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Working in our streets. 




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Working in our communities. 




Boston Water and Sewer Commission 



2002 Annual Report 



Digitized by the Internet Archive 

in 2010 with funding from 

Boston Public Library 



http://www.archive.org/details/annualreport2002bost 




Executive Director's Letter for 2002 Annual Report 



Throughout 2002, the Boston Water and Sewer Commission continued its overall objective to provide Boston's 
residents, businesses and visitors v\/ith the highest quality w/ater and sewer services possible. Despite difficult 
fiscal times for all of Massachusetts, the Commission achieved numerous accomplishments within the City's water 
and sewer systems. 

In 2002, the Commission continued its efforts for consistent improvements to the City's water distribution system. 
BWSC maintained an extensive network of water mains, valves and hydrants to provide an uninterrupted supply 
of high quality, potable water at adequate pressure for consumption and fire protection. Water mains were relayed 
and relined and older hydrants were replaced as necessary on all projects. The Commission exceeded its yearly 
goal of 17 miles of new or rehabilitated pipe throughout the City of Boston. 

The Commission launched SmartRead, its automated meter reading system, in November 2002 beginning with 
the Allston and Brighton communities. Over the next three years, every home and business in Boston will be 
upgraded with the new SmartRead system. This system will increase water accountability and will greatly improve 
the level of service to Commission customers. Daily readings from these new water meters will virtually eliminate 
the need for estimated bills and will provide an excellent tracking of our water usage. 

The Commission has been working diligently on sewer separations as a part of the Massachusetts Water 
Resources Authority's Combined Sewer Overflow (CSO) Reduction Program. The purpose of these projects is to 
reduce discharge into our neighboring tributaries by utilizing the existing "combined" sewer system and splitting it 
into two separate systems — one for sanitary flow and one for stormwater flow. The Dorchester Sewer Separation 
project completed the first two major projects of its eight-contract site. Construction contracts also continued on 
the Stony Brook Sewer Separation project. This CSO program is another way over the years, and particularly in 
2002, that the Commission has assisted in reducing pollution levels in Dorchester Bay, Muddy River, Chartes 
River and Boston Harbor. 

By redesigning business processes and using new technologies, the Commission continues to increase its efficiency 
enabling it to provide the highest quality water and sewer services possible in the most cost effective manner. 




Boston Water and Sewer Commission • 2002 Annual Report ^^ Page 1 



Page 2 ^^ Boston Water and Sewer Commission • 2002 Annual Report 



Independent Auditors' Report 



The Commissioners 

Boston Water and Sewer Commission: 

We have audited the accompanying statements of net assets of the Boston Water and Sewer Commission (the 
Commission) as of December 31, 2002 and 2001, and the related statements of operations and cash flows for 
the years then ended. These financial statements are the responsibility 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 auditing standards generally accepted in the United States of 
America. 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 statements. 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 reasonable basis for our opinion. 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial 
position of the Commission at December 31, 2002 and 2001, and the results of its operations and its cash 
flows for the years then ended in conformity with accounting principles generally accepted in the United States 
of America. 

As discussed in note l(k), the Commission adopted the provisions of GASB Statements No. 34, Basic Financial 
Statements — and Management's Discussion and Analysis — for State and Local Governments,- No. 37, Basic 
Financial Statements — and Management's Discussion and Analysis — for State and Local Governments — 
Omnibus; and No. 38, Certain Financial Statements Note Disclosures effective January 1, 2001. 

The Management's Discussion and Analysis on pages 4 through 7 is not a required part of the basic financial 
statements, but is supplementary information required by accounting principles generally accepted in the United 
States of America. We have applied certain limited procedures, which consisted principally of inquiries of man- 
agement regarding the methods of measurement and presentation of the required supplementary information. 
However, we did not audit the information and express no opinion on it. 

Our audits were made for the purpose of forming an opinion on the basic financial statements. The accompany- 
ing supplemental schedule of revenues and expenses — rate basis is presented for purposes of additional anal- 
ysis and is not a required part of the basic financial statements. Such information has been subjected to the 
auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated 
in all material respects in relation to the basic financial statements taken as a whole. 



k^M<Sr U-T 



March 28, 2003 



Boston Water and Sewer Commission • 2002 Annual Report ^^ Page 3 




Management's Discussion and Analysis 



Required Supplementary Information 
December 31, 2002 and 2001 



Since its creation in 1977, tine Boston Water and Sewer Commission (tine Commission) assumed the responsibility to 
provide water distribution, wastewater collection and storm water drainage services in the City of Boston (the City). 

The Commission has realized surplus from its operation in each year since its inception. In accordance with the 
Boston Water and Sewer Reorganization Act of 1977, the Commission applies audited surpluses to reduce its rates 
in succeeding years. 

To accommodate the rate-mal<ing process, the Commission follows the accounting standards set forth in Statement 
of Financial Accounting Standards (SFAS) No. 71. SPAS No. 71 allows certain (a) revenues provided for future 
allowable costs to be deferred until the costs are actually incurred (deferred credits) and (b) costs incurred to be 
capitalized if future recovery is reasonably assured (deferred charges). 

Condensed financial information from the statements of net assets and operations is presented in this section of the 
report. The statement of net assets provides information on the assets and liabilities of the Commission, with net 
assets reported as the difference between assets and liabilities. The statement of operations of the Commission 
reflects all revenues earned and all expenses incurred for each of the years ended December 31, 2002 and 2001. 



Condensed Financial Information 

Current assets 
Capital assets, net 
Other assets 



2002 

f 27,527,877 
627,393,255 
280,074,598 



2001 

f 23,727,006 
589,487,908 
303,994,651 



Total assets 



934,995,730 



917,209,565 



Current liabilities 
Noncurrent liabilities 



31,755,677 
717,989,162 



32,127,384 
722,037,239 



Total liabilities 



749,744,839 



754,164,623 



Net assets: 

Invested in capital assets, net of related debt 
Restricted net assets 
Unrestricted net assets 



210,369,633 
136,568,617 
(161,687,359) 



168,564,280 
146,249,913 
(151,769,251) 



Total net assets 



$185,250,891 



$163,044,942 



In 2002, the Commission's net assets totaled $185.3 million, an increase of $22.2 million, or 13.6% from the previ- 
ous year. The Commission recognized surplus of only $0.4 million in both FY02 and FYOl. Total assets in FY02 
were $935.0 million, an increase of $17.8 million, or 1.9% from last year's (FYOl) total assets of $917.2 million. 
The Commission invested in various capital assets, including capital improvement projects, machinery and equip- 
ment, buildings and improvements. These investments totaled $627.4 million, up $37.9 million, or 6.4% over the 
previous year's total investment in capital assets. 



Page 4 



Boston Water and Sewer Commission • 2002 Annual Report 




Management's Discussion and Analysis 



Required Supplementary Information 
December 31, 2002 and 2001 



Operating revenues: 

Water and sewer usage 

Fire pipe 

Other 



Total operating revenues 



Operating expenses: 

Operations 
Maintenance 
MWRA assessment 
Depreciation and amortization 



Total operating expenses 



Excess operating revenues 



Nonoperating revenue (expense): 

Investment income 
Interest expense 



$187,074,121 

2,922,124 

14,393,107 



204,389,352 



46,135,304 

6,974,382 

122,737,010 

17,001,481 



192,848,177 



11,541,175 



11,709,410 
(16,827,500) 



$173,054,018 

2,690,551 

10,851,618 



188,596,187 



44,329,620 

6,537,991 

117,674,466 

15,376,188 



183,918,265 



2,677,922 



17,289,911 i 
(17,793,752) 



Total nonoperating expense 


(5,118,090) 


(503,841) 


Excess revenues before capital grants and contributions, 

and transfer requirements 
Capital grants and contributions 


6,423,085 
25,169,817 


2,174,081 
12,244,871 


Excess revenues before transfer requirements 

Excess revenues used to fund reserves and ottner deferrals 
Accumulated revenues used to offset future rates — beginning of year 


31,592,902 

(31,575,719) 
421,425 


14,418,952 

(23,872,097) 
9,874,570 


Accumulated revenues used to offset future rates — end of year 


$ 438,608 


$ 421,425 



Water and sev\/er charges in FY02 represented 91.5% of operating revenues. Water and sewer charges totaled 
$187.1 million, which was $14.0 million, or 8.1% higher than the same period the prior year, due primarily to a 
rate increase of 8.9% in water and sewer charges in 2002. The Commission accrued billing adjustments at 3.0% 
and bad debts at 0.5% of accrued water and sewer charges for the year. Additionally discounts were accrued at 
1.0% of unbilled water revenue. Total operating revenues in FY02, which include fire pipe and other revenues, 
totaled $204.4 million, representing an increase in total operating revenue of $17.8 million, or 9.5% higher than 
the same period the prior year. 

