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2. Revenue Sufficiency Analysis Although IRCDUS does not currently have outstanding debt, the County's Master Bond Resolution13 • established a covenant to maintain net revenues (gross revenues minus operating expenses) that are at least 1.20 times greater than the annual debt service expense (i.e. the annual principal and interest payments) for its outstanding bonds. To the extent the Utility issues future debt and is unable to meet these requirements, it could face the possibility of having its credit rating downgraded, which is dependent on ability to fund debt service requirements, among many other criteria. A credit downgrade would affect interest rates and terms of future financing activities. It is important to note that these covenants (often referred to as debt service coverage requirements) represent minimum requirements. As a policy decision, utilities often measure revenue sufficiency and set rates based upon a higher debt service coverage level to ensure compliance with these types of covenants in the event future projections of revenue and expenses do not occur as predicted (i.e., due to extended drought conditions, unanticipated capital requirements or O&M cost increases, natural disasters, or other reasons). As such, the financial management plan presented herein achieves a debt service coverage ratio more than IRCDUS' minimum 1.20 requirement throughout the projection period. Schedule 8 of Appendix A provides a summary of the projected annual debt service coverage over the projection period. 2.3.8 Minimum Reserve Balances Reserve balances for utility systems are funds set aside for a specific cash flow requirement, financial need, project, or legal covenant. These balances are maintained to meet short-term cash flow requirements and, • at the same time, minimize the risk associated with meeting the financial obligations and continued operational and capital needs of the utility under adverse conditions. The level of reserves maintained by a utility is an important component and consideration of developing a utility system multi-year financial management plan. Many utilities, rating agencies, and the investment community place a significant emphasis on having sufficient reserves available for potentially adverse conditions. The rationale related to the maintenance of adequate reserves is twofold. First, it helps to assure a utility that it will have adequate funds available to meet its financial obligations during unusual periods (i.e., when revenues are unusually low and/or expenditures are unusually high). Second, it provides funds that can be used for emergency repairs or replacements to the system that can occur because of natural disasters or unanticipated system failures. IRCDUS' minimum reserve balance policies are established by County and include the following components: • Unassigned Fund Balance: 20.0% of annual budget, 13 Resolution No. 93-80 16