VIRGIN VALLEY WATER DISTRICT REGULAR BOARD MEETING
VIRGIN VALLEY WATER DISTRICT OFFICE
October 5, 2010

Minutes of a Regular Board Meeting of the Virgin Valley Water District Board held on October 5, 2010, at the Virgin Valley Water District Office at 5:00 p.m. Attending were President John Paul, Vice-President Karl Gustaveson, Secretary-Treasurer Kenyon Leavitt and Board Members Ted Miller and Mark McEwen. Also present were John Gleave District CFO, Martin Johnson, JNA Consulting Group and Hatty Tanner taking minutes and other interested parties of agenda items.

John Paul opened the meeting at 5:02 p.m.

Mark McEwen offered a Prayer and Kenyon Leavitt led the pledge.

Public Comment –Trent Graves on behalf of Advanced Construction asked that his request to transfer currently installed meters on Calais Drive to another property address, be agendized for the next board meeting. He requested that the board relook and/or possibly amend the current policy to allow the transfer of a currently installed meter from one property to another property. John asked if there were any comments, Karl said that he felt we needed to review this item. John said they would direct staff to place this item on the next agenda.

Ronald Struhar – 600 Palos Verdes Drive, wanted to know what type of entity the water district was. President John Paul explained that we were created by the state legislation as a water district, here to serve the people within the water district boundaries. Ronald wanted to know where and how the district fit into the public utility as far as being a co-op or a company. Karl addressed his questions letting him know that we are a government agency and the board members are either appointed or elected and we operate similar to the power company. Mr. Struhar wanted to know if we had a charter. The board said that we did have documents showing what we are and Ted directed him to our website where he could find the documents.

Discussion: Board Comments - None
President of Board Comments - None

CONSENT AGENDA:

Kenyon Leavitt made a motion to approve the consent agenda as listed below. Karl Gustaveson seconded this motion and it was unanimously carried. 5-0

1. Discussion & Action - Approve Agenda

2. Discussion & Action – Approve Minutes from 9-21-10 Regular Meeting

3. Discussion & Action – Approve Bills Paid - $93,483.71

4. Discussion & Action – Approve Purchase Orders Over $2,500
A. Tradewest Construction - $21,050.00 – Road repair and remove old vault and replace line on Summit Cr.

**End of Consent Agenda**

5. Discussion & Possible Action – Presentation of Annual Audit for Fiscal Year Ending June 30, 2010 by Hinton Burdick

Morris Peacock with Hinton Burdick reviewed some added challenges faced this year in completion of the audit that both John Gleave and Hinton Burdick had to go through that were different than prior years; with the allocations of the investments in capital assets for buildings, structures, site work and equipment following the construction completion of the new arsenic treatment plants. These allocations require the separation of costs into the different types of asset classes and also determining the useful lives for depreciation purposes, consequently effecting the financial statements. Morris said that the MD&A was not complete but the draft financial statement was a solid draft and that not many changes would need to be made. He then went on to explain the net changes between prior and the current year beginning with the Statement of Net Assets on page 12. The District’s Cash & Cash Equivalents were down $871 thousand; the Investments were down $1.5 million; part of which was expected because of the funds used on capital projects that were in construction. Morris then stated that the Restricted Cash & Cash Equivalents were down $550 thousand and the Restricted Investments were down $1.8 million; the total of Restricted Investments consisted of the remaining unspent funds of the 2008 Bond plus approximately $1 million in Ordinance 2 fees. He then stated that Construction in Progress (CIP) went from $26 million to $2.2 million because with the completion of the arsenic treatment plants during the year, the costs were transferred from CIP to the Capital Assets section and allocated in Building & Improvements and Operating Equipment & Wells to be depreciated. Morris continued with explaining other pages of the financials and stated that the Net Operating Income/(Loss) shows a significant loss of $2.7 million and also the Change in Net Assets had a loss of $174 thousand, which most of the loss was created by the depreciation expense and not necessarily money. Morris did state that this was the first time he has seen this District or the previous Farmstead having an overall net loss. He went on to say that a major component of the expenses was an increase in professional legal fees which primarily was related to the pipe litigation and that hopefully the results of the litigation will be a positive to the District in the future. Morris stated that the rest of operating income and expenses are generally consistent with prior years; Water Use Fees, Installation Charges, Salaries, Insurance up, Utilities down, Operating and Maintenance is down, which is headed in the right direction but has been affected by the pipe issues. Morris then discussed the findings and recommendations letter at pages 30-31. There were no new findings for the current year audit and discussed the recommendations listed from prior years audits, which were that the District should have a fraud risk management program; he provided information to John Gleave for Ken Rock at the meeting. He also said that the District needs to have segregation of duties; the District is weak in this area, such that the person that signs the checks should not reconcile the bank accounts. John Gleave said that this was corrected after the 2008 audit was presented during the 2009 fiscal year by implementing new processes that were put in place to address the weakness. Morris said that the other weakness he could see as a potential problem would be in the authorization of payroll direct deposits, even though when they tested this procedure, no problems were found, the District should still implement a double check process to prevent any problems. John Gleave said that this was corrected after the 2009 audit was presented during the 2010 fiscal year by implementing the procedure of a second authorization for payroll direct deposits. After Morris was finished presenting the draft fiscal year 2010 audit, the board discussed and requested that the final audit be brought back before them for approval at the next board meeting.

