Clear as mud—$5.48-million loan for downtown water project

We were promised more information the next time, the next time and the next time, but we never received more details. Now we (water-rate payers) are indebted with no clear understanding how the bridge loan with the Bank of the Southwest worked and what, exactly, was folded into the 40-year USDA loan that will pay for the downtown water project still being worked on.

I write about this particular and somewhat boring and complex capital project’s financing as an exemplar, to alert the citizens to the vast sums of their money being spent with little planning or explanation.  As stated in the past, the city’s budgets over the last four years have skyrocketed due to capital projects—the $51- million draft budget passed in May is comprised of between $27 and $29 million in capital projects.

Over two years ago, when Morris Madrid was city manager, I wrote an article citing an engineering report that stated about 40 percent of the city’s water was being lost. The subsequent city manager, Bruce Swingle, reported 43 percent is being lost, but Madrid denied it and the city commission went along with the denial. The attitude then was that, sure, the water system needed work, and capital projects would be escalated to address it. The attitude Swingle brought, recently retired, was that the water system was in a state of emergency.

Traci Alvarez was then development director (manager of capital projects) and planning and zoning administrator. She has since been elevated to assistant city manager, but she still has the other two titles.

The downtown water project started as do all city capital projects. Not with city commissioners leading the way through planning and ordering preliminary engineering studies and then directing staff to investigate funding sources. It started with Alvarez presenting an application, not included in the city packet, for city commission approval. Alvarez provided little information about the project, such as why this one and why now and how much it would cost and how needed was it in comparison to other necessary projects and what was the source or engineering study bearing this out? No information was given on the strategy that made her apply for the U.S. Department of Agriculture grant/loan and what its guidelines are, such as its practice of giving 60/40 percent loan/grants to needy communities. Typically, the city commission asked no questions and rubber-stamped it.

Months later the city commission was told the USDA was thinking about offering a $3.9 million grant and $5.48 million loan to do a downtown water project to replace pipes and also beef up the city’s sole chlorination plant at Cook Street Station. No preliminary engineering plan was presented, just a brief description of the project. Please approve the grant/loan, Alvarez asked, and the city commission does so, without having it explained that their approval was really obligating the city to obey certain requirements and conditions. The conditions letter was in the packet, but it did not appear the city commissioners read it.

Months later, without referring to the conditions letter from the USDA that set several requirements in train, Madrid is cryptic. He tells the city commission that “the city has to have some skin in the game.” The public later learns that the USDA hired Rural Communities Assistance Corporation, a subsidy of USDA or historically a preferred sub-contractor. The RCAC comes to assess the city water department’s ability to manage and operate the utility and to generate money sufficient to ensure the USDA is not wasting money and will be paid back.

Madrid and the RCAC representative confer on a water-rate study. They give two “town halls” on the downtown water project but ignore all public input. People ask why Madrid refutes the engineering study that states there is over a 40-percent water loss, why there wasn’t a master plan before choosing this project and why water and sewer and roads repairs aren’t being planned and constructed and finances in concert to save money. No answers, at least none that are understandable. Activist Ron Fenn’s suggestion that the downtown water pipes be abandoned and placed alongside sewer pipes in the dirt alleys, thus saving road tear up for this project and in the future, was also ignored.

The town halls, unlike official public hearings, do not result in recording public input. The town halls were a one-way street—to explain what the new rates would be and to assure downtown businesses the city would be in touch to confer about minimizing disruption to their business.

Soon after the town halls, the city commission approved water rate increases—50 percent in 2020 and increases corresponding to the consumer price index every year thereafter. Water rates went up about 5.5 percent in 2021, about 9.7 percent in 2022 and will go up again this June or July.

Madrid is forced to resign for unstated reasons and City Manager Bruce Swingle takes his place. At one of his initial city commission meetings, Alavarez is made assistant city manager by the city commission, the promotion pushed by then-City Commissioner Frances Luna. The same secret capital projects system remains in effect. Alvarez controls the capital projects pipeline, choosing the project for unstated reasons, submitting a grant application, hiring a preliminary engineering report from Wilson and Company and arranging financing in coordination with the city manager, the city commission granting approvals without seeming knowledge or discussion. This is surmise based on four years of observing at city meetings, since there is nothing concrete to go on, that is, nothing is stated or asked in city meetings.

Sometime later, March 2022, Swingle vaguely explains the USDA requires the city to take out a bridge loan for the project, the USDA will not loan the $5.48 million up front. The implication is, based on the legalese in a USDA requirements and conditions document, the city is on probation and the USDA is hedging its bets—they want to see the final engineering plans and then the competition procurement process and then the contracting and hiring process.

Alvarez said, vaguely, that the USDA loan “will pay us back for the bridge loan.”

The city commission approves the bridge loan without explaining it to the public.

