UNITING SALES TAX AND SRF (RLF) FOR CAPITAL FUNDING: A FAYETTEVILLE, ARKANSAS CASE STUDY

The City of Fayetteville, Arkansas provides wastewater collection and treatment services to approximately 24,000 customers inside and outside the City on a retail basis and treatment services to one area community on a wholesale basis. A Master Plan completed in 1995 identified additional treatment capacity and other system improvements required to serve the projected population through 2020.The service area encompasses two watershed areas, the White River and the Illinois River. The existing treatment plant is located in the White River watershed. The decision has been made to construct a new treatment plant in the Illinois River watershed, which will eliminate six pump stations. Preliminary engineering is essentially complete; the discharge permit application is being reviewed by the appropriate regulatory agencies; a financing plan has been submitted to City Council; and a special election was held in November 2001 for authorization of a sales tax to implement the preferred financing plan.The preliminary engineering report for the Wastewater System Improvements Project shows that construction of the new treatment plant, collection system improvements, and improvements to the existing treatment plant will cost approximately 120 million. The new facilities are scheduled to go on-line in 2006.The City of Fayetteville is perceived as having the highest water and sewer rates in the region. In developing the financing plan for this project, City staff and advisors have recognized those perceptions coupled with the number of system users that are visitors to the City.Three alternative methods of funding the wastewater improvements have been evaluated for their impacts on total financing costs and on individual customer's bills:Issuance of revenue bonds with principal and interest repaid from wastewater service charges.A RLF loan with principal and interest repaid from wastewater service charges.A RLF loan with principal and interest repaid from proceeds of a ¾ cent special sales tax.The traditional method of funding major capital expenditures through issuance of revenue bonds has been utilized by the City of Fayetteville in the past. Issuance of 120 million in revenue bonds to fund the proposed capital projects would result in annual debt service costs of approximately 9.6 million, assuming an average interest rate of 5 percent with equal semi-annual principal and interest payments over the 20 year life of the bonds. The bond issue would be sized to include payment of issuance costs and deposit to the debt service reserve fund. Additional operation and maintenance expenses associated with the new treatment plant are forecasted at approximately 4.1 million per year. Funding the additional debt service and operating expenses would require an increase in the existing wastewater service charges of approximately 157 percent. This financing scenario would raise the typical monthly wastewater bill for a residential customer from the current charge of 17.60 to over 45.00.In an effort to mitigate impacts on customer bills to pay for capital costs, the City has secured a commitment from the State of Arkansas for a RLF loan of 100 million with an interest rate of 3.25 percent. Assuming the 115 million loan is repaid from system revenues over 20 years with equal semi-annual principal and interest payments, annual debt service payments would be approximately 7.9 million. Funding the additional debt service and additional operating expenses from wastewater service charges would require an increase of 134 percent in the existing schedule of rates, raising the typical monthly wastewater bill for a residential customer to over 41.00.The third alternative funding scenario also utilizes a RLF loan of 115 million. However, this alternative also required approval of a ¾ cent sales tax by the Fayetteville electorate in November 2001. The proceeds of the sales tax would then be used to repay the RLF loan. Because no new debt service would be incurred, the only additional revenue requirements to be met from wastewater charges would be the additional operating expenses associated with the new facilities. The additional operating expenses could be met with a 29 percent increase in the existing schedule of rates, raising the typical monthly wastewater bill for a residential customer to approximately 22.76. This scenario allows the project to be constructed and the debt retired in approximately 14 years.As various financing options were reviewed, the most favorable option appeared to be utilization of the state revolving loan fund. The funding scenario ultimately utilized by the City of Fayetteville was therefore dependent on the outcome of the November sales tax vote. The electorate approved the sales tax in November 2001, which required the City to proceed with the RLF loan with principal and interest repaid from the proceeds of the ¾ cent sales tax.This paper will provide a description of the evaluation of the alternative funding scenarios, the process of securing the RLF loan, and public information efforts related to passage of the dedicated sales tax.