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Full text of "Annual report"

BOSTON PUBLIC LIBRARY 




BOSTON WATER AND 
SEWER COAAMISSION 

Annual Report 2007 



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A LEADER IN 
CONSERVATION 




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The word that best defines what 
BWSC has accomplished is 

conservation. 

In fact, you can think of it as 
30 years of conservation — 
conservation of the 

natural resources 

that are vital to the quality of life 
of Boston's residents and the 
economic vitality of its businesses, 
and conservation of the 

financial resources 

BWSC needs to operate efficiently 
and effectively. 




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ANNUAL REPORT 2007 



MESSAGE FROM THE EXECUTIVE DIRECTOR 



In 1977 the Boston Water and Sewer Commission 
was created by an act of the Massachusetts legisla- 
ture. That means BWSC just turned thirty. Now is 
the time to take stock of what BWSC has accom- 
plished these past three decades. 

The word that best defines what BWSC has 
accomplished is conservation. In fact, you can 
think of it as 30 years of conservation — conservation 
of the natural resources that are vital to 
the quality of life of Boston's residents and the 
economic vitality of its businesses, and conservation 
of the financial resources BWSC needs to operate 
efficiently and effectively. 

What may best sum up BWSC's dedication to 
conserving our natural and financial resources is a 
single set of comparative statistics. When BWSC 
was created in 1977 Boston's water distribution 
system was losing 70 million gallons of water 
every day through leaks and illegal connections. 
Today, the total amount of water BWSC purchases 
from the Massachusetts Water Resources Authority 
is just 71 million gallons daily. As a city, we use almost 
the same amount of water today as was being lost 30 
years ago. 

This is a great accomplishment. For those millions of 
gallons of water don't just represent a precious natu- 
ral resource. They also represent millions of dollars 
of savings. It is because we have been so aggressive 
reducing unaccounted-for water that we have been 
able to maintain our rates at the levels 
we have. In the last fourteen years, our operating 
expenses have risen only $12 million, despite a 
rate of inflation roughly twice that. In fact, against 
inflation BWSC spends 18% less on operating 
expenses today than it did 14 years ago. 




Left to Right Vincent G. Mannering. Executive Director 

Dennis DiMarzio. Chair. Board of Commissioners: 

Cathleen Douglas Stone. Commissioner 

and Muhammad Ali-Salaam. Commissioner 



Mayor Menino's leadership has been essential to 
our efforts to conserve your water and your money. 
Under his sustained leadership BWSC will continue 
to live up to its motto — Customer Service is our #1 
priority — and we will do it as efficiently and effectively 
as possible. 



Sincerely, 




' ^Mrr/^l^fte^ 



Vincent Mannering ' 
Executive Director 





BOSTON WATER AND SEWER COMMISSION 

A LEADER IN 
CONSERVATION 

THE FOUNDATION 

BWSC's remarkable ability to conserve our natural and finan- 
cial resources starts in the ground, where more than 1,000 
miles of pipe carry water to homes and businesses throughout 
Boston. The city's water distribution system first opened 
in 1848 and by the time BWSC was created a large number of 
the pipes in the system were in disrepair. This was one of the 
primary reasons so much water was being lost. 




Beginning in 1979, BWSC began systematic efforts to reline 
and replace its problem pipes. In 1984, BWSC began outlining 
these efforts in its Capital Improvement Program, which had 
as a stated goal that any main in the system more than a 
century old would be relined or replaced by 2010. BWSC is 
well on its way to meeting its goal, having relined or replaced 
more than 500 miles of water main since its first efforts back 
in 1979. As a result, Boston enjoys one of the lowest rates of 
water main breaks of any large city in the country. 



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ANNUAL REPORT 2007 



THE ORGANIZATION 

When BWSC was first enabled by the Massachusetts 
legislature back in 1977, it relied on separate water 
and sewer departments to operate and maintain the 
water distribution and wastewater collection systems. 
The results were inefficiency and high costs. In 1995, 
BWSC began training its Operations employees in 
both water and sewer system maintenance and opera- 
tion. Overtime costs were reduced, as was the number 
of full-time employees hired by BWSC. Through 
retirement and natural attrition, BWSC's workforce 
shrank from more than 600 to less than 500 employ- 
ees, a reduction only made possible by the greater skill 
and productivity of BWSC's current employees. 

BWSC is now a leaner, more responsive organization. 
Both the Engineering and Operations Divisions are 
integrated units whose employees are trained to per- 
form a broad range of field service and to respond to 
all types of emergencies. As a result, BWSC is better 
able to deploy its workforce as it responds more rap- 
idly and more effectively to customer requests. 





THE TECHNOLOGY \ 

In 1977 few people could then imagine what the 
world, and specifically the world of business and 
the technologies companies and agencies use to meet 
customers needs, would be like. The internet, personal 
computers, roaming communications technology — 
these were the ideas of science fiction, not customer 
service. Of course, the world has changed at an ever 
accelerating pace the last thirty years. To ensure that; it , 
fulfills its promise to make customer service its #11 ' 
priority, BWSC has changed with the times. J 

i 

Some of the changes just make good business sense. 
BWSC's Customer Information and Billing system 
tracks customer requests. An intranet allowed BWSC 
employees to communicate with one another /nore 
efficiently. The BWSC website, which first came online 
in 1998, allows customers to pay their bills electroni- 
cally, saving them time. It even allows customers to 
track their water use. And a new database aljpws 



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BOSTON WATER AND SEWER COAAMISSION 



BWSC employees to track inventory so that supplies — every- 
thing from pipe joints to safety equipment — are purchased and 
used more efficiently, saving BWSC and its customers money. 

These changes were made as part of a 5-year technology plan 
first outlined in 1996 and updated in 2001. By anticipating the 
technology required to meet customer needs, BWSC was able 
to plan to meet the technology's cost, mitigating it through 
incorporation in BWSC's Capital Improvement Program. 





THE RESOURCES 

As part of its second 5-year technology plan, BWSC completed 
installation of an automated meter reading (AA4R) system. 
Before its installation, BWSC's customers could expect to have 
their meters read just every other month. Today, through the 
remote technology the AMR system uses, every meter in the 
BWSC system is read four times daily. 

The results speak for themselves. The AMR system has elimi- 
nated the need for estimated bills, previously the most common 
complaint BWSC received from customers. The system also 
allows BWSC to track water consumption more closely and 
alert customers of unexpected consumption spikes, which 
might indicate a leak in the internal plumbing. BWSC has also 
used the AMR system to identify unaccounted-for waten 



ANNUAL REPORT 2007 




Looking to the future, BWSC is in the process of pur- 
chasing devices that listen remotely for water main 
leaks. The listening devices can pinpoint leaks so that, 
not only is water saved, but the work needed to repair 
any leaks is isolated. It is just one more example of 
BWSC's commitment to conserving our natural and 
financial resources. 



The combined sewer system was for the most part 
large enough to accommodate Boston's sewage and as 
long as it didn't rain there was rarely ever a problem. 
If it rained, however, the combined wastewater and 
storm water often exceeded the carrying capacity of 
the system; the overflow was designed to empty direct- 
ly into Boston Harbor and its tributaries at 53 desig- 
nated overflow sites across the city. The result was 
point source pollution and water that was unsafe to 
swim in. 

As part of the Capital Improvement Program instimted 
in 1984, BWSC, in addition to replacing or relining 
old water mains, has worked to separate combined 
sewers, dramatically reducing overflow events, work 
for which BWSC has been recognized as an environ- 
mental steward by the Boston Harbor Association. 
30 years of conservation includes protecting Boston's 
harbor, rivers and beaches. 



THE ENVIRONMENT 

Water isn't the only natural resource BWSC has 
worked so hard for three decades to help conserve. 
BWSC doesn't just distribute the water Boston's 
residents and businesses drink, cook and clean with; 
it also collects the wastewater they produce and 
the storm water that falls as rain, sleet and snow. 
When Boston's original sewer system was built almost 
two centuries ago, environmental protection wasn't a 
priority. As a result, most of it combined wastewater 
and storm water When the state's wastewater treat- 
ment plants came on line — first at Plum and then at 
Deer Island — Boston's combined sewers ran to them. 




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AND SEWER COAAMISSION 





THE BOTTOM LINE 

BWSC's long-term efforts to maintain its physical assets, 
streamline its organization, and maximize productivity 
through the latest technology have paid off, quite literally. In 
1994, BWSC's operating expenses were $44.4 million; in 

2007, they were just $50.6 million, almost $12 million less 
against inflation over the same period of time. In real dollars, 
BWSC spent less in 2007 than it did in 1994. Not only that, 
BWSC's operating expenses have come in under budget in each 
of the last 14 years. BWSC doesn't spend money just because 
it budgets it; it spends money only when it needs to. That's part 
of conservation. 

