June 20, 2005

Chairman Foy and Board Members

Monterey Peninsula Water Management District

5 Harris Court, Building G

Monterey, California 93940

Dear Chairman Foy and Board Members:

This letter transmits the Fiscal Year 2005-06 budget. The budget document presents a comprehensive plan to eliminate the use of general operating reserves that has taken place in recent years while preserving existing services and enabling the District to carry out its legislative mission and the Board’s strategic vision.

District budgets have been balanced in recent years by using large amounts of previously accumulated general operating reserves, which are now approaching precariously low levels. This was due mainly to the intentional spending of previously accumulated reserves to develop water supply projects as well as the shifting of large amounts of property tax revenues from the District by the State of California. At the January 19, 2005 Budget Workshop, the Board adopted the following strategy to develop a balanced budget:

v Minimize impact on District constituents (reductions should seek to avoid significant adverse impacts on existing service levels)

v Phase out the use of operating reserves (diminish the use of operating reserves to balance the 2005-2006 budget while maintaining a minimum operating reserve level of 5% to 10%, and planning for re-establishing operating reserves to a prudent level of approximately 50% of the annual budget over the subsequent five fiscal years)

v Structure permit and other processing fees to fully recover service costs (establish and institute fees that are sufficient to cover costs of issuing permits and providing other services)

v Explore ways to be more efficient and economical (review the way tasks are currently accomplished and solicit ideas from employees on how to be more efficient and economical in daily activities)

v Minimize impacts on existing staffing level (reductions should seek to avoid significant adverse impact on existing regular staff in order to maintain satisfactory services levels for current programs and activities)

v Invest in strategic projects (budget funds as needed to develop Aquifer Storage & Recovery and other long-term water supplies)

v Minimize environmental impacts (provide District services while minimizing the effects on, and improving, the environment)

v Adjust the 7.125% User Fee as required to meet service program needs (if the above measures are not adequate to balance the budget, increase user fees to a level required to balance the budget, while striving to achieve objectives in the District’s Strategic Plan, including Mission and Vision Statements)

The 2005-06 budget is consistent with this strategy. In addition to implementing this strategy, management staff also proposed that the budget be restructured to include program categories and performance measures, and the Board agreed with that proposal. This change has been incorporated into the budget so that labor costs and other expenditures are now accumulated in one place so that citizens and the Board easily identify how much each major program of the District actually costs.

Lastly, at the budget workshop, the Board of Directors also concurred with staff’s recommendation that the Board consider an ordinance to restructure and add to Water Demand Division permit and other processing fees to fully recover service costs. As a first step towards balancing the budget, the Board adopted an ordinance revising those fees on February 21, 2005. It is estimated that the new and updated fees will generate over $200,000 of additional revenue in fiscal year 2005-06, which is included in the 2005-06 budget.

Budget Development - Expenditures

In mid-February, the General Manager and Administrative Services Manager/Chief Financial Officer met with the employees of each Division to discuss the strategies to balance the budget and to elicit ideas for reducing the expenditure side of the budget. A listing of the most pertinent ideas offered was presented to all employees in the form of a written survey, asking them to rank the items in order of desirability. The results of this survey were later used by the management team when making budget decisions required to balance the budget.

After compilation of the original requests for the 2005-06 budget, requested expenditures totaled $5,398,900 and projected revenues, including $60,000 from the capital equipment reserve, totaled $4,211,500 resulting in a general operating deficit of $1,187,400. These original requests were based on the same levels of service as in prior years, or “business as usual.” Subsequently, the management team identified a series of expenditure reductions and requested expenditures were reduced by $789,300 to $4,609,600.

In addition to these expenditure reductions that are included in the 2005-06 budget, the management team has included a furlough week with the District closed for business between Christmas and New Year’s resulting in a savings of approximately $29,700. While this amount cannot be removed from the actual budget because most staff would use vacation or other paid leave to be paid during the time off, the District would still realize a savings at year-end when the value of outstanding leave balances are calculated and recorded on the financial statements as a liability. In this case the liability would be reduced by the amount of paid leave taken during the furlough week, thereby increasing the amount of the general operating reserves by the same amount. The furlough week would also result in similar savings in future years. While the furlough week was ranked very highly in the employee survey mentioned earlier, this item would still require that the District meet and confer with the management and general staff bargaining units before adoption by the Board.

