Director McLean presented the staff report of February 7, 2002 including the Finance Advisory Committee’s recommendations as listed on Page 7 of their report.

Mayor pro tem Stern asked if there was any data available to assess when loans would be repaid. He further elaborated that it appeared as though the financial model contained in the staff report was based upon the worst case scenario; that property owners participating in a loan deferral program would continue to own the property throughout the entire duration of the term debt obligation, therefore, the City would pay the assessments until the end of the term of the district debt obligation.

Director McLean said that because no information regarding the frequency of property sales was easily available, the financial models were based upon the assumption that some properties would transfer within a 20-year period based on mortality rates only. Other sales frequency trends would be completely unpredictable.

Councilman Gardiner asked if the 1913 Act required the City to set aside this large fund up front for a 20-year stream and he wondered why there could not be a deferral fund enabling annual contributions to it over a period of time.

Deputy City Attorney Mandell, Deputy City Attorney, explained that there were legal limitations in the City’s ability to make contracts for future years but there were two options. The City could: (1) create a deferral fund which would be sufficient to make assessment payments on behalf of participating property owners over the life of the term debt and enter into an agreement with the property owner to make those payments on behalf of the property owner or (2) enter into an agreement in which the City makes a commitment to make the assessment payment on behalf of the property owner for only one year at a time.

Councilman Gardiner expressed the concern that a long-term agreement would be established; the home might sell a short time thereafter. He further stated that although the funds would be released, it seemed like a lot of money to set aside at the outset.

Councilman Clark pointed out that there were not mutually beneficial results by implementing the deferral fund.

Mayor pro tem Stern felt that the two options seemed to be two extremes and that ideally, perhaps the City would like to be able to say that as long as a property owner continues to qualify, the City would commit to make payments for that year only.

Deputy City Attorney Mandell explained that the annual option provided something close to that arrangement because the City could enter into an agreement with the homeowner at the outset to pay their assessments from year to year but the City still reserved the right to discontinue paying the assessment after any year. He clarified that the City could use either option in the same Undergrounding District.

Mayor pro tem Stern pointed out that it was not just a matter of trusting the City but that sometimes circumstances change and options could be eliminated.

Mayor McTaggart raised the idea of reserving cash funds and dedicating the interest earnings for deferral loans.

Director McLean indicated that interest currently earned was less than 4%; therefore, a substantial amount of monies would have to be reserved.

Mayor pro tem Stern speculated that this would not provide enough income.

Councilman Clark asked if other cities have successful mechanisms like this.

City Manager Evans said that Manhattan Beach and Hermosa Beach have been involved with undergrounding utilities, but they don’t have a loan deferral programs like this one under consideration.

Deputy City Attorney Mandell noted that Berkeley has created an elaborate procedure for financing but it did not involve any loan assistance from the City. He said that undergrounding utilities was relatively rare and generally did not include provisions for deferral loans.

Councilman Clark asked if technological advances had reduced the cost of undergrounding utilities to the point that the cost estimates include in the financial models were overstated.

Director Allison replied that in his regular conversations with Scott Gobble of Southern California Edison, there had been no indication of cost reductions now, or in the future.

Mayor McTaggart felt the opposite was true and that costs were much higher than just a few years ago.

Councilman Clark said that there was a miniscule contribution from Southern California Edison which did not take into account sustainment of the system and maintenance of the infrastructure.

Deputy City Attorney Mandell agreed that the Southern California Edison would provide a credit but the amount was small, only about 10-15%.

Councilman Clark felt that Edison’s contribution did not cover the benefit they would be receiving in terms of reduced costs for maintaining the overhead system.

Deputy City Attorney Mandell clarified that Southern California Edison’s contribution was governed by rules set by the Public Utilities Commission.

Councilman Gardiner recalled that Scott Gobble had mentioned a figure of $9.00 credit for a cost of $300.00 per foot.

Mayor pro tem Stern felt that there could be no change other than through lobbying.

Councilman Clark said he would like to see the City participate in this lobbying.

Councilman Gardiner said that he had heard of money available in San Diego for a project by Pacific Gas & Electric and asked if there money available for undergrounding projects.

Mayor McTaggart said this would apply only to major arterial undergrounding.

Deputy City Attorney Mandell indicated that a portion of each ratepayer’s utility bill went into a fund for undergrounding projects of substantial community benefit but the City’s fund currently had a negative balance.

Director McLean then summarized the recommendations from the Finance Advisory Committee as detailed in the staff report.

Councilman Gardiner pointed out that were two types of financial hardship. One was for someone on a fixed income and the other might be for someone with a temporary setback. He noted that the City Council had the ability to not approve an Undergrounding District if there too many homeowners adversely impacted.

