Accounting and Finance - 101Accounting and Finance - 101

CINDY NAVAROLI, MPA, CPA & SHERI ROJO, CPA

CINDY NAVAROLI, MPA, CPA & SHERI ROJO, CPA

www.pcgclient.com

Understanding Financial Statements

Preparing and Understanding Budgets

Emerging Financial Issues for Utilities

1

2

3

4 Establish & Review Reserve Policies

PART 1 – Understanding Financial

Statements

PART 1 – Understanding Financial

Statements

Financial Statements vs. BudgetsFinancial Statements vs. Budgets

• Budgets plan the future, Financial Statements explain the past

• Cash vs. Accrual?– Financial Statements usually prepared on “accrual” basis

When prepared?– Prepared monthly and annually– Comprehensive Annual Financial Report (CAFR)

• The CAFR is usually prepared three months or more after fiscal year-end

• Audited by a CPA firm

Financial StatementsFinancial Statements• Introduction - Transmittal Letter (Letter to the

public describing events and issues from the past year and future)

• Management’s Discussion & Analysis (MD&A)• Statement of Revenues, Expenses and Changes

in Net Assets • Statement of Net Assets• Statement of Cash Flows• Footnotes• Statistical Schedules

Management’s Discussion & Analysis (MD&A)

Management’s Discussion & Analysis (MD&A)

• Addressed to citizens and/or Board/Council• Subjective information about agency• Economic & financial outlook• Organizational chart

Transmittal LetterTransmittal Letter

• Summarized financial data• Prior year’s comparisons• Variance analysis

Earned by the utility

Costs to run the utility

Revenues - Expenses =Change in Net Assets(also, referred to as Net Income)

Revenues

Expenses

Change in Net Assets

The Statement

of Changes in Revenues, Expenses,

and Net Assets depicts

how profitable the utility was over the fiscal

year

THE STATEMENT OF CHANGES IN REVENUES, EXPENSES, AND NET ASSETS

Operating Revenues

Revenues Expenses

Non-OperatingRevenues/Cash

Inflows

OperatingExpenses

Non-OperatingExpenses/Cash

Outflows

Revenues – Expenses = Net Income (change in net assets)

Relate to your primary

business of buying and

selling water

• Water Sales (commodity charges)

• Fixed Charges• Connection

fees• Other fees

Ancillary Income

• Property Taxes• Interest income

Not in FinancialStatements, but

may be in the budget because

they are a source of cash

• Bond Proceeds• Reserves• Transfers in from

other funds

Operating Revenues

Non-OperatingRevenues

Cash Inflows –Other Financing

Sources

REVENUES AND CASH INFLOWS

Relates to your primary business of

buying & selling water

• Variable Commodity Charges

• Salaries & Benefits• Supplies & Services• Administrative

Expenses

Ancillary expenses

• Interest Expense• Miscellaneous

fees

Not in FinancialStatements, butare in the budget

because they are a use of cash

• Bond Principal• Reserves

Funding• Capital Outlay• Transfers out to

other funds

Operating Expenses

Non-OperatingExpenses

Cash Outflows –Other Financing

Uses

EXPENSES AND CASH OUTFLOWS

Typical expense distribution for water utilities

Typical expense distribution for water utilities

Depreciation & Amortization

Variable Water Costs :

GW, Import & Power

Salaries and Benefits

Supplies & Services

Interest & Principal on Long

Term Debt Other

EXPENSES

Things we own of value

Things we owe

The Assets – Liabilities = Net Assets (also, called Fund Balance or Fund Equity)

ASSETS

LIABLITIES

NET ASSETS

The Statement

of Net Assets is a “snapshot” of the utility on the last day of the fiscal year

STATEMENT OF NET ASSETS

Common “Funds” in Water UtilitiesCommon “Funds” in Water Utilities

What is a “fund”?• Like a separate division – fully separate set of books

What are common funds in utilities?• Water Fund• Sewer Fund• Recycling Fund• Wastewater Fund• Capital Projects Fund • Debt Service Fund• Other special purpose funds

STATEMENT OF NET ASSETS – CITY OF SAN DIEGO PUDAs of June 30, 2009

(In Thousands)

