City Council Work Session

Lake Havasu City Mayor Mark S. Nexsen Vice Mayor Donna Brister Lake Havasu City Police Facility Councilmember Dean Barlow 2360 McCulloch Blvd North Councilmember Don Callahan Work Session Minutes - Final Lake Havasu City, Arizona 86403 www.lhcaz.gov Councilmember Jeni Coke Councilmember Michele Lin Councilmember Cal Sheehy City Council Work Session Tuesday, December 16, 2014 4:00 PM 1. CALL TO ORDER Mayor Nexsen called the meeting to order at 4:00 p.m. 2. PLEDGE OF ALLEGIANCE The mayor led in the Pledge of Allegiance. 3. ROLL CALL Present 7- Mayor Mark S. Nexsen, Councilmember Dean Barlow, Councilmember Don Callahan, Vice Mayor Donna Brister, Councilmember Jeni Coke, Councilmember Michele Lin, and Councilmember Cal Sheehy 4. CALL TO THE PUBLIC Mr. Bruce Deile addressed the Council regarding the ordinance that prohibits camping or sleeping in a vehicle. He said he is homeless and is trying to figure out how he can be legal and sleep in his van without being arrested. Mr. Deile said he is also concerned about court ordered Alcoholics Anonymous (AA) because there are religious dynamics involved which the public needs to be aware of. He added that since the 1930’s, AA has been court ordered and the carnage still continues from drunken driving. Mr. Deile said he felt there should be more severe laws for drunken driving. 5. PUBLIC HEARING 5.1 ID 14-0627 Discussion and Possible Direction Regarding Private Sector Responses to the Request for Information (RFI) Regarding Ideas, Approaches, and Solutions to Mitigate the Cost of Wastewater Service for the Citizens of Lake Havasu City City Manager Charlie Cassens thanked the Council for granting this opportunity for staff to bring forward this topic. He said he hoped there would be significant discussion tonight prior to giving staff a direction to take regarding the high cost of wastewater services in Lake Havasu City. Lake Havasu City Page 1 City Council Work Session Work Session Minutes - Final December 16, 2014 Mr. Cassens reviewed the following: Purpose o Receive direction from City Council on a preferred path relating to changes to the City’s water and/or wastewater utility service delivery and/or the associated financial model(s) in order to mitigate costs to the consumer. Background/History o 2001 – Voters approved borrowing up to $463 million to sewer the City and avoid a building moratorium. o 2002 – Construction began and the first two of twelve loans were secured for funding. (General Fund and IDD (water fund) have contributed over $40 million to the program). o 2011 – Project completed ahead of schedule and $120 million under original projections. o 2012 – Staff analyzed various financial alternatives to mitigate sewer rates caused by $320 million of debt. o Potential options presented included new taxes on property and sales, flat charges, and supplemental fees on water bills. o Consensus to leave the rate system as-is while continuing to work with the Water Infrastructure Finance Authority (WIFA) on debt restructuring. (Approximately 2/3 of the sewer rate is attributable to debt). o Most agreed that everyone benefitting from the sewer system should be paying something, even those not connected. WIFA o State Agency that provides technical and funding assistance to Arizona governmental entities. o Created in 1992 when no more federally funded water and wastewater public works projects. o Interest on loans is federally subsidized through the State Revolving Fund program. o Eleven of the City’s twelve loans are WIFA issued (the Greater Arizona Development Authority (GADA) issued one loan). o WIFA manages all twelve loans for the City o Last December, the City requested WIFA allow the City to refinance/restructure outstanding debt for the purpose of lowering the cost to the end user by approximately 20%. o In April, a subcommittee of the WIFA board was convened to consider our request. o In June, the sub-committee met and the City was later informed that WIFA would entertain: • Restructuring the GADA loan $58 million 5% interest-only) as a WIFA loan (principle plus low interest) for the remainder of the term – projected debt payment lowered by approximately $1.2 million (depending on available interest rates). Lake Havasu City Page 2 City Council Work Session Work Session Minutes - Final December 16, 2014 • Stipulations: -Restructure not to take place until after the 7-15 “call” date -Both 2002 loans paid off ($8.8 million) -New wastewater project included o No other restructure/refinance options were offered on the reaming loans. Mayor Nexsen said the City approached WIFA in December and finally got a sub-committee of the board to convene in April, which only happened because he went to the President of the Arizona State Senate who forced them to meet with the City regarding this request. Mr. Cassens said the reason he included the timeline is because the City has been accused of doing nothing, and as Mayor Nexsen pointed out, it has taken some legislative intervention for a sub-committee to finally agree to meet, because at that time WIFA had informed the City that they were not willing to entertain any of the other restructure or refinance options for any of the other eleven loans. The RFI o August 12, 2014, staff received City Council approval