Of course, the bulk of BWSC's budget are not operating 
expenses. They include debt service obligations and 
Massachusetts Water Resource Authority assessments. Even 
there, though, the story is one of conservation. From 1995 to 

2008, total BWSC expenses rose at a rate $3 million slower 
than inflation, this despite increases in the MWRA assessment 
$20 million above inflation. In fact, if one removes MWRA 
assessments from the equation, BWSC's total expenses have 
risen $22 million less than inflation. In fact, between 1998 and 
2006, total expenses other than MWRA assessments actually 
fell. That is conservation, plain and simple. 






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ANNUAtgEilPORf 2007 

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BOSTON WAT€R AND 
SEWER COMMISSION 

Financial Statements, 

Required Supplementary Information, 

and Supplemental Schedules 



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December 31, 2007 and 2006 
(With Independent Auditors' Report Thereon) 



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BOSTON WATER AND SEWER COAAMISSION 



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ANNUAL REPORT 2007 



INDEPENDENT AUDITOR'S REPORT 



THE COMMISSIONERS 

BOSTON WATER AND SEWER COA^MISSION 



We have audited the accompanying statements of net 
assets of the Boston Water and Sewer Commission (the 
Commission) as of December 31, 2007 and 2006, 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 considera- 
tion of internal control over financial reporting as a 
basis for designing audit procedures that are appro- 
priate in the circumstances, but not for the purpose of 
expressing an opinion on the effectiveness of the 
Commission's internal control over financial report- 
ing. Accordingly, we express no such opinion. 
An audit also includes examining, on a test basis, 
evidence supporting the amounts and disclosures in 
the financial statements, assessing the accounting 
principles used and significant estimates made by 
management, as well as evaluating the overall finan- 
cial 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, 
2007 and 2006, and the results of its operations and its 
cash flows for the years then ended in conformity with 
U.S. generally accepted accounting principles. 



As described in note 9, the Commission, in fiscal 2007, 
implemented Goverrmiental Accounting Standards 
Board (GASB) Statement No. 45, Accounting and 
Financial Reporting by Employers for Postemployment 
Benefits Other Than Pensions. 

The Management's Discussion and Analysis on pages 2 
through 6 and the Schedule of Funding Progress — 
OPEB on page 33 are not required parts of the basic 
financial statements, but are supplementary informa- 
tion required by U.S. generally accepted accounting 
principles. We have applied certain limited procedures, 
which consisted principally of inquiries of management 
regarding the methods of measurement and presenta- 
tion of the required supplementary information. 
However, we did not audit the information and express 
no opinion on them. 

Our audits were conducted for the purpose of forming 
an opinion on the basic financial statements. The 
accompanying other supplemental information 
is presented for purposes of additional analysis 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 state- 
ments taken as a whole. 



K^Mc^ LCP 



August 28, 2008 



BOSTON WATER AND SEWER COMMISSION 



MANAGEMENT'S DISCUSSION 
AND ANALYSIS 

Required Supplementary Information, 
December 31. 2007 and 2006 
(Unaudited) 



OVERVIEW 

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

The Commission has realized a rate basis 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 surpluses to reduce its rates in 
succeeding years. 

To accommodate the rate making 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). 

The statements of net assets provide information on the 
assets and liabilities of the Commission, with net assets 
reported as the difference between assets and Habilities. The 
statements of operations of the Commission reflect 
all revenues earned and all expenses incurred. 

Condensed financial information for the most recent fiscal 
years is presented in this section of the report. 





CONDENSED FINANCIAL INFORMATION 








(in thousands) 








2007 


2006 


2005 


Current assets 


$ 38,912 


35,105 


32,611 


Capital assets, net 


922,399 


872,518 


795,417 


Other assets 


207,757 


216,671 


245,774 


Total assets 


1,169,068 


1,124,294 


1,073,802 


Current liabilities 


92,876 


75,580 


40,672 


Noncurrent liabilities 


773,007 


759,125 


757,781 


Total liabilities 


865,833 


834,705 


798,453 


Net assets 








Invested in capital assets, net of related debt 


533,178 


516,473 


470,599 


Restricted net assets 


83,734 


83,184 


82,702 


Unrestricted net deficit 


(314,727) 


(310,068) 


(277,952) 


Total net assets 


$ 303,185 


289,589 


275,349 



10 



ANNUAL REPORT 2007 



During the year, the Commission saw a slight increase in 
total assets and in total liabilities, resulting in an increase in 
total net assets of $13.6 million, or 4.7%. In 2006, net assets 
totaled $289.6 million, an increase of $14.2 million, or 5.2% 
from 2005. The Commission's 2007 operations resulted in a 
budgetary surplus of approximately $81,000, compared to 
approximately $134,000 in 2006 and $600,000 in 2005. 

The Commission invested in various capital assets, including 
capital improvement projects, machinery and equipment, 
buildings, and improvements. These investments, net of accu- 
mulated depreciation, totaled $922.4 million, which is 5.7% 
higher than in 2006. In 2006, these investments totaled $872.5 
million, an increase of $77.1 million, or 9.7% over the 2005 
total investment in capital assets. These increases in capital 
assets are the result of continuous upgrade of the Commission 
owned water and sewer infrastructure. 

Total operating revenues in 2007 were $261.9 million, 
which is 7.0% greater than in 2006. Total operating rev- 
enues in 2006 were $244.8 million, which is 2.4% greater 
than in 2005. Operating revenues consist of water and sewer 
revenue, late charge revenue, fire pipe revenue and other 
income. Water and sewer revenue in 2007, 2006 



and 2005 represented 96.6%, 95.1% and 90.0% of total 
operating revenues, respectively. The increases in 2007 and 
2006 operating revenues were primarily driven by a 9.25% 
and 9.85% average rate increase, respectively. 

Total operating expenses in 2007 were $239.0 million, 
which represents an increase of 7.0% from 2006. The 
increase in 2007 operating expenses was primarily due 
to a 3.6%, or $5.6 million, increase in the Massachusetts 
Water Resources Authority (MWRA) assessment coupled 
with a $6.0 million expense that reflects the Commission's 
actuarially required contribution for postemployment 
benefits other than pensions calculated in accordance with 
GASB Statement No. 45, which was implemented in 2007. 
Total operating expenses in 2006 were $223.3 million, 
which represents an increase of 4.1% from 2005. 
This increase in 2006 expenses was almost exclusively 
driven by an increase in the MWRA assessment. Operating 
expenses consist of operations and maintenance, MWRA 
assessment, and depreciation and amortization. The MWRA 
assessment is the largest expense incurred by the 
Commission, representing 66.8% in 2007 and 68.6%, 
in both 2006 and 2005 of total operating expenses. 



Operating revenues 

Water and sewer usage 

Other 
Operating expenses 

Excess operating revenues 

Investment income 

Interest expense 
Total nonoperating net expense 
Excess revenues before capital grants 
and contributions and transfer requirements 

Capital grants and contributions 
Excess revenues used to fund reserves 

and other deferrals 
Change in accumulated revenues used to 

offset future rates 

Change in net assets 

Net assets, beginning of year 
Net assets, end of year 



CONDENSED FINANCIAL INFORMATION 

(in thousands) 

2007 

$ 252,920 

8,964 

238,979 

22,905 

13,735 

(19,188) 

(5,453) 



17,452 
21,454 

(25,363) 

53 

13,596 

289,589 
$ 303,185 



2006 

232,827 
11,980 

223,294 
21,513 

10,889 
(17,877) 



14,525 
18,649 

(19,382) 



448 



14,240 

275,349 
289,589 



2005 

215,212 
23,874 

214,399 
24,687 

9,051 
(17,886 ) 
(8,835 ) 

15,852 
34,645 

(19,734) 

7,196 
37,959 

237,390 
275,349 



BOSTON WATER AND SEWER COAAMISSION 

MANAGEMENTS DISCUSSION 

AND ANALYSIS, continued 



CAPITAL ASSETS 

In fiscal year 2007, major Commission project additions 
totaled $40.9 million, of which $21.3 million was 
financed with bond proceeds. Major project expenditures 
(in thousands) are as follows: 



Relay of water mains 


$ 18,100 


Reline of water mains 


5,400 


Rehabilitation/replacement 




of sewers or storm drains 


10,200 


Interceptor improvements 


200 


Separation of combined sewers 


6,000 


Infiltration and inflow 


600 


Meter replacement 


400 




$ 40,900 







The Commission's 2008-2010 capital budget includes 
projected expenditures of $183.2 million for infrastruc- 
ture and capital projects. The major projects are for 
the rehabilitation of water mains and the replacement/ 
rehabilitation of the sewer system. Some water projects 
are financed on a pay-as-you-go 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 read- 
ing system will be financed through bond proceeds. 
However there are sewer improvements that are funded 
through the utilization of the MWRA loan programs. 
Please refer to footnote 3 for more detailed capital asset 
activity. 



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 
requirements described below. 

The Commission issues General Revenue Bonds to finance 
portions of its capital improvement projects. 
The Commission's 2008-2010 capital budget, which totals 
$183.2 million, anticipates that projects totaling $118.9 
million, or 64.9% of the Commission's 2008-2010 capital 
budget, will be funded from bond proceeds. 
The 2008 budget for debt service is $36.9 million. 