In addition, to ensure the grant money isn’t used to finance the bridge loan, the USDA won’t disburse the $3.9 million grant until much later. I surmise the grant money will be released after the bridge loan is closed out and the 40-year USDA loan goes through closing, which will probably be a month after the May 24 city commission approval of the USDA loan.

I wrote an article September 2022 about the bridge loan because I was shocked at its cost, estimated by the USDA in a conditions letter at over $635,000. Of the $9.4 million grant/loan, only $6.8 million will go to actual construction, $2.6 million eaten up by design/engineering/onsite management fees and bridge loan financing costs and attendant bond counsel and legal fees.

https://sierracountycitizen.org/another-reason-not-to-pass-3m-in-general-obligation-bonds/

I could not understand the dense financial language describing how the bridge loan would work and my questions to the city resulted in being told “do an IPRA.”

In an effort to understand the bridge loan, I submitted an Inspection of Public Records Act Request to view the city’s payments to Bank of the Southwest, which holds the city’s bridge loan. The loan documents said, in brief and bold below:

The loan was taken out 3.17.22 and ends 3.17.25 at 5 percent interest

The original loan balance on 4.3.22 was 1,057,558.62. 

 4.20.22 the city paid SW $16,000 interest “for interest through June.” 

4.21.22 the city paid SW $2,743.28 interest

5.13.22 the city paid SW $4,406.50 interest on loan bal. $1,057,558.62

6.10.22 the city paid SW $4,553.38 interest on loan bal. $1,057,558.62

7.01.22 the city paid SW $55,200 interest

7.15.22 the city paid SW $4,537.74 interest on loan bal. $1,081,787.54

8.17.22 the city paid SW $4,678.20 interest on loan bal. $1,088,206.10

9.16.22 the city paid SW $4,685.33 interest on loan bal. $1,088,206.10

By my addition, all the payments since the loan was taken out, seven months, from March to Sept., total $96,804.43. 

Unlike the city packet documents that said the bridge loan was for $5.48 million, the city’s Bank of the Southwest documents stated the bridge loan was for $1.05 million. The interest was the same 5 percent, but on which principal amount was it being compounded, $5.48 million or $1.05 million? Or was the interest compounded on a principal based on what was left of the $5.48 million after a draw? The latter is what I thought was going on from the loan document. I also couldn’t figure out how often the 5 percent was compounded on this possibly moving principal amount. Was the 5 percent compounded quarterly, monthly or yearly? The only thing that was clear was that only interest would be paid on the bridge loan, no principal.

A few Sierra County Sun readers (since closed down) took exception to my article. At least one of them contacted Swingle and asked him to correct my article and then forwarded his email response. Swingle said the $635,000 interest and fees was for the bridge loan and the 40-year USDA loan combined. He said my reporting wasn’t factual but stemmed from my “malice for the city.”

At an April city commission meeting, the city’s bond counsel, Modrall Sperling’s Chris Muirhead, presented a resolution that vaguely stated the city commission approved closing out the bridge loan. No details were provided verbally or in packet documents. The city commission rubber-stamped the closing of the bridge loan via resolution with no discussion.

At the May 24 city commission meeting, Muirhead presented the loan documents for the 40-year USDA loan that supposedly includes the bridge loan, but again, there were no details.

I had emailed city commissioners and Swingle about a week before the meeting and asked that they have someone explain the bridge loan and 40-year loan and provide written schedules of payments paid to Bank of the Southwest and future payments owed to the USDA. I asked that the schedules be included in the city packet for the public, since it was paying for the debt (specifically, water customers’ bill payments are paying off the debt). No response from Swingle or city commissioners and nothing in the city packet.

Muirhead verbally stated at the meeting that he had recently called the Bank of the Southwest and the city had paid about $195,000 so far and the loan would close soon. He also said, “The interest is compounded daily,” evidently made aware of some of my questions.

This makes no sense to me. If 5 percent interest were compounded daily on $5.48 million the city would owe $274,000 a day. If the loan was for $1.057 million and the 5 percent were compounded daily, the city would owe nearly $53,000 a day. Since the bridge loan spanned a year and three months or about 455 days, clearly the 5 percent interest was not compounded daily.

Muirhead said the USDA 40-year loan comes with a 2.125 interest rate and “The city will pay $17,000 a month for the life of the loan.”

By my calculation that totals $8.16 million. The city will have paid $2.68 million interest on the $5.48 million loan.

The city staff’s and city commission’s nonchalance while spending millions and millions of public dollars with little transparency on capital projects is like nothing I’ve seen elsewhere among the dozen local governments I have reported on over the last 18 years in three states. The lack of transparency and no talking works. It’s very hard to report on and it appears the public is fine with not knowing for the most part. If people could see how other cities are run in comparison, I think more outrage would be heard and very different city commissioners would be elected.