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City Council Study Session Minutes—September 27, 2010
At 7:30 p.m. Mayor Maxwell called the regularly scheduled Anacortes City Council study session of
September 27, 2010 to order. Councilors Erica Pickett, Brad Adams, Bill Turner, Cynthia Richardson and
Brian Geer were present. Kevin McKeown and Nick Petrish were excused.
Mayor Maxwell invited Police Chief Bonnie Bowers to give an update on Sunday's Oyster Run 2010. The
Chief reported that the event was successful, that many bikes arrived on Saturday because the weather
was better and that an estimated one-third fewer than normal bikes arrived on Sunday due to the rain.
There were three reportable collisions, none serious. The Chief thanked Washington State Patrol for their
assistance on Saturday and Sunday. Mrs. Richardson said she was impressed how clean downtown was
by Monday morning.
Update on Antique Fire Engine Restoration
Fire Chief Richard Curtis introduced volunteer Loren Knutsen who gave an update on the restoration of
the City's 1924 American LaFrance fire truck. Mayor Maxwell thanked the group for taking on this project.
Mr. Knutsen explained that in 1924 the City needed a new fire apparatus so it sent delegates to the Fire
Equipment Expo in San Francisco where they chose the brand new LaFrance. He said the truck has been
in town ever since although it traveled to Bellingham once to help fight a mill fire. Mr. Knutsen recalled
that a dozen years ago Anacortes fireman Chuck Tidrington had started a project to restore the truck
which was well worn but was still running. Mr. Knutsen offered to restore the carburetor. After talking with
the Mayor, Mr. Knutsen suggested that if the City would pay for the out of pocket expenses he would find
a team of volunteers to perform the labor. The City Council approved the idea and added the project to
the budget. Mr. Knutsen reported that a similar engine is currently for sale back east, unrestored, for
$47K. He said the Anacortes truck could be worth $80-100K when restored. Mayor Maxwell assured that
the truck will not be sold. Mr. Knutsen said the volunteers are shooting to have the truck ready to
participate in the next July 4t" parade. He said they have been very fortunate to get community
cooperation and donations. For example, Tim Sullivan of Skagit Transportation has donated the shipping
of parts to and from Spokane for chrome plating. Mr. Knutsen said there's a talented group of volunteers
working on the truck which is stored the at south side fire hall. They meet there on Tuesday mornings but
also work on projects at home. The group includes Mike McCunn (whose wife, Pam McCunn, prepared
the slides that accompanied the presentation), Clay Leming, Jack Richardson, John Gruenewald, Karl
Essig, and Al Bush. Mr. Knutsen invited interested citizens to join them on Tuesday mornings. Mr. Geer
asked if volunteers are tracking their hours. Mr. Knutsen said that would be hard to do but when the
project is finished they will create a plaque recognizing the extensive list of volunteers and contributors
which includes Piston Service and Carquest. Mr. Adams asked where the engine will be displayed. Mayor
Maxwell said the City may have to find a way to display it at the main fire station but assured it will be
prominently displayed. The Mayor extended the community's appreciation to the group.
Water Treatment Plant Prolect Update
Public Works Director Fred Buckenmeyer provided an update on the upcoming water treatment plant
upgrade. Noting that the project has been in the works since 2004 he reported that the facility master plan
is complete, the pre-design report is done, peer review is complete, the 100%design review is done,
required permits and franchise agreement have been applied for with the County, the City has 100%
plans in hand, the specifications have been reviewed by Foster Pepper and the project advertises for bids
on September 28. Mr. Buckenmeyer acknowledged team members Assistant City Engineer Matt
Reynolds, Water Treatment Plant Manager Jamie Leblanc, design consultant HDR, Finance Director
Steve Hoglund, Ashley Emery of Peninsula Financial Consulting, Susan Musselman of
DashenMusselman, Inc., and Jane Towery of Piper Jaffray. Mr. Buckenmeyer recapped the scope of the
Anacortes water system including the treatment plant in Mount Vernon and the double transmission lines
across the Skagit Valley. He then summarized the design elements of the upgrade project which he had
presented at prior Council meetings. He reminded that City users purchase just under 10%of the total
water sold. He emphasized that the project goals are maintaining high water quality as required by
Department of Health, ensuring reliable supply, and increasing capacity to handle projected water needs
through 2029 by means of phased expansion. He noted that the plant is certified by the State Department
Anacortes City Council Study Session Minutes September 27, 2010 1
of Health for 30 MGD but the City takes an average of 21 MGD right now with a maximum of 29 MGD.
Projected future demand is an average of 27 MGD (38 MGD maximum) by 2019 and an average of 29
MGD (41 MGD maximum) by 2029. In response to a question from Mr. Turner, Mr. Buckenmeyer said all
the new buildings will be watertight to withstand flooding up to the 100-year-flood level. Mr. Buckenmeyer
said the estimated project cost ranges from $48M to $67M. Given the current bidding climate staff is
working with an estimate of$60M not including services during construction. Mrs. Pickett asked what
"services during construction" means. Mr. Buckenmeyer explained that includes two primary consultants
who will be employed for the 2.5 years of construction, MWH for construction management and HDR for
design revisions, as well as specialty testing and inspection firms. Mrs. Richardson asked the bid date.
Mr. Buckenmeyer said bid opening is slated for November 16 and the target schedule calls for
construction beginning in February 2011 with substantial completion in 2013 after a 30-month
construction period. He noted the City is still awaiting permits from Skagit County but they are currently
being processed.
Finance Director Steve Hoglund then addressed Council about project funding. He reviewed the water
rate structure which captures the City's share of regional system costs and as well as retail system costs.
