The Zone 3 East Reservoir Expansion involves the construction of an additional storage reservoir to meet current storage deficits and support ongoing growth in the area.  The new reservoir would be a companion to the present Fox Reservoir which is located southwest of Skyview High School.  This project is included in the Capital Improvement Program (CIP) with a specified funding source of State Revolving Fund (SRF) loan.  Using debt for large capital improvements to spread costs over time helps in achieving rate stability and also provides rate equity by spreading costs over the period of time that the capital improvement benefits the public.  The SRF Loan Program was established by the Montana Legislature to make at-or below-market interest rate loans to eligible Montana entities for water and wastewater improvement projects. The SRF programs are funded with capitalization grants from the U.S. Environmental Protection Agency and are matched by 20% with State-issued general obligation bonds. Combined, these two sources of funds create the State Revolving Fund, from which loans are made and borrower repayments revolve to provide loans for infrastructure projects. 

The current SRF loan terms are 20 year amortization with a 3% interest rate. The comparative current market rate for 20 year, non-collateralized revenue bonds is approximately 5%.  The Zone 3 East project is included on the Montana Department of Environmental Quality's Drinking Water SRF Intended Use Plan; however, the attached SRF Application is required to apply for the loan.

The Council may:

• Apply for SRF funding; or
• Do not apply for the SRF loan.  Alternate financing would need to be secured or other capital projects would need to be deferred to complete this project. 

The total cost of this project is estimated at $2,886,295, including $196,295 of related loan costs for bond counsel, audit fees, and required loan reserves.  Water revenues will be used to fund $186,295 of the project and the remaining $2,700,000 will be funded through the SRF loan.  The estimated annual debt service over the next 20 years for this loan is $181,295 and will be funded with water revenues.

Staff recommends that Council authorize the Mayor to execute the application for a State Revolving Fund backed water loan in the amount of $2,700,000.