HomeMy WebLinkAboutC-2971 - Groundwater Project FinancingM
Agenda Item No. 10
CITY OF NEWPORT BEACH ; C.
DEPARTMENT OF FINANCE j
Interdepartmental Memorandum DEC 1 3 1993
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December 1, 1993 APPROVED
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
C -297/
FROM: Dennis Danner, Director of Finance
Jeff Staneart, Utilities Director
SUBJECT: GROUNDWATER PROJECT FINANCING
DISCUSSION:
As the City Council is aware, there is a capital project underway to obtain groundwater
wells for the City, thereby reducing the City's reliance on the Metropolitan Water
District to fulfill all of the City's water needs. Briefly, this project involves drilling
water wells in the City of Fountain Valley, pumping and transporting this water to the
City, and storing it for use by City residents and businesses.
The concept of this project has been discussed for many years. As the cost of MWD
water has increased, the project has become increasingly attractive from an economic
standpoint. In anticipation of this project, the City has been accumulating reserves
within the Water Fund to at least partially fund the project. As of June 30, 1993,
approximately $7.0 million had been accumulated for this project. The best and most
current total cost projection of the project is $18.0 million, including $2.0 million already
spent.
There have been several discussions by the Utilities Committee as to the best way to
pay for this project. The alternatives are to sell water bonds for all or a portion of the
construction, or to finance the project from a combination of reserves and future water
rate increases. At the Utilities Committee meeting of November 19, 1993, there was
discussion of issuing additional debt for the financing of future capital projects, i.e.,
placing a cover on Big Canyon Reservoir. Staff is exploring this possibility.
At the City Council study sessions of October 11, 1993, and November 22, 1993, these
financing alternatives were discussed. Also at the November 22, 1993, study session a
cash flow analysis f9r the Water Fund, with and without bond financing was presented.
This analysis indicated that the ending Reserve Account balance within the Water Fund,
after 15 years, would be approximately $3.0 million higher with the issuance of bonds.
The analysis also indicated that a rate increase would be required to finance the project
if the bonds were not sold.
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GROUNDWATER PROJECT FINANCING
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A further question was raised at the Study Session as to how the project could be
funded without bond financing? In response, staff has prepared another analysis,
which also includes the other recommended long term capital project priorities.
Included in this analysis are the City's ongoing water main replacement program, water
quality improvement program, and other necessary water capital improvement
projects. This analysis indicates that a water rate increase of approximately 46 percent
would be required in fiscal year 1994 -95. A further increase of approximately 2 percent
would be required in fiscal year 1995 -96. These projected rate increases include
assumed MWD price increases of approximately 20 percent each year. The MWD price
increases would necessitate a City water rate increase with or without the bond
financing. These increases will be eliminated once the water wells begin producing
water. A copy of this analysis is attached to this staff report.
Staff believes that rate increases of this magnitude would be unacceptable, and may not
fully fund the necessary capital improvement program of the Water Fund. Further, this
approach would require expending all existing Water Fund reserves, and would
preclude all flexibility to address unforeseen emergencies or events.
A final reason for issuing debt at this time to fund the project is because of the attractive
long term financing rates. Water revenue bonds could currently be issued with a net
interest cost of approximately 5.3 percent. The City currently earns in excess of 7.0
percent on its cash reserves. This difference produces the $3.0 million positive cash
flow of issuing debt to finance the project. If this situation ever reverses, the bonds
would have an early call provision to defease the issue. This would help protect the
City from undue exposure of an interest rate reversal.
Also at the Study Session of November 22, 1993, a projected calendar of events was
presented to the Council, if the bond financing is to proceed. This projected schedule
indicated that the bond counsel and trustee for the financing would be selected at the
December 13, 1993, Council meeting if bonds were to be sold in January or February,
1994. Attached to this report is a copy of the projected bond financing schedule.
FACTS:
1. Proposals for bond counsel services were received from the following firms
(excluding out of pocket expenses):
Richards, Wafson & Gershon $40,000.00
Brown, Diven & Hentschke 39,687.50
Rutan & Tucker 35,000.00
Stradling, Yocca, Carlson & Rauth 33,750.00
GROUNDWATER PROJECT FINANCING
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2. Proposals for trustee services were received from the following firms:
Acceptance Fee Annual Admin. Fee
U. S. Trust $4,500.00 $3,500.00
Bank of America 4,500.00 3,200.00
First Interstate Bank 3,500.00 2,500.00
Meridian Trust Company 2,200.00 2,500.00
3. References for bond counsel and trustee services are excellent for all of the above
mentioned firms.
4. The fees quoted are reasonable and competitive.
5. Initial charges for bond counsel and trustee services will be paid out of bond
proceeds. Thereafter, the annual administration fee for the trustee will be budgeted
within the Water Fund.
6. The analysis was prepared using an initial bond offering of $13,750,000, which
would net the City $12,000,000 for construction purposes.
RECOMMENDATIONS:
It is respectfully recommended that the City Council proceed with the issuance of
Water Revenue Bonds and retain the services of Stradling, Yocca, Carlson & Rauth for
bond counsel, and Meridian Trust Company for trustee. It is further recommended that
this item be referred back to the Utilities Committee to determine the amount of the
bond issue.
11/07/9311:17 AM WATER1 DOC
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