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RATIONALE FOR WATER & SEWER CHARGES AND DISPOSITION REDWOOD CITY GENERAL IMPROVEMENT DISTRICT NO. 1-64 DANIEL, M<\NN, JOHNSON, & MENDENIlALL DISTRICT ENGINEER Included in the Financial Analysis of the Feasibility and Engineering Planning Report is the application of water and sewer revenues to retire District Bonded indebtedness. Two methods were used in the feasibility study to determine water & sewer charges. These were (1) "use of the faci li ty" technique and (2) "sep- arable cost/remaining benefits" method. The first is used to cleterJ.11ine allocation of repayment among various beneficiaries. The second is used to allocate cost~ for repayment among the various bond facilities. 1. The "use of the faci 1 i ty" technique is based upon the concept that repayment of the cost of facility should be based upon user benefits thus "use of facility". This principle underlies the rationale for issuance of revenue bonds. Revenues produced from charges levied against users are used to repay bonded debt. Whereas the benefits from other facilities can be allocated on the basis of the relative assessed value of the property of the beneficiaries, water and sewer charges usually cannot. A heavy water user with high waste disposal requirements, such as a heavy industrial firm, will in most cases have less assessed value per acre than single family residences which require substantially smaller service connections, use less water and discharge sub- stantially less waste. Therefore, the use of only ad valorem tax levies to repay water and sewer facilities costs usually are not equitable. As stated above the "use of the facility" method, based upon the general concepts of revenue bonding, was used in the feasibility study. However, revenue bond financing, per se, at least in' the early years of the project, was not considered appropriate for t\vO reasons. a. For revenue bonds to be saleable, buyers usually require that revenues exceed debt retirement by 50 percent (1.5 to 1.0 debt coverage ratio), requiring higher charges to users. b. Since revenue bonds are not usually backed by tax base, interest rates usually are much higher and amortization periods shorter, requiring higher annual debt service charges. ,..