Boston Water one Sewer Commission ANNUAL REPORT 1987 MESSAGE FROM CHAIRMAN TYE < Dating back to the second century A.D., this aqueduct is located in Segovia, Spain. It was built by the Romans with unmortored granite blocks to tronsport water from over ten miles away. Throughout our ten year history, The Boston Water and Sewer Commission has endeav- ored to build and constantly improve its service obligation to its rate payers by being an efficient and well managed agency. The Commission is proud, not only of our record of past accomplish- ments, but also of the significant initiatives which we have undertaken to ensure the proper delivery and maintenance of quality water and wastewater services to the City of Boston. As the Commission enters the next decade, we are preparing now for future system demands. As the largest customer of the Massachusetts Water Resources Authority we are cur- rently facing the financial impact that the Boston Harbor cleanup mandate will have upon both the Commission and the citizens of all the MWRA member communities in the Commonwealth of Massachusetts. In addition, as Boston's strong economy continues to grow and attract new industry to this area, we are planning for the additional demand for water and wastewater services. We see our challenge to be the control of rate increases concurrent with the provision of necessary capital Improvements. With continued prudent and sound fiscal management strategies, equipment mainte- nance and customer service, the Boston Water and Sewer Commission will move confidently into the 1 990's. We are secure in knowing that the Commission has the resources to continue its tradition of service to the City of Boston. Sincerely, A. Raymond Tye Chairman A. Raymond Tye CHAIRMAN Lisa G. Chapnick COMMISSIONER ■«■»«■■"■■»' A TRADITION OF SERVICE Discovered in the Andean region of Peru, this Inca pottery jar, or calabash, dates back to 500 A.D., when it was used to transport water from rivers and streams to highland fortresses. Over tlie past decade ttie Boston Water and Sewer Commission iias embarked upon an aggressive Capital Improvement Program intended to meet the present and future needs of the City of Boston. As a result, the Commission is well positioned to provide quality water and waste- water services at reasonable rates both now and into the next century The Commission has established an innovative long term debt management strategy which is designed to cost effectively fund its Capital Improvement Program enabling the Commis- sion to keep water and sewer rates stable, thus mitigating the cost of required improvements to Boston's rate payers. WATER AND SEWER RATES The Commission's responsibility to provide water and wastewater services on a fair and equitable basis requires that it set rates at sufficient levels to meet all costs for operations. The Commission is sensitive to the concerns of its rate payers over rising water and sewer rates, fueled by the much needed Boston Harbor cleanup. As a result, management has embarked upon an intensive public awareness effort while at the same time redoubling its efforts to control or cut administrative costs. CAPITAL IMPROVEMENT PROGRAM Boston's public water system dates back to 1 848. Although some components of the system are over 1 00 years old, its overall structural integrity remains strong. Those portions of the system that require replacement or repairs have been identified and the necessary work has either been effected or is in the planning stages. Wherever possible, the Commission has enhanced the system's operability through upgrading its components to take advantage of advancements in technology. Relaying and Relining Program The primary purpose of the relaying and relining program is to ensure a supply of high quality water, at adequate pressure, for customer use and fire protection through the rehabilitation, installation and the cleaning of the water mains. Metering Program Since the inception of the metering program in late 1978, over 48,000 remote reading residential meters have been installed. This has dramatically reduced the number of estimated bills and has increased water accountability. Computerized Work Order System Automation of the water maintenance system was implemented at ttie end of January, 1987 The computerization of this system provides us with better utilization of manpower and isolation of troublesome