Cave Creek approves $800,000 wastewater bond refunding, saves $100,000 annually

Cave Creek Council Approves $800K Bond Refund and Votes 7-0 on Desert Hills CAP Water Despite Colorado River Drought Risk

Cave Creek Town Council voted unanimously on July 20, 2021 to refinance wastewater debt through $800,000 in excise-tax-backed bonds—generating $100,000 in annual savings—and to commit the town to a long-term purchase of 386 acre-feet of Central Arizona Project water for the Desert Hills system at cost ranging from $757,000 to $788,000 upfront, plus ongoing capital charges of approximately $50–60 per acre-foot annually. The CAP water vote came after two hours of intensive questioning from council on cost allocation, drought vulnerability, and the timing of an application first filed in 2013.

Key Speeches

"The general answer is no it's on a project by project basis. In the event that we don't hit our targets or the savings isn't there and there's no actual transaction consummated we don't get paid anything. It's only based on whether or not we achieve the expected results within the parameters of the authorizing resolution." — Jim Strickland, municipal advisor, Webbush Securities

"The new loan is a mirror image of the existing loan. The existing loan that you have with WIFA has a pledge of excise taxes and your utility revenue is not sufficient to produce coverage that is acceptable to the WIFA folks. In the event that we were using a utility pledge we wouldn't be able to have released the reserve fund." — Jim Strickland, on excise-tax pledge structure

"Water is Arizona's most precious natural resource. Whether we use it for Desert Hills or not, there's no way that we as the elected leaders of this community could turn it down. It's an opportunity that we must accept." — Mayor Robert Morris, on CAP water vote

"The nia water, while being a lesser priority than our municipal industrial, is still a surface water supply. Right now I think that the cost to buy a more secure or a higher priority water allocation can be as expensive as fifteen to twenty thousand dollars per acre foot." — Michelle VanQuitten, water attorney

Timeline

Webbush Securities engagement and bond refunding (Items 1 and 2):

• Applicant/advisor presentation: Pat Walker (town finance officer) and Jim Strickland (Webbush) outlined engagement letter and resolution for $800,000 refunding bonds at target 2% rate.
• Staff recommendation: Approve engagement and refunding resolution.
• Council discussion: Vice Mayor Smith questioned whether engagement was done via RFP and whether fee was contingent on achieving sub-2% rate (confirmed yes on both). Robert Morris noted pledge of excise taxes (not utility revenues) and asked why wastewater revenues insufficient; Strickland explained existing WIFA pledge structure and that refunding improves coverage. Smith asked whether repair-and-replacement reserve requirement freed up funds; answer was no money freed per se, just no longer required to reserve. Public commenter David Phelps objected to continued "private mortgage insurance" (excise-tax pledge) despite excellent system performance.
• Vote: 7-0 approval on both items.

CAP water allocation (Item 4 – Resolution 2021-16):