No Action taken at this time on this item

6. Discussion & Possible Action – Approve and adopt Mission Statement for the VVWD

Karl stated that we had quite a few recommendations on this item and what we came up with was to keep it concise, simple and meaningful for the community.

Karl Gustaveson made a motion to approve our mission statement which is “Safe and dependable water for today and tomorrow”. Kenyon Leavitt seconded this motion and it was unanimously carried. 5-0

7. Discussion & Possible Action – Transfer $116,000 per month from the District’s “rainy day fund” to the bond reserve fund until the necessary reserves or $2.0 million is met; whichever comes first. The amount for necessary reserves will be established by Martin Johnson, and depend on the type and amount of outstanding bond debt

Board requested Marty Johnson with JNA to explain the process. Marty explained that when the District first issued bonds in 1999, which included in the bond documents, was the requirement that a reserve fund be created to provide additional security for the District’s revenue bonds, which generally was stated as being equal to 1 year of debt service. Also included in the bond documents was an alternative to creating a cash reserve fund, which allowed that a surety bond could be purchased to satisfy the cash reserve requirement, but also the insurer of the surety bond must keep its own rating no lower than an A rating; the bond documents also state that if the insurer’s rating goes below an A rating, then the District is required to replace the surety bond with cash reserves. Of the current outstanding revenue bonds, surety bonds were purchased and provided by 2 separate bond insurers, unfortunately due to the change in the economic environment over the past couple years, one insurer has no rating and the other one has a C rating and therefore we have to replace the insured amount with cash deposits into a reserve fund in order to satisfy our
Revenue Bond requirements. Marty said that the requirement of creating a cash reserve fund for Revenue Bonds was one reason we switched to issuing General Obligation Bonds (GO bonds). According to the bond documents, the District can make cash deposits monthly over the next year. The amount of the bond reserve requirement can change over time and will reduce as debt goes down, and once the 2001 Revenue Bond is refunded with a GO Bond then it will be pulled out of the reserve fund calculation, which results in lower bond reserve requirements with excess reserve funds eventually being returned to the District. Karl asked when the 2001 Bond could be called. Marty said that the call date is in June, but once the new GO Bonds are issued then the 2001 Bond will be considered defeased on approximately March 15, 2011. At that point that bond amount would be removed from the reserve fund calculations. Marty continued to say that looking back the District has still saved over $100,000 by not putting cash into a reserve fund and by using the surety bonds for the period in which it worked. Over the years all bonds can be changed to GO Bonds if it becomes beneficial to the District. Mark asked for a clarification as to if we were legally required to replace the bond reserve requirement as a result of the bond insurers ratings being lowered. Marty said yes. Discussion was had about the exact amount to be deposited monthly and Marty explained that the bond reserve balance is estimated and once the 2001 Bond is refunded we can relook at the amounts to be deposited to be in compliance. John Gleave said that the majority of the rainy day funds are invested in securities, but at this time there is approximately $230,000 not invested in securities, and that he would prefer to transfer the $116,289 from those funds not invested in securities and/or other unrestricted accounts instead of the rainy day funds.