to solicit possible solutions from the private sector through an RFI process. o Issued RFI August 19, 2014. o Closed RFI October 27, 2014. o 12 Responses, 11 Submittals, 5 Categories • Offers to help • Finance/Debt Focused • Public/Private Partnerships (P3) • Operations Focused • Privatization Mayor Nexsen also noted that in July the City Manager requested that WIFA consider refinancing the GADA loan prior to the call date of July 1, 2015, due to interest rates. He said he made a second request in October, and a third request in November, and finally tomorrow, six months later, WIFA is putting it on the table for consideration and will let the City know of their decision. Offers to Help KPMG – McLean, VA o Offer to assist the City in exploring solutions o Focus on debt restricting and cost reductions through private sector operations and organizational streamlining o Financial advisory services PFAL – San Francisco, CA Lake Havasu City Page 3 City Council Work Session Work Session Minutes - Final December 16, 2014 o Offer to work with the City to evaluate which of the available options provide the best short, medium and long-term to user rates, water quality and level of service o Focus on private concessions, privatization, P3 o Financial, technical and operational advisory services Finance/Debt Focused J.P. Morgan – New York, NY o Issue long-term bonds into the public market and use proceeds to refund outstanding WIFA debt o Convert GADA loan to WIFA debt o May reduce annual debt service by $4 million, offset need for rate increases but no reduction in current charges PERC Water – Costa Mesa, CA o Looking to contract for utility management services o Suggest increasing revenue by $6.5 million through: • Annual property tax assessment for all parcels • Increase effluent rates to 90% of potable rates • Increased operational efficiencies via concession and/or energy/operating audits Mr. Cassens stated that in the RFI process the City provided as much information as they could including the City’s infrastructure, properties, and financials to anticipate questions before they are asked; however, it was brought to his attention that potentially 10% of the operating expenses in the wastewater system operations, particularly the 48 serial pump stations, was inadvertently omitted. He explained that there is a lot of due diligence before we get to the real numbers and whether it affected projected cost reductions or rate reductions in the submittals remains to be seen. Public/Private Partnerships EPCOR – Phoenix, AZ o Pay concession fee to City that may be used to pay off callable debt o 50-year Design/Build/Operate/Finance agreement – both utilities o Some City employees subcontracted to EPCOR, others transferred o Estimated average $4 million/year savings over first 10 years United Water – Harrington Park, NJ o Joint venture with capital partners (consortium of private investors) o 40/50 year operating agreement – both utilities o Up-front payment to defease debt o Annual concession payment $1.25 million to City o City retains ownership of system and rate-setting responsibilities Lake Havasu City Page 4 City Council Work Session Work Session Minutes - Final December 16, 2014 Mr. Cassens stated that both water and wastewater operating expenses are subject to interdepartmental transfers for overhead from other departments when there are matters related to wastewater or water. He said for example if $1.5 million is through interdepartmental transfers and if the operations in the wastewater area are moved out of the City, $1.5 million would have to be absorbed by the general fund. He added that there would also be other consequences by moving operating expenses outside the City. infraManagement Group – Overland Park, KS o Restructure all current WIFA debt through KeyBanc o Minimum 10-year asset-management agreement with IMG o Estimated 10% operational savings – 3-5 years o Total annual savings estimated $4 million to $7 million Guggenheim Securities, LLC – New York, NY o “Public to Public” financial model using revenue bonds issued by existing or newly-created not-for-profit municipal authority o Long-term overhead and maintenance agreement contract with the authority o City WIFA and IDD debt defeased - $1 million annual concession payment to City o City retains ownership, participates through advisory committee o Estimated 23% reduction in water and wastewater charges Macquarie Capital (USA) Inc. – Los Angeles, CA o Combine private capital or new debt with existing wastewater reserves to fund near-term WIFA debt and lower rates accordingly o 50-year lease with private operators or City continues operations with new debt o Estimated 15% rate reduction first five years and levels out in the next 20 to 25 years Operations Focused Severn Trent Services – Gilbert, AZ o Long-term overhead and maintenance contract for water and wastewater systems o Estimated 10 to 20% operational savings o Suggest the City partner with other financial firms to address debt services challenges Privatization Brookfield Asset Management – New York, New York o Proposes 100% acquisition of water and wastewater systems o Assumes all liabilities, overhead and maintenance, ownership o Reduction to user charges, if any, are unknown In-House Option o Pay