HomeMy WebLinkAbout04-17-18 F&A Committee Packet 1
OTAY WATER DISTRICT
FINANCE AND ADMINISTRATION
COMMITTEE MEETING
and
SPECIAL MEETING OF THE BOARD OF DIRECTORS
2554 SWEETWATER SPRINGS BOULEVARD
SPRING VALLEY, CALIFORNIA
BOARDROOM
WEDNESDAY
April 17, 2018
12:00 P.M.
This is a District Committee meeting. This meeting is being posted as a special meeting
in order to comply with the Brown Act (Government Code Section §54954.2) in the event that
a quorum of the Board is present. Items will be deliberated, however, no formal board actions
will be taken at this meeting. The committee makes recommendations
to the full board for its consideration and formal action.
AGENDA
1. ROLL CALL
2. PUBLIC PARTICIPATION – OPPORTUNITY FOR MEMBERS OF THE PUBLIC TO
SPEAK TO THE BOARD ON ANY SUBJECT MATTER WITHIN THE BOARD'S JU-
RISDICTION BUT NOT AN ITEM ON TODAY'S AGENDA
DISCUSSION ITEMS
3. APPROVE THE FIRST AMENDMENT TO THE 2001 AGREEMENT FOR THE OP-
ERATIONS AND MAINTENANCE OF THE PUMP STATION WITH THE LAKEVIEW
AT HIGHLANDS RANCH HOMEOWNERS ASSOCIATION (WALMER) [5 minutes]
4. APPROVE AMENDED AGREEMENTS TO EXTEND THE TERMS FOR TWO (2)
YEARS, PLUS THREE (3) ONE-YEAR EXTENSION OPTIONS; ONE WITH
INFOSEND TO PROVIDE BILL PRINT AND ELECTRONIC BILL PRESENTMENT
SERVICES IN AN AMOUNT NOT TO EXCEED $1,310,000 ($262,000 ANNUALLY,
INCLUDING PASS-THROUGH POSTAGE COSTS OF $170,000), AND ONE WITH
ELECTRONIC PAYMENT EXCHANGE TO PROVIDE ONLINE PAYMENT
TRANSACTION PROCESSING SERVICES IN AN AMOUNT NOT-TO-EXCEED
$1,500,000 ($250,000 ANNUALLY) (CAREY) [5 minutes]
5. RECEIVE THE DISTRICT’S INVESTMENT POLICY, BOARD OF DIRECTORS
POLICY NO. 27, FOR REVIEW AND RE-DELEGATE AUTHORITY FOR ALL
INVESTMENT RELATED ACTIVITIES TO THE CHIEF FINANCIAL OFFICER IN
ACCORDANCE WITH GOVERNMENT CODE SECTION 53607 (FAKHOURI) [5
minutes]
2
6. RECEIVE INFORMATION REGARDING A LOWER COST STRATEGY FOR
FUNDING CALPERS (KOEPPEN) [5 minutes]
7. APPROVE THE TRANSFER OF THE SAN MIGUEL FIRE TRAINING SITE TO THE
COUNTY OF SAN DIEGO FOR USE BY THE COUNTY FIRE AUTHORITY
(WATTON) [5 minutes]
8. ADJOURNMENT
BOARD MEMBERS ATTENDING:
Mark Robak, Chair
Gary Croucher
All items appearing on this agenda, whether or not expressly listed for action, may be delib-
erated and may be subject to action by the Board.
The Agenda, and any attachments containing written information, are available at the Dis-
trict’s website at www.otaywater.gov. Written changes to any items to be considered at the
open meeting, or to any attachments, will be posted on the District’s website. Copies of the
Agenda and all attachments are also available through the District Secretary by contacting
her at (619) 670-2280.
If you have any disability which would require accommodation in order to enable you to par-
ticipate in this meeting, please call the District Secretary at 670-2280 at least 24 hours prior
to the meeting.
Certification of Posting
I certify that on April 13, 2018 I posted a copy of the foregoing agenda near the regular
meeting place of the Board of Directors of Otay Water District, said time being at least 24
hours in advance of the meeting of the Board of Directors (Government Code Section
§54954.2).
Executed at Spring Valley, California on April 13, 2018.
/s/ Tita Ramos-Krogman, Sr. Confidential Executive Secretary
STAFF REPORT
TYPE MEETING: Regular Board
MEETING DATE: May 2, 2018
SUBMITTED BY:
Rita Walmer
Finance Manager
PROJECT: DIV. NO. All
APPROVED BY:
Joseph R. Beachem, Chief Financial Officer
Mark Watton, General Manager
SUBJECT: Authorize the First Amendment to the 2001 Agreement for the
Operation and Maintenance of the Pump Station with the
Lakeview at Highlands Ranch Homeowners Association
GENERAL MANAGER’S RECOMMENDATION:
That the Board authorize the General Manager to execute the First
Amendment to the 2001 agreement for the operation and maintenance of
the pump station with the Lakeview at Highlands Ranch Homeowners
Association.
COMMITTEE ACTION:
See Attachment A.
PURPOSE:
That the Board authorize the General Manager to amend the agreement
with the Lakeview at Highlands Ranch Homeowners Association (HOA).
The purpose of the amendment is to extend the time period for the
funding of the replacement reserve and allow for a gradual increase
of the funding until the reserve reaches the agreed upon target.
ANALYSIS:
The District entered into the agreement with the HOA in 2001. The
agreement calls for the HOA to pay the District for the maintenance
and operation of the pump station. The pump station was needed to
service the homes at the higher elevations because the developer did
not build a reservoir to serve these homes. Additionally, the
agreement calls for the HOA to fund a replacement reserve to be used
for the eventual replacement of this facility.
The agreement assumed the facility would be replaced in 20 years and
so the collection period was set for 20 years with the assumptions
that the interest earned on the reserve would be at 5% and the ENR
index (inflation per year) would be 2%. However, the reserve will not
be on target because the interest earnings on the reserve averaged
1.75%, far less than anticipated, and the ENR index during this
period was 2.6%, which was higher than anticipated.
To collect the necessary amount in the reserve by year 2023, the
monthly amount collected would have to increase from $1,620.93 to
$3,525.82, a 117% increase. The District also considered extending
the collection period by an additional 5 or 10 years. The HOA agreed
to extend the collection period by 10 years. This would allow the
increase in monthly payments from $1,620.93 to $1,746.00, a 7.7%
increase beginning on June 1, 2018. Then beginning July 1, 2019, an
annual increase of 10% will take effect until the reserve is fully
funded. The HOA stated that they would ratify the amendment to the
contract at their board meeting scheduled for May 17, 2018.
FISCAL IMPACT: Joseph Beachem, Chief Financial Officer
This is a cost neutral contract amendment. It allows the HOA to fund
the replacement reserve over 10 additional years.
STRATEGIC GOAL:
To manage the financial issues that are critical to the District to
maintain financial strength.
LEGAL IMPACT:
None.
Attachments:
A) Committee Action
B) First Amendment to the Agreement
ATTACHMENT A
SUBJECT/PROJECT:
Authorize the First Amendment to the 2001 Agreement for the
Operation and Maintenance of the Pump Station with the
Lakeview at Highlands Ranch Homeowners Association
COMMITTEE ACTION:
The Finance, Administration, and Communications Committee recommend
that the Board authorize the General Manager to execute the First
Amendment to the 2001 agreement for the operation and maintenance of
the pump station with the Lakeview at Highlands Ranch Homeowners
Association.
NOTE:
The “Committee Action” is written in anticipation of the Committee
moving the item forward for board approval. This report will be sent
to the Board as a committee approved item, or modified to reflect any
discussion or changes as directed from the committee prior to
presentation to the full board.
FIRST AMENDMENT TO THE AGREEMENT FOR THE OPERATION AND
MAINTENANCE OF PUMP STATION BETWEEN THE OTAY WATER DISTRICT
AND THE LAKEVIEW AT HIGHLANDS RANCH HOMEOWNERS ASSOCIATION
This First Amendment (“Amendment”) to the original Agreement for the Operation and
Maintenance of Pump Station dated May 2, 2001, is made and entered into on __________, 2018,
by and between the OTAY WATER DISTRICT, a Municipal Water District formed under the
Municipal Water Act of 1911 ("District"), and the LAKEVIEW AT HIGHLANDS RANCH
HOMEOWNERS ASSOCIATION, a California nonprofit mutual benefit corporation
(“Association”), with reference to the following facts which are acknowledged by each party as
true and correct. District and Association are collectively referred to as the “Parties”.
RECITALS
1. On May 2, 2001 the District and Association entered into that certain “Otay Water District
Agreement for the Operation and Maintenance of a Pump Station” (“Agreement”), under
which the Association agreed, among other things, to assume the responsibilities relating
to the maintenance and replacement of the Pump Station, a hydro-pneumatic facility that
is needed to supply water to specific lots within Lakeview at Highlands Ranch.
2. Pursuant to Section 7 and 8 of the Agreement (Maintenance of Pump Station and
Replacement of Pump Station respectively), the District was required to create separate
reserve funds for the operation and ultimate replacement of the Pump Station. The
Association was required to collect funds from owners within the Association and pay said
funds on the first day of each month to the District’s Maintenance Reserve Fund and
Replacement Reserve Fund, for the operation and ultimately the replacement of the Pump
Station.
3. Pursuant to Section 7 of the Agreement (Maintenance of Pump Station), the Association is
required to make payments to the District for the maintenance of the Pump Station in
perpetuity.
4. Section 8 of the Agreement (Replacement of Pump Station) estimates that the useful life
of the Pump Station is 20 years; thus, the Association anticipates making payments to the
District’s Replacement Reserve Fund for a period of 20 years, ending in 2022.
5. The Association currently pays the sum of $1,620.93 each month to the District’s
Replacement Reserve Fund.
6. The Parties’ original assumption for collecting the Replacement Reserve Fund was that the
Reserve Fund would earn interest at the rate of 5% per year, and that ENR (inflation per
year) would be 2% per year.
7. The Replacement Reserve Fund is not on target to be fully funded at the end of the 20
years.
Attachment B
8. The District and the Association desire to amend the terms and provisions of the Agreement
to extend the date for Association’s contribution to the Replacement Reserve Fund, as set
forth below.
AMENDMENT
NOW THEREFORE, in consideration of the above Recitals and of the promises and agreements
contained herein, and for other good and valuable consideration, the receipt and adequacy of which
is hereby acknowledged, District and Association do hereby promise and agree as follows:
1. The Association shall continue to collect funds from owners within the Association and
pay said funds on the first day of each month to the District for deposit in the Replacement
Reserve Fund for an additional eleven (11) years, until the year 2033, and subject to the
same terms as set forth in Section 8 of the Agreement.
