Public Utilities Revenue Bond Oversight Committee

MINUTES

Monday, January 9, 2006
9:30 a.m. – 12:00 p.m.
1155 Market Street (between 7 & 8th Streets) 4th Floor
San Francisco, CA  94103

1. Call To Order and Roll Call

   Chair Patrick Sweetland called the meeting to order at 9:40 a.m. and roll call was taken.  RBOC members present were Patrick Sweetland, Lisbet Sunshine, Aimee Brown, Brian Browne, Severin Campbell, and David Sutter.  Mr. Sweetland reported that he had not heard back from the Controller regarding the appointment to replace Ms. Adams vacated position, but will follow up on the matter.
   

2. Public Comment – There were no members of the public present at this time.
   
3. Report from the Chair 

   a. Status of RBOC Audit Request For Proposal.  Mr. Sweetland reported that eleven firms were solicited and four responded. The proposal review panel was scheduled to meet January 10, 2006 to evaluate the proposals.   

   b. Status of Reappointments to RBOC.  Mr. Sweetland said that the Board of Supervisors reappointed Mr. Sutter for a four-year term.
   

4. Election of Officers
   

   Mr. Browne moved to elect Ms. Sunshine as Chair and Aimee Brown seconded the motion.  Mr. Sutter called for discussion before a vote on the motion was taken.  Mr. Sutter stated that while he fully appreciated Ms. Sunshine’s qualifications and commitment, he felt that the present configuration of Chair and Vice-Chair should remain unchanged. He felt that Mr. Sweetland and Ms. Sunshine were doing an excellent job and felt that it was in the best interest of the Committee that they remain in their positions.  Mr. Sutter moved to re-elect Mr. Sweetland and Ms. Sunshine as Chair and Vice-Chair.  Ms. Sunshine stated that she would support Mr. Sweetland’s re-election if he were willing to continue in that role.  Mr. Sweetland responded that he appreciated the vote of confidence but felt that the Committee would be better served if the Chair and Vice-Chair rotated among the Committee members.

   Since the first motion to elect Ms. Sunshine as Chair was still on the floor and had not been rescinded, the vote was taken.  Mr. Sweetland, Mr. Browne, Ms. Campbell, Ms. Brown and Ms. Sunshine voted yes.  Mr. Sutter voted no.  

   Ms. Sunshine called for motions to elect a Vice-Chair.  Mr. Sweetland’s motion to elect Ms. Brown Vice Chair was seconded by Ms. Campbell.  The motion passed unanimously.

   
   
5. Approval of regularly scheduled meetings for 2006 (January 9, January 30, March 6, May 1, August 7, October 2, December 4).  Mr. Sweetland moved to accept the 2006 meetings as scheduled.  Mr. Browne seconded the motion.  The motion passed unanimously.

6. Discussion and possible action on proposed 2006 Series A Bonds.
   Ms. Ostberg updated the Committee members on details of the upcoming bond sale.  She said that the sale date was postponed from January 31 to February 22 due to some administrative issues.   Ms. Ostberg described the bond sale process stating that electronically submitted bids would be taken on February 22 at 9:30 a.m. and the award will go to the syndicate of underwriters offering the lowest interest cost to SFPUC.  Two weeks later the bonds will “close”, meaning the underwriters will wire money in exchange for bonds delivered by SFPUC.  The bonds are structured with a 30-year term and with fixed interest rates.  A draft of the preliminary official statement was sent to RBOC members in late November and the final version will be forwarded to Committee members.

   Mr. Sweetland asked for explanation of the procedures that take place before the Board of Supervisors.   Ms. Ostberg said that they would seek Finance Committee approval on February 2nd and Board of Supervisor approval on February 7th.   Full authorization to sell the bonds will be achieved when the Mayor signs the resolution – expected on February 10th. 

