City prepares for future decisions, looks to separate utilities
Published 11:05 pm Thursday, June 2, 2011
The city wants to decouple its unified waterworks utility to establish three separate funds for the water, sewer and storm and surface water management funds.
The proposal is in anticipation of a sewer bond equest and a possible transfer or sale of the water utility.
The city will try to access a limited-term general obligation (LTGO) bond to complete payment of the still unfinished Waste Water Treatment Plant (WWTP) upgrade. The city was told by its financial advisor and bond counsel that a separate utility will improve its ability to get a bond.
The city is in the midst of a water utility review to determine if it should transfer, sell or retain the utility. It would need to be separate if the council decides to transfer or sell it.
Though the city’s utilities have always been managed and accounted for separately, they are structurally under a unified utility, according to municipal code.
The ordinance introduced at Wednesday’s council meeting will create distinct funds held apart from all others and budgeted separately. The ordinance will be up for public comment and a vote at next week’s council meeting.
Interim City Manager Brenda Bauer said the decoupling will make it clear to the bond market that the city is seeking to borrow for one specific utility. The move would also prepare for the council’s upcoming decision on the water utility.
Bauer said the decoupling is not in response to the Bainbridge Ratepayers Alliance (BRA). She added that it is something the litigants have sought, and if the city chooses that direction it will need to separate the utilities.
“BRA certainly supports the move,” said Sally Adams, secretary for the Ratepayers Alliance. “It’s an appropriate gesture on part of the city.”
Due to the city’s poor financial standing and the ongoing BRA litigation, the city has been unable to repay the sewer utility’s $3 million interfund loan from the water fund to pay for part of the WWTP upgrade that has cost the city an excess of $14 million.
The loan was initially approved in May 2009 and extended in May 2010 and again in April 2011 to a new deadline of Dec. 1, and faces the possibility of defaulting if the loan is not repaid at that time.
The city ended 2010 with a financial boost thanks to the $2 million in Washington State Ferry money, and hopes that will improve its ability to access the bond market. The revenue from a new bond would be used to refund and replace previous bonds, including the interfund loan.
Bauer said an economic impact to the general fund by separating the utilities is very unlikely.
In order to get the best interest rate for a LTGO bond, the city will guarantee to pay the bond using all of its assets, including the general fund. In the unlikely scenario that the utility failed, the city would be responsible to pay those costs from the general fund.
“The actual risk to the general fund is extraordinarily low if not negligible,” said Bauer.
Bauer said it’s a similar situation as to when a parent cosigns for a dependent’s loan in order to obtain a good interest rate, but has no intention of making payments on that loan.
Finance Director Ellen Schroer said that segregating the utilities will not effect the cost of financing, but does impact the city’s debt capacity. The city is well under its 40 percent debt limit, she said.
Councilor Barry Peters said he felt ratepayers will feel more secure knowing that they can’t be burdened for other utility costs, which were complaints made in the initial BRA filing.
“How can we feel safe as water ratepayers when we are bonding the sewer?” said Peters. “We are putting at ease that fundamental concern that when we issue a bond for the sewer it will be very clear that the sewer utility is the source of repayment for the bond instead of the potential lend of other utilities.”
The ratepayers lawsuit includes a range of allegations, including that the city has unfairly raised utility rates, used utility funds for other purposes and seeks more bond money for the WWTP than it actually needs. A Kitsap County Superior Court judge threw out the lawsuit’s assertion that the city cannot purse bond funding for the WWTP in September 2009. Despite a BRA appeal, the courts ruled the city was justified in pursuing the bonds.
“If we didn’t have a utility lawsuit I would feel a lot better about this whole thing,” said Councilor Kim Brackett.
The WWTP upgrade is more than a year behind schedule, but city officials say it is “substantially complete” after running into some complications with the contractor. It was scheduled to be finished in February 2010.