2. The Association will pay to the District’s Replacement Reserve Fund the sum of $1,746.00
on the first day of each month commencing June 1, 2018.
3. The Association’s monthly payments to the District’s Replacement Reserve Fund will
increase at the rate of 10% per year commencing July 1, 2019, until the year 2033 or until
the Replacement Reserve Fund is fully funded, whichever occurs first.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
4. All other terms and conditions of the Agreement, which are not modified or amended by
this Amendment, are and shall remain in full force and effect.
IN WITNESS WHEREOF, the Parties have caused this Amendment to the Agreement to
be executed as of the day and year first above written.
OTAY WATER DISTRICT
By: _____________________________ Date: _______________
Mark Watton
General Manager
Approved as to form:
By: _____________________________ Date: _______________
General Counsel
LAKEVIEW AT HIGHLANDS RANCH HOMEOWNERS ASSOCIATION
By: ______________________________
Name: ____________________________
Title: _____________________________
Date: __________________________
STAFF REPORT
TYPE MEETING: Regular Board
MEETING DATE: May 2, 2018
SUBMITTED BY:
Andrea Carey
Customer Service Manager
PROJECT: DIV. NO. All
APPROVED BY:
Joseph R. Beachem, Chief Financial Officer
Mark Watton, General Manager
SUBJECT: Authorize the General Manager to Amend Agreements with
InfoSend and Electronic Payment Exchange for Billing and
Online Payment Services
GENERAL MANAGER’S RECOMMENDATION:
That the Board authorize the General Manager to amend agreements to
extend the terms for two-years, plus three one-year extension options
with:
1) InfoSend to provide bill print and electronic bill presentment
services in an amount not to exceed $1,310,000 ($262,000
annually, includes pass-through postage costs of $170,000); and
with
2) Electronic Payment Exchange (EPX) to provide online payment
transaction processing services in an amount not to exceed
$1,500,000 ($250,000 annually).
COMMITTEE ACTION:
See Attachment A.
PURPOSE:
Authorize the General Manager to amend agreements with InfoSend for
bill print and electronic bill presentment services, and with
Electronic Payment Exchange for payment transaction processing
services.
ANALYSIS:
The District bills approximately 52,000 customers each month (624,000
billings annually) for water and sewer services. Of these bills,
approximately 36,500 are mailed to customers every month, while the
remaining 15,500 bills are delivered electronically (e-bill). The
District receives over 22,000 payments monthly via the website.
InfoSend has been the District’s bill print provider since 2008 and
its online payment provider since 2010. In 2013, the District entered
into a five-year agreement with InfoSend to provide bill print,
mailing services, online bill presentment, and web payment services
to the District.
Over the past six months, staff has researched bill print and online
payment service providers. Utilizing the piggyback option in the
District’s Purchasing Policy, staff evaluated various other agencies
request for proposals for similar services. Staff found the City of
Morgan Hill’s recently completed formal RFP to mirror the District’s
requirements. Morgan Hill received nine responses and narrowed the
final evaluation down to two vendors: InfoSend and Dataprose. The
evaluation team ultimately chose InfoSend as they offered a more
complete service package at a lower overall cost. Morgan Hill also
selected to use EPX for payment processing.
Based on the City of Morgan Hill’s RFP and contract plus weighing in
the cost, complexity, and risk of changing bill print and online
payment processing services, staff recommends remaining with InfoSend
and extending the current contract for another five-year term.
Although the prior contract allowed for modest price increases,
InfoSend did not increase pricing throughout the initial five-year
term. For the upcoming five-year term, InfoSend has increased bill
print service fees by .0006 cents and envelope costs by .003 cents,
with all other fees related to printing and electronic bill and
payment services remaining the same. In order to ensure our pricing
with InfoSend is competitive in current market conditions, staff
compared Otay’s pricing with other similarly sized agencies who
recently entered into contracts with InfoSend such as Helix, Irvine
Ranch, Cucamonga Valley and the City of Modesto and found Otay’s
pricing was the lowest. It should also be noted that 17 of the 24 San
Diego County Water Authority member agencies use InfoSend for bill
print services.
On the online payment side, InfoSend partners with payment processors
EPX and Vantiv to verify and transmit customer payments. These
payment processors verify the credit card and banking information for
each transaction and then wire funds daily to Otay’s account with
Union Bank. Staff analyzed the fees charged by both EPX and Vantiv
and found EPX to be lower. The cost of services are as follows:
Payment Services
Vendor Annual Price (Estimate)
EPX $250,000
Vantiv $260,000
Staff is currently using EPX and is satisfied with their online
portal and level of customer service.
The District has more than 22,000 customers paying in excess of $3.5
million monthly through InfoSend’s online site, which includes more
than 13,000 who have selected automatic pay. A transition from
InfoSend would result in these customers having to re-enroll in
electronic services. The staff time and inconvenience to the customer
would be great and most likely result in a drop-off in the number of
electronic payments and those customers receiving an electronic bill.
By continuing the relationship with InfoSend and EPX, the District’s
customers will not be subject to a change in their online accounts or
bill print delivery.
Given the complexity and sensitive nature of these services, it is
recommended that the General Manager amend the agreements with
InfoSend and EPX to extend the term for two-years, plus three one-
year extension options. After the initial two-year period, the
District will have the option not to renew should opportunities,
circumstances or business practices change. The agreements will run
concurrently and expire at the same time. Both companies allow the
District to terminate for cause at any time.
FISCAL IMPACT: Joseph Beachem, Chief Financial Officer
The increase in bill print processing costs for InfoSend translates
to a 1% increase or approximately $3,000 more a year. The annual cost
for InfoSend services will be approximately $262,000 (includes pass-
through postage costs of $170,000) and for EPX services it will be
approximately $250,000. The proposed FY 2019 budget is sufficient to
cover these costs.
STRATEGIC GOAL:
Evaluate the most cost effective and efficient processes and tools to
communicate service related issues to customers.
LEGAL IMPACT:
None.
Attachments:
A) Committee Action
ATTACHMENT A
SUBJECT/PROJECT:
Authorize the General Manager to Amend Agreements with
InfoSend and Electronic Payment Exchange for Billing and
Online Payment Services
COMMITTEE ACTION:
The Finance, Administration and Communications Committee recommend
that the Board authorize the General Manager to amend agreements with
InfoSend for bill print and electronic bill presentment services and
with Electronic Payment Exchange for payment transaction processing
services.
NOTE:
The “Committee Action” is written in anticipation of the Committee
moving the item forward for board approval. This report will be sent
to the Board as a committee approved item, or modified to reflect any
discussion or changes as directed from the committee prior to
presentation to the full board.
STAFF REPORT
TYPE MEETING: Regular Board MEETING DATE: May 2, 2018
SUBMITTED BY: Eid Fakhouri,
Finance Manager
PROJECT: DIV. NO. All
APPROVED BY:
Joseph R. Beachem, Chief Financial Officer
Mark Watton, General Manager
SUBJECT: Annual Review of the Investment Policy (Policy No. 27) of the
District’s Code of Ordinances and the Re-delegation of
Authority for All Investment Related Activities to the Chief
Financial Officer
GENERAL MANAGER’S RECOMMENDATION:
That the Board receives the District’s Investment Policy (Policy No.
27) of the District’s Code of Ordinances for review and re-delegate
authority for all investment related activities to the Chief
Financial Officer, in accordance with Government Code Section 53607.
COMMITTEE ACTION:
See Attachment A.
PURPOSE:
Government Code Section 53646 recommends that the District’s
Investment Policy be tendered to the Board on an annual basis for
review. In addition, Government Code Section 53607 requires that for
the Chief Financial Officer’s delegation of authority to remain
effective, the governing board must re-delegate authority over
investment activities on an annual basis.
ANALYSIS:
The primary goals of the Investment Policy are to assure compliance
with the California Government Code, Sections 53600 et seq. The
primary objectives, in priority order, of investment activities are:
1. Protect the principal of the funds.
2. Remain sufficiently liquid to enable the District to meet
all operating requirements which might be reasonably
anticipated.
3. The District’s return is a market rate of return that is
commensurate with the conservative investments approach to
meet the first two objectives of safety and liquidity.
The code provides a broad range of investment options for local
agencies, including Federal Treasuries, Federal Agencies, Callable
Federal Agencies, the State Pool, the County Pool, high-grade
corporate debt, and others. Over recent years, the size of the
District’s portfolio has declined from $110 million in 2010 to $87
million as of February 28, 2018. The reduction is primarily due to
planned outlays for construction projects.
Because of the District’s adherence to a conservative range of
authorized investments, we have been able to maintain a healthy and
diversified portfolio with no investment losses despite an extended
period of turmoil and instability in the national financial markets.
The policy is consistent with the current law and the overall
objectives of the policy are being met.
FISCAL IMPACT: Joseph R. Beachem, Chief Financial Officer
None.
STRATEGIC GOAL:
Demonstrate financial health through formalized policies, prudent
investing, and efficient operations.
LEGAL IMPACT:
None.
Attachments:
A) Committee Action
B) Investment Policy No. 27
ATTACHMENT A
SUBJECT/PROJECT:
Annual Review of the Investment Policy (Policy No. 27) of
the District’s Code of Ordinances and the Re-Delegation of
Authority for All Investment Related Activities to the
Chief Financial Officer
COMMITTEE ACTION:
The Finance, Administration, and Communications Committee
recommend that the Board review the Investment Policy (Policy
No. 27) of the District’s Code of Ordinances and re-delegate
authority for all investment related activities to the Chief
Financial Officer.
NOTE:
The “Committee Action” is written in anticipation of the
Committee moving the item forward for board approval. This
report will be sent to the Board as a committee approved item,
or modified to reflect any discussion or changes as directed
from the committee prior to presentation to the full board.
OTAY WATER DISTRICT
BOARD OF DIRECTORS POLICY
Subject Policy
Number
Date
Adopted
Date
Revised
INVESTMENT POLICY 27 9/15/93 5/2/17
Page 1 of 17
1.0: POLICY
It is the policy of the Otay Water District to invest public funds in
a manner which will provide maximum security with the best interest
return, while meeting the daily cash flow demands of the entity and
conforming to all state statues governing the investment of public
funds.
2.0: SCOPE
This investment policy applies to all financial assets of the Otay
Water District. The District pools all cash for investment purposes.
