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"Since the Boston Water and Sewer Commission was created in 1977, it has 
served its customers through efficient management and effective delivery and mainte- 
nance of quality water and wastewater services," said A. Raymond Tye, chairman of 
the hoard which oversees the Boston Water and Sewer Commission. 

"Throughout the 1980s, the Commission established itself as a self-sufficient 
entity," continued Chairman Tye. "This past year, the Commission has undergone 
a reorganization to better meet the challenges of the 1990s — the cleanup of Boston 
Harbor and the demand for services created by a vibrant Boston economy." 

"The emphasis of the reorganization was to enhance accountability, specifically 
in the areas of service delivery, finance and management," said Mary Nee, commis- 
sioner of the Boston Water and Sewer Commission. 

Commissioner Lisa G. Chapnick added, "The Commission will be more respon- 
sive in addressing issues that concern our ratepayers, rangingfrom the financial and 
environmental impact of the Boston Harbor cleanup to the increased demand for 
water and sewer services. " 



Accountability 
To Customers 




Improving the delivery of services and the quality of 
life for its customers is the primary concern of the Boston 
Water and Sewer Commission. 

The Commission has aggressively improved its water 
and wastewater systems, components of which are over 
130 years old. 

An active leak detection program initiated by the 
Commission in 1978 has been a model for other cities. 
In 1988 alone, the Commission conducted a survey of 
95 percent of its 1182 miles of water main, locating 800 
underground leaks. By the end of the year, 72 percent of 
the leaks had been repaired. 

As a result of its leak detection and repair efforts, as 
well as its metering 
and pipe replacement 
programs, the Com- 
mission has been able 
to reduce its water 
purchases from the 
Massachusetts Water 
Resources Authority 
(MWRA) by 26 per- 
cent since 1978. 
These savings are 
passed along to its 
customers. 

A new meter 

reading system was introduced in September 1988. 
Electronic hand held devices now record readings for 
approximately 66 percent of the Commission's 87,000 
accounts. This provides more accurate readings, giving 
customers better service by reducing estimated readings 





and billing errors. 
Accurate meter read- 
ings provide a precise 
reflection of water 
sales, reduce billing 
adjustments and 
encourage 
conservation. 

The Boston Water 
and Sewer Commis- 
sion believes in being 
part of the neighbor- 
hoods it serves. At no 
additional cost to the 
Commission, representatives hold office hours in social 
service agencies in 15 convenient neighborhood locations 
throughout Boston. A customer service representative is 
available to accept payments, listen to service related 
complaints and process elderly and disabled discounts. 

The Commission has increased the discount offered 
to qualified homeowners 65 years of age and older and 
homeowners who are fully disabled. Eligible homeowners 
can now save 25 percent on their water bill. 

Community outreach makes the Commission more 
accessible to people. As the Commission's rates continue 
to escalate, it is important to provide quality service to its 
customers. The goal of the Commission is to provide this 
service, whether to individuals or to the largest commer- 
cial/industrial users, at the lowest possible cost. 



Boston Harbor 
Cleanup 




The Boston Water 
and Sewer Commis- 
sion is participating 
with the MWRA, the 
Department of Envi- 
ronmental Quality 
Engineering and the 
Environmental Pro- 
tection Agency in the 
cleanup of Boston 
Harbor. 

The Commission 
significantly contrib- 
utes in efforts to end 
the pollution of Boston Harbor through the ongoing 
maintenance and improvement of its sewer system. 

A major achievement was the completion in 1988 
of a multiphased project which included construction of 
the New East Side Interceptor and the New Boston Main 
Interceptor. The $60 million project, which began in 
1982, extends along the waterfront from Rowes Wharf to 
the MWRA headworks at Columbus Park. 

Finished one year ahead of schedule and under bud- 
get, the new interceptors provide added capacity for 
downtown development. Completion of the project vir- 




tually eliminates dry weather overflows into the inner 
harbor. The new interceptors are prepared to handle flows 
into the 21st century, ensuring improvement in the water 
quality of Boston Harbor. 

The Commission is committed to the challenge of 
modernizing a sewer system that is over 100 years old. 
In addition to installing new interceptors, these efforts 
include cleaning existing sewer interceptors and separat- 
ing combined sewers into sanitary and storm systems. 
These programs increase capacity to the Deer Island 
treatment plant, reducing overflows into the Boston 
Harbor during storm events. 