A detail of the line-item expenditure reductions, proposed by the General Manager and Division Mangers, and contained in the 2005-2006 budget are listed in the tables below. These items were the major focus of discussion at the May 3 and May 26, 2005 budget workshops. The service level impacts of the line-item reductions were ranked as follows:

None – The reduction has no impact on service levels

Low – The reduction will have a minimal impact on services levels

Moderate – The reduction will have a somewhat greater, but not a significant, impact

on service levels

General Manager’s Office

Category	Reduction Detail	Service Level Impact	Estimated Savings
Services & Supplies	Legal Services/ Travel	None – Special Counsel is absorbed in ASD legal services budget	$2,000
Personnel/Services & Supplies	Staff Development/ Board Member Expenses	Low – 50% reduction in ACWA and other Board and staff conference attendance	$4,700
Services & Supplies	Meeting Expenses/Professional Fees	Low – Annual (rather than semi-annual ) update of Board’s strategic plan	$5,000
Fixed Assets	Hardware & Software Upgrades	Moderate – 50% reduction in planned IT capital expense for hardware & software upgrades	$11,000
Services & Supplies	Data Processing	Moderate – 80% reduction in outsourced IT support and a 33% reduction in non-capitalized software upgrades	$18,000
		GMO Total Savings	$40,700

Administrative Services Division

Category	Reduction Detail	Service Level Impact	Estimated Savings
Personnel	Unemployment Compensation, Temporary Personnel, Recruitment and Pre-Employment Physicals	None – Use general contingency if required	$6,700
Office Purchase Reimbursement	Office Purchase Reimbursement	None – This is an internal transfer only and need not be budgeted as there is no effect on cash flow	$159,600
Fixed Assets	Capital Equipment Reserve	Low – Defer annual contribution to replace telephone system by one year (one-time savings)	$8,500
Services & Supplies	Facility Maintenance	Low – Reduce janitorial service from 5 to 3 days per week	$11,400

Administrative Services Division (continued)

Category	Reduction Detail	Service Level Impact	Estimated Savings
Program Expenses	Annual Report	Low to Moderate – Prepare Annual Report in-house with distribution to local government agencies and libraries only	$10,000
Services & Supplies	Office Supplies	Low to Moderate – Reduce by 15% by reducing quality of letterhead, envelopes, etc. Purchase only items that are absolutely necessary	$4,900
Services & Supplies	Legal Services RLS 04-01 (Board/Committee Attendance)	Low to Moderate – General counsel would continue to attend all regular and special Board meetings; and only those Board committee meetings during which a proposed ordinance is to be reviewed, or where General Manager confirms legal support is essential for Board committee to discuss agendized District policy item(s)	$9,000
Services & Supplies	Legal Services RLS 04-03 (General Manger Support)	Low to Moderate - General Counsel workload reduced by 1/3 on miscellaneous legal work not aligned to a specific charging category; will be achieved by more efficient and selective use of legal counsel resource, and break-out of legal budget by Division for improved cost control	$4,500
Services & Supplies	Legal Services RLS 04-05 (Team Supply, CEQA, CPUC)	Low to Moderate - District to streamline existing approach to analysis of Cal-Am rate cases and other CPUC filings, enabling more focused and efficient use of legal resources, by: a) General Counsel/General Manager initial scoping session on each CPUC filing to identify priority issues related to District’s strategic interests, b) preparation of strategy briefing paper for Board closed session review and confirmation of priority issues for guiding District intervention; and c) align legal analysis required to support of CPUC intervention strategy	$13,500
Services & Supplies	Legal Notices	Moderate – Reduce budget by 50%. Stop publishing all but required items i.e., Board agendas, bid notices, etc. (Amounts preserved for ordinances, etc.)	$6,000
		ASD Total Savings	$235,300

Note: The reductions to the three legal services categories were made after discussion with, and the concurrence of, General Counsel Dave Laredo.

Planning & Engineering Division

Category	Reduction Detail	Service Level Impact	Estimated Savings
Program 2-1-1. C	Purchase Irrigation Water from Cal-Am	None – Negotiate with Cal-Am to provide irrigation water at no charge	$5,000
Program 2-5-5	Implement Ordinance No. 105	Moderate – Ordinance No. 118 will require applicants to do more upfront rather than staff. Reduction of budget request from $25,000 to $12,500, ½ of FY 2004-05 amount. Focus consultant’s work on highest priority items and staff will need to take on other items.	$12,500
Personnel	Staff Development	Moderate – Reduce ability for staff to attend or participate in skills training and professional seminars and workshops. Reduce employee morale	$3,000
		P&E Total	$20,500