These funds are accounted for in the District’s audited Comprehensive
Annual Financial Report (CAFR) and include:
2.1) General Fund
2.2) Capital Project Funds
2.2.1) Designated Expansion Fund
2.2.2) Restricted Expansion Fund
2.2.3) Designated Betterment Fund
2.2.4) Restricted Betterment Fund
2.2.5) Designated Replacement Fund
2.2.6) Restricted New Water Supply Fund
2.3) Other Post Employment Fund (OPEB)
2.4) Debt Reserve Fund
Exceptions to the pooling of funds do exist for tax-exempt debt
proceeds, debt reserves and deferred compensation funds. Funds
received from the sale of general obligation bonds, certificates of
participation or other tax-exempt financing vehicles are segregated
from pooled investments and the investment of such funds are guided by
the legal documents that govern the terms of such debt issuances.
3.0: PRUDENCE
Investments should be made with judgment and care, under current
prevailing circumstances, which persons of prudence, discretion and
intelligence, exercise in the management of their own affairs, not for
speculation, but for investment, considering the probable safety of
their capital as well as the probable income to be derived.
Attachment B
OTAY WATER DISTRICT
BOARD OF DIRECTORS POLICY
Subject Policy
Number
Date
Adopted
Date
Revised
INVESTMENT POLICY 27 9/15/93 5/2/17
Page 2 of 17
The standard of prudence to be used by investment officials shall be
the “Prudent Person” and/or "Prudent Investor" standard (California
Government Code 53600.3) and shall be applied in the context of
managing an overall portfolio. Investment officers acting in
accordance with written procedures and the investment policy and
exercising due diligence shall be relieved of personal responsibility
for an individual security's credit risk or market price changes,
provided deviations from expectations are reported in a timely fashion
and appropriate action is taken to control adverse developments.
4.0: OBJECTIVE
As specified in the California Government Code 53600.5, when
investing, reinvesting, purchasing, acquiring, exchanging, selling and
managing public funds, the primary objectives, in priority order, of
the investment activities shall be:
4.1) Safety: Safety of principal is the foremost objective of
the investment program. Investments of the Otay Water
District shall be undertaken in a manner that seeks to
ensure the preservation of capital in the overall portfolio.
To attain this objective, the District will diversify its
investments by investing funds among a variety of securities
offering independent returns and financial institutions.
4.2) Liquidity: The Otay Water District’s investment portfolio
will remain sufficiently liquid to enable the District to
meet all operating requirements which might be reasonably
anticipated.
4.3) Return on Investment: The Otay Water District’s investment
portfolio shall be designed with the objective of attaining
a benchmark rate of return throughout budgetary and economic
cycles, commensurate with the District’s investment risk
constraints and the cash flow characteristics of the
portfolio.
5.0 DELEGATION OF AUTHORITY
Authority to manage the Otay Water District’s investment program is
derived from the California Government Code, Sections 53600 through
53692. Management responsibility for the investment program is hereby
OTAY WATER DISTRICT
BOARD OF DIRECTORS POLICY
Subject Policy
Number
Date
Adopted
Date
Revised
INVESTMENT POLICY 27 9/15/93 5/2/17
Page 3 of 17
delegated to the Chief Financial Officer (CFO), who shall be
responsible for all transactions undertaken and shall establish a
system of controls to regulate the activities of subordinate officials
and their procedures in the absence of the CFO.
The CFO shall establish written investment policy procedures for the
operation of the investment program consistent with this policy. Such
procedures shall include explicit delegation of authority to persons
responsible for investment transactions. No person may engage in an
investment transaction except as provided under the terms of this
policy and the procedures established by the CFO.
6.0: ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investment process shall
refrain from personal business activity that could conflict with the
proper execution and management of the investment program, or that
could impair their ability to make impartial investment decisions.
Employees and investment officials shall disclose to the General
Manager any material financial interests in financial institutions
with which they conduct business. They shall further disclose any
personal financial/investment positions that could be related to the
performance of the investment portfolio. Employees and officers shall
refrain from undertaking personal investment transactions with the
same individual with whom business is conducted on behalf of the
District.
7.0: AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The Chief Financial Officer shall maintain a list of District selected
financial institutions and security broker/dealers authorized and
approved to provide investment services in the State of California.
Investment services include the buying or selling of permissible
investments such as treasuries, government agencies, etc. for delivery
to the custodian bank. These may include “primary” dealers or regional
dealers that qualify under Securities & Exchange Commission Rule 15C3-
1 (Uniform Net Capital Rule). No public deposit shall be made except
in a qualified public depository as established by state laws. All
financial institutions and broker/dealers who desire to become
qualified bidders for investment transactions must supply the District
with the following, as appropriate:
OTAY WATER DISTRICT
BOARD OF DIRECTORS POLICY
Subject Policy
Number
Date
Adopted
Date
Revised
INVESTMENT POLICY 27 9/15/93 5/2/17
Page 4 of 17
Audited Financial Statements.
Proof of Financial Industry Regulatory Authority (FINRA)
certification.
Proof of state registration.
Completed broker/dealer questionnaire.
Certification of having read the District’s Investment
Policy.
Evidence of adequate insurance coverage.
An annual review of the financial condition and registrations of
qualified bidders will be conducted by the CFO. A current audited
financial statement is required to be on file for each financial
institution and broker/dealer through which the District invests.
8.0: AUTHORIZED AND SUITABLE INVESTMENTS
From the governing body perspective, special care must be taken to
ensure that the list of instruments includes only those allowed by law
and those that local investment managers are trained and competent to
handle. The District is governed by the California Government Code,
Sections 53600 through 53692, to invest in the following types of
securities, as further limited herein:
8.01) United States Treasury Bills, Bonds, Notes or those
instruments for which the full faith and credit of the United
States are pledged for payment of principal and interest. There
is no percentage limitation of the portfolio which can be
invested in this category, although a five-year maturity
limitation is applicable.
8.02) Local Agency Investment Fund (LAIF), which is a State
of California managed investment pool, may be used up to the
maximum permitted by State Law (currently $65 million). The
District may also invest bond proceeds in LAIF with the same but
independent maximum limitation.
8.03) Bonds, debentures, notes and other evidence of
indebtedness issued by any of the following government agency
issuers:
Federal Home Loan Bank (FHLB)
OTAY WATER DISTRICT
BOARD OF DIRECTORS POLICY
Subject Policy
Number
Date
Adopted
Date
Revised
INVESTMENT POLICY 27 9/15/93 5/2/17
Page 5 of 17
Federal Home Loan Mortgage Corporation (FHLMC or "Freddie
Mac")
Federal National Mortgage Association (FNMA or "Fannie Mae")
Government National Mortgage Association (GNMA or “Ginnie
Mae”)
Federal Farm Credit Bank (FFCB)
Federal Agricultural Mortgage Corporation ( FAMCA or “Farmer
Mac”)
There is no percentage limitation of the portfolio which can be
invested in this category, although a five-year maturity from the
settlement date limitation is applicable. Government agencies
whose implied guarantee has been reduced or eliminated shall
require an “A” rating or higher by a nationally recognized
statistical rating organization.
8.04) Interest-bearing demand deposit accounts and
Certificates of Deposit (CD) will be made only in Federal Deposit
Insurance Corporation (FDIC) insured accounts. For deposits in
excess of the insured maximum of $250,000, approved collateral
shall be required in accordance with California Government Code,
Section 53652. Investments in CD’s are limited to 15 percent of
the District’s portfolio.
8.05) Commercial paper, which is short-term, unsecured
promissory notes of corporate and public entities. Purchases of
eligible commercial paper may not exceed 10 percent of the
outstanding paper of an issuing corporation, and maximum
investment maturity will be restricted to 270 days. Investment is
further limited as described in California Government Code,
Section 53601(h). Purchases of commercial paper may not exceed 10
percent of the District’s portfolio and no more than 10 percent
of the outstanding commercial paper of any single issuer.
8.06) Medium-term notes defined as all corporate debt
securities with a maximum remaining maturity of five years from
the settlement date or less, and that meet the further
requirements of California Government Code, Section 53601(k).
Investments in medium-term notes are limited to 10 percent of the
District’s portfolio.
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8.07) Money market mutual funds that invest only in Treasury
securities and repurchase agreements collateralized with Treasury
securities, and that meet the further requirements of California
Government Code, Section 53601(l). Investments in money market
mutual funds are limited to 10 percent of the District's
portfolio.
8.08) The San Diego County Treasurer’s Pooled Money Fund,
which is a County managed investment pool, may be used by the
Otay Water District to invest excess funds. There is no
percentage limitation of the portfolio which can be invested in
this category.
8.09) Under the provisions of California Government Code
53601.6, the Otay Water District shall not invest any funds
covered by this Investment Policy in inverse floaters, range
notes, interest-only strips derived from mortgage pools, or any
investment that may result in a zero interest accrual if held to
maturity. Also, the borrowing of funds for investment purposes,
known as leveraging, is prohibited.
9.0: INVESTMENT POOLS/MUTUAL FUNDS
A thorough investigation of the pool/fund is required prior to
investing, and on a continual basis. There shall be a questionnaire
developed which will answer the following general questions:
A description of eligible investment securities, and a
written statement of investment policy and objectives.
A description of interest calculations and how it is
distributed, and how gains and losses are treated.
A description of how the securities are safeguarded
(including the settlement processes), and how often the
securities are priced and the program audited.
A description of who may invest in the program, how often,
and what size deposits and withdrawals are allowed.
A schedule for receiving statements and portfolio listings.
Are reserves, retained earnings, etc., utilized by the
pool/fund?
A fee schedule, and when and how is it assessed.
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Is the pool/fund eligible for bond proceeds and/or will it
accept such proceeds?
10.0 COLLATERALIZATION
Collateralization will be required on certificates of deposit
exceeding the $250,000 FDIC insured maximum. In order to anticipate
market changes and provide a level of security for all funds, the
collateralization level will be 102% of market value of principal and
accrued interest. Collateral will always be held by an independent
third party with whom the entity has a current custodial agreement. A
clearly marked evidence of ownership (safekeeping receipt) must be
supplied to the entity and retained. The right of collateral
substitution is granted.
11.0: SAFEKEEPING AND CUSTODY
All security transactions entered into by the Otay Water District
shall be conducted on a delivery-versus-payment (DVP) basis.
Securities will be held by a third party custodian designated by the
District and evidenced by safekeeping receipts.
12.0: DIVERSIFICATION
The Otay Water District will diversify its investments by security
type and institution, with limitations on the total amounts invested
in each security type as detailed in Paragraph 8.0, above, so as to
reduce overall portfolio risks while attaining benchmark average rate
of return. With the exception of U.S. Treasury securities, government
agencies, and authorized pools, no more than 50% of the District’s
total investment portfolio will be invested with a single financial
institution.