In late 1988, the Commission contracted for the 
replacement of 10 defective tidegates, eliminating the 
inflow of tidewater into the sewer system during high 
tide. These tidegates prevent the unnecessary treatment 
of extraneous flows and allow increased capacity for treat- 
ment of sewage at Deer Island. 

The Commission has always conducted its construc- 
tion projects in a cost-effective manner by working coop- 
eratively with other city, state and regional agencies. The 
Commission's ongoing evaluation and maintenance of 
both the water and sewer systems continues to protect the 
integrity of the system and the Commission's capital 
investment. 



Commission 
Goals 




FINANCIAL ACCOUNTABILITY 

Continued improvements in financial management 
capabilities resulted in the Boston Water and Sewer Com- 
mission being upgraded from A- to A by Moody's Inves- 
tor Service in April 1988. Taking advantage of favorable 
market conditions, the Commission completed a refund- 
ing bond issue which will result in present value interest 
cost savings of $3 million. These savings are directly 
passed along to ratepayers. 

The Commission restructured the entire budgeting, 
financial planning and rate setting process. Development 
of the capital improvement program is now more closely 
integrated with the rate setting and budget cycle. The 
budget and planning process weighs the priorities of the 
Commission in allocating limited resources for operations 
and capital improvements. Budget requests must be sup- 
ported by measurable performance objectives related to 
improved service delivery. 

A review of special charges, such as permits, inspec- 
tions and meter testing, took place to determine the full 
cost of providing services. Fees were adjusted to more 
accurately reflect these costs. 

While the Commission implemented a 28 percent 
rate increase to its customers in April 1988, much of the 
increase was due to increased wholesale water and sewer- 
age treatment services provided by the MWRA. As its 
biggest customer, the Commission shares the expense of 
upgrading the MWRAs regional water delivery and waste- 
water treatment systems. However, the success of the 
Commission's leak detection program together with close 
analysis of data used to determine MWRA sewer charges 
have resulted in overall cost savings of approximately 
$2.5 million. 



MANAGEMENT ACCOUNTABILITY: 
Reorganization/Revitalization 

'We have created a strong management team vital 
to the proactive development of the Commission," said 
David L. Conlon, acting executive director. "Results, 
performance, accountability and innovation will be the 
forces driving the Commission in the 1990s. " 

Over the past year, the Commission consolidated 
functions for better operating efficiency, developed clearer 
lines of accountability and initiated Commission-wide 
performance standards. The position of planning and 
program management director was created to integrate 
policy and strategic planning within the Commission. 

The administration and engineering departments 
were reorganized, and the operations department created. 
The treasurer/chief financial officer consolidated financial 
activities, while the director of public affairs continued to 
emphasize community outreach. 

In addition to creating a management team that 
was more responsive to the customer and to community 
issues, the Commission reaffirmed its commitment to 
reflect the population that it serves. The position of affir- 
mative action manager was created and a comprehensive 
affirmative action program is now in place. 

"One of our goals is to create a better working rela- 
tionship among the community our field operations and 
management. For many of our customers, our field opera- 
tions represents their first contact with the Commission," 
said Mr. Tye. "We encourage pride in our work through- 
out all levels of the Boston Water and Sewer Commission 
to better serve our customers. " 



Independent Auditors' Report 



Boston Water and Sewer Commission: 

We have audited the accompanying balance sheets of the Boston Water 
and Sewer Commission as of December 31, 1988 and 1987 (Restated) and 
the related statements of operations, of Commission equity and of cash 
flows for the years then ended. These financial statements are the responsi- 
bility of the Commission's management. Our responsibility is to express an 
opinion on these financial statements based on our audits. 

We conducted our audits in accordance with generally accepted audit- 
ing standards. Those standards require that we plan and perform the audit 
to obtain reasonable assurance about whether the financial statements are 
free of material misstatement. An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial state- 
ments. An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audits provide a rea- 
sonable basis for our opinion. 

