Exeter refinances water debt, increases reserves

Exeter City Council votes to OK refinance $4.8 million USDA loans, add $700,000 to general fund reserve

By Paul Myers

EXETER – While Exeter and its residents have been painfully aware of the lack of money coming into the city’s water, sewer and general fund, it took a state report to quantify just how bad things have been.

The California state auditor released their new dashboard in October, ranking more than 470 cities based on detailed information about their fiscal health. While cities like Lindsay got the most scrutiny for being the fourth most challenged city in the state, Exeter was not far behind at 54. Exeter is struggling in two major areas: debt burden and financial reserves. 

The largest portion of Exeter debt is in the water fund. Between two United States Department of Agriculture (USDA) loans, Exeter owes $4.8 million. Paired with another loan in the fund and then smaller loans in the sewer fund, the auditor’s report puts Exeter in the high-risk category for debt burden. But that was not necessarily news.

“It told us what we already knew, but it reinforced it,” Tavarez said at Exeter’s Nov. 13 city council meeting. 

During the same meeting the city council voted to refinance their USDA loans in the water fund to  potentially realize a savings of $575,000 through 2045. Exeter city manager Adam Ennis said the loans carry a 4.38% interest rate, but NHA Advisors who is helping them refinance believes they can capture a bond for around 3.05%. The savings would be approximately $29,000 per year. But that is a drop in the bucket compared to the million and a half they need to make ends meet in the fund.

“Any penny we can save we are trying to do it. When you compare the $29,000 and then $1 to $1.5 million needed to close the gap, it isn’t anywhere what we need to get where we want to go,” Ennis said.

The bulk of Exeter’s revenue for their water and sewer fund will come from increasing rates. That decision will come down to residents. 

Exeter will hold their Prop 218 public hearing on Dec. 10 where residents will have their last opportunity to oppose utility increases. Residents will have had 45 days leading up to the meeting to submit their written protest. It takes 50% plus one of the residents to protest by the deadline to stymie the increase.

As proposed at the Exeter City Council’s Sept. 24 meeting, rates will jump from a base water rate of $24.26 per month for a single-family residence to $47.74 per month over five years. Over the same five year period base sewer rates will jump from $22.18 per month to $49.68. By 2023 single family residences will pay a total of $97.42 for their sewer and water services.

According to Tavarez’s Nov. 13 presentation, in order to move out of the state’s “high risk” category, enterprise fund rates should cover operational, maintenance, capital projects, reserves and debt needs. In the 2018-2019 fiscal year, water fund expenses ranged between $3 million and $3.5 million. Daily expenses were just under $2 million, while revenues fell between $1.5 million and $1.75 million. Tavarez notes that those numbers are likely to continue through the 2022-2023 fiscal year without an increase in revenue.

“We are covering our bare minimum expenses compared to our revenues…So if this continues without significant cuts, which we’ve already done the fund is going to keep sinking,” Tavarez said.

Things are similar in the sewer fund, but projected revenue marginally outpace daily expenses. Tavarez’s presentation notes that it would take nine years for the sewer fund to overcome their $400,000 debt, if they spent nothing on repairs and new projects. 

“As far as unrestricted money, like money available for capital projects, we are in the hole,” Tavarez said.

Lack of general funding

In order to move out of the “high risk” category for general fund reserves, Exeter will have to reach a minimum of 25%. The city council decided in fiscal year 2017-2018 that they wanted to stash away 10%. According to Tavarez, they were only able to put away 3% which would cover less than a month of the city’s expenses. 

A 25% reserve would move the city to the lower end of the moderate risk classification, where 31% of California cities are. Exeter would have to save up to 50% of reserves to be a part of the other 265 cities that create the low risk category. 

According to Tavarez’s presentation, preliminary budget analysis of the 2018-2019 fiscal year indicates that the city managed to save approximately $700,000 in the general fund thanks to correcting personnel costs to appropriate funds, deferring employment for unfilled positions, contracting out services and holding off on some needs.   

“This is good. It shows that the actions we are taking are paying off,” Tavarez said.

Benefiting the city as well, has been the overall economy. Tavarez said that revenues have increased thanks in part to the unprecedented period of economic prosperity. But he added that a downturn is expected, and that may affect the city’s ability to save. He suggested the council save the additional $700,000 as an unrestricted fund balance for fiscal emergencies and potential fiscal downturn. 

Adding those savings to reserves pushes the city past their original 10% goal into the 16%-18% range.

“The good news is if that council chooses to take those 2018-2019 unrestricted funds left and put it in reserves that puts us on the road to being a little better position,” Ennis said.

The city council ultimately agreed with Tavarez and Ennis’ approach.

“I think we should move the added funds over to the reserves to help boost us,” councilman Frankie Alves said.

“I think our goal should be to move [reserves] to 25%,” Hails said.

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