City Council Meeting

J.C. MartinezstaffThank you, Mayor, Council. TONIGHT WE HAVE DAVENPORT, SPECIFICALLY MR. LUX AND MR. SACKS WHO WILL BE PRESENTING TWO OF THE THREE PRESENTATIONS. OF THE PRESENTATIONS, ONE WILL DEAL WITH THE GENERAL FUND FY27 PLAN OF FINANCE SPECIFICALLY ON CAPITAL. THE OTHER ONE WILL BE ON WASTEWATER FUND ANALYSIS AND THE THIRD ONE WILL BE ON THE STORMWATER UTILITY UPDATE AS WELL. happy to answer any questions during those presentations or any time after those presentations as well again we have Kyle Lux from Davenport with the city having a 25 year relationship with Davenport who have really walked us through the financing also they were a part of the city when we were upgraded from our double A to our triple A bond ratings as well so with that being said

Kyle LuxVery good. Thank you, Mr. Martinez and Mayor, members of Council, nice to see you this evening as always. And again, Kyle Lux with Davenport. So we have a couple different presentations, really I think two that we'll handle and then one your staff will handle. We'll start with the general fund, as we've called it, FY27 plan of finance. And so what we're really asked to do, knowing that you are in your budget deliberation process now, is bring forward the general plan, the timeframe, the process we'd go through for financing the bond portion, meaning the bond funded portion of your FY27 proposed CIP. So we'll talk through that. I think I would say at the outset this really comes at the culmination of the last several

We're not here to lend any dollars, so forth and so on, but we've appreciated that roughly 25 years. It might even be more helping you as a city think through and plan for these important types of projects and initiatives. So, we note that in terms of the background. I think we can go to the next page. So the two components of your proposed CIP that for the moment we're talking about the general fund. So our second presentation we'll talk about a sewer. But for the moment we're talking about the general fund like we've discussed in the past what we call the tax supported portion of your capital improvement program. It's really two-fold that is contemplated in the proposed budget and CIP. You see them highlighted there in the middle of the page.

Thomas PetersonI understand it correctly, even though the public facility bonds are sometimes I think called revenue bonds, short-handedly, even though they're called that it's not necessarily the case that there is a requirement to have an earmarked set of revenues that are independent of general fund for instance gate receipts things like that we we don't have that requirement we have flexibility uh

Kyle Luxthat that's correct i think one when we get to the second presentation we'll talk about what true revenue bonds meaning we'll talk about that in the second presentation but these public facility revenue bonds you're correct in so far as there's not a requirement that you have an earmarked revenue stream to pay for those there is a requirement that you have the dollars in your general fund debt service budget appropriated to make the debt service payments but it's different than the revenue bonds we'll talk about for the sewer fund in a minute

members of Council. Sorry. I'm a little distracted there getting my little sip of water there. But again, our second presentation, which we've kind of segued into, is something we haven't in fairness talked about in great detail for a number of years, but it's something you've had in place. It is important to how you run your city financially. And so that is our wastewater fund. everything we were just talking about in the prior presentation really kind of wraps up under the general fund you obviously have a number of enterprise funds and those concepts of enterprise funds are funds that have a very specific revenue source tied to the business if you will of running those various enterprises

So we'll go to the next page. And so we really looked at this in detail last in 2021. So it's been about five years, which is a pretty normal cycle. About every five years, it's good to be updating a plan like this for the Wastewater Enterprise Fund. Importantly, the concept of an enterprise fund basically means that all of the revenues and expenditures are captured within a specific fund. So there's no general fund dollars that go to help the wastewater fund. The best practice in how it is we have this quote-unquote enterprise fund is the revenues of the sewer fund pay for all of the expenses, whether it's operating capital or debt service. That is a best practice. That's what you've had in place.

And the planning we're going to talk about is really intended to make sure we can continue to do that into the future. That's not only a best practice, but also helps to insulate the general fund, doing, meaning you as a city are doing on the general fund, having a self-supporting sewer fund means that those critical services within sewer are done up to the professional standards you need them and they are not a drain on the general fund. So a lot of what we're talking about here while it is totally separate and isolated from the general fund, the reason we do that is to make sure we're protecting the general fund knowing that there's a considerable drain and strain on the resources that are limited

So we'll do a couple things, and I'll talk for a couple pages. Austin will do a couple pages as well so you don't have to listen to me for the whole presentation here in fairness. We'll do some history in terms of the wastewater fund. We'll look at some of the city adopted financial policies. So prior presentation we'll talk about the general fund, debt policies, we've got the same thing on the sewer fund. That all goes with the management, making sure that this wastewater fund continues to be self-supporting and not a drain on the general fund. We'll talk about the existing debt profile. We do have some debt on the wastewater fund. It tends to be a capital intensive type of operation to run.

