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San Diego to Sell Bonds For Water System Upgrade
San Diego Daily Transcript - 8/5/02

San Diego will sell up to $350 million in bonds to begin paying for the next phase of a massive effort to improve the city's water storage and delivery system.

In April, the City Council passed a hefty 34 percent water rate increase, partly to raise money for the annual debt service on the bonds. The council followed up Monday, clearing the way for city staff to raise the money to pay for the initial phases of the half-billion-dollar capital improvement program.

Over the course of the five-year plan, the city's water department will complete dozens of individual projects. They range from the replacement of old cast-iron pipes that are responsible for most of the city's water main brakes to upgrades in the reservoir and water treatment systems.

Under the plan adopted by the council Monday, the city's staff will have the discretion to sell between $150 million and $350 million in bonds. Exactly how much money will be raised will depend on cash flow needs and the market conditions when the bonds are sold in October, according to Deputy City Manager Patricia Frazier.

In addition, the city may use some of its capacity to refinance a portion of the $385 million in bonds it sold in 1998 to begin its huge water infrastructure overhaul. That initial, three-year program is nearly complete.

Under the new program, more bond sales will be required to keep cash flowing in as the projects are constructed between 2003 and 2007, Frazier said.

There are two primary decisions facing city staff at this point: whether or not to refinance a portion of the previous bonds; and how many years of construction to fund in the initial bond sale.

If the city does decide to refinance, it could sell up $95 million in bonds, resulting in $8 million a year of debt service for 30 years. A cost analysis will be conducted to determine if the city will save money by refinancing, Frazier said.

The second decision involves how much of the construction the city will finance initially -- two or three years' worth of work. At two years, the city will sell up to $180 million in bonds at an annual debt service of approximately $13 million for 30 years. Under a three-year plan, the city will sell up to $255 at an annual cost of about $20 million.

The money for the debt service will come from a series of rate increases approved by the council in April. They will raise the department's revenue by 6 percent a year over the course of five years. With some compounding, the rate hikes will result in an overall revenue increase of 34 percent.

A little more than half the money will go for debt service on the bonds. The rest will pay for the growing operational and maintenance costs in the city's water department.

Small users will see the biggest percentage increases due to the structure of the rate changes. Half of the revenue will come from increases to the base rates and the other half from the commodity portion of the bill.

Richard Mendes, the city's utilities general manager, said San Diego's water infrastructure had been all-but ignored for decades before the council approved the initial series of three rate increases in 1997. Those hikes allowed the department to float the $385 million in bonds and begin the massive program. The bond sale approved by the council Monday will continue the program.

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