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, January 20, 2015 2:00 PM 1. CALL TO ORDER Mayor Nexsen called the meeting to order at 2:00 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. Gene Dimitruk addressed the Council and stated he was Director of the Lake Havasu City Foundation, Incorporated, a non-profit organization that has been following the sewer bond issue since its inception in September of 2001. He said a statement made by the Mayor and Council was that the current sewer rates are unsustainable and requested a definition of that term. He also said during the construction of the sewer project, the City paid $5 million a year out of Irrigation and Drainage District (IDD) Funds for many years and wondered if that was a consideration to make the current sewer rates sustainable. Mr. Dimitruk stated his second issue was the legality of the proposal and added the City has voted on the issue, it was passed, and there is an emergency clause that allows the City to raise Ad Valorem taxes. He cautioned the Council to proceed very carefully before signing any changes to the current situation. 5. PUBLIC HEARING 5.1 ID 15-0027 Presentations by Request for Information (RFI) Respondents, infraManagement Group (iMG) and Guggenheim Securities City Manager Charlie Cassens stated back on December 16, 2014, Council received a staff presentation summarizing the eleven proposals received in response to the City’s Request for Lake Havasu City Page 1 City Council Work Session Work Session Minutes - Final January 20, 2015 Information (RFI). He said from that session three proposals were selected for further review; however one proposal was subsequently removed from consideration due to its higher proposed cost associated with issuing bonds on the open market. Mr. Cassens stated the two remaining respondents were invited to provide presentations and answer questions necessary to determine if the City will pursue a private sector solution in an effort to bring down the cost of sewer service to the citizens. Mr. Cassens introduced Mr. Bruce Allender, Chief Operating Officer of infraManagement Group (iMG). Mr. Allender said he welcomed the opportunity to provide additional detail on what their response was in their proposal to the City. He introduced Mr. Geoff Urbina, Managing Director of KeyBanc Capital Markets; Mr. Brian DePonte, Senior Vice President of Key Equipment Finance; and Mr. Doland Cheung, Manager of Asset Management Consulting with Black & Veatch Corporation. Mr. Allender stated that he wanted to speak again on the benefits, the background on what the commercial structure may look like, and the implementation timeline of their proposal. He added he would also be talking about the financing, the refinancing solutions, and their two stage proposal alliance. He stated the first stage is an assessment of the utility and whether they can find operational or capital investment improvements that will give efficiencies to the City. Mr. Allender reviewed the portfolios for Black & Veatch Corporation and KeyBanc for the Council. Mr. Allender stated the challenge, as put in the RFI, was to refinance the debt and bring the best solution to the City. He said they are looking at an immediate debt reduction through financing of approximately $5 to $8 million using tax exempt debt. He said KeyBanc has further financial enhancements that could be layered on top of that and can also help the City with a debt service reduction by implementing a generational payback. Mr. Allender stated the other thing they had looked at was a two-step approach of life cycle optimization and added, they have worked for cities around the world with an asset management framework where they would initially assess the system and benchmark where the City is against world’s best practice to see if there is any savings with regards to operations and capital investment. He stated there are clear off-ramps in the proposal and they are not looking at changing the ownership structure or outsourcing overhead and maintenance. Mr. Allender stated this would be a two contract approach because there are separate timeframes. He said one is with KeyCorp to look at the refinancing immediately and any ongoing finance and the second is a two-step approach with iMG to see if there are any life cycle optimizations and savings and if there is, implement a contract to assist City staff in implementing those improvements. Mr. Allender stated there are two timelines, one would be the financing which would take two to four months and depending on the debt profile payback or pay down, that refinancing could go anywhere between twenty to forty years. He said the second timeline is the assessment of the systems which could take anywhere between three and twelve months and if they do not find the need for any optimization or any improvements, there would be an off-ramp to that contract. Mr. Lake Havasu City Page 2 City Council Work Session Work Session Minutes - Final January 20, 2015 Allender stated if there is a need for optimization or improvements, the timeline could be up to nine years but their typical experience has been three to five years and would work with the city to make sure those improvements are sustainable around an asset management approach. Mr. Urbina reviewed the current WIFA debt service for the Council and said what they would try to do is structure a rate based on the debt service. He said ultimately, when they talk about setting rates or setting a rate mechanism, they look at the debt service and how those two correlate. He added that there has to be some spread between net revenues and the debt service that would allow some flexibility going forward regarding retiring debt and building