FINANCE COMMITTEE MINUTES

JUNE 6, 2007

The meeting was called to order by Mr. Fogt at 6:00 p.m.

MEMBERS PRESENT: Dan Fogt, Ed Pleasant, Leah Sellers

OTHERS PRESENT: Andy Brossart, Kathy House, John Morehart, Phil Roush

AGENDA:

· Elect a Chairperson

Mr. Pleasant nominated Mr. Fogt, seconded by Ms. Sellers. Affirmative voice vote was unanimous.

· City’s debt

The reason for this discussion is that Mr. Fogt wants to make sure the City does not assume too much debt that it can’t get out of debt. Also, Mr. Pleasant stated not only how much debt can the City stand, but what can be done over the next few years to lower the debt to pursue quicker payoffs.

Mr. Brossart of 5/3 responded in answer to the question, does the City have too much debt. His response was yes. Any debt is bad debt, but it’s a necessary evil. To think that the City is ever going to be completely debt-free as a system is unrealistic, given the size and the amount of enhancements needed to the system. He agreed major upgrades made in the City are justified and needed. Unfortunately, they come with a very high price tag. In terms of how much the City can afford, if there is more debt that is needed, there will be a need for more rate increases because the system can’t handle it. If development occurs quicker and the City gets more tap-in fees to pay down on what’s needed for new projects, or the residential incentive districts really perform beyond expectations, then less debt is needed. It’s a double-edge sword, if development slows, City really has a problem.

Other options are low interest loans, and there are advantages and disadvantages to using them, and there is grant money. He said now is the time to start lobbying representatives and congress members to talk to them about increasing the amount of grants that are given to these unfunded mandates. If you want the biggest bang for your buck, that’s what it’s going to be, grants.

Mr. Morehart said that Mr. Brossart looks at the total picture as far as how the debt should be structured and tries to provide some relief in the early years as the revenue functions are maturing. When you look in the later years, you see a prior amortization schedule as far as what goes to principal, mainly because as we’re early in the process with the tap-fee revenue and dependency on tap-fee revenues and TIF’s, those projects are just maturing, and it may take 5/6 years before we’re at 100% build-out, so we’re maximizing the revenue. At that point, we should be maxed out on the debt service and be able to amortize the debt quicker. Once we go to bonds, there’s a limitation as to when we can do that. Mr. Brossart said you can go five years without paying principal, and then you start amortizing principal. Mr. Morehart said in the most recent debt issuance which occurred today, City had bonds and notes. There is more flexibility with notes. If we do get some additional revenue, we can pay that down as aggressively as we want, but that note matures in a year. We’re limited on the bond side in the first few years because we have a stated interest rate, a stated amortization schedule which we have to follow for a number of years, unless rates would decrease significantly where we can refinance, which we’ve done in the past.

Regarding the $32M principal amount, Mr. Brossart explained a lot of that was the principal amortization, and when you start prepaying principal for the latter part of the life of the bonds, is it ideal? No. It used to be a state law where you had to have level principal payments. But in order to keep rates low and try to capture future growth, a lot of the debt structured for the City has gone up a little over time. You don’t want to defer too much debt, because it puts too much burden on the later residents of the City, but you want to get the right equilibrium where you’re not raising rates too much in order to complete the projects.

Mr. Fogt asked about the MIG 1 rating. Mr. Brossart explained that is a note rating. It stands for Moody’s Investment Grade rating. When evaluating debt, Moody’s look at revenue streams and look at the top 10 payers in the water system. Their concern is that the top 10 make up about 40% of the City’s overall revenue flow, and that’s bad. If Honda goes out of business, City would be in trouble. As for concentration of the largest users, they really like to see the top ten not make up any more than 20% of the overall revenue flow.

Proforma debt service coverage, ideally would like to see system revenues cover debt service at least by 1x. City is now at .8. For a developing system, that’s normal, but when you look out 20 years, you want to see reliance on tap-in fees decrease to pay operations and debt.

