percent of water billings. 'The System has 13,778 meters, of which 9,963 (72 percent) are s/8-inch and 2,942 (21 percent) are 1 -inch. WATER SUPPLY In 1982/83 the System obtained 4462.5 acre-feet (37%) of its water from its own wells and the remain- ing 7760.0 acre-feet (63%) through purchases from the East Orange County Water District, which in turn purchases its water from the Municipal Water District of Orange County. The Municipal Water District Orange County bbtains its water from several sources, the most significant of which is purchases from the Metropolitan Water District of Southern California. Certain of the System's wells have recently exper/- enced contamination from nitrates which occasionally percolate into the upper levels of the aquifer. Two of the System's wells have been shut down and operations at several other wells have been affected from time to time. In such instances, the System has increased its purchases of water, With the result of increasing the operating costs of the System. The City estimates that such nitrate contamination has in the past reduced the amount of water pumped from the System'i wells by as much as ·30%. The City cannot predict the extent of nitrate contamination of the System's wellsin the future, nor has it determined the feasibility of av. oiding-..nitfi/te~: percolation by deepening thc System's wells~i'~:..7;:~ ~. ~':'~'.:.~'; · The long-term availabili/~'bf'13iarChfi~;id'~'~i'e/-i System is subject to the continuing:water s/ip~ly:efforts of the System's direct and in.diri~Ct, lsfiPpligr~.~: Those. efforts are subject to circumstances not withiti"th~: con- trol of the City, including environmental: 'and ?at'~r.-~- quality regulation, changes in water rights 1/~w, litiga.t.!0.'n,3 and availability of local and impb"x'ted...~.i/,ti~:.r.g~'pPlies;. .. ApprOximately 63 % of the City's :wafer'is)prSVid~d by purchases from the East Orange CountY Water Dis-;.( Current water rates are' 'summarized in Table 10. trict. Under this arrangement, the Ci~ is cur~,~nfiy'-p'fiy,-.- These rates were effectiye January 1, 1983. The rates:'i-:'- ing apProximatel~t '$i90 per' ·acre` foot~ Rates "for S~i'ch~' we~-e developed based on study by a consulting engineer.' ......purcha~-e~ are-'det~'r~nined by '~th~""g~r~i: 'fif"di~e~t0~4;' o~'" ... the East Orange Count), Water L. _.~ct and are based upon the cost of water to the District. Although the cost of water from the East Orange County Water Dis- trict is anticipated to increase from time to time in the future, at the present time the City cannot predict the amount or timing of such increases. TABLE 10 CITY OF TUSTIN MONTHLY WATER RATES, 1983 WATER USAGE (COMMODITY) CHARGES 0-6 hcf (per hcf)* . ..................... $0.33 Over 6 hcf (per hcf) ..................... 0.57 MONTHLY FIXED CHARGES Meter Debt Charge Surcharge Total s/8' X 3/4" meter ..... $ 2.51 $ 2.50 $ 5.01 3.13 3.75 6.88 4.36 6.25 10.61 7.45 12.50 19.95 11.14 20.00 31.15 19.79 37.50 57.29 32.15 62.50 94.65 63.02 125.00 188.02 3/4" meter .......... 1" meter ........... 11/2" meter ......... 2" meter ........ '... 3" meter ........... 4" meter ........... 6" meter ........... MONTHLY MULTIPLE RESIDENTIAL CHARGES Fixed and water usage charges plus:' $1.00 per residential unit plus $1.27 per meter serving a group of residential units $2.00 per residential unit for debt service FIRE LINE AND DETECTOR CHECK VALVE CHARGES 4" fire service .................. $15.68 per service 5" fire service .................. 19.60 per service 6" fire service .................. 23.52 per service 8" fire service .................. 31.36 per servme 1 O" fire service .................. 39.20 per servme 12" fire service .................. 47.04 per servme CONSTRUCTION WATER From metered hydrants ........... $0.39 per hcf From unmetered hydrants ......... $0.11 per 1 O0 gal., $5.60 minimum 'hcf = hundred cubic feet. PROJECTED Wp,,,-'R REVENUES AND EXPENSES Table 11 projects revenue and expenses for tl'- City's Water Enterprise Fund through 1989/90. Rev, nuts and expenses are divided between operating ar nonoperating. Operating revenues consist of water rat, from 'fixed meter charges and commodity charges ar some .miscellaneous revenues from such sources as co: struction water sales. Operating expenses arc based( a study performed by the City's consulting engineer are projected to increase at about 8 percent per year. Commodity charge revenues are increased at an equiva- lent rate. Operating expenses also include an allowance for capital improvements. Nonoperating expenses consist of lease' rental pay- ments to Tustin Water Corporation and retirement of TWW bonds assumed by the Corporation, payable as additional rental. Revenues of about $852,000 per year are raised through a debt surcharge established by the Council to make water debt payments. Non- operating revenues also include interest earnings on the Water Enterprise Fund balance. Lease payments have been stated by fiscal, year and reduced.by earn- ings on the Reserve Fund. Table 11 shows accumulated contributions to Water 17 Enterprise Fund equity of $1.8 million as of the end of 1989/90. These funds provide a source of funds for necessary capital improvements to the system and for future debt service payments. In fiscal year 1990/91, $600,000 of TWW bonds come due, followed by another $500,000 in June 1993. ASSESSED VALUATION The Orange County Assessor assesses all property within the City except utility property, which is assessed by the State Board of Equalization. In the'past, property in California has been assessed at 25 percent of full cash value. Beginning in 1981-82, property is assessed at 100'percent of full cash value. Under Article XIIIA of the.California Constitution, the value may be adjusted annually by not more than 2 percent to account for inflation. Due to changes in assessment under Article XIIIA, the County assess- ment roll is no longer proportional to market value. California law provides exemptions for owner- occupied residences and. business inventories. Prior to 1980/81, 50 percent of thc value of business inven- tories was exempt' from taxes; as of 1980/81 this exemption increased to 100 percent. $7,000 of the value of owner-occupied residences is also exempt TABLE 11 CITY OF TUSTIN WATER ENTERPRISE FUND PROJECTED REVENUES AND EXPENSES 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 18 OPERATING Revenues Meter charges .......... $ 632,000 Commodity charge, s ..... 2,766,000 Other ................ 50,000 Total Revenues ......... $3,448,000 $ 632,000 $ 632,000 $ 632,000 $ 632,000 $ 632,000 $ 632,000 2,987,000 3,226,000 3,484,000 3,763,000 4,064,000 4,389,000 50,000 50,000 50,000 50,000 50,000 50,000 23,669,000 $3,908,000 24,166,000 $4,445,000 $4,746,000 $5,071,000 EXpenses Operations ............ $2,920,000 Capital outlay. ......... 15,000 Developer advances ..... 75,000 Capital improvements .... 163,000 Total Expenses ......... $3,173,000 Net Income ............ $ 275,000 Accumulated Contribution to'Retained Earnings ... $ 275,000 23,154,000 23,407,000 23,680,000 23,974,000 24,292,000 24,659,000 16,000 17,000 18,000 20,000 22,000 23,000 72,000 58,000 44,000 30,000 16,000 2,000 460,000 319,000 315,000 357,000 300,000 300,000- $3,702,000 · $ (33,000) $ 242,000 NONOPERATING Revenues Debt surcharge Interest earnings ....... Total Revenues ...- ...... $ 852,000 26,000 $3,801,000 $ 107,00.0 $ 349,000 $4,057,000 $4,381,000 2 1i0,000 $ 64,000 $ 459,000 $ 523,000 $4,630,000 $4,984,000 $ 116,000 $ 87,000 $. 639,000 $ 726,000 $ 852,000 .$ 852,000 $ 852,000 $ 852,000' $ 852,000 67,000 25,000 53,000 80,000 108,000 $ 852,000 112,000 $878,000 $ 91'9,000 $ 877,000 $ 905,000 $ 932,000 $ 960,000 $ 964,000 21,055,000 $ 120,000 $ 120,000 $ 120,000 $ 420,000 400,000 400,000 448,000 466,000 483,000 Expenses TWWbonds ........... 2 192,000 Series A lease payments.. 175,000 Total Expenses ......... $ 367,000 $ 96,000 496,000 $1,455,000 2 520,000 $ 568,000 $ 586,000 $ 903,000 $ 592;000 $ 512,000. $ (536,000) Contributions to Fund Equity Accumulated Contributions. $ 842,000*$ 306,000 *Includes prior-year balance of $330,000. Source: Prepared by Bartle Wells Associates. $ 357,000 2 338,000 $ 347,000 $ 57,000 2 663,000 $1,001,000 $1,347,000 $1,405,000 $ 373,000 $1,777,000 from property taxation. Iri the past, revenues lost to tax-supported public agencies duc to. these two exemptions were fully reimbursed by a State subven- tion; it is not known whether and to what extent the · exemption for business inventories will continue to be so reimbursed. ~. Table'12 shows a history of Tustin's assessed valua- tion since 1977/78.. Over the'years shown, the. City's · assessed valuation has increased at an .average-annual .rate of 14.4 percent. The 1983/84 preliminary assessed valuation is 6.1 percent, higher than that of I982/83. Table 13 lists the ten largest taxpayers in 1982/83. TAX LEVIES AND DELINQUENCIES In accordance with the California Revenue and · Taxation Code, the Orange County Tax Collector collects secured tax levies for each fiscal year. One- half of the taxes is due November 1, and becomes TABLE 12 ASSESSED VALUATION .. Fiscal Assessed Year . Valuation': -.. Percent . Change 1977/78 ...' ........ $ 149,968,390 :;~ '. --% 1978/79 ........... 174,340,430..' .. 16.3 1979/80 ........... 210,277,040 20.6 1980/81 . ......-, ........ ..... 233,300,000~' .-'... 10.9: '1981/82' .......... 1;047,175,004 12.2 1982/83' .......... . 1,268,534,645 21.1 ' 1983/84' .......... 1,345,397,097 . 6.1. 'Since 1981/82, assessments have been stated at 100% of 'full valuation rather than at 25%. Equivalent values at 25% would be $261,751,751 in 1981/82 and $317,133,661 in 1982/83. delinquent December 10; the secona installment is due February 1, and becomes delinquent April 10. A l0 percent penalty is added lo any late installment. On June 30, delinquent properties are sold to the state. Property owners may redeem property upon payment of delinquent taxes and penalties. Properties sold to the slate incur a redemption penalty of 1.5 percent of the taxes due per month. Properties may be redeemed under an installment plan by paying current taxes plus 20 percent of delin- quent taxes for five years. Interest accrues at one-half of 1 percent per month on the unpaid balance. If no payments have been made on delinquent taxes at the end of five fiscal years, the property, is deeded to the State. Such properties may thereafter be con- veyed to the County Tax Collector as provided by law. Table 14 presents tax levy statistics since 1977/78. With the exception of 1978/79, current tax delin- quencies have not exceeded 5 percent of the current levy. Collections of delinquent taxes have brought total annual Collections to over 96 percent of the levy for each year except 1978/79. OUTSTANDING DEBT · Tustin has two outstanding general obligation bond issues for parks and city hall, with a combined out- standing principal amount of $1,370,000. The 1971 park bonds mature in 1991 and the 1973 civic center bonds in 1998. Debt service is paid primarily from property taxes. Table 15 details Tustin's direct and overlapping bonded debt as of September 20, 1983. TABLE 13 CITY OF TUSTIN LARGEST TAXPAYERS Taxpayer 1983 Type of Business Valuation Steelcase ........................................ · Basic Four Corporation .............. . ..... · .......... Larwin Square Ltd ................................. Tustin Business Venture !1 ........................... Malta Properties, lnc ............................... Courtyard Center .................................. Eddy. & Violet Meredith ............................. Rreef IV, Inc ........ i ............................. Fireman's Fund ................................... Safe Care Co., lnc ......................... . ........ Source: Orange County Assessor's Office. i manufacturing $ '44,059,837 manufacturing 34,467,233 commercial property 15,924;611 commeri:ial property 11,385,391 commercial property 9,697,899 commercial property 8,528,905 commercial property 6,784,033 commercial property 6,415,017 office/commercial 5,709,250 hospital 5,351,269 $148,323,445 19 TABLE 14 CiTY OF TUSTIN PROPERTY TAX LEVIES AND 'COLLECTIONS Total- Current Fiscal Tax Tax Year Levy Collectio. ns Percent of Delinquent Total 'Percent of Levy Tax Tax Total Collected Collection Collection Levy 1977/78 .................. $1,739,200 1978/79 ....... ' ........... '1,124,130 1979/80 .................. 1,732,497 1980/81 .................. 1,982,294 1981/82 .................. 2,783,661 1982/83 .................. 3,352,539 $1,651,899 1,006,134 1,675,595 1,938,882 2,685,895 3,255,986 95.0% $24,159 $1,676,058 96.4% 89.5 29,194 1,035,328 92.1 96.7 24,060 1,699,655. 98.1 97.8 28,321 .'1,967,203 99.2 96.5 29,918 2,715,813 97.6 97.1 43,742 3,299,728 98.4 TABLE 15 CITY OF TuSTIN DIRECT AND OVERLAPPING BONDED DEBT Percent Applicable Debt as of 9/20/83 20 Orange County ..:'.....: ................................................. Orange County building authorities Orange County Flood Control District ................................... ...... Metropolitan Water District Saddleback Community College District Irvine Unified School District Orange Unified School District .............................................. 1.867% 1.867 1.867 0.375 6.755 0.284 0.032 Santa Aha Unified School District and School District ........................... 0.022 Tustin Union High School District (variou~ issues) ..... , ....................... 10.101-10.980 Tustin School District .............. · ............................. ...... ..... 42.770 San Joaquin School District (various issues) ' "0.119-0.134 ' ' City of Tustin ...... . .................................................... 100. City of Tustin Water Co'rporation · 100. " Orange County Sanitation District No. 1 ...................................... 0.013 Orange County Sanitation District No. 7 (various issues) ......................... 9.718-15.589 East Orange County Water District ............................................ - 32.237 Irvine Ranch Water District ............................................... 7.213 irvine Ranch Water District, I.D. No. 2 5.353 Irvine Ranch Water District, I.D. No. 105 ............. : ........................ 24.667 · Irvine Ranch Water District, I.D. No. 250 ...................................... 24.717 Municipal Water District of Orange County Water Facilities Corporation ............. 2.402 Total Gross Direct and Overlapping Bonded Debt ' ' Less: Municipal Water District of Orange County Water Facilities Corporation (100% self-supporting) ...................................... .'. City of Tustin Water Corporation (100% self-supporting) ............. '~otal Net Direct and Overlapping Bonded Debt ' · 50,409 276,021 265,767 1,762,683 205,014 111,086 4,756 4,256 450,725 419,573 ....... 8,790 1,370,000 4,500,000® .... 54 574,153 2,106,687 . 396,715 1,413,727 9,284,658 1,876,020 1,847,1 38 $26,928,232® 1,847,138 4,500,000® $20,581,094 Ratio to: Assessed Valuation Population .$1,268,534,645 40,200 'Di~'eCi de'bt'($5,8~OiO00i '.. i ................................ : ..........'... 0.46% $146.02' Total gross debt ($26,928,232) ....... . ................... - ..... ' ............ 2.12 669.86 Total net debt (.$20,-58!~.09.4.).;.: .... ,'.'. ........... . .............?.. ............ 1.62 ... 511.97 · oo.o .. .......... ..~.,,,,.~.,...~,...-:.~ .......,...; -.~ .... . . .~.........~. .... ...., ......... ..<..~. .... ... ~ · ® Lease revenue bonds to be sold. ~ Excludes tax and revenue anticipation notes, revenue and tax allocation bonds, and non-bonded capital lease obligations. Source: Compiled by Bartle Wells Associates in cooperation with California Municipal Statistics, inc. , ~.. _ i-"~% ' : ~,:':: -.. ,,'-~..' · '~'-:'.:;,--:;,'C, ' ':"" ...... --- ~., ;-..:.).. i~..-;:-.-.~.:... .--..-. ...... :,.::~. -~: '.-,.,.....,_ - ..: r.' ;, ~ ·. . ~....,...~.. .... ' .~ .. .,. .... ........ "'- ............ :. ? :" ' :' ..... ; L';':~. - ~ ' ",-. .~;_ ',...,,.. . . -. · -..- :.r.' '~P-~i~-'.!'." ; - ~" - - ":: ' ':-;: :"-' .'i;.:: .L:..': . . ~ ~ o.~, _ . . - .... ..% .. · ..... . -".'.'.;:,..?.r":~.--.-:F_' ~ '-'.."'.'-.' ".., - :..'..~. '.,. "," :'-' - -[ ," '.': -- .'T" ;:' -'."" ' " .... " ' · ..... ," ;:;: ~:-3':',.-. :'---" ' ' ' :' ' . . · - · ;-~-~.. ~-_ ...... ~ =-~-....,~,~...-~ .-...~..,...· ~ .~.. _ - ........ o . ,..- . ... .... .... -.. ,..~ ....... -, · CC: ~':'' .¢ · ' · .- :. ;.-r_;..~ '~'T%': · . ,."~,'..3~:.,.' ? . .,,:=... :. ,,-;~, · . . .... ,~ ..-. ,: ~ ,, . o., ,¢ .. .. CONSTITUTIONAL AMEND/v,,... ~ TS AFFECTING CITY REVENUES On June 6, 1978, California voters approved Propo- sition 13, a statewide initiative relating to the taxation of real property which added Article XIIIA to the California Constitution. Among other things, the Propo- sition: (a) limits ad valorem property taxes of all real property to one percent of the full cash value of the property; (b) exempts existing voter-approved bonded indebtedness from the 1 percent limitation; (c) defines "full cash value" as the Assessor's appraised value of real property as of March 1, 1975, adjusted by changes in the Consumer Price Index or comparable data-- not to exceed 2 percent per year; (d) permits estab- lishment of a new "full cash value" when there is new construction or a change in ownership; (e) permits the reassessment, up to the March 1, 1975 value, of prop- erty which was not current on the 1975/76 assessment roll; (f) requires counties to collect the 1 percent prop- erty tax and to "apportion it according to law to the districts within the counties"; (g) prohibiti new ad valorem taxes on real property, or sales taxes, or transaction taxes, on the sales of real property; (h) permits the; imposition of special taxes by cities, coun- ties and special districts if .approved by a two-thirds vote of the qualified electors of such districts; and (i) requires a two-thirds vote of all members of both houses of the legislature for any changes in state taxes which would result in increased revenues. Various legislative measures have been adopted bv the California legislature since the passage of Proposi- tion 13 to reduce its impact on local governments. The net effect of Proposition' 13 and such measures in 1978/1979 was a decrease in the City's property tax revenues of 35 percent, from $1.7 million in 1977/78 to $1.1 million in 1978/79. The City's property tax levies have increased at an average annual rate of 31 percent from 1978/79 thr6Ugh 1982/83, as a result of new construction and reevaluation from changes in ownership. A special election was held on November 6, 1979, at which time the voters of the State of California ap- proved the Initiative Constitutional Amendment--Lim- itation of Government Appropriations ("Proposition 4") which'added Article XIIIB to the California Con- stitution. The details are complex and will require clarification from subsequent legislation or. judicial decisions. The City cannot predict whether the amend- ment will, if challenged, be upheld, in whole or in part, by the courts. Proposition 4 went into effect on July 1, 1980 and provides that state and local government appropriations from certain revenue sources each Year' may not ex- ceed the appropriations limit related to such revenue sources set for the fiscal year 1978/79, with certain adjustments made for changes in the cost of living and population. Any surplus revenues will be required to be returned to the taxpayers through' downward re- vision of tax rates and fee schedules during the subse- quent two fiscal years. The.measure also contains pro- visions relating to emergency situations, revision of lhe appropriations limit by a majority vote of the people, reorganizations of governments, savings by government, nonimpairment of bonds, allocation of funding of state- mandated programs and various exemptions. Tustin's appropriations limit is $12,226,539 in 1983/84, an increase .of 4.5 percent from the 1982/83 limit of $11,695,561. Appropriations subject to limitation were $8,128,814 in 1982/83 and are $8,429,580 in the 1983/84 preliminary budget. CITY PENSIONS All full-time City employees are memberl of the Public Employees' Retirement System (PERS) of the State of California and benefits are funded by City and employee contributions. The City contracts with PERS separately for. retirement plans £or tlie public safety employees and for employees not in the public safety category. The City contribution rate, as actuarially determined, for the year ended June 30, 1982, were 13.908 percent of salaries for public safety employees and 9.977 percent for employees not in the public safety category. The City's contributions for' the year were $417,091 and $343,945, respectively. Contribu- tion rates have been established to amortize the unfunded liabilities by the year 2000. Actuarial infor- mation on present value of vested accumulated plan benefits and the present value of nonvested accumu- lated plan benefits is not available. Net assets available for benefits at June 30, 198I, the date of the latest actuarial valuation, were $1,185,677 and $1,586,201, and the actuarially determined unfunded liability was $248,595 and $547,320, respectively. The assumed rate of return used for determining the actuarial value of accumulated plan benefits is 8.5 percent. The City has made available to its employees a deferred compensation plan. Funds withheld per em- ployee authorization are invested in variable or fixed investments, as stipulated by the employee. Restricted investments are reported at cost, which approximates market. LABOR RELATIONS .- The City of Tustin has two recognized bargaining groups representing employees regarding wages and working conditions. The Tustin Municipal Employees' Association represents all nonmanagement and non- sworn public safety' employees. The Tustin Police Employees' Association represents sworn police per- sonnel only. The most recent memorandums of under- standing for both groups expired July 1, 19832 Both groups have agreed 'to extend these agreements until October 1, 1983. The City of Tustin has not expe- rienced any job action regarding labor relations in its history. 21 CiTY OF TUSTIN 22 GENERAL Columbus Tustin, the city's founder .and namesake, came to California from Oregon during the Gold Rush. In 1868, twenty years after settling in Sonoma County, he and his partner, Nelson Stafford, purchased 1,300 acres of Rancho Santiago de Santa Aha, originally a Spanish land grant. Tust. in and Stafford divided their purchase and Tustin started "Tustin City" on his portion. The .orange industry in Tustin began in 1875, when the first sizeable grove was planted. The city was soon surrounded by orange, walnut, and apricot orchards. Between 1900 and 1950 the orange groves gradually took over from the other crops, and processing citrus fruits was the city's most important industry. Tustin is in the center of Orange County and adjoins the Cities of Orange to the north, Santa Aha to the west, and Irvine to the south. The city includes approx- imately 11.2 square miles and accounts for about 2 percent of the county's population. It has a temperate climate with a mean average temperature of 63 degrees and average annual rainfall of 13 inches. POPULATION AND INCOME Tustin grew along with all of Orange County during the population boom of the 1960's. From a population of 2,006 in the 1960 census, the city had grown to 21,178 in 1970. According to State Department of Finance estimates, Tustin had a January 1983 popula- tion of 40,200. The 1983 estimate represents an aver- age annual increase of 7.8 percent from the 1980 cen- sus. Growth rates in the 1960's and 1970's averaged 27.2 percent and 4.2 percent per year, respectively. Population for the city is shown in Table 16. . ! TABLE 16 · CITY OF TUSTIN POPULATION 1960 ................................ 2,006 1970 ............................... 21,178 1980 32,073 1981 ................................ 37,264 1982 .............................. , 38,650 1983 ................................ 40,200 Source: U.S. Census and State Department of Finance. i Table 17' shows median h~usehold effective buying ]ncome (EBI) for Orange County, the State of Cali- .fornia,. and the United State~. The county's EBI increased 7.8 percent from 1981 to 1982 and 7.8 per- cent from 1980 to 1981, while the rates of increase for the State of California were 5.4 percent and 8.0 per- cent, respectively. EB.I is reported annually by Sales & Marketing Management magazine in its "Survey of Buying Power." It is defined as personal income less personal taxes, nontax payments (fines, fees, and pen- TABLE 17 MEDIAN HOUSEHOLD EFFECTIVE BUYING INCOME 1980 1981 Orange County ......... $25,925 State of California ....... 21,322 United States ........... 19,146 1982 $27,948 23,018 20,746 $30,126 24,260 22,000 Source: Sales & Marketing Management, Survey of Buyihg Power. TABLE 18 . ~ . ORANGE COUNTY '-- "' '-:".' -.- ANNUAL AVERAGE EMPLOYMENT BY. PLACE OF WORK (THOUSANDS). .i. - ', '--~ ,.. '- 1978 · . .: ....: .. ,...,....,.-~ :;:/::,:::::..:. :.. ...... ,:.. ,!' J,,~ '.i '. '. ,' · 1979 . 1980 , 1981 j' · 1982 .. Construction.'.?.:: .:':. ~':'...':.':'.': '..5:: ....... -.; .... . .... - ..... 46.7 ' 51.4. -': !?- 50.0".::.71:-i.. ';47.8 ~..i"., :..- 38.6' Manufacturing:::,:.~.: :-' -.":,-.:.' ::- '.:-~' . :~ .' - '; ' '. .... ~ .... _._.-...: :' Nondurable '. "~.:':. :".-';:': .' .... ". ...... 49.5 53.6 54.5 -,-~-,- . 56.5::::;-'~:~' -'-':'::'Du'iable.,:'.'.,.:.,~.::..,..:,,:-.:....':....:..;.:..- ..... :148.5 .162.4; '-:-i:'166.1 ;~:'~i!?i 166.1.~;:'~-":;:,159.6 --...Transp0rtatiOn and utilities ..-,:..'.......:,.. :~,..~'. ..... : .:': ......... '~: 23.0-:::::'-'.-- 26.2 - ;:-:::..:-. 27.3 29.9' :--;-/":;. 29.8. ,: Trade::-.'.-:'.":'.:'..':::":',.':..':.".':'i:'...:..'.'..:..;.:...~2..'. .... -. 181.1 ; :-'. 192.0" :.. 201.3::?:~:i!210.3i::':;% 210.0. .. .Finande';insurance an~l real'~State .:".-....'.". ~..'.::'.-'.':.: ..... ' 46.8' 52.7.' i'-- 57.2.'"'-';;-5'::- 61.2.-., r:: - 60.4 "Services:.,:::-:.-..-:.......-.:...:,..:?-:.'-.:::.:.. :...'.-: :" .... ~'....".-..'~ .... .147.7' 162.4' -' 172.1...': :. ' 183.4-':'; :'- 190.2 . Government-.4. :. :-: '...' ............ : · i..- .............i 101.9 - 10t.3 -'- 105.6 - 106.0 · 103.8 '- Total All industries"..".. ~ i'.;: ;'...'.: .:. .... :.. 7.. :.: '.". ~ .-... 755.8 811.3 ' 843.8" ' 871.8 858.1 . - .' .,-. · - . . .: ,'° .. ': . :. Source: State Employment Development Department. i ii allies), personal contributions for social insurance, and compensation paid to military and diplomatic pcrson- nel stationed overseas. EMPLOYMENT Employn'ient in the Anaheim--Santa Ana--Garden Grove Standard Metropolitan Area (SMA), which includes all of Orange County, increased at an aver- age annual rate of 3.2 percent over the five years ending in 1982. The largest employment categories are manufacturing, trade, and services, as shown in Table 18. In 1982 manufacturing accounted for 25 percent of total employment, trade for 24 percent, and services for 22 percent. Table 19 shows unemployment rates for the SMA between 1978 and 1982. The labor force statistics are based on place of residence. County unemployment rates were 4.7. in 1981 and 7.2 percent in 1982. TABLE 19 ORANGE COUNTY EMPLOYMENT AND UNEMPLOYMENT Table 20 lists the largest manufacturing and non- manufacturing employers in the Tustin area as of fall 1982. TRANSPORTATION ¢ Interstate 5 and State Route 55 both pass' through Tustin. Three other freeways are within five miles .of the city. John Wayne Airport (formerly Orange County Air- port) is located five miles from Tustin. Nine scheduled airlines provide daily service. Santa Fe Railroad pro- vides freight service through Tustin on scheduled daily stops. An AMTRAK passenger station is located two miles away, in Santa Ana. Trucking service is available through 73 certified carriers, 65 of which serve Califor- nia and interstate points. Overnight service is available to San Diego, Los Angeles, Phoenix, and the San Francisco Bay Area. 1978 1979 1980 1981 1982 Labor force (000) .............................. 1,022.6 Employment (000) ............................. 953.7 Unemployment (000) ............................ 48.9 Unemployment rate .- ............................. 4.9% Source: State Employment Development Department. o 1,063.4 1,094,2 1,168.8 1,206.5 .1,019.3 1,046.8 1,114.3 1,119.6 44.1 47.3 54.5 86.9 4.1% 4.3% 4.7% 7.2% 23 TABLE 20 TUSTIN AREA MANUFACTURING EMPLOYMENT Company Product or Service Employment Manufacturing Basic Four Corporation ...................... small business computers Steelcase ................................ office furniture Silicon Systems ............................ semiconductors Thiokel/Dynachem ......................... chemicals Fesco ..................... : ............. plastics and rubber Ocean Pacific .............................. clothing Westercorp ............................... computer disk controllers Nonmanufacturing Tustin Unified School District ................. Tustin Community Hospital ...' ................ Fireman's Fund ............................ Shick Moving & Storage ..................... City.of Tustin ......... .................... Mervyn's ... ...... . ....... i ................. Sunwest Bank .............................. Coors Distributing ...' ....................... Source: Tustin Chamber of Commerce. -- education medical services insurance moving company municipal government retail department store banking distributor 1',150 800 245 150 150 145 140 1,065 395 220 170 160 150 130 115 BUILDING ACTIVITY Table 21 shows building activity in Tustin since 1978. Dwelling units authorized over the five-year period ranged from a high of 241 in 1979 to a Iow of 3 in 1982. Total permit valuation ranged from $35 million in'1978 to 5;14 million in 1982. RETAIL TRADE · Total taxable sales in the city increased at an average annual rate of 12.1 percent between.1978 and 1982, as shown in Table 22. During the same period the city added 268 trade outlets. The biggest category of taxable retail sales is eating and drinking establishments followed by service stations and food and liquor stores. The fastest annual growth rates between 1978 and 1982 were in general merchan- dise stores (25 percent), and service stations (15 per- cent). TABLE 21 CITY OF TUSTIN BUILDING PERMITS AND VALUATIONS _ . COMMUNITY FACILITIES Tustin Unified School District provides primary and secondary public education through 12 elementary schools, three junior high schools, and three senior high schools. Tustin is located within the Saddleback Junim: College District. Saddleback Junior College, in Mission Viejo, is a two-year institution offering a full rang~ of courses. The University of California at Irvine, located four miles inland from Newport Beach, and California State University at Fullerton provide advanced edu- cation. Sanitation District No. 7 of Orange County supplies sewer service. It has a pr(mary and. secondary treatment plant, but no facilities for nonrecoverable industrial wastewater. ~'he Southern California Gas Company supplies natural gas, and Southern California Edison provides electric power. 