The Commission currently has nine series of General 
Revenue Bonds outstanding at the end of 2007, totaling 
approximately $307.3 million as follows (in thousands): 



1992 Series A 

1993 Series A 

1994 Series A 
1998 Series A 
1998 Series C 
1998 Series D 

2003 Series A 

2004 Series A 



The Commission did not issue any General Revenue 
Bonds in 2007 or 2006. Please refer to footnote 4 for 
more detailed long-term debt activity. 



12 



ANNUAL REPORT 2007 



DEBT SERVICE COVERAGE REQUIREMENTS 

The Commission's bond covenants require 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, (iii) to create and maintain such reasonable 
reserves as may be reasonably required by any trust agree- 
ment 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 which 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 rev- 
enues in each year during 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 1 977. 

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, pay- 
ing 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 outstand- 
ing 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. 



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. 

In 2006, the Commission modified its inclining block rate 
structure. The number of rate blocks was reduced from 
ten to six, thereby making the structure easier 
to understand for customers while still promoting 
water conservation and generating sufficient revenue. 
In addition, average water and sewer rates were increased 
by 9.85%. In 2007, the Commission increased its water 
and sewer rates by an average of 9.25%. The major 
reasons behind these increases were: (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. 

Effective January 1, 2008, the Commission increased its 
water and sewer rates by an average of 5.6 %. 

CREDIT RATINGS 

The Commission's revenue bonds are rated "Aa2" by 
Moody's Investors Service and "AA" by FitchRatings. 

CONTACTING THE COMMISSION'S FINANCIAL 
/y\ANAGEMENT 

The report is designed to provide our bondholders, 
customers and other interested parties with a general 
overview of the Commission's finances and to demon- 
strate the Commission's accountability for the revenue it 
receives. If you have questions about this report or need 
additional information, contact the Boston Water and 
Sewer Commission, Finance Department, 980 Harrison 
Avenue, Boston, MA 02119. 



BOSTON WATER AND SEWER COAAMISSION 



STATEMENTS OF NET ASSETS 

December 31, 2007 and 2006 



ASSETS 

Current assets: 

Cash and cash equivalents (note 9) 

Accounts receivable, net: 
Customers, less allowances of $2,839,653 in 2007 and 2005 (note 1 ) 
Unbilled revenues, less allowances of $1,702,361 in 2007 and 2006 

Construction grants receivable 

Prepaid expenses 
Totalcurrent assets 

Noncurrent assets: 

Restricted cash and investments (notes 4 and 9) 
Capital assets (note 3): 

Depreciable, net 

Nondepreciable 
Deferred charges (note 2) 
Bond issue costs, net 

Total noncurrent assets 

TOTAL ASSETS 



2007 



$ 5,478,302 



189,695,465 



1,130,156,002 
1,169,067,893 



2006 



6,782,025 



18,600,179 


16,842,215 


14,137,162 


10,889,490 


106,830 


19,535 


589,418 


571,537 


38,911,891 


35,104,802 



197,050,990 



710,502,784 


663,745,646 


211,896,567 


208,772,337 


16,617,577 


17,997,808 


1,443,609 


1,622,841 



1,089,189,622 
1,124,294,424 



LIABILITIES 

Current liabilities: 
Payable from current assets: 
Accounts payable 
Other accrued liabilities 
Commercial paper notes (note 5) 
Current portion of long-term notes (note 4) 
Current portion of revenue bonds (note 4) 
Total current liabilities 

Noncurrent liabilities: 
Long-term debt, net (note 4) 
Long-term notes payable (note 4) 
Other long-term liabilities 
Deferred credits and reserves (note 2) 
Total noncurrent liabilities 

TOTAL LIABILITIES 

NET ASSETS 

Net assets: 

Invested in capital assets, net of related debt 

Restricted for debt service 

Restricted for capital assets 

Restricted for debt covenants 

Unrestrirted net deficit 
Commitments and contingencies (notes 11, 12, and 13) 

TOTAL NET ASSETS 



18,060,589 


24,645,796 


5,746,352 


5,364,015 


46,600,000 


25,000,000 


9,644,216 


8,215,519 


12,825,000 


12,355,000 


92,876,157 


75,580,330 


292,901,305 


305,080,221 


45,285,880 


47,362,938 


7,627,510 


4,799,712 


427,191,776 


401,882,354 


773,006,471 


759,125,225 


865,882,628 


834,705,555 


533,177,676 


516,472,664 


38,722,718 


37,618,370 


699,800 


— 


45,312,437 


45,565,644 


(314,727,366) 


(310,067,809) 


$ 303,185,265 


289,588,869 



See accompanying notes to financial statements. 



14 



STATEMENTS OF OPERATIONS 

Years ended December 31, 2007 and 2006 



ANNUAL REPORT 2007 



2007 



2006 



Operating revenues: 
Water and sewer usage (note 7) 
Fire pipe 
Other (note 1) 
Total operating revenues 

Operating expenses: 
Operations 
Maintenance 

IVIWRA assessment (note 6) 
Depreciation and amortization 
Total operating expenses 

Excess operating revenues 

Nonoperating revenue (expense): 
Investment income 
Interest expense 
Total nonoperating net expense 

Excess revenues before capital grants and contributions 
and transfer requirements 

Capital grants and contributions 

Excess revenues before transfer requirements 

Excess revenues used to fund reserves and other deferrals (note 2) 
Change in accumulated revenues used to offset future rates (note 2) 

Change in net assets 
Net assets, beginning of year 

Net assets, end of year 



$ 252,920,327 


232,826,975 


3,595,899 


3,469,844 


5,367,899 


8,509,793 


261,884,125 


244,806,612 


53,882,665 


49,045,154 


6,582,756 


4,181,233 


159,736,851 


154,135,878 


18,776,772 


15,931,900 


238,979,044 


223,294,165 


22,905,081 


21,512,447 


13,735,219 


10,888,561 


(19,188,062) 


(17,876,667) 


(5,452,843) 


(6,988,106) 


17,452,238 


14,524,341 


21,453,580 


18,649,193 


38,905,818 


33,173,534 


(25,362,776) 


(19,382,031) 


53,354 


448,184 


13,596,396 


14,239,687 


289,588,869 


275,349,182 


$ 303,185,265 


289,588,869 



See accompanying notes to financial statements. 



15 



BOSTON WATER AND SEWER COMMISSION 



STATEMENTS OF CASH FLOWS 

Years ended December 31, 2007 and 2006 



2007 



2006 



Cash flows from operating activities: 
Receipts from customers 
Payments to suppliers 
Payments to employees 
Net cash provided by operating activities 

Cash flows from investing activities: 
Investment income 
Sales of investments 
Purchases of investments 
Net cash provided by investing activities 

Cash flows from capital and related financing activities: 
Purchase of capital assets 
Proceeds from debt 
Payment of bond principal 
Proceeds from commercial paper 
Paydown of commercial paper 
Capital contributions 
Payment of bond interest 

Net cash used in capital and related financing activities 

Net increase 

Cash, cash equivalents, beginning of year 
Cash, 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: 
Reserves released to stabilize rates 
Depreciation and amortization 
Postemployment health insurance 
Changes in assets and liabilities: 
Accounts receivable, net 
Unbilled revenues 
Construction grants receivable 
Prepaid expenses 
Accounts payable 
Other accrued liabilities 
Other long-term liabilities 
Net cash provided by operating activities 



$ 256,878,489 


240,688,601 


(184,655,416) 


(173,583,733) 


(34,287,435) 


(33,051,556) 


37,935,638 


34,053,312 


13,735,219 


10,888,561 


63,195,131 


181,608,643 


(56,569,075) 


(153,871,720) 


20,361,275 


38,625,484 


(71,668,695) 


(86,604,778) 


7,567,158 


7,974,391 


(20,570,519) 


(19,061,786) 


152,800,000 


25,000,000 


(131,200,000) 


— 


21,453,580 


18,649,193 


(17,982,160) 


(17,158,015) 


(59,600,636) 


(71,200,995) 


(1,303,723) 


1,477,801 


6,782,025 


5,304,224 


$ 5,478,302 


6,782,025 


$ 22,905,081 


21,512,447 


— 


(3,096,732) 


18,776,772 


15,931,900 


3,200,000 


— 


(1,757,964) 


125,391 


(3,247,672) 


(1,127,135) 


— 


(19,535) 


(17,881) 


5,487 


(2,019,097) 


3,632,693 


468,601 


(388,918) 


(372,202) 


(2,522,286) 


$ 37,935,638 


34,053,312 



Noncash capital and related financing activities: 
Noncash purchases of capital assets totaled $7,727,043 and $12,293,152 in 2007 and 2006, respectively. 

See accompanying notes to financial statements. 



