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New Post has been published on http://citizensjournal.us/santa-paula-center-stage-for-public-works/
Santa Paula: Center Stage for Public Works
By Sheryl Hamlin
Not only did the Santa Paula Public Works Department announce its new, Main Street location in the historic Clock Tower Building, but the agenda for the Monday, February 2, 2015 city council meeting included two major public works related projects.
Acquisition of Wastewater Recycling Facility (WRF)
Distancing himself from the unpopular waste water project, City Manager Fontes opened his summary remarks by reminding the audience that he inherited the PERC/Alinda Design Build Operate and Finance (DBOF) project in 2010. The project has been problematic since the initial RFP review, the 3-2 vote to approve the vendor, the financing, expensive sewer bills and lack of treatment for chloride removal. The name itself – Wastewater Recycling Facility – is a misnomer because the plant does not recycle water for other uses such as agriculture nor are there plans to add such capability.
Wastewater Treatment Case Study: Koch Membrane Systems
Recently the city took legal action against PERC/Alinda for the chloride issue and the matter was scheduled for an arbitration hearing of three days later this month. Concurrent to the arbitration preparation, the city and Santa Paula Water, LLC (PERC/Alinda) agreed to negotiate a buyout of the plant.
With a negotiated price of $70.8 million, the city would save $5 million from the contractual buyout amount of $76 million. Note that the plant has an assessed value of $60 million. In order to take advantage of the reduced buyout, Santa Paula had to agree to end the arbitration.
A statement in Mr. Fontes’ report is worth noting. In discussing a possible refinancing with Alinda, Fontes reported that “Alinda Capital was unwilling to do so and expressed its intent to remove the WRF from its financial portfolio”. Why would Alinda want to remove a high yielding asset from its portfolio unless it knew there were problems in the future, like fines, for example, due to the chlorides? This statement was not questioned.
Mr. Fontes turned the meeting over to Terry Maas of FirstSouthwest whose PowerPoint presentation summarized benefits and potential savings for rate payers of $37.73 per month in year one dropping to a savings of $9.52 in year 30 (2045). He indicated that he arrived at this as follows for year one:
This chart says that with an average monthly rate of $83.01, the gross revenues would be around $11 million. Subtracting about $2 million Operating and Maintenance costs and $3.7 million new Debt Service via the bond offering, there will be a profit of $5,982,613 yielding a “Coverge” of 2.58. Coverage is a term used in the bond world to describe the cushion so that potential investors can rest assured the seller of the bonds has enough cash flow for eventual principal payback plus the monthly interest. The coverage of 2.56 is excessive which means rates can be reduced while still maintaining the debt service and operations. Note that the most recent audited financial statements showed the WRF producing a positive cash flow of several million dollars.
Now lowering the average monthly rate by $36.37 in year one, the chart is as follows:
What the second chart says is that Santa Paula can lower its average monthly rate by $36.37 to $46.64, pay the same amount of O&M, pay the new debt service and achieve a coverage of 1.2. Now 1.2 is a bit slim for coverage, so Mr. Maas recommends a 1.5 coverage for more cushion.
What does not make sense with either of these two charts is the total number of customers implied by columns one and two. Multiplying column one (Monthly Rate) by 12 and dividing this number into column two (Gross Revenues) yields paying customer base of 11,975; however the number of 7000 to 8000 customers has been used at previous meetings.
The O&M used in Mr. Maas’ analysis are actual Operations and Maintenance Costs, services now provided by PERC. PERC will be asked to continue until such time Santa Paula transitions to self-maintenance; however, there is a termination fee with PERC of $940,000. Nor is PERC obligated to maintain the same cost structure under a new owner, so the O&M costs could escalate. The consultant’s analysis did not consider changes to the O&M structure.
What is not obvious from the rate/rebate analysis are the assumptions in the increases in the monthly rate (first column in the second table above) nor were there questions which cause the rebate to decrease each year.
The other potential expenses are the property taxes for which the city is liable in the PERC/Alinda contract. Santa Paula Water, LLC has paid the taxes, but the city has not paid them. Perhaps the “closing” costs will require the city to pay these property taxes. Once the city owns the plant, there will be no taxes due because cities do not pay property taxes. This amounts to approximately $600,000 savings, which will be significant over the life of the plant.
