December 8, 2003
M E M O R A N D U M
TO: Mayor Shirley Franklin
Council President Cathy Woolard
Members of City Council
FROM: Renay Blumenthal
SUBJECT: Financial Impact of 6 ccf Rate Structure
Attached is the Department of Finance’s analysis of the impact of the 6 ccf rate plan as passed by the City Council on
December 1, 2003. Specifically, attached are:
1. a written summary of the financial impact;
2. a graph showing the impact on debt coverage; and
3. a pro forma analysis for years 2004-2008 showing financial
detail.
As the attached analysis indicates, there are shortcomings of the 6 ccf plan stemming from the sustainability and viability of a $25 million budget reduction, the compounding of the revenue loss beyond the $25 million initially projected, and the resulting decline in the debt coverage ratio. As a result of these factors, taken over a five-year horizon, the 6 ccf rate structure is not adequate to support the water and wastewater fund at the levels needed for service delivery and for the City’s Capital Improvement Plan (CIP). More critical, the 6 ccf does not provide the capacity in 2004 to borrow the amounts necessary to fund the CIP at planned levels.
We are conducting similar analyses on the proposed 4 ccf rate plan. We are also analyzing the level of changes that would need to occur in either bond capacity, revenue enhancements and/or operating reductions to make both the 4 and 6 ccf plans viable with respect to being able to meet Consent Decree and other requirements. We hope to have these additional analyses completed as soon as possible.
cc: Rick Anderson, Chief Financial Officer
Linda DiSantis, City Attorney
Jack Ravan, Commissioner, Department of Watershed
Management
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FINANCIAL ANALYSIS OF 6 CCF RATE STRUCTURE
Overview
Taken over a five-year horizon, the 6 ccf rate structure is not adequate to support the water and wastewater fund at the levels needed for operations and for the City’s Capital Improvement Plan.
The 6 ccf plan does allow the City to meet its debt service payment in 2004 and meet required debt coverage ratios in 2004 on existing debt. However, assuming the CIP is funded at planned levels, our debt coverage ratio severely declines over the five-year period, impacting our ability to borrow. As a result, the 6 ccf rate plan will not support the future borrowing needed for the CIP.
· As discussed in the sections below, the shortcomings of the
6 ccf rate plan stem from:
- the compounding of the revenue loss;
- the impact of the $25 million budget reduction, which is
not sustainable to offset each year’s revenue loss and will also
impact service delivery;
- the declining debt coverage ratio, which would be below the
required 1.1 level by 2006. *
(* The City’s bond covenants require that income available for debt service payments exceed the amount of the debt payment by at least 10%, or a ratio of 1.1. The investment community typically likes to see this ratio at a higher level such as 1.2. If coverage drops below 1.1, the City stands in default of our bonds.)
Impact on Revenues
. Estimated revenue loss of $21.6 million in the first year (2004).
Originally estimated at $25 million based on a cursory
calculation conducted during the December 1 Council meeting,
the revenue loss has been refined based on the availability
of time to complete a more thorough and detailed analysis.
This update in data means that potentially $3.4 million of the
$25 million budget reduction could be restored. (That is, the
difference between $25 million and $21.6 million. For ease of
discussion, and until action is taken on the difference, this
document still refers to the $25 million.)
· This revenue loss compounds negatively to $88 million by
year five (2008).
· Specifically, the revenue losses by year are as follows:
2004 - $21.6 million
2005 - $52.5 million
2006 - $62.5 million
2007 - $74.7 million
2008 - $88.1 million
· These revenue losses reflect the forgone revenue that the 45,
45, 11, 11, 11 percent increases would have generated on the
first 6 ccfs of consumption. The losses also reflect
the estimated impact of greater conservation efforts by
ratepayers. (That is, since 6 ccfs are close to the average r
esidential usage of 8 ccfs, consumers may make a more
concerted effort to conserve in order to keep their
usage closer to 6 ccfs and keep their rates low.)
Impact on Budget and Service Delivery
· Council proposed a $25 million reduction to the Department of
Watershed Management (DWM) budget in 2004 to offset the
revenue loss. This reduction represents a 18.4% cut to
the budget (direct DWM operations only - does not include
support departments and indirect costs).
· A reduction of this magnitude will impact service delivery
to customers and will be detrimental to the DWM’s ability to
carry out and manage consent decree-related work.
· Additionally, the budget reduction only addressed the revenue
loss in the first year. The compounded revenue losses in years
2-5 have not been addressed and cannot practically be made
up by additional cuts to the budget. Revenue losses in years
2-5 would require total cumulative cuts to the budget of 38%,
46%, 55% and 65%, in each of those years respectively, which
are not practical.
· (Note: as information, reducing the budget to $21.6 million to
reflect the updated revenue loss figure represents a 15.8%
budget cut.)
Impact on Existing Bonds
· In the first year (2004), the City would be able to make the $93
million debt service payment. However, we would not be able to
make this payment without the $25 million reduction in O&M.
· The 6 ccf rate plan allows for a 1.19 debt coverage ratio in
the first year (2004). However, as will be discussed in the
section below and per the attached schedule, this ratio
declines over the five-year horizon and drops below the
required 1.1 ratio by 2006, assuming the CIP is funded at
planned levels and assuming the $25 million budget cut
remains in place for 2004 through 2008.
· If no other borrowing was done beyond the $1.7 billion that is
currently outstanding from the last bond issue in 2001, the 6
ccf plan does not threaten the City’s debt coverage ratio.
However, assuming no additional debt for the City means we
would not borrow the funding necessary for consent decree
projects thus putting us out of compliance.
Impact on Future Borrowing
· The 6 ccf rate plan will not support the future borrowing needed
to fund the CIP at current levels.
· Specifically, the 6 ccf plan results in a declining debt coverage
ratio of 1.15 in 2005, 1.07 in 2006, and 1.03 in each of the
years 2007 and 2008. At these levels, we would be in default
by 2006. Additionally, the declining ratios demonstrate that the
City does not have a solid five-year financial plan or revenue
stream. As a result, the City would not be able to adequately
demonstrate that it has the ability to support borrowing for the
planned CIP as we move forward to 2004.
· Additional analysis is still being conducted to determine at
what levels the CIP would need to be reduced and still meet
coverage levels. Although this analysis is not complete, we
do know that it would necessitate the reduction of the CIP from
the planned $2.5 billion for years 2004 through 2008 and may
indicate that the CIP would need to be reduced beyond what i
required for the consent decrees.
Attachments:
1. Graph - Impact of 6 ccf plan on debt coverage ratio
2. Pro forma for years 2004-2008 showing detail of 6 ccf impact
Click here to view attachments
.