Presentation to Public Forum September 11, 2012

1. Fallbrook/Rainbow Consolidation Study Presentation to Public Forum September 11, 2012

2. Background

3. 44 square miles • Population: 35,000 • 9,100 water customers • 5,000 sewer customers • 25 reclaimed customers • 68 employees budgeted • $21 million op. revenues* • $90 million in total assets • 10,600 acre feet sold • 78 square miles • Population: 18,000 • 7,200 water customers • 1,900 sewer customers • No reclaimed customers • 55 employees budgeted • $31 million op. revenues* • $111 million in total assets • 17,700 acre feet sold *2010-2011 audited financials

4. Timeline: • Outgrowth of functional consolidation investigations in 2011 • GM discussions in first quarter 2012 • Board ad hoc committees formed in March 2012 • Initial feasibility review in March-April 2012

5. Joint Opportunities: • Reducing administrative overhead • Optimizing operating assets • Improving emergency response • Capturing economies of scale (warehousing, purchasing, risk management) • Expanding water reclamation • Consolidating operating management • Advancing technology • Strengthening financial capacity

6. Governance

7. Going Forward: Three Options • Remain Separate Entities (base case) • Form a Joint Powers Authority • Consolidate through LAFCO* * San Diego Local Area Formation Commission

8. Remain Separate Entities (base case) • No consolidation of staffs • Systems are operated independently • Separate financials are maintained • No significant joint savings • Provide for mutual aid • Collaborate on CWA issues

9. Form a Joint Powers Authority FPUD Ratepayers RMWD Ratepayers FPUD Board JPA BOARD Rainbow Board Management FPUD Employees | RMWD Employees

10. JPA: Advantages and Disadvantages • Creates new agency • Adds a layer of bureaucracy • Easier to undo • No LAFCO involvement but level of study probably similar • Allows each agency to retain existing CWA vote • Existing labor contracts could remain in place • More difficult to merge workforce to create greatest efficiency, but certainly possible • Potential to perpetuate employees’ existing attitudes towards old entities

11. Consolidation through LAFCO • A merger of equals • A new entity (i.e. MWD, PUD, CSD, etc.) • Unified management team • Ratepayer group protections • Employee protections

12. Consolidation: Advantages & Disadvantages • Reduces number of public agencies • Difficult to undo • Time and expense of LAFCO review and approval • Existing Boards replaced with yet to be determined Board makeup • Merges CWA Vote • New agency means new labor contracts • Best opportunity to create most cost-effective organizational hierarchy • Fresh start • Ends employee ties to old entity • Loss of individual Branding • Potential new Branding opportunity

13. Strengths of both Options: • Greater resources to better meet the needs of the ratepayers • More crews for critical response • Ability to devote crews to infrastructure improvement (i.e., valve replacement) • Improves system reliability/ reduces construction costs • Better response to bids for services • Billing • Cross-connection • Legal • Audit • Opportunity to pool bulk purchases, i.e.; chemicals, meters, computers, office supplies, etc. • Potential for sharing assets: • Red Mountain/Beck Reservoirs • Utilize Red Mountain and UV plant for domestic storage and Beck for recycled/ground water storage • Ability to create agricultural water/recycled water dual distribution system • FPUD has 2700 sq. ft. modern office space available and larger board room • No need to upgrade RMWD campus • RMWD has good corporate yard and storage for supplies • Pooling and reducing size of motor vehicle fleet Opportunity for more effective use of technology: • IT functions • SCADA

14. Savings

15. Staffing Efficiencies FPUD 68 Budgeted Employees RMWD 55 Budgeted Employees • Ability to reduce overhead costs (particularly through reductions in labor costs) and eliminate redundant capital equipment JPA/CONSOLIDATION 115/103 Budgeted Employees +/-

16. Reductions In Forces (RIFs) • Timing of senior management RIFs concurrent with consolidation • Rank-and-file RIFs: • Attrition/managed re-sizing • Separation payments • Retirement and “other post-employment benefits” (OPEB) services • Less impact on employees • Takes longer to achieve full cost savings • Delays full implementation of reorganization • Supports LAFCO position for dealing with RIFs

17. Example: • Sewer Collection Operations: • Rainbow staff: 6 (1900) • Fallbrook staff: 8 (5000) • Total equipment: 3 Vactor trucks • Combined operation: • Staff: 10-11 • Equipment: 2 Vactor trucks • Savings: • Labor: >$350,000/year (salaries plus benefits) • Equipment: eliminate one vactor truck • Per sewer customer: >$50.00/year

