Background
The City’s focus on resiliency and innovative constraint has enabled us to maintain our financial strength and continue providing the high quality services that are important to our residents – even during challenging swings in the economy. To accomplish this, the City of Sugar Land prepares a five-year capital improvement program (CIP) annually as part of the budget process, incorporating the first year of the plan into the adopted budget for appropriation. Our approach in the FY19-23 CIP continues this focus – taking into account current and future capital needs while weighing financial impacts on taxpayers and rate payers.

In order to maximize the City's ability to invest in such improvements - and to ensure residents today will not be solely responsible for funding improvements that will benefit future residents, the fiscal year 2018 and 2019 CIP includes projects anticipated to be funded from the issuance of Utility Revenue Bonds, which are supported by the Utility System Enterprise Fund.

Previous City Council Actions

In February 2018, City Council approved a resolution stating the City's intent to reimburse project expenditures for FY2018 budgeted projects from the proceeds of future tax exempt bonds. This allowed the City to move forward with project expenditures and delay the actual issuance of bonds until they could be combined with FY2019 project funding needs.

Ratings Review
As part of the issuance process, the City of Sugar Land hosted representatives from both Standard & Poor’s and Fitch Investors Service on November 8 and 9, 2018.

One of the topics discussed during the visits with both agencies was the City’s utility rate structure and the plan for future rate increases. When evaluating the strength of the utility system, these rating agencies look at the all-in coverage margins of revenues compared to debt obligations of the system – whether coverage is legally required by bond covenants or not.

As a reminder, though the fiscal year 2018-2022 forecast showed a minimal rate increase anticipated for fiscal year 2019, with the ongoing Integrated Water Resources Plan (IWRP) set to be completed in early 2019 - and the positive impact of the annexation on the utility fund, staff deferred any recommendations on rate adjustments until the plan is completed. Therefore, the current forecast for 2019-2023 does not reflect any rate increases. As stated throughout the FY19 budget preparation process, however, we know there will need to be rate increases within the next five years – and likely next year, but we felt it was in the best interests of our residents to not make those recommendations until we are certain any rate increases are aligned with the deliberate strategy outlined in the IWRP. With that, going into the spring of 2019 and as the IWRP wraps up, we will be building projects and financial impacts into the fiscal year 2020-2024 CIP and forecast. Based on the revenue needs to support the capital investment, staff will recommend any necessary adjustments to utility rates beginning as early as 2020.

S&P affirmed their AA+ rating with a stable outlook. Their report cited the City's management team and economics of the City, with the recent annexation reflecting a positive impact on the City. S&P stated that the City is willing to raise rates when necessary, and also noted coverage requirements and future capital needs as limiting factors for the rating.

Fitch Investors Service also affirmed the City’s AA+ rating on the Utility Revenue Bonds but has revised the outlook from stable to negative. Their reasoning for the change in outlook is based on the all-in revenue coverage compared to the overall debt obligations that the system is supporting, which includes tax backed debt assumed from MUD's and surface water debt supported by GRP fees. They note that the City’s rates are very low compared to other utilities and household income, that they have not been increased since 2014, and that the current five-year plan does not include rate increases- despite positive financial performance and increasing coverage in fiscal year 2018 and explanation that future rate increases will be evaluated as one of the results of the IWRP.

Fitch recommends that going forward, the City look at sensitivity analysis for the fund and rate structure that treats all debt obligations including transfers as “above the line” for coverage purposes and that we establish a plan to utilize revenue generated from future rate increases to cash-fund capital project needs going forward. We advised that our discussion relative to IWRP implementation will take their recommendations into account.

Projects Funded
As approved in the FY2018 and FY2019 budget and capital improvement program, the projects funded from the proceeds (in $ Millions) of the Series 2019 Utility Revenue Bonds are as follows:

Projects include water and wastewater system improvements, including water wells, distribution system, groundwater storage tanks, groundwater plants, lift stations, wastewater treatment plant and easement acquisition. A detailed list of projects funded from bond proceeds is included as an exhibit.

Overall, this proposed bond issuance was reviewed with the City Council Finance/Audit Committee at an October 9, 2018, meeting, and the Committee was supportive of moving forward as proposed.

Bond Sale
The Preliminary Official Statement and draft Bond Ordinance are attached as exhibits. The bonds are scheduled to be sold on a competitive basis with bids due at 11:15 a.m. on December 4, 2018. Based on bids received, City staff, financial advisors and bond counsel will be present at the meeting to report the results and recommend approval of the winning bid based on lowest true interest cost.