up reserves. Mr. Urbina said utilities nationally have been under a lot of pressure because of fixed debt service expense and rates that are subject to consumption which is variable. He added what they are going to talk about is how to restructure loans that can provide for building reserves and provide some flexibility. He noted that what they want to do is refinance or restructure the debt service in a legal framework that makes sense for the City. He said the issue in the State of Arizona is the voter approval process but stated the City could do it on a non-profit basis on a lease back transaction as well as setting up a separate entity which would purely be an authority. He added there are a lot of nuances as far as structure and how the City would walk through the process, but involving the public is a certainty. Mr. Urbina stated the other thing is the outstanding WIFA loans, whether to restructure the entire amount of debt service or only a portion of the debt service. He said from their standpoint, if they restructure a portion of the City’s WIFA loans, they believe they can do it on a parity basis which means that they would not need to take the entire amount of debt outstanding to do the restructuring which would be cost effective to the City and its rate payers. Mr. Urbina explained that when they speak of pledge status, they look at how the City would fit with regard to a separate entity and how the credit profile of this net revenue pledge looks from one of the three nationally recognized rating agencies: Moody’s, S&P, or Fitch. Mr. Urbina stated they could be comfortable with an “A Category” rating and qualify for those interest rates in that category while at the same time provide flexibility for the City. He said once they have established a credit rating, they would have an opportunity to ultimately change the underlying debt structure. Mr. Urbina reviewed the following debt restructure scenarios for the Council: Option #1 - Aggregate Level Debt Service o Credit Rating “A” o Amortization: 2016-2045 o Structure: Level Debt Service $15.5 Million o Coverage: 1.04x Coverage o Zero growth modeling can take existing debt and fit it under the net revenue with marginal coverage Lake Havasu City Page 3 City Council Work Session Work Session Minutes - Final January 20, 2015 Option #2 - Aggregate Deferred – Level Debt Service o Credit Rating “A” o Amortization: 2016-2039 o Debt Service Target (2016-2024) $14.54 Million o Target Coverage (2015-2024) 1.10x o Zero growth requires increase in rates, no rate increases for 8 to 10 years Option #3 - Aggregate Deferred Debt Service o Credit Rating “A” o Amortization: 2016-2039 o Debt Service Target (2015-2024) 1.10x o Target Coverage (2015-2024) 1.10x Mr. Urbina stated that depending on the goals of the Council and their constituents, they could reduce the rates up to 25 percent without any optimization or efficiencies other than debt service reduction. He said they would want to find a way to reduce the burden today but not push all of it onto the future. He said KeyBanc delineates from a number of other institutions because they can put loans and debt on a balance sheet, they have the ability to issue bonds on the open market, and they can do a private placement with other institutions. Mayor Nexsen asked if all the options only proposed refinancing a portion of the debt, to which Mr. Urbina stated with Option #1, they drew the debt out and in order to flatten it under the zero growth, they had to structure all of the debt. He added Option #2 and #3 included only refinancing a portion of the debt. Mayor Nexsen said Mr. Urbina had mentioned previously they would not restructure all of the debt because of the call features. He asked if the call features were eliminated, would it be better to restructure the whole debt, to which Mr. Urbina stated there are some issues with regard to the WIFA organization and being able to work with the organization long term, but the interest rates on some of the loans are still relatively low and if the call option was waived, it would still be optimal to restructure some of the debt but not all of it. Mr. DePonte noted that Key Equipment Finance has diversity with not only the capital market groups that can go out and issue bonds and access public markets but Key Equipment Finance can take care of the ongoing annual equipment needs that are budgeted out and stagger those out, vary the terms based on useful life, and do that in such a way to make those live in harmony with the existing debt. He added, where the debt restructuring may take two to four months, Key Equipment Finance would be there for the long haul to help with all of the other acquisitions and equipment needs. Lake Havasu City Page 4 City Council Work Session Work Session Minutes - Final January 20, 2015 Mr. Urbina reviewed prior vendor experiences for the Council. He stated this is a multi-decade process and they would make sure there is ample sustainable revenue to service debt and provide the flexibility for debt pay down. Mr. Allender stated with regard to operational efficiencies and what they have done for a number of cities, is to start out with a three to twelve month assessment and if there are no significant improvements that need to be made, there is an off ramp and they would go no further. He said if they do find inefficiencies, they would encourage the City to consider partnering with them to further implement those changes. He stated they would work with the City to help identify those inefficiencies, agree upon them in an assessment stage, and agree on how they would be implemented over a period of time. He said they use the ISO 55,000 asset management program that is used worldwide and has