FINANCE COMMITTEE

FINANCE COMMITTEE MEETING

SEPTEMBER 20, 2005

The meeting was called to order by Dan Fogt at 5:30 p.m.

MEMBERS PRESENT: Dan Fogt, Ed Pleasant, Nevin Taylor

OTHERS PRESENT: Kathy House, Phil Roush, John Morehart, John Green, Tracie Davies, Doris McCarty, David Creviston, Tom Bulcher, John Mastracchio, Ryan Horns, Steve Stolte, Jenny Snapp, Andy Brossart, Don Bergwall, Lloyd Baker

Agenda:

1) 2004 Audit Update

Mr. Morehart reported that the 2004 Audit has been completed. A post-audit review was requested for the October 11^th Finance Committee Meeting.

2) Trash Collection Contract

Mr. Morehart stated the trash contract expires at the end of this year. He distributed copies of info that was distributed to the bidders. It was done a little differently this year, giving them two options to bid if they so choose. Bid 1 will continue with the current volume base pricing arrangement; Bid 2 will be as if the City would make some changes to that, possibly consider changes to the volume base pricing such as a flat rate or any other alternative to the current volume based pricing. Preliminary discussion with the Mayor indicates he has some reservations about changing the current arrangement, but did give the green light to proceed with at least soliciting a second bid. There are advantages and disadvantages to both. Volume based pricing has been in effect since the early 90’s. Bids will be opened on September 26^th. No bids have been received to date.

Mr. Creviston questioned why the Board of Control opens the bids. Feels Council should be in control of the contract and award the contract. Feels there are numerous problems, Codified Ordinance is outdated, typos in the contract, Mayor can’t make the award; he’s the signatory agent, director of administration should not make decision to approve a sublet of the contract. He asked the City to withdraw the bids.

3) LUC Planning Commission Membership

Ms. House distributed information from LUC and MORPC showing the benefits and resources available to the City from each organization, as well as the cost for membership. She has been very pleased with services from MORPC. Feels LUC offers some resources that are not available through MORPC. A lot of services

available through MORPC are not needed due to the City’s in-house resources. She suggesting setting aside some money in the budget for memberships in both. Possibly talk to LUC about a modified type of membership which would limit some services or privileges, but would allow the City to be involved or be an active participant with both associations.

Memberships are based on per capita for our population. Each organization calculates population a little differently. Per capita through MORPC is $.43 and LUC is $.82.

Steve Stolte, County Engineer, addressed the Committee. He is convinced that not enough effort is put into planning at either the County or City level. The City and County spend substantial dollars on economic development, but spend a pittance on planning. Cost to the City for membership to LUC would be about $14,000. The County spends about $23,000 for planning through LUC. Feels more should be spent. Believes the first step the City should take is to become an active member in LUC. The City needs to have input at the County and Regional level. LUC is a partnership of local governments, partnership of all political jurisdictions in the three counties; it provides an opportunity for all those local governments to interact and learn from one another. He encouraged the City to become an active member in LUC and be at the table to help change LUC so it benefits the City and Union County to the maximum.

Mr. Fogt asked, since Marysville is not a member of LUC, if it had any influence on anything happening outside the City. Mr. Stolte said no. If the City was a member of LUC, it would have a vote on anything happening outside the City. Mr. Fogt noted that as a big advantage, but $13,000 is quite a bit of money. He agreed with Mr. Stolte that we need to plan better and noted the comprehensive plan is old. Probably need a new comprehensive plan which the City and County could work on together.

Jenny Snapp, Director of Planning for LUC, addressed the Committee. LUC has continued to grow and increase services over the last couple of years. Feels LUC membership provides a lot of expertise on various issues. The value of the LUC organization and the membership is in the inter-governmental communications and also the networking and being a part of the community.

4) Sewer Rate Discussion

Mr. Tom Bulcher and Mr. John Mastracchio attended representing Malcolm Pirnie. Mr. Mastracchio showed the committee how they arrived at the proposed sewer rate increases. He also shared a couple of alternatives that were considered, but not proposed.

Financial model #1 - Since City is issuing bond anticipation notes to pay for the majority of the sewer improvements, Malcolm Pirnie has established a debt service coverage target. Coverage is the amount above the debt service that needs to be maintained in order to satisfy the note and bond holders. The rates are set with a coverage requirement of 1.1, meaning that you need to have that .1 extra in revenue associated with providing that security to the note and bond holders. That is one of the constraints that is being shown.

