1.      Call to Order.

10:15 a.m.

2.      Roll.

Directors Amoroso and Comstock; General Manager Jennifer Blackman also present

3.      Draft Five-Year Capital Improvement Plan; Draft Financial Reserve Policy

Director Comstock said he preferred to begin with the Five-Year Capital Improvement Plan as he thinks the reserve policy will require extensive discussion.  With regard to the plan, he said he understands that it is based on the prioritized list of projects distilled by staff from the inventory of all district assets.  Director Comstock emphasized that he wants to be sure the plan includes, from a technical analysis standpoint, the full scope of projects the district should do within the next 5 years, without regard to cost.  He noted that a line is included for “unanticipated capital expenditures” and staff said this is the amount to be dedicated to reserves for each applicable year.  Director Comstock questioned whether this should be part of the reserve analysis rather than delineated in the plan itself;  he said the plan perhaps should be confined to specific projects the district intends to install (recognizing that unexpected projects will arise and need to be paid for by the district).  Director Comstock said his goal is to craft the plan to enable the district to make the best possible management decisions. 

Discussion ensued about the level of appropriate contingency reserves and the type of projects such reserves may be needed to finance.  Director Comstock said that he would like to see the district be debt-free;  director Amoroso noted that the district has only borrowed from state or federally funded, low-interest programs.  Director Comstock said that while such programs offer low-interest funds, it still needs to be paid back and that places a burden on the district. 

With regard to the capital improvement plan (“CIP”), director Comstock said he would like to see the specific water main replacement projects scheduled out so that he can see the interrelationship between the prioritization worksheet and the CIP.  He acknowledged that this is a topic of primary concern to him. Director Comstock also said he would like to have Bill Pierce attend a meeting of the Finance Committee so that the committee members can ask questions about the technical analysis he has used to identify and prioritize the water main replacement projects.  Staff directed the Committee’s attention to the asset inventory which identifies, among other things, the entirety of the district’s water distribution system by location, pipe size, pipe material and condition.  Staff prioritized all pipe not rated in “good” condition for the spreadsheet, and then included all prioritized pipe receiving “1” or “2” for the 5-year CIP.  Director Comstock asked staff to include notes in the plan to explain this process so it is more clear to a casual reader; he says such notes will make the plan a much more substantive document and demonstrate the amount of work and extensive analysis that is going into it.  He suggested a preamble be included to narratively explain the process of how the plan was created, as well as notes to explain each specific project and how the estimated cost of that project was derived (i.e., engineering estimates, staff estimate, etc.).  If the numbers are preliminary, make a note of that as the plan can be updated from time to time.  In addition, the plan should be specific as to exactly when (i.e., in which fiscal year) the district anticipates that each of the projects will be installed.

Discussion then turned to the draft Financial Reserve Policy and director Comstock inquired about the possibility of shifting operating reserves to capital reserves.  Director Comstock said he feels strongly that the district should not have more money sitting in its operating reserves than is necessary; based on an analysis he has done on the amount of funds in operating reserves at fiscal year end, the district may be holding as much as $200,000 more than necessary in its operating reserves – money that could be transferred to capital reserves.  Discussion ensued on this topic; director Comstock advocated that the district analyze this question because he feels that overall, the district is in very good shape in terms of its operational reserves, but not in as strong a position in terms of its capital reserves.  Director Comstock said that the distinction between operating and capital reserves is critical on a managerial basis to help the district decide how to fund the capital improvement projects it has decided (based on a professional, technical analysis) to bring the district up-to-date on its capital needs (as expressed in the 5-year CIP).