Water Demand Division

Category	Reduction Detail	Service Level Impact	Estimated Savings
Program 4-2-4-B	Reduce printing of rebate program materials, including brochures, applications, handouts.	Low – Proposed reduction will maintain current service level.	$1,000
Program 4-2-4-C	Rebate fund	Low – Reduction will result in potential delay in funding rebates and may preclude expansion of rebate program.	$25,000 (50% reimbursable)
Program 4-2-4-D	Delete Rebate Program advertising.	Low – Proposed increase planned to coincide with planned program expansion and promotion.	$ 25,000 (100% reimbursable)
Personnel	Delete Senior Conservation Representative Position (New position requested in original requests)	Low – No significant service level impact to maintain status quo. Service levels remain the same.	$ 75,300
Personnel	Reduce training budget	Low – Reduction to $1,000 per person. Potentially service level impacts as training is related to customer service.	$9,000
Office Supplies	Letterhead, permit paper, computer paper	Low – Will use photocopied letterhead, single-sheet water permits on single paper rather than multi-copy NCR forms.	$ 900

Water Demand Division (continued)

Category	Reduction Detail	Service Level Impact	Estimated Savings
Fixed Assets	Inspectors handheld and new workstation for new employee	Low – Inspector’s handheld is contained in GM office budget. Workstation for new employee is not necessary if there are no new employees. If the Con Rep I/II (reimbursable) is hired that person will have to sit at the front counter	$12,500
Travel	Travel related to training.	Moderate – Service level reduction if pertinent training is located outside of area.	$1,000
Program 1-2. Implement Demand Management Ordinances	Print forms and obtain other related material	Moderate – Reduce printing of permit-related documents, such as permit applications. May result in delays in providing applications to jurisdictions.	$1,500
Program 4-1-4	Enable updates to Policies and Procedures Manual by authors.	Moderate – Will reduce ability to respond to staff’s requests for updates after funding has been expended. May result in delays in updating procedure information and in linking policy and procedure features with database.	$3,000
		WDD Total	$154,200

Water Resources Division

Category	Reduction Detail	Service Level Impact		Estimated Savings
Program 1-2-1 A. 2	ASR – PG&E Power	None – This cost would be borne by Cal-Am if the proposed MOU is approved		$55,000
Program 1-2-1 A. 6	ASR – Flow Valve, Luzern	None – Installation has been completed and paid for by Cal-Am		$7,000
Program 1-2-1 A. 5	ASR – Site Maintenance	None – This cost would be borne by Cal-Am if the proposed MOU is approved		$10,000
Program 2-6 (multiple line items)	CR sediment sampling, Publish WR data reports, CV WQ sampling (reduce frequency)	Low – Will reduce data coverage and reporting		$5,700
Program 2-6-4	Part-time position – Water level and quality data management	Low – Continue with current old database management; increased burden to existing staff		$3,600
Program 2-4-11	CR Bioassessment sampling – reduce frequency	Low to Moderate – Will reduce available records and result in less certainty of data analysis		$2,000
Program 1-2-1 A. 4	ASR – Tracer Testing	Low to Moderate – Will likely be required in future; will reduce ability to respond to fate & transport questions	$35,000

Water Resources Division (continued)

Category	Reduction Detail	Service Level Impact	Estimated Savings
Program 1-2-1 A. 7	ASR – Pilot Declorination Test	Moderate – Could be DHS/Cal-Am concern if dechlorination becomes a permit requirement	$25,000
Program 2-6-2 E. 1	Assistance for SB GW Management Plan (reduce to technical assistance only	Moderate – Would increase burden on staff for Plan completion within planned project schedule	$25,000
Program 1-2-1 C.	ASR – Resubmit Long Term Petitions for Change (net reduction)	Moderate – Exposes District to risk if SWRCB request re-submittal of petitions	$1,500
		WRD Total	$169,800

District Wide

Category	Reduction Detail	Service Level Impact	Estimated Savings
Contingency	Contingency	Low – Replace contingencies in each Division with one amount of $75,000 in ASD	$104,200
Fixed Assets	Vehicles	Low – Extend replacement of three vehicles by one year (one-time savings)	$34,900
Personnel	Salaries & Wages – Furlough week between Christmas & New Year’s	Low to Moderate – Office Closed for 4 extra days	$29,700
		District Wide Savings	$168,800

TOTAL EXPENDITURE REDUCTIONS $789,300

After reviewing the proposed reductions on May 3 and May 26, 2005, the Board directed two changes to the budget. The first was to increase the amount budgeted to prepare and distribute the 2005 annual report to $13,200. This would provide funds for the report to be distributed District-wide via US Mail should the Board decide to do so at the time the report is distributed. The second change was to add $10,000 to the budget for advertising an expanded rebate program for conservation. Subsequent to the May 26, 2005 meeting, staff requested that $22,000 related to the upgrade of the conference room be carried over to the 2005-06 budget, and the budget was increased accordingly.

