Department of Finance
Reference: Water Treatment Plant Financing Update
To: Mayor Gregory Mills and Members of City Council
Through: Michael P. Martinez, City Manager
Prepared By: Catrina Asher, Director of Finance
Date Prepared: January 14, 2025
PURPOSE
To provide City Council with a financing update related to the Water Treatment Plant.
BACKGROUND
Financing Review
The Water Treatment Plant (WTP) project is financed by a combination of ARPA Grant Funding, the issuance of $80M in bonds in 2022, fund reserves, and the proposed issuance of $85M in bonds in 2025. The following section will provide updates on the 2022 bonds and information regarding the proposed issuance in 2025.
2022 Bond Rating Update
The 2022 bonds were issued in November of that year and provided a total of $80M in proceeds to finance the first portion of the WTP project. At that time, the issuance was rated by Fitch and S&P rating agencies. S&P provided a rating of AA with a negative outlook. In the report provided, S&P cited reliance on development revenues as well as the 8% rate reduction in 2019 as being a compounding factor in stress on the fund. They also cited management’s positive actions to address financial stress and negative trends in the fund, but the risk associated still warranted a negative outlook in the opinion of the agency.
In November 2024, S&P reviewed the rating with staff and decided to downgrade the rating on these bonds to AA- with a stable outlook. The agency cited continued reliance on development revenues as the primary reason for the downgrade. While development revenues are a strong source of revenue for the City’s utility funds, and a necessary and appropriate source for financing system expansion, they are nonetheless considered less reliable than user rate revenue, which drove the agency’s rating decision.
The new rating of AA- is generally considered to be a strong rating and is consistent with the City’s rating on other borrowings. Being that this rating is a downgrade from the previous rating, disclosure is required, and it can impact borrowing rates on future issuances.
2025 Bond Issuance
The project is currently underway and is ahead of schedule with completion planned for early 2027. At this time, the current bond fund (proceeds from the 2022 borrowing, plus interest earned) is expected to be fully utilized in Q1 2025. Therefore, staff began the process for the second borrowing so that funds will be received in Q1 2025.
The second borrowing will be $85M and is targeted to close in February 2025. The proposed timeline is as follows:
• December 17 City Council Meeting - Reimbursement Resolution (APPROVED)
• January 14 Study Session - Project update and financing overview
• January 21 City Council Meeting - Bond Ordinance (Initial)
• January 27 - Rating Agency calls
• February 4 City Council Meeting - Bond Ordinance (Final)
• February 19 - Competitive Bond Sale
• February 27 - Bond Closing & Receipt of Funds
Staff intends to propose the Bond Ordinance on January 21st, with final reading on February 4th. The ordinance will do the following:
• Authorize staff to proceed with the borrowing through a competitive public sale.
• Pledges the revenues of the Water Activity Enterprise as payment for the debt.
• Set maximum terms for the borrowing, including a maximum amount, interest rate, and term.
If City Council acting as the Water Enterprise approves the ordinance, staff will proceed with the bonding process, including ratings calls, issuance of the preliminary official statement, holding the competitive bond sale, and closing the transaction.
CRITERIA BY WHICH COUNCIL MUST CONSIDER THE ITEM
This financing has been contemplated since the beginning of the project and estimated debt service has been factored into financial models since that time. The financing is necessary for completion of the WTP project underway.
FINANCIAL IMPACT
The future borrowing and related debt service has been factored into the City’s multiyear plans for the Water Fund since the project broke ground in 2022 and have been factored into rate projections. The user rates for 2025 were proposed with this financing in mind. Those rates have already been approved and staff is not requesting any changes to those rates at this time.
Attachments:
Ø Presentation