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March 19, 1983 Page 4 only be realized if revenues (water sales & sewer use fees) are of an amount sufficient to pay current expenses and to pay depreciatio expenses. In the past utility revenues have not always been suffic to pay depreciation expense. t My understanding is that, in the past, revenues have not been sufficient to pay depreciation expense because of past policy re- garding the financing of the replacement of plant and equipment. Much of the physical plant of the utilities was originally financed by special assessments against benefitted properties. Past policy has been that replacement of those items would also be financed from special assessments at the time of replacement. Following that rationale, depreciation expense on those assets was not taken into con- sideration when past rates were set. That depreciation is identified in the financial statements as Depreciation On Assets Acquired From Contributions. Assets financed from sources other than special assessments are identified as Depreciation On Assets Acquired With Own Funds. It wasn't until the last few years that depreciation on assets acquired with own funds was taken into consideration when rates were established. For these reasons cash on hand does not equal the amount of depreciation expense that has been taken. Staff recommends that the present cash balances of the Water Fund and the Sewer Fund be maintained at current levels. While I have previously discussed their cash balances separately they must also be considered as a whole. The Water Fund has sufficient cash on hand for working capital but the Sewer Fund does not. The cash balance of the Water Fund after working capital needs are taken into account is, in effect, providing the working capital for the Sewer Fund. Additionally the cash on hand should be maintained and even increased so that at a future date when both funds have sufficient cash for working capital the money could be used to finance replace- ment of plant and equipment rather than having to borrow for this purpose. A further reason is to enable the Water Fund to continue to realize the benefit of Investment Earnings. II. Financial Needs of Funds to Meet Operational, Maintenance & Capital Improvement Requirements. Operational Needs - Water Fund The ideal situation for an enterprise fund is that current sales should be sufficient to cover the costs of current operations, current maintenance needs, and depreciation expense on assets ac- quired from contributions and acquired with own funds. Investment Income would be used to help offset the difference between the re- placement cost of assets and the amount of cash set aside from depreciation expense (depreciation expense is based upon actual cost of the asset). Amounts used for operations, contingency, and de- preciation on assets acquired with own funds, are from the previously adopted 1983 Interim Water Budget. Depreciation On Assets Acquired With Contributions is based upon audited depreciation schedules. Maintenance is per the Public Works Director's recommendations.