Consideration and Adoption of Ordinance No. 2019-06:  An ordinance of the Council of the City of Flagstaff, Coconino County, Arizona (1) providing for the sale and execution and delivery pursuant to a Series 2019 Utility System Revenue Trust Agreement of utility system revenue obligations, in one or more series evidencing proportionate interests of the owners thereof in installment payments of the purchase price to be paid by the City of Flagstaff, Arizona, pursuant to a Series 2019 Utility System Revenue Purchase Agreement to finance costs of certain improvements to the water and sewer utility system of the City; (2) authorizing the completion, execution and delivery with respect thereto of agreements necessary or appropriate as part of financing the costs of such improvements and paying related financing costs; (3) delegating to the Mayor, the City Manager, and the Management Services Director certain authority with respect to the purposes hereof; (4) authorizing the Management Services Director to expend all necessary funds therefor and (5) authorizing the Management Services Director or his designees to take all other actions necessary to the consummation of the transaction contemplated by this ordinance and establishing an effective date.

This ordinance allows for the issuance of up to $9,600,000 of revenue pledged indebtedness for water and wastewater capital projects.  The issuance of debt was identified during the 2016 rate study completed by the Water Services Division.  An ordinance for this action is required by City Charter ARTICLE VI - FINANCE AND TAXATION, Section 5 - WHEN ACTIONS ARE TO BE TAKEN BY ORDINANCE.

The issuance of debt for the water and wastewater funds has been established during the 2016 rate study and included in the current 5-year plans for the funds.  The issuance of this debt will be managed within the current debt service estimates and will be included in the FY 2020 budget. Issuing debt will incur interest expenses and issuance costs.

The April 2014 Utilities Integrated Master Plan-Principles of Sound Water Management Water Policies sets forth finance policies for the Water and Sewer utilities.  Policy A1.1 states that annual debt service payments should not exceed 20% of total operating revenues.  The issuance of this debt will maintain annual debt service payments within this policy.

Regional Plan:
Policy WR.2.2. Maintain and develop facilities to provide reliable, safe, and cost-effective water, wastewater, and reclaimed water services.
Policy WR.4.1. Use the Regional Plan as a guide for the Utilities Integrated Master Plan to better plan for the necessary infrastructure sizing and location to accommodate planned growth and resource management.
Policy WR.4.2. Maintain, at the City level, a financially stable utility to provide reliable, high-quality utility services.

On April 19, 2016 Council adopted Ordinance 2016-23 which set the rates for water and wastewater services.  These rates included the issuance of debt for water and wastewater capital projects.  During the FY 2019 budget process, staff provided balanced 5-Year plans for the Water and Wastewater Funds which included the issuance of debt and increased annual debt service payments.

• Approve the Ordinance as written allowing the City to move forward with the issuance of pledge revenue obligations. Pros-Allows for cash flow necessary to complete voter-approved projects. Cons-Increases City indebtedness.
• Recommend changes to the Ordinance modifying the issuance of the New Money Obligations. Pros and Cons are dependent on changes.
• Do not approve the issuance of pledged revenue obligations. Pros-Delays level of debt for the City. Cons-Projects may need to be delayed and the City re-evaluate the water and wastewater capital improvement programs.

Issuing debt for water and wastewater funds is a common practice to pay for large capital improvement projects for such utilities.  Rate studies for these utilities address this when setting user fees and balancing the consideration of fee-based capital projects versus debt-based capital projects.  Often there is a balance of both.  The most recent rates adopted included the consideration of issuing debt for capital improvements as well as meeting the financial policy of the utilities. In addition, the April 2014 Utilities Integrated Master Plan-Principles of Sound Water Management Water Policies sets forth finance policies for the Water and Sewer utilities.  Policy A1.1 states that annual debt service payments should not exceed 20% of total operating revenues.  The issuance of this debt will maintain annual debt service payments within this policy.  

Through the 5-year planning process, staff has identified the need to issue debt to pay for several capital projects.  We will be issuing up to $9,600,000 of revenue obligation debt for the following capital projects.  Water capital projects include: Water Services Building Purchase and Remodel, Switzer Canyon Waterline Replacement Phase 3, Interstate 40 Country Club Water Transmission Line, Fountain Street Waterline Replacement, and Design/Replacement of Aging Water Infrastructure.  Wastewater capital projects include: Wildcat Gas Conveyance System Improvements, Westside Interceptor Improvements, Rio Plant UV System Replacement, Biosolids Master Plan, Wildcat Digester #3, and Design/Replacement of Aging Wastewater Infrastructure.  All projects have been budgeted for and/or included in the 5-year plans.

While the purpose of this agenda items is to approve an ordinance to allow the City to issue debt, we have included a draft Trust Agreement and Purchase Agreement as informational documents you may review. These documents have been reviewed by our Financial Advisors and Bond Counsel.  These are materially complete however may have some changes prior to completion of the debt transactions. Final documents will be available upon request to the Management Services Director.

Upon approval of Ordinance 2019-06, city staff will issue a formal request for proposals (RFP) which banks will respond to.  City staff will then negotiate best and final offers prior to award.

The cost of issuing new revenue obligations includes fees for our bond counsel, financial advisors and trustee.  We are on state contract for bond counsel with Greenburg Traurig and the fee for this sale is $40,000.  We have a contract for financial advisory services with Stifel, Nicolaus & Company and the fee for this sale is estimated at $30,240.  The trustee fee for this issuance will be $1,000.  These are common issuance costs and have been factored into the issuance of debt.

Staff is planning on issuing the debt with a payback period of 15 years.  This shorter term option allows the City to take advantage of procuring the debt using a private placement method.  Private placement issued debt reduces costs to issue debt, saves staff time and should provide favorable interest rates.  Preliminary estimated interest over the life of the debt is approximately $2,780,000.

Inform: To provide the public information related to the issuance or water and wastewater revenue obligations.