had good success in the framework of asset management. Mr. Allender stated there would be a benchmark of where the City is and where the improvements may be able to be achieved and where investments should be focused on to be able to maintain a level of service. He said by benchmarking, most clients see approximately a 10 percent reduction in operating costs. Mr. Allender stated if they would reach Phase II of the program, that would be a decision point and a presentation would be made before the Council. He said what they are looking at is a joint management team assisting the City in helping them with a resource to realize efficiency gains and look at capital prioritization and capital deployment of the CIP program. Mr. Allender reviewed previous and current vendor achievements for the Council. He stated the City would still have ownership and maintenance of the operation. Mayor Nexsen asked if two or three of them would be part of the joint management team, to which Mr. Allender stated that would be flexible and would depend on what would come out of the assessment. He added it could be full time if they thought there is enough opportunity to continue to drive the program or if it is a smaller opportunity they would maybe only come in and help staff every few weeks or on a monthly basis. Mayor Nexsen asked how their staff is perceived when they give top management advice. Mr. Allender stated they would not tell them how they are doing it wrong but how they could do it better but added, it is a mixed reaction. Councilmember Barlow stated what has been described sounded very much like a service contract that the City is hiring them to come in and do certain things for the City on a limited basis or long-term basis but the City would have to pay for that service. Mr. Allender stated the assessment and implementation would be for a service fee, but they could also work with the City around a performance contract where they would have some skin in the game to meeting those key performance indicators. Mr. Urbina stated a bond holder or an institution having a third party coming in and validating the operations would certainly go into a disclosure document that they would market. He said there may be a cost benefit expense versus the savings on interest rate or lower interest rate or an uptick in rating. Lake Havasu City Page 5 City Council Work Session Work Session Minutes - Final January 20, 2015 Councilmember Sheehy asked for further explanation of the alliance and how that would interact with the program. Mr. Allender stated they would be assisting staff with either an integrated team or from an advisory perspective to help the City meet the key performance indicators or the efficiencies that have been identified through the assessment. He said they would work either as a total integrated team or would assist on a periodic basis to work with staff to look at the City’s capital and when to invest in the system but still keep the same level of service. He added if they are doing their job properly, the City should get better life cycle asset management. Councilmember Sheehy asked who would be on the alliance, to which Mr. Allender stated it would consist of a city leadership team and an alliance leadership team and then depending on what is found with the assessment, there could be a joint management team to assist City staff in implementing those changes. Mayor Nexsen said earlier he heard that the City could only implement one thing but in the proposal it stated that two transactions would be necessary in order to fully implement the program. Mr. Allender stated that came across wrong and added they are flexible and it was misstated in the proposal. He said it would be diligent to do the assessment and then decide whether there is a reason to go into the alliance. Councilmember Sheehy stated then the City could only do the refinance, but asked when it comes to the alliance, the outcome of Phase I would not automatically create Phase II, to which Mr. Allender stated, ideally what they would like to do is enter into a two-step alliance because they would be bringing a lot to the table from an intellectual property on the assessment and would not like to see that then go out to industry again. He added that they would like to have the right to negotiate the next step. Councilmember Callahan asked if the Council was correct in assuming there will be an upfront cost to the City for the assessment phase of the operation, to which Mr. Allender stated that was correct. Mr. Cassens introduced Mr. Ramiro Albarran from Guggenheim Securities. Mr. Albarran stated it was their intent to take the Council step-by-step on the materials that were in the response to the RFI, give clarification, and provide the basis on what is reported across the 23 percent estimate in rate reduction. Mr. Albarran stated from their prospective, they heard loud and clear the ideas around solving the issues related to wastewater rates, where they are today, and where they might go in the future. He said with regard to maximizing value for the city, they interpreted that to be; how do they drive those savings while achieving fairness, protecting employees, and maintaining local control. Mr. Albarran noted that Guggenheim partners with Resolute Consulting, DLA Piper Law, the world’s largest law firm, and Veolia. He said collectively, these groups spent a lot of time going through all of the available documentation, including the WIFA loans, the CAFER reports, and Lake Havasu City Page 6 City Council Work Session Work Session Minutes - Final January 20, 2015 doing site visits to bring forward a recommendation. Mr. Albarran reviewed the presentation outline for the Council. Mr. Albaran stated