1978 1979 1980 1981 1982 24 Dwelling Units Single .................................. 9 Multiple ................................ 31 Total ................................... 40 Valuation ($000) Residential .......... - .................... $1,783 Commercial ............................. 2,209 'Industrial ............................... 25,616 All other ................................ 5,594 Total ................................... $35,202 Source: Security Pacific National Bank. TABLE 22 CITY OF TUSTIN TRADE. OUTLETS AND TAXABLE SALES 1978 ' :':" '1979 0 8 9 3 241 37 23 0 241 45 32 3 $ 5,942 $ 6,552 $ 2,321 $ 1,684 8,542 3,461 11,212 3,150 9,8i4 7,959 11,056 1,817 6,254 6,780 3,956 7,315 $30,552 $24,752 $28,545 $t 3,966 198o 1981 Trade Outlets · Retail stores ........: .............................. 392 404 All other - .661 - 709' Total All Outlets ' ' · 1,053.. .....1,11 3 Taxabl[, sales ($000) · '- Retail ~tores: :':' :~:'': ':' ": ...... General merchandise ........................ $ 12,059.-' '-' $- 15,011 Food and liquor - - 23,310-:. "- '26,502 Eating and drinking places ................... :!:'..-.::. 25,715':--:::':;': 30,436' Service stations ...............................-: 20,002::.-: :..: 27,874 Othei'retail ................................ "48,108 :.:. 59,381. All other'outlets ' 83,646 . 122,128 o. _ Total Taxable Sales ........................... $212,840' $281,332 Source: . State.Boa.rd of Equalization... 404 787 1,191 $ 18,035: 28,495 31,783 35,035 66,104 122,221 $301,673 404 ; .... : 423 '~ 854 . -... 898 :'"' 1,258. ?-" 'i'. 1,321~i''''' '" :.; .., - :~ ' -.~ . 1., -..~ . :' $ 23,649:-..:' $ 29,273.': 3~ ,074-!'::' .;'i(' 32,667 :':'~'" 37,271 .... 36,111."_"~-'-:.': 36,730. 35,255.'¢.:s~' 73,655 ' ' ."~.:79,160.~..::: 127,821 ... 123,698 :.. _ -$330,200 '---- $336,164 ~ -' ..:':.:.:'.,- ,.". *..-~.. -" . .- · ii Exhibit F 1 2 2 RESOLUTION 92-110 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF TUSTIN ADJUSTING WATER SERVICE RATES 4 The City Council of the City of Tustin finds and determines as follows: 5 7 9 3. 10 A complete analysis of the Tustin Water System's needs and recommended water supply and storage projects and distribution system improvements has been completed; and The complete analysis revealed that major system improvements are required to maintain system reliability; and The analysis determined that substantial additional funding will be required in order to complete the necessary improvements; and 1] 4. 5. 13 The Tustin Water Service has experience~.increased costs of operations; and A complete study of the Tustin Water Service Rate Structure and Financing Plan have been completed; and 14 6. 15 The study has determined that it. has become necessary to adjust water service rates'to maintain operations and to finance the recommended capital improvements; and 16 7. 17 8. 18 19 It will be necessary to increase rates for next three years; and The revised rates as set forth herewithin are reasonable and are necessary to cover the costs of operations of the Tustin Water Service delivery for the next three years. NOW, THEREFORE, the City Council of the City of Tustin does hereby 20 resolve as follows: 21 22 Effective November 1, 1992, November 1, 1993, and November 1, 1994 the bi-monthly water usage rates and charges are hereby established as follows: · 23 24 25 26 27 28 FXXED C~ARGE 1~/~/92 1~/~/93 1~/1/9.4 Meter Size Charge Charge. Charge 5/8" and 3/4" $ 11.00 $ 13.00 $ 16.00 1" 27.50 32'. 50 40.00 1 1/2" · 55.00 65.00 80.00 2" 88.00 104.00 128.00 3" 165.'00 1~5.00 240.00 4" 275.00 · 325.00 400.00 5" or Larger 550.00 650. O0 ~00.00 Multiple Units Charge/unit 8.80 10.40 12.80· 1 '2 4 5 7 8 9 10 12 13 14 15 16 17 ~8 19 20 21 22 23 24 25 26 27 28 CONBUMPTION CHARGE- per one hundred cubic feet (HCF) Volume Block Multi-family* 0-6 hcf 0-5 hcf $ .35 7-40 "" 6-32 "" .85 41-60"" 33-48"" 1.00 Over 60"" Over 48"" 1.10 *Multiple dwelling is per unit charge .35 $ .35 .97 1.12 1.10 1.20 1.20 1.32 FIRE METER CHARGE 4" .$ 35.00. $ 41.00 $ SD.00 5" 44.00 52 . 00 63.00 6" 53 . 00 63 . 00 76.00 8" 71.00 84 . 00 ]/]2.00 10" 88.00 104.00 126.00 12" 106.00 125.00 /51.00 PASSED AND ADOPTED at a regular meeting of the city Council of the City of Tustin, held on the 21st day of September, 1992 Leskie Anne ~ontious, MaYor ATTEST: Mary E. ~nn, Ci.~.~. Clerk City~ of Tustin RESOLUTION CERTIFICATION STATE OF CALIFORNIA ) COUNTY OF ORANGE ) ss CITY OF TUSTIN ) RESOLUTION NO. 92-110 Mary E. Wynn, City Clerk and ex-officio Clerk of the City Council of the city of Tustin, California, does hereby certify that the whole number of the members of the City Council is five; that the above and foregoing resolution Was passed and adopted at a regular meeting of the City Council held on ~he 21st day of September, 1992, by the following vote: COUNCILMEMBER AYES: COUNCILMEMBER NOES: COUNCILMEMBER ABSTAINkD: COUNCILMEMBER ABSENT: Pontious, Potts, Puckett, Saltarelli, Thomas None None None ~~n~' City~lerk Mary E. , Exhibit G CITY OF TUSTIN WATER RATE STUDY AND FINANCING PLAN July 1992 -. BARTLE WELLS ASSOCIATES Independent Public Finance Advisors 1636 Bush Street San Francisco CA 94109 Tel. 415/775-3113 July 30, 1992 City of Tustin 15222 Del Arno Avenue Tusfiri CA 92680 Bartle Wells Associates Independent Public Finance Advisors I636 Bush Street San Francisco 94109 4151775-3113 FAX 415/775-4123 Attn: Ronald A. Nault Finance Director Bartle Wells Associates is pleased to present our water rate study and financ- ing plan prepared for the Tustin Water Service. The report presents our rec- ommendations on adjustments to the city's water rates to cover operating and capital expenses and on financing of the recommended capital improvements. The city's consulting engineer and water and public Works departments have analyzed 'the water system's needs and recommended water, supply and storage projects and distribUtion system improvements. The projects address the struc- tural needs of eo~.' -ting city reservoirs and allow the city to maximize its use of lower-cost Water through well and storage improvements. Project costs, includ- ing an allowance for inflation over a 12-year construction period, total about $20 mllllon for water supply and storage and another $18.5 million for the distribution system. - ~ . Projects scheduled for construction in 1992/93 and 1993/94 cost about $7.5 million. The city w/il need to borrow for these improvements, which will re- quire a bond issue of about $8.5 million, including bond reserve and allOwance for issuance costs. The city should also consider refunding its outstanding water, bonds in conjunction with the new issue,-to reduce interest rates to to- day's levels. Tustin's water rates have been essentially unchanged since 1982. Rates ~ need to be raised both to' maintain operations and to finance the capital im- .provements. This report recommends, rates for the next three years. The rate increases will increase the' average bimonthly water bill for a residential Cus- tomer within the city from the current $35.89 to $42.00 in 1992/93, then $48.08 and $56.18 in the following two years. We recommend that the city implement the rates for the next three years in one council action. We have enjoyed working with the city on this inter~sting 'and challenging assignment. We appreciate the cooperation we have received from city staff, particularly Irma Hemandez and Ron Nault in the Finance'DePai~dnent and Gary Veeh in the Water Department. We .appreciate our Continuing relatiOn-. ship with the city and look forward to working with the city in'implementing the recommendations. ' · very truly yours, ' w J.s socr .s '- ra J Stovall, CI?F.~ LJS:mt CONTENTS Summary and Recommendations ..................... 1 Introduction and Backgrdund ........................ 3 Tustin Water Service ............................. 4. Water Customers ........................................ 4 Water Supply and Use ..................................... 4 Current Water Rates ...................... .- .......- ........ 4 Financial Data .......................................... 5 Recommended Water System' ImproVements · 6 6 Supply and' Storage ' . .................... Distribution System Improvements.. .............. · .7 Capital Improvement Program ......... .. .....' 7 Revenue and Expense Projection ..................... 8 Water Sales and Customers ............................ ' ..... 8 Sources of Funds ..................... ' . 8 Operation and Maintenance Expenses ............ : ............. 10 Debt Service . .- .................. ' .... 10 Capital Expenditures ...................................... 10 Revenue Tests . . ..................... 10 New Water Debt ' · . 11 Revenue Requirements ............ · ........ ' 11 · Water Rate Recommendation. ....................... 13 Meter Charges .......................................... 13 Volume Charges ........................... , ............. 14 Recommended Rates ...................................... 14 Impact on Residential Customers .......................... .... 15 LIST OF TABLES le 2. 3. 4. 5. 6. 7- 8. 9.' 10. 11. 12. 13.' 14. Active SerVice Connections by Customer Class'. ........ 16 ACtive Service connections by Meter Size' '~ '... 16' water Supply and Use (hcf) .............................. 16 Annual Water Sales (hcf) ..... . .......................... 17 Largest Water Users, 1990/91 . . .' .......................... 17 Current Bimonthly Rates and Charges ' ' ..." 18 Water Enterprise Fund Cash Flow, June 30 ~ .. Capital Improvement Program: 12-Year Schedule ' - Revenue & Expense Projection ...................... _.: .,. · Projected..Water Cost ' ' · .... ............... Revenue Tests ................... , ........... ;, ..., .... . Total Capital Project Funding - Recommended Rates -"- . .. Water Charge Revenue ..................... Single-Family Residential Bimonthly Bills . ....... .. 19 20 21 22 23 · 24~ . 25 26' SUMMARY AND RECOMMENDATIONS Tustin Water Service provides water service to about 13,400 customers, about two-thirds of which are within the city limits of Tustin. Most of the customers are single-family residences. Typical residential customers with 5/8" meters use 40 hundred cubic feet (hc0 of water in a two-month billing period. Typical residential customers with 1" meters use about 60 hcf of water in two months. The water system needs substantial improvements in its water storage, sup- ply, and distribution facilities. The recommended projects were selected to address problems of the current system and to increase the city's abil- ity to use lower-cost sources of water. The city's reservoirs need structUral improvement and expansion. EXist- ing reservoirs provide one day of storage; Metropolitan Water District's regulations require its customers to provide storage sufficient for a seven- day interruption in imported water supply.. Increasing storage c.apacity will improve the city's ability to meet water supply and fire sennce needs and reduce overall costs ...... The recommended water supply facilities will enable the city to make greater Use of groundwater, its lowest-cost source of water. The proj- ects' include new wells, groundwater treatment, and participation in MWD's seasonal storage program. The improvements called for by the consulting engineer and the city's water and public works departments total about $30 million in current dollars; inflation at 5 percent per year over a 12-year construction period will increase total costs to almost $40 million. The city will need to borrow about $8.5 million to finance the immediate water improvements and should consider refunding its outstanding water bonds at the same time to reduce interest costs. Additional debt may be needed in 1994/95 and 1996/97 for projects scheduled at that time. · The city acquired the water system in 1980 and established water rates in '1982. The rate structure recommended in this report-is very similar to the- eXisting rate structure, with a fixed bimonthly meter charge based on flow capacity and a volume charge for all water consumption. · The current meter charge is made up of three 6omponents.--service, demand, and debt.' The recommended meter charge is a single charge, and revenues . from the meter charge would be applied along with. revenues from the vol- ume charges~ to all of the water .system's expenses and obligations. Recommended meter charges are designed to generate .about one-third of the necessary annual revenue. This approach will reduce fluctuations in the city's water revenue and is recommended because of the increase in debt service expense. 'Multiple units served by a single meter should be charged a meter charge of'80 percent of the s/s" meter rate per unit, rather than the charge for the size of meter in use because their water use characteris- tics are residential in .character. : Four rate blocks are recommended: a reduced rate for the first 6' hcf of water would be retained as a lifeline rate. Additional rate blocks would be created for usage from 7 to 40 hcf, 41 to 60 hcf, and over 60 hcf. The rate blocks are designed to encourage water conservation. Block rates for. multiple units would be based on 80 percent of the blocks for other customers on a per-unit basis. The rate blocks for multiple units would be 0-5 hcf, 6-32 hcf, 33-48 hcf, and over 48 hcf. A four-unit build- tug would receive 20 hcf (S hcf per unit) at the lifeline rate, then usage above 20 and up to 128 hcf (32 hcf per unit) would be billed at the next block rate, and so forth... . · While the capital needs constitute the largest share.of the increase in ex- penses facing the water system, operating costs are also increasing. MWD projects the cost of imported water to increase from $263 per acre-foot in 1991/92 to $472 in 1993/94. The city needs to increase its rates this year to meet increa.ses in operating costs irrespective of.the capital program. . · Ftate increases for the next three years should be adopted in a single reSolu- tion or ordinance. They can be adjusted in subsequent years if necessary based on changes in the cost of Water or capital improvement plans. The recommended rates will increase the charge for 'a typical residential cus- tomer with a 5/8" water meter fi.om the current rate $35.89 to $42.00 this year and $56.18 by 1994/95, The charge for-a typical customer with a 1" meter would go fi.om the current rate of $60.92 to $78.50 this year and $104.18 by 1994/95. . · __ INTRODUCTION AND BACKGROUND Tustin'Water Service ('IWVS) provides water to most of th'e city as well as area outside of the city limits. The City of Tustin acquired the former Tustin Water Works system in 1980. Prior to that time,' the city had not operated a water system. In 1982 the city adopted a water rate strUcture recommended in a study by James M. Montgomery Engineers., The rates and the rate structm-e adopted in 1982 have been basically unchanged since 1982. In 1990 Daniel Boyle Engineering prepared a Water System Storage Evaluation Study for the dty. This study recommended improvements to existing storage facilities to provide structural integrity and storage increases to meet minimum reliability standards. The 'city's distributio.n., system also needs improvements. Barde Wells Associates, independent public finance advisors, was retained to review the city's Current water rate structure and recommend Water rates and methods of financing the recommended storage and distribution improvements. This report presents Battle Wells Associates' conclusionS and recommendations. '-'..'. ' ... : .......................... . ........ 3 TUSTIN WATER SERVICE ' Water Customers '- TWS serves 13,400 connections, of which about' 9,000 are within the city and the remaining 4,400 are outside. Tables 1 and 2 summarize the water cus- tomers. Table 1 shows customers by customer class. About 85 percent of the total customers are single-family residential units; 98 percent of the connec- tions outside the city are single-family units. Table 2 breaks down the water customers by meter size. About 93 percent of 'the water connections have s/s" or 1" meters. These meter sizes serve single- family or small multiple dwellings or small commercial buildings. The number of water customers has been basically stable since the city acquired TWS. No significant growth 'within the TWS service area is anticipated. · Water Supply and Use .... , , . -. TWS has two. sources of water-imported water and groundwater. About 30 percent of the dty's, water is impOrted water supplied tsy Metropolitan Water District through East Orange County Water District. The balance of'the water supply comes from city wells. Table 3 shows the city's water supply and use for the first two years of city operation of the water system and for 1989/90 and 1990/91. The figures in the table are in hundred cubic feet (hcf), which is 'IWVS's basic billing unit. Water supply and use have remained fairly constant since the city assumed operation of the water system. . Table 4 shows annual water sales by' customer class for the past two years. Single-family residences account for about 55 percent of total sales. The table also shows the decrease in water sales in 1990/91 caused 'by adoption of man- datory conservation effective April 1991. The city has since ch.anged its policy from mandatory to voluntary conservation. Bartle Wells Associates conducted an analysis of water bills for single-family' customers. Based' on this analysis, average bimonthly water' use for a residen- tial customer with a s/s" water meter was 40.82 hcf, .or 509 gallons per day prior to mandatory Conservation. The average bimonthly water use for resi- dential customers with 1" meters was 61.96 hcf.or 772 gallons per day. Tustin Unified School District is the city's largest water customer, with about 2 percent.of total usage. The city's largest CUStomers in terms of total annual water use are shown in Table 5. These customers may have multiple service' addresses. The'city's top. 100 users account for about one-quarter of total water use. . - Current Water Rates · Table 6 summarizes the city's current water rate structure. The rates consist of a bimonthly-fixed service charge and a volume charge for each hcf of water delivered. ' '- The service charge, or meter charge, is. a readiness-to-serve charge and is re- lated to the meter size as a relative measure of the potential demand a cu~- 4' tomer may place on the water system's facilities. The city's service charge has three components: service or meter reading, demand; and debt. The meter reading portion is the same for all meter sizes. The remaining com- ponents of the service charge are based on the flow capacity of each size meter. Financial Data The water enterprise fund is comprised of three f'unds--operating, capital, and debt service. Table 7 shows the water enterprise cash flow for fiscal years 1988/89 through 1990/91. The cash flow includes costs related to capital and debt service payments. Cash and cash equivalents amounted to $6.0 m~llion at June 30, 1991, and are projected to t'otal $4.6 million as of June 30, 1992. RECOMMENDED WATER SYSTEM IMPROVEMENTS The recommended water system improvements include additional water supply projects, rehabilitation and increase in .storage reservoirs, and replacement and improvement of distribution facilities. The recommended improvements are based on analysis by outside engineers and by the city's public works and water departments The City's water storage facilities were constructed priim~y by the privately owned Tustin Water Works in the 1960s...The storage facilities have numerous shortcomings and have.structural elements which are unsound by today's standards. In addition, the volume of water storage in the existing system is below the level generally accepted as a minimum to provide reliable service. Of the system's nine active wells, the oldest was drilled in 1930 and the latest in 1984. The evaluation of the existing reservoir condition and the analysis of the mini- mum recommended reservoir storage volume .requires that the city invest a substantial amount in capital reconstruction, or replacement of their reservoirs. Additionally, older wells are approaching the end of their useful life and should be replaced. Supply and Storage In October 1990, Daniel Boyle Engineering prepared a Water System Storage Evaluation Study which identified numerous shortcomings in the city's water storage system. The shortcomings are categorized into two major groups: (1) structural deficiencies of facilities and (2) inadequate volume of storage. The report recommended increased storage facilities and improvements to ex- isting reservoirs. The Daniel Boyle study recommends that the city drill two new wells, with emergency power to provide an additional'4.3 mg of emer- gency storage. Based on the shortcomings described in the report, city staff has prioritized im- provement pr. ojects in such a manner as to provide the highest level of service while correcting all of the system .deficiencies in the most expeditious manner. Required'reservoir improvements consist of the following: · Main Street Reservoir:. Design and. construct a 2.2-mg Main Street reservoir. Rawllngs Reservoir: Construct new retaining walls, install access stair- way, and conduct structural analysis.of roof and support system, and re- pair roof or expand reservoir. · Foothill Reservoir:. Remove topsoil and cOnduct structural analysis and site evaluation. Design and construct replacement reiervoir. [] Simon Reservoir:. Remove topsoil and conduct' structural analysis. Design and replace roof. Other improvements include the purchase of a generator and construction of Zone II booster pumps. Distribution System Improvements Because of the age of the system, the city needs to repair or replace old water mains, hydrants, and services. The city. has an ongoing capital improvement program which includes replacement or installatiOn of water mains, other im- provements,, and related landscaping. · , Capital Improvement Program Table 8 lists the recommended caPital expenditures for supply, storage, and distribution system. Construction of the projects l~as been spread over a 12 year period to minimize the impact on system'usersl The capital expenditures also include an estimate of inflation at S percent per year. Total annual costs average about $~ million per year through 1998/99,. then decline until the expansion of the Rawlings Resef'voir in the last two years shown. '. · · The supply and_storage pi'oj.eCts shown in Table 8 have a ~otal cost of $14.6 million in current dollars; this cost rises to $19.7 million with inflation. Costs of the distribution system projects are estimated at $14'.9 million in current dollars, increasing to .$18.5 million with inflation. . Table 8 does not include the costs of new wells. These wells are expected to be funded with low-cost loans under Orange County Water District's (OCWD) ' conjunctive use program, discussed in a later section of this report. REVENUE AND EXPENSE PROJECTION The financing plan is based on a 12-y6ar revenue and expense projection shown in Table 9. The projection includes all of the expenses and obligations of the water system--operation and maintenance expenses, water supply ex- pense, existing and new debt service, and the capital improvements shown in Table 8. The projection is designed to estimate the amount of water revenues and borrowing needed to meet all of these obligations. The following section of this report develops 'water rates to generate the necessary revenue. This ' section discusses the bases of the projections. Water Sales and Customers Water sales and customers are assumed to remain basically stable over time. ' Water sales in 1992/93 increase 4 percent from 1991/92, reflecting the change in po]icy from mandatory to voluntary conservation. The projection shows water use leveling off at 5,000,000 hcf, about 92 percent of pre-drought water use in 1994/95~ Expe.rience indicates that it takes several years after the re- moral of water use restrictions for consumption to return to pre-drough, t levels. Sources Of Funds The sources of funds available to the water department include 'its fund bal- ance, revenues from water sales and interest, contributions from other agen- cies, and funds generated from the issuance of debt. July 1, 1992 fund balance ($4,630,000) was' estimated by the finance de- partment based on the cirfs 1992/93 budget. It represents the total' bal- ances in the water operations, debt service, and capital projects funds. Water sales is total water revenue from meter and volume charges neces- sary to meet' water system's expenses and obligations and meet the criteria discussed under REVEN~ TESTS.. [] Interest is calculated at 5 pei'cent on the average of the beginning and ending balance. Capital are sources of funds (other than water revenues) for capital expen- ditures. They include repayments from Caltrans in 1992/93, redevelop-. ment funds applied to water projects, loans from Orange County Water. DiStrict, and net proceeds of city debt for water projects, discussed below. Redevelopment Agency Funds: Redevelopment agency funds have been com- mitted for 50 percent of the Project costs for enlargement of the Main Street Reservoir and for the Main Street well and .an additional well, which are in the Town Center Redevelopment Area. The well pr0jec~s can also be financed' through OCWD's 'loan program at 3.5 p.ercent. It will lower overall costs of the capital improvements if the 'redevelopment agency funds hre reallocated to -other projects in the redevelopment project area and the wells are financed with OCWD loan funds, allowing the city the use of two low-cost .sources of money to displace more expensive city borrowing. OC'WD Loans: OCWD provides loans to water retailers for desalting projects and conjunctive use wells. . · OCWD Desalter Projects: OCWD will cooperate with water retailers such as Tustin in developin~ and financing-desalter projects. The district and the city have cooperated in the construction of a desalter on one of Tustin's wells (the Main Street desalter), and OCWD has proposed an agreement for development of a second project (the 17th Street desalter). The basic terms of the project agreements are as follows: · Main Street Desalter: This project has been completed and is now in the testing and' demonstration period. Tustin's payments to date have been minimal. The contract requires a lump-sm payment in 1992/93 of $615,000. The balance of the cost of the project (about $.750,000), with interest at 8 percent, is repaid over time through payment for water at MWD's treated noninterrupfible rate. Tustin can pay off the · principal balance at any .time. . _ . · 17th Street Desalter: The proposed additional- desalter project' would install a treatment plant on three existing city wells which do not meet · current drinking water standards. Under the contract with OCWD, OCWD would design and construct the project (with Tustin's approval) at an estimated cost of $5.5 million. Tustin would then enter into a lease to acquire the project; the lease calls for payments over 11 years with interest at 7 percent. ' The 0CWD agreements also provide that the cost of water from the de- salter projects, will not exceed the cost of imported water from MWD dur- ing the lease period, and that water produced by. the desalters w/il not be charged against the city's groundwater allocation. The city is proceeding with the I7th Street desalter project with OCWD. This project will add to the overall water supply at a Cost which will not exceed the cost of ira.- ported water. The wells will produce a reliable water supply under the city's control. The interest rates on the desalter leases are higher than current interest rates in the municipal bond market. However, the city can pay off the prin- cipal mount of the leases at any time without penalty. If the city does any other water financing (discussed below); one or both of these leases could' be ~:efinanced at the same time if it is to the city's advantage to do so. OC3t~' ConjunCtive U~;e Well ConstrUction Program: OCWD also has a 'prOgram to provide loW-interest loans to 'finance-well Construdti0n.or rehabilitation to promote greater conjunctii/e use' Of in/ported and.local water supplies. The program works in combination with MWD's Seasonal Storage Service Program which reduces imported '~va'ter rotes to enc°umge ' lng gr p ap, abiliti ....... ' increas oundwater roduction'c es.:. :-~-:- -:-:- :;- ...... - ' ,. .-: ~'.: ... .... :., ..-:_,"..,_... :. '-- '....: . . ~ ,:, .. .-'.-_.' ;.~ . :,- ....... · .~ l ;,? .~'- 2~;. - 2 .... · .... ' ........... ~ ........... "' .... ' -'., ' ' "'5 -' '" ' .._ ~.Under. i OCWD's'-aSsisted'prbgram; '.OCWD will {rikke loans. t° w~ter ducers for well construction or rehabilitation, for a term of up· to 20 years with interest'at 3.5 percent. Prospective participants must-meet k&rtain criteria.'-; OCWD's fun.ding limits are $750,000 per Well and three wells' per · . . Tustin should take whatever actions are necessary to participate in this program. This program will help Tustin to develop additional local water sources at a lower cost to its water customers than the city's other financ- ing options. The city has applied to OCWD for funding of its well proj- ects, and the estimated debt service is included in Table 10. Operation and Maintenance Expenses O&M expenses, except water supply, are increased at 5 percent per year from 1992/93 budget figures. This item includes transfers to other funds. Water supply is calculated in Table 10 on projected cost of water by source, Provided by the water department.' Table 10 projects Water cost per acre-foot through 1996/97 for groundwater, treated groundwater, and imported water. The table also shows the cost components for ground~vater. According to the projections in Table 10, total water cost will increase by 40 percent in the next two years. An increase in the volume rates of $0.18 per hcf would be required to meet this cost alone. Water supply makes up close to 50 percent of total O&M expenses. 