Direct operating expenses in FY02 totaled $192.8 million, which was $8.9 million, or 4.9% over direct operating 
expenses the same pehod the phor year. This unfavorable variance resulted from a substantial increase in the 
MWRA assessment. Investment income decreased by $5.6 million in 2002, offset slightly by a favorable vahance 
of $1.0 million in interest paid, reflecting the low interest rate environment in FY02. 



Boston Water and Sewer Commission • 2002 Annual Report 



^f 



Page 5 




Management's Discussion and Analysis 

Required Supplementary Information 
December 31, 2002 and 2001 



Capital Assets 

In fiscal year 2002, major Commission's project additions totaled $22.8 million, of which $8.9 million were financed 
with bond proceeds. Major project expenditures (in millions) are as follows: 

Relay of water mains • $3.9M 

Reline of water mains 3.2IV1 

Rehabilitation/replacement of sewers or storm drains 4.9M 

Interceptor improvements 3.4M 

Separation of combined sewers 2.5M 

Infiltration and inflow 0.9M 

Meter replacement 4.0M 

The Commission's 2003-2005 capital budget includes projected expenditures of $167.7 million for infrastructure 
and capital projects. The major projects are for the rehabilitation of water mains and the replacement/rehabilitation 
of the sewer system along with the installation of a new radio frequency meter-reading system. Some water projects 
are financed on a pay-as-you-go cash basis combined with an interest-free loan for water rehabilitation provided by 
the MWRA. The majority of the sewer improvements along with the installation of a new radio frequency meter- 
reading system will be financed through bond proceeds. 

Debt Plan 

The Commission is empowered by the Boston Water and Sewer Reorganization Act of 1977 (the Enabling Act) to 
issue bonds and notes payable solely constituted on the general obligation of the Commission. The Commission has 
no legal restrictions concerning the amount of debt, which it may have outstanding, subject to the coverage require- 
ments described below. 

The Commission issues General Revenue Bonds to finance portions of its capital improvement projects. The 
Commission's 2003-2005 capital budget, which totals $167.7 million, anticipates that projects totaling $102.5 
million, or 61.1% of the Commission's 2003-2005 capital budget, will be funded from bond proceeds. The 2003 
budget for debt service is $30.3 million. 

The Commission currently has seven senes of General Revenue Bonds outstanding at the end of 2002; totaling 
approximately $322.8 million. 



$ 30.8 M 

$ 91.0 M 

$ 35.1 M 

$ 13.0 M 

$ 11.2 M 
$122.7 M 

$ 19.0 M 



llion 1992 Series A 

llion 1993 Series A 

llion 1994 Series A 

llion 1998 Series A 

llion 1998 Series C 

llion 1998 Series D 

llion 2002 Series A 



In 2002, the Commission completed a successful refunding of the callable portion of the 1992 Series A Bonds, 
which generated a net present value savings of $1.5 million. 



Page 6 ^& Boston Water and Sewer Commission • 2002 Annual Report 



Management's Discussion and Analysis 

Required Supplementary Information 
December 31, 2002 and 2001 



Debt Service Coverage Requirements 

The Commission's bond covenant requires that rates and charges be at least sufficient to provide revenues (i) to 
pay all current expenses of the Commission, (ii) to pay the principal of, premium if any, and interest on all bonds 
issued by the Commission as they become due and payable, (ill) to create and maintain such reasonable reserves 
as may be reasonably required by any trust agreement or resolution securing bonds, (iv) to provide funds for paying 
the cost of all necessary repairs, replacements and renewal of the systems and (v) to pay or provide for any and all 
amounts w/hich the Commission may be obligated to pay or provide for by law or contract. The Commission is also 
required to establish and maintain rates and charges at levels sufficient so that total net revenues in each year dur- 
ing which bonds are outstanding will equal at least 125% of (1) the bond debt service requirement during such 
year less (2) the amount, if any, of bond proceeds available to pay interest becoming due in such year on bonds 
outstanding as of the first day of such year. The Commission has exceeded the 125% debt service coverage 
requirement of the Resolution in each year since its inception in 1977. 



Additional Bonds and Refunding Bonds 

The Enabling Act permits the issuance of additional bonds for paying the cost of any project, making deposits in 
various funds established under the Enabling Act, paying costs of issuance, paying the principal, premium and 
interest on any notes issued in anticipation of additional bonds, or any combination of the above. 

Refunding bonds may also be issued by the Commission only upon certifying that the aggregate debt service in 
each fiscal year in which Refunding Bonds are outstanding will not be increased as a result of the issuance of the 
Refunding Bonds; provided that, in lieu of such certification, the Commission may deliver to the Trustee certificates 
satisfying the conditions described above for the issuance of additional bonds. 



Next Year's Budgets and Rates 

The Commission from 1994 to 2001 was able to maintain its water and sewer rates to its customers without an 
increase. Additionally the Commission is required by law to be self-sustaining, to set its rates at a level sufficient to 
cover expenses and debt service requirements each year. The Commission instituted a combined rate increase of 
8.9% in fiscal years 2002 and 2003. The major reasons behind this increase are: (i) the increase in assessment 
paid to the Massachusetts Water Resource Authority (MWRA), and (ii) the decline in water sales due to general 
water conservation efforts of individuals and businesses throughout the City 



Boston Water and Sewer Commission • 2002 Annual Report 



^f 




statements of Net Assets 

December 31, 2002 and 2001 



Assets 

Current assets: 

Cash and cash equivalents (note 9) $ 9,340,446 $ 7,072,158 

Accounts receivable, net: 

Customers, less allowances of $5,435,458 in 2002 and 2001 (note 1) 7,567,520 8,130,567 

Unbilled revenues, less allowances of $1,702,361 in 2002 and 2001 8,873,762 6,910,585 

Construction grants receivable 1,325,497 1,282,682 

Prepaid expenses 420,652 331,014 



See accompanying notes to financial statements. 



Total current assets 21, ^21 fill 23,727,006 



Noncurrent assets: 

Restncted cash and investments (notes 4 and 9) 252,141,542 273,941,597 

Capital assets: 

Depreciable, net (note 3) 481,188,905 484,328,338 

Nondepreciable (note 3) 146,204,350 105,159,570 

Deferred charges (note 2) 25,775,674 27,762,709 

Bond issue costs, net 2,157,382 2,290,345 



Total noncurrent assets 907,467,853 893,482,559 



Total assets 934,995,730 917,209,565 



Liabilities 

Current liabilities: 

Payable from current assets: 

Accounts payable 11,200,001 12,188,635 

Other accrued liabilities 5,568,561 5,907,724 

Current portion of long-term notes (note 4) 5,207,115 5,076,025 

Current portion of revenue bonds (note 4) 9,780,000 8,955,000 



Total current liabilities 31,755,677 32,127,384 



Noncurrent liabilities: 

Long-term debt, net (note 4) 310,577,189 320,321,133 

Long-term notes payable (note 4) 38,527,699 33,136,635 

Other long-term liabilities 18,884,754 27,966,905 

Deferred credits and resen/es (note 2) 349,999,520 340,612,566 



Total noncurrent liabilities 717,989,162 722,037,239 



Total liabilities 749,744,839 754,164,623 



Net Assets 

Net assets: 

Invested in capital assets, net of related debt 210,369,633 168,564,280 

Restricted for debt service 41,230,234 41,929,867 

Restricted for capital assets 57,465,923 67,145,401 

Restncted for debt covenants 37,872,460 37,174,645 

Unresthcted net assets (161,687,359) (151,769,251) 



Commitments and contingencies (notes 10, 11, 12, and 13) 

Total net assets $185,250,891 $163,044,942 



Page 8 ^S Boston Water and Sewer Commission • 2002 Annual Report 




statements of Operations 

Years Ended December 31, 2002 and 2001 



Operating Revenues: 

Water and sewer usage $187,074,121 $173,054,018 

Fire pipe 2,922,124 2,590,551 

Other 14,393,107 10,851,618 



See accompanying notes to financial statements. 