off 2002 junior and senior loans - $8.8 million Lake Havasu City Page 5 City Council Work Session Work Session Minutes - Final December 16, 2014 o Pay off 2004 senior loan - $3.55 million o Convert GADA loan to new WIFA loan o Add “green” project to new WIFA loan o Consider IDD subsidy to wastewater revenues o Refinance remaining loans as they become callable o Conduct operational efficiency assessments o Estimated initial annual savings - $3 million o Scheduled rate increases necessary Mayor Nexsen noted that all this is doing is taking available cash from the wastewater fund to pay off the loans, which would give relief at the top level where the City has to meet certain loan covenants. He said the City has a senior loan covenant and a junior loan covenant and this would give relief of the junior loan covenant of 1.2 times the annual debt service. Mayor Nexsen noted that it would help, but there is also a bottom line covenant that states that there must be a certain amount of cash on hand or the City would be in violation of the debt covenants. He said again that paying off the loans would help but the fund would quickly run out of cash because the wastewater fund is already running at about a $4 million deficit, and added that it would force scheduled rate increases to keep enough cash to make the cash requirements on the remaining debt. Mr. Cassens added that the City has not accessed a rate increase since April 2010 and that increase was not sustainable. He said staff did have high expectations that WIFA would help us out and come up with some alternatives. Administrative Services Department Director Valerie Fenske explained that there are debt covenants that must be met on all of the City’s existing debt. She said one of those is a cash target ratio and the other is debt coverage ratios which relate to the junior and senior lien debts and apply to both the wastewater and water fund. Ms. Fenske stated that one of the earlier points to consider is an Irrigation and Development District (IDD) subsidy to wastewater revenues, but added that there would be a corresponding effect on the water side related to rates. She noted that while it is great to pay off the debt, it also in turn puts pressure on the cash balances which are being used for the deficit situation on an annual basis which then puts pressure on rates. She said subsidy to the wastewater fund from the IDD is one thing to consider, and added that staff has also worked extensively with the City’s external rate consultant and looked at multiple scenarios on paying off both of the 2002 loans along with refinancing the GADA and other scenarios to pay off the 2004 loan. Ms. Fenske said as some of the larger debts become callable, and if the City were to pay them off, staff would have to start looking at accumulating cash now in order to pay those which in turn would put pressure on rates now in order for that to happen in the future. Ms. Fenske noted that with any rate increase there are strict constraints from the State as to when staff would have to post any increases related to utilities. She said staff has been exploring these options for the last three years with public outreach and public forums, but the bottom line is a significant amount of debt was incurred to construct the sewer system. Ms. Fenske added that the City is very committed to Lake Havasu City Page 6 City Council Work Session Work Session Minutes - Final December 16, 2014 meeting the debt covenant requirements and refinancing the GADA loan but doing these things does not solve all of the ratio and coverage issues the City has, given the level of the current revenues and required ratios. Mr. Cassens thanked Ms. Michele Bax and Mr. Bill Hicks, Bond Counsel with Ballard Spahr; Mr. Andrew Rheem, Rate Consultant with Raftelis Financial Consultants, Inc.; Mr. Mark Reader, Financial Advisor with Stifel, Nicolaus & Company, Inc. ; Valerie and her staff; and Mayor Nexsen for his expertise as a Certified Public Accountant. Mayor Nexsen said he was not going to be critical of any of the proposals but wanted to state which firms he thought showed some level of promise. He suggested that staff ask infraManagement Group (iMG) and Guggenheim to appear before the Council to explain exactly how they would produce results. Mayor Nexsen noted that he found the Guggenheim proposal interesting because they propose a 23 percent reduction in wastewater charges without going back to the current rates for 12 years, and said he liked it because it is without any sort of efficiencies from wastewater or water, and is just financial. Mayor Nexsen added that he was not interested in selling the systems as he thought it would result in a disaster over time. He said he thought the proposal from iMG was a little all over the board but noted that there were some similar elements to the Guggenheim proposal. Mayor Nexsen added that staff should continue working on refinancing the GADA loan with the idea that the City would not sign any loan docs until private sector solutions have been explored. Mr. Cassens also agreed that the Guggenheim proposal was the most comprehensive and complete. Mayor Nexsen said it would be a “pure financing play” because it would take all the debt and extend it to make it more affordable for the