20-163/REPORT/TM/Final Draft
DRAFT | TECHNICAL MEMORANDUM
DATE: June 22, 2022 Project No. 22-1-009
TO: Nelson Schlater, Senior Wastewater Engineer
FROM: Jacques DeBra, Principal Supervising Water Resource Planner SUBJECT: City of Pacifica – Wastewater CIP Funding Summary
EXECUTIVE SUMMARY AND RECOMMNDATIONS
Every five years, the City of Pacifica (City) completes a wastewater rate study to determine rate increases necessary to meet the Wastewater Division’s (Wastewater) operating costs, projected Capital Improvement Program (CIP), and expected yearly consumer price index increases. Plant and Collection System infrastructure age, exposure to the harsh coastal environment, vendor phase-out of parts, and more frequent extreme weather events translate into the City’s need to incur costs to replace and maintain its sewer treatment infrastructure.
At the May 9, 2022 City Council Meeting, Council adopted a resolution approving New Wastewater Service Charges (Rates) to finance a $120M Ten-year CIP, as documented in the Bartle & Wells Rate Study dated January 26, 2022. CIP funding requires a $31.554M loan in FY 22-23 and a $52.405M loan in FY 26-27.
Discussions with Bartle & Wells indicated that increasing the FY 22-23 loan to $41M and lowering the FY 26-27 loan to ~ $43M would not exceed the Debt Service coverage for any year over this ten-year period.
The cost of borrowing money has increased significantly since the rate study was published in January 2022. Luhdorff & Scalmanini Consulting Engineers (LSCE), working with City Staff, proposes a two-step loan strategy to address the first half of the Ten-year CIP to secure the lowest overall loan interest rates:
• In FY 22-23, borrow $21M from iBank ISRF1
• In FY 23-24, borrow $20M from EPA WIFIA2
Loan needs for the out years of the Ten-year CIP will be addressed at a later date.
Increasing interest rates mean the time to loan closing is critical for locking in the lowest interest rate.
Furthermore, relative to municipal revenue bonds, iBank generally takes less time to secure an executed agreement and iBank interest rates are a minimum of 15 basis points lower for cities with strong credit like the City of Pacifica. Assuming the application process starts in July 2022, we anticipate an executed agreement in 4 to 5 months or in the October 2022 to November 2022 timeframe. This first step will take the City into FY 24-25.
1 California Infrastructure and Economic Development Bank (iBank) Infrastructure State Revolving Fund (ISRF) 2 Environmental Protection Agency (EPA) Water Infrastructure Finance and Innovation Act (WIFIA) Program 20-163/REPORT/TM/Final Draft
Note that iBank loan duration is <=30 year, has a funding limit is $25M, and requires that funded projects achieve substantial completion in three years or less. Therefore, to address the first five years’ of the CIP, a second loan is required.
We propose the WIFIA Program3 as the second loan. WIFIA will have lower interest rates than iBank.
Furthermore, WIFIA has the following time-related advantages: funded projects must achieve substantial completion in five years or less; and loan duration can be up to 35 years with 5-year deferral of repayment.
This first point means that we can lock in the interest rate as soon as feasible but have the flexibility to begin funded projects in FY24-25. The second point allows the City to sculpt loan repayment. The above points make WIFIA a good compliment to iBank, locking in the WIFIA interest rate as soon as is feasible, allowing time for the City to start designing WIFIA-funded projects, and stretch out repayment to reduce annual payments.
Therefore, we recommend the City proceed with the proposed two-step loan strategy as follows:
• apply for an iBank loan of $21M and complete the paperwork in July 2022 for an anticipated executed agreement in November 2022; and
• apply for a WIFIA loan of $20M and begin the paperwork in last July 2022 or early August 2022 for an anticipated executed agreement in August 2023.
Lastly, it should be noted that the team did consider the Clean Water State Revolving Fund (CWSRF). Even though CWSRF typically has lower interest rates than WIFIA, CWSRF is anticipated to take 18 to 24 months from application to executed agreement. In addition, CWSRF has stringent requirements on funded project design level (i.e., 90%) which impacts whether or not the project is funded. Moreover, CWSRF is in the process of revising their selection scoring approach which could further stretch out the time from application to executed agreement. Additional time to secure a CWSRF loan will most likely translate into higher interest rates which may impact it’s desirability relative to WIFIA. And lastly, although CWSRF has some ability to sculpt loan repayment (3 years from substantial completion), this is less than WIFIA ability to sculpt the loan repayment (5 years from substantial completion). We will continue to monitor the CWSRF program but at this time, we recommend an iBank-WIFIA two-step loan strategy for the first $41M loan.
3 The WIFIA funding “floor” is $20M and will fund up to 49% of a project, hence the iBank loan is set to provide 51%.