13.0: MAXIMUM MATURITIES
To the extent possible, the Otay Water District will attempt to match
its investments with anticipated cash flow requirements. Unless
matched to a specific cash flow, the District will not directly invest
in securities maturing more than five years from the settlement date
of the purchase. However, for time deposits with banks or savings and
loan associations, investment maturities will not exceed two years.
Investments in commercial paper will be restricted to 270 days.
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14.0: INTERNAL CONTROL
The Chief Financial Officer shall establish an annual process of
independent review by an external auditor. This review will provide
internal control by assuring compliance with policies and procedures.
15.0: PERFORMANCE STANDARDS
The investment portfolio shall be designed with the objective of
obtaining a rate of return throughout budgetary and economic cycles,
commensurate with the investment risk constraints and the cash flow
needs.
The Otay Water District’s investment strategy is passive. Given this
strategy, the basis used by the CFO to determine whether market yields
are being achieved shall be the State of California Local Agency
Investment Fund (LAIF) as a comparable benchmark.
16.0: REPORTING
The Chief Financial Officer shall provide the Board of Directors
monthly investment reports which provide a clear picture of the status
of the current investment portfolio. The management report should
include comments on the fixed income markets and economic conditions,
discussions regarding restrictions on percentage of investment by
categories, possible changes in the portfolio structure going forward
and thoughts on investment strategies. Schedules in the quarterly
report should include the following:
A listing of individual securities held at the end of the
reporting period by authorized investment category.
Average life and final maturity of all investments listed.
Coupon, discount or earnings rate.
Par value, amortized book value, and market value.
Percentage of the portfolio represented by each investment
category.
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17.0: INVESTMENT POLICY ADOPTION
The Otay Water District’s investment policy shall be adopted by
resolution of the District’s Board of Directors. The policy shall be
reviewed annually by the Board and any modifications made thereto must
be approved by the Board.
18.0: GLOSSARY
See Appendix A.
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APPENDIX A: GLOSSARY
ACTIVE INVESTING: Active investors will purchase investments and
continuously monitor their activity, often looking at the price
movements of their stocks many times a day, in order to exploit
profitable conditions. Typically, active investors are seeking short
term profits.
AGENCIES: Federal agency securities and/or Government-sponsored
enterprises.
BANKERS’ ACCEPTANCE (BA): A draft or bill or exchange accepted by a
bank or trust company. The accepting institution guarantees payment
of the bill, as well as the issuer.
BENCHMARK: A comparative base for measuring the performance or risk
tolerance of the investment portfolio. A benchmark should represent a
close correlation to the level of risk and the average duration of the
portfolio’s investments.
BROKER/DEALER: Any individual or firm in the business of buying and
selling securities for itself and others. Broker/dealers must register
with the SEC. When acting as a broker, a broker/dealer executes
orders on behalf of his/her client. When acting as a dealer, a
broker/dealer executes trades for his/her firm's own account.
Securities bought for the firm's own account may be sold to clients or
other firms, or become a part of the firm's holdings.
CERTIFICATE OF DEPOSIT (CD): A short or medium term, interest bearing,
FDIC insured debt instrument offered by banks and savings and loans.
Money removed before maturity is subject to a penalty. CDs are a low
risk, low return investment, and are also known as “time deposits”,
because the account holder has agreed to keep the money in the account
for a specified amount of time, anywhere from a few months to several
years.
COLLATERAL: Securities, evidence of deposit or other property, which a
borrower pledges to secure repayment of a loan. Also refers to
securities pledged by a bank to secure deposits of public monies.
COMMERCIAL PAPER: An unsecured short-term promissory note, issued by
corporations, with maturities ranging from 2 to 270 days.
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COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual
report for the Otay Water District. It includes detailed financial
information prepared in conformity with generally accepted accounting
principles (GAAP). It also includes supporting schedules necessary to
demonstrate compliance with finance-related legal and contractual
provisions, extensive introductory material, and a detailed
statistical section.
COUPON: (a) The annual rate of interest that a bond’s issuer promises
to pay the bondholder on the bond’s face value. (b) A certificate
attached to a bond evidencing interest due on a set date.
DEALER: A dealer, as opposed to a broker, acts as a principal in all
transactions, buying and selling for his own account.
DEBENTURE: A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of
securities: delivery versus payment and delivery versus receipt.
Delivery versus payment is delivery of securities with an exchange of
money for the securities. Delivery versus receipt is delivery of
securities with an exchange of a signed receipt for the securities.
DERIVATIVES: (1) Financial instruments whose return profile is linked
to, or derived from, the movement of one or more underlying index or
security, and may include a leveraging factor, or (2) financial
contracts based upon notional amounts whose value is derived from an
underlying index or security (interest rates, foreign exchange rates,
equities or commodities).
DISCOUNT: The difference between the cost price of a security and its
maturity when quoted at lower than face value. A security selling
below original offering price shortly after sale also is considered to
be at a discount.
DISCOUNT SECURITIES: Non-interest bearing money market instruments
that are issued at a discount and redeemed at maturity for full face
value, e.g., U.S. Treasury Bills.
DIVERSIFICATION: Dividing investment funds among a variety of
securities offering independent returns.
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FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to
supply credit to various classes of institutions and individuals,
e.g., S&L’s, small business firms, students, farmers, farm
cooperatives, and exporters.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that
insures deposits in member banks and thrifts, currently up to $100,000
per deposit.
FEDERAL FARM CREDIT BANK (FFCB): The Federal Farm Credit Bank system
supports agricultural loans and issues securities and bonds in
financial markets backed by these loans. It has consolidated the
financing programs of several related farm credit agencies and
corporations.
FEDERAL FUNDS RATE: The rate of interest at which Fed funds are
traded. This rate is currently pegged by the Federal Reserve through
open-market operations.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION (FAMC or Farmer Mac): A
stockholder owned, publicly-traded corporation that was established
under the Agricultural Credit Act of 1987, which added a new Title
VIII to the Farm Credit Act of 1971. Farmer Mac is a government
sponsored enterprise, whose mission is to provide a secondary market
for agricultural real estate mortgage loans, rural housing mortgage
loans, and rural utility cooperative loans. The corporation is
authorized to purchase and guarantee securities. Farmer Mac
guarantees that all security holders will receive timely payments of
principal and interest.
FEDERAL HOME LOAN BANK (FHLB): Government sponsored wholesale banks
(currently 12 regional banks), which lend funds and provide
correspondent banking services to member commercial banks, thrift
institutions, credit unions and insurance companies.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC or Freddie Mac): A
stockholder owned, publicly traded company chartered by the United
States federal government in 1970 to purchase mortgages and related
securities, and then issue securities and bonds in financial markets
backed by those mortgages in secondary markets. Freddie Mac, like its
competitor Fannie Mae, is regulated by the United States Department of
Housing and Urban Development (HUD).
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FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA or Fannie Mae): FNMA, like
GNMA was chartered under the Federal National Mortgage Association Act
in 1938. FNMA is a federal corporation working under the auspices of
the Department of Housing and Urban Development (HUD). It is the
largest single provider of residential mortgage funds in the United
States. Fannie Mae is a private stockholder-owned corporation. The
corporation’s purchases include a variety of adjustable mortgages and
second loans, in addition to fixed-rate mortgages. FNMA’s securities
are also highly liquid and are widely accepted. FNMA assumes and
guarantees that all security holders will receive timely payment of
principal and interest.
FEDERAL RESERVE SYSTEM: The central bank of the United States created
by Congress and consisting of a seven member Board of Governors in
Washington, D.C., 12 regional banks and about 5,700 commercial banks
that are members of the system.
FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC. (FINRA): An independent,
not-for-profit organization authorized by Congress to protect
America’s investors by making sure the securities industry operates
fairly and honestly. It is dedicated to investor protection and
market integrity through effective and efficient regulation of the
securities industry. FINRA is the successor to the National
Association of Securities Dealers, Inc. (NASD).
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): A
government owned agency which buys mortgages from lending
institutions, securitizes them, and then sells them to investors.
Because the payments to investors are guaranteed by the full faith and
credit of the U.S. Government, they return slightly less interest than
other mortgage-backed securities.
INTEREST-ONLY STRIPS: A mortgage backed instrument where the investor
receives only the interest, no principal, from a pool of mortgages.
Issues are highly interest rate sensitive, and cash flows vary between
interest periods. Also, the maturity date may occur earlier than that
stated if all loans within the pool are pre-paid. High prepayments on
underlying mortgages can return less to the holder than the dollar
amount invested.
INVERSE FLOATER: A bond or note that does not earn a fixed rate of
interest. Rather, the interest rate is tied to a specific interest
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rate index identified in the bond/note structure. The interest rate
earned by the bond/note will move in the opposite direction of the
index. An inverse floater increases the market rate risk and modified
duration of the investment.
LEVERAGE: Investing with borrowed money with the expectation that the
interest earned on the investment will exceed the interest paid on the
borrowed money.
LIQUIDITY: A liquid asset is one that can be converted easily and
rapidly into cash without a substantial loss of value. In the money
market, a security is said to be liquid if the spread between bid and
asked prices is narrow and reasonable size can be done at those
quotes.
LOCAL AGENCY INVESTMENT FUND (LAIF): The aggregate of all funds from
political subdivisions that are placed in the custody of the State
Treasurer for investment and reinvestment.
MARKET VALUE: The price at which a security is trading and could
presumably be purchased or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future
transactions between the parties to repurchase/reverse repurchase
agreements that establish each party’s rights in the transactions. A
master agreement will often specify, among other things, the right of
the buyer-lender to liquidate the underlying securities in the event
of default by the seller borrower.
MATURITY: The date upon which the principal or stated value of an
investment becomes due and payable.
MONEY MARKET: The market in which short-term debt instruments (bills,
commercial paper, bankers’ acceptances, etc.) are issued and traded.
MUTUAL FUNDS: An open-ended fund operated by an investment company
which raises money from shareholders and invests in a group of assets,
in accordance with a stated set of objectives. Mutual funds raise
money by selling shares of the fund to the public. Mutual funds then
take the money they receive from the sale of their shares (along with
any money made from previous investments) and use it to purchase
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various investment vehicles, such as stocks, bonds, and money market
instruments.
MONEY MARKET MUTUAL FUNDS: An open-end mutual fund which invests only
in money markets. These funds invest in short term (one day to one
year) debt obligations such as Treasury bills, certificates of
deposit, and commercial paper.