'Water-supply expenses for 1992/93 and 1993/94 have been adjusted in Table 9 to reflect water purchases of less than 5 million hcf in each of those years. Debt Service · . Debt service expenses include debt service on outstanding Tustin Water Corpo- ration bonds, new city debt and OCWD repayment. [] 1983 Bonds: The city issued bonds in 1983 through the Tustin Water Corporation, a nonprofit corporation 'created to finance water projects. The final maturity, of the bonds is October 1, 2003; annual payments range from $514,000 to $549,000. The outstanding bonds bear interest at rates substantially higher than todafs rates; the city should consider refinancing these bonds in conjunction with the issuance of new water debt: · New Debt:. New debt is estimated at 7 percent' interest and a term of 20 years._ The actual interest rote in today's market-would be about 6.5 per- cent. New debt issues include provision for a bond reserve fi.md of 10 percent of the issue size and a 2 percent allowance for issuance costs. The specific issue recommended for 1992 is discussed in a subsequent section. ' · [] OCWD.Debi~, oCWD debt s~rvice'is baSed on the tenn~ of oc~ loans · and le_ases diicussed previously.'._. · .. · - . . "Capital expenditUres are 'annual p~c~j~.~ c.%sts from'Table 8; inila~ng the infla- tion allowance. The projection assumes that the city pays off the Main Street des_alt.er: lease in_.1992/93 in conjunction with the issuance';bf-dty waiir debt. · ~:..-The water revenues indicated in Table 9 ar~-designed to'"in'eet thr~'"te~ts to provide the water fund with sound financial operations. The~e'te'stS-'are calcu- lated in Table 11' ' · 10 · Minimum Balance Test: The city's adopted policy calls for maintaining a balance in the water fund of not less than 5 percent of annual operating expenses plus 10 percent of plant value. Plant value was estimated at $30 million when the city acquired the system; $30' million is assumed to be current plant value. The current balance should be built up over time with annual contributions of at least $100,000. · Annual'Revenue Test: Revenue from Water sales and interest must cover all expenses except capital. This test ensures that the water department generates sufficient revenue in each year from ongoing sources to pay O&M and debt service expenses. Debt Service Coverage Test: This test measures the ability of the water fund tO support debt. In this calculation, O&M expenses are deducted from water revenues and interest to arrive at the definition of "net reve- nues'' generally used for municipal bonds. The remainder is divided by debt service (excluding OCWD loans) to produce a "coverage ratio." The city will probably be required to set rates which maintain a specified min- imum coverage ratio as security for future water debt. These three tests together ensure that the water system has a balanced budget and maintains its financial integrity. New Water Debt Table 9 indicates 'that, to fund the full capital improvement program, the city will need to borrow water debt this 'year (1992/93) and again in 1994/95 and 1996/97. Each bond issue is designed to fund approximately two years' capi- tal improvements. , The amounts shown in Table 9 are the net amounts available for construction. The par amounts of the bond issues would be greater by the amounts neces- sary 'to pay issuance, expenses and fund a debt service reserve fund. The 1992/93 bond issue would be about $8.5 million, to yield $7.5 million for construction.. As discussed earlier, the city should also consider refunding the outstanding 1983 water bonds in conjunction with the 1992/93 issue, as todafs interest rates are substantially le~ss than. the rates on the 1983 bonds. This would require a total issue of about $12.S million. Refunding the 1983 bonds at June 1992 interest rates would reduce annual debt service by about $35,000 per year. The amounts shown for future debt issues are estimates, based on todafs esti- mates of project costs, inflation, and other revenues and expenses. The actual timing and amounts of future debt issues cannot be precisely established at this Revenue Requirements Table 10 projects that the city will need water revenu&s of $5.7 m{ll{on in 1992/93 and that the revenue requirement will increase annually through 1998/99. Water revenues in 1991/92 are.expected to total about $4.7 re{Il{on. The city's 1992/93 water budget, including the distribution CIP expenditures but excluding all other 6apital expenditures, projects expenditures of $9 mil- . 11 lion and applies the available fund balance to capital projects. The projected closing fund balance meets the test of 5 percent of annual operating expenses but, without implementation of the recommended rate increases and borrow- ing, would be below the city's minimum balance policy. Alternative construction schedules were evaluated during ~ preparation of the financing plan. The 12-year schedule allows the city to make reasonable pro- gq'ess with the construction projects while controlling the impact on water rates. 12 WATER RATE RECOMMENDATION The revenue and expense projection shows that the city will need annual in- creases in water revenues, both ~o pay annual expenses and to accomplish its capital projects. This section proposes water rates for 1992/9:3 through 1994/95, to allow' the city to meet its 'projected expenses and obligations and proceed with the necessary capital projects. The recommendations are designed as much as possible to provide equity be- tween customers, to be consistent with the city's prior practice, and to serve the best interests of the community and the water enterprise. The previous section discussed tests used in determining the necessary amount of revenue. The tests were designed, to ensure that the water enterprise budget is balanced, that appropriate reserves are main/ained, and that ongoing annual revenues cover ongoing annual expenses. The rates recomrhended in this section are designed to consistently and reliablY meet these tests. The recommended rates include a fixed meter charge and ascending block rates for water consumption. The rates are designed to limit fluctuations in water revenue by reducing the portion of the revenue that is related to water con- sumption. The construction program, and the OCWD loans w/ll sharply in- crease the city's debt service obligations. These are fixed expenses and should be covered by fixed charges. The rates are also designed to encourage conservation through the. use of ascending block rates--that is, as a customer's water use increases, the charge for additional water also increases. While the mandatory conservation pro- gram has been lifted, water is increasingly recognized as a limited and valuable resource in California and its wise use should be encouraged. Meter Charges The meter charge was designed to raise about one-third of th~ needed annual revenue. The program cans for the city to take on significant fixed expenses for debt service, in addition to other increases in costs, and the increase in the meter charge is designed to reduce the volatility of w/~ter revenues. The current meter charge consists of several elements reflecting different costs. · In the proposed rate structure, these elements have been consolidated into one charge. This approach provides a rate structure that will be simpler to admin- ister and adjust than the current rates. Revenues generated from the meter 'charge will be applied along with revenues from volume charges to all ex-- penses incurred by the .enterprise. .-i. . :' :. ' ..... The meter, charge is a readiness-to-serve charge and reflects the' demands that'- the customer can impose on the water system at any time. A significant per- centage of the costs of any water system is related to its.. ability to deliver water to any customer instantaneously at any time-and Up to the floTM caP~c- ity of that customer's meter. - .. _ Meter charges for different sizes of meters should be based on the relative flow capacity of.different-sized meters. The city's existing rates' are. based 'on such 'demand-rauos, and they should be retained,' The 'fees'on' fc~r'this ap~i--0ach is that the meter capacity measures the demand that each customer can place, on 13 the water system at any time. For example, a 1" meter has a flow capacity of 2.S times that of a s/8" meter. The potential demand on the system is 2.S times that of the s/8" meter and the meter charge should be 2.S times the s/8" meter .charge. Following are the demand ratios of meters to the s/8" meter: 518" meter .......................... : .......... 1.0 1" meter ...................................... 2.5 11/~'' meter .................................... 5.0 2" meter ............................... ....... 8.0 3" meter ....................... .. ............. 15.0 4" meter ..................................... 2S.0 6" meter ..................................... $0.0 Thg recommended meter charge for multiple dwellings is 80 percent of the sis" meter charge per unit. Thus, a five-unit building with a 1" meter would pay 4 times the s/s" meter charge, rather than the 1" meter charge. The current c.harge for multiple units is 80 percent of the meter charge excluding the ser- ,ace portion. The rate for multiple units should be tied to the regidential rate rather than meter size, because analysis of Water demands has shown that multiple units exhibit the same usage patterns as single-family units. All residential units tend to exhibit morning and evening peak periods of water use, which impose definite costs On water system design and operation. Commercial customers, on the other hand, generally do not significantly contribute to maximum or peak demand. Commercial peak demands occur at different times from resi- dential peaks. The multiple rate is based on 80 percent of the residential rate rather than the f'tfll rate, for two reasons: (1) the typical multiple unit is smaller and has fewer occupants than the typical single-family home; and (2) the costs of serv- ing a multiple dwelling served by one meter are slightly lower because the water department reads one meter and sends one bill. Volume Charges Four block rates are included, as shown below. The initial rate applies to minimum "lifeline" usage. The blocks at 40 and 60 hcf are based on average residential usage for s/8" and 1" meters, respectively. Volume charges for multiple units would be pro-rated at 80 percent of the blocks for other customers for each dwelling unit. ~ --~ . .. Per .. All Other -:-'- ~-- Multiple Unit.' Meters '.. Block 1 .... :"'":"''. 0-5 · Block 2- - 6-32 Block 3 · . ' 33.-48 Block 4 ' ' ' ' over 48 hcf., -. 0'6 hcf hcf' 7-40 hcf hcf'... 41-60 hcf · . hcf over 60 hcf .. · . , 14 Sample allocations to multiple units are as follows: Number of Multiple Units per Meter 4 10 25 5O Block 1 ............................ '20 50 125 Block 2 ........ · .................... 108 270 675 Block 3 ....... · ..................... 64 160 400 Block 4 ............................ 192-' 480 . 1,200 25O 1,350 800 2,400 I i i Recommended Rates Table 12 summarizes the recommended rates for the next three.years. The recommended 5/8" meter charge would increase from the current bi- monthly charge of $9.77 to $11.00 in 1992/93; recommended meter rates for the following two years are $13.00 and $16.00. The lifeline rate is increased from the current rate of $0.33 per h~f to $0.35 per hcf, to minimize the rate increase on extremely low-volume customers. The rates shown in Table 12 are designed to generate slightly more than the projected revenue needed, especially in. 1992/93. The highe, r quantity rates may lead customers to reduce their water use below projecuons. These rates 'should still produce the necessary revenue with some reduction in water sales: Table 13 shows the estimated annual revenue produced from the rates shOwn in Table 12. Impact' on Residential Customers Table 14 demonstrates the impact of the proposed rate schedule on the aver- age residential customer with a. s/8" and 1" meter. A typical residential cus- tomer with a s/8" meter using 40 hcf of water in a bimonthly period would have a total water bill in 1992/93 of $42.00, an increase of 17 percent from the current bill of $35.89. A customer with a 1" meter using 60 hcf of water would have a bimonthly bill of $78.50, a 29 percent increase from the current bill of $60.92. The additional increase in 1993/94 and 1994/95 will bring the average s/8" meter bill to $48.08 and $56.18 and the 1" meter bill to $89.50 and $104.18, respectively. 15 TABLE 1 · City of Tustin Water Service AclJve Service Connections by Customer Class User Connections Inside Outside Total Single-family . ................. i ........... 7,123 Multiple-family ............................. 847 Commercial ................................. 749 Industrial · : ............................... 51 Public agencies ............................. 77 Landscap~ ng ................................ 165 Nursery & farms .............. - .... · ........... 3 Subtotal ................................... 9,015 F i re 140 Total'" ..................................... 9,155 4,294 11,417 30 877 29 779 -- 51 13 90 17 182 2 5 ~1,385 13,400 5 145 4,390~ 13,545 TABLE 2 m ~Jty of Tustin Water Service Active Service Connections by Meter Size* Meter Size Connections Inside Outside Total 5/8" 1" ....................................... '7,304 · 835 ..... ........ . ......................... 3O4 2" ......................................... 504 3" 4" 6" 17 *Not including 145 fire connqctions. 2,203 9,507 2,110 2,945 32 336 35 539 2 37 2 18 1 18 4,385 13,400 TABLE 3 · ~ty of Tusfin Water Service' Water Supply and Use (hc0 1980/81 1981/82 : 1989/90 1990/91 Water Supply. Purchased ............ ~.. 3,391,788 Pumped .................. 2,379,857 Total supply · · 5,78g,645 Water use 5,085,453 3,078,445 2,458,001 5,536, 446 4,991,147 : 3,470,836 2,525,203 : 2,378,249 2.977.013 :" 5,849,085' 5,502,216 , . : 5,425,489 5,066,520 : 16 TABLE 4 · City of Tustin Water Service Annual Water Sales OacO User 1989/90 Percent Of Total Percent 1991 1990/91' Decrease Sales Single-family ............. 2,987,612 Multiple-family ............ 1,241,878 Commercial ................ 566,446 Industrial ................ 210,940 Public agencies ............ 240,770 Landscaping ' .. 154,709 Nursery & farms ............ 23,134_ Total s .................... 5,425,489 2,782,959 - 6.9% 55% 1,189,976 - 4.2 23 562,706 - 0.7 11 182,515 -13.5 4 191,869 -20.3 4 143,191 - 7.4 3 13,304 -42.5 -- 5,066,520 - 6.6% *Mandatory ra{ioning effective April 22, 1991. required overall 15% reduc- tion in usage. ! TABLE S · City of Tustin Water Service Largest Water Users, 1990/91 Consumpti on CuStomer (hcf) Tustin. Unified School District .............................. · 98,545 Steelcase, Inc .... J ..................... ' ................... '. 87,988 41,963 City of Tustin ............................................. Thoner & Birmingham Realty .................................. 32,670 J. F. Shea ........................................ -' ........ 29,186 Park Place Apartments ........................ · ...............27,413 Roy E. Daly & Co ........................................... .. 24,699 Satellite Management Co ....................... ° ..............24,512 Schroeder Management ........................................ 23,984 Pacific Bell ~ ......... ~ .................................... 22,879 Arnell Development Co ....................................... 20,015 . . Source: Top 100 user report dated 10/11/91. 17 mi TABLE 6 · City of Tustin Water Service Current Bimonthly Rates and Charges Meter Size Bimonthly Fixed Service Charge Service Demand' Debt Total 5/8" ............................ $2.54 2.54 2" .............................. 2.54 3" .............................. 2.54 4" .............................. 2.54 6" .......................... .... 2.54 $ 2.48 $ 4.75 $ 9.77 6.18 11.88 20.60 12.36 23.75 38.65 19.76 38.00 60.30 37.04 71.25 110.83 61.67 118.75. 182.96 123.50 237.50 363.54 Multiple residential ............. ' $2.54 per meter plus $5.80~ per unit Fi re meters: 4" 5" .............................. $31.36 6" .................... ' .......... 39.20 .............................. 47.04 Bm' .............................. 62.72 10" ............................. 78.40 12" ............................. 94.08 Bimonthly volume charge (per h~cf)-2 First 6 hcf ................... $0.33 Over 6 hcf ..................... 0.71 · . I - $2.00 demand plus $3.80 debt. 2 - One hcf equals 100 cubic feet. Source: City records. 18 TABLE 7 · City of Tustin Water Se,vice Water Enterprise Fund Cash Flow, June 30 1'989 1990 1991 Operating revenue ............ . ..... $5,200,100 Operating expenses ................ 3,700,800 Income from operations · 1,499,300 Adjustments: Depreciation ....... '. ........... Other adjustments ............... Total adjustments .................. ' · Operating transfers out ........... 385,800 93,400' 479,200' (262,50~)) Debt and interest expense ......... '(1,214,300 Capital improvements .............. (1,112,300 Developer contributions ............ 499,700 Total capital-related · (1,826,900 Interest 'income ................... 419,000 Net increase-in cash .............. 308,100 Cash & equivalents, July 1 ........ 5,254,000 Cash & equivalents,.June 30 ....... $5,562,100 $5,477,100 $5,076,900 , 3,821,100 4,278,800 1,656,000 798,100 322,7O0 {314,4D0) B,300 (375,000) ) . (569,400} (908,900) 418,400 )(1,059,900) 448,400 677,9O0 5,562,100 $6,24O,OOO 350,100 168,00Q 518,200 (389,000) I859,8oo841,50D/ 184,400 (1,516,900) 406,000 (183,600) 6,240,000 $6,056,400 /, · 2O §§ {§ §§ i§ 21 TABLE 10 · City of Tustin Water Service Projected Water Cost % HCF hv Groundwater 0.52 2,600,000 Treated groundwater 0. lB 900,000 Imlx)rted water 0.30 1,500,000 Total 1.00 5,000,000 6,000 2,100 3,400 11,500 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 cost PER A(~E HIIF Groundwater fl~ergy 64.00 68.00 '71.00 75.00 79.00 83.00 Replenistm~nt assmt. 51.00 60.00 63.00 66.00 69.00 72.00 ORM (1) 10.00 11.00 11.00 12.00 12.00 13.00 Groundwater 125.00 139.00 145.00 153.00 160.00 168.00 276.00 290.00 304.00 319.00 335.00 329.00 472.00 502.00 586.00 580.00 Treated groundwater (1) 263.00 Imtx~rted water (2) 263.00 Groun~ater 750,000 Treated grotmdwater 552,000. Imported water 894,000 834,000 870,000 918,000 960,000 1,008,000 580,000 609,000 638,000 670,000 704,000 1,119,000 1,605,000 1,707,000 1,992,000 1,972,000 Total 2,196,000 2,533,000 3,084,000 3,263,000 3,622,000 3,684,000 Capital portion o~ 1990 OCWD-Tustindesalter 2100AF~57/AF CCWDfuturedesalter Total purdmsed water 2,413,000 120,000 120,000 120,000 120,000 736,800 736,800 736,800 ,- 736,800 · 2,z v, o , ,20o 2,%s,mo ·. 1 - Escalated at 5% 2 - MWD projections. MWD + MWDOC ($2) + EDCWD ($5). Note: Ca-rent water productim capabilities are: groundwater 51%-53% of supply; treated grcmrmXmter 1896 of supply; imported water 29%-31% of supply. · . · . · · · · .. . . : 22 ! ! ! ~ I I i · 23 II TABLE 12 m City of Tustin Water Service Recommended Rates Meter Size Bimont,hly Charge 1992/93 1993/94 1994/95 5/8" x 3/4" 1" ................................ $ 11.00 $ 13.00 $ 16.00 55 O0 2" ........................................ 88.00 3" · 165.00 · 41' ....................................... 275.00 ........................................ 550.00 32.50 40.00 65,00 80.00 104.00 128.00 195.00 240.00 325.00 400.00 650.00 800.00 Multiple dwelling units ................... 80~ of the 5/8" meter charge per unit Volume Block Per Rates per hcf Multiple Unit 1992/93 1993/94 1994/95 Block 1: 0-6 hcf................ 0 _5 Block 2: 7-40 hcf .............. 6-32 Block 3: 41-60 hcf ........ ] .... 33-48 Block 4: Over 60 hcf ........... Over 48 $0.35 $0.35 $0.35 0.85 0.97 1.12 1.00 1.10 1.20 1.10 1.20 1.32 Fi re Meters Bimonthly Charge 1992/93 1993/94 1994/95 ll ....................................... $ 35.00 $ 4t.00 $ 50.00 '! . · 44.00 52.00 63.00 6" 53 O0 63 O0 76 O0 Oml ....................................... 71.00 84.00 102.00 12" ...................................... 88'.00 104.00 126.00 ...................................... 106.00 125.00 151.00 ,o 24 ~' ~. - ....~ ;. · .. TABLE 13 · City of Tustin Water Service Water CSmrge Revenue No. of Meter Size Connections 1992/93 5/8 9,443 $623,200 1 2,511 414,300 1-1/2 231 76,200 2 283 149,400 3 29 28,700 4. 10 16,500 6 5 16,500 12,512 $1,324,800 Multiple: Meters Units Subtotal .. Fire Meters 888 10,872 574,000 Total $1,898,800 4 35 $7,400 5 1 300 6 72 22,900 8 34 14,500 10 2 1,100 12 1 600 Total Meters Volume BloCks Annual Revenue 1993/94 1994/95 Block 1 Block 2 Block 3 Block 4 Total Volume Charges Total Revenue $736,600 489,600 90,100. 176,600 33,900 19,500 19,500 $1,565,800 678,400 $2,244,200 $906,500 602~600 110,900 217,300 41,800 2 ,ooo 24,000 $1,927,100 ,835,000 $2,762,100 145 13,545 $46,800 $8,600 30O 27,200 17,100 1,200 8OO $55,200 $10,500 400 32,800 20,800 1,500 900 $66,900 272,000 2,118,200 1,127,000 554,400 4,071,600 -- $6,017,200 272,000 2,417,200 1,239,700 604,800 4,533,700 $6,833,100 272,000 2,791,000 1,352,400 665,300 5, o8o, 700 25 TABLE 14 · City of Tustin Water Service Single-Family Residential Bimonthly Bgk Ff1992/93 FY 1993/94 Block Block Volume Rates Bimonthly Rates ' Binonth]y Blocks $/hcf Tot a] S/her Tot al 0 6 0.35 $2.10 0.35 $2.10 7 40 0.85 28.90 0.97 32.98 41 60 1.00 1.10' Over ~ 1.10 1.~ Bimonthly service charge Bimonthly bill ~ 40 hcf Percent increase 5/8" FY 1994/95 Block Rates S/her BiiDonthly Total 0.35 1.12 1.2 1.32 $2.10 38.08 11.00 13.00 16.00 .,, $42.00 $48.08 $56.18 17% 14% 17% Volme Blocks FY1992/93 Block Rates Bimonthly Total 0 6' 0.35 7 40 0.85 41 60 1.00 Over 60 1.10 Bimonthly service charge Bimonthly bil]~ 60 hcf Percent increase - $2.10 28.90 20.00 27.50 $78.50 29% FY 1993/94 Block Rates · $/hcf Bimonthly Total 0.35 0.97 ] .lO 1.20 $2.10 32.98 22.00 32.50 $89.58 14% FY 1994/95 Block Rates Bimonthly $/hcf Total 0.35 $2.10 ] .12 38.08 1.20 24.0O 1.32 $104.18 16% . 26 Exhi bi t H i CiTY OF TUSTIN 300 CENTENNIAL WY TUSTIN, CA 92680 THE CITY OF TUSTIN WATER SYSTEM. FINANCIAL REVIEW AND RATE STUDY OCTOBER 1982 JAMES M. MONTGOMERY, CONSULTING ENGINEERS. INC. T.T~T OF TABLES Table No. Z-1 Z-Z Z-3 Z-~ Z-5 3-1 3-Z 3-3' 3'~: 3-5 3-6 5-1 5-Z Figure No.' 1 Z ., Seasonal Water Production for Fiscal 1980-81 and 1981-8Z Seasonal Water Consumption for Fiscal 1980-81 and 1981-8Z · Total Active Service Connections by Customer Classification and Meter Size Analysis of Residential Service Connections Analysis of Consumption by Meter Size and Customer Classification Fiscal 1981-8l Expenditure Summary' by Cost Function ' Summary of Tustin Water Rates Five Year Capital Improvement Program Projected A~ual Debt Service Alternative Annual Debt Service Alternative Annual Debt Service Five .Year Operation and M21~tenance Cost Projections Five Year Summary of Water System Expenditures Two Year Average Annual Expenditure. Summary Developing Capacity Units for Demand Charges !-~gT OF FIGURES Historic and Projec, ted Price Indices Historic and. Projected Engineering News Record Construction Cost Index for Los Angeles and Z0 Cities Average page No. Z-Z Z-5 Z-6 Z-6 Z-8 Z-9 3-3 3-5 3-6 3-7 '3-9 3-10 5-3 5-5 Fono~ Page No. 3-Z 3-Z THE crrY OF TUSTIN RECE VE 0 C T 2~ ]. 19B~ TUSTIN PUBLIC WORKS DEPT, BY ., 'WATER. SYSTEM FZN~~ AND R~TE STUDY JAMES M. MONTGOMERY, CONSULTING ENGINEERS, INC. 250 North Madison Avenue, Pasadena, California 91101 / (213) 796-9141 or 681-4255 Cable Address: Montgomery Pasadena California Telex: 67-5420 t .. October ZZ, 1982, Honorable City Council City of Tustin Department of Public Works/Engineering 300 Cente~al Way Tustin~ CA 9Z680 Attention: Mr. Bob Ledendecker Director of Public Works/City Engineer Gentlemen: We are pleased to submit herewith our completed report entitled "Water System Financial Review and l~ate Study." This report analyzes the City's limited experience with operation of the former Tustin Water Works system since assuming the responsibility on November 1, 1980 and develops financial projec- tions for a five-year planning horizon. From the standpoint of rate structure, we have concluded the City's present rate structure is fundamentally sound and in keeping with modern water rate design with two minor exceptions. The exceptions noted, include the proportional relationship of various sized meter services in fixing the service charge and some disparity between single f2mily and multi-family units for the s2me purpose. These subjects are discussed in detail with~ the report. While five consecutive years are included in the financial pl2~-g projections, the rate program recommended herein will be adequate for only the next two calendar years. It is suggested that future rate adjustments should occur in mid- winter and at intervals no greater-than two years.. R~vesme. estimates_based on the City's current water-~*~ indicate ~av~ge ~ort~f~ of a~r0~f&l ' $556'000 '~h~ com ~ ' ' - ~:~ -. Y , _.~ .... p ~~costsov~the next two ye~ ~~~p~~'[~d"~eh~m~d4d rates--~"~-~~-~S~-. ~..recomm~d ~'~ates ~: ~ .:~-'a~ed .e'- t6~'? a?' ~ic~':~"~n~]e''='{~m~v'?~' ~ ~'~?~+~ ~'~ ~'.~-~-..~.~ ~~~-*~. ~ . ~ ~ . . ~- . ~ .z ~0--~ .c __ ~ .."~v~ ._*.~ -' ~e wish to e~e~ o~ ~eciatio= ~o~ ~e ~e~u~t ~d ~e~ help~ usist~ce ~o~ by ~1 o~. Ae City stE~ perso~el who have be~ ~volved ~ the st~y. PLANNING ... RESEARCH .. - ENVIRONMENTAL ENGINEERING ! · JAMES M. MON/T~MERY, CONS' ~G' ENGINEERS. INC.. 250 No~h I~ ~e. Pasadena. C~lilo~nia 91101. (213) 796-9141168~-4255 · . Honorable City Council -Z- October ZZ, 198Z In the event we can be of further assistance, or if there are questions concerning the content of this report, we shall be pleased to meet and discuss the subject further at your convenience. Yours very truly, /rasp i.. TABLR OF CONTENTS · CHAPTER 1. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS Findings and Conclusions Production and Sales Service Connections Sales Growth Operating Expenditures Capital Expenditures Debt Service Negative Cash Flow Projected Cost Recovery Requirements Water Rate Structure Lifeline Rates Outside City Rates ReCommendations Cost Allocations Modifications Rate Structure Recommended Rates' Commodity Rates Individual Cost Impact CHAPTER Z. WATER SYSTEM BACKGROUND Background Production and Sales Service Connections W. ater System Expenditures Existing Water Rates and Charges Debt Service Refunding Contracts CHAPTER 3. PROJECTED WATER SYSTEM FINANCIAL REQUIREMENTS Introduction Revenue Requirements Growth . .Inflation Future.Capital Expenditures 1-.1 1-1 1-1 1-1 1-Z 1-2 1-3 1-3 1-3 1-4 1-4 1-4 · 1-5 1-5 1-6 1-6 1-7 1-7 Z-1 Z-1 Z-Z Z-4 Z-4 Z-7 Z-10 Z-11 3-1 3-1 3-1 3-Z 3-Z 3-Z {. ..o Debt Service Alternative Debt Service Negative Cash Flow Operation and M~tenance Summary of Financial Requirements CHAPTER 4. P_ATE DESIGN AND PRICING POLICY CONSIDERATIONS Introduction Flat Rates for Unmetered Customers Uniform Metered Rates , Sliding Scale Rates Seasonal pricing Demand Pricing :. .... Lifeline !:k'icing. ~ .. '. M~mum Rates Service Charges Fire Protection Charges- Conservation Pricing Considerations Pricing by Cost Allocation Tustin Water Pricing CHAPTER 5. RATE STRUCTURE AND WATER RATES Rate Structure Modifications Cost Allocation Methodology Cost Allocation to Service Charges Service Charge Summary Commodity Charges Existing City Water Revenue Individual Water Cost Increases 3-3 3-4 3-4 3-4 3-8 4-1 4-1 4-1 4-1 4-Z 4-Z 4-Z 4-3 4-4 4-4 4-4 4-5 4-5 4-6 5-1 5-1 5-Z 5-4 5-5 5-6 5-7 5-7 CITY OF TUS/'iN WATER RATE STUDY FINDINGS, CONCLUSIONS, AND RECOM~ATIONs .. This report has been prepared for the City of Tustin in accordance with the scope of work contained in an agreement by and between the City of Tustin and J~r-es M. Montgomery, Consulting Engineers, Inc., dated June 7~ 198Z. The report consists of five chapters which outline a review of available Water Department and related financial records; develops five-year 'financial projec- tions; describes alternative water pricing policy considerations; and develops an appropriate water rate structure with specific rate recommendations adequate for the approximate next two-year period. The purpose of the report is to assist the City Council and City staff with developme~nt of a financial policy and .revenue plan to meet the immediate near' future operation, maintenance,' and capital requirements of the City's water system.~ Methodology is developed and demonstrated to provide the City staff with tools for continual surveillance over revenue sources and costs for periodic update of service rates and charges in the future. FINDINGS AND CONCLUSIONS The City assumed operation of Tustin Water Works on November '1, 1980~ the ultimate 'purpose being system acquisition for the benefit of the City and its residents. Because the City has operated the former Tustin Water Works system for less than two full years~ some data for several prior months in 1980 has been included in the historical analysis contained in this report. ' PRODUCTION AND SALES Two cOnsecutive fiscal year records (1980-81 and 1981-82) of production and sales are analyzed in Chapter 2.' Production in fiscal 1981-8Z is. over'4 percent below the reported productiOn in 1980-81. This is considered normal and typical of the experience in most southern California communities due to the difference in weather conditions. Water sales dropped Z percent in 1981-8Z when compared to .1980-81 indicating an actual reduction in unaccounted-for water. SERVICE CONNECTIONS. .~--~-. '~'~',","7~ ..'t~,~-.-i ~- -~'--.-~-'-~----n--~ ............. ' - · -,,.,+;,1..1,~' -.L,~.~.'''':~''_ ....... -.. -..: .... :...._. -: _. - -..~..:._o_ ..... . ~.~. ........ : . ..~ . ~ ....... ..,~,.,v.. .~u,~ ,,,~: services- ' : ...... ~ ......*- '-:.'~-'-'-? - .......... ~ o~ which 13 076 or 5 er ...... - ........... ':.. ............ ,~ ...................................... , ..... ....~?.. p .cent.': aze~[-xesid.enti, a~.~ ;The · . · _ ......... :. ;: . ·, ,, , , . . .~ . ~.' .'...: 1-1 ~nngs, Conclusions, and Recomme. .ions average monthly consumption in 1981-8Z was approximately 3000 cuft per service. Residential service represents approximately 84 percent of all water consumption and other types of users acc6unt for the rem'ai~ing 16 percent. Approximately 50 percent of the water system service lies outside of the City's incorporated boundaries in predominately, residential neighborhoods, and important areas within the City's boundaries are served by other water purveyors. Analysis of the 13,076 residential water meters indicates that 889 meters (about 7 percent) are serving multiple residential .' property representing 47 percent of the total residential units served by the system. SALES GROWTH When comparing 1980-81 sales statistics with'fisCal 1981-8Z, it is noted that the increase in active service connections is less than one percent and ~mlt consumption has declined .slightly., Based on the current economic climate and the housing construction industry in particular, it is not believed appropriate to forecast much, if any, growth over the next few years. While it is recos~ized that occupancy of existing housing has been. increasing, this has apparently had relatively little impact on water consumption. For the purpose of this study, it has been assumed that there will be relatively little growth in either meter services or water consumption during the next two years. OPERA~G EXPENDITURES Assuming growth remains relatively fiat during the near future, inflation becomes the important consideration in projecting future costs. The trend 'in recent unit costs is often helpful in predicting future costs, however, with less than two full years of operating experience, historical cost data is less than adequate for the purpose of projections. In this instance, the study has relied on a detailed Cost analysis of 1981-8Z operating expenditures and forecasts based on specific., economic indices. Excluding all 'capital related expense, operating costs for_.._fis_~.' .1.?