The money people pay each month to be on city water? Those dollars will now stretch further to pay off a “bridge loan” with Bank of the Southwest.
Why is the city taking out an expensive bridge loan for $4.8 million up for three years that comes with an interest rate of 5.5 percent?
The city received a loan/grant from the U.S. Department of Agriculture in 2021. The loan portion was for $4,811,000. The grant portion was for $2,720,000.
The money was for the “Water System Performance Improvements project,” which the city refers to by the inside-baseball acronym of WSPI-1.
Around 2019, according to the city’s financial advisor, the USDA changed how it loans and grants money. Attorney Chris Muirhead, of Modrall Sperling, presented the bridge loan/bond debt ordinance to the city commission and public at the Feb. 14 city commission meeting.
The USDA used to give city grant and loan recipients the money right away for the project. Now it requires that cities get an interim loan, the USDA withholding its money until after construction is complete.
This interim financing cuts into how much of the loan grant/goes to construction costs. The city took out the same kind of bridge loan for the downtown water project, which was nearly a $10-million project. Only about $6 million went to construction.
The USDA loan will pay for the bridge loan, Muirhead said, and the debt will be rolled into the USDA’s $4.8 million loan, which debt is extended over 40 years at 1.37 percent interest, Muirhead said.
This city already borrowed $750,000 from Bank of the Southwest to pay for the design and engineering costs for WSPI-1 project. Assistant City Manager Traci Alvarez, who oversees capital projects, said she thought the interest rate was 5.3 percent on that loan. She did not say when the city borrowed the money and how much was paid. Muirhead said the $750,000 loan will be paid by this new bridge loan.
Confusing? The $750,000 Bank of the Southwest loan will be paid off by the $4.8 million Bank of the Southwest bridge loan, which will be paid off by the $4.8 million USDA loan.
The $4.8 million bridge loan requires the city pay Bank of the Southwest interest payments monthly and interest is only on the city’s “draw.” Mayor Pro Tem Amanda Forrister said the size of the draw will be determined by the contractors’ bills for the month. Muirhead gave an example. If the city draws $1.5 million one month, it will pay 5.5 percent interest only on that $1.5 million.
Although this draw arrangement can go on for up to three years, the city can stop the loan at any time. As soon as construction is complete, no doubt the city will inform the USDA and the bridge loan will be closed out.
Alvarez said the Bank of the Southwest and USDA can “compel a [water] rate increase,” to ensure they get their loan payments. The city raised water rates about 50 percent in 2019, a USDA requirement before giving the city a $5,457,000 loan and $3,960,000 grant for the downtown water project. That rate increase ordinance also specified that water rates will continue to go up each year, with rate increases tied to the consumer price index. There was a 5.4 percent increase, a 9.4 percent increase, and then I lost track. Despite the rate increases, an end-of-October income report stated the city expects to spend about $377,000 more than it takes in in revenue by the end of the fiscal year, which is June 31.
Water and Wastewater Director Arnulfo Castaneda said the WSPI-1 project will create a “third pressure zone,” in the city’s water system, which currently has two pressure zones, he said.
The implication is that water leaks and resulting pressure changes when they are fixed can be contained within each of the pressure zones, preventing some breakages and leaks.
He did not explain how this new pressure zone will be formed but his next statement was that a “Seven-mile transmission line [will be replaced that goes] from Cook [Cook Street Station, where all water from the city’s wells goes for chlorination treatment] to Morgan and directly into the storage tank.”
The project also includes “four or five pressure reducing valves.”
The city commission approved the bridge-loan ordinance for publication. This ordinance will come up for action in about a month.