HomeMy WebLinkAbout07-23-19 F&A Committee Packet1
OTAY WATER DISTRICT
FINANCE AND ADMINISTRATION
COMMITTEE MEETING
and
SPECIAL MEETING OF THE BOARD OF DIRECTORS
2554 SWEETWATER SPRINGS BOULEVARD
SPRING VALLEY, CALIFORNIA
BOARDROOM
TUESDAY
July 23, 2019
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.ADOPT RESOLUTION NO. 4369 TO INDEMNIFY THE BOARD OF DIRECTORS,
GENERAL MANAGER, AND DEFERRED COMPENSATION COMMITTEE
MEMBERS AGAINST LIABILITY, LOSS, DAMAGE OR EXPENSE RESULTING
FROM ANY ACT OR OMISSION IN THEIR OFFICIAL CAPACITIES IN THE
ADMINISTRATION OF THE 401(a) AND 457(b) DEFERRED COMPENSATION
PLANS, EXCLUDING WILLFUL MISCONDUCT (WILLIAMSON) [5 minutes]
4.REVIEW THE EVALUATON OF VARIOUS TIMING AND STRUCTURES OF SEWER
DEBT; AND OBTAIN APPROVAL FROM THE BOARD TO PROCEED WITH
ISSUING SEWER DEBT IN ACCORDANCE WITH THE RECOMMENDED TIMELINE
AND STRUCTURE (KOEPPEN) [5 minutes]
5.ADOPT RESOLUTION NO. 4368 TO CAST THE DISTRICT’S VOTE ON UP TO
THREE (3) CANDIDATES FOR THE SPECIAL DISTRICT RISK MANAGEMENT
AUTHORITY’S BOARD OF DIRECTORS (SEGURA) [5 minutes]
6.ADJOURNMENT
2
BOARD MEMBERS ATTENDING:
Mitch Thompson, Chair
Mark Robak
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 July 19, 2019 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 July 19, 2019.
/s/ Susan Cruz, District Secretary
STAFF REPORT
TYPE MEETING: Regular Board MEETING DATE: August 7, 2019
PROJECT: DIV. NO. ALL
SUBMITTED BY: Kelli Williamson
Human Resources Manager
APPROVED BY: Adolfo Segura, Chief, Administrative Services
Mark Watton, General Manager
SUBJECT: ADOPT RESOLUTION #4369 TO INDEMNIFY THOSE RESPONSIBLE FOR THE
DISTRICT’S 401(a) AND 457(b) DEFERRED COMPENSATION PLANS
GENERAL MANAGER’S RECOMMENDATION:
That the Board adopt Resolution #4369 to indemnify the members of the
Board of Directors, the General Manager, and the Deferred Compensation
Committee members against liability, loss, damage or expense resulting
from any act or omission in their official capacities in the
administration of the 401(a) and 457(b) Deferred Compensation Plans, and
excluding willful misconduct.
COMMITTEE ACTION:
Please see “Attachment A”.
PURPOSE:
To request that the Board adopt Resolution #4369 to indemnify the members
of the Board of Directors, the General Manager, and the Deferred
Compensation Committee members against liability, loss, damage or
expense resulting from any act or omission in their official capacities
in the administration of the 401(a) and 457(b) Deferred Compensation
Plans, and excluding willful misconduct.
ANALYSIS:
The District offers its employees 401(a)and 457(b) Deferred Compensation
Plans (the “Plan”). The Plan allows contributions from the employer, the
employee, or both, to be set aside for retirement.
AGENDA ITEM 3
It is the goal of the District to continue to offer retirement plan
options that fit employees’ needs and preferences, to work to provide a
diversified landscape of investment options with reasonable fees and
competitive returns, and to maintain employee satisfaction with these
services.
General Manager Authority
As referenced in the attached resolution (see Attachment B), the General
Manager has been designated by the Board to be the coordinator and plan
administrator of all District deferred compensation programs, which
includes, but is not limited to: executing all necessary agreements;
determining whether to add, maintain, or eliminate a plan; performing
administrative duties to carry out any plan; and obtaining professional
and/or legal advice as necessary to ensure compliance with federal and
state laws affecting deferred compensation plans.
Fiduciary Responsibilities
There are certain fiduciary responsibilities required by the District in
administering the Plan. As a Plan sponsor, the District has legal and
fiduciary obligations to employees who participate in the Plan. As laws
are expanding in these areas, it has become a best practice for agencies,
as plan sponsors, to work with financial subject matter experts to better
oversee and proactively manage their plans.
District Deferred Compensation Committee
Based on industry best practice, the General Manager formed a Deferred
Compensation Committee (“Committee”) that includes the Human Resources
Manager, Chief of Administrative Services, Chief Financial Officer,
Assistant Chief Financial Officer, Human Resources Analyst and two
employee association representatives. This Committee was formed to
oversee the Deferred Compensation Program which includes, but is not
limited to:
•Preparing and revising a Deferred Compensation Investment Policy
(DCIP) Statement.