In our opinion, such financial statements present fairly, in all material 
respects, the financial position of the Commission at December 31, 1988 
and 1987 and the results of its operations and its cash flows for the years 
then ended in conformity with generally accepted accounting principles. 

As discussed in Note 9 to the financial statements, the Commission 
has restated its previously issued 1987 financial statements. 



Re^a£/4*4^ *Sjl& 



DELOITTE HASKINS & SELLS 
Boston, Massachusetts 
April 14, 1989 



BALANCE SHEETS 
December 31, 1988 and 1987 (Restated) 



ASSETS 

CURRENT ASSETS: 

Cash and cash equivalents 

Accounts receivable, customers less allowances of 

$10,174,803 in 1988 and $8,160,000 in 1987 
Earned revenues in excess of billings less allowances of 

$641,623 in 1988 and $639,000 in 1987 
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 

6 
1,2,7,9 



1988 



1987 



$ 36,932,369 $ 15,369,792 
36,812,209 27,327,027 



7,134,473 

11,784,224 
1,585,750 
1,073,979 

10,427,415 



7,300,955 

19,299,357 

2,390,799 

721,792 

6,835,730 





105,750,419 


79,245,452 


1,4,7 


86,008,860 


100,426,523 


1,4 


2,614,295 


11,328,676 


1,3, 10 


228,925,916 


208,654,029 


L,2, 7, 9 


29,486,521 


19,282,240 


1 


3,989,837 


4,606,390 




$456,775,848 


$423,543,310 



See notes to financial statements 



LIABILITIES AND COMMISSION EQUITY 


Notes 
7 


1988 


1987 


CURRENT LIABILITIES: 
Payable from current assets: 
Accounts payable 
Other accrued liabilities 


$ 5,581,059 
3,763,845 


$ 5,030,822 
4,054,777 


Total 




9,344,904 


9,085,599 


Payable from restricted asset funds: 

Massachusetts Water Resources Authority 
assessment for water and sewerage 
City bonds 


9 

4 


2,495,227 
630,174 


689,436 


Total 




3,125,401 


689,436 


General revenue bonds 


4 


7,386,749 


7,152,511 


Deferred credits 


1,2 


30,752,850 


18,604,763 


Total current liabilities 




50,609,904 


35,532,309 


OTHER LIABILITIES: 
City bonds 

General revenue bonds 
Deferred credits 
Other liabilities 


4 

4 

1,2,9 


2,295,000 

204,632,803 

97,342,356 

1,674,126 


2,885,000 

193,461,826 

97,682,944 

2,354,328 


Total other liabilities 




305,944,285 


296,384,098 


COMMISSION EQUITY: 
Contributed capital 
Accumulated deficit 


1 


105,768,355 
(5,546,696) 


97,173,599 
(5,546,696) 


Total commission equity 




100,221,659 


91,626,903 


TOTAL 




$456,775,848 


$423,543,310 



STATEMENTS OF OPERATIONS 
For the years ended December 31, 1988 and 1987 (Restated) 



Total Water Sewer 



1987 1988 1987 1988 1987 



OPERATING REVENUES: 

Water and sewer usage $90,734,764 $70,103,869 $44,560,550 $32,553,268 $46,174,214 $37,550,601 

Fire pipe 1,378,635 1,021,521 1,378,635 1,021,521 

Other 813,539 1,127,391 382,363 515,218 431,176 612,173 

Total operating revenues 92,926,938 72,252,781 46,321,548 34,090,007 46,605,390 38,162,774 

OPERATING EXPENSES: 

Operations 61,353,142 49,595,870 27,832,594 22,671,027 33,520,548 26,924,843 
Engineering and 

administrative 14,409,642 12,616,729 6,585,206 5,765,845 7,824,436 6,850,884 

Maintenance 4,575,196 4,422,268 2,726,623 2,539,977 1,848,573 1,882,291 

Depreciation 3,901,230 3,181,591 1,782,862 1,453,987 2,118,368 1,727,604 

Total operating expenses 84,239,210 69,816,458 38,927,285 32,430,836 45,311,925 37,385,622 

TOTAL OPERATING 

INCOME 8,687,728 2,436,323 $ 7,394,263 $ 1,659,171 $ 1,293,465 $ 777,152 

OTHER INCOME (EXPENSE): 