The other constraint is the capital improvement program that has been developed. In FY2006, chart shows $115M in capital projects associated with the new wastewater treatment plant, as well as other piping infrastructure plus some capital outlay. FY2009, $35M for some additional improvements that have been identified through the master study process completed last year. It’s a combination of the coverage requirements, the capital improvement program and working capital, which is cash available to fund projects that drive the rate increase requirements down. He noted rate revenue increases of 17-1/2 in FY2006 and 17.1 in 2007 & 2008 to pay for these projects. He noted it was pretty level across the three years. One of the things that was considered when that was generated was not having a more significant spike in one of those three years. It was considered to smooth out the rate increase requirements over those three years. He showed a model without the smoothing approach with rates calculated in a just-in-time basis.

Mr. Pleasant noted the three spikes with the fourth and fifth year being lower. What affect does five years of equalization do vs. the three spikes and two lower years? Mr. Mastraccho stated one of the problems with spreading it out over five years is that you actually need the money earlier. Spreading it out over five years is difficult because of the constraints you have in those earlier years.

Financial model #2 – (eliminating the smoothing) Shows a very small rate increase in 2006, but the problem is 2007 and 2008 with a 30% rate in 2007 and a 23% rate increase in 2008. Instead of having these two years of large increases, felt it would make sense to smooth out the rates over the three year period and generate a little bit more cash that could be used to fund some of the projects later on.

Mr. Pleasant asked, over the five-year period, is there an increase percentage of one model over another. Response: From a financial standpoint, they are equivalent.

Mr. Fogt asked Mr. Brossart (5/3 Securities) if there was any preference? He responded that this is driven by the City’s ability to place this debt in the market. He set the model up as they started through this process and are at the barebones minimum for coverage factors for what the market will allow. He said they squeaked by the 110 coverage factor in Chicago with the rating analyst when they rated the debt for the issue. One question that came up was where the rates were at, because they saw the glooming issue coming down the pipeline and were concerned as to what was going on. It would be cost prohibitive to the City to have rates that don’t start until 2007 as compared to 2006. It’s important to have 2006, 2007 and 2008 in place, so we have the ability to not have to pay any principal back on the $110/115M until 2008 or 2009. Mr. Fogt asked why are we not paying principal back. Response was if you were amortizing this issue up front in 2007, you would be looking at much higher rates than what are being proposed. The other issue is that as construction goes on, they don’t want to go to bonds too early and the fact they don’t want to bond everything up front. Hopefully the project comes in below cost and you can decrease the amount of your borrowing at that point in time, then go into bonds at that point.

Per Mr. Pleasant’s request, Mr. Brossart gave a little background/history of his involvement with the City of Marysville. He has worked with the city for about eight years, helping the city put documents together, the proformas, the financials, the fiscal statements, getting the City ready to go to the capital markets. In the municipal world, you cannot go to a bank directly and get a loan for twenty years for these kinds of dollars. Municipalities come to underwriters, such as 5/3 Securities, to get the City set up in the best manner possible to access the capital markets cheaply. Come the day of sale, this issue goes out to the market place for all kinds of different investors to bid on across the world, and those buyers who are willing to pay the lowest interest rate, get the bonds. It’s not a 5/3 Securities loan; it’s a 5/3 Securities underwriting to folks who are willing to invest in your community and to your sewer system because of the proformas, showing that the money will be paid back and the system will be well run and operated efficiently. Mr. Brossart is clear on the needs of Marysville. He pointed out an integral point to this whole financing program is the residential incentive districts that were put in place. Without the residential incentive districts, looking at 31% increases for three years. The tax reform bill tried to take it all away from cities. The groundwork has been set for different aspects that the City is able to slide in under so that those residential incentive districts stay in place. He is going to slide these into three exemption areas so they cannot be taken away. After January 1, 2006, no municipality is going to want to be involved in one of those deals again. The law has been restructured to make them very difficult to do. The two areas that 5/3 is currently working on to preserve the incentive districts are developer agreements with developers of the subdivisions, and the provision that allows you to exempt out of is whether or not you have debt outstanding at the end of the year and if they take away this provision, does it hurt your ability to pay back that debt.

Mr. Pleasant asked if there were any other possibilities to help lower any of the percentages. Mr. Brossart responded currently not. You always have the ability to do tap-in fees, but the problem with those is when anyone investing in your bonds looks at those, those are one time hits and if your growth does not continue to expand, that revenue stream might shrink. The only guarantee that they are going to get their money back is through the rates charged to the customers. The tap-in fees should be in place to help pay or buy down any future borrowings in the future to help keep the rates down. This model indicates that in the future those will come in over time, but in terms for this rate increase now, that’s not going to be an immediate impact. It will be an impact for future growth of the system to help pay for that. Tap-in fees are part of the formula, but not just the major portion. The 110 coverage factor is set up in a way at the bare minimum for where the rates can be too and where tap-in fees can be at as well.