•Performing reviews of the Plan’s investments to ensure they comply
with the DCIP.
•Engaging experts who have knowledge of the strategies, standards,
laws and trust provisions that impact the investment process of the
Plan.
•Engaging appropriate experts to make prudent investment decisions
for the Plan.
•Engaging a professional investment advisor to monitor the
activities of all investment-related service vendors and to provide
relevant information to the Committee.
Financial Consultant
Human Resources contacted other agencies to locate financial consultants
and solicited proposals. The Committee reviewed the proposals and
selected SageView Advisory Group (“SageView”), an independent registered
investment advisor, to assist with fiduciary services and training.
SageView is a co-fiduciary with the District and ensures that we are
following best practices according to the laws and requirements necessary
to ensure our Plan is complying and managed with the appropriate
governance regulations. SageView also provides services to Padre Dam
Municipal Water District, San Diego County Water Authority, and other
public entities.
The Committee worked with SageView to develop Committee Guidelines and
the DCIP statement, and is currently working with SageView to establish
a new investment line-up for the new deferred compensation provider,
Voya Financial (“Voya”), that will go into effect by the end of this
calendar year. The Committee will continue to meet at least semi-annually
to review the Plan, which will include a market and macro-economic
overview, Plan snapshot, investment fund performance and peer group
rankings, and Plan cost benchmarking to include the expenses/fees. In
addition, the consultant will analyze Voya’s overall performance to
ensure the District is providing the best Plan investment options and
recordkeeping services for Plan participants.
Fiduciary Liability Insurance
Further research was completed regarding fiduciary liability insurance
to protect the District and the Committee. Based on discussions with
SageView and the Finance Department, it was determined a $2 million-
dollar policy with a retention of $150,000, was the best level of
insurance for the District based on the Plan assets. Special District
Risk Management Authority (SDRMA) does not provide fiduciary liability
insurance. Accordingly, their broker, Alliant, obtained quotes for
coverage for the District. The District plans to purchase insurance
that will be effective on July 1, 2019, from Hudson Insurance Company in
the recommended amount. The annual cost of this insurance is $3,271.40.
This insurance will be reviewed on an annual basis as Plan assets
increase to ensure the proper level of coverage is maintained.
Indemnify Board of Directors, General Manager and Deferred Compensation
Committee Members
Committee members will exercise discretion and independent judgment in
the performance of their duties and are required to act prudently and in
the best interest of participants and beneficiaries of the Plan.
However, staff is requesting that the District indemnify the Committee,
as well as members of the Board, and General Manager, against losses
incurred in the management of the Plan.
The attached resolution includes the following language:
That the District will indemnify, defend and hold harmless
members of the Board of Directors, the General Manager, or
any Employees or former Employees who have, or had,
administrative responsibility under the 401(a) and 457(b)
Deferred Compensation Plans, and the Deferred Compensation
Committee or any member thereof, with respect to any and all
liability, loss, damage or expense resulting from any act or
omission, except willful misconduct, in their official
capacities in the administration of the 401(a) and 457(b)
Deferred Compensation Plans, including, but not limited to,
attorney, accountant, and advisory fees and all other
expenses reasonably incurred in their defense, and, in no
event shall the District pay such indemnification or defense
using 401(a) and/or 457(b) Deferred Compensation Plan assets.
Based on the above, it is recommended that the Board of Directors adopt
Resolution #4369 to indemnify the members of the Board of Directors, the
General Manager, and the Deferred Compensation Committee members against
liability, loss, damage or expense resulting from any act or omission in
their official capacities in the administration of the 401(a) and 457(b)
Deferred Compensation Plans, and excluding willful misconduct.
FISCAL IMPACT: Joe Beachem, Chief Financial Officer
None.
STRATEGIC GOAL:
Review Deferred Compensation Program for reduced fees and streamlined
approach to ensure program offerings are fully utilized.
LEGAL IMPACT:
None.
ATTACHMENTS:
Attachment A – Committee Action Report
Attachment B – Resolution #4369
ATTACHMENT A
SUBJECT/PROJECT: ADOPT RESOLUTION #4369 TO INDEMNIFY THOSE RESPONSIBLE FOR
THE DISTRICT’S 401(a) AND 457(b) DEFERRED COMPENSATION PLANS
COMMITTEE ACTION:
The Finance & Administration Committee reviewed this item at a meeting
held on July 23, 2019. The Committee supports presentation to the full
Board for their consideration.
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.
