Yuma mulls covering cost of plant expansion with bonds

Desert Dunes wastewater facility reaching capacity due to record growth

With new homes popping up in record numbers, many on the east side of Yuma, the Desert Dunes Water Reclamation Facility will soon reach capacity. Consequently, city officials are looking into expanding the plant and possibly issuing bonds to pay for the construction.

The Yuma City Council recently listed expansion of the treatment plant, located at 3901 S. Avenue 6E, as a priority.

On Wednesday, City Administrator Phil Rodriguez and Mark Reader of the financial advisory firm Stifel, Nicolaus & Co. presented information on the need for expansion and how to pay for it.

Rodriguez noted that 2020 had “many difficulties and challenges” for the city, but it did not slow down growth in the city, which recorded the largest number of newly constructed homes and the second largest number of commercial projects in its history.

“We’re now at a point where the Desert Dunes Water Reclamation Facility out on 6E on the east side of town is now to the point that we are starting to reach capacity sooner than anticipated,” Rodriguez said. “We want to make sure that we are planning for the future and that we have a good plan in place that both aligns with the needs and the strategic plan.”

The “pretty significant expansion” would come with a “very expensive” construction cost that is now estimated at $80 million, Reader noted. One way to pay for it is through the issuance of bonds. According to www.investopedia.com, when an investor buys a municipal bond, they are loaning money to the issuer in exchange for a set number of interest payments over a predetermined period. At the end of that period, the bond reaches its maturity date, and the full amount of the original investment is returned to the investor.

The city recently engaged Stifel to advise and assist the city with the issuance of bonds to pay off outstanding debt related to public safety pension plans. To take advantage of the historically low interest rates, the city also used bond proceeds to refinance the long-term debt associated with the City Hall.

Reader explained that interest rates are

still “very attractive” and noted that a financing deal on Wednesday would have locked in an interest rate either in the high 1% or a low 2% .

Yuma currently has $84 million in outstanding bonds for water and wastewater utilities issued in 2015/16. About $10 million is coming off the books in about 60 days.

“Good job on that,” Stifel said.

The city has an annual debt service in 2021/22 of about $13.8 million, which then drops to $9.5 million and $7.5 million in subsequent years.

The timing for this potential bond sale “works out well,” Reader noted.

The financing would be paid off through a combined pledge from the water and wastewater funds. The objectives would be to expand the wastewater treatment plant and complete related infrastructure improvements with minimal utility rate increases. Stifel does not recommend a rate increase for fiscal year 2022.

If plans move forward, the financing deal could likely close around September or October.

The estimated construction cost of $80 million could change as the firm is in the process of updating engineering and cost estimates, especially in view of rising construction costs.

The city has about $11 million left over after wastewater operating costs to make debt payments. That means the city has about $2 in revenue to cover every $1 in debt.

The combined water and wastewater systems net about $27 million in revenues. Reader reiterated that this means “strong coverage” with $2 for every dollar in debt.

During the council discussion, Councilman Gary Knight asked whether these figures took into consideration increases in revenue from new houses and developments. Reader said that the figures assumed no future growth and did not include potential revenue increases, but he agreed that revenues would likely increase along with growth.