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<br />MEMORANDUM <br /> <br />TO: <br /> <br />The Town of Erie File <br /> <br />FROM: <br /> <br />Bill Green <br /> <br />DA TE: <br /> <br />December 19, 1997 <br /> <br />RE: <br /> <br />Consent to Parity <br /> <br />In reviewing the Town of Erie's audit report for the year ending December 31, 1996, I <br />found that water sales revenues in that year were $295,235 and water tap fee revenues <br />were $1,287,454. Since water and sewer funds are combined in the report, I'm unable to <br />tell exactly what percent of total water revenues tap fees represent but the numbers do tell <br />us that tap fees are about 77 percent of water sales plus tap fees. <br /> <br />The accountant's coverage certificate of August 12, 1997, states that net revenues for <br />1996 were $1,410,930 and that average annual debt service for existing and future debt <br />would be $677,605. Using these numbers, the Town easily passes our current parity test <br />which simply requires revenues sufficient to pay: annual O&M, deposits to reserve <br />accounts and debt service on existing loans as well as the proposed debt. The problem is <br />that water sales revenues were actually insufficient without a large amount in tap fees to <br />meet all three parity test requirements. <br /> <br />In discussing Erie with Alan Matlosz of George K. Baum & Co., he indicated that the <br />Town has experienced very rapid growth in the last couple of years requiring substantial <br />investment in new infrastructure and a corresponding increase in debt. In preparing the <br />official statement for the recent bond issue, Geo. K. Baum did look at several financial <br />scenarios in which tap fees would fall well below current levels. He indicated that water <br />rates would not have to increase significantly in the event the number of new taps drops <br />as much as one-third of current levels once the Town has about 1,400 taps on line <br />(currently about 900). He also indicated that the Town is establishing a reserve fund <br />during the next couple of years equivalent in amount to about 18 months of debt service <br />(about $900k). <br /> <br />The bottom line here, however, is that everyone is taking some risk by speculating that <br />revenues will continue as they have the last few years based primarily on growth. <br /> <br />The Erie situation raises the question as to whether we should suggest to the Board a new <br />definition of our parity test to take into account types of revenue we would use for the <br />test. Personally, I'm not comfortable with a situation like Erie where revenues are very <br />heavily growth dependent. <br /> <br />Cc: Bill Stanton <br />Ian lllian <br />Linda Bassi, AGO <br />