Ironically, Mr. Maas was bidding a 40 year bond in 2007 which the city rejected in favor of the DBOF with PERC/Alinda.
Council Member Gherardi prepared a lengthy set of questions. Mr. Maas covered a few of the questions. One question was about the $70.8 net proceeds of the bonds versus the par value of $61 million. Why would the Santa Paula bonds be priced above par? Par is the coupon value of the bond, so a bond sold above par means there is a “premium” on the bond. According to Maas, investors are willing to pay more to have a stable environment with a tax-free interest much higher than taxable government bonds, for example, or taxable corporate bonds. Another Gherardi question concerned the effect of the proposed bond sale on the city’s finances. Mr. Maas indicated that the water and sewer operations were considered separate “enterprises” and as such their funds were not comingled with those of the city.
According to the bond buyer, there is a deficit of about $100 billion between the need for municipal bonds and the number of new offerings. Coupons, payments and calls total $351 billion but new issues are $264 billion, so it is a sellers’ market with respect to municipal bonds.
The consultant expects the bonds to be rated at AA-. He said there was an explanation of all costs which contribute to the TIC (true interest cost), but that chart did not appear in his presentation. This would/could include his fees, insurance, regular SEC auditing in addition to the coupon rate.
The proposed schedule appears tight, but Mr. Maas felt confident it was achievable:
The chloride issue would be considered at a date in the future. Per the consultant: Mandated State of California chloride removal costs can be financed at reduced cost and over time through a combination of cash, State loans and additional bond issuance. So it is likely that chloride removal could negate the savings from the buyout. There was no discussion about water recycling/reuse and the revenue potential.
The good news is that Santa Paula will own the facility, as it should have initially; the bad news is that the savings may not materialize as presented in the consultant’s hypothetical report. The council voted 5-0 in a roll call vote to move forward with the acquisition at the “settlement” price of $70.8 million.
Recology is Coming to Santa Paula
As reported earlier in the citizensjournal.us, Recology is buying the Crown trash collection franchise. Brian Yanez reported that the sale started in November and that they have been performing due diligence with Recology receiving excellent marks. Council Member Hernandez reported that he too checked references. The results were 87% above satisfactory and 13% satisfactory on customer service according to Brian Yanez.
Recology is a much larger company than Crown. The sale includes equipment and all current employees have been hired, including the key employees.
Recology will share the space on Main Street with the Public Works Department. As part of the existing franchise agreement, Crown agreed not to raise rates in exchange for lengthening the term of the agreement. The new rates begin July 1, 2015 based on a .7% CPI.
The Santa Paula franchise will be DBA, Recology Ventura as part of Recology Southern California. Joe Matz, General Manager, has 20 years with Recology. They will be adding recycling services. Branding on trucks and trash containers will be phased in as equipment is replaced.
Other Business
One other noteworthy item was the salary survey. City Manager Fontes had spent $25,000 recently on a salary survey in order to compare Santa Paula employee salaries with neighboring cities. He was requesting another $6,480 to add four more cities: Atascadero, Moorpark, Goleta, Paso Robles. Mr. Fontes noted that previous surveys compared Santa Paula to other cities within Ventura county. Council Member Gherardi stated that the chosen cities in the new survey are not comparable, except for Port Hueneme. Danny Carillo of SEIU spoke saying Simi would be a comparison because Santa Paula employees might like to work there but Atascadero is not a realistic comparison geographically. Council Member Gherardi said the list wasn’t reviewed with the council first, nor did she understand that it was to be done by a paid consultant rather than an in-house report. The council denied the extra funds in a 4-1 vote with Council Member Gherardi opposing the denial. The extra cities will not be added.
The entire six hour meeting may be watched here.
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Sheryl Hamlin: With an MS in Industrial Engineering, Sheryl Hamlin spent years in technology with stints at Motorola, Tandem Computers and various startups. She has been on the boards of neighborhood organizations both in San Francisco and Palm Springs where planning issues were her specialty. She now resides in Santa Paula and loves the historic fabric of the city. Ms. Hamlin’s blog Stealth Fashion and technology product ‘ Plug and Play Webmaster’.
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