ASSETS SEWER WATERCurrent Assets

Cash and Investments $ 345,933 $ 225,556 Receivables

Accounts - Net 35,172 43,573 Accrued Interest 1,420 604 Grants - 1,822

Inventory of Water in Storage - 36,947 Inventories - 620 Prepaid Expenses 3 456

Total Current Assets $ 382,528 $ 309,578 Non-Current Assets

Restricted Cash and Investments $ 231,212 $ 263,883 Deferred Charges 7,114 6,988 Loan Receivable 3,487 -Capital Assets - Non Depreciable 118,881 240,760 Capital Assets - Depreciable 2,710,102 1,611,573

Total Non-Current Assets $ 3,070,796 $ 2,123,204 TOTAL ASSETS $ 3,453,324 $ 2,432,782

STATEMENT OF NET ASSETS – CITY OF SAN DIEGO PUD(In Thousands)

LIABILITIES SEWER WATERCurrent Liabilities

Accounts Payable $ 11,995 $ 32,367 Accrued Wages and Benefits 7,682 2,145 Interest Accrued on Long Term Debt 6,162 11,589Long Term Debt Due Within One Year 54,663 19,705 Due to Other Funds 510 558 Due to Other Agencies 10,262 1,046 Deferred (Unearned) Revenue - 817 Contract Deposits 3,503 4,756 Current Liabilities Payable from Restricted Assets - 4,566

Total Current Liabilities $ 94,777 $ 77,558 Non-Current Liabilities

Deposits/Advances from Others $ 250 $ -Compensated Absences 2,323 2,036 Liability Claims 27,776 1,576 Loans Payable 67,100 17,573 Net Revenue Bonds Payable 1,251,957 895,146 Pollution Remediation Obligation - 620 Other Post Employment Benefit Obligation (OPEB) 6,916 6,578 Net pension Obligation 10,785 8,477

Total Non-Current Liabilities $ 1,367,107 $ 932,006 TOTAL LIABILITIES $ 1,461,884 $ 1,009,564

STATEMENT OF NET ASSETS – CITY OF SAN DIEGO PUDAs of June 30, 2009

(In Thousands)

NET ASSETS SEWER WATER

Invested in Capital Assets Net of Related Debt $ 1,698,249 $ 1,186,697

Restricted for Debt Service 750 3,622

Unrestricted 292,441

232,899

TOTAL NET ASSETS $ 1,991,440 $ 1,423,218

Statement of Cash FlowsStatement of Cash Flows

• Shows Sources and Uses of Cash• Operating, Non-Capital Financing, Capital

Financing, Investing• Change in cash from prior year to current

year• Many agencies budget on a basis similar to

the cash flow statement

FootnotesFootnotes• Explanation of funds, accounting policies

and other definitions• Investment categorizations & credit risk• Potential & actual contingent liabilities• Pension and OPEB funding status• Detail of long-term liabilities and other major

items on the Statement of Net Assets• Transfers between Funds• Major contractual commitments

Statistical SectionStatistical Section

• 5-10 years history for a variety of financial information

• Net asset (fund balance) trends• Revenue/expense trends• Principal employers/taxpayers• Population/demographics/economic info• Employee count by department• Other operating indicators

PART 2PART 2

PREPARING AND UNDERSTANDING BUDGETS

BUDGETSBUDGETS

• The budget is one of the most important documents that a government prepares. It describes what services will be provided, what those services will cost, and how they will be funded.

• The budget is an important planning tool, both for internal and external users.

• Allows the entire organization to be involved in the planning process.

• No rules to follow like the financial statements!

BUDGETSBUDGETS

The budget focuses on projected revenues and expenses for the fiscal year (generally do not budget Statement of Net Assets)

There a two types budgets prepared:

Operating Budget – the next fiscal year (some budgets are two year budgets)

Capital Budget – covers the next five years or more

The Budget ProcessThe Budget Process

• Budget calendar is created; process usually starts in January

• Current year revenues and expenses are analyzed and projected through year-end in each department

• Reserves are analyzed and future sources and uses are determined

• Expenses are separated into fixed and variable components (fixed are easier to budget than variable)

