HomeMy WebLinkAbout11/01/1988, C-9 - WATER PROJECT FINANCING ����Inl�plll�l�ll�llr MEETING GATE:
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�j��l� Cl o san lugs oB�spo November 1, 1988
us COUNCIL AGENDA REPORT 11E "NUMBERe_ CJ
FROM: William C. Stader, Director of Finance
SUBJECT: WATER PROJECT FINANCING
CAO RECOMMENDATION
Authorize staff to initiate proceedings for the issuance of $5 million in Certificates of
Participation/Lease Revenue Bonds in order to provide financing for approved water
projects.
OVERVIEW
The proposed project financing is in conformance with the policies, objectives, and
projects outlined in the 1987-89 Financial Plan, and is recommended for implementation at
this time due to the following factors:
• Enables all approved water projects to proceed expeditiously.
• Record keeping and investment earning advantages associated with completing a
small debt issuance (defined by the IRS as $5 million or less) prior to the
close of 1988.
• Favorable market conditions for an issuance of this type.
The following summaries of the proposed financing and improvement projects are provided
in Attachments A, B, and C:
• Attachment A provides an overview of the proposed financing including issue
size, anticipated net proceeds, project summary, maturity term, type of issue,
projected interest rate, and tentative calendar.
• Attachment B provides a summary of the proposed projects to be financed.
• Attachment C is a memorandum from the Director of Utilities describing the
project scope in greater detail using tables excerpted from the Capital
Improvement Section of the Draft Water Management Plan.
FISCAL IMPACT
The use of debt proceeds for the financing of the proposed projects was identified and
approved in the 1987-89 Financial Plan. Additionally, the estimated cost of the debt
service on an issuance of approximately $5 million was included in the water rate
analysis approved by the City Council on June 6, 1988. As such, there is no adverse
fiscal impact associated with this action, and approval of the recommended action would
be consistent with the City's adopted financial plans.
CONSEQUENCES OF NOT TAKING THE RECOMMENDED ACTION
Failure to initiate proceedings at this time will:
• Delay the implementation of approved water projects, which are dependent upon
the proceeds from the issue for funding as identified in the 1987-89 Financial
Plan, Draft Water Management Plan, and recent water rate review. e�'— f� /
city of San LUIS OBISpo
AMoGe COUNCIL AGENDA REPORT
• Result in a lost opportunity to conduct a small issue financing during 1988,
which provides significant record keeping and interest earning advantages to the
City.
• Result in a potential lost opportunity to benefit from current market conditions
which are especially favorable at this time for an issuance of this type.
BACKGROUND
In preparing the workscope for the Financial Services Study currently in progress, it was
originally anticipated that the need for any water project financings and related water
rate increases would be addressed as an integral part of the study. However, significant
progress has already been made in this area: as part of the water rate increase approved
by the City Council on June 6, 1988, provisions were made to fund the operating and
capital needs of the water system, and accordingly, the debt service on an issue of
approximately $5 million (estimated at $490,000 annually) was reflected in the water rate
analysis. As summarized in Attachment B, this size issue would provide funding for those
projects addressed in the 1987-89 Financial Plan and Draft Water Management Plan, with
the exception of the construction component of the Salinas Reservoir Expansion and
Balancing Reservoir projects, which were not included at this time due to uncertainties
regarding cost and feasibility.
Initial presentation of the Financial Services Study to the City Council is currently
scheduled for a study session in early January as part of the 1989-91 Financial Plan
preparation process. Rather than waiting for the completion of the Financial Services
Study, it is recommended that the City initiate proceedings for the issuance of $5
million in Certificates of Participation/Lease Revenue Bonds (COP'S/LRB's) to be
completed prior to the end of 1988.
As noted previously, one of the primary benefits of proceeding at this time includes the
record keeping and investment earning advantages associated with completing a small debt
issuance (defined by the IRS as $5 million or less) prior to the close of 1988. Under
the Tax Reform Act of 1986, there are significant restrictions on the investment of
proceeds from any debt issuances that exceed $5 million cumulatively during any calendar
year. Under these provisions, the issuing agency is prohibited from earning investment
revenues greater than the net interest cost of the financing. In addition to limiting
the investment earning potential from bond proceeds (which prior to the restrictions were
used to reduce the size of the issue and related annual debt service costs), these
arbitrage restrictions place significant record keeping burdens on the issuing entity in
determining and documenting any such variances. Due to the significant penalties
associated with any violation of these provisions (including the withdrawal of tax
benefits to the bond holder, which is the primary incentive for them to purchase local
agency securities), most agencies contract annually with a Big 8 accounting firm to
provide this service at costs ranging from $5,000 to $20,000 per year per issue. By
completing this issuance prior to the close of the current calendar year, the City can
take advantage of the reduced record keeping and interest earning requirements associated
with a small debt issuance.
