Apple Valley Cost On Failed H2O Takeover Effort Now At $8.3M; May Climb To As High As $15M

The Town of Apple Valley’s abject defeat in its effort to commandeer the Apple Valley Ranchos Water Company from Liberty Utilities by means of what proved to be an unsuccessful eminent domain proceeding saddled the town with an $8,355,556.45 bill for legal fees and costs since the commencement of the eminent domain action in 2015 as of June 16, 2021. That total extends to the amount of money the town owes the law firm of Best Best & Krieger for its work on the failed lawsuit and the money the town paid for research and consultant work relating to the lawsuit. The total does not reflect money the town, as the losing party in the eminent domain litigation, may yet have to pay to the the law firm that Liberty Utilities used – Manatt, Phelps & Phillips – in fending off the proposed forced takeover.
While the town’s elected officials, top managers and administrators and its lawyers confidently predicted, going into the litigation, that the town would prevail, take over ownership and control of the town’s domestic water system and thereby ensure into perpetuity reasonable rates on the delivery of water to homes and businesses in Apple Valley, the failure of the litigation leaves the water company in the hands of Liberty Utilities, a Canadian-owned company. Unable to defray the cost of the litigation out of the town’s operating budget, officials this week approved the issuance of a $10 million bond to debt service and refinance a loan those officials earlier took out to pay for the water system takeover effort.
Judge Donald Alvarez, who heard the case that had been filed more than five years ago during a 67-day trial that began in October 2019 and which was interrupted by the COVID-19 pandemic from March 2020 until June 2020 before testimony and the presentation of evidence concluded in July 2020, found against the town in a scathing tentative decision filed in May of this year. Alvarez ruled that Liberty had proved itself to be a responsible steward of the water company and its assets, prudently raising water rates to maintain the water system, while evidence presented at trial suggested that the town and surrounding public entities have neglected upkeep on water and utility infrastructure that they own and control.
Alvarez stated in his decision that the “town allege[d] it began exploring acquisition in response to… such things as public concern about escalating water rates and the lack of local control and decision-making over water rates, service and expenditures, although curiously, at trial, the town’s own evidence acknowledged it was unlikely water rates would be reduced” if the town won ownership of the town’s water system. Judge Alvarez further stated, “Liberty has rebutted the presumptions that the public interest and necessity require the [water company acquisition] and that [town ownership of the water facilities] is a more necessary public use of liberty’s property. [T]here is a substantial risk that the water system will be imperiled and the ratepayers will be harmed if the town were permitted to take over the system and supplant regulation by the Public Utilities Commission.”
Furthermore, according to Judge Alvarez, “Liberty has operated a safe and reliable water system; allowing the town to acquire it would create substantial risks to continued effective operations.”
Finding that the town would be overwhelmed by and not be likely to meet the demands of maintaining the water system at a level that would ensure adequate provision of water service to the town’s residents, Judge Alvarez ruled against the town in its eminent domain action.
In 2018, confident it would eventually prevail in the attempt to seize the water company, the town secured a $10 million line of credit from JP Morgan Chase Bank to defray the cost of its attorneys and the undertaking of other action in pursuing the eminent domain strategy. That money, as it was loaned on an as-needed basis, was to be provided at a variable interest rate of .075 percent to 2.52 percent, depending upon prevailing market conditions at the time each installment was made.
The town has borrowed $6 million against the credit line, which expires on October 1, 2021. The town has not paid anything toward the $6 million principal, but has remained current with regard to interest payments on the loan.
Town officials earlier this year decided they wanted to refinance the debt accrued with JP Morgan Chase Bank, and believe that an issuance of municipal bonds which are to be sold to investors would provide the town with the means to do the financing. Under the California Constitution, however, a governmental entity cannot issue bonds without first getting a majority of that particular jurisdiction’s residents/taxpayers to vote in favor of the issuance. One way around the vote requirement is a so-called lease/lease back exemption. This somewhat complicated strategy involves a long-term lease obligation entered into by the governmental entity, insofar as the tenant is not be considered an “indebtedness or liability” under the debt limit set for that particular governmental entity, and if the lease arrangement entails a bond structure in which a joint powers financing authority issues revenue bonds secured by lease payments to be made by the government entity pursuant to a lease agreement.
In this case, the Apple Valley Public Financing Authority is set now to issue lease revenue bonds in an aggregate principal amount not to exceed $10,000,000. As part of a circuitous arrangement, the town and the authority, which in the final analysis are one and the same, have entered into a ground lease in which the town is leasing the gymnasium at the James A. Woody Community Center and Town Hall to the authority. These leased assets are simultaneously being leased back from the authority, and the rental payments are pledged to the owners of the bonds issued by the authority. This indenture, or commitment, is made by the town and the authority through an arrangement with the U.S. Bank National Association, the trustee on the bond issuance. To debt service the bonds, the town will pay a fixed 2.52 percent of the total issuance – calculated at $664,000 annually, over the next 20 years, at which point the bonds will fully mature and the city will need to pay the bondholders the face value of the bonds – $10 million. Thus, the city over the 23 years running from 2018 until 2041, will have paid $22.88 million to finance its failed water company takeover bid. The 2.52 percent interest rate is guaranteed through arrangement with with First Foundation Public Finance.
Some have likened what the town is engaging in to a pyramid scheme, but Town Attorney Thomas Rice has given everyone an assurance that everything about it is legal.
The full town council on Tuesday, September 21, voted 5-0 to initiate action toward issuing the bonds. Roughly $8,355,556.45 of the proceeds from the bonds will go toward retiring the city’s outstanding legal bills and costs with regard to the eminent domain suit. The remaining $1,644,443.55 has been earmarked for capital improvements relating to town infrastructure or future legal action if the town elects to appeal Judge Alvarez’s ruling, which has not yet been finalized.
While it is anticipated that Judge Alvarez will confirm his tentative decision with his final ruling, he has not yet indicated whether he will grant Liberty Utilities’ request to be reimbursed for its legal costs, which have not been quantified but are estimated as exceeding $6 million.
-Mark Gutglueck

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