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BACKGROUND In November 2004, the City issued the City of Pleasanton, Water Revenue Refunding Bonds, Series 2004 (Bonds) in the amount of $3,595,000. The Bonds are payable from water revenues from ratepayers from the Water Fund. The final payment on the Bonds is September 1, 2014. The bonds require that the City set rates and collect water revenues from its customers annually that pay all maintenance and operation costs of the Water System and generate net revenues equal to 1.25% of the debt service payments (principal and interest) then due on the Bonds (Bond Covenant). The City has ample reserves to pay the annual debt service on the Bonds; however, the Bond Covenants require the monies to come from annual water revenues not existing reserves, If they are unable to come from annual revenues then water rates must be increased accordingly. DISCUSSION The City had not raised its water rates for ten years and during that time it had been using reserves to supplement annual operating revenues (fees and charges from water customers) to fund annual operations. Staff knew that the growth in expenditures (mainly Zone 7 water costs) was outpacing the growth in water revenues and a rate increase was necessary. However, the water rate increase that was approved by Council and implemented September 1, 2010, came too late to help the Water Fund in 2009/10FY. Therefore, the City needed to reduce the Water Fund expenditures in order to meet its Bond Covenant in the 2009/10FY. The logical candidate of expenditures to reduce was the overhead charges from the General Fund. Annually, the City charges the Water Fund and other enterprise operations an overhead charge for administrative services provided by the operating staff funded in the General Fund (i.e., payroll, City administration, engineering, City attorney's support, etc.). It should be noted that not meeting the City's Bond Covenant requires a water rate increase (which the City did implement in September 2011) and continued violation of its Bond Covenants could result in a downgrade in the City's bond rating. Once again as a result of the reduction in overhead charges the City was able to meet its bond covenant for the 2009/10FY and avoid any potential downgrade in its bond rating. To avoid this issue in the future staff is recommending that the City payoff the remaining Bonds from the Water Fund reserves. The total amount needed to payoff the Bonds is $715,916 of which $71,591 is currently on hand with the Bond Trustee. Therefore, the remaining funds needed to payoff the Bonds Is $644,325. These monies will come from the Water Fund's reserves of $6.0 million. Submitted by:�Q� Approve by: Emily Wagner Nelson Fialho Director of Finance City Manager Attachments: 1. Resolution 2. Escrow Instructions Page 2 of 2