1997 AGN JUL 15 I26 - Laserfiche WebLink

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Page 2 Forgiveness of Loan July 15, 1997 6. General Fund expenditure were made which generally benefited the citizenry who would have had to pay for them through some type of City collection of revenues for services. 7. Foir the most part, all expenditures served the purpose of the General Fund services provided. 8. If based on voter action, the forgiving of the loan may give the electorate a feeling that they have some control over what they paid on the electric bill (i.e., police, fire, park benefits, etc.) 9. Enables reduction of the Utility Users Tax by the $132,000 scheduled to be repaid in fiscal year 1997- 1998. 10. Restructuring of the Corporation Yard Bond issue (general fund obligation) as a lease borrowing will relieve the City of Colton from Standard & Poors and Moody's ratings and credit watch. CONS 1. Forgiving the loan recognizes the errors of previous policy makers. 2. The financial markets may view forgiving of the loan as a failure of the City to repay its debt. 3. Forgiving the loan may have an adverse effect on the City's ability to receive favorable ratings on future debt issues. 4. Forgiving the loan essentially condones the past indiscriminate spending of the General Fund. 5. Forgiving the loan opens the door for future "loans" based on the theory, "we did it once, we can do it again". 6. Forgiving the loan uses electric ratepayer money for General Fund expenditures. This then becomes a hidden tax on prior electrical usages. Ratepayers and taxpayers are not the same set of individuals. 7. Considerable disclosure will have to be made through the financial statements and audits. 8. The balance sheet (fund balance) for the Electric Utility will suffer vis-a-vis the loss of an asset. 9. Citizens and businesses may start to view their electric bill the same as General Fund taxes lessening the Electric Utility's claim to be "not for profit" and cost of service based. 10. Potential of suit brought by ratepayers that the City is in violation of California statutes allowing municipalities to establish not for profit electric utilities. 11. Forgiving the loan damages the future competitive position of the Electric Utility, resulting in a reduction in the monies transferred tot he General Fund from the utility. 12. Gives the Electric Utility an incentive to negotiate non-cash settlements with future litigants in order to keep cash balances low enough to not be attractive for general fund borrowings. 13. Addressing the debt creates ongoing concern at each budget session by determining "where do you cut to pay back the debt" and "how much do you pay annually without affecting city services". ALTERNATIVES 1. a. Forgiive only a percentage of the loan. As an example, $2,009,721 forgiveness would leave a $5 million balance. b. Pay existing $132,000 budgeted as well as the $270,000 ($250,000 reserve fund plus $20,000 annual debt service payment reduction) of savings from the restructuring of the Corporation Yard Bond issue. c. Set-up non-interest bearing loan payments of $154,000 for the next 30 years to repay the $4.5 million loan balance. 2. All future general fund revenues, above and beyond fiscal year 1997-98 estimated revenues, used to repay existing debt without interest. If general fund revenue is not more than the current revenue, no payment shall be made that fiscal year. 3. Place on November 1997 ballot a measure to either forgive the loan or continue the Utility User Tax for a period of three years pledging the $2.2 million in revenue to the repayment of the General Fund loan from the Electric Utility. CONCLUSION Some form of repayment to the Electric Utility would allow the Utility to aggressively participate in the retention and attraction the increase of electrical usage. Competition will require incentives in the short term in order to attract these new sales opportunities. Therefore, repayment would enhance the electric utility options.