PASSIVE INVESTING: An investment strategy involving limited ongoing
buying and selling actions. Passive investors will purchase
investments with the intention of long term appreciation and limited
maintenance, and typically don’t actively attempt to profit from short
term price fluctuations. Also known as a buy-and-hold strategy.
PRIMARY DEALER: A designation given by the Federal Reserve System to
commercial banks or broker/dealers who meet specific criteria,
including capital requirements and participation in Treasury auctions.
These dealers submit daily reports of market activity and positions
and monthly financial statements to the Federal Reserve Bank of New
York and are subject to its informal oversight. Primary dealers
include Securities and Exchange Commission registered securities
broker/dealers, banks, and a few unregulated firms.
PRUDENT PERSON RULE: An investment standard. In some states the law
requires that a fiduciary, such as a trustee, may invest money only in
a list of securities selected by the custody state—the so-called legal
list. In other states the trustee may invest in a security if it is
one which would be bought by a prudent person of discretion and
intelligence who is seeking a reasonable income and preservation of
capital.
PUBLIC SECURITIES ASSOCIATION (PSA): A trade organization of dealers,
brokers, and bankers who underwrite and trade securities offerings.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not
claim exemption from the payment of any sales or compensating use or
ad valorem taxes under the laws of this state, which has segregated
for the benefit of the commission eligible collateral having a value
of not less than its maximum liability and which has been approved by
the Public Deposit Protection Commission to hold public deposits.
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RANGE NOTE: An investment whose coupon payment varies and is dependent
on whether the current benchmark falls within a pre-determined range.
RATE OF RETURN: The yield obtainable on a security based on its
purchase price or its current market price. This may be the amortized
yield to maturity on a bond the current income return.
REGIONAL DEALER: A securities broker/dealer, registered with the
Securities & Exchange Commission (SEC), who meets all of the licensing
requirements for buying and selling securities.
REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these
securities to an investor with an agreement to repurchase them at a
fixed price on a fixed date. The security “buyer” in effect lends the
“seller” money for the period of the agreement, and the terms of the
agreement are structured to compensate him for this. Dealers use RP
extensively to finance their positions. Exception: When the Fed is
said to be doing RP, it is lending money that is increasing bank
reserves.
SAFEKEEPING: A service to customers rendered by banks for a fee
whereby securities and valuables of all types and descriptions are
held in the bank’s vaults for protection.
SECONDARY MARKET: A market made for the purchase and sale of
outstanding securities issues following their initial distribution.
SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to
protect investors in securities transactions by administering
securities legislation.
SEC RULE 15C3-1: See Uniform Net Capital Rule.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises
(FHLB, FNMA, FAMCA, etc.), and Corporations, which have imbedded
options (e.g., call features, step-up coupons, floating rate coupons,
derivative-based returns) into their debt structure. Their market
performance is impacted by the fluctuation of interest rates, the
volatility of the imbedded options and shifts in the shape of the
yield curve.
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TREASURY BILLS: A non-interest bearing discount security issued by the
U.S. Treasury to finance the national debt. Most bills are issued to
mature in three months, six months, or one year.
TREASURY BONDS: Long-term coupon-bearing U.S. Treasury securities
issued as direct obligations of the U.S. Government and having initial
maturities of more than 10 years.
TREASURY NOTES: Medium-term coupon-bearing U.S. Treasury securities
issued as direct obligations of the U.S. Government and having initial
maturities from two to 10 years.
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission
requirement that member firms as well as nonmember broker-dealers in
securities maintain a maximum ratio of indebtedness to liquid capital
of 15 to 1; also called net capital rule and net capital ratio.
Indebtedness covers all money owed to a firm, including margin loans
and commitments to purchase securities, one reason new public issues
are spread among members of underwriting syndicates. Liquid capital
includes cash and assets easily converted into cash.
YIELD: The rate of annual income return on an investment, expressed as
a percentage. (a) INCOME YIELD is obtained by dividing the current
dollar income by the current market price for the security. (b) NET
YIELD or YIELD TO MATURITY is the current income yield minus any
premium above par or plus any discount from par in purchase price,
with the adjustment spread over the period from the date of purchase
to the date of maturity of the bond.
STAFF REPORT
TYPE MEETING: Regular Board Meeting MEETING DATE: May 2, 2018
SUBMITTED BY: Kevin Koeppen, Assistant
Chief of Finance
PROJECT: DIV. NO. All
APPROVED BY:
Joseph R. Beachem, Chief Financial Officer
Mark Watton, General Manager
SUBJECT: Communicate to the Board a Lower Cost Strategy for Funding
CalPERs
GENERAL MANAGER’S RECOMMENDATION:
This is an informational item only.
COMMITTEE ACTION:
Please see Attachment A.
PURPOSE:
Communicate to the Board a lower cost strategy for funding CalPERs.
BACKGROUND:
In an effort to reduce the impact on rates for the cost of funding
the CalPERs unfunded liability, staff is examining the impact of
using reserves to fund a portion of the CalPERs unfunded liability.
CalPERS would be funded using reserves that are currently designated
by the Board to be used to fund CIP projects. The CIP projects would
then be funded by reserves and the issuance of additional debt. This
would effectively switch the highest cost debt for a much lower cost
debt, potentially saving the ratepayers up to $15.3 million.
The District is a part of the CalPERS Retirement System. The total
liability as of June 30, 2016 is $121.8 million. The unfunded portion
of this liability is $48.1 million. The estimate of the unfunded
liability rolled forward to June 30, 2018 is $49.2 million, not
taking into account the CalPERS approved reduction in the discount
rate from 7.375% to 7.0%. The unfunded liability is based on the
District’s contractual obligation and the District is unable to
legally modify past pension terms to reduce the liability (Government
Code section 7522.02-4(c)1). While the historical obligation cannot
be reduced, steps have been taken to reduce future exposure to
pension costs. In 2013, the District’s pension benefit was
significantly reduced by the California Public Employees’ Pension
Reform Act of 2013(PEPRA) from 2.7% at 55 years of age to 2.0% at 62
years of age for employees hired into CalPERS on or after January 1,
2013.
The payments to amortize the unfunded portion of the liability by
CalPERS is calculated at a rate of 7.375%, and will be reduced over
the next two years to 7%. This debt, along with the OPEB debt, are
the highest interest rate debt the District holds. It is anticipated
that the CIP tax-exempt debt would be at a rate approximately half
the 7% rate in April, 2018.
The less CalPERS debt the District has the greater the savings to the
ratepayers. However, the amount of debt to be issued is limited by
the CIP projects that the District is building over the next three
years. Staff anticipates that not all of the CalPERS debt can be paid
off using this strategy alone.
A second complementary strategy to fund the CalPERS debt is related
to the OPEB plan. Just like the CalPERS plan, the OPEB plan has a
portion of the liability that is not funded. However the OPEB fund is
in a very strong position and will be fully funded in 2021. A
significant reason for this strong position is that the District has
not drawn on the OPEB fund to pay the OPEB benefits. The District has
been funding the retiree benefits from reserves in order to improve
the funding levels and eliminate the unfunded liability. When the
OPEB plan is fully funded the benefits will begin to be paid from the
OPEB trust. When this happens in 2021, staff is recommending that the
general funds currently funding the OPEB benefits, be shifted to
reduce the PERS liability. Through the shifting of these funds the
District is able to reduce the high cost PERS debt at a faster rate.
The CalPERS debt is made up of seventeen different layers of debt
which can generally be paid off in any order. The District will
identify those layers of debt to pay off first that will provide the
greatest cash flow benefit.
Addressing Potential Concerns
Stock Market Fluctuations: The potential interest savings described
are based on CalPERS achieving an investment rate at least equal to
the discount rate (7%). The CalPERS benefits have a long-term time
horizon. With a long-term time horizon, equities are a sound
investment as they will recover from short-term volatility. When the
District funds the CalPERS plan, those funds will be placed into the
CalPERS portfolio which is made up of 44% global equities. The long-
term nature of the CalPERS benefits is why this level of equities
investment is appropriate. Some may feel uncomfortable with this
level of equity, but again, the time horizon of the payments makes
equities a sound investment for this long-term time horizon.
CalPERS also currently amortizes investment gains and losses over 30
years, but amortizes assumption changes (such as the reduction from
7.735% discount rate to 7.0% discount rate) over 20 years. Beginning
in 2021, all new amortization bases will be amortized over 20 years.
While this is a positive for getting credit for investment gains, it
will now shorten the amortization of investment losses from 30 years
to 20 years.
Debt Levels: Rating agencies evaluate the financial strength of the
District. One of the factors they look at is the level of debt. Debt
is measured as a ratio against asset values. The CWA is at a debt-to-
plant of 60%. Other neighboring agencies have debt-to-plant ratios
from 0% to 61%. Excluding agencies with no outstanding debt, the
average debt-to-plant ratio is 27%. The District is currently
considered to have a moderate level of debt, with a debt-to-plant
ratio of 22%. Every $5.0 million of debt issued equates to a 1.1%
increase in the District’s debt-to-plant ratio. If the District were
to issue $30.0 million of debt, its debt-to-plant ratio would be
approximately 28%. The District’s long-term debt load is an important
factor and will be a part of the analysis that will be performed in
the next few months. A financial advisor is being hired to assist in
the evaluation of the District’s debt load and the advisability of
this issuance.
The sewer side of the District currently has no outstanding debt
issuances. The proposed debt of $5.0 million for sewer improvements
would put the sewer debt-to-plant ratio at 21%, which is considered
moderate.
Future Increases in the Liability: The current CalPERS liability
discussed in this report doesn’t include the expected increase in the
unfunded liability from the change in the discount rate from 7.375%
to 7.0%. It also does not include the benefit of the CalPERS rate of
return of 11.2% in 2016-17 compared to the 7.375% discount rate.
Additional future changes in the CalPERS liability will occur as a
result of changes in a number of actuarial assumptions, such as
longevity or retirement ages. If future changes negatively affect the
liability, those changes would be independent of the improvements in
the funding being recommended here.
Next Steps
Staff will hire a financial advisor on this bond issuance and
consider the various complexities of this plan. Alternatives will be
considered and an evaluation will be performed. One consideration in
this evaluation is the long-term need for debt. A recommendation will
then be brought to the Board with the appropriate resolutions needed
to move the project forward.
Conclusion
Due to the complexity of this debt issuance with its connection to
the funding of CalPERS, the recommendation will not be finalized
until a financial advisor has been hired and reviews the
recommendation. Staff is expecting to incorporate a funding strategy
into the upcoming proposed FY2019 budget recommendation. The savings
are anticipated to lower the projected rate increases by up to 1.2%
for water customers and 1.3% for sewer customers.
