HomeMy WebLinkAboutStaff Report 2404-2837CITY OF PALO ALTO
Finance Committee
Regular Meeting
Tuesday, May 21, 2024
Agenda Item
2.Review Wastewater Treatment Fund Cashflow and Recommend to the City Council
Authorization of the Negotiation and Execution of a Line of Credit
Finance Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Public Works
Meeting Date: May 21, 2024
Report #:2404-2837
TITLE
Review Wastewater Treatment Fund Cashflow and Recommend to the City Council
Authorization of the Negotiation and Execution of a Line of Credit
RECOMMENDATION
Staff recommends that the Finance Committee recommend to City Council:
1. Approval for staff to pursue negotiating a line of credit totaling $31 million to restore a
positive cash balance in the Regional Wastewater Treatment Fund, and
2.Authorize the City Manager or their designee to negotiate and execute the line of credit.
EXECUTIVE SUMMARY
The capital improvement program at the City’s Regional Water Quality Control Plant (RWQCP)
is entering its peak construction period. Although the City obtained $212 million in low interest
loans for its projects from the state’s Clean Water Revolving Fund (SRF), the Wastewater
Treatment (WWT) Fund is experiencing short-term negative cash balances. The state averages
three months from the time of submission to issue reimbursements. Given the magnitude of
the fund’s capital costs and timing of reimbursement requests, the WWT Fund is not able to
cover the shortage. Staff recommends that the Finance Committee approve pursuing a $31
million line of credit to restore a positive cash balance in the WWT Fund. The WWT Fund will
pay for issuance costs and interest, recovered through periodic billing to the six partner
agencies, including the City’s Wastewater Collection Fund during the term of the line of credit.
Cash balances in the WWT Fund are monitored monthly by Administrative Services and Public
Works. Until the line of credit is in place, the WWT Fund will continue to draw upon the City’s
overall cash pool to pay operating and capital expense and will incur a loss of investment
income.
Beyond cost and resource projections, a significant factor to consider is the uncertainty related
to large capital project schedules and costs. Large capital projects and the associated cost
estimates impact the WWT Fund’s cash shortfall; the fund’s cash flow could be higher or lower
compared to the forecast. The line of credit option is a financing tool designed to accommodate
uncertainty and may be drawn upon as needed. Staff evaluated several financing strategies and
recommend the line of credit (LOC) approach because it provides the most flexibility. Other
regional wastewater plant operators including Silicon Valley Clean Water, the City of San Jose,
and the City San Mateo have also relied on a line of credit for short-term borrowing.
Regarding the City’s Debt Policy1, the Enterprise Funds have a debt service limit of 15%. The
issuance of an LOC would increase the fund’s debt service limit by approximately 0.6 to 1.8
percentage points between FY 2025 and FY 2027. The estimated debt limit for FY 2025 is 7.6%.
The Council approved an exception to the debt limit on December 5, 20222 upon approving the
budget amendment to fund the Secondary Treatment Upgrade (STU) project using the 2022
SRF Loan. In FY 2028, based on estimated interest cost and the forecasted budget, the WWT
Fund is estimated to exceed the 15% debt limit due to repayment of the 2022 SRF Loan.
BACKGROUND
The RWQCP operates 24 hours a day to treat all wastewater from the City of Palo Alto and the
City’s five partner agency regional service areas (Mountain View, Los Altos, Los Altos Hills,
Stanford, and East Palo Alto Sanitary District) to ensure compliance with regulations protecting
the San Francisco Bay and the environment. The City’s RWQCP operating and capital budgets
and actuals are managed in the WWT Fund. The City is implementing a large capital
improvement program (CIP) to replace aging infrastructure and upgrade treatment systems for
new regulations. The 2025-2029 five-year CIP has recommended funding of $187.6 million with
$109.2 million proposed for FY 2025. The large CIP is mostly funded by low-interest SRF loans,
the largest of which being the $193 million 2022 SRF loan for the STU project (WQ-19001).