16 



NOTES TO FINANCIAL 
STATEMENTS 

December 31, 2007 and 2006 



ANNUAL REPORT 2007 



(1) ORGANIZATION, BASIS OF PRESENTATION, 
AND SUM^VARY 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 
regulation 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 
contributions. However, there is no legally adopted budget 
that the Commission must adhere to. To comply with the 
external financial reporting requirements of the Board, 
the accompanying financial statements are presented on a 



basis that is consistent with U.S. generally accepted 
accounting principles (GAAP) for regulated utilities (i.e., 
the accrual basis of accounting and the capital mainte- 
nance measurement focus). 

To accommodate the rate making process, the 
Commission follows the accounting standards set forth in 
Statement of Financial Accounting Standards (SEAS) No. 
71, Accounting for the Effects of Certain Types of 
Regulation. SEAS No. 71 allows certain board approved 
(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). 
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 opera- 
tional 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, 2007 is provided below: 



As presented in the statements of operations 
Operating revenues/expenses 
Other revenues/expenses 
Total 

Reclassifications and deferrals: 
Contributions to reserves 
GAAP adjustments 

Excess bond payments over depreciation and amortization 
Interest expense (escrowed funds) 
Investment income (escrowed funds) 
Capital expenditures 

Excess revenue used to offset current rates 
Other deferrals 
As presented in the supplemental schedule, rate basis 



Revenues 


Expenses 


$ 261,884,125 


238,979,044 


13,735,219 


19,188,062 


275,619,344 


258,167,106 


_ 


3,971,000 


(7,334,500) 


(10,534,500) 


— 


(1,190,857) 


— 


(560,543) 


(4,905,019) 


— 


— 


13,853,358 


134,108 


— 


— 


(272,385) 


$ 263,513,933 


263,433,179 



17 



BOSTON WATER AND SEWER COAAMISSION 



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 $80,754 
and $134,108 for the years ended December 31, 2007 
and 2006, respectively, to offset rates in the respective 
subsequent years. 

(a) Revenue Billings 

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 yean Some adjustments are made on a 
post-billing basis that reduce the amount of total billings. 
The total customer bills outstanding as of December 31, 
2007 and 2006, respectively, were $21,439,832 and 
$19,681,868. These net billing amounts are reduced by an 
allowance for uncollectible accounts of $2,839,653 in both 
2007 and 2006 to arrive at the net accounts receivable. 



(e) Depreciation 

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



Water: 
Works 
Meters 
Hydrants 

Sewerage: 
Works 

Pumping station 
Buildings 
Other 



Years 

100 
10 
40 



75 
35 

40 
4-14 



(b) Investments 

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

(c) Capital Assets 

Capital assets are stated at historical cost. Depreciation is 
provided on the straight-line method based upon the esti- 
mated useful lives of the various classes of assets. 
Maintenance and repairs are charged to expense as 
incurred. Major renewals or betterments over $500 
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 2007 or 2006 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 res- 
ignation and/or retirement from the Commission (subject 
to Commission policies and/or bargaining agreements.) 
The liability for vacation leave is based on the amount 
earned but not used; for sick leave, it is based on a percent- 
age of the amount accumulated at the statement of net 
assets dates. The liability for both amounts is calculated 
based on the pay or salary rates in effect at the statements 
of net assets dates. 



(f) Cash Equivalents 

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

(g) 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. 

(h) Business-Type Activity Accounting and 
Financial Reporting 

Under the Governmental Accounting Standards Board 
(GASH) Statement No. 20, Accounting and Financial 
Reporting for Proprietary 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 con- 
flict with or contradict GASB pronouncements. 

Business-type activity funds distinguish operating 
revenues and expenses from nonoperating items. 
Operating revenues and expenses result from providing 
services in connection with ongoing operations. All 
revenues and expenses not meeting this definition are 
reported as nonoperating revenues and expenses. 



ANNUAL REPORT 2007 



(i) Use of Estimates 

The preparation of financial statements in conformity 
with U.S. GAAP requires management to make estimates 
and assumptions that affect the reported amounts of 
assets and UabiHties, 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. 

(j) Implementation of New Accounting Standards 
GASB Statement No. 45, Accounting and Financial 
Reporting by Employers for Postemployment Benefits 
Other Than Pensions, requires governments to 
recognize other postemployment benefits (OPEB) 
when earned rather than on a pay-as-you-go basis. 
Governments with revenues greater than $100 million 
are required to implement this standard for financial 
statement periods beginning after December 15, 2006. 
The Commission implemented this standard in the 
current year. See footnote 9. 



(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 
statements 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 and other 
deferrals" on the statements of operations. 
The components of these amounts are as follows: 





2007 


2006 


Contributions to reserves 


$ 3,971,000 


568,000 


Principal payments on long-term debt 


19,969,755 


18,527,795 


Interest paid from escrow funds 


(560,543) 


(716,174) 


Capital expenditures 


13,853,358 


11,232,964 


Depreciation and amortization 


(17,401,895) 


(12,980,768) 


Investment income on project 






and escrow funds 


4,905,018 


2,061,494 


Other 


626,083 


688,720 




$ 25,362,776 


19,382,031 



The activity in and components of deferred charges included in the accompanying statements of net assets are 
as follows: 



Deferred loss on land taking 
Accrued pension expense 
Debt extinguishment expense 



December 31, 
2005 

$ 5,305,600 
10,552,478 
3,297,778 



(decrease) 

(221,067) 
(676,282) 
(260,699) 



mber 31, 


Increase/ 


December 31, 


2006 


(decrease) 


2007 


5,084,533 


(221,067) 


4,863,466 


9,876,196 


(898,465) 


8,977,731 


3,037,079 


(260,699) 


2,776,380 



Total deferred charges 



$ 19,155,856 



(1,158,048) 



17,997,808 



(1,380,231) 



16,617,577 



BOSTON WATER AND SEWER COAAMISSION 



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





December 31, 


Increase/ 


December 31, 


Increase/ 


December 31, 






2005 


(decrease) 


2006 


(decrease) 


2007 


Debt service 


$ 


127,296,824 


568,000 


127,864,824 


3,971,000 


131,835,824 


Capital improvements 




241,195,285 


18,814,031 


260,009,316 


21,391,775 


281,401,092 


Worl(ing capital 




14,730,838 


(3,096,732) 


11,634,106 


— 


11,634,106 


Self-insurance 




2,240,000 
385,462,947 


— 


2,240,000 
401,748,246 


— 


2,240,000 




16,285,299 


25,362,775 


427,111,021 


Reduction of future rates 




582,292 


(448,184) 


134,108 


(53,354) 


80,754 


Total deferred credits and reserves 


$ 


386,045,239 


15,837,115 


401,882,354 


25,309,422 


427,191,776 



(3) CAPITAL ASSETS 

The cost and activity of water and sewerage capital assets in service and related accumulated depreciation at 
December 31, 2007 and 2006 is as follows: 





Balance at 


Increases 


Decreases 


Balance as of 




December 31, 






December 31, 




2006 






2007 


Capital assets, not being depreciated: 










Land 


$ 5,884,243 


— 


— 


5,884,243 


Construction in progress 


202,888,094 


65,328,506 


(62,204,276) 


206,012,324 


Total capital assets not being depredated 


208,772,337 


65,328,506 


(62,204,276) 


211,896,567 


Capital assets, being depreciated: 










Buildings and improvements 


66,502,512 


— 


— 


66,502,512 


Machinery and equipment 


27,481,908 


1,305,677 


— 


28,787,585 


Infrastructure 


755,165,027 
849,149,447 


62,672,679 
63,978,356 


— 


817,837,706 


Total capital assets being depreciated 





913,127,803 


Less accumulated depreciation for: 






Buildings and improvements 


9,493,556 


2,286,876 


— 


11,780,432 


Machinery and equipment 


21,516,278 


1,592,644 


— 


23,108,922 


Infrastructure 


154,393,967 

185,403,801 

663,745,646 

$ 872,517,983 


13,341,698 
17,221,218 
46,757,138 
112,085,644 


— 


167,735,665 


Total accumulated depreciation 


— 


202,625,019 


Total capital assets being depredated, net 





710,502,784 


Capital assets, net 


(62,204,276) 


922,399,351 



20 



ANNUAL REPORT 2007 



Capital assets, not being depreciated: 
Land 

Construction in progress 
Total capital assets not being depreciated 

Capital assets, being depreciated: 
Buildings and improvements 
Machinery and equipment 
Infrastruaure 
Total capital assets being depreciated 

Less accumulated depreciation for: 

Buildings and improvements 

iWachinery and equipment 

Infrastruaure 
Total accumulated depreciation 
Total capital assets being depreciated, net 
Capital assets, net 



Balance at 

December 31, 

2005 


Increases 


Decreases 


Balance at 

December 31, 

2006 


$ 2,519,243 
155,719,432 


3,365,000 
91,686,080 


(44,517,418) 


5,884,243 
202,888,094 


158,238,675 


95,051,080 


(44,517,418) 


208,772,337 


65,599,726 
26,764,636 
714,962,536 


902,786 

717,272 

40,202,491 

41,822,549 

2,007,225 
1,642,753 
11,605,640 
15,255,618 
26,566,931 
121,618,011 


— 


66,502,512 
27,481,908 
755,165,027 


807,326,898 


— 


849,149,447 


7,486,331 
19,873,525 
142,788,327 


— 


9,493,556 
21,516,278 
154,393,967 


170,148,183 


— 


185,403,801 


637,178,715 


— 


663,745,646 


$ 795,417,390 


(44,517,418) 


872,517,983 



During 1999, the Boston Redevelopment Authority (BRA) took land owned by the Commission through eminent domain. 
The book value of the land, at the time of the taking, was $7,598,710. A portion of this loss, $6,632,000, of which 
$4,863,466 and $5,084,533 remain unamortized at December 31, 2007 and 2006, respectively, was 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. 



