Palm Coast Will Borrow $30 Million to Build New Sewer Plant, Pledging No Rate Increase For 5 Years

Palm Coast is re-starting the process for one of its more massive public works projects: building a new, $30 million wastewater plant to ensure that it has sewer capacity by 2018, without which the state environmental agency can impose a growth moratorium on the city. The city had planned for that sewer facility in 2005, but the housing crash halted progression.

The Palm Coast City Council on Tuesday agreed to re-start the process, including borrowing the money at a low interest rate, ensuring that water and sewer rates, which increased 8 percent in 2013, have increased 4 percent last year and again 4 percent in 2015, will not have to be raised yet again to pay for the new plant (other than  for inflation adjustments).

With interest, the city would be left with an additional debt load of $33.8 million  to be paid in $1.69 million annual increments over 20 years, with rate-payers’ revenue underwriting the payments. “We’re borrowing the whole $30 million because you have other projects besides the $30 million,” said Robert J. Ori, President of Public Resources Management Group, the Maitland-based financial consulting firm that prepared the city’s financing plan for the project. The city’s utility has $10 million in operating reserves, but does not intend to use that amount, as it is a financial security buffer for the city’s operations.

“With this loan we’re proposing we do not have to have a rate increase for the next five years,” Palm Coast City Manager Jim Landon said.

The loan would result in a total debt load for the city of around $200 million at the outset.

“By the financial plan you have and how you’ve structured your rates and how you’ve addressed your issues,” Ori told the council, “you’ve become very stable, very strong, you’re in a very good fiscal, positive position. It’s very, very good.” Spreading the cost over 20 years would also spread the cost to future residents, rather than saddling current and past residents with the cost upfront.

“I don’t know if you remember when Alan Peterson was on city council,” Mayor Jon Netts said, “he was a firm believer in debt service. Let the future pay for the future needs. In other words don’t burden the previous residents with future needs.”

But council member Steven Nobile was worried about the city’s total debt load. “Revenue is about $35 million, our debt is going to be $200 million,” Nobile said, “now, our current utility residents are paying for this.”

“That’s correct,” Ori said.

“We’re paying for this now. In the future they are going to be paying for this,” Nobile said, even as he acknowledged that the utility’s financing plan was sound. “But we at the council have to look at the bigger picture, that we’re not $200 million in debt after this, the utility is, and it’s over a third of the revenue. Now, we can handle that. But on whose back? On our backs, because we’re already paying 30 to 40 percent above everyone else’s rates.” He said he understood the concept of taking on the debt, “but there comes a point where it’s going to start troubling us.”

(There was significant disagreement about Palm Coast’s current rates, compared to other cities: Ori noted that Palm Coast was “about the middle of the pack” in terms of rates, compared to other cities, a point Nobile contested when the comparison applies to “contiguous cities around us,” based on his review of other cities’ posted rates online. The city manager disputed his findings, saying Palm Coast’s rates are lower than the average in the area. Palm Coast’s rates also reflect continuing debt payments on the city’s 2003 acquisition of the water utility.)

Nobile, however, conceded: “We all agree that getting a loan at less than 1 percent is optimal. Nobody is arguing that point.” Still, his concern over debt load persisted.

“We don’t want to issue a bunch of debt,” Ori said. “I don’t disagree with you that your debt load to your assets, I’m not going to lie it’s on the high side, and one of the reasons it’s on the high sides is, we bought a utility 10 years ago, it’s a little different. But it’s going down. It’s improving every year. And we maintain working capital of a minimum of 120 days.” He noted that the city’s A+ rating is still high, and may soon be increased to the highest level in its history.

Construction would begin in early 2016 and be completed by 2018. It would service northwest Palm Coast, much of it yet undeveloped, including the planned, Palm Coast Park Development of Regional Impact, and the Matanzas Woods and Indian Trails subdivisions. The large-scale developments of Old Brick Township and possibly Neoga Lakes further to the south are also on the western end of the city.

“The city had already began the financing process way back in the 2005, 2006 time frames,” David Gierach, president of Sanford-based CPH Engineers, the company that prepared Palm Coast’s facility plan, said. The reason: the Department of Environmental Protection requires that any new sewage treatment facility be completed and operational six months before a city’s existing infrastructure reaches capacity. If that’s not the case, DEP may stop the city from issuing building permits, resulting in a  moratorium. “There’s a good chance they would also put you under consent order for not complying with the regulations they have in place,” Gierach  said, which means the city would be in violation of state rules, forcing it to take action to comply.

