Pay now or over time?: Twp. responsible for portion of $42M bond for improving wastewater facilities in Pontiac

Oxford Township officials have a big decision to make – pay more than three-quarters of a million dollars now for a major sewer project or be part of a bond that spreads the cost out over the next two decades and adds more than $230,000 in interest to the total bill.

They’re expected to decide at their 7 p.m. Wednesday, May 10 meeting.

“I’m leaning toward paying it off now,” said Trustee Jack Curtis, chairman of the water/sewer committee. “You can save massive amounts of interest. It’s not like a thousand dollars. It’s hundreds of thousands. Saving that money over time benefits the sewer user.”

Although he’s still in the process of researching the issue, township Clerk Curtis Wright, who also serves on the water/sewer committee, agreed.

“I’m of the opinion right now that the prepayment is the better way to go,” he said.

“With bonding, you’re locked in for that 20-year period. You’re at the mercy of whatever that (interest) rate’s going to be,” Wright explained. “There’s not much value in paying interest.”

As one of 13 communities that make up the Clinton River Water Resource Recovery Facility Drainage District, the township is responsible for 1.847 percent of an estimated $38.5 million improvement project involving two wastewater treatment facilities that operate as one in Pontiac.

“Most” of the current equipment at these facilities “is beyond its useful life and is not performing at optimal levels,” wrote engineer Steven A. Korth, a manager for the Oakland County Water Resources Commissioner’s (WRC) Office, in a letter to the township.

One facility went into service in 1921, while the other was constructed in 1962. Both were renovated in the 1980s and upgrades were made to both in 2010, 2012 and 2014, according to Korth’s letter.

To pay for the upcoming improvement project, the drainage district is planning to sell bonds in an amount not to exceed $42 million. This bond debt would be paid off over a period of 20 years at an interest rate of 2.5 percent.

Oxford Township’s portion of the $42 million debt amounts to $775,740.

If officials choose to be part of the bond and help pay off the debt over time, they would be responsible for the $775,740 in principal, plus $235,735 in interest. This would increase the township’s total obligation to $1.01 million over 20 years.

According to estimated debt service schedule provided by the WRC, the township would not begin paying on the principal until 2019, however, it would be expected to make three interest-only payments, totalling $25,858, in 2017 and 2018 .

The township does have the option to avoid the interest costs by prepaying the entire $775,740 by June 15.

“You have to decide up-front whether you’re going to do it or not,” explained township engineer Jim Sharpe. “You can’t pay (on the bond debt) for two years and then pay the rest of it off like a mortgage or something like that. You’re either in it for 20 years or you prepay it.”

Curtis believes the township has adequate money in its sewer fund to cover its share of this major project without adding to the debt load and without negatively impacting the fund’s liquidity should a sudden need for cash arise.

“We’ve discussed this with (township bond counsel) Paul Stoddard and he recommends a certain amount of money be kept in the coffers for emergencies. We have well over that,” he said. “Paying it off (now) is almost a no-brainer. We’re not putting our emergency fund in jeopardy. We’re making fiscal decisions to save the sewer user money.”

According to Wright, the sewer fund, as of March 31, has a balance of $3.13 million.

“That’s the cash we have in the bank,” he said.

Stoddard recommended “always” maintaining “a balance near the $1 million mark” in the water fund, which is separate from sewer, for emergencies.

“But it’s probably not a bad rule of thumb” for the sewer fund as well, Wright noted.

Wright said right now, it appears the sewer fund has the money to spare.

“If you take $775,000 out of the $3.1 million, you’re still looking at a $2.3 million surplus, which is well within, indirectly, what Mr. Stoddard’s telling us,” he said. “For the most part, it looks like we would be on pretty solid ground recommending a prepayment.”

Wright said although this a “big decision” to make, he’s glad the sewer fund has such a healthy cash balance, so the township has options.

“It’s just something that we have the opportunity to go either way on,” he said.

Prepaying sewer bonds is nothing new for the township. It has previously prepaid a total of $1.478 million for four bonds related to the Oakland-Macomb Interceptor Drain, to which Oxford is connected.

In addition to Oxford Township, the Clinton River Water Resource Recovery Facility Drainage District includes the townships of Independence, Oakland, Orion, Waterford and West Bloomfield; the villages of Oxford and Lake Orion; and the cities of Auburn Hills, Lake Angelus, Pontiac, Rochester and Rochester Hills.

Oxford Village’s portion of the $42 million bond amounts to $255,780 (or 0.609 percent).

 

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