§.~l.~§~..,~er_e. _$Z'076,588. ~The Water DeP~tm. ent..oper~}.'.m.g.expense ' :--' b/idge ti[. (~i"~-c..'~a~ .'~!~.~b.'.~'.~is)'~ for''. ~i. sc .a!. 1.98 Z-83is -~ti~"~te d' t6 B~'.$Z, 502,8 Z3 ,:~' ":'~in~'~'~'bf"~li~t~'t!~."~.~'~i ~..'~ Z.9~.c. ent. ]This increase reflects a. dat'Ch'up. situation in the second full year of system operation as well as the cost of engineering studies and longer term planning The five'year operating cost projections included in this study project a gradual incre, as_e..~i!~....._o..per~_t_ing costs to fisc~..! 'ir'i"' iicii;at% i this' level' relateS to predictable"ener~jr. increases and the hi~her cost of imported water supplies 'from the MWD. "O~he~.". )c~St~"~.e.~:~t..i~ipate6.' to' rise ....... -; - -a.... ,:.-,-..- .~. ,, ,.,, . . ,.-~. 8 percent per year..'- } · ~., CAirlTAL' ~-XPEND~ "' · - '- ' " ~ .,., .~: .... - . u-, :-.j '_ ': :: The City"staff.pravid~d"the:.stU~[ ~it~":a lis~ of az.. projects needed durin~ the next' five years. Th~'annu~l"p~Ojected cost of these projects are shown in 1-Z indings, Conclusions, and Recom.. ndations Table 3-1 in Chapter 3 of the report. The City's 198Z dollar cost estimate has been escalated to the probable year of construction and a proportionate amount of City labor and equipment (based on 198Z-83 budget expectations) has also been allocated to this capital program. The annual facility improvement and replacement program (primarily. replace- ment) is substantially greater than book depreciation presently running at about SZZ0,000. Because replacement represents a real expenditure and depreciation represents a theoretical non-Cash expense, depreciation has' not been included in future cost projections for revenue planning pUrPoSes. Debt Service The other principal capital cost element included in projected future costs is debt service. Debt service is composed of 'repayment of acquisition debt, .. repayment-of the outstanding Tustin-Water=~.W, orks~bonds,.reDavment of out standing develoner 'refun~--- ___,_~_~i ~~"~:~?,-~:'-:.~.:.~ :-:~-~-- , Because final terms and conditions of the 'acquisition debt have not been resolved, certain assumptions have been USed herein to project future annual cost. The $900,000 outstanding Tustin Water Works bond debt due in fiscal' .1984-85 further complicates the uncertainty of debt requirements. Table Chapter 3 demonstrates annual debt service with the outstana~g bond debt repaid on schedule. Tables 3-3 and 3-~ present modified debt programs both of which include refinancing of the $900,000 in outstanding bonds when they come due. Table 3-3 assumes Z0-year ~r-ortization at' 10.5 percent interest and ~Tab-.-1-e-.-~i~...--~-~.~-:U.~e.~s~!...0:ye...~..l~amort_iz_ation at 10.5 Percent interest. ~::th~debt/Pl~sh0Wn':in'Tabl~3'~:~ '--~b~- i .................. -~ ..... :-: ...... - ............ "'?~'-.-~'.~'~- ~:.~:~i'?~._--~.~~'. ..~:.~,~,..~. :-.:-.::.:_.. ..?...:. .......... .~.~:,...~can... e .. mplemented, the anniml ~ve 2~-j ; u=o~ re un'emenT: Is a - · ...... , .... : .... .~,-:.,: .... :. ,. ;. :..... _.. ~-o, ! ......· ..... . .q ........ pprox~mately $8~0,000 per year'.:· ~ " ' Negative Cash F/ow Since the_ acquisition of the water system, expenditures have exceeded revenue ~ and the present accumulated deficit (due the General Fund) is in excess of i $5.00,000. This negative cash flow Position (deficit)' is growing with an existing annually accumulating interest Cost of about '$83,000.. As' can be seen, failure to ~ reduce this deficit or at least pay. the interest on the principal amount Will ! · . eventual_lyoresult.in much ' : .:-~.reas~_{t~oiild..'.-.~;~,,,,~,;~,%-.'~_~_~=~ ..... - ...... .~. . _ ers_ i-. adjtfstm · ~..~:?,~,~_~.:De~-aDOU, T',_~¥UU~UOO.~.-~R'_:_-'~- :~i' ~.~.'~.~ _ ' !:,'..- : .:': :'"-:-' ~.:~' ::".:~','~-'~?'-'-'--.°---~'~.~-~-~L".ttt~-~°=~ _ _ . _ - ........ ~.' ._~ .:.~ ,. , ........ i . t · . - ~ ....... :---- · ...... * :-: .... . .-,~ ~- ~. . ?.' ' .~ ~ .. -_' ,._; .... ' .._' , L'.,.,I.~,.i., . · g.;,.:. '.? ...!.~'.'.:_' ~.~': PROJECTI~ COST RECOPY I~EQ~MI~TS'" -": ~'' ~- ::: "-i! .':::'::'r .. .:: .: i Total projected annual cost recovery requirements., r.ange., from $3,594~408, in I fiscal 198Z-83 to $4,809,500 in fiscal 1986-87. Five'year ~a~icia1' planning periods a~e desirable exercises to remove sha~ dips or peaks in the revenue an, ho e, er/five-yea aVera' % £&r th e fi rate. pl -'- -- c~s e~ - . "Man ici s o .o-,- _-,,-:~- _~ .~..a, ~.~ _, ...... '~; ~,"s.,: .. .~. ..~"-~ .- .~,',': ~, ~-~'. ,,' ~;,, o,~'.,~..;.l,./. .: ..~.., -~ '.:_'~ .l~ .: ? - . . . .- ~ .*-i'-'_-' .'.i ." ' ':~'~-5;7..i-~ :.'.~' .' ./ _ 'L "' .: E-...gi" .:.'.' .'.. 1-3 ,.Lugs, Conclusions, and Recomme ions m,mlcipalities review costs and adjust rates 2nnually. In any, event, rate adjustments should be reviewed at least every two years and the effective date for water rate changes should occur in the late fall or mid-winter to reduce the cost impact on consumers. . , .. In this report, it 'is assumed that new rates would become effective in December .~ .~-.~ o f 19 8 Z and[th-&~fo-'!l_ o w~two~¥ea~.~ost~~- _~Ta~r?g~qi~' 'm~:i~ - -- . '-~ - -- ' II - -- average revenue requirements for this two' year period are $~,~?,000 assumin8 a restructure of the $900,000 bond debt due ~anuary ~, ~$. ~f this debt payment c~ot be refinanced the &vera~e ~ual revenue requirement increases to $4,~Z7,000, 'an increase of nearly ~ percent.. A ~ma_~r brea~do~ of this ~ual requirement is Presented on Table ~-1. in Chapter 5. WATm ST UC · .... The City's p~esent rates and charges for water service are cont2i,~ed in Council Resolution 8Z-ZS. From a review of the resolution, the rate structure consists of a service .charge that. increases with meter size, a uniform lifeline commodity rate for the first 600 cuft, and a uniform commodity rate for all water use in excess of 600 cu ft. The rates are based on bimonthly billing. The concept of a "service charge" or "service availability charge" without a water' allowance is a valid approach in modern water rate design. In this i~stance, the service charge concept is an extension of the rate structure that had previously been 'aPproved by the PUC prior to City operation of the system. When first approved by the PUC, the service charge probably contained the allocation of specific costs. Subsequent increases in rates and service charges by the City may have been more a function of matching total revenue with total expense rather than a continuation of the original specific cost allocation formula. The history of Tustin water rates has not been traced as a part of this study, since it is not considered material to .the purpose of the study. LifeH~e Rates From an engineering economic point of view, the r'ate structure of the. municipal utility' 'enterprise is not the best place to solve social problems (the intended purpose' of lifeline rates). It' is recognized, however, that social pressures on elected officials often require some consideration'in this. regard. If a lifeline (soci~d).~-r~te schedule must be included in the rate'structure, the method used in the. CitY'S i~e.s._e~!.r'.aie .structure is the best 'and least eXpensive. method'(i:e.; the t.;--rate':is'a~plicable to all-users). " Outside City Rates It is noted that rates for customers_ outside :Of-the' Cit~'are'-iden~i~;M With those i'i.;°f,i'i..~iSid'&";~,i.t~'[~.~,gmers. ~ City, staff indicates tl4e~;~e~on; for.', this. 'relates to commit~eni~.reqUested by, the PUC;'. As 'a general rul&~'::~ities that' Supply water ~,'ser-vi~e-' ~t~id~['~f' their corporate boundaries'make~a~"differe~ial charge, to at least' ~o~b~r dosts o.~ benefits that resul{ from the" City'"o'Wn~rship a~d operation. 1-4 , ?indings~ Conclusions, and Recoil . ~adations It will be noted on Table 2-6, costs labeled property taxes and franchise fees, as an example, are costs directly attributed to outside of City facilities and service. Inclusion of these costs as well as credit for "economies of scale" made possible by City ownership, result in a direct subsidy of outside City customers by inside City customers. Further, the PUC has no jurisdiction over the water service pricing policies of municipalities in California~ therefore the City of Tustin may eventually Wish to reconsider this pricing relationship. R.ECOM~ATiONS In the final analysis, the pricing formula and resulting rates for water service is a matter of. local policy. In recognition of this, the pricing program finally adopted by the city's policy makers will unquestionably be consistent with local conditions and the objectives of the City. The pricing structure and resulting rate schedule developed in this report demonstrates a revenue plan that recovers the city's annual cost, discourages waste, and represents a fair and equitable allocation of cost among the city's consu, mers, from an engineering perSpective. In summary, the general water system revenue planning policy recommended to the City of Tustin consists of the following criteria: 1. The water system and the service it provides is. an enterprise, and financial planning should include all of the elements .necessary to operate and maintain this non-profit municipal enterprise in a financially healthy condition. The rates and charges levied for various types of service benefits should be tailored to the city's needs, be commensurate with the burden (benefit) imposed by the system:s individual customers, be cost justified rather than arbitrary, and be non-discriminatory. 3. The'city's water rate structure should be designed in a manner that will discourage waste of both .water and energy 'resources. While five consecutive rut .ute fiscal years are included in the planning horizon in this report, it is not considered practical to develop and recommend specific rat~ for such~a lengthy.' period. ~' It.is~beli~d-,~th~t~_a_t :.~ch-~C~e~.-~]~'.!~ ............ .~ .... .~ ........ .: ~.~.~ ..... .,~.. ........ ~o~'year--rat~-r'e-vi~i ..... reflect chan~, o '.~.-;_:,.' -. -_: .~.azy, .. pp oprzate and will more"a c-~,,].; ''~'' , ~ ~ consumer impact it- is r:--: - 4'~--"-;.'- 'ad'UStmen ' . , .: ~ommen~e~.: that- th ": ~ 3 t (beyond the adjustment neede~ ,~;o ' _ . ....... .......e :.n. ext..:r_ate of calendar year 1984. .... o year) would occur zn the late fall COST ALLOCATIONS MODIFICATIONS : :: :: · .: The fundamental Concepts-utilized in the present TUStin~ wafer~ ..~ ~ : sound, m principal.' Howev' ' _ . .... :.. . ~ rate. structure are ~ ......... :.. ,. · : ..~.. er, · the results-, xndicate' two::' ......... :~' ~' contain eqmtv' Urobl~ms 'r~-~ .......... :.=:-..:~.~: .... ~, ........ :.;---.~-..ar__eas that aP ear to .......... --,..~ .... · -'- ~. · ; ~,-,~ pr?blem concerns, tn~ -Pr358~ti~M:-r~latPi :" · ; ~ between, s~rNrice ~chErq'&~'f "~;:' .... -~: ..... · '- ........ :: ...... -,-~.;~-~-~, .... P~ . [ ' us. m. eter The · · .... ~ ....... ~ .- ~--y ~: present: rate / schedule, does not: ~relat-~.- t6': :~he · . .. _ . . -~ ................. 1-5 '~ .~ings, Conclusions, and Recomm4 ;ions ...o . o proportional capacity of the various sized meters. This may be due to the influence of the PUC or the nature of costs included in the service charge when the pricing system wa~ originally implemented. ' The equity problem relates to the same service charge for multi-residential ~ts as applied: to single family units. There is generally a sufficient difference between single family and multiple family residential occupancy to require a differential in their respective service charges. This subject is discussed in greater detail starting on page 5-1 of Chapter 5. Costs typically experienced by municipal water utilities are readily segregated. into three distinct categories, (1) costs that apply to all customers uniformly, (Z) costs that only relate to p~ak demand (instantaneous use), and (3) costs that are directly related'to the average demand placed on the system '(commodity use). To the extent that these costs can be defined and properly allocated, the rate structure formula is esentially determined. Costs that have no relationship to the amount of water used by system customers c2~not be fairly allocated to commodity charges. This is the real basis for a ~service availability charge.~ There are two distinct costs that clearly' fall into this category~ (1) customer service expense (meter reading, billing, and customer records), and (Z) the capital costs related to above-average demands (the m2~er in which water is used). Based on this cost allocation philosophy) it is recommended that the City adopt a rate structure policy that: . Allocates customer service expense equally between all customers regardless of use or meter size; Z. Allocates 75 percent of 2~nual capital expense not funded from other sources, to the unit capacity of respective meter sizes or units served in the case of multi-residential, property~ and · . . 3. Allocates the remaining annual costs to uniform commodity rates. To accomplish the above policy, it is recommended that items 1. and"Z be included in a "service availability" charge without water ~!!owance and that all .. rem_2~f~g costs be included in either a single ~form 'commodity rate or a two- block system with the first block priced as a "lifeline" block rate. ' ...~.: R.ECOMM~ED RATES ' · The methodology and 'calculations described in general terms above are outlined in detail in Chapter 5. A s~r~mary of the results are presented as follows: · , · . '..' ' . .. "- more than'bna'residential'unit) is as follows:.. -'." .:- :.',:' > ... ~ .',"~ ,~..:·.-!,, ~:,iiC~,:.,..:.:'~ -,-..~-:. :~, ;:':'~; "' "' '~" .... : ....... ".,-,...~'>: -.-.. Findings, Conclusions, and Recon~-.-endations i Total Meter Customer Demand Service Size Service Increment · Charge 5/8x3/4" $2.75 $ 5.60 $ 8.35 3/4" 2.75 8.40' 1i.15 1" 2.75 14.00 16.75 1~4"' 2.75 28.00 '" ' 30.75 Z" 2.75 44.80 47.55 3" 2.75 84.00 86.75 4" Z. 75 140. O0 14Z. 75 6" Z. 75 Z80. O0 ZSZ. 75 The bimonthly service charge for service where more residential unit is served by a meter includes: than one . . , a'single customer service charge of $Z'75 plus a demand charge of $4.50 per trait.' "' Commodity Rates · _. As previously indicated, the total annual average revenue requirement for the next two years is $3,997,000. The service charges listed above will generate an estimated revenue Of $1,177,000-or nearly 30 percent of the total revenue requirement. The remaining SZ,SZ0,000 would be recovered from commodity rates. Total estimated annual water sales (based on 1981-82 sales) are expected to be about 5,000,000 consumption units. In the event the City Council were to consider elimination of the present lifeline provision, the uniform water rate is as follows: _ $2~8Z0~000. 5,000,000 units - $0.56/100 cuft In the event the lifeline rate is retained at $0.30 per 100 Cuft, lifeline revenue would be approximately $149,000 and lifeline'water' use would be' 497,000 consumption units. The remaining commodity rate Would be as follows:. : .. . .... 5,000,000(497,000)-.--" . ' I1 v . · INDIVIDUAL COST IMI:'ACT · i-A~- tedious1 .... ,! ~~,.~ ..... .... _: ely $556 000-~~ · -m · .~ ..... :.: ...... .... .~. ~ue m~e~e for. - --~ ........... Y, .~However- dffe to th ......... · ..... "-~ · '~ : .rate st~ct~% the effectlv ,. :. :~--, ....-... e?~om~ended ch~ges e m~e~e e~em~ced by m~du~ wi~ depend on met~ siz% ~o~t of ~e~ t~e of ~e~ ~d ~ of the other factors ~fected by ~e rate st~ct~e. -; A 5~[ z z 51 ~.~ ....... - ............ '~ i~: .2- i '~,' :~i ~. i.:t .~ - .,.. . . , 1-7 i . ' P~ings, Conclusions, and ltecommenu=~ions In Chapter 5, an analysis of average single family residential costs and average multi-f~mil7 residential unit costs are developed at both present City rates and at the proposed rates presented herein. T~i~ analysis demonstrates that single family costs will increase approximately ~percent and multi-family unit costs will increase by 1.3 percent. I~ A similar analysis of one particular multi-residential property containing 9Z units, demonstrates a reduction of 7 percent. An analysis of typical 1" meter services indicates an increase of Z$ percent in cost. The analysis of average single family and multi-residential costs at existing rates clearly demonstrates an existing inequity that is corrected with the application of proposed rates. It is recognized that there are many customers that are not -aVerage, however, rate structures must be designed on this basis and the test of fairness and equity must be applied on this basis. ~,~lw;s~,~.:~,:~a~,,~_. -~;~'_~-~_~,~-.~.-~.:-,..,~'~..~:.:':-':' ;-~-~-,-~,.... ~ ...'.: ~.~_ -~-;',~ .... ,.~..~..:~::.- .~:~...-~ ;- ~.~ .... :~..~..-~:~.. .....,: ....~ .... "~ se~cesi~ ~;l~g~. met~-;se~ces 'relates... ~ecfly: ~to.L~e, ~ff~.~.Ce ?~~i~~~Ci~i~i'~ '~ '~ '~'::p~t ~fi ~. ~t~t~eo~ "me~.g~g:~fid~:~'0f..,~S".'mff~'~C~'~'~ S~ce dem~d shoed lo~cmly pay the . proportionate ~ff~ence ~ .cost. ~ ':.'. :: ..... 1-8 . C~ Z C1TY OF TUSTIN WATER SYSTEM BACKGROUND BACKGROUND The City of Tustin is located in ~the central portion 'of Orange County. The boundaries are set as the city of Orange to the north, City of Santa Ana to the west, the Marine Corps Air Facility to the south, and the Irvine Ranch to the east. Incorporated in 19Z7, Tustin became a general law City governed by a council/manager form of government. Tustin is one of many cities in Orange County which had phenomenal growth during the decade of the 60%. 'During that period of time, Tustin increased in population frOm ZOO6 in 1960 to 11,178 in 1970, increasing over ten times its original population at the time of the 1970 census. The 1980 census recorded a population of $Z,073. Pl~i~g Department data indicates a current populgtion of approximately 37,800. Tustin residents are provided with water services throuEh several water pur.veyors. The City of Tustin's water department, operating the Tustin Water Company system, provides a major portion of the water service withlr~ the City. Nearly fifty percent of the City's water customers, however, are located in county territory outside of the City's corporate boundaries. The City is presently in the process of finalizing the acquisition of the Tustin Water Works facilities withi~ the City. It is anticipated that final acquisition will be completed by November 1983. In addition to this rate study, the City water department is presently having an engineering study and report prepared, entitled "Water Service Management ProEr2m and System Analysis". This plan Will provide the City with direction and concepts for mai~t2i~ing, updating, and improving the City's water system. Finandial reviews with a cost of service analysis, future cost projections and cost recovery pr°gr2mS, require an understandi_n/f of the elements that impact cost. This chapter is devoted to a description of the current financial status of the City's water operations. JAMES M. MONTGOMEP. Y.CONSULTING ENGINEERS, INC. Z-1 ,J ~.~ly of Tustin Water System Backgr~.--~d .. PRODUCTION AND SALES lax support of a study o£ this nature, it is important to review the production requirements and the water use pattern of system customers. The City staff has provided the study with a series of internal monthly reports that indicate the amount of 'Water produced to meet demand, the number of billings and the amount of commodity usage: This type of data is often useful in developing projections for future years based on the apparent trends of the immediate past. · Because the City has not operated the systems for two complete fiscal years, data for several prior months in 1980 has been included in the analysis. Monthly production records are reproduced in Table Z-1 for fiscal 1980-81 and fiscal 1981-8Z. It will be noted in Table Z-1 that production requirements in fiscal 1981-8Z were approximately 45% lower than in the previous fiscal year. SEASONAL WATER PRODUCTION FOR FISCAL 1980-81 AND 1981-8Z GOO ca ft) 1980-81- 1981-8Z Month Pumped Purchased Pumped Purchased _ July 334,85Z 3Z7, Z36 308,98Z 346,305 Aug. S lB, 819 313,547 317,688 347,318 Sept. Z60,0Z5 Z84,964 Z78,748 301,983 Oct. 195,Z69 31Z,741 Z15,ZZ3 Z55,303 Nov. 156,305 307,0Z1 197, Z03 Z41,511 Dec. 118,8Z4 Z51,9Z5 154,500 198,680 jan. 110,493 Z3Z, 816 131,881 198,773 Feb. 96,770 Z09,6ZZ 1Z7,879 Z01, $0Z Mar. 104,083 ZSZ, 096 1Z7,605 191,4Z3 Apr. 170,93Z Z59, Z10 168,448 Z1Z, 647 May ZSZ, 535 30Z,465 Z16,41Z Z84,657 June Z98~950. 358~145 Z13 ~43Z. .- Z98,043_ Totals Z,397,857 3,391,788 Z,458,001 3,078,445 t ...:. :: .-. ...... .... .. - 5,536,446~ ': . , Total -: .: :: .:.. 5,789,645 .'. .... '.::' ' - .- -.:':-':~ · :'"" Table Z-Z presents a monthly recap Of water sales and billings' during the same' two-year period. Table Z-Z also shows the change in total water 'sales during the period and the change in average monthly use per account between the two periods. JAMES M. MONTGOMERY.CONSULTING ENGINEERS. INC. Z-Z City of Tustin Water System Badl~grotmd TABr-~ Z-Z SEASONAL WATER CONSUMI~ON FOR.FISCAL 1980-81 AND 1981-8Z · 1980-81 1981-8Z Number Consumption Number Consumption Month of Bills (100 cuft) of Bills (100 cuft) _ July 6,978 5Zl, Z04 6,97Z 574,00Z Aug. 7,0Zl 591,930 7,016 631,635 Sept. 7,000 497,361 6,980 540,644 Oct. 7,064 489,999 6,98Z 505,56Z Nov. 6,943 403,758 6,95Z 403,641 Dec. 7,004 '395,031 6,958 351,084 Jan. 6,967 346,934 , 6,931 30Z,475 Feb. 6,97Z 330,68Z 6,957 Z75,977 Mar. 6,951 Z78, Z37 6,98Z Z88,081 Apr. 6,998 3Z7,006 7,007. 317,503 May. 6,975 38Z, 136 6,951 348,348 June 7 ~ 059 .. 521 ~ 175 7 ~ 030 45Z ~ 195 _ Totals 83,93Z 5,085,453 83,713 4,991,147 _ Average Bi-Monthly Billinga 13,989 847,575 13,95Z 831,858 Average Monthly Use/Acct. 30.30 Z9.81 · aAccounts : - _ z , : ~ .i. .- . , .~ ~-'.~: '.- - · .. - . "An important considerations developed £rom"a review of Table Z-Z "indicate an average.bimonthly water use 'of about 3,000 cuft per ~tom~se~ee. ~is is t~ic~ of simil~ southern C~ifomia commd~itiei at ~e present time." . JAMES M. MONTGOMERY.CONSULTING ENGINEERs. !Nc. Z-3 ~_~ty of Tustin Water System Backgr~ _~d SERVICE CONNECTIONS Another important element in this study relates to the number, siZe, classifica- tion (type), and the mount of water used by various types of customers. The reason these statistics are important relates to the benefits received by system customers and the cost allocation process (rate structure). Of a total of 13,807 meter servides, City records indicate that 13,076 or 95 percent provide' residential service. This is an unusual percentage and is probably due primarily to the geographic location of the system. As previously indicated, 'approximately '50% of 'the service lies outside of the City in predominately residential neighborhoods while several areas of the City are served by other systems. Table Z-3 shows the total active service connections by customer classification and meter size at the mid-point of fiscal 1951-8Z. Table Z-4 presents an analysis of residential 'meter services by size and type of residential service {i.e., single family'and multi-f_~_rnily). Table Z-5 indicates water consumption by meter size and by customer classification. Analysis of data included in these three tables shows that the 95% of the meters (residential) use nearly 84% of the Water. Table Z-4 clearly shows that of the 13,076 residential meters, multiple family meters represent about 7%, however, multiple units represent 47% of the total residential units served. WATER. SYSTEM EXPENDITURES In developing anticipated future costs related to the water system, expected growth and inflation are elements that must be estimated. With the exception of capital requirements, a review of previous costs will often indicate trends upon which to base future estimates. Because' the City of Tustin has operated the water system for less than two complete years, fiscal 1981-8Z represents the only complete historic experience upon which to base judgments. This is admittedly less than desirable, therefore the data and conclusions must be viewed from that perspective. The City water fund is composed of two separate budgetary accounts; (1) Water Operations and (Z) Service 'Billing. The service billing budget items primarily represent costs related to customer service expense with cert_~in exceptions. Meter reading costs, .as an ex2r~ple, are included in the Water. Operations budget and debt service/developer refunds etc, are included in the service billing budget. Meter reading .is a service billing cost and debt service or developer ' refunds represent capital expense. .. The City staff has provided the study with a number 'of work sheet explanations including labor cost allocations tb specific Cost functions. With this data, the various costs contained in both bUdgets have been rearranged into typical municipal water utility cost categories. - JAMES M. MONTGOMERY.CONSIfLTIN'~ ENGI~'4EE~S. Z-4 .... "City of Tusti~ V~ater System Back,round JAMES ~i. MONTGOMERY.CONSULTING ENGINEE~.S. !NC. ~'of Tustin Water System Backg ANALY~g OF ~ENTIAL SER~CE CONNECTIONS Meter Single Size Family Multiple (Inches) Meters Metersa , $/8X3/4 9,7z6 63 1 Z,300. 441 1~ 8Z 109 Z 74 Z46 4 -- 1Z 6 ' -- 13 , Total 1Z, 187 889 Units Served 1Z, 187 10,643 ainciudes condominiums, apartments, and mobile homes TABLE Z-5 ANALYSIS OF CONSUMPTION BY METER SIZE AND CUSTOMER CLASSIFICATION (Calenda~ 1981) Meter l~esidential Percent Business Percent Size Consumption o£ & Other of (inches) (100 cu It) Total ' (100 cu It) Total · . . _ . '5/8x3/4 .Z,133,140 41.0 ' -~":: 32,,705 .... ':' 0.6':' ' 1." 1,18Z,054 .... . ZZ.7 ' -'~. " ~' 83,481 -'' ~ I'~7' lYl . i6z,877 ...3.0 105,9Z5 '" Z ' ~' 730,386 14.0 33Z,335 6.5 3' ' Z8, ZZ5 O. 5 88,838 1.8 4 59,94Z 1 · 0 178, Z69 3 · 5 6 74~410 1.4 .... Total 4,371,034 83.6 8Z1,553 16.4 JAMES M. MONTGOMERY.CONSULTING ENGINEERS. INC. Z-6 City of Tustin Water System -.~otmd Table 2-6 presents the City Water Department's 1981-82 expenditures by 'cost function.' Project. ions of future costs are developed in this same format later in the report. To expedite future updates or rate adjustments, the City might consider some revision of cost accounting to match the format on Table '2-6. ]~G WATER RATES AND CttA_~G~ The City's present rates and charges for water service are contained in Council Resolution 8Z-25. From a review of the resolution, the rate structure consists of a service charge that increases with meter size, a uniform life-line commodity rate for the first 600 cuft, and a uniform commodity rate for all water use in excess of 600'cu ft. The City's present rates and charges are presented on Table 23-7. The concept of a "service availability charge" without water allowance is a valid approach often used in modern water rate design. The. use of a life-line rate that is uniform represents the most 'efficient approach in .dealing with social pressures that are often present in rate decisions, and a Single' u~form commodity rate for use in excess of ~he life-line amount is also valid where differences between services are accommodated in the service Charge. Possible improvement in the City's present system would be the development of a formal .cost allocation formula to establish and update these individual charges from time to time. As an example, the service charge is a carryover in rate structure from the private company that· won approval from the PUC sOmetime in the past. When first approved by the PUC, the service charge probably ~ontalned the allocation of specific costs. Subsequent increases in rates and service charges by. the City appears to have been more a function of matching total revenue with total expense rather than a continuation of the original specific cost allocation formula. The history of Tustin water rates has not been traced as a part of this study, as it is not considered material to the purpose of the study. It is noted that rates for outside of City .customers are identical with those of inside City customers. City staff indicates the reason for this relates to commitments requested by the PUC. As a general rule, cities that supply water service outside of their corporate boundaries make a differential charge to at least cover costs or benefits that result from the City ownership and operation. It will be noted on Table 2-6, costs labeled property taxes and franchise fees, 'as an example, are costs directly attributed to outside of City fac'ilities and service. Inclusion of these costs as well as credit for- conom]es of scale" made possible bY City O~nerShip, result in a direct subsidy of outside City customers by. inside City ·customers. Further, the PUC has no jUrisdiction over~:~.h~ Water service pricing policies of municipalities in California, therefore the City of Tustin may wish to reconsider this pricing relation'ship'in the futUre. . . . ...... _i'L ' ' .' .L '"' . Z-7 ,ity of Tustin Water System Bacl ,md r;: .fl'.' L'_.."[ k /' City of Tustin Water System B~ckground · TABLE Z-7 SUMMAR.Y OF TUST~ WATER. RATES SERVICE CHARGES The bi-mOnthly service charge 'per meter (except for meters servicing more than on residential unit)- . 5/8x3/4" meter 1" ~neter " 1~4" meter Z" meter '3" meter 4" meter 6" meter $ 6.50 9.74 13.10 17.85 33 ·04 44·55 74.50 The bi-montMy service charge for service ·where more than one ~esid~ntial unit is served by a meter:' , . . Per residential unit $ 6.50 COMMODITY CHARGES ~ 0 to 600 ~cubic feet b. Over 600 cubic-feet $0.Z95 per 100 cubic feet 0.510 per 100 cubic feet · 3. BI-MONTHLY FI~E CHAi~GES 4" 'fire' service 5" fire service · · '6" -fire· service 8"_ fire service ....... 10" fire service 1Z" fire service $31.36 per service 39. Z0 per 'service~ 47 ..04 per Service 6Z.7Z per service 78..40 per~ service. 94.08 per service · · CONSTRUCTION WATER · -k- :, . Metered Fire Hydrants -, , Un?Metered. ~e ~ ~ ~ ~' ~'Water sold ~ ~ . .. c-: ...... Un-Metered New Develdp~t . . $0.39 .per 100 cubic feet :~ : - ! '" $0:1 i:: Pe~ 100 gallons '5.50 pe~ application Each unit under construction: $10.00 'for first-two months of the construction period and $5.00 for each additional month or portion thereof· .