RECENT FINANCING EXPERIENCE
The City's most recent project financing was completed on July 15, 1986, with the
issuance of $13,970,000 in Lease Revenue Bonds related to the Madonna Road and other
street improvements ($5,000,000) and the construction of parking structures
($8,970,000). Net proceeds available for construction from the issue after debt service/-f 02—
����►� ��uIINa1�1110I11 city of San Luis OBISp0
COUNCIL AGENDA REPORT
reserve requirements, capitalized interest, and issuance costs were $10,208,000. The
bonds were issued through the San Luis Obispo Capital Improvements Board, which was
established on April 15, 1986 as a public facilities financing authority. The City
Council serves as the Board of Directors for this agency. The portion of the issue
pertaining to road improvements was secured by the sale of property (City Hall and Police
Station) to the Board from the City. The issuance of the COP'S or LRB's through the
Board is also anticipated for the proposed financing.
Other recent uses of debt financing include lease-purchase agreements for construction of
the corporation yard, acquisition of the City Hall telephone system, and purchase of the
financial management information system computer. Historical uses of debt financing
include the issuance of general obligation and revenue bonds in the late 1950's and early
1960's for the construction and implementation of various water and sewer facilities,
including the City's share of the Whale Rock Reservoir.
The City's current debt management policies are provided on page B-3 of the 1987-89
Financial Plan. As noted previously, the proposed financing is in accordance with these
policies.
ACTIONS REQUIRED TO INITIATE THE PROPOSED FINANCING
As part of the workscope of the Financial Services Study currently in progress, the City
Council selected the firm of Evensen Dodge to serve as the City's Financial Advisor for
any project financings that may be initiated during the next five years. As such, a
significant step in the project financing has already been accomplished. The following
is a summary of additional City Council actions required to initiate the remaining
proceedings:
Bond Counsel Services - Legal services are required in conjunction with any project
financing. Customary services include the preparation of documents and opinions
related to the financing; consultation regarding federal tax and state public finance
laws; and other legal matters which may arise in the course of planning and
conducting debt financings. As noted above, a master agreement for Financial Advisor
Services was an integral part of the City's Financial Services Study process.
Although subject to annual renewal, the agreement with Evensen Dodge anticipates an
ongoing relationship of at least five years. It is recommended that a similar
approach also be used in selecting and retaining bond counsel services. This
selection process has already been initiated, with RFP's sent to the top five
California bond counsel firms on October 10, 1988. Pursuant to this RFP process, it
is recommended that the City Council authorize the CAO, with the concurrence of the
City Attorney, to enter into an agreement for bond counsel services with the selected
f irm.
Approval of Financing Documents - The formal approval by the City Council of a
variety of documents is required prior to closing the project financing, including
the bond indenture, trust agreement, and official statement. Prepared by the
Financial Advisor and Bond Counsel, it is anticipated that these documents will be
submitted for City Council approval at the November 15, 1988 meeting. In conjunction
with the preparation and execution of these documents, the services of a trustee,
paying agent, registrar, and transfer agent will also be required. It is anticipated
that the City's Financial Advisor (Evensen Dodge) will assist in the selection of
firms providing these services, and it is recommended that the City Council authorize
the CAO to enter into any required agreements.
city of San tins OBISpo
A COUNCIL AGENDA REPORT
Competitive Sale - The project financing can be placed with an underwriter (the
purchaser of the issue who provides the City with the net proceeds from the
financing) through either a negotiated or competitive sale. Under a negotiated sale,
the City and its Financial Advisor negotiate directly with the prospective
underwriter for the placement terms such as discount, other underwriter fees, and
interest rate. Under a competitive sale, the City awards the placement to an
underwriter based on a competitive bid process. Depending on the complexity of the
issuance, improvements to be funded, time constraints, debt instruments, repayment
structure, and market conditions; there are advantages and drawbacks to each
approach. For this project financing, a competitive sale is anticipated.
Closing Date and Award of Bid - Under the competitive sale approach, it is
anticipated that the award of bid for the placement of the debt issuance will be made
on December 12, 1988, which has already been scheduled for a City Council study
session. Award at that time should allow sufficient time for the preparation of
closing documents and receipt of net proceeds prior to the end of 1988.
SUMMARY
In order to provide funding for currently approved water projects, it is recommended that
the City Council authorize the following actions:
• Authorize staff to initiate proceedings for the issuance of $5 million in
Certificates of Participation/Lease Revenue Bonds.
• Authorize the CAO, with the concurrence of the City Attorney, to enter into an
agreement for bond counsel services.