FISCAL IMPACT: Joe Beachem, Chief Financial Officer
This is an informational item only.
STRATEGIC GOAL:
The District ensures its continued financial health through sound
policies and procedures.
LEGAL IMPACT:
None.
Attachments:
A) Committee Action
B) Presentation
ATTACHMENT A
SUBJECT/PROJECT:
Communicate to the Board a Lower Cost Strategy for Funding
CalPERs
COMMITTEE ACTION:
This is an informational item only.
NOTE:
The “Committee Action” is written in anticipation of the
Committee moving the item forward for board approval. This
report will be sent to the Board as a committee approved item,
or modified to reflect any discussion or changes as directed
from the committee prior to presentation to the full board.
CalPERS Funding
Alternative Funding Solutions
May 2, 2018
Background
Overview of the District’s Pension Status
Funding Options
Recommendation Impact
Questions
2
Overview –(Figures as of June 30, 2016)
$48.1 million unfunded liability
$46.3 million – Water
$ 1.8 million – Sewer
Funded percentage as of June 30, 2016: 60.5%
Status Quo 100% funded in FY2041
Government Code section 7522.02-4(c)1 eliminated ability to reduce
the benefit for individuals employed prior to January 1, 2013
PEPRA – Reduced benefit for new PERS members hired on or after
January 1, 2013
% Funded Year
75% 2026
85% 2032
100% 2041
3
Savings Matrix
75% Funding Level (Status Quo 75% funded in 7 years)
No additional funding needed
85% Funding Level (Status Quo 85% funded in 2032 = 13 years)
100% Funding Level
Years to Achieve CIP Debt Funding PV of Savings Annual Rate Savings
10 $7.0 Million $4.6 Million 0.2%
Years to Achieve CIP Debt Funding PV of Savings Annual Rate Savings
10 $36.0 Million $17.0 Million 1.3%
15 $30.5 Million $15.3 Million 1.2%
20 $15.0 Million $6.6 Million 0.6%
Without shifting of $1.2 M of OPEB funding
beginning 2021, and debt funding in 2019.4
Maximum Debt Scenario
Water
Transfer $30 million of unrestricted water reserves to CalPERs
Water issues $30 million of debt to fund water CIP
Based on 3-year CIP plan
Sewer
Transfer $1.8 million of unrestricted sewer reserves to CalPERS
Based on UAL and 3-year CIP Plan
5
Water Impact
$30 million payment
•$15.3 million net present
value savings over 30
years
•$700,000 average annual
savings over the next 6
years
•1.2% benefit to rates
•80% funded after
payment
•100% funded in 15 years
6
Sewer Impact
$1.8 million payment
•$437,000 net present
value savings over 30
years
•$40,000 average annual
savings over the next 6
years
•1.3% benefit to rates
•100% funded and
eliminates the UAL
7
Concerns
Stock Market Fluctuations
Long-term horizon
Debt Levels
Remain above the 150x debt coverage target
Future Liability Increases/CalPERs assumption
modification
8
Next Steps
Financial Advisor
Incorporate Advised Options into the FY 2019
Budget
9
Questions 10
STAFF REPORT
TYPE MEETING: Regular Meeting MEETING DATE: May 2, 2018
SUBMITTED BY:
Mark Watton
General Manager
PROJECT: DIV. NO. All
APPROVED BY:
Joseph R. Beachem, Chief Financial Officer
Mark Watton, General Manager
SUBJECT: Informational Item regarding the transfer of the San Miguel
Fire training site to the County of San Diego for use by the
County Fire Authority
GENERAL MANAGER’S RECOMMENDATION:
That the District terminate its lease with the San Miguel
Consolidated Fire Protection District, enter into a new lease with
the County of San Diego, and transfer ownership of the improvements
on the leased property to the County of San Diego, and further that
the Board authorize the General Manager to enter into the following
agreements to effectuate this transfer: The Lease Cancellation and
Termination Agreement between the Otay Water District and San Miguel
Consolidated Fire Protection District, and thereafter the Lease
Agreement between Otay Water District and the County of San Diego.
COMMITTEE ACTION:
Please see Attachment A.
PURPOSE:
To obtain Board authorization to terminate the District’s lease with
the San Miguel Consolidated Fire Protection District(“San Miguel”),
enter into a new lease with the County of San Diego (“County Lease”)
on the same terms as the lease with San Miguel, and transfer
ownership of the improvements on the leased property to the County of
San Diego (“County”).
ANALYSIS:
Otay Water District is the owner in fee simple of real property
located at 11880 Campo Road, within the County of San Diego,
California. In or about 2007, San Miguel desired to lease
approximately 2.73 acres of this property to construct and operate a
regional training center which included a number of improvements to
the land. On or about December 21, 2007, the District entered into a
Ground Lease and Joint Use Agreement with San Miguel, under which the
District leased the real property to construct a regional training
center and conduct training programs. All costs associated with the
construction of the improvements and their subsequent maintenance and
operation were borne by San Miguel, including taxes. Pursuant to the
Lease, San Miguel owned all the improvements, which it constructed.
The initial term of the Lease was thirty (30) years, with an optional
term of twenty (20) years. The rent for the initial term was $10 per
year. The rent for the entire initial term ($300) was paid in full
at the commencement of the Lease.
The Lease was amended in or about May 2011, to provide for the
Regional Training Center to comply with the County of San Diego’s
storm water requirements. The Lease was amended again in June 21,
2012.
San Miguel and the District now desire to terminate the Lease
pursuant to its terms and conditions. The primary purpose of this
termination is to facilitate the transfer of the lease of the
property, including all improvements, and facilities constructed
thereon, to the County under terms substantially similar to the terms
of the former San Miguel lease.
On March 15, 2018, San Miguel provided General Manager Watton with a
letter confirming that all the improvements shall remain on the
property including approximately 60,000 square feet of concrete, six
fire hydrants, a 2' trench drain, 3' wide drainage ditch, retaining
walls, 3' concrete ribbon gutter, concrete swale, 10,000 gallon
commercial draughting pit, battery sand-oil interceptor, confined
space prop, depressed prop for live fire, highway overpass prop,
electrical service and back flow, plus all fixtures permanently
attached to the Premises.
San Miguel has agreed to execute a Lease Cancellation and Termination
Agreement with the District; but, to date, it has not been executed.
As with the prior lease, the County is solely responsible for the
operations and maintenance of the facilities and improvements. At
the commencement of the County Lease, the District will convey
ownership of the improvements described above to the County. The
District does not bear the financial risk associated with any
operating costs or capital expenditures. Either party may cancel the
lease upon written notice, pursuant to the timelines contained in the
agreement. The County intends to use the leased premises for fire
and emergency services training programs and services for the County
Fire Authority. The initial term of the County Lease is three
hundred and sixty (360) months, and the County has the option to
extend the term for an additional two hundred forty (240) month
period upon three hundred sixty five (365) days' prior written notice
to the District. The rent for the term of the County Lease is one
Dollar ($1.00).
District Options and Legal Obligations
The District has the option of not leasing the land to the County,
however, this lease is in the best interests of the District, and
there is no reason to deny the County the ability to maintain,
operate, and improve this existing facility.
There are no additional legal obligations created by transferring
this Lease from San Miguel to the County. The District remains
responsible for the existing access road from Highway 94 to the site;
however, pursuant to the Lease, the District and the County are each
responsible for 50% of any and all future maintenance and/or repair
for this access road during the lease; this effectively reduces the
District’s obligation.
The County is responsible for all utilities associated with the
Lease.
The District is responsible for its own, and its agents (contractors,
licenses, etc.) acts, omissions, or negligence which occur on the
subject premises.
Operating Arrangement
Facility Lease
This lease, like the former lease with San Miguel, is a facility
lease, where the land is leased to the County who provides site
maintenance, site operations, and overall facilities management
services. The purpose of this lease is not financial gain. The rent
is $1.00 for the term of the agreement. This is substantially similar
to the terms of the former San Miguel lease. The County is obligated
to fund required capital improvements, operating expense, and reserve
for any ongoing capital improvements. As such, the financial risk is
borne by the lessee.
FISCAL IMPACT: Joe Beachem, Chief Financial Officer
As a result of the termination of the San Miguel lease and the
creation of the new lease with the County there is no expectation of
any significant fiscal change impacting the District.
The sole financial obligation of the District relating to this lease
concerns the existing access road from Highway 94. The District and
the County are each responsible for 50% of any and all future
maintenance and/or repair for this access road during the lease.
STRATEGIC GOAL:
None.
LEGAL IMPACT:
There is no particular legal impact warranting special attention. The
primary purpose of this lease is to transfer the operation and
responsibility for the fire training facilities previously built and
operated by San Miguel, to the County for use by the County Fire
Authority, with little to no substantive change in the rights or
obligations of the District.
The lease is fairly standard, assigning indemnification, liability,
and related obligations in a standard and unobjectionable fashion.
Attachments:
A) Committee Action
B) San Miguel Fire Lease Agreement, dated December 21, 2007
C) First Amendment to San Miguel Fire Lease Agreement, dated May
2011
D) Second Amendment to San Miguel Fire Lease Agreement, dated
June 21, 2012
E) Lease Cancellation and Termination Agreement between the
District and San Miguel
F) Letter from Fire Chief Brainard to General Manager Watton dated
March 15, 2018
G) Lease Agreement between Otay Water District and the County of
San Diego
ATTACHMENT A
SUBJECT/PROJECT:
Informational Item regarding the transfer of the San
Miguel Fire training site to the County of San Diego for
use by the County Fire Authority
COMMITTEE ACTION:
The Finance, Administration, and Comunications Committee (Committee)
reviewed this item at a meeting held on April 17, 2018. The
Committee supported Staff’s recommendation.
NOTE:
The “Committee Action” is written in anticipation of the Committee
moving the item forward for Board approval. This report will be sent
to the Board as a Committee approved item, or modified to reflect any
discussion or changes as directed from the Committee prior to
presentation to the full Board.
1
AMENDMENT TO AGREEMENT BETWEEN THE OTAY WATER DISTRICT AND THE SAN
MIGUEL FIRE PROTECTION DISTRICT FOR A REGIONAL TRAINING CENTER
This Amendment to the Agreement (“Amendment”), made this __ day of [month], 2011, by and
between the OTAY WATER DISTRICT, a municipal water district, formed and existing pursuant
to California Municipal Water District Act of 1911, as amended (“DISTRICT”), and the SAN
MIGUEL FIRE PROTECTION DISTRICT, a consolidated fire protection district established
pursuant to Section 13812 of the Health and Safety Code and the Cortese-Knox-Hertzberg
Local Government Reorganization Act of 2000, commencing with Section 56000 of Title 5 of the
Government Code (“SAN MIGUEL”), with reference to the following facts which are
acknowledged by each party as true and correct:
RECITALS
A. DISTRICT is a municipal water district, formed and existing pursuant to the California
Municipal Water District Act of 1911, as amended.