On page number seven, we'll show a little bit of history, and we'll talk about the financial policies. So, again, similar themes here. On the general fund, we've got policies. With the wastewater fund, we have policies as well. It goes to that management side that the rating agencies and outside the lenders are looking at. And there's two in particular that we'll highlight here. On the left-hand side, you see a debt service coverage ratio. That is our utility corollary to debt service to expenditures we looked at in the prior page. A higher number here is better, the way this particular ratio works. your policy for the moment says that we want that debt service coverage ratio to be at least 1.15x or 1.15 times.

as we look into the CIP in the future. The other ratio on the right-hand side called day's cash on hand. So this is the sewer fund corollary to the fund balance on the general fund. Again, in this particular ratio, a higher number is better. Our current policy is to have 20%. That's in the red line. Again, our recommendation as you work through this budget is to enhance that a little bit, get ourselves up a little bit more. We talked in the prior discussion about just how important fund balance and reserves and liquidity are And so the sense here is look at this planning is let's go ahead and enhance make that stronger in terms of that day's cash on hand policy With the budget and move that to 120 days

You can see that visually in the graphs. They're moving from the red lines to the orange lines, which is making both of those stronger On the next page page 8 I mentioned this this is the existing debt profile For the wastewater fund there's roughly 30 million dollars of debt outstanding all of this is paid for from The sewer fund itself, so this is not an impact to the general fund. It's not an impact to your tax rates It is born within The rates and charges that are paid on the sewer bills the structure of the debt and that picture there it's level each and every year. That's very normal for utility system. Looks much like a mortgage like we talked about on the general fund side. All of this debt is fixed rate. So there's many themes here from the

general fund that translate over to the sewer fund. On page number nine, a little bit of history in terms of what your rates and charges have been over the last five years. I mentioned this at the outset. You've been incrementally adjusting these rates on an annual basis, 6% a year. Most really well-run utility systems are making annual adjustments, knowing that whether it's inflationary increases or regulatory increases, there's just an increase in cost of doing business, especially in a system that is as critical as the wastewater. And so you've been doing those routine annual, historically 6%. I'll jump forward a couple pages. The plan and the recommendation is to keep with that 6% for next year.

is really given to us by the county. and resetting the plan to basically grow into some of these projected higher capital costs. I think an important point though and also to talk about this, this plan is designed to be looked at annually. Just like on the general fund we talked about all right where the checks and balances to all of this. It's really part of an annual process with the budget and CIP. So the numbers we've set up are the best estimates we have right now given the information we have. obviously what they need to take action on FY 2027. The real intent and the best practice, though, is to make sure on an annual basis we're going back and relooking at these numbers and saying, okay, how many dollars are actually spent on capital? What are our actual reserves?

Austin Sachssystem and so those will be pledged revenues to repayment of that debt in the second bullet point talk about using the virginia resources authority pooled financing program the city's had very much success in using that previously it's most previously used in 2022 it allows the city to access the public credit markets through the VRA pool achieve that 30-year debt term at favorable interest rates without an independent credit rating on the wastewater utility system itself like I'll also mention this insulates any effect to the city's tax supported borrowing capacity these are totally rating agencies view these as a separate credit and so it does not affect the city's tax supported borrowing capacity for general fund capital as well as school capital.

Kyle LuxYeah, so at the top level, you're absolutely right in terms of the ultimate goal here is to make sure that the wastewater fund is self-supporting and in the strongest financial shape that it can be. And so I agree with you there. And the way that you do that is, again, by watching some of these underlying factors. And so things like the cash levels, things like the debt levels, those are underlying components that all kind of add up and build up to making sure we can, as a city, maintain the wastewater fund such that it's self-supporting, not a drain on the general fund, and doing things in the most financially efficient manner possible, if that's helpful.

Mr. AlexanderstaffVery quickly April 7th work session we'll have a discussion on third-party event sponsorships an update on city services and support for older adults we'll talk about language access and translation services at our council meetings and then we'll have a discussion another discussion on the budget and general fund questions and discussion on the 7th as far as the regular meeting on the 14th of note you'll have a number of introductions related to the budget as you see on consent. Notably, on number eight, we'll have an introduction of an authorizing ordinance for a bond resolution for the issuance for the sewer system on consent there. Public hearing again for the budget, a work session also again on the budget for us to discuss council-identified topics