BOSTON WATER AND SEWER COAAMISSION 



(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, 2007 and 2006 
(amounts in thousands). 



Balance at Additions Reductions Balance at Amounts 

December 31, December 31, due within 

2006 2007 one year 



DESCRIPTION 



Revenue bonds: 



1992 Series A, bearing interest rates $ 30,810 
ranging from 6.1% to 5.75%, with maturity dates 

ranging from November 1,2008 to 2013 

1 993 Series A, bearing interest rates 46,735 
ranging from 5.125% to 5.25%, with maturity dates 

ranging from November 1,2012 to 2019 

1994 Series A, bearing a variable interest rate, 31,700 
with maturity dates ranging from 

November 1,2008 to 2024 



1,000 



30,810 



46,735 



30,700 



4,445 



1,000 



1998 Series A, bearing Interest rates 12,960 

ranging from 5.0% to 5.125%, with maturity dates 
ranging from November l,2014to 2015 

1 998 Series C, bearing Interest rates 1 1 ,220 

ranging from 4.5% to 5.2%, with maturity dates 
ranging from 2008 to 2021 

1998 Series D, bearing Interest rates 1 12,020 

ranging from 4.525% to 5.0%, with maturity dates 
ranging from November 1,2008 to 2028 

2002 Series A, bearing interest rates 4,000 

ranging from 3.0% to 3.0%, with maturity dates 
of November 1,2007 



2,990 



4,000 



12,960 



11,210 



109,030 



3,130 



2003 Series A, bearing interest rates 

ranging from 2.5% to 4.0%, with maturity dates 
ranging from November 1 , 2008 to 201 1 

2004 Series A, bearing Interest rates 

ranging from 3.0% to 5.0%, with maturity dates 
ranging from November 1,2008 to 2025 



18,800 



51,455 



319,700 



3,585 



770 



12,355 



15,215 



50,685 



307,345 



3,690 



550 



12,825 



Plus (less) unamortized loss on refunding 
Plus (less) unamortized Issue discount 

Net revenue bonds 



(3,013) 
748 

$ 317,435 



(759) 
113 



11,709 



(2,254) 
635 

305,726 



12,825 



22 



ANNUAL REPORT 2007 



DESCRIPTION 



Balance at Additions Reductions Balance at Amounts 

December 31, December 31. due within 

2005 2006 one year 



Revenue bonds: 

1992 Series A, bearing interest rates 

ranging from 6.1% to 5.75%, with maturity dates 
ranging from November 1,2008 to 2013 

1993 Series A, bearing interest rates 

ranging from 5.125% to 5.25%, with maturity dates 
ranging from November 1,2012 to 2019 

1994 Series A, bearing a variable interest rate, 
with maturity dates ranging from 
November 1,2007 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 2007 to 2021 

1998 Series D, bearing interest rates 

ranging from 4.625% to 5.0%, with maturity dates 

ranging from November 1, 2007 to 2028 

2002 Series A, bearing interest rates 

ranging from 3.0% to 3.0%, with maturity dates 
of November 1,2007 

2003 Series A, bearing interest rates 

ranging from 2.5% to 4.0%, with maturity dates 
ranging from November 1,2007 to 2011 

2004 Series A, bearing interest rates 

ranging from 3.0% to 5.0%, with maturity dates 
ranging from November 1 , 2007 to 2025 



Plus (less) unamortized loss on refunding 
Plus (less) unamortized issue discount 
Net revenue bonds 



$ 30,810 



46,735 



32,600 



12,960 



11,230 



114,875 



900 



22,295 



52,245 



331,630 



916 



2,855 



3,495 



790 



11,930 

(793) 
168 



30,810 



46,735 



31,700 



12,960 



11,220 



112,020 



4,000 



18,800 



51,455 



319,700 

(3,013) 
748 



1,000 



2,990 



4,000 



3,585 



770 



12,355 



$ 328,740 — 11,305 317,435 12,355 



23 



BOSTON WATER AND SEWER COMMISSION 



Annual sinking fund requirements and debt principal and 
interest maturities for all future years as of December 31, 
2007 are as follows (amounts in thousands): 



2007 



2006 



REVENUE BONDS 

2008 

2009 

2010 

2011 

2012 

2013-2017 

2018-2022 

2023-2027 

2028-2030 



Principal 

$ 12,825 
13,430 
14,080 
14,775 
15,530 
83,715 
88,530 
56,445 
8,015 

$ 307,345 



Interest 

15,629 
15,020 
14,368 
13,669 
12,917 
51,570 
29,317 
9,015 
334 

161,839 



(a) Prior Year Debt Refunding 

In the aggregate, $145,220,000 remains outstanding at 
December 31, 2007, on the bond issues that were 
defeased "in-substance" during prior years. 

(b) Restricted Cash and Investments 

The Commission has established both trusteed and 
nontrusteed funds with investments, principally short- 
term securities, which are restricted for payment of spec- 
ified liabilities, capital projects, or other costs 
of operations. The components of the trusteed and 
nontrusteed investments at December 31, 2007 and 2006 
are as follows: 





2007 


2006 


Trusteed: 






Other government obligations 


$ 142,074,337 


94,545,865 


Money market and cash investments 


1,419,253 


1,851,322 


Open-ended mutual funds 


2,465,285 


640,150 


Commercial paper 


— 


39,024,983 


Repurchase agreements 


11,746,250 


11,746,250 




$ 157,705,125 


147,808,570 



Nontrusteed: 






U.S. Government Agencies 


$ 6,116,898 


119,902 


Money market and cash investments 


9,104,046 


19,578,975 


Open-ended mutual funds 


16,769,396 


19,729,318 


Commercial paper 


— 


9,814,225 



Restricted cash and investments 
Less trusteed and nontrusteed cash 
Trusteed and nontrusteed investments $ 1 79,1 72,1 66 



31,990,340 
189,695,465 
(10,523,299) 



49,242,420 
197,050,990 
(21,430,297) 
175,620,693 



The Commission's bond resolution requires certain 
accounts to maintain a minimimi balance at all times. 
The resolution allows the Commission to utilize surety 
bonds where the issuer maintains a minimum credit rating 
of an "AA" or equivalent towards the minimum balance in 
the senior debt service reserve account. Subsequent to year- 
end, the surety bond provider was downgraded to below an 
"AA" or equivalent. In response to the downgrade, with 
Board approval, the Commission transferred cash to the 
senior debt service reserve account to fund the difference. 
The bond resolution is silent on the amount of time to fund 
a reserve shortfall, however, it does define an event of 
default as any violation of the bond resolution that is not 
resolved in 30 days or, if that period is not adequate, as 
expeditiously as possible in whatever reasonable period of 
time is required. The Commission funded the shortfall 
within 42 calendar days. 

(c) Long-Term Notes Payable 

During 1997 and 1996, the Commission executed loan 
agreements with the Massachusetts Water Pollution 
Abatement Trust (MWPAT) to finance and refinance a 
portion of the Commission's water pollution abatement 
projects. For purposes of offsetting principal and interest 
payments, an amount aggregating approximately 
$7,797,000 as of December 31, 2007, consisting of 
contract assistance payments from the Commonwealth 
of Massachusetts and other interest subsidies from 
MWPAT, will be recognized as capital grants over the 
remaining term of the loans. 



24 



ANNUAL REPORT 2007 



The scheduled loan payments for all MWPAT obligations and related subsidies are shown below as of 
December 31, 2007 (amounts in thousands): 













Contract 


















Equity 


assistance 












Principal 


Interest 


Total 


earnings 


payments 


Total 


Principal 


Interest 


Total 


2008 


$ 1,750 


705 


2,455 


347 


815 


1,162 


1,130 


172 


1,302 


2009 


1,825 


623 


2,448 


309 


815 


1,124 


1,186 


145 


1,331 


2010 


1,894 


543 


2,437 


271 


801 


1,072 


1,235 


125 


1,360 


2011 


1,971 


459 


2,430 


230 


801 


1,031 


1,290 


103 


1,393 


2012 


2,057 


372 


2,429 


188 


804 


992 


1,354 


80 


1,434 


2013-2017 


6,485 


660 


7,145 


346 


2,070 


2,416 


4,595 


98 


4,693 




$ 15,982 


3,362 


19,344 


1,691 


6,106 


7,797 


10,790 


723 


11,513 



The Commission has entered into various interest free loan agreements with the MWRA. Under these agreements, the 
Commission is required to repay these loans in annual installments as part of the MWRA's Infiltration/Inflow Local 
Financial Assistance program (I/I), Local Water Infrastructure Rehabilitation Program (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 long term note activities for the years ended December 31, 2007 and 2006. 



