Streetlight financing, part II

Posted 2 years ago by Sam Finn

Key Points

In advocating for the streetlight project Public Works Director Wheeler, City Attorney McSherry, and City Finance Director McCoy grossly overestimated the savings from the city’s streetlight conversion. Here we discuss the likely origin of their error. This post is a continuation of “Did Santa Fe correctly estimate the cost of the streetlight upgrade?” 

Introduction And Recap

In February 2021, Santa Fe entered into a contract with Dalkia, LLC, to upgrade 3,355 of Santa Fe’s streetlights to LEDs, and also to maintain them for 15 years. The total cost of the loan financing Dalkia’s upgrade of 3,355 of City-owned streetlights – principal plus interest – is approximately $3,530,000. In a memo to the Governing Body discussing the Dalkia contract, Public Works Director Wheeler asserted that the “on-bill electric savings” associated with the conversion of these lights would pay for the conversion. Later in the same memo, Director Wheeler estimated these “on-bill electric savings” to be $550,000/yr.  

To support the Governing Body’s decision making, every proposed bill or resolution brought before Santa Fe’s governing body requires a Fiscal Impact Report, describing the the direct impact upon the Santa Fe’s operating budget. These reports are reviewed and approved by the City Attorney and the City Finance Director, who present them to Santa Fe’s oversight committees (Finance, and Public Works and Utilities) and Governing Body. In the Fiscal Impact Report addressing the Sterling Bank loan being used to finance the Dalkia streetlight upgrade, City Attorney McSherry and Finance Director McCoy asserted that “the streetlight upgrade and the maintenance will generate savings over the current contract with PNM that will pay for capital expense in six years.” Meeting this commitment requires at least $550,000/yr in savings, which is the same as Pubic Works Director Wheeler’s estimate of savings. 

Our own analysis shows, based on the Dalkia contract, current electric utility rates, NM Stat §6-23-1 to -10 (which governs the Dalkia contract and its financing), shows that the project will generate no more than $226,000/yr in savings, which is the sum of $209,000/yr in utility cost savings and $17,000/yr in conservation-related cost savings. Furthermore, the language in the City ordinance authorizing the financing agreement actually allocates only the utility costs savings to pay for projects capital expense. At this rate of payment Santa Fe will require at least 17 years to pay-off the loan financing the conversion, which is a far-cry from the six years that Director Wheeler, City Attorney McSherry, and City Finance Director McCoy assured the Governing Body and its oversight committees. 

How do we account for the difference between the Wheeler/McSherry/McCoy estimate of $550,000/yr and the $209,000/yr we identified yesterday? 

Document Request

In an attempt to understand the origin of the Wheeler/McSherry/McCoy estimates we filed IPRA requests #21-5544 and #21-5545. Together these two requests asked for any and all documents underlying the energy savings estimates associated with the street light LED upgrade project made to the City by Public Works Director Wheeler, and any and all documents supporting estimates of the pledged revenues that would be available from the streetlight upgrade.  In response, the City provided the Dalkia contract as of July 2021, a statement from PNM regarding the approval of certain streetlight fixtures for installation in Santa Fe, the lease-purchase agreement with Sterling National Bank, and a Nov 2020 email from PNM to Director Wheeler, which included a spreadsheet attachment. Remarkably there were no reports, memos, emails, notes, worksheets, envelopes with scribbles, ink-stained napkins, or other documentation describing how Director Wheeler’s savings estimates, or City Attorney McSherry and City Finance Director McCoy’s Fiscal Impact Report claims, were arrived at. 

The spreadsheet attachment to the mail from PNM was, however, illuminating: from it we can reasonably well guess the origin of the Wheeler/McSherry/McCoy claim of approximately $550,000/yr savings. 

At the same time, a review of the spreadsheet shows that more than half of the claimed “savings” are entirely unrelated to the Dalkia streetlight conversion project. As such, these “savings” are almost certainly not allowed by state law to finance the Dalkia streetlight conversion contract. 

What is, and isn’t, in the PNM Spreadsheet?