Each of those includes components for existing debt service, operation and maintenance costs and
capital costs to improve and upgrade the system. He said the City's portion of the debt service is
estimated to be $10M over the life of the bonds. Operating and capital costs will be revisited every year
and rates adjusted as necessary. He then presented a summary of the projected capital requirements for
each element for the next six years. Mr. Hoglund explained that retail water rates include a base charge
and volume charge. The base charge applies to every account that has a meter regardless of usage but
varies with the meter size. The volume charge is for quantity used, currently$1.03/cf for residential
customers and $1.54/cf for commercial customers. Mr. Geer asked why commercial customers have a
higher volume rate. Mr. Hoglund explained that higher fire flow requirements for commercial buildings
drive that cost. He then reviewed the proposed change in water rates which would be an incremental
increase in the base charge over three years for a total of$5.27 increase for a typical residential
customer. The volume charge would not change. Mr. Geer asked why. Mr. Hoglund said most of the
water system costs are fixed costs, not dependent on the volume of water treated, so this is the most
equitable way to allocate costs among stakeholders. He added that the normal CPI increase will be
suspended during the next three years so there would be no additional cost increases for those three
years. Mrs. Richardson said citizens have asked why the City can't charge more for water and use the
extra income to fix roads. Mr. Hoglund replied that state law prevents one fund from benefiting at the
expense of another so funds can't be transferred from the water fund to the road fund or other funds;
water revenue can only be used to support the water system. Mr. Turner clarified that the capital
projections only cover the next six years but that the City will sell bonds for the entire $60M project cost
and then recoup that via water rates. Mr. Hoglund confirmed. Mr. Adams asked if Oak Harbor will develop
its own rate structure to cover its increased costs. Mr. Hoglund said yes. He then showed some examples
of the total projected cost increase at various levels of use for residential and commercial customers. Mrs.
Pickett asked how commercial water rates in Anacortes compare to surrounding areas. Mr. Hoglund
presented a slide comparing residential rates for Anacortes and surrounding areas such as Stanwood,
Port Townsend, Port Angeles, Skagit Valley PUD, etc. He pointed out that Anacortes has the lowest rates
by far now and even with the increase they would still be lower than the other systems are today. Mrs.
Richardson observed that Skagit Valley PUD takes water from the Skagit River just as Anacortes does
and asked why their rates are so much higher. Mr. Hoglund suggested that their infrastructure costs may
be higher. Mayor Maxwell observed that after the bids come in the City will know just how much it will
need to borrow. He also noted that the project will create 300-400 construction jobs and said that Build
America Bonds may be used.
Alice Ostdiek of Foster Pepper, the City's bond counsel, then addressed the Council to explain the
financing strategy being developed by the finance team which includes Foster Pepper as bond counsel to
prepare legal documents and structure the bond issue, Susan Musselman of DashenMusselman, Inc. as
financial adviser for modeling and Jane Towery of Piper Jaffray as the underwriter. Ms. Ostdiek explained
that the City will probably divide the bond issue in two pieces, one piece issued this year to fund the first
year or so of construction, then a second bond issue when the final costs are known. She said Anacortes
has been awarded a$10M Public Works Trust Fund loan but the State may not be able to fund it so
waiting to issue the second portion of the bonds until that is known may lower the overall need for bonds.
Anacortes City Council Study Session Minutes September 27, 2010 2
The team plans to issue bonds shortly after the bids come in based on estimated costs for first year or so.
Their goal is to issue $30-40M worth of bonds before December to take advantage of Build America
bonds that allow the City to issue bonds on the taxable market which they can't normally do; this
broadens the investor pool which in turn can drive down the rates. The City then collects a 35% subsidy
from the federal government to offset the interest cost. Ms. Ostdiek said they will recommend a
combination of Build America bonds and tax exempt bonds because bonds with different maturities yield
a better bottom line for different types of bonds. She added that the water rate structure will be reviewed
and wholesale contracts updated to ensure those users bear their share of the project costs,
approximately$50M of the $60M. Ms. Ostdiek advised that in the next few weeks Susan Musselman and
Jane Towery will present to Council more information on interest rates and the market, bond repayment,
cash flow, etc. Council will also be presented with a draft of the bond authorizing ordinance. She noted
that the new bonds will be parity bonds so they will be issued on the same basis as the City's existing
outstanding debt. When the date for Council action to approve the ordinance has been determined, likely
in November, the bond underwriter will price the bonds on that morning and the final amounts will be
inserted into the ordinance for Council approval that evening. She encouraged Councilmembers to raise
any questions they have about the draft ordinance language before the final approval date. Mayor
Maxwell asked if this a good time to borrow money. Ms. Ostdiek say yes, interest rates are at historic
lows, Build America bonds are available, and construction bids are very low so it is an excellent time to
finance this project. Mr. Turner asked why the City wouldn't sell bonds for the full $60M this year to take
advantage of the Build America bonds. Ms. Ostdiek replied that the final project cost is not yet known, the
$10M Public Works Trust Fund loan may still come through, and that delaying borrowing delays the date
the City starts paying interest. Mrs. Pickett asked why the City's users, who purchase 10% of the water,
are paying $10M instead of just$6M of the $60M project. Ms. Ostdiek said $10M is the City's 10% share
including interest over 20 years. Mayor Maxwell said if the bonds can be paid off earlier, they will be. Mr.
Turner remarked that he has watched the project come together over the past few years in the Public
Works and Finance committees and expressed full confidence in the project team. Mayor Maxwell
concluded that the Anacortes Water Treatment Plant is the single largest piece of capital infrastructure in
two counties providing for economic development in the region.
There being no further business, at approximately 8:35 p.m. Mayor Maxwell adjourned the regularly
scheduled study session of September 27, 2010.
Anacortes City Council Study Session Minutes September 27, 2010 3