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HomeMy WebLinkAboutAgenda - 09-29-1999 - 9cORANGE COUNTY BOARD OF COMMISSIONERS ACTION AGENDA ITEM ABSTRACT Meeting Date: September 21, 1999 Action Agenda Item No. q _~„ SUBJECT: Efland Sewer Fund Inter-fund Debt DEPARTMENT: Finance. PUBLIC HEARING: (Y/N) No ATTACHMENT(S): INFORMATION CONTACT: .Ken Chavious, ext 2453 TELEPHONE NUMBERS: Hillsborough 732-8181 Chapel Hill 968-4501 Durham 688-7331 Mebane 336-227-2031 PURPOSE: To consider options for resolving debt issues related to the Efland Sewer Fund. BACKGROUND: In a memorandum dated April 23, 1999, the Manager informed the Board of a letter received from the Local Government Commission (LGC) discussing the unstable financial condition of the Efland Sewer Fund. Since the beginning of operations the Efland Sewer enterprise fund has shown signs of financial weakness. This is due mainly to debts owed to the General Fund and County Capital Projects Fund. The LGC recommended that the County either eliminate the debts or adopt a repayment plan for the debt. As mentioned in the Manager's memorandum, these debts are a product of the Water and Sewer Policy adopted by the Board in the mid-1980s. The debts were created during construction of the Efland Sewer lines. The County Commissioners at that time provided a total of $223,000 from the general fund toward the construction. Of the $223,000, $87,000 was required as matching funds to grants used for construction and the remaining $136,000 was considered as a loan from the County general fund. The Board, in formulating the Water and Sewer policies, affirrx~ed that this loan was to be repaid from operating revenues of the system. The County Commissioners also provided a loan of $66,983 from the county capital project fund with same expectations for repayment. In addition to the principal amounts mentioned, the Water and Sewer Policies also state that interest is to be paid on the loans at an annual rate equal to the interest rate on annual delinquent tax collections (9%). As reported to the Board on previous occasions, the revenue currently generated by the Efland Sewer operating fund is insufficient to cover the operating costs associated with the sewer system. In fact, without annual appropriations from the General Fund the sewer fund would run operating deficits each year. There is no repayment requirement associated with these General Fund appropriations. As mentioned above, the LGC recommended two possible courses of action that the County could pursue in addressing the sewer fund's financial condition. • Eliminate the Obligation -Elimination of the obligations could be accomplished by adoption of a resolution by the Board amending the Water and Sewer policy. Elimination of the debt would have minimal impact on the financial condition of the General and Capital Project Funds and would move the sewer fund to a more sound financial condition. However, if the debt is eliminated the Board could lose an opportunity to benefit from the potential for repayment in the future, if the Efland Sewer System becomes economically viable. Adopt a Repayment Schedule for the Balance Owed -There is no repayment schedule currently in existence for the sewer fund debt. Once the Sewer System began receiving operating revenues, all debt became due and payable. This means that the $202,983 in total debt is classified as a current liability or obliga#ion, for which the sewer fund lacks the resources to pay. Adoption of a repayment schedule that identifies payment due dates would mean that the $202,983 could be classified as a long-term liability. For example, If the Board were to adopt a repayment plan that began in 2005 for a period of 10 years and eliminated the interest requirements, the sewer fund would be liable for annual payments of approximately $20,000. In this scenario the debt would remain on the books as long term with no current obligations due. There are numerous scenarios and potential repayment options that can be explored. It is important to note that the Board has complete control over the debt itself as well as any repayment. This control is established in the Board's ability to amend the Water and Sewer Policy. This issue comes about because of good intentions of the Board, at that time, to ensure that the monies provided to the Efland Sewer Project could be returned to the General and County Capital Projects Funds. This matter is essentially an accounting issue related to the classification of long and short-term obligations., FINANCIAL IMPACT: There is no real overall monetary gain or loss to the County in either option listed above. This is due to the fact that the resources of the Sewer fund, the General Fund, and the County Capital Projects Fund are all under the County's umbrella. In the repayment of these loans, the County would be essentially "writing itself a check" from one account and depositing it into another, if the sewer fund becomes economically viable. In the elimination of the debt the County would be removing the need to "write itself a check". RECOMMENDATION(S): The Manager Recommends that the Board provide direction to the staff as to the option to pursue and direct staff to prepare and submit the necessary documents for consideration at an October 1999 Board meeting.