Funding for this project is already encumbered in FY 2024, and as a result, the costs and SRF
revenue for WQ-19001 are still displayed in FY 2024, in addition to the 2025-2029 CIP
recommended funding listed above. Funding and SRF revenue for the STU project will be
carried forward and reappropriated to FY 2025 as part of the FY 2025 budget process.
Maintaining cash liquidity in the City’s overall treasury portfolio is an investment objective in
the City’s Investment Policy3. However, for the WWT Fund, negative cash balances are
anticipated due to the timing of expenditures and reimbursements of project expenses; the
1 City Debt Policy, dated April 11, 2017, https://www.cityofpaloalto.org/files/assets/public/v/1/administrative-
services/adopted-debt-policy-2017-04-11.pdf
2 City Council, December 5, 2022, CMR ID 14710: https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-
minutes-reports/reports/city-manager-reports-cmrs/2022/id.-14710-secondary-treatment-upgrades-approval-of-
contract-design-contract-amendment-and-partner-agreements.pdf
3 City Council, June 19, 2023; Agenda Item #12; SR #2305-1529
https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82443
fund is currently in a negative cash position. Prior to 2020, before the Primary Sedimentation
Tank (PST) Rehabilitation (WQ-14003) and STU capital projects began, the WWT Fund
maintained a $13 million cash balance to cover different timing of revenues and expenses. The
anticipated negative cash flow issues caused by the SRF loan process were discussed with the
Finance Committee in April 20214 and in approval for the STU Project in November 20225, and
with the City Council in December 20226. Staff is returning to the Finance Committee with this
report specifically addressing the cash flow issue and the financing strategy to return the fund’s
cash balance to a positive position. SRF loans have been the primary financing mechanism for
the WWT due to their low interest rates (0.8% for the STU project) compared to a typical 2.8-
3.2% interest rate for a utility revenue bond, generating significant 30-year savings in reduced
interest expense for the STU Project.
4 City Council Finance Committee, April 20, 2021; Agenda Item #3; SR #12170
https://www.cityofpaloalto.org//files/assets/public/v/2/agendas-minutes-reports/reports/city-manager-reports-
cmrs/year-archive/2021/id-12170.pdf
5 City Council Finance Committee, November 15, 2022; Agenda Item #1; SR #14918
https://www.cityofpaloalto.org//files/assets/public/v/3/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20221115/20221115pfcs-linked.pdf and staff presentation
https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/item-
presentations/2022/20221115/20221115pptfcsm-item-1.pdf
6 City Council, December 5, 2022; Agenda Item #8; SR #14170
https://www.cityofpaloalto.org//files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports-
cmrs/2022/id.-14710-secondary-treatment-upgrades-approval-of-contract-design-contract-amendment-and-
partner-agreements.pdf
City Enterprise Funds or the General Fund which would help cover the short-term timing issue
for cashflow.
ANALYSIS
Chart 1: Wastewater Treatment Fund Cumulative Cash Balance (in millions)
July 2024: PST Complete
March 2025: Advanced Water Purification System begins
July 2026: Outfall Pipeline begins
April 2028: STU complete
October 2028: 2022 SRF debt service begins; assumes bond proceeds for Headworks Project
Based on these estimates, it is useful to note a couple features of these expected cash
shortfalls. First, the amount of borrowing needed fluctuates over time. It reaches a peak of
$30.9 million at the end of the first quarter of FY 2025 (September 30, 2024), decreases
thereafter, and peaks again to $28.1 million in September 2028. Second, there are months
without cash shortfalls and it would be advantageous to have no debt outstanding in those
months. The draw and repayment flexibility (or lack thereof) offered by an LOC or bond
anticipation note (“BAN”) were considered in the context of these fluctuating short-term
borrowing needs.
State SRF reimbursement delays are not unique to Palo Alto. In coordination meetings, State
staff shared that many agencies struggle with the delays; the issue was also an audit finding7 for
the SRF program. Other local agencies including Silicon Valley Clean Water in Redwood City, San
Jose, and San Mateo have pursued and obtained interim borrowing financing to manage SRF
reimbursement delays.