ATTACHMENT B
RESOLUTION NO. 4369
A RESOLUTION OF THE BOARD OF DIRECTORS
OF OTAY WATER DISTRICT TO PROVIDE INDEMNITY
TO THOSE RESPONSIBLE FOR THE DISTRICT’S
401(a) and 457(b) DEFERRED COMPENSATION PLANS
WHEREAS, the Otay Water District presently provides its employees with the
opportunity to participate in deferred compensation plans in accordance with sections 401(a) and
457(b) of the Internal Revenue Code; and
WHEREAS, the Board of Directors designated the General Manager to be the
coordinator of all District deferred compensation programs; act as plan administrator and/or
contract with other persons to serve as plan administrators; receive necessary reports, notices,
etc. in relation to such plans or to trusts created to maintain plan funds; execute all necessary
agreements; determine whether to add, maintain, or eliminate a plan; perform administrative
duties to carry out any plan; serve as the District’s trustee and/or representative for any trust
created or maintained in conjunction with or relation to a plan; cast, on behalf of the District, any
required votes; obtain such professional and/or legal advice as may be necessary to ensure
compliance with federal and state laws affecting deferred compensation programs; and, at his/her
discretion, delegate any or all of the foregoing responsibilities to other District employees; and
WHEREAS, the General Manager has formed a Deferred Compensation Committee to
manage the District’s 401(a) and 457(b) Deferred Compensation Plans; and the Deferred
Compensation Committee will exercise discretion and independent judgment in the performance
of its duties, and it will act prudently and in the best interest of participants and beneficiaries of
the 401(a) and 457(b) Deferred Compensation Plans; and
WHEREAS, the District now desires to indemnify, defend and hold harmless members of
the Board of Directors, the General Manager, or any Employees or former Employees who have,
or had, administrative responsibility under the 401(a) and 457(b) Deferred Compensation Plans,
and the Deferred Compensation Committee or any member thereof, with respect to any liability,
loss, damage or expense resulting from any act or omission, except willful misconduct, in their
official capacities in the administration of the 401(a) and 457(b) Deferred Compensation Plans.
NOW, THEREFORE, BE IT RESOLVED that the District will indemnify, defend and
hold harmless members of the Board of Directors, the General Manager, or any Employees or
former Employees who have, or had, administrative responsibility under the 401(a) and 457(b)
Deferred Compensation Plans, and the Deferred Compensation Committee or any member
thereof, with respect to any and all liability, loss, damage or expense resulting from any act or
omission, except willful misconduct, in their official capacities in the administration of the
401(a) and 457(b) Deferred Compensation Plans, including, but not limited to, attorney,
accountant, and advisory fees and all other expenses reasonably incurred in their defense.
BE IT FURTHER RESOLVED that the District will indemnify, defend and hold
harmless members of the Board of Directors, the General Manager, or any Employees or former
Employees who have, or had, administrative responsibility under the 401(a) and/or 457(b)
Deferred Compensation Plans, and the Deferred Compensation Committee or any member
thereof, as described in the aforementioned paragraph, and, in no event shall the District pay
such indemnification or defense using 401(a) and/or 457(b) Deferred Compensation Plan assets.
BE IT FURTHER RESOLVED that this Resolution will take effect retro-actively from
January 1, 2019.
PASSED, APPROVED AND ADOPTED by the Board of Directors of the Otay Water
District at a regular meeting held this 7th day of August, 2019.
Ayes:
Noes:
Abstain:
Absent:
President
ATTEST:
District Secretary
STAFF REPORT
TYPE MEETING:Regular Board Meeting MEETING DATE: August 7, 2019
SUBMITTED BY:Kevin Koeppen, Assistant
Chief of Finance
W.O./G.F. NO:DIV. NO. All
APPROVED BY: Joseph R. Beachem, Chief Financial Officer
Mark Watton, General Manager
SUBJECT:To Present to the Board the Evaluation of Various Timing and
Structures of Sewer Debt; and Obtain Approval from the Board to Proceed with Issuing Sewer Debt in Accordance with the Recommended Timeline and Structure
GENERAL MANAGER’S RECOMMENDATION:
That the Board direct staff to proceed with issuing sewer debt in
accordance with the recommended timeline and structure.
PURPOSE:
Present to the Board the evaluation of various timing and structures
of issuing sewer debt; and obtain approval from the Board to proceed with issuing sewer debt in accordance with the recommended timeline and structure.
BACKGROUND:
As part of the FY 2020 Budget presented to the Board on June 5, 2019,
staff communicated that the District’s sewer fund would need to issue $6.0 million of debt in FY 2020 to fund capital improvement projects. This debt is needed to meet the capital improvement needs of the
District and will require a 125% coverage ratio. During the FY 2020 budget process, the Board requested that staff evaluate alternative
options for issuing sewer debt to smooth in the rate impact the debt will have on customers. Staff engaged Suzanne Harrell, of Harrell and Company Advisors, LLC, to assist in evaluation of debt
alternatives.