   Mr. Sweetland questioned if the Committee should comment to the Board about the upcoming bond sale, as permitted under Proposition P.  After some discussion, the Committee concluded that it would be beneficial to exercise their prerogative to submit a statement to the Finance Committee.  Ms. Sunshine agreed to write a draft of that statement for consideration at the January 30th RBOC meeting.  

7. Discussion of draft Annual Report
   
   Mr. Sweetland and Ms. Sunshine invited comments on the draft Annual Report dated January 5th provided by Mr. Sweetland.  Ms. Sunshine thanked Mr. Sweetland for taking on the responsibility of drafting the Annual Report.  Mr. Browne stated that he had submitted comments (e-mail dated January 5, 2006) with the assistance of Steve Lawrence and that he asked that they be included in the record.  It was agreed that Mr. Browne’s e-mail comments would be included as an attachment to the minutes of the current meeting.  It was also suggested that some of Mr. Browne’s comments might be incorporated in the Future Activities section of the 2005 Annual Report.

   The members shared several comments and Mr. Sweetland agreed to continue taking the responsibility for drafting the Annual Report until its completion.  Comments are to be submitted to Mr. Sweetland by January 18 and he will provide another draft by January 23rd for adoption at the January 30, 2006 meeting.

   Ms. Sunshine asked for public comments through Item 7.
   
   Mr. Kalman made reference to the General Obligation Bond Oversight Committee, and was told that it was a separate committee from the RBOC. 
   
   Discussion and possible action to approve the minutes of the December 5, 2005 meeting.
   Ms. Brown motioned to approve the minutes of December 5, 2005.  Mr. Sweetland requested that line 37 be corrected to read that his appointment was through the Bay Area Water Users Association (BAWUA) and given that correction, seconded the motion.  Mr. Browne questioned several passages of the minutes, but said he will personally review the tapes for accuracy.  The misspelling of Ms. Brown’s name in several instances will also be corrected. The motion was passed with yes votes by Mr. Sweetland, Ms. Sunshine, Ms. Campbell, Ms. Brown and Mr. Sutter.  Mr. Browne voted no. 

8. There were no public comments.

9. Discussion and possible action regarding proposed agenda(s) for next meeting(s).
   Suggested agenda items for the January 30, 2006 meeting were: 
   • Approve selection of Contractor
     
   • Discuss/approve statement to Board 
     
   • Approve final 2005 Annual Report
     
   • Discussion of definition of Illegal Use of Funds within the context of Proposition P

   Ms. Ostberg noted that agenda item #7 “Discussion and possible action establishing term limits for the Chair and Vice Chair of the RBOC” from the December 5, 2005 meeting was continued, but had been inadvertently left off the agenda for the January 9, 2006 meeting.  Mr. Browne made a motion to drop the item and Ms. Brown seconded the motion. 

   Ms. Sunshine invited public comment.  Mr. Kalman requested copies of technical and financial documentation of projects.  Mr. Kalman stated that his particular focus is with the recycled water program with which he has some knowledge.  He stated that the project(s) should not go forward until a financial feasibility assessment was completed.

10. Adjournment
    
    Mr. Sweetland motioned to adjourn the meeting.  Mr. Browne seconded the motion.  Ms. Sunshine adjourned the meeting at 11:35 a.m.

    <The following is included as part of the minutes of the January 9, 2006 RBOC meeting.>

    
    Sent:    Thu 1/5/2006 3:13 PM
    From:    Brian [brian@h2oecon.com]
    To:    karol ostberg; patrick sweetland; Lisbet Sunshine; Steve Lawrence
    Copy:    Peskin, Aaron; Steve Lawrence
    Subject:   2005 Revenue Bond Oversight Committee Annual Report.

    Dear Lisbet and Patrick,

    Thank you for the draft copy of the 2005 RBOC Annual Report. I also thank you and all involved for your efforts in preparing this draft report. .