Description 

MWRA I/I Program Phase III, interest free, 
due August 15,2010 

MWRA I/I Program Phase IV, interest free, 
due February 15,2012 

MWRA I/I Program Phase V, interest free, 
due November 15,2012 

MWRA RA.R Program, interest free, 
due November 15,2017 

MWPAT Pool I, subsidized interest, 
due August 1,2013 

MWPAT Pool II, subsidized interest, 
due August 1,2015 

MWPAT Pool III, subsidized interest, 
due February 1,2017 

Total long-term notes 



Balance at 

December 31, 

2006 


Additions 


Reductions 


Balance at 

December 31, 

2007 


Amounts 

due within 

one year 


$ 2,602,616 


— 


881,806 


1,720,810 


881,806 


4,345,436 


3,035,807 


1,345,655 


6,035,588 


1,952,817 


— 


2,968,351 


— 


2,968,351 


593,670 


30,970,575 


1,563,000 


4,309,993 


28,223,582 


4,466,293 


5,164,611 


— 


654,144 


4,510,467 


678,894 


4,992,828 


— 


437,504 


4,555,324 


464,301 


7,502,391 


— 


586,417 
8,215,519 


6,915,974 
54,930,096 


606,435 


$ 55,578,457 


7,567,158 


9,644,216 



25 



BOSTON WATER AND SEWER COAAMISSION 



Description 


Balance at 

December 31, 

2005 


Additions 


Reductions 


Balance at 

December 31, 

2006 


Amounts 

due within 

one year 


MWRA I/I Program Phase III, interest free, 
due August 15,2010 


$ 3,484,422 


— 


881,806 


2,602,616 


881,806 


MWRA I/I Program Phase IV, interest free, 
due May 15, 2011 


3,510,382 


1,817,258 


982,204 


4,345,436 


1,345,655 


MWRA R A.R Program, Interest free, 
due November 15,2016 


28,507,722 


6,157,133 


3,694,280 


30,970,575 


4,309,993 


MWPAT Pool 1, subsidized interest, 
due August 1,201 3 


5,754,450 


— 


589,839 


5,164,611 


654,144 


MWPAT Pool II, subsidized interest, 
due August 1,201 5 


5,408,311 


— 


415,483 


4,992,828 


437,504 


MWPAT Pool III, subsidized interest. 


8,070,563 


— 


568,172 


7,502,391 


586,417 


due February 1,2017 






Total long-term notes 


$ 54,735,850 


7,974,391 


7,131,784 


55,578,457 


8,215,519 



(5) SHORT-TERM OBLIGATIONS 

During fiscal year 2007, tiie Commission instituted a commercial paper program for the purpose of financing 
capital expenditures. The following represents the Commission's commercial paper outstanding as of December 31, 2007 
and 2006: 



Description 


Balance at 

December 31, 

2006 


Additions 


Reductions 


Balance at 

December 31, 

2007 


Commercial paper notes: 
Cabrera Capital program due March 7, 2008 


$ 5,000,000 


25,000,000 


15,000,000 


15,000,000 


Lehman Brothers program due 
February 1 3, 2008 through August 6, 2008 


20,000,000 


127,800,000 


116,200,000 


31,600,000 


Total long-term notes 


$ 25,000,000 


152,800,000 


131,200,000 


46,600,000 


Description 


Balance at 

December 31, 

2005 


Additions 


Reductions 


Balance at 

December 31, 

2006 


Commercial papernotes: 
Cabrera Capital program due January 12,2007 


$ - 


5,000,000 


_ 


5,000,000 


Lehman Brothers program due 
January 8,2007 through March 2, 2007 




20,000,000 
25,000,000 




20,000,000 


Total long-term notes 


$ - 


— 


25,000,000 









Subsequent to December 31, 2007, all outstanding commercial paper notes were rolled over into other commercial paper 
notes with maturities ranging from January 7, 2008 to April 9, 2008 with interest rates ranging from 0.95% to 2.95% at 
maturity. The notes were then rolled-over again with new maturity dates later in fiscal year 2008. 



26 



ANNUAL REPORT 2007 



(6) AAASSACHUSETTS WATER RESOURCES 
AUTHORITY 

The MWRA 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 MWRA'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 assessments by the Authority for 2007 
and 2006 are as follows: 





2007 


2006 


Assessments allocated on: 






Water usage 


$ 63,342,139 


61,786,176 


Wastewater usage 


96,394,712 


92,349,702 


Total 


$ 159,736,851 


154,135,878 



In 2007 and 2006, over 82% and 81% respectively, 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 ten City departments 
during 2007 and 2006, respectively, based on actual 
consumption of $5,189,049 and $4,630,853. 

The City provides services to the Commission, including 
paving and facilities rental. Operating costs billed to the 
Commission by the City were $405,227 and $463,243 
during 2007 and 2006, respectively. Capital costs billed 
by the City were $2,578,880 and $1,168,471 during 
2007 and 2006, 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, 2007 
and 2006 receivables totaling $150,404 and $160,373, 
respectively, 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 trans- 
ferred into the tax lien program for collection. 
As of December 31, 2007 and 2006, $846,464 and 
$796,007, respectively, remains outstanding. 

(8) PENSION 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. 

A dispute concerning the Commission's past and future 
obligations 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 setdement 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 proportion of each employee's total years of 
creditable service, level of compensation, and group clas- 
sification. Employees become 100% vested after ten years 
of creditable service as defined by Chapter 32 of the 
Massachusetts General Laws (MGL). 



27 



BOSTON WATER AND SEWER COAAMISSION 



(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 benefi- 
ciaries. Chapter 32 of the MGL assigns authority to 
establish and amend benefit provisions of the plan. The 
System issues a publicly available financial 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 1 1 % of annual covered com- 
pensation. 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 employers 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 contributions 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, 2007, 2006 and 2005 were 
approximately $528,649, $501,311 and $498,219, 
respectively, which equaled its required contribution each 
year. Total employee contributions, based on 
actuarially determined amounts, were approximately 
$2,352,561, $2,214,840 and $2,094,303, or 8.9% of 
covered payroll in 2007, 2006 and 2005, 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 reim- 
burse 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 oi; for vested employees, are used to defray a 
portion of the total retirement benefit. The Commission's 
policy is to make employer contributions to the Trust 
Fund based upon the actuarially determined cost of future 
benefits, net of employee contributions. 

Trust Fund assets at December 31, 2007 and 2006 are 
as follows: 





2007 


2006 


Assets (at feir value): 






Common stock 


$ 35,519,458 


38,188,602 


International stock 


14,235,538 


14,713,678 


Fixed income 


28,449,049 


27,215,774 


Total 


$ 78,204,045 


80,118,054 



The Trust Fund activity is as follows: 



Assets (at fair value), December 31, 2005 


$ 73,864,257 


Employer contributions 


501,311 


Investment income and gains 


9,169,176 


H/lanagementfees 


(302,465) 


Payments to SBRS 


(3,114,225) 


Assets (at fair value), December 3 1 , 2006 


80,118,054 


Employer contributions 


528,649 


Investment income and gains 


3,888,098 


Management fees 


(296,980) 


Payments to SBRS 


(6,033,776) 


Assets (at fair value), December 3 1 , 2007 


$ 78,204,045 



The investment portfolio is regulated by the MGL, 
Chapter 32, Section 23. The investments are managed by 
independent investment advisors. Bank of America 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. 



28 



ANNUAL REPORT 2007 



(9) POST-EMPLOYMENT BENEFITS OTHER THAN 
PENSIONS 

GASB Statement No. 45, Accounting and Financial 
Reporting by Employers for Postemployment Benefits 
Other Than Pensions, is required to be implemented by 
governments with annual revenues greater than $100 mil- 
lion for financial statement periods beginning after 
December 15, 2006. Statement No. 45 requires govern- 
ments to account for other postemployment benefits, 
primarily healthcare, on an accrual basis rather than on a 
pay-as-you-go basis. The effect is the recognition of an 
actuarially required contribution as an expense when a 
future retiree earns their postemployment benefit rather 
than when they use their postemployment benefit. To 
the extent that an entity does not fund their actuarially 
required contribution, a postemployment benefit liability 
is recognized over time. 

In addition to offering pension benefits to their retirees, 
the Commission also offers other post-employment 
benefits (OPEB) upon retirement. 

The Commission participates in the City of Boston's 
health insurance program, which is administered by 
the City of Boston as an agent multiple-employer defined 
benefit OPEB plan. The OPEB plan does not issue a 
stand-alone financial report. Participation in the City's 
plan was made via an agreement between the City and the 
Commission and may be amended with the agreement of 
both parties. The Commission also offers its retirees dis- 
ability and life insurance, which are established and 
amended via collective bargaining agreements and the 
Policy Governing Executive Employees. 

