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March 19, 1983 Page 2 necessary to provide funds for expenses which must be made before we receive revenues. Utility bills are sent to our customers on a quarterly basis and the payments are received over a period of approximately one month to one and one-half months. We must have some cash to meet payrolls and to provide for payment of other expenses which are made on a regular basis. A desirable amount of cash on hand for operating expenses would be approximately one quarter of the annual expenses of the Water Fund and also the Sewer Fund. A second important factor to be considered is what financial analysts call "cushion". This is the amount that is considered necessary to replace possible revenue shortfalls and/or to provide funds for unexpected expenditures which may occur in the coming year. Possible revenue shortfalls could include higher than normal delinquencies with respect to payment of utility bills, non payment of a bill by a large customer or several large customers, lower than expected revenues from user fees. Lower than expected user fees is more likely to occur in the Water Fund than in the Sewer Fund. This could arise from a wet year in which less lawn watering was done or any number of factors which would cause a sharp decrease in water consumption. Some unexpected expenditures could be caused which would be due to natural disasters, costs higher than expected because of inflation, higher than anticipated wage and salary settlements, high- er than expected utility costs, public safety costs which could be incurred through contamination of the water source, unanticipated mechanical failure of a piece of major equipment. It is important to have a revenue "cushion" because budgeted expenditures must be funded from anticipated revenues. It is not always possible to adjust budgeted expenditures rapidly. This may be because of contractual obligations, union contracts, or other factors. A revenue "cushion" would allow some time to adjust to an unexpected revenue shortfall. It is desirable to have on hand approxi- mately one quarter's revenue in the event of possible revenue short- fall. An expenditure "cushion" should be maintained to provide for unexpected expenditures. Previous discussions have centered around a maintenance fund and an amount of $80,000 for both the Water and Sewer Funds have been suggested. Also in inflationary times such as these it is wise to have a contingency for fluctuations in the current operating budget. These could provide for greater than expected costs, such as, utility rate increases by the gas, electric or telephone utility companies, or unexpected increases by the Metropolitan Waste Control Commission MWCC). A desirable level to provide for an operating contingency is 100 of the operating budget of the fund. I