• Known changes in the next fiscal year are incorporated

Finance Dept

GM-Director

ITHuman

Resources

OperationsGM & Admin

Board-Council

Billing

FY 07/08 Actual

FY 08/09 Budget

FY 08/09 Projections

FY 09/10Budget

Water Revenues $ 45,000,000 $ 49,000,000 $ 47,000,000 $ 52,000,000

Sewer Revenues 2,300,000 2,400,000 2,400,000 2,450,000

Other Fees & Charges 800,000 825,000 550,000 400,000

Property taxes 1,200,000 1,250,000 1,000,000 800,000

Transfers infrom reserves

100,000 100,000 200,000 200,000

Interest Income & Other Non-Operating

800,000

575,000

350,000

200,000

TOTAL REVENUES $ 50,200,000 $ 54,150,000 $ 51,500,000 $ 56,050,000

REVENUES BUDGET

FY 07/08 Actual

FY 08/09 Budget

FY 08/09 Projections

FY 09/10Budget

Commodity Charges (Water Purchases) $ 25,000,000 $ 23,000,000 $ 22,000,000 $ 28,000,000

Salary & Benefits 14,000,000 15,100,000 14,600,000 15,000,000

Supplies & Services 2,500,000 2,900,000 2,700,000 2,800,000

Transfers Out to Reserves 3,000,000 2,500,000 2,500,000 1,000,000

Bond Principal & Interest 2,200,000 2,200,000 2,200,000 2,200,000

Capital Outlay 560,000 625,000 350,000 1,000,000

Depreciation 3,500,000 3,700,000 3,700,000 3,900,000

TOTAL EXPENSES $ 50,760,000 $ 50,025,000 $ 48,050,000 $ 53,900,000

EXPENSES BUDGET

WATER DEPARTMENT FUND 41500 FY 2008 FY 2009 FY 2010

BUDGET BUDGET FINAL

REVENUE

Capacity Charges $11,244,286 $11,465,528 $7,736,000

Damages Recovered $290,200 $264,596 $265,000

Financing Proceeds $117,753,345 $165,193,489 $119,857,000

Grant Receipts $3,385,000 $8,000,000 $7,744,703

Interest Earnings $4,132,000 $4,132,000 $6,032,000

New Water Services $2,402,400 $2,115,497 $1,860,000

Other Revenue $380,047 $806,870 $1,136,783

Reclaimed Water $5,628,593 $7,876,063 $7,399,000

Reimbursement from Capital Outlay Fund $100,000 $600,000 $600,000

Sale of Discarded Materials $14,000 - $46,000

Sale of Water $297,677,782 $292,330,535 $342,798,830

Service Charges $1,375,000 $1,227,488 $1,543,000

Service Rendered to Others $10,730,528 $8,004,740 $8,564,000

TOTAL REVENUE $462,174,462 $510,410,016 $513,630,272

TOTAL BALANCE AND REVENUE $617,797,416 $728,998,465 $761,302,272

WATER DEPARTMENT FUND 41500 FY 2008 FY 2009 FY 2010

BUDGET BUDGET FINAL

CAPITAL IMPROVEMENTS PROGRAM (CIP)

CIP Expenditures/Budget $145,575,252 $177,869,077 $149,776,309

TOTAL CIP EXPENSE $145,575,252 $177,869,077 $149,776,309

OPERATING EXPENSE

Assurance Fund $4,500,000 $4,500,000 $5,500,000

Debt Service $57,512,463 $63,440,664 $64,407,859

Department Expenditures/Encumbrances $146,451,651 $131,684,529 $149,056,541

Operating Reserve-Budgeted $877,784

State Revolving Fund loan Expense $1,375,922 $1,375,922 $1,333,546

Transfers to Other Funds $4,755,513 $6,083,917 $7,240,462

Unallocated Reserve $5,822,200 $5,822,200 $5,000,000

Water Purchases (Commodity) $81,617,290 $110,527,369 $134,113,961

Water Purchases (Fixed Charges) $38,408,136 $12,653,135 $17,010,885

TOTAL OPERATING EXPENSE $340,443,175 $336,087,736 $384,541,038

TOTAL EXPENSE $486,018,427 $513,956,813 $534,317,347

Category FY10 FY11 ChangePersonnel 46,287,707$ 46,076,273$ (211,434)$ Fringe 21,749,352$ 21,454,964$ (294,388)$ Supplies 13,063,414$ 12,300,016$ (763,398)$ Contracts 57,734,559$ 59,163,546$ 1,428,987$ Energy & Utilities 10,029,062$ 12,045,235$ 2,016,173$ Information Tech 11,590,807$ 13,149,444$ 1,558,637$ Other 1,034,606$ 1,279,004$ 244,398$ Capital Expenditure 2,089,077$ 1,614,103$ (474,974)$ Debt 65,667,042$ 66,008,400$ 341,358$

