Chapter 5.05
FISCAL POLICIES

Sections:

5.05.010    Adopted.

5.05.020    Generally.

5.05.030    Financial integrity and stability.

5.05.040    Funding growth-related system expansion.

5.05.050    Capital program funding.

5.05.060    Managing debt.

5.05.070    Financial planning and revenue sufficiency.

5.05.080    Budgeting and accounting.

5.05.090    Rate structure and equity.

5.05.100    Efficiency and conservation.

5.05.010 Adopted.

The Board of Directors of Cascade approves and adopts fiscal policies codified in this chapter. [Res. 2018-14 § 1 (Att. 2); Res. 2016-20 § 1; Res. 2012-14 § 1; Res. 2006-05 § 1].

5.05.020 Generally.

The Board of Directors of Cascade (the Board) has determined that Cascade shall maintain fiscal policies that promote:

A. Financial integrity and stability.

B. Rate equity.

C. Efficiency and conservation.

From time to time, the Board may amend these policies as it deems appropriate. It is the exclusive authority of the Cascade Board to revise these fiscal policies as appropriate. The Board may delegate review and evaluation of the fiscal policies and any proposed amendments to its Finance and Management Committee for this purpose. [Res. 2018-14 § 1 (Att. 2); Res. 2016-20 § 1; Res. 2012-14 § 2; Res. 2006-05 § 1].

5.05.030 Financial integrity and stability.

Cascade will provide a stable financial structure that enables it to fulfill its mission to provide regional water supply and transmission services in an efficient and cost-effective manner.

A. Revenue Stability. Cascade will establish and maintain a financial structure that provides for stable and predictable revenues, relying primarily on fixed charges to members.

B. Operating Reserves (Operating Fund Balance). Cascade will maintain an operating fund and establish and budget for a beginning and ending operating fund target balance of no less than 13.7 percent (50 days) of budgeted annual operating expenses. Cascade may routinely budget higher levels of reserves to mitigate unpredictable lump sum expense adjustments, such as the annual Seattle contract true-up, and to reflect accruals toward intermittent large scale operating expenditures. In the event that the operating fund balance falls below the target balance, Cascade shall budget and set rates so that target fund levels are restored within two years.

C. Bond Reserves. Cascade will maintain a bond fund for bond reserves and debt repayment, and shall maintain bond fund balances consistent with corresponding debt covenants. In the event that the bond fund balances are found to fall below target levels, Cascade shall remedy the shortfall within 90 days or, if unable, within that period make partial remedy as able and adopt an action plan to complete the remedy.

D. Contingency Planning. Cascade will incorporate adequate contingencies in its capital planning to provide for orderly cash flow on capital projects and accommodate reasonable adjustments to capital budgets, scope and schedule, including an explicit provision for capital risk to provide for as-yet unidentified capital needs.

E. Rate Stabilization Fund. Cascade will maintain a rate stabilization fund (RSF) to be used to mitigate fluctuations in revenues, expenses or rates. Cascade shall target a RSF balance equal to 5% of operating revenues plus provisions for accruals for intermittent large scale operating expenditures. The Board shall establish rules for rate and fund management addressing additions to or withdrawal from the RSF with the objective of smoothing rate transitions and impacts, and may modify these by resolution.

F. Asset Management. Cascade shall establish capitalization and asset management policies and will maintain a fixed asset schedule and depreciate or amortize assets based upon reasonable expectations of useful life. When infrastructure assets are not booked as depreciable assets (e.g. alternate method accounting), Cascade shall estimate useful life and annual depreciation for purposes of establishing equivalent annual depreciation and net book value of assets for fiscal policy compliance.

