REPORT TO THE CITY COUNCIL December 11, 2014 FROM: THOMAS C. ESQUEDA, Director Department of Public Utilities THROUGH: STEPHEN A. HOGG, Assistant Director Department of Public Utilities - Wastewater Management Division BY: KEVIN L. NORGAARD, PE, Supervising Professional Engineer Department of Public Utilities - Wastewater Management Division SUBJECT ..Title Actions pertaining to the Recycled Water Distribution System, Southwest Quadrant State Revolving Fund loan documents (Council District 3) 1. RESOLUTION - To authorize the Director of Public Utilities to sign a financing application for a financing agreement with the California State Water Resources Control Board 2. ***RESOLUTION - To finance the cost of improvements 3. ***RESOLUTION - To pledge revenues and funds to satisfy repayment obligations for the financing agreement ..Body RECOMMENDATION Staff recommends that City Council adopt a resolution authorizing the Director of Public Utilities to sign a financing application for a financing agreement with the California State Water Resources Control Board (CSWRCB), a resolution to finance the cost of improvements relating to the Recycled Water Distribution System, Southwest Quadrant Projects, and a resolution to pledge revenues and funds to satisfy repayment obligations for the financing agreement of the Recycled Water Distribution System, Southwest Quadrant Projects. EXECUTIVE SUMMARY On September 14, 2014 the Governor of California signed into law three bills that are collectively referred to as the Sustainable Groundwater Management Act (the Act). The Act recognizes that excessive groundwater extraction can cause overdraft, failed wells, deteriorated water quality, environmental damage, and irreversible land subsidence - all of which require corrective action. The Recycled Water Master Plan prepared by the Department of Public Utilities' Wastewater Management Division (Division) identifies opportunities to assist with compliance of this law by reducing groundwater pumping and replacing groundwater with recycled water for non-potable purposes (i.e. outdoor irrigation, dust control, fountains, etc.). The Division's long-term goal is to produce and deliver 25,000 acre-feet of recycled water to the City's service area to reduce groundwater over drafting. The Southwest Quadrant Projects are the first phase of recycled water distribution facilities to deliver recycled water to the community. The Division is requesting the adoption of three resolutions required to apply for a low-interest (1 percent) State Revolving Fund (SRF) loan, as managed by the CSWRCB. The proceeds from the low-interest loan will be used to finance the Southwest Quadrant Projects for the Division's Recycled Water Distribution System. The amount to be financed with the low-interest loan is approximately $51 million dollars. Utilizing the SRF loan will allow the Division to optimize the management of available cash reserves, reduce the need for future bond issuances for capital improvement projects, and minimizing future user fee rate increases. BACKGROUND In July 2013, the City entered into a consultant services agreement with Blair Church & Flynn Consulting Engineers to design the Southwest Quadrant portion of the Division's Recycled Water Distribution System. The Southwest Quadrant Project will deliver recycled water from the Fresno/Clovis Regional Wastewater Reclamation Facility to southwest Fresno and downtown Fresno. For bidding and construction purposes, the Southwest Quadrant Project was segregated into four separate pipeline projects designated as SW1A, SW1B, SW1C and SW1D, as well as a fifth project which is a recycled water booster pumping station. The Southwest Quadrant Project will consist of 22 miles of recycled water distribution main, ranging in size from 8" to 54", and an estimated cost of $51 million dollars. On April 24, 2014, Council approved three resolutions to allow for the use of SRF loans to finance the design and construction of SW1A of the Southwest Quadrant Project. The first resolution was to authorize the Director of Public Utilities to sign a financing agreement with the California State Water Resources Control Board. The second was to finance the cost of improvements associated with SW1A. The third resolution was to pledge revenues and funds to satisfy repayment obligations for the financing agreement of the project. After consultation with the CSWRCB, Division staff has determined that it is financially beneficial for the City and the City's ratepayers to modify our SRF Loan Application and request low-interest loan funding for all five (5) Southwest Quadrant Projects. City Council approval of the three resolutions contained in this Agenda Item will replace the resolutions previously approved by the City Council on April 24, 2014. The Southwest Quadrant Projects were originally planned to be funded during FY2014 and FY2015 using available cash reserves in the Division's Sewer Enterprise Fund. Utilizing low-interest (1 percent) SRF loans for the Southwest Quadrant Projects will allow the Division to optimize the management of available cash reserves, reduce the need for future bond issuances for capital improvement projects, and minimizing future user fee rate increases. Given the financial scale of the Division's CIP, staff recommends financing the Southwest Quadrant Project using a low-interest SRF loan from the CSWRCB. Using a low-interest, unsecured, thirty-year loan will enable the Division to preserve accumulated cash reserves, reduce the amount of new debt financing required in 2018, reduce future debt issuance costs and debt service payments, reduce future debt service coverage requirements, and minimize future user fee rate increases - all of which will optimize the management of the Division's cash reserves. The current interest rate for SRF loans is approximately 1.0 percent, which is lower than the 4.5 percent previously secured for revenue bond debt for DPU. The SRF loan will be used to reimburse the Sewer Enterprise Fund for progress payments made during construction, and the City will not be required to begin making debt service payments on the low-interest SRF loan until twelve months after the completion of construction. In addition, while the CSWRCB will encumber the entire amount of the low-interest loan (i.e. $51 million), interest only accrues to the City as funds are disbursed to the City for construction progress payments. The Division's financial plan is to use the low-interest SRF loan to pay the majority of the construction cost payments during the twenty-four month construction period, and then use the 12-months following construction to complete a business case-evaluation to determine if it is financially beneficial to use a portion of the Division's $102 million accumulated reserves to prepay the loan before the 30-year term. The City may, without penalty, prepay all or a portion of the loan before the 30-year term. If the business case evaluation determines that it is financially beneficial to repay the loan over the 30-year term, the $51 million that would have been used to prepay the low-interest SRF loan will be used to fund other needed projects in the Division's $376 million, five-year CIP, subject to City Council approval. The CSWRCB requires the adoption of three resolutions prior to entering into a financing agreement. The first is designating the DPU Director as the authority to apply for the SRF loan. The second is to approve the financing of the project with the CSWRCB. And the third is to pledge funds to repay the loan. The funds pledged for the repayment will be from the Sewer Enterprise Fund and are intended to be used for funding capital improvement projects. The annual debt service payment for this SRF loan will be approximately $2.0 million dollars annually for thirty years. The additional debt service will not jeopardize required debt coverage ratios. The resolutions associated with this Agenda Item have been reviewed and "approved as to form" by the City Attorney's Office. ENVIRONMENTAL FINDINGS By the definition provided in the California Environmental Quality Act Guidelines Section 15378 the approval of these resolutions do not qualify as a "project" and is therefore exempt from the California Environmental Quality Act requirements. LOCAL PREFERENCE Local preference was not involved because adopting resolutions do not include an award of a service or construction contract. FISCAL IMPACT The actual fiscal impact of adopting these resolutions is zero. However, the projected fiscal impact of the project once the construction contract is awarded is a debt service payment of $2.0 million dollars annually for a period of 30 years. The funds for the repayment will be from the Sewer Enterprise Fund and will have no impact on the General Fund. There will be no impact to the General fund because all the debt service payments will be made with Sewer Enterprise Fund revenue. This loan will help postpone the need for future rate payer increases. This project is located in Council District 3 and portions of Fresno County. Attachments: * Resolution Authorizing Director DPU to Apply for SRF Loan * Resolution Approving the Financing of the Project * Resolution Pledging Funds to Repay Loan