As we have been evaluating various sewer debt alternatives, staff was made aware of additional information after the budget was prepared,
AGENDA ITEM 4
which will place added pressure on rates for the current 6-year period and beyond.
In the past, the rolling 6-year view of the rate model and the relatively stable financial status of the District, allowed for
stable planning with only a 6-year view. This is the current situation for water, where there are no significant shifts on the
financial horizon. However, the financial horizon of sewer is changing. As we have been evaluating the various options for issuing the upcoming sewer debt, staff was informed of the County’s plan to
replace a force main, which the County owns and the District shares. The initial estimate of the District’s share of this project is
$6.0M. The County’s CIP is not anticipated to begin within the next 6 years; however, it is likely to occur within the 6 years following 2025. This information has led staff to take an additional in-depth look at the future of sewer rate increases beyond the current 6-year rate model window. As a result of the focus on the sewer financial
planning, some long-term impacts need to be brought into the current rate modeling projections.
In addition to the County’s project, the continuation of Pure Water to the financial model for sewer customers has changed the long-term
ability of sewer customers to fund CIP projects. The Pure Water impact in the next 6 years has been mapped out in the rate model,
based on the best information the City of San Diego has provided staff, however, the following 6 years has not been planned out in detail by the City of San Diego. Where rate increases would have
been used to fund CIPs, now they must also go to fund Pure Water. Years before Pure Water was placed into the rate model, it
was understood that the sewer reserves would run low and debt would need to be issued periodically. Sewer reserves have been drawn down by $8M over the past 6 years, to the point where they are now at
target. This planned usage of reserves allowed the rates to remain low, but it was well understood that future CIP funding was going to
include debt financing. Without excess reserves, this leaves cash funding and debt as the primary funding mechanisms for CIPs. With cash funding having an additional burden to fund Pure Water, debt
will become a more regular feature in the financing plan. This is a new dynamic which is significant and will occur just outside the
current 6-year rate model. With that debt dynamic, also comes the corresponding rate increases needed to support the debt.
The need for debt is somewhat well defined for the next 6 years of the rate model, but again, it had not been planned out in any detail
beyond the 6-year rate model. With this information and with the District’s own sizable sewer CIP in years 2026-2031, it would be financially prudent to place the District in a stronger position in year 2025 than the current model
presents. Staff is presenting a 2020 Budget Modified 6-year
projection, which includes 8.9% rate increases in FY 2020 and FY 2021, which is consistent with the increases presented in the
FY 2020 budget. From FY 2022 to FY 2025, the projected annual rate increases have increased from 5.0% to 6.4%. This is the new base-line from which staff has looked at options to modify the proposed
$6M debt issuance.
These new dynamics create an increased need for debt in years 2026-2031 and staff has taken some added steps to forecast rates.
1. Staff has extended the sewer rate model out to 2031. 2. Staff has asked for additional clarification on the amount and
timing of the District’s sewer CIP expenditures in this future period. 3. Staff has asked for additional information related to the County’s long-term sewer CIP expenditures.
By taking these steps, the necessary financial position of the District in 2025 has added clarity. With this expanded view of the debt needs of the sewer customers, it is clear the financial position
of the District in 2025 needs to be improved. It is prudent to place the District in a strong financial position in year six, 2025, so
that no unexpected or extreme rate increases are needed to handle the increasing levels of debt in the following period. There are
slightly higher rate increases, in the short-term, that are needed to handle the additional future debt without rate spikes. This expanded view of the sewer financial position is reflected in the “FY 2020
Budget - Modified” in the table below. ANALYSIS: Working with Suzanne Harrell, staff evaluated multiple options for
the upcoming sewer debt issuance including:
1. A single issuance of $6.0M with a one year deferral of principal payments to begin in FY 2022, which is the assumption used to prepare the FY 2020 Budget and modified to
adjust future rate increases based on the new information regarding the County’s project.
2. Issuing $3.0M in FY 2020 with a one year deferral of principal payments which will begin in FY 2022, and a $3.0M issuance in FY 2022 with no payment deferrals.
3. Issuing $3.0M in FY 2020 with no deferral of principal payments which will begin in FY 2021, and a $3.0M issuance in
FY 2022 with no payment deferrals. 4. A single issuance of $6.0M with deferred principal payments beginning in FY 2022 and $180,000 of capitalized (deferred) interest.
The options being presented are intended to smooth out the rate increases for the sewer customers. The following table demonstrates
the rate impacts of each scenario along with the debt service coverage ratios in FY 2021 and 2025. The FY 2021 debt coverage ratio is included because it is the lowest debt coverage position over the
6 year period, while the FY 2025 debt coverage position is included to demonstrate the necessary increase in the District’s financial
position to meet the CIP needs in the years immediately beyond FY 2025.
