September 21, 2018
Transcript
Describer:
CASTLE PINES NORTH METROPOLITAN DISTRICT
BOARD OF DIRECTORS
SPECIAL BOARD MEETING
September 21, 2018 @ 8:30 AM
7404 Yorkshire Dr.
Castle Pines, CO 80108
Dave McEntire – President Term Expires May 2022
Robert Merritt – Vice President Term Expires May 2022
Denise Crew – Treasurer Term Expires May 2020
Kathy Rosenkrans – Director Term Expires May 2020
Norman Froman - Director Term Expires May 2020
1. Call to Order Special Meeting
2. Roll Call/Announcement of Quorum/Disclosure of Potential Conflicts of Interest.
3. Approval of Agenda.
4. Action Items.
A. Consider Funding PCWRA 3 MGD Capacity Expansion Work Package No. 1 and Funding for Entirety of CPNMD Portion of the Project.
5. Adjournment.
Board President David McEntire:
Good morning everybody. You want to call this meeting to order? It is Friday, September 21st, 8:37 a.m.. Please join me this morning in saying the Pledge of Allegiance to open this meeting up.
All Speak:
I Pledge of allegiance to the flag of the United States of America and to the Republic for which it stands. One nation under God, indivisible, with liberty and justice for all.
David:
Thank you very much. Roll call. And, when your name is called, if you will signify your presence by here and, disclose any potential conflicts of interest at that time, please.
Board Member Director Robert Merritt:
Director Merritt. Present. No conflicts.
Board Member Director Denise Crew:
Director Crew. Present. No conflicts.
Board Member Director Kathy Rosenkranz:
Director Rosenkranz. Present. No conflicts.
David:
Very good. McEntire is here and has no potential conflicts of interest. Item number three is the approval of the agenda. You see before you again. dated September 21st, 2018, 8:30 a.m., A special board meeting agenda. There's been prepared at the request of, Director Merritt, from our, September 17th meeting to consider, a single action item, predominantly, the funding, the Plum Creek Water Reclamation Authority, $3 million or 3 million gallon capacity expansion work package number one.
That being said, I'd like to. Extend my appreciation to, Amanda, for Pinnacle as she on the phone very good man to thank you for the work. That you presented. We have all been in receipt of. We're in receipt of the worksheet, and the and the cover letter. Muchas gracias. And, we've also been in receipt of, another spreadsheet, and some figures, handed out by Jim Nikkel.
Jim, would you take a minute and just share with us what that is?
District Manager Jim Nikkel:
Jim, would you take a minute and just share with us what that is? Yeah. That's, the other portion of the work that was prepared by Ellers and Company last night. Hello. Go ahead. That, is additional work that Amanda worked off of. Actually, entire team worked off of that was prepared by Jim Mann and, Melissa over at Ellers and Company.
So it takes a a real team effort to pull all these together. And it has, as I've described in our budgeting process, anytime we're dealing with these types of finances, it's a very iterative process. So, what you're seeing here, I'll call the final version. There's probably still a little tweaking that'll be done, after today. But, this is what it takes time to pull all this together.
And, when you guys made the assignment Monday night, it put us all under kind of a tough deadline to get all these iterations done over the last few days with everybody else's schedule. So I apologize for this coming in at, you know, almost 10:00 last night, but it was absolutely the best we could do.
David:
Very good. It it appears as if it ties not,
Well, I can I understand what I've been able to review in the 11th and a half hour. I'm certain that this back up was necessary because, at least as I walk through the assumptions, there's some, a common theme and a common objective, and it looks like would, culminate in, the same result.
So, that being said, I'm going to, open up with a couple comments first and then pass it on to my colleagues for their comments and questions. When looking at the well, let me let me just comment on what Jim said, specifically as it relates to the team, and, and while I did not make a motion on on Monday the 17th, to put this organization and, and its consultants, on a path where they could not succeed, but rather to exercise a process.