users. He said what the community wants is for everyone to pay for the sewer, and by extending the debt; it drives the rates down because as time goes on there are more users paying for the system. Mayor Nexsen added that the City did not build the sewer system for the citizens living in Lake Havasu City today, but in the capacity for future residents and added that by extending the debt it also makes it closer to the life of the asset. Councilmember Barlow said a few of the proposals suggested that the City work better with WIFA and he wondered how the other firms thought they could accomplish that, to which Mayor Nexsen explained that one way is dealing with call features when there is available cash, but added that, quite honestly, he was more interested in political solutions to the call features. Councilmember Barlow said several proposals estimated a 20 percent reduction in operating expenses and wondered how they could calculate something like that, to which Mr. Cassens explained that large firms have thousands of employees, purchasing power, and do not have to do things at the speed of government. He added that there are also some economic scales with overhead expenses that the City has locally but large firms have regional, national, and global Lake Havasu City Page 7 City Council Work Session Work Session Minutes - Final December 16, 2014 economic scales that could reduce overall operating costs. Mr. Cassens said as far as operating the systems more efficiently and reducing the overall expenses, ostensibly there could be a reduction in the number of people operating the system through technology; but from a simple operational efficiency standpoint, the systems that the City has are expertly operated and very well maintained. Mr. Cassens added that the City’s wastewater system is relatively new.Many times by the time a community starts looking at an outside operating system they are already in trouble, they have a system that needs work, and/or they cannot afford to maintain the system; therefore, it requires an upfront infusion of capital from an outside operating entity to come in and make those improvements in exchange for a long term operating agreement, which is how some of those proposed reductions are generated. Mayor Nexsen said with recent rumors circulating, he wanted to clarify that the City is not selling the systems. He added that if the City were to privatize any portion, the Council’s first concern would be to make sure the City stays with companies with comparable positions, pay, and benefits. He said City staff is at the forefront of their concerns and what the Council is doing is looking to find a financial solution for the community to afford the rates. Councilmember Coke asked what the timeframe would be for the City to be in a position to work with one of the firms, to which Mr. Cassens replied about five months. Councilmember Callahan asked who comprises the authority feature in the Guggenheim proposal, to which City Attorney Kelly Garry explained that it is similar to any other process that is creating a separate district or a board and petition to the City Council to create the authority where there would be an election or the Council would appoint officers to oversee it. Councilmember Lin asked how long the City would be committed with the partnerships if using an outside firm, to which Mayor Nexsen replied that it would be the length of the contract. Councilmember Lin asked if the City would be able to make any other in-house options, to which Mayor Nexsen replied no because the firm would be paying off the debt. Mr. Cassens added that with the Guggenheim proposal it would be a minimum 30 year, up to possibly 50 year, lease agreement. Mayor Nexsen opened the public hearing. Mr. Clayton Siegl addressed the Council and said he retired from the Milwaukee Metropolitan Sewer District which was privatized with United Water in 1997 or 1998 and six years later they are on their second privatizer. Mr. Siegl said subcontracting employees can be done but doing so comes with positives and negatives. He explained that the Internal Revenue System (IRS) will allow those employees to remain in the city’s pension system but questioned why anyone would want to give away valuable employees that they paid to train. He suggested that the City joint contract for supplies with some of the other cities in the area to reduce purchasing price. Mr. Siegl Lake Havasu City Page 8 City Council Work Session Work Session Minutes - Final December 16, 2014 said he witnessed assets that were turned over to private companies were either sold or reduced and it took months to receive repair parts that were used to be readily available for emergencies. He said the private companies also tried to eliminate trained employees, and the once “brand new system” becomes junk because it is not maintained. Mr. Pete Freestone addressed the Council and stated that when the City first was involved with the sewer “fiasco” it was all about clean water and now it is time to finally separate water consumption from sewer usage. He said everyone should be paying the basic share and he did not think it was fair for an apartment and/or condo unit to pay a lesser minimum than a residential customer. He added that the charges for duplexes should