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8. REPORTS

A. ERP and HRIS/Payroll Implementation Budget and Implementation Update

– Mike Huber, Finance Director; Butch Johnson Procurement Director; and

Denis DesRosiers, ERP Program Director; Nicolette N. Bateson, CFO

B. Transition Services Budget and Project Update

– Mike Huber, Finance Director

9. INFORMATION

10. LOOK AHEAD

Next Audit Committee Meeting: Friday, April 1, 2016 at 8 am

11. OTHER MATTERS

12. ADJOURNMENT

Great Lakes Water Authority

Audit Committee Meeting MINUTES

Friday, March 4, 2016 at 8:00 a.m.

5th Floor Board Room, Water Board Building 735 Randolph Street, Detroit, Michigan 48226

GLWater.org

1. CALL TO ORDER

Chairman Baker called the meeting to order at 8:10 am.

2. ROLL CALL

Chairman Brian Baker, Director Robert Daddow, and Director Joseph Nardone

3. APPROVAL OF AGENDA

Chairman Baker requested approval of the Agenda.

It is noted that an Addendum to the Agenda has been added. ATTACHMENT 3

MOTION BY: ROBERT DADDOW

SUPPORT: JOSEPH NARDONE

ACTION: APPROVED

4. APPROVAL OF MINUTES

Chairman Baker requested approval of the Minutes of February 19, 2016.

MOTION BY: JOSEPH NARDONE

SUPPORT: ROBERT DADDOW

ACTION: APPROVED

5. PUBLIC PARTICIPATION

None

AGEMDA ITEM 4A

Page 1

Item 7B was moved up on the Agenda.

B. Investment Management Report

Presenter: Deirdre Henry, Treasury Manager, and via telephone Brian Quinn,

Director, PFM Asset Management LLC, Kathleen Walters and Christopher Harris,

CFA

Action: Receive and File Report



ACTION: APPROVED

Item 7A was moved up on the Agenda.

A. FY 2015 Detroit Water & Sewerage Audit Update ATTACHMENT 7A

Presenter: Joseph Kowalski, Partner, KPMG




ACTION: APPROVED

6. OLD BUSINESS

A. FY 2017 and 2018 Financial Planning Update – Including:

- Implementation of Lease and Related Documents

- Financial Planning Implications for Use of Lease Payment

- DWSD-R Current and Next Year Budget Update

Presenter: Nicolette N. Bateson, CPA, Chief Financial Officer/Treasurer




ACTION: APPROVED

Page 2

7. NEW BUSINESS

C. Proposed Resolution of the Great Lakes Water Authority Authorizing

Declarations of Intent to Reimburse Expenditures from Proceeds of Revenue

Bonds

Presenter: Jon Wheatley, Public Finance Manager

Action: Audit Committee recommends that the Great Lakes Water Authority

Board approve the resolution Authorizing Declarations of Intent to Reimburse

Expenditures from Proceeds of Revenue Bonds as presented at its Regular

Meeting on March 9, 2016.


SUPPORT: BRIAN BAKER

ACTION: APPROVED

8. REPORTS

A. ERP and HRIS/Payroll Implementation Budget and Implementation Update

(verbal report)

– Mike Huber, Finance Director; Butch Johnson Procurement Director; and

Denis DesRosiers, ERP Program Director; Nicolette N. Bateson, CFO

Denis DesRosiers

o GL Strings are a targeted issue right now, but we are working

through these.

o We cut our first check on Wednesday for $50.80. We will have a

bigger check run on next week.

o Will be rolling out invoice approval to get more of the

organization involved.

o We will be scanning invoices, which has never been done.

o WAM – this weekend we will be uploading GL Strings on both

sides. There will still be one WAM for both entities. We will be

pushing the city’s new eight segments chart of accounts to assets

that are on the city side and the four segments chart of accounts

for our assets. The city is set to go, but if they decide that they

are not going to go, we are not going to do that push, we will wait

until they are ready, which means that our manual processes will

be a little more cumbersome until such time. But, the

Procurement Team is okay with that.

o We are targeting May for the plant split.

Page 3

Mike Huber

o Thanked everybody involved in this process.

Nicolette Bateson

o We kicked off Ceridian’s Phase II, which deals with HR issues

B. Shared Services – Billing & Agreement Review (verbal report)

– Nicolette N. Bateson, CFO, and Mike Huber, Finance Director

C. City of Detroit Retail Receivable

- Marcus Hudson, CFO, DWSD

D. Great Lakes Water Authority Receivable Report

- Cindy Cezat, CPA, Financial Management Professional

9. INFORMATION

A. Highland Park Accounts Receivable (Jon Wheatley, Public Finance Manager)

B. Flint Prepayment Reconciliation (Jon Wheatley, Public Finance Manager)

C. Wholesale Water Customer Sales (Jon Wheatley, Public Finance Manager)

Director Baker stated that it would be nice to have Detroit included

D. Cash Transfers to DWSD (Nicolette N. Bateson, CFO)

10. LOOK AHEAD

Special Audit Committee Meeting is scheduled for March 24, 2016 at 8:00 am.

11. OTHER MATTERS

Director Daddow stated, through our lobbyist in Washington, DC, which is Dykema

Gossett, he received some information. Over the last couple of years, the Obama

Administration and several members in Congress, have been looking at trying to cap the

IRS income, relating to municipal debt. For people earning an effective rate over 28% in

their taxes, the tax exempt interest would not be tax exempt, it would be taxable.

It is a way of capturing dollars relating to what is fully tax exempt. The problem in doing

this is, if it starts to ratchet down the tax exemption, there is going to be an effect on

what the interest rates are. That being inquiries from where they are today. A part of

the advantage we have in municipal interest, happens to be that it is tax exempt.

Page 4

An article issued by the bond buyer, as well as one that I received from the Hill

(“whatever that is”) is that there has been a bipartisan house set of people who have

launched an opposition caucus to this effort. You do not develop a caucus on a point,

unless the underlying activity has potential of going forward.

There is also another item that deals with the definition of political subdivisions. It looks

like we are outside of the definition of political subdivisions. It is targeted more of

development districts in other areas, where the development districts benefit individual

people (e.g. farmers), where there would be a limited number of people in the district,

or where control is not provided through the government. That item also warrants

some efforts, which I will share with the Board, as well as the CEO.

12. ADJOURNMENT

Chairman Baker requested a motion to adjourn.


SUPPORT: ROBERT DADDOW

ACTION: APPROVED

There being no further business, the meeting was adjourned at 10:20 am.

Page 5

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Page 6

Board of Water Commissioners

Detroit Water and Sewerage

DepartmentMeeting Agenda - Final

735 Randolph

Detroit, Michigan 48226

5th Floor Board Room, Water Board Building2:00 PMWednesday, March 16, 2016

Regular Meeting and Public Hearing-Budget

1. CALL TO ORDER

2. ROLL CALL

3. APPROVAL OF AGENDA

4. APPROVAL OF MINUTES

February 17, 2016 Regular Meeting

February 11, 2016 ORCAP Committee

March 9, 2016 Finance Committee

5. PUBLIC COMMENTS (3 minutes per speaker)

Anyone from the public who wishes to address any item on the Agenda or make a

comment. (3 Minute Limitation)

6. ITEMS FROM THE COMMISSIONERS

1. Follow-up Items

a. Joyce Moore-Virginia Park Community-Copied Board

b. Anthony Hawkins of 18442 Bretton-Copied Board

c. Alice Pruitt of 18251 Freeland St-Copied Board

d. Robert Yonkers of 3001 West Big Beaver Road-Copied Board

e. Revonne Martin of 20331 Chalon-Copied Board

2. Committee Updates

3. Damage Claims under $5,000-Copied Board

4. Board Policies and Procedures Discussion

7. PUBLIC HEARING-BUDGET 2017

16-0041 DWSD Budget Review

Sponsors: Hudson

Finance Committee DWSD Budget Review 3.9.2016Attachments:

Legislative History

3/9/16 Finance Committee recommended for approval

8. NEW BUSINESS

Page 1 Detroit Water and Sewerage Department Printed on 3/15/2016

Page 7

http://dwsd.legistar.com/gateway.aspx?m=l&id=/matter.aspx?key=2570

http://DWSD.legistar.com/gateway.aspx?M=F&ID=f7654779-434e-4ccd-94dd-bc896ef83999.pdf

March 16, 2016Board of Water Commissioners Meeting Agenda - Final

16-0046 The Board of Water Commissioners approves the proposed FY 2016-17

$113,301,240 million water system budget and $265,723,266 sewage

disposal system budget and proposed FY17-18 $115,385,002 million water

budget and $274,381,966 million sewage disposal system budget for the

City of Detroit Water and Sewerage Department, and also authorizes the

Director to take such other action as may be necessary to accomplish the intent

of this vote.

Sponsors: Brown

9. COMMENTS BY COMMISSIONERS

10. DIRECTOR'S METRICS

11. COMMENTS BY THE CHAIR

12. OTHER MATTERS

13. ADJOURNMENT

Page 2 Detroit Water and Sewerage Department Printed on 3/15/2016

Page 8

http://dwsd.legistar.com/gateway.aspx?m=l&id=/matter.aspx?key=2575

File #: 16-0046 Version:1 Name:

Type: Resolution, Finance Status: Approved

In control: Board of Water Commissioners

On agenda: 3/16/2016 Final action: 3/16/2016

Title:The Board of Water Commissioners approves the proposed FY 2016-17 $113,301,240 million water system budget and $265,723,266 sewage disposal system budget and proposed FY17-18 $115,385,002 million water budget and $274,381,966 million sewage disposal system budget for the City of Detroit Water and Sewerage Department, and also authorizes the Director to take such other action as may be necessary to accomplish the intent of this vote.

Indexes: Finance Committee

TitleThe Board of Water Commissioners approves the proposed FY 2016-17 $113,301,240 million water system budget and $265,723,266 sewage disposal system budget and proposed FY17-18 $115,385,002 million water budget and $274,381,966 million sewage disposal system budget for the City of Detroit Water and Sewerage Department, and also authorizes the Director to take such other action as may be necessary to accomplish the intent of this vote.

BodyAgenda of March 16, 2016Item No. 16-0046FY 2016-17 and FY 2017-18 Water and Sewage Disposal Budgets

TO: The HonorableBoard of Water CommissionersCity of Detroit, Michigan

FROM: Gary Brown, DirectorDetroit Water and Sewerage Department

RE: Adoption of the FY 2016-17 budget and average rate increase for the Waterand Sewage Disposal Systems

MOTIONUpon recommendation of Gary Brown, Director, the Board of Water Commissioners approves the proposed FY 2016-17 $113,301,240 million water system budget and $265,723,266 sewage disposal system budget and proposed FY17-18 $115,385,002 million water budget and $274,381,966 million sewage disposal system budget for the City of Detroit Water and Sewerage Department, and also authorizes the Director to take such other action as may be necessary to accomplish the intent of this vote.The proposed FY 2016-17 and FY2017-18 budgets for the City of Detroit Water and Sewerage Department were reviewed by the Board of Water Commission Finance Committee on March 9, 2016 and is recommended for approval by the Board of Water Commissioners subject to public comment.