• Applicant presentation: Water Director Sean Kuhn presented 386 acre-feet of non-Indian agricultural CAP allocation after 8-year application process (filed 2013, allocated January 2021). Cost structure: $1,961.50 per acre-foot upfront ($757,000 lump sum or $788,000 over 5 years at 2.5% interest), then ~$50–60 per acre-foot annual capital charge, plus operational charge if water ordered. Town budgeted first-year payment of ~$160,000–168,000.
• Staff recommendation: Approve resolution to enter CAP subcontract; allows staff and mayor to execute documents pending judicial confirmation (expected 60 days); enables water order by Sept. 30.
• Council discussion: Extensive. Vice Mayor Smith opened with questions on terminology (allocation vs. entitlement), ongoing costs, and whether CAP could ever reclaim the water (answer: possible but requires public interest review and transfer to another provider). Robert Morris repeatedly pressed on reliability: "The nia water will become less and more vulnerable to outages." Kuhn acknowledged tier-1 shortage anticipated for 2022 but NIA water expected to survive that year; future years uncertain. Smith asked whether desert hills customers would bear cost in rate study (yes, recommended by staff and confirmed by Pat Walker). Robert Morris questioned timing of offer amid drought: "This is a question we asked for this water 15 years ago. And just when there's no water or there may not be any water now it's there. We've got to make a decision right now. Doesn't that seem a little odd?" VanQuitten noted settlement process took time and deadline pressure from CAP to allocate by 2022. Robert Morris pressed further: "Is somebody behind this? The farmers or what? Why when the water is just about to be allocated why is it suddenly an emergency?" No direct answer given. Kathryn Royer (present remotely via Zoom) explained water-banking analogy and noted original 1,300 acre-foot application (from 2008 master plan build-out analysis) had reduced to 386 due to competing applications. Smith and Robert Morris both confirmed: (1) only one opportunity to buy this year; (2) upfront cost is one-time; (3) subsequent annual cost ~$50–60/acre-foot regardless of use; (4) if drought worsens, actual water delivered may be less than 386 but capital charge continues. Public commenter David Phelps voiced support after speaking with Kathryn Royer, calling it "an incredible enjoyment" to watch council deliberate and noting it "a tremendous opportunity for us to help the neighbors and desert hills and let them pay for it absolutely."
• Vote: 7-0 approval.

Opposition

CAP water vote opposition:

• Number of speakers: 1 (David Phelps, initial skepticism, later recanted).
• Main concerns:
  1. Timing suspicious: offer arrives precisely when Colorado River threatened by shortage and drought is declared.
  2. Desert Hills is a "waterless water company"—town should not subsidize acquisition for its benefit.
  3. Ongoing capital charges (~$50–60/acre-foot annually) are indefinite obligation even if water unavailable.
  4. NIA water is lower priority than town's existing municipal-industrial allocation; therefore vulnerable to further cutbacks.
  5. Reliability uncertain: tier-1 shortage already declared for 2022; no guarantee 386 acre-feet delivered in subsequent years.

Bond refunding opposition:

• Number of speakers: 1 (David Phelps).
• Main concerns:
  1. Excise-tax pledge (not utility-revenue pledge) despite excellent wastewater system performance and cost recovery.
  2. Continued reliance on TPT (transaction privilege tax) encumbrance is "usury" and unfair given strong operational metrics.
  3. Why can town not "carve out" TPT encumbrances when over 50% of ownership position demonstrates creditworthiness?

Most compelling argument (opposition): Phelps's observation that excise-tax pledge persists despite town running "the plant better than it's ever been run before" and meeting all payment obligations—equivalent to forcing "private mortgage insurance" on a borrower with perfect credit.

Organized opposition: None; only individual public comment.

Support

CAP water vote support:

• Proponents: Robert Morris, Councilmembers Silva, Kathryn Royer, Robert Morris.
• Number of speakers in favor: 1 (David Phelps, after council discussion clarified water-banking and Desert Hills benefit).
• Main arguments:
  1. Water is Arizona's scarcest resource; refusal to accept available allocation is fiscally and strategically irresponsible.
  2. Desert Hills requires renewable surface-water supply; groundwater table dropping rapidly in shallow Desert Hills aquifer.
  3. NIA water, while lower-priority than town's existing municipal-industrial allocation, still ranks above excess/ag-pool water and provides long-term portfolio optionality.
  4. Opportunity is one-time only; if rejected, CAP will allocate to other applicants on waitlist (~18 recipients total; 20 applicants initially).
  5. Water banking (recharge and recovery) is future option; once water in portfolio, town can optimize storage and use.
  6. Cost (~$160,000/year for first 5 years, then ongoing capital charge) is low compared to market rate for higher-priority water ($15,000–20,000/acre-foot).

Organized support: None; support voiced by council members and one public commenter (Phelps).

Most compelling argument (support): Robert Morris framing: "Whether we use it for Desert Hills or not, there's no way that we as the elected leaders of this community could turn it down."