    With grateful assistance from Mr. Steve Lawrence (a member of the CAC), I herein submit some summary observations on your proposed Annual Report.  I also attach my January 11, 2005 email with comments on the 2004 Annual Report.  Respectfully, I believe that our annual and ongoing reports must be more substantive and go to the core of what is happening (not happening) with the current CIP.

    Very best regards,

    Brian Browne.

    ********************************************************************************************************************

    The purpose of RBOC is to oversee the spending of public money for capital improvements being made to the water and sewer systems. No less than annually, RBOC is required to report.
     
    The second annual report again does not say whether the money spent to date has been spent appropriately or not. This is because RBOC has yet to address this matter that is at the heart of its purpose.
     
    In the upcoming year RBOC should begin to address whether program money is being well spent, whether the programs are advancing as intended towards their goals, and if there are faults, what can be done to fix them.
     
    What has been reported by the majority report that is useful is that $124 million of the $4.3 million program to improve the water system has been spent in the first three years of the 13-year program. Less than 3% has been spent during the first 23% of time. At this rate, the program will take nearly 100 years to implement.
     
    Planning costs for the water system program have more than doubled. Meeting planning milestones continues to take longer than expected. The program's costs rise as planning and other scheduled milestones slip.
     
    Recently a new program, re-named WSIP, has been adopted. It eliminates much work that would have been done under the old water program. So far these authors are not assured that the system will be properly reliable at the end of the lesser improvements to be done under the new program. RBOC should seek further information about this, and should report on its findings well before the next annual report is due.
     
    In sum, these authors are concerned that RBOC is not answering the basic question it should be answering: is the capital program money being well-spent?  There are indications that the water program is not going well, has not made adequate progress, and may not deliver what it should. RBOC should address these important matters ASAP.
     
    Brian Browne, assisted by Steve Lawrence
    *****************************
    -----Original Message-----
    From: Brian [mailto:brian@h2oecon.com]
    Sent: Tuesday, January 11, 2005 10:24 AM
    To: Patrick Sweetland; colleen adams; karol ostberg
    Subject: Your Annual Report for The Revenue Bond Oversight Committee
    Dear Patrick and Colleen,

    Respectfully, I feel your proposed annual report lacks substance.

    I believe that the committee should meet monthly, the minutes should  be a full replication of the entire proceedings, and that individual members should be permitted to directly ask reasonable questions of the SFPUC rooted in their discipline and not  be required to make a case to the entire committee on each and every data request. The RBOC meetings are too infrequent (quarterly) and we all come from different disciplines and have different knowledge levels regarding the SFPUC. 
     
    The purchasing power of the $1.6  billion funding granted by the voters in 2002 has been significantly eroded by inflation.  Most San Francisco voters approved Proposition A in the belief that the SFPUC had a viable CIP plan and that this plan would be immediately implemented upon funding approval. This has not happened.  As of writing approximately $67 million has been spent on Proposition A projects.  I feel that by not addressing these issues, we would be accessories to a breach of public trust.

    What is the annual report to include? "The Committee shall issue regular reports on the result of its activities. A report shall be issued at least once a year." [And shall be a public record and posted on the Website.]  "The Committee shall provide oversight to ensure that: (1) The proceeds from revenue bonds...are expended in accordance with the authorizing bond resolution and applicable law; (2) Bond proceeds are expended solely for uses [authorized]; and (3) Revenue bond funds are appropriately expended for authorized capital improvements so that an uninterrupted supply of water and power continues to flow to the City and to the PUC's customers." [Italics added]

    To my mind this means we must not only point out malfeasance but also address whether system reliability is being properly improved.
     
    During the first two years of the the thirteen year program, the big projects that are the heart of the program have been delayed by more than two years. Three of four of these projects are called by the CIP of 2002 "critical high priority for immediate implementation." Those served by the SFPUC, who authorized and funded the program, deserved progress towards building these critical projects. They have not received it. By delaying the heart of its capital program, the SFPUC is failing to improve system reliability, and is squandering funds because the cost of those projects done later will rise.
     