Water Purchases 151,124,846$ 187,708,374$ 36,583,528$

Total 380,370,472$ 420,799,359$ 40,428,887$

Including Reserves 385,370,472$ 424,299,359$ 38,928,887$

OPERATING BUDGET - SAN DIEGO PUD

SuppliesFY2010 - $13,063,414 FY2011 - $12,300,016 Change - ($763,398)

w $2.3M for chemicalsw ($1.7M) in Pipesw ($680k) Fuelw ($683K) Fill

ContractsFY2010 - $57,734,559 FY2011 - $59,163,546 Change - $1,428,987

w $2.4M Hydraulic Sediment Transport Analysisw ($1.7M) Indirect Potable Re-use Studyw $358 in contracts for flow meteringw $370k Comprehensive Recycled Water Study

VARIANCE ANALYSIS

After the Budget is AdoptedAfter the Budget is Adopted

• The budget is monitored each month to determine whether the utility is on target with projections

• A variance analysis (difference between budget and actual) is prepared monthly

• Budget amendments and transfers may take place throughout the year

• Generally, utility management must get Board approval to exceed budgeted expenses over a certain threshold

Part 3Part 3

Emerging Issues and Trends in Water Utility Finance

ECONOMIC CHALLENGES FOR

WATER UTILITIESOPEBLIABILITIES

INCREASE COSTS ANDDECREASED REVENUES –

PROP 218 PROCESS

AGINGINFRASTRUCTURE

CONSERVATION-THE DOUBLE

EDGED SWORD

RESERVES

OPEB LIABILITIESOPEB LIABILITIES

• GASB 45 – new accounting rules that require the recording of Other Post Employment Benefits (OPEB)

• Indicates whether these benefits are “funded” or “unfunded”

• Has a huge impact on utilities that have not been funding future benefits (have been “pay-as-you-go”)

City of San Diego – OPEB(in thousands)

City of San Diego – OPEB(in thousands)

Actuarial Valuation Date

Actuarial Value of Assets

Unfunded Actuarial Accrued Liability (UAAL)

Funded Ratio

6/30/2008 $ 29,637 $1,206,070 2.4%

6/30/2009 $ 41,497 $1,317,880 3.1%

City of San Diego Unfunded Pension Liability (PERS)

City of San Diego Unfunded Pension Liability (PERS)

Actuarial Actuarial Funded

Valuation Date Value of Assets UAAL Ratio

6/30/2005 $ 2,983,080 $ 1,452,937 67.3%

6/30/2006 3,981,932 1,000,768 79.9%

6/30/2007 4,413,411 1,184,242 78.8%

6/30/2008 4,660,346 1,303,204 78.2%

The City’s unfunded pension liability remains a significant obligation of the City. The City has aggressively confronted this deficit, fully funding the City’s Annual Required Contribution (ARC) beginning in fiscal year 2006, and has made significant additional payments in excess of the ARC into the pension fund in certain years.

Increased Costs / Decreased RevenuesIncreased Costs / Decreased Revenues

• Cost of water is increasing dramatically• Pension & OPEB expenses are increasing • Conservation is resulting in decrease of unit sales• Other revenues are decreasing

– property taxes– developer fees – investment income

CONSERVATION ISSUES – Have We Gone Too Far?

CONSERVATION ISSUES – Have We Gone Too Far?

Units of Water Sold

Cost of Water

= Less Cash Flow

Double Edged Sword!Double Edged Sword!

As volume of water sold goes down,

revenues collected also goes down.

How will we pay for expenses and capital projects?

Fund Reserves??

Options?Options?

• Cut costs across all departments• Employee furloughs, unfunded positions• Salary reductions, decrease in benefits• Two tiered pension and benefit systems• Defer asset maintenance• Defer capital projects• Restructure rates to Tiered System• Water budget rate structures• Raise rates, pass through costs

Prop 218Prop 218

TYPICAL

RESERVE

CATEGORIES

RATE STABILIZATION

EMPLOYEE BENEFITS

OPERATING

SELF INSURANCE

CAPITALIMPROVEMENTS

DEBT SERVICEEMERGENCY

ASSET R&R

Why Adopt a Formal Reserve Policy?

