TO:	HONORABLE MAYOR AND CITY COUNCIL	FROM:	Richard Doyle City Attorney
SUBJECT:	Ordinance Relating to Municipal Water System Potable Water Revenue, Expenditures, Rates and Charges	DATE:	June 6, 2003

RECOMMENDATION

Adoption of an ordinance amending Chapter 4.80 of Title 4 of the San José Municipal Code by repealing Part 3 relating to the Alviso Water Service Area Extension and Improvement Fund and amending Part 12 relating to the Consolidated Water Utility Fund, and amending Chapter 15.08 of Title 15 of the of the San José Municipal Code to add a new Part 2.5 relating to rates and charges for potable water service.

BACKGROUND

On May 6, 2003, this Office was directed by Council to draft an ordinance that would limit revenue transfers from the Municipal Water System to the General Fund, beginning in fiscal year 2004-05; provide for certain reserve funds to be established for the Municipal Water System; and establish a process for rate increases, including advance notification of rate increases. On May 27, Council considered the City Attorney's draft of the proposed ordinance and moved adoption of the ordinance with the following amendments:

• Include requirement for operational and financial audit, as described in Mayor's May 2^nd memo;

• Include requirement that debt service be paid prior to making general fund transfers;

• Include as goals that Municipal Water system rates remain below the average rates paid by City residents who are customers of other water systems and that staffing levels stay at historic levels.

The May 27^th motion also asked the City Attorney to explain how the 7% capital reserve fund requirement related to the original Council direction.

ANALYSIS

The ordinance has been revised consistent with the Council approval of the previous draft with the specific recommended changes to include audit and debt service requirements; and goals related to staffing ratios and average water system rates.

The capital reserve requirement has been left at 7%. The original Council memoranda directing this ordinance recommended a "guideline" of 6% for a capital reserve fund, 8% for capital "on-going" costs, and a "minimum allocation" of 7% of total revenue per year for "on-going capital improvements to preserve the asset." We used the 7% figure for the capital reserve fund because it was stated as "minimum" in the Council memoranda. Establishing two capital reserves funds would, in our review be redundant.

The purpose of reserve funds is to have funds available in the event unanticipated costs arise. The rate stabilization reserve fund, which will always be at least 5% of revenue in a given year, will be available to postpone the need for a rate increase if, for example, wholesale water or power prices increase during the year. Similarly, the capital reserve fund, which will always be at least 7% of revenue in a given year, will be available for capital projects, regardless of the amount budgeted for capital projects, which may be more or less than the 8% guideline.

CONCLUSION

It is recommended that the Council adopt the revised ordinance. A copy of the revised ordinance is attached hereto for convenient reference.

RICHARD DOYLE

City Attorney