Total operating revenues 204,389,352 186,596,187 

Operating expenses: 

Operations 46,135,304 44,329,620 

Maintenance 6,974,382 6,537,991 

MWRA assessment (note 6) 122,737,010 117,674,466 

Depreciation and amortization 17,001,481 15,376,188 



Total operating expenses 


192,848,177 


183,918,265 


Excess operating revenues 


11,541,175 


2,677,922 


Nonoperating revenue (expense): 

Investment income 


11,709,410 


17,289,911 



Interest expense (16,827,500) (17,793,752) 

Total nonoperating expense (5,118,090) (503,841) 

Excess revenues before capital grants and contributions 

and transfer requirements 6,423,085 2,174,081 

Capital grants and contributions 25,169,817 12,244,871 



Excess revenues before transfer requirements 31,592,902 14,418,952 

Excess revenues used to fund reserves and other deferrals (note 2) (31,575,719) (23,872,097) 

Accumulated revenues used to offset future rates — beginning of year 421,425 9,874,570 

Accumulated revenues used to offset future rates — end of year $ 438,608 $ 421 ,425 



Boston Water and Sewer Commission • 2002 Annual Report ^^ Page 9 




statements of Cash Flows 

Years Ended December 31, 2002 and 2001 



Cash flows from operating activities: 

Receipts from customers 
Payments to suppliers 
Payments to employers 



Net casli provided by operating activities 



Casli flows from investing activities: 

Sale of investments 
Investment income 



Net cash provided by investing activities 



Cash flows from capital and related financing activities: 

Purctiase of property, plant and equipment 
Proceeds from debt 
Payment of bond principal 
Capital contributions 
Payment of bond interest 



Net cash used in capital and related financing activities 



Net increase (decrease) in cash and cash equivalents 

Casti and cash equivalents, beginning of year 



Cash and cash equivalents, end of year 



Reconciliation of operating income to net cash provided by 
operating activities: 

Excess operating revenues 

Adjustment to reconcile operating income to net cash: 

Excess revenues used to fund reserves and other deferrals 
Depreciation and amortization 
Change in assets and liabilities: 
Accounts receivable, net 
Unbilled revenues 
Construction grants receivable 
Prepaid expenses 
Accounts payable 
Other accrued liabilities 
Deferred credits and reserves 
Other long-term liabilities 



Net cash provided by operating activities 



See accompanying notes to financial statements. 



$193,559,454 

(146,365,943) 

(31,618,396) 



15,575,115 



21,800,055 
11,709,410 



33,509,465 



(51,725,764) 
24,527,155 

(27,960,000) 
25,169,817 

(16,827,500) 



(46,816,292) 



2,268,288 

7,072,158 



9,340,446 



11,541,175 

(9,386,954) 
17,001,481 

563,047 

(1,963,177) 

(42,815) 

(89,638) 

(988,634) 

(339,163) 

8,361,943 

(9,082,150) 



$ 15,575,115 



$185,533,532 

(143,937,948) 

(29,622,043) 



1 1 ,973,541 



34,220,459 
17,289,911 



51,510,370 



(53,196,589) 

817,997 

(8,550,000) 

12,244,871 

(17,793,752) 



(66,477,473) 



(2,993,562) 

10,065,720 



7,072,158 



2,677,922 

(4,911,852) 
15,376,188 

2,474,147 

1,380,405 

(5.354) 

29,449 

(2,699,027) 

(82,065) 

4,911,852 

(7,178,124) 



$ 11,973,541 



Page 10 



Boston Water and Sewer Commission • 2002 Annual Report 




Notes to Financial Statements 

December 31, 2002 and 2001 



(1) Organization, Basis of Presentation, and 
Summary of Significant Accounting Policies 

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 subject to regula- 
tion with respect to rates, accounting and other matters, where 
applicable, by the board of commissioners (the Board). The 
Board is appointed by the City's Mayor subject to confirmation 
by the City Council. It regulates the rates that the Commission 
can charge its customers for water and sewer usage. The rates 
charged to customers are based on the cash required for the 
Commission's operations, debt service and reserve contribu- 
tions. However, there is no legally adopted budget that the 
Commission must adhere to. To comply with the external finan- 
cial reporting requirements of the Board, the accompanying 
financial statements are presented on a basis that is consistent 
with generally accepted accounting principles (GAAP) for 
regulated utilities (i.e., the accrual basis of accounting and 
the capital maintenance measurement focus). 

To accommodate the rate-making process, the Commission 
follows the accounting standards set forth in Statement of 
Financial Accounting Standards (SFAS) No. 71, Accounting 
for the Effects of Certain Types of Reguiation. SFAS No. 71 
allows certain (a) revenues provided for future allowable costs 
to be deferred until the costs are actually incurred (deferred 
credits) and (b) costs incurred to be capitalized if future recov- 
ery is reasonably assured (deferred charges). Revenues and 
expenses appearing in the supplemental schedule of revenues 
and expenses — rate basis are presented in the same format 
as utilized in the Commission's operational budgeting and rate- 
setting process. The revenues and expenses shown on the 
statements of operations are presented on a GAAP basis. A 
reconciliation between the revenues and expenses of these two 
operating statements for the year ended December 31, 2002 is 
provided in the next column: 



Expenses 



As presented in the statements 
of operations: 



Operating revenues/expenses 


$204,389,352 


$192,848,177 


Other revenues/expenses 


11,709,410 


16,827,500 


Total 


216,098,762 


209,675,677 


Reclassifications and deferrals: 






Provision for working capital 


570,428 


— 


Revenue adjustments/bad debt expense (5,603,254) 


(5,603,254) 


Excess bond payments over 






depreciation and amortization 


— 


(2,859,762) 


Interest expense (escrowed funds) 


— 


(1,030,056) 


Investment income (escrowed funds) 


(2,533,616) 


— 


Capital expenditures 


— 


8,900,324 


Excess revenue used to offset 






current rates 


421,425 


— 


Other deferrals 


154,592 


(413,200) 


As presented In the supplemental 






schedule 


$209,108,337 


$208,869,729 



The Enabling Act requires that any net surplus, as defined by 
the rate-setting process, be either turned over to the City or 
applied to offset water and sewer rates for the following year 
The Commission has applied $438,608 and $421,425 for the 
years ended December 31, 2002 and 2001, respectively, to 
offset rates in the respective subsequent years. 

(a) Revenue Biliings 

Water and sewerage fees are billed to users of the systems 
on a monthly cycle basis. Revenues are accrued for periods 
between the termination of billings for the various cycles 
and the end of the year. Various adjustments are made on 
a post-billing basis that reduce the amount of total billings. 
Accordingly, the 2002 and 2001 total customer bills outstand- 
ing of $23,022,758 and $23,585,805, respectively, have been 
reduced by provisions for billing adjustments and sewer abate- 
ments of $10,019,780 in 2002 and 2001, respectively. These 
net billing amounts are further reduced by an allowance for 
uncollectible accounts of $5,435,458 in 2002 and 2001, 
respectively, to arrive at net accounts receivable. 