Interest income 6,503,666 7,716,628 

Interest expense (15,642,921 ) (15,568,111 ) 

LOSS FROM CURRENT 

OPERATIONS (Note 1) (451,527) (5,415,160) 

PRIOR YEAR RATE SURPLUS 
RECOGNIZED IN 
CURRENT YEAR 3,448,091 8,863,251 

CURRENT YEAR RATE 
SURPLUS DEFERRED TO 
SUBSEQUENT YEAR 

(Note 1) (2,996,564 ) (3,448,091 ) 

NET INCOME $ -0- $ -0- 



See notes to financial statements 



STATEMENTS OF COMMISSION EQUITY 
For the years ended December 31, 1988 and 1987 (Restated) 



Balance, January 1, 1987 
Contributions in aid of construction 
Depreciation of related property 
Balance, December 31, 1987 
Contributions in aid of construction 
Depreciation of related property 
Balance, December 31, 1988 



Contributed 
Capital 


Accumulated 
Deficit 


Total 

Commission 

Equity 


$ 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 


9,373,194 




9,373,194 


(778,438) 




(778,438) 


$105,768,355 


$(5,546,696) 


$100,221,659 



See notes to financial statements. 



STATEMENTS OF CASH FLOWS 
For the years ended December 31, 1988 and 1987 (Restated) 



Notes 



OPERATING ACTIVITIES: 
Net income 

Adjustments to reconcile net income to net cash: 
Depreciation and amortization 
Loss on disposals of property, plant and equipment 
Change in assets and liabilities: 
Accounts receivable — net 
Earned revenues in excess of billings — net 
Deferred charges 

Accounts payable, assessments, accrued liabilities 
and other 
Deferred credits 
Total 



$ -0- 

5,453,874 
100,346 

420,750 

166,482 

(13,795,966) 

11,914,179 
11,807,499 
16,067,164 



1987 



3,677,254 



647,968 
(2,772,284) 
2,038,076 

(2,324,078) 
7,343,692 

8,610,628 



FINANCING ACTIVITIES: 

Proceeds of debt issuance 

Payment for defeasance of bond principal and interest 

Payment of debt issuance costs 

Payment of principal on bonds 

Proceeds of contributions in aid of construction — net 

Total 



54,290,112 

(51,498,254) 

(1,071,345) 

(2,900,000) 

8,594,756 

7,415,269 



(2,850,000) 

10,081,822 

7,231,822 



INVESTING ACTIVITIES: 

Purchase of property, plant and equipment 

Proceeds from investment maturities and sales - 

Total 



(25,051,900) (30,769,925) 
23,132,044 13,448,291 

(1,919,856) (17,321,634 ) 



CASH AND CASH EQUIVALENTS: 
Increase (decrease) during year 
Balance, beginning of year 

Balance, end of year 

YEAR-END BALANCES COMPRISED OF: 

Cash 

Current portion: 

Trusteed assets 

Nontrusteed assets 



1,4,7 
1,4 



Total cash and cash equivalents 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 
Cash paid during the year for interest 
(net of amount capitalized) 



21,562,577 
15,369,792 



199,636 

13,925,770 
22,806,963 



See notes to financial statements 



(1,479,184) 
16,848,976 



$36,932,369 $15,369,792 



241,950 

10,602,991 
4,524,851 



$36,932,369 $15,369,792 



i!5,682,944 $17,072,171 



Notes to Financial Statements 



1. Organization, Basis of Presentation and 
Summary of Significant Accounting 
Principles 

The Boston Water and Sewer Commission (the "Commis- 
sion") 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 Reorga- 
nization 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 rec- 
ognizes 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 credits); b) allowable incurred costs are 
capitalized if future recovery is assured (deferred charges). 

The following is a reconciliation outlining the effects of 
FAS-71 on the statements of operations for the years ended 
December 31, 1988 and 1987: 



1987 
(Restated) 



Income prior to deferrals 
Revenues and expenses deferred 

in accordance with FAS-71: 

Deferred revenues 

Deferred expenses 
Loss from current operations 



',439,775 $ 6,921,150 



3,669,739) (12,546,479) 
778,437 210,169 



(451,527) $(5,415,160) 



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 has applied $2,996,564, and 
$3,448,091 for the years ended December 31, 1988 and 1987, 
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 NONTRUSTEED 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. Deprecia- 
tion is provided on the straight-line method based on the esti- 
mated 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 esti- 
mated useful lives. 

