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DISCUSSION Financing Options Staff explored the option of making the DERWA payment through incremental payments based on the City's increased demand for recycled water In that scenario, the City would make six$1 18 million payments over 3 5 years or approximately $1 8 million a fiscal year for four years Those payments reduce the amount of Water funds available to fund other Water capital project priorities Securing financing to pay the City's DERWA obligation ensures the Water Fund will have funds available to fund other priority capital projects over the next four years which prompted staff to evaluate issuing debt as an option to pay the City's obligation to DERWA Finance staff and the City's Financial Advisor, PFM, worked with the City's bank, JP Morgan Chase, to evaluate the feasibility of financing the City's obligation to DERWA through a private placement bond JP Morgan Chase current interest rate is 2 07%for an eight year bond with no call option A review of current market rates indicates that an 8- year AA rated Municipal Bond would yield an interest rate of approximately 2 21% Thus, staff and PFM concluded the 2 07% interest rate is a favorable rate for the City Further, interest rates have increased since October of 2016 by almost 100 basis points and are expected to continue to increase Thus, soliciting quotes from other banks exposes the City to the risk of paying higher rates by extending the time required to complete the borrowing Legal Structure and Financing Documents The resolution that Council and the JPA Authority are being asked to adopt will approve the following documents o Installment Salle Agreement - Under the Installment Sale Agreement, the Authority agrees to implement the Project as an improvement to the existing system and to sell the improved system back to the City The City agrees (a) to accept appointment as the agent of the Authority to actually implement the Project, (b) to make Installment Payments on account of the agreed purchase price (which is the same amount as the Bonds) from the water system revenues, and (c) to maintain water rates and charges at a level which assures the City's ability to (i) maintain the system and (ii) make timely payment of the Installment Payments and any other payment obligations secured by and payable from the water system revenues © Trust Agreement— Under the Trust Agreement, the Finance Director, as Trustee, agrees to (a) provide for execution and delivery of the Bonds to JP Morgan Chase, N A as the purchaser of the Bonds in exchange for the bond proceeds, (b) to receive and administer the bond proceeds to pay for the Project and related costs of issuing the Bonds and (c) to receive the Installment Payments from the City and apply the moneys to repayment of the principal of and interest on the Bonds • Purchase Contract— The Purchase Contract sets forth the terms and conditions under which JP Morgan Chase, N A will purchase the Bonds from the Authority, including the length of the term of the Bonds and the interest rate on the Bonds Page 3 of 4