Financial feasibility analysis for the acquisition of AVRWC (February 11, 2014)

By Urban Futures

Risk Factors

The Town’s boundaries differ from the boundaries of the service area of the AVR system. The Town would likely acquire all of the AVR facilities and not just those facilities located in the Town’s boundaries. If the Town were to use a CFD or assessment district to finance the acquisition, the boundaries of the district can be drawn to match the service area boundaries of AVR. Otherwise the Town may be required to incur the time and expense of an annexation process to bring all of the AVR facilities within Town boundaries. The ultimate cost of the annexation is unknown.

The total acquisition cost of the AVR system is still unknown. This feasibility analysis presents cost estimates including transactions cost, but the ultimate cost will depend on the condemnation judgment. The time required and the costs of the condemnation process itself are unknown, and total transactions cost may exceed the estimates provided in this report. An engineering consultant will need to review the overall condition of the water system as part of the acquisition process. There is a risk that the engineer may identify unanticipated capital costs, necessary replacements, deferred maintenance, or other issues that increase the cost of the acquisition to the Town.

There can be uncertainty with regard to accessing the municipal bond market. Interest rates are at historic long term lows but there is the potential for rates to rise before the condemnation process in concluded. Higher interest rates will mean higher property tax rates, special tax rates or assessments for property owners if the acquisition is financed via the tax bill. If revenue bonds or installment sale COPs are used, higher interest rates will cut into the system’s bonding capacity, cause increases in water rates, or even make the acquisition not feasible. Disruptions or problems in the financial markets themselves can make debt issuance and therefore project acquisition not feasible.

There is risk with respect to the adequacy of the water supply. The Mojave basin is adjudicated and there are essentially continuous groundwater shortages. The groundwater basin is in an overdraft condition and is being depleted, and maintaining water levels within the basin depends on recharging with water from the State Water Project. In past years, AVR has regularly exceeded its FPA. As a result, it must to lease water rights from other agencies and individuals. The Town will need to continue leasing water rights to maintain adequate supplies.

The Town Council will need to become knowledgeable regarding water system operations, capital requirements and issues concerning the water industry. The council will need to establish water rates, charges, and policies. The Town Manager and senior staff members will also need to become knowledgeable of the water system. Assigned staff will need to become proficient at running the day to day operations of the system. The Town may encounter problems regarding collections or high delinquencies, which would necessitate that the Town engages in burdensome and time consuming collection activities.

The Town will also be responsible for the repayment of customer advances. The estimated AVR customer advances for 2012 are approximately $31 million. The Town would be responsible for the repayment, or would need to arrange for repayment with the current owner when the system is purchased. The Town will need to satisfy accounting and record keeping requirements with regard to the advances, which can be time consuming and expensive.

The Town should be aware that there is unaccounted for water for both the domestic and irrigation system. This means there is a certain amount of leakage or loss of water within the system. Under the ALJ Decision, the parties agreed to estimate unaccounted for water at 8.0%.

There is always a risk of higher operating or capital costs in the future due to federal or state regulations. Regulations can mandate higher treatment standards and can cause the Town to incur large capital expenses to upgrade different parts of the water system.

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