Contributions received in aid of specific construction proj- 
ects 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: 



Water: 

Works 

Meters and hydrants 
Sewerage: 

Works 

Pumping station 
Other 



60 to 100 
10 to 40 

40 to 75 

35 
3 to 15 



The Commission capitalizes interest costs related to con- 
struction of assets for its own use. Interest totaling approxi- 
mately $660,000 and $1,258,000 was capitalized for the years 
ended December 31, 1988 and 1987 respectively. 

STATEMENT OF CASH FLOWS 

In 1988, the Commission adopted Statement of Financial 
Accounting Standards No. 95, "Statement of Cash Flows." 
Accordingly, the accompanying financial statements include 
statements of cash flows replacing the statements of changes 
in financial position presented in prior years. The 1987 finan- 
cial statements have been restated to conform with the 1988 
presentation. 

The Commission considers all highly liquid, short-term cash 
investments to be cash equivalents. 

BOND ISSUE COSTS 

Expenses related to the issuance of bonds are amortized on 
a weighted-average basis over the life of the bonds. 

2. Deferred Charges and Credits 

The following is a summarization of the major components 
of deferred charges and credits included in the accompanying 
balance sheet: 



3. Property, Plant and Equipment 

The cost of water and sewerage plant and equipment in 
service and related accumulated depreciation at December 31, 
1988 and 1987 are summarized as follows: 



1987 
(Restated) 



(000's omitted) 



Deferred charges: 

Provision for pension settlement 

(see Note 7) 
Loss on debt defeasance 
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 credits: 

Capital improvement reimbursements 
Principal payments on long-term debt 
Allowance for slow collection 
Working capital at inception of 

Commission 
Provision for additional working 

capital 
Other 
Total deferred credits 

Current deferred credits 
Noncurrent deferred credits 

Total 



17,111 



16,933 
11,069 

2,732 
743 

8,437 4,848 

39,914 $ 26,119 



2,675 
1,485 



10,427 $ 6,836 
29,487 19,283 



39,914 $ 26,119 



55,308 $ 57,897 

6,160 4,573 

8,282 8,282 

28,986 28,986 



10,159 
19,200 



16,550 



il28,095 $116,26 



30,753 
97,342 



18,605 
97,683 



Water: 
Works 

Meters and hydrants 
Total water 
Sewerage: 
Land 
Works 

Pumping station 
Total sewerage 
Other 
Total 

Less accumulated 
depreciation 

Total 

Construction in progress 
Total 



83,217,000 
9,559,755 



76,078,487 
8,926,947 



92,776,755 85,005,434 



195,482 

132,419,951 77,030,797 

6,781,316 6,781,316 

139,201,267 84,007,595 

10,017,442 8,541,307 



241,995,464 177,554,336 



29,789,897 



25,372,933 
212,205,567 152,181,403 



16,720,349 56,472,626 



$228,925,916 $208,654,029 



;128,095 $116,288 




4. Bonds Payable 

Outstanding bonds payable including accrued interest, at 
December 31, 1988 and 1987 were as follows: 



Revenue Bonds: 

1984 Series A, bearing 
interest at rates ranging 
from 8.25% to 10.5% 
with maturity dates 
ranging from January 1, 
1989 to January 1,2011 

1985 Series A, bearing a 
variable interest rate 
(7.25% at December 31, 
1988), maturing in two 
equal amounts on 
November 1, 2014 and 
2015 and requiring 
annual sinking fund 
contributions through 
2014 

1986 Series A, bearing 
interest at rates ranging 
from 5.9% to 7.875% 
with maturity dates 
ranging from November 
1, 1989 to 2015 

1988 Series A, bearing 
interest at rates ranging 
from 6.0% to 7.4% with 
maturity dates ranging 
from November 1, 1989 
to 2008 

City Bonds, bearing interest 
at rates ranging from 
5.1% to 9.5% with 
maturity dates ranging 
from December 1989 to 
December 1999 

