Adopt resolution to provide financing to the Madison Community Services District; and approve a loan agreement with the Madison Community Services District in an amount of $500,000, with an option to increase by $250,000 to $750,000 with maturity of December 31, 2024. (No general fund impact) (Haynes/Xiong)

The County has periodically provided loans to special districts and agencies within the County where there is a public interest and benefit in offering financing. The borrowing and lending of County funds is governed by the County Policy on Borrowing, Debts and Obligations and provides certain authorities to the County Chief Financial Officer (in role as County Treasurer). The Chief Financial Officer generally has authority when debt amounts do not exceed $500,000, obligations are less than $150,000 per annum and don't result in a significant change in the County's financial health. When these dollar thresholds are exceeded, the Chief Financial Officer would convene a Debt Committee to provide a recommendation to the Board for approval. In this instance, dollar thresholds were not large enough to require convening of the Debt Committee. However, all borrowing arrangements with other government agencies require approval by the Board of Supervisors. 

The Madison Community Services District ("Madison CSD") obtained a $3.8 million grant from the Department of Water Resources in order to perform the Madison Community Drinking Water Rehabilitation Project which involves the replacement of existing leaking water distribution system pipelines and rehabilitations to the existing well to ensure the community has reliable water supply during current and future droughts. Due to the size of the project relative to the district budget, and being a disadvantaged community, the Madison CSD met with the County of Yolo in May 2023 to pursue a line of credit that would allow them to have sufficient financing to manage the cash flow on the sizable grant. This line of credit would be secured by the receipts from the California Department of Water Resources (and all revenues of the district if grant revenues are insufficient). Based on a cash flow schedule provided by the Districts engineer for the project, the district asked for a $500,000 line of credit and the County provided an option for the CFO to increase the line by $250,000 to a total of $750,000 if necessary to complete the project. The County provided a term sheet that contained proposed loan terms, subject to Board of Supervisors approval. This term sheet allowed the district to consider outside financing options. Due to being a disadvantaged district and the challenges of obtaining external financing, the District indicated their desire to accept the County's offer. 

The proposed line of credit contains a simple interest rate of 5.00% per annum with payment at maturity at December 31, 2024, which coincides with the end of the project. The District asked for the loan to be structured as a line of credit so that they only borrow amounts that are needed to cover cash flow requirements and minimize interest expense, which is not covered by the grant. The security for the loan, should a default on the loan occur, is the grant revenues from California DWR. However, if grant revenues are insufficient and the loan is in default, the Chief Financial Officer may withhold an equivalent amount of property taxes or direct charges to ensure repayment to the County. The District Board of Commissioners is expected to consider the loan agreement at a special Board meeting either in late June or July. Should the Board not approve to proceed with this financing, the District may need to delay the project until other financing is identified, which is likely to be at a significantly higher cost. 

If approved, the loan agreement would be funded by the Demeter fund, which currently has an available balance of approximately $5.9 million. The Demeter fund is an endowment fund maintained by the County that accumulates funding each year from the de-allocation of Tobacco Settlement revenues, with the intent of providing the County with an annual stream of revenue beginning in 2043. As such, the Demeter fund does not currently fund any operating expenses, and has been used by the County to make similar loans in the past. Should the Board not proceed with lending, these monies would be invested in the markets to earn a rate of return for the endowment. Any lack of repayment, should it occur, may jeopardize the endowment strategy; however, the County has required security through the state grant and revenue of the district to reduce that risk.

The most recent loans (in the last five years) from County funds to special districts, which have all been repaid, include the following: 

Staff from the Department of Financial Services have collaborated with Madison CSD on the proposed loan agreement. The Department of Financial Services also informed the County Administrator and District 5 at various stages in loan development. 

Not applicable