(b) Investments 

Investments are stated at fair value. Fair value is determined 
based on quoted market price. 



Boston Water and Sewer Commission • 2002 Annual Report 



Page 11 






Notes to Financial Statements 

December 31, 2002 and 2001 



(c) Capital Assets 

Capital assets are stated at tiistorical cost. Depreciation is pro- 
vided on tlie straight-line mettiod based upon 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. 

The Commission capitalizes interest costs during construction 
of assets for its own use. No interest was capitalized in 2002 
or 2001 because the amount calculated was not material. 

(d) Compensated Absences 

Various employees of the Commission accumulate unused sick 
time (subject to certain limitations) to be used at a later date or 
a percentage paid in cash upon voluntary resignation and/or 
retirement from the Commission (subject to Commission poli- 
cies and/or bargaining agreements). The liability for vacation 
leave is based on the amount earned but not used; for sicl< 
leave, it is based on a percentage of the amount accumulated 
at the balance sheet date. The liability for both amounts is cal- 
culated based on the pay or salary rates in effect at the balance 
sheet date. 

(e) Depreciation 

The Commission provides for depreciation using the straight- 
line method. Estimated useful lives used in computing depreci- 
ation are as follows: 



Water 


Years 


Sewerage 


Years 


Worlds 


100 


Worlds 


75 


Meters 


10 


Pumping station 


35 


Hydrants 


40 


Buildings 


40 






Other 


4 to 14 



(f) Capital Grants and Contributions 

The Commission receives capital grants and contributions from 
governmental agencies, individuals, and the City in aid of spe- 
cific construction projects. In fiscal 2001, the Commission 
adopted GASB Statement No. 33, Accounting and Financial 
Reporting for Nonexchange Transactions, which requires capi- 
tal grants and contributions to be reported as capital contribu- 
tion revenue. The amount recorded as revenue in fiscal 2002 
and 2001 was $25,169,817 and $12,244,871, respectively. 

(g) Cash Equivalents 

The Commission considers all highly liquid, short-term cash in- 
vestments with original maturities of three months or less to be 
cash equivalents for purposes of the statements of cash flows. 

(h) Bond Issue Costs 

Expenses related to the issuance of bonds are amortized on 
a weighted average basis over the life of the bonds, which 
approximates the effective interest method. 



(i) Proprietary Activity Accounting and Financial Reporting 

Under the Governmental Accounting Standards Board (GASB) 
Statement No. 20, Accounting and Financial Reporting for 
Proprietar/ Activities, the Commission has elected to apply all 
Financial Accounting Standards Board (FASB) statements and 
interpretations issued on or before November 30, 1989 except 
those that conflict with or contradict GASB pronouncements. 

Proprietary funds distinguish operating revenues and expenses 
from nonoperating items. Operating revenues and expenses 
result from providing services in connection with ongoing oper- 
ations. All revenues and expenses not meeting this definition 
are reported as nonoperating revenues and expenses. 

(j) Use of Estimates 

The preparation of financial statements in conformity with 
generally accepted accounting principles requires management 
to mal<e estimates and assumptions that affect the reported 
amounts of assets and liabilities, and disclosure of contingent 
assets and liabilities, at the date of the financial statements 
and the reported amounts of revenues and expenses during 
the reporting period. Actual results could differ from those 
estimates. 

(k) New Reporting Model 

The Commission adopted the provisions of Governmental 
Accounting Standards Board Statement No. 34, Basic 
Financial Statements — Ivlanagement's Discussion and 
Analysis — for State and Local Governments; Statement 
No. 37, Basic Financial Statements — and Management's 
Discussion and Analysis — for State and Local Governments: 
Omnibus: and Statement No. 38, Certain Financial Statement 
Note Disclosures (Statement 38), effective January 1, 2001. 
Statement 34 establishes financial reporting standards for all 
state and local governments and related entities. There was no 
effect on equity as a result of implementing GASB Statement 
No. 34. However, a new presentation of equity, net assets, 
resulted from the adoption of this Statement. The other 
changes included the presentation of management's discus- 
sion and analysis, and the preparation of the statement of 
cash flows on the direct method. 

Statement No. 38 establishes and modifies certain financial 
statement note disclosure requirements to make the financial 
statements more useful in the context of the Statement 34 
reporting model. Statement No. 38 had an impact on the notes 
to the financial statements, but no impact on net assets. 

(I) Reclassifications 

Certain 2001 amounts have been reclassified to conform with 

the 2002 presentation. 



Page 12 



Boston Water and Sewer Commission • 2002 Annual Report 




Notes to Financial Statements 



December 31, 2002 and 2001 



(2) Deferred Charges and Credits 

As discussed in note 1, the application of SFAS No. 71 results 
in certain revenues and expenses being removed from the 
statements of operations and reflected in the statement of net 
assets as deferred charges or deferred credits. The revenues 
and expenses that have been removed from the statements 
of operations and added to the statements of net assets as 
deferred credits appear in the line "Excess revenues used to 
fund reserves, increase contributed capital, and other defer- 
rals" on the statements of operations. The components of 
these amounts are as follows: 



The components of deferred charges included in the accom- 
panying statement of net assets are as follows: 





2002 


2001 


Deferred loss on land-taking 
Accrued pension expense 
Debt extinguishment expense 


$ 5,968,799 
12,394,168 
7,412,707 


$ 6,189,868 
12,955,715 
8,617.126 


Total deferred charges 


$25,775,674 


$27,762,709 



The activity in and components of deferred credits and 
reserves included in the accompanying statement of net assets 
is as follows: 



Provision for working capital 
Provision for capitalized interest 


$ (570,428) 

(154,593) 

13,580,172 

(1,030,056) 

8,900,324 

(14,037,612) 

2,533,616 
148,348 


$ (570,428) 

(154,593) 

12,809,815 

(1,085,996) 

11,138,500 

(12,638,416) 

4,723,977 
142,138 




December 31, 
2001 


Increase 
(decrease) 


December 31, 
2002 


Principal payments on long-term debt 
Interest paid from escrow funds 
Capital expenditures 
Depreciation and amortization 


Debt service 
Capital improvements 
Working capital 
Self-insurance 


$124,445,837 

188,406,450 

25,098,854 

2,240,000 


$ - 
9,940,199 
(570,428) 


$124,445,837 

198,346,649 

24,528,426 

2,240,000 


Investment income on project 

and escrow funds 
Other 


Reduction of future rates 


340,191,141 
421,425 


9,369,771 
17,183 


349,560,912 
438,608 


Total deferred credits 
and reserves 


$340,612,566 


$9,386,954 






$ 9,369,771 


$14,364,997 


$349,999,520 



(3) Capital Assets 

The cost and activity of water and sewerage capital assets in service and related accumulated depreciation at December 31, 2002 
and 2001 are as follows: 



Balance at 

December 31, 

2001 



Capital assets, not being depreciated: 

Land 

Construction in progress 



I 2,519,243 
102,640,327 



Total capital assets not being depreciated 



105,159,570 



Capital assets, being depreciated: 

Buildings and improvements 
Machinery and equipment 
Infrastructure 



57,163,359 
21,020,097 
528,990,646 



Total capital assets being depreciated 



607,174,102 



Less accumulated depreciation ton 

Buildings and improvements 
Machinery and equipment 
Infrastructure 



Total accumulated depreciation 



122,845,764 



Total capital assets being depreciated, net 



484,328,338 



Capital assets, net 



$589,487,908 



52,889,919 



52,889,919 



2,567,169 

959,113 

8,315,016 



11,841,298 



846,237 


1,551,523 


12,501,524 


2,295,685 


109,498,003 


11,133,523 



14,980,731 



(3,139,433) 