Total bonds outstanding 

Less current portion due 
within one year including 
accrued interest 

Portion due after one year, 
net of unamortized 
original issue discount 



1 988 



1987 



25,048,342 $ 67,495,121 



50,411,868 51,170,192 



81,131,143 81,949,024 



55,428,199 



2,925,174 3,574,436 



214,944,726 204,188,773 
8,016,923 7,841,947 



The Resolution Establishing Issue of Revenue Bonds 
adopted by the Commission on December 6, 1984 places cer- 
tain 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 reve- 
nues, as defined, be deposited in a Revenue Fund maintained 
by a fiscal agent. Amounts held in the Revenue Fund are to be 
disbursed 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 covenants are met, the Com- 
mission 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 nontrusteed funds with assets, 
principally short-term securities, which are restricted for pay- 
ment of specified liabilities. The Commission has options for 
early redemption of revenue bonds starting in 1995 at prices 
ranging from 103 to 100% of face value. 

REVENUE BONDS 

The 1984 Series A Bonds were issued in order to advance 
refund a series of 1980 System Revenue Bonds. Under the 
Refunding Trust Agreement, 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 Refunding Trust Agreement and pledged for 
their benefit thereunder. 

The 1985 Series A Bonds were issued to provide funds for 
projects under the Commission's ongoing capital improvement 
programs and other capital and operating needs. 



$206,927,803 $196,346,826 



In August of 1986, the Commission issued 1986 Series A 
General Revenue Bonds (1986 Bonds). This issue was struc- 
tured 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 guar- 
anteed redemption for the 1985 bonds. 

In December of 1988, the Commission issued 1988 Series 
A bonds to provide for the defeasance of a portion of the Com- 
mission's General Revenue Bonds 1984 Series A, to provide 
supplemental funding for the Operating Reserve Fund and to 
pay costs of issuance. Under the 1988 Refunding Trust Agree- 
ment the Commission deposited sufficient funds with the 1984 
Bond Trustee to pay when due, the principal and interest on the 
refunded bonds until the first call date, January 1, 1995. As a 
result, the refunded bonds are no longer outstanding under the 
Commission's Resolution. 

CITY BONDS 

At the time of its creation, the Commission assumed gen- 
eral obligation certificates of indebtedness of the City (City 
Bonds) pertaining to the water and sewerage works systems. 
Payments for principal and interest are made directly to the 
City in accordance with the original maturity and interest 
schedule. 

Aggregate bond maturity and sinking fund requirements 
of the Revenue bonds and City bonds at December 31, 1988 are 
as follows: 



Year 



Total 




Subtotal 
Accrued interest 
Unamortized debt discount 
Total bonds payable 



5. Massachusetts Water Resources Authority 

The Massachusetts Water Resources Authority (the Author- 
ity) provides all the Commission's water and sewer treatment 
requirements and assesses the Commission for its actual oper- 
ating and capital expenses. Payments to the Authority are due 
in four installments in March, May, September and November. 
Interest is not charged on the outstanding balance. Charges and 
assessments for 1988 and 1987 are as follows: 



1987 
(Restated) 



Assessments allocated on 

water usage 
Assessments allocated on 

sewer usage 
Total 



$18,415,728 $14,951,135 

24,778,849 19,413,527 
$43,194,577 $34,364,662 



$ 3,115,000 
3,780,000 
3,805,000 
4,060,000 
4,230,000 
197,670,000 
216,660,000 
4,901,924 
(6,617,198) 

$214,944,726 



During 1988 and 1987, approximately 67% of water 
received from the Authority was billable to customers. Since 
its inception, the Commission has increased the percentage of 
billable water from 52% in 1977 to the current level of 67% 
in 1988 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. 

6. Transactions with the City of Boston 

The Commission's ongoing program to meter City facili- 
ties has resulted in billings to nine City departments based 
on actual consumption of $1,249,000 and $1,090,000 in the 
1988 period and 1987, respectively. The remaining four City 
departments were billed based on estimated consumption for 
$1,564,000 and $1,319,000 during the 1988 period and 1987, 
respectively. 

The City provides services to the Commission, including 
paving and facilities rental. Operating costs billed by the City 
were $520,000 and $463,000 during 1988 and 1987 respec- 
tively. Capital costs billed by the City were $361,000 and 
$263,000 during the 1988 period and 1987, respectively. 



