ITEM 15: REQUEST FROM THE CITY OF SAN DIEGO (CITY) THAT THE STATE WATER RESOURCES CONTROL BOARD (SWRCB) PURCHASE CERTIFICATES OF PARTICIPATION IN LIEU OF A STATE REVOLVING FUND (SRF) LOAN TO FINANCE WASTEWATER TREATMENT PLANT PROJECTS

DISCUSSION: The City is requesting that the SWRCB purchase Certificates of Participation (COP)in an installment-purchase agreement between the City and a Joint Powers Agency (JPA). At its October 7, 1998, Workshop, the SWRCB had several questions that could not be answered at the time and directed staff to bring this item back to the January Workshop.

Attached is a copy of the City's response to the SWRCB's questions. (not available electronically)

The City has received preliminary loan commitments totaling $86.557 million in local match SRF loans from the SWRCB. The commitments include three projects and five loan contracts. The three projects are the: (1) Point Loma Digesters 7 & 8 and Gas System Upgrade, SRF Loan No. C-06-4383-110, for $10.9 million, Resolution No. 97-079 dated September 18, 1997; (2) Point Loma Central Boiler facility and Piping Gallery Upgrades, SRF Loan No. C-06-4245-110, for $8.021 million, Resolution 97-104 dated November 18, 1997; and (3) South Bay Water Reclamation Plant, SRF Nos. C-06-4119-310, 410, & 510, (three contracts totaling $67.636 million), Resolution No. 97-105, dated November 18, 1997. All projects are under construction with the exception of the operations and maintenance buildings at the South Bay Water Reclamation Plant (SRF No. C-06-4119-410) which is scheduled to begin construction in February 1998.

On December 27, 1997, the Division of Clean Water Programs (Division) sent its first SRF loan contract to the City (the Point Loma Digester Project, SRF No. C-06-4383-110) for signature. In April 1998, the City informed the Division that its Charter prevented it from entering into any SRF loan contracts with the SWRCB. Because of this, work on the subsequent loan contracts is on hold.

The City is proposing an alternate method whereby it can accept SRF funds. The City's proposal calls for the SWRCB to purchase COPs which would be backed by revenue received from users of the City's Wastewater Treatment System. Because one of the SWRCB's concerns was whether there was insurance that the loan would be repaid, the City and Division staff have been meeting and discussing bond insurance. The City has indicated that it is willing to purchase insurance. According to the City, with bond insurance, their obligations to make installment payments would be rated AAA, higher than its current rating on its General Fund or its Sewer Revenue Fund.

Basically, sale of COPs is a method used by public agencies in California to finance larger capital projects. A COP is a security that evidences an undivided fractional interest in an underlying tax exempt lease or installment sales agreement. The COP entitles its owners to a proportionate share of lease (or installment sale) payments made by a government agency pursuant to a lease (or an installment sale) agreement. For all intents and purposes, COPs function like municipal bonds.

The City is proposing to enter into an installment purchase agreement with a JPA that would construct the wastewater treatment project improvements and sell them to the City. The JPA would assign the installment purchase to a trustee (typically a bank). The SWRCB would use money in the SRF to purchase discounted COPs in the underlying installment purchase agreement for the local match loan. The trustee would distribute the proceeds of the purchase to the JPA and receive the installment payments from the JPA. The Trustee would then distribute the installment payments received from the JPA to the SWRCB with the amount and timing of the repayments equivalent to the normal SRF loan repayment provisions.

Although not currently provided for in the SWRCB's SRF Policy, purchase of COPs from the City, if properly structured, could be an allowable use of federal and state revolving fund proceeds. Subchapter VI of the Federal Clean Water Act, (33 USC {Special Char 167 in Font "Imprint"}1381 et. seq.) sets forth the types of financial assistance that may be provided with the Federal Water Pollution Control Revolving Loan funds. Section 1383(d) provides that SRF funds may be used to buy or refinance the debt obligations of municipalities. State limits on use of the money in the State Pollution Control Revolving Fund track the federal rules. Water Code Section 13480 provides that money in the fund can be used for permissible purposes allowed under the Federal Act.

EPA, Region 9 has informed the Division that purchase of COPs from a municipality is an acceptable use of SRF funds and that other states have used SRF funding in a similar manner to purchase municipal bonds issued by local agencies. The details of the agreements between the various parties, identification of those parties, and the mechanism for assuring that all state and federal SRF requirements are met have yet to be finalized. Moreover, any purchase of COPs by the SWRCB in the manner suggested by the City would most certainly require prior approval by the SWRCB, EPA and the State of California financial control agencies.

In the meantime, the City is requesting that the SWRCB continue to set aside the SRF funds previously committed to it while it attempts to work out the details of alternative financing in a manner acceptable to all parties. It is likely that substantial negotiation and discussions will have to occur prior to all approvals. This process will certainly require a great deal of staff time and effort.

A problem similar to this occurred recently in which the City and County of San Francisco (CCSF) was prevented by its charter from entering into a SRF loan contract. The SWRCB, in April 1998, adopted Resolution 98-029 which deobligated $50 million in SRF funds previously allocated for CCSF projects with the intent of restoring those funds if a proposed amendment to the City Charter authorizing receipt of SRF funds was approved by the voters.