areas. The Boston Water and Sewer Commission currently services over 87,000 homes, apartments, business and institutions through 1080 miles of delivery pipes and 1300 miles of drainage pipes. Leak Detection Program During 1 987 the Commission conducted leak detection testing on 447 miles of piping out of a system total of 1 1 82 miles, or 38% of the total system. Increased leak detection efforts will continue in order to encompass a greater percentage of the total system. To make the detection of leaks much easier, the Commission has initiated a program of valve upgrading intended to facilitate the subdividing of service areas Into smaller sections. This program will be instrumental In shortening response time required to detect and repair water main breaks or leaks. The Commission's Hydrant Improvement Program will also reduce unaccounted for water by improving the operabillty of hydrants by eliminating ungated hydrants. Wastewater Collection System The backbone of the wastewater collection system is the Boston Main Drainage system, which was constructed between 1 877 and 1 884 and currently remains operational. This system combines five sewer mains, referred to as "interceptors," the Calf Pasture Pumping Station, and the Dorchester Bay Tunnel. Extensive plans were developed to replace two of the original interceptors with construction beginning In 1 982, resulting in the completion of the New Boston Main Inter- ceptor in 1 987 and the New East Side Interceptor to be completed in 1 988. Commission engineers consider the remaining interceptors to be structurally sound. FINANCIAL STABILITY The Boston Water and Sewer Commission's financial statements for 1 987 show continued improvement in the Commission's financial condition. In 1 987, our debt service coverage was 200%, significantly exceeding the mandated 1 25% requirement of our indenture documents. Throughout this past year, the Commission maintained its Standard and Poors rating at "A" and its Moodys rating at "Baa 1 ." Early in the second quarter of 1 988, Moody's Investor Services upgraded its rating to "A." The Commission has for the tenth consecutive year received an unqualified audit opinion. The City's robust, vibrant economy continues to outperform much of the nation, and with this economic growth comes increased demand for services. As we prepare for these demands, we stand upon past achievements, secure In knowing that we are prepared to meet future challenges. LOOKING Combined Capital Improvements to Water & Sewer Property While the accomplishments of the Boston Water and Sewer Commission are many, our mission has only begun. WATER DISTRIBUTION SYSTEM The primary objectives of the proposed 1988-1990 water Capital Improvement Program will be met through three major areas of activity: a relaying and relining program; a metering pro- gram; and special projects. Commission policy, whenever possible, is to tie relaying and relining of water to other work requiring street and highway construction, urban development, housing development, and subway construction. Coordinating projects in this way helps to minimize costs and reduce traffic-flow problems. The Commission's metering program continues to place emphasis on increasing water accountability and equitably allocating the costs of water and wastewater services to its customers based upon actual usage. With this as our goal, we plan to continue the installation of remote read- ing residential meters, in conjunction with the Commission's 1 5 year meter replacement program. As a special pilot project, we plan to initiate the use of electronic probing devices on larger user accounts , as well as the use of computerized hand held meter reading devices. These innovations should provide for quicker billing, better route manipulations, and the elimination of read verifications. SEWER AND DRAINAGE SYSTEM The sewer system Capital Improvement Program includes the protection of the structural integrity of current wastewater collection and storm drainage systems; the reduction of infiltration and inflow in the wastewater system; the control of combined sewer overflows; the improvement of water quality in Boston Harbor as well as its tributary rivers; and the separation of combined systems where appropriate and cost-effective. Improvement projects fall into three broad categories: renewals and replacements, separa- tion of combined sewers, and