Blue Ribbon Water Committee Report (December 12, 2011)

Selected quotes.

The Finance Committee recommends that the Town not attempt to purchase Apple Valley Ranchos Water Company (AVR) through condemnation for the following reasons (in no particular order of importance):

  1. The value of AVR set by the Court may be substantially more than the Town could fund through bond financing. In the present economic climate, The Town may not be able to raise $50 million or more through a General Obligation Bond or Specialty Tax Bond. The Bond Rating of the Town of Apple Valley along with many cities in California was reduced from A- to BBB+ in 2011.
  2. The value established by the Court in a condemnation proceeding could greatly exceed AVR’s real market value. The Town should not substantially overpay for AVR in any acquisition.
  3. The value established by the Court could exceed a purchase price that would make economic sense to the ratepayers of AVR.
    1. AVR water rates could increase from present levels by an estimated 46% between now and 2019. This would add $206 to the average annual water bill of $448. Therefore, the increases in property taxes due to bond financing for the purchase of AVR should not exceed the expected 46% increase in the average water bill over the next 8 years. The BRWC thought it would be in the interest of the ratepayers to incur this level of higher property taxes in order to avoid any future increases in water rates.
    2. Given this limitation, (property tax increases should not exceed a 46% increase in the average water bill over 8 years): The maximum purchase price that could be funded by General Obligation Bonds is $90 million. The Maximum amount that could be funded by Specialty Tax Bonds is $60 million because of higher interest rates. This assumes the interest rates the Bartle Wells Report estimated (the financial markets would require for each financing option) proves to be accurate. The BRWC is concerned that the interest rates would be substantially higher should the Town attempt such a large bond issue.
  4. Both bond financing options would require a ⅔ vote of approval by the voters of the Town of Apple Valley. It would be extremely difficult to get ⅔ of the voters to approve the Town’s acquisition of AVR, because other than the likelihood of substantial increases in water rates, there are no serious deficiencies in the delivery of water to the AVR ratepayers.
  5. Certificates of Participation (COPs), a form of Revenue Financing, do not require voter approval in a general election, and do not count as indebtedness under the California constitutional debt limitations. Unfortunately, the Town would not be able to issue COPs to finance the purchase of AVR, because the Town-owned water company is expected to generate only approximately $554,000 of Cash Flow in 2012 provided the water rates are not increased from 2011 levels. For example, an $80 million COPs would require approximately $9.9 million per year to service the debt.
    The Bartle Wells Report concluded that there would be $6 million of Net Revenue available per year to service the bond debt. This is not correct. The Cash Flow that would be available to make the bond payments would be $5.5 million less than the Bartle Wells Report indicated.
  6. If the Town of Apple Valley was not able to purchase the water company, either because it did not obtain voter approval, or because it could not obtain the bond financing, AVR and its owner, which would likely be the Carlyle Group, would sue the Town for damages. This could lead to a substantial award against the Town.
  7. It would not be prudent for the Town in this economic environment to incur $5 million or more in legal and consulting fees for a hostile condemnation proceeding, when the Town’s annual budget for 2011-2012 is only $25 million.