The PNM spreadsheet is an estimate of some, but not all, of the changes expected in PNM billing associated with an LED upgrade of 5,412 Santa Fe streetlights. This includes 2,057 streetlights owned by PNM that are not part of the guaranteed utility savings contract with Dalkia and whose conversion is not being financed via the lease-purchase arrangement with Sterling National Bank. It includes some, but not all, of the utility cost savings that may arise from their conversion. It includes savings in maintenance  and other “connection” fees that will no longer be paid to PNM following the upgrade of the 3,355 City-owned lights.

Missing from the spreadsheet are Rate 20 utility savings of approximately $65,000/yr associated with a future conversion of PNM-owned lights, and $119,000/yr associated with the Dalkia conversion of the City-owned lights.

The PNM spreadsheet does not include any expenses not charged by PNM. Important among these is the Dalkia maintenance contract, which will replace the PNM maintenance contract on the 3,355 City-owned streetlight following the Dalkia conversion.

With these provisos the spreadsheet identifies $556,430.76/yr that will no longer be paid to PNM if the specified 5,412 streetlights are upgraded as described. This is almost certainly the source of the “estimated on-bill savings” of approximately $550,000 Wheeler/McSherry/McCoy and incorrectly ascribed to the Dalkia project. 

Resolving the Discrepancy

If we use the PNM Spreadsheet, provided as part of Santa Fe’s response to IPRA request #21-5544, as the basis for the Wheeler/McSherry/McCoy estimate of savings then we can identify two fundamental errors with their estimate of savings:

  • They count as “savings” funds that may result from a possible future conversion of PNM lights, not part of the Dalkia guaranteed utility savings contract, not funded by the Sterling National Bank loan, and that state law (NM Stat §6-23-8) appears to forbid being used to fund the Dalkia project; 
  • The city ordinance authorizing the financing of the Dalkia guaranteed utility savings contract pledges only the electrical utility costs savings to the repayment of the streetlight financing.

With regard to the first bullet, a plain reading NM Stat §6-23-8 indicates that only the utility cost savings and conservation-related cost savings associated with the 3,355 City-owned streetlights upgraded under the guaranteed utility savings contract may be used to finance the streetlight upgrade. The purpose of this requirement is to insure that municipalities like Santa Fe do not speculate with taxpayer dollars, or use contracts like these to get around the requirement that municipalities like Santa Fe must balance their books every year. The Dalkia contract and guarantee addresses only the 3,355 City-owned streetlights: it does not involve or extend any guarantee to PNM-owned and operated streetlights. Likewise, the Sterling Bank loan is financing only the conversion of only the 3,355 city-owned streetlights. Taking NM Stat §6-23-8 at face value, no potential savings associated with a possible future conversion by PNM of the PNM-owned lights are eligible for use in paying-off the Sterling National Bank loan. The city is not allowed to speculate with taxpayer funds. 

The last bullet is perhaps the most important. NM Stat §6-23-8 requires that the city specify what funds will be used to finance the loan and that the city cannot use any other funds for that purpose. The city ordinance authorizing the loan is clear that only the electricity utility cost savings are to be used to finance the Dalkia part of the Sterling Bank loan. And, as we saw earlier, these utility cost savings amount to $209,000/yr, which is far from the $550,000/yr required to pay-off the Sterling Bank loan in less than seven years. 

Discussion

Even if the new streetlights were “magic” and guaranteed to consume no electricity, there would be no more than $370,000/yr in utility cost savings available to pay-off the loan financing the project. The actual utility cost savings – streetlights do consume electricity – based on the Dalkia contact “guarantee” will be no more than $209,000/yr. At this rate it will require 17+ years for the streetlight project electric utility savings to pay for the expense of the conversion. 

It is no exaggeration to say that nearly all of the utility and conservation-related cost savings associated with the conservation measures the city has contracted with Dalkia to implement will accrue to Dalkia’s benefit. Dalkia is milking the city dry on this project. Santa Fe – meaning the city’s taxpayers – will be lucky to break-even.

Quite the contract that Mayor Webber, his Public Works Director, & his City Attorney negotiated for Santa Fe taxpayers. 