increased system capacity Renewal and replacement projects, which maintain the useful life of existing facilities, are financed from the annual sewer rates. Projects in the other categories, which improve, enlarge or expand the system, are financed through the sale of bonds. The promise of cost-efficient, quality water and wastewater systems is becoming a reality in Boston due to sound fiscal planning and effective operations management. Regardless of what the fijture may bring to the City, the Boston Water and Sewer Commission lies prepared to meet the challenge given to us a decade ago . AUDITORS' OPINION Boston Water and Sewer Commission: We have examined the balance sheets of the Boston Water and Sewer Commission as of December 31, 1987 and 1986 and the related state- ments of operations, of Commission equity and of changes in financial posi- tion for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, such financial statements present fairly the finan- cial position of the Boston Water and Sewer Commission at December 31, 1987 and 1986 and the results of its operations and changes in its financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. ^^jdifi:^ \^cKtAu4 '^sji^ Boston, Massachusetts March 23, 1988 BALANCE SHEETS, December 31, 1987 and 1986 ASSETS CURRENT ASSETS: Cash Trusteed assets Nontrusteed assets Accounts receivable -customers, less allowances of $8, 1 60,000 in 1 987 and $8,604,000 in 1986 Earned revenues in excess of billings, less allowances of $639,000 in 1 987 and $397,000 in 1986 Accounts receivable: Federal and state construction grants City of Boston -net Prepaid expenses Deferred charges Total Current Assets TRUSTEED ASSETS NONTRUSTEED ASSETS PROPERTY, PLANT AND EQUIPMENT, NET DEFERRED CHARGES DEBT ISSUE COSTS, LESS AMORTIZATION TOTAL NOTES 1,4,7 1,4 1987 1986 $ 241,950 $ 699,389 10,602,991 12,595,006 4,524,851 3,554,581 27,327,027 35,002,146 7,300,955 4,528,671 19,299,357 12,591,636 6 2,390,799 2,071,369 721,792 1,126,018 1,2,7 32,563,431 22,505,758 104,973,153 94,674,574 1,4 100,426,523 96,867,616 1,4 11,328,676 28,335,874 1,3,8 208,654,029 181,065,695 1,2,7 35,958,127 29,570,773 1 4,606,390 4,941,062 $465,946,898 $435,455,594 See notes to financial statements. LIABILITIES AND COMMISSION EQUITY CURRENT LIABILITIES: Payable from current assets: Accounts payable Other accrued liabilities Total Payable from restricted asset funds: Massachusetts Water Resources Authority assessment for water and sewerage City Bonds Total General Revenue Bonds Deferred revenues Total Current Liabilities NOTES 1987 5,030,822 4,054,777 9,085,599 1986 $ 6,154,860 3,041,058 9,195,918 5 42,322,893 34,663,756 4 689,436 747,023 43,012,329 35,410,779 4 7,152,511 18,604,763 8,548,984 1,2 21,010,789 77,855,202 74,166,470 OTHER LIABILITIES: Massachusetts Water Resources Authority assessment for water and sewerage City Bonds General Revenue Bonds Deferred revenues Other liabilities Total Other Liabilities COMMISSION EQUITY: Contributed capital Accumulated deficit Total Commission Equity TOTAL 5 4 4 1,2 29,066,270 2,885,000 193,461,826 68,697,369 2,354,328 18,242,304 3,525,000 195,201,294 58,947,651 3,827,794 296,464,793 279,744,043 1 97,173,599 (5,546,696) 87,091,777 (5,546,696) 91,626,903 81,545,081 $465,946,898 $435,455,594 STATEMENTS OF OPERATIONS for the Years Ended December 31, 1987 and 1986 OPERATING REVENUES: Water and sewer usage Fire pipe Other Total Operating Revenues NOTE TOTAL WATER SEWER 1987 1986 1987 1986 1987 1986 $70,103,869 $62,487,001 $32,553,268 $30,681,253 1,021,521 742,152 1,021,521 742,152 1,127,391 853,753 515,218 418,339 $37,550,601 $31,805,748 612,173 435,414 72,252,781 64,082,906 34,090,007 31,841,744 38,162,774 32,241,162 OPERATING EXPENSES: Operations Engineering and administrative Maintenance Depreciation Total Operating Expenses 49,595,870 41,953,509 22,671,027 20,753,385 26,924,843 21,200,124 12,616,729 11,108,885 5,765,845 5,443,354 4,422,268 3,389,586 2,539,977 1,829,625 3,181,591 2,924,362 1,453,987 1,819,423 6,850,884 5,665,531 1,882,291 1,559,961 1,727,604 1,104,939 69,816,458 59,376,342 32,430,836 29,845,787 37,385,622 29,530,555 TOTM OPERAT ING INCOME 2,436,323 4,706,564 $ 1,659,171 $ 1,995,957 $ 777,152 $ 2,710,607 OTHER INCOME (EXPENSE): Interest income Interest expense 7,716,628 6,746,611 (15,568,111) (7,504,160) INCOME (LOSS) FROM CURRENT OPERATIONS 1 PRIOR YEAR RATE SURPLUS RECOGNIZED IN