Based on construction timelines and invoicing, reimbursement timing from SRF, routine partner
contributions and all capital and operating expense in the WWT Fund, staff forecasts a negative
$30.9 million cash flow by October 2024, which was discussed with partner agencies and
researched by the City financial advisor, PFM.
7 The CA CWSRF: Review of the Loan Award and Disbursement Processes, July 2022; PDF pp. 27, 35-6
https://www.waterboards.ca.gov/water_issues/programs/grants_loans/srf/docs/CWSRF-program-review.pdf
Interim Borrowing Options
1 sets forth the criteria for the City’s issuance, repayment, and
management of debt. The City’s underlying approach to debt financing is to borrow only for
capital improvements that cannot be funded on a pay-as-you-go basis. Short-term financing
instruments, such as Tax and Revenue Anticipation Notes (TRANs) or BANs are intended to
bridge cash flow shortages; the former being repaid within one year or less and the latter being
issued in advance of a larger, future bond issue. Revolving LOC is another bridge financing
option that was reviewed and considered by staff.
2.
Table 1: Highlights & Challenges of Line of Credit and Bond Anticipation Note
Instrument Highlights Challenges
Line of Credit
Bond Anticipation Notes (BANs)
(tax-exempt)
Table 1: Highlights & Challenges of Line of Credit and Bond Anticipation Note
Instrument Highlights Challenges
Lead Time: 5-6 months to inverted yield
curve conditions
- Stability over time
due to fixed
interest rate
changes; does not allow
flexibility for project delays
- Track investments purchased by
bond proceeds to avoid an
unfavorable investment scenario
(i.e., negative arbitrage)
*Interest Cost includes both the Utilized Interest Rate and the Unutilized Interest Rate
Line of Credit (LOC)
A line of credit is a flexible loan, for a defined amount of money, from a financial institution that
is accessed to manage cash flow or other short-term financing needs. Unlike a bond issuance,
the line of credit has terms directly negotiated with the bank and has more flexibility with use
of the monies. Under this option, the City would enter into a line of credit with a commercial
bank for five years, not to exceed $31 million. Over that five-year period, the City can draw
down funds from the line of credit on an as-needed basis. When SRF reimbursement proceeds
are received, the line of credit may be immediately repaid and the full amount, or portion,
would be reconstituted. Flexibility is a key attribute of a line of credit; the City may borrow,
repay, and re-borrow on a regular frequency, hence the revolving nature of this financing
strategy. The LOC also provides flexibility on the use of funds amongst WWT projects during
the term, which is relevant as WWT has multiple upcoming projects.
With the assistance of the City’s municipal finance advisor, PFM, a request for proposal would
be issued and proposals would be evaluated based on proposed terms and conditions. Issuance
costs are approximately $0.2 million and include the request for proposals, evaluation of
proposers, outside counsel legal review, and executing the agreement. A line of credit has both
a “utilized” (also known as a Secured Overnight Financing Rate, or SOFR) and a “unutilized” fee.
The utilized fee is applied against the amount drawn down from the line of credit. As of the
writing of this report, the utilized fee ranges between 3.0 to 5.1% and is applied only to the
amount drawn from the line of credit. The rate will reset monthly and under current market
conditions, short-term rates are relatively high. In 2024, it is expected that the Federal Open
Markets Committee (FOMC) may decrease the federal rate by 0.5%, which would decrease
rates on a line of credit. The unutilized fee is applied against the portion of the line of credit
that is not drawn or utilized. It is essentially a “capacity” fee that is charged by commercial
banks that allows borrowers immediate access to liquidity with one to two days’ notice. As of
the writing of this report, the unutilized fee is estimated to be 0.35%.
Table 2 outlines the estimated line of credit cost, including both the SOFR rate and the
unutilized cost, the Palo Alto Wastewater Collection Fund share, and debt limit percentage for
the WWT Fund in FYs 2025 to 2029.
Table 2: Line of Credit Cost & Estimated Wastewater Collection Fund Share
Line of Credit
(SOFR Current, 5.1%)
Line of Credit
(SOFR 5-Year Avg.)
