The Capistrano Insider

Supervisor Bates on Bringing Public Salaries in Line

This from Orange County Supervisor Patricia Bates, whose district includes San Juan Capistrano:

2012 Labor Negotiations

A major focus of your Board of Supervisors in 2012 will be labor negotiations. Several employee contracts are up for renegotiation, and it will be the responsibility of this Board to ensure taxpayers’ interests are successfully represented at the bargaining table.

We need to take the opportunity of the 2012 negotiations to explore options for slowing the rapidly rising cost of government. Employees must be compensated fairly; however, the compensation offered to employees must live within means of what the County treasury can afford both in the short-term and long-term.

In the closing months of 2011, the Board has taken actions that signal our intentions for 2012 labor relations and have initiated reforms that will prevent mistakes made in past negotiations.

In my view, a positive step forward for taxpayers was the Board’s recent action to reject proposed changes in the Orange County Managers Association (OCMA) contract. If approved as presented to the Board, the OCMA contract, which contained a “Pay for Performance” award program, would have significantly raised the salary range for managers and long-term pension costs.

The accelerated increase in base salaries, which is a byproduct of the Pay for Performance program, is what is threatening the fiscal solvency of our pension plans and the overall cost of government. That is why my colleagues and I rejected the OCMA contract proposal.

Similarly, this week we rejected a proposal that would have increased salary ranges for Law Enforcement Managers. I believe our employees deserve to be paid appropriately; however, we must correct the past that set salary and pension benefits at rates we cannot afford in the long-term.

To correct the record and avoid confusion, I should point out that media reports asserted the Board privately approved retroactive raises for members of OCMA prior to publicly voting down the contract I mentioned above. Such an assertion is inaccurate. The fact is these “raises,” or more accurately performance awards, were made in compliance with a previously negotiated contract.

The County began negotiations with OCMA in November 2010, as their employment contract was due to expire January 14, 2011; and as part of the negotiations, the County included in the discussions significant changes to the Pay for Performance award program contained in this existing contract. OCMA agreed to defer the 2010 performance awards that were due to be paid to eligible managers on or around January 5, 2011 until a new contract was hammered-out.

As a result of not reaching agreement on the new contract, it was determined the County was legally bound to fund and award performance increases, as outlined in the previous existing contract. Paying the previously agreed to awards saves the County the costs associated with litigation and avoids the large salary range increases included in the new proposed contract.

The Board has directed staff to continue to work with OCMA to reach an agreement that is fair to the County’s managers and awards exceptional performance yet does not significantly increase pay ranges and associated pension benefits.

Going forward, the prospects for taxpayers in the 2012 negotiations are strong. The Board continues to move toward implementing a significant reform: hiring a third party private firm to negotiate our labor contracts.

The negotiators supplied by a private firm will provide the County with the needed skill and expertise. A private, independent firm will also determine short-term and long-term impacts of every major contract component discussed at the bargaining table.

In the past, the County relied on in-house staff to conduct our negotiations. However, we believe a third party will provide for a stronger advocate at the bargaining table.

An additional positive for taxpayers is our recent Performance Audit, which identified over $150 million in savings can be achieved in contract negotiations. As such, the Board has agreed to meet and discuss this list of savings and develop a strategy for making them a reality.

Balancing savings for the taxpayer with salaries that award performance and also retains a superior workforce will continue to be a priority for me throughout my term. Nowhere is the opportunity for savings greater than in our labor contracts.

I value the work our public employees do and the services they provide; and I know Orange County is fortunate to have very competent and diligent public servants. However, the current path is unsustainable. Reversing the trend is the challenge all local officials must take on and one this Orange County Board of Supervisors is ready to meet.

Now, Here is a City that's Nearly Bankrupt

It's more than a bit of hyperbole when San Juan Capistrano's critics describe the city as nearly bankrupt, but here's one community that is in serious financial trouble:

from www.latimes.com:

Compton's financially struggling City Hall may have to shut down if the City Council doesn't approve a new budget Tuesday night.

The council in recent weeks has twice voted down a budget that would lay off dozens of employees, including several department heads.Those voting in the majority said they wanted to see alternatives to layoffs.

City officials including City Manager Willie Norfleet and Mayor Eric Perrodin said last week that without a budget, a government shutdown could be imminent, with all city employees involuntarily furloughed except for public safety workers and other essential staff. City Treasurer Douglas Sanders said that he would not issue city paychecks this week if there was no budget appropriating the funds. City employees received notices weeks ago warning that their paychecks might be delayed.

Unions representing city employees have threatened to sue if the budget calling for layoffs is adopted. The unions contend that a resolution passed in 2009 gives the city authority to keep functioning until a budget is passed. City officials, however, said they did not have authority to operate without a budget under the city’s charter.

