HomeMy WebLinkAbout04.c. Review draft Position Paper to consider revising the interest rate charged in certain sewer development and connection fee financing programs Page 1 of 4
Item 4.c.
BOARD OF DIRECTORS
20L POSITION PAPER
MEETING DATE: MAY25, 2021
SUBJECT: REVIEW DRAFT POSITION PAPER TO CONSIDER REVISING THE
INTEREST RATE CHARGED IN CERTAIN SEWER DEVELOPMENTAND
CONNECTION FEE FINANCING PROGRAMS
SUBMITTED BY: INITIATING DEPARTMENT:
RUSS LEAVITT, ENGINEERING ASSISTANT ENGINEERING AND TECHNICAL SERVICES-
III PDS-RESOURCE RECOVERY
THOMAS BRIGHTBILL, SENIOR ENGINEER
REVIEWED BY: DANEA GEMMELL, PLANNING AND DEVELOPMENT SERVICES DIVISION
JEAN-MARC PETIT, DIRECTOR OF ENGINEERING AND TECHNICAL
SERVICES
ISSUE
Changes to interest rates for certain fees financed through existing agreements under Central San's
Contractual Assessment District (CAD) program, the Alhambra Valley Assessment District (AVAD)
program, and the Septic Conversion program are policy decisions which require review and approval by
the Board of Directors.
BACKGROUND
Central San offers several programs which allow property owners to finance wastewater Capacity Fees
or their share of the construction cost for neighborhood street sewers over 10 or 15 years. Property
owners sign an agreement which allows Central San to place these charges on the annual property tax
bill. The annual payments include interest, which has historically been set at the larger of "LAI F plus
one or six percent" (LAI F is the State of California's Local Agency Investment Fund). At the time the
"LAI F plus one or six percent" interest rate was established, lower interest rates were typically available
from banks and other lenders.
On March 18, 2021, the Board of Directors received a presentation for a new Non-Residential Capacity
Fee Installment Payment Program. The presentation included a proposed change to the basis for the
interest rate to be charged under the new program. Specifically, the new basis was proposed as LAI F
for the most recent quarter plus the spread between the 20-year and 3-month treasury bill rates plus
0.5% for ongoing administration costs. The new basis addressed concerns that a de-facto 6%
minimum interest rate was unreasonably high for land-secured financing agreements which provided for
collection of payments on the annual property tax bills. The resulting interest rate was also used for the
new Septic-to-Sewer program which was approved by the Board of Directors on March 4, 2021.
May 25, 2021 Regular FINANCE Committee Meeting Agenda Packet- Page 114 of 326
Page 2 of 4
The question of whether the new, lower basis for interest rates should be extended to existing
agreements was not discussed at the March 4 Board meeting. It is presented for discussion with this
Position Paper.
CAD Program
State Law generally prohibits the use of existing ratepayer revenue to fund the construction of new
neighborhood street sewers. The CAD program is authorized by California Streets and Highway Code
section 5898.10 et seq. and Central San Board Policy No. BP 010 - Contractual Assessment District.
It allows groups of neighborhood property owners to form voluntary CADs for the purpose of
constructing new neighborhood sewers. Initial participants are offered the option of financing their share
of the costs over 10 years, including interest.
BP 010 states that annual payments collected for CADs shall "include a nominal interest rate." The
actual interest rate used at the time that a CAD is created is listed in the Schedule of Environmental and
Development-Related Fees and Charges.
As of August 2020, 28 parcels were making annual CAD payments on their property tax bills.
AVAD Program
The AVAD program is authorized by California Streets and Highway Code section 5898.10 et seq and
Central San Board Policy No. BP 022 -Alhambra Valley Assessment District. Participants are
offered the option of financing their share of the neighborhood sewer construction costs over 15 years,
including interest. AVADs also include the capacity fee, annexation fee, and (where applicable)the
"indirect" fee which represents those parcels'share of the Alhambra Valley Trunk Sewer cost as part of
the financing.
BP 022 states that annual payments collected for AVADs shall "include a nominal interest rate." The
actual interest rate used at the time that an AVAD is created is listed in the Schedule of Environmental
and Development-Related Fees and Charges.
