Rochester Hills Legistar System

Gerianne Reimann, Accountant, briefly reviewed the new financial report and major

changes including the following:

* Financial Statements have been changed so they comply with new GASB 34.

* Introductory section remained the same as last year.

* Financial section changes:

* Introductory Statement includes:

* Transmittal letter

* Organizational chart

* Listing of the City Administration

* Certificate of Achievement

* Financial Sections:

* Independent Auditor's Report - essentially the same as in the past.

* Management Discussion and Analysis Report which is an

explanation of the Cities financial performance for 2003.

* Charts and graphs reflect summarized financial information.

* Governmental Activities are now activities with the City other than

Water and Sewer Fund.

* Combined funds consist of general, special revenue, capital project,

debt service and internal service.

* Net Assets instead of Fund Balance will show a comparative analysis from

one year to the next.

Ms. Reimann continued to review the changes to the CAFR, noting the following

regarding new documents:

Statement of Net Assets:

* Is a combination of all of the City's activities combined in three columns:

* Component Units: contains all of the information for the four (4) component

units including OPC, RARA, LDFA, EDC.

* Column 2: contains the total financial activity of the year.

* Business Activity: represent only the water/sewer activity for the year.

* Two biggest changes are:

* Assets are now disclosed which include assets that were previously

recorded as building, furniture and equipment; and incorporates

roads, sidewalks, right of way and similar infrastructure items.

* Liabilities on the City's debt is now disclosed on this statement.

Statement of Activities:

* Helps with understanding financing of programs through user fees.

* Begins with expenses.

* Incorporates program revenues.

* Finishes with net expense.

Fund Type:

* Focuses on City's major or significant funds:

* General Fund

* Major Roads

* Local Roads

* Special Police

* Fire Fund

* OPC Building Construction Fund

* Municipal Building Construction Fund

* Details of other funds can be found on the back of the financial statements.

Statement of Revenue and Expenditures for major funds are similar to the past except

now the City is disclosing its major funds as opposed to all of the funds.

Ms. Lee reviewed the prepared graphs that highlight key financial information including:

* Change in terminology from "Fund Balance" to "Net Assets".

* Net Assets are broken into two (2) components.

* Restricted Net Assets.- Assets available to be spent for a specific purpose.

Example: Fire Millage; any accumulation you can spend but only for specific fire

purposes.

* Unrestricted Net Assets - Resources available to be spent for any purpose.

* Two important changes to note:

* Assets are now disclosed.

* Debt is now disclosed.

* Document can now be viewed and compared with other municipalities.

* Statement of Activities helps with understanding financing of programs through user

fees.

* Statement of revenue and expenditures for major funds remains similar.

* Management Discussion Analysis helps the reader understand the information.

* Graphs highlight key financial information and gives a basis for comparison.

Julie Jenuwine, Interim Finance Director reviewed the graph on page two (2) including

the following:

* Revenues are broken down into two (2) large and distinct pieces.

* GASB 34 calls general revenue

* Includes all property taxes levied.

* GASB 34 calls program revenue.

* Revenue derived specifically from user charges or charges for

services.

Discussed graph on page three (3) - Cost of the City's expenses:

* GASB 34 compares cost of different functional expenses, subtracts the program

revenues or revenues derived from specific programs, comes up with the Net Expense.

* Rochester Hill's long-range financial plan is viable.

* Proposal A and the Headlee Amendment have negatively impacted

municipalities.

* Changes to the Singular Audit Act requires separate compliance audit on Federal

Funding.

* Threshold has increase staring in 2004 from $300,000 to $500,000.

* Cities that spend less than $500,000 in federal expenditures will no longer

have to have this separate compliance audit.

* Qualifying Statement must be filed with State by June 30th.

Discussed chart on page four (4) - Water and Sewer Fund Activity

+ 2002 - 2003 Activity includes:

* Operating revenue - increased due to rate increases in water and sewer.

* Operating expenses - increased due to increase in what the City paid for

water and sewer.

* Unrestricted Net Assets.

* Fund Balance - Key Funds:

* General Fund - remains healthy.

*, Fire Fund - City has been spending down the resources.

* Police Fund - has remained constant.

* Major Roads Fund - City has been spending down those resources on

different projects.

* Local Roads Fund - gone up between 2001-02 and then slightly down this

past year.

Ms. Jenuwine discussed the Letter of Comments and Recommendations page one (1)

including the following points:

* Informational item regarding the new format.

* Revenue sharing has decreased over last several years.

* State expects to hold revenue sharing at a constant next year.

* Rochester Hills should remain cautious and budget for a decrease in State Revenue

Sharing.

* Rochester Hill's budget is dependent upon two specifics:

* Increase in tobacco tax.

* Elimination of State Share Revenue to Counties.

Committee members discussed Retiree Health Care Funding.

* GASB 34 impacts City of Rochester Hills Supplemental Plan.

* GASB 34 requires the City to have an actuarial evaluation on the liability.

* Expense figure will increase.

* Actuary to look at benefits paid in the future.

* Actuary will compute an annual contribution.

* Rochester Hills pays an annual contribution into pension plan; which is an expense.

* Rochester Hills does not pay an annual contribution into pension plan; which is a

liability.

Committee members discussed internal control.

* Implement limited ability for departments and staff to add vendors into the system.

* Require formal approval policy when adding new vendors to system.

* Implement ability for other staff to review bank reconciliation's other than the preparer.

* Require formal approval policy to limit access to JDE.

* JDE is an integrated system where there are shared common areas.

* JDE keys held by two (2) different departments.