Councilman Clark asked if there was sufficient interest in pursuing an undergrounding process and an assessment deferral process or was this merely a hypothetical debate.

Director Allison indicated that there were usually four to five inquiries per year and that after the procedure was discussed by the Council last fall, there had been three to four calls.

Mayor pro tem Stern felt that the mechanism should be established and until there is publicity, the City will not know how many successful districts could be established. However, the benefits of undergrounding were many and it was worth pursuing.

Councilman Gardiner asked about the undergrounding of high voltage wires and if this was including in undergrounding and Director Allison stated that they could not be included because they provide general benefit.

Mayor Pro Tem Stern noted that the cost to underground these wires was astronomical compared to the ones being addressed in this process.

City Attorney Lynch confirmed that the wires were not included and that it would be important for the residents to know that these wires would remain when making a decision to underground their neighborhood.

City Attorney Lynch indicated that the procedure itself would have to be brought back to the Council because approval of the proposed guidelines was delayed until the loan deferral procedure was established.

Mayor pro tem Stern asked about interest charge.

Director McLean said it could be a little over the city’s LAIF, approximately 1-4% greater than the City’s LAIF rate.

Councilman Gardiner inquired about the percentage of the City which was already undergrounded and Director Allison replied that it was approximately 60%.

Director McLean added that Chair Butler of the Finance Advisory Committee had expressed an opinion that the frequency of undergrounding and requests for loan deferrals would probably be less than expectations.

Council consensus was to adopt the Finance Advisory Committee’s recommendations with a provision to charge interest a few points above the LAIF rate and agendize Council review of the process to establish an Undergrounding Assessment District.

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TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL

FROM: EARL BUTLER, CHAIR, FINANCE ADVISORY COMMITTEE

DATE: FEBRUARY 5, 2002

SUBJECT: UTILITY UNDERGROUNDING ASSESSMENT DISTRICTS –

PROPOSED ASSESSMENT DEFERRAL LOANS

Staff Coordinators:
Dennis McLean, Finance Director
Kathryn Downs, Accounting Manager

BACKGROUND

During its November 7^th discussion of utility undergrounding assessment districts (hereafter referred to as "UUAD’s"), the City Council assigned the Finance Advisory Committee (the "FAC") with the following task:

"To investigate a structure that creates a revolving fund to allow people who meet criteria to delay fees, including the $5,000 connection fee, with a lien placed on the home and funds repaid when house is sold, possibly funded initially by a securitized bond."

During the December 12^th meeting of the FAC, the Deputy City Attorney and the Public Works Director presented a broad overview about UUAD’s and assessment deferrals. During the January 17^th FAC meeting, Finance Staff and the Deputy City Attorney presented additional information to the FAC including an overview of (1) deferral alternatives; (2) pro-forma cost computations based upon different eligibility scenarios; and (3) identification of several planning issues. Though a copy of the staff report to the FAC, dated January 17, 2002, is attached to this report, most of the same information has been incorporated into this staff report for your convenience.

DISCUSSION

Assessment Deferral Alternatives:

As you may recall, the City Attorney’s Memorandum, dated October 29, 2001 (attached to this report), referred to several assessment deferral alternatives.

The FAC quickly discovered the limitations of both the State Controller’s Office Property Tax Postponement Program and the use of monies in its RDA Low and Moderate-Income Housing fund due to the following reasons:

1. The State Controller’s Office Property Tax Postponement Program has limited use for the proposed UUAD assessment deferrals. Eligibility is limited to senior citizens and the disabled with household incomes of less than $24,000.
2. Recent changes to the redevelopment law effectively eliminated the ability for the Agency to finance a UUAD (except possibly for the private connection portion). Therefore, the Deputy City Attorney has recommended eliminating further investigation of the option to use RDA funding for UUAD’s.

Therefore, an assessment deferral loan program pursuant to the 1913 Act quickly became the primary assistance method for consideration by the FAC. There are two alternatives to provide assessment deferral loans in accordance with the 1913 Act:

Assessment Deferral Loan Provisions:

Regardless whether the City Council chooses the Assessment Deferral Agreement option or the Deferral Fund option under the 1913 Act, the documentation of loans to eligible property owners would be the same. The eligible property owner and the City would enter into a secured loan agreement. The loan balance owed the City would be increased with every annual assessment payment made by the City on behalf of the eligible property owner. The loan would be secured by the assessed property, but subordinate to any previous security interest recorded against the property (e.g. first and second mortgages). The loan would require repayment to the City upon transfer of the property or complete payment of UUAD bond indebtedness (probably based upon a 20 year bond term), as well as all assessments associated with it. The City Council may choose for the assessment deferral loans to be interest-free or subject to interest.

