SR-505-006
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srbonds
Council Meeting: January 23, 1990
505-00p
Santa Monica, california
TO:
Mayor and City Council
FROM:
city staff
SUBJECT:
Recommendation to Proceed wi th Revenue Bond
Issuance for city's Capital Portion of the Hyperion
wastewater Treatment System and Authorize the city
Manager to Retain Bond Counsel and Financial
Advisor
INTRODUCTION
This report recommends that the ci ty Council direct staff to
initiate a $28.31 million revenue bond offering to finance Santa
Monica's five-year capital portion of the cost to upgrade the
Hyperion Wastewater Treatment System ($27.5 million) and various
other net costs associated wi th issuance of the bonds. The
report also recommends that the city council authorize the city
Manager to retain a bond counsel and a financial advisor for the
bond offering.
BACKGROUND
The Hyperion Treatment Facility is owned by the City of Los
Angeles and its subscribing agencies. The City of Santa Monica
contracts with the City of Los Angeles for sewer treatment and
disposal services, as do several other area cities and agencies.
Due to Federal Clean Water Act requirements, the ci ty of Los
Angeles is in the process of upgrading and expanding the
treatment system to provide full secondary treatment for all
wastewater. These improvements will greatly improve the quality
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of effluent which is eventually discharged into Santa Monica Bay.
As a contract agency with the City of Los Angeles, Santa Monica
is required to pay its pro-rata share (2.6%) of all costs
associated with the operating and maintenance (O&M) costs and
capital improvement costs at the Hyperion Treatment Plant. The
City's share of Capital improvement costs over the next ten years
is $56 million.
In addition, Los Angeles has been mandated by the california
Department of Water Resources to renegotiate all existing
wastewater contracts in order that each contracting agency is
treated in a fair and equitable manner. This is a recent
requirem.ent for all agencies, such as Los Angeles, who have
received federal and State grants. The results of the
renegotiation will affect capacity allocations, monitoring
requirements and the costs associated with sewage treatment.
DISCUSSION
On June 13, 1989, staff presented a report to council which
discussed the significant increases in Hyperion O&M and capital
costs and the impact on the Wastewater Fund. The report stated
that in order to finance Santa Monica's O&M and capital costs
over the next five years solely through wastewater fees (pay as
you go) it would require a rate increase of 180%. Staff
recommended that Council finance the increased costs through the
combination of an 81% wastewater rate increase and a bond
issuance. council approved the rate increase and directed staff
to return with a report on bonding options.
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Basis for O&M and capital Costs
The prior report included a five-year projection of $27.5 million
(1989/90 to 1993/94) of future wastewater fund expenditures based
on estimated costs provided by the City of Los Angeles in a memo
dated April 21, 1989. The city of Los Angeles cost estimates are
based the following assumptions which are subject to change:
- Currently Santa Monica's flow is 11.4 mgd and
staff estimates that future flow will be equal to
or less than 12 mgd during the next five years. A
change in the flow assumption will result in a
decrease of capital costs charged to santa Monica
from that presented in the April 21, 1989 memo from
Los Angeles.
- The estimated costs are also based on Santa
Monica's reported levels of sewage strength which
the City of Los Angeles considers to be unusually
low. The City of Los Angeles is proposing that a
domestic residential average for sewage strength be
used for O&M costs and a design treatment capacity
for sewage strength be used for capital costs.
Adoption of this proposal would increase Santa
Monica's share of O&M and capital costs.
- The city of Los Angeles has been mandated by the
state to allocate future O&M charges based on flow
and strength. Currently costs are allocated on
flow only per Santa Monica's contract with Los
Angeles. By using both flow and strength as the
basis of cost allocation, Santa Monica's O&M costs
will be less than the current contract terms. This
is reflected in the April 21, 1989 memo from Los
Angeles numbers. The April capital projections also
were based on flow and strength, although the city
of Los Angeles is not mandated by the state to
allocate capital costs in this manner. The City of
Los Angeles is now considering charging future
capital costs based solely on flow. If this
practice is used, Santa Monica's capital costs will
increase.
FINANCING OPTIONS
In order to determine the optimal financial package for the city,
Public Financial Management Inc. (PFM) of San Francisco was
retained to investigate and analyze the bonding options
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available. The options, as identified in PFMts financing plan
for the City of Santa Monica, are:
- Bond Issuance by the City of Santa Monica
- Bond Issuance with other Contract Agencies
in a Joint Power Authority (JPA)
- Financing through the City of Los Angeles
PFM explored these options and the various types of bonds
available to Santa Monica: general obligation bonds, revenue
bonds and lease revenue bonds (certificates of participation,
nonprofit corporation lease bonds, joint powers authority bonds).
PFM recommends, and staff concurs, that the city pursue a revenue
bond issuance on its own for the following reasons.
-Revenue bonds isolate the Wastewater Fund revenues
as security for the bonds without the pledge of
General Fund revenues.
-Revenue bonds, as available to the City of Santa
Monica under its City Charter provisions, provide a
simpler structure for issuance when compared with
the need to create a nonprofit corporation or Joint
Powers Authority or the necessity to negotiate with
the City of Los Angeles for favorable financing
terms.
staff believes the City should move ahead expeditiously with
issuing revenue bonds to take advantage of the current favorable
market trends and interest rates. If prevailing interest rates
increase by one-half of a percentage point over the assumed rate
of 7.26% used in the bond sizing model presented in this report,
Santa Monica's estimated annual debt service payment would
increase by $76,000, or $1,520,000 over the 20-year bond life.