Medical and prescription drug benefits are provided to all 
eligible retirees not enrolled in Medicare through a variety 
of plans offered by Blue Cross Blue Shield of 
Massachusetts, Harvard Pilgrim HealthCare, and 
Neighborhood Health Plan. Medical and prescription drug 
benefits are provided to retirees enrolled in Medicare 
through supplemental and Medicare Advantage plans 
offered by Blue Cross Blue Shield of Massachusetts, 
Harvard Pilgrim HealthCare, and Tufts Health Plan. 

Groups 1 and 2 retirees with at least 10 years or 20 years 
of creditable service are eligible at age 55 or any age, 
respectively. Retirees on ordinary or accidental 
disability retirement are eligible at any age while ordinary 
disability retirement requires 10 years of creditable service. 
The surviving spouse is eligible to receive both pre- and 
post-retirement death benefits, as well as 
medical and prescription drug coverage. 



(a) Funding Policy 

Employer and employee contribution rates are governed by 
the collective bargaining agreements and the Policy 
Governing Executive Employees. Prior to January 1, 2008, 
the City of Boston paid for the Commission's retirees' 
health benefits. Subsequent to January 1, 2008, the 
Commission will be responsible for the payment of their 
retirees' health benefits. The Commission currently funds 
the plan on a pay-as-you-go basis. The Commission and 
plan members share the cost of health insurance. As of June 
30, 2005, the valuation date, the plan members contribute 
10% to 25% of the monthly premium cost, depending on 
the plan in which they are enrolled. The Commission con- 
tributes the balance of the premium cost. 

(b) Annual OPEB Cost and Net OPEB Obligation 

The Commission's annual OPEB expense is calculated based 
on the annual required contribution of the employer (ARC), 
an amount actuarially determined in accordance with the 
parameters of GASB Statement No. 45. The ARC represents 
a level of funding that, if paid on an ongoing basis, is pro- 
jected to cover the normal cost each year and amortize any 
unfunded actuarial liability over a period of thirty years. The 
following table shows the components of the Commission's 
armual OPEB cost for the year ending December 31, 2007, 
the amount actually contributed to the plan, and the change 
in the Commission's net OPEB obligation based on an actu- 
arial valuation as of June 30, 2005: 



Annual Required Contribution (ARC) 
Interest on net OPEB obligation 
Adjustment to ARC 

Annual OPEB cost 

Contributions made 

Change in net OPEB obligation 

Net OPEB obligation — beginning of year 
Net OPEB obligation — end of year 



$ 5,987,121 



5,987,121 



5,987,121 



$ 5,987,121 



The Commission's annual OPEB cost, the percentage of 
annual OPEB cost contributed to the plan, and the net 
OPEB obligation were as follows: 



Fiscal Year Annual 
Ended OPEB Cost 



Percentage of 
OPEB Cost 
Contributed 



2007 



$ 5,987,121 



Net OPEB 
Obligation 

5,987,121 



The Commission's net OPEB obligation as of December 
31, 2007 is recorded as a component of the "Other Long 
term Liability" line item. 



29 



BOSTON WATER AND SEWER COAAMISSION 



(c) Funded Status and Funding Progress 
The funded status of the plan as of December 31, 2007, 
based on an actuarial valuation as of June 30, 2005, was 
as follows: 



Actuarially accrued liability (AAL) 
Actuarial value of plan assets 


$ 85,588,894 


Unfunded actuarial accrued liability (UAAL) 

Funded ratio (actuarial value of plan assets/AAL) 
Covered payroll (active plan members) 
UAAL as a percentage of covered payroll 


$ 85,588,894 

— % 

$ 23,410,932 

365.59% 



Actuarial valuations of an ongoing plan involve estimates 
of the value of reported amounts and assumptions about 
the probability of occurrence of events far into the future. 
Examples include assumptions about future employment, 
mortality, and the healthcare cost trend. Amounts deter- 
mined regarding the funded status of the plan and the 
annual required contributions of the Commission are sub- 
ject to continual revision as actual results are compared 
with past expectations and new estimates are made about 
the future. The schedule of funding progress, presented as 
required supplementary information following the notes to 
the financial statements, presents multi-year trend infor- 
mation that shows whether the actuarial value of plan 
assets is increasing or decreasing over time relative to the 
actuarial accrued liabilities for benefits. 



(d) Actuarial Methods and Assumptions 
Projections of benefits for financial reporting purposes are 
based on the substantive plan (the plan as understood by 
the Commission and plan members) and include the types 
of benefits provided at the time of each valuation and the 
historical pattern of sharing of benefit costs between the 
Commission and plan members to that point. The actuar- 
ial methods and assumptions used include techniques that 
are designed to reduce short-term volatility in actuarial 
accrued liabilities and the actuarial value of assets, consis- 
tent with the long-term perspective of the calculations. 

In the June 30, 2005 actuarial valuation, the projected 
unit credit cost method was used. The actuarial assump- 
tions included a 5.0% investment rate of return and an 
annual health care cost trend rate of 10%-12% initially, 
reduced by decrements to an ultimate rate of 5% 
after 5-7 years. The health care cost trend rate differs 
between the master medical, master medical prescription 
drug, and other healthcare plans. The actuarial value 
of assets was determined using the market value of invest- 
ments. The Commission's unfunded actuarial accrued 
liability is being amortized as a level percentage of pay on 
a closed basis. The remaining amortization period at 
January 1, 2007 was thirty years. 



30 



ANNUAL REPORT 2007 



(10) DEPOSIT AND INVESTMENT RISKS 

The following represents the Commission's essential risk 
information about deposits and investments for the years 
ended December 31, 2007 and 2006. 

(a) Custodial Credit Risk 

Custodial credit risk is the risk that in the event of bank 
failure, the Commission's deposits may not be returned. 
The Commission carries deposits that are fully insured by 
FDIC insurance or collateralized with securities held by 
the Commission or the Commission's agent in the 
Commission's name. The Commission also carries 
deposits that are not collateralized and are uninsured. The 
Commission does not have a formal policy for 
managing custodial credit risk of deposits. As of 
December 31, 2007 and 2006, the bank balances of unin- 
sured and uncollateralized deposits totaled approximately 
$8,165,731 and $10,593,999, respectively. 

Further, all of the Commission's investments are held by a 
third-party in the name of the Commission. 

(b) Investment Policy 

Investment of Commission funds is governed by federal 
and state law and is restricted to permitted investments as 
defined by the Commission's General Revenue Bond 
Resolution and Supplemental Resolutions. Revenues gen- 
erated from the investment of Commission funds reduce 
the amount the Commission must charge to its customers, 
while any investment losses would negatively affect the 
Commission's general rates and charges. Consequently, 
the Commission shall at all times maintain a fully invested, 
diversified portfolio with the objective of achieving the 
highest yield that is attainable in conjunction with a very 
low risk of loss of capital. The basic criteria that will be 
used in making investment decisions include the evalua- 
tion of risk/reward tradeoffs, historical price spreads 
between different securities, the slope of the yield curve 
and the anticipated cash flows of the different investment 
accounts of the Commission. 

Current permitted Investments under the General 
Revenue Bond Resolution include: 



1. Any bond or other obligation to which principal and 
interest are unconditionally guaranteed by the United 
States of America. 

2. Any bond or other obligation of any state, agency or 
local government unit of any state which are: 

A. noncallable 

B. fully collateralized by fund consisting of cash, 
bonds or obligations of one of the above. 

3. Public Housing bonds which are secured by the United 
States of America, certain notes issued by 
public agencies or municipalities fully secured by the 
United States of America or obligations issued by State 
or public agencies or municipalities carrying the highest 
bond rating. 

4. Obligations of any state to which the full faith and 
credit of the state is pledged and are within the two 
highest bond ratings. 

5. Prime Commercial Paper rated A-1 or P-1. 

6. Shares of a money market fund which is open ended 
and rated A or better or a money market fund of banks 
meeting certain criteria. 

7. Certificates of Deposits issued by FDIC banks which 
are fully secured by obligations described in 1 or 2 
above. 

8. Repurchase Agreements fully collateralized by 
obligations described in 1 or 2 above. 

9. Futures contracts traded on exchange for 1, 2, 3, 
and 4 above. 

A single investment can not be more than $15 million and 
can only be purchased once. Further, all investments of the 
Commission are held in the Commission's name by third- 
party. 