The city's fiscal situation is dire. Its general fund has been running deficits for the last three years. The city’s independent auditors, citing the deficits and “liquidity problems,” have questioned the government's ability to remain solvent. According to a report provided by the city, Compton’s general fund ended the latest fiscal year with a deficit of about $23 million, equal to about 40% of the city’s budget for the period. The deficit was inflated by $11.6 million because money was transferred from the general fund to pay off an accumulated deficit in the city’s general liability fund.

Here's the entire post.

I Guess Capistrano IS Serious about Cutting Employee Costs

I stumbled across this on San Juan Capistrano's website, under the "jobs" section:

"Please Note:  The City is currently negotiating with its bargaining groups, and as a result of these negotiations, a new retirement formula of 2%@ 57 may be implemented for new employees.  Under this formula, the employee will be responsible for paying the entire employee share of retirement costs, which is calculated based upon age of entry into the Orange County Employees Retirement System, or a reciprocal system such as CalPERS.  The effective date of implementation and the employee costs will be provided upon City Council approval.  Please direct any questions you may have to Laura Hendrix, Human Resources Assistant at lhendrix@sanjuancapistrano.org"

 

Fitch Downgrades Capistrano's Bond Rating

  story posted at www.thecapistranodispatch.com

Fitch Downgrades San Juan Capistrano Pub Fin Auth, California's Rev COPs to 'A'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings downgrades the following San Juan Capistrano Public Financing Authority, CA's (the authority) outstanding revenue certificates of participation (COPs):

--$36.5 million revenue COPs to 'A' from 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The downgrade to 'A' from 'AA' reflects a dramatic weakening of the city of San Juan Capistrano's (the city) financial profile including the depletion of unrestricted cash reserves, costly and delayed remediation of water contamination, and insufficient net system revenues to meet annual debt service requirements.

--Liquidity is expected to remain negligible for at least the next several years, providing limited operating and capital flexibility.

--The Rating Outlook is Stable because debt service coverage is projected to improve with approved rate hikes, reduced operating expenses from decreased imported water purchases, and a receipt of the first installment of a disbursement pursuant to a settlement agreement related to water contamination.

--The debt profile is elevated and likely to increase further.

--Rates are affordable, providing room for projected increases.

--Demographics are healthy with high wealth levels and unemployment below state and national averages.

KEY RATING DRIVERS:

--Ability of the city's groundwater recovery plant (GWRP, or the plant) to operate at or near full production, alleviating costly imported water purchases.

--Improvement in debt service coverage and financial flexibility.

SECURITY:

The certificates are secured by installment payments made by the city to the authority. Installment payments are a special obligation by the city, secured by a pledge of and first lien on the net water system revenues.

CREDIT SUMMARY:

A number of factors contributed to the rapid deterioration in the system's financial position. The city completed construction of a GWRP in fiscal 2005, which was built to reduce the city's reliance on imported water to meet area needs. The plant has been operating at only one-half production for over two years due to various factors, including methyl tertiary butyl ether (MTBE) contamination at plant wells. Consequently, operating expenses, which had been projected to decline with decreased water purchases, actually increased by 8% and by another 5% in fiscal 2009 and 2010 respectively. The operating expense increases were not counterbalanced by increased water sales. Instead, two years of wet weather, when water sales were reportedly at a 20-year low, led to a 13% and 4% decline in operating revenues in fiscal 2009 and 2010, respectively.

The housing collapse compounded the decline in system revenues, resulting in a 25% drop in developer fees from fiscal 2009 to 2010. Thus, debt service coverage (DSC) levels, which had averaged 3.2 times (x) over the fiscal 2006 to 2008 period, fell to 1.8x in fiscal 2009 and dropped precipitously to 0.2x in fiscal 2010. Unrestricted cash was also drawn upon in fiscal 2009 and entirely depleted by fiscal 2010 to cover capital expenditures and debt service payments.

Fiscal 2009 rates were kept in place for most of fiscal 2010 (i.e. rate hike was 0%), but were raised by 13% in February 2010 with the adoption of a five-year rate package (overall fiscal 2010 rate increase was 5.4%). Rates were increased by an additional 18% for fiscal 2011 (effective in July 2010), resulting in a cumulative rate increase of 27% for fiscal 2011. In conjunction with the rate package, council approved future automatic rate adjustments to pass-through any rate increases imposed by the Metropolitan Water District of Southern California (MWD). The city currently purchases 70% of its water from MWD, in contrast to planned purchases of about 50% with full GWRP operating production.

A settlement agreement between Chevron Corporation (rated 'AA' by Fitch) and the city to address the cleanup of groundwater contamination that contributed to the poor performance of the GWRP was reached on March 7, 2011 after long delays. The city has received $1.5 million in disbursements from the company, and expects to receive an additional $50,000 in fiscal 2011. While the city's forecast assumes no disbursements from Chevron beyond fiscal 2011, successful and timely completion and proven effective operation of a granulated active carbon (GAC) facility at the contaminated well site entitles the city to an additional $1.6 million in settlement funds. The city expects to complete construction of the GAC treatment system in July 2011. The GAC facility is expected to remove the MTBE contaminant, thus allowing the GWRP to operate at full production and help reduce purchases of costly water from MWD to historical levels.