18. Consolidation results in potential to reduce workforce Employee reduction assumptions were provided through interviews with District Staff (GM’s & CFO’s) 3 Year Staff reduction proposal reflects a measured approach which still provides flexibility to adjust plans should service levels require it

19. Consolidation Benefit Assumptions - Workforce

20. Employees per 1,000 Water Accounts Note: This metric excludes wastewater employees

21. Finance and Accounting

22. Financial Perspective: • Advantages: • Financially stronger consolidated district • Total assets • Cash position • Debt capacity • Credit rating • Significant labor/other savings potential • Due Diligence: • Operating assets condition • Rate setting philosophies • Obligations/liabilities • Divisional accounting

23. Preferred consolidation model: • Santa Rosa/Rancho 1977-78 consolidation • Divisional accounting format assures ratepayer equity • Each division maintains separate assets, liabilities, rates and charges RCWD service area

24. Divisional AccountingDebts and Assets Under Divisional Accounting the debts and assets of the two existing agencies remain separate and are assigned to existing ratepayers. FPUD ratepayers pay for FPUD Debt and RMWD ratepayers pay for RMWD debt. This is very common among other public agencies, including RMWD and FPUD. FPUD Ratepayers New Agency RMWD Ratepayers FPUD Debts and Assets RMWD Debts and Assets

25. Divisional Accounting • New agency would share administrative overhead and some operating costs between both districts • Capital costs remain the responsibility of the predecessor agency • Sharing of assets may occur, but agency receiving benefit must pay fair share of the cost • Both FPUD and RMWD already accomplish this through Improvement Districts—it is not a complicated process

26. Other Potential Benefits • Cost Reduction Opportunities: • Reduced property and liability insurance - JPIA • Reduced vehicle fleet – heavy/specialty equipment • Reduced information technology costs • Banking service fee reduction • Internal training opportunities • One general counsel • One Board of Directors • Combined outsource billing savings • Audit costs • Eliminating one office location • Optimize operations – pumping/storage facilities (capital & operating) • Potential to reduce more costly outsourcing • Potential to outsource existing internal functions performed by staff • Income Enhancement Opportunities: • Rental RMWD office • Investment management (lower fees & potentially improved return)

27. Value to Ratepayers • Net savings in year 1 - $675,000 • $65,000 per month • Net savings, per year, by year 3 - $2,535,000 • $211,000 per month • Assuming 29,000 acre-feet of annual water sales $2.5 million in savings could offset the cost of water by more than $86 per acre-foot

29. Backup Slides

30. Combined Operation • Combining the two agencies, through consolidation or JPA, creates an agency that: • Covers 122 square miles (3rd largest in San Diego County) • Serves a population of 53,000 • Delivers water to 16,300 connections • Has assets totaling over $200 million • Collects $50+ million in annual operating revenue • Sells 29,000 acre-feet of water annually • Controls 6.6 percent of the vote at CWA (2nd greatest behind City of San Diego) • Provides considerable economies for the ratepayers of both organizations

31. Functional Areas: • Engineering • Customer Service • Finance/Accounting • Maintenance • Construction • Human Resources • Operations Support • Collections • WW Treatment • System Services • System Operation • Administration --------Time-----

32. With the exception of revenues, both agencies have very similar Statements of Revenues, Expenses, and Changes in Net Assets

33. Consolidated district provides opportunity for investment grade credit rating.

34. Consolidated Pro-Forma Summary Amounts in Millions

35. Recording Revenues and Expenses Utility Billing Financial Statements (Rancho) Balance Sheet /Income Stmt Accounting Record (General Ledger) Accounts Payable Financial Statements (Santa Rosa) Balance Sheet /Income Stmt Payroll Inventory Financial Statements Consolidated Balance Sheet /Income Stmt

36. 3 Year Pro-Forma Phillip Forbes, Consultant

37. Divisional Accounting • Potential Consolidation of FPUD and RMWD • How to ensure fiscal fairness & equity is achieved • Ensure that the cost of one District does not become the cost of the other • Ensure assets and liabilities of each District remain their assets and liabilities • Ensure that the rates are set to reflect each District’s cost of service • Ensure that revenues are applied to the appropriate Divisions • Divisional Accounting can achieve this • Multiple ways to implement divisional accounting • Share the RCWD method which has been successfully utilized since 1977 (35 years)