City government

Good news, bad news for city on water financing

By From page A8 | July 19, 2013

The city recently got some good news and some bad news related to financing its share of the Woodland-Davis Clean Water Agency surface water project.

The good news, ironically, comes in the form of a contaminated supply of drinking water. The bad news is that the rates the city adopted to pay for the $110 million project, which will serve Davis with a new supply of drinking water by 2016, are still tied up in court.

Both ground wells serving North Davis Meadows, an unincorporated community adjacent to the Davis Golf Course north of town, exceed the state’s maximum nitrate levels, forcing residents to use bottled water for all of their drinking water.

Davis may be able to cash in on those spoiled wells because officials from the California Department of Public Health have proposed a deal where, if the city pipes drinking water to North Davis Meadows, the department would bump Davis into the “fundable range” for very low-interest loans through the state revolving fund program.

If the city borrowed money with those widely sought-after state funds to pay for the entire cost of the surface water project, it could save Davis and its ratepayers $60 million over the cost of other bonding options, according to Herb Niederberger, the city’s general manager of utilities, development and operations.

State revolving funds usually carry a payback term of 20 years at a very low interest rate, perhaps between 1.5 and 2 percent, as compared to traditional bonds that carry 30-year terms with higher interest rates closer to 4 and 5 percent, according to Niederberger.

Ratepayers likely wouldn’t see a huge difference in their monthly utility bills for 20 years because of the quicker payback term associated with the SRF loans, but city leaders are still excited about the prospect of saving a substantial amount of money nonetheless.

“It’s very exciting that this is a possibility, particularly the potential to qualify for SRF rates and the amount of money that it potentially saves the ratepayers overall,” Councilman Lucas Frerichs said last week. “That’s very positive.”

Water bills are still expected to triple over the next five years and continue to rise thereafter.

City management estimates that building a pipeline to North Davis Meadows and connecting the homes to Davis’ water supply would cost about $6 million, $2 million of which would be paid back by the unincorporated community over the next 20 years with similar, low-interest rates. Those terms could change, however.

Yolo County would be responsible for all of the local connections to the water supply and the corresponding meters.

Staff will work with all interested parties over the next few weeks to come to a full agreement, which will be presented to the City Council for approval after its members return from their recess in late August.

The bad news

Local officials say the lawsuit that’s been filed against the city, which alleges that the water rates the council adopted earlier this year are illegal, has creditors concerned.

That concern, city officials say, is jeopardizing not only potential interest rates, but also the type of bonds the city can issue to pay off the project.

“With a lawsuit pending, it will impact the types of financing the city can use and most likely will cost the ratepayers additional funding over the course of the project,” City Attorney Harriet Steiner said earlier this week.

“A lawsuit will always impact what (lenders) are willing to invest. … (Our advisers and the lenders) who are working on that will tell you that the city won’t be able to borrow money at the most advantageous rates while a lawsuit is pending.”

City Manager Steve Pinkerton said that with the lawsuit hanging over the rates, the city cannot make public offerings to investors, which consistently produce better interest rates for the issuers than limited private offerings. He also said the lawsuit could affect the city’s ability to lock down those desirable state revolving funds.

The suit was filed in March by a group called the Yolo Ratepayers for Affordable Public Utility Services, who claim, among other things, that the city’s water and sewer billing systems don’t charge ratepayers fairly under Proposition 218.

If the city can’t shake the lawsuit soon, Pinkerton says Davis may borrow only enough cash to pay for the first year of costs for the surface water project. And with interest rates at record lows, even modest increases in debt service could affect ratepayers dramatically.

“Let’s say two years from now we finance the balance of (the project), but rates are 2 percent higher at the time,” Pinkerton explained. “It could cost $1 (million) to $2 million per year (extra) of debt service at that point.”

An increase in $1 million of debt service per year translates to $50 per ratepayer.

“This could cost the ratepayers millions and millions of dollars,” Pinkerton said.

The city manager and his financial advisers are still considering what to ultimately recommend to the City Council, which will have to sign off on any financing plan that Pinkerton comes up with.

Expediting lawsuit

In an attempt to expedite the lawsuit’s proceedings and excise any problems from the city’s financing prospects, city legal staff filed a motion last month with Yolo Superior Court to bifurcate the overarching complaint.

Essentially, Steiner has asked the court to make a ruling on the sections of the lawsuit that allegedly are scaring away lenders from handing over their best interest rates.

In the motion, which will receive a ruling on Tuesday from Yolo Superior Court Judge Dan Maguire, the city’s legal team argues that bifurcation would result in a “more efficient resolution of this litigation, preserve judicial resources and minimize undue prejudice to the city.”

City staff also hope to set a hearing schedule so that the suit can be resolved in a timely manner without affecting the timing of the project. If the lawsuit is resolved by September, Steiner says, the city could turn to creditors with a clean bill of fiscal health.

“It’s absolutely clear to the city, based on all the experts we’ve been working with, the city would get much more desirable borrowing rates (without the lawsuit), which would translate to benefits to the ratepayers,” Steiner said.

But not so fast. The attorney representing the group suing the city, Michael Harrington — the Davis resident who led the referendum campaign that overturned the city’s water rates the first time the council tried to pump them up to pay for the water project in 2011 — has filed opposition to the bifurcation.

Harrington, in the plaintiff’s rebuttal, says it would not be fair to rule on the motion and the validity of the water rates based only on the city’s administrative record, or documented evidence pertaining to the case.

The plaintiffs’ attorney says the city’s record is incomplete.

“The requested relief, if granted, would do nothing to further judicial efficiency,” Harrington’s opposition states. “Moreover, such relief would severely prejudice the rights of plaintiffs by depriving them of the right to make a complete presentation with cross-examination of witnesses.”

Steiner has said the city asked the plaintiffs to add whatever they’d like to the record, but Harrington wants access to all city documents in order to ensure that everything pertinent is included.

As for the city’s request for bifurcation due to the financial implications, the plaintiffs have no sympathy.

“To the extent the city claims an urgency because it has already signed binding contracts, this is a self-inflicted wound, and does not serve as a basis to punish plaintiffs,” Harrington said.

Harrington adds that the city knew of the pending lawsuit on the rates before it entered into its “amended and restated Joint Powers (Authority) Agreement.”

The city signed the original JPA agreement in 2009.

Judge Maguire will make a tentative ruling on the bifurcation Tuesday, which will become the “ruling of the court” Wednesday unless a party desiring to be heard indicates it would like to appear in court.

Harrington would not say whether he would challenge the ruling if the judge finds in favor of the city.

— Reach Tom Sakash at [email protected] or 530-747-8057. Follow him on Twitter at @TomSakash

Tom Sakash

Tom Sakash covers the city beat for The Davis Enterprise. Reach him at [email protected], (530) 747-8057 or @TomSakash.
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