Cash Reserves

AWWA Policy Statement on Cash Reserves

The American Water Works Association (AWWA) believes that utilities should establish cash reserve policies that identify adequate reserve levels, how those levels are established, and the intended use of each reserve. For the purpose of this policy statement, the term “cash” includes cash equivalents (i.e., short-term investments that are easily convertible to known cash amounts). Properly designed reserve policies are beneficial to a utility and its customers and are an integral component of financial sustainability. Utilities should review the philosophy or approach used to establish reserve policies at least every three to five years or more frequently if a utility’s risk profile changes.

In establishing reserve policies, a utility should consider its financial leverage, operational and capital risks, regulatory risk, infrastructure risk, level of risk tolerance, governing financial requirements, future capital funding requirements, revenue, and cost volatility, as well as other ways to manage or mitigate financial risks. A utility should identify the intent of each specific reserve that it establishes and maintains. Reserves designated for a specific purpose are recommended to be dedicated for their intended use. However, allowing for some flexibility in the use of the reserve may be warranted.

Utilities should monitor reserve levels at least annually to evaluate conformity with reserve policies and ensure they have the appropriate level of financial resources. If cash reserves are used, resulting in reserve levels falling below minimum reserve targets, the utility should plan for the replenishment of the reserves within a reasonable timeframe. Improving a utility’s cash position is one of the best ways to enhance a utility’s credit rating.

Practices specified in this policy statement are consistent with all other pertinent AWWA policy statements.

Adopted by the Board of Directors Executive Committee on October 24, 2018, and March 27, 2025.