To protect taxpayers, state law appears to require that Santa Fe’s streetlight upgrade contract with Dalkia include a guarantee that the project’s annual cost savings meet or exceed the cost of the streetlight upgrade. The guarantee is supposed to be secured by a bond or financial guarantee issued by a responsible concern. The Dalkia contract does not guarantee annual cost savings sufficient to pay the costs of the loan financing the streetlights, nor can the “guarantee” be used to make payments on the loan financing the upgrade. The guarantee is itself incomplete and insufficient to pay-off the loan financing the improvements. Finally, Santa Fe never received the required bond backing the utility savings guarantee.
Does the guarantee extend long enough to cover the city’s outlay?
As City Attorney McSherry has pointed out, the Dalkia contract is a guaranteed utility savings contract. The law governing these contracts and their financing is found in NM Stat §6-23-1 to -10. NM Stat §6-23-3 appears to require that the guaranteed utility savings contract include “a written guarantee from the qualified provider that the annual utility cost savings and conservation-related cost savings shall meet or exceed the cost of the conservation measures; and a requirement that the qualified provider maintain a direct financial relationship with the governmental unit, irrespective of the source of financing for the energy or water conservation measures to be implemented.” NM Stat §6-23-2 appears to require that the guarantee utility savings contract provides that savings are “guaranteed to the extent necessary to make the payments for the conservation measures” (emphasis ours).
We have shown that if the actual savings – not the grossly inflated ones claimed by the city – materialize, they will be just sufficient to pay-off the loan financing the conversion in seventeen years; however, the Dalkia contract, which includes the savings guarantee, is for only fifteen years. At the end of fifteen years – before the loan is paid off – the guarantee ends and the city will no longer have any financial relationship with Dalkia. If this understanding is correct the guarantee is thus not “to the extent necessary” to make the payments for the conservation measures.
Are the guaranteed savings sufficient to cover the city’s outlay?
The assumption that the guaranteed utility savings are sufficient to pay-off the loan depends upon a guarantee of all the utility cost savings. A careful reading of the Dalkia contract shows that the guarantee covers only a fraction of the total utility costs. This again raises the question of whether the required savings are, in the language of NM Stat §6-23-2, “guaranteed to the extent necessary to make the payments for the conservation measures.”
The utility cost associated with street lighting has three components: the “Rate 20” per kWh base rate; the “FPPCAC” or “Rider 23” per kWh fuel costs adjustment, and the renewable energy “Rider 36” per kWh adjustment. Rider 23 and Rider 36 currently amount to 40% of the total streetlight utility costs. In the guaranteed utility savings contract signed with Santa Fe, Dalkia agrees to “reimburse” the city for energy usage in excess of a certain number of kWh in an amount determined by Rate 20 only. [See contract Section 1.2 of Appendix 3A to Schedule 3, pg. 58, which describes when the guarantee is triggered; Section 4.1.2 on page 65, which describes the amount of the guarantee in terms of the “Constant Energy Rate”; and Schedule 1, page 36, which defines the “Constant Energy Rate” to be PNM Rate No. 20.]
NM Stat §6-23-3 states that the cost of implementing the conservation measures – in this case, the Sterling National Bank loan financing the streetlight upgrade – should not be expected to exceed the cumulative amount of the cost savings over the expected useful life of the measures. The City ordinance authorizing the financing declares this to be 20 years. [The law puts an upper cap of 25 years on the pay-off period.] If we take NM Stat §6-23-2 requirement that the Dalkia contract must provide that savings are “guaranteed to the extent necessary to make the payments for the conservation measures,” then – focusing just on the guaranteed savings ($126,000/yr) – it will take over 28 years to pay-off the loan. This is more than thirteen years greater than the duration of the Dalkia contract that includes the guarantee, ten years greater than the eighteen year period of the Sterling National Bank loan financing the streetlight conversion, eight years greater than the lifetime of the improvements, and three years greater than the maximum pay-off period allowed by NM Stat §6-23-3.
Is the Guarantee Properly Secured?
Any guarantee is only as good as the standing of the company backing it. For this reason, NM Stat §6-23-4 requires that the provider of a guaranteed utility savings contract – in this case, Dalkia – “shall provide a performance guarantee in the form of a performance bond, a cash bond, a letter of credit issued by a bank with a Moody’s or Standard and Poor’s rating of ‘A’ or better or any other surety, including insurance, satisfactory to the governmental unit and its approving agency. The guarantee for each year shall be in an amount equal to the amount of the annual guarantee given by the qualified provider in the guaranteed utility savings contract.” (Emphasis added.)
To follow-up on this requirement we asked the City of Santa Fe, in IPRA #21-6864, for a copy of any bond, letter of credit, or other financial guarantee of the promised energy savings associated with the Dalkia guaranteed utility savings contract. In response the city provided a copy of a bond for the “upgrade of the city streetlighting infrastructure”: i.e., the purchase and installation of the new streetlights. That bond is limited to the principal of that part of the Sterling National Bank Loan taken for the streetlight infrastructure upgrade. It terminates when the lights are installed. It does not cover the annual energy savings promise. We asked for further clarification, but were provided none.
Correspondingly, we are led to conclude that the city has failed to require Dalkia to provide the City with the kind of surety apparently required by state law guaranteeing Dalkia’s ability to provide the provide the promised energy savings guarantee.
Is The Guarantee Even a Guarantee?
Another peculiarity in the Dalkia contract is how the savings “guarantee” is implemented. If Dalkia fails to meet its savings target, the city is not actually reimbursed for the excess utility costs. Instead, Dalkia records a “credit” to the city on Dalkia’s books, which the city can then apply to “further work” with Dalkia (see contract Section 1.2 of Appendix 3A to Schedule 3, pg. 58). If the city had no intention of contracting additional work with Dalkia – because, for example, Dalkia had shown itself unable to meet its cost savings commitment – then the “guarantee” is worthless to the city taxpayers.
