NHA | ADVISORS Strategy. Innovation. Solutions. Pajaro Valley Water Management Agency Financial Review and Initial Assessment October 22, 2014

NHA |ADV I SORSStrategy. Innovation. Solutions.

Pajaro Valley Water Management AgencyFinancial Review and Initial Assessment

October 22, 2014


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Discussion Points NHA Advisors – Who Are We? Approach to Financial Assessment Agency Reserve & Capital Planning Policies Agency Debt Obligations Debt Covenants Refinancing Options Next Steps/Process Municipal Market Update



Who Are We?


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NHA Advisors – Independent Municipal Advisors Finance Experts Advising California Public Agencies Focus on Planning and Policies Related to Capital and Operating

Expenses Funding Solutions Include:

Grants Internal sources Subsidized loan programs Bank/capital providers Traditional bond financing

NHA Is Not An Underwriter or Advocate for “Bond” Financing NHA has a Fiduciary Responsibility to Act in the Best Interest of Our

Clients



Approach to Financial Assessment


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Components of Financial Assessment

Reserve Policies (Capital & Operating)

Existing Fund Balances

Near-Term Capital Needs

Revenue/Rate Structures

Existing Debt Obligations

Alternatives for Refinancing

What are:



Agency Reserve & Capital Planning Policies


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Reserve Policies/Considerations General Reserve (Economic Uncertainty)

Typically 3%-5% of general fund

Operating Reserve 3-6 months of annual operating expenditures

Rate Stabilization Reserve Only used for revenue-secured debt obligations

Capital Replacement Reserve Typically calculated based on annual capital appropriation



Agency Debt Obligations


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Debt Summary

$53 Million of Outstanding Debt Total combined annual payment: $4.1 million for next two years and $4.9

million thereafter (through 2037)

All except for the Watsonville 2007 Water Revenue Bonds (2016) can be redeemed (“called”) anytime without penalty

Debt ObligationIssued

AmountOutstanding

AmountCoupon Range Final Maturity

Call/Prepayment Feature Annual Payment

1999A COPs $19,725,000 $13,620,000 5.5% to 5.75% 3/1/2029 Anytime at 0% penalty $1,377,119

1999 SWRCB Loan $11,650,000 $6,029,218 2.7% 12/17/2022 Anytime at 0% penalty $763,561

2003 SWRCB Loan $6,214,989 $3,590,404 2.7% 11/21/2023 Anytime at 0% penalty $414,486

2005 DWR Loan $3,511,446 $2,467,689 2.4% 9/30/2027 Anytime at 0% penalty $222,098

2007 Water Bonds (City of Watsonville) $27,345,000 $27,345,000 4% to 5.1% 5/15/2037 2016 at 0%

penalty$1.3mm (2015-16); $2.1mm (2017-37)

Subtotal $68,446,435 $53,052,312 $4.1mm (2015-16)$4.9mm (2017-37)



Debt Covenants


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1999A Certificates of Participation Installment Purchase Agreement: All Revenues pledged to the payment

of the 1999A Installment Payments Installment Payments payable from Net Revenues of the Agency

Net Revenues = Total Revenues less Operations and Maintenance Costs

Rate Covenant: Agency shall fix, prescribe and fix rates and charges for water service such that Net Revenues are at least 125% of that fiscal year’s debt service

Additional Bonds Test: Agency can issue additional bonds if prior year (and estimated future) Net Revenues equal at least 125% of annual debt service

Reserve Fund: Must maintain DSRF at maximum annual debt service ($1,379,737.50) Requirement currently satisfied with a surety bond


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SWRCB Loans (1999 & 2003) Future Debt: All future debt incurred by the Agency shall

be on parity with, or subordinate to, these loan obligations

Prepayment: Agency can prepay prepay all or any portion of the outstanding principal amount of the loans at any time without penalty


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DWR Loan (2005) No additional loans issued with higher priority without prior written

consent of the State Must levy and collect assessments in an amount necessary to operate

and maintain the project and meet the payments of the loan Agency must continue operating Project in an efficient and economical

manner, providing for repairs, renewals, and replacements necessary Must establish dedicated revenue source for repayment of the loan Must maintain Fiscal Agent, Fiscal Services Agreement, and dedicated

repayment account Agency agrees to grant to the State security interests in real and

personal property as necessary to secure obligations Reserve Fund (1 year debt service) accumulated over 10 years


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City of Watsonville Obligation (2007) Not a Direct Obligation of Agency Not Subject to Rate/Coverage Covenant City holds Grant Funds that can be used to redeem a

portion of obligation Subject to full or partial redemption in 2016 Agency may execute refinancing in 2016 if interest rates

are lower than 2007 interest rates



Refinancing Options


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Debt Refinancing Options Evaluate ALL Agency Obligations Take Into Consideration Project Needs Incorporate Financing Options into Rate Study


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Refunding Scenarios Refund 1999 Certificates of Participation (“COPs”)

Annual savings of $199,000 through 2029 NPV savings: $2,270,000

Refund Two State Water Resources Control Board (“SWRCB”) Loans Annual savings of $1,500 through 2024 NPV savings: $63,000

Refund Department of Water Resources (“DWR”) Loan Annual loss of $13,500 through 2028 NPV loss: $99,000


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Additional Information All scenarios assume that a Reserve Fund is required

Investors may not require a Reserve Fund, which would increase savings

DWR loan refunding may be beneficial even with negative savings Refunding all outstanding debt gives Agency the ability to alter

rate covenants and coverage requirements



Next Steps


Process for Refinancing and Funding Projects Reserve & Capital Policy Discussion Complete Rate Study and 218 Process Identify Project Timing Develop Financing Plan and Legal Documents Agency Board Approval of Financing Documents Solicit Bids for Financing/Lock Interest Rates Refinance Debt/Fund Project

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Municipal Market Update


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Municipal Market Update Tax-Exempt Volume is Down (below historical averages) Treasury Yields

10-Year Treasury approximately 2.20% 30-Year Treasury approximately 2.95%

Bond Investors Public agency financials improving (better credit) Interest rates appear to be holding Community banks continue to invest In tax-exempt securities (looking to

shorter-term maturities) Traditional municipal investors creating demand higher than supply SEC/MSRB demanding more due diligence and disclosure information in

offering documents