Authorize Transfers from the Water Operating Fund and Drinking Water State Revolving Fund Totaling $18,347,543.06 to the Water Priority Lien and Water Subordinate Lien Debt Service Funds and Adopt Appropriation Ordinances (ALL COUNCIL DISTRICTS)

It is recommended that the City Council:

1.  Adopt the attached appropriation ordinance increasing estimated receipts and appropriations in the Water and Sewer Operating Fund in the amount of $15,000,000.00 from increased revenues;

2.  Authorize transfer of $15,000,000.00 from the Water and Sewer Operating Fund to the Water and Sewer Priority Lien Debt Service Fund to support an initiative to fulfill transfer and fund balance / net position covenants as laid out in the bond documents;

3.  Adopt the attached appropriation ordinance increasing estimated receipts and appropriations in the Water Priority Lien Debt Service Fund in the amount of $15,000,000.00 for the purpose of supporting the initiative to fulfill transfer and net position covenants as laid out in the bond documents; and

4.  Authorize transfer of $3,347,543.06 in excess proceeds from the Drinking Water State Revolving Fund, with $3,317,637.58 moving to the Water and Sewer Priority Lien Debt Service Fund and $29,905.48 moving to the Water and Sewer Subordinate Lien Debt Service Fund to support the initiative to fulfill transfer and net position covenants as laid out in the bond documents.

The purpose of this Mayor and Council Communication (M&C) is to take actions to enhance compliance with bond covenants of the Water and Sewer System Revenue Financing Program.

The Department of Financial Management Services, in conjunction with the Water Department, has completed a review of existing debt covenants and requirements associated with the System's current outstanding revenue bond issues. As a result of this review, it has been determined that the current balances maintained within the Water & Sewer Debt Service Funds (Priority Lien and Subordinate Lien) are below calculated requirements. The appropriations and transfers outlined within this M&C reallocate funds that are available within Fiscal Year 2018 as a result of positive operating results in the Water Department to the debt service funds to increase the balances within these funds.

The City's current practice includes budgeting funds required to meet the annual debt service obligations for each Fiscal Year, and then transferring that total via a series of equal monthly installments that commences on October 1 and continues through the subsequent and respective debt service payment date. In effect, the yearly transfer amounts have equaled the total principal and interest payments due for the Fiscal Year. While this practice has supported the timely payment of principal and interest of all bonds outstanding without missing a debt service payment, it is not in full compliance with the technical requirements of certain bond covenants.

The System's bond documents call for monthly installments of a portion of the subsequent principal and interest payments that are due, with those transfers to occur on an on-going basis from each principal or interest payment date to the next, resulting in a funding schedule that would cross Fiscal Years. As such, the actions outlined within this M&C will enhance the water debt service funds' covenant compliance.

On June 26, 2018, City Council approved M&C G-19310 to provide the City Manager with delegated authority to expedite the clean-up and closure of the City's legacy capital project funds; however, it did not provide the City Manager the authority to move excess proceeds to debt service funds. Rather than appropriating residuals in the Drinking Water State Revolving Fund and then transferring them to the debt service funds, staff proposes moving any excess revenues from the Drinking Water State Revolving Fund to the corresponding new debt service funds. This approach will simplify future monitoring and auditing of the funding sources by maintaining the distinct character of each. The movement of funds will not result in an increase of appropriations; however, it may be necessary to reduce appropriations in order to close out projects in the Drinking Water State Revolving Fund.

Providing the City Manager with delegated authority will allow the City to effectively clean-up and close the Drinking Water State Revolving Fund by moving excess proceeds to the respective debt service funds. Delegated authority shall end when the Drinking Water State Revolving Fund is closed.

This M&C does not request approval of a contract with a business entity.