G. Capital Reinvestment. Cascade will budget, generate and restrict funds for system repair and replacement (R&R), which will be made available for projects that replace assets or extend their lives whether or not such expenditures are capitalized. The annual budgeted amount will be total annual depreciation and amortization of system assets, less planned debt principal repayment, but in no case less than one-half percent of total asset value (original cost before depreciation). Subject to realization of sufficient revenues and cash balances to fund and transfer the budgeted amount, and net of R&R expenditures made through the operating budget, the net remaining annual R&R provision will be transferred into the construction fund, to be used as cash funding toward Cascade capital projects. [Res. 2018-14 § 1 (Att. 2); Res. 2016-20 § 1; Res. 2012-14 § 3; Res. 2006-05 § 1].

5.05.040 Funding growth-related system expansion.

Cascade will establish and impose member charges that provide for equitable recovery of growth-related costs from member agencies experiencing growth. The regional capital facilities charge (RCFC) is the member charge imposed for this purpose, and is applicable to all new or expanded water services within Cascade member service areas as defined in the RCFC methodology.

A. RCFC Basis. Cascade will adopt an RCFC methodology consistent with equity and revenue-generating purposes as required by the Cascade Joint Municipal Utility Service Agreement. The methodology will define the basis for determining the charge and the structure for imposing it.

B. RCFC Structure. The RCFC will be imposed on members based on customer growth. Any future revisions of the basis for RCFCs shall be limited to prospective purposes, and shall not affect past payments or previously determined RCFC credits.

C. RCFC Credits. Cascade may provide credits against RCFC payments due from members. Credits issued shall be defined in terms of a number of Cascade Equivalent Residential Units (CERUs) provided. Revisions in the definition of CERUs shall not be cause for a restatement of available credits.

D. RCFC Use and Restrictions. RCFC revenues will be used to offset system capital costs, including debt service and funding of debt related reserves. RCFCs shall be deposited into an RCFC fund, where they may be used for any authorized capital purpose.

As a part of Cascade’s adopted budget, the Board shall set a minimum annual transfer of RCFC revenues from the RCFC fund to the capital fund to be used as cash funding for capital projects, attaining a minimum transfer of 75 percent of annual RCFC revenues by 2020. For this purpose, the portion of RCFCs used in support of debt service will be funded first, with all additional RCFC revenues then allocated to capital purposes. The Board will also determine appropriate restrictions, if any, on transferred funds as related to specific projects or uses.

When major construction projects cause a substantial increase in debt burden, when accumulated construction funds exceed reasonably projected needs, or when debt funding obligations require increased deposit into the debt funds (such as for bond reserves), the Board may take action to temporarily reduce the annual capital transfer of RCFC revenues to as little as 50%, provided that the 75% transfer level is restored within 10 years. [Res. 2018-14 § 1 (Att. 2); Res. 2016-20 § 1; Res. 2012-14 § 4; Res. 2006-05 § 1].

5.05.050 Capital program funding.

In conjunction with establishing, planning or updating its capital program, Cascade will develop a corresponding capital-financing plan that supports execution of that program.

A. Construction or Acquisition of Assets. Capital funding, net of any grants, dedications or other assistance, will consist of a combination of cash (equity) and debt financing.

B. Capital Structure of Project Financing. Cascade’s capital funding strategy will be developed with an objective that total cumulative debt outstanding shall not exceed 80% of the net book value (original cost net of depreciation or amortization) of fixed assets and asset-backed capacity rights. Cascade may establish, by Board action, more stringent limits on debt levels and debt funding of the capital program as it deems prudent to sustain Cascade’s fiscal integrity.

C. Operating Costs. Cascade’s capital funding strategy will consider estimated impacts on operating expenses related to planned capital improvements.

D. Master Meter Replacement. Cascade delivers water to its members through one or more wholesale master meters, owned and maintained either by Cascade or other regional water utilities such as Seattle Public Utilities and Tacoma Public Utilities. Costs to maintain, repair and replace master meters shall be considered Cascade operating and maintenance costs to be recovered through the uniform demand share structure of Cascade. Costs to install new wholesale master meters initiated by Cascade shall be Cascade capital costs. Costs to install new master meters initiated by a member shall be the responsibility of the member and charged directly to that member. [Res. 2018-14 § 1 (Att. 2); Res. 2016-20 § 1; Res. 2012-14 § 5; Res. 2006-05 § 1].

