1997 AGN JUL 15 I26 - Laserfiche WebLink

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City of Colton AGENDA REPORT FOR COUNCIL MEETING OF JULY 15, 1997 TO: HONORABLE MAYOR AND CITY COUNCIL APPROVAL.: GRACIE FERNANDEZ HARMON, ACTING CITY MANAGER FROM: MIKE WILLIAMS, CITY TREASURER ANNA A. VEGA, FINANCE DIRECTOR THOMAS K. CLARKE, UTILITY DIRECTOC SUBJECT: CONSIDER FORGIVENESS OF ELECTRIC UTILTIY LOAN TO GENERAL FUND DATE: JULY 9, 1997 BACKGROUND Over several years the City of Colton did not sufficiently anticipate the reduction in revenues attributable, in large part, to the sluggish economy. As a result, the City resorted to balancing its General Fund budget by, among other things, projecting revenues at levels that were not realized and by drawing upon (and exhausting) one-time revenue sources. In addition, over the last three years the State of California has reversed a 1978 action granting Cities additional property tax revenue and redirected General Fund those taxes for edlucational purposes. At June 30, 1995, these past actions created a cumulative borrowing of $8,668,721 from the Electric Utility to Colton's General Fund. In December 1994, and February and March 1995, a Fiscal Health Plan was proposed by management and adopted by the City Council. The plan included, (i) instituting a utility users tax in April, 1995, which expires in April, 1998; (ii) a reduction in expenditures, including the elimination of 110 positions which resulted in the laying off of 71 employees, and furlough (time off without pay) hours for city employees; and (iii) a final inter -fund borrowing of $2.1 million from Colton's Electric Utility, to meet a portion of the cumulative deficit disclosed in the City's fiscal year 1995-96 audit. The balance at June 30, 1997 is $7,009,721 reflecting a 1995-96 payment of $459,000 and a 1996-97 payment of $1,200,000 by the general fund towards the Electric Utility advance. The management team implemented policies and procedures, as well as, the utilization of the new computer system to monitor and avoid further deterioration of reserves. There were no additional advances from the Electric Utility to the General Fund as of June 30, 1995. In addiction, the Electric Utility, in determining its ability to meet rate covenants, debt service coverage, additional bonds test, and other obligations and covenants, has always excluded from such calculation the amounts owed to the Electric Utility by the General Fund. DISCUSSION/ANALYSIS City Staff was asked to provide pros and cons with regards to the forgiveness of the loan from the Electric Utility to the General Fund. The following is staffs analysis: PROS 1. Forgiving the loan removes a long-term obligation of the General Fund. 2. Repayment of the loan places the Electric Utility in a much stronger financial position. The cash reserve that the repayment represents can be used to stabilizelreduce electric rates, attract/retain industrial customers, and provide for system upgrades to enhance reliability and quality of service. 3. Forgiving the loan relieves the current policy makers from having to deal with past practices. 4. Financial planning can be facilitated absent the issue of the outstanding debt. 5. Financial reporting will be enhanced through the elimination of the balance sheet liability and disclosure. -