The Fiscal Impact Report presented to the council oversight committees and the governing body over-represented the actual savings by nearly a factor of three. The FIR is also inconsistent with the city ordinance it was presented in support of. Remarkably, the actual ordinance committed not what the Fiscal Impact Report claimed for the ordinance, but just those actual savings sufficient to pay-off the capital expenses over the period of the loan. This is a truly striking coincidence. It is almost as if City Attorney McSherry, Finance Director McCoy, and Public Works Director Wheeler knew the right numbers even as they presented the wrong numbers in  Fiscal Impact Report. In the face of such an astonishing coincidence one might be excused for believing that Wheeler, McSherry, & McCoy deliberately deliberately sought to mislead the city oversight committees and the councilors. But, what possible motivation might they have? One might note that in the strong-mayor/CEO-style government implemented by Santa Fe beginning in 2018, each of these public servants are directly responsible to the mayor and the mayor alone; so, it would be surprising if such a misdirection was not undertaken at Mayor Webber’s direction. Perhaps to notch a win for his election bid?

Rather than going too far down that rabbit hole let’s instead keep in mind the sage advice that one should  avoid ascribing to conspiracy that which is adequately explained by incompetence: in this case, gross incompetence of Mayor Webber’s appointees.

And, of course, Mayor Webber: they are each his appointees and report only to him.

The failure in budgeting and financial planning identified here has significant repercussions for Santa Fe taxpayers. 

  • The Santa Fe Governing Body has, no doubt, planned in anticipation of savings that will not materialize: What city services will be cut to make-up for that deficit?
  • 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? 

Taking Action

Write the councilors: we’ve provided a factual and well-documented discussion of a gross error in estimating  the cost savings associated with the Dalkia streetlight conversion project and the reporting of those savings to the city oversight committees and the Governing body. Write your Councilors and ask them to provide an equally factual and well-documented discussion either confirming or disputing the statements made here:

  • What are the dollar utility cost savings associated with Dalkia’s LED conversion of the city streetlights financed by the Sterling National Bank Loan?
  • What are the dollar conservation-related cost savings associated with Dalkia’s conversion of the city streetlights financed by the Sterling National Bank Loan?
  • What are the dollar cost savings from the Dalkia conversion of the city streetlights that are pledged to pay-off the loan financing the Dalkia conversion?
  • Given the actual savings pledged to the payment on the Sterling National Bank loan financing the streetlight conversion, how long will it take to pay-off the loan?

If the answer to these questions is consistent with the analysis presented here, ask the councilors

  • How is it that the McSherry/McCoy Fiscal Impact Report (FIR) so grossly overestimated the actual savings?
  • How is it that those errors passed undetected through two of the city’s oversight committees?
  • How could the FIR submitted in support of the ordinance authorizing the loan could be so inconsistent with the actual ordinance?
  • What actions are the councilors going to hold the Mayor responsible and to ensure that errors of this kind do not happen in the future?

In the “strong mayor”/CEO-style city government adopted by Santa Fe, the responsibility for senior city staff rests solely with the mayor: the Public Works Director, City Attorney, and City Finance Director were all appointed by Mayor Webber, report only to Mayor Webber, and only Mayor Webber can discipline or fire them. Nevertheless, acting as a group city councilors do have the ability to demand answers from the Mayor by withholding their support for his initiatives until they receive credible answers. Urge that they do so.

Councilors form the membership of each of the city’s oversight committees: urge that the councilors be more skeptical and questioning of estimates brought before them by city staff. Remind them that this is not the first time they have been misled. 

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 holding local government and elected officials accountable in the use of public funds. Contact the State Auditor and ask that his office investigate the city’s actions in this project. 

Get the word out! 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. If they are being honest the independent assurance is good to have; if they are not, they need to be held accountable.

And, share this post with everyone who is concerned that city government spend taxpayer dollars responsibly.

Tomorrow

Thought we were done? Not by a long-shot. Santa Fe’s contract with Dalkia is even dicier than described here. Tomorrow we’ll talk more about Santa Fe’s contract with Dalkia, raising questions about whether the “guarantee” in the Dalkia contract is really a guarantee at all.