B. SAN MIGUEL is a consolidated fire protection district established pursuant to Section
13812 of the Health and Safety Code and the Cortese-Knox-Hertzberg Local Government
Reorganization Act of 2000, commencing with Section 56000 of Title 5 of the Government Code
C. On December 21, 2007, DISTRICT and SAN MIGUEL entered into a ground lease and
joint use agreement (“Agreement”), whereby SAN MIGUEL leased certain real property from the
DISTRICT pursuant to the terms and conditions of the Agreement (“Leased Property”), including
agreeing to undertake certain duties and obligations relating to the Leased Property.
D. Subsequent to entering into the Agreement, on or about October 22, 2010, the County of
San Diego (“County”) approved Major Use Permit P 09-007 (“MUP”) for SAN MIGUEL in
connection with SAN MIGUEL’s use of and construction on the Leased Property.
E. The MUP requires the establishment of a maintenance agreement and, accordingly, the
County has requested that the DISTRICT, as the owner of the Leased Property, enter into
Storm Water Facilities Maintenance Agreement, with Easement and Covenants (L-15514/MUP
P09-007) (“Stormwater Agreement”) with the County.
F. The Stormwater Agreement imposes additional obligations on the Leased Property
related to SAN MIGUEL’s use of and construction on the Leased Property, including, but not
limited to, providing the County with a Letter of Credit in the amount of $11,075.
G. The Agreement provides for a “Completion Date,” as that date is defined in subsection
3.3 of section 3 of the Agreement, in 2009, which date has passed without the completion of the
specified improvements.
H. DISTRICT and SAN MIGUEL now desire to amend the Agreement for SAN MIGUEL to
assume any and all duties and obligations under the MUP and Stormwater Agreement and to
extend the Completion Date of the Agreement, and SAN MIGUEL is willing to amend the
Agreement pursuant to the terms and conditions of this Amendment.
AMENDMENT
2
NOW, THEREFORE, it is agreed by and between the parties as follows:
1. DISTRICT and SAN MIGUEL agree to amend the Agreement by incorporating by reference
County of San Diego Major Use Permit P 09-007 (“MUP”) and Storm Water Facilities
Maintenance Agreement, with Easement and Covenants (L-15514/MUP P09-007)
(“Stormwater Agreement”), attached hereto as Exhibits “A” and “B” to this Amendment,
respectively. SAN MIGUEL expressly assumes any and all obligations and duties of the
DISTRICT as set forth in the MUP and Stormwater Agreement and agrees to fully comply
with the same. SAN MIGUEL will perform all obligations which otherwise would have been
performed by the DISTRICT as required in the MUP and Stormwater Agreement. SAN
MIGUEL further agrees to defend, indemnify, and hold harmless the DISTRICT from any
and all claims arising from the MUP or Stormwater Agreement, in addition to and as part of
SAN MIGUEL’s indemnification obligations under subsection 13.1 of section 13 of the
Agreement.
2. DISTRICT and SAN MIGUEL agree to amend the Agreement to extend the “Completion
Date,” as set forth in subsection 3.3 of section 3 of the Agreement, to ______, 20__.
3. All other terms of the Agreement remain unchanged.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed the
day and year first above written.
SAN MIGUEL FIRE PROTECTION
DISTRICT
By: ____________________________
August F. Ghio, Fire Chief
ATTEST:
____________________________
District Recording Secretary
APPROVED AS TO FORM:
_______________________________
General Counsel
OTAY WATER DISTRICT
By: ___________________________
Mark Watton, General Manager
ATTEST:
_______________________________
Susan Cruz, District Secretary
APPROVED AS TO FORM:
_______________________________
General Counsel
SECOND AMENDMENT TO GROUND LEASE AND JOINT USE AGREEMENT
BETWEEN OTAY WATER DISTRICT AND
SAN MIGUEL CONSOLIDATED FIRE PROTECTION DISTRICT FOR REGIONAL TRAINING
CENTER
This Second Amendment ("Amendment") to the original Ground Lease and Joint Use
Agreement is made and entered into as of the 21 §!-day of Ut.«'' V' , 2012 and is
effective as of April4, 2012, by and between OTAY WATER DISTRICT ("Otay"), and SAN
MIGUEL CONSOLIDATED FIRE PROTECTION DISTRICT ("San Miguel").
A. District and San Miguel entered into that certain Ground Lease and Joint Use
Agreement dated December 21 , 2007 (the "Lease"), under which Otay leased certain real
property to San Miguel for the construction and operation of a regional training center (the
"Training Center'').
B. In May 2011 , Otay and San Miguel amended the Lease with regard to County of
San Diego stormwater requirements.
C. Otay desires to construct and/or install facilities at the Training Center and to
properly address such improvements and future improvements in the Lease.
D. Otay and San Miguel desire to enter into this Amendment to amend certain
specific terms and conditions of the Lease as indicated below.
E. All terms in this Amendment shall have the same meaning as provided in the
Lease unless otherwise noted .
NOW, THEREFORE, in consideration of the foregoing and the mutual promises and
covenants hereinafter contained , the parties agree as follows :
1. Section 3. 7 is hereby added to the Lease as follows:
3.7 Construction of OWD Improvements. Throughout the term of this Lease,
OWD may construct and/or install certain improvements on the Premises (the "OWD
1
Improvements"), provided the OWD Improvements do not interfere with the Improvements or
San Miguel's use of the Premises. The OWD Improvements shall become a part of and subject
to the terms of this Lease upon written notice to and acknowledgment by San Miguel. If
construction and/or installation of OWD Improvements coincides with any construction by San
Miguel, San Miguel agrees to include the OWD Improvements in its construction contracts upon
request by OWD and in compliance with California public contracting laws. OWD agrees to
provide sufficient funding to San Miguel to cover the cost of such OWD Improvements.
2. Section 4.5 is hereby added to the Lease as follows:
4.5 Use of OWD Improvements. OWD and San Miguel agree that San Miguel shall
be allowed to make use of the OWD Improvements in the following manner:
a. Reserved Use. San Miguel staff, volunteers, employees, agents or
invitees may reserve the use of any OWD Improvements during hours of non-operation by
OWD, at no charge, upon the conditions agreed upon by San Miguel and OWD.
b. Shared Use. San Miguel staff, volunteers, employees, agents or invitees
shall have access to and be able to use the OWD Improvements at any time upon reasonable
notice of not less than 24 hours to OWD provided said use does not conflict with planned use
by OWD.
c. Indemnification for San Miguel Use. San Miguel shall, to the fullest
extent permitted by law, hold harmless, protect, defend (with attorneys approved by OWD) and
indemnify OWD, its Board of Directors, and each member thereof, its officers, agents,
employees, representatives, and their successors and assigns, from and against any and all
losses, liabilities, claims, suit damage, expenses and costs including reasonable attorney's fees
and costs, and expert costs and investigation expenses ("Claims"), which arise out of or are in
any way connected to San Miguel's use of the OWD Improvements under this Lease or any
negligent or wrongful act or omission by San Miguel, its officers, employees, representatives,
subcontractors, or agents regardless of whether or not such claim, loss or liability is caused in
2
part by a party indemnified hereunder. San Miguel shall have no obligation, however, to defend
or indemnify OWD if it is determined by a court of competent jurisdiction that such Claim was
caused by the sole negligence or willful misconduct of OWD.
3. Section 7.3 is hereby added to the Lease as follows:
7.3 Ownership of OWD Improvements. All OWD Improvements constructed or
installed on the Premises by OWD shall be and remain the property of OWD. San Miguel shall
have no right to waste the OWD Improvements, or to destroy, demolish or remove any OWD
Improvements except as approved by OWD pursuant to a written amendment to this Lease.
San Miguel agrees and acknowledges that it shall have no right, title, or claim in the OWD
Improvements and that it shall not allow any liens, encumbrances, or claims other than those
expressly allowed by OWD.
4. Section 9.1 of the Lease shall be amended and replaced with the following:
9.1 Maintenance and Repair. OWD places prime importance on quality
maintenance to ensure the safety and well being of its staff, visitors and volunteers and any
other person using the Improvements or OWD Improvements and/or participating in any
Training Programs. Except as otherwise provided in this Lease, San Miguel assumes full
responsibility for the construction, operation and maintenance of the Improvements, and
maintenance of the OWD Improvements, without any expense to OWD, and agrees to perform
all repairs and replacements necessary to maintain and preserve the Improvements, the OWD
Improvements and the premises in a clean and safe condition reasonably satisfactory to OWD
and in compliance with all applicable laws. Normal wear and tear of the Improvements and the
OWD Improvements will be acceptable to OWD assuming San Miguel regularly constructs and
performs all necessary repairs to maintain the Improvements and OWD Improvements in first-
class condition, similar to their condition on the date the Improvements and OWD
Improvements are accepted from the contractor. In addition, San Miguel shall keep the
3
premises and the Improvements and OWD Improvements free from all graffiti and any
accumulation of debris or waste material.
5. The parties agree that all terms and cond itions of the Lease not modified or
amended by this Amendment, including without limitation all indemnity and insurance
requirements, are and shall remain in full force and effect.
6. This Amendment is subject to the venue, choice of law and interpretation
provisions of the Lease.
IN WITNESS WHEREOF, the parties have caused this Amendment to the Lease to be
executed as of the day and year first above written.
OTAY WATER DISTRICT
By: lid tdtiJV
/Mafi<Watton
Its: Gen,ral Jv1anager
Date: &!]A /Z!?..'k I I
Appr:?!orm:
By: -~~----------------General Counsel
4
SAN MIGUEL CONSOLIDATED FIRE
PROTECTION DISTRICT
By A~
Its: Fire Chief
Date:
Page 1 of 5
LEASE CANCELLATION AND TERMINATION AGREEMENT
This Lease Cancellation and Termination Agreement (“Agreement”) is entered into as of
____________________ (“Effective Date”), by and between Otay Water District, a municipal
water district, as landlord (“District”), and San Miguel Consolidated Fire Protection District, a
consolidated fire district, as tenant (“San Miguel”). District and San Miguel are collectively
referred to herein as the "Parties."