    There are other substantive matters I would include in our report:
    * Some indication has come to the RBOC's attention that amounts spent before the start of the program (which we deem to be January 1, 2003) and before the voters voted to authorize the the funding under our purview (November 2002) may be charged to the bond program. This must not be done. Voters authorize future expenditures. Unless expressed clearly in the ordinance authorizing bonds, not the case here, bonds should not be used to finance past expenses. That is taking from the bond fund and depletes the fund. (For some indication that such unfortunate accounting may be done, see Quarterly Report for Sept. 2003, page 1-3, footnote at bottom.)
     
    * The RBOC notes that much of the CIP effort to date has been spent and is being spent planning. While careful planning is commendable, it must be understood that the cost of planning is not only in the direct expenditures on consultants and salaries. Time is a greater concern, for two reasons. First, costs are rising as time passes. The same work done later will cost more. While at present a 3% inflation rate (CPI - probably not the appropriate inflationary index for the CIP) is assumed by SFPUC, during a recent 17 month period, the cost of a basket of construction materials commonly used in engineered construction such as for water projects, rose nearly 25%. (Engineering News Record, Construction Cost Index, April 2003 to October 2004.) The second reason time is so important is that the idea of the program is to reduce the risk that the city and other users will be without water following an earthquake or similar disaster. By delaying the day when the program is completed (or key program work is), water users are at risk for longer. While SFPUC's schedule still shows the program being completed by 2015, the large jobs, which may be called the "Big Four", have been delayed an average of 28 months. The Irvington tunnel project, which creates key redundancy and will allow maintenance of a tunnel that has not been maintained for thirty years, has been delayed 50 months. The RBOC notes that implementation of the CIP to date has emphasized starting smaller and local projects, but has put off the critical priority, larger regional projects that are the heart of the program and provide most of its benefits.
    (The"Big Four" comprise more than half the CIP program in dollar terms. The four projects are Irvington tunnel, Calaveras dam, Bay Division Pipeline Hydraulic, and San Joaquin Pipeline No.4. The CIP deems three of the four "critical high priority for immediate implementation." The Irvington tunnel job builds a second tunnel through the coastal hills, to Fremont. The Calaveras dam project is to build a new dam to replace one that is unsafe, allowing at least as much water to be stored at the reservoir as the dam was designed to store. The Bay Division Pipeline job builds a fifth pipeline/tunnel combination to bring water from the east bay across to the Peninsula. The San Joaquin No.4 is another pipeline with which to bring water across that valley, and will also rehabilitate the three existing pipelines, which are corroding, and have operational deficiencies that should be remedied.)
    * The RBOC notes that the CIP for water may be significantly changed. The SFPUC undertook a programmatic EIR (environmental impact report) process. This process is hoped to take about three years. In the course of it, many assumptions underlying the program as originally conceived will be questioned. It is very possible that the set of projects that emerges from the process is quite different than those for which funds were voted when this committee and the bonds for which it provides oversight were authorized. These program changes mean that the day when water users enjoy greater protections will be extended. The delays will increases costs (or will reduce how much can be accomplished for the authorized money).
     RBOC questions the amount of consulting done to date. While it does not? have figures at present, it seems excessive. As one example, about a million dollars was expended in Red Oak's study of the PUC organization. That study seems to have accomplished little. We should also question how effective are these numerous CIP consulting studies and how these contracts are awarded.
    ? SFPUC has a $250 million commercial paper program. This may well be the most expeditious method for early CIP funding, however, RBOC should note that the SFPUC did not do an a priori cost benefit analysis on CP v incremental revenue bond issuance.  In this context, we question the decision making process of the SFPUC. We also question the method used by the SFPUC to estimate water demand and the price/revenue relationship required to retire the immense revenue bond debt associated with planning and implementing the CIP.
    Thank you for soliciting and considering these comments.
    Cheers,

    
    Brian Browne