Objectives of a Reserve Policy:

• Establishes sound formal fiscal reserve policies, which will be the foundation that ensures strong fiscal management and policies that guide future utility decisions.

• Builds adequate reserves over time. This action will provide the utility with resources to help stabilize the organization’s finances, and position it to absorb economic downturns or large-scale emergencies.

• Helps the utility meet its short-term and long-term obligations, and to ensure that the utility maintains the highest possible credit rating.

Procedures

Procedures for accounting for reserves:

The Finance Department performs a reserve analysis annually to be submitted to the Board/Council. In addition, a reserve analysis is generally required upon the occurrence of the following events: (1) Board review of the annual budget; (2) Presentation of the annual audited financial statements; and (3) When a major change in conditions threatens the reserve levels

established by policy.

The annual review determines if the funding levels are still appropriate and aligned with Board/Council goals and objectives. Interest generated in each reserve usually goes to the Operating Fund for operating use, unless otherwise stated.

Reserve Types

Most agencies separate their reserves into Operating and Capital, and are reported under three categories: Undesignated, Designated, and Restricted categories, which are described as follows: 1. Undesignated Reserves: No designations or restrictions

2. Designated Reserves: Designated reserves are reserves that are established and set aside to be used only for a specific, designated purpose.

3. Restricted Reserves: Restricted reserves are reserves that are restricted by an outside source, such as by statute, court, or contract.

In addition, most reserves are categorized as Non-Capital or Capital

How Much is Enough?

Most agencies set thresholds for reserves in combinations of the following:

 1. Target: Desired (ideal) level of reserve.

2. Minimum: The ideal minimum amount that would be maintained in the reserve. Sometimes called a “floor”.

3. Maximum: The ideal maximum that would be maintained in the reserve. Sometimes called a “cap” or a “ceiling”.

Following are an example of some reserve funds that water agencies commonly utilize:

Designated - Operating Reserves

 Operating Reserve: Covers operating costs for an established period of time. Many utilities adopt a minimum operating reserve balance that covers 60 – 180 days of operating expenses. This reserve aids in maintaining minimum day-to-day operations in the event normal cash flows are interrupted or reduced. Generally, these funds should not be used to finance ongoing utility expenses, except in fiscal hardship periods, in order to sustain desired service levels.

The GFOA (Government Finance Officers Association) recommends 8%-17% of operating expenditures as a minimum in an operating reserve

Designated - Operating Reserves Cont’d.

Water Rate Stabilization: Covers the smoothing of water rates in the event of short to mid-term revenue loss, property tax revenue loss and higher than anticipated budget costs that cannot be supported by normal revenues. Some utilities dedicate penalty billings to this reserve to help smooth the variations in billings and collections.  Emergency/Contingency: For immediate reconstruction and/or support from a catastrophic event or circumstance. This reserve assists in covering emergency cash until other financing can be obtained.  Employee Benefits and OPEB: Covers sick and vacation leave-time liability, other post employment benefits obligations (OPEB), and accrued compensatory time. 

Restricted Reserve – Debt Service

Debt Service: Covers the 2008 COPS Official Statement requirements to maintain $2.1M in trust for the life of the bonds to serve as “insurance” to the bondholders. This reserve cannot be spent and must be maintained for the life of the bonds. 

Designated - Capital Reserves

Asset R/R: This reserve is generally used for planned capital repair and replacement of the utility facilities. Usually funded each year at a level amount from water rates, and drawn down as needed for capital repair and replace-ment. Helps ensures that ratepayers pay a consistent amount for asset R&R each year, even though the actual costs will likely fluctuate from year to year.

• A separate capital outlay (vehicles & equipment) reserve may be maintained.

• The reserve might be separated between water system facilities and administration facilities.

  

AGING INFRASTRUCTUREAGING INFRASTRUCTURE

Designated - Capital Reserves, Cont.

Capital Investment Program (CIP): Designated for funding the acquisition and construction of NEW capital assets and is also used in concurrence with outside funding sources.

This reserve fund is generally established for all new capital items (excluding capital outlay/equipment) or projects with a cost of $5,000 or more and a useful life of 5 years or greater.

RESULTSRESULTS

Questions?Please feel free to email or call

anytime with questions

srojo@pcgclient.comcindy@pcgclient.com

909-227-8351

www.pcgclient.com