EBMUD changing its short-term financing for borrowing funds

on November 25, 2015

In an abbreviated meeting on Tuesday before Thanksgiving, the East Bay Municipal Utility District (EBMUD) unanimously passed a proposal to change their short-term financing in order to reduce long-term risk. EBMUD will be moving from “extended” back to “traditional” commercial paper, according to Dari Barzel, EBMUD’s principal management analyst.

What does that mean? “Commercial paper is by far our lowest-cost financing,” Barzel told the directors, citing a 30-day interest rate of about 0.09 percent. “You can’t beat it.”

Commercial paper is a popular form of unsecured, short-term debt used by corporations with excellent credit ratings to cover short-term liabilities like accounts receivable and inventories. From the 1980s until 2009, EBMUD financed short-term borrowing with traditional commercial paper, often with banks to back them in case there was a problem. But starting in late 2008, many major banks had their own problems: Many teetered near collapse during the financial crisis. Some went bankrupt, while others required government bailouts. Most grew reluctant to extend credit, even to low-risk organizations like public water agencies.

So EBMUD went to extended credit financing: That meant borrowing from a global market of about five institutional investors, like Charles Schwab. The risk: If one or more of those companies decided to stop investing in commercial paper, the market could dry up. EBMUD might get stuck holding the bag, and have to pay a hefty penalty rate. And with EBMUD holding $375 million outstanding in commercial paper at any one time, costs could add up fast.

With many experts expecting the Federal Reserve to begin raising interest rates starting in December, Barzel says that could affect the market for extended commercial paper. “In the spirit of continuing our de-risking,” as Barzel put it, EBMUD’s directors unanimously agreed to return to traditional commercial paper, backed by banks, for the majority of its short-term borrowing.

EBMUD, however will continue to use extended credit for its wastewater financing. The change will cost about $1.3 million per year in added financing costs, but it dramatically reduces the risk of big losses over the long term, according to Barzel.

That $1.3 million comes out to an increase in water rates of approximately 0.25 percent, according to EBMUD general manager Alexander Coate.

In other news, the board heard a plan to fast-track compliance with the federal HEART Act—the Heroes Earnings Assistance and Tax Relief Act—for EBMUD employees who get called to active military duty. The HEART Act provides tax and pension benefits for veterans and their families if they die or become disabled while on active duty.

Finally, recovery from the Butte Fire around Pardee Reservoir is proceeding, according to EBMUD manager of fisheries and wildlife Jose Setka. The goal for EBMUD is to control erosion and protect water quality after the fire, Setka said, and $588 million in federal grants and $147,000 in local matching funds have begun to make an impact. And the welcome fall rains have so far been steady but not torrential—a lucky break from Mother Nature.

1 Comment

  1. Greg Prescott on November 30, 2015 at 11:22 am

    Thanks for the post. I did not know about the short term financing issue. :)

    I will definitely consider this as I continue to live in Oakland.



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