EID bond refinancing approved: Will save $1M annually; term not extended

By Michael Raffety

Mountain Democrat 1-31-14

A majority of the Board of Directors of the El Dorado Irrigation District Jan. 27 approved saving $1 million a year by refinancing $133 million of its debt at a lower interest rate.

The vote was 3-0-1. Voting for the refinancing were Board President Alan Day and Directors George Osborne and Bill George. Director Greg Prada abstained and Director Dale Coco was on a prior-announced absence.

By the time the existing bonds are swapped out for the new issue in mid-February, the savings this year is expected to be $300,000.

At the final moment when the general manager, finance director, bond counsel and bond underwriter decide whether backing the bond issue with bond insurance is the most economical approach, the district could wind up with fewer bonds on the books at a lower rate without extending the term of the bonds. It could also come up with a bonus when they are sold.

The bonds were chosen for refinancing because they are callable, meaning EID can pay them off before they mature. The new bonds will have the same maturity date of 2039. In addition to the $1 million savings through 2025 and $400,000 thereafter, there will be a net present value saving of $6 million-$8 million, according to Finance Director Mark Price.

Net present value analysis, according to Fundamental Accounting Principles by Larson, Wild and Chiappetta, “applies the time value of money to future cash inflows and cash outflows so management can evaluate the benefits and costs at one point in time.”

Price told the board the savings could be used to decrease future rate increases and fund smaller capital projects on a pay-as-you-go basis.

The bonds, called Certificates of Participation, were issued in 2004 at an original true interest cost of 4.144 percent and will be refunded at a rate of approximately 2.8-3 percent. The 2009 original true interest cost was 5.964 percent and the refunding rate will be approximately 5.1-5.25 percent, according to Price.

The district has $360,561,000 in outstanding debt. Thirty-one percent of the debt is in variable-rate bonds backed by a letter of credit from Citibank. From March 1, 2004, to Dec. 30, 2013, the rate has varied from a high of 3.828 percent in 2008 to a low of 0.991 percent Dec. 30, 2013.

The district actually earns more on its reserve funds than it pays in variable rate interest, said Dave Houston of Citibank. “The reserve funds are invested in the State Treasurer’s Local Agency Investment Fund and can be withdrawn anytime. It’s a net cash positive versus what the district is paying,” Houston said.

Houston said the variable rate debt is “tailored for EID to have the best match to liabilities” and “to take the volatility our of your budget.”

Price noted that in the last couple of months the variable rate of the district’s bonds had been 0.03 and 0.04 percent.

Tuesday General Manager Jim Abercrombie told the Mountain Democrat the latest indications from the bond market are that the actual savings from the refinancing may be as high as $1.4 million annually.

In an e-mail to the Mountain Democrat sent at midnight Monday, Director Greg Prada explained his abstention as follows:

“With regret today, I abstained on voting for the debt refinance due to my concern that the Preliminary Official Statement contained materially misrepresented projections as to the district’s intent to raise rates 5 percent annually in 2016-2017,” Prada said.

“I believe that the debt refinance opportunity is in the district’s best interests but only if it can be obtained using financial projections which reflect only board-approved rate hikes and further are consistent with the campaign representations three board members made to the public in getting elected,” Prada said.

“Things can change regarding rate hike intentions by one or more of these board members, but to date the board has had no scrutiny of 2015-forward budgets and spending alternatives,” Prada said. “I am disappointed that the financial projections being presented to prospective new bond holders precluded my ability to vote for the debt refinance.”

Prada did join a unanimous vote for the EID “Disclosure Procedures,” which he had wanted more time to study when it was presented at the Jan. 13 meeting.

Six actions were approved by the board:

1. Resolution authorizing issuance of the refunding revenue bonds.

2. Indenture of Trust agreement making Union Bank trustee for the eventual bond holders.

3. Preliminary Official Statement disclosing all material aspects of the district.

4. Continuing Disclosure Certificate describing reporting requirements for the duration of the bonds.

5. Escrow Agreements making Union Bank the recipient and escrow agent for the borrowing proceeds.

6. Bond Purchase Agreement contract with underwriter Citigroup Global Markets Inc., valued at about $900,000.

Another $300,000 covers the cost of the bond counsel, the cost of the rating agencies to rate EID’s bond issuance, EID’s financial adviser and other costs of issuance. Total cost of the refinancing, according to Price, is $2.3 million. The savings figures touted for the refinancing included the transaction costs, he said.

Prada’s objection was to a No. 3, the Preliminary Official Statement. The POS is a treasure trove of information about the district. A statement on page 30 brought his opposition:

“The district is currently projecting water system rate increases of 5 percent in fiscal year 2016 and 5 percent in fiscal year 2017,” the POS stated.

However, the very next two sentences stated, “Any increases in water system rates in fiscal years 2016, 2017 and thereafter are subject to notice, public hearing and protest process as described under … Proposition 218. ”

The final sentence of the POS stated, “There can be no assurance that such increases will be approved by the Board of Directors or that a majority protest against the increase will not occur.”

On page 31 was a list of bimonthly water service charges for single-family residents, with EID’s lower than Grass Valley, Elk Grove, Placerville, Rancho Murieta, Placer County Water Agency, Nevada Irrigation District and South Lake Tahoe. At $94.34, EID’s rate was slightly higher than flat-land districts like Sacramento Suburban and Folsom, and definitely higher than Citrus Heights’ $57.28.

El Dorado Hills resident Paul Raveling produced a graph showing rates, operating expenses and inflation from 1996 to 2013.

“Rates increased 5.6 percent between 1990 and 2009,” Raveling said, adding the Consumer Price Index rose 81.5 percent in the same period. “EID is catching up with inflation.”

Prada also objected that the Facility Capacity Charges (hookup fees) for 2014 were too low at $17,578 plus the cost of the meter and any potential road crossing charges.

“The financial plan was submitted last year. The board approved the financial plan document. The budget was approved in October,” said Day. “The board did not approve rate increases for 2016. That would have to go through a Prop. 218 process.”

“The information is a snapshot in time,” said Day. “So long as we pay our bills we’re OK.”


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