CURRENT YEAR CURRENT YEAR RATE SURPLUS DEFERRED TO SUBSEQUENT YEAR 1 (5,415,160) 3,949,015 8,863,251 4,914,236 (3,448,091) (8,863,251) NET INCOME -0- $ -0- See notes to financial statements. STATEMENTS OF COMMISSION EQUITY for the Years Ended December 31, 1987 and 1986 Balance, January 1, 1986 Contributions in Aid of Construction Depreciation of Related Property Balance, December 31, 1986 Contributions in Aid of Construction Depreciation of Related Property Balance, December 31, 1987 TOTAL CONTRIBUTED ACCUMULATED COMMISSION CAPITAL DEFICIT $(5,546,6961 EOUITY $72,514,229 $66,967,533 15,138,007 15,138,007 (560,459) (560,459) 87,091,777 (5,546,696) 81,545,081 10,707,286 10,707,286 (625,464) (625,464) $97,173,599 $(5,546,696) $91,626,903 See notes to financial statements. STATEMENTS OF CHANGES IN FINANCIAL POSITION for the Years Ended December 31, 198 7 and 1986 OPERATING ACTIVITIES: Net income Depreciation and amortization (no funds required) Realized from (used for): Accounts receivable -net Earned revenues in excess of billings- net Deferred charges Accounts payable, assessments, accrued liabilities and other Deferred revenues Total 1987 1986 ■0- $ -0- 3,677,254 3,243,407 647,968 (14,013,964) (2,772,284) 3,049,928 (16,445,027) (24,662,657) 16,159,025 886,051 7,343,692 9,184,726 8,610,628 (22,312,509) FINANCING ACTIVITIES: Bond: Proceeds Payments Contributions in aid of construction -net Debt issue costs Total 81,876,248 (2,850,000) (1,630,000) 10,081,822 14,577,548 (1,548,082 ) 7,231,822 93,275,714 INVESTING ACTIVITIES-Purchase of property, plant, and equipment (30,769,925) (27,589,812) CASH AND SECURITIES: Increase (decrease] during year Balances at beginning of year Balances at end of year (14,927,475) 43,373,393 142,052,466 98,679,073 $127,124,991 $142,052,466 YEAR-END BALANCES COMPRISED OF: Cash Current portion: Trusteed assets Nontrusteed assets Noncurrent portion: Trusteed assets Nontrusteed assets $ 241,950 $ 699,389 10,602,991 4,524,851 100,426,523 11,328,676 12,595,006 3,554,581 96,867,616 28,335,874 TOTM CASH AND SECURITIES $127,124,991 $142,052,466 See notes to financial statements. 10 NOTES TO FINANCIAL STATEMENTS ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES The Boston Water and Sewer Commission (the "Commission") has the responsibility to provide water and wastewater services on a fair and equitable basis in the City of Boston (the "City") as required under the Boston Water and Sewer Reorganization Act of 1977 (the "Enabling Act"). Under the Enabling Act, the Commission is required to maintain and present its financial statements in accordance with generally accepted accounting principles ("GAAP"). Also, the Commission has adopted a rate setting process which recognizes certain costs in periods other than when the costs are incurred. This is generally accepted as appropriate regulatory practice. To accommodate this rate setting process the Commission follows the accounting standards set forth under the Financial Accounting Standards Board Statement No. 71 ("FAS-71"), "Accounting for the Effects of Certain Types of Regulation." FAS-71 requires that under regulation a) revenues provided for future allowable costs are deferred until the costs are actually incurred (deferred revenues); b) allowable incurred costs are capi- talized if future recovery is assured (deferred charges). The following is a reconciliation outlining the effects of FAS-71 on the statement of operations for the years ended December 31, 1987 and 1986: 1987 1986 Income (loss) prior to deferrals $ (4,770,020) $ 2,631,615 Revenues and expenses deferred in accordance with FAS-71: Deferred revenues (12,546,479) (14,386,709) Deferred expenses 11 ,90 1 ,339 1 5,704, 1 09 Income (loss) from current operations $ (5,415,160) $ 3,949,015 The Enabling Act requires that any net surplus or deficit, as defined by the rate setting process, must either be returned to the City or applied to offset water and sewer rates for the following year. The Commission hasapplied $3,448,091, and $8,863,251 for the years ended December 31, 1987 and 1986, respectively, to offset rates in the respective subsequent years. Revenues Water and sewerage fees are billed to users of the systems on a quarterly cycle basis. Revenues are accrued for periods between the termination of billings for the various cycles and the end of the year. Trusteed and Non-Trusteed Assets These assets, consisting of direct and unconditionally guaranteed short-term obligations of the U.S. Government; repurchase agreements and money market units secured by government securities, are stated at cost plus accrued interest (approximating market). Property, Plant and Equipment Property, plant and equipment is stated at cost. Depreciation is provided on the straight-line method based on the estimated useful lives of the various classes of assets. Maintenance and repairs are charged to expense as incurred. Major renewals or betterments are capitalized and depreciated over their estimated useful lives. 