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Page 9

DWSD BUDGET REVIEW

BOWC Finance Committee 3/9/2016

1

Page 10

Next week, we will request the BOWC approve $115 million and $266 million Water and Sewer budgets for FY 2017; we anticipate rates well below 4%

2

2017 2018 2017 2018

Sales RevenueRetail Domestic MCF Charges 69,059,865$ 67,823,461$ 262,101,914$ 274,882,935$ Retail Fixed Charges 27,928,397 28,812,890 12,495,669 12,933,574 Fee's & Penalties 4,750,000 4,750,000 5,000,000 5,000,000 Ownership Equity 20,700,000 20,700,000 5,516,000 5,516,000 Less: Bad Debet & NSFs (12,261,123) (12,449,029) (29,061,230) (28,882,197)

Net Sales Revenue 110,177,138$ 109,637,322$ 256,052,354$ 269,450,312$

Controllable Operations & MaintenancePersonnel 13,033,985 13,451,333 19,550,977 20,176,999 Contracted Services 15,074,618 15,074,618 17,543,802 17,543,802 Utilities 73,378 73,378 1,341,971 1,346,351 Fringes, Taxes & Other Overhead 7,917,204 7,917,204 5,787,231 5,787,231

Total O&M Charges 36,099,185$ 36,516,533$ 44,223,982$ 44,854,383$

Contribution Margin 74,077,953$ 73,120,789$ 211,828,372$ 224,595,929$

Wholesale O&M AllocationMonthly Wholesale O&M Charges 15,831,543 16,464,805 51,836,900 53,910,376 Retail Allocation 4,969,467 5,168,246 10,209,270 10,698,861 Other CTA Allocation 2,323,176 3,170,614 6,788,722 10,768,746

Total Operating Expenses 23,124,186$ 24,803,664$ 68,834,892$ 75,377,983$

Operating Surplus/(Deficit) 50,953,767$ 48,317,125$ 142,993,481$ 149,217,946$

Non-Operating Expense / (Income)Debt Payments 45,195,714 45,182,224 121,809,319 123,265,760 Lease Payments 2,529,884 2,529,884 11,950,476 11,950,475 WRAP Deposits 604,809 605,235 1,321,541 1,350,308 ER&R 713,792 713,792 1,024,493 1,024,493 B-Note Payment 706,644 706,644 7,206,431 7,206,431 Budget Stabilization Deposits 2,327,026 2,327,026 2,352,133 2,352,133

Total Non-Operating Expenses 52,077,869$ 52,064,805$ 145,664,393$ 147,149,600$

Deposits to Improvement & Extension (1,124,102)$ (3,747,680)$ (2,670,912)$ 2,068,346$

Minimum Rate Increase 1.10% 3.70% 0.96% -0.71%

Additional I&E Deposit 2,000,000$ 2,000,000$ 7,000,000$ 7,000,000$

Required Incremental Rate 2.06% 2.07% 2.55% 2.43%

Maximum Rate Increase 3.17% 5.77% 3.50% 1.73%

WATER SEWER

DWSD Preliminary 2-Year Budget Proposal Budget Highlights► FY 2017 rates likely to be less

than 4% for both Water & Sewer– Despite falling volume, max

water rate increase projectedat 3.2% FY 2017

– Sewer volumes expected toimprove; max rate less than3.5% for FY 2017

► Rate increases include additionaldeposits into the I&E fund

– Creates some cushion in thebudget

– Helps DWSD begin to rebuildcredit rating

► Budget figures are predicated onstrong collections – data ispointing in the right direction

► No lease money used to supportrates Page 11

Several major assumptions underpin our budget

3

Metric Water SewerVolume 3,034,000 (↓8.0%) 2,800,000 (↓7.5%)One Year Collection Rate 90% (↑ 5%)Bad Debt Expense $12,200,000 $29,000,000Default System Allocation 40% 60%Headcount 482 (↑ 57 heads)Employee Compensation 4% 4%

► Lease payments deposited to I&E funds; no support of rates► GLWA allocated expenses reduce by $9 million to reflect more appropriate allocation of

Administrative & General costs► Reduction in hospitalization assumption to 10% of salaries to reflect elimination of sewer

treatment plant workers in DWSD employee pool (down from 21%)► Zero net impact of shared services agreement true-up

Other Assumptions

Major Assumptions

Page 12

Lower water bad debt and O&M expenses offset lower volumes, bifurcation inefficiency, and the elimination of prior year water rate support

4

0%

5%

10%

15%

20%

25%

LowerVolume

MonthlyAllocation

Prior YearSupport

DebtPayments

Lower BadDebt

Expense

LowerO&M

Expenses

Other Base RateIncrease

PERC

ENT

OF B

ASE

REVE

NUES

Water FY 2016 to FY 2017 Rate Walk

12.9%

3.1%

4.4% 0.4% (6.9)%

(13.5)%

0.8% 1.1%

Improved collection rate from 85% to 90%

• Lowered overallcontract costs

• Refined distribution ofadministrative costs

Increase driven by Shared Service costs

Includes correction of fireline charges

Page 13

For sewer, lower bad debt and wholesale allocation offset lower volumes, higher O&M expenses, and the elimination of prior year sewer rate support

5

0%

2%

4%

6%

8%

10%

12%

14%

Prior YearSupport

HigherO&M

Expenses

LowerVolume

DebtPayments

Lower BadDebt

Expense

LowerWholesaleAllocation

Other Base RateIncrease

PERC

ENT

OF B

ASE

REVE

NUES

Sewer FY 2016 to FY 2017 Rate Walk

7.6%

2.7%

1.7% 0.5% (3.6)%

(7.5)%

(0.4)% 1.0%

Improved collection rate from 85% to 90%

• $15 million LBA reduction

• Assumed $9 million decrease to reflect reallocation of GLWA SG&A

Elimination of prior year support for rates

Refined allocation of O&M expenses

Page 14

As we strive to improve customer service and clear a backlog of 40,000 work orders, we project 482 FTEs for FY 17, a 13% increase over FY 16

6

Projected 2017 Headcount

482 FTES

Operations, 223

Compliance, 13Finance, 43

Customer Service, 184

0

100

200

300

400

500

600

FY '16Budget

Ops CustomerSvc

Other FY '16Budget

DWSD FY ‘16 vs. FY ‘17 Headcount

42532 11 14 482

(1) (2)

(3) (4)

(1) Customer service includes Service Centers, Billing & Collection, Meter Operations, and Fleet(2) Operations includes Field Services and Field Engineering(3) Finance includes Budget, Accounting, Purchasing, & Material Management(4) Compliance includes Legal , Public Relations, and Information Technology

191

173

61

223

184

75

► New customer service initiatives including WRAP and Drainage as well as delinquency management (shut-offs, illegal checks, etc,) likely to flood customer service centers as well as call center

► 48,000 open service orders includes 8,000 “fatal” orders– Includes residential lawn and pavement repair– Inhibiting full billing of customers

Page 15

FY ‘17 contract spending represents a $2 million or 6% decrease over FY ’16; reduction in interagency billing allows increase in service initiatives

7

$0.0$5.0

$10.0$15.0$20.0$25.0$30.0$35.0$40.0

FY '16 FY' 17

Water Sewer

DWSD FY ‘16 vs. FY ‘17 Contract Spending

$34.7$32.6

Contract SummaryMajor Contract Subtractions► Detroit Interagency billing reduced by $7.1

million– Reflects smaller DWSD; lower allocations

as a result– Several allocations for which DWSD is

self contained have been removed► EMA contracts expires June 30th (~$1

million) – no intention to renew► 75% ($2.1 million) of Green Infrastructure

moved to CIP; eligible for SRF loans

Major Contract Additions► Increase delinquency management to be on

par with FY ‘16 spending (↑ $3 million)► Outsourcing printing to Utilitec ($1.8

million) – note, self funded as it includeslabor and all printing fees

Page 16

80% of operating contract funding is driven by C&G; nine contracts drive 75% of C&G spending most of which is for professional services

8

Projected 2017 Contract Spending

Pavement Repair10%

Leak Repair…

Delinquency Mgmt

9%

Sewer Repair8%

Green Infrastructure

6%AT&T5%

PMO4%

Utilitec4%

Meter Ops4%

Other C&G20%

Operational Contracts

20%

$42.8 million

Professional Services92%

Legal Services2%

Personnel Services

6%

Projected 2017 C&G Contract Spending

$32.6 million

C&G ~ 80% of Total

Nine contracts ~ 75% of C&G Page 17

Our budget includes $76 million and $228 million for GLWA water and sewer allocations, respectively; most of this represents debt service

9

$0

$100

$200

$300

$400

Debt CSOBasins

O&M B-Note Lease BudgetStablization

WRAP OtherAllocations

FY '17Budget

Projected 2017 Allocations Funding

$136.1$37.5

$67.6 $7.9 $14.2 $4.7 $1.9$17.8 $289.3

$75.8

$213.5

(1)

(1) CSO Basins is Sewer only and include $31.5 million of Detroit specific debt(2) O&M costs include approximately $8.8 million of shared service costs. Also note that $10 million of Sewer O&M is in dispute with GLWA(3) Includes non-operating portion of Pension allocation

MILL

IONS

OF

DOLL

ARS

(2)

Water Sewer

$45.3

$90.8

$15.8

$51.8 $0.7$7.2

$2.2$12.0

$2.3

$2.4

$1.3

$0.6 $7.3$10.5

(3)

Page 18

Several headwinds pose a threat to the FY ’17 and ‘18 budgets; we have a “Plan B” if we cannot meet revenue and expense requirements

► Pare merit increases as necessary► Limit non-critical IT and other contract spending► Stagger hiring of incremental headcount

10

Risk Characteristics

Volume Declines Accelerate

Collection Rates Don’tMeet Expectations

DWSD / GLWA Cannot Settle on Appropriate

AllocationProbability • Low-Medium • Medium • Medium-High

Impact • Every1% decline involume reducesrevenues an additional$3 million

• 5% decrease incollection rate increasessewer bad debtallowance by $10 millionand water bad debtexpense $7 million

• Maintaining currentmethodology willincrease allocatedexpenses by $9 millionvis-à-vis budgetedamounts

Mitigating Factors

• More cost allocated toSewer; higher fixed priceto customers

• Moving name toaccounts in April

• Increased shut-offspending

• WRAP has launched

• Entering disputeresolution process

DWSD Budget Headwinds

What Is Plan B?