$49,750,486 



',139 



11,845,139 



$11,845,139 



Balance at 

December 31, 

2002 



I 2,519,243 
143,685,107 



146,204,350 



59,730,528 
21,979,210 
537,305,662 



619,015.400 



2,397,760 
14,797,209 
120.631.526 



137,826,495 



481,188.905 



$627,393,255 



Boston Water and Sewer Commission • 2002 Annual Report 



Page 13 






Notes to Financial Statements 

December 31, 2002 and 2001 





Balance at 

December 31, 

2000 


Increases 


Decreases 


Balance at 

December 31, 

2001 




Capital assets, not being depreciated: 

Land 

Construction in progress 


$ 2,519,243 
116,837,021 


$ - 
52,266,498 


$ - 
66,463,192 


$ 2,519,243 
102,640,327 


^ 


Total capital assets not being depreciated 


119,356,264 


52,268,498 


66,463,192 


105,159,570 




Capital assets, being depreciated: 

Buildings and improvements 
Machinery and equipment 
Infrastructure 


12,971,948 
18,638,578 

514,032,617 


48,392,169 
3,480,269 
15,528,846 


4,200,758 

1,098,750 

570,817 


57,163,359 
21,020,097 
528,990,646 




Total capital assets being depreciated 


545,843,143 


87,401,284 


5,870,325 


607,174,102 




Less accumulated depreciation for: 

Buildings and improvements 
Mactiinery and equipment 
Infrastructure 


4,697,316 
11,424,627 
99,289,290 


346,680 
2,166,079 
10,702,272 


4,197,759 

1,089,182 

493,559 


846,237 

12,501,524 
109,498,003 




Total accumulated depreciation 


115,411,233 


13,215,031 


5,780,500 


122,845,764 




Total capital assets being depreciated, net 


430,231,910 


54,186,253 


89,825 


484,328,338 




Capital assets, net 


$549,588,174 


$106,452,751 


$86,553,017 


$589,487,908 





During 1999, tine Boston Redevelopment Auttiority (BRA) took land owned by the Commission througti eminent domain. 
Tine book value of ttie land, at the time of the taking, was $7,598,710. A portion of this loss, $6,632,000, has been included 
in deferred charges in the accompanying statements of net assets as that amount will be recovered through future rates. The 
Commission was paid no compensation for the land and does not expect to receive any consideration from BRA in the future. 



Page 14 



Boston Water and Sewer Commission • 2002 Annual Report 




Notes to Financial Statements 

December 31, 2002 and 2001 



(4) Long-Term Obligations 

The Commission issues revenue bonds to support various projects. 

The following is a summary of revenue bond activity for the years ended December 31, 2002 and December 31, 2001 (amounts in 
thousands). 



Description 



Balance at 

December 31, 

2001 





Balance at 


Amounts 




December 31, 


due within 


Reductions 


2002 


one year 



Revenue bonds: 

1992 Series A, bearing interest 
rates ranging from 5.5% to 
5.75%, with maturity dates 
ranging from November 1, 
2002 to 2013 

1993 Series A, bearing interest 
rates ranging from 4.6% to 
5.25%, with maturity dates 
ranging from November 1, 
2002 to 2019 

1994 Series A, bearing a variable 
interest rate, with maturity 
dates ranging from 
November 1, 2002 to 2024 

1998 Series A, bearing interest 
rates ranging from 5.0% to 
5.125%, with maturity dates 
ranging from November 1, 
2014 to 2015 

1998 Series C, bearing interest 
rates ranging from 4.5% to 
5.2%, with maturity dates 
ranging from November 1, 
2002 to 2021 

1998 Series D, bearing interest 
rates ranging from 4.5% to 
5.0%, with maturity dates 
ranging from November 1, 

2002 to 2028 

2002 Series A, bearing interest 
rates ranging from 2.0% to 
3.0%, with maturity dates 
ranging from November 1, 

2003 to 2007 



$21,870 



2,700 



2,825 



12,960 



11,270 



125,125 



19,005 



122,730 



19,005 



2,505 



3,640 



Less: 

Unamortized loss on refundiqg 
Unamortized issue discount 



19,005 
1,025 



2,209 



776 



322,815 



1,025 
1,433 



9,780 



Net revenue bonds 



$329,276 



$17,980 



$26,899 



$320,357 



$9,780 



Boston Water and Sewer Commission • 2002 Annual Report 



^f 



Page 15 



Notes to Financial Statements 

December 31, 2002 and 2001 



Description 



Revenue bonds: 

1991 Series A, bearing interest 
at a rate of 6.5%, with a 
maturity date of 
November 1, 2001 

1992 Series A, bearing interest 
rates ranging from 5.5% to 
5.75% with maturity dates 
ranging from November 1, 
2001 to 2013 

1993 Series A, bearing interest 
rates ranging from 4.6% to 
5.25%, with maturity dates 
ranging from November 1, 
2001 to 2019 

1994 Series A, bearing a variable 
interest rate, with maturity 
dates ranging from 
November 1, 2001 to 2024 

1998 Series A, bearing interest 
rates ranging from 5.0% to 
5.125%, with maturity dates 
ranging from November 1, 
2014 to 2015 

1998 Series C, bearing interest 
rates ranging from 4.5% to 
5.2%, with maturity dates 
ranging from November 1, 
2001 to 2021 

1998 Series D, bearing interest 
rates ranging from 4.5% to 
5.0%, with maturity dates 
ranging from November 1, 



Balance at 

December 31, 

2000 





Balance at 


Amounts 




December 31, 


due within 


Reductions 


2001 


one year 



$ 1,045 



55,665 



$1,045 



2,985 



1,515 



700 



52,680 



93,650 



3,150 



11,280 



2001 to 2028 


127,420 


— 


2,295 


125,125 


2,395 


less unamortized issue discount 


340,035 
2,460 


— 


8,550 
251 


331,485 
2,209 


8,955 . 


Net revenue bonds 


$337,575 


$ - 


$8,299 


$329,276 


$ 8,955 



Page 16 



Boston Water and Sewer Commission • 2002 Annual Report 




Notes to Financial Statements 



December 31, 2002 and 2001 



Annual sinking fund requirements and debt principal and 
interest maturities for all future years are as follows (amounts 
in ttiousands): 

Revenue bonds 
Principal Interest 



2003 

2004 

2005 

2006 

2007 

2008-2012 

2013-2017 

2018-2022 

2023-2027 

2028 



10,095 
10,535 
10,910 
11,435 
80,925 
77,810 
63,005 
40,305 
8,015 



16,392 
16,018 
15,624 
15,189 
14,712 
62,004 
40,416 
21,047 
7,593 
334 



$322,815 



$209,329 



(a) Prior Year Debt Refunding 

In the aggregate, $155,155,000 remains outstanding at 
December 31, 2002, on the bond issues that were defeased 
"in-substance" during prior years. 

(b) Trusteed and Nontrusteed Casli and Investments 
The Commission has established both trusteed and non- 
trusteed funds with investments, principally short-term securi- 
ties, which are restricted for payment of specified liabilities, 
capital projects, or other costs of operations. The components 
of the trusteed and nontrusteed investments at December 31, 
2002 and 2001 are as follows: 



Trusteed: 

U.S. Treasury notes $ 22,198,506 $ 34,163,251 

Other government obligations 96,777,725 90,814.967 

Money market and cash investments 6,741,136 1,131,389 

Open-ended mutual funds 10,818,223 6,435,585 

Commercial paper 34.891,713 51,159,166 

Repurchase agreements 8.416,250 8,416,250 



$179,843,553 $192,120,608 



Nontrusteed: 






Other government obligations 


$ 617,126 


$ 853,408 


Money market and cash investments 


1,233,368 


1,746,361 


Open-ended mutual funds 


57,450,439 


20,827,533 


Commercial paper 


12,997,05 


12,624.774 


Repurchase agreements 


— 


45,768,913 




72,297,989 


81,820,989 




252,141,542 


273,941,597 


Less trusteed and nontrusteed cash 


(7,974,504) 


(2,877,749) 


Trusteed and nontrusteed 






investments 


$244,167,038 


$271,063,848 



(c) Long-Term Notes Payable 

During 1997 and 1996, the Commission executed loan agree- 
ments with the IVlassachusetts Water Pollution Abatement 
Trust (MWPAT) to finance and refinance a portion of the 
Commission's water pollution abatement projects. As of 
December 31, 2002, an aggregate amount of $32,334,700 
was received by the Commission. For purposes of offsetting 
principal and interest payments, an amount aggregating 
$15,290,956, consisting of contract assistance payments from 
the Commonwealth of Massachusetts and other interest subsi- 
dies from MWPAT, will be recognized as capital grants over the 
remaining term of the loan. 



