Sewer fund almost dry; city seeks interfund loan.

Stuck between a lawsuit and a contract for a half-complete wastewater treatment plant, the city is banking that the water utility can flush them out of a tight spot.

Administration officials are hoping the City Council will approve a $3 million interfund loan from the water utility to cover the ongoing cost of the Wastewater Treatment Plant (WWTP) on Hawley Lane.

So far, the city has failed to receive a bond or interim financing for the project because of litigation by the Bainbridge Ratepayers Alliance. The group alleges city misuse of utility funds and challenges the city’s use of utility bonds to fund capital projects without the oversight of a mandated citizen utility commission.

“What the litigation has done has prevented us from going outside for either short-term or long-term financing,” said City Administrator Mark Dombroski. “We’re looking at options of an interfund loan as a means of financing while that buys us enough time to remove the litigation. We believe (the lawsuit) has no merit, but even meritless claims have to work through the courts.”

At this week’s City Council Finance Committee meeting, members debated borrowing up to $3 million from the water utility – then by a 2-1 vote approved sending it to the full council. The WWTP needs more than $4.5 million in direct funding to hit a February 2010 completion target. The sewer fund will have a $5,000 balance by the end of next week, Finance Director Elray Konkel said, making it all the more necessary to come up with a funding strategy.

“We’re just going to run out of cash,” Konkel said. “We have to do something just to cover the balance.”

According to city documents, the water utility fund money would be transfered to the sewer fund on an as-needed basis, essentially creating a $3 million line of credit to pay for ongoing WWTP costs. The water utility fund has about $3.6 million in cash that has been accumulated through customer fees. Under the terms of the interfund loan, the city would have until May 15, 2010 to repay the amount borrowed, with interest.

It’s also possible that borrowing money from the water fund could affect the Winslow Way reconstruction project, Konkel said. That project is slated to break ground next year, and relies on an estimated $2.5 million in water utility funds.

“I think this could play havoc with the entire city’s financials,” he said of the lawsuit and the need for an interfund loan.

The loan is the third option the council will consider to finance the WWTP. An earlier bond issuance for roughly $6 million failed to go to market due to concerns over the ratepayer litigation.

Upon that failure, on April 22 council members approved a bond anticipation note (essentially a line of credit to be paid by a future sewer bond) for $6 million from Cashmere Valley Bank, the same day the Ratepayers Alliance filed suit. Cashmere Valley Bank rescinded its offer based on the lawsuit, winnowing the city’s alternatives for funding.

“It’s difficult to lend into a situation that has pending litigation,” Ron Olsen of Cashmere Valley Bank said. “I hope the city isn’t put in a financial squeeze. The construction project, as we see it, is relatively normal. The costs are within the normal range.”

The WWTP has been budgeted to cost $14.3 million. So far, the project is on schedule and is tracking closely to that budgeted amount, running a tab between $200,000 and $400,000 per month.

However, borrowing money from ratepayer accounts may do little to cool the Ratepayers Alliance, which says it is representing the interests of 2,200 water and 1,800 sewer customers.

“I don’t think the $3 million interfund loan is a slam dunk,” Ratepayers member Sally Adams said. “It puts water utility ratepayers’ money at risk. The chance of the loan being repaid depends on the litigation being settled, and that remains to be seen.”

Some council members contend that the litigation will be costlier for utility customers in the long run.

“In my opinion the lawsuit is increasing the costs to ratepayers without providing any gain,” council member Barry Peters said.

It was revealed at Tuesday’s finance meeting that the city would charge all expenses related to the lawsuit to the sewer utility, which would be paid for from a future sewer bond if the ratepayers’ lawsuit is quashed in the courts.

“The funding will come out of bond proceeds, because (the lawsuit) is directly related to the bond issuance,” said City Attorney Paul McMurray.

But the city is also drafting alternatives to the interfund loan, which could include stopping or slowing the WWTP project, or increasing customer fees to cover the cost of construction.

“An option could be to charge a surcharge on sewer fund ratepayers so that we would pay cash for the rest of the project,” Konkel said. “By my own estimate we would be at least doubling the outstanding rates.”

Konkel noted that option is highly unlikely. Stopping the project could also cost the city about $1 million and could open the city to a breach-of-contract lawsuit, administration officials said.

Despite those flawed alternatives, some council members are likely to reject the interfund option.

“When the city starts borrowing money from utility funds, it raises a serious red flag about the financial management,” council member Bill Knobloch said.

According to Knobloch, the city should have dealt with ratepayers’ grievances before the issue of funding the WWTP arose. He also feels a viable alternative to the interfund loan would be to slow the project down and look for alternative means of financing.

“If none are viable, then mediate the lawsuit and settle,” he said.

The Ratepayers Alliance would like to see an independent audit of utility funds and the creation of a utility advisory commission.

In response to the ratepayers’ demands, the city recently began a search for utility commission candidates. That search will end on May 11.

Funding alternatives for the WWTP and the interfund loan proposal are on the agenda for Wednesday’s council meeting.

How the city backs out of this corner will depend on how the ratepayers litigation is settled, and how the council will decide to fund the WWTP.

“This project is on time, on budget and according to plan,” Konkel said. “The only thing that isn’t right is the cash flow.”