Page 19

For FY 2017 and FY 2018 we have budgeted $9 million per year in I&E between the water and sewer funds to mitigate downside budget risks

► Provides additional flexibility in the event of accelerated declines in volume, increase in unforeseen expenditures, or lower collections

► Protects DWSD in the event of unfavorable dispute resolution

► Allows for more cash availability for System Revenue Finance Capital, decreasing funding need

► Begins to build DWSD credit rating; reducing reliance on GLWA and providing debt issuance flexibility

► The Goal: 200 days cash on hand by FY 2021

11

Page 20

Next steps…

► 3/10: Presentation to City Council

► 3/16: Approval by BOWC

► 3/23: Approval by FRC

► 3/23: Submission to GLWA

► April: Presentation of Financial Strategy

► May: Introduction and Approval of Rates by Customer Class

12

Page 21

APPENDIX – QUESTIONS FROM CITY COUNCIL

13

Page 22

Q&A for City Council

1. The Detroit Water and Sewerage Department bifurcated from the Great Lakes Water Authority on January 1, 2016.The FY 2017 DWSD budget is pending approval by the Board of Water Commissioners (BOWC) and is expected inearly March 2016. Please provide us with the final BOWC approved budget

– To be provided after 3/8/2010 BOWC Finance Committee Meeting2. How much bad debt expenses are appropriated in the DWSD FY 2017 Budget? What is the total amount of

delinquent accounts receivable due from Detroit water and sewerage customers as of January 31, 2016? Havecollections improved in the last year?

– We have appropriated $9 million in bad debt expense to the water fund and $29 million in bad debt expense to thesewer fund for FY2017. Collections within one year is currently between 88% and 90% of billings, up from 85%assumed for FY2016.

3. What is the amount of debt service charges included in the DWSD FY 2017 budget? How much of the annual $50million Lease revenue due to DWSD is being applied to pay debt service in the FY 2017 budget?

– Water and sewer debt service approximate $46 million and $122 million, respectively. The latter includesapproximately $31.5 million for CSO Basins. Our intent is to not use any lease dollars for debt service in FY2017.

4. City of Detroit residents pay the highest rates for sewerage disposal in the region. How is the City's 40.04% of"Common-to-all" share determined (per the attachment "FY 17 Cost of Service Study and Service ChargeRecommendations", dated January 26, 2016- Table 5 of the "Sewer Tables")? What is being done to bring theserates down?

– The 40.4% is Detroit’s proportion of gross sewer volume (called “flow” which equals sanitary flow + infiltration &inflow + wet weather inflow) vis-à-vis other regions. There is a minor adjustment made for the dilutive impact of wetweather inflow. We have challenged the allocation methodology used by the Authority as it allocates a significantamount of fixed costs on a variable basis and for which Detroit gets no incremental benefit. While costs associatedwith the plants call for a greater study, we believe the administrative and general expense portion can be handledimmediately and have budgeted $7 million in lower costs in anticipation of resolving this issue.

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5. Please explain the 83/17% split between the City (83% of costs) and suburbs (17% of costs) regarding the costs for the Combined Sewer Overflow (CSO) systems? What is being done to reduce this burden on the City?

– The 83/17% split is the result of extensive rate settlement talks between the suburbs and the City approximately a decade ago. Simply put, suburban communities agreed to pickup 17% of the basins’ construction and operating costs given that Detroit’s building of the basins allowed them to continue to send their flow to the sewerage system. There is fairly minimal technical data which supports the 83/17% split. DWSD executive staff has asked for a technical review of the 83/17% split by the Technical Advisory Committee of the Customer Outreach Group (DWSD is represented in the Technical Advisory Committee by Palencia Mobley). We anticipate a study will start sometime in FY2017 and will likely take in upwards of a year. Rate relief on this topic will likely take two to three years.

6. How does DWSD ensure the quality of the drinking water? What measures are taken to inspect the drinking water for contaminants such as lead and other hazardous materials? Where are these costs in the FY 2017 budget?

– By law, Detroit is required to test samples of water from residents for lead and other contaminants. Currently, DWSD has a shared service agreement with GLWA to test samples at the GLWA laboratories.

7. What is being done to reduce the amount of unbilled water lost in the system due to leakage and other causes? What is Detroit's share of these costs?

– DWSD has dedicated $9.5 million for local leak detection and repair. To aid the effort, we have budgeted an additional 20 heads in the Field Services and Field Engineering groups. GLWA has similar efforts. The incremental costs associated with broader system leaks are accounted for as a common to all expense and allocated in line with the normal methodology. Detroit is charged approximately 12% of these costs.

8. Has the charges for the Bankruptcy settlement debt (e.g., VEBAs, POCs, Swaps) been determined and allocated between GLWA/DWSD? If so what are the annual cost for the settlement debt in the FY17 budget for GLWA/DWSD?

– All charges for the bankruptcy settlement are included in the Operating Pension and B-Note line items, the latter of which includes OPEB. The annual costs appropriated to these amounts totals $48.3 million annually of which roughly $20 million is allocated to DWSD

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9. Have the cost of services the City of Detroit provides to GLWA and DWSD such as DRMS, new ERP, assetinventory (Asset Works), accounts payable, payroll, workers compensation, etc. been determined and included inthe FY 2016 and FY 2017 budgets? If so how much are GLWA and DWSD paying to the City in FY 2016 and FY2017? Where are these costs in the FY 2017 DWSD budget?

– Services provided by the City to DWSD are allocated to DWSD and included in the appropriate cost center as aninteragency contracts (627000 series of objects). Any costs charged to DWSD for which GLWA receives a benefitwill be recovered from GLWA via the shared services agreement. Note, the new ERP will not be allocated to GLWAas GLWA has opted for an alternative ERP solution.

10. Please provide us with copies of the Shared Services Agreements between DWSD and GLWA that have beenapproved by the BOWC. What are the revenues included in the FY 2017 DWSD budget for shared services providedto GLWA? What are the appropriations for GLWA provided shared services included in the FY 2017 DWSD budget?

– Copies to be provided post meeting with the BOWC. DWSD has budgeted approximately $4.4 million in revenuefrom GLWA while appropriating $8.8 in charges from GLWA. The difference is primarily IT costs.

11. Please provide us with the Agreement on methodology for allocating pension funding and investment expenses toGLWA/DWSD

– Clarification needed – Agreement on methodology between GRS and combined DWSD/GLWA organization (AmandaVan Dusen) or agreement between DWSD and GLWA on amount allocated from GRS. The latter has not yet beenagreed to and will be included in a forthcoming MOU.

12. Are there any other major agreements between DWSD and GLWA with significant financial implications for theCity? If so, what are the agreements and what are their implications?

– DWSD is currently negotiating a MOU which will memorialize the initial distribution of cash and potentially redefine theallocation of Administrative & General expenses to DWSD, both of which could have a substantial impact on rates.The MOU will also address the allocation of Pension / OPEB allocation between DWSD and GLWA as well as theallocation of existing debt service

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13. How much has DWSD budgeted in FY 2017 for its pension contribution to the General Retirement System, and is DWSD current on making its pension contributions to the General Retirement System?

– DWSD is current on its payments to GRS and has budgeted approximately $14.4 million for payment in FY 2017. This EXCLUDES additional payments to GLWA as part of DWSD’s common to all allocation.

14. Is DWSD using the new ERP/HR (UIItipro) solution the City of Detroit's Office of the CFO/Department of Innovation and Technology are currently undertaking? If so, what is DWSD's cost share of the new system? What is included in the FY 2017 DWSD budget for the City's DOlT (Department of Information Technology) service costs?

– DWSD will be on new ERP / HR systems. Cost associated with the system have yet to be provided to DWSD, as such, we have used previous billings from DOIT to estimate DWSD’s FY2017 costs. Based on the allocation methodology used by the City (number of users), we estimate the total costs associated with DOIT to approximate $600,000 per year.

15. Is DWSD responsible for fire hydrant maintenance in the City? If so what is the budget in the FY 2017? Will the Fire Department be billed for these costs? If so how much is expected to be billed to the Fire Department for FY 2017?

– Follow up needed from Palencia / Gary.16. Is the afford ability of water and sewerage services for City of Detroit residents, who cannot reasonably afford the

rising rates, part of the mission, responsibility, or vision of either DWSD or GLWA? Please explain. No reference to the report of the Blue Ribbon Panel on Afford ability would be necessary or helpful.

– DWSD Executive Management deems the affordability of water and sewer rates as core to our mission. As outlined in previous documents, we are guided by three principles: Affordability, Accessibility, and Accountability. To this end, we have examined a refinement of cost allocation between sewer and water, focused on reducing bad debt expense, pushed GLWA on system cost allocation, introduced the WRAP, and are seeking to refine drainage charges all within the construct of current State laws. Further, we are working vigorously to develop and implement an inclining block rate structure and are seeking grants for internal resident infrastructure which, given our analysis of DWSD customers, will likely provide rate relief for lower income residents.

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17. How much is included in the FY 2017 DWSD budget for the Water Residential Assistance Program (WRAP) forDetroit residents? Where is this in the budget??

– DWSD’s FY2017 budget includes $1.9 million for WRAP ($0.6 for Water and $1.3 for Sewer). This will be included inNon-O&M Expenditures.

18. What are the available federal and state revenue sources for DWSD? What are the amounts of federal and staterevenue included in the FY 2017 DWSD budget?

– Currently, no revenues from the State of Michigan or Federal Government are included in the DWSD budget. Whilethere are State run loans with some principle forgiveness (i.e., for Green Infrastucture), grants are fairly limited (e.g.,SAW grants). Any such of the currently available grants would be included in DWSD’s CIP. DWSD is investigatingmultiple sources to determine our ability to develop special, non-CIP programs eligible for grants.

19. What is DWSD's "ownership benefit" that is a factor in its cost share as a "hybrid“ wholesale customer for GLWAservices?

– DWSD’s ownership benefit for water is $20.7 million and $5.516 million for sewer. These amounts are used to reducethe revenue requirement on a dollar for dollar basis and reflect a continuation of the recognition that the citizens ofDetroit own the water / sewer systems. Note, the sewer ownership benefit is substantially lower than water given theselling of several major sewer assets to other communities

20. Will Judge Cox's 2012 order governing which DWSD contracts must come before City Council be modified? Whatwould be the justification after the bifurcation date (January 1, 2016) to not submit the DWSD contracts to CityCouncil for approval?