7. Retirement Benefits 

The Commission provides retirement benefits to sub- 
stantially all of its employees through a pension trust fund 
(trust fund) and the State-Boston Retirement System (Boston 
System). During 1986, a dispute concerning the Commission's 
past and future obligations to all Commission employees cov- 
ered by the Boston System was settled, resulting in a payment 
of $19,100,000 to the Boston System. This payment, funded 
primarily through 1985 and 1986 bond proceeds, was recorded 
as a deferred charge to be recovered through future rates. 

As part of the settlement with the Boston System, the 
Commission annually reimburses the City for the Commis- 
sion's share of pension benefits paid to Commission employees. 
The Commission's share is based upon the proportion of each 
employee's total years of creditable service that were spent with 
the Commission. Employees become 100% vested after 10 years 
of creditable service as defined by Chapter 32 of the Massachu- 
setts General Laws. 

The Commission's covered payroll in 1988 was 
$13,570,544. Total payroll for all Commission employees was 
$15,085,956. As of December 31, 1988 there were 98 retired 
and inactive employees, 153 vested active employees and 
365 nonvested active employees. Employee contributions are 
defined under M.G.L. c. 32. For the year ended December 31, 
1988 total employee contributions were $863,522 or 6.36% 
of covered payroll. 

As required by the Commission's Enabling Act employee 
pension contributions are transferred to the Boston System 
and are either returned to employees upon termination or 
for vested employees are used to defray a portion of the total 
retirement benefit. The Commission's policy is to make addi- 
tional contributions to the pension trust fund based upon the 
actuarially determined cost of future benefits net of employee 
contributions. 

The fair market value of trust fund net assets available 
for benefits was $14,095,301 and $11,442,000 at December 
31, 1988 and 1987 respectively. Trust fund assets at December 
31, 1988 consisted of $4,146,601 in U.S. Government securi- 
ties, $7,213,562 in stocks and convertible securities and 
$2,602,612 in cash and cash equivalents. 

Total unfunded pension benefit obligation (assets in excess 
of pension benefit obligation) applicable to the Commission's 
employees was $(5,453,000) on December 31, 1988 deter- 
mined as follows: 



Pension Benefit Obligation: 

Retirees and beneficiaries 

currently receiving benefits 
Current Employees: 

Employer-financed vested 
Employer-financed nonvested 
Total Pension Benefit 
Obligation 
Net assets available for benefits 

Assets in excess of Pension Benefit 
Obligation 



$ 1,685,000 

2.790,000 
3,954,000 

$ 8,429,000 
13,882,000 

$(5,453,000) 



The amount shown as the Pension Benefit Obligation 
is a standardized disclosure measure of the present value of 
pension benefits, adjusted for the effects of projected salary- 
increase, estimated to be payable in the future as a result of 
employees service to date. The measure is intended to help 
users assess the funding status of the system on a going concern 
basis, assess progress made in accumulating sufficient assets to 
pay benefits when due and make comparisons among systems. 
The measure is independent of the actuarial funding method 
used to determine contributions to the pension trust fund. 

The Pension Benefit obligation was computed as part of an 
actuarial valuation performed as of January 1, 1989. Significant 
actuarial assumptions used to calculate the pension benefit 
obligations include a rate of return on investment of present 
and future assets of 9% a year compounded annually and pro- 
jected salary increases of 7% a year, compounded annually. 

The Commission's funding policy has been to provide for 
quarterly employer contributions to the trust fund based upon 
an actuarially determined rate using the aggregate actuarial 
cost method. For the year ended December 31, 1988 the Com- 
mission's contributions totaled $916,012 or 6.75% of the cov- 
ered payroll. A new actuarial valuation is currently underway 
which will reassess the Commission's contribution rate. His- 
torical information on the Commission's pension plan is not 
available. 

8. Deposits and Investments 

The Commission maintains certain accounts and funds in 
accordance with its General and Supplemental Bond Resolu- 
tions. All deposits and withdrawals to and from these accounts, 
as well as investment of the funds, are governed by the Resolu- 
tions. With the exception of the Operating and Maintenance 
Fund, the Project Funds and the Insurance Reserve, all funds of 
the Commission are administered by the Trustee as specified in 
the Resolution. 