Cost Considerations of the Proposed UUAD Assessment Deferral Loans:

The City’s cost of providing UUAD assessment deferral loans would be affected by the following:

There are several significant factors that will affect the City’s cost of providing UUAD assessment deferral loans that would be relatively within the City’s control, including the following:

Pro-Forma Computations of Cost Comparisons – Annual Deferral Agreement vs. Deferral Fund:

During the City Council’s discussion regarding assessment deferral programs on November 7, 2001, several Council members expressed concerns regarding the ability of seniors, disabled and low-income resident’s ability to pay UUAD assessments. Accordingly, Finance Staff proceeded to prepare pro-forma cost computations based upon several different income and age scenarios. Staff was unable to find any 2000 census data to support the number of disabled property owners within the City. Therefore, the presentation of the estimated eligible households presented below does not include a provision for disabled property owners.

Finance Staff prepared the following pro-forma cost comparisons for both the Annual Deferral Agreement and the Deferral Fund options. A summary follows the cost comparison tables. The method utilized to calculate the pro-forma financial impact was not performed scientifically, but rather an estimation of likely factors. Finance Staff used the following assumptions provided by the Director of Public Works and the Deputy City Attorney:

Based on these assumptions, Finance Staff calculated an average annual assessment of $2,821 per property within a UUAD for the pro-forma computations that follows.

Finance Staff utilized census data to extrapolate the estimated number of households potentially eligible for assessment deferral loans based upon age and household income. Using the simple extrapolation method and assuming an average assessment district size of 20 homes, the estimated number of households eligible for deferral is presented below. The estimated eligible households are multiplied by the calculated average annual assessment of $2,821 to determine the estimated annual assessment deferral loan.

Note: Staff was unable to find any 2000 census data to support the number of disabled property owners within the City. Therefore, the presentation of the eligible households presented above does not include a provision for disabled property owners.

The following assumptions were considered while preparing the following tables:

The annual pro-forma financial impact using the Annual Deferral Agreement option is presented below, assuming one UUAD is formed each year. If proceeds received from future assessment deferral loan repayments are used to fund new assessment deferral loans, the deferral fund becomes self-sufficient after the first repayment. For the 65+ categories, this is assumed to occur after 12 years and after 20 years for the All (no age threshold) and 55+ categories.

Annual Pro-Forma Financial Impact
Annual Deferral Agreement Option
(Based Upon the Assumptions Described Above, Including 20 Homes Per UUAD)

Annual Pro-Forma Financial Impact
Deferral Fund option (see following Note)
(Based Upon the Assumptions Described Above, Including 20 Homes Per UUAD)

Note: Deposited monies will continue to earn interest, which in turn will contribute to future debt service payments. For purposes of this example calculation, the actual required deposit cannot be estimated due to market uncertainties. Therefore, the required principal and interest have been included in the "up-front" commitment calculation for conservatism.

Assuming that one UUAD is begun each year, the Annual Deferral Agreement option requires significantly less cash outlay during the first year (and most every year thereafter) compared with the Deferral Fund option. A cost comparison based upon establishing One UUAD Every Year compared with One UUAD Every Three Years follows:

The graphic charts that were inserted here in the original email did not convert properly. Please email Councilman Clark if you want a complete transmission of his email.

RECOMMENDATION

In the event the City Council chooses to provide assistance to property owners for the payment of UUAD assessments, the FAC recommends the following:

The following additional information is offered by the FAC for the City Council’s consideration while contemplating UUAD deferral loans:

Public Comments During the FAC’s Consideration of UUAD Deferral Loans:

During the January 17^th FAC meeting, Michael Kendel, 5809 Flambeau Road, addressed the FAC and stated that there is no need for a UUAD in his neighborhood, because utility wires reside behind homes and are generally blocked by trees and other vegetation. He also expressed his opinion that only residents who vote affirmatively for UUAD’s, should be required to pay the UUAD assessments. Mr. Kendel also expressed concern regarding the fact that UUAD deferral loan application information would become public information. He stated that it would be embarrassing for an applicant with financial hardship to be forced to apply for help from the City.

The members of the FAC wish to thank the members of the City Council for delegating this assignment. The FAC stands ready to answer any questions the City Council may have and perform any further assignments regarding the investigation of an assessment deferral loan program.

Respectfully Submitted,
Earl Butler, Chair, Finance Advisory Committee

Reviewed,
Les Evans

Attachments

Finance Staff report to FAC, dated January 17, 2002, Utility Undergrounding Assessment Districts – Assessment deferral Loans Provided By City

Finance Staff report to FAC, dated December 12, 2001, Assessment Deferrals for undergrounding Districts (including City Attorney Memorandum, dated October 29, 2001, Assessment Deferrals for Senior Citizens, the Disabled and Persons With Limited Income)