– Judge Cox’s orders where amended to allow for the reintegration of DWSD upon agreement between the Mayor andthe BOWC that the City is prepared to handle such reintegration. Given the substantial amount of change in the City,we do not anticipate this reintegration happening in the near future. Approval levels have not been modified underJudge Cox’s orders. As such, certain contracts above the delegation of authority as laid out by the court will continueto require Council (and FRC) approval. Requiring approvals below this amount given the numerous changesoccurring in the City would decrease the alacrity in which DWSD can effectively operate. 18

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T F G

THE FOSTER GROUP P.O. BOX 26282 The Foster Group, LLC Leawood, KS 66225 Bart Foster, President Tel: (913) 345-1410 Cell: (913) 530-6240 Fax: (913) 345-1640 [email protected]

MEMORANDUM

March 2016 Financial Performance Report March 21, 2016 Initial FY 2016 (ytd November) Estimated Results

To: Nickie Bateson

From: Bart Foster

Submitted herewith our report on the financial performance of the Detroit Water and Sewerage Department (“DWSD”) for consideration by the GLWA Audit Committee at their March 24, 2016 Meeting. This report is intended to serve as an initial estimate of DWSD financial results for the first five months of FY 2016, based on our review and analysis of preliminary subsidiary data from various systems, and based on consultation with the GLWA Financial Planning and Analysis group. We have selected to report on year to date activity through November 2015. While preliminary data for subsequent months is available for certain financial elements, the complexities involved with the separation into GLWA wholesale and the “new” DWSD retail utilities complicates reporting on this subsequent data. Our decision and approach effectively results in a report on the “old” DWSD financial activity, since GLWA was not an operating utility until January 1, 2016. The December data will be subject to rigorous closing entries and audit review, and efforts to report on December activity are premature. Data available after January 1 is reported by multiple systems and efforts to efficiently accumulate information for financial reporting are still under development.

In summary, this report reflects the “consolidated” wholesale and retail utilities that existed in the “old” DWSD. We note that subsequent reports reflecting “post separation” periods will still require this consolidated approach. The format of this report is designed to comprehensively address metrics and reporting requirements set forth in the Master Bond Ordinance and related commitments to stakeholders.

Executive Summary 1. The positive wholesale water revenue variance experienced in the first quarter of the

fiscal year has been partially offset by lower than expected billings during October and November, but total revenue for these customers remains ahead of budgeted amounts. Retail revenues reported by the Detroit customer class are approximately 95% of expected levels. Combined, this report estimates that total Water and Sewer

AGENDA ITEM 7A

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March 2016 Financial Performance Report March 21, 2016 Initial FY 2016 (ytd November) Estimated Results Page 2

revenues through November are approximately 98% of budgeted levels, representing a negative variance of approximately $6.3 million.

2. Evaluation of year to date operating expenses is complicated by the fluid nature of thesubsidiary systems, as they are impacted by the FY 2015 audit process. This reportreflects estimated accruals of expenses in certain cost categories. We have appliedsound experience and judgment in preparing the estimated accruals, but the specificamounts remain under review. Combined, this report estimates that total Water andSewer operating expenses through November are approximately 93% of budgetedlevels, representing a positive variance of approximately $10.5 million.

3. As a result, Net Revenues (revenues less operating expenses) available for debtservice and reported debt service coverage reflect an overall positive variance ofapproximately $4.2 million.

4. Since this report does not reflect any modifications from budgeted levels for year todate debt service or non-operating expense, the $4.2 million positive variance alsoapplies to the reported Net Resources.

5. This report indicates a moderate positive variance for both the Water Fund and SewerFund.

6. As noted herein, all of these figures should be considered preliminary, and remainunder further review.

More rigorous commentary and material follows in the balance of this memorandum . . .

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This report presents financial performance from a modified cash basis “revenue requirements” perspective, consistent with how such data was traditionally presented to the BOWC Finance Committee and as part of annual communications with customers and stakeholders. Revenues reflect billings during the period in question, and operating expenses reflect “booked” expenses on a modified accrual basis. Summaries are presented for the DWSD system as a whole (combined Water and Sewer), and individually for the Water and Sewer Funds. Highlights of the individual reports are summarized herein.

The format, content, and preparation process for this report continues to undergo review and modification. As we’ve noted in the past, the current preparation process relies on significant analysis of subsidiary data from various systems. As new GLWA systems are implemented and the Finance Transformation process continues to mature, it is envisioned that more reliance on existing systems and internal resources will evolve in the preparation of these monthly performance reports.

• All “Annual Targets” in this report reflect the FY 2016 BUDGET originally approved bythe DWSD BOWC in March 2015, modified to reflect subsequent developments relatedto negotiation of the Leases, decisions made by the City of Detroit regarding use of theLease Payment for FY 2016, and service charge development for “non-contract” watercustomers.

o The “Annual Targets” do not reflect any efforts to “bifurcate” the FY 2016Budget.

• Revenues reflect an analysis of billing records to individual customers and customerclasses, net of estimated bad debt expense. Billings to retail customers in the City ofDetroit (and related miscellaneous revenue) reflect information reported by DWSDFinance. Billings to wholesale customers reflect review of GLWA billing records to allwholesale customers.

o Retail billed revenues reported by the Detroit customer class are approximately95% of expected levels. Sewer revenues are closer to target than are waterrevenues.

o Reported billed revenues for the suburban wholesale customer class are slightlyabove expected levels. As expected, billed sewer revenues precisely matchexpectations, while billed water revenues continue to reflect the positive varianceexperienced in the first quarter of the fiscal year.

• For purposes of this report, we’ve applied the original projected FY 2016 collectionexpectations, and are assuming that resulting bad debt expense will be equivalent tobudgeted amounts.

o Bad debt expense is not “known and estimable” until the books are closed at theend of the year. Future reports may evaluate collection data to attempt to refinemid year estimates of this element.

• Similarly, we’ve assumed that year to date non-operating revenues (primarily investmentearnings) match budget amounts.

• Operation and maintenance expenses reflect a review of year to date information asreported on the FAAR reports. Our review indicates that reported operating expenses

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have likely not been fully reported in the subsidiary systems for certain cost items. As a result, several management estimates have been applied to the operating expenses reported by the financial systems, in an attempt to provide more reasonable estimates of FY 2016 activity. Items impacted by these estimates, (which total approximately $30 million, including approximately $6 million for the Water System and approximately $24 million for the Sewer System1), which are noted below along with other observations and commentary.

o We’ve made estimated allocations between water and sewer expenses for certainitems, principally personnel and other expense, to reflect the fact that expensetransfers are pending.

o The reported salaries and wages are slightly over budgeted amounts, principallydue to overtime expenses, which are being reported at $1.35 over the year to datebudget.

o We’ve accrued estimated amounts for certain employee benefit expenses (such asthe health care reserve) at budgeted levels, as actual amounts are not yetreflected in the FAAR report. Even after this adjustment, reported employeebenefit expenses are significantly below budgeted amounts

o We’ve accrued the estimated operating pension reimbursement at the budgetedlevel, as it has not yet been expensed in the year to date FAAR report.

o All reported year to date non-personnel operating expenses are significantlybelow budget, perhaps due to processing delays as the focus has been on closingbooks for FY 2015. We’ve included estimated accrued amounts for all non-personnel items, based on a review of FY 2015 activity and our experience inreviewing historical expenses. We note that modifications to reported figures forthese elements will be less necessary once the FY 2015 audit is complete.

o Based on the assumptions and accruals noted above, estimated operatingexpenses for FY 2016 through November represent a positive variance (budgetsavings) of approximately $10 million.

• We’ve included year to date debt service at the originally estimated levels, since thisreport through November pre-dates the December refunding transactions.

o Subsequent reports for FY 2016 will reflect the refunding results.• We’ve reorganized the “fixed non-operating expense” elements in the report to fully align

with the requirements of the Leases and Services Agreement. We’ve assumed that eachof these elements are being “accrued” in equal monthly amounts.

• Revenues remaining after payment of operation and maintenance expense, Debt Service,and fixed non-operating expenses are referred to as “Net Resources” in this report. Theseamounts generally represent amounts earmarked for capital improvements, but can beused for any utility purpose, including funding of operating reserves.

o Based on the assumptions and accruals noted above, reported “Net Resources”for the System as a whole reflect a positive variance of approximately $4.2million, the net difference of a $6.3 million negative revenue variance and the$10.5 million positive O&M variance.

1 Figures net, after water sewer allocations

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o The reported Net Resources reflect positive variances for both funds, approximately $2.5 million for the Water Fund and $1.7 million for the Sewer Fund.

o Reported debt service coverage levels generally mirror net resources performance – slight positive variances. Again, all else being equal, these ratios will improve once the results of the December refunding transactions are included in subsequent reports.

• Capital program expenditures approximately reflect a 43% achievement ratio of projected amounts. The reported Water achievement ratio is higher than the reported Sewer figure.

We are prepared to present this material and discuss this matter at your convenience.

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PRELIMINARYTFG

THE FOSTER GROUP 3/21/16

COMBINED DWSD Water and Sewer SystemsFY 2016 Financial Plan Performance Summary - Year to Date thru November 2015

Annual "Target" based on Consolidated Budget Approved by DWSD BOWC, Modified by Final Lease NegotiationsUNAUDITED Achieve

Annual Target YTD Target YTD Actual Variance PctgRevenue Requirements Summary (a)

Revenue1 Retail Billings 388,901,600 169,346,100 161,214,300 (8,131,800) 95%2 less: Bad Debt Expense (54,000,000) (22,564,200) (22,564,200) 0 100%

---------- ---------- ---------- ---------- 3 Net Retail 334,901,600 146,781,900 138,650,100 (8,131,800) 94%

4 Wholesale Billings 559,623,900 237,460,400 239,052,700 1,592,300 101%5 less: Bad Debt Expense (6,769,200) (2,829,700) (2,829,700) 0 100%

---------- ---------- ---------- ---------- 6 Net Wholesale 552,854,700 234,630,700 236,223,000 1,592,300 101%

7 Sewer IWC & Surcharge 18,962,000 7,932,000 7,923,100 (8,900) 100%8 Miscellaneous Operating Revenue 9,750,000 4,070,600 4,312,500 241,900 106%

---------- ---------- ---------- ---------- 9 Total Operating Revenue 916,468,300 393,415,200 387,108,700 (6,306,500) 98%

10 Non-Operating Revenue 5,088,600 2,124,100 2,124,100 0 100%---------- ---------- ---------- ----------

11 Total Revenue Available 921,556,900 395,539,300 389,232,800 (6,306,500) 98%

Revenue Requirements12 Operation and Maintenance Expense (b) 379,459,200 158,710,800 148,205,600 (10,505,200) 93%13 Debt Service 422,508,400 174,297,700 174,297,700 0 100%14 Fixed Non-Operating Expense (c) 64,457,000 26,963,100 26,963,100 0 100%15 "Net Resources" (11) - (12,13,14) 55,132,300 35,567,700 39,766,400 4,198,700 112%

---------- ---------- ---------- ---------- 16 Total Revenue Requirements 921,556,900 395,539,300 389,232,800 (6,306,500) 98%17 Balance 0 0 0 0

Debt Service Coverage (d)18 Senior Lien 1.91 2.03 2.07 0.0419 Senior and Second Lien 1.43 1.51 1.54 0.0320 All Bonds, Including SRF Jr. Lien 1.28 1.36 1.38 0.02

Capital Improvement Summary21 CIP Expenditures (direct payments only) 262,299,000 148,366,000 63,750,000 (84,616,000) 43%

(a) Reflects accruals based on management estimates for certain items, including certain water/sewer allocations;(b) Operation and Maintenance Expense Detail