FY Total Cost
Wastewater
Collection Fund
Share (34.97%)Total Cost
Wastewater
Collection Fund
Share (34.97%)
2025 $0.7M $0.2M $0.4M $0.1M
2026 $0.5M $0.2M $0.3M $0.1M
2027 $0.4M $0.1M $0.2M $0.1M
2028 $0.9M $0.3M $0.5M $0.2M
2029 $0.5M $0.2M $0.3M $0.1M
Total $3.0M $1.0M $1.8M $0.6M
In Fiscal Years 2025, 2026, and 2027, the annual debt service amount falls below the policy
guideline of all annual debt service being less than 15% of operating expenditures. In FY 2028,
2022 SRF loan repayments for the STU project begin, and drive the WWT Fund to exceed the
15% debt limit percentage.
Both the City of San Jose and Silicon Valley Clean Water utilize line of credit financing to
support their capital programs. The City of San Jose secured a $200 million line of credit in 2023
and plans to refund this line of credit through a Utility Revenue Bond in 2026. Silicon Valley
Clean Water has been utilizing a $30 million line of credit, expandable up to $75 millionError!
Bookmark not defined., since 2012 for their SRF-funded CIP work.
Bond Anticipation Notes (BANs)
A BAN is a short-term security that is issued in advance of larger, future bond issuances. A BAN
may be issued in a public sale or direct loan with a commercial bank. A direct loan includes a
potentially faster timeline and limited disclosure (no preliminary official statement document).
Proceeds from the City’s SRF reimbursements and reimbursements from the City’s partners
would be used to pay debt service. Unlike the LOC, the BAN is relatively inflexible with its
prepayment penalty, repayment schedule and specified use of funds (i.e., should the need
arise, BAN funds cannot be applied to other WWT fund projects after issuance).
The City’s municipal finance advisor, PFM, can assist with evaluating direct loan pricing
compared to a potential public sale. As of the time of drafting this report, the WWT Fund is
anticipated to achieve a rating of around AA- by S&P Global Ratings (lower than the City’s
General Obligation Bond credit rating of AAA). Based on this, the interest rate is estimated to
be 3.2% for a $31 million BAN, maturing in five years. Interest costs over five years total $4.1
million. One-time issuance costs associated with issuing BANs total $0.2 million. The offsetting
interest revenue of bond proceeds would decrease the annual debt service by approximately
$2.3 million over five years, bringing the net total interest cost to $1.9 million.
Table 3: Bond Anticipation Note Cost and Estimated Wastewater Collection Fund Share
FY
Interest Cost
(3.2%, 5 yrs.)
Investment
Return (2.76%,
5-yr SOFR rate)
Net Interest
Cost
Wastewater
Collection Fund
Share (34.97%)
Total $4.1M $2.2M $2.1M $0.7M
Chart 2: RWQCP Future Projects
FISCAL/RESOURCE IMPACT
2 2 2 2 2 2 2
A
C C
N
C C
H
C C
in the WWT Fund and an assumption of a 2.76% rate of return-on-investment income for bond
proceeds.
Table 4: Comparison of Line of Credit and BAN, $30M, 5 Years
Fiscal
Year
Period
Line of Credit
(SOFR Current)
Line of Credit
(SOFR
5-Year Avg.)
BAN
(Net Interest)
LOC vs. BAN
Current
LOC vs. BAN
5-Yr Avg
Total $3.0M $1.8M $1.9M ($0.9M)$167,000
8, 9. Reserve
targets are included in Attachment B, and they range from $7 million to $18 million with a
midpoint target of $13 million. Reserves fell below the minimum guideline of $7 million at end
of FY 2023, and the cash balance has been below the minimum target throughout FY2024.