BOSTON WATER AND SEWER COA^MISSION 



(c) Interest Rate Risk 

The following is a listing of the Commission's fixed income investments and related maturity schedule (in years) as of 
December 31, 2007 and 2006: 



Investment type 

U.S. government agencies 
Guaranteed investment contract 
Open ended mutual funds 


Fair Value 

$ 148,191,235 
11,746,250 
19,985,486 

$ 179,922,971 


Less than 1 

56,492,884 

19,985,486 
76,478,370 


2007 
1-5 

26,265,049 


6-10 

54,636,142 


More than 10 

10,797,160 
11,746,250 




26,265,049 


54,636,142 


22,543,410 


Investment type 

U.S. government agencies 
Guaranteed investment contract 
Other (comm. paper) 
Open ended mutual funds 


Fair Value 

$ 94,665,767 
11,746,250 
48,839,208 
20,369,468 

$ 175,620,693 


Less than 1 

5,804 

48,839,208 
20,369,468 

69,214,480 


2006 
1-5 

31,461,192 


6-10 

17,783,534 


More than 10 

45,415,237 
11,746,250 




31,461,192 


17,783,534 


57,161,487 



The Commission's guidelines do not specifically address limits on maturities as a means of managing its exposure to fair 
value losses arising from increasing interest rates. 

(d) Credit Risk 

The Commission's fixed income investments as of December 31, 2007 and 2006 were rated by Standard and Poor's and/or 
an equivalent national rating organization and the ratings are presented below using the Standard and Poor's 
rating scale: 



2007 



Investment type 


Fair Value 


AAA 


U.S. government agencies 


$ 147,405,596 


147,405,596 


Guaranteed investment contract 


11,746,250 


— 


Open ended mutual funds 


19,985,486 


19,985,486 



AA Not rated 

— 11,746,250 



$ 179,137,332 



167,391,082 



11,746,250 



Investment type 


Fair Value 


AAA 


U.S. govemment agencies 


$ 93,527,652 


93,527,652 


Guaranteed investment contract 


11,746,250 


— 


Other (comm. paper) 


48,839,208 


— 


Open ended mutual funds 


20,369,468 


20,369,468 




$ 174,482,578 


113,897,120 



2006 



AA 



48,839,208 



48,839,208 



Not rated 

11,746,250 

11,746,250 



ANNUAL REPORT 2007 



As of December 31, 2007 and 2006, the Commission had 
$785,639 and $1,138,115 of investments that are explic- 
itly guaranteed by the U.S. goverimient that are not 
included above schedules, respectively. 

(e) Concentration Risk 

The Commission has no investments, at fair value, that 
exceed 5% of the Commission's investments as of 
December 31, 2007 and 2006. 

(11) LEASE COA^MITMENTS 

The Commission leases office space and equipment under 
various 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 
$104,362 and $134,141 in 2007 and 2006, respectively. 

(12) COMMITMENTS 

The 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 
infrastructure. Commitments under these contracts aggre- 
gate approximately $52.1 million as of December 31, 
2007. Capital improvements, primarily related to enhance 
the operation of the water and sewer system projects 
including reducing pollution to Boston Harbor and neigh- 
boring waterways, are expected to aggregate approximately 
$146.9 million for 2008 through 2009. Of this amount, 
approximately $128.4 million represents extension and 
improvement projects and $18.5 million represents renew- 
al and replacement projects. The extension and improve- 
ment projects will be funded by federal, state and 
Massachusetts Water Resources Authority grants and 
loans. The remaining amounts will be funded from the 
Commission's bond proceeds and operating revenues. 

(13) RISK AAANAGEMENT AND OTHER INSURANCE 

The Commission carries self insured retention limits for 
claims filed under workers' compensation and general lia- 
bility and completely self insures for all unemployment 
benefits. The workers' compensation self insured reten- 
tion limit is $750,000 per claim and is supplemented with 
$25 million in excess coverage purchased through an 
outside carrier. For general liability, the Commission's self 
insured limits are $1 million per occurrence, $2.5 million 
aggregate, and is subordinate to $10 million of excess 
coverage purchased through an outside carrier. Under the 
sections of the Model Water and Sewer Act, the 
Commission's tort Uability is capped at $100,000 
per claimant. 



The Commission maintains other insurance coverage as 
follows: 



Policy type 


Coverage 


Vehicles 


Combined single limit of $1 million/accident, 
ttiere is a $5,000/occurrence deductible 
for property damage 


Property 


Aggregate limit of $108 million on Harrison Ave. 
with other sublimits at other BWSC facilities. 


Public officials 


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


Fiduciary 


$2.5 million coverage; 

with $10,000 deductible per claim 


Crime 


Employee dishonesty coverage of $5 million 



Insurance claims for all policies have not exceeded cover- 
age by a material amount in the past three years. 

The Corrmiission participates in the City's health benefits 
plans for which the City assesses monthly premiums to 
the Commission based on current enrollments. 

Liabilities for self insured claims are reported if it is prob- 
able that a loss has been incurred and the amount can be 
reasonably 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 dur- 
ing 2007 and 2006 were immaterial. 

Changes for the years ended December 31, 2007 and 
2006 are as follows: 





2007 


2006 


Beginning balance of reserves 


$ 2,294,914 


2,367,407 


Payment of daims attributable to 
events of both cun'ent and prior years: 






Workers' compensation 


(267,453) 


(422,493) 


General liability 


(156,150) 


— 


Incurred daims 


598,000 


350,000 


Ending balance of reserves 


$ 2,469,311 


2,294,914 



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



33 



BOSTON WATER AND SEWER COMMISSION 



(14) CONTINGENCIES 

The Commission is involved in ordinary and routine 
litigation and other matters related to its operations and 
the establishment 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 reimbursement to the grantor agency for expenditures 
disallowed under terms of the grant. The Commission 
believes such disallowances, if any, will not be significant. 

The Commission is involved as a defendant in litigation 
regarding the pollution of Boston Harbor. Management 
believes that the Commission's extensive capital improve- 
ment program (see note 11) addresses probable actions 
that the Commission may be required to undertake in con- 
nection with this litigation. Additionally, the Commission 
is likely to bear either directly or through future assess- 
ments of the Authority a substantial portion of the finan- 
cial costs involved. As of December 31, 2007, the overall 
cleanup costs are estimated to be approximately $893.4 
million. However, the extent of the Commission's liability 
for these costs cannot be determined. 



34 



ANNUAL REPORT 2007 



SCHEDULE OF FUNDING PROGRESS— OPEB 

Required Supplementary Information, December 31. 2007 
(Unaudited) 



Actuarial Actuarial value Actuarial accrued Unfunded Funded ratio Covered {(b^)/c) 

valuation date of assets (a) liability (b) (b-a) (a/b) payroll (c) 

6/30/2005 $ — 85,588,894 85,588,894 — % 23,410,932 365.6% 



See accompanying independent auditors' report. 



35 



BOSTON WATER AND SEWER COAAMISSION 

SUPPLEMENTAL SCHEDULE OF 
REVENUES AND EXPENSES— RATE BASIS 



Years ended December 31, 2007 and 2006 



Revenues: 
Water revenue 
Sewer revenue 

Subtotal 
Less: 
Adjustments 
Discounts 
Bad debt 

Subtotal 

Net billed charges 

Prior year surplus 

Miscellaneous revenues: 
Late charge revenue 
Investment income 
Rre pipe revenue 
Other income 
Total revenues 

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 
Travel and training 
Damage claims 
Inventory 
Capital outlay 
Total direct operating expenses 

Nonoperating expenses: 

MWRA assessment 

Capital improvements 

Principal payments 

Interest expense 

Deposits to reserve ftjnds 

SDWA assessment 
Total nonoperating expenses 
Total current expenses 
Cunrent year rate surplus 



2007 

$ 112,633,394 
140,286,933 
252,920,327 

6,329,825 

866,197 

138,479 
7,334,501 -^ 



$ 



245,585.826 



134,108 



943,257 

7,886,944 

3,595,899 

5,367,899 

263,513,933 



28,138,771 

613,197 

6,603,848 

2,283,837 

6,582,756 

1,067,410 

2,691,028 

106,982 

1,256,064 

766,680 

53,825 

125,833 

26,304 

94,642 

50,411,177 



159,736,851 
13,758,716 
19,969,755 
15,345,212 
3,971,000 
240,468 
213,022,002 
263,433,179 
),754 



2006 



107,394,320 
125,432,655 
232,836,975 



5,609,032 
846,151 
361,202 

6,816,385 
226,010,590 



582,292 



993,771 

7,833,296 

3,469,844 

8,509,793 

247,399,586 



26,801,523 

605,167 

5,927,567 

2,308,064 

4,181,232 

1,351,769 

2,782,136 

137,077 

1,385,327 

782,078 

46,358 

534,744 

17,100 

85,151 

46,945,293 



154,135,878 
11,147,813 
18,527,795 
15,702,119 
568,000 
238,580 

200,320,185 

247,265,478 

134,108 



This supplemental schedule presents the Commission's revenues and expenses on the basis that is presented in the Commission's budget 
and rate-setting dcKuments. See foomote 1 in the notes to the basic financial statements for the differences between this supplemental 
schedule and CjAAP. 
See accompanying independent auditors' report. 



36 



ANNUAL REPORT 2007 






BOSTON WATER AND SEWER COMMISSION 

980 HARRISON AVENUE 

BOSTON, MA 021 19 

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