1 Salaries/Wages 77,265,800 32,468,400 32,751,500 283,100 101%2 Employee Benefit Expenses 26,894,900 11,301,800 10,249,800 (1,052,000) 91%3 Operating Exp. Pension Reimbursement 24,000,000 10,000,000 10,000,000 0 100%

---------- ---------- ---------- ---------- 4 SUBTOTAL PERSONNEL 128,160,700 53,770,200 53,001,300 (768,900) 99%5 Contractual/Purchased Services 118,678,700 49,559,000 44,726,400 (4,832,600) 90%6 Utilities 67,659,600 28,244,100 26,847,300 (1,396,800) 95%7 Chemicals 30,458,800 12,728,000 12,073,800 (654,200) 95%8 Supplies & Other 34,501,400 14,409,500 11,556,800 (2,852,700) 80%

---------- ---------- ---------- ---------- 9 SUBTOTAL NON-PERSONNEL 251,298,500 104,940,600 95,204,300 (9,736,300) 91%

---------- ---------- ---------- ---------- 10 TOTAL 379,459,200 158,710,800 148,205,600 (10,505,200) 93%

(c) Fixed Non-Operating Expense11 Non-Op Pension Reimburse 21,400,000 8,951,900 8,951,900 0 100%12 B/C Note Payments 2,923,200 1,222,800 1,222,800 0 100%13 Budget Stabilization Fund 7,918,500 3,312,400 3,312,400 0 100%14 WRAP Deposit 4,533,800 1,896,500 1,896,500 0 100%15 Lease Payment Deposit to Retail I&E 27,681,500 11,579,500 11,579,500 0 100%

---------- ---------- ---------- ---------- 16 TOTAL 64,457,000 26,963,100 26,963,100 0 100%

(d) Bond ordinance requirements (prospective) = 1.20, 1.10, 1.00; BOWC policy minimums = 1.35, 1.25, 1.15

PRELIMINARY

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PRELIMINARYTFG


DWSD Water Supply SystemFY 2016 Financial Plan Performance Summary - Year to Date thru November 2015



Revenue1 Water Retail Billings 109,656,200 46,889,800 43,143,900 (3,745,900) 92%2 less: Bad Debt Expense (15,000,000) (6,250,000) (6,250,000) 0 100%

---------- ---------- ---------- ---------- 3 Net Water Retail 94,656,200 40,639,800 36,893,900 (3,745,900) 91%

4 Water Wholesale Billings 305,499,900 131,575,400 133,106,800 1,531,400 101%5 less: Bad Debt Expense (1,200,000) (500,000) (500,000) 0 100%

---------- ---------- ---------- ---------- 6 Net Water Wholesale 304,299,900 131,075,400 132,606,800 1,531,400 101%

7 Miscellaneous Operating Revenue 4,750,000 1,979,000 2,229,000 250,000 113%---------- ---------- ---------- ----------

8 Total Operating Revenue 403,706,100 173,694,200 171,729,700 (1,964,500) 99%9 Non-Operating Revenue 2,805,300 1,169,000 1,169,000 0 100%

---------- ---------- ---------- ---------- 10 Total Revenue Available 406,511,400 174,863,200 172,898,700 (1,964,500) 99%

Revenue Requirements11 Operation and Maintenance Expense (b) 162,765,400 68,086,900 63,577,200 (4,509,700) 93%12 Debt Service 183,066,000 74,530,000 74,530,000 0 100%13 Fixed Non-Operating Expense (c) 34,792,200 14,553,900 14,553,900 0 100%14 "Net Resources" (10) - (11,12,13) 25,887,800 17,692,400 20,237,600 2,545,200 114%





1 Salaries/Wages 31,646,200 13,385,100 13,501,800 116,700 101%2 Employee Benefit Expenses 11,010,000 4,656,800 4,223,300 (433,500) 91%3 Operating Exp. Pension Reimbursement 10,300,000 4,291,500 4,291,500 0 100%

---------- ---------- ---------- ---------- 4 SUBTOTAL PERSONNEL 52,956,200 22,333,400 22,016,600 (316,800) 99%5 Contractual/Purchased Services 52,049,300 21,687,000 19,542,100 (2,144,900) 90%6 Utilities 35,639,100 14,849,500 14,137,600 (711,900) 95%7 Chemicals 8,174,500 3,406,000 3,220,300 (185,700) 95%8 Supplies & Other 13,946,300 5,811,000 4,660,600 (1,150,400) 80%


---------- ---------- ---------- ---------- 10 TOTAL 162,765,400 68,086,900 63,577,200 (4,509,700) 93%

(c) Fixed Non-Operating Expense11 Non-Op Pension Reimburse 9,200,000 3,848,500 3,848,500 0 100%12 B/C Note Payments 1,097,200 459,000 459,000 0 100%13 Budget Stabilization Fund 2,327,000 973,400 973,400 0 100%14 WRAP Deposit 1,995,000 834,500 834,500 0 100%15 Lease Payment Deposit to Retail I&E 20,173,000 8,438,500 8,438,500 0 100%

---------- ---------- ---------- ---------- 16 TOTAL 34,792,200 14,553,900 14,553,900 0 100%


PRELIMINARY

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PRELIMINARYTFG


DWSD Sewage Disposal SystemFY 2016 Financial Plan Performance Summary - Year to Date thru November 2015



Revenue1 Sewer Retail Billings 279,245,400 122,456,300 118,070,400 (4,385,900) 96%2 less: Bad Debt Expense (39,000,000) (16,314,200) (16,314,200) 0 100%

---------- ---------- ---------- ---------- 3 Net Sewer Retail 240,245,400 106,142,100 101,756,200 (4,385,900) 96%

4 Sewer Wholesale Billings 254,124,000 105,885,000 105,945,900 60,900 100%5 less: Bad Debt Expense (5,569,200) (2,329,700) (2,329,700) 0 100%

---------- ---------- ---------- ---------- 6 Net Sewer Wholesale 248,554,800 103,555,300 103,616,200 60,900 100%

7 Sewer IWC & Surcharge 18,962,000 7,932,000 7,923,100 (8,900) 100%8 Miscellaneous Operating Revenue 5,000,000 2,091,600 2,083,500 (8,100) 100%

---------- ---------- ---------- ---------- 9 Total Operating Revenue 512,762,200 219,721,000 215,379,000 (4,342,000) 98%

10 Non-Operating Revenue 2,283,300 955,100 955,100 0 100%---------- ---------- ---------- ----------

11 Total Revenue Available 515,045,500 220,676,100 216,334,100 (4,342,000) 98%Revenue Requirements

12 Operation and Maintenance Expense (b) 216,693,800 90,623,900 84,628,400 (5,995,500) 93%13 Debt Service 239,442,400 99,767,700 99,767,700 0 100%14 Fixed Non-Operating Expense (c) 29,664,800 12,409,200 12,409,200 0 100%15 "Net Resources" (11) - (12,13,14) 29,244,500 17,875,300 19,528,800 1,653,500 109%





1 Salaries/Wages 45,619,600 19,083,300 19,249,700 166,400 101%2 Employee Benefit Expenses 15,884,900 6,645,000 6,026,500 (618,500) 91%3 Operating Exp. Pension Reimbursement 13,700,000 5,708,500 5,708,500 0 100%

---------- ---------- ---------- ---------- 4 SUBTOTAL PERSONNEL 75,204,500 31,436,800 30,984,700 (452,100) 99%5 Contractual/Purchased Services 66,629,400 27,872,000 25,184,300 (2,687,700) 90%6 Utilities 32,020,500 13,394,600 12,709,700 (684,900) 95%7 Chemicals 22,284,300 9,322,000 8,853,500 (468,500) 95%8 Supplies & Other 20,555,100 8,598,500 6,896,200 (1,702,300) 80%


---------- ---------- ---------- ---------- 10 TOTAL 216,693,800 90,623,900 84,628,400 (5,995,500) 93%

(c) Fixed Non-Operating Expense11 Non-Op Pension Reimburse 12,200,000 5,103,400 5,103,400 0 100%12 B/C Note Payments 1,826,000 763,800 763,800 0 100%13 Budget Stabilization Fund 5,591,500 2,339,000 2,339,000 0 100%14 WRAP Deposit 2,538,800 1,062,000 1,062,000 0 100%15 Lease Payment Deposit to Retail I&E 7,508,500 3,141,000 3,141,000 0 100%

---------- ---------- ---------- ---------- 16 TOTAL 29,664,800 12,409,200 12,409,200 0 100%


PRELIMINARY

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Financial Services Group

Audit Committee Communication

Date: March 24, 2016

To: Great Lake Water Authority Audit Committee

From: Jon Wheatley, Public Finance Manager

Re: Rating Agency Criteria and Benchmarking Presentation

Background:

As the Great Lakes Water Authority (“GLWA”) completes the budget process for FY 2017 and

prepares to enter the bond market later this year, GLWA management wanted to revisit the

current ratings for GLWA (Moody’s Baa1, S&P A‐, Fitch BBB) and to see how GLWA compares to

similar water and sewer utilities across the country.

Analysis‐ Metrics Comparison (pages 6‐8): The included report prepared by PFM, benchmarks

GLWA’s key rating metrics to large water and sewer utilities of different sizes and ratings as of

the end of their 2014 fiscal years. The metrics compared were service population, debt service

coverage, day cash on hand, debt to operating revenues, debt per capita and CIP per capita. For

these metrics we compared GLWA to the following systems:

1) City of Baltimore Water and Sewer Systems (Moody’s Aa2, S&P AA)

2) Boston Water & Sewer Commission (Moody’s Aa1, S&P AA+, Fitch AA+)

3) City of Cleveland Water System

4) D.C. Water & Sewer Authority

5) New York Municipal Water Finance Authority

6) Northeast Ohio Regional Sewer District

7) City of Philadelphia Water and Sewer Systems

8) San Francisco Public Utilities Commission for Water and Sewer

Analysis‐ Moody’s and Standard and Poor’s (“S&P”) Scorecards (pages 9‐23): All three major

rating agencies have historically had ratings methods which were uniquely ambiguous to each

one, recently however, Moody’s and S&P (Fitch has not move toward this type of scoring) have

developed methodologies that are more transparent and quantifiable. The included report lays

out the major categories and how they are weighted for Moody’s and S&P and shows how each

category is scored and how GLWA scores as of FY 2014.

AGENDA ITEM 7B

Page 36


Financial Services Group

Audit Committee Communication

Each methodology calculates an “indicative” rating based on the weighted categories, but also

allows for “notching” up or down for criteria that may not be included in the indicative rating,

factors that may cap the rating or extremely weak or strong indicators within a category.

Take Aways: As GLWA Management and its Board of Directors look to the future performance of GLWA, we now have additional tools for improving the financial condition of GLWA. The first is the benchmarking of higher rated utilities and their key financial metrics. The second is the actual scorecards, from two of the three rating agencies, which can serve as roadmaps to future ratings upgrades.