As of August 2020, 64 parcels were making annual AVAD payments on their property tax bills.
Septic Conversion Program
The Residential Capacity Fee Installment Payment Program (commonly known as the Septic
Conversion Program) allows residential property owners who are abandoning their septic tank and
connecting to the public sewer to finance their wastewater Capacity Fees over 10 years. This program
is authorized by District Code chapter 6.12.040 E. This code section includes a provision that the fees
shall be financed "at the interest rate established for the Program in the Schedule of Environmental and
Development-related Fees and Charges in effect as of the effective date of [the] agreement."
As of August 2020, 24 parcels were making annual Septic Conversion payments on their property tax bills.
ALTERNATIVES/CONSIDERATIONS
The Board of Directors could decline to extend the new, lower basis for interest rates to existing CAD,
AVAD, and Septic Conversion agreements.
The Board of Directors could direct staff to make a one-time change to the interest rates for existing
CAD, AVAD, and Septic Conversion agreements reducing the rate to 3.22% which is the rate proposed
for new agreements effective July 1, 2021.
The Board of Directors could provide some other direction to staff.
FINANCIAL IMPACTS
May 25, 2021 Regular FINANCE Committee Meeting Agenda Packet- Page 115 of 326
Page 3 of 4
If no change to the interest rate for existing CAD,AVAD, and Septic Conversion agreements is made,
interest revenue from those agreements is estimated to be approximately$399,000 over the next 14
years.
If the Board of Directors were to reduce the interest rate for the existing CAD,AVAD, and Septic
Conversion agreements to 3.22%, interest revenue would be reduced by as much as $184,767. A
breakdown of this estimate is shown in Attachment 1. Note that the final reduction would likely be less
as some property owners typically pay off their agreements prior to the end date.
COMMITTEE RECOMMENDATION
The Finance Committee reviewed this matter at its May 25, 2021 meeting and recommended
RECOMMENDED BOARD ACTION
Consider revising the interest rate charged in certain sewer development and connection fee financing
programs.
Strategic Plan Tie-In
GOAL ONE: Customer and Community
Strategy 1—Deliver high-quality customer service, Strategy 2—Maintain a positive reputation
GOAL THREE:Fiscal Responsibility
Strategy 1—Maintain financial stability and sustainability
ATTACHMENTS:
1. Potential Changes in Interest Revenue
May 25, 2021 Regular FINANCE Committee Meeting Agenda Packet- Page 116 of 326
Page 4 of 4
POTENTIAL CHANGES IN INTEREST REVENUE ATTACHMENT 1
Contractual Assessment Districts (CADs)
Years Interest Interest
remaining Revenue Revenue Change in
on Tax roll at 6% at 3.22% Revenue
VISTA DEL ORINDA 2 555.23 297.97
ST. MARY'S ROAD 2 1,301.92 698.70
SMITH ROAD 3 2,056.14 1,103.46
SOUTH JACKSON WAY 8 53,703.05 28,820.64
NORTH JACKSON WAY 9 66,353.54 35,609.73
HARPER LANE AREA 9 152,809.60 82,007.82
Total Estimated Interest Revenue 276,779.48 148,538.32 (128,241.16)
Alhambra Valley Assessment Districts (AVADs)
Years Interest Interest
remaining Revenue Revenue
on Tax roll at 6% at 3.22%
TRUNK SEWER 14 54,379.89 29,183.87
GORDON/MILTHWAIT 6 18,058.22 9,691.24
RELIEZ VALLEY 7 11,619.67 6,235.89
MONTEIRA 3 1,198.92 643.42
QUAIL 3 7,386.50 3,964.09
VIA VAQUEROS 5 5,026.08 2,697.33
Total Estimated Interest Revenue 97,669.28 52,415.85 (45,253.43)
Septic Conversion Program
Interest Interest
Revenue Revenue
at 6% at 3.22%
Total Estimated Interest Revenue 24,328.90 13,056.51 (11,272.39)
TOTAL CHANGE (184,766.98)
May 25, 2021 Regular FINANCE Committee Meeting Agenda Packet- Page 117 of 326