Monday, July 29, 2013

Ogden Council Poised to Borrow $18 Million for Utility Projects

Sole purpose of new debt is to maintain even larger cash balance in case of “emergency”

By Dan Schroeder

The Ogden City Council will vote this Tuesday on the proposed bonds that were discussed at its July 9 work session. The bonds are intended to fund a new water filter plant below Pineview Dam ($11.6 million), some smaller water infrastructure projects ($1.8 million), and a series of storm drain improvements to alleviate storm water hazards on Harrison Blvd. ($4.7 million). These bonds would add to the utility funds’ existing debt of approximately $60 million.

Nobody is questioning the importance of these utility infrastructure projects. But at the July 9 work session, several council members wisely questioned the idea of paying for them with borrowed money, when the utility funds have more than enough cash already sitting in the bank. City treasurer Mike Goodwin stated on July 9 that the water fund balance was currently at approximately $11 million, while the sewer and storm drain fund was at approximately $17 million. He further stated that these cash reserves are held in a variety of investments that earn from 0.5% to 1.25% interest.

Thus, the city administration is proposing to borrow approximately $18 million at 4 or 5% interest, for the sole purpose of maintaining an even larger cash balance that’s earning approximately 1% interest.

The council’s agenda packet for this Tuesday (relevant pages excerpted here) shows a few further details and minor changes to the proposal.

First, to partially address the council’s concerns, the staff are now offering four different borrowing options for the water portion of the bonds (see Council Staff Review, page 3). The three new options would reduce the water bond amount from $13.4 million to $11.6 million, or reduce the repayment period from 30 years to 20, or both. Making both changes would reduce the total interest payments from about $11 million to only $6 million (not including the interest on the storm drain bonds).

Second, staff have provided some updated numbers for the current financial position of the water fund (see pdf page 9, numbered 4 on the page). Apparently the water fund balance stood at $10.2 million at the end of June, somewhat less than Goodwin had informally indicated on July 9. Furthermore, the city is making an emergency expenditure of $1.4 million to replace the pipeline that recently ruptured near the mouth of Ogden Canyon and temporarily closed Highway 39. (I’m not sure why this long-overdue pipeline replacement wasn’t already in the city’s near-term plans.)

On the other hand, the water fund had an operating surplus of $3.2 million for the most recent year, and another rate increase of 7%, approved in May of last year, just took effect this month. So by the time the bills for the filter plant come due in 2015, the fund should have accumulated several million dollars more.

(The council packet does not include any updated information on the cash balance of the sewer and storm drain fund—only budget projections that are now out of date.)

So again, why would the city borrow money at 4 or 5% interest, just to maintain an even larger cash balance earning only 1%?

The council actually adopted a resolution last year that endorsed the concept of maintaining large cash balances. At that time, the justification provided by the city’s financial consultant (Laura Lewis of Lewis, Young, Robertson, and Burningham) was that large cash reserves look good to investors, making it possible for the city to borrow money at lower interest rates. In other words, the reason to borrow the money, rather than paying for the projects with cash, is so the city can get a lower interest rate when it borrows the money.

Lewis did not repeat this line of circular reasoning on July 9. Instead she pointed out that if the city uses up all its cash reserves and then an emergency repair needs to be made, the interest rate on an emergency loan or bond would be relatively high. Nobody in the room gave an example of what sort of emergency expenditure they thought the city might expect to make.

Even if the city forgoes the bond and pays for the filter plant and other projects with cash, the total balance in the utility funds should should never drop below $10 million. And the city’s utility infrastructure is widely dispersed, so it’s hard to imagine an emergency that would cost more than a couple million dollars in the short term. (The $1.4 million pipeline replacement near the mouth of Ogden Canyon is an excellent example.)

I recently asked a couple of council members what sort of disaster they have in mind that might cost the city more than $10 million in emergency repairs. The only scenario they’ve mentioned is the potential failure of Pineview Dam, perhaps due to a major earthquake. Geologists estimate that major earthquakes on the Wasatch Fault occur on average every 300-400 years. In such an unlikely event, it is highly probable that Ogden’s utility systems would be eligible for federal grants that would cover at least 75% of the cost of replacement.

Lewis, Young, et al.,
Taxpayer Leeches
"Financial Consultants"
So I’m still at a loss to understand the motivation behind these proposed bonds, which would ultimately cost the city about $10 million in net interest payments (plus or minus a few million, depending on the option chosen and the actual interest rates obtained). That’s $10 million that the city could instead spend on other needed infrastructure upgrades in coming years—or refund to the citizens in the form of lower utility rates.

But it’s quite clear that the Caldwell administration is behind this bonding proposal—as is its consultant, Laura Lewis. Lewis’s firm would presumably act as the city’s “financial advisor” on the bonds, and (according to the final page of the packet excerpt) receive a fee of 0.4% of the amount borrowed, or about $70,000.


Carol said...

What in the bloody hell is going on here with UT politics ?

Dan S. said...

I didn't want to speculate too much in this article about the Caldwell administration's motives for pushing this otherwise irrational bond. But I've talked with several people about it in recent days, and the most plausible suggestion I've heard is that the administration wants to tie the hands of future city councils, so they can't go back and undo any of the rate increases that were approved last year. Long-term debt obligations are one of the few ways that the current council can limit the options of future councils. The administration apparently wants stable and predictable revenues over the long term, even if that means squandering much of the revenue on interest payments and ending up with less to actually spend.

Smaatguy said...

This is just RIDICULOUSLY INSANE CRAZY MAKING BEHAVIOR!!! Next time the City needs 70k for something very beneficial to the community but tell us they don't have it then what?
Pay no attention to the economy, all is well in municipallalaland...yeah, tell that to Detroit.

Smaatguy said...

The failure of Pineview Dam???...oh come on....$18 million will be a drop in the bucket if that happened...not to mention it's a federal project...and not to mention the Federallies will swoop in and provide the needed denero's or would be a national disaster...pull my damn finger...this whole thing stinks.

rudizink said...

You Da Man, Smaatguy!

Smaatguy said...

the sad thing is this damn thing will pass....

LibertyinUtah said...

I can't follow their logic either. Either they are hiding the reason they need the money in the future, which is insulting as a tax-payer, or they are doing something shady, which I hope is not the case.

Maybe it's just too complex for us simple citizens to understand..

rudizink said...

That's why we Ogden lumpencitizens need to play it smart in the 2013 Ogden Municipal election (and thereafter) elect smart and independent-minded candidates like Stephen Thompson and Courtney White to the council this November, don'tcha think?

blackrulon said...

It seems that bonding the full amount instead of using part of the reserve/rainy day fund is just a taxpayer gift to the banks and lending institutions which will make a nice profit at the citizens expense. Perhaps a councilmember or Silent Mike Caldwell could explain the real purpose of the emergency fund?

Danny said...

I think I said previously that the reason the consultant wants to bond is to get the fees. Now we learn that is true. Now ask what kind of campaign contribution Caldwell has arranged to receive from the consultants, Lewis and Young, and the circle will be complete.

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