Mr. Fogt asked if the increase was considered in this. Mr. Brossart said yes, the revenues from the increase coming in this year were taken into consideration. The numbers in the feasibility study are conservative. When you look at the amount of growth within the proformas, those numbers have historically been conservative. Operating expenditures have been conservative and that’s done for a reason, that what’s presented to the people is what’s going to happen.

If development happens sooner and you bring in more tap-in fees and have excess cash, you can defease bonds, or since City has a short-term loan on the wastewater side, you can pay that down sooner or you can apply those monies to future capital projects, which would reduce the amount borrowed.

Rating companies do not like to see a City spend down all their cash reserves. They want to make sure you have enough money to operate with, because you can’t borrow for operations.

City needs a 15-20 year plan on how to put new revenue streams in place to capture the growth. Tap-in fees are in place, but need to explore if there is anything else that can be done to keep rates down.

Mr. Brossart said the key highlight of the system is the fact that it’s just not a city system. Bringing in the County system and having access to the growth outside the City was a big issue in saving the ratings. They like regional systems. Ms. House added that regional systems make the EPA happy.

Ms. Sellers asked what kind of ratings do other regional systems in Ohio have? Mr. Brossart responded that the northwest water & sewer district has an A- rating from S&P. Butler County water and sewer system has an A3 rating. Cincinnati’s water system is AA rated, because they have so much capacity and can make deals with a lot of the surrounding areas.

Regarding the large capital plan, Mr. Fogt asked what was included in the plan. Mr. Brossart said that whole plan was included in the feasibility study. Mr. Fogt asked specifically if the trunk line sewer around the west and southwest side of the City was included. Response was yes. Mr. Roush added that the southwest trunk sewer and the Watkins Road trunk sewer are the two key ones. Mr. Fogt doesn’t want any big surprises that would affect the rating negatively. Mr. Brossart said the only surprise would be if the revenues aren’t there to pay for it, but added that they are not rating that project yet. They know the capital plan is continuing, and if those issuances are going to happen, by either tap-in fees doing well, or whether rates have to be raised, or grant money comes in to help cover those needs. The rate structure currently in place for the next five years includes the southwest trunk sewer. For the rating, they look at a 20-year plan.

The BBB rating is only for the wastewater treatment system. The water treatment system will be rated separately.

This summer, City Administration and Mr. Brossart will have to go for a rating trip to Standard & Poor’s to talk about an issue for the water system. Ms. House suggested having a member of City Council accompany staff on this trip. Mr. Roush said the volume of projects in the water area is not nearly as those in wastewater. Instead of $220M over 20 years, it’s about $40/50M.

Referring to the City’s rating and its concentration on the top ten largest users, what can be done to correct this? Mr. Brossart said, by adding more customers. City has done what they could by bringing in the county system. Expansions to the south, grabbing the industrial base and other large users would be good. It gets better every year, but it’s going to take time.

Ms. Sellers said the small municipal bond market is very inefficient. Why? Mr. Brossart responded that he’s seeing more of it now than in the past. Municipalities are building their own water plants, contracting with municipalities to buy excess water from them. City of Cincinnati is building lines up to communities 2/3 counties north of where they are at and buying water from them instead of building their own plant.

Mr. Fogt asked for confirmation that if you buy insurance, you get a better rating. Mr. Brossart stated yes, they bought insurance from Excel Capital for this project. When you buy insurance, you don’t automatically get AAA rating; you usually get below AA rating. It saves a lot of money by doing this. You recoup that cost of insurance in the first two to three years. Marysville’s rating is BBB, but the bonds have an insurance policy on them that is AAA. Actually, Marysville’s rating is better than a BBB. Insurance affords more buyers to get a better rate.

Mr. Brossart suggested talking to growing area townships about JED’s. It’s a nice revenue stream for the township and the city.