~y of Tustin Water System Backg. DEBT SERVICE The City assumed operation of Tustin Water Works on November 1, 1980, for the ultimate purpose of system acquisition. The total agreed-upon purchase price is $6,374,'001 plus outstanding developer refunding contracts. Terms Of the purchase include the aSSumption of outstanding debt in the amount of $Z,600,000, leaving a balance of $3,764,001. The original acquisition agreement provided for three ~nual payments of l/Z5 of the purchase balance plus interest following which the entire balance would be due and payable. The three year term is purportedly for the purpose of developing a financing plan. schedules are as follows: Nov. 1981 Principal @ l/Z5 purchase price Interest @ 7.Z$% Nov. 198Z ° Principal @ l/Z5 purchase price Interest @ 8.Z5% The three payment $147,8Z6 Z69 ~ 19Z $417,0Z1 $147,8Z6 Z90,55_9 $438,385 Nov. 1983 Principal @ l/Z5 purchase price $147,8Z6 Interest @ 9.Z5% 31Z, 105 $459,931 ... The originally assumed Tustin Water Works bond obligations of $Z,600,000 has been reduced with a $300,000 principal payment in April of 1981. The remaining bond obligations including maturity schedules and 2nuual interest payments are presented as follows: Annual Maturity Principal Interest Interest Date Amounts l~ate Payment 1/09/85 $ 900,000.00 8% $ 7Z,O00.O0 5/Z4/89 300,000. O0 8% Z4,000. O0 ll/ZO/90 300,000. O0 8% Z4,000. O0 3/Z3/91 300,000. O0 8% Z4,000. O0 6/16/93 500 ~ 000. O0 9~4% 47,500. O0 $Z,300,000.00 $191,500 · O0 ' All Tustin Water Works Bonds are Registered BOnds, issued in the name of the. purchaser/owner; and all are issued at One Thousand Dollars ($1,000.00) Face Value and carried at that value on the books of the Corporation. In{erest is payable on all Tustin Water Works Bonds, quarterly at the rate of interest indicated, on the last day of the calendar quarter - March 31, June 30, September 30, and December 31'. Z-10 City of Tustin Water System Background R~ING CONTRACTS An additional condition of the water company acquisition was 'the assumption, by the City, of developer refunai~g contract obligations.' Under Public Utility Commission rules, a private water utility may receive advances from developers for construction of facilities and provide the developer with a 20-year refunding contract. The terms of these contracts limit annual payment to ZZ percent of the gross revenue (received from the facilities constructed with the advance) · until the original 2mount is repaid~ not to exceed Z0 years. ~ite often, the full 2mount is not repaid within the Z0-year limit. -- The City st~ff provided a list of these contracts which indicate an outstanai~g total balance at April 30, 198Z of $654,135.35. Actual 1981 refunds totalled $111,537.09 and the 1982-83 budget estimate includes $110,000 for this purpose. In computing revenue requirements, this element' of cost is important because it actually represents a direct reduction in water sales revenue. ' Z-11 . . CHAPTER 3 - PRO~ECTED WATER SYSTEM FINANCIAL ~E~~~TS INTRODUCTION Anticipated ~nnual water system expenditure requixements is the subject of this Chapter. A brief history of the City's water operations including sales, customer services~ operating expendituxes, and water rates are discussed in Chapter Z. From this perspective, future 'operating demands must be estimated, along with related costs to determine appropriate rates. While five consecutive fiscal years axe included in the projections cont_~j~ed herein~ it is not believed practical to develop and recommend specific water rates for such a lengthy period. In the cuxrent economic climate, a two-year rate adjustment time schedule is believed appr.opriate and will more accurately reflect Changes that may occur in both growth and inflation. From the standpoint of consumer impact, it is also anticipated that future rate adjustment would occur between October 1 'and January I of alternate fiscal years. Usin~ the basic formula and revenue structure finally adopted by. the City Council~ the projected rate adjustments may be modified in the fall of 1984, in accordance with conditions that then exist. Five-year projections are at best an "educated guess" as to what may happen from the viewpoint of current knowledge and conditions. In addition~ the City's "'Water Service Management and System Analysis" study, recently commenced, may change the capital iu~Provement projections utilized herein. REVENUE KEOUIREMENTS . The two basic categories of water, system, cost are either operation related or · capital 'related.:' In turn' these., two'general cost categories break down into a ' numbe~ of sUb-~cCounts that may. be either, fiX&d~'-Variable,. or provide a variety of ~servi~e ~enefit~'to different:'groups Of s~stem dustOmers: In develOPing'~nt~cipated futUre costs-related {o'-opeiati°n and m~i~tenance of the water system, growth' and inflatic]n~'are 'the PrinCipal factors that must be estimated. Due to the fact that growth in southe, rn C.alifornia may continue slow for sometime~ due to interest rates and'th'e'~Ost-of ~i~ hO~si~g, the' Projected cost esti~?tes....devel~oPe~ later in this chapter~ are. based on relatively little · ... : growth in either met?' serviCes or water use. · · . ..... ..,:.' ~'~:~ !?'~': ~:::;i~.~: ~:,~ ,. .... JAMES M. MCNT.QCME~':'.CONSULTi-NG ENG:-¢EERS [NC. 3-1 ~:ojected Water System Financial Requirements GRO~FI'~ As indicated in Chapter Z, Tables Z-1 and Z-Z, there has been little if any change in meter service billings over the past two years and Water use in 1981-82 is less than it was in 1980-81. For this reason, prudence dictates that water use projections over the next two years should be assumed on a no-growth basis. With new housing construction at a standstill, there has been a strong trend to increased occupancy in existing housing. This has been particularly true of multi-residential housing in many comm,,n~ties. However, there is no recent data available from the City of Tustin Pl~n~ng Department that would indicate current occupancy factors for different types of housing. It is logical to assume that increased occupancy has occurred, and it is also logical to assume, that the decrease in water use is principally a function of weather conditions. Projectioms of water use for the purpose' of financial pl~ng should be cOnservative, therefore, "estimated future usage at 1981-8Z levels are used herein. ' ' ' Normally, historic trends accumulated from utility accounting records provide guidance and a starting point in estimating future costs. In this instance the City has operated the system for less than two years, and very limited pertinent historical data is available. There are other aids, however, including numerous indices covering energy, construction, materi~]~, and labor that can be used where historical data is inadequate. In spite of the temporary oil surplus of the past year, many economists are predicting that energy costs will continue to increase at a differential inflation rate of 3 to 4 percent. Figure 1 presents the historic and probable future pattern of electric power and consumer prices'. The projections in Figure 1 include an 8 percent per year increase in the Consumer Price Index (CPI) and an 11 to 1Z percent annual increase in the electric power index. ,. Construction cost indices a~e available from a number of sources, however, the Engineering News Record (ENR) construction Cost Index is widely used in th.e' engineering profession for the. purpose of measuring price changes related to c~o.nstructio.n. Durjmg..t~e past-ten 'years, .incr_eases in 'construCtion .'cost' have oxy:eh run in. e?cess, o~ 'consumer prices,', however,' this tendencY_ h~'~"fec~ntly changed; Figure Z" Presents ' the ' historic'and ~'~timated 'ne~' fuf~-c°~t'r~i~tion cost index for both the Z0 cities average a~d: for 'the Los'-'Angeies~met-~0politan area. The projections for the near future are estimated to closely, follow the CPI at an estimated rate of 8 percent' per year~ ...... .......... .......... ; ..... :~ .. :.... ~'. ~..~. .-'- . . ~. ._. ~ .'.'.~."-.'~ .... ' -. Ann~-al: capi-tat ................. . ....... costS are traditionally' incurred .b~ "' ' .............. ~" ~'t~r-'Uiiliti~'-~ f0~ir distinct categories: (1) pl~-~ed expansi0~' and improvement'pr&jects timt-ar~ ~ncluded in an annual capital program; (Z) unanticipated projects resulting from syste, m -. 3-Z (:3 7OO HISTORY ~ ~ PROJ ECTED--~ · , o/ / / / / PRODUCE~ PRiCe INDEX. ,'ELECTRIC POWER ~_"~j ~--z3"~'~/- CONSUMER PRICE INDEX .~~ ' , ALL COMMODITIES 1 i _ I : 600 500 400 X, l.U 300 200 I 1970 72 74 76 ' ]8 80 82 YEAR ........ HI"STORIC AND_ PROJECTED " .... ' "-PRICE INDICES' o. . FIGURE I'.. 7000 6500. 6000 5500 5000 4500 4000 3500 3000 2500 2000 1500 I000 500 'i971 72 73 74 75 76 77 ,78 79 80 81 82 83 84 85 HIS TORI C AND 'PROJECTED ENGINEERING NEWS RECORD cONSTRucTION'COsT ;'iN~Ex E~. , '. .: ~ , ;. . ..... ;. . FOR LOS ANGELES AND'20 CITIES AVERAGE FIGURE 2 86 87 Projected Water System Financial Requ~ments failures or emergencies; (3) facility replacement projects; and (4) ~,mual debt service recluirements. . · . . . As previously indicated, studies have recently commenced which may change the City's presently projected capital improvement pro,ram. The City staff provided a list of 3Z projects (principally replacement) that are spread over the next five years. The cost figures attached to the projects did not include City labor and were also in 1981 dollars. Table 3-1 presents a five-Year summary of this capital improvement pro,ram and 1981 costs have been escalated at 8 percent per' year to the year of construction. Internal City labor, proportionate labor overhead and transportation costs, as allocated to capita/improvements in budget year 198Z-83, are also included and escalated in Table 3-1. - ' . . The assumption that this amount Of City labor would continue to be used each year for capital improvements may not prove to be accurate.' In the event less City labor. is used for capital projects, the chances are, these costs would then be added to operation and maintenance expense. 'TABT:E 3-1 FIVE YEAR CAIrlTAL IMPROVEMENT PROGRAM Fiscal Year Item 198'Z/83 1983/~4 1984/85 ~985/86 1986/87 . Material Replcmnt & Imp.a $Z68,900b 314,500 350,400 364~000 381,000 City Salaries 57,100 60,500 64,Z00 68,000 7Z,100 Salary&Misc. O.H.c Z5,700 Z7 ~Z00 Z8,900 30~600. · 3Z~500 Total ' $351,700 $40Z,Z00 $I~3,500 $46Z,600 $485,600 · . aEScalated @ 85% per year to the Year of construction._ .:.: i .._ binciudes $130,000 carry forward from 1981-8Z...-. ' Clnclt~de transp rtatiOn "' '-':' -':: ...... ' ........ s o etc. ,.l . -.-.. ..:: ' ' -. . DEBT SERVICE - o The existing, outstanding debt..is discussed and shown..~ in, Chapter· . .. .:..Z',. ~'-As. pointed. ~' out 'in~ chi~t:~r z; the..'meth0d'°f piymen~t~ 'i({r.'the a~'~tisition is not-., resolved at ": '. thi~ w~iting. 'Outst~ding ..T~.u~_'t.in/,..W_~:a~te.r.':~s~ ,17 B0.~,_d~..-':in;~hil..am_ .°unt~ ,o_f~ _$?_0_0.0..0_0_ :': pay-abla;in fisCal 198~t~-85,are'ate. a}i,addit~°~n - _~ual average debt sermce requirements- . . . -.. JAMES M.'MONTGOMERY-CONSULTING ENGINEERS. INC. 3-3 ~ojected Water System Financial Requirements Table 3-Z has been prepared to demonstrate annual debt cost based on the following assumptions: lo' Acquisition cost would be financed on a continued ZS-year amortiza- tion basis, with interest at 10.5 percent per annum beginning in fiscal 1984-85. .. Ze The annual interest cost and lump sum principal due dates of all outstanding Tustin W~ter Works Bonds are assumed without refinancing. .. 3. The continued annual repayment .of developer refund contracts are reduced on a straight line basis from the 198Z-83 budget projections. · · Table 3-Z presents the above described debt assumptions through fiscal 199Z-93, the year of final retirement of Tustin Water Works Bonds. During this eleven (11) year period average annual debt service is $807,000. Through fiscal 1986-87, (the planning period for this report) average, annual debt service is $886,000. 'It should be noted~ however, that the $900,00.0 Tustin Water Works Bond repayment schedule in fiscal 1984-85 would require the annual accumulation of approxi- mately $1.Z5 million for the next Z~i years. Alternative Debt Service Alternative debt schedules are presented on Tables 3-3 and 3-4. Both tables assume the $900,000 of Tustin Water Works Bonds are refinanced in fiscal 1984-85. Table 3-3 is based on the refinancing assumption of Z0 years at 10.5' percent interest and Table 3-4 assumes a redemption period of 10 years at the same rate ~f interest. For the purpose of this report, it is assumed that refinancing of the $900,000 is essential and at least $820,000 per year should be included in the City's cost recovery plan for outside debt service. Negative Cash Flow · Since the acquisition of the water system, expenditures have exceeded revenue and the present, accumulated deficit (due the General Fund) is in excess of $500,000. This negative cash flow position (deficit) is growing with an existing annually accumulating interest cost of about $83,000. As can be seen, failure to reduce this defici{ or at least pay the interest on. the principal amount will eventually result in much higher ~ual Costs 'to the water consumerS.' For this reason, it would seem prudent to plan' for interest cost recovery in the CUrrent rate adjustment, with a principal cost recovery plan added to the next rate adjustment. Based on this plan total 2~ual debt service funding for all purposes would be about $900,000. : OPERATION'AND MAINTENANCE '- .. · Water system costs· that are beyond the c~)ntrol oi"l~cal po.li'cy makers are .: increasingly a larger'share of' total' c~p. era. ting expense. These out-of-control costs are principally ener~r related, costs 'such .as direct power purchases 'for '" pumping, purchased water from outside So.arces, and the chemical requirements .;'AM.S,..q M. MONTGOMERY.CONSULTi;N'G ENGISEER$. INC. " Projected Water System Financial Requirements -. JAMES M. MONTGOMERY.CONSULTING ENGINEERS, !NC. 3-5 .o Projected Water System Financial Requirements : 3-6 -i Projected Water System Financial l~equirements .. -,- 3-7 Projected Water System Finaucial Requirements i for water treatment. Attempts to predict, with reasonable accuracy~ the level such costs will reach three to five years henc% is not sufficiently reliable t° fix long-term utility rates. Many municipal ,utilities have adopted biennial rate reviews as a matter of policy. Some municip'al utilities are reviewing their rates on an ahnual basis. Automatic administrative rate adjustment procedures for power increases and purchased water-supply are increasingly being utilized by municipal utilities to avoid losses that can occur between regular rate reviews. The City may wish to consider instituting such procedure. A summary of water system operating costs for,fiscal 1981-82 is presented in Table Z-5 in Chapter Z. Based on this experience~ plus the assumption that growth will be minimal and the anticipated inflation rates shown in Figures 1 and Z are r. easonable~ Table 3-5 indicates the projected annual .operation and maintenance requirements for the next five fiscal years. -, SUMMARY OF FINANCIAL REQUIREMENTS,. _ · . Based on the assumptions and discussions presented in this Chapter (including the restructure of debt), the total annual expenditure requirements are estimated to increase from approximately $3.6 million in the current year to .$4.8 million in fiscal 1986-87. This represents an annual average increase' of approximately 8 percent. The five-year summary of water system expenditures is presented on Table 3-6. - · _ JAMES .~,~. MONTGO-'.,!'E?,¥.CONSULTING ENGINEERS. iNC. · 3-8 Projected Water System Financial Requirements i. TABLE 3-5 CITY OF TUSTIN WATER DEPAR~M~T FIVE YEAR OPERATION AND MAINTENANCE COST PROJECTIONS · I[ ~ ' ',! ' v ..~.._ m,~ C~_+__.~mele~ 1981-%3 1983~ ' 198~S 198~6 1986~7 ~wat~~~ $ ~0,~ $ ~3,~ S 591,~0 $ 6ST,0~ $ 730,000 ~ Wat~ 1,1~, 300 1, ~0,300 1,361, ~ 1,470, ~0 1, S87, ~0 ~~~m Z,~O Z,~O Z,~O · ~,~00 ~,9~ M~t~ . - ~&,750 ~S,9~ ~?,Z~ ' ~8,600 ZO,O00 ~ & ~ O~ Z,3~ ZtSO~. .' RT600, ZtSO0. 3,000 Tot~ ~ o~ ~Zy S2,6~ ,SSO S;, 8~ ,300 S~, 98S ,3~ ~, X6~, 9~ ~, 3~,3~ , G~t ~ $ Y9,8~ $ XZ,~O $ ~,~0 $ X4,000 S ;5,000 M~t~,-ce 1~, 6 ~ ~9, ~ 1 S0,000 16Z, 000 I~ S, 0~ T~~ · ~,~ 3Y,~0 41,1~ ~0 49,800 S~ & ~ O~ 3~ v~ ~, 000 4Z t 8~ 4S, 800 49 ~ ~ To~~a~ $ ~6,~8 $ 3~,8~ S 414,300 S ~,1~ $ ~0,~0 C~ ~ ~ $ 3, ~0 $ 3, Z00 $ 3, S00 $ 3,800 O/rice ~ P~ $ lZ,~00 13 ~8~ 14,900 16~ 100 1T ~0 ~ ~ Corette 14 ~ ~0 15, SOO 16 ~ 800 18 ~ 100 19 ~ 600 Tr~~ ~ ~ 700 IT ~ 1~ Z9 ~ 800 3Z ~ 8~ 36,100 M~ Mmt~ce ~S ~8~ ~9~ 31,100 33,T00 ~ 1~,~ 113,~0 111,~0 119 ~900 ~8,900 S~ & M~ O.~ IT ~ 10~. Z9,000' 31, ~0 33 ~ Z00 35 ~ S00 Tot~C~mm~ ~ce $ Z~,4~5 $ ~,600 $ ~000 $ Z~8~ $ ~5~000 ~ ~~ $ 35~5 , $ 38,300 $ 41~0 $ ~,~00 $ ~,300 C~t ~c~ 15, ~0 16 ~ ~0 1~ ~ S00 18 ~ 900 ~, ~0 ~ T~ 35, ~0 35,700 36 ~0 3T,Z00 3T ~900 M~t~ ~ R~ 3,1TS 3,, ~0 3 ~ 6~ 3,8~ 4,000 Tr~~ ~, 60V ~, 8~ Z~ ,300 30,0~ 33 ~ ~0. S~ - * 9T ~ S00 1~300 111 ~ 600 119 ~400 117,800 S~& M~ O.~ -.* ~t~q ~,8~ ~t60~ 30z60~ 3Z~800 To~Aa~i~---~G~'" S'. ~3,T60 --$ ~9,s00 $ z66,~0' $ ~4,600 $ 3~,zoo rot~ ~~ ~ ~ sz,soz,s~ sz?6,~o ~,9n,~o ~,~sY,~o ~,~,~00 I JAMES M. MONTGOMERY[CONSULTING ENGINEERS, INC'.' 3=9 F- r . t Projected Water System Financial Re~ui merits .Li?~E~ :~i -~dO-~T-QC:,~ERY.CONSULTiN.~ ZNGiNEERS, [.'NC. 3-10 [ - CHAPTER 4 DESIGN AND PRICING POLICY CON~ERA~ONS INTRODUCTION The method by which costs are allocated to the users of 'the Utility service, resulting in a fair and equitable distribution-of 'said costs, is the goal of rate structure design. Rate structures utilized by public and private water agencies have long been a subject of disagreement among engineers and accountants. In recent years such disagreement has intensified with environmentalists and economists joining the list of professionals with divergent opinions concer~ng design of utility rate structures. Widely accepted rate structure designs of the past have come under critical scrutiny as a result of the worldwide energy problem and national goals for improved resource conservation. There are a'wide variety of rate designs used in the pricing of water: fiat rates, ,,~form rates, step or block rates (both inclining and decH,~,~g), seasonal rates, and demand rates. Various combinations 'of these rate applications are .also widely used .to accomplish a local purpose. The rate applications in more common usage are described in the following sub-sections. FLAT RATES FOlq. ~ Er) CUSTOMERS The flat rate structure is a constant water Charge independent of consumer use. This structure is generally only used in the case of unmetered services.- The magnitude of the .charge may vary with the opport-~ties for use including seasonal use and the capacity of the service connection, however, it rem~s constant for a designated period regardless of actual water consumption. Flat rates generally rem2~ in use where the water supply is unusually plentiful and where service can be provided at relatively Iow cost. The basis for fiat rates may be the number and types of plumbing fixtures, the size of a .b~lding or the number 'of rooms, the type of occupancy or the number of occupants and~/or the number of employees in the case of commercial and industrial customers. In any event, the relationship between these factors and the actual use of water, is at best, only an estimate. UNIFORM METEI~ED RATES -The-simplest rate structure involving meters is the ,,-~form rate. A single common charge for a unit of water came into use following the 'introduction of water meters. Under' uniform rate Pricing the ',~,~n~t price of water is constant regardless of time Or quantity," That is, the-' cust6mer using~ 100,000 gallons JAMES M. MONTGOMERY.CONSULTING ENGINEERS. INC. 4-1 l~ate Structure Policy Considerations during a billing period, pays exactly ten times that paid by a Customer using 10,000 gallons. There are relatively few communities in the country that currently continue to use a pure ,miform metered rate. , . The use of a single ,?n~form Commodity rate today is often preceded by a base charge (sometimes called demand charge or service availability charge). The service availability charge is paid regardless of the amount of water used. The demand or service availability charge often varies as a function of' meter size. ST.TT'~ING SCAT-R I:I.A.~S The sliding scale, method of rate application (often 'called 'block rates" or "step rates") has generally been represented by. a declining rate for increasing water use. Historically, utilities have used the block rate structure with uniform but different rates in each block. Under block-rate pricing, a Series of water use blocks are billed at specific but differing prices..For example, the first 1000 units may be billed at one price while the next 1000 are billed at another, the' next 1000 at a third price and so on, Three to five blocks are typical, the last block being open-ended so that all consumption above a cert~ limit is billed at the unit price of the last block. TWo types of block rates are in practice today, decreasing block rates and increasing block rates. With decreasing block rates, the unit price of water is less in successive blocks so that ~s a user c, onsumes 'more water the' averag~ cost of water decreases. The decreasing block rate structure is based on the "economies of scale" theory which assumes that greater quantities of use through a single meter result in unit cost saving and should be Passed on to the consumer. Increasing block rates, on the other hand, are generally practiced in areas where source of supply is critical and large uses are to be discouraged or penalized. SEASONAL PRICING With seasonal pricing, water is priced higher during periods that stress' the system than during periods when the system has excess capacity. ~ The on-peak seasonal rate is higher than the average price of water, so for revenue earned to balance with expense, off-season .rates are set lower than the average price. Any of several different pricing techniques previously described can be modified to include seasonal pricing.. Seasonal pricing is a practice that may be used where unusual peak demands occur as a result of a periodic tourist influx. In theory,' those users that benefit from the 'tourist trade, i.e., hotels~' motels, 'restaurants, and resort activities are charged for the increased system capital investment and operating inefficiencies that result from the local economic anomaly. . DEMAND PRICING Demand charges may be allocated against daily, monthly, or Seasonal demands. It is apparent that direct measurement of daily or hourly._-, peaking requires demand metering of some form. In demand metering either, a .record of maximum demand is kept at ~he meter (by me2~-~ of a device reset at each meter · 4-Z _~ate Structure Policy Consideratic reading, or a time history of demand is recorded or is transmitted to the water utility. Based on the maximum recorded demand or on the incidence of demands coincident with system peaks,' the demand charge is calculated. Demand charges without demand metering are often based on engineering studies of demand characteristics or .upon the relative potential demand that various sized meters can impose upon the system.' Another type of peak load pricing that would not require any special meter equipment is seasonal pricing. Seasonal pricing and demand metering are not necessarily mutually exclusive, although in practice the two techniques are often addressed to the same problem; control of lawn (irrigation) watering demands or a short seasonal tourist influx. L~E PRI~NG · · Over the last decade, many municipal utilities have been urged to adopt "lifeline" provisions as an integral part of their rate structure. There are many opinions and a wide variety of definitions or interpretations concerning the establishment of lifeline rates. Questions that continue to concern policy makers include; (1) what segment of the population should be entitled to special rates?; (Z) what evidence of need should be required?; (3) which utility cost functions should be included in lifeline rates?; and (4) what'quantity of water or level of Service should be included in the lifeline charge? From an objective engineering perspective, the utility enterprise is not con- sidereal the best vehicle to solve social problems. However, elected policy makers are charged With the responsibility for making such judgements, not the technici_~ .. _ The purpose of lifeline rates are generally 'believed to lighten the burden on those dependent on fixed incomes or the less fortunate living on relatively Iow incomes. To identify and provide special rates for special groups can add cost burden to the utility's administrative budget. In recognition of the social pressures that policy makers may need to accommodate, and at the same time remove the administrative burden that many lifeline plans require,~ it is suggested that the lifeH~e rate schedule be 'applied ,_,_nlformly to all users. As au example, the estimated lifeline, quantity of water essential for residential sanitation and minimum public health purposes may be. 500 cuft per month. Providing this amount of Water to each customer' at the stripped cost of production and treatment as a first block rate. with rema~ng costs allocated to all water, use in excess of. 500 cuft, is one. way. to accomplish.~ this~ social objective without' discrimina'tion.~ Those who choose to limit their use-to_ the lifeline quantity enjOy, low cost water, while those who require~ a.larger amount will still obt_~ their first 500 cu ft at the reduced rate.-: ' ~ · -: '~ ':~: -'-:'~ :..-..' .. Note: The present-Tustin rate'structure provides the first 600 cu ft. .bi-m°nthly · · at a lifeline rate. :: ...... ': -. :"., ".~:' .i.-L':" ~ !":~ ~.: .i..~:~, :~_--~:.,.::-.: ',,:,:'/,:~'. :~ --': :~'~ :?":: Rate Structure Policy Considerations MINIMUM RATES A minimum rate, with or without a service charge, may be incorporated with uniform commodity rates or sliding scale rates. Minimum rate schedules generally stipulate a charge for a given billing period and include a specific quantity of water. Minim,r, rates may or may not include a service or demand charge. When demand charges are included, the charge generally increases with increased meter size and in practice often includes an increased quantity of allOwed water use for the minimum charge. Meters are generally sized to accommodate maximum flow requirements rather than average flow thus, an increased-quantity allowance with the minimum charge has the tendency to encourage waste in many situations. SErViCe. CSA G The concept 'of a service charge or service availabiiit7 charge that has no relationship to water used is becoming an accepted substitute for the previously and widely used minimum charge. It is important, however, that the mount included in the service charge have a defensible basis in cost... Ail too often, both minimum charges, and service charges have been arbitrarily fixed to raise a given percentage of total revenue rather than recover specific costs. The logical basis for "service availability charges" is recovery of costs that have' no relationship to the amount of commodity used by the.system's customers. When such costs are included in commodity rates, the allocation between customers with differing usage requirements will not be equitable. There. are two distinct costs that clearly fall into this category; (1) customer service expense (meter reading, billing, meter maintenance, and customer records) and (Z) the capital costs related to maximum demand (the manner in which water is used). It is acknowledged 'that some general and administrative costs are difficult to relate to water use, however, the accounting system would require much greater detail than is normal to distinguish these costs. PROTECTION CHARGES The cost attributed to fire protection (excepting individual fire line service connections) is principally related to the capital cost associated with-larger diameter-.pipelines, increased reservoir and pumping Station capacity, and hydrant maintenance.... Charges for fire prOtectiOn do not follow any."u~iform practice. -In some communities the 'utility CoSts 'or. value attributed t~' fire protection is estimated and contributed from the municipal generaI fund or from- the fire department budget. In other communities this annual Cost is submerged in the utility capital and operation and maintenance budget. ~ :..i'. ::: .... .--- Fire service connections for ~the benefit' of specific 'i~rOperties are normally charged on a standby basis and generally vary as a function' of-the' 's~rvice':size (diameter). 4-4 I~ate Structure Policy Considerations -' coNsERVATION PRICING CON._~IIr~ERATIONS · · Water and energy resources are not unlimited, and to the extent that rate structure and pricing formula can reduce the Waste of resources, such techniques should be utilized. The P~oduCtion and distribution of water is generally energy intensive and the development of new and additional water supply has become difficult, expensive, and in some instances environmentally unacceptable. . · · These factors have introduced new considerations into the design of rate structure. There are ·some who advocate rate programs designed to discourage water use through the device of economic penalties.. 'There are few who would condone a pricing system that encourages waste of 'resources, on' the other hand, there has been relatively little good solid data developed, through careful experi- mentation, to justify many of the published conclusions concerning the relation- ship between price and water consumption (price elasticity). In an affluent society, the price 'of water (Uuless Punitive) does not appear to have much long-term impact on the pattern or quantity of use. This is apparently due to our 'pass through' economy and the relatively minor portion of average income represented by the cost of water. In time, and if the cost of water service Continues to increase more rapidly than general inflation, a change in the character of water use may gradually appear. Until water service does begin to represent a larger and more important share of average income, other conservation tools including public education, physical system constraints, and statutory or 'ordinance requirements are likely to be more effective. ; . Experience indicates that large increases in the cost of water service often will have but a temporary influence on the quantity, of use except',mg in cases where punitive pricing penalties-are levied and/or are accompanied by well .organized public awareness programs. This is not intended to signify that the subject should not be addressed, rather it is intended to place conservation, in relation to pricing and pricing structure, in its proper perspective. PRICING BY COST Arff-OCATION In the final analysis, the pricing formula and resulting rates for water service become a matter of local policy. In recognition of this, the pricing program finally adopted by policy makers will typically be consistent with local conditions and the objectives of the community. From an engineering perspective, the .pricing structure and resulting rate schedules that are finally adopted, should produce the 'revenue needed to cover costs, should discourage waste, and should also represent a reasonably equitable allocation of cost among consumers. As previously indicated, the costs directly related to the provision of service (and/or levels of service) allocated to customers or'groups of customers on the baisis of their, respective imposition of cost on the system, constitutes an ideal utility rate structure. However, there, are gener .ally a number of assumptions involved in any determination concer~_ing the cost of service. 