60 to 100 10 to 40 40 to 35 3 to 75 15 Contributions received in aid of specific construction projects are considered contributed capital and are included in Commission equity. Accordingly, depreciation of the related property is charged directly to Commission equity and is not included in the accompanying statements of operations. The ranges of estimated useful lives used in computing depreciation are as follows: YEARS Water: Works Meters and hydrants Sewerage: Works Pumping station Other The Commission capitalizes interest cost related to construction of assets for its own use. Interest total- ing approximately $1,258,000 and $734,000 was capitalized in 1987 and 1986, respectively Bond Issue Costs Expenses related to the issuance of bonds are amortized on a weighted-average basis over the life of the bonds. Reclassification Certain prior year balances have been reclassified to conform with current year presentation. 2. DEFERRED CHARGES AND REVENUES The following is a summarization of the major components of deferred charges and revenues included in the accompanying balance sheet: 1987 1986 Deferred charges: Provision for pension settlement (see Note 7) Excess of amounts accrued for water and sewerage assessments over cash payments Provision for litigation claims and other accruals Provision for adjustments Excess of amounts accrued over cash payments- bond interest Total deferred charges Current deferred charges Noncurrent deferred charges Total Deferred revenues: Capital improvement reimbursements Principal payments on long-term debt Allowance for slow collection Other Total deferred revenues Current deferred revenue Noncurrent deferred revenue Total (OOO's omitted) $17,111 $17,707 42,403 23,938 2,675 1,485 2,928 2,228 4,848 5,276 $68,522 $52,077 $32,564 35,958 $22,506 29,571 $68,522 $52,077 $57,897 4,573 8,282 16,550 $45,803 8,175 9,682 16,299 $87,302 $79,959 $18,605 68,697 $21,011 58,948 $87,302 $79,959 3. PROPERTY, PLANT AND EQUIPMENT The cost of "water and se"werage plant and equipment in service and related accumulated depreciation at December 31, 1987 and 1986 are summarized as follows: 1987 1986 Water: Works Meters and hydrants $ 76,078,487 8,926,947 $ 63,189,978 8,228,903 Total water 85,005,434 71,418,881 Sewerage: Land Works Pumping station 195,482 77,030,797 6,781,316 195,482 54,002,202 6,777,290 Total sewerage 84,007,595 60,974,974 Other 8,541,307 6,622,028 Total Less accumulated depreciation 177,554,336 25,372,933 139,015,883 21,921,021 Total Construction in progress 152,181,403 56,472,626 117,094,862 63,970,833 Total $208,654,029 $181,065,695 4. BONDS PAiABLE Outstanding bonds pa"yable including accrued interest, at December 31, 1987 and 1986 "were as follows: 1987 1986 Revenue Bonds: 1 984 Series A, bearing interest at rates ranging from 6.75% to 10.5% with maturity dates ranging from January 1,1 988 to January 1,2011 $ 67,495,121 $ 67,991,521 1985 Series A, bearing variable interest rates (6.50% and 7.375% at December 31, 1987), maturing in two equal amounts on November 1, 2014 and 2015 and requiring annual sinking fund contributions through 2014 51,170,192 51,288,424 1986 Series A, bearing interest at rates ranging from 4.75% to 7.875% with maturity dates ranging from November 1,1988 to 2015 81,949,024 84,470,333 City Bonds, bearing interest at rates ranging from 4.25% to 8% with maturity dates ranging from November 1988 to December 1999 3,574,436 4,272,023 Total bonds outstanding 204,188,773 208,022,301 Less current portion due within one year including accrued interest 7,841,947 9,296,007 Portion due after one year, net of unamortized original issue discount $196,346,826 $198,726.294 The Resolution Establishing Issue of Revenue Bonds adopted by the Commission on December 6, 1984 places certain restrictions on the Commission's operations. It