STAKEHOLDER ENGAGEMENT
ENVIRONMENTAL REVIEW
8 City Council, May 6, 1993; SR# CMR:263.93 WWT Fund Rate Stabilization Reserve Policy:
https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports-
cmrs/year-archive/1993/cmt-263.93-wwt-fund-rate-stabilization-reserve-policy.pdf
9 City Council May 24, 1990; SR# CMR:320:0 WWT Fund Equipment Plant Replacement Reserve Policy:
https://www.cityofpaloalto.org//files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports-
cmrs/year-archive/1990/cmt-no-320.0-wwt-fund-equipment-plant-replacement-reserve-policy.pdf
ATTACHMENTS
Attachment A: PFM Memo Summarizing Aspects of Line of Credit and BAN
APPROVED BY:
Brad Eggleston, Director Public Works/City Engineer
44 Montgomery Street
3rd Floor
San Francisco, CA 94104
May 8, 2024
Memorandum
To: City of Palo Alto
From: PFM Financial Advisors LLC
RE: Interim Borrowing Options to Support the Regional Water Quality Control Plant
Capital Improvements
INTRODUCTION
PFM Financial Advisors LLC (“PFM”), as the financial advisor to the City of Palo Alto (the “City”), has
prepared this memorandum evaluating interim borrowing options to manage cash shortfalls
associated with the funding of major capital improvements for the Regional Water Quality Control
Plant (RWQCP).
The City, through the Wastewater Treatment (WWT) Fund, is implementing a large capital
improvement program (CIP) to replace aging infrastructure and upgrade treatment systems for new
regulations. The CIP program budget was approximately $5 million to $9 million in FY 2021 and FY
2022, respectively, but increased to $193 million and $63 million in the FY 2023 and FY 2024
adopted budget, respectively. The large CIP program increase is mostly funded by low-interest state
revolving fund (SRF) loans. However, there is a mismatch between project expenditures and
reimbursement of those eligible expenditures through the SRF loan program. Reimbursement from
the State SRF take approximately three months, on average, creating short-term cash shortfalls.
Based on construction timelines and invoicing, reimbursement timing from SRF, routine partner
contributions and all capital and operating expense in the WWT Fund, staff forecasts that the
cumulative shortfall in the WWT Fund will reach approximately $30.9 million by September 2024.
Thereafter, through 2028, shortfalls will vary depending on project expenditures.
In this memorandum we first identify the timing and amount of estimated cash shortfalls between
2024 and 2028. We then evaluate two forms of short-term or “interim” borrowing to address these
cash shortfalls: a (i) revolving line of credit (LOC) and (ii) a bond anticipation note (BAN). These two
alternatives are examined in terms of their program flexibility and cost.
WASTEWATER TREATMENT FUND ESTIMATED CASHFLOWS
As noted above, the significant size of the RWQCP capital improvements, together with the timing
mismatch in project expenditures and SRF loan reimbursements is creating cash shortfalls in the
WWT Fund. Monthly cashflows and total WWT Fund shortfalls have been estimated by City staff and
are depicted below.
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May 8, 2024
Page 2
Based on forecasted cashflows, the WWT Fund is currently experiencing cash shortfalls in the
amount of $7.5 million (April 2024) and, cumulatively, reaches a peak shortfall of $30.9 million in
September 2024. As SRF loan proceeds flow to the City on a reimbursement basis, this cumulative
shortfall declines through October 2025 and is positive for several months. Cash shortfalls are
expected to recur thereafter through October 2028. Thereafter, the WWT Fund is positive.
Based on these estimates, it is useful to note a couple features to these expected cash shortfalls.
First, the amount of borrowing needed fluctuates over time. It reaches a peak of $30.9 million in
September 2024, decreases thereafter, and peaks again to $28 million in October 2028. Second,
there are months when no cash shortfalls exist and it would be useful to have no debt outstanding in
those months. The draw and repayment flexibility (or lack thereof) offered by an LOC or BAN should
be considered in the context of these fluctuating short-term borrowing needs.