Director Comstock then advocated that once the district identifies, on a technical basis, the capital projects that it should implement to bring the district up-to-date on its infrastructure by 2020, the district then needs to analyze the total cost of those projects and decide whether it can pay for those projects, based on an understanding of its operating reserves, capital reserves, and contingency reserves, and the charges it imposes on its customers.  If the district does not have enough revenue/reserves projected to pay for the full array of projects needed, then the list of projects will need to be pared back by the Finance Committee.  So, it is important that the committee determine what the district’s target levels of reserves should be.  Director Comstock noted that the district has a $500,000 “endowment” reserve; what is this reserve intended to pay for and should some or all of those funds be dedicated to capital needs?  Director Amoroso explained that this reserve (and the others established by the money received by the district from the sale of its land to the National Park Service) were established by the Board at a special meeting in June of 2010.  Director Comstock noted that the district’s debt burden is projected to decrease significantly over time (with a portion of the overall debt retiring in 2018 and in 2022), which is the functional equivalent of bolstering the district’s reserves. 

Director Comstock noted that the draft reserve policy proposes a target minimum capital reserve equal to one year of capital spending (i.e, $500,000).  He said this is a reasonable number, but it assumes the district will pay for current CIP projects from the current budget so that the target reserve stays intact.  In reviewing the district’s balances in its various funds, only certain of them are available as capital reserves while others are specifically designated for other purposes.  However, if only the dedicated reserves for water and sewer are taken into account, the total is approximately $500,000, so the district is about on target. 

Director Amoroso commented that some of the district’s most significant capital expenditures have been necessitated by regulatory changes and emergency events (i.e., were not planned capital improvement projects).  For example, the district was mandated to improve its water treatment process in the 1990’s to meet drinking water standards and it was mandated to construct the sewage treatment plant in reponse to an order from the Regional Board to cease discharging waste to the Bolinas lagoon (which were funded by a combination of grants and loans from state and federal sources);  in addition, the district has implemented water main replacement projects in response to wash-outs caused by El Nino rain event years (which ultimately were reimbursed by FEMA/CalOES).  Director Comstock said that the district’s contingency reserves should be used for these purposes.  Director Amoroso said the district’s decision-making also should be guided by evaluating the risk/cost of the failure of a particular asset;  director Comstock agreed this is a good point.

Discussion focused on the district’s $500,000 Endowment Fund and director Comstock asked director Amoroso whether it is available for capital projects and, if so, if it would need to be restored after being expended in capital projects – or, can it more accurately be regarded as a contingency fund that does not need to be restored?  Director Amoroso said that in his view, this fund should stay intact and would need to be replenished if funds were “borrowed” for capital purposes.  He noted, however, that the Board agreed that the designation of this fund (and the others financed from the money received from the sale of district property to the National Park Service) can be changed by a 4/5 vote of the Board;  in other words, a super majority of the Board must agree in order to re-direct these funds.  Director Comstock asked how much money is available in the district’s proposed budget for capital projects;  staff said the answer to that depends on the final determination as to the capital projects that will be implemented in the upcoming fiscal year, but the current draft envisions $1 million in operating costs; $261,000 in capital expenditures; $87,000 in reserve contributions; and $137,000 in debt reduction.  These will be paid for via a combination of a proposed rate increase of 6% and draw-down on reserves;  however, the overall impact on water reserves will be a net increase of $20,000 (given the planned contributions) whereas the overall impact on sewer reserves will be a net decrease of $50,000.  Director Comstock said that if the district wants to keep reserves at the same levels (i.e, and not draw down reserves in any way to pay for current capital projects), it sounds like capital spending would need to be reduced by $30,000, to a level more like $230,000.  He noted that the 5-Year CIP has identified projects totaling closer to $500,000 per year in needed capital projects, so those projects will need to be pared back if the Board elects not to reduce current reserves to pay for them.  Staff said that grants may be available to help close the financing gap;  directors Comstock and Amoroso agreed it will be well worth the time needed to investigate sources of grant funding, particularly on the sewer system.

Staff will revise the financial reserve policy to reflect the committee comments, and work on the 5-Year CIP to incorporate the presentation suggestions, such as a narrative preamble and notes for specific projects.

4.      Draft Fiscal Year 2015-16 Budget

Deferred to the next scheduled Finance Committee meeting, which is tentatively scheduled for March 17, 2015.

5.      Community Expression

None.

6.      Adjournment

1:05 p.m.