There’s good news and bad news in regard to the city’s massive $44 million sewer system loan. The bad news: The city doesn’t have enough money to make its annual payment. The good news: Assistance could be on the way.
A bleak report on the Crescent City sewer’s debt situation has the city requesting financial assistance from the state for the loan’s $2.2 million annual debt service payments, $1.1 million of which is an interest payment that the city can’t pay, putting the loan in technical default. City Manager Gene Palazzo said that the assistance request, which involves putting the city on a workout plan that aims to lower the interest payments to 0 percent as well as move to a graduated payment plan, has received “positive feedback” from the state, but for now “they haven’t approved anything.”
The approval, or any response, for that matter, will probably come in October, Palazzo said, when the State Water Resources Control Board has its monthly meeting.
“We’re hoping they say, ‘Yes, we realize your situation. We’re going to modify our agreement and have you pay just the principal, not the interest.’ Hopefully, they do that,” Palazzo said. “When we were working with their staff, it sounded like they would support that. I don’t know that as a fact till I see their report in October.”
The assistance request, which came in the form of a letter that the City Council gave its unanimous approval to send at its meeting this week, describes the wastewater system as “in a depleted financial condition” whose debt payment consumes 50 percent of user revenue and leaves the system with insufficient cash flow for operations, among other expenditures.
“This 2007 loan has become an unworkable financial burden on the Wastewater System’s small customer base in this economically disadvantaged community,” reads the city’s letter addressed to the State Water Resources Control Board’s financial department.
The 12-page letter goes on to request financial assistance through loan modification, which, along with exactly how burdensome a $44 million loan is on a small city like Crescent City, was a primary focus of both the letter and the presentation at the council meeting.
“A $44 million loan for a city this size is really almost a shocking level,” said Susan Mayer, who served as the city’s interim finance director in 2013 and is part of a team that city staff put together to analyze the options the city has to deal with the loan. “It’s quite a burden and quite a challenge for a community of this size to attempt to repay a $44 million loan. You would typically see this size of loan with a much larger population base to support it.”
In order to begin digging out of this debt hole, the city’s team, which includes Mayer, Public Works Director Eric Wier, Finance Director Emily Boyd, Utilities Manager Tom Romesburg and Willdan Consulting, represented at the meeting by consultant Jonathan Banks, came up with six loan modification scenarios, as well as a specific proposal that sets the city on course to pay off the loan over the course of 30 years — an extended payment term that economically disadvantaged communities qualify for. The normal term would be 20 years, according to Mayer.
“But even with that 30 years it’s still a challenge,” Mayer said.
The modification proposal is centered around adjusting the interest rate, currently at 2.4 percent, to zero. Interest payments since 2007, when the city took out the loan, are also proposed to be credited to the loan balance.
Additionally, the proposal recommends turning to a “graduated principal amortization schedule,” which, after the upcoming August 1 principal payment of $1.1 million (in accordance with the original loan repayment plan), will put the city’s annual payments on course to increase 4 percent annually after an initial $800,000 payment starting next year. This would bring about a “very significant” $18 million in debt service savings, according to the proposal. The 4-percent annual increases correspond with 4.5-percent annual increases in user fees — another element of the modification proposal — which, numbers aside, means more sewer rate hikes for users.
The 4.5-percent annual increase would take place over the next five years — “it’s hard to crystal ball beyond five years,” Palazzo said — and most immediately, in 2016, would be an increase to $3.34 cents a month, according to Finance Director Emily Boyd. Then the next year it would increase to $3.49.
The most recent increase, which took effect July 2, raised rates by 3.6 percent.
“It goes up just a few pennies every year,” Boyd said.
Obviously, more rate increases might not sit well with the city’s customers, as illustrated by frustrated comments from the public during the council meeting.
“You guys should feel ashamed of yourselves because you put the city in this mess,” Linda Sutter said. “Not the citizens of the city, but you folks did.”
Councilman Richard Enea refuted that statement, saying that even though he wasn’t on the council when the loan was taken out, he still would have voted yes to avoid fines from the state for violating state environmental regulations, as the old plant did.
“I’ll tell you what the chain of events were — 26 years of doing nothing, back in the ’70s or ’80s,” Enea said, in reference to decades of council inaction regarding old wastewater treatment practices and facilities that brought about a cease and desist letter from the state in 1997 and was rescinded in 2011. “And that’s on prior councils, not on this council. When I got on this council in 2010 we wanted to bring things current, and we’re doing that. We had to do it because we were going to be fined by the state. If we did nothing for all these years that plant would cost 68 million. And so we’re trying to figure a way out of this. There’s nothing new in this report.”
Sutter, as well as Donna Westfall, another member of the public who commented, also brought up a doomsday-scenario $154 monthly fee that users would refuse to pay, they said. The fees would rise to that amount if the city continued on its current course without any loan modifications — “what we would need from users if nothing happens,” Palazzo said.
However, Mayor Rick Holley was quick to assure the audience that wouldn’t happen.
“What I’m afraid of is that people are going to take away a sound bite,” Holley said at the end of the discussion. “And what they’re going to take away is 154 dollars a month. That’s not being proposed here. Our staff and our consultants have been working on this for months to get this down so it’s palatable for everyone. I encourage anyone to go into our website and actually read the documentation that’s in there. Gather as much information as you can and don’t depend on misinformation and sound bites.”