5.05.060 Managing debt.

A. Use of Debt for Capital Assets. Cascade will issue debt for investments in system infrastructure that provide tangible or intangible assets. Debt will not be used to fund ongoing operating and maintenance costs that cannot be capitalized.

B. Structure of Debt. The Board shall determine the term and structure of debt issued by Cascade. In determining debt structure, the Board shall consider the useful life of assets, existing debt and debt service load, plans for future debt issuance, market conditions, impacts on rates and charges, potential effect on Cascade’s credit-worthiness, and other factors that the Board deems relevant. When debt is used for capital investment, the term of debt shall not exceed the reasonable useful life of the asset being acquired, constructed or enhanced.

C. Nontraditional Debt. Cascade will not use nontraditional debt, such as derivatives, swaps, variable rate obligations or other financial mechanisms, unless such instruments are allowable under Washington law, determined by the Board to be in the best interest of Cascade, and found by the Board to provide financial benefit to Cascade without undue risk. Cascade will not use derivatives or swaps without the Board first adopting policy by resolution on the use of such mechanisms and approval by a 65 percent dual majority vote. Cascade will also provide in payment agreements for derivatives or swaps that termination payments to a provider will be subordinate to debt service on a member’s bond obligations.

D. Debt Modification. Cascade may consider debt refunding, defeasance or restructuring when demonstrated to be financially advantageous. When Cascade accumulates cash and investments in excess of identified near-term requirements, Cascade will consider debt reduction as one of the potential uses for such resources.

E. Disclosures. Cascade shall make timely filings of regular disclosures of information required by its bond covenants to the Municipal Securities Rulemaking Board (MSRB), including certain financial information and operating data of Cascade and of its Members and notices of the occurrence of certain enumerated events, if material. The specific nature of the information to be contained in the annual disclosure report and in notices of material events is set forth in the continuing disclosure certificates of Cascade’s bonds. The CEO will be responsible to execute the disclosures and notify the Board of such reports. [Res. 2018-14 § 1 (Att. 2); Res. 2016-20 § 1; Res. 2012-14 § 6; Res. 2006-05 § 1].

5.05.070 Financial planning and revenue sufficiency.

Cascade shall establish member charges sufficient to meet all cash operating requirements of the system.

A. Cash Requirement. Cash operating requirements are defined to include operating expenses, debt repayment, planned equity funding of the capital program, and planned addition to operating, bond or other reserves. Resources considered for this purpose shall include, in addition to member charges, available interest earnings, ancillary energy and resource recovery revenues, miscellaneous revenues, and planned use of available reserves.

B. Coverage Requirement. Cascade shall comply with bond covenants and satisfy related coverage requirements. In addition, Cascade will establish member charges sufficient to maintain net revenues that provide a debt coverage factor of no less than 1.25 times total annual debt service. For this purpose, available revenues shall include member charges, interest earnings, ancillary energy and resource recovery revenues, miscellaneous revenues, and transfer to the operating fund from the rate stabilization fund. Expenses shall include operating expenses and transfers from the operating fund into the rate stabilization fund. Expenses shall not include capital expenditures, capacity investments such supply acquisition investments or conservation investments with quantifiable return in reduced water demand, or minimum payment obligations related to maintaining unused capacity rights.

C. Rate Transitions/Planning. In order to maintain orderly and reasonable transitions in rates, Cascade shall rely on the most current rate forecast as guidance in establishing member charges. Member charges (meaning unit charges applied to calculate member payments) shall not be reduced any year when a net increase in required revenues derived from member charges is projected within the upcoming five-year period. When substantial future revenue increases are forecast, Cascade shall, to the extent practical, increase member charges in an orderly fashion through a series of moderate annual adjustments with an intent to provide smoothing of increases and impacts over a prospective five-year period. [Res. 2018-14 § 1 (Att. 2); Res. 2016-20 § 1; Res. 2012-14 § 7; Res. 2006-05 § 1].