In this regard, we note that in the Citelum contract with Albuquerque, which Public Works Director Wheeler and City Attorney McSherry assured the Governing Body was the model for the Dalkia contract with Santa Fe, the energy savings guarantee is an actual reimbursement to the city (see CABQ-Citelum contract Schedule 3 Appendix 3A Section 4.1.2 page 65).
The clear purpose of the state law authorizing and governing – NM Stat §6-23-1 to -10 – is to protect taxpayers from incompetent or unscrupulous city governments and contractors. Santa Fe’s contract with Dalkia is an example of what can happen when (a) laws protecting taxpayers don’t exist and (b) when they do exist but are ignored or not enforced.
It seems unlikely that the City Councilors are aware that the guarantee is of insufficient duration to cover the capital cost of the improvements, or that the guarantee is only a partial one, or that it does not actually reimburse the city for utility costs resulting from a failure to meet the savings guarantee, or that it is required to be covered by a bond or other surety, which the city failed to secure. There is no evidence that Public Works Director Wheeler, City Attorney McSherry, or Finance Director McCoy brought any of these issues to the attention of the Governing Body or any of the city’s oversight committees (i.e., the Finance Committee, or the Public Works and Utilities Committee).
Let us suppose that this is all news to Mayor Webber, Public Works Director Wheeler, City Attorney McSherry, or Finance Director McCoy. One can only wonder “why?” Who should know the finances better than the Finance Director? Who should know the law better than the City Attorney? Who should understand the cost of operating public works better than the Director of Public Works?
And, who is responsible for the appointment and supervision of these senior city staff, and their work product, other than the Mayor?
Mayor Webber’s failure – for it is, in the end, Mayor Webber’s staff and Mayor Webber’s responsibility – raises again a number of difficult questions for Santa Fe taxpayers:
- To guard against the risk it has undertaken the city is likely to need to set-aside tax revenues. What city services will be cut to make-up for that deficit? Will taxes need to be raised?
- What are the implications of this mismanagement for the Sterling National Bank loan: did the city provide incorrect information about its resources when applying for the loan?
- What does this mean for the value that should be placed on the city’s audits? (Remember, a financial audit checks that the books are consistent, not that planning assumptions and projections are correct. As long as one is careful to be consistent in ones wrongness, one can pass an audit. But, eventually, the bills come due.)
- What are the implications for the Santa Fe’s bond rating, which affects the City’s ability to issue bonds and seek other loans at favorable rates?
- How will these errors in accounting and reporting be viewed by the State Auditor, who has already expressed serious concerns with the City’s audit reports?
- How will failure to follow state law be viewed by the Office of the Attorney General?
We’ve provided a factual and well-documented discussion of what the law appears to require, what the Dalkia contract does and does not include, and where the city has fallen – grievously, it appears – short. Write your Councilors and ask them to provide an equally factual and well-documented discussion either confirming or disputing the statements made here:
- Either the guarantee covers the full utility costs – Rate 20, Rider 23, & Rider 36 – or it does not.
- Either the guarantee allows the city to recover the dollar costs of a failure to meet the guarantee in a form that can be applied to the financing of the improvements, or it does not.
- Either the City received the appropriate “performance bond, a cash bond, a letter of credit issued by a bank with a Moody’s or Standard and Poor’s rating of ‘A’ or better or any other surety”, or it did not.
- Either the councilors were aware of all these things when they approved the Dalkia contract and Sterling National Bank financing, or they were not.
And, to the extent that what we have written above is an accurate assessment of the situation, ask the councilors what they are going to do to address the problems created by the Mayor and his appointees, and how they are going to reinvigorate their oversight roles to prevent mistakes like these from happening in the future?
The city and area newspapers have a role to play here as well. Contact the New Mexican, the Santa Fe Reporter, Searchlight New Mexico, KRQE TV and KSFR radio news, and other local radio and TV news outlets and urge them to provide their own, independent reporting on the issues raised here. City Attorney McSherry has famously stated that the City Attorney’s office does not answer or otherwise respond to city resident questions or complaints: perhaps the City Attorney’s office will respond to questions from one of these news outlets. Insist that area newspapers, radio, and TV stations not take the Mayor or other City Staff “at their word:” fact-check them. That ought not be hard for a reporter and a newspaper or TV news station. If Mayor Webber and his staff are being honest the independent assurance is good to have; if they are not, they need to be held accountable.
Contact the Office of the State Auditor. City government has a fundamental responsibility to be effective stewards of the taxpayers’ money. The State Auditor’s office is responsible for enforcement of the procurement code and for holding local (as well as state) government and elected officials accountable in the use of public funds.
Contact the Office of the Attorney General and ask that they investigate what are apparently multiple violations of the state laws that are meant to protect city taxpayers.
Get the word out! Share this blog entry with everyone you think might be interested in responsible city government. If Santa Feans want safely lit streets, their tax dollars spent responsibily, and “good” city government, its citizens, area news media (newspapers, radio & TV), city councilors, all need to up their game: area news media need to report what is happening in the city and not just what the mayor and his staff say is happening; councilors need to accept and carry-out their oversight responsibilities; the mayor needs to accept responsibility for his staff and his responsibility to the city; and the citizens of the city need to hold their city government responsible.
No, we’re not done. The story is not yet over. Tomorrow we’ll talk about how Santa Fe apparently blew past other provisions of state law meant to protect taxpayers against exactly the problems we’ve highlighted with financing and the utility cost-savings guarantee…