That I believe in, which is namely, given the opportunities to surround myself with the very best, only a fool would do otherwise. And and, if that means that we go through the same process over and over and over again, it's what we do, and it's how we roll. And it always, always, generates a productive outcome, albeit it may be different than, the one previous, it's, it's a it's a good exercise to keep in the forefront of, of, our practices, moving forward.
And, again, thank you for everybody that was involved. I look at this spreadsheet and really I focus on,
Two issues, one, the debt, which was recommended, in, in, in the previous meetings and as it has been accounted, and memorialized for, say, the last year or two, of approximately $5 million. I look at, the spreadsheet which, really reflects not only the million dollar, plug under the first column, 2019, but also demonstrates the, $3 million from that $5 million that will be paid out in 2019 for the completion of that expansion, but also the strength of the district, as it relates to the million nine in in cash that will be coming out.
Describer:
Jim Nikkel rises to answer the phone on the board of director's table.
Jim:
Amanda. Hello.
Hello.
Hello. Hey. You. You're. Okay and you're really staticky.
Okay. Leave us on speaker until you get in the office and call in on a land line, then.
Describer:
Jim hangs up and returns to his seat.
David:
So as I continue to, read through this, if if my assertions are, one differs with, feel free to interrupt me and and, I'll try not to be too long winded here. But the difference between, the $5 million, that we see in the plug or as a part of that plug under total wastewater non operating revenue.
And on the column of 2019, the difference between it and the capital expense, two figures below that, the 3 million is, is a $2 million difference approximately. And and that's where the million nine is, is in cash, making up the difference. So, while the revenue of the bond, is accounted for, the cash is accounted for, and the total expense of the project is accounted for in this exercise. .... Where I really want to focus is at the bottom, very bottom.
The ending fund balance at the end of this year, if we were to pass, this, would be $2.5 million. It's evident to Pinnacle...
Kathy:
Hold on, is that next year or 2019?
David:
You're right, Director Rosenkranz. Correct. Got out of myself.
Kathy:
I just wanted to make sure I was following along.
David:
And while that's. And I appreciate that with to, it's interesting because,
Well, we should have a 2018, ending balance of of more than $15,000. I'm not going to dwell on that for the moment, but thank you. At the end of 2019, we're at $2.5 million. And as an ending, fund balance. And what that does is, is, as Jim represented and, and may have been part of his plan all along was to replenish $1.9M and and, in cash, because the assumptions that he's given to, the financial folks is that, we ought to have at least six months of, of operating expenses in reserve, as well as at least one year of, of, debt service payment.
And while that is about $1 million a little bit north of $1 million, you still see that there's, about a million and a half, in excess. And I'm, I'm guessing, confidently that that that was one of the reasons that Pinnacle has come back, in the nine, in a 48 minute hour of last night and said, hey, maybe, maybe 4 million, we'll get this deal done instead of five.
And, and while there are assumptions, as you can clearly see, as 4% rate increase, there's even some commentary about, extending the term of that. And James is going to be pursuing that in our behalf over the course of the next 30 days if we decide to move forward and, and maybe even longer than that. But, the assumptions are parallel, both from their staff and from our accountants, that we're going to potentially realize 60 new connections over the course of the next, each over the course of the next ten years.
We've talked about prepayment penalties and windows and, and, well, if it goes faster, we'll see a bigger fund balance grow. And, because after that window, we can pay it down without any penalties and, and, but we didn't factor that into this. And then the, the operating man and maintenance inflation factor of 3%.
So, Really there's there's, it's an interesting question. We could actually go, we could actually go for $2.5 million, cut this debt in half today and, and leave ourselves with zero cash. But but, it's interesting that that, while that may not be the prudent thing to do. That, the district has, planned prudently and and proactively, enough to, consider this new debt and, and, and it look, strong, for anyone looking in and for anyone with the responsibility of operation, the way it is outlined, at least, from a Pinnacle recommendation, point of view.