• Authorize the CAO to enter into agreements for other services incidental to the
project financing, such as trustee services, paying agent, registrar, or
transfer agent.
CONCURRENCES:
City Attor y
Director of Utilities
ATTACHMENTS
Overview of the proposed financing (Attachment A).
Summary of the proposed projects (Attachment B).
Description of the project scope (Attachment Q.
BOND COUNSEL/AGRPTWTR
ATTACHMENT A
SUMMARY OF PROPOSED PROJECT FINANCING
------------------------------------------------------------------------------ --
1987-89 Financial Plan
Draft Water Management Plan
• Policy Links: Water Rate Review, June 6,1988
• Issue Size: $5,000,000
• Anticipated net proceeds after debt service
reserve requirements and issuance costs: 54,400,000
• Project cost summary (See Attachments 8 and C):
Source of supply 575,000
Distribution system 2,050,000
Treatment plant 1,739,300
Total estimated project costs 54,364,300
Certificates of Participation
• Type of debt instrument: or Lease Revenue Bonds
San Luis Obispo
• Issued through: Capital Improvement Board
• Maturity period: 20 years
• Estimated interest rate: 8.0% to 8.5%
• Estimated annual debt service: 5490,000
• Schedule of key events:
Initiate selection process for band counsel October 10, 1988
City Council authorization to initiate proceedings for
debt issuance; authorization for CAO, with concurrence of the
City Attorney, to enter into an agreement for bond counsel services November 1, 1988
Formal City Council approval of bond documents
and authorization to solicit underwriter bids November 15, 1988
Closing date; City Council award of bid (scheduled study session) December 12, 1988
* Public facilities financing corporation established on April 15, 1986;
the City Council serves as its Board of Directors.
ATTACHMENT B
SUMMARY OF WATER CAPITAL PROJECTS BASED ON THE 1987-89 FINANCIAL PLAN AND DRAFT WATER MANAGEMENT PLAN
SOURCE OF SUPPLY
Golf course wells 75,000
Salinas Reservoir expansion
Design 250,000
Construction 2,450,000
Groundwater wells 250,000
---------------
Total source of supply projects 3,025,000
---------------
DISTRIBUTION SYSTEM
Pump and valve improvements
Pump station - Hathway B Freeway 90,000
Pressure reducing valve relocation @ Chorro & Foothill 80,000
Pressure reducing valve 8 Johnson & Buchan 30,000
Other pump/valve improvements 130,000
Water main reconstruction and upgrades
Higuera - South of Marsh 160,000
George Street 100,000
Higuera - California to Johnson 80,000
Monterey Garfield to Freeway 150,000
Johnson to Henry 230,000
Monterey to Reservoir No. 1 180,000
Highway 1 8 Foothill 240,000
Other water main projects 580,000
Balancing reservoir 2,500,000
---------------
Total distribution system projects 4,550,000
---------------
WATER TREATMENT PLANT
Floculation basin improvements 235,900
Master control system 65,000
Telemetry system improvements 70,000
Imrproved backwash facilities 211,300
Chemical feed facilities 135,400
Standby emergency power 85,000
Filter media conversion/underdrain system 260,000
Operations center 250,000
Other water treatment plant improvements 426,700
---------------
Total water treatment plant projects 1,739,300
---------------
TOTAL PROJECTS RECOMMENDED FOR FINANCING AT THIS TIME
Source of supply 575,000
Distribution system 2,050,000
Water treatment plant 1,739,300
---------------
TOTAL $4,364,300
* Due to uncertainties regarding cost and feasibilty, financing for these projects is not recommended at this time.
d- f-4
ATTACHMENT C
Bisnjo- s o
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..,
L _--� 955 Morro Street • San Luis Obispo, CA 93401
October 12, 1988
MEMORANDUM
To: Bill Statler, Director of Finance
From: William T. Hetland, Utilities Director '
Subject: Summary of Recommended Water Fund Projects
Attached is a summary of recommended water fund projects and their
estimated costs. The summary is divided into three catagories:
A. Water Source of Supply $ 31025, 000
B. Water Treatment Plant 11739, 300
C. Water Distribution 4 , 550, 000
Total $ 91314, 300
These projects were taken from the Draft Water Management Plan and
the 1988/89 Financial Plan and Budget and are the basis for the Water
Funds capital program over the next five years.
* Water Source of Supply
The Water Source of Supply projects include projects for development
of additional water resources for the City. The emphasis is in two
areas; groundwater and expansion of the Salinas Reservoir. The
initial phases of the groundwater projects (including construction)
are underway. The feasibility study and design phase of the Salinas
Reservoir is under contract.