mitigating rates not only from the current levels, but where they could go in the future has been a driving factor in putting together their proposal along with local control and fairness to make sure that not only the residents and business owners today are covering the capital investment made by the City but that it transcends to the future rate payers as well. He added that employees are another issue that has come up regularly in conversations and there are a number of ways to protect employees. Mr. Albarran said the presentation will illustrate a 20 percent or more in rate reductions overall and stated they feel they can affect the transaction in 90 to 120 days. He stated that the foundation they are proposing is a transaction they have successfully utilized in other context and that is to set up a counter party relationship with the City and an authority. He said the authority is another public agency that shares many of the same powers that the City would have and has the ability to contract for operations or use public employees. He added the authority has the ability to issue tax free bonds to raise capital on an ongoing basis and shares a lot of the features that the City has in terms of the powers that are available as a public agency. Mr. Albarran stated there is a contractual relationship between the City and the municipal authority and could be created and operated by the City. He added it could effectively take the water and wastewater assets and combine them in a new authority with its own powers to operate the system on a going forward basis. Mr. Albarran stated they would propose that the legal arrangement between the authority and the City be embodied in a lease agreement and would transfer the powers and obligation of managing the water and wastewater system to this authority. He said the advantage to this is the City would have the ability to set forth the standards of operations, how rates are set, and how decisions are made. He said this could be an independent authority, which could be an easier and quicker transaction to affect, and all of the controlled decisions would be in a lease agreement and would be put before an advisory committee that would have City representation and allow the City the ability to make decisions on annual business plans, rate setting, and capital decisions. Mr. Albarran said the municipal authority would be a public agency, a non-for-profit with the public interest in mind and would be able to issue tax free bonds for the purposes of making a payment to the City that would fully defease the WIFA debt. He said they also looked at whether or not it made sense to have the WIFA debt outstanding but in this case, this is an ability to create a stand-alone entity and set up its own debt platform on a going forward basis. Mr. Albarran stated the transaction between the authority and Guggenheim would be the implementation of these tax free bonds at very low interest rates. Mr. Albarran explained that Veolia is often able to identify operational savings with municipal authorities. He said they did look at the City municipal system and bench marked the performance Lake Havasu City Page 7 City Council Work Session Work Session Minutes - Final January 20, 2015 of the system relative to other systems. He added they did identify some savings but it was a very small component of the overall savings that they had identified, approximately 3 percent of the 23 percent that they had originally identified in terms of rate reductions. Mr. Albarran stated the City can easily operate the system with the current employees and current management structure without Veolia, and they have looked at the financial impact and have assumed no operational savings. Mr. Dan Gangwish with Guggenheim addressed the Council and stated their financial results show a greater than 20 percent rate reduction and explained that they focused on the numbers provided in the RFI, reviewed the CAFR reports, budgets, and rate studies back to 2009 and 2010 to get a broader understanding of what the system is, how it was financed, how it is operated, what the cost structure is, and how they could use that information going forward. Mr. Gangwish reviewed the operating expenses for both the water and wastewater utilities for Council and stated the operating expenditures for both utilities match up exactly with the current numbers provided in the RFI. Mr. Gangwish said water has almost no debt service with excess revenue that is an increase in fund balance which can be used for rate increase mitigation in the future. He said on the wastewater side there is a large amount of debt, and when you look at the utilities on a combined basis, essentially debt service is half of the City’s entire obligation of the $45 million. Mr. Gangwish stated that in the debt portfolio there are contingent liabilities that come with that debt as water and wastewater utility bonds are structured with rate covenants. He said in terms of the existing loans, the Junior Liens have no property tax associated with them and there are a number of reserves that are required to be maintained with a state intercept in the event for whatever reason the City would choose to not pay or could not pay. Mr. Gangwish said Guggenheim is proposing to defease all of the water and wastewater debt by funding $15 million of water capital improvement projects (CIP) and funded operating and debt service reserve funds. He said in addition, they focused on the next 10 years to fund all $46 million of water CIP, $15 million in the initial bond issue, and $6 million of wastewater CIP. He said it is a combination of pay-as-you-go and bond financing over the next 10 years. Mr. Gangwish stated in terms of rate