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HomeMy WebLinkAboutStaff Report 4.B 05/16/2016Agenda Item #4.B DATE: May 16, 2016 TO: Honorable Mayor and Members of the City Council through City Manager FROM: William Mushallo, Finance Directo SUBJECT: Resolution Authorizing an Interfund Loan from the Wastewater Utility to the Vehicle and Equipment Replacement Fund, in an amount not to exceed $3,025,000 RECOMMENDATION It is recommended that the City Council adopt the attached resolution authorizing an interfund loan from the Wastewater Utility to the Vehicle and Equipment Replacement Fund, in an amount not to exceed $3,025,000. BACKGROUND In June, 2000 the City adopted an Interfund Loan Policy. Both short term and long term loans are covered in the policy. In order to put a loan into place, a promissory note is required and the term of the loan cannot exceed 15 years. The City Council reviews loans over $200,000 and the status of each interfund loan will be reported in the City's quarterly treasurer's report. Over the past several years interfund loans have been put into place for various reasons. During the three fiscal years prior to 2008/09 the City contributed approximately $350,000 per year to provide for replacement of the City's fleet. Contributions to the City's Vehicle and Equipment Replacement fund (VERF) were suspended due to financial hardship, and were not resumed until 2013/14, when $100,000 was contributed to the Fund. Between 2009 and 2013 the balance on hand in the fund was spent down, with the main expenditures being two demo ambulances, purchased in fiscal years 2012/13, and 2013/14, at a combined cost of $320,353. In 2013, the City Council adopted its goals for 2013 and 2014. Among the goal priorities was "Develop a Structured, Prioritized, and Time Specific Plan for a Comprehensive City -wide Fleet Replacement Program ". This priority recognized the City's lack of investment in its rolling stock, due to financial hardship, and the need for a comprehensive vehicle replacement plan. In May, 2014, the City Council was presented a plan that addressed vehicle replacement needs for a thirty -year period, and totaled $65.85 million. The General Fund share of that plan totaled $53.45 million. The Council identified this need as a priority for Measure Q, the City's failed 2014 sales tax measure. As noted, contributions to the VERF resumed in 2013/14, and were repeated again in fiscal year 2014/15. The 2015/16 contribution was $400,000, deriving from the General Fund ($300,000) and the Transient Occupancy Tax Fund ($100,000) In 2015, six (6) police cars were replaced, using unspent appropriations from the Police budget, and a Type 1 Fire Engine was purchased using monies accumulated in the VERF. The balance in the fund is projected at $174,680 as of June 30, 2016. DISCUSSION Vehicle replacement has become particularly critical for the Police and Fire Departments, with concerns mounting regarding reliability and maintenance costs. The City Manager requested the two departments to submit lists of the vehicles and apparatus in most serious need of replacement, to establish a target for a lease purchase or financing solution that could utilize the annual contribution to the VERF to service the debt. Their lists were conservative, totaled approximately $5.2 million, but exceed the capacity of the annual contribution to the VERF to service debt on that amount. In the meanwhile, the Finance Department examined financing alternatives, and determined that an interfund borrowing is the most attractive option. This option would allow for lower rates than external borrowing or leasing, but would pay the lending fund more than is currently earned by the City's pooled investments. Total borrowing capacity, relying on the current contribution level to the VERF is approximately $3,050,000. Using that total as a guide, department's requests were further prioritized, with a focus on the most critical vehicle and equipment replacement needs. That list totals $3.025 million and will provide significant relief for the departments for the next several years. The list of equipment is as follows: 2 ambulances $ 340,000 1 ladder truck 1,250,000 1 fire engine 520,000 15 police patrol vehicles 825,000 2 police motorcycles 60,000 1 police investigation vehicle 30,000 Total $3,025,000 An interfund loan of $3,025,000 is proposed, from the Wastewater Fund to the VERF. The Wastewater Fund has a projected balance of $30.4 million as of June 30, 2016. The interfund loan amount of $3,025,000 will be transferred into the Vehicle and Equipment