The scheduled loan payments for all MWPAT obligations and related subsidies are shown below (amounts in thousands): 



Loan subsidy amounts 



Scheduled loan repayments 





Principal 


Interest 


Total 


2003 


$ 1,395 


$1,261 


$2,656 


2004 


1,446 


1,191 


2,637 


2005 


1,510 


1,115 


2,625 


2006 


1,573 


1,031 


2,604 


2007 


1,647 


940 


2,587 


2008-2012 


9,493 


3,177 


12,670 


2013-2017 


6,520 


681 


7,201 



Equity 
earnings 



Contract 
assistance 
payments 



Principal 



Net loan repayments 



Interest 



$ 619 
581 
542 
501 
458 



852 



1,438 



926 
952 



$ 259 
247 



1,199 



859 


1,401 


992 


232 


1,224 


862 


1,363 


1,029 


212 


1,241 


862 


1,320 


1,075 


192 


1,267 


4,260 


5,828 


6,217 


625 


6.842 


2.114 


2,470 


4,633 


98 


4.731 



$23,584 



$9,336 



$32,980 



$4,625 



$10,666 



$15,291 



$15,824 



$1,865 $17,689 



Boston Water and Sewer Commission • 2002 Annual Report 



Page 17 







m 

J 
Notes to Financial Statements 










Decern 


ber 31, 2002 and 2001 








The Commission lias entered into 


various interest-free loa 


1 agreements with the Massachusetts Water Resources 


Authority 




(the Authority). Under these agreements, the Commission 


is required to 


repay these loans in annual installments 


as part of the 




Authority's Infiltration/Inflow Local Financial Assistance program (I/I), Local Water Infrastructure Rehabilitation Pre 


gram (WIR) 




and Pipeline Assistance Program 


(PAP). These programs are designed to assist service area communities with sewer system 




rehabilitation. 














The following is a summary of Ion 


g-term note activities for the years ended December 31, 2002 


and 2001. 








Balance at 






Balance at 


Amounts 






December 31, 






December 31, 


due within 




Description 


2001 


Additions 


Reductions 


2002 


one year 




MWRA I/I Program Phase II, interest 














free, due November 15, 2003 


$ 549,194 


$ - 


$ 327,397 


$ 221,797 


$ 221,797 




MWRA I/I Program Phase III, interest 














free, due November 15, 2004 


1,748,067 


— 


659,649 


1,088,418 


659,649 




MWRAW.I.R. Program, interest 














free due November 15, 2004 


3,361,786 


— 


1,945,771 


1,416,015 


1,083,494 




MWRA PA.P. Program, interest 














free due November 15, 2011 


7,743,515 


10,480,250 


799,116 


17,424,649 


1,847,141 




MWPAT Pool 1, subsidized interest. 














dueAugust 1,2013 


7,837,653 


— 


483,396 


7,354,257 


507,298 




MWPAT Pool II, subsidized interest. 














dueAugust 1,2015 


6,876,086 


— 


340,358 


6,535,728 


357,378 




MWPAT Pool III, subsidized interest. 














due February 1,2017 


10,096,359 


— 


402,409 


9,693,950 


530,358 




Total long-term notes 


$38,212,660 


$10,480,250 


$4,958,096 


$43,734,814 


$5,207,115 






Balance at 






Balance at 


Amounts 






December 31, 






December 31, 


due within 




Description 


2000 


Additions 


Reductions 


2001 


one year 




MWRA I/I Program Phase II, mterest 














free, due November 15, 2003 


$ 1,101,076 


$ - 


$ 551,882 


$ 549,194 


$ 327,397 




MWRA I/I Program Phase III, interest 














free, due November 15, 2004 


2,407,716 


— 


659,649 


1,748,067 


659,649 




MWRAW.I.R. Program, interest free, 














dueNovember 15, 2004 


5,307,556 


— 


1,945,770 


3,361,786 


1,945,771 




MWRA PA.P Program, interest free, 














due November 15, 2011 


2,476,351 


5,514,799 


247,635 


7,743,515 


799,116 




MWPAT Pool 1, subsidized interest. 














dueAugust 1,2013 


8,297,443 


— 


459,790 


7,837,653 


483,396 




MWPAT Pool II, subsidized interest, 














due August 1,2015 


7,204,158 


— 


328,072 


6,876,086 


340,358 




MWPAT Pool III, subsidized interest. 














due February 1, 2017 


10,600,359 


— 


504,000 


10,096,359 


520,338 




Total long-term notes 


$37,394,659 


$ 5,514,799 


$4,696,798 


$38,212,660 


$5,076,025 







Page 18 



Boston Water and Sewer Commission • 2002 Annual Report 




Notes to Financial Statements 

December 31, 2002 and 2001 



(5) Current Refunding 

On November 1, 2002, the Commission issued $19,005,000 
in Series A General Revenue Refunding Bonds witli an interest 
rate range of 2.0% to 3.0% to refund an $18,720,000 portion 
of outstanding 1992 Series A General Revenue Bonds witfi an 
interest rate range of 5.7% to 6.1%. The new bonds require 
five debt service payments with the final payment due on 
November 1, 2007. The net proceeds of $19,061,457 were 
used to purchase State and Local Government Series Certificate 
of Indebtedness and Notes. These securities were deposited 
in a current refund trust fund with an escrow agent to provide 
for the final debt service payment on the bonds. As a result, 
the bonds are considered to be defeased and the liability has 
been removed. The defeased debt was retired on the call date 
of November 1, 2002. On December 31, 2002, $19,005,000 
of bonds were outstanding and considered defeased. 

The Commission refunded the 1992 bonds to reduce its total 
debt service payments over the next five years by $1,644,390 
and to obtain an economic gain (the difference between the 
present value of the debt service payments on the old debt and 
the new debt) of $1,538,665. 



(6) Massachusetts Water Resources Authority 

The Authority provides all the Commission's water supply and 
sewer treatment requirements and assesses the Commission 
for a portion of its actual operating and capital expenses. The 
assessment is based on the Authority's fiscal year (July 1 
to June 30), and payments are due to the Authority in ten 
equal installments excluding the months of January and July. 
Amounts included in the statements of operations for assess- 
ments by the Authority for 2002 and 2001 are as follows: 





2002 


2001 


Assessments allocated on: 

Water usage 
Wastewater usage 


$ 43,369,447 
79,367,563 


$ 40,035,390 
77,639,076 


Total 


$122,737,010 


$117,674,466 



In 2002 and 2001, over 78% of water provided from the 
Authority was billable to customers. Since its inception, the 
Commission has maintained the percentage of billable water 
at 78% and is continuing to take steps to improve the amount 
of billable water, including replacement of old and defective 
meters and implementation of a comprehensive leak detection 
and repair program. 



(7) Transactions with the City of Boston 

The Commission's ongoing program to meter City facilities has 
resulted in billings to 10 City departments during 2002 and 2001, 
respectively, based on actual consumption of approximately 
$4,386,765 and $3,805,088 in 2002 and 2001, respectively. 