'Before any .assumptions' can be developed it is necessary to understand the various cost functions involved and where cost recovery responsibility resides. · 4-5 .L' Rate Structure Policy Considerations Costs typically experienced by water utilities are readily segregated into three distinct categories~ (1) costs that apply to all customers u~formly, (Z) costs that only relate to Peak demand (instantaneous use), and (3) costs that are directly related to the average demand placed on the system (commodity use). To the extent that these costs can be clearly defined and properly allocated~ the rate structure is essentiall7 determined. Existing water rates in Tustin are 'discussed in Chapter Z and the rates and charges contained in Council Resolution 83-35 are shown on Table Z-7. As indicated previously, the service charge concept is an acceptable modern method of recovering costs that are ,,~elated to commodity usage. In addition, the cost increment related to demand (capital costs attribUted to maximum demand) or. the-m2~_er in which customers use water should logically increase service charges with increased meter size. Beyond the service charge, all remaining costs can equitably be recovered with a ~m~form commodity rater or if desired, a lifeline rate followed by a uniform rate for usage in excess of the lifeline quantity. On the surface, it may appear .that the present Tustin water pricing structure is equitable within these definitions and previous discussions in this chapter. However, a careful examination of the 1981-82 summary of cost by cost function in Table 2'6, the active service connections by size in Table residential service connections in Table 2-4, and the graduated service charges by meter size on Table Z-7,-indicate that improved equity can 'be att21ned through development bfa cost allocation formula. Such a formula adopted as general policy, would then be used to initially establish rates for the immediate near future revenue requirements and would also be used periodically as rate adjUStments are 'neCessary. The pricing methodology and calculations are described in detail in Chapter 5. 4.-6 CHAPTEI~ 5 RATE STRUCTURE AND WATER I:~TES In Chapter Z, the recent historic water service data is developed including.. reproduction, sales, customer meter services, the Water Department's 1981-8Z operating and capital, costs, and the city's present rates and. charges for service. Chapter 3 develops 5-year projections of probable cost for the contin,,~g operation of the city's Water Department including O&M, capital replacement and improvement, and possible 'alternative _~nual debt service requirements. Policy considerations related to formalized rate structure are described in Chapter 4. This chapter will describe the cost allocation methodology discussed · in Chapter 4 and will develop the calculations in support of the methodology using costs developed in Chapter 3. RATE STRUCTURE MODIFICATIONS The fundamental concepts utilized in the present Tustin water rate structure are sound in principal. However, the results indicate two areas that appear to cont~ equity problems, depending upon the cost allocation formula utilized. One problem concerns the proportional relationship between service charges for the various meter sizes. The difference between service charges does not relate to the proportional capacity of the various sized meters. This may be due to the nature of costs included in the service charge when the pricing system w.as originally implemented. In any event, there is no recOrd available to determine the original intent. The second possible equity problem relates to the same service charge for multi-residential ,,~ts as applied .to single family units. There is generally sufficient difference between single family and multiple" family.residential occupancy to require .a differential in their respective service charges. ~ Multiple residential hOus:mg will nearly always average feWer'occupants per, than the average number' occupying single famil7 units. ~. To a great extent .this is due to the difference in residential construction practiceS.-. Typically ~here are relatively few two bedroom homes constructed as s'mgle f~ily dwellings .and one bedroom single family homes are rare. In the case of multi-residential co~struction~ particularly large apartment complexes, a mix of one,: ..two, and three bedroom units (the majority"of Which. are genera~l¥-'tWo-lbed.r....00ms) a~e typicaL Mobil~ home parks, also cont~_~n"a, majority ..0f. . two.bedroom'unitS.. . .... .... . . with a few three bedr0om units..- . -- . . ..: :.:...:..-~:...:..-:..-. _-.:.-_::.:--.' · . 5-1 l~ate Structure and Water Rates It is recognized that the current housing shortage is increasing the average occupancy factor of all housing and multiple family housing in particular. HOwever, in the absence of substantiating data to the contrary, it would seem logical to assume that the average unit occupancy of multi-family residences would not be greater than 80 percent of the average occupancy of single family un~ts and it couAd be lower. .' This discussion is not intended to indicate that a multiple u~t service charge is improper, quite the contrary, it is proper. Equity, however, dictates that service availability benefits are more a function of specific costs allocated to 'average unit occupancy rather than to housing ~_~ts. It is recognized that very few situations are ever average. Some singl~ people live in a single f~r~ily home and some large f~r~ilies live in an apartment. Absolute equity is difficult if not impossible to attain, however, for the pUrPose of this report and the calculaticms which follow, it is asSUmed that the average occupancy of single family homes is at least Z0 percent greater than the average o~ccupancy of multi-family units. COST ALvOCATION METHODOLOGY For the purpose of this report, it is assumed' that any fiscal 198Z-83 rate adjustment necessary would not be possible prior to November or December. 'In addition, it has also been aSSumed that any rate adjt~stment adopted this year should be adequate until the late fail of 1984, (approximately Z calendar years).- The esfimated annual Water Department expenditures for the next five years are described in Chapter 4 and summarized on Table 3-5. To determine the average ~--ual ~r~Ount of cost recovery necessary for the next two calendar years, 50 percent of the costs for fiscal 1982-83, all of the estimated costs for fiscal 1983-84, and 50 percent of the costs for fisCal 1984-85 have been added' and averaged for the next succeeding two year period. .The 2-~ual average costs are shown on Table 5-1.' -' As indicated in Chapter 4, the justification and logical basis 'for service charges is the recovery of costs that cannot be' properly allocated to commodity use. These costs have been described in Chapter 4 as customer service expense and the demand increment of capital costs. .- · Customer Service-Expense. Water meters must be read and a bill rendered regardless of the amount of 'water use. -There is no greater Cost inv0~ved in reading the meteri billing~~ ~nd Collecting: the 2~bunt billed· for a 6,in~h~meter service than is the case with a typical 5/Sx3/4-inch household meter. Logically, this 'COst'"c0m~on~nt: belongs'-~in a service availability-~'charge' and".' the" 'total ~. c~s. t°me~...~ service~'"expe~nse ca.tegory~ can' b~ ~renly. divided', among;: the:':-total .~ accounts served.' The average ann~al cost of this expense item'over the nex~t two years is appr0~i~'~tely $2Z8,200 (See Table 5-1)'~' "D~mand" C~harg~-S..::- Water. System p~al~ing.~. requir.~e~ex~ts.:-including 'fii~' :'~ flow '~ capacity (demands~grda't~:"than: average):, '~'eprese~it between' 70 perd~n~ and -- 80 Percent of' the '~apit~al'·cost of a modern :~atdr' system; ' This share: of capital or capacity expense, often referred to as the demand ~cren~ent~' should logically. · l~ate Structure a~d Water l~ates T~O YEAR AVERAGE. ANNUAL EXPENDITURE SUMMARY Expenditure Category Annual ·Costa Annual costb , · . OPERATIONS ' Source of Supply $1,816,400 $1,816,400 Transmission & Distribution 40Z, 500 40Z, 500 Customer Service ZZ8,300 ZZ8,300 Administrative & General' Z49 ~ 800 _ Z49 ~ 800 Total Operations SZ, 697,000 SZ, 697,000 ,' . CAPITAL EXPENDITURES Replacement & Improvement $ 400,000 $ 40.0,000 Debt Service 1 ~330 ~ 000 900 ~ 000 Total Capital $1,730,000 $1,300,.000 .. · ! · Total Annual AVerage $4,4Z7,000 $3,997,000 · a Assumes $900,000 of debt paid on January 9, 1985. b Assumes $900,000 refinance& be charged to the beneficiaries of the cost on a proportionate basis. The cost is represented by increased pipe size, pumping capacity,' reservoir capacity, and production capacity, all made necessary because of the manner in which water is used. Such costs are not related to the amount of customer water .use but rather their periodic instantaneous use.. The total average 2nnual cost allocated to capital, over the next two years is $1,Z60,000 ( Table 5-1). It is suggested that 75 Percent of this cost ($945,000) representing, the demand component, be recovered by service charges with the remaining costs recovered by c.ommodity charges ...... · It should be noted that the' 2unual capital"cost used, assumes the city will be able to refinance the $900,000 o~ Tustin Water Works Bonds scheduled for repayment on January 9, 1985 as demonstrated-in Table 3-3 and also, recover the~ interest cost due to the negative cash flow in the city's General Fund. In the event the bond debt were not.refinanced, the demand portion of the service charge would increase by more than 30 percent. A system of charges for peak demand capital cost will accomplish two objectives: (1) recover the proportionate cost from those meter services that are responsible for the'additional capital requirements, and (Z) reduce pe.ak 5-3 Rate Structure a~d Water Rates demands on the system by encouraging a reduction in the average meter size. While this latter may not apply to the Tustin water system, oversizing of meter services is ~ practice that should be avoided. . COST ALLOCATION .T~ SERVICE CHARGES . ~,.-. . :. ~. . ' As. shown in Table2-s, there:are i3,807 active ~ot~ble water met'ers preSently. served by the city water' system. The benefit (and cost) accruing from customer service expense is equal, therefore, the bimonthly cost allocation .for customer service expense is calculated as follows: · . ~ $16.53 ' ' '-.:.. ' = '6 billings = $Z.75 per meter service bimonthly. The demand 'increment of the service charge is a function. of':~verage residential · occupancy_ (people) and/or meter size.-. As previously described~ this element of capital investment is directly related to the_m~er in which'water is used rather than the amount. Excepting for..multipie meter-installatiOn, as is often .the case with multi-residential services, the.theoretiCal 'maximum demand of individual 'water meter services is directly proportional 'to the" capacity of various meter sizes. For example, a (~" service has fifty .times 'the capacity of. the 5/8x3/4-inch service; a. 4" service has twenty-five times the Capacity~ and a '.Z" service has eight times the, 5/8x3/4" meter capacity.~ It is thiS potential demand, that the water system must be designed to' accommodate that increases the capital investment. · . For the purpose of computing the combined capacit~ units creating demand on the City's water system the actual capacity, unit ratio of all meters (excepting multiple residential) plus multiple residential u~ts (at 0.8 of a 5/8x3/4 inch meter) are used2 Table 5-2 summarizes the computation of total capacity units creating a demand on the City water system. Full 3/4" and 6" meters are shown in Table 5-2 even though there are no existing installation of these sizes serving other than multi-residential un~ts at this time. - The demand' increment portion of the service charge is determined by the'. annual 'capital cost times 0.75, divided by total capacity units as' shown in Table~ 5-2. The bimonthly charge is computed by dividing the annual charge by; billing frequency. The computation is preso, nted as follows:-..-.:. ~. '. $1,Z60~000 x 0.75 $33:49 28,209 GUs. 6 billings = $5.58 say $5.60/cap unit bim~ii-ttfl~" . . · '. '!~&G - - - -v, ' · . "- ' ' 5-4 Rate Structure and Water Rates TABLE 5--Z DEVELOPING CAPACITY UNrFS FOR DEMAND CHARGES · ~ · - Total · Service Size Capacity Number .. Capacity (Classification) Ratio . of Units Units · · Multi-Family 0' 80 10,643 8,514 Meter Size 5/8x3/4" 1. O0 9,968a 9,968 3/4" 1.50 - 0 - -' 0 - 1"- Z.50 '. Z,487 6,Z17 l~i" 5.00 , 'lgZ '- 960 Z" 8. O0 ' ' 235 1 ~ 880 3" 15.00 Z3 _·' 345 4" ZS. O0 13 3Z5 6" 50.00 - 0 - - 0 - , Total Z8 ~ Z09 aMeters serving multiple properties (Table Z-4) excluded-from totals. SERVICE CHARGE SUMMARY The bimonthly service charge per meter (exCept for meters servicing more than one residential unit) is as follows: Total Meter Customer Demand .-· Service Size Service Increment Charge $/sx3/4" .3/4". · 3" 4" 6" ._. $Z.75 $ 5.60 : ..Z.75. -... :.8.40 ~ . :. Z.75 ,:.:. 14.00::-_ :,, ' . ~. !6..75 ...... ; ::,i-.:...- -Z.75 : . Z8.00 '- · ...... 30.75. i ,: :.,.:--:' _Z.75 . . . 44.80 ,' ' :,:.,:: ::.47~-.55 ' ': :.:.-.-~ ' .. "Z.75 '84~00 .... 86.75 Z.75 , 140.00 - Z.75: ' 'Z80',O0 .... -~ -._. . The bimonthly service charge for service where more than one residential .~it is served by a meter includes: a single customer service charge of $Z.75 plus a demand charge of $4.50 per unit. . .... ·: :.:. -:.-.i.; -! -.:: -.:: .... . ..: _--.-- '~c:-.: :.-:L:,~-.:.-2. '-_-.-: 2, L';._r.y.::.~ :..~,] Rate Structure and Water Rates COMMODITY CHARGES Assuming acceptance of the cost allocation servi~e availability charge that includes all costs associated with customer service expense and 75 percent of the ~ual capital costs, the remain'rog costs associated with ~nual operation are directly related to commodity usage. Where all cost that may be different for various types of users (the demand increment of capital cost) are accommodated in the availability charge, the application of a single uniform commodity rate or a lifeline rate block becomes a matter of local policy 'choice. The city's present rate schedule includes a lifeline rate block of 600 cuft bimonthly @ $0.Z95 per 100 cu ft. ,. As indicated on Table 5-1, the total annual average revenue requirement over the next two years is $3,997,000. i~ifter subtracting prc~jected revenue received from service charges the remaining cost recovery must come from commodity rates. Total service charge revenue is estimated as follows: Multiple Residential 889 meters x $2.75 .x 6 billings = $ 14,670' 1.0,643 units x $4.'50 x 6 billings = Z87,360 Total $ 302,030 All Other Accounts 12,918 meters x $Z.75 x 6 billings : 19,695 cap units x $5.60 x 6 billings =. Total Total Service Charge Revenue = Remaining Revenue Requirement = $ Z13,150 661,750 $ 874,900. $1,176,930 SZ, 8Z0,070 Based on the assumption that annual water use will closely approximate the use in 1981-8Z, the average ,;nit cost of water is:' SZ,8Z0,070 5,000,000' units : $0.56/100 cuft · In the eYent each meter s~rvice consumes at least the 600 cuft per billing period, total '~nnual lifeline water use would be 497,05Z consumption units. Fixing a lifeline rate of $0.30 Per 100 cu ~t would yield $149,115. The rate for water use in .excess of lifeline' consumption would be: $2,820,070($ i 49,115) 5,000,000(497,05Z) $0.59/100 cuft~ · Rate Structure and Water Rates [.'. EXISTING C1TY WATER REVENUE Based upon the assumptions, used in the previous calculations, the following represents revenue projections .from the present city rate schedule: Service Charge Revenue" Multi-Res. Units- 10,643 x $ 6.50 x 6 billings = 5/8x3/4" meters ~ 9,968 x $ 6.50 x 6 billings = · . 1" meters - Z,487 x $ 9.7.4 x 6 billings = 1M" meters - Z" meters - 3" meters '- 4" meters - 6" meters .- 19Z x $ 13.10 x 6 billings = Z35 x $ 17.85 x 6 billings = Z3 'x $ 33.04 x 6 billings = -13 x $ 44.55 x 6 billings = -0- x $ 74.50 x 6 billings = .- . Total Service Charge Revenue · Commodity Charge Revenue Lifeline - 13,807 services x 6 cons. units x 6 t{il!ings x $0.Z95 = $ 415,077. 388,75Z 145,340 15,091 Z5,168 4,559 3,475 --0-- $ 997,46Z $ 146,630 Excess use - 5,000,000.,,nits less lifeline (497,05Z) x $0.51 = Total Direct .Water Service Revenue Z, z96,503 $3 ' .440,595 With an s~nual average revenue requirement of $3,997,000, the City's present rates are inadequate by Approximately $556,000. This represents a .required increase in revenue of 16 percent. . / INDIVIDUAL WATER COST INCREASES As previously indicated, the necessary revenue increase for the Water Department is approximately 16 percent. However, due to the recommended changes in rate structure, the effective increase experienced by individuals will depend on meter size, smount of use, type of use, and all of the other factors involved with the rate structure. In Chapter Z, it is pointed out that residential services comprise 95 percent of total services and consume 83.6 percent of the total water. · Total residential water use is approximately 4,3'71,000 consumption ,mits, however, the use is divided between 1Z, 1S7 single family units and 10,643 multiple units. Single family ,:~its require greater= quantities of water for outside irrigation and occupancy is generally greater than is the case with multiple units. To determine the' average use and individual water' cost for both types of .'residential use, it 'is assumed that-unit'consumption on multi-residential is approximately 0.7 of that 'required for "single family. This translates into an '"'average of 3,700'cu ft bimonthly for single family Units 'and 2,600 cu 'ft · · . . . · 5-7 Rate Structure and Water Rates .- bimonthly for multi-residential-~its. Additionally, there is an average of 1Z ,mits per meter service for multiple residential properties in the City of Tustin. Based cm these assumptions, the comparative cost of water for both types of residential service under existing rates and under proposed rates are as follows: Comparative Average Bimonthly Residential Water Cost Single Familya Multi-Familyb Elements Pre.sent Proposed Present Proposed of Charges Cost Cost Cost Cost. Service Charge $ 6.50' $ 8.35 $ 6.50 $ 4.7Z Lifeline 1.77 1.80 .14 .15 Extra Use 15.81 18.Z9 13.00 ' 15.04 Totals $Z4.08 $Z8.44 $19 · 64 $19 · 91 Cost Per Consumption Unit $ 0.65 $ 0.76 $ 0.75 $ 0.76 Percent Increase ~o~~° 1.3% · . Based on 5/8x3/4" meter and 3,700 cu ft. Based on 1Z units/meter service and Z,600 cuft per unit. It should be noted that the above comparative costs are based on averages or typical conditions. Quite obviously, there are many water customers that do not approximate the average situation. The City staff provided 1981-8Z data on one large multi-residential property and the comparative 2~uual costs are shown as follows: four Z" water meters 92 residential units 1981-8Z water use = 6,799 consumption units Service Charge _ . Lifeline Charge Extra Use Charge Total .... :.. :- .. Present Cost Proposed Cost ~ ..~ ..... ~ ~,. $3,588.00 . $Z,500.50 :..4Z-48'... , 43.Z0 ... - 3~394.05 :. 3~990.17-:.--- ;i ....... '. " ' '",: .'"-d "~ : $7,0Z4.53 -:_.:.... ; .: .. $6,533.87--: .... !:c~ There a~.e Z,300 one-inch meters serving single family residences.:i As near as can · i - .be.!determined~_ the average single family., use, where a 1 ."- meter is.'installed, is ~! .... .. approximately ....... 6,500 cu ..ft bimonthly.,. ....'--This. ~much.. higher.~ than.: average.: Use !: requiring a-1' meter, generally indicates-a larger than-average lot and 'greater i outside irrigation demands. Based on the City's present rates, the bimonthly :.' :2- ': ~.: -'. ~ :: ' ?:.'.'~'.~. ' -.';".?::. ';.'~ -. ' -' - - . -. :':.: - · · 5-8 ~ate Structure a~ Water ~ates average cost is $41.60. Using the proposed rates this bimonthly cost will increase to $53.36, an increase of Z8 percent. The sole reason for this differential percentage increase between small meters and larger meters relates directly to the difference in their respective capacities and the potential instantaneous demand these larger meters can and do impose on the City's water system. This greater demand represents a corresponding greater capital investment to satisfy the demand and the beneficiary of this difference in service demand should logically pay the proportionate difference in cost. ..'o ,JAMES .M. ,~NTSCMXP, Y CONSULTiN'G ENG;NEEKS. [_NC 5-9 Exhibit H JAMES M. MONTGOMERY, CONSULTING ENGINEERS, INC. 17802 Sky Park Circle, Suite 201, Irvine, California 92714 / (714) 979-8733 December 10, 198Z City of Tustin Department of Public Works/Engineering 300 Cente~al Way Tustin, CA 9Z680 AttentiOn: Mr. Bob Ledendecker Director of Public Works/City Engineer · Subject: Supplemental Letter Report Examining Alternatives to the Water Rate Recommendations Contained in the. Original October Engineering Report Gentlemen: The attached supplemental report describes several alternative revenue plans based upon our understanding 'of City Council discussions during the recent' workshop presentation, followed by a meeting with City staff on November ZZ, 198Z. There are actually three new plans presented herein. The first' two are in conformance with a Council suggestion that a sinking fund customer surcharge approach might be used to accommodate the water company acquisition debt cost and the $900,000 bond debt due in January of 1985. .. 'Council members also expressed interest in the concept of an automatic pass- through of energy and purchased water cost increases as they occur, however, they were resistant to the idea of estimating labor cost increases in advance, of July 1. ThiS. resistance effectively eliminates the option of fixing and adjusting rates on a two-year basis as demonstrated in the OCtober report. The October Engineer's Report recommended the two-year revenue plan' with · rate adjustments occurring in mid-winter, when water use is minimal, to soften any cost increase' impact on the City's customers. Council members present at the workshop appeared to agree with the mid-winter adjUStme.n_._t~.excepting for the l~bor cost adjustment that always occurs at July 1. To accommodate this policy feeling it would appear appropriate to add pass-through labor'{djustments to energy and purchased water. . . PLANNING . . . RESEARCH . . . ENVIRONMENTAL ENGINEERING ~ ~ MO~'~t_~~ ~~ ~ XNC~ 17802 Sky Park Circle, Suite 201. Irvine, California 92714/(714) 979-8733 City of Tustin -Z- December 10, 198Z in the revised plans presented in the attached supplemental report, 198Z-83 budget numbers have been used assuming pass-through energy and purchased water increases plus labor cost changes which will generally occur at the beginning of the fiscal year. This will permit formal rate adjustments to occur in mid-winter (JanuarF 1) each year with the principal elements of adjustment confined to capital improvements and costs -~elated to pass-through costs. The third plan' shown herein represents a modification of the recommendation cont2i~ed in the October report using all of the same assumptions described above excepting debt. The original October report recommendation for debt service is retained in this alternative plan without surcharges for comparative pUrPoses only. The debt service element in the October report assumed refinancing of most of the $900,000 bond debt in Januar7 of 1985, spreading the repayment cost out over a Z0-year time-frame. It will also be noted in the October Engineer's Report relating to financial projections, that growth in the immediate future has been assumed as flat. This was done to more accurately reflect near future water sales and corresponding revenue. It is realized that as the economy turns around, growth will once again become an important factor in both cost and revenue, in this regard~ the City should consider the near future adoption of a schedule of "development fees" to generate .funding for capital facility requirements which will be caused by such growth as it occurs. ' The proposed debt service'surcharges as developed in the attached plans will effectively .be paid by current system users within a relatively short period of time. Adoption of a realistic "development fee" schedule will provide greater equity between existing C,ity customers and future customers that ~will not have previously contributed to the capital plant. The analysis required to determine a fair and equitable development fee schedule involves research not included in the scope of work. for this study, therefore, additional study would, be necessary. We Will'be available 'at the Council_. workshop on December Z0 to ~-~wer qUesti°n~ and' discuss the contents of this supplemental report further. - ~. ,-._ - Yours very truly, vice /rasp CITY OF TUSTIlq WATER SYSTEM FINAN~ REVIEW AND RATE STUDY SUPPLEMENTAL REPORT ]~TRODUCTION 'An engineering report entitled 'City Of .TUStin Water System FinanCial Review and Rate Study~~ dated October ZZ~ 198Z~ Was 'presented to the City Council in workshop session' on November 16~ 198Z. While no formal action was taken by, the City Council at that time~ a number of concerns and severai constructive suggestions were expressed which constitute 'the basis'` for this supplemen{al report., . , '- The engineering report reviewed the financial history of the City's Water Department since the City assumed operating reSPonsibility on November 1980. Five-year financial projections~ alternative 'water pricing considerations~ a' water rate structure~ and specific rate recommendations adequate for the next two-year period Were included in the October report. An important aspect of the. report is a clear delineation of the City's debt obligations includSng the system's acquisition cost~ the assumption of former Tustin Water Works bond debt and a .negative cash flow obligation to the City's General Fund. These obligations represent a substantial portion of total Water Department cost until they are finally retired~ and the recommended rate structure included a debt retirement increment that assumed some refinancing of existing debt. Several members of the Council have expressed support for the general principles contained in the proposed rate structure~ however~ would prefer to see at least 'some of this debt obligation treated as a surcharge superimposed on regular' rates rather than refinance the debt as it comes due....... ~ Other Council expressions noted during the wor~ksh°P sessiOn~ included the desire for a' shorter time-frame between rate adjustments.: to.. alleviate, l°ng-term assump{i6nl 'related to future City wages and~i~r0visio~:'~6r"~'~i'thr~tgk' adjust- ment of costs that are beyond City control Pass-through cost adjus.tments generally include, energ~r., and Purchased' water supply~: howeVer~ if; labOr cost increases were also included in the pass-through provisions',: regular, formal rate adjustments could continue to take place at January 1' each year.' Mid-winter rate adjustments are highly desirable from a customer relation~ Point of.'VieW;'. In conformance With the suggestions outlined above~, particularly the ·desire for rate adjustment to accurately reflect City wage rates at Suly 1~ the revenue S-1 plans presented herein reflect the City's current 198Z-83 budget for operation and maintenance as presented on Table 3-5 (page 3-9) in the October engineer's report. In addition to the use of current 198Z-83 operation and maintenance-b.udget figures, two plans for debt surcharges are presented. Plan A provides for a surcharge that represents a sinking fund for the retirement of Tustin Water Works Bonds only, on schedule without refinancing. Plan B provides a surcharge that includes the Tustin Water Works Bond retirement and the regUlar acquisition debt payment of November 1983 as shown on page Z-10 in the engineer's report. In both cases the surcharge represents 75 percent of the annual sinking fund amount with the remaining Z5 percent allocated to commodity rates in accord- ance with the October engineering report rate structure..recommendations. .. COST REcoVgRy -SOtYmEMENTS -- . -'. . Based on the previous discussion, the total annual cost recovery requirement is $4,148,954 divided approximately 60 percent for operation and maintenance and 40 percent for capital related expenditures. Over 31 percent of the total annual cost is direct debt service..The following table presents a summary of the ~osts that· are used herein to determine rates and charges for the respective revenue plans. COST SUMMARY OPERATiON AND MAINTENANCE Customer Service Expense Other O&M TOTAL O&M CAPITAL Capital Improvements ACquisition Debt (Nov. 1983), Tustin Wastewater Bonds (Z yr annual)a Developer Refunds Negative Cash-Flow Interest' TOTAL CAPITAL . TOTAL ANNuALIZEi~ cost.' .. - . ~ . . $ Z09,475 Z ~ Z93 ~ 348 '$Z,50Z,SZ3 $ 351,700 459,931 641,500 110,000 83,000 ' $1,646,131 :'. ' o -,..,.. '_ -, : $4,148;954 aIncludes interest and 'the accUmulatiOn 0f'$900,000 principal due 5anuary~ 9, 1985 (two years). · . . : .... - ._ . - . :-... ::- . , ; ~:.'::- ::,.-.,,..-.-::-?'-).. RATE STRUC~~ :.· _ The recommended structure" for ..both" rates'~ and'.:.' surcharge provisions are described as follows: -' - "'-.- ' ".L'_: ::' ~ :-, - .- ,.. . '. , . . . . . Z. Customer Service Expense is equally divided between all customers regardless.of use or meter size and is included in a bimonthly "service availability charge." · seventy-five precent (75%) of the annual capital expense not funded from other sources (or the surcharge) is allocated to the-unit capacity of respective meter size or ,]~its served in the case of multiple residential property and is also included in the "service availability charge." . . Seventy-five percent (75%) of the debt obligations earmarked to surcharges are allocated to customers in the same manner as capital expense in Z, above. l~emaining costs including other operation and maintenance expense and Z5 percent of. capital cost (not included in either the surcharge or' service availability charge) are allocated to commodity ·rates. Commodity rates are uniform including a bimonthly lifeline rate for the first 600 cubic feet of consumption. ALTERNATIVE DEBT SURCHARGES Plan A includes the payment of interest on outstanding Tustin Water Works Bonds, $191,500/year and principal accumulation of $450,000 per year for a total of $641,500 2~ually. in calendar 1983 and 1984. The $900,000 bond principal payment'is due January 9, 1985. Allbcation of 75 percent of this annua~ costt among the total capacity' ,,~its. served by the City (see Table 5-Z in the~ engineering report) results in a surcharge o..