be corrected and considered two residences instead of only paying the basic $41 minimum charge per month. Mr. Freestone said the citizens who are not on sewer say they should not have to pay, but he does not have any children or grandchildren in public schools, does not attend college or go to the public library, but he still pays for those things in taxes. Mayor Nexsen said the reason apartments and condos have a lesser minimum is because they are allotted a lesser amount of water and if they use exactly what a residential home uses they pay the exact same amount as the residential homeowner. Ms. Amy West addressed the Council and asked why the owners of parcels only pay when they hook up to sewer, to which Mayor Nexsen explained that when the community voted on the sewer in 2001 the voter pamphlet was clear that you would not have to pay for sewer until you were hooked up to the sewer system. He said in 2012 staff explored ways to make everyone pay for the sewer system; one being through a property tax element, but ultimately everyone who pays the minimum $41 per month would pay substantially more and currently 52 percent of residents pay the minimum. Mayor Nexsen added that everyone’s rates are the same except empty lots, which do not pay into the sewer system but do pay into the IDD. He said the City can use some of the IDD money to pay for the sewers, which is another avenue so everyone is paying for the sewer system. Ms. West asked, in regards to the new WIFA loan, how much debt would be added to the existing loan, to which Mr. Cassens replied that a project between $500,000 and $1 million would be added to the loan, and said he hoped the City could design a effluent storage and delivery system that follows the WAPA transmission power line down through the City to reach more of the parks and schools to offset the need for potable water which is part of the “green credit” he mentioned earlier. Ms. West said City employees have done a good job and she hoped all of this could be done through refinancing. Mr. Doug Dill addressed the Council and said he has lived in Lake Havasu City since 1969 and worked for the school district for 23 years. He added that the school district does not pay water or sewer fees because of an intergovernmental agreement which is a good deal for the City because they get to use the school district’s infrastructure for their water and sewer. Mr. Dill wondered why only a portion of people pay for sewer when there are people on the outskirts of town who are not Lake Havasu City Page 9 City Council Work Session Work Session Minutes - Final December 16, 2014 supporting it, to which Mayor Nexsen said it is because that is how the sewer was voted on back in 2001. Mr. Dill questioned why there are people paying when other places in town will never be put on sewer and never have to pay, to which Mayor Nexsen responded that only about 11 percent of the community is not on sewer and one of the reasons why is because the cost was so excessive that the rates would have been higher and it was actually less expensive to not sewer those particular areas. There being no further comments, Mayor Nexsen closed the public hearing. Councilmember Callahan said he agreed with the Mayor’s comments that employees are their first concern. Councilmember Callahan wanted to assure everyone that no one would be leaving because of this program. Councilmember Brister agreed with Councilmember Callahan and added that the Council is very proud of what City staff has accomplished. She said no one wants to see high rates and the Council is very dedicated to working and trying to find an answer that is fair for everyone. Councilmember Brister asked what the rate increases would be if things were to stay the same, to which Ms. Fenske replied that the rates would vary depending on which alternatives are done and the timing of the rates. Ms. Fenske added that every time rate increases are pushed out a little farther it only prolongs what is going to take place. She estimated a rate increase between five and six percent, or even as low as two percent, depending on exactly what the City does and the different options that the City chooses. She said it is important to bring cash flow into the wastewater system from an external source, and one of the options of the IDD is transferring money to wastewater, but added that in doing so there is an effect on the water side. Councilmember Lin asked if a rate increase would affect both residential and commercial, to which Ms. Fenske said the focus of the rate analysis is residential because residential is the City’s largest customer base; however, there is generally an effect on commercial when it comes to rate increases. Councilmember Barlow asked if the Council could elect to just address the financial part without the proposals to take over the system, to which Mayor Nexsen replied that the City could always do a financial without an operational solution, and added that, quite honestly, the financial solution is what will have the biggest impact. He said assuming what is in the proposals can be done; he would not be comfortable with making any decisions until the Council was able to talk with the companies and get answers to their questions. He said if the Council decided to do an internal