2020 2021 2022 2023 2024 2025 2021 DSC 2025 DSC
FY 2020 Budget 8.9 8.9 5.0 5.0 5.0 5.0 126 201 Alternative Debt Options:
Option 1 – 2020 Budget Modified 8.9 8.9 6.4 6.4 6.4 6.4 126 254
Option 2– Recommended 8.9 6.7 6.7 6.7 6.7 6.7 189 243
Option 3 8.9 8.9 6.0 6.0 6.0 6.0 163 243
Option 4 8.9 6.8 6.8 6.8 6.8 6.8 225 246
Option 1 is the proposed budget structure included in the FY 2020 budget, which was modified for the new information regarding
the County’s project. It provides a relatively low debt service coverage, but it only allows for the impact of debt to be smoothed into the rates over FY 2020 and FY 2021. Option 2 is being recommended at this time, because it provides the
earliest rate relief, and allows for the debt impact to be smoothed into the rates over a longer duration, which addresses an inquiry
made by the Board during the June 2nd budget approval meeting. It also provides a more secure debt coverage ratio in FY 2021 compared to budget. Both of these benefits are at a relatively low cost,
which is summarized in the attached letter from Harrell & Company Advisors, LLC.
Option 3 is not recommended. While it provides increased debt service coverage security in FY 2021, it does not provide for the
rate impact to be smoothed in over a longer period, which is the primary objective of this analysis. It also results in a lower debt
service in FY 2021 than the recommended option. Option 4 is also not recommended. When compared to the recommended
option, the debt service under this option provides slightly less rate relief and one less year to meet the debt service of a single $6
million issuance. While the FY 2021 debt service in the above schedule is greater under this option, the FY 2022 debt service drops to 147%, which is the lowest of all the options.
Staff also examined shorter duration debt issuances of 25-year and 20-years. Shortening the duration to 25-year or 20-year terms would
result annual rate increases of 7.1% and 7.4%, respectively, from FY 2021 to FY 2025. These options were not recommended because they
place additional pressure on rates, and when compared to the anticipated life of the projects being funded, provide less generational equity.
When combined with the recommended debt financing, the potential rate
increases will maintain the reserves and debt coverage at or above targeted levels through 2025.
NEXT STEPS
Staff has engaged with Harrell & Company Advisors, LLC to act as the Financial Advisor for this issuance and has selected Hawkins, Delafield & Wood, LLP to serve as Bond and Disclosure counsel. Due to the size of this debt issuance, and the sewer not recently
issuing public debt, it is anticipated that this bond sale will be sold as a negotiated sale. The last negotiated sale the District performed was the 2010 Build America Bonds.
Staff is in the process of selecting an Underwriter/Placement Agent for the issuance. Staff anticipates returning to request final
approval for the General Manager to issue debt at the October Board meeting.
FISCAL IMPACT: Joe Beachem, Chief Financial Officer
The recommended option will result in debt service requirements growing from $44 thousand in FY 2020 to $348 thousand in
FY 2023 and will include a debt coverage covenant of 125%. STRATEGIC GOAL: The District ensures its continued financial health through long-term
financial planning and debt planning. LEGAL IMPACT: None.
General Manager
Attachments:
A) Committee Action Form B) Harrell & Company Advisors, LLC – Evaluation Letter and Recommendation
ATTACHMENT A
SUBJECT/PROJECT: To Present to the Board the Evaluation of Various Timing
and Structures of Sewer Debt; and Obtain Approval from the Board to Proceed with Issuing Sewer Debt in Accordance with
the Recommended Timeline and Structure
COMMITTEE ACTION:
The Finance and Administration Committee recommend that the Board direct staff to proceed with issuing sewer debt in accordance with the recommended timeline and structure.
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.
The City Tower, 333 City Boulevard West, Suite 1215, Orange, California 92868
Tel: 714.939.1464
July 10, 2019
Joseph R. Beachem
Chief Financial Officer
Otay Water District
2554 Sweetwater Springs Blvd.
Spring Valley, CA 91978-2096
RE: Sewer Funding Options
Dear Joe:
The Otay Water District (District) has requested a discussion of alternative structures for funding expected
sewer projects over a six year time frame to determine the potential impact on the rates. The District has
stated it has $6 million of CIP needs over the next 3 years, with an additional $6 million requirement
expected in the next six year period following 2025.
I understand that the current method for assessing sewer charges based on prior winter averages will be
under review, with possible changes to make the rate structure more stable if there are particularly wet
winters which can currently result in lower revenues in a future year without a compensating rate increase.
This analysis, and the staff assessment of the required rate increase under various scenarios, has been
completed without anticipating any change in the existing rate structure.