structure, the rates will remain flat for three years from a reduced level and they have a projected 4 ½ percent increase in aggregate over 10 years, a ½ percent average annual increase over the next ten years from the reduced level. He said in addition, they structured debt service over a 30 year maturity Mr. Gangwish reviewed a table illustrating a slight debt reduction and reduced excess revenue of $9 million on the water side. He stated on the wastewater side revenues are the same; there is a debt service reduction and a slight amount of excess revenues. He said the $45 million of expense obligations under the existing structure is approximately $31 million under their proposal. Mr. Gangwish said how they came up with those figures is with a rate reduction on both the water and wastewater side and also includes the elimination of the IDD, and the elimination of the property Lake Havasu City Page 8 City Council Work Session Work Session Minutes - Final January 20, 2015 tax. Mr. Gangwish said there is a fairness question because there are some people not connected to the sewer system that are paying property tax that supports the wastewater system. He reviewed a chart describing the overall reduction in debt. Mr. Gangwish said with regard to rates, they based them on a single family residential average using 12 ccf for water consumption, 9 ccf for wastewater consumption, and a half acre minimum for property tax for an annual aggregate between $1,200 and $1,179. He said to pay the full amount of the wastewater debt it would bring that up to $1,409 per single family residence annually and would require a rate increase. He stated under their proposed structure, water fees are reduced slightly, there is elimination of the property tax and the wastewater user fee. He said the annual aggregate would total $938, for an average single family residence, a reduction of 20.4 percent. He said that does not match up with the 23 percent but added a great piece of that is the differential in the property tax because they wanted to focus on water and wastewater revenues to fund all of the costs. Mr. Gangwish stated one thing Veolia did bring to the table in addition to a modest rate reduction, was a cap on controllable costs for a ten year period. Mr. Albarran said time is of the essence because the Council is in the process of dealing with what the next steps are if refinancing does not occur. He said the ability to close this transaction in an expedient manner allows for those decisions to take place now and take into account the revised structure as opposed to what it might be under the current debt structure. He said they have affected these types of transactions, have come to successful closings on them, have learned a lot through the processes, and identified the type of transaction of maintaining the core themes in terms of rate reductions and the ability within this structure to deliver local control. Mayor Nexsen asked with regard to the public authority, if the City would have representation on the advisory committee. Mr. Albarran stated to the extent it is more expedient, or more desirable to use an independent authority, the advisory committee would be fully staffed, or fully represented by the city and the city alone and it would not be necessary to have a third party. Mayor Nexsen stated in the presentation it was mentioned to eliminate or keep the IDD tax. He said the IDD tax would be going away in the year 2022 and wondered if there would be an advantage of keeping that until it runs out to assist with either paying down debt or allowing additional rate decreases. Mr. Albarran stated the advantage would be that there is revenue coming from non-rates or non-flow. He said Mayor Nexsen’s point and the discussion around it should be, is there additional revenues from effectively vacant property that is helping to support the wastewater debt. Mayor Nexsen asked if this new debt would have call features, to which Mr. Albarran stated there would be call features in order to achieve the lowest cost. He said they could have a conversation of lower or no call protection but that would come with a higher overall cost in terms of what the interest rate would be. He added that it comes in terms of understanding that debt instrument for Lake Havasu City Page 9 City Council Work Session Work Session Minutes - Final January 20, 2015 the life of the ownership to the extent that the City has something that is non-market and there is a price for that. Mr. Albarran stated with regard to the IDD, they have assumed that 100 percent of the revenue lost by the elimination of the IDD would be borne by the rate payers but added the results would be better by including the IDD revenue. Councilmember Sheehy asked if Veolia was out of the proposal at this point, to which Mr. Albarran stated Veolia was not a critical component to affect their transaction but added that they did identify a little bit of savings and there is also the ability to have a risk transference over to the operator for the purposes of absorbing unexpected costs within their contract. He said while those are their benefits, they are not required to be a part of the proposal. Councilmember Sheehy stated their presentation brought before the Council is basically a financing play. Mr. Albarran stated it is a financial structure, one that deals with some of the outstanding constraints, but it does not come with the requirement of an operator. Councilmember Sheehy asked if water and wastewater staff would continue in their current role. Mr. Albarran stated that is the reason they changed the comparison where operating expenses for both water and wastewater are identical with the assumption it is the same operational