RECITALS
A. On or about December 21, 2007, the District entered into a Ground Lease and Joint
Use Agreement with San Miguel (“Lease”), under which the District leased certain real property
(“Property”) to San Miguel for the purpose of constructing, developing and operating thereon a
state-of-the-art regional training center that included certain Improvements, and to offer certain
Training Programs and services as described in the original Lease and exhibits thereto, and any
subsequent Amendments.
B. In or about May 2011, the District and San Miguel entered into an Amendment to
Agreement between the Otay Water District and the San Miguel Fire Protection District for a
Regional Training Center to comply with the County of San Diego’s storm water requirements.
C. On or about June 21, 2012, the Parties entered into a Second Amendment to Ground
Lease and Joint Use Agreement, which amended portions of the Lease.
D. Any reference to the Lease within this Agreement incorporates any Amendments
relating thereto.
E. San Miguel desires to terminate the Lease and the District desires to cancel the
Lease pursuant to the terms and conditions specified in this Agreement.
E. This Agreement is entered into pursuant to Water Code sections 35405 and 35406
because the conveyance is in the public interest and the cancellation and termination of the Lease
will enable The District to recover possession and access of the Property and Improvements and
make constructive use of the Property.
AGREEMENT
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the District and San Miguel agree as follows:
1. Lease Modification. The term of the Lease shall expire and shall be deemed
terminated and cancelled effective on [insert date], 2018 (“Expiration Date”). Except as modified
herein, the Lease is unmodified and remains in full force and effect.
2. Lease Termination and Termination Payment. Notwithstanding the foregoing, if,
on or before the Expiration Date, San Miguel vacates the Property and leaves such Property and
Improvements in reasonably good condition and repair and otherwise in such condition as is
required under Paragraph 4 below, and under the Lease with respect to the surrender of the
Page 2 of 5
Property and Improvements following a termination of the Lease then, as of the date that San
Miguel so vacates the Property (such date being the “Termination Date”), (i) the Lease shall be
deemed terminated and cancelled with the same effect as if such date were the normal expiration
date of the Lease; (ii) San Miguel shall pay or cause to be paid all rent to the District and any and
all utility charges that are due on or before the Termination Date; (iii) neither party shall have any
claim against the other, and each party releases the other from any and all claims, liabilities,
damages, or actions of any kind whatsoever arising out of or pursuant to the Lease or San Miguel’s
use or occupancy of the Property; and (iv) San Miguel shall remove all personal property from the
Property not qualifying as an Improvement, as defined in the Lease or exhibits thereto.
Notwithstanding any provision in the Lease or in this Agreement, if for any reason San Miguel
fails to perform any obligation hereunder or under the Lease, including, but not limited to, San
Miguel’s obligation to vacate the Property and to leave such Property and Improvements on or
before the Expiration Date in reasonably good condition and repair and otherwise in such condition
as is required under Paragraph 4 below, then San Miguel hereby agrees that the Lease remains in
full force and effect and is responsible for all payments of rent as if this Agreement had not been
entered into.
3. Compliance with Obligations. San Miguel shall be responsible for all its
obligations under the Lease through and including the Termination Date including, but not limited
to, San Miguel’s obligation to pay monthly rent, additional rent, utility charges, and all other
amounts and charges owing under the Lease.
4. Condition of Property. On or before the Termination Date, San Miguel shall
remove all of its personal property; repair all damage to the Property and/or the Improvements;
vacate the Property and leave such Property and Improvements in reasonably good condition and
repair and otherwise in such condition as is required under the Lease with respect to surrender of
the Property and Improvements at the end of the term of such Lease; and deliver the keys to the
Property to the District.
5. Mutual Release. By this Agreement, effective on the Termination Date and as long
as neither party shall be in default under its obligations hereunder, each party hereto releases the
other party hereto from all claims, demands, damages, rights, liabilities, and causes of action of
any nature whatsoever, whether at law or equity, known or unknown, suspected or unsuspected,
which are related or in any manner are incidental to the Lease or the Property and which first arise
out of transactions and occurrences from and after the Termination Date. Each party waives and
relinquishes any right or benefit which it has or may have under applicable law regarding waiver
of unknown claims to the full extent that it may lawfully waive such rights and benefits. In
connection with such waiver and relinquishment, each party acknowledges that it is aware that it
or its attorneys, accountants, or agents may hereafter discover facts in addition to or different from
those which it now knows or believes to exist with respect to the subject matter of this Agreement
or the other party hereto, but that it is such party’s intention hereby to fully, finally, and forever
settle and release all of the claims, disputes, and differences, known or unknown, suspected or
unsuspected, which now exist or may exist hereafter between each party with regard to the Lease
or the Property. This Agreement shall be and remain in effect as a full and complete release
notwithstanding the discovery or existence of any such additional or different facts.
Notwithstanding the foregoing to the contrary, this Mutual Release is not intended to release or
offset actions by either party for claims arising as a result of (i) a breach of the Lease and occurring
Page 3 of 5
on or before the Termination Date; (ii) a breach of this Agreement; or (iii) transactions or
occurrences on or before the Termination Date.
6. Indemnity. To the fullest extent permitted by law, the District shall not be liable
for, and San Miguel shall defend and indemnify the District and its elected officials, officers,
agents, employees, and volunteers (collectively “the District Parties”), against any and all claims,
deductibles, self-insured retentions, demands, liability, judgments, awards, fines, mechanics’ liens
or other liens, labor disputes, losses, damages, expenses, charges or costs of any kind or character,
including attorneys’ fees and court costs (collectively “Claims”), which arise out of or are in any
way connected to this Agreement or the Lease, whether arising either directly or indirectly from
any act, error, omission, or negligence of San Miguel or its officers, employees, agents,
contractors, licensees, or servants including, without limitation, Claims caused by the sole passive
negligent act or the concurrent negligent act, error or omission, whether active or passive, of the
District Parties. San Miguel shall have no obligation, however, to defend or indemnify the District
Parties from a Claim if it is determined by a court of competent jurisdiction that the Claim was
caused by the sole active negligent act or willful misconduct of the District Parties.
7. Knowing Release. In executing this Agreement, each party hereto acknowledges
that they have consulted with and received advice of counsel and that the parties have executed
this Agreement after independent investigation and without fraud, duress, or undue influence.
8. Authority of San Miguel. San Miguel represents and warrants that (i) it is the owner
and holder of the San Miguel interest in the Lease and that it has the power, right, and authority to
execute this Agreement and to carry out the intent hereof; (ii) the execution and delivery of this
Agreement shall not violate or contravene any agreement, contract, security agreement, lease, or
indenture to which San Miguel is a party or by which it is bound or requires the consent of any
party to any of the foregoing; and (iii) the Property, including all improvements and betterments
thereto, is unencumbered, free of any security interests, liens, chattel mortgages, leases, lease
purchase agreements, or any other security or financing devices and all such installations have
been fully paid for.
9. Attorneys’ Fees. If any party initiates legal proceedings to enforce its rights under
this Agreement, the substantially prevailing party shall be entitled to reimbursement of its
reasonable attorneys’ fees, costs, expenses, and disbursements from the other party.
10. Entire Agreement. This Agreement together with all exhibits attached to this
Agreement and other agreements expressly referred to in this Agreement, constitutes the entire
agreement between San Miguel and the District with respect to the subject matter contained in this
Agreement. All prior or contemporaneous agreements, understandings, representations,
warranties and statements, oral or written, are superseded.
11. Further Assurances. San Miguel and the District shall perform any further acts and
execute and deliver any additional documents and instruments that may be reasonably required to
carry out the provisions of this Agreement and the intentions of San Miguel and the District.
12. Governing Law. This Agreement shall be governed, interpreted, construed and
enforced in accordance with the laws of the State of California.
Page 4 of 5
13. Construction. The captions and section headings used in this Agreement are
inserted for convenience only and are not intended to define, limit or affect the construction or
interpretation of any term or provision of this Agreement. Whenever required by the context of
this Agreement, the singular shall include the plural and vice versa. This Agreement shall not be
construed as if it had been prepared by San Miguel or the District, but rather as if San Miguel and
the District had jointly prepared this Agreement.
14. Modification, Waiver, Amendment. No modification, waiver, amendment or
discharge of this Agreement shall be valid unless the modification, waiver, amendment or
discharge is in writing and signed by San Miguel and the District.
15. Notices. All notices or other communications required or permitted under this
Agreement shall be in writing, and shall be personally delivered by reputable overnight carrier,
sent by certified mail, postage prepaid, return receipt requested, or sent by telecopy or e-mail, and
shall be deemed received upon the earlier of (a) if personally delivered or delivered by overnight
courier, the date of delivery to the address of the person to receive the notice, (b) if mailed, two
(2) business days after the date of posting by the United States Postal Service, (c) if given by
telecopy or e-mail, when sent. Any notice, request, demand, direction or other communication
sent by telecopy or e-mail must be confirmed within forty-eight (48) hours by letter mailed or
delivered in accordance with this section.
If to San Miguel: _______________________________
________________________________
________________________________
_______________________
If to the District: Otay Water District
2554 Sweetwater Springs Boulevard
Spring Valley, California 91978
Attention: General Manager
Any notice of change of address shall be given by written notice in the manner detailed in
this section. Rejection or other refusal to accept or the inability to deliver because of changed
address of which no notice was given shall be deemed to constitute receipt of the notice, demand,
request or communication sent.
16. Severability. If any term, provision, covenant or condition of this Agreement is
held to be invalid, void or otherwise unenforceable, to any extent, by any court of competent
jurisdiction, the remainder of this Agreement shall not be affected, and each term, provision,
covenant or condition of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
17. Successors. All terms of this Agreement shall be binding upon, inure to the benefit
of, and be enforceable by San Miguel and the District and their respective heirs, legal
representatives, successors, and assigns.
18. Waiver. The waiver by one party of the performance of any term, provision,
covenant or condition shall not invalidate this Agreement, nor shall it be considered as a waiver
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by the party of any other term, provision, covenant or condition. Delay by any party in pursuing
any remedy or in insisting upon full performance for any breach or failure of any term, provision,
covenant or condition shall not prevent the party from later pursuing remedies or insisting upon
full performance for the same or any similar breach or failure.
SIGNATURES
This Agreement shall be effective as of the date of its approval by San Miguel.
SAN MIGUEL:
San Miguel Consolidated Fire Protection District,
a consolidated fire protection district
Date: __________________ By: ______________________________
August F. Ghio, Fire Chief
APPROVED AS TO FORM:
_______________________________
General Counsel
DISTRICT:
Otay Water District, a municipal water district
Date: __________________ By: _________________________________
Mark Watton, General Manager
APPROVED AS TO FORM:
__________________________________
General Counsel