The sewer plant was designed and permitted in 2011, but the housing crash halted planned construction. The new plant would include numerous technological advances that would, among other improvements, allow for expanded water recycling (or reuse), and diminish consumption of drinkable water on lawns. “The wastewater system improvements included and recommended in this facility plan will produce treated water suitable for reuse,” the city’s management plan for the new facility states. “Use of treated reclaimed water for irrigation will reduce the use of potable water for irrigation. This in turn will conserve the high quality potable water available, and reduce the rate of groundwater withdrawal.”

The city says current population projections have the existing sewer plant reaching capacity by early 2018. That capacity is 6.83 million gallons per day of wastewater. (About 40 percent of Palm Coast is served by gravity sewer systems and 60 percent is served by PEP, or pre-treatment effluent pumping. Those aren’t going away in older neighborhoods.  But all new subdivisions are required to have a gravity system.

Palm Coast’s intent is to borrow money under the state’s revolving fund program.  Right now the city could borrow at a 0.83 percent interest rate. But the fund administrator do not make the loan available until the project is a certainty. They would hold a hearing in August 2015 to hear Palm Coats’s case. The council must approve submitting a loan application, and it only has a window once a year: the loan hearings only take place every August.

“We are confident that you will be able to get these funds,” Gierach told the council.

The Clean Water State Revolving Fund loan agreement would be signed in November. The revolving fund, administered by the federal Environmental Protection Agency and all 50 states, provides low-interest loans to municipalities to build clean-water projects, and uses the repayments and interest payments to “revolve” available funds perpetually. Financing rates are set according to a locality’s household income and unemployment rate, among other factors: the lower the household income and the higher the unemployment rate, the more favorable the interest rate. Palm Coast having Florida’s leading unemployment rate among metropolitan areas, and its household income having declined since the housing bust, resulted in much more favorable financing terms for the government loan.

In comparison, if the city were to take out a conventional loan and stretch it over 30 years, its interest rate would likely be between 3 and 4 percent, Ori, the PRMG president, said.

The city says current population projections have the existing sewer plant reaching capacity by early 2018. That capacity is 6.83 million gallons per day of wastewater. “A lot of people are forecasting that we’re going to be right at or over capacity even before December 2017,” City Manager Jim Landon said.

And Public Works and Utilities Director Richard Adams cautions: “We’re very close on the numbers on the actual move-ins, but if you get a developer come along that wants to build a subdivision, DEP will tell him no now, because we don’t have the capacity.” The city can issue what’s called a dry-line permit, but that requires a leap of faith on developers’ part that the city will have its project completed in time, which may work against the developer’s intentions.

At the height of the boom, the population increased by 8,000 in a single year (from 60,600 in 2005 to 68,400 in 2006), then leveled off at 75,000 for two years in 2010 and 2011. It has since been adding about 1,000 residents each year.

Wastewater flows have increased as well, though not nearly as dramatically: in 2005, city residents were producing about 4 million gallons of waste per day, on an annualized average. By October 2007, that peaked at 4.8 million gallons. Flows then fell marginally for a couple of years before increasing again, starting in late 2009 and 2010, passing the 5 million mark. Flows slowed again in 2011, but by 2013 the climb resumed. In April 2014, flows reached almost 6 million gallons per day, the highest mark yet. That leaves a diminishing margin between current flows and what the city is permitted for before hitting the 6.83 million capacity at its existing plant.

The city is projecting population growth based on estimates from the University of Florida’s Bureau of Economic and Business Research. Those figures have had their flaws, and are often revised, but they are the standard for many Florida governments when needing to plan long-term, projects where population is a key variable.

Palm Coast’s population in 2015 is just short of 80,000. The city’s sewer service area population is a little higher, at around 80,500. The city projects a growth rate that would have Palm Coast’s population at 84,000 by 2018 (with wastewater flows at 6.4 million gallons per day), and the service area population at just shy of 89,000. Population projections then get more sanguine, with a population of 93,000 projected for 2012, and of 110,000 for 2024, with wastewater flows at 8.2 million gallons per day by then. (Rainfalls can impact fluctuations in wastewater.)

By 2035, the population of the city is projected at 151,000, and sewer flows at 11.2 million gallons in the city proper, and 12.2 million the entire service area.

“Will our next project be expansion of Plant two, or Plant One? We don’t know,” Richard Adams, the utilities director, said.

Tuesday  morning, focusing on the financial plan for the new sewer project, Landon, the city manager, portrayed the , matter in glowing terms. “To be able to come to you and say it’s time to build a plant, and we don’t need a rate increase,” Landon said, “I am actually shocked. That just doesn’t happen. And so, it has to do with that long-term plan, it has to do with holding the line and having concern for the numbers on all sides of the equation.”

But the plan depends on stable growth in the future. Forecasts point to just such growth. But if the region were to be struck with yet another downturn in the coming few years, Palm Coast’s plan—the gamble city council member Bill McGuire described as “throwing the dice”—would sour.

Palm Coast Sewer Plant Presentation (2015)