In June of 1998, CCSF voters did approve a charter amendment that allowed San Francisco to accept SRF loan funds. The SWRCB recommitted $50 million to CCSF at the November 19, 1998, Board Meeting.

Considering that extensive staff time will be needed to develop an acceptable procedure for purchase of the COPs, that the demand for SRF funding exceeds the available funding, that most agencies are capable of accepting the SWRCB's standard SRF loan, and that accepting the City's proposal could generate other requests for alternate financing from other SRF loan applicants, the Division is seeking guidance from the SWRCB as to how it wishes staff to proceed.

POLICY ISSUE: Should the SWRCB purchase Certificates of Participation in the City's installment purchase agreement?

RWQCB IMPACT: SRF financing would not be available to the City if the SWRCB decides not to participate in this alternative financing method. The City is currently in compliance with their discharge permits and would eventually be out of compliance and/or in violation of requirements due to flow increases caused by population growth if these projects are not built.

FISCAL IMPACT: There will be a balance of $21.6 million in the SRF account if the project on the agenda for the January Workshop and Board Meeting is approved. If funds are deobligated from the City, $86.557 million would be returned to the SRF account for use for other projects.

STAFF RECOMMENDATION: No recommendation. Staff presents three options as described in the draft resolution.

(Copy of the attachment is not available electronically but a copy can be obtained by calling Dan Little at (916) 227-4575.)

DRAFT December 28, 1998

WHEREAS:

1. The SWRCB has approved $86.557 million in zero-interest loans for three projects for the City for upgrades and expansion to their wastewater treatment system. The three projects include five loan contracts;

2. The Division of Clean Water Programs (Division) prepared the first loan contract for the City in December 1997;

3. In April 1998, the City informed the Division that its Charter prevented it from entering into a SRF loan contract agreement with the SWRCB;

4. The City is proposing an alternate financing method which calls for the SWRCB to purchase Certificates of Participation (COPs) which would be backed by revenue from users of the City's wastewater treatment systems;

5. The City would purchase bond insurance which would guarantee repayments of the SRF loan to the SWRCB;

6. The City proposes to enter into an installment purchase agreement with a Joint Powers Agency (JPA). Under this arrangement, the JPA would construct the projects, sell them to the City, and assign the installment purchase to a trustee. The SWRCB would use SRF funds to purchase COPs in the installment purchase agreement at zero percent interest. The trustee then distributes the proceeds of the COP purchase to the JPA and receives installment payments from the JPA. The trustee then distributes installment payments received from the JPA to the SWRCB;

7. The Federal Clean Water Act provides that SRF funds may be used to buy or refinance the debt obligations of municipalities, and the State Water Code provides that money in the fund can be used for permissible purposes allowed under the Federal Act;

8. The Environmental Protection Agency has confirmed that the purchase of COPs is an acceptable use of SRF funds;

9. The City and County of San Francisco (CCSF) was faced with a similar situation where its City Charter prevented it from entering into SRF loan agreements with the SWRCB. In June 1998, the voters of CCSF approved a charter amendment allowing it to accept SRF loan funds. The SWRCB, in the meantime, deobligated $50 million in previously allocated SRF funds because other projects were ready to proceed with construction, with the intent of restoring those funds if the voters approved the amendment authorizing the CCSF to enter into SRF loan agreements. The SWRCB recommitted $50 million to the CCSF at the November 19, 1998 meeting;

10. The City of San Diego is requesting the SWRCB to continue its previously committed set-aside of loan funds while it works out the details of this alternative financing method to the satisfaction of all parties involved. The Division anticipates that considerable staff time and effort will be required for this process should the SWRCB accept the City's proposal; and

11. Demand for SRF funding exceeds availability of funds. Many other projects are almost ready to proceed and are able to accept the SWRCB's standard method of SRF financing.

THEREFORE BE IT RESOLVED THAT:

The State Water Resources Control Board:

1. Continues its commitment of $86.557 million and directs staff to negotiate the purchase of COPs, including City's purchase of necessary bond insurance to cover the SRF loan balance, to finance this commitment for SRF project Nos. C-06-4383-110, C-06-4245-110, and C-06-4119-310, 410, and 510. When the City works out the details of this alternative financing method, staff is further directed to return to the SWRCB when such details are satisfactory to all parties involved; or

2. Deobligates the preliminary loan commitment of $86.557 million, while the City works out the details of this alternative financing method, including City's purchase of necessary bond insurance to cover the SRF loan balance, with the intent of restoring funds if and when the details of this transaction is satisfactory to all parties involved; or

3. Does not wish to purchase COPs and deobligates it's preliminary loan commitment of $86.557 million to the City of San Diego.

The undersigned, Administrative Assistant to the Board, does hereby certify that the foregoing is a full, true, and correct copy of a resolution duly and regularly adopted at a meeting of the State Water Resources Control Board held on January 21, 1999.


____________________________

Maureen Marché

Administrative Assistant to the Board