Table I attached to this transmittal compares the current 2004-05 expenditure budget as amended at the February 2005 Board meeting, the 2005-06 expenditure budget as originally requested by staff and the 2005-06 expenditure budget as amended by the General Manager, Division Managers and the Board of Directors. The table also shows the percentage change from the 2004-05 budget to the 2005-06 budget. As the table shows, the expenditure budget totals $4,650,800 which is $388,200, or 7.70%, less than the current fiscal year’s budget.

Budget Development – Revenues

When calculating additional user fee revenues for the 2005-06 budget due to Cal-Am’s pending rate increase request, the management team used a conservative estimate of a 10% effective January 1, 2006. This amount is well below the percentage increase requested by Cal-Am. Also included in the budget are increased revenues generated by the updated permit fees recently approved by the Board. During review of the budget requests, several other sources of supplementary revenue were identified and included in the 2005-06 budget. They are as follows:

Revenue Source	Amount
Reimbursement from Cal-Am for costs of new Water Conservation Representative I/II	$63,800
Reimbursement from Cal-Am for conservation materials, showerheads, etc	$10,000
Additional reimbursement from Cal-Am for maintenance of Lower Carmel Valley wells (currently receive $7,000 per year)	$3,000
Partial reimbursement from property owners for lower Carmel River restoration project	$50,000
Total Additional Revenues	$126,800

In addition to the above revenue adjustments, the budget includes an adjustment to the user fee to provide funding for an expanded Aquifer Storage & Recovery (ASR) Project. This includes current costs plus items associated with planning for a second well such as completing planning, specifications and engineering, expansion site planning and completing an EIR for the long-term ASR project. Total expenditures, including labor, related to the ASR Project for Fiscal Year 2005-06 is anticipated to be approximately $345,000. An increase of the user fee 1.2% (to a total of 8.325%) is required to fund this amount, and provide ongoing revenues for annual operating costs of the ASR Project. Since there is at least a six-month time lag between Board authorization to increase the user fee and the time the first revenue is received, the budget reflects a final, one-time use of $172,500 in general operating reserves to fund the ASR Project until the user fee increase becomes effective. Although District staff is also in the process of applying for Proposition 50 grant funds for planning and implementation of the ASR project, the application process is extremely competitive and staff recommends that no grant funds be anticipated in the budget at this time.

Reserves

As discussed earlier in this transmittal, the strategy used to prepare the 2005-06 budget includes phasing out the use of operating reserves. More specifically, the strategy is to diminish the use of operating reserves to balance the 2005-2006 budget while maintaining a minimum operating reserve level of at least 5% to 10%. The 2005-06 budget exceeds this goal by maintaining approximately 20% of general operating reserves. When excluding the final, one-time use of $172,500 of general operating funds for the ASR Project as discussed in the previous paragraph, and expenditure carryovers of $22,000 from fiscal year 2004-2005, the budget actually increases the general operating reserve by $7,700. As discussed earlier, the general operating reserve will also increase by approximately $29,700 at the end of the fiscal year due to the decreased liability for compensated employee absences due to the use of paid leave by staff during the furlough week between Christmas and New Years.

Summary

The 2005-06 budget was prepared using the strategies adopted to balance the budget at the January 19, 2005 Budget Workshop. The budget does not have a significant impact on the services provided by the District or its ability to achieve the objectives in the District’s Strategic Plan, including Mission and Vision Statements.

Budgeted expenditures have been reduced by $388,200, or 7.70%, from the 2004-05 budget; and $748,100, or 13.85%, from the original 2005-06 budget requests. Budgeted revenues have increased by $355,000, or 8.64% over the 2004-05 budget.

This budget process has been one of extraordinary partnership – with the Board of Directors, the District Management Team and other District employees. They have made a direct contribution to the development of a balanced budget for the first time in many years, and we acknowledge their efforts.

Respectfully submitted:

_________________________________ ________________________________

David A. Berger Rick L. Dickhaut

General Manager Administrative Services Manager/CFO

_________________________________ _________________________________

Andrew M. Bell Stephanie Pintar

Planning & Eng. Manager/Dist. Engineer Water Demand Manager

_________________________________

Joseph W. Oliver

Water Resources Manager

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