The rate hikes and settlement monies are expected to improve the system's financial profile for fiscal 2011 and beyond, with DSC currently projected at 1.7x in fiscal 2011 and similar levels over the five-year forecast period. However, delays that prevent the city's GWRP from operating at full production to alleviate costly imported water purchases could negatively affect results beyond the current fiscal year. The level of adopted rate hikes is not expected to replenish reserves for at least several years, affording the system little operating flexibility.

The city's current five-year capital improvement plan (CIP) totals $29.3 million. However, given the system has no cash reserves available and surplus revenues will not be sufficient to meet projected annual capital costs, projects will need to be deferred until cash reserves have been restored and/or debt will need to be issued to meet current five-year capital needs. Issuance of additional debt will cause already high debt ratios to escalate further. Debt amortization is average.

The water system serves approximately 11,000 customers, including about 1,000 users outside of the city limits. Customer growth has been modest at 1.0% annually over the past five years. San Juan Capistrano (general obligations rated 'AAA' with a Stable Outlook) is located 60 miles north of San Diego, within one mile of the Pacific Ocean and 60 miles south of Los Angeles. The city is largely a residential, suburban community with residents commuting to jobs in the Orange County, San Diego, and Los Angeles areas. Area wealth levels are 50% and 70% above state and national levels, respectively, and the 8.1% unemployment rate as of January 2011 is below state, county, and national levels.

Why Others Have No Debt, Or Less Debt ...

So you hear or read elsewhere that other cities don't have debt or as much debt as San Juan Capistrano. Well, maybe. But keep some perspective: Dana Point and Laguna Niguel also don't have water agencies. Laguna Niguel (and other areas) have Moulton-Niguel Water District.

That is a big district and it does have debt. Maybe less, maybe it's OK, but don't believe everything you read ...

Here's from Fitch:

Fitch Rates Moulton Niguel Water District, California's GO Bonds 'AA+'; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)--As part of its continuous surveillance effort, Fitch Ratings takes the following rating actions on Moulton Niguel Water District, CA's (MNWD):

--$41.74 million consolidated refunding general obligation (GO) bonds series 2003 affirmed at 'AA+'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The GO rating is based on a weak link analysis of the ability of each of three of the MNWD's six improvement districts to levy unlimited ad valorem taxes to repay their respective share of debt service;

--It further reflects the provision of essential services to the three affluent, largely built out improvement districts;

--Each of the districts has experienced tax base declines, though tax rates are adjusted annually by the county based on each district's debt service needs and assessed valuation;

--Concentration is not a concern as the areas are primarily residential;

--All three districts have low direct debt levels, rapid amortization, and no additional capital needs except for district-wide projects;

--MNWD's overall financial performance has been very strong with solid debt service coverage levels and well above-average liquidity despite reliance on costly imported water supplies for 100% of its potable water needs;

--The district enjoys low rates, as property taxes contribute a significant portion of revenues.

KEY RATING DRIVER:

--Maintenance of sound financial results despite rising fixed and operating costs and a recently declining tax base will be important to maintaining the rating level;

SECURITY:

The bonds are payable solely from unlimited ad valorem assessments on all taxable land within improvement district Nos. 6, 7, and 8. Each obligation is several and not joint, thus amounts collected in any improvement district will not be available to pay any other improvement district's share of debt service payments. Proceeds from land delinquency sales and certain moneys and earnings from the bonds' funds and accounts are also pledged to debt service.

CREDIT SUMMARY:

MNWD provides water, wastewater and recycled water services to approximately 167,000 residents in southern Orange County. Encompassing 36.5 square miles, the district includes the cities of Aliso Viejo, Laguna Niguel, significant portions of Laguna Hills and Mission Viejo and small portions of Dana Point and San Juan Capistrano. County wealth levels in the area are very high with median household income approximately 123% of the state and 144% of the national average. District-wide assessed value (AV) levels (land only) have declined by a combined 7.7% over the past two years. The district does not participate in the Teeter plan, thus tax revenues are based on actual collections which can be over 100% because of a 5% delinquency factor included in the tax rate assumptions less any excess funds available from the prior year.

Fitch rates the MNWD's water revenue certificated of participation 'AAA' outlook stable as payments are secured first by property tax revenues, and secondly from net revenues of the entire district's water, recycled water and sewer systems. The GO bonds are secured by tax assessments within three of MNWD's six improvement districts whose obligations are several and not joint and are thus based on a weak link analysis of the three districts. MNWD includes six operating improvement districts (Nos. 1, 2, 3, 6, 7, and 8) and allocates costs of development and maintenance of the water and sewer systems to each district.