REVOLVING LINE OF CREDIT (LOC)
An LOC may be established with a commercial bank which establishes a not-to-exceed amount and a
maximum term to the agreement. For example, the City could enter into a line of credit with a
commercial bank for 5-years with a not to exceed amount equal to $31 million. Over that 5-year
period, the City can draw down funds from the LOC on an as needed basis. When SRF loan
proceeds are received, the line of credit may be immediately repaid and the full amount of the $31
million limit is reconstituted. This flexibility is a key attribute of a LOC: the City may borrow, repay and
re-borrow from time-to-time up to the full available balance in the maximum amount of $31 million:
hence, the “revolving” nature of the LOC. This differs from bond or note proceeds where when those
proceeds are borrowed and spent, the ability to repay those bonds is limited to the call date and
additional proceeds may not be drawn again without initiating a new transaction.
There is both a “utilized” and an “un-utilized” fee associated with a LOC. Based on recent market
solicitations for LOCs, we estimate that an un-utilized fee would be approximately 0.35%. That is, the
City would pay 0.35% on the portion of the LOC that is not drawn or utilized. This is essentially a
“capacity” fee charged by commercial banks that allows borrowers immediate access to liquidity with
The City of Palo Alto
May 8, 2024
Page 3
one to two days’ notice. There are also transaction costs associated with establishing the line of
credit, which are approximately $200.000.
When the City draws on the LOC, it will pay an interest rate equal to 80% of the Secured Overnight
Financing Rate (SOFR) plus an “applicable spread.” We estimate the applicable spread equal to
0.85% (based on its current credit ratings). As of April 29, 2024, the total estimated interest rate on
drawn amounts would equal 5.11%. This rate will reset each month, based on where SOFR resets.
Under current market conditions, short-term rates – including SOFR – are relatively high. It is
expected that the Federal Open Markets Committee (FOMC) may decrease the Fed Funds rate by
0.50% through 2024 which would decrease SOFR and related short-term rates. When we take the 5-
year average of SOFR plus the 0.85% applicable spread, that interest rate is 3.06%. This provides a
range of cost in the current high market environment, as well as a potential reversion to the lower 5-
year average. The City’s cost over the 5-year term would likely be somewhere in between. A
summary of utilized and un-utilized rate assumptions is presented below.
Based on monthly shortfalls and borrowing needs, we estimate the total borrowing cost (i.e., utilized
and unutilized fees) below for both the current interest rate conditions and interest rates based on the
5-year average. Under current rates with the LOC draw schedule driven by forecasted monthly
shortfalls, total borrowing cost for the LOC through October 2028 totals $2.94 million. Assuming the
5-year average of SOFR, the total cost totals $1.87 million.
Unutilized
SOFR 80% SOFR Spread Final Rate Rate
Current*5.32% 4.26% 85 bps 5.11% 35 bps
5-Year Avg. 2.76% 2.21% 85 bps 3.06% 35 bps
*As of 4/29/2024
Estimated LOC Rates
Utilized
SOFR (Current)
SOFR
(5-Yr. AVG)
FY Total Cost Total Cost
2025 $689,646 $431,609
2026 $462,541 $310,086
2027 $361,092 $252,322
2028 $903,312 $561,055
2029 $527,495 $319,816
Total $2,944,086 $1,874,889
COMPARISON OF LOC COSTS
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May 8, 2024
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BOND ANTICIPATION NOTE (BAN)
A BAN is a short-term security that is issued in advance of a future bond issuance, the proceeds from
which are used to repay the principal on the BAN upon maturity. In that concept, the proceeds from
the City’s SRF loan would be used to repay the principal on the BAN at maturity. The City could
issue a BAN for $31 million and use the BAN proceeds to fund the cash shortfalls in the WWT Fund.
A BAN has a defined maturity date when principal payment is due. With WWT Fund shortfalls
continuing through October 2028, the final maturity of the BAN would be November 2028. BANs may
be sold with an early call or redemption feature and that is commonly limited to six months prior to
final maturity. As such, even if SRF loan funds become available early, the BANs cannot be repaid
prior to 6-months ahead of the final maturity. Interest on the full $31 million will begin as soon as the
BANs are sold (i.e., August 2024) and will continue through final maturity. BANs do not have the
ability to repay and redraw the proceeds, like a LOC.
