Water: Staff concluded bonds would be cheaper than a loan. Brennon Dixson

The City of Santa Monica could issue revenue bonds that will allow officials to continue a number of water sustainability projects in the wake of an $84 million funding gap.

In 2018, Santa Monica City Council approved a Sustainable Water Master Plan (SWMP) Update in an effort to establish a diverse, sustainable and drought-resilient local water supply. At the time, city leaders believed they would be able to stop importing water from the Metropolitan Water District of Southern California by 2023 and, to date, Santa Monica’s Water Resources and Engineering Divisions have secured more than $20 million in grants and $75 million in low-interest loans to fund the suite of improvements totaling over $197 million.

However, a few projects remain underfunded as a direct impact of the COVID-19 pandemic, which is why staff recently completed an analysis to determine if Santa Monica should move forward with a Water Infrastructure Finance and Innovation Act loan or the issuance of revenue bonds.

The City is one of 55 municipalities across the United States that was invited to apply for the WIFIA loan, which, along with grants and state revolving fund loans, could reduce the original projected average local water production costs by as much as 20%.

“A five percent water savings for Santa Monica would be approximately 500 to 600 acre-feet per year of water, which equates to approximately how much water is used by 1,400 single family homes or 4,500 multi- family units each year,” the analysis states as it details additional long-term benefits of the loan like AMI smart water meters, more efficient billing and improved accuracy in meter reads.

After working with the Finance Department and the City’s financial advisor, Public Resources Advisory Group, to conduct a comparison between the two options, the analysis states staff found the interest rates offered by the U.S. EPA and those for the revenue bonds are essentially the same. “However, the revenue bond does offer a few advantages over the U.S. EPA WIFIA loan that may indirectly provide time or cost savings to the City,” according to the report.

One of the first advantages is a revenue bond could be secured almost six months sooner than the WIFIA loan.

“Given recent market volatility and rapid increase in interest rates, locking in the interest rate sooner would minimize the City’s risk with respect to market volatility on interest rates,” the analysis states, mentioning a WIFIA loan would force the City to adhere to federal procurement requirements and add another variable in market volatility risk that may impact project costs.

If the city were to secure a bond in July 2021, then construction on the Arcadia Water Treatment Plant Production Efficiency Enhancement and Expansion Project could begin in September 2021, which would likely save approximately $1.5 to $2 million in inflation cost compared to starting construction in February of 2022. City leaders would also have greater control over terms, timing, use of funds, and structure if it opts to issue bonds, compared to the WIFIA loan that would require the City to pay project costs upfront and then request reimbursement.

As a result, officials have deemed that a revenue bond is more favorable to the City since it allows the projects to stay on schedule and provide greater cash flow stability, the analysis concludes. “Staff is proceeding with preparing issuance of a revenue bond for the water self-sufficiency projects and will bring this item to Council for approval in July 2021.”