· Job Ready Sites Grant Agreement

Mr. Fogt said the City is going to have to spend about $4M on this deal to get the $3.5M. He asked if this $4M figure includes running the sewer and water. Mr. Roush has a copy of the final agreement. The grant would not fund the street portion, so the grant was amended to leave the street work out. The JRS grant total is $9.3M with $3.5M being the grant amount and 5.8% being the local match. The local match listed as part of the grant has already been paid out as part of the water reclamation facility and money encumbered for the trunk interceptor project. In addition to the grant, City needs to get the engineering done for the first phase of the southwest trunk sewer. The JRS does include a total of $485,000 in professional fees to help design the water line and part of the sanitary sewer extension. The City does not need to come up with $4M out of pocket. Mr. Fogt asked for the amount of money the City does have to spend. Mr. Roush stated the City has to do the engineering. The City has to have the money up front and will then be reimbursed by the State within 60/90 days. City applied for 10% upfront money, which amounts to $380,000. Ms. House stated the City’s local match in sewer development is $5.8M, but a huge majority of that has already been spent on the sewer, pump station, force mains and the plant. A percentage of all of those projects is going to serve this site. That percentage is part of that $5.8M. Mr. Fogt asked if the cost of installing the pipe to the site is included. Mr. Roush stated that the $1.8m of the grant money, the refund/reimbursement phase to the City. It’s estimated at $1.815M for the sewer part, the water line is estimated at $440,000, which is the extension along Scottslawn Road. Professional fees of $484,880 would be the design fees for water & sewer. In order to get the part of the southwest trunk sewer done for the JRS site, we need to design more of the southwest trunk, which is where the $2M comes in. That would design the southwest trunk all the way over to Southard Road. We wouldn’t have to build all that, just design it. We could design in phases. The $2M for engineering will have to be incurred this year. The $484,880 will offset a portion of that. City’s responsibility is $1.5M and that $1.5M is built into the model done by John Mastraccio, with the grant included in our obligation to that grant on the wastewater side, and in the business assessment to be sure the rates did not have to go up any more than what City was committed to. Construction will begin next year. Grant agreement states project will be done or significantly done by the end of 2009. There is an opportunity for an extension if the project has begun. Mr. Fogt asked how the City can justify that amount. We’re trying to attract a business in there and hopefully will get our $1.5 money back. Ms. House said that money would have to have been spent to design the southwest trunk sewer regardless. Readying that site gives the City a better opportunity to pay it off earlier. In addition to the grant money for the City, also included in the grant is $781,000 for extending natural gas to the site and around $28,000 for extending additional electric to the site. Ms. House said the only impact that the City didn’t expect is we’re doing it earlier. The Southwest trunk sewer was not projected to be designed until 2009.

· Funding for K-mart Wastewater Pump Station Elimination Project

Ms. House stated $330,000 was in last year’s budget to eliminate the lift station located at K-mart. It’s an antiquated lift station and is not safe. In addition to eliminating that lift station, it would also bring service to several properties that do not have sewer service presently on Main Street, that were annexed many years ago. The project was designed and the bids came in at over $700,000 as opposed to the $330,000 that was budgeted. Because part of this goes through the old landfill area plus the wastewater plant, City asked them to do trenchless technology. Discussion has been held with the consultant and have come up with a method designed to use open cut methods and satisfy EPA concerns, while lowering the cost. The cost is now $509,000, which includes inspection costs, additional engineering and easement costs. Ms. House said there is $30,000 in this year’s budget for the easement acquisitions. The intent was to do this project with cash on hand. Mr. Morehart said $2M was budgeted in the Sewer Improvement fund, which included cash to fund with assumptions of $540,000 from the operating fund, which will happen, then about $650,000 from tap-fee revenue, so that makes about $1.1/$1.2M difference, which is about $900,000 which will be funded from the cash reserves that we had in the end of 2006. He now sees the $540,000 for the transfer from the operating fund will occur. The tap-fee revenue is way down, which is consistent with the situation we’re in right now. His concern is whether the City can fund the $2M that’s in the budget, plus this $540,000 for this particular project. We may have to go back and look at the budget to see if there is something in the budget that we may not want to do this year to be able to come up with this $540,000 re-prioritize the capital projects that are in the budget and include this $540,000. Ms. House said they may or may not be back with an appropriation to fund this. No money will be borrowed. The project won’t be done until the City has the money. Administration will keep the committee updated.

The meeting adjourned at 7:10 p.m.