Trusteed and nontrusteed deposits and investments of the 
Commission at December 31, 1988 were as follows: 



Demand Deposits and Cash 
Interest Bearing Deposits 
Money Market Accounts 
Corporate Securities 
U.S. Government Securities 
Total 

Unrestricted 

Restricted 

Total 



Trusteed 
I 2,648,677 
28,170,951 
4,515,381 
44,572,944 
20,026,677 



Nontrusteed 
$ 7,122.803 
11,698,218 
2,025,688 

4,574,549 



99,934,630 25,421.258 

$4,031,955 
$99,934,630 21,389.303 
$99,934,630 S25.421.258 



The Commission maintains deposits at several financial 
institutions, providing a total of $400,000 in Federal Deposi- 
tory Insurance (FD1C). At December 31, 1988, nontrusteed 
deposits and investments of the Commission include a 
$500,000 repurchase agreement held in the Commission's 
name at a bank. 



9. Restatement 

The Commission has restated its 1987 financial statements 
to reflect changes in its accounting for the Massachusetts Water 
Resources Authority (MWRA) assessments from those utilized 
in its previously issued financial statements; namely, its liability 
recognition methods for recording MWRA assessments due in 
future periods and the related effects of this change on deferred 
charges and deferred credits accounted for under FAS-71 (See 
Note 1): 

The following is a summary of the financial statement 
amounts which were affected by the restatement: 





Previously 
Reported 


As 
Restated 


Deferred Charges: 

Current 

Non Current 
Payable for MWRA Assessment: 

Current 

Non Current 
Deferred Credits: 


$32,563,431 
35,958,127 

42,322,893 
29,066,270 


$ 6,835,730 
19,282,240 


Current 
Non Current 


18,604,763 
68,697,369 


18,604,763 
97,682,944 



NOTE 1 TO FINANCIAL STATEMENTS: 

The following is a reconciliation outlining the effects of 
FAS-71 on the statement of operations for the year ended 
December 31, 1987: 



Previously 
Reported 



As 
Restated 



Income (loss) prior to deferrals $(4,770,020)$ 6,921,150 
Revenues and expenses 

deferred in accordance with 

FAS-71: 

Deferred revenues (12,546,479) (12,546,479) 

Deferred expenses 11,901,339 210,169 

Loss from current operations $ (5,415,160 ) $ (5,415,160) 



10. Commitments 

During 1987, the Commission moved its administrative 
offices. The 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 subject to certain 
limitations. In 1988 the Commission entered into an additional 
three-year lease of a vehicle maintenance facility. Total rent 
expense charged to operations amount to $1,025,000 and 
$820,000 for the years ended December 31, 1988 and 1987, 
respectively. 

A major capital improvement program is currently in 
progress. As part of this program, the Commission has entered 
into a number of contracts for the design and construction of 
its facilities. Commitments under these contracts aggregate 
approximately $33.6 million at December 31, 1988. Capital 
improvements, primarily related to water and wastewater sys- 
tem projects with an emphasis on the clean-up of the Boston 
Harbor area, are expected to aggregate approximately $145 mil- 
lion for 1987 through 1991. Of this amount, approximately 
$109 million represents extension and improvement projects 
and $36 million represents renewal and replacement projects. 
Prior to 1988, the Commission funded renewal and replace- 
ment projects through current revenues. During 1988, the 
Commission adopted a uniform policy of funding all capital 
improvement projects (both extension and improvements and 
renewal and replacement projects) through Commission reve- 
nue bonds or federal and state grants. The effect of this change 
is to reduce the Commission's current operating expenses by 
$5,627,000 in the 1988 period. 

11. Contingencies 

The Commission is involved in ordinary and routine litiga- 
tion incidental to its operations. Management believes that the 
resolution of these matters will not materially affect the finan- 
cial 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 reim- 
bursement to the grantor agency for expenditures disallowed 
under the terms of the grant. The Commission believes such 
disallowance, 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 inci- 
dental to the litigation, the Commission's extensive capital 
improvement program (see Note 10) addresses possible actions 
that the Commission may be required to undertake in connec- 
tion with this litigation.