The Pleasanton City Council approved a resolution on Tuesday which declares the city’s intent to reimburse money spent on near-term improvements to Pleasanton’s water infrastructure through debt financing in the form of a revenue bond sale that the council will look at approving at a future council meeting.
According to staff, these improvements — which include replacing water booster stations and pipes — will help improve the city’s water system capacity, increase water reliability and support future projects like the drilling of two new groundwater wells.
However, in order to pay the vendors who would be carrying out these projects within the next few years, staff needed the council to pass Tuesday’s resolution.
“The resolution simply states that we’re just going to pay back these vendors, possibly with debt … But we intend to do it for the capital improvements to the water fund,” Councilmember Jack Balch said at the March 5 meeting.
“The whole debate we’ve had and the debt financing and all of that; that conversation and the quantities of factors that will make the debt, will come back,” Balch added. “But the resolution allows us to begin those short term $14 million improvements immediately so that we’re not hopefully staving off the peaking problems this summer as fast as we can.”
According to the city’s finance director, Susan Hsieh, the city recently conducted a comprehensive hydraulic analysis that identified improvements, which would lead to the future growth of the overall water system. The overall costs for all the projects, Hiseh said, could range anywhere from $18 million to $19 million.
Three of the near-term improvement projects that make up the $14 million consist of replacing turnouts, booster stations and water mains in several areas of the city. The other roughly $4 million identified by the city would be for the design work of the two regional groundwater wells that the city is planning on building outside of the PFAS plume in order to address its water supply needs.
PFAS are also known as forever chemicals and the city recently conducted a water alternatives study that led to the council voting to construct the two new wells — according to Hsieh the $4 million would be to start the design work, which is expected to finish in spring 2025.
But in order to get started on these projects, the city had to have Tuesday’s discussion on declaring its intent to reimburse the funds for these projects through debt financing.
Hsieh explained that the city could look at a public bond sale or a bank loan.
“The repayment terms for public offering are 20 years or 30 years, the repayment term for a bank loan is 20 years,” she said. “The effective interest rates are subject to range from 4.1% to 4.8%.”
She also broke down the annual debt service payment for each option. For a public sale with a repayment plan over 30 years, the annual debt service payment would be about $1.2 million and for a public sale with a 20 year plan, it would be about $1.4 million.
As for a bank loan with a repayment term of 20 years, the annual debt service payment is estimated at about $1.5 million, Hsieh said.
According to Hsieh, a public sale with a 30-year plan is the less expensive option and would keep rate increases at a minimum while also retaining capacity for future debt issuance.
On the topic of costs for issuing a bond, Hsieh said that a public sale bond would cost $200,000 while issuing a bank loan would cost $129,000.
City Manager Gerry Beaudin further explained that the discussion on debt financing for these projects, along with the future discussion on a potential water revenue bond, are both related to the city’s Water Enterprise Fund.
He said the resolution that the council passed on Tuesday was a situational awareness update so the city could finance those short term improvement projects necessary for the water system in the city, but also to address the water fund which should have been able to pay for these projects.
“The way that I level it is, it’s really risk management,” Beaudin said.
He said that the city needs to make sure its water system works and is stable so that it could last through the future summers with peaking water demands that could come from potential changes in the climate, drought or change of demands from the growing population.
But Beaudin said that because of the financial state of the water fund, which is one of the main reasons the city needed to raise the water rates during the next couple of years, the city needed to look at debt financing. He also said that with so many outside factors coming into play, looking at debt financing these projects was a necessary action the city needed to take.
“If we weren’t where we are with our water fund, and financially with this whole situation, these (projects) would be sort of business as usual,” he said. “The reason we’re spending a lot of time right now is because obviously we’re having to do things a little bit differently with our finances while we figure out the finances for the Water Enterprise Fund.”
Hsieh said that due to the city’s financial challenges, the water fund did not meet the required debt service coverage in 2023 and because of that, the city needs to pay off its current outstanding water revenue bond before it can issue new debt. She said that the outstanding debt service payment is about $980,000.
During the meeting, Councilmember Valerie Arkin also brought up the question of when the city had been in the process of increasing its water rates, one of the main talking points the city outlined for those raises were to help fund near-term improvements and so she wanted to know why the city now needs to look at debt financing when the rate increases were supposed to help pay for those projects.
Beaudin said that after the city conducted its Water Management Plan, the city was able to look at the water system as a whole and while the initial water rate increase proposal identified $6 million of improvements, the city now has new information and began putting in contractor bids for these projects that showed the roughly $19 million needed for the improvements.
And while the council didn’t decide on an exact option on debt financing on Tuesday — that decision will be made at the May 7 council meeting — Arkin also wanted to know if that was the city’s only option, to which Beaudin said there were no other options.
He did entertain the idea of theoretically going into the city’s Capital Improvement Program, taking general fund dollars from those Capital Improvement Projects and putting that money into the water fund. However, he said that the city had done that with its Golf Course Enterprise Fund and it is still paying back those general fund dollars.
“We’re working toward getting our enterprise funds to function on their own so I would say that academically, that’s a possibility, but what you’d be talking about is essentially defunding a lot of our general fund supported capital investments,” Beaudin said. “If we’re having sort of a fun academic conversation, that is an option. It wouldn’t be staff’s recommendation.”