~~.~85 bimonthly per capacity unit. The multiple residential surcharge would be~$~Z.Z~ per residential unit._. . Plan B includes the' surcharge coSt allocation demonstrated ~n Plan A plus the inclusion of the November 1983 acquisition payment. The acquisition debt payment scheduled for November 1983 includes $147,8Z6 for' principal $31Z,105 of interest (total $459,931). An allocation' Of 75 percent of. this ~ual~ cost among all capacity units plus the bond debt allocation shown in Plan A results in a surcharge of $4..8F9-.-~i. 'xmonthly per capacity ~t.. The multiple residential surcharge would be $3_.gZ~er residential -~t. - ' · ~~- . · S-3 SURCHARGE SUMMARy The bimonthly debt surcharges for each plan are shown as follows: · . Classification (Service Size) Plan A- Plan'B Multi-Res/Unit $ Z. Z8 $ 3.92 Meters 5/8x3/4" 3/4" Z" '3"' 4" Z.85 4.Z8 7:13 14.25 gZ.80 4Z.75 71.Z5 14Z. 50 ' 4.89 .7.34 1Z; Z3 Z4.45 39.1Z 73.35 1ZZ. Z5 Z44.50 COST ALLOCATION TO SERVICE CHARGES The cost allocation process to determine regular service charges is the same as provided for in the October engineering report excepting for use of the 198Z-83 budget figures and removal of costs associated ~vith the surcharges. Due to the different surcharge'plans there are also two separate "service availability charge" plans. Customer service expense equally allocated to all meters served is identical for each plan and is calculated as follows: Customer Service Expense. = · . $Z09,4'~5 "$15.18 ' " 13,804 meters = 6 billings = $Z.53 per meter Service bimonthly-` Based upon the previoUs-discussion relating to retirement of bonds on schedule, total capital requirements include scheduled' improvements to the Water system $351,700 (198Z-83 budget), acquisition debt $459,931 (November 1983), Tustin Water .Works Bond debt $641,500 :(Z year annual), developer refunds $110,000 (198Z-83 budget), and interest "on the negative cash flow in the City's general fund of $83,000. (added to prevent an accumulating deficit). The demand increment pbrtion of the service' availability charge is. determined · by the annual capital cost times 0.75, divided by total capacity units as shoWn in 'Table 5-Z in the engineer*s report. The bimonthly Char, ge is Computed by dividing the 2~nual 'charge by billing frequency. The computation for each plan is presented as follows: Plan A Capital Requirement x 0.75 Less Surcharge Revenue Remaining Demand Requirement : $1,Z34,598 = (481,1zs,) = $ 753,473 Service Availability Charge Demand Increment = $753,473 $Z6.71 = $4.46/cap unit bimonthly ZS,Z09 CUs= 6 billings Plan B Capital Requirement x 0.75 Less Surcharge Revenue Remaining Demand Requirement = $1,Z34,598 = (8Z6~073) = $ 408,5Z~ Service Availability Charge Demand Increment = $408,5Z5 $14.49 = SZ.4Z/cap unit bimonthly ZS,Z09 CUs- 6 billings SER~CE CHARGE SUMMARY The bimonthly regular service availability charges for each plan are shown in the following tables: PLA~ "A" SERVICE AVAVr-ABILITY CHARGES Total Meter Customer Demand Service Size Service Increment Charge 5/8x3/4" $Z.53 $ 4.46 $ 6.99 3/4" Z.53 6.69 9.ZZ 1" Z.53 11.15 13.68 1M" Z. 53 ZZ. 30 Z4.83 Z" Z.53 35.68 38.Z1 3" Z. 53 66.90 69.43 4" Z.53 111.50 ' 114.03" 6" Z. 53 ZZ3 . 00 ZZ5.53 The bimonthly service charge for service where residential ,nit is served by a meter includes: more than one a ~single' custome~ service charge of $?,.53 per mete~ Plus demand charge Of $3.57 per ,m~t. ; . - S-5 PLAN "B" SERVICE AVAILABILITY CHARGES Total Meter Customer Dem and Service Size Service Increment Charge 5/8x3/4- $Z.53 $ Z.4Z $ 4.95 3/4" Z.53 3.63 6.16 1" Z.$3 6.05 8.58 1M" Z.53 1Z.10 14.63 Z" Z.53 19.36 Z1.89 3" Z.53 36.30 38.83 4" Z. 53 60.50 63 . 03 6" Z.53 1Z1.00 1Z3.$3 The bimonthly service charge for service where residential unit is served by a meter includes: more than one a single customer service charge of $Z.53 per meter plus a demand charge of $1.94 per unit. COMMODITY CItARGES The City's 198Z-83 operation and maintenance budget is SZ~50Z,SZ3. Customer service expense is $Z09~475 collected with the service availability charge~ leaving SZ~Z93~348 plus the remaining Z5 percent of capital expense ($411~533) to be collected with commodity rates. Commodity related cost recovery requirements under both Plan A and Plan B is SZsT04s$81. The October engineer's report also indicates that water sales of 5~000~000 consumption units per year can be expected. Assuming that each meter service consumes the lifeline quantity at the rate of $0.30 per 100 crt ft, 497,05Z consumption units would be used at a revenue yield of $149,115. Remaining consumption 'would necessarily have .to recover remaining cost as follows: ($Z,704~881 - $149~115) (5,000,000 -497,04Z)- =. $0.57/100 cut ft lq. ATE ADJUSTMENTS The adoption of either Plan A or Plan B provides for an equitable rate structure and corresponding rates at present cost. Both plans generate the same amount of total revenue'and both plans retire $900,000-of Tustin Water'Works bonds due in January of 1985 without refinancing. At 'that time the surcharges could be reduced to a level that would still accommodate the remaining outstanding bonds and the negative cash flow (General Fund deficit). It should be noted, however, that the acquisition debt service used to develop either the Plan B surcharge or the service availability charge and water rates in Plan A include only the interest and principal for the November 1983 payment. Following that payment date, a different acquisition repayment schedule will be in effect and either rates or the sur,charge or both will require readjustment.. PASS-THROU GH AD JU STMENTS Automatic administrative pass-through adjustment of commodity rates for energy, purchased water, and possibly labor, provides assurance that the revenue plan will maintain fiscal continuity. Using 198Z-83 as a base year, purchased water ($1,1Z5,300) represents 4Zpercent of the commodity rate revenue requirement. Energy. for pumping water' ($356,400) represents slightly over' 13 percent of the commodity rate revenue requirement. Demonstrating the pass-through effect of a 10 percent increase ($11Z,530) in the cost of purchased water~ as an example, would be accomplished as follows:: $11Z~530 = $0.0Z5/100 cut ft i5,o, oo,ooo - 9?,osz) In 'the above example, water use i~ excess of' the lifeline rate would increase Z.5 cents per 100'cu ft. Purchased water and energy are important and substantial costs that are completely beyond the City's control. ImmediaTM recovery of such cost increases as they occur, - will provide financial stability for the City's Water Department. SUMMARY · A summary presentation of the applicable rates and charges for each plan that includes debt surcharges is presented on Table 1 and Table Z. Comparison of the results shown in Tables 1 and Z with the recommended rates in the October engineer's report would not be a proper comparison because of the difference in base costs used. The October report plan included substantial refinancing of the $900,000 of Tustin 'Water Works bonds in January of 1985, a financing plan for acquisition debt, and all other costs were averaged for a twoLyear period with no interim rate adjustments necessary. Since the two plans developed in this supplemental report are based on the current budget and assumed automatic 'labor, power, and purchased water cost increases, it'would appear necessary to modify the .engineering report' recommendations .using the same base for comparative purposes. 'Table 3 presents a modification of the engineering report recommended rates reflecting the 195Z'$3 budget figures, as used in Plan A and B excepting for debt service..The debt service accumulation recommended in the original report is retained~ which would require 'the refinancing of most of the $900,000 Tustin Water Works bonds due in January .1985. The Table 3 alternative also uses a service availability charge without debt service surcharges. As pointed out in the October engineering report, the expected 2~nual revenue from the city's present rates is $3,440,595. This amount i~ inadequate to recover costs under any of the alternative, plans. Table 4 presents a summar~ comparison of expected gross revenue and respective cost allocation to the various rate structures, including the City's present rate structure. ' FISCAL POU~ The cost accounting and cost allocation methodologY used herein and detailed in the October Report~ are based on sound' and defensible principles widely used in modern water rate design by muni'cipal water suppliers. The results represent fair and equitable allocation of cost between the various customer categories regardless of which 'demonstrated plan is finally selected by 'the Council: The differences between these plans are policy determinations related to the financing of current outstanding obligations and the. time-frame between rate adjustments. A decision was made in 1980 that began a City water supply enterprise. The most important result of this study is a recOmmendation t_hat the City Council .adopt financial polices that. will assure continued go°d service to the public by establishing and maintaining the fiscal health of the water utility enterprise. Adoption of the rate structure in principal, provisions for pass-through cost adjustments~ scheduled annual financial reviews, established policy for debt retirement (long or short)~ and the eventual establishment of a schedule of "development fees" to fund facilities made necessary because of growth~ will ail combine to assure a solid fiscal basis for the water ut.ility enterprise. TABLE 1 BIMONTHLY WATER SERVICE RATES AND SPECIAL CHARGES PLAN A FIXED .CHARGES (Other Than Multi-Residential) · . Meter Service Debt Total Size Availability Service Fixed (Inches) Charge SurCharge Charges 518:3/4 $ 6.99 $ Z.85 $ 9.84 3/4 9.ZZ ' 4.Z8 13.50 1 13.68 7.13 Z0.81 1~4 Z4.83 14. Z5 39 . 08 Z 38.Z1 'ZZ.80 61.01 3 - ' ' 69.43 4Z.75 11Z.18 4 ' 114.03 71 · Z5 185. Z8 6 ZZ5,53' 14Z. 50 368 · 03 FIXED CHARGES MULTI-RESIDENTIAL .. a. Service availability charges will be the accumulated total of $Z.53 for each meter plus $3.57 per unit. b. Debt surcharge will be SZ.Z8 per ,,nit. COMMODITY RATES First 600 cuft @ $0.30 per 100 cuft Over' 600 cuft @ $0.57 per 100 cu ft' S-9 TABLE Z BIMONTHLY WATER SERVICE RATES AND SPECIAL CHARGES PLAN B FIXED CHARGES (Other Than Multi_Residential) Met er Service Debt Tot al Size Availability Service Fixed (Inches) Charge Sttrcharge Charges 5/8x3/4 $ 4~95 , $ 4.89 $ 9.84 3/4 6.16 7.34 13.50 · 1 8.58 lZ.Z3 Z0.81 1M 14.63 '-7,,4.45 39 · 08 Z Zl. 89 39.1Z 61. O1 3 38.83 73.35 - 112.18 4 63 . 03 1ZZ. Z5 185. Z8 6 123 . 53 244.50 368.03 · FIXED CHARGES MULTI-RESIDENTIAL · a. - Service availability charges will be the accumulated total of $Z.53 for each meter plus $1.94 per unit.' b. Debt surcharge will be $3.9Z per unit. COMMODITY RATES First 600 cuft @'$0~30'per 100 cuft Over 600 cult@ $0.57 per 100 cult S-10 TABLE 3 BIMONTHLY WATER SERVICE RATES AND CHARGES (Engineering Report Recommendations Modified) FIXED CHARGES (Other Tham Multi-Residential) Meter Total · Size Customer Demand Service {Inches) Service Increment Charge $/8x3/4 $z.$3 . $ s.$s $ 8.08 3/4 Z.53 " 8.33 10.86 1 Z.53 13.88. 16.41 -1M Z. 53 Z7.75 30. Z8 Z Z.53 44.40 46.93 3 'Z. 53 83. Z5 85.78 4 Z. 53 138.75 141 . Z8 6 Z. 53 ZT?. 50 Z80.03 FIXED CHARGES MULTI-RESIDENTIAL Service availability charges for multiple residential properties will be the total of $l.53 for each meter plus $4.44 per ,mit. COMMODITY RATES First 600 cu ft @ $0.30 l~er 100 cu ft Over 600 cuft @ $0.55 per 100 cuft S-Il 0[~ I o I 0 c~ o .,., 0 0 I I I I c~ S-1Z · C Moody Investors Service - g9 Church Street, New York, N.Y. 10007 212-553-0300 Exhibit I ..~ September 19, '1983 .~ Mr. Bill Huston City Manager City of Tustiu 300 Centennial Way Tustin, California 92680 Dear Mr. Huston: We wi'sh to inform you that our Rating Committee has assigned the rating of A to the $4,500,000 Tustin Water Corporation, California~ Lease Rental Bonds to be sold September 20, 1983. in order that We may maintain the currency of this rating, over the period of the loan, we will require current financial and other updating information. We will appreciate your continued cooperation in the future. Enclosed please find our credit report on the above referenced bond sale. Sincerely yours, Freda Stern Ackerman Executive Vice President EJs: vlw . · cc: Mr. Edwin Wells Bartle Wells Ass6c. 1636 Bush Street San Francisco,. Caiifornia 94109 25 Broadway, New York. New York 10004, Telephone Debt Rating Serv~ october 13, 1~83 Hr. E~win Wells, Consultant Battle Wells Associates 1636 Bush Strut San Fra~cisco, California 94113 $4,500'00.0_C__~.t¥ o.~.. Tusttn Wateg.Corpogation (CaItfor~nLa) , Lease Revenue Bonds. seztes-A'~ dat~: october Ir !9B3 ,_ Dear Mr. Wells=. Pursuant to r~quest fo= a Standard & Poor's rati~ on the above debt obligations,'we have =ev-~ewed the infor~ation, furnished to us and, subject to the terms and con~ttions o~ the MEHO~~ OF AGREEMENT on the r~verse stSe hereO~, have assigne~ a rating o~ ~A-~ to the obligations. Please note that the information re~erre~ to in the thir~ paragraph of the M~MOP.~NDUM OF AG~EBT~KNT includes ~u~ au~its ~d ~gets ~,-~or revenue ~n~ ratings in ~,~tion with ~nstruct~on f~nc~ng~ profess Te~rts, not less often than ~rte~lF, ~=ing the ~o~t ~tng ftnan~.~ In ~he event that ~ou ~ecide to include this. rating in an o~ftcial Statement, prospectus or other o~fering literature, we request that ~ou include S&~'s ~efinttion *of the rating ~ together wi~h a statement that the rating day be changed, suspende~ o= withz]rawn as a result of changes in, or unavailahilit2' o~,. information. We aze please~ to have been o{~ servic~ to 2ou.. Our bill will be sent in due course. I~ ~u have any T~estions, please contact t~s. /cc H~n c. Gt~an Y:.~OODY'$ INVESTORS SVC , Moo y Investors Scrv]c ~g C~h~'ch 5'truer N~w,~ Y~rk, NY 1~:D7 · April 20; !993 .Municipal Bond Investors Assurance Corporation 113 King Street .krmonk, New York 105:0.4 Dear M~/.A Co.-p.: 's Inves%ors Serviae hz assigned uhe'ratin~ of AAa Insured - Policy NO. 13492). =o the $11,500,000 City Par=icipation, Zmries 19~3, da~ed Amri! 1, 1993, which sold April 5, !9~3. The r&tin~ is based upon an insurance Policy provided by Municipal Bond Investors kSsura_nce r~cration. ) no: he$i=a~a =o con~am~ the &ssi~n~d analyst, Margaret er ~= (212) Sincerely yours, Daniel ~..He~mowi Executive Vic~ President Director · Public Finance Depar~men~ al & Poor's Corporation Bond Insurance Admlnistretian New York, New York 10004-10i~ 212/208-1740 :,FAX 212/208-82fl2 Bond Investors Assurance Corporation ,13 King Street , NeW York 10504 .. $11,$00,000 City of 7kstln, California, Water Systtm. Revenue Certifi~'ts of Patticipatlon, 1993 Series, dated.. April 1, 2993, due: April' Z, I994-2013 'O~OLICY #]3492) and Gcnttamcn: is to advise you that we have Changed the .rating to 'AAA; from 'A' on the subject rating changc reflects our assessment of the likelihood of repayment of principal and !retest based on the bond insurance policy your company, is providing. · · using this Standard & Poor'~ rating, include S&P's definition of the ra~ing together ith a statement that this may be' changed, suspended or withdrawn as a result of changes in, unavailability of, information.. This rating is not a "market rating'*, because it ia not a to buy, hold or se, Il the obligations. · . . !you have any questions, 'plgasc contact Very truly ,yours, Municipal Bond Investors Assurance Corporation ' 113 King Street Armonk, NY 10504 914 273 4545 ~pril 21, 1993' the corporate trust office of Bank of America National Trust and Savings Association Los Angeles, California Gentlemen: $11,500,000 City of Tustin Water System. Revenue Certificates of Participation 1993 Series In connection with the above-described obligations (the "Obligations") of which you are acting as paying agent (the "Paying Agent"), please be advised that the payment to you of principal' of and intgrest on the Obligations has been guaranteed by a policy of financial guaranty insurance (the "Policy") issued by the Municipal Bond Investors Assurance Corporation (the "Insurer"). Citibank, N.A., New York, New York, (the "Fiscal Agent") is acting as the fiscal agent for the Insurer. The Policy unconditionally and irrevocably guarantees to any owner or holder of the Obligations Or, if applicable, of the coupons appertaining· thereto (the - "Owner"), the full and complete payment required to be made by or on behalf of the issuer of the obligations (the "Issuer") to the Paying Agent or its successor of an amount equal to (i) the principal of (either at the stated maturity or by any advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the Obligations as such payments shall become due but shall not be so paid (except that in the event of any acceleration of the·due date of such principal by reason of mandatory or 'optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund. payment, the payments guaranteed by the Policy. shall' be made in such'amounts and at such times as such payments of principal would have been due had there not been any' such acceleration); and (ii) the reimbursement of any such payment whi6h' is subsequently recovered from any Owner pursuant to a final judgment by a court of ~ompetent jurisdiction that such payment ~onstitutes an' avoidable preference. (.a "Preference") to the Owner within the meaning of any applicable bankruptcy law. The .amounts referred to in clauses (i) and (ii) of the preceding, sentence are referred to collectively in this letter as the "Insured Amounts. '" .. .' Exhibit J .. · · .: · . · ::: .- ... .. .. .. · .. · -2- The Policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Obligations. The Policy does not, under any circumstance, insure against loss relating to: (i) optional or mandatory redemptions (other than mandatory sinking fund redemptions); (ii) any payments to~ be made on an accelerated basis; (iii) payments of the purchase price of Obligations upon tender by an Owner thereof; or (iv) any Preference relating to (i) through (iii) above. In the event that the Issuer does not make full and complete payment when due of the principal of and interest on the Obligations, please immediately notify, by telephone or telegraph, the Insurer, 113 King Street, Armonk, New York, 10504, (914) 273-4545. On the due date or within one business day after receipt of such notice, whichever is later, the Insurer will deposit funds with the Fiscal Agent sufficient to pay the Obligations (or, if applicable, coupons appertaining thereto)' then due. Upon presentment and surrendeY of such Obligations (or, if applicable, coupons) or presentment, of such other proof of ownership of Obligations together with any appropriate instruments of assignment to evidence the assignment of the Insured Amounts due' on the Obligations as are paid by the Insurer, and appropriate instruments to effec~ the appointment of the Insurer as agent for the Owners in any legal, proceeding related to payment of Insured Amounts on the Obligations (or, if applicable, coupons), such instruments being in a form satisfactory to the Fiscal Agent, shall disburse to you payment of the Insured Amounts due on such Obligations (and, if applicable, coupons), less any amount held by you for the payment of such Insured Amounts and legally available therefor. Forms of such instruments of assignment and instruments to effect the appointment of the Insurer as such agent for the Owners .(collectively, the "Claim Documents"), which are currently acceptable to 'the Fiscal Agent and the Insurer, are on file with the Fiscal Agent. The Insurer may, from time 'to time, file revised forms of Claim Documents with the .Fiscal Agent in substitution for the form~ previously filed with the Fiscal Agent, and upon such filing, the revised forms .shalI supersede all forms of Claim. Documents previously filed with the Fiscal Agent, except as otherwise directed by the Insurer in writing. In the event that you shall have prior knowledge of an impending failure by the Issuer to make payment on the Obligations (or, if- applicable, coup°ns) when due, please immediately notify the Insurer so that-it will be possible to have funds available' for you on the due date to make payments against surrendered Obligations (and, if applicable~ coupons). · Your cooperation in this matter will be most appreciated and will make. it possible for the Owners of Obligations guaranteed by the Insurer to be assured of a~l payments when due. · Very'truly yours, David H. Elliott, President Municipal Bond Investors Assurance Corporation FINANCIAL GUARANTY INS~CE POLICY Municipal Bond Investors Assurance Corporation Armonk, New York 10504 Policy No. 13492 c~p~lc palm ~d to ~ m~ oy or ~ ~half of ~ ~s~r to t~ co~ ~t ~f~ of B~ of ~fica Nafi~ Trust a~ Sav~ ~afio~ L~ ~, ~lif~i~ ~ i~ ~or (~ ~a~ng ~nt") of ~ ~nt ~u~ to (i) ~ ~al of (ei~r at ~ sm~d mam~ or by any ~va~nt of ~tu~ ~u~t to a m~at~ slnk~g ~ pa~) a~ ~t ~ ~ Obllgafio~ (~ ~at ~ ~ ~fined ~low) ~ such pa~n~ shall ~c~ du~ but shall nm ~ so pa~ (~pt ~t ~ ~ ~t of ~y ~6~ of ~ d~ da~ of such p~ipal by ~ m~ato~ s~ fu~ ~ ~ pa~n~ ~~d ~by ~ ~ m~ in such ~n~ ~ at such ~ ~ such ~~ ~ ~ip~ would hav~ ~n ~ h~ ~ ~t ~n any such ~mti~); ~ (H) ~ ~bu~nt of ~ ~ch ~t whi~ ~ su~u~ntly ~cov~ from ~ ~r pu~ua~t to a ~nal jn~nt by a co~ of c~t ~dic6~ ~at such pa~t c~mt~ ~ ~o~ab~ ~f~c~ to suc~ o~r ~sihm ~ ~m~ ~f ~y a~hcab~ b~~ law. ~ ~nts ~f~d ~ ~ clau~ (i) ~ (il) of ~ ~ng ~nc~ sh~l ~ $I l,.S00,000 · City of Tustin Wa~r Sys~m P,~venu¢ C~tifical~ of Participa6on !~3 ~ ~t~n ~t~ ~ ~g~ or c~md mini by ~ ~umr ~ ~ Pang Agent ~ ~y ~ of ~ ~lign~ ~ paint of an ~ ~ount f~ which is ~n ~. ~at s~h ~qui~d pny~t h~ not ~ m~. ~ ~umr ~ ~ ~e d~e ~ s~hpa~nt ~ wi~ o~ b~ day afar mc~t of n~ of such n~pay~ whlc~ver [~ laler, will mak~ n ~p~it of ~, in ~ accent ~ Ofib~ N~, in New Y~, New Yo~. or ~ succor, su~c~m f~ ~ pny~t of any such ~u~d ~n~ wh~h ~ ~n d~. U~ p~nt ~ su~r of such Obligatio~ ~ ~n~nt of such o~r ~f of ow~hip of ~ ~liga~o~, togc~ wi~ ~y ~a~ i~n~ of ~[g~nt to cvi~n~ I~ ~ign~nt of tlc ~su~d ~b ~c ~ t~ ~ii~s ~ am paid ~ ~ I~=, ~ a~r~a~ Jm~n~ to cff~t ~ n~oin~cnt of 0m ~su~ ~ agent fm such o~. of ~ Obli~ti~ in ~y ~g~ ~~g ~la~ to paint o[ ~d ~oun~ on ~ Obligations, such ~nb ~ing in a f~ sat~fa~ to ~ti~k. N.~ ~ti~ N~. shall ~s~ to such ow~, ~ ~ Paying Ag~t pnymcnt o~ ~c ~umd ~oun~ duc ~ such Obl{ga~ons, ~ any ~o~t ~ by t~ Pay~g ~nt for ~ pay~nt o~ such ~umd ~oun~ a~ ~nlly nvajlab~ t~for. ~is ~licy ~ n~ insure a~imt i~ of any p~ay~t ~-~.Jum w~ may at ~y ~ ~ payable ~ ~t to any Obligati~. As u.~l h~¢in, the I~nn 'owner" shall n~an Iig r~gi.~lcmd owner Of any Obligation as indicalcd in ti~ books maintair~d by the Paying Agent, tl~ Is.~u~, or any dcsisne~ of th~ Issuer for such purpose. The lerm owner shall not includ~ th~ Issuer or any party who~¢ agrc-~'n~nt with the Issuer constitul~ tl~ ut~icrlying s~c~Hty for thc: Obligations. Any s~rvicc of process on th~ Insttrcr may be mnci~ to th~ Insurer at its offices ioca~d at 113 King Strut, Armc~ New York 10504'and such scrvicc of process shall b¢ valid and binding. This policy is non-canc¢llabi¢ for any mason. Th~ premium on this policy is not r~fundabi¢ for any mason including tl~ payment prior to maturity of tl~ Obligations. 1~ W~ WFI]~,EOF, ttm lmur~r has caused this policy to b~ executed in facslmii~ on its tx:half by its duly authorizod officers, this 21st day of April, 1993. MUNICTP~ BOND INVESTORS ASSURANCE CORPORATION · President Auk. st: STD-R/CA-4 -i · · ... .. .-. Exhibit ~K ENTERPRISE FUNDS · 65 contributions of fixed assets, donations restricted to the acquisi- tion of fixed assets, and contributions and system-connection- related fees (e.g., impact, tap) in excess of related costs. A significant accounting issue related to contributed capital was addressed in the 1987 Codification, Section G60.116. This section states that "depreciation recognized on assets acquired or constructed through such resources externally re- stricted for capital acquisitions may be closed to the appropriate contributed capital account..." Such "resources" are identi- fied in the 1987 Codification, Section G60.116. These resources include grants, entitlements and shared revenues externally restricted for capital acquisitions or consmaction. The optional close-out of depreciation to the contributed capital account should not be netted against the depreciation expense account. Instead, it should be presented as a separate account after et income as shown in Illustration 8-1. Payments in Lieu of Taxes. Governments o~ten assess enter- rise activities for payments in lieu of various taxes (e.g., property taxes, sales taxeS). These taxes should be reported as an operating expense only when the assessment is based on criteria applied to similar activities in the private sector. For example, if an enterprise activity is assessed for an amount equivalent to a general sales tax and the payment is based on a percentage equal to that found in the private sector (1 percent of sales), the payment should be classified as an operating expense. When there is no direct relationship, the payment should be classified as an operating transfer out. Regulation. Sometimes government enterprise funds (e.g., elecu-ic utilities) are subject to rate regulation. SFAS No. 71, Accounting for the Effects of Certain Types of Regulation (as amended by SFAS No. 90, Regulated EnterprisexmAccounting for Abandonments and Disallowances of Plant Costs) applies to enterprise funds that meet all of the following criteria: (a) The enterprise's rates for regulated services or products provided to its customers are established by or are subject to approval by an independent, third-party regulator or by its own governing board empowered by statute or contract to establish rates that bind customers. (b) The regulated rates are designed to recover the specific enterprise's costs of providing the regulated services or products. (c) In view of the demand for the regulated services or products and the level of competition, direct and indirect, it is reasonable to assume that rates set at levels that will recover the enterprise's costs can be charged to and collected from customers. This criterion requires consideration of anticipated changes in levels of demand or competition during the recovery period for any capital- ized costs. ILLUSTRATION 8-1 Optional .Add-back of Qualifying Depreciation Net income $ 1,250 · Add depreciation on t-~xed assets acquired by grants extemaily restricted for capital acquisitions and · constTuction .. 25 Increase in retained earnings $ 1,275 Although some may conclude that any enterprise fund with rates approved by a governing body is subject to the provisions of SFAS No. 71, generally only enterprise funds that do not receive subsidies ('i.e., those with rates designed to cover cost) should adopt these provisions. Authoritative pronouncements that apply to nonregulated enterprise funds also apply to regulated enterprise funds. How- ever, regulated enterprise funds should apply SFAS No. 71 when its provisions conflict with other authoritative pronounce- ments. Regulation of an enterprise fund's prices is sometimes based on the enterprise fund's costs. Regulators use a variety of mechanisms to estimate a regulated enterprise's allowable costs, and they allow the enterprise to charge rates that are intended to produce revenue approximately equal to those al- lowable costs.- Regulators sometimes include costs in allowable costs in a period other than the period in which the costs would be charged to expense by an unregulated enterprise. That procedure can create assets (future cash inflows that will result from the rate-making.process), reduce assets (reductions of future cash inflows that result from the rate-making process) or create liabilities (future cash outflows that will result from the rate- making process) for the regulated enterprise. An incurred cost for which a regulator permits recovery in a future period is accounted for like an incurred cost that is reimbm:sable under a cost reimbursement-type contract. Rate actions of a regulator can provide reasonable assurance of the existence of an asset. An enterprise fund should capitalize all or part of an incurred cost that would otherwise be charged to expense if both of the' following criteria set forth in SFAS No. 71 are met: -(a) It is probable that future revenue in aa amount at least equal, to capitalized cost will result from inclusion of that cost in allowable cost for rate-making purposes. (b) Based on available evidence, the future revenue will be provided to permit recovery of the previously incurred cost rather than to provide for expected levels of future costs. If the revenue will be provided through an auto: matic rate adjustment clause, this criterion'requires that the regulator's intent clearly be to permit recovery of the'previously incurred cost. Rate actions of a regulato_r can reduce or eliminate the value of an asset. If a regulator excludes all or part of the cost fxom allowable cost and it is not probable that the cost will be included as an allowable cost in a future period, the cost cannot be expected to result in future revenue through the rate-making process. Accordingly, the carrying amount of any related asset should be reduced to the extent that the asset has been impaired. Subsequent FASB pronouncements fu~er define when an asset has been impaired and at what value the asset should be carried in the enterprise fund. Rate actions of a regulator can impose a liability on a regu- lated enterprise fund. Such liabilities are usually obligations to the enterprise fund's customers. SFAS No. 71 states that the following are the usual ways in which liabilities can be imposed and the resulting accounting: (a) A regulator may require refunds to customers. Refunds that meet the criteria of... FASB Statement [SFAS] No. 5, Accounting for Contingencies, shall be recorded ~ ' Exhibit L M E M OR.A. NDUM To: From: Tustin City Council Sara B. Penn Date: March 18, 1996 .' Subiect:' ~lhstin V~ratex: Corporation · · I want to go into a little, history of the Tustin Water Corpora[ion and then come to why I am here tonight. '. . -. · In 1980 thc City of Tustin purchased the TuStin \A)ater Works for $6,245,000. $2.6 million of that purchase price was assumption of debt already on the books of Tustin Water Works. This debt matured on various dates .through 1993.' $500,000 of this debt which'was due in 1993 was paid off on 12/31/87 by redeeming those particular bonds. - In 1983(10/1/83).tlae City of Tustin sold $4.5 million of revenue bonds to complete the acquisition for Tustin Water Works ( the balance of the acquisition price was $3,695,000). The difference of $805,000 was used for some purpose-a portion, but not all, would be the cost to issue the bonds. These bonds had maturities on-various dates through 2004-a period of 2-0 ),ears- ~dth over 65% of the principal due in the last 8 years. So these were bonds with balloon payments at the end of bond term. · During thc 6/30/84 year,, a Debt Service Surcharge was initiated to accumulate funds to retire the $2.6 million of debt assumed on purchase of the Water Works and to retire the $4.5 million in bonds issued during that ),ear. · - And we come to 1993. During the. 10 ),ears since the 1983 bonds were issued .only $650,000 wa's paid on the.principal.