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Water Rate Cost-of-Service Study Section 3. Revenue Requirements HF&H Consultants, LLC | July 8, 2025 | Page 18 of 53 Figure 3-5. Total Revenue Requirement Projections Source: Data from City’s FY 2024-25 Budget. RESERVES Rates need to generate sufficient revenue to cover unfunded annual operating and capital expenses. However, rates are not set to exactly match cash expenditures because the timing of cash expenditures can fluctuate. If rates were set to exactly match expenditures, rates would also fluctuate. To avoid increasing and decreasing rates from year to year, reserves are used to cover the difference so that rate increases are smooth and gradual. The City’s current level of reserves has enabled it to maintain a strong credit rating, which reduces its financing costs. The City uses its reserves to stabilize rates against annual fluctuations in capital expenditures, variances between projected and actual water demands, and unanticipated expenditures and other expenditure variances. In some years, there is surplus revenue that is available to replenish reserves. In other years, reserves are drawn down to cover the cost of service. Rates are set to generate a constant level of revenue to maintain reserves at adequate levels. At the same time that revenue from rates is added to reserves, reserves are drawn down to fund capital projects whose costs vary from year to year. In effect, reserves are used to buffer rates from varying levels of capital expenditures and unforeseen variances in operating expenditures. Water Enterprise Expenses FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 Purchased Water $26,759,500 $26,759,500 $27,036,322 $28,743,394 Other O&M $22,397,052 $20,941,441 $21,279,472 $22,605,436 Capital Expenditures $8,638,538 $13,161,266 $13,161,266 $13,161,266 Total Revenue Requirement $57,795,090 $60,862,207 $61,477,061 $64,510,096 Annual Increase 5.3% 1.0% 4.9% ATTY/RESO.0109/CC RESO WATER RATES - EXHIBIT A REV: 11-05-25 MI