So it's it's it's, should be obvious. If not, I am, of a mind to make a motion to approve, the district pursue a $4 million, debt vehicle to accomplish the, 13.86%, ownership and capacity opportunity within the Plum Creek Water Reclamation Facility, but want to open it up to each director for their comments, questions and concerns.
Kathy:
Oh. Good point. Yes. So, I actually do not have any concerns. Thank you.
Denise:
I just wanted to say thank you again for everybody putting numbers together. I know that's a lot to ask for in a short amount of time. But the bottom line is we're able to fund this practically for $1 million less than what we had expected.
So again, I think that was a prudent, fiscally responsible direction to take. And I appreciate it. Thank you.
Jim:
Could could I address that just for a moment? What we did as a team really was originally we wanted to pay them $1.9 million out of reserves and then pay that back over time. Well, as we continue to work on it, we decided to one, our goal really was to keep our annual, increases on rates in the 3 to 4% range.
And in order to do that, to make that work, we either needed to go out longer in time or front end, load this with additional cash, or basically reduce the amount to be borrowed. So in the end, what we've done is we still pay $1.9 million out of reserves. That really for the start of next year, does drive that reserve balance down.
But we start to build. We'll refund $1 million back into the reserves. It's a 900 million or $900,000 hit to the reserves. But as you as Mr. McEntire pointed out, we do then start to build those reserves back up. And we do that fairly quickly. Two things to make comment on. Each year as we go through the budget process, we will reanalyze how much money we truly want to have and into reserves.
And that affects the next year's rate increase. The other thing that will affect the rate increase is the rate at which we will take in new taps and the problem we get into here is while taps are part of the revenue stream. We cannot pledge that revenue because tap fees dry up tomorrow. And we've seen that happen in this state.
We've seen it happen nationally. The housing market suddenly goes away. This proves to the lenders that we have the capability to continue to make our payments, but on an annual basis, as we see these taps come in, we go through this exact same process during budgeting to decide how much money comes out of taps to go to payments, how much money, have we taken in that helps reduce those annual increases?
What this really is, is a roadmap that says we're quite capable of doing this at 3% a year annually, with only 60 taps coming in. As I pointed out Monday night, we sold 14 just to one developer last week. We continue to sell taps to both Meritage as well as to Lennar and Century homes are going to be coming in here very quickly.
They're going to want to start to go vertical. So they again, we're dealing with public funds. So we always want to be conservative on our projections. That's why we chose that 60 taps per year over a ten year period number, so. I hope that helps a little bit. The explanation.
Robert:
How many taps do we already have this year?
Jim:
We're probably at 80, maybe 85 this year. So far we've been running about five per month for Meritage and 14, 15, 16 that come in from our from Lennar, 16 that's come in 17. That's come in now from so yeah, we're in that that between 60 and 80 taps that have come in this year and we only have one builder active at the start of this year.
Now we've got two and soon to have three.
Robert:
I guess it's my turn then. And, just appreciate everybody being here and having another look at this in a final hour. Like I said, it seems like both sides has been put under some pressure for this. But in doing so, the adequate, adequate due diligence seems to be done at this point with, and numbers, look a lot better than they did before.
So at that point, I would like to be able to second, Dave McEntire's motion for the approval. And if no one else has any other comments, I'll hand the microphone back to David.
Jim:
Can I suggest one addition to the, motion? And that would be to fund, work, work package number one at the amount of $1.9 million?
That then gives me the authorization to start that wire process.
Oh. Thank you. And and to approve execution of the contract. That's from legal counsel.
Sure. Let me, if I may, let me restate the, motion on the floor, inclusive of of, staff and counsel's, comments and recommendation. And before I start that dissertation, counsel, are you, good? Yes. Okay. James, is with us from Ellers in, in the audience.
The assumptions that, Pinnacle made in their write up, included, A specific reference to a 15 year term regardless of of the type of financing, I will assume, is that a reasonable assertion on their part?
Describer:
James rises from the audience and comes to the board to use their microphone.