The City provides services to the Commission, including paving 
and facilities rental. Operating costs billed to the Commission 
by the City were approximately $857,710 and $1,066,553 
during 2002 and 2001, respectively. Capital costs billed by the 
City were approximately $2,097,599 and $2,336,802 during 
2002 and 2001, respectively. 

The Commission has an agreement with the City that allows 
the Commission's water and sewer bills that have remained 
unpaid for more than two years to be added as liens on the 
City's property tax bills. Under this agreement, the City provides 
collection services on these bills for an administrative fee. As 
of December 31, 2002, receivables totaling approximately 
$1.6 million of billings had been included on property tax bills. 

Under the Commission's own tax lien program, accounts which 
have unpaid balances over two years old are transferred into 
the tax lien program for collection. As of December 31, 2002 
and 2001, approximately $3,191,929 and $3,270,797, respec- 
tively, remains outstanding. 



(8) Retirement Benefits 

The Commission provides retirement benefits to substantially 
all of Its employees through the State-Boston Retirement 
System (SBRS, or the System), a cost-sharing multi-employer 
retirement plan. The Commission does not provide any other 
significant postemployment benefits. 

A dispute concerning the Commission's past and future obliga- 
tions to all Commission employees covered by the SBRS was 
settled in 1986, resulting in a payment of $19,100,000 to the 
SBRS. This payment was funded primarily through 1985 and 
1986 bond proceeds and is recorded as a deferred charge that 
will be recovered through future rates. As part of the settlement 
with the SBRS, the Commission annually reimburses the City for 
the Commission's share of pension benefits paid to Commission 
employees. The Commission's share is based upon the propor- 
tion of each employee's total years of creditable service, level of 
compensation, and group classification. Employees become 
100% vested after 10 years of creditable service as defined by 
Chapter 32 of the Massachusetts General Laws (MGL). 



Boston Water and Sewer Commission • 2002 Annual Report 



Page 19 




Notes to Financial Statements 

December 31, 2002 and 2001 



(a) Description of the SBRS Plan 

The SBRS is a cost-sharing, multi-employer, public employee 
retirement system established under Chapter 32 of the MGL 
and is a member of the Massachusetts Contributory Retirement 
System. The System provides retirement, disability, and death 
benefits to plan members and beneficiaries. Chapter 32 of the 
MGL assigns authority to establish and amend benefit provi- 
sions of the plan. The System issues a publicly available finan- 
cial report which can be obtained through the Commonwealth 
of Massachusetts, Public Employee Retirement Administration 
Commission (PERAC), One Ashburton Place, Boston, 
Massachusetts 02108. 

(b) Funding Policy 

Plan members are required to contribute to the SBRS at rates 
ranging from 5% to 11% of annual covered compensation. The 
Commission is required to pay into the SBRS its share of the 
remaining systemwide actuarially determined contribution plus 
administration costs which are apportioned among the employ- 
ers based on active covered payroll. Through fiscal 1998, 
the Commonwealth of Massachusetts reimbursed the SBRS 
for a portion of benefit payments for cost-of-living increases. 
Beginning July 1, 1998, the SBRS is locally funding the cost- 
of-living adjustments as approved by the SBRS' Board of 
Retirement, the City's Mayor, and City Council. The contribu- 
tions of plan members and the Commission are governed by 
Chapter 32 of the MGL. The Commission's contributions to 
the System for the years ended December 31, 2002, 2001 
and 2000 were approximately $481,719, $565,350 and 
$1,244,000, respectively, which equaled its required contri- 
bution each year. Total employee contributions, based on actu- 
arially determined amounts, were approximately $2,001,820, 
$1,929,788 and $1,871,797, or 8.3%, 8.2% and 7.9% of 
covered payroll in 2002, 2001 and 2000, respectively. 

(c) The Commission 's Trust Fund 

On a quarterly basis, the Commission deposits an amount into 
a Trust Fund, the assets of which are used to reimburse the 
SBRS for amounts paid on behalf of the Commission. As 
required by the Commission's Enabling Act, employee pension 
contributions are transferred to the SBRS directly 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 emp/oyer contribu- 
tions to the Trust Fund based upon the actuarially determined 
cost of future benefits, net of employee contributions. 



Trust Fund assets at December 31, 2002 and 2001 are 
as follows: 



Assets (at fair value): 

Common stock 
International stock 
Mutual funds 
Fixed income 



$23,777,945 $30,964,785 

5,394,386 5,800,928 

977,983 759,140 

25,464,818 25,915,183 



Total 



$55,615,132 $63,440,036 



The Trust Fund activity is as follows: 



Assets (at fair value), January 1, 2001 


$64,565,087 


Employer contributions 




565,350 


Investment income and gains 




(13,357) 


Management fees 




(247,289) 


Payments to SBRS 




(1,429,755) 


Assets (at fair value), December 31 


2001 


63,440,036 


Employer contributions 




481,719 


Investment income and gains 




(6,614,536) 


Management fees 




(224,409) 


Payments to SBRS 




(1,467,678) 


Assets (at fair value), December 31 


2002 


$55,615,132 



The investment portfolio is regulated by the MGL, Chapter 32, 
Section 23. The investments are managed by independent 
investment advisors. Fleet Bank of Massachusetts, N.A. is the 
custodian of the portfolio. The Trust Fund assets will be used 
by the Commission to reimburse SBRS in future years for 
required employer contributions. 



(9) Deposits and Investments 

The Commission's General Revenue Bond Resolution, adopted 
December 6, 1984, as amended, places certain limitations 
on the nature of deposits and investments available to the 
Commission. Demand deposits and term deposits without 
coilateralization can only be made with financial institutions 
meeting certain criteria. Certificates of deposit must be fully 
collateralized and issued by FDIC-insured banks. Investments 
can also be made in securities issued by or unconditionally 
guaranteed by the U.S. Government or its agencies; public 
agencies, municipalities, or state obligations carrying the highest 
bond rating; commercial paper rated A-1, P-1; A-Rated money 
market funds; fully collateralized investment contracts and 
certain futures contracts. In addition, the Commission's Trust 
Fund has additional investment powers, most notably the ability 
to invest in stocks, corporate bonds, and other instruments. 



Page 20 



Boston Water and Sewer Commission • 2002 Annual Report 




Notes to Financial Statements 

December 31, 2002 and 2001 



(a) Deposits 

A summary of the Commission's deposits that are (Category 1) fully insured or collateralized with securities held by the Commission 
or its agent in the Commission's name, (Category 2) those deposits that are collateralized with securities held by the pledging finan- 
cial institution's trust department or agent in the Commission's name, and (Category 3) those deposits that are not collateralized as 
of December 31, 2002 and 2001 follows. 







Category 




Total bank 
balance 


Carrying 


2002 


1 


2 


3 


amount 


Cash 

Bank money market deposits 


$100,000 


$ - 


$10,110,187 
7,974,504 


$10,210,187 
7,974,504 


$ 9,340,446 
7,974,504 


Total 


$100,000 


$ - 


$18,084,691 


$18,184,691 


$17,314,950 


2001 


1 


Category 
2 


3 


Total bank 
balance 


Carrying 
amount 


Cash 

Bank money market deposits 


$100,000 


$ - 


$ 7,068,787 
2,877,749 


$ 7,168,787 
2,877,749 


$ 7,072,158 
2.877,749 


Total 


$100,000 


$ - 


$ 9,946,536 


$10,046,538 


$ 9,949,907 



Deposits in transit and outstanding checks account for the majority of the difference between the bank balance and the carrying 
amount. 

(b) Investments 

The Commission's investments are categorized according to the level of custodial credit risk assumed by the Commission. Category 1 
includes investments that are insured, registered, or held by the Commission's trustee in the Commission's name. Category 2 in- 
cludes uninsured and unregistered investments held by the counterparty's trust department or agent in the Commission's name. 
Category 3 includes uninsured or unregistered investments held by the counterparty, its trust department, or agent but not in the 
Commission's name. 