Project Details

CAP Water Allocation:

• Resolution number: 2021-16
• Applicant/Developer: Town of Cave Creek (on behalf of Desert Hills water system)
• Water attorney: Michelle VanQuitten (town counsel, water law specialist)
• Water director: Sean Kuhn
• Allocation: 386 acre-feet per year of non-Indian agricultural (NIA) Central Arizona Project water
• Current supply status: Desert Hills historically supplied by groundwater and bulk-water transfers from Cave Creek system (averaging 600+ acre-feet/year in recent years); no firm surface-water allocation
• Priority level: NIA (yellow tier in CAP allocation hierarchy); below municipal-industrial (MI) but above agricultural-pool (ag-pool) and excess water
• Upfront cost: $1,961.50 per acre-foot × 386 acre-feet = $757,000 (lump sum) or $788,000 (5 equal annual payments at 2.5% interest)
  • Composed of: $1,295.96/acre-foot (back capital charges on original federal facility construction, formerly borne by Pinal County farmers who declined allocation) + $665.54/acre-foot (settlement/infrastructure credit to farmers)
• Ongoing annual capital charge: ~$50–60 per acre-foot (for 386 acre-feet = ~$19,000–23,000/year) regardless of whether water is ordered or available
• Operational charge: Additional monthly fee per acre-foot if water actually delivered and used (same rate structure as Cave Creek's existing CAP allocation)
• Budget impact: First-year payment (~$160,000–168,000 if spread over 5 years); subsequent 4 years also ~$160,000/year; then perpetual ~$19,000–23,000/year capital charge plus usage fees
• Proposed cost allocation: Staff and council recommended all costs (upfront, capital, and operational) allocated to Desert Hills water system users via rate study adjustment and/or bulk-water charge (no subsidy from Cave Creek general fund or Cave Creek water ratepayers)
• Authorization: Resolution 2021-16 authorizes town manager (Kerry Direct) and mayor to execute final CAP subcontract, subject to minor legal changes and judicial confirmation process (estimated 60 days); water order to be placed with CAP by September 30, 2021

Bond Refunding:

• Resolution number: 2021-15
• Bond type: Excise tax revenue refunding obligations series 2021B
• Issue size: $800,000 (refinancing existing WIFA wastewater debt)
• Target rate: 2%
• Annual savings: ~$100,000 in debt service
• Repayment pledge: Excise taxes (transaction privilege tax / TPT) on utility services; not general-fund revenues
• Existing pledge: Mirrors structure of original WIFA loan (approved 2013); excise tax pledge allows release of repair-and-replacement reserve requirements (reserves no longer mandated but remain available if town elects to fund)
• Municipal advisor: Jim Strickland (Webbush Securities); engaged via engagement letter (Item 1) on fixed-fee basis contingent on achieving sub-2% rate or transaction consummation
• Bond counsel: Tim Stratton
• Savings mechanism: Refinancing $800,000 of existing debt at lower rate (target 2% vs. current 3.49% on original WIFA debt) over original bond term; reduces annual debt service by ~$100,000
• Purpose: Free operational revenue for wastewater utility system and reduce general-fund subsidy to utilities

Vote Breakdown

Item 1 – Webbush Securities Engagement Letter:

• Final: 7-0
• Yes: Robert Morris, Councilmember McGuire, Vice Mayor Smith, Councilmember Diefenderfer, Councilmember Silva, Kathryn Royer, Mayor Budge
• No: None
• Abstentions/absences: None

Item 2 – Resolution 2021-15 (Excise Tax Revenue Refunding Bonds Series 2021B):

• Final: 7-0
• Yes: Councilmember McGuire, Vice Mayor Smith, Councilmember Diefenderfer, Councilmember Silva, Kathryn Royer, Robert Morris, Mayor Budge
• No: None
• Abstentions/absences: None

Item 3 – Resolution 2021-14 (Town Manager as CFO):

• Final: 7-0
• Yes: Councilmember Defender [Diefenderfer], Councilmember Silva, Kathryn Royer, Robert Morris, Councilmember McGuire, Vice Mayor Smith, Mayor Budge
• No: None
• Abstentions/absences: None

