(11)AR 101607 Short Term Loan Agreement

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ITEM #11 CITY OF COLTON AGENDA REPORT FOR CITY COUNCIL AND UTILITY AUTHORITY MEETING OF OCTOBER 16, 2007 TO: HONORABLE MAYOR AND CITY COUNCIL MEMBERS AND MEMBERS OF THE UTILITY AUTHORITY FROM: DILU DE ALWIS, FINANCE DIRECTOR ,bk SUBJECT: APPROVAL OF A SHORT TERM LOAN FROM THE WASTEWATER FUND TO THE WATER FUND IN THE AMOUNT OF $2,000,000; AND APPROVE AND ADOPT A RESOLUTION ADOPTING THE LOAN AGREEMENT DATE: OCTOBER 10, 2007 BACKGROUND Since calendar year 2002 the City of Colton has spent significant resources to address the contamination of certain water wells with perchlorate. These resources were spent on shutting down wells and drilling new wells as well as treatment of the water system. These actions have resulted in a significant drain on cash for the water fund, whose balance has seen a drastic reduction from $7.4 million at the end of fiscal year 2002 to a negative $1.1 million at the end of fiscal year 2007. DISCUSSION/ ANALYSIS Since 1997 findings of perchlorate in the City of Colton's water system and focusing on addressing this situation starting in 2002, the Water Fund has expended significant financial resources resulting in a drain on the Water Fund's fiscal condition. The water utility has incurred significant legal costs, expert costs and remediation/investigation costs since 2002, relative to the perchlorate issue. Some of the costs associated with the perchlorate issue include treatment of the water system, shutting down of wells and drilling of new wells. All of these actions have led to a significant reduction of the water utility's cash from a high of $7.4 million at June 30, 2002 to a negative $1.1 million at June 30, 2007. This negative cash position will have a significant impact on the water utility's ability to continue to operate and will require a cash infusion from another source. The Wastewater Fund's cash position has improved since the rate increase which went into effect in 2004 resulting in a cash balance of $4.4 million at June 30, 2007. The wastewater utility is in a position to loan $2 million over a short term and not affect its ability to maintain its operation as well as any capital projects as budgeted for the current fiscal year. Staff will utilize the Local Agency Investment Fund (LAIF) interest rates to calculate the loan payments and the water utility will make interest only payments through the end of the fiscal year of June 30, 2008 with the anticipation of paying off the loan within eighteen months. The water fund is owed $2.073 million from the West Valley Project Area and with the Agency Board's approval of a bond issuance which staff is currently working on, it is anticipated that the water utility will be paid back this said amount at which time the loan amount will be paid back in full. The loan terms were discussed with the City Treasurer and City Manager who have approved the presentation of this report to the City Council and Colton Utility Authority for approval. FINANCIAL IMPACT The fiscal impact of this loan is detailed in the discussion analysis of the staff report. The interest payments on this loan will be paid semi-annually in January and June till such time that the loan is paid in full. It is anticipated that the loan period will not exceed eighteen moths. ENVIRONMENTAL IMPACT N/A