As of the time of this memo, the WWT Fund’s credit rating is AA- (lower than the City’s General
Obligation Bond credit rating of AAA) and based on a $31 million issuance for 5-years, the interest
rate is estimated to be 3.20%. One-time issuance costs associated with issuing BANS total $0.2
million. Based upon the rate assumption of 3.20%, total interest costs are presented below for a BAN
option. Interest costs on the BAN total $4.24 million through November 2028.
The net cost of a BAN under these circumstances may include an additional feature. Namely, with
the full contribution of $31 million in BANs occurring in August 2024, it would allow for higher fund
balances in the WWT Fund through October 2028, compared to an LOC where only the amount of
the cash shortfall is drawn as needed. These higher WWT Fund balances may be invested in short-
term assets (e.g., money market funds) and those interest earnings could be used to offset some of
the BAN interest costs. The use and investment of reimbursed SRF loan proceeds would need to be
reviewed by legal counsel, but we assume that is a potential for analytical purposes here.
The investment return of the fund balance is subject to prevailing interest rates over time, but for
estimation purposes we assume an average rate of 2.76% (i.e., 5-year average of SOFR) for this
analysis. The net interest costs for a BAN, under this approach totals $2.047 million through
November 2028.
BAN
FY Interest Cost
2025 $832,000
2026 $998,400
2027 $998,400
2028 $998,400
2029 $416,000
Total $4,243,200
BAN BORROWING COST
The City of Palo Alto
May 8, 2024
Page 5
COMPARISON OF RESULTS
The City has two viable options to meet expected short-term cash shortfalls in the WWT Fund: (i) a
revolving LOC or (ii) a BAN. If short-term rates remain high through 2028, the BAN strategy would
cost approximately $896,000 less than a revolving LOC. If short-term rates return to the 5-year
average, a revolving LOC could cost slightly less than a BAN. One conclusion may be: either
financing alternative is feasible from a cost perspective when considered in the context of delivering a
large CIP program for the Regional Water Quality Control Plant (RWQCP).
There are relevant considerations beyond cost. Large capital projects carry uncertainty with respect
to schedule and costs. Cost shortfalls could be higher or lower than currently forecast. The revolving
LOC is a financing tool designed to accommodate cost and schedule uncertainty. If cashflow needs
change, the LOC may be drawn upon more or less. As reimbursement SRF Loan proceeds come in,
those draws may be repaid, reconstituting the capacity under the LOC. This flexibility under the LOC
provides a benefit that a BAN will not provide. BAN proceeds must be spent within a reasonable
timeframe following initial issuance, and the interest cost will begin to accrue on the full amount from
day one. Similarly, there is a limitation to repaying the BAN early – generally 6-months ahead of final
maturity.
The City may wish to consider these two financing options both in terms of their potential cost, but
also ongoing flexibility in the context of your larger RWQCP CIP program.
FY Interest Cost Reinvestment Net Interest Cost
2025 $832,000 ($365,256)$466,744
2026 $998,400 ($650,143)$348,257
2027 $998,400 ($709,016)$289,384
2028 $998,400 ($394,355)$604,045
2029 $416,000 ($76,620)$339,380
Total $4,243,200 ($2,195,389)$2,047,811
BAN BORROWING COST (Net of Investment Income)
BAN
LOC
(Current SOFR)
LOC
(5-Yr. AVG SOFR)BAN**BAN vs LOC
(Current)
BAN vs LOC (5-Yr.
AVG)
FY Total Cost Total Cost Net Interest
2025 $689,646 $431,609 $466,744 ($222,901)$35,135
2026 $462,541 $310,086 $348,257 ($114,284)$38,171
2027 $361,092 $252,322 $289,384 ($71,708)$37,062
2028 $903,312 $561,055 $604,045 ($299,267)$42,990
2029 $527,495 $319,816 $339,380 ($188,115)$19,565
Total $2,944,086 $1,874,889 $2,047,811 ($896,275)$172,923
PV (Total) *** $2,700,467 $1,720,976 $1,880,462 ($806,268)$159,473
** Assumes 5-year avg. of SOFR for reinvestment rate
***Present valued to 8/1/2024 at 3.000%
COMPARISON OF ALTERNATIVES
Difference