Mr. Pleasant asked if tap-in fees are increased and we have an above average number of tap-in fees, called excess off of the model, does that affect the overall end product. Does it affect the overall length of pay down of debt? Mr. Brossart responded that in the future if the City had excess cash flow coming in, you could pay down. It would help to keep the rate increases down after this five-year period.

Mr. Fogt asked Mr. Brossart if other cities used impact fees to help with wastewater treatment plants. Mr. Brossart responded that he has been told over and over that impact fees in the state of Ohio are illegal. You are in the same situation with tap-in fees, it’s a one-time hit and the future goal is to help keep the borrowings down in the future, because the cash fund will grow and can be used for those purposes. The only thing left are the rates and tap-in fees to help with future issues down the road.

Mr. Pleasant asked Mr. Mastracchio to give a little background on his position with Malcolm Pirnie. He works with Malcolm Pirnie’s financial services practice. Has worked for Malcolm Pirnie for about 3-1/2 years. Prior to that, he worked for Arthur Anderson. He has been working with Marysville from the beginning of the Master Study up to this point. He exclusively does this type of work for utilities helping with financial planning, master plans and rate setting.

Mr. Pleasant asked if he saw anything that was being overlooked? He does not see anything that can be done to lower the rates with the constraint that tap-in revenues cannot be used towards coverage. Since that’s the case, increasing tap-in fees will potentially increase cash balances for future expenditures, but won’t do anything to reduce those rate increases in the short term.

Mr. Fogt asked Mr. Brossart if we were to level off the increases a little more over the five years, i.e. 12% increase per year over five years, would that hurt the City’s borrowing ability or rating? Mr. Mastracchio responded that 12% over five years would mean that coverage requirements would not be met in all five years and felt the note and bond holders would have a problem with it. Mr. Brossart added that it would be in violation of the Master Trust Indenture that the City must sign into when bonds are issued. We’re at the minimum 110 coverage factor that the market allows at this time.

If we go below the 110 coverage factor and you don’t come back and raise your rates, then they can come in and force you to do that. Mr. Mastracchio said that the rates being proposed are at the minimum in order to meet all requirements.

Mr. Don Bergwall addressed the Committee. There is no question in his mind that rates will have to be significantly increased and that it will be an ongoing program. He expressed a concern in the interest of being as fair as possible overall, and noted articles of foreclosures of homes. When a home goes into foreclosure, he asked who would be paying the sewer and water for that vacant home. In cases likes these, revenues would not be received as forecasted. Another concern is impact fees and not being able to (inaudible). He noted the City has a Parkland Fee for every new development. This provides for the expansion, acquisition and maintenance of parks. He does not understand why the City can’t have an infrastructure fee that can provide for specific items on improvements in the infrastructure of the City such as, wastewater treatments, streets, etc. Possibly specific items could be listed as a use for these funds. Something else that should be considered is whether the tap-in fees are really adequate. He realizes they must be justified, but they need to be reviewed. The tap-in fees for residents are based on a line, a meter and one equivalent residential fee. When you have multiple units, such as an apartment complex, rates are structured on the meter size. He gave an example of a 90-unit apartment complex which has a 3” meter supply to that complex, so they are paying for 15 equivalent meter fees for a 3” line. There are 90 units consuming water, dumping sewage, and they are paying the equivalent of 15 residents. He does not feel this is equal or fair to long-time residents of Marysville to see more growth along those lines, paying those kinds of fees, as opposed to getting it more equalized. He’s merely looking for opportunities to create some revenue, and if it slows down growth, it doesn’t seem like it would be a real deterrent to this, but at least we’re doing more of a fair-share pay.

Mr. Fogt noted Mr. Mastracchio had done a comparison of tap-in fees with other central Ohio cities. Knowing that the tap-in fees must be justified, he asked Mr. Mastracchio if he felt the City could do it? He responded that if you include the cost of building infrastructure to serve new growth in the tap-in fee and you take a look at the cost associated with that, as well as the number of equivalent new connections that will come in to be served by that capacity, you can come up with a fairly good estimate of whether your tap-in fees are appropriately priced. From a comparison standpoint, that analysis has been done in other communities in Ohio and Marysville’s tap-in fees are in line with that type of pricing, so tap-in fees would include the cost of providing service to new customers. That conclusion was drawn as part of the master study at that time. Since the completion of the master study, that evaluation has not been revisited. He offered to take another look at it to see if an increase or decrease is appropriate. He mentioned that regardless of whether the city’s tap-in fees should be slightly higher or lower, based on that analysis, due to the bond requirements, in the short term, it will

have no affect on rate increases. Mr. Fogt and Mr. Pleasant would like to take another look at the tap-in fees.