- it appears that.the City Used the borroWed funds left over f~om 1.983! 86% Of the liability remained on the books. · · -In I993 .(4/21/93) an $I 1.5 million bond isSUe xwas floated to retire the remaining` $3,850,000 due on the.1983 bonds and thc balahce of $7,650,000.Was to be used to make maior impro, vements t© the water system. 'Again there are balloon payments on the principal being due in the very later years of these bonds. (this time the 20 years of maturities have 66% of the pri.ncipal becoming due in the last 1'0 years)." WHY WEREN'T THE RATE INCREASES USED TO RETIRE THIS 1983 BOND DEBT? When you look'at the financial statemenu% money was'being set aside to retire the' debt, but . · . · why wasn't that used?. As in 1983 we again in 1993 had rates increased to retire this new ~ndebt.~lness. THE RATE INCREASES SINCE 1992 HAVE GENERATED ADDITIONAL.. PROFITS OF $SMILLION. The profit of the Water Corporation before any transfers Out was $900,000q-, at 6/30/93. An increase of $900,000+ over 6/30/92. Th~ profit at 6/30/94 was $1.6million + ahd the profit at 6/30/95 was $2.Smillion. " - · Profit after paying, interest in 1987 $2 million: in I988 $2.1 million; in 1989 $1.4million; in. 1990 $'I.6'raillion; in 1991 $700,000; in 1992 ~0. : Since the rate increas&s in 1993, 1994 and I995 $1.7 million has been t~'ansferred to the City's Operat. ing Fund-over 1/3 of the profits! , Transfers to the General Operating Fund haVe ranged from 14% of the net profit to 83% of the net profit' since 1987.'1 'don't have any numbers P~,ior to 'that time. Even iA 1992 when the profit was right at 0, the City transferred over $500,000 to its Operating Fund. Instead of using .this money to retire'debt as the reason behind the increases, the City'of Tustin ~appears to'be "using this 'money to fund short;fails'in its operat4, ons.' I understand that another, rate increase is under discussion. .. THIS IS TAXATION WITHOUT A VOTE. I reque'st that City .~ouncil look into .this matter. I'feel that it should be reviewed in detail by the A/adit Comrnittee and'I would appreciate'a written r~spon~e in 30 days with the appropriate documentation. o. · o o Exhibit L COMMENTS CONCERNING CITY OF TUSTI~ LETTERS OF JUNE 18, 1996 RON NAULT'S COMPARISONS WITH OTHER MUNICIPALrrlES [] Before you can accept another entity's procedure, you would need to understand the assumptions that went into the decision-making process. In the case of another city looking at Tustin's 8.2% transfers they would not know that: (1) liability fund transfers are included and (2) the balanceis reimbursements for personnel and fringe benefits only. [] Per Ron Nault there has never been a reimbursement for anything other than personnel and fringe benefits. There is no overhead allocation. [] Pursuant to Page 4 of the public testimony Before the Public Utilities Commission of the State of California on October 2, 1980 states: Resolution 80-31 of Tustin City Council... "to continue water rates at their same level and hereatter to only modify such water rates as may be required by increased costs of energy, water and operating costs, together with'the cost of necessary capital improvements". This means that the Water Fund cannot transfer a profit to the City of Tustin; it can only reimburse for costs. [] Basically, this is an attempt to compare apples and oranges. BILL BXISTON'S LETTER Transfers in General [] My memorandum to City Council did not object to transfers. transfers of a certain nature from the Water Fund. Redevelopment Agency [] I am questioning Originally, the only reason that transfers from the Redevelopment Agency were addressed is the comparable methodology to the Water Fund as to the computation of the reimbursement of personnel costs and the associated fringe benefits. The additional factor that has arisen after looking at the size of the Redevelopment Agency reimbursements in conjunction with the size of the Water Fund reimbursements, is the realization that the sum of these two allocations become a significant percentage of an individual department's expenses. These could well be an unrealistic allocation. The entire discussion of factors to consider in General' Fund transfers from the Redevelopment Agency is not in point. This has not been questioned2 Water Fund reimbursements for personnel costs and the related fringe benefit costs have absolutely nothing to do with property taxes and the Redevelopment Agency. The comment on Page 3 that "the City does not have a cost .allocation system in place" and "we know (emphasis added) that substantial staff resources are being directed toward high priority redevelopment activities". How do you know? Unless you have a time system that documents hours spent per function or department you are only guessing. And without a computation there is no way oflmowing how good a guesser you are. COMIVIENTS CONCERNING CITY OF TUSTIN LETTERS OF JUNE 18, 1996 Water Fund [] The gemera; statement has been.made that "lack of sound engineering and operations data concerning the condition and capital needs of the water system" was a problem.. However, (1)during the Public Utilities Commission hearing the City Engineer and Water System Superintendent testified "that main replacements will be made to meet system requirements based on good engineering practices, .within budget limitations, n°t on political'considerations." And further in Resolution 83-'7 the City of Tustin states "a complete study of the Tustin water Service rate structure has been completed; and the rate structure has been modified to equitably assess the fixed cost · of the Tustin Water Service". ' Consultants were again obtained in 1993.to asses the rate structure and the capital improvements needed. The staten~ent is made that since 5 staff positions were eliminated and there is an annual savings of $300,000 (whi'ch is not documented) the General Fund is entitled to reimbursement. However, this is contrary to GAAP (Generally Accepted Accounting Principles). You only reimburse for costs incurred, not for what you saved. To give another example of how ridiculous this is - say you sell Your building. and it cost $1,000,000 to operate each year. Your position after the building is sold to continue addifig that $1,000,000 to costs! C{eative accounting at iis outer limits! On Page 4, the statement is made that "the Water Fund was not paying its full share 'of direct and indirect costs incurred by the General Fund". The computation per Ron Nault has never included anything by personnel and fringe benefits. Overhead was specifically excluded because they dicln~ want to have to go through the computation. Again, there is an apples and oranges discussion of private vs pub.lie method of operation. -You either do one or the other. Again, this is not GAAP. Even small businesses are required to maintain adequate books and recordS. The City of Tustin collected during the year ended June 30, 1995 around $40,000,000. To not have a-proper cost allocation system is not to maintain adequate books and records. -.. Exhibit L ISSUES RAISED AT TIlE MARCH 18, 1996 TUSTIN CITY COUNCIL MEETING REFERRED TO AUDIT COMMITTEE 1983 B [] OND ISSUE Tustin City Council RESOLUTIO.IN-gg3,-7 dated January 17, 1983 authorized a Debt Service Surcharge "for the purpose of~ater bonds'' issued September 20, 1983.. During the 10 years since 1983 only $650,000 of the $4,500,000 bonds issued Was paid off. Pursuant to the prospectus of the $4,500,000 bond issue "$852,000 per year are raised through a debt surcharge 'established by the Council to make water debt payments" Over 10 years this would be $8,520;000. Of this mount collected $650,000 was applied to the bond debt. What happened to the remairfing millions?,,. AUDIT ISSUE Pursuant to the 1983 Bond prospectus the Water Fund generated $8,520,00p, which is double the amount of bonds issued. The actual amount collected, which should have been restricted for use in retiring the 1983 bond issue, needs to be' 'confirmed. OBSERVATION The necessity of borrowing funds in 1993 to retire the unpaid portion - $3,850,000 - of the 1983 bond debt would not have arisen if the Debt Service Surchage had been properly used to pay these bonds. LEGAL ISSUE Is this appropriation of funds by the City of Tustin a violation of the security offering prospectus? 1993 BOND ISSUE [3 Tustin City Council RESOLUTION # 92-110 dated September 21, 1992 and Staff Report dated September .16, 1992, that accompanied this resolution, authorized increased rates to "maintain operations, and provide for capital improvements which would be financed through new bond debt". [] AUDIT ISSUE These increased funds since November 1, 1992 (step increases again at November 1, 1993 and'November 1, 1994) are restricted to bond debt retirement and operations-in the water fund. Determine how much each year should have been restricted. [] The 1993 $11,500,000 bonds issue (April 21, 1993) was restricted in use to paying off the balance of the 1983 bond debt of $3,850,000 and to provide for capital improvements of' $7,650,000. [] LEGAL ISSUE In the 1993 bond prospectus, this Debt Service sUrcharge is comingled with the Charges for Services revenue. Is this inadequate disclosure? ..' , . IN SUMIVIARY The $8,520,000 generated by the 1983 Debt Service Surcharge and the 1992, 1993 and 1994 rate increases are restricted to retlring the 1983 and 1993 bond issues. The 1983 fund restrictions are disclosed in the City's June 30, 1983 Financial Statements in Bill Huston's and ROn Nault's letter to the City Council. The 1993. fund restrictions are disclosed in the City's June 30, 1993 Financial Statements in Ron Nault's letter to the City Council. The dollar amounts of these fund restrictions' · haVe never been disclosed in any audited financial statement. The outside auditors should be · consulted on this matter. · · ..· . . ISSUES RAISED AT THE IVLARCH 18, 1996 TUSTIN CITY COUNCIL MEETING REFERRED TO AUDIT COMMITTEE TRANSFERS FROM THE WATER FUND TO Tttlg GENERAL FUND [] The foregoing restrictions mean that (1) only reimbursements of costs AND (_2) transfers of monies above the debt retirement restrictions are allowable. [] These restrictions are unique to the City of Tustin due to the Resolution'language. [] AUDIT ISSUE It therefore becomes important to review the City's computation of reimbursed costs. [] Documentation of the computation of reimbursed costs has been lost per Ron Nault. [] However, Berklee Maughan was given a copy of the calculations pertaining to June 30, 1986. This is an indication of the methodology that had been used at that point. [] AUDIT ISSUE These computations can be rec6nstructed using the City'J methodology from the June 30, 1986 worksheet. It.becomes very clear that this reconstruction is necessary when you look at these June 30, 1986 numbers. Of the $166,693 that was reimbursable; $425,000 was actually transferred - an excess of $258,307. Tkis is more than 2 1/2 times the amount due. Only if there were unrestricted funds available, could the $258,307 be transferred pursuant to the above resolutions. [] LEGAL ISSUE Does the City Council approval of the annual budgets, which included these transfers, void or negate the cash restrictions that accompanied the rate increases? Can the City Attorney give a legal opinion that the City, at any time, can void prior resolutions without going through the resolution repeal process. Since they have Previously not repealed these resolutions City.Council has, perhaps unknowingly, violated these ~:ash restrictions. Neither {he City Attorney, the outside auditors, nor City Staffhave brought to the attention of City Council,'when approving these transfers, that they did not take into consideration computation of these cash restrictions. In addition to the above, it has come to my attention in reviewing the transfers, that there were two components. In 1990, 1992, 1993, 1994 and 1995 the Water Fund contributed to the general liability fund. In the year ended June 30, 1995, it contributed $250,000 which is supposed to be 1/2 of the total premium. AUDIT ISSUE Does the City have an opinion letter from its risk management consul'mnt that the water operation is 50% of the entire City of Tustin's exposure to liability claims? AUDIT ISSUE 'The Redevelopment Agency does not contribute to the general liability 'fund. Why is there no liability exposure for the Redevelo'~ment Agency. Exhibit M ::)ATE: TO: FROM' SUBJECT: '.]-ONE 18, 1996 .. AUDIT C OM/VIITrEE VvqIJuIANI A. HUSTON,'CITY MANAGER I1NTE~ TRANSFERS lnter-Com At its June 20, 1996, meeting, the Audit Corftmittee will be discussing interfund, transfers. I will be unable to attend the meeting since I will be in Washington, D.C. concerning MCAS, Tustin closure matters. As City Manager, it is my ultimate responsibility to propose interfund transfers through the annual budget submitted to the City Council. The purpose of this memorandum is to explain to the Audit Committee my perspective on interfund transfers as ! will not be able to attend the meeting. The City has utilized a practice of interftmd transfers based on a number of criteria. Some transfers, such as tra. nsferring General Fund income to the Capital Projects Fund, are 'relatively straightforwa!, d. Monies are transferred to the Capital Projects Fund to fund general purpose capital improvement'projects transacted through this fund. Other interfund transfers involve more complex financial, administrative and policy considerations. The Water Fund and Redevelopment Fund transfers to the General Fund fall in this category. Because the Water Fund and Redevelopment Fund transfers involve common considerations and others unique to each fund individually, my comments below address each separately. REDEVELOPMENT FUND Over the past five fiscal years, the Fund have been: ._ : . ~ Redevelopment Fund transfers to the General ' 1991-92 $659,000 1992-93 $766;000 1993-94 $766,000 · - . . 1994-95 $~66,0.00 · ' , 1995-96 ' $766,000 . .. Audit Committee MemorandLuu June 18, 1996 Page 2 The proposed .1996-97 transf~er is $766,000. It is noteworthy that in each fiscal year the City's auditors have not identified the method of transfer as a reportable item. , · The Redevelopment Fund transfer is made to cover cost incurred by the General Fund for redevelopment activities. There are .two staff members budgeted in the Redevelopment' Agency, but there is also a significant amount of management planning and oversight provided through General Fund perso~.uel. Additional Costs are inctn'red by the General Fund for office space, financial systems suplSort, general overhead, etc. Over the years, we h~{ve attempted to set the transfer to the General Fund based on a reasonable estimate of these cost considerations. The transfer is not based on a formal cost allocation system because one has not Yet been developed by the City due to cost and staffing limitations. - The transfer to the Generai Fund should also be' considered in the ·context of other factors such as: l. When a redevelopment project area is created, State. law provides .that the current assessed values of property within the project area are designated as the "base year." After the project area redevelopment plan is adopted, any increase in property taxes (due to new development, increase in values, etc.) beyond the base year amount go entirely to the Redevelopment Agency. The General Fund loses annual proper, ty tax revenue as a result of the incremental increase of property tax revenue above the base year being allocated entirely to the Redevelopment Agency. The City could have entered into a "pass ih.rough" agreement with the Redevelopment Agency when its project areas were created, but chose not to and instead make an annual transfer. A pass thr°ugh agreement sets an amount or percentage of property tax revenue that flows to a public agency that otherwise flows to a redevelopment agency. In fiscal year 1995-96, for example, the General Fund did ~tot receive $513,510 in property tax revenue that it Would have if there was not a Redevelopment Agency. It is not unusual for a City with a Redevelo~pment Agency to have a pass through agreement to offset the loss of General Fund revenue. The City of Tustin chose not 'to do so in order to .maximize the amount of funds available for redevelopment projects. ' Cun:ent state law recognizes that cities (and other public agencies) do not have to bear the full burden of General Fund revenue loss due. to a 'redevelopment agency2~ The City of Tustin, if the~ RedeVelOpment Agency was created under. current State' law, .could legally ~receive approximately $790,000 from the ' Redevelopment Agency in 1996-97 to offset the loss of General Fund revenue.. The City would be entitled to a flat 25% share of net armual Rede-~elopment Agency tax increment revenue (net Would be the amour[t after the mandatory 20% set-aside for housing projects); Th~ City's redeQrelopment program has become more aggressive in the past several y.ears. The Shea Tustin Groves housing project', MicroCenter, Newp6rt Avenue underpass project (design, acquisition of 'Case-Swayne, etc.), E1 camino Real Gateway expansion/rehabilitation project and housing rehibflitatiOn programs are examples of a substantial commitment of time to initiate, plan, negotiate and administer redevelopment transactions. Audit Committee Memorandum June 18, 1996 Page 3 While, as indicated above, the City does not have a cost allocation system in place, · we know that substantial staff resources are being directed towards high-priority ' redevelopment activities. .WATER FUND Over the past five years, the Water Fund transfer to the General Fund has been: 1991-92 $358~000 1992-93 $653,000 1993-94 $673,000 1994-95 $673,000 1995-96 $673,000 The proposed 1996-97 transfer is $673,000. In each fiscal year, the City's auditors have not identified the method of'transfer as a reportable item. The underlying basis for the Water Fund transfer is the sarae as the Redevelopment Agency transfer. However, there are differences which wan:ant an explanation. Field operations personnel, general supervisory personnel, water billing personnel, systems maintenance and operations costs, capital improvement projects, etc., are charged directly to the Water Fund. Since the City acquired the water system in 1980, financial systems, general overhead and management planning and oversight is provided through the General Fund. · The water system has gone through what I Consider to be two key phases. From 1980, when the system was acquired, to the late 1980's, a substantial effort was made by the City to deal with: -- . ~ 1. The overall deteriorated condition of some components of the water System;" 2. The water operation's poor financial condition (which effectively precluded adequate transfers to cover General Fund costs); 3. The lack of a credible basis for setting water rates; 4. The lack~of sound engineering and operations data concerning the condition and capital needs of the water system; 5. How to finance acquisition of the system and needed cap.ital improvements.. . . During this first phase period, the City dealt with the above issues by undertaking water rate analyses, various engineering studies and a restructuring of the water system administrative and accounting funCtions. Five staff positions were eliminated. and the workload absorbed by remaining Water operations and' General Fund · personnel. This represents an annual present value savings of approximately 3~udit Committee Memorandum June 18, 1996 Page 4 $300,000 per year to the Water Fund. General management oversight was pr. ovided by General Fund personnel. A bond issue was structured and sold in 1983 to complete, acquisition of the water system. A new water rate structure was implemented, and an aggressive capital improvement program was initiated. All of these actions involved significant support and oversight of General Fund personnel. The second phase, from the late 1980's to present, has entailed more extensive analysis of the operational condition of the water system and options for financing and implementing a $40 h~llion capital improvement program. The water system is now financially stable but continues to need an aggressive capital improvement program to sustain its reliability, and safety, ensure adequate water production and storage capacity, and further reduce dependency on purchased water in' order to stabilize operating costs. This phase has also involved a substantial amount of' General Fund overhead and staff support. In fiscal year 1992-93 a decision was made that, based on t~n year's history and what' needed to be done in subsequent years; the'Water 'Fund was not paying its full share of direct and indirect costs incun:ed by the Genera]. Fund in' support of the water system. The 1992-93 transfer was increased to an amount more reflective of General Fund costs and thereafter held at a relatively flat amount.' The transfer to the G&neral Fund should also be considered in the context of other · factors such as: ~ l. If the water system was privately owned, the City. co.uld collect a franchise fee. Based on projected 1996-97 revenue, the City would collect a minimum of $250,000 per year in franchise fees (based on revenue generated within the City's limits). . . The -City would also be entitled to collect plan check and construction permit. fees for improvements w/thin the public right-of-way undertaken bY a private · water company. . The City would collect approximately $31,000 per year in property tax in-lie~ revenue from a private water company. The Water Fund transfer to the General fund also ensures that County residents who are served by the City's water system pay their fair share of operating the system-. County residents pay through the Water rate structure which is set at a level sufficient to include the 'c°st of the annual transfer. -' City and County residents pay the same exact rates for water services. . . - . · If County residents Were to attempt to obtain water Service other than thiough .the City, their 6ost~ Would be much higher .thah wh'at it coSfs to obtai~ water tl%r. ough the City. To repli6ate the infraStructure needed to provide water service as a standalone system in the Cotmty area (served by the City) .would be very - expensive. Audit Committee Memorandum June 18, 1996 Page 5 Finance Director Ron Nault will provide the Audit Committee a sur~ey of the interfund transfer practices of fifteen other Orange County cities.providing water service. The survey indicates that transfers range from 1% of water revenues to a high of 23%. The average is about 9%. Tustin's 1996-97 transfer is 8.2%. In s.umm~, ! believe the Water Fund and Redevelopment Fund transfers are prudent. Each transfer strikes a balance between not having a 'formal full-cost recovery system and a general overhead charge which typically can be 15%. 'To put' it in perspective, if a 15% general overhead cha~ge were used, the Water Fund transfer fo:: 1996-97 would be $2,068,000~ and the Redevelopment Fund transfer would be $961,000. ! am sorry that I will be unable to attend the Audit Committee meeting but would be glad to answer .any questions at a subsequent meeting or by phone at your · individual conve, nience. cc: Ron Nault .. Exhibit N ATE: JU1TE 18, 1996 Inter.-Com O: ROM: UBJECT: . ~FATER ENTERPRIBE INTER-FUND TRANSFERS Staff has had several meetings With Mrs. Sara Penn and Berklee Maughan to review the items addressed in Mrs. Penn's letter of March 18, 1996. The area of primary focus for Mrs. 'Penn'and Mr. Maughan concerns the inter-fund transfers fromthe Water Enterprise to the General and Liability Funds. Subsequent discussions have raised the same.concerns as they relate to the transfers from the Redevelopment Agency and the GeneralFund. Staff has misplaced files that support the original transfers which began in the mid to late 80's, so a good portion of the time spent with Mrs. Penn and Mr. Maughan has been going through old financial records and recreatin~ support'for the prior period transfers. While there are no current industry guidelines regarding the appropriate methodology for making inter-fund transfers, there are many options that are used by public agencies which range from a flat dollar or percentage amount to a full blown cost allocation system. I 'have put together the attached matrix which shows the current transfer methodology used by the fifteen Cities in the County that also operate a Water utility. I've also included' the source document for your review. As you can see, quite a few agencies utilize a fixed percentage of annual revenues-as the transfer amount.. There are a few that transfer a flat dollar amount, a few that charge a franchise fee and property tax in-lieu fee,.and several Cities that use a combination of both. The flat · dollar amount that the City of Tustin transfers is the equivalent of'8.2% of projected 96 revenues, well within the range of' all other agencies. The'City Manager has prepared the enclosed memo to further describe the position of the City regarding .these transfers. AUD2: Agenda~. Jun INTERFUND TRANSFER METHODS CITY OPERATED WATER UTILITY 1995/96 TRANSFERS TO CITY UTILITY BUDGET GENERAL FUND COMMENTS ~,NAHEIM $.38,700,000 1.5 - 5.5% l~,& FIXED RIGHT OF WAY FEE, PLUS 0 - 4% ADOPTE_D AN NUAI 1Y BY CITY COUNCIL 3REA $8,300,000 7% FIXED WITH ANNUAL ANALYSIS ~UENA PARK $6,800,000 $475,000 TIME CHARGED DIRECTLY TO WATER - APPROXIMATELY $475,000 (SOURCE- B.P. FINANCE DEPARTMEN'f) :OUNTAIN VAII Fy $5,800,000' $900,000 FIXED (SOURCE - F.V. FINANCE DEPARTMENT) - :UI I FRTO N $14,000,000 1~,4, FIXED, DETERMINED BY CITY CO UNCIL ~,RDEN GROVE $14,700,000 $2,725,000 BASED O N ACTUAL COST, PLUS IN- U ELI FEE AND FRANCHISE FFE 4UNTINGTON BEACH $26,500,000 15% + $2.6 MIL 15 % FIXED PLUS ACTUAL COSTS .A HABRA $6,300,000 $535,500 VARIABLE - SET ANNUALLY AS FRANCHISE FEE AND PROPERTY TAX IN-U_FU FEE (SOURCE - LH. FINANCE DEPT.) _A PALMA .$2,000,000 23% FIXED - RECOMMENDED BY CITY MANAGER ~_~/PORT BEACH $20,600,000 7% FIXED CRANGE $19,700,000 6.9% RATIO OF WATER TO GENERAL FUND BUDGETS 3AN CIE[MEN ~ b I $8,240,000 10% FIXED - IN LIEU OF TAX AND ADMINISTRATIVE OVERHEAD ~ANTAANA I $26,515,880 10% + $2 MIL FIXED @16% PLUS VARIABLEAPPROXIMATELY$2 MIL I (SOURCE- S.A. FINANCE DEPARTMENT) 3EAL BEACH $2,500,000 1%. DETERMINED ANNUALLY VESTMINSTER $9,500,000 6% DETERMINED ANNUALLY FUSTIN... I $11,000,000 $673,000 I FIXED :::)URCE: '1995 Orange County Water Rates Survey City of Tustin Audit Committee July 18, 1996 Page 2 Operating revenues, from meter and commodity charges, and nonoperating revenues, from a special debt surcharge and interest earnings, are projected to meet all operating expenses, lease rental payments, and obligations of Tustin Water Works assumed by the [Water] Corporation. (See Exhibit E) The foregoing statements are consistent with what in fact occurred. Legal Issue No. 2: In the 1993 bond prospectus, this debt service surcharge is commingled with the.charges for services revenue. Is this adequate disclosure? Response: The debt service surcharge was superseded in 1992 when an'entirely new rate structure took effect. It did not exist in 1993. Accordingly, the 1993 official statement .does not violate any disclosure obligations of the City. In 1992, the water rate structure was completely revamped; the debt service charge was eliminated. The City adopted a new rate structure to service both operations and debt. As accurately described in the official statement, the 1993 Certificates of Participation were to be secured by purchase payments "payable from net water revenues." As described in the official statement: "Net revenues consist of gross revenues from the water service charges and all other income derived by the City from ownership, operation, use, or service of the water system, less maintenance and operation expenses of the water system." The concept of "net water revenues" includes the proceeds of all water rates; it is not dependent upon a specific rate or charge. City of Tustin Audit Committee July 18, 1996 Page 3 the City Attorney, the outside auditors, nor City Staff have brought to the attention of City Council, when approving these transfers, that they did not take into consideration the computation of these cash restrictions. The proceeds of the 1983 debt service surcharge were used to retire debt, not to reimburse the General Fund. The proceeds of the 1992, 1993, and 1994 rates were used for water operations and debt retirement, consistent with the rate resolutions. Expenditures for water op--~rations includes reimbursements to the General Fund. The annual budget is a common and appropriate way to authorize water operation reimbursements to the General Fund. Other methods of authorization may be used; there is no rule of law governing such interfund transfers. In sum, in our opinion, there was no transfer of water funds to the General Fund in violation of any rate resolution or applicable rule of law. The question relating to the repeal of resolutions is whether the adoption of Resolution No. 92-110, establishing a new rate structure, required the formal repeal of Resolution No. 83-87, which-established the debt service surcharge. The answer is, No. After a full presentation of the 1992 Water Rate Study and Financing. Plan was made by City consultants, the City Council adopted Resolution No. 92-110, establishing a completely new rate structure. The new rate structure, by implication, superseded the old. In other words, by "occupying the field," so to speak, with a new and comprehensive rate structure, the City Council, in effect, repealed the old. This is called a repeal by implication. 1100-00018 32323_1 1100-00018 32323_1 !1 !Ill J: Illl I i! Iii il! ! il ! llli _ ~ L_;.! ! il I --!-i-I-cT-i jill