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. . Senate Agriculture, Natural Resources & Energy Committee/ Capital Development Committee Apri 1 23, 1986 Page three feasibil ity study of a major water resources project for M&I users on Clear Creek in the Denver metro area and initiating a feasibility study to develop up to 300,000 acre-feet per year from the deep aquifer system in the San Luis Valley. Financing Parameters for the Authority The term "leveraging" has been used widely in the Colorado water communi- ty during the past several years to describe a perceived method of achieving a multiplier effect in a project revenue financing. While leveraging is an appropriate concept when obtaining matching funds under a federal grant pro- gram (i.e., a 2 to 1 cost sharing ratio, for example), it has been miscon- strued to mean that the availability of an amount of cash alone would allow the issuance of bonds in significant multiples (i.e.. a $10 million one-time appropriation would allow for the issuance of $100 million of revenue bonds). Although the $10 million appropriation in the above example would provide equity in the form of a bond reserve fund (thereby reducing the size of the borrowing by $10 million plus the size of a reserve fund attributable to $10 million of bonds and related costs of issuance) and the investment from the $10 million in reserves would provide a source of revenues ($1 million per year at an assumed investment rate of 10 percent), it wi 11 not support the annual debt service on a $100 million issu~ An infusion of equity into a bond issue is helpful in reducing the size of the borrowing and providing a partial source of revenues. However, the multiplier effect is only slightly in excess of 1 to 1. The remaining reve- nues required to support a borrowing must come from other sources as those desc ri bed be low. In order to provide long-term bond financing for a water project, there must be available a stable stream of revenues that can be irrevocably pledged to the payment of the bonds. The stream of revenues could be provided from one or more of a variety of sources including project revenues (water and hydroelectric power sales), taxes (sales, ad valorem, etc.), qr "take or pay" contracts with public or private entities (investor owned utilities or other water or power users). Regardl ess of the source of the revenues, there must be a legally binding obligation on the part of the bond issuer to make the revenues available to service the debt. In particular, in the case of a tax, the public body which levies and collects the tax must have the legal author- ity to pledge the tax revenues to the payment of the bonds and must covenant to maintain the tax at a level necessary to pay the bond~ As an example, it takes an aggregate of $100 million of bonds to provide $78 million of construction proceeds because of the necessity to pay costs of issuance, capitalize interest during construction, and bond reserve funds. In addition, the revenue required to be available each year is in excess of the