Item 4 – Resolution 2021-16 (CAP Water Allocation for Desert Hills):

• Final: 7-0
• Yes: Councilmember Silva, Kathryn Royer, Robert Morris, Councilmember McGuire, Vice Mayor Smith, Councilmember Diefenderfer, Mayor Budge
• No: None
• Abstentions/absences: None

Outcome & Next Steps

Bond Refunding (Items 1-2): Approved unanimously. Webbush Securities engaged as municipal advisor on fixed-fee basis; refunding bond (Series 2021B) authorized for issuance at target 2% rate. Town expects to realize $100,000 in annual debt-service savings over life of new bond. Release of repair-and-replacement reserve requirements frees accounting flexibility (though council noted no immediate cash freed, merely elimination of mandatory reserve threshold). Savings to be applied toward reduction of general-fund subsidy to wastewater utility.

CAP Water Allocation (Item 4): Approved unanimously. Town authorized to enter into 100-year CAP subcontract for 386 acre-feet of non-Indian agricultural water for Desert Hills system. Upfront capital cost of $757,000–$788,000 approved for budget allocation (first payment $160,000–168,000 in FY 2022); town commits to perpetual capital-charge obligations ($50–60/acre-foot annually, ~$19,000–23,000/year).

Immediate next steps:

• Town manager and mayor to execute final CAP subcontract (pending legal review for minor changes).
• Subcontract proceeds to federal judicial confirmation process (~60 days expected).
• Water order placement with CAP required by September 30, 2021 (cave creek order already placed; Desert Hills order new).
• Town to conduct rate study to determine cost allocation to Desert Hills users; bulk-water charge and/or rate adjustment anticipated FY 2022.
• Staff to coordinate two separate CAP orders (Cave Creek MI allocation and Desert Hills NIA allocation) and manage budget transfers to account for Desert Hills payment obligation.

Long-term contingencies:

• If tier-1 Colorado River shortage continues or worsens, actual water deliveries may fall below 386 acre-feet in subsequent years; capital charge obligations continue regardless of availability.
• Town to explore water-banking and recharge options (identified in future integrated master plan) to optimize use of both Desert Hills NIA water and Cave Creek's excess MI allocation.
• Future opportunities to consider purchase of higher-priority water allocations (at market rate ~$15,000–20,000/acre-foot) if funding and strategic need emerge.

Controversies & Context

Timing of CAP offer amid drought: Robert Morris flagged the apparent paradox that the town's 2013 application for NIA water was approved and offered for acceptance in January 2021—the same moment the Colorado River entered its first tier-1 shortage (declared effective January 2022). Robert Morris asked pointedly whether "somebody behind this" (farmers, CAP, or other interest) had orchestrated the timing. Water attorney Michelle VanQuitten attributed delay to federal process complexity and settlement negotiations with Pinal County farmers; CAP reportedly set deadline to allocate remaining NIA water by 2022 to meet policy objectives. No evidence of coordination offered, but council's skepticism reflected broader anxiety about drought and the reliability of the offer.

Excise-tax pledge controversy: Public commenter David Phelps objected to pledging transaction privilege taxes (excise taxes on utility sales) rather than direct utility revenues to secure the refunding bond—despite the wastewater system's strong operational performance, zero-miss payment history, and reserve accumulation. He characterized the requirement as "usury" and "private mortgage insurance" imposed on a creditworthy borrower. Bond advisor Jim Strickland explained that WIFA lender (the original debt holder) had structured the existing pledge to ensure coverage; WIFA would not accept utility-revenue-only pledge and would have required reserve maintenance. Strickland noted the refunding (with excise-tax pledge maintained) actually improves the town's overall coverage ratio by reducing debt service $100,000/year. Robert Morris acknowledged frustration but affirmed the refunding was still a "slam dunk" and "good transaction."

