Title
Authorization for the Issuance of Obligations for the Water Department's Capital Improvement Program (Ordinance S-45429)
Description
An ordinance authorizing the City Manager to cause the issuance of one or more series of obligations of or by a municipal property corporation or by a private leasing company as short- and/or long-term obligations and to issue long-term obligations to refund short-term obligations authorized hereby, authorizing the City Manager to execute and deliver all leases and other agreements necessary or appropriate for the financing of costs to expand and improve the water system of the City. Further authorizing the City Manager to execute other appropriate agreements in connection therewith, including but not limited to any official statements and bond purchase agreements and certificates necessary or appropriate to finance or reimburse a principal amount not exceeding $600,000,000 plus related financing costs; authorizing the City Manager to take any and all other necessary or desirable actions in connection with such issuance; and authorizing the City Controller to expend all necessary funds therefor.
Report
Summary
As part of the rate setting process, the Water Department provided Council with an overview of infrastructure needs over the next five years totaling over $1.5 billion (the "Water CIP"). Consistent with the Council's authorization, the Chief Financial Officer expects to fund approximately $600,000,000 of the Water CIP with debt financing, consisting of issuing tax-exempt bonds and entering into a Water Infrastructure Finance and Innovation Act (WIFIA) loan.
The Finance Department looks at all options available to find the lowest interest costs, mitigate complexities of use for each product and provide flexibility. For example, the City may want to pay slightly more now in order to pay-off the debt early without penalty later. Each financing tool is considered along with City needs and market circumstances at the time. Due to the City's high credit ratings (AAA by S&P and Aa2 by Moody's), tax-exempt bond financing will likely be the lowest cost option for the City; however, the Water Department has been granted an opportunity by the Federal Environmental Protection Agency (EPA) to apply for a WIFIA loan.
WIFIA
Congress enacted WIFIA as part of the Water Resources Reform and Development Act of 2014. It was modeled after a similar program at the Department of Transportation called TIFIA, which was considered successful. The program is administered by the EPA and provides federal credit assistance in the form of a secured (direct) loan for eligible water infrastructure projects. Eligibility is based on creditworthiness, technical feasibility of the project and whether the project meets the strategic objectives outlined in the WIFIA statute and regulation.
The Water Department was successful in meeting eligibility on one of its Water Main projects. The EPA has invited the City to apply for a loan for up to $49 million to pay for approximately 49 percent of the project. Given current market rates, the WIFIA loan cost is slightly more than the cost for tax-exempt bond financing, if the timing of locking in the WIFIA loan rate and issuing tax-exempt debt happens simultaneously. In addition, the Water Department would have to be in compliance with certain federal laws pertaining to NEPA, Davis-Bacon, American Iron and Steel and all federal cross-cutting provisions. Compliance with these regulations should not be an issue. After discussions with the Water Department staff and considering all these provisions, the Finance Department believes there are still significant advantages to securing the WIFIA loan.
1. The WIFIA loan allows the City to lock-in the rate without securing funds;
whereas, the rate can only be locked-in on tax-exempt financing when funds are
received.
2. The WIFIA loan allows the City to draw funds as needed while tax-exempt
financing requires all funds to be drawn at the time of closing.
3. The City is not obligated nor is there a penalty to draw on the loan if market rate
conditions are more favorable to issue tax-exempt debt.
4. The WIFIA loan has flexible payment options which allow the City to pay-back at
any time without penalty.
Financing Considerations
As part of the Finance Departments overall strategic plan to provide financial excellence, staff will continue to monitor financing options prior to any actual issuance. Financing options will be executed based on market timing, prevailing interest costs and option flexibility. The Ordinance allows for flexibility in financing options.
Financial Impact
This Ordinance provides authorization to issue obligations, including a WIFIA loan, to fund the Water CIP. All expenditures related to the issuance and payment of any such obligations will be paid for with Water revenues.
Department
Responsible Department
This item is submitted by City Manager Ed Zuercher and the Finance Department.