requires that rates, charges and fees be set at a level sufficient to meet a net revenue test on an annual basis and requires that all revenues, as defined, be deposited in a Revenue Fund maintained by a fiscal agent. Amounts held in the Revenue Fund are to be dis- bursed to and withdrawn from other funds provided for in the Resolution. The Resolution provides that all excess cash be held in the Revenue Fund until the last business day of the fiscal year. At that time, if certain cov- enants are met, the Commission has the option to remove any excess cash from the Revenue Fund and place such cash in a fund not restricted by the Resolution. In compliance with the Resolution, the Commission has established both trusteed and non-trusteed funds with assets, principally short-term securities, which are restricted for payment of specified liabilities. The Commission has options for early redemption of revenue bonds starting in 1995 at prices ranging from 103 to 100 percent of face value. Revenue Bonds The 1 984 Series A Bonds were issued in order to advance reftand a series of 1980 System Revenue Bonds. Under the Reftinding Trust Agreement, the Commission deposited sufficient funds with the 1980 Bond Trustee to pay when due, the principal and interest on all 1980 bonds through January 1, 2001, the final matu- rity date thereon. By depositing such funds with the 1980 Bond Trustee under the Refunding Trust Agreement, the Commission caused the 1980 Bonds to be no longer outstanding under the 1980 Resolution. The 1980 Bondholders have no right, title, interest or liens in any other funds, real or personal property or assets of the Commission other than the amounts held under the Reftinding Trust Agreement and pledged for their benefit thereunder. The 1985 Series A Bonds were issued to provide fiands for projects under the Commission's ongoing capital improvement programs and other capital and operating needs. In August of 1986, the Commission issued 1986 Series A General Revenue Bonds (1986 Bonds). This issue was structured as a rolling cross-over refunding and new money issue. The 1986 bonds provide funds for the Commission's ongoing capital improvement programs and other capital and operating needs. In addition, a portion of the proceeds of the 1986 bonds were deposited to the 1986 Series A Escrow Account to provide for the principal payments of the 1985 Series A Bonds and the interest payments of the 1986 bonds as they come due. Thus, the Commission is allowed to pay the low short-term interest rates provided under the 1985 bonds and has secured a guaranteed redemption for the 1985 bonds. City Bonds At the time of its creation, the Commission assumed general obligation certificates of indebtedness of the City (City Bonds) pertaining to the vrater and sewerage works systems. Payments for principal and interest are madedirectly to the City in accordance with the original maturity and interest schedule. Aggregate bond maturity and sinking ftind requirements of the Revenue bonds and City bonds at December 31, 1987 are as follows: YEAR TOTAL 1988 $ 2,900,000 1989 3,015,000 1990 3,180,000 1991 3,165,000 1992 3,380,000 Thereafter 190,545,000 Subtotal 206,185,000 Accrued interest 4,94 1 ,947 Unamortized debt discount (6,938,174 ) Total bonds payable $204,188,773 MASSACHUSETTS WATER RESOURCES AUTHORITY On January 1,1985, legislation became effective creating the Massachusetts Water Resources Author- ity (the Authority) which transferred possession, control and operations of the Metropolitan District Commis- sion (MDC) Waterworks and Sewer System to the Authority. The Authority commenced operations on July 1 , 1985. The Authority (previously MDC) provides all the Commission's water and sewer treatment require- ments and assesses the Commission for its actual operating and capital expenses. Payments for the prior calen- dar year's water and sewer treatment assessments are due semi-annually in November of the current year and in May of the subsequent year. Interest is not charged on the outstanding balance. Charges and assessments for 1987 and 1986 are as follows: 1987 1986 Water charges $21,720,502 $15,761,242 Wastewater assessments 31,127,262 20,723,367 Total $52,847,764 $36,484,609 In 1987 and 1986, approximately 67% of water purchased from the Authority was billable to custom- ers. Since its inception, the Commission has increased the percentage