The Terre Haute, Ind., Board of Sanitary Commissioners on Tuesday approved resolutions to continue a financing process to issue up to $85 million for the second phase of a combined sewer overflow project.
The board approved resolutions for a revenue bond, not to exceed $20 million for engineering and legal costs. Officials say this bond will likely be closer to $15 million, paid from sanitary fees. Additionally, a resolution was approved for a general obligation bond, paid from property taxes, to fund construction of Phase 2 projects such a new main sanitary sewer lift station, not to exceed $70 million. Officials think this bond issue will likely be between $60 million and $65 million. However, the two bonds cannot exceed a total of $85 million.
The resolutions next go before the Terre Haute City Council in October for approval.
Prior to its vote during a public hearing, Terre Haute attorney Richard Shagley urged the board to delay any financing of sewer projects while the Federal Bureau of Investigation investigates the wastewater treatment plant for possible bribery and fraud.
"The term pay-to-play frightens me," Shagley said. "It would be my opinion that this board needs to really evaluate the processes of choosing engineers down the line. It is concerns me that that all of this is going on and we are continuing with an $85 million bond project. And then on the other side, the city has to cut $8 million per DLGF (Department of Local Government Finance) while at the same time taking ($4 million) in pilot fee from the sewer utility."
Deen C. Rogers, accountant for Indianapolis-based HJ Umbaugh & Associates, said while legitimate concerns, "we worked with another community with an FBI investigation and did disclose that in an open market bond issue and were able to issue those bonds. I think it would be tough here (Terre Haute) if going the open market route (due to the city's low bond rating), but I think we have another means" through Indiana's State Revolving Fund (SRF), which the resolutions authorize as a buyer of the bonds.
"I think given the (agreement) we have in place and with the timing required, I don't know that we have a choice," Rogers said.
The sanitary district is under an EPA-mandated combined sewer overflow project, which includes oversight from the Indiana Department of Environmental Management, which includes a state judicial agreement to have its entire CSO project completed within 25 years.
While Rogers declined to name the city after the meeting, the FBI is investigating the city of Muncie's Sanitary District, after previously also investigating Muncie's building commissioner, Craig Nichols, who was arrested on federal charges of wire fraud, theft and money laundering.
Dennis Otten, an Indianapolis attorney with Bose McKinney & Evans, serving as bond counsel, said he has been in contact with the Indiana's SRF. "We have contacted them about the FBI investigation and they are aware it is ongoing," Otten said. "They will be carefully scrutinizing the records of the sanitary district before any bonds are issued."
Otten said the city could face penalties and additional construction costs for delaying its CSO project.
City Councilman Earl Elliott questioned the revised cost of the project, stating the City Council last year was told a sewer rate increase was required for a more than $42 million project for Phase 2. At that cost, it requires about a $2 million payment from Sanitary District revenues.
"We plugged in those $2 million amounts needed to make the debt service payments, which drove the amount of the rate increase we needed to pass" to pay for debt on $42 million, Elliott said. "Now we have a $15 million bond issue with a $700,000 annual payment," he said, referring to the first bond issue covered from Sanitary District revenues. To cover that, the city could have passed a lower sewer rate increase, Elliott said.
"The revenue increase is higher than it needed to be," Elliott said. "I am perplexed. Why did we go to a property tax bond (for part of Phase 2 funding) and how did we get to ($85 million) from $42 million?"
City Engineer Chuck Ennis said the $42 million presented last year was a 2011 estimate. Since that estimate, "we have been through a preliminary design phase and gotten a little better handle on some of the cost, most of it is the main lift station. Another component is we did the high rate treatment facility in two phases instead of one, so we pushed that cost from Phase 1 into Phase 2," to be covered in a general obligation bond, paid from property taxes.
"It was a shock to us too, we didn't expect the numbers to be that high," Ennis said.
The larger bond, not to exceed $70 million, will not be issued until next year, so the city should have a better estimate on construction costs, Ennis said.
"Well Phases 2 through 5 was to be like $85 million on the original (planning and cost schedule), now Phase 2 is $75 million. I don't want to ask what Phase 3, 4 and 5 will be, apparently we will blow way higher than the total (of the original plan)," Elliott countered. "Additionally, the constituents can't spend that $1 million or $1.3 million that they have to pay (in higher sewer rates). It is no longer in their pocket."
"There will be no rate increase" for the Phase 2 project, Ennis said, adding any funds not spent would be used on other CSO phases. Ennis said the funds cannot be used for any other purpose than for the CSO project.
Umbaugh's Rogers said the Phase 2 project "had higher project costs than originally anticipated. We pushed a piece of the financing to the general obligation (bond) side" to keep the property tax rate the same, he said.
Reed said financing for Phase 2 at $62 million is about $4.3 million a year. "If you were to finance using a 20-year term, you would see a tax rate decrease for the general obligation bonds through the Sanitary District," Reed said. "The strategy is still open for discussion as to whether you want to maintain the tax rate where it is and maybe shorten the terms on those those bonds so you have some flexibility for future phases or if you want to maximize that term and lower that tax rate."
City Council President Karrum Nasser questioned if the council will be asked to pass any future sewer rate increase. Reed said not for the Phase 2 project. "What will come for the future, I can't say," Reed said.
After the meeting, Nasser said he has already determined he will not vote for the bond funding when it comes before the City Council.
Nasser said until the city's investigation is complete, as well as the FBI investigation, "We should hold off any issuance of sewer bonds. Now we are looking at bonds that are double in cost for Phase 2 from what (the City Council) was told last year."