Replacement Fund in order to purchase the vehicles in FY 16 -17. FINANCIAL IMPACTS The proposed loan is structured to provide $3,025,000 for vehicle purchases, with annual debt service payments of $395,275 to the Wastewater Utility Fund, over an 8 -year period; at an interest rate of 1.25 %. This interest rate is 0.35% more than the fund would have earned over the past 8 years by investing in the City's pooled account, and is significantly more than the rate the portfolio is currently earning. The interest rate paid is also significantly less than the rate that 2 would be paid should the City do a lease /purchase of the vehicles. That rate currently is in the 2.5% to 3% range. Appropriations to implement this loan have been included in the appropriate budgets, and $400,000 is recommended in FY 16 -17 in the VERF to repay the loan. Total transfers into that fund are recommended at $500,000, which provides additional coverage for debt service should it be needed, and is could address pay- as -we -go needs regarding individual vehicles elsewhere in the City fleet. Transfers in 2016 -17 are $300,000 from the General Fund, and $200,000 from the Transient Occupancy Tax Fund. ATTACHMENT 1. Resolution Authorizing the Establishment of an Interfund Loan from the Wastewater Utility to the Vehicle and Equipment Replacement Fund ATTACHMENT 1 RESOLUTION AUTHORIZING THE ESTABLISHMENT OF AN INTERFUND LOAN FROM THE WASTEWATER UTILITY TO THE VEHICLE AND EQUIPMENT REPLACEMENT FUND FOR THE PURCHASE OF NEEDED VEHICLES AND EMERGENCY EQUIPMENT WHEREAS, the Police and Fire Departments are in need of critical vehicles and equipment to perform public safety services for the City; and WHEREAS, adequate funding does not currently exist in the Vehicle and Equipment Fund for the purchase of such vehicles and emergency equipment; and WHEREAS, it is the policy of the City Council that interfund loans greater than one year may be approved, provided that such loans are repaid in fifteen (15) years or less, and that interest should be paid on such loans; and NOW, THEREFORE, BE IT RESOLVED that the City Council hereby approves an interfund loan from the Wastewater Utility to the Vehicle and Equipment Replacement Fund. 1. The interfund loan shall be formalized pursuant to a Promissory Note, attached and incorporated herein as Exhibit A. 2. The loan amount shall not exceed $3,025,000 unless authorized by the City Council. 3. Interest shall be charged at the rate of 1.25% per annum, and shall accrue annually. 4. The first loan payment, including interest, shall be made during FY 16 -17, and every year thereafter, in 8 equal installments, such that the entire principal and interest shall be repaid on or before June 30, 2025, unless extended by the City Council. 5. Payment of the full amount of principal advanced and any interest otherwise unpaid shall be made no later than June 30, 2025, unless extended by the City Council. 6. The City Manager and Finance Director /City Treasurer are hereby authorized to execute the Promissory Note and any associated documents that may be subsequently needed. rd [KM M1U: •1 CITY OF PETALUMA, CA PROMISSORY NOTE FOR INTERFUND LOAN This Promissory Note (Note) for an interfund loan is executed as of May 16, 2016, by the City Treasurer of the City of Petaluma, acting as custodian of the funds of the City of Petaluma, and the City Manager of the City, acting for the City Council in implementation of the directives and authority of Resolution Number 2016- , adopted on May 16, 2016. 1. The Treasurer shall transfer to the Vehicle Equipment and Replacement Fund, from the Wastewater Enterprise Fund, the amount of $3,025,000 for the purchase of necessary critical emergency vehicles and equipment. 2. Interest shall accrue annually, compounding monthly, beginning July 1, 2016, on the principal sum at the rate of 1.25% per annum. 3. Payment of principal and all interest accrued shall begin on June 30, 2017, and shall be made in 8 equal annual installments such that the entire principal and accrued interest shall be fully repaid on or before June 30, 2025. 4. The full sum of the interfund loan including all principal and interest otherwise remaining unpaid pursuant to this Promissory Note is due and payable no later than June 30, 2025. The full sum or any partial payment of principal may be prepaid with no penalty. 5. This Note is subject to the terms of the City of Petaluma Resolution Number 2016- Executed as of the date first above written CITY OF PETALUMA, CA By: City Treasurer By: City Manager Approved as to form this day of , 2016. City Attorney