[BoulderCouncilHotline] Re: Water and sewer revenue bonds

[Skinner, Kara]

Good afternoon,

Below are responses Council Member Wallach’s questions regarding the April 5, 2022 Regular Meeting, Item 3D - ordinance authorizing the issuance of Water and Sewer Revenue Bonds:



1)      Authority is sought to issue bonds subject to an interest rate cap of 4.5%. With interest rates rising rapidly (at least with respect to mortgages), how much clearance does this give us in terms of where bond rates are today? How close are we cutting it with that cap?



A: Just last week our financial advisor recommended we raise the maximum interest rate from 4% to 4.5%. Today we confirmed our financial advisor remains comfortable that 4.5% will provide sufficient cushion (at least a 1% cushion is built in) for our bond sale which is scheduled for mid-May.



2)      The memo states that the City reserves the right to spend the proceeds on different or additional projects. Please explain. If we are approving a specific set of expenditures (and they are good ones), what, exactly is the discretion to use bond proceeds for purposes not enumerated in this memo? Would it not be appropriate to submit to Council for approval any changes from the authorized expenditures?



A: The agenda item on April 5 will be to approve a Resolution and Ordinance for the City to issue Water and Sewer bonds and call for a public sale of these bonds on a specific date. Council is not actually approving any projects. The projects slated for bonding have already been approved in the Capital Budget process. The projects listed in the agenda memo are mainly for informational purposes only and the departments normally have every intention to spend the bond proceeds on those specific projects. Our bond counsel always includes language Council member Wallach is referring to in the case a project falls through or we have some excess bond proceeds left over. We would not formally have to go to Council to change a project if that should happen. Procedures could be set up however to provide Council with an Information Packet to communicate any changes in projects. To note, any replacement or new project would have to be specific to the Water and Sewer system, be capital in nature, and have the required useful life to be qualified for tax-exempt financing.



3)      Do we know the S&P rating for the prospective bond issuance?



A: We are meeting with Standard and Poor’s on April 5. We should have the rating back within a week.



4)      Will this issuance have an impact on our capacity to issue bonds for CU South?



A: No, the bond issuance for South Boulder Creek Flood Mitigation Project (also referred to as CU South) will be coming from the Stormwater and Flood Management fund. The Stormwater fund stands on its own with regard to debt issuance. Any CU South bond issues will solely be backed by revenues of the Stormwater fund.



5)      Can someone explain the pro forma debt service coverage chart on page 106 of the memo? Surely, we are not showing a net profit of $37.7MM in 2020? At that level of profitability, it would be reasonable to ask whether we require a bond issuance at all. I know that I am not reading this correctly, but an explanation would be helpful.



A: The table Council member Wallach is referring to is analyzed by bond counsel and rating agencies. It is used to see how much revenue the utility has over operating expenses that can be used on anticipated total yearly debt service. In order to issue any additional Water and Sewer bonds, the facility must have at least 1.25 times more revenue than operating expense. In this case per the table we have 2.82 times. Rating agencies look at this as a sign of strength with the higher the number the better. Bond council looks at it to make sure the utility can legally issue the additional bonds. The 2020 $37.7MM  amount from the table does not include $12.3MM in debt service payments, amounts spent for capital expenditures and amounts placed in required reserves the utility maintains. In addition, the $37.7MM amount is a combination of our Water and Sewer funds because both funds cross pledge Water and Sewer bond issues. We would be happy to provide more detail about the numbers if needed or answer any questions concerning this.



6)      I know that this information has been provided to us previously, but could the sewer and stormwater rate increases projected for the next few years be provided again? Are those projections inclusive of both this bond issuance and the CU South project? Increases in both percentages and dollar amounts would be useful. I apologize for the redundancy of the request.



A: For 2023 the projected percentage increases and respective monthly bill impacts for single family residential customers are as follows: Water 6% ($2.89), Wastewater 5% ($2.06), and Stormwater 12% ($2.64). The 2024 projected percentage increases are the same as 2023.  The projected Stormwater rate increases do include the South Boulder Creek Flood Mitigation Project (also referred to as CU South).



Thanks,
Kara and Joe

Kara Skinner
Interim Chief Financial Officer
Pronouns:She/Her/Hers What's This?<https://gcc02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.mypronouns.org%2Fwhat-and-why&data=04%7C01%7CSkinnerK%40bouldercolorado.gov%7Cf66662c837b645b4d96e08d93009ece2%7C0a7f94bb40af4edcafad2c1af27bc0f3%7C0%7C0%7C637593641454404328%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C1000&sdata=8z1E4U%2FSwp0RE7oXNus3XW3pBiH9DNG2Mc%2F3PCHTH1M%3D&reserved=0>
W: 303-441-4027
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Joe Taddeucci, P.E.
Director of Utilities
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C: (720) 635-6970
taddeuccij at bouldercolorado.gov<mailto:taddeuccij at bouldercolorado.gov>
Public Works - Utilities Department
1739 Broadway | Boulder, CO 80302
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From: Wallach, Mark <wallachm at bouldercolorado.gov>
Sent: Saturday, April 2, 2022 6:49 PM
To: HOTLINE <HOTLINE at bouldercolorado.gov>
Subject: Water and sewer revenue bonds

As I suspect that no one, ever, has wanted to discuss water and sewer revenue bonds (despite their critical importance), I thought it might be preferable for me to ask my questions in writing concerning Tuesday’s consent agenda item, so that we do not have to spend time on this subject at next week’s busy meeting.  At the outset, let me state that I am entirely supportive of the bond issue and the purposes for which it is intended. Nevertheless, I am hoping the following few questions can be answered prior to our meeting:

1) Authority is sought to issue bonds subject to an interest rate cap of 4.5%. With interest rates rising rapidly (at least with respect to mortgages), how much clearance does this give us in terms of where bond rates are today? How close are we cutting it with that cap?

2) The memo states that the City reserves the right to spend the proceeds on different or additional projects. Please explain. If we are approving a specific set of expenditures (and they are good ones), what, exactly is the discretion to use bond proceeds for purposes not enumerated in this memo? Would it not be appropriate to submit to Council for approval any changes from the authorized expenditures?

3) Do we know the S&P rating for the prospective bond issuance?

4) Will this issuance have an impact on our capacity to issue bonds for CU South?

5) Can someone explain the pro forma debt service coverage chart on page 106 of the memo? Surely, we are not showing a net profit of $37.7MM in 2020? At that level of profitability, it would be reasonable to ask whether we require a bond issuance at all. I know that I am not reading this correctly, but an explanation would be helpful.

6) I know that this information has been provided to us previously, but could the sewer and stormwater rate increases projected for the next few years be provided again? Are those projections inclusive of both this bond issuance and the CU South project? Increases in both percentages and dollar amounts would be useful. I apologize for the redundancy of the request.

Thank you in advance for any information you can provide to my colleagues and myself.



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