In the short term, both scorecards from Moody’s and S&P indicate there should be upward movement in GLWA’s rating based on where we are now. In the longer term, there are key areas in those scorecards‐ most notably the debt service coverage, which we can improve upon to achieve the long term goal of higher, sustainable ratings.

Proposed Action: Receive and file presentation

Page 37

GREAT LAKES WATER AUTHORITY RATINGS AGENCY VIEWS AND FINANCIAL METRIC PEER COMPARISON

March 21, 2016

Page 38

AGENDA

2

I. GLWA Current Ratings and Selected Peer Group II. GLWA Financial Metrics and Selected Peer Comparison III. Moody’s Scorecard Methodology & GLWA Calculations IV. S&P Scorecard Methodology & GLWA Calculations

Topic

Note: While many of the credit criteria considered by Fitch in assigning a rating are similar to those included by Moody’s and S&P in their respective scorecard analyses, at this time Fitch has not published a mathematical scorecard for Water & Sewer utilities.

Page 39

GLWA CURRENT RATINGS AND SELECTED PEER GROUP

Page 40

SELECTED PEER GROUP GLWA CURRENT RATINGS & SELECTED PEER GROUP

4

Issuer System Type ~Population

Served (Retail +

Wholesale) Moody's S&P Fitch

Baltimore (City of) Sewer Enterprise, MD Sewer 1,800,000 Aa2 AA - Baltimore (City of) Water Enterprise, MD Water 1,500,000 Aa2 AA - Boston Water & Sewer Commission, MA Combined 800,000 Aa1 AA+ AA+ Cleveland (City of) Water Enterprise, OH Water 1,400,000 Aa1 AA - District of Columbia Water & Sewer Authority, DC Combined 2,200,000 Aa2 AAA AA Great Lakes Water Authority (DWSD), MI – Water Enterprise Water 3,800,000 Baa1 A- BBB Great Lakes Water Authority (DWSD), MI – Sewer Enterprise Sewer 2,800,000 Baa1 A- BBB New York City Municipal Water Finance Authority, NY Combined 8,000,000 Aa1 AA+ AA+ Northeast Ohio Regional Sewer District, OH Sewer 1,000,000 Aa1 AA+ - Philadelphia (City of) Water and Sewer Enterprise, PA Combined 2,000,000 A1 A+ A San Francisco Public Utilities Commission Sewer Enterprise, CA Sewer 1,000,000 Aa3 AA- - San Francisco Public Utilities Commission Water Enterprise, CA Water 2,600,000 Aa3 AA- -

Source: Ratings from EMMA as of March 17, 2016. Figures from Moody’s MFRA as of March 17, 2016. Moody’s MFRA data as of FY15 for NY Water, Philadelphia Water, and SFPUC; as of FY14 for Boston WSC, Cleveland Water, DC Water, GLWA and Northeast Ohio Regional Sewer District; and as of FY13 for Baltimore Water & Sewer.

Page 41

GLWA FINANCIAL METRICS AND SELECTED PEER COMPARISON

Page 42

COVERAGE METRICS GLWA FINANCIAL METRICS & SELECTED PEER COMPARISON

Source: Figures from Moody’s MFRA as of March 17, 2016. Moody’s MFRA data as of FY15 for NY Water, Philadelphia Water, and SFPUC; as of FY14 for Boston WSC, Cleveland Water, DC Water, GLWA and Northeast Ohio Regional Sewer District; and as of FY13 for Baltimore Water & Sewer. Debt service coverage is calculated as adjusted by Moody’s and may not align with indenture calculations. 6

Senior Debt Service Coverage Total Debt Service Coverage

Issuer Actual (x) Required (x) Actual (x) Required (x)

Baltimore (City of) Sewer Enterprise, MD 1.2 1.15 1.2 1.00 Baltimore (City of) Water Enterprise, MD 2.0 1.15 1.6 1.00 Boston Water & Sewer Commission, MA 1.7 1.25 1.4 1.00 Cleveland (City of) Water Enterprise, OH 2.2 1.25 2.1 1.00 DC Water & Sewer Authority, DC 5.0 1.20 1.7 1.00 Great Lakes Water Authority (DWSD), MI – W 1.3 1.20 1.0 1.00 Great Lakes Water Authority (DWSD), MI – S 1.9 1.20 1.1 1.00 NY City Municipal Water Finance Authority, NY 13.1 1.15 5.5 1.00 Northeast Ohio Regional Sewer District, OH 5.1 1.15 1.9 1.00 Philadelphia Water and Sewer Enterprise, PA 1.5 1.20 1.5 1.00 San Francisco PUC Sewer Enterprise, CA 1.9 1.25 1.9 1.00 San Francisco PUC Water Enterprise, CA 1.5 1.25 1.5 1.00

Page 43

LIQUIDITY AND DEBT METRICS GLWA FINANCIAL METRICS & SELECTED PEER COMPARISON

Source: Figures from Moody’s MFRA as of March 17, 2016. Moody’s MFRA data as of FY15 for NY Water, Philadelphia Water, and SFPUC; as of FY14 for Boston WSC, Cleveland Water, DC Water, GLWA, and Northeast Ohio Regional Sewer District; and as of FY13 for Baltimore Water & Sewer. 7

Days Cash Debt to Operating Revenues

Issuer

Total Current Cash, Cash

Equivalents and Investments

($000s)

Total O&M Expenses ($000s)

Day's Cash

Long-Term Debt

Outstanding ($000s)

Operating Revenues

($000s)

Debt to Operating

Revenues (x)

Baltimore (City of) Sewer Enterprise, MD 48,753 125,215 142.1 714,917 183,521 3.90 Baltimore (City of) Water Enterprise, MD 25,075 100,845 90.8 502,496 154,680 3.25 Boston Water & Sewer Commission, MA 6,319 267,389 8.6* 532,584 325,864 1.63 Cleveland (City of) Water Enterprise, OH 245,928 153,559 584.6 749,490 303,408 2.47 DC Water & Sewer Authority, DC 239,925 266,733 328.3 2,547,408 473,824 5.38 Great Lakes Water Authority (DWSD), MI – W 112,901 174,262 236.5 2,553,333 349,369 7.31 Great Lakes Water Authority (DWSD), MI – S 116,899 229,169 186.2 3,347,853 475,771 7.04 NY City Municipal Water Finance Authority, NY 1,238,122 1,517,132 297.9 30,933,343 3,791,135 8.16 Northeast Ohio Regional Sewer District, OH 614,407 102,198 2194.4 1,606,355 239,185 6.72 Philadelphia Water and Sewer Enterprise, PA 80,070 376,528 77.6 2,110,797 676,867 3.12 San Francisco PUC Sewer Enterprise, CA 148,240 166,231 325.5 777,508 249,645 3.11 San Francisco PUC Water Enterprise, CA 354,091 201,566 641.2 4,418,978 426,047 10.37

*Although BWSC typically reports $5-10 million in unrestricted cash balances, total system liquidity is generally more robust due to a number of designated operating reserves that,although reported as restricted, generally are available for any lawful purpose

Page 44

DEBT AND CIP METRICS GLWA FINANCIAL METRICS & SELECTED PEER COMPARISON

Source: Long-term debt figures from Moody’s MFRA as of March 17, 2016. Population served and Five Year CIP rom latest issuer filings with EMMA as of March 17, 2016. Moody’s MFRA data as of FY15 for NY Water, Philadelphia Water, and SFPUC; as of FY14 for Boston WSC, Cleveland Water, DC Water, GLWA, and Northeast Ohio Regional Sewer District; and as of FY13 for Baltimore Water & Sewer. 8

Long-Term Debt per Capita 5-Year CIP per Capita

Issuer

Population Served

(Retail + Wholesale)

Long-Term Debt Outstanding

($000s) Debt Per Capita ($) Five Year CIP

Amount ($000s) CIP Per Capita ($)

Baltimore (City of) Sewer Enterprise, MD 1,800,000 714,917 397 800,000 444 Baltimore (City of) Water Enterprise, MD 1,500,000 502,496 335 2,200,000 1,467 Boston Water & Sewer Commission, MA 800,000 532,584 666 285,000 356 Cleveland (City of) Water Enterprise, OH 1,400,000 749,490 535 334,500 239 District of Columbia Water & Sewer Authority, DC 2,200,000 2,547,408 1,158 2,200,000 1,000 Great Lakes Water Authority (DWSD), MI – W 3,800,000 2,553,333 672 800,000 211 Great Lakes Water Authority (DWSD), MI – S 2,800,000 3,347,853 1,196 594,000 212 NY City Municipal Water Finance Authority, NY 8,000,000 30,933,343 3,867 11,775,000 1,472 Northeast Ohio Regional Sewer District, OH 1,000,000 1,606,355 1,606 1,440,000 1,440 Philadelphia Water and Sewer Enterprise, PA 2,000,000 2,110,797 1,055 1,480,000 740 San Francisco PUC Sewer Enterprise, CA 1,000,000 777,508 778 3,000,000 3,000 San Francisco PUC Water Enterprise, CA 2,600,000 4,418,978 1,700 614,000 236

Page 45

MOODY’S SCORECARD METHODOLOGY & GLWA CALCULATIONS

Page 46

MOODY’S WATER & SEWER UTILITY SCORECARD CALCULATION MOODY’S SCORECARD METHODOLOGY & GLWA CALCULATIONS

10 Source: Moody’s U.S. Municipal Utility Revenue Rating Methodology, December 15, 2014.

System Characteristics

(30%)

Financial Strength & Liquidity (40%)

Management (20%)

Legal Provisions (10%)

Adjusted Score

Peer / Outlier Comparison

Qualitative Factors

FINAL RATING

Application of Notching Factors Preliminary Score

Page 47

MOODY’S WATER & SEWER UTILITY SCORECARD – GLWA WATER SYSTEM MOODY’S SCORECARD METHODOLOGY & GLWA CALCULATIONS

11 Source: Moody’s Municipal Utility Debt Methodology, December 2014. Data from MFRA and calculated using data from DWSD financial statements, FY2014.