Background
By way of background, most of the financings described herein are expected to be sold publicly and have
a 30 year maturity. As we have discussed over the last year, banks that make loans to public agencies
typically have a 15 year limit on the loan payback. In general, a 15-year payback would increase the annual
payments made on a 30-year by about 50%, but would be paid in full much earlier. These bank loans are
referred to in this memo as “private placements” since they do not involve a public sale of debt and are
“placed” with one lender. You originally concluded that the private placement 15-year option does not
work well with the District’s short term rate-setting objectives. However, there are certain circumstances
under which you might consider a private placement for the first phase of financing, discussed toward the
end of this analysis.
The debt service estimates used in the analysis assume the first series of bonds would be issued in November
2019, with a 30 year repayment. The principal payments would be made on September 1 each year. We
discussed your options for selecting a principal payment date and you chose September 1 to coincide with
the payments you make on the water system financings. Interest will generally be paid semi-annually on
March 1 and September 1, therefore, in FY 2019-20, the District will have an interest-only payment in
March 2020.
Attachment B
Page 2
July 10, 2019
This financing will be the first public debt incurred for the sewer system. Taken together with the system’s
generally low net revenues for at least the next 2 years, lack of significant liquid reserves and need to
increase rates for future bond issues, I have assumed the bond investors will be expecting a bond funded
reserve fund at least equal to 50% of annual debt service. The rating agency will also take funding of a
reserve fund (or lack of funding) into account in their analysis. I have factored the funding of such a reserve
fund into the bond sizing.
Rates are based on market conditions as of June 28, and I did not add a contingency to account for market
changes until the bonds are issued in November 2019, nor did I factor in any potential Federal Reserve
action to change the discount rate (the market has effectively factored that in already). I did add a
contingency of 25 basis points for bonds to be issued 2 years in the future.
Tax-exempt bonds typically must pay interest at least once during the first 12 months after issuance, with
the exception of capital appreciation bonds which accrete in value until maturity.
Structuring Alternatives
For the debt sizing alternatives that follow, I will start with the most common structures for publicly-offered
debt used by public agencies and progress to the less frequently used options. This will be followed by a
discussion of private placement alternatives.
Level Debt Service:
This structure will result in approximately level annual payments for 30 years (ignoring the first year partial
payment of interest only).
This structure could be used to issue bonds in one series in 2019, or for two separate bonds, one issued in
2019 and one issued in 2021 (or later), each funding half of CIP requirement. This structure will result in
additional costs of issuance, and lack of interest rate certainty, but provides the benefit of easing into your
desired rate increase compared to rates needed to fund the entire CIP requirement up front.
This structure can be modified to have no principal payment in the first or second year (referred to in this
memo as “principal deferral”), so that only interest is paid during that period, and then debt service would
be level through maturity of the bonds once the principal payment commences. This increases the total
interest cost of the issue, but the magnitude of the cost increase depends on how many years principal is
deferred.
This structure can also be modified to add “capitalized interest” – that is, borrowing additional bond
proceeds to set aside with the trustee to offset all or a portion of the interest payment. Capitalized interest
can be used during the first 3 years of a bond issue. Typically it is done in issues with principal deferral,
but that is not required. It can also be used to pay some but not all of the interest due. The additional cost
here is for increasing the bond size to fund the capitalized interest.
Shown on the following page is a simplified cost comparison of the different modifications to the level debt
service alternative for the first $6 million of project funding. The debt service is not materially different
under any option once the District begins amortizing the principal.
Page 3
July 10, 2019
Issue
Date
First
Principal
Project
Fund
Cost of
Issuance
Capitalized
Interest
Total Debt
Service Arb Yield All-In
1 One Series 11/1/2019 9/1/2020 $6,000,000 $157,000 $ - $10,282,000 2.52% 3.69%
2 One Series 11/1/2019 9/1/2021 6,000,000 157,000 - 10,337,000 2.52% 3.69%
3 First Issue 11/1/2019 9/1/2021 3,000,000 109,000 - 5,184,000 2.51% 3.76%
Second Issue 11/1/2021 9/1/2022 3,000,000 103,000 - 5,288,000 2.76% 3.90%
6,000,000 212,000 - 10,472,000
4 One Series/CI 11/1/2019 9/1/2021 6,000,000 158,000 180,000 10,454,000 2.52% 3.68%
Fiscal Year Debt Service
19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27
1 One Series $88,000 $340,000 $340,000 $340,000 $340,000 $340,000 $340,000 $340,000
2 One Series 88,000 264,000 344,000 344,000 344,000 344,000 344,000 344,000
3 First Issue 44,000 133,000 173,000 173,000 173,000 173,000 173,000 173,000
Second Issue - - 45,000 175,000 175,000 175,000 175,000 175,000
44,000 133,000 218,000 348,000 348,000 348,000 348,000 348,000
4 One Series/CI 45,000 135,000 354,000 354,000 354,000 354,000 354,000 354,000
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July 10, 2019
Wrap-around Debt Service:
This structure would typically have level debt service for the first series of bonds (for example, the first
series issued in 2019 and maturing in FY 2049-50), and then the second series of bonds issued later (for
example, the second series issued in 2025 and maturing in FY 2055-56) would have lower debt service in
the years when the 2019 Series was outstanding – through FY 2049-50 - and the debt service would increase
after the maturity of the 2019 Series so that the total combined debt service through FY 2055-56 was level
for all years once the 2025 Series was issued.