Desert Hills water subsidy debate: Several council members emphasized that all costs associated with the CAP allocation must be borne by Desert Hills water ratepayers, not subsidized by Cave Creek ratepayers or general fund. Pat Walker (finance officer) confirmed this approach aligns with prior rate-study methodology (bulk-water charge calculated on per-1,000-gallon cost). Water director Kuhn concurred: "Long term as cave creek continues to grow that water allocation is needed to support the land use and growth of cave creek not desert hills. So desert hills needs its own water resources." Phelps initially objected but reversed position after Kathryn Royer privately explained the water-banking strategy and long-term benefit to Desert Hills.

Historical context — 2013 application: Former utilities director Jessica Marlow (now head of utilities for Gilbert) initiated the 2013 CAP application to Desert Hills with prescient assessment that Desert Hills' groundwater supply would eventually prove inadequate. Original application requested up to 1,300 acre-feet (calculated from 2008 master plan build-out projections for Desert Hills). Allocated amount of 386 acre-feet is substantially less but representative of actual recent consumption (600+ acre-feet/year to Desert Hills in recent years but higher than typical historical average of ~400 acre-feet/year). Eight-year delay in allocation reflects federal process and settlement negotiations with original CAP allocation holders (Pinal County farmers).

Colorado River drought context: CAP management has declared tier-1 shortage for calendar year 2022, with potential cutbacks to non-Indian agricultural (NIA) allocations if drought continues. Town understands NIA water ranks below its existing municipal-industrial (MI) allocation in cutback priority; therefore, MI water (2,228 acre-feet currently ordered) is more secure than NIA water (386 acre-feet being added). Council acknowledged this vulnerability but voted to accept the allocation as part of long-term water-portfolio diversification and hedge against future well-production decline in Desert Hills' shallow groundwater basin.

Duration

• Item 4 (CAP water allocation discussion): Approximately 2 hours
• Items 1-3 (bond refunding and CFO appointment): Approximately 45 minutes
• Total meeting duration: Approximately 5+ hours (including extended quarterly utility report presentation by Water Director Kuhn, ~90 minutes; technical delays with Zoom audio in first 30 minutes)

Other Notable Items

Item 5 – Quarterly Utility Report: Water Director Sean Kuhn delivered comprehensive presentation on cave creek water treatment, CAP deliveries, Desert Hills well performance, Rancho Mañana wastewater/reclaimed-water flows, non-revenue water losses, distribution system maintenance, and capital projects (Phoenix interconnect, Carefree system disconnect, wastewater collection assessment, water-ranch facility improvements). Key metrics: Cave Creek system delivered ~1,500 acre-feet in 2020 (below allocation of 2,100); Desert Hills consumption rising to 600+ acre-feet/year (historically ~400); Rancho Mañana golf course receives ~32% of Cave Creek's distributed water, much lost to pond evaporation and overflow (73 acre-feet in 2020 calendar year). Councilmember McGuire praised staff for data transparency and monitoring. No vote required.

Item 6 – Dutch Brothers Coffee Reimbursement: Council approved reimbursement of City of Phoenix water-development fees (~$50,000+) to Cave Creek Olsen DG LLC for Dutch Brothers commercial development (APN 211-46-340-A) under terms of 2018 intergovernmental agreement. This is the third of four reimbursement agreements; one remains pending (Sprouts/big-box retail meter). Total town obligation under IGA approximately $600,000; approximately $112,000 remaining balance to be reconciled in FY 2022 capital budget. Approved 7-0.

Maricopa County Billboard Expansion (Public Comment): Bruce Arlen presented 9-page analysis of Maricopa County Planning Commission proposal to expand digital billboards and reduce spacing requirements. Requested council compose joint letter opposing expansion due to light pollution and dark-sky impacts. Council noted July 22 hearing delayed to August 5 due to pushback. Town attorney Sims advised individual council members may send letters; coordinated joint letter not feasible on timeline. Arlen noted Cave Creek's existing dark-sky ordinances provide some protection but would be ineffective against county billboards near town borders. No vote taken; individual member letters recommended.