ITEM:		DISCUSSION ITEM
8.	DISCUSS PLAN TO DEFEASE MECHANICS BANK LOAN (FORMERLY RABOBANK)
Meeting Date:			September 16, 2019	Budgeted:	Yes
From:			David J. Stoldt,	Program/	N/A
			General Manager	Line Item No.:
Prepared By:			Dave Stoldt	Cost Estimate:	N/A
General Counsel Approval: N/A
Committee Recommendation: This item was presented to the Administrative Committee for discussion. No action was taken by the committee.
CEQA Compliance: This action does not constitute a project as defined by the California Environmental Quality Act Guidelines section 15378.

SUMMARY: On April 1, 2013 the District entered into a $4,000,000 installment purchase agreement (borrowing) on the Aquifer Storage and Recovery (ASR) Project Santa Margarita facilities. The proceeds were utilized to fund ASR completion and expansion, to replenish District reserves that had been expended for ASR, and to establish a debt service reserve fund of $219,136. Interest on the borrowing was established at 3.6%.

The current balance of the principal due is $3,466,312.30

Although the term was nominally established through December 31, 2042 there is a balloon payment due at the “Maturity Date” of June 30, 2023. At the Maturity Date the District must pay all outstanding Installment Payments or refinance the borrowing.

The borrowing is secured by the District’s pledge of “Revenues”, defined as “the water supply charge levied pursuant to Ordinance 152.” The Ordinance 152 Citizens Panel has advised the Board to develop a plan for payment of the loan, emphasizing a desire to pay the loan off at its 2023 maturity or sooner in order to unencumber the Water Supply Charge. District Ordinance No. 152 which established the Water Supply Charge states in its Section 10.C(b) that the District shall not collect a Water Supply Charge “to the extent alternative funds are available via a charge collected on the California American Water Company bill.” Therefore, in April 2016, the Board adopted a plan examining reductions or possible sunsets of either or both.

The plan adopted was to collect both charges for at least 3 years. This was done for 4 key reasons: (i) the User Fee would primarily fund programs already in Cal-Am surcharges that would be removed (District conservation and river mitigation), so there was potentially little “new” revenue; (ii) the Monterey Peninsula Taxpayers Association lawsuit over the Water Supply Charge remained unresolved at the time, hence that revenue remained at risk; (iii) there were still large near-term expenditures required on water supply projects; and (iv) Cal-Am had a recent history of significant revenue undercollection, so the viability of the User Fee was at risk until the CPUC ruled on a more stable rate design, and the predictability of the User Fee revenue was better known. After that time, begin to sunset or reduce collections of either or both, if possible. We are now in the third year of collections of both fees, therefore this item is brought to the board for discussion at this time, with direction and action anticipated during budget discussion in the spring.

The remaining amortization through the Maturity date is shown below:

Hence, $2,952,998.30 will need to be paid or refinanced on June 30, 2023.

The Board has several options:

1) Status Quo 1: Make semiannual payments (shown above) and refinance in 2023.

2) Status Quo 2: Make semiannual payments and budget the pay-off from reserves in the FY2022-23 budget.

3) Discretionary Set-Asides: Board budgets additional amounts each year beginning FY2020-21 to accumulate a portion of the pay-off balance.

4) Sinking Fund Defeasance: Board establishes a sinking fund beginning FY2020-21 to accumulate the full pay-off balance. Assuming a 1-year LAIF investment rate of 2.3%, the Board would need to set aside $962,202 each July 1^st in the next three budgets, in addition to the regular annual principal and interest ($219,136).

5) Full Defeasance: Board budgets to purchase a 3-year negotiable CD from reserves in the FY2020-21 budget to pay the full pay-off balance. At today’s 3-year interest rate (2.65%), this would require a set-aside in next year’s budget of $2,730,149 in addition to the annual principal and interest amount.

6) Prepayment: Board budgets to prepay on December 31, 2020. This would require a budgeted amount for FY 2020-21 of $3,431,185.30

7) Refinance: At any time before the Maturity Date, if there are favorable market conditions, the District could choose to refinance. However, that would leave the Water Supply Charge encumbered. There would also be financing costs, which in 2013 were $40,000.

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