Loading...
April 19, 199404 -19 -94 31:43 April 19, 1994 Mr. Drago, PMG ASSOCIATES 491 P01 ETP O11S Uciat&, Jam. ECONOMIC, MARKETING AND MANAGEMENT CONSULTANTS Mr. John Drago, City Administrator City of Okeechobee 55 SE Third Avenue Okeechobee, Florida 34974 In response to questions posed from yourself and from Mr. Frank Altobello regarding the recent appraisal performed by Deighan Appraisal Associates, I have prepared the following discussion of the Equity issues found in that study. The Deighan report identified Assets at $19 million (figures not verified and not accepted at this time) and Liabilities at $15.9 million leaving an Equity of $3.1 million). The Liability figure listed here is incorrect based on the published Financial Statements of the City. Currently, the Liabilities portion of the Balance Sheet (outstanding bonds) is $14.7 million. The Deighan report used an assumption that the bonds would have to be refinanced to be transferred to the Authority. This assumption is incorrect. The bond covenants permit the transfer of the bonds to the new agency without the need for refinancing. This option is obviously preferred since the additional cost of refinancing generates no value to the citizens of the area. The result of this situation is that the Equity to the City of Okeechobee is therefore $4.3 million (assuming the Asset figure is correct). It is my understanding that Deighan and Associates has claimed that any reduction in Liabilities is matched with a reduction in Assets. This assertion is preposterous. Accounting principles dictate that Assets must equal a combination of Liabilities plus Equity. Therefore, if Liabilities decrease, Equity must increase. "Elements of Financial. Statements of Business Enterprise," Statement of Accounting Concepts No. 3, Financial Accounting Standards Board, 1980). The other aspect of this situation is common sense. If an entity's debt is reduced without use of cash or other assets, the equity increases. Deighan made an arbitrary and incorrect assumption of an increase in debt. Correction of this obvious error increases Equity. 3880 N. W. 2ND COURT DEERFIELD BEACH, FLORIDA 33442 (305) 427 -5010 I must emphasize again that we, in no way, agree to the Asset determination in the Deighan report. Further analysis by engineering and financial consultants is necessary for protection of the City and assurance that the appraisal was completed properly. If you have any additional questions, please call on me. Very truly yours, PMG Associates, Inc. Philip M. Gonot 04 -19 -94 16:12 April 19, 1994 9 11/g a L ECONOMIC, MARKETING AND MANAGEMENT CONSULTANTS Mayor James Kirk City of Okeechobee 55 SE Third Avenue Okeechobee, Florida 34974 Mayor Kirk, PMr, ASSOCIATES 488 P01 At your request, I have briefly reviewed the Smith Gillespie (S &G) Water and Sewer Rate Analysis. Our review is not detailed or complete due to the time constraints with the City Council meeting only one day after the delivery of the report. More time is required to adequately address the concerns found in the S &G study. The first issue is general in nature, but significant for the City of Okeechobee. The S &G report fails to list its assumptions so that they can be easily identified. The entire analysis is based on certain assumptions and the City should be provided with these presumptions. Our cursory examination resulted in the identification of seven areas of grave concern with the S &G report. 1) Is it permissible to use interest from the $2 million or $3 million from Okeechobee County to reduce the debt service costs? 2) Is the 7% interest rate use for the invested funds realistic? 3) How is the additional capital costs for start -up purposes of the Authority addressed? 4) Capital costs for possible upgrade of the Okeechobee Beach Water Association (OBWA) system are not addressed. We cannot determine the value or usefulness of the system without a detailed appraisal of OBWA. 5) How can S &G rationalize an increase in the debt service and volume rates without OBWA when the City system currently generates sufficient revenues to meet Debt Service and Operating costs even without OBWA revenues? 6) Is Debt Service coverage included as required by the Bond Covenants? 7) What is an accurate comparison of rates under the current City system versus the combined Authority system? 3880 N. W. 2ND COURT DEERFIELD BEACH, FLORIDA 33442 (305) 427 -5010 O4 -19 -94 15:13 RESPONSE: PMI3 ASSOCIATES. 