Mr. Fogt asked how tap-in fees are distributed. The money from tap-in fees is used for only capital projects, no maintenance. There are four separate capital funds, two capital funds for water and sewer and two incremental funds for capital improvements.

Mr. Steve Stolte addressed the Committee. He stated he was impressed with the level of detail and effort that everyone has put into this in examining the different alternatives. It’s never easy to raise rates. He appreciated the hard questions asked by the Committee.

Mr. Tom Bulcher, Malcolm Pirnie. He has been the project manager for all the wastewater projects for the City over the last two years. He provided comments for the city’s NPDS permit renewal then project manager for the wastewater master study and currently is project manager for the wastewater facility’s design.

Mr. Fogt asked Mr. Bulcher if he felt the City was doing it the right way, not cutting corners, etc. Mr. Bulcher agreed. It’s the correct way and the practical way. Currently looking at building a 6 MGP with a possibility of taking bids for an 8 MGP. If price for the 8 MGP comes in reasonable, will build an 8 MGP.

Ms. Doris McCarty addressed the Committee. She asked if this new plant is built, was the future projected growth of Marysville taken into account? Response was yes. Mr. Bulcher stated when looking at the master study, they recommended purchase of a site that would accommodate growth for the next 40 years. Potentially there is room on this site to treat up to 24 MGD, which is not anticipated anywhere in the near future. It is set up to expand in even increments. The plant is being set up so it can be readily expanded in a very orderly fashion.

Mr. Fogt stated the $110M is for the initial construction and the collection pipe going from the old plant to the new plant. In 2010, there is a plan to put another pipe in, which would go from the cemetery out around the western edge of the city, around Timber Trails to Industrial Parkway. That would be an additional cost. Mr. Roush added the Master Plan identified about $220M worth of projects that would be needed over the next 16 years. All have been factored into the financial analysis. The city has anticipated not only the initial $110M to get started, but another $110M over the next 15 years to continue to keep pace with the anticipated growth. All variables out there that could affect us for the next 20-40 years have been taken into account. Mr. Fogt noted that is why it’s important to increase tap-in fees now, in order to build up our reserves for ten years down the road.

Mr. Fogt asked if there were any other spikes expected in those next 16-20 years? Mr. Mastracchio said there is another spike in 2011 or 2012, depending on when plant expansion occurs, to pay for that second $110M. Growth will dictate when that will occur. He recommended monitoring growth, the timing of when the capital improvements need to be made and look for ways, such as making sure tap-in fees are appropriately priced, so that you mitigate and minimize the rate impacts over the long term.

Mr. Bergwall stated from the comments just made, growth needs to pay for growth in the future. This $110 million dollars should not be a burden on the existing community of Marysville; it should be a burden on the growth that created the need for the expansion. He feels there has been a lot of good work done and a lot of effort made to minimize the impact to the City to end up with something that not only accommodates the near term, but long term needs. He applauded the efforts that everyone has put forward. Definitely need to look at tap-in fees and impact fees so that future burden is not placed on existing citizens.

Mr. Andy Brossart commented that he lives in Cincinnati, next to Warren County, second fastest growing county in the state, next to Delaware. There are initiatives going on with their legislators to try to get those in place. He urged everyone to get a hold of their legislators and express to them how important it is to you. They are seeing the same problems, water and sewer growth.

Mr. Lloyd Baker addressed the committee. He agreed with Mr. Stolte’s comments on the poor planning that has occurred throughout recent history in the city and noted the Rt. 38 relocation project. He mentioned a comment made by Mr. Marshall for the potential for this becoming a “cash cow”. He shared those concerns. How monitored is this project going to be for quality assurance to make sure along the way that we do get what is needed. Feels it’s very important on this project that there be adequate internal controls and monitoring as this project develops, which has not been done in the past.

In closing, Mr. Fogt commented he feels Malcolm Pirnie is a top-notch engineering firm. Feels they are looking at every aspect and they will do top quality work. Feels the construction will be monitored as well to a high degree. “We can’t do this wrong. If we do this wrong, it’s just going to be terrible.”

Meeting adjourned at 7:00 p.m.