solution instead of the financing solutions, inevitably rates would have to go up and quickly. He said he would propose using the IDD to get everyone paying for the sewer system. He further explained that by using the IDD, it would take a certain amount on an annual basis and move it over to the wastewater system so that everyone is responsible for paying down the wastewater Lake Havasu City Page 10 City Council Work Session Work Session Minutes - Final December 16, 2014 debt. Mayor Nexsen said doing so would not provide a reduction in rate or stop a rate increase; but would only temper the rate increases. He said some of the proposals state that they do not go back to the rates we have today for 12 years; however, the community will need to be comfortable about what that means and if the Council decided to do that there would need to be public outreach to make sure people understand: 1) what the City is doing, 2) why rates are going down, and 3) what the projected incremental increases are over time. Mr. Cassens said another advantage to using the IDD as a funding source is that vacant parcels also pay the IDD tax to help spread the load across all those parcels that have not been built but the capacity was built into the system and the dry lateral is there for connection. He said there would need to be a consequential rate adjustment in the water rate but submitted a 5, 8, or 10 percent increase in water rates is much less substantial than a 10 percent increase in sewer rates. Councilmember Sheehy said he agreed that iMG and Guggenheim are two solutions that the Council should explore further, but added that, after listening to some of the public comments, J.P. Morgan Chase may also be another proposal to look at to provide a mix of public/private partnership and finance focus options. Mayor Nexsen said the only thing he cautioned with the J.P. Morgan Chase is they were very clear in their proposal that they would not be able to reduce rates, to which Mr. Sheehy agreed but said it seemed as if they would be offsetting rate increases. Councilmember Sheehy added that he would also like to see some of the in-house proposals explored, because while the WIFA and GADA loans are very frustrating, he did not like that they are trying to put a condition on the City to take on additional debt in order to do so. He said this should be more of a policy decision and not a requirement put on the City. Councilmember Sheehy added that he supports local ownership and control and believes it should be considered in all of their decisions. Mayor Nexsen said the reason for a small project is because the impact is minimal and it avoids the term “refinancing,” which the loan does not allow. He explained that if the City were to refinance the loan through the revolving loan fund subsidy the City would be looking at rates around 2.3 percent, and added that this small $1.2 million dollar project was something the City wanted to do anyway. Councilmember Sheehy said when the three options are brought back to Council for further discussion he requested that they also see built in rate increases that would be very specific, to which Ms. Fenske said the modeling period that the rate consultant uses, which is for ten years, would be laid into the projection. There was a consensus of the Council to have further discussion at a future work session regarding proposals from infraManagement (iMG), Guggenheim, and J.P. Morgan Chase Bank. Lake Havasu City Page 11 City Council Work Session Work Session Minutes - Final December 16, 2014 6. CALL TO THE PUBLIC Water Operations Manager Chuck Michalski addressed the Council and said the staff and crowd in the audience will always be concerned when it comes to privatizing, partnerships, and the P3’s. He said the fact is everyone should be sharing the cost of sewer just like water. Mr. Michalski said if the City was to dissolve the IDD the water department would have the same issues as wastewater because 35 percent of people in Lake Havasu City are part time and the people who live here year round are the ones that incur that debt in their water rates. Mr. Michalski said wastewater and water employees are dedicated employees who do a good job, support this city, and no one can really compare with private and public partnerships. He said the City can treat it like a private entity and cut wherever possible and tighten their belts to save a few dollars but certain things would have to suffer. Mr. Michalski said the ultimate goal is to have more funds to pay off the debt, and said he did not think that would happen until something is done through either the IDD or by creating a new sewer district. Mr. Doug Dill addressed the Council again and said the school district he worked for tried outsourcing their maintenance and it only worked for about five years. 7. ADJOURN Upon motion by Councilmember Callahan and seconded, the meeting adjourned at 5:51 p.m. CERTIFICATION I hereby certify that the foregoing is a full and true copy of the Work Session Meeting Minutes of the Lake Havasu City Council held on the 16th day of December, 2014. I further certify that the meeting was duly called and posted, and that a quorum was present. ____________________________________ Kelly Williams, City Clerk Lake Havasu City Page 12