5.05.080 Budgeting and accounting.

Cascade shall develop and approve biennial budgets as provided by the Cascade Water Alliance Joint Municipal Utility Services Agreement (“Cascade Agreement”) and bylaws and consistent with adopted fiscal policies.

A. Annual Budget. Each annual Cascade budget shall establish authorized expenditure levels, estimated revenues and reserve levels. Cascade shall amend the adopted budget, as deemed appropriate, by Board action to reflect material changes in anticipated revenues or expenditures. The CEO shall establish procedures and practices for periodic reporting to the Board on budget performance.

B. Rate Planning. In support of the budget process, Cascade shall determine corresponding rates and charges and provide such information to members. Cascade shall issue a preliminary rate forecast no later than July 1st of each year. Cascade shall issue a revised rate forecast no later than October 1st of each year. These rate forecasts shall address no less than a 10-year planning horizon. Cascade shall issue additional rate analyses and forecasts as directed by the Board.

In addition, Cascade shall periodically, but no less than every ten years, develop a financial forecast encompassing at least a 20-year planning period. This forecast shall project member charges as required to satisfy financial requirements and performance standards.

C. Financial Reporting. Cascade shall establish and maintain financial records in a format consistent with Washington State BARS system of accounts. Cascade shall conform with generally accepted accounting with principles in its accounting, reporting and procedures.

D. Audit. Cascade shall be audited by an independent outside auditor no less than annually. Such audit shall be performed by the State Auditor or their agent or by a public accounting firm knowledgeable in Washington municipal accounting practices.

E. Funds. Cascade shall establish and maintain appropriate segregation of monies as required to provide adequate accounting for to the source and use of funds. To this end, Cascade shall maintain: (1) an operating fund; (2) an RCFC fund; (3) a rate stabilization fund; (4) a bond fund and (5) a construction fund. Any additional funds or accounts shall be established and maintained as defined by Board resolution.

F. Investments. The Board shall adopt by resolution an investment policy which is fully compliant with statutory requirements and which protects the security of invested funds. The investment strategy contained in that policy will consider appropriate maturities for investments as related to corresponding yield and intended uses of various funds and reserves. The investment strategy may be executed through contract with third party governmental investment pools that comply with statutory limits, such as King County or the State investment pool, provided that those pools are also consistent with Cascade’s investment policies and objectives.

G. Board Oversight. Cascade’s Board shall receive regular reports and briefings on Cascade’s financial status. The Board shall receive directly, or through its Finance and Management Subcommittee, at a minimum:

1. Net Assets Report, Balance Sheet, Treasurer’s Report, Contracts Status Report, Budget-versus-Actual Report, Income Statement, and Warrants and Wires Listing (no less frequently than quarterly);

2. Direct reports from Cascade’s independent outside auditor reporting the results of quarterly financial reviews conducted for quarters one, two, and three of every year;

3. Direct reports from Cascade’s independent outside auditor reporting the results of the annual independent financial audit and Government Auditing Standards examination of Cascade;

4. Direct reports from the State Auditor’s Office reporting the results of the state’s annual audit of Cascade;

5. A written monthly narrative that reports on Cascade’s financial and administrative activities;

6. Written Exception reports including material variance from budget;

7. Notice of disclosure submittals related to outstanding bonds;

8. Any other information as requested or directed by the Board. [Res. 2018-14 § 1 (Att. 2); Res. 2016-20 § 1; Res. 2012-14 § 8; Res. 2012-07 § 34; Res. 2006-05 § 1].

5.05.090 Rate structure and equity.

Cascade has established a uniform structure of charges to all members regardless of location. This structure reflects Cascade’s uniform regional commitment of service to its members. Members shall not enjoy or suffer from geographic advantage as an element of the allocation of regional water resources or their costs.