This would not be a structure that the District would apply now to the “two series” option above because
the difference in annual payments in the early years would be negligible. This structure may be considered
in the future when the timing and amount of the six year CIP requirements following 2025 becomes clearer.
Capital Appreciation Bonds:
This structure is typically used to leverage bonding capacity in future years when the District has no
capacity to pay debt in early years because there are no interest payments made on capital appreciation
bonds (CABs). Instead, the CAB is issued at less than face value and accretes in value until it reaches
maturity. This structure can be used to reduce interest expense paid in the early years. Sometimes this
structure is used for a second series instead of the wrap-around structure when there is no capacity for
additional debt service at all in the early years. You have probably seen this done by school districts that
might have a 20 year general obligation bond outstanding and that want to capture their taxing authority in
years 21-30 but have no ability to generate any additional taxes to pay debt service in years 1-20 because
of the legal limit on the tax rate. CABs are generally not appropriate for agencies with rate setting authority
such as the District, since it results in a significant deferral of debt service expense into the future.
Private Placement:
A private placement is typically up to 15 year financing entered into with a bank or lender. Private
placements have a lower issuance cost by about $20,000-25,000, since there is no need for preparation of
an official statement or a rating. Higher interest rates tend to offset any upfront cost savings because the
bank or lender (1) needs to charge a higher rate to receive the same benefit from the tax-exemption that an
individual might because the corporate tax rate is lower than personal rates or (2) needs to recover its
expenses (such as the bank’s legal counsel) for the financing through the interest rate.
Further, you will recall that tax reform in late 2017 reduced the corporate tax rate from a maximum of 35%
to a maximum of 21%. This is a 40% reduction in the tax rate, and the value of tax-exempt income to a
bank is worth less than before tax reform. Before tax reform, the taxable interest rate equivalent for a 2.5%
tax-exempt loan was 3.85% (2.50% ÷ .65) and now it would be 3.16% (2.50% ÷ .79). So today you might
see that same 2.50% quote increase to 3.05% to produce the same rate of return to the bank.
However, while there may not necessarily be an all-in cost savings for private placements, some lenders
are willing to be flexible in how the repayment is structured (so you can achieve your rate-setting objectives)
and potentially allow a very early redemption, usually at a premium, that would provide the opportunity for
a restructuring at a much lower cost than is typically available with public debt. This may be of interest to
the District due to the plan to potentially modify the rate structure based on a cost study in the near term,
as well as the because of the recent elimination of advance refunding options as part of the 2017 tax reform.
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July 10, 2019
There is one lender I am aware of that recently received approval to extend some of its private placement
financing up to 30 years. While the rate might be higher, it could be of benefit to lock in today’s rate, but
still provide some flexible repayment terms – which could be useful until the rate structure is revised.
Private placements generally do not require funded reserve funds, which is another factor to consider, since
it results in a lower upfront borrowing amount.
This option will continue to be included in the evaluation and compared against the terms of a negotiated
sale to determine if it is cost beneficial.
Draw-down Financing:
This structure is not available for publicly issued debt. This is typical of a private placement where the
lender/bank only charges the District interest for the amount of funding that is drawn down over a specified
period of time, which rolls into a long-term (15-year) level debt service payment once all the funds are
drawn. This is akin to construction-to-permanent bank loans you might see in the construction sector. It
can provide some cost savings depending on the draw schedule. If most of the funds are drawn early, the
savings are minor.
Many private placement lenders offer this option, and the funds are held with a third party escrow agent
until they are spent. I do not know if the lender with a 30 year financing option would provide a draw-down
feature.
Conclusion
The District is projecting to have at least another $6 million in CIP needs in the six years following the
current six year projection. Given that a second financing will require higher net operating revenues to
service the debt, rate increases for that debt will be needed in addition to the rate increases for the current
anticipated debt. The District has always used rate smoothing to accommodate future debt plans so that
there is no rate-shock when a future series of bonds is issued. Based on the District’s practice to smooth
out rate increases, rate model and the resulting rates, as well as the near-future rate restructuring possibility
based on an expected cost study, I will recommend that the District take the two issue approach to its first
$6 million in financing needs.