455 POE 1) It appears to be acceptable to include interest from the $2 million to $3 million to be donated by the County as revenue based on the Bond Covenants. It is not acceptable to use the total capital amount ($2 million to $3 million) for these purposes, only the interest. These statements have been confirmed by the Bond Counsel for the City. 2) The 7% interest rate is unrealistic. Currently the City of Okeechobee participates in the State pool for investments in order to achieve a higher rate. The current rate based on information from Finance Directors in several cities is 3.5 It is possible to generate a return of 5 but this is on long -term investments which restrict the funds for a considerable period of time. It is likely that the capital donated in order to generate interest income ($2 million to $3 million) will be restricted by the Bond Underwriters. These funds would then be frozen for the revenue generation purposes. Reduction of the interest income will result in a higher rate in the combined system analysis. 3) The report did not address additional costs of creating the Authority due to requirements for buildings, equipment and other items. It is more appropriate for the contribution from the County ($2 million to 3 million) to be used for these purposes since no other funds exist. The contribution can be used to generate interest for increased revenues or for capital requirements. It cannot be used for both. If it is assumed that these items will not be purchased, but rather leased, the capital requirements will be reduced. However, no such assumption was made and the increased operating costs were not included. Addition of these appropriate costs will increase the rates in the combined system. 4) Since no records have been made available on the condition and equipment of the OBWA system, it is uncertain if an upgrade is necessary. Questions of line sizes, fire hydrants and other facilities must be answered prior to defining the costs of the combined system. Funds required to upgrade OBWA if necessary, will increase the rates in the combined system. Even if upgrade costs are only paid by existing customers of the OBWA system, cost for this group may increase dramatically. 5) It appears that S &G did not examine the financial operations of the City system. The debt service portion of the utility bill is calculated so that the retail customers generate sufficient funds to meet annual debt service payments. The payments from OBWA are not included in this calculation and their loss will not effect the debt service rate. Any presumption by S &G to the contrary is not correct. Volume rates are also at a level that will be sufficient without the inclusion of OBWA. In fact, an examination of the system will be conducted to create a step rate for water usage. This will lower slightly the overall revenues from water consumption. The City has the ability to possibly reduce rates, not raise them. Since the City utility system can meet finnacial obligations without OBWA, the debt service and volume components of the City rate structure will not have to be increased. 6) The S &G report did not include debt service coverage which is a violation of existing bond covenants. The Bond Counsel confirmed that the Authority will have to increase rates to meet bond coverage requirements. S &G obviously did not make such inclusion since the City does not have to increase rates for coverage purposes. Instead, the City pledges certain revenues from Utility Taxes for this purpose. This does not mean that the City must pay cash to the coverage, since this is only a paper transaction. The Authority must either increase rates for the combined system or pledge their own Utility Tax revenues for this purpose. 7) The accurate comparison of the two system is the existing rate structure in the City system with the combined system showing no cash from the County. In addition, the combined system must show an increase for debt service coverage. The following table represents a more accurate comparison. We used the figures found in the S &G report and have not been able to confirm them for accuracy due to the time constraints. The figures for the combined system without contributions by the County was used for a direct comparison. These figures were adjusted to increase the debt service portion by 25% to account for coverage as required by the bond covenants. 04 -19 -94 16:14 GALLONS 3,000 5,000 10,000 FMG ASSOCIATES 498 P03 CURRENT RATS CHARGES BY SYSTEM VERSUS CORRECTED S &G REPORT COSTS FOR COMBINED SYSTEM GALLONS 3,000 5,000 10,000 CITY I COUNTY 16.70 20.10 25.16 28.60 35.81 9.00 15.00 30.00 PERCENTAGE CHANGE FOR CUSTOMERS BASED ON COMBINED SYSTEM CITY 4.3% 8.6% +15.0% If you have any other questions please call. OBWA S&G REPORT (CORRECTED COUNTY I OBWA 16.7% I +93.4% 13.2% I +45.5% 8.2% I 9.6% As was stated earlier, this review is not detailed nor complete. We do believe that the issues raised here are significant and that the combined system increases rates for the City resident customers as well as the customers of OBWA. The combined system will not result in reduced rates for the customers on an overall basis. Very truly yours, PMG Associates, Inc. Philip M. Gonot 17.41 21.83 32.88