of billable water from 52% in 1977 to the current level of 67% in 1 987 and is continuing to take steps to improve the amount of water billable, including replacement of old and defective meters and a comprehensive leak detection and repair program. TRANSACTIONS WITH THE CITY OF BOSTON The Commission's ongoing program to meter City facilities has resulted in billings to nine City depart- ments based on actual consumption of $1,090,000 and $1,016,000 in 1987 and 1986, respectively The remaining four City departments were billed based on estimated consumption for $ 1 ,3 1 9,000 and $ 1 , 1 82,000 during 1987 and 1986, respectively. The City provides services to the Commission, including paving and fecilities rental. Operating costs billed by the City were $463,000 and $481,000 during 1987 and 1986, respectively Capital costs bUled by the City were $263,000 and $264,000 during 1987 and 1986, respectively RETIREMENT BENEFITS The Commission provides retirement benefits to substantially all of its employees through a pension trust fund (trust fund) and the State-Boston Retirement System (Boston System). The Commission's policy is to accrue the normal cost of future benefits using an actuarially determined rate of 6.75% and 1 1 . 1 4% of regular compensation in 1987 and 1986, respectively. Pension expense is generally funded annually and was $805,000 and $1,267,000 for 1987 and 1986, respectively The fair market value of trust fund net assets available for benefits was $ 1 1 ,442,000 and $ 1 0,984,000 at December 31, 1987 and 1986, respectively The trust fund reimburses the Boston System for the Commis- sion's share of all benefit payments made to its retired employees and related administrative costs. During 1986, a dispute concerning the Commission's past and future obligations to all employees cov- ered by the Boston System was settled, resulting in a payment of $19,100,000 to the Boston System. This pay- ment, funded primarily throught proceeds from bonds issued in 1985 and 1986, was recorded as a deferred charge to be recovered through future rates. 8. COMMITMENTS During 1987, the Commission moved its administrative offices. In conjunction with the move to new- offices, the Commission terminated its lease and a new lease was obtained for the new office space. The new lease provides for an initial term of five years with two options to extend the lease for additional five-year terms. The basic rent will include an allocation for building operating costs and is subject to an escalation clause sub- ject to certain limitations. Total rent expense charged to operations amounts to $820,000 and $758,000 in 1987 and 1986, respectively. A major capital improvement program is currently in progress. As part of this program, the Commis- sion has entered into a number of contracts for the design and construction of its facilities. Commitments under these contracts aggregate $1 1,107,000 at December 31, 1987. Capital improvements, primarily related to water and wastewater system projects with an emphasis on the clean-up of the Boston Harbor area, are expected to aggregate $65 million for 1987 through 1991. Of this amount $30 million represents extension and improve- ment projects to be ftinded by the proceeds of Commission revenue bonds and federal and state grants for cer- tain wastewater projects, and $35 million represents renewal and replacement projects to be funded by current revenues of the Commission. 9. CONTINGENCIES The Commission is involved in ordinary and routine litigation incidental to its operations. Manage- ment believes that the resolution of these matters will not materially affect the financial position of the Commission. The Commission has received federal and state grants for specific purposes that are subject to review and audit by the grantor agencies. Such audits could lead to requests for reimbursement to the grantor agency for expenditures disallowed under the terms of the grant. The Commission believes such disallowances, if any, will not be significant. The Commission is involved as a defendant in litigation regarding the pollution of Boston Harbor Management believes that, except for increases in future MWRA assessments incidental to the litigation, the Commission's extensive capital improvement program (see Note 8) addresses possible actions that the Commission may be required to undertake in connection with this litigation.