framework. Councilmember Sheehy asked, during their analysis, how that played out with regard to the call features that the City currently has with the WIFA debt, and if the City were to keep the call features and keep part of the debt financed with WIFA and refinance the remaining debt without the call features. Mr. Albarran stated mathematically there is a scenario where there is a baseline of debt within the WIFA structure that can be left in place and effectively wrap the solution they proposed around that. He added there is a philosophical question for the Council as to the value of keeping WIFA as a partner on a long term basis versus having the ability to start from scratch. He said what was presented to the Council was with the assumption that all of the WIFA debt would be called out pursuant to the policy that the WIFA board has approved relative to the in place state for the projects that were financed by WIFA. Mr. Gangwish added there is the contingent liability point that he had brought up to the extent that if the WIFA debt is still outstanding you would still have those funding requirements under that debt irrespective of what you would be able to achieve. Mayor Nexsen asked if the City was able to eliminate those call features, if that would benefit this model. Mr. Albarran stated absolutely, but the defeasance cost is significant and it is embedded in the cost and all of those savings would be made available to the overall goals. Mr. Cassens stated with respect to the operational savings that has been outlined, they identified certain operational savings that might need to be realized. He added whether the City would go with a private sector or stay with the in house solution, it was still his intent to commission an operational assessment to see if there are operational efficiencies the City could realize. Mr. Lake Havasu City Page 10 City Council Work Session Work Session Minutes - Final January 20, 2015 Cassens said the City does have a significant investment in an assessment management program that has not been fully implemented yet and would like to see how that works on our behalf. He added it is also a good time to do that operational assessment at the same time that staff fully implements that asset management program and added, it is staff’s intent to go after those operational savings even if we have to do that on our own. Councilmember Sheehy asked how the authority would be structured, to which City Attorney Kelly Garry stated there is a statutory process that allows the creation of this authority and it would be an election by the Council of this new board to create this authority. Mayor Nexsen said there are already existing Arizona authorities so if the Council decided to not do that the City could use existing Arizona authorities. Mr. Cassens stated originally, the contract was directly between Veolia and the authority and the diagram shown earlier in the presentation showed the public employees pointing to the public authority. He asked if the public employees would be operating under some kind of contract with the authority. Mr. Albarran stated the municipal authority becomes the entity that has the operational responsibilities for the water and wastewater system pursuant to the actions that the Council would take. He added those City employees would be effectively doing the job that the authority has been tasked to do but would still be in their current framework. Mr. Cassens stated, then the fact that the authority exists would be transparent to the employees with regard to their benefits and employment status, to which Mr. Albarran stated that was correct. Councilmember Barlow said his interpretation is that we are under this authority and are just adding another level of management that really does not do much of anything. Mr. Albarran stated it is a vehicle to affect the refinancing and the benefit is the ability to manage them as one system and create the best framework and the best rate structure to affect the overall system. Mayor Nexsen opened the public hearing. Mr. Clayton Siegl addressed the Council and expressed concern that what he heard in the presentation was privatization of the water and sewer operations. He also stated he felt since the sewer system is a municipal operation, the cost of installation should be shared by all the residents, hooked up or not. Mr. Siegl stated since the Senior Lien Debt cannot be paid by property tax money, the debt must be restructured to pass the burden on to future residents and owners who will still be benefiting from the system for many years in the future. He added the Junior Lien Debt should have been transferred immediately to property tax debt on the basis of property tax evaluation. Mr. Siegl also stated the City must protect our valuable, trained, and skilled employees whom we have developed to improve our operations rather than allowing a privatizer to lay them off and generate savings by bringing in fewer, less skilled people from a private operator. Mr. Leonard Lacy stated he liked the proposals that were presented but stated one thing he would Lake Havasu City Page 11 City Council Work Session Work Session Minutes - Final January 20, 2015 like to see is for the City to create a water board of directors. He said the employees hold a water title unlike a public works title and the board would be able to apply for more loans and work with separate funding. He said it is a lot of management but it is a way to be able to move money around and actually be able to ask other departments for money in return. Mr. Chuck Vaughn stated what he heard sounded like both proposals were to refinance bond measures without a management contract. He said he thought the City