Enactment No: RES0178-2004

2004/2005 Water and Sewer Rate Recommendation to Mayor and City Council

Committee

Water & Sewer Rates without resevoirs.pdf; Water & Sewer Rate

Schedulespdf; Reservoir info.pdf

Committee members introduced the Water and Sewer Board Richard Rowe, George

Karas and Gerald Verschuren and Roger Rousse from the DPS.

Committee members discussed water and sewer rates including the following.

* GASB 34 picked up two (2) major assets:

* Infrastructure developed by the builder is given to the City.

* Infrastructure is considered a contribution equivalent of the cost.

Ms. Jenuwine reviewed the two (2) methods of calculation, traditional and modified,

noting the City has used the modified approach to collect information.

Ms. Jenuwine provided a review of the information including the following points:

* Oakland County has not provided updated information for this year.

* Last meeting memo from Bob Spaman indicated a five (5%) percent increase was

proposed to the water and sewer rates.

* DWSD is increasing the City's water rate by 3.8 percent and the sewer rate 4.6

percent.

* If City increases rates by the same amount as DWSD rather than the 5%, then the

new rates would increase to $2.08 as opposed to $2.18 for water and $2.09 as opposed

to $2.10 for sewer.

Committee members discussed how a reservoir effects the rates.

* Would not see benefit until 2006-2007 if reservoir is build in 2005.

* Reservoir must be up and running by summer 2005 for DWSD to establish water rate

for 2006.

* Reservoir plan is to become a maximum day customer rather than a peak hour

customer.

* There are controls set in the system because the proposal calls for valves to be

installed at the inlets of the City. Those valves have an orifice in them which allows the

City's maximum day amount to come through there. Ideally the City would watch the

levels in the reservoir and buy at off peak hours and then use the water from the

reservoir at peak times.

* Key is to have enough storage so the City does not have to draw more than the

maximum day demand.

* Proposed savings is $1.2 million dollars, however, construction of reservoir and

interest on bonds to fund construction must be taken into consideration.

* Highest estimated cost is $8 million dollars which includes two (2) reservoirs and (2)

pump stations.

* Analysis indicates that the cost of constructing the reservoirs and pump stations would

be paid for in approximately six (6) years.

Committee members discussed separating Replacement Fund and Capital Improvement

Fund.

* Currently Capital Improvements come out of the annual rates.

* Replacement Funds grow from contributions from new developments or from a portion

of rate fees.

* Rates are based on expenses annually.

* Capital Improvements come out of the Capital Improvement Fund.

* Currently Capital Improvement and Replacement funds are combined.

* GASB 34 requires we estimate assets, determine replacement costs and calls for a

separate Capital Replacement Fund.

* Utilizing the GASB 34 recommendations, the ordinance and implementing a separate

Capital Replacement Fund will insure:

* Possibility of low increases in rate structure.

* Possibility that fund will stabilize rates.

* Communities with high rates deferred maintenance.

* Current life cycle of sewer/water system is 50 to 100 years. The City's system is 30

years old. There is a 20 year window of opportunity to start saving which will stabilize

rates and the only increases that will be seen are labor costs, material costs and

possibly some DWSD costs.

* Guarantees that rates will not increase ten (10) percent annually with a

Capital Replacement Fund.

* Rates will be stabilized long-term.

* Potential benefits from a Capital Replacement Fund will come

subsequently.

Committee members discussed how to separate funds.

* Ordinance already states City should have a Capital Replacement Fund.

* City cash reserves total $16 million.

* Committee recommends to the Council that the funds be separated.

* City adheres to its ordinance.

* Separate monies that are available.

* Council needs to recommend how fund to be used.

* Possible policy issues need to be reviewed.

Committee members discussed what a "Target Balance" is.

* Target Balance is what capital revenue is on hand in Operating Fund.

* Target Balance is also the annual depreciation of the sewer/water system.

* Analysis calls for a Target Balance of 90 days of operating expenses.

* Capturing capital revenue during a community development phase reduces bonding

100 percent ultimately.

* In 1998 capital improvement/replacement fund was at $16 million.

* Subsidizing rates depleted fund to its current value $6 million.

* GASB 34, Ordinance, Black and Veach in agreement to separate Operating and

Capital Funds.

* Ninety (90) days of operating costs or fifteen (15) percent of operating costs on hand.

* Annual depreciation emergency repair expenses on hand.

* Depleting Fund because it is a combined Fund.

Committee members discussed Engineering study.

* Engineering Department currently evaluating age of in-ground infrastructure to

develop a replacement time-line and estimate life span of system. Things to consider:

* Size of pipe.

* Material used (transit pipe, ducktail iron pipe, trust pipe for sewers).

* Location of pipe (high impact vs. low impact).

* Proposed 2005 Asset Management Software Program will provide

predictive maintenance and replacement schedules.

Committee members discussed funding for sewer/water replacement.

* New fund to be used for replacement of existing water/sewer and extension of water/

sewer into areas that do not have it.

* Extension Policy needs to be defined by Council.

* Past practice costs fell on developer or homeowner.

* Fund must be designated specifically i.e. "replacement".

* Sewer lines require homeowner mandatory hook-up but water lines are not mandatory

Committee members discussed possibility of increasing all rates to five (5) percent.

* Currently capital and lateral revenue goes into Operating Fund.

* Currently subsidizing rates using capital and lateral revenue.

* Establishing a new fund would cause capital revenue to be diverted into that new fund

* For revenues to meet expenditures would require further rate increase.

* Currently City can lump sum one-half of what is needed into Capital Improvement

Fund.

* By continuing to deposit capital and lateral charges into the Operating Fund, would

eliminate a rate increase above five (5) percent.

* Currently lateral charges contribute approximately $1 million per year to operate.

Committee members discussed acquisition of land for reservoirs.

* Possibility of property located on Letica owned by Sewer and Water Fund.