STAFF REPORT - CITY COUNCIL/SUCCESSOR AGENCY/PUBLIC FINANCE AUTHORITY

City Manager and Assistant City Manager to adopt resolution No. 3999 authorizing the Mayor to execute a long-term contract to purchase water supply from the United States Department of the Interior, Bureau of Reclamation (USBR).

The City of Coalinga first entered a 40-year contract with USBR for Central Valley Project Water Supply in 1968, ending December 31, 2008 (USBR 14-06-200-4173A).  Since 2008, the City has entered into a series of six Interim Renewal Agreements, IR-1 through IR-6.  The sixth, two-year agreement terminates February 28, 2021, and a seventh is being prepared if needed.

A second long-term contract has been delayed because USBR was unable to complete a successful Programmatic Environmental Impact Statement (PEIS).  Further, to avoid paying USBR one and one-half time the annual mitigation and restoration payments, the City entered a special agreement with USBR in September 1997 (USBR 14-06-200-4173A-BA). This agreement stipulated the City’s agreement to pay the higher amounts as soon as the PEIS was completed, but it was never completed because of environmental interest groups.  The overall result of having no PEIS has been the series of Interim Contracts.

In 2016, the United States Congress provided an alternative approach through the WIIN Act (Water Infrastructure Improvements for the Nation).  This approach does not require environmental approval and provides for a contract into perpetuity (no expiration date). However, the WIIN Act requires prepayment of outstanding construction cost obligations, discussed below.  Other aspects of water service from USBR are the same as before.

The proposed long-term contract will provide water supply security for the City long into the future, as the contract has no termination date.  The contract is also valuable because it demonstrates water supply stability to rating agencies and potential bond buyers, helping the City’s credit ratings and ability to sell water system bonds.  Finally, obtaining the long-term contract will alleviate the administrative need to enter interim renewal contracts every two years.

To enter the new contract, the City must pay the remaining balance of “M&I Construction Cost” allocated to the City by USBR.  As of September 2019, the amount was $697,495, as shown in Exhibit C of the proposed contract.  USBR is in the process of deducting further payments made by the City through September 2020, which will reduce the payoff amount further.  To the extent the City has made rate-related payments for USBR construction costs after the USBR calculation, USBR will credit the City later.  The City must make a lump-sum payment to USBR within 60 days of signing the new contract.

Under the new contract, the payment component for construction cost recovery is removed from USBR rates applied to the City.  Presently the Construction Cost component is $20.96 per acre foot (2020 rates).  This means the City will pay less for ongoing water because of the lump-sum payment.

Staff is currently considering two funding alternatives to pay off the construction cost component.  The first is to use the Series 2021 bonds in conjunction with the Series 2012 refinance and Series 2021 capital improvement funding.  The water payment component would be a taxable component of the bonds.  Bond funding is attractive because enterprise cash balances are preserved and because interest rates are presently low.  The second alternative is for the water fund to borrow short-term from the gas or sewer funds, both of which have available cash.  Using available cash is attractive especially if the actual payout to USBR is lower than the current $697,495.  Using available cash saves ratepayers interest costs over the long-term because the interfund loan would be paid much faster than bond funding.

The attached draft contract is the version that USBR has posted for public review.  The executable version will be carefully reviewed and approved by the city attorney.  City council is asked proactively to authorize the Mayor to execute the final version because time is of the essence to complete this contract prior to bond funding to support the City’s credit rating.  Early execution also benefits from USBR’s current calculation of the City’s total outstanding construction cost at $697,495.  USBR’s preliminary rates for 2021 show a recalculated construction cost component much higher at almost $3.3 million.   

The new contract is proposed to be effective February 1, 2021.

The alternative is to continue extensions of the Interim Renewal contracts.  The next Interim Renewal Contract would be IR-7, effective February 1, 2021 through January 31, 2023.

The rates paid to USBR will be the same, except the construction cost component is removed after being prepaid as discussed above.

The financial impact of using available cash through an interfund loan from the gas or sewer fund is to temporarily reduce available cash during the time the loan is being repaid by the water enterprise.  The minimum annual payment would mimic the bond payments discussed below, approximately $38,000 per year; however, the objective would be to repay the amount much faster to clear the accounting necessary between funds.

The financial impact of bond funding is a net positive cash flow.  For example, during an average year where the City purchases 6,000 AF from USBR and based on a construction cost component of $21 per acre foot, the City contributes $126,000 of repayment.   Under the new agreement, instead of paying the construction cost component, the City will pay a much lower amount of approximately $38,000 annually in debt service (based on $700,000, 3.5%, 30 years).  The City may pay off the debt without penalty after 10 years to avoid ongoing interest costs associated with the 30-year term.