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Five-Year Wastewater Fund projections
In addition to the capital requirements there are opertion and
maintenance fund modifications that must be made. The Q&M costs
for each fiscal year presented in the June 13, 1989 staff report
were based on the past practice of paying the previous year's
costs in the current fiscal year. Bonding covenants require that
payments be made in the year that the costs are accrued.
Therefore, the five-year fund projection upon which the bonds
will be based reflects these changes. The revised Wastewater
Fund status, assuming debt financing, is as follows:
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1988-89/1992-93
WASTEWATER FUND BALANCE PROJECTION
ASSUMING DEBT FINANCING OF A $28.31 MILLION WASTEWATER REVENUE BOND
1988-89 1989-90 1990-91 1991-92 1992-93
Beg. Bal. 2,109,930 3,416,601 4,641,796 4,655,529 5,598,049
Revenues 5,432,5811 9,949,3962 10,109,6203 10,109,620 10,109,620
AB 16004 288,925 780,000 780,000 780,000 780,000
LESS:
City 0 & M 1,129,0765 1,863,101' 2,186,8877 2,318,1008 2,457,1868
City CIP 264,5759 1,366,10010 1,819,00010 749,00010 1,000,00011
Hyperion O&M 3,021,18412 5,015,00013 4,350,000 4,360,000 4,616,000
Hyperion CIP N/A14 N/A N/A N/A N/A
Debt Services -0- 1,260,000 2,520,000 2,520,000 2,520,000
End. Bal. 3,416,601 4,641,796 4,655,529 5,598,049 5,894,483
~ Revenues as stated in the recently completed year-end audit including
deferred AB1600 revenues.
2 Revenues as stated in the 1989-90 adopted budget plus $157,932 in
additional industrial wastewater fees to be generated in FY 1989-90 per
September 5, 1989 staff report to Council less $5,000 for non-operating
revenue which cannot be used for bond covenant.
3 Assumes no further rate increases and an additional $160,224 generated from
the fully implemented industrial wastewater program.
4 Assumes that the ABl600 deferred revenue can be used for bond covenant. A
formal legal opinion will be made by the bond counsel retained by the city.
5 Expenditures as stated in the recently completed year-end audit
6 Expenditures as stated in the 1989-90 adopted budget plus $142,692 as
appropriated for expanded industrial wastewater program per september 5, 1989
staff report to Council.
7 Includes 6% increase and an additional $212,000 for fully implemented
industrial wastewater program.
8 Includes 6% increase
9 Expenditures as stated in recently completed year-end audit
10 Per adopted 1989-90 through 1991-92 CIP program less Hyperion capital
costs which will be paid by bond proceeds
11 1992-93 CIP estimate
12 1988-89 0 & M payment which was budgeted at $3,500,000 for FY 1989-90
13 1989-90 budget of $3.5 million was to pay FY 1988-89 bill. Subsequent to
budget adoption, corrected bill for FY 1988-89 of $3,021.184 was received and
paid. Bill for FY 1989-90 is projected at $5,015,000.
14 Hyperion capital costs will be paid by bond proceeds.
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staff is also recommending that the City Council authorize the
City Manager to retain a bond counsel.
BUDGET/FINANCIAL IMPACT
Financing the Hyperion capital costs through debt financing will
eliminate the need to further raise user fees to fund the
$27,512,000 required for Hyperion capital payments over the next
five years. The impact is $1,260,000 in debt service in 1990 for
the first year of the bonds and $2,520,000 for the remaining
nineteen years of the bond life. The FY 1989-90 adopted Capital
Improvements budget reflects a Hyperion payment of $7,656,000
which will be reduced to $1,260,000 needed to pay the first year
debt service payment. This will result in a net decrease to the
wastewater Fund of $6,396,000. However, since bond covenants
require that payments be made in the year that the costs are
accrued as previously stated in the report, the Wastewater
Supplies and Expense budget for FY89-90 must be increased by
$5,015,000 to pay for the FY 1989-90 Hyperion O&M costs. This
increase results in $1,381,000 net savings to the Wastewater
Fund.
As previously noted, the total estimated ten-year capital cost to
the city for the Hyperion System Upgrade is approximately $56
million. Proceeds from the proposed bond issue will cover the
first five years of these capital costs. However, if the
proceeds exceed the amount of capital costs owed for the next
five years (1988/89 through 1992/93), they may be applied to the
capital costs of subsequent years or can be used to call down the
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bonds.
conversely, if the proceeds from the bond issue are
inadequate to cover the capital costs owed for 1988/89 through
1992/93 due to project cost overruns, staff will reevaluate the
Cityts financing options and return to Council with additional
financing recommendations.
staff will return to Council in FY 1992-93 to present a financing
plan based on the most current cost estimates received from the
City of Los Angeles for Santa Monica's portion of Hyperion
capital costs for the period of 1993/94 to 1998/99.
RECOMMENDATION
It is recommended that the City Council:
1. Direct staff to proceed with issuing revenue bonds for
financing the Cityts share of the Hyperion capital costs;
.2. Decrease the 1989-90 adopted capital Improvement account
Number
31-760-661-24290-8928-99123
(Hyper ion
Capital
Contribution) from $7,656,000 to $1,260,000; and
3. Appropriate $5,015,000 from the Wastewater Fund to Account
Number 31-500-661-00000-5512-00000 for FY 1989-90 O&M costs; and
4. Authorize the City Manager to retain a bond counsel and a
financial advisor.
Prepared by: Stan Scholl, Director of General services
Byron Gaines, utilities Manager
Jean Higbee, Administrative Analyst
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