A. Cascade Revenue Sources. The basic member charges imposed by Cascade are defined by the Cascade Agreement and include:

1. Annual administrative dues.

2. Conservation program charge.

3. Demand share charges.

4. Volume charges.

5. Regional growth charge (RCFC).

B. Credits and Adjustments. Cascade’s fixed charge structure can in certain cases lead to results of overpayment or underpayment by members in a given fiscal year. Cascade shall identify and correct for overpayment and underpayment caused by estimation. Cascade will determine the net of such payments no later than June 30th of the next fiscal year. The net credit or surcharge due will be applied during the budgeting process for the following fiscal year, with corresponding adjustments to that year’s scheduled payments. For example, overpayment received in 2020 would be identified in 2021 and credited against 2022 payments. As approved by Board resolution, earlier payment of credits to members may be approved, but Cascade may not unilaterally require early payment from members. Such credits, surcharges or adjustments shall not accrue interest. They shall be treated by Cascade as revenues or expenditures in the year payments are to be made.

C. New Member Buy-In Charges. As contemplated and provided in Section 3.2 of the Cascade Agreement, Cascade shall establish and require appropriate buy-in payments from new members. The Board shall consider net value of the Cascade system, supply requirements of the new member, Cascade’s supply status, and other relevant factors as relevant to determining an equitable and appropriate payment that protects the interests and investments of existing members.

D. Sales or Capacity Commitments to Nonmembers. Cascade may determine that it is in its best interests to enter into water contracts to supply or otherwise serve nonmember utilities or agencies. In such cases, no commitment or supply to nonmembers may offer terms that are financially favorable in comparison to those offered to members except as the Board determines that such terms are of material benefit to Cascade and its members. The Board may consider material differences in service or supply commitments in its consideration of such terms.

E. Special Projects and Programs. It is expected that there may be occasional opportunities for arrangements of mutual benefit between Cascade and its members, or with nonmembers. The Board shall have the discretion to consider and enter into special agreements related to Cascade’s and its members’ resources and programs on a case-by-case basis; provided, that such agreements are uniformly available to any members able to participate. [Res. 2018-14 § 1 (Att. 2); Res. 2016-20 § 1; Res. 2012-14 § 9; Res. 2012-07 § 35; Res. 2006-05 § 1].

5.05.100 Efficiency and conservation.

Cascade is committed to efficient and responsible use and stewardship of water resources. Water efficiency and conservation provide cost-effective means to avoid or delay costly system expansions while reducing environmental impacts on water systems.

A. Recovery of Conservation Program Costs. Cascade shall fund conservation and efficiency measures consistent with its service obligations and shall recover related program costs through a uniform conservation program charge that best relates to the cost and benefits attributable to its member agencies.

B. Cost-Effectiveness of Conservation and Efficiency Measures. As a means of meeting its members’ demands, Cascade shall periodically evaluate potential efficiency and conservation measures and determine cost-effectiveness of those measures relative to related system expansion. That cost-effectiveness determination shall consider direct realized and avoided costs, but may also consider external costs or benefits related both to the measure and its alternate supply development option.

C. Access to Conservation and Efficiency Program and Measures. Cascade shall endeavor to develop conservation and efficiency programs that are broadly and universally available throughout its member service areas, recognizing that some measures are specific to retail customer activities and land uses that may not be uniformly distributed among members.

D. Wholesale Wheeling. When the Cascade Board determines it to be efficient and cost-effective, Cascade may contract with member or other water utilities, to “wheel” or transfer water through their systems to member or contract customers of Cascade in lieu of facility construction by Cascade. Payments made by Cascade for wheeling shall be considered a Cascade operating and maintenance expense.

E. Master Metering. To support efficient use of water resources, Cascade shall meter all water delivered to its members through one or more wholesale master meters, owned and maintained either by Cascade or other regional water utilities such as Seattle Public Utilities and Tacoma Public Utilities. Member charges shall include charges based on water delivered to each member. [Res. 2018-14 § 1 (Att. 2); Res. 2016-20 § 1; Res. 2012-14 § 10; Res. 2012-07 § 36; Res. 2006-05 § 1].