The three districts securing the bond payments (Nos. 6, 7, 8) are all built out with basically unchanged populations over the past ten years. The bonds are allocated to each district based on their respective share of improvements, with district 6 responsible for 71% of remaining principal, district 7 responsible for 28%, and district 8 responsible for 0.5%. While delinquency rates for the three districts are low, they have risen in the last year. Tax rates are adjusted for each improvement district by the County on an annual basis to account for any changes in AV, which mitigates concerns about tax base declines.

Comprising about 6,410 acres in the northern portion of MNWD, district No. 6 is the largest of the three with a population of 49,903. In fiscal 2010 it served about 28% of total MNWD connections with about 15,280 water connections and 14,032 sewer connections. It also has the largest AV of the three; however, AV declined a combined 11.4% in fiscal 2010 and 2011. As of 2003, the most recent information available to Fitch, the top 10 taxpayers accounted for about 11% of AV, which is slightly concentrated; however, their residential status somewhat mitigates any concern. While it has the highest tax rate of the three, it is still low at 0.10894 per $100 AV. Its current tax collections equaled 97.1% of the levy in fiscal 2010, down from 107.4% the prior year.

District No. 7 comprises 1,500 acres in the cities of Laguna Niguel and Dana Point in the southern part of the district closest to the ocean. It serves about 10,325 residents with 3,532 water connections and 3,283 sewer connections (about 6.5% of total MNWD connections). As of 2003, the ten largest taxpayers represented a low 5.1% of AV, most of which were single family residential. AV declined a combined 7% in fiscals 2009 and 2010, before increasing 0.1% in fiscal 2011. Its current tax collections equaled a high 102.3% of the levy in fiscal 2010, down from 105.6% the prior year.

District No. 8 comprises about 1,730 acres in the central part of the district parallel to the San Diego Freeway. It has a small population of 8,558 and serves about 5% of total MNWD connections with 2,608 water connections and 2,484 sewer connections. Its primary development is the Nellie Gail Ranch a 917-acre community of luxury homes on equestrian lots. As of fiscal 2003, the district was not concentrated with the ten largest taxpayers, most of which were single family residential, representing only 2.75% of AV. AV declined a combined 9.8% over the last three years. Its current tax collections equaled 96.6% of the levy in fiscal 2010, down from 105.7% the prior year.

Within each district, direct debt levels are very low and all principal is retired within 10 years. Debt as a percent of TAV is a very low 0.72% for district No. 6, 0.51% for district No. 7, and 0.01% for district No. 8 and is less than $1 per capita for each district. The remaining debt authorization for each district is as follows: $77.5 million for ID No. 6, $6.9 million for ID No. 7, and $7 million for ID No. 8. While MNWD anticipates some district-wide capital needs which would be funded with water system revenues, it does not expect to issue additional GO debt in the near term as the districts are built out. Amortization of the GO principal is rapid, maturing in fiscal 2013 for district No. 8, 2017 for district No. 6, and 2020 for district No.7. In addition, overall direct and overlapping MNWD debt is low at $2,415 per capita or 2.8% of AV in fiscal 2010.

MNWD's overall financial performance has been very strong with historic debt service coverage ranging from 2.0 times (x) to 4.7x from fiscal 2005 through 2010. Coverage levels are projected to dip to just below 2.0x in fiscal 2011 when the 2009 debt rolls on and maximum annual debt service is reached, but is expected to rebound quickly thereafter to above 2.0x from fiscals 2012 through 2015. Liquidity measures have been very strong with well over two years of cash since 2005. At the end of fiscal 2010, unrestricted cash and investments totaled nearly $12 million, equal to an impressive 896 days cash. With a manageable $135 million five-year capital plan requiring no additional debt and approved rate increases through fiscal 2012, liquidity is expected to remain above the district's comprehensive reserve policy that sets minimum targets for three general reserves and three capital reserves.

The district is a member agency of the Metropolitan Water District of Orange County (MWDOC) and receives 100% of its potable water supply from MWDOC. MWDOC in turn, imports water which it buys primarily from the Metropolitan Water District of Southern California (MWD; revenue and GO bonds rated 'AAA' by Fitch). MWD's significant water supply challenges and cost pressures on imported water are expected to continue and to impact the cost of operations of underlying retailers to some degree. Nevertheless, the district's rates are among the lowest in the area, benefiting from the property tax revenues generated and collected by the district; these revenues account for about one-third of total district revenues. Currently, the average monthly water bill using 1,600 cubic-feet of water is $28, significantly less than the water portion of bills for other entities which also are highly dependent on imported water from MWD; wastewater charges are also low. Even with approved annual rate increases of 16.2% over the next two years, projected rates are expected to remain very affordable.