James, Ellers and Company:
Pick a microphone any microphone? In in terms of the, assumption, the 15 year, are you questioning whether because Pinnacle references that you could probably go out 20 years? You could, there's nothing that would stop you to doing that. You're going out further on the yield curve. So there is going to be, an impact on your interest rates.
Longer you go, the harder is to sell. But that being said, interest rates are relatively low and the yield curve is relatively flat. So there isn't a lot of difference between a huge amount of difference between the interest rate that you see on a 15 year versus a 20 year obligation. Now, the one thing I would say about that is when you when you look at on either of the projections, when you get out about seven years and you look at the fund balance that's been created.
If seven years out, which would be kind of the standard call protection, you really sitting on 7 or $8 million, you would probably pay this obligation off. So why go out further on the yield curve and, you know, absorb that additional hit? Now, the issue being is that, as Jim alluded to, if for whatever reason, the tap fee revenue dries up, we still need to have rate structure put in place to be able to pay the operation of the utility plus the principal and interest on these bonds.
And that's why it's important that that coverage ratio, that is on our spreadsheet, the one with the colors on it, there are two coverage ratios. One is with tap fees and one is without tap fees. It's important that the coverage ratio without tap fees always be at least one times coverage. And it really should be about 110 times coverage as a floor.
Simply because you want to be able to have enough dollars coming into the utility on an annual basis, regardless of the tap fees, to be in a position to fix things when they break without necessarily having to go out and borrow additional money. You don't want to be in a position where all of a sudden a pump goes out on a lift station, and you don't have the wherewithal to just write a check out to replace it.
Now you're trying to scramble and find, you know, $100,000 to fix it. That's the position you don't want to be in. And so prudently, you always want to be above that one times coverage without the tap fees. As long as the tap fees are coming in, it's great because there's there's plenty of cash rolling in. But if that dries up, which it does from time to time, that's that's when the utility finds itself in a tough position.
So our recommendation would be to stick as much as possible with a 15 year when, when, Jim and I started talking about this, we talked about a ten year obligation. But to get that one times coverage, to do a ten year obligation would have meant that you would have been way beyond your 3 to 4% increases on an annual basis for the sewer rates.
And that politically was not palatable to Jim, which obviously probably would not be palatable to you folks either. And that's why we ended up arriving at the 15 years so we could spread out the payments a little longer.
David:
Thank you. James. I want to include that term as a minimum term in my motion simply, as a as a, an endorsement to Pinnacle’s recommendation as well as staff's recommendation for, a flat 4% annual increase in service, fees. And, so it is with that and all of everyone's hard work time and consideration, and I make the following motion.
I make a motion to authorize the district manager, to put into escrow as a part of, as the initial step towards the acquisition of 13.86% of the 3 million, gallon per day expansion project, Plum Creek water reclamation.
District or association? And number two, to authorize the district manager to in behalf of this district in, enter into the agreement with Parker water, or Plum Creek. Excuse me. Plum Creek, all these acronyms, Plum Creek water reclamation district. And thirdly, to authorize the district, by and through the district manager and counsel and Pinnacle, the issuance of $4 million in debt over the minimum of 15 years, as recommended by Pinnacle and by, counsel and by staff this morning.
Do I hear a second?
Robert:
I second that motion.
David:
Further conversation from the board. If any. Hearing none, be a head shake, and some mumbling without the the, mic’s working. There is no further conversation of of, the board at this time. I'd like to call for a vote. Please indicate or signify your vote with a yay or nay when called upon.
Board Voting All Speak:
Director Rosenkranz. I. Director Crew. I, Director Merritt. I. Director McEntire votes in favor as well. With that, we have a motion that is passed with the majority of the board voting yay!
David:
Again, thank you very much for everyone attending and for working with the board over the course of the last week to come to this decision.
Great job. I look for motion to adjourn. And in the spirit of expediting that, I make the motion to adjourn. Is there a second?
Robert:
Second, that emo, that motion.
Board Voting All Speak:
Director Rosenkranz, would you agree with that? I. Crew. I. Merritt. I. McEntire I. Meeting adjourn.