The first series of $3 million would be financed as a 30 year bond (or possibly private placement if that
lender’s option for 30 years cost effective). Then, once the rate study is complete and the new rates are
effective (assumed 2 year process), the second series of $3 million could be issued. At that time, the District
will have a better sense of the timing of its future funding requirements and the benefits of any new rate
structure and can factor that in (or not) to the required rate increases. I believe this is a better option than
trying to develop a $6 million structure today to fit future needs. It also gives time for a more flexible rate
structure to be considered based on a rate study.
I did consider a 15 year private placement for the first $3 million in 2019, with a wrap-around second series
in 2021 for an additional $3 million, but that did not produce any lower annual debt service and therefore
doesn’t match the District’s rate-setting objectives.
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July 10, 2019
Next Step
The next step for the District is to engage a bond underwriter. I do not envision this first sewer bond to be
sold at competitive sale based on its size and the term. Both of those factors would limit the pool of
interested competitive sale bidders and likely not produce any better result (that is, better interest rate) than
engaging one bond underwriter up front to work with the District during the structuring process. They will
become familiar with the credit factors of the sewer system and can focus their selling efforts on their
customers who are likely buyers. This process is called a “negotiated sale.”
Citigroup was selected as the underwriter for the District’s sale of Build America Bonds in 2010, which
was the only negotiated sale of bonds by the District in the last 20 year. As with the sewer bonds, there
was a particular reason to complete that transaction as a negotiated sale – in that case, there were taxable
bonds and a more complex financing structure.
An underwriter can also act as a “placement agent” and engage with banks and lenders regarding private
placement interest rates. Municipal Advisors are not permitted to solicit financings from banks and
lenders.
I am available to discuss this information in further detail at your convenience.
Very truly yours,
Suzanne Q. Harrell
Suzanne Harrell
STAFF REPORT
TYPE MEETING: Regular Board MEETING DATE: August 7, 2019
PROJECT: Various DIV. NO. ALL
SUBMITTED BY: Adolfo Segura
Chief, Administrative Services
APPROVED BY: Mark Watton, General Manager
SUBJECT: ADOPT RESOLUTION NO. 4368 TO SELECT UP TO THREE (3) CANDIDATES
FOR THE SPECIAL DISTRICT RISK MANAGEMENT AUTHORITY’S (SDRMA)
BOARD OF DIRECTORS
GENERAL MANAGER’S RECOMMENDATION:
That the Board consider and select candidates for the Special District
Risk Management Authority’s (SDRMA) Board of Directors election and
cast the District’s vote by adopting Resolution No. 4368.
COMMITTEE ACTION:
See “Attachment A.”
PURPOSE:
To present for the Board’s consideration, the ballot to select up to
three (3) candidates for the Special District Risk Management
Authority’s (SDRMA) Board of Directors.
ANALYSIS:
SDRMA is holding an election to fill up to three (3) seats on its Board.
Attached in this staff report and for the Otay’s Board review, is each
candidate’s qualifications, background, experience, and expertise
(Attachment B).
AGENDA ITEM 5
In an effort to provide a good balance of representation on SDRMA’s
Board (based on agencies represented), staff recommends that the Otay
Board consider and select the following candidates:
Patrick K. O’Rourke
Board Member, Redwood Region Economic Development Commission
Sandy Seifert-Raffelson (Incumbent)
Finance Manager/Treasurer, Herlong Public Utility District
Bob Swan (Incumbent)
Board Member, Groveland Community Services District
Attached are statements of qualifications (Attachment B) as submitted
by each candidate, along with the official election resolution
(Attachment C) and ballot (Attachment D), which SDRMA requires to ensure
the integrity of the balloting process. The ballot requests that the
District select up to three (3) candidates when placing its vote.
The ballot must be sealed and received by 4:30 pm on Wednesday, August
21, 2019.
FISCAL IMPACT: Joe Beachem, Chief Financial Officer
None.
STRATEGIC GOAL:
Maintain effective communications with other cities, special districts,
State and Federal governments, community organizations, and Mexico.
LEGAL IMPACT:
None.
Attachments: Attachment A – Committee Action Report
Attachment B – Candidates’ Statement of Qualifications
Attachment C – Resolution No. 4368
Attachment D – Official 2019 Election Ballot
ATTACHMENT A
SUBJECT/PROJECT:
ADOPT RESOLUTION NO. 4368 TO SELECT UP TO THREE (3)
CANDIDATES FOR THE SPECIAL DISTRICT RISK MANAGEMENT
AUTHORITY’S (SDRMA) BOARD OF DIRECTORS
COMMITTEE ACTION:
The Finance & Administration Committee reviewed this item at a meeting
held on July 23, 2019. The Committee supports presentation to the full
Board for their consideration.
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.
ATTACHMENT B
ATTACHMENT C
ATTACHMENT D