Description Weight Aaa Aa A Baa Ba GLWA GLWA Category GLWA

SYSTEM CHARACTERISTICS (30%) 0.50-1.49 1.50-2.49 2.50-3.49 3.50-4.49 4.50-5.49 Input Rating Score Score

Asset Condition - Remaining Useful Life (Net Assets / Annual

Depreciation)

10% > 75 Years 75 years > n > 25 years 25 years > n > 12 years 12 years > n > 9 years 9 years > n > 6 years 23.7 A 3 0.30

System Size: (O&M in 000s)

7.5% > $65 million $65 M > n > $30 M $30 M > n > $10 M $10 M > n > $3 M $3 M > n > $1 M $174,262,000 Aaa 1 0.08

Service Area Wealth: MFI

12.5% > 150% of US median 150% to 90% of US Median 90% to 75% of US Median 75% to 50% of US Median 50% to 40% of US Median 95% Aa 2 0.25

FINANCIAL STRENGTH (40%)

Annual Debt Service Coverage

15% greater than 2.00X 1.70X to < 2.00X 1.25X to < 1.70X 1.00X to < 1.25X 1.00X to < 0.70X 0.98x Ba 5 0.75

Days Cash on Hand 15% ≥ 250 days 150 to < 250 days 35 to <150 days 15 to <35 days 7 to <15 days 236 days Aa 2 0.30

Debt to Operating Revenues

10% Less than 2.00x 2.00x < n < 4.00x 4.00X to < 7.00X 7.00X to < 8.00X 8.00X to < 9.00X 7.31x Baa 4 0.40

MANAGEMENT (20%)

Rate Management 10%Excellent rate setting; no material political, practical, or regulatory

limit to rate increases

Strong rate setting; little material political, practical, or regulatory


Average rate setting; some material political, practical, or

regulatory limit to rate increases

Adequate rate setting; political, practical, or regulatory

impediments place material limits to rate increases

Below average rate setting; political, practical, or regulatory impediments place material limits

to rate increases

Average rate setting

A 3 0.30

Regulatory Compliance and Capital Planning

10%

Fully compliant OR proactively addressing compliance issues;

Maintains sophisticated and manageable Capital Improvement Plan that addresses more than a

10-year period

Actively addressing minor compliance issues; Maintains

comprehensive and manageable 10-year Capital Improvement Plan

Moderate violatinos w ith adopted plan to address issues; Maintains

manageable 5-year Capital Improvement Plan

Signif icant compliance violations w ith limited solutions adopted; Maintains single year Capital

Improvement Plan

Not fully addressing compliance issues; Limited or w eak capital

planning

Minor Compliance

IssuesAa 2 0.20

LEGAL PROVISIONS (10%)

Rate Covenant 5% greater than 1.30X 1.30X to < 1.20X 1.20X to < 1.10X 1.00X to < 1.10X < 1.00x 1.20x A 3 0.15

Debt Service Reserve Requirement

5% DSRF funded at MADSDSRF funded at lesser of

standard 3 prong testDSRF funded at less than 3

prong test No explicit DSRF No explicit DSRF MADS Aaa 1 0.05

TOTAL SCORE: 2.78

Management of System

Legal Provisions

Scoring on Moody's Municipal Utility Methodology - Great Lakes Water Authority (Water)

Factor


Financial Strength and Liquidity

Page 48

MOODY’S PRELIMINARY RATING SCORING CHART - GLWA WATER SYSTEM

12


Source: Moody’s Municipal Utility Debt Methodology, December 2014.

Indicated Rating Preliminary Weighted Score Aaa 0.50 to 1.50 Aa1 1.50 to 1.83 Aa2 1.83 to 2.17 Aa3 2.17 to 2.50 A1 2.50 to 2.83 A2 2.83 to 3.17 A3 3.17 to 3.50

Baa1 3.50 to 3.83 Baa2 3.83 to 4.17 Baa3 4.17 to 4.50 Ba1 4.05 to 4.83 Ba2 4.83 to 5.17 Ba3 5.17 to 5.50

Adjusted Score

Application of Notching Factors


Qualitative Factors

FINAL RATING

Page 49

MOODY’S WATER & SEWER UTILITY SCORECARD – GLWA SEWER SYSTEM

13

Description Weight Aaa Aa A Baa Ba GLWA GLWA Category GLWA

SYSTEM CHARACTERISTICS (30%) 0.50-1.49 1.50-2.49 2.50-3.49 3.50-4.49 4.50-5.49 Input Rating Score Score

Asset Condition - Remaining Useful Life (Net Assets / Annual

Depreciation)

10% > 75 Years 75 years > n > 25 years 25 years > n > 12 years 12 years > n > 9 years 9 years > n > 6 years 24.0 A 3 0.30

System Size: (O&M in 000s)

7.5% > $65 million $65 M > n > $30 M $30 M > n > $10 M $10 M > n > $3 M $3 M > n > $1 M $229,169,000 Aaa 1 0.08

Service Area Wealth: MFI

12.5% > 150% of US median 150% to 90% of US Median 90% to 75% of US Median 75% to 50% of US Median 50% to 40% of US Median 95% Aa 2 0.25

FINANCIAL STRENGTH (40%)

Annual Debt Service Coverage

15% greater than 2.00X 1.70X to < 2.00X 1.25X to < 1.70X 1.00X to < 1.25X 1.00X to < 0.70X 1.08x Baa 4 0.60

Days Cash on Hand 15% ≥ 250 days 150 to < 250 days 35 to <150 days 15 to <35 days 7 to <15 days 186 days Aa 2 0.30

Debt to Operating Revenues

10% Less than 2.00x 2.00x < n < 4.00x 4.00X to < 7.00X 7.00X to < 8.00X 8.00X to < 9.00X 7.04x Baa 4 0.40

MANAGEMENT (20%)

Rate Management 10%Excellent rate setting; no material political, practical, or regulatory


Strong rate setting; little material political, practical, or regulatory


Average rate setting; some material political, practical, or

regulatory limit to rate increases

Adequate rate setting; political, practical, or regulatory

impediments place material limits to rate increases

Below average rate setting; political, practical, or regulatory impediments place material limits

to rate increases

Average rate setting

A 3 0.30

Regulatory Compliance and Capital Planning

10%

Fully compliant OR proactively addressing compliance issues;

Maintains sophisticated and manageable Capital Improvement Plan that addresses more than a

10-year period

Actively addressing minor compliance issues; Maintains

comprehensive and manageable 10-year Capital Improvement Plan

Moderate violatinos w ith adopted plan to address issues; Maintains

manageable 5-year Capital Improvement Plan

Signif icant compliance violations w ith limited solutions adopted; Maintains single year Capital

Improvement Plan

Not fully addressing compliance issues; Limited or w eak capital

planning

Minor Compliance

IssuesAa 2 0.20

LEGAL PROVISIONS (10%)

Rate Covenant 5% greater than 1.30X 1.30X to < 1.20X 1.20X to < 1.10X 1.00X to < 1.10X < 1.00x 1.20x A 3 0.15

Debt Service Reserve Requirement

5% DSRF funded at MADSDSRF funded at lesser of

standard 3 prong testDSRF funded at less than 3

prong test No explicit DSRF No explicit DSRF MADS Aaa 1 0.05

TOTAL SCORE: 2.63

Financial Strength and Liquidity

Management of System

Legal Provisions

Scoring on Moody's Municipal Utility Methodology - Great Lakes Water Authority (Sewer)

Factor



Source: Moody’s Municipal Utility Debt Methodology, December 2014. Data from MFRA and calculated using data from DWSD financial statements, FY2014.

Page 50

MOODY’S PRELIMINARY RATING SCORING CHART - GLWA SEWER SYSTEM

14 Source: Moody’s Municipal Utility Debt Methodology, December 2014.


Indicated Rating Overall Weighted Score Aaa 0.50 to 1.50 Aa1 1.50 to 1.83 Aa2 1.83 to 2.17 Aa3 2.17 to 2.50 A1 2.50 to 2.83 A2 2.83 to 3.17 A3 3.17 to 3.50

Baa1 3.50 to 3.83 Baa2 3.83 to 4.17 Baa3 4.17 to 4.50 Ba1 4.05 to 4.83 Ba2 4.83 to 5.17 Ba3 5.17 to 5.50

Adjusted Score

Application of Notching Factors


Qualitative Factors

FINAL RATING

Page 51

MOODY’S ADJUSTMENT/NOTCHING FACTORS AND RELATIONSHIP TO GO CREDIT • Relationship to the Detroit GO credit

— Moody’s believes that municipal utility debt is generally exposed to similar credit strengths and pressures as the GOand can thus expect to experience simultaneous credit improvement or deterioration

— Because of these linkages, in most cases, ratings of a municipality’s utility debt will be within two notches ofits GO rating

— In rare cases, a utility’s credit strength may be sufficiently independent from its associated GO rating to justify a larger notching difference than two notches

• Additional adjustment/notching factors applied after determination of the Indicative Rating include:— System Characteristics

– Additional service area economic strength or diversity– Significant customer concentration– Revenue-per-Customer greatly over/under regional average– Exposure to weather volatility, extreme conditions, or resource vulnerability– Sizable or insufficient capacity margin– Weak depreciation/reinvestment practices relative to industry norms

— Financial Strength – Debt Service Coverage (Annual or MADS) below key thresholds: Additional Bonds Test and 1.00x coverage– Constrained liquidity position or significant exposure to puttable debt and/or swaps or other unusual debt structure– Outsized capital needs or ANPL relative to debt or significant ARC under-payment – Significant exposure to puttable debt and/or swaps or other unusual debt structure

— Legal Provisions, due to structural enhancements/complexities — Management, due to unusually strong or weak operational or capital planning — Other

– Credit Event/Trend not yet reflected in existing data set on other adjustments at discretion of Analyst

15


Source: Moody’s Municipal Utility Debt Methodology, December 2014. Page 52

S&P SCORECARD METHODOLOGY & GLWA CALCULATIONS

Page 53

S&P WATER & SEWER UTILITY SCORECARD CALCULATION S&P SCORECARD METHODOLOGY & GLWA CALCULATIONS

17 Source: S&P U.S. Public Finance Waterworks, Sanitary Sewer, And Drainage Utility Systems: Rating Methodology And Assumptions, January 19, 2016.

Economic Fundamentals

(45%)

Industry Risk (20%)

Market Position (25%)

Operational Risk Assessment (10%)

Enterprise Risk Profile (1 to 6)

Financial Risk Profile (1 to 6)

All-in Coverage (40%)

Liquidity and Reserves (40%)

Debt & Liabilities (10%)

Financial Management

Assessment (10%)

Initial Indicative Rating

Application of Rating Caps

Application of Overriding Factors

Indicative Rating

Peer Comparisons (one notch potential)

FINAL RATING

Page 54

S&P WATER & SEWER UTILITY SCORECARD – GLWA WATER SYSTEM S&P SCORECARD METHODOLOGY & GLWA CALCULATIONS

18 Source: S&P U.S. Public Finance Waterworks, Sanitary Sewer, And Drainage Utility Systems: Rating Methodology And Assumptions, January 19, 2016. Data calculated using a three year average of data from DWSD financial statements, FY2012-2014..

Note: S&P metrics are calculated with 3-year rolling average data. Above calculations use DWSD audited FY12-14 financials.

Description Weight 1 2 3 4 5 6 Pos / Neg GLWA

Extremely Strong Very Strong Strong Adequate Vulnerable Highly VulnerableNotching Factors Score


45%

Stronger than US rate of GDP and 100-

125% of US median household effective

buying income

Stronger/same rate as US rate of GDP

and 75-100% of US median household effective buying

income

Same as US rate of GDP and 75-100% of US median household

effective buying income

Same or w eaker rate of US GDP grow th and 50-75% of US median household effective buying

income

Weaker rate of US GDP grow th and 35-75% of US median household effective

buying income

Weaker rate of US GDP grow th and

<35% of US median household effective

buying income

Economies of scale; diverse employment base;

unique stabilizing employer; high

unemployment; declining population;

economic/customer concentration;

employment sector concentration

2

Industry Risk 20%

Very low competitive risk of "1" applied to most utilities, given monopolies w ith

autonomy over rates

- - - - -

Need to obtain regulatory approvals for rate increases. State

provisions that allow initiatives to overturn rate

and other actions.

