City set to issue bonds for water

The city’s financial adviser says a balance needs to be struck between reasonable annual debt service in the short term and prudence in the long term when paying down the first series of revenue bonds secured by the recent water rate increase.

Bob Wright, senior managing director for Crews & Associates, told the Hot Springs Board of Directors last week that the $20.5 million bond issue it will consider next month can be structured to keep annual debt service at $2.5 million on new and existing debt the city’s issued for capital improvements to its water system, creating principal and interest payments of $65.5 million over the next 25 years.

The new debt would be added

to four water bond issues that are still outstanding, the last of which obligates the city until 2040.

“That’s wrapping it around, backloading the principal to keep your principal and interest the same at $2.5 million,” Wright said. “A lot of your principal is not paid out until the end. It keeps your payments as low as possible right now, but you’re going to pay for it in the long run.”

Or the new debt could be retired more aggressively, requiring more than $3 million to service the debt next year and in 2020 and annual payments of more than $2.7 million from 2021 until 2034. Annual payments would be less than $1.3 million during the final three years, saving the city almost $4 million over the life of the issue.

Wright said the city’s rate consultant needs to confirm the rate increase that took effect in January can service the more aggressive schedule. The board approved the increase in November, enabling a rate structure that will raise the minimum monthly charge to $13 by 2021 for residential customers inside the city.

The 160-percent increase will secure $110 million in new debt for capital improvements to the water system serving more than 35,000 meters inside and outside the corporate limits. In January, minimum monthly charges increased by $3 for resident customers and $4.50 for nonresident customers.

“Here we’re coming in and amortizing over $500,000 a year in principal,” Wright said of the latter approach. “Not only is this one more efficient, but I think when we bring in that $90 million transaction in two or three years, it’s going to give us even more ability to be creative and amortize debt.

“We might come in with something in between. We might push a little of the principal out and ramp it up a little slower.”

The $20.5 million bond issue on track to close in May would finance a 3 million-gallon elevated storage tank, new switchgear and master controls at the Ouachita Plant, improvements to dams impounding a series of small lakes in the city’s Northwoods Urban Forest Park and design costs and right of way acquisition needed to bring the city’s 23 million-gallon average day allocation from Lake Ouachita online.

Bond issues of $30 million the city plans on floating in 2020,

2021 and 2022 will pay for the Lake Ouachita project’s infrastructure — intake, raw waterlines, finished waterlines and a

15-mgd treatment plant in the Amity Road area.

The city began paying the U.S. Army Corps of Engineers

$470,507 a year last May to store the Lake Ouachita allocation, an obligation the city bears despite being years away from having the infrastructure in place to tap, treat and distribute the water.

Payments compensating hydropower producers for water reallocated from the hydropower pool to municipal supply represent $444,440 of the cost, with the city paying 75 percent of the $579,705 the Mid Arkansas Water Alliance remits to the Corps annually for foregone benefits at Lake Ouachita.

The North Garland County Regional Water District and Hot Springs Village Property Owners Association have sub-allocations of 5 mgd and 2 mgd that’s part of MAWA’s 30-mgd total.

Foregone benefits were calculated at $472,485 annually, according to an August 2016 email from Katy Breaux, a project manager for the Corps, to MAWA, but the obligation increased by more than 20 percent when the storage agreement was signed last May.

The $20.5 million bond issue the board will consider next month includes $465,699 in issuing costs. That figure comprises Crews & Associates’ $45,000 fee, and Raymond James Financial Services and Stephens Inc.’s 6.6 percent underwriting fee.

The $133,250 fee comes from the underwriters buying the bonds from the city at a discount and selling them to investors at a higher price.

The coupon rate, or semiannual tax-free interest payment investors receive, will range from 3 to 4 percent. According to Crews & Associates, interest rates on municipal revenue bonds have climbed to more than 4 percent, up from the historic low of 3.03 percent in the summer of 2016.

Wright said the bonds’ taxfree status requires most of the proceeds be spent within three years.