With its letter of credit hopes diminishing, it appears the City of Corcoran will be looking for a fixed rate financing package to pay off the bonds used to build its water treatment plant.
The city is still struggling to meet deadlines on the issue, which has already resulted in one water rate increase for local customers, and is expected to result in another after the beginning of the fiscal year in July. A water rate study is currently being conducted to determine how much money will be needed to provide water to the community, while leaving an extra allocation to pay back some $16 million in bonds issued in 2008 to construct the water treatment plant.
The severe California drought over the past four years has pushed the issue to the forefront. As the city began intensive water conservation programs, as mandated by the state, water revenues for the city have decreased. That’s because approximately half the city’s water users are on metered services, dropping their water bills as those users drop water usage.
The city was constrained by tenants of its bond payment package to maintain 120 percent of its annual payment in water rate collections. City staff noted earlier in the fiscal year that it would not meet that goal, placing in jeopardy a letter of credit that bolstered its strong repayment stance. To add insult to injury, the city saw its financial rating slide from an A+ to an A while watching the date approach for renewing its letter of credit. (The letter of credit was never actually used, but was a stool to back up the city’s debt position).
The letter of credit has been extended for three months, but will not be renewed. The city is now scrambling to replace its financing package for the bonds.
During a special council meeting held last week, the option of switching from a variable interest rate package to a fixed interest rate got the nod from the council. According to City Manager Kindon Meik, the full benefit or impact of restructuring the bonds will be determined now that council has given that direction. It’s not expected to be cheap, but there also appear to be few choices.
The city is still on the hook for over $16 million on the bonds. And, in addition to the bonds, the city entered into a fixed payer swap with Piper Jaffrey Financial Products (PJFP) to whom it pays 3.72 percent as the swap provider.
The city’s current financial advisor, NHA Advisors, has recommended the city moved to a fixed rate bond, due to current low interest rates. However, in doing so, the city will have to pay Jaffrey $3.72 million as a swap termination payment. NHA said the fixed interest rate option is estimated to cost about $1 million more over the next 20 years of bond repayment.
The fixed rate, however, would reduce risk to the city have having to continually renew a letter of credit.
City staf and NHA are expected to return with a finalized repayment package that will outline actual costs.