1

Market Position 25%

Utility bill less than 1.00% of Median

Household Effective Buying Income and less than 10% of service population living in poverty



Utility bill 1.00-2.00% of Median Household

Effective Buying Income and less than

20% of service population living in

poverty




poverty

Utility bill more than 2.00% of Median

Household Effective Buying Income and more than 20-30+% of service population

living in poverty


Household Effective Buying Income and more than 30% of service population living in poverty

- 2

Operational Management Assessment

10%

Strong management, including secure w ater supply and system capacity.

Mgmt communicates long term needs and strategic goals. Multi year, preapproved

rate actions.

Strong management, w ith w ater supply

and system capacity suff icient for existing

customer base. Public out reach and

transparency on planning. Rate

actions done year to year.

Good management, w ith w ater supply





Adequate management, w ith w ater supply and system capacity needs in 10-20

years. Management depth and breadth

limited. Rate actions driven by legal

covenants.

Management capabilities limited, w ith w ater supply

and system capacity not suff icient current.

Management depth limited, w ith reliance on outside parties. Rate actions only driven by w eak

condition.

- - 2

Subtotal 1.8

Enterprise Risk Profile

Factor


Page 55

S&P WATER & SEWER UTILITY SCORECARD – GLWA WATER SYSTEM

19 Source: S&P U.S. Public Finance Waterworks, Sanitary Sewer, And Drainage Utility Systems: Rating Methodology And Assumptions, January 19, 2016. Data calculated using a three year average of data from DWSD financial statements, FY2012-2014.





All-in Annual Debt Service Coverage

40% greater than 1.60X 1.40X to < 1.60X 1.20X to < 1.40X 1.10X to < 1.20X 1.00X to < 1.10X <1.00X

Signif icant w holesale contracts (20-49% of revenues); planned,

infrequent use of RSF; debt service schedule that requires signif icant

grow th or large rate increases to meet

requirements

6

Liquidity and Reserves 40%Greater than 150

days and more than $75 million

90- 150 days and betw een $20-$75

million

60-90 days and betw een $5-$20

million

30-60 days and betw een $1-$5 million

15-30 days and $1 million

<15 days and $500,000

Distribution-only system; liquidity skew ed by seasonality; lack of

operating cost pass-thru structure; high 2-3 year

refinancing risk; exposure to contingent liabilities

2

Debt and Liabilities 10% Up to 20% 20% to 35% 35% to 50% 50% to 65% 65% to 80% >80%Rapid principal

amortization; pension funding concerns

6

Financial Management Assessment

10%

Strong revenue and expense tracking and

budget monitoring. Good long-term

financial planning and assessment. Formal f inancial, investment

and debt policies.

Revenue and expense tracking and budget monitoring but

less robust. Good f inancial planning but limited in term. Formal f inancial, investment and debt policies, but

may be lacking in

Revenue and expense tracking

done but w ith optimistic

assumptions. Financial planning but

limited updates. Some formal f inance policies, but may be

Revenue and expense projections

exist, but w ith optimistic

assumptions and limited testing.

Financial planning done, but may not be realistic. Finance and


ignore shortfalls, w ith no formal review . No

long term financial planning done.

Absence of formal or informal policies w ith

use of riskier

- - 2

Subtotal 4.0

Financial Risk Profile


Factor

Page 56

S&P WATER & SEWER UTILITY SCORECARD – GLWA WATER SYSTEM INDICATIVE RATINGS


1 2 3 4 5 6

1 AAA AA+ AA- A BBB+/BBB BB+/BB

2 AA+ AA/AA- A+ A- BBB/BBB- BB/BB-

3 AA- A+ A BBB+/BBB BBB-/BB+ BB-

4 A A/A- A-/BBB+ BBB/BBB- BB B+

5 BBB+ BBB/BBB- BBB-/BB+ BB BB- B

6 BBB- BB BB- B+ B B-

En

terp

rise

Ris

k P

rofi

le


• S&P initial indicative ratings are subject to certain overall overriding factors and caps, including: — Peer comparisons — Recent bankruptcy or financial crisis — Future projected trends — Lack of willingness to raise rates to support debt service — Going concern opinion


Page 57

S&P WATER & SEWER UTILITY SCORECARD – GLWA SEWER SYSTEM





Enterprise Risk Profile Extremely Strong Very Strong Strong Adequate Vulnerable Highly VulnerableNotching Factors Score


45%

Stronger than US rate of GDP and 100-

125% of US median household effective

buying income

Stronger/same rate as US rate of GDP

and 75-100% of US median household effective buying

income

Same as US rate of GDP and 75-100% of US median household

effective buying income

Same or w eaker rate of US GDP grow th and 50-75% of US median household effective buying

income

Weaker rate of US GDP grow th and 35-75% of US median household effective

buying income

Weaker rate of US GDP grow th and

<35% of US median household effective

buying income

Economies of scale; diverse employment base;

unique stabilizing employer; high

unemployment; declining population;

economic/customer concentration;

employment sector concentration

2

Industry Risk 20%

Very low competitive risk of "1" applied to most utilities, given monopolies w ith

autonomy over rates

- - - - -

Need to obtain regulatory approvals for rate increases. State

provisions that allow initiatives to overturn rate

and other actions.

1

Market Position 25%








poverty




poverty


Effective Buying Income and more

than 30% of service population living in

poverty


Household Effective Buying Income and more than 30% of service population living in poverty

- 3

Operational Management Assessment

10%

Strong management, including secure w ater supply and system capacity.

Mgmt communicates long term needs and strategic goals. Multi year, preapproved

rate actions.

Strong management, w ith w ater supply





Good management, w ith w ater supply





Adequate management, w ith w ater supply and system capacity needs in 10-20

years. Management depth and breadth

limited. Rate actions driven by legal

covenants.

Management capabilities limited, w ith w ater supply

and system capacity not suff icient current.

Management depth limited, w ith reliance on outside parties. Rate actions only driven by w eak

condition.

- - 2

Subtotal 2.1



Factor

Page 58

S&P WATER & SEWER UTILITY SCORECARD – GLWA SEWER SYSTEM






All-in Annual Debt Service Coverage

40% greater than 1.60X 1.40X to < 1.60X 1.20X to < 1.40X 1.10X to < 1.20X 1.00X to < 1.10X <1.00X

Signif icant w holesale contracts (20-49% of revenues); planned,

infrequent use of RSF; debt service schedule that requires signif icant

grow th or large rate increases to meet

requirements

6

Liquidity and Reserves 40%Greater than 150

days and more than $75 million

90- 150 days and betw een $20-$75

million

60-90 days and betw een $5-$20

million

30-60 days and betw een $1-$5 million

15-30 days and $1 million

<15 days and $500,000

Collection-only system; liquidity skew ed by seasonality; lack of

operating cost pass-thru structure; high 2-3 year

refinancing risk; exposure to contingent liabilities

2

Debt and Liabilities 10% Up to 20% 20% to 35% 35% to 50% 50% to 65% 65% to 80% >80%Rapid principal

amortization; pension funding concerns

6

Financial Management Assessment

10%

Strong revenue and expense tracking and

budget monitoring. Good long-term

financial planning and assessment. Formal f inancial, investment

and debt policies.

Revenue and expense tracking and budget monitoring but

less robust. Good f inancial planning but limited in term. Formal f inancial, investment and debt policies, but

may be lacking in certain areas.

Revenue and expense tracking

done but w ith optimistic

assumptions. Financial planning but

limited updates. Some formal f inance policies, but may be

lacking in certain areas.


exist, but w ith optimistic

assumptions and limited testing.

Financial planning done, but may not be realistic. Finance and

investments driven by state

requirements.


ignore shortfalls, w ith no formal review . No

long term financial planning done.

Absence of formal or informal policies w ith

use of riskier structures.

- - 2

Subtotal 4.0



Factor

Page 59

S&P WATER & SEWER UTILITY SCORECARD – GLWA SEWER SYSTEM INDICATIVE RATINGS


1 2 3 4 5 6

1 AAA AA+ AA- A BBB+/BBB BB+/BB

2 AA+ AA/AA- A+ A- BBB/BBB- BB/BB-

3 AA- A+ A BBB+/BBB BBB-/BB+ BB-

4 A A/A- A-/BBB+ BBB/BBB- BB B+

5 BBB+ BBB/BBB- BBB-/BB+ BB BB- B

6 BBB- BB BB- B+ B B-

En

terp

rise

Ris

k P

rofi

le


• S&P initial indicative ratings are subject to certain overall overriding factors and caps, including:— Peer comparisons— Recent bankruptcy or financial crisis— Future projected trends— Lack of willingness to raise rates to support debt service— Going concern opinion


Page 60

Date: M

To: G

From: M

Re: F

BackgrouWater AuDecembeBS&A FinSystem (Wand the C

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Budget Im

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Total B

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Notes:

(1) HP h

March 24, 20

Great Lakes W

Michael Hube

inancial Syst

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ract finalizatio

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financial syson was approation, confige Oracle Worh separate rD) within a s

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100,000

243,200

549,600 $

1,200,000 $

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520,000

300,000

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on

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aid through

2.23.2016227,505

75,250

‐

122,200

197,450

‐

424,955

‐

‐

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ter Autho

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and WAM

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131,15$

‐

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ority

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s

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50

00

00

00

00

00

AGENDA ITEM 8A

Page 61

Date: M

To: A

From: M

Re: T

BackgrouWater AuSystem (million in(CGAP) oGreat Lak

Analysis:spendingfrom theas of Ma

Budget Im

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Michael Hube

ransition Bu

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mpact: Non

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Category

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ices

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016

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dget Update

y out the legLWA”) and tthe Board o

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summary of /GLWA spenproximately $6.

e.

one.

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e

gal, financialthe City of Dof Water Comn of funding unty. The fucomplete th

spending bynding. It sho$2.9 million

pent CGAP S

6,093 27

7,899 1,27

1,766 1,21

0,921 1,06

‐

6,679 3,82

Aud

l, and operatetroit Watermmissionersfrom the Conding for this project.

y category. Tuld be notedremains uns

Spent Total S

73,666 1,4

71,261 2,0

14,177 2,2

61,591 1,3

‐

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429,759

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332,512

‐

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akes Wat

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to stand‐up ge Departmetablished fuGrant Assistaes carried fo

includes boe $6.2 million1.1 million is

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1,891,666

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1,773,256

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ter Autho

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oth CGAP n of fundings uncommitt

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461

144

768

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roup

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akes tail .2 m e

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udget

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4,105

8,234

0,744

7,636

2,626

AGENDA ITEM 8B

Page 62