currently has good management and has enough expertise within the City. He said he is all for refinancing of the bonds but did not feel outside management would help. There being no further comments, Mayor Nexsen closed the public hearing. Councilmember Lin asked why it is believed that a private company can manage the utilities better than the City. Mayor Nexsen stated from his standpoint the Council has a responsibility to the community to look at all options, put everything on the table, sort through those options, and decide what is best for the community. He said staff has tried everything possible for a government solution through state agencies and has not received the cooperation they were hoping for. He added privatization might not be the right answer because the savings are small but what Mr. Cassens suggested is that we make sure that we have the most efficient operations but we will continue to manage them. Mayor Nexsen stated in his view, this is going to be a financing transaction. Mr. Cassens added that WIFA, who manages all of the debt that the City has in place now, has very strict limitations on how the City can manage that money. He said two-thirds of the sewer rate is just debt repayment and the only way we can bring that rate down is to spread that debt over a more reasonable life span of the infrastructure. Mr. Cassens said the terms on each of those loans are pretty short terms, most less than 20 years, and when you hear people say that we should pay off the debt early, it is paying it off quickly that is killing us; however, if you can stretch it out, it makes it more affordable. Mr. Cassens stated WIFA has told staff they would not be interested in entertaining extending the term of the debt that we have in place now but that is available in the private sector. He said the message staff received is that there is no interest in a private operating contract but we do like, or maybe would like, the possibility of managing that debt or having the option of having more flexibility on how that debt is managed over a longer term or stay with our WIFA debt and go with those in-house options that were outlined on December 16th. Councilmember Brister stated what she has heard from the last meeting and the organizations that presented today is staff has done a great job and never once said that the City employees are not doing a good job. She said it comes down to three things: 1) stay where we are and raise sewer rates; 2) add it to our property tax which means people are not going to be conserving water; or 3) go with an organization that is international that can help us refinance. Lake Havasu City Page 12 City Council Work Session Work Session Minutes - Final January 20, 2015 Mayor Nexsen stated with regard to Mr. Siegl’s opinion, the City should have gone for a property tax in the beginning, however, by moving to a property tax now and for those who have done a great job of conserving water and are paying the lowest rates, they will be punished the most. He said if you were paying $41 and then suddenly you add a property tax, which in effect would be adding almost a 50 percent increase to your rate. Councilmembers Barlow and Callahan thanked both of the companies for their presentations. Mayor Nexsen stated by stretching out our debt we are leaving the debt for our children, but what the Council is really trying to do is more closely align the debt with the life of that asset and those who will benefit. Mr. Cassens said staff is seeking direction from the Council regarding the level of interest in pursuing a private sector solution or continuing to work with WIFA and the available financial options currently in place. Councilmember Callahan suggested the City pursue the options put before the Council today and see if money can be saved through private financing. He added that he would like to see a side-by-side comparison of the in-house options that were offered to the Council on December 16th and the two proposals before the Council to see what the end result would be to the rate. He said both proposals before the Council are viable options that could help bring down rates for the rate payers. Mr. Cassens noted that the comparison is going to be higher or lower. Mayor Nexsen assumed that if the Council were to stay with the in-house solution there would need to be an immediate rate increase, to which Mr. Cassens stated that was correct. Councilmember Callahan requested that information be provided to the Council. Mayor Nexsen said regardless of which group the Council decides to go with, he would suggest a community outreach program, to which Councilmember Lin also agreed. Mayor Nexsen suggested that the side-by-side comparison be done in relatively short order, to which Mr. Cassens replied that much of that work has already been done, as staff has initiated the process of restructuring the GADA debt and paying off the 2002 issues, and looking at the possibility of transferring about $2 million a year out of the IDD to the wastewater fund. He added that transferring those funds out of the IDD would set the wheels in motion for the next rate increase for sewer in April 2016 and would probably be in the neighborhood of 5 percent. Mr. Cassens further added that because the IDD benefits the water side, staff would also be looking at a water rate increase of about 5 percent. He noted that staff has already begun the process of restructuring the GADA loan but added the City has to add an additional $1.3 million project to that loan as required by WIFA. Lake Havasu City Page 13 City Council Work Session Work Session Minutes - Final January 20, 2015 Mayor Nexsen stated that the Council needs to give some direction to staff either to continue