* Water Treatment Plant
The Stenner Canyon Water Treatment Plant was constructed in 1963 and
was reviewed in the Draft Water Management Plan. The primary areas
which were analyzed included plant flexibility and operational
efficiency, replacement of outdated or deteriorated facilities,
ability to meet State Health Department requirements and increase in
plant capacity. The recommendation was to improve the flocculation
and filtration processes plus address some hydraulic restrictions
within the plant. Nineteen specific projects were identified in
order to upgrade the plant.
Summary of Recommended Water Fund Projects
Page 2
* Water Distribution
Parts of the City's water distribution system are over one hundred
years old and are undersized to meet the needs of a modern
community. As part of the development of the Draft Water Management
Plan the City staff used a computer program to analyze our
distribution system. The analysis looked at improving system
reliability, reducing our pressure zones and minimizing our energy
requirements in delivering water to our customers.
The analysis showed that by restructuring our pressure zones the City
could save on its energy costs. This is possible by the addition of
new water lines and the replacement of some old undersized lines in
addition to some new valve and pump system improvements.
The analysis also showed that the southeastern portion of the City
was deficient in treated water storage. It was proposed that a
balancing reservoir be added to the, system in that area. The
balancing reservoir has not been authorized by the council and
additional justification will be necessary before it can proceed.
watfunproj/n
SUMMARY OF RECOMMENDED WATER FUND PROJECTS
A. WATER SOURCE OF SUPPLY TOTAL
1. Golf Course design $ 10,000
construction $ 65,000
2. Salinas Reservoir Expansion study/design $ 250,000
construction $2,450,000
3. Water Well Location and Development
study/design $ 60,000
construction $ 190.000
TOTAL WATER SOURCE OF SUPPLY PROJECTS $3,025,000
B. WATER TREATMENT PLANT TOTAL
1. Flocculation Basin Improvements $ 235,900
2. New Master Control System $ 65,000
3. Influent Rate Control $ 25,100
4. Improved Backwash Facilities $ 211,300
5. Surface Wash Piping and Valve Replacement $ 28,300
6. Clarifier Bypass Line $ 55,900
7. Chemical Feed Facilities $ 135,400
8. Filter Rate Control and Instrumentation $ 91,000
9. Clarifier Improvements $ 19,900
10. Expanded Laboratory Facilities $ 7,500
11. Standby Emergency Power $ 85,000
12. Cover Clarifier/Filter Influent Flume $ 8,000
13. Filter Media Conversion/Underdrain System $ 260,000
14. Influent Piping Modifications $ 86,700
15. Radio Telemetry Monitoring/Control System $ 70,000
16. Chemical Application and Flash Mixing $ 19,800
17. Direct Filtration Option $ 24,500
18. Miscellaneous Hydraulic Restrictions $ 60,000
19. Operations Center S 250,000
TOTAL TREATMENT PLANT PROJECTS $1,739,300 '%
RECOMMENDED WATER FUND PROJECTS
Page 2
C. WATER DISTRIBUTION TOTAL
1. Balancing Reservoir $2,500,000
2. Water Main reconstruction/improvements
California/Hathway $ 20,000
California/Foothill $ 20,000
Monterey/Andrews $ 20,000
Serrano Heights $ 20,000
Ella/Johnson $ 10,000
Oakridge/Ferrini Tank $ 90,000
Serrano/Ramona/Broad $ 20,000
Skylark/Wilding $ 60,000
Ramona/La Entrada $ 10,000
Johnson/Henry $ 230,000
Monterey to Reservoir 1 $ 180,000
Highway I/Foothill $ 240,000
La Entrada/Catalina $ 20,000
Ella/Johnson to Sierra $ 20,000
Higuera/Marsh South $ 160,000
George St $ 100,000
Higuera/California/Johnson $ 80,000
Monterey/Garfield/Freeway $ 150,000
Buena Vista $ 80,000
Santa Ynez $ 70,000
Morro St. $ 30,000 _
Court St. $ 30,000
McCollum $ 60,000
3. Pump and Valve improvements
Pressure Reduc Valve - Grand/Wilson $ 30,000
Check Valve - Warren Way/Patricia $ 10,000
Remove Air Compressor - Alrita $ 10,000
Check Valve - Alrita/Flora $ 20,000
Pump Station - Hathway/Freeway $ 90,000
Pressure Reduc Valve - Highland/Oakridge $ 30,000
Check Valve - Johnson/Bishop $ 10,000
Pressure Reducing Valve - Johnson/Buchon $ 30,000
Pressure Reducing Valve - Chorro/Foothill $ 80,000
Emergency Pumping Hydrants $ 20,000
TOTAL DISTRIBUTION PROJECTS $4,550,000