Karl Gustaveson made a motion to transfer $116,289.00 per month from the districts unrestricted funds to the bond reserve fund until the necessary reserves or $2 million dollars is met; whichever comes first. Mark McEwen seconded this motion and it was unanimously carried. 5-0

8. Discussion & Possible Action – Consideration and possible approval of a resolution for refinancing of the 2001 Bond obligation of the Virgin Valley Water district. The Virgin Valley Water District would notify the Clark County Debt Management commission of a proposal to issue General Obligation (Limited Tax) water refunding bonds (additionally secured by pledges revenues).

Marty Johnson talked about the refinancing of 2001 Bond and the savings it would provide to the District. He explained that this is the first step in a process to approach the Clark County Debt Management Commission with our goal in February 2011 to sell the refunding bond and close in March 2011. The 2001 Bond will no longer show as an outstanding balance on the District’s books even though the actual bonds will not be called until June 1, 2011. At March 2011 with the closing of the new GO Bond, the District will have debt outstanding with a lower interest rate; will not be subject to the reserve requirements and to the 125% coverage calculation. Marty said that there will be a number of months of work between all parties before we can sell the bonds and lock in interest rates. Kenyon asked that if the District would need to make a motion to get the process started? Marty stated yes; what needs to happen is that the District needs to go to the Debt Management Commission with a proposal to issue bonds and this will then start the process of refunding of the 2001 Bond. It was stated that the resolution should say that the District requests to borrow up to $4.2 million.

Karl Gustaveson made a motion to approve by resolution refinancing of the 2001 bond obligation Virgin Valley Water District. The Virgin Valley Water District would notify the Clark County Debt Management Commission of a proposal to issue General Obligation (Limited Tax) water refunding bonds (additionally secured by pledged revenues). Kenyon Leavitt seconded this motion and it was unanimously carried. 5-0

9. Informational Item – 2008 Bond Defeasance Tentative project Schedule and report by Marty Johnson

Marty Johnson with JNA was asked to give an update on and explain the defeasement related to the 2008 Bonds. The process of defeasement is to set aside cash sufficient to pay the debt service when it comes due, thus the cash and debt can be removed from the District’s balance sheet; the process of setting aside cash is done by purchasing special government securities created by the U.S. Treasury irrevocably pledged to the payment of the designated outstanding bonds. As of last Friday, the District locked in the interest rates to purchase the securities that at the defeasement closing date on October 12th the District will purchase these securities that will be held in an escrow account by the trustee to make the defeased 2008 Bond payments as they come due. Based on current interest rates, the District was able to eliminate about $18.8 million from the principal and interest payments of the 2008 Bond debt. The details of this defeasement was based upon the previous Board approved scenario when the District was looking at the water rate increases and what would need to happen there, and combined with the 2001 Bond refunding will make the debt coverage numbers work based on the projections done by Bowen Collins. These combined actions together will allow the District to be in compliance with its required debt coverage ratios. Ted asked Marty for an additional brief explanation for the public attending about the defeasement currently in process. So Marty stated that as was approved in the previous board meeting, the District will use the remaining unspent 2008 Bond proceeds that were originally intended for the construction of capital projects, which now those capital projects have been determined unnecessary, and to take these proceeds, identified at just under $11 million, and place the money in an irrevocable escrow account which will be set aside to make the payments of 2008 Bond debt service totaling about $18.8 million. So basically for the 2011 fiscal year audit, you will see a reduction of the 2008 Bond debt and a corresponding cash reduction, which will be removed from the Districts books.

10. Public Comment – Ronald Struhar – 600 Palos Verdes Drive, what is the total indebtedness of the Water District at this time? Ted Miller stated 43 million dollars and we are just getting rid of 11 million dollars right now thru the bond processes bringing the total to $32 million in indebtedness. Ronald wanted to know when the debt has been paid off will the water rates come down. Members of the board stated “yes”; when the debt has been paid we would look at it.

11. Adjournment

President John Paul adjourned the meeting at 5:50 p.m.
NOTE): The minutes of this meeting have been tape-recorded and will remain on file in the District office for a one-year period for public examination.

•  Board Meeting Minutes: 2010-10-05 (.pdf 25.K)