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March 19, 1983 Page 5 As can be seen from the exhibit labeled Water Fund - Ideal Situation this would require a water rate of $1.03/ 1,000 gallons of water sold. For numerous reasons a rate of $1.03/ 1,000 gallons is not realistic and is, therefore, not recommended. The 1983 Water Fund Interim Budget is contained in an attached exhibit. The Budget is in total dollars and in the form of the amount per 1,000 gallons of water sold. It should be noted that the present rate of $0.55 per 1,000 gallons of water sold does not generate enough revenue to meet current operating expenses of $0.6763. The additional $0.1263 that is needed is being financed primarily from Investment Income ($0.1303). The present water rate of $0.55 per 1,000 gallons has been in effect since January 1, 1980. A review of the 1982 Water Fund Budget and the 1983 Interim Water Fund Budget shows that Investment Income has subsidized water rates. Staff re- commends that Investment Income not be used to subsidize water rates and that water rates be at a level sufficient to ensure that water sales generate enough revenue to cover the costs of operations, depreciation on assets acquired with own funds, and contingency. Investment Income is an unpredictable source of revenue and fluctuates greatly as interest rates move up and down. When 1983 estimated Water Fund revenues were prepared last summer interest rates were between 12% - 16%. At that time I conservatively estimated Investment Income for 1983 at $70,000 based upon an average interest rate of 10%. At the present time interest rates are between 7% - 8%. I have, therefore, revised my estimate of 1983 Investment Income to 49,000 based on an average interest rate of 7%. This is a reduction of $21,000 from the previous estimate. An exhibit labeled Investment Income - Water Fund illustrates how Investment Income can vary greatly depending on interest rates. Due to the unpredictability of interest rates and the subsequent unpredictability of Investment Income, staff recommends that Invest- ment Income not be a consideration in setting utility rates. Staff recommends that water rates be set at a level sufficient to ensure that current sales revenues would cover the costs of Current operations, Depreciation on Assets Acquired With Own Funds and Contingency. The exhibit entitled Water Fund - Rate Needed for Sales to Equal Current Expenses illustrates that a water rate of $0.70 per 1,000 gallons would be required. Maintenance & Capital improvement Requirements- Water Fund Public Work's Director Johnson has proposed a maintenance program based upon seven year and fourteen year maintenance cycles. The annual cost of this maintenance program is $42,500. Additionally various system improvements were proposed. The earlier years of this schedule contain "catch up" maintenance projects and the later years have "normal" maintenance. Staff recommends an annual maintenance allowance of $42,500 be funded for the seven and fourteen year main- tenance cycles. In the earlier years this allowance would be entirely used for maintenance projects. In the later years after the "catch up'