2002 



Categorized: 

U.S. Government obligations 
U.S. Government agency obligations 
Repurchase agreements 
Commercial paper 



Total 



Category 



22,198,506 
97,394,851 
8,416,250 
47,888,769 



$175,898,376 



$ - 



Not categorized: 

Open-end mutual funds 



Total 



Fair value 



22,198,506 
97,394,851 
8,416,250 
47,888.769 



$175,898,376 



68,268,662 



$244,167,038 



Boston Water and Sewer Commission • 2002 Annual Report 



Page 21 



bBS BS ^ 



Notes to Financial Statements 

December 31, 2002 and 2001 



Category 



2001 



Categorized: 

U.S. Government obligations 
U.S. Government agency obligations 
Repurchase agreements 
Commercial paper 



34,163,252 
91,668,376 
54,185,163 
63,783,939 



34,163,252 
91,668,376 
54,185,163 
63,783,939 



Total 


$ - 


$243,800,730 


$ - 


$243,800,730 


Not categorized: 

Open-end mutual funds 








27,263,118 


Total 








$271,063,848 



The investment portfolio is regulated by the MGL, Chapter 32, 
Section 23. The investments are presented in the financial 
statements at fair market value. U.S. Bank and Trust Company 
is the custodian of the portfolio, which is managed by inde- 
pendent investment advisors. 



(10) Lease Commitments 

The Commission leases office space and equipment under vari- 
ous leases that have been accounted for as operating leases. 
The payments received under these leases are not material. 

Rent expense under operating leases amounted to $81,918 and 
$464,760 in 2002 and 2001, respectively. 



(11) Commitments 

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 facili- 
ties. Commitments under these contracts aggregate approxi- 
mately $52.9 million as of December 31, 2002. Capital 
improvements, primarily related to water and wastewater system 
projects with an emphasis on the cleanup of the Boston Harbor 
area, are expected to aggregate approximately $127.5 million 
for 2003 through 2004. Of this amount, approximately $107.6 
million represents extension and improvement projects and 
$19.9 million represents renewal and replacement projects. 
The extension and improvement projects are expected to be 
42% funded by federal and state grants and Authority grants 
and loans. The remaining amounts will be funded from the 
Commission's bond proceeds and operating revenues. 



(12) Risk IVIanagement and Other insurance 

The Commission carries self-Insured retention limits for claims 
filed under workers' compensation and general liability and 
completely self-insures for all unemployment benefits. The 
workers' compensation self-insured retention limit is $250,000 
per claim and is supplemented with $5 million in excess cover- 
age purchased through an outside carrier. For general liability, 
the Commission's self-insured limits are $1 million per occur- 
rence, $2.5 million aggregate, and is subordinate to $5 million 
of excess coverage purchased through an outside carrier. 
Under the sections of the Model Water and Sewer Act, the 
Commission's tort liability is capped at $100,000 per claimant. 

The Commission maintains other insurance coverage as follows: 



Policy type 



Coverage 



Healtti Premiurr based 

Vehicles Combined single limit of $1 million 

Property Aggregate limit of $66.3 million 

Public officials Coverage of $3 million; $100,000 self-insurance retention 

Fiduciary $2 million coverage 

Crime Employee dishonesty coverage of $5 million 

The Commission participates in the City's health benefits plans 
for which the City assesses monthly premiums to the Com- 
mission based on current enrollments. Insurance claims for all 
policies have not exceeded coverage by a material amount in 
the past three years. 



Page 22 



Boston Water and Sewer Commission • 2002 Annual Report 




Notes to Financial Statements 

December 31, 2002 and 2001 



Liabilities for self-insured claims are reported if it is probable 
that a loss has been incurred and the amount can be reason- 
ably estimated. The Commission has established a liability 
based on historical trends of previous years and attorney's 
and independent Insurance reserve appraiser's estimates of 
pending matters and lawsuits in which the Commission is 
involved. Unemployment claims paid during 2002 and 2001 
were immaterial. 

Changes for the years ended December 31, 2002 and 2001 
are as follows: 



Beginning balance of reserves 
Payment of claims attributable 
to events of both current 
and prior years: 
Workers' compensation 
General liability 
Incurred claims 



(333,044) (665,123) 

(252,215) (269,619) 

1,063,365 547,329 



Ending balance of reserves 



$3,333,077 



$2,854,971 



Incurred claims represent the total of a provision for events 
of the current fiscal year and any change in the provision for 
events of the prior fiscal years. 



(13) Contingencies 

The Commission is involved in ordinary and routine litigation 
and other matters related to its operations and the establish- 
ment of rates. Management 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 reim- 
bursement to the grantor agency for expenditures disallowed 
under terms of the grant. The Commission believes such dis- 
allowances, if any, will not be significant. 

The Commission is involved as a defendant in litigation regard- 
ing the pollution of Boston Harbor. Management believes that 
the Commission's extensive capital improvement program 
(see note 11) addresses probable actions that the Commission 
may be required to undertake in connection with this litigation. 
Additionally, the Commission is likely to bear either directly or 
through future assessments of the Authority a substantial por- 
tion of the financial costs involved. As of December 31, 2002, 
the overall cleanup costs are estimated to be approximately 
$610 million. However, the extent of the Commission's liability 
for these costs cannot be determined. 



Boston Water and Sewer Commission • 2002 Annual Report 



^^ 



Page 23 




Supplemental Schedule of Revenues and Expenses - Rate Basis 

Years Ended December 31, 2002 and 2001 



Revenues: 

Water revenue 
Sewer revenue 



; 77,877,004 
109,197,117 



; 63,020,837 
110,033,181 



Subtotal 



187,074,121 



173,054,018 



Less: 

Adjustments 
Discounts 
Bad debt 



4,439,652 
777,021 
386,581 



4,707,667 
657,474 
494,579 



Subtotal 



5,603,254 



5,859,720 



Net billed charges 
Prior year surplus 

Miscellaneous revenues: 
Late charge revenue 
Investment income 
Fire pipe revenue 
Other income 



181,470,867 
421,425 

1,241,285 
7,934,508 

2,922,124 
15,118,128 



167,194,298 
9,874,570 

1,475,973 
11,089,964 

2,690,551 
11,576,636 



Total revenues 



209,108,337 



203,901,992 



Direct operating expenses: 

Salaries and wages 

Overtime wages 

Fringe benefits 

Supplies and materials 

Repairs and maintenance 

Utilities 

Professional services 

Space and equipment rentals 

Other services 

Insurance 

Damage claims 

Inventory 

Capital outlay 



25,558,712 

521,971 

5,364,521 

2,103,293 

6,974,382 

1,121,739 

2,790,215 

87,598 

1,318,834 

579,282 

11,477 

1,673 

23,513 



24,997,216 

617,803 

4,169,896 

2,354,260 

6,537,991 

1,354,969 

2,501,705 

548,735 

1,234,412 

502,664 

48,896 

31,546 

653,751 



Total direct operating expenses 



46,457,210 



45,553,844 



Nonoperating expenses: 

MWRA assessment 
Capital improvements 
Principal payments 
Interest expense 
Deposits to reserve funds 



122,737,010 

8,876,812 

13,580,172 

15,797,444 

978,578 



117,674,466 
10,484,749 
12,809,815 
16,707,756 



SDWA assessment 


242,503 


249,937 


Total nonoperating expenses 


162,212,519 


157,926,723 


Total current expenses 


208,669,729 


203,480,567 


Current year rate surplus 


$ 438,608 


$ 421,425 



This supplemental schedule presents the Commission 's revenues and expenses on the basis that is presented in the 
Commission's budget and rate-setting documents. 
See accompanying independent auditors' report. 



Page: 



Boston Water and Sewer Commission • 2002 Annual Report 




Boston Water and Sewer Commission 

980 Harrison Avenue 

Boston, MA 02119 

617-989-7000 

www.bwsc.org