MAYOR’S OFFICE OF
COMMUNICATIONS
55 Trinity Avenue, Suite 2500
Atlanta, Georgia 30303 |
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| CONTACT: |
Sandra Allen Walker, Director |
| Office |
404-330-6395 |
| Cell: |
404-925-1666 |
| E-mail: |
swalker@ci.atlanta.ga.us |
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or |
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LaChandra Butler |
| Office: |
404-330-6248 |
| Cell: |
404-886-2334 |
| E-mail: |
ldbutler@ci.atlanta.ga.us |
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December 9, 2003 |
Text of Budget Chief Renay
Blumenthal's Letter to the Mayor and City Council
December 8, 2003
M E M O R A N D U M
TO: Mayor Shirley Franklin
Council President Cathy Woolard
Members of City Council
FROM: Renay Blumenthal
SUBJECT: Financial Impact of 6 ccf Rate Structure
Attached is the Department of Finance's analysis of the impact
of the 6 ccf rate plan as passed by the City Council on December
1, 2003. Specifically, attached are: 1. a written summary of
the financial impact; 2. a graph showing the impact on debt
coverage; and 3. a pro forma analysis for years 2004-2008 showing
financial detail.
As the attached analysis indicates, there are shortcomings
of the 6 ccf plan stemming from the sustainability and viability
of a $25 million budget reduction, the compounding of the revenue
loss beyond the $25 million initially projected, and the resulting
decline in the debt coverage ratio. As a result of these factors,
taken over a five-year horizon, the 6 ccf rate structure is
not adequate to support the water and wastewater fund at the
levels needed for service delivery and for the City's Capital
Improvement Plan (CIP). More critical, the 6 ccf does not provide
the capacity in 2004 to borrow the amounts necessary to fund
the CIP at planned levels.
We are conducting similar analyses on the proposed 4 ccf rate
plan. We are also analyzing the level of changes that would
need to occur in either bond capacity, revenue enhancements
and/or operating reductions to make both the 4 and 6 ccf plans
viable with respect to being able to meet Consent Decree and
other requirements. We hope to have these additional analyses
completed as soon as possible.
cc: Rick Anderson, Chief Financial Officer Linda DiSantis,
City Attorney Jack Ravan, Commissioner, Department of Watershed
Management
-------------------------------- FINANCIAL ANALYSIS OF 6 CCF
RATE STRUCTURE
Overview
* Taken over a five-year horizon, the 6 ccf rate structure
is not adequate to support the water and wastewater fund at
the levels needed for operations and for the City's Capital
Improvement Plan.
* The 6 ccf plan does allow the City to meet its debt service
payment in 2004 and meet required debt coverage ratios in 2004
on existing debt. However, assuming the CIP is funded at planned
levels, our debt coverage ratio severely declines over the five-year
period, impacting our ability to borrow. As a result, the 6
ccf rate plan will not support the future borrowing needed for
the CIP.
* As discussed in the sections below, the shortcomings of the
6 ccf rate plan stem from: - the compounding of the revenue
loss; - the impact of the $25 million budget reduction, which
is not sustainable to offset each year's revenue loss and will
also impact service delivery; - the declining debt coverage
ratio, which would be below the required 1.1 level by 2006.
*
* The City's bond covenants require that income available for
debt service payments exceed the amount of the debt payment
by at least 10%, or a ratio of 1.1. The investment community
typically likes to see this ratio at a higher level such as
1.2. If coverage drops below 1.1, the City stands in default
of our bonds.)
Impact on Revenues
* Estimated revenue loss of $21.6 million in the first year
(2004). Originally estimated at $25 million based on a cursory
calculation conducted during the December 1 Council meeting,
the revenue loss has been refined based on the availability
of time to complete a more thorough and detailed analysis. This
update in data means that potentially $3.4 million of the $25
million budget reduction could be restored. (That is, the difference
between $25 million and $21.6 million. For ease of discussion,
and until action is taken on the difference, this document still
refers to the $25 million.)
* This revenue loss compounds negatively to $88 million by
year five (2008).
* Specifically, the revenue losses by year are as follows:
2004 - $21.6 million 2005 - $52.5 million 2006 - $62.5 million
2007 - $74.7 million 2008 - $88.1 million
* These revenue losses reflect the forgone revenue that the
45, 45, 11, 11, 11 percent increases would have generated on
the first 6 ccfs of consumption. The losses also reflect the
estimated impact of greater conservation efforts by ratepayers.
(That is, since 6 ccfs are close to the average residential
usage of 8 ccfs, consumers may make a more concerted effort
to conserve in order to keep their usage closer to 6 ccfs and
keep their rates low.)
Impact on Budget and Service Delivery
* Council proposed a $25 million reduction to the Department
of Watershed Management (DWM) budget in 2004 to offset the revenue
loss. This reduction represents a 18.4% cut to the budget (direct
DWM operations only - does not include support departments and
indirect costs).
* A reduction of this magnitude will impact service delivery
to customers and will be detrimental to the DWM's ability to
carry out and manage consent decree-related work.
* Additionally, the budget reduction only addressed the revenue
loss in the first year. The compounded revenue losses in years
2-5 have not been addressed and cannot practically be made up
by additional cuts to the budget. Revenue losses in years 2-5
would require total cumulative cuts to the budget of 38%, 46%,
55% and 65%, in each of those years respectively, which are
not practical.
* (Note: as information, reducing the budget to $21.6 million
to reflect the updated revenue loss figure represents a 15.8%
budget cut.)
Impact on Existing Bonds
* In the first year (2004), the City would be able to make
the $93 million debt service payment. However, we would not
be able to make this payment without the $25 million reduction
in O&M.
* The 6 ccf rate plan allows for a 1.19 debt coverage ratio
in the first year (2004). However, as will be discussed in the
section below and per the attached schedule, this ratio declines
over the five-year horizon and drops below the required 1.1
ratio by 2006, assuming the CIP is funded at planned levels
and assuming the $25 million budget cut remains in place for
2004 through 2008.
* If no other borrowing was done beyond the $1.7 billion that
is currently outstanding from the last bond issue in 2001, the
6 ccf plan does not threaten the City's debt coverage ratio.
However, assuming no additional debt for the City means we would
not borrow the funding necessary for consent decree projects
thus putting us out of compliance.
Impact on Future Borrowing
* The 6 ccf rate plan will not support the future borrowing
needed to fund the CIP at current levels.
* Specifically, the 6 ccf plan results in a declining debt
coverage ratio of 1.15 in 2005, 1.07 in 2006, and 1.03 in each
of the years 2007 and 2008. At these levels, we would be in
default by 2006. Additionally, the declining ratios demonstrate
that the City does not have a solid five-year financial plan
or revenue stream. As a result, the City would not be able to
adequately demonstrate that it has the ability to support borrowing
for the planned CIP as we move forward to 2004.
* Additional analysis is still being conducted to determine
at what levels the CIP would need to be reduced and still meet
coverage levels. Although this analysis is not complete, we
do know that it would necessitate the reduction of the CIP from
the planned $2.5 billion for years 2004 through 2008 and may
indicate that the CIP would need to be reduced beyond what is
required for the consent decrees.
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