with WIFA or go for a private sector solution. Councilmember Barlow said he would be in favor of entertaining a private refinancing solution. Councilmember Brister stated she felt the Council needed to continue to look at everything and have those numbers available to the public so they can understand what the options are, to which Councilmember Barlow agreed but felt the Council had enough information to make a decision. Councilmember Sheehy said the common sense of the equation is a private sector solution, and added that what he would like is to have all the information to help sell it to the community. Councilmember Coke said she agreed with the presentations and moving forward with the private sector. Mayor Nexsen added that he believed it to be the best solution. Councilmember Barlow suggested that the City go with infraManagement Group. Mayor Nexsen said he liked the Guggenheim presentation using the public authority, but added he also liked the idea of using infraManagement Group as a consultant for efficiency purposes. Mr. Cassens said iMG is a two-pronged agreement and wondered if the initial assessment could be done without having any obligation for the second phase, to which Mr. Allender replied that what the City would have is an off-ramp to have no obligation if the assessment comes at very minimal operation efficiency. Mr. Cassens stated that from a procurement standpoint, staff would need to find out more information how that works to stay within the confines of the law and still accomplish our goals. Councilmember Sheehy stated that Guggenheim suggested not having WIFA at all and iMG recommended a half/half split. He added that he would like to explore the features and benefits of those two proposals. Mayor Nexsen said he thought both proposals were excellent. He said he liked the fact that Guggenheim brought other team members to bear as well and it sounds as though they have vetted this system a couple of times. He added that the Council was talking about public outreach which is what Resolute does which is why he went that direction but thought both proposals were very close. Councilmember Callahan stated that he would rather see the Guggenheim financing proposal and if the iMG proposal looks good as far as the assessment, he would agree with that aspect as well. Lake Havasu City Page 14 City Council Work Session Work Session Minutes - Final January 20, 2015 Councilmember Coke stated that she was more in favor the Guggenheim proposal. Councilmember Brister agreed with Councilmembers Callahan and Coke on the Guggenheim proposal. Councilmember Lin stated that she preferred the iMG proposal. Councilmember Sheehy asked what the cost of the call features would be if they went with the Guggenheim proposal, to which Mayor Nexsen replied that it is a big number but is hoping it is zero. Councilmember Sheehy asked where it is in the legislative process if we have a quick close of 90 days. Mayor Nexsen said staff does not know what is going to happen at this point. He explained that the City never agreed to the call features, and said WIFA had a change in policy in 2011 and put call features on all of the City’s debt requiring that the City cannot pay off the debt earlier than 10 years from the date of the loan. Mayor Nexsen noted that staff is hoping to negotiate with WIFA but right now he guessed the cost of the call features to be $20 million. Mr. Albarran stated that they would be working through a whole host of discussion items that are embedded into a solution and timing would be one of those. He suggested time is of the essence given the interest rates but to the extent there was a solution imminent or pending as to the elimination of the call provisions pursuant to legislation. Councilmember Lin asked how long the contract would be with Guggenheim, to which Mr. Albarran stated Guggenheim would help affect the transaction and the contract would effectively end at the financial close. He said Resolute would assist with the community outreach which would require additional time after closing. Mr. Urbina added that the call option gives the City the right to call but it is not continuously callable like a mortgage. He said anytime you refinance a debt it comes at a cost; either a cost at the call or what they call a negative cost to carry which means you have to deposit those monies in an escrow account and they earn interest at a very low rate until those loans are callable. Councilmember Callahan stated that staff found out that WIFA has refinanced their own debt and that is the reason he would like to get completely away from WIFA if possible. Mayor Nexsen said there was a consensus of the Council to move forward with the Guggenheim proposal, but added that he would still like to have a discussion regarding some of the work. Mayor Nexsen said it is a matter of negotiating. Mr. Cassens added that there is still due diligence to be done by staff before it is brought back to the Council with a timeline. Mayor Nexsen asked if for any reason staff cannot agree to move forward with the Guggenheim proposal could the City could go with the KeyBanc solution, to which Ms. Garry replied Lake Havasu City Page 15 City Council Work Session Work Session Minutes - Final January 20, 2015 absolutely. 6. ADJOURN Upon motion by Councilmember Barlow and seconded, the meeting was adjourned at 4:45 p.m. CERTIFICATION I hereby certify that the foregoing is a full and true copy of the Work Session Minutes of the Lake Havasu City Council held on the 20th day of January, 2015. I further certify that the meeting was duly called and posted, and that a quorum was present. ____________________________________ Sacia Graber, Assistant City Clerk Lake Havasu City Page 16