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MSD Exhibit No. MSD 3H
2023 Wastewater Rate Change Proceeding
TIM R. SNOKE
Direct Testimony
Metropolitan St. Louis Sewer District
March 24, 2023
Table of Contents
Page
Witness Background and Experience ........................................................................................... 1
Wastewater Debt Financing .......................................................................................................... 1
State Revolving Fund (SRF) Financing ........................................................................................ 8
Wastewater Additional Funding Sources .................................................................................... 11
Direct Testimony of Tim R. Snoke, MSD March 24, 2023
2023 Wastewater Rate Proceeding 1 MSD Exhibit No. MSD 3H
Witness Background and Experience 1
Q1. Please state your name, business address, email address, and telephone number. 2
A. Tim Snoke, 2350 Market Street, St. Louis, MO 63103, (314) 768-6222; 3
tsnoke@stlmsd.com 4
Q2. What is your occupation? 5
A. I am the Secretary - Treasurer for the Metropolitan St. Louis Sewer District (District or 6
MSD). 7
Q3. How long have you been associated with the District? 8
A. I have held that position since I started with the District in May 2014. 9
Q4. What is your professional experience? 10
A. I started my professional career in 1992 with Ralston Purina Company. In 1994, I joined 11
Ralcorp Holdings, Inc. (a Purina spinoff) and started my career in Treasury there in 1997. 12
Since then, I have held various managerial positions of increasing responsibility over areas 13
including treasury operations, corporate finance, and financial planning and analysis. 14
Q5. What is your educational background? 15
A. I hold a B.S. degree in Business Administration from Valparaiso University (1992) and a 16
Master in Business Administration degree from St. Louis University (1997). 17
Wastewater Debt Financing 18
Q6. How does the District expect to finance its major capital improvements for this rate 19
cycle? 20
A. For the term of the remaining rate cycle (FY21-FY24), the District expects to finance its 21
wastewater capital improvement plan with cash on hand, new debt issued from the 22
approximately $628 million of debt financing still available under its previous bond 23
Direct Testimony of Tim R. Snoke, MSD March 24, 2023
2023 Wastewater Rate Proceeding 2 MSD Exhibit No. MSD 3H
authorizations, and user charges based on the rates approved by the District Board in June, 1
2021. 2
Q7. How does the District expect to finance its future major capital improvement needs? 3
A. As presented in the Rate Change Proposal, to fund the CIRP from FY25 through FY28, the 4
District assumes the use of $43 million additional debt financing remaining under its 5
current $500 million authorization, up to $670 million of additional debt proceeds under a 6
new $750 million authorization, and $585 million of cash, or PAYGO, funding. The 7
District expects to continue using debt as a major component of CIRP funding until such 8
time it no longer becomes financially prudent. 9
Q8. How much of the District’s previous total bond authorizations remain available to 10
finance capital improvements through FY24? 11
A. There is currently $628 million remaining under previous bond authorizations to finance 12
capital improvements in FY23, FY24, and into the new rate cycle. Additional bond 13
authorization will be required by voters to fund the CIRP as proposed for FY25-FY28. 14
Q9. Will there be additional debt authorization remaining after the end of this current 15
rate cycle (FY21-FY24)? 16
A. Yes. The 2019 Rate Proposal anticipated that there would be approximately $136 million 17
of debt authorization remaining at the end of the FY21-FY24 rate cycle to be used in FY25 18
based on expected CIRP spending and certain assumptions such as inflation rates and bond 19
interest rates. However, unexpected declines in volume and wastewater user charge 20
revenue resulted in less PAYGO and more debt funding over the FY21-24 period than 21
originally anticipated. The District now expects to have only $43 million of debt 22
authorization available headed into FY25. 23
It is important to note that debt service costs are calculated from the face, or par, amount 24
Direct Testimony of Tim R. Snoke, MSD March 24, 2023
2023 Wastewater Rate Proceeding 3 MSD Exhibit No. MSD 3H
of debt outstanding and not on the amount of debt that is authorized. Also, the fact that the 1
District will use more debt authorization in the FY21-24 cycle than originally proposed 2
does not mean that debt service costs are higher than expected for the current rate cycle. In 3
fact, an increase in federal funding over the last few years allowed the District to shift 4
planned capital market debt issuances to SRF and WIFIA debt, lowering debt service 5
expense in the first couple years of each issuance since interest is only paid on the amounts 6
drawn as project costs are incurred and not immediately on the full face amount of the loan 7
agreement. The District continued to only issue debt as needed to fund the CIRP and did 8
not add to debt service costs unnecessarily. In addition, the fall in interest rates during the 9
pandemic created a record low rate environment in which MSD refinanced some of its 10
outstanding debt, reducing debt service by $19 million in the FY21-24 period and 11
approximately $34 million in the FY25-28 period. This created more rate setting flexibility 12
heading into the new rate cycle. 13
Q10. What forms of debt and their relative amounts will be used to fund the proposed 14
wastewater capital improvement program in FY25-28? 15
A. The proposed CIRP is anticipated to be funded with a combination of approximately 60% 16
debt and 40% other sources, primarily PAYGO (35%). New debt financing is expected to 17
be made up of approximately 80% percent senior lien bonds and 20% State Revolving 18
Fund (SRF) loans. We also are currently anticipating the issuance of fixed rate tax-exempt 19
bonds. In the event Congress approves new authorization for Build America Bonds or 20
other tax subsidy or credit bonds we would also analyze the financial benefits of these 21
financing tools. 22
Q11. Is municipal debt financing of major capital improvements a practical way of 23
obtaining funds? 24
Direct Testimony of Tim R. Snoke, MSD March 24, 2023
2023 Wastewater Rate Proceeding 4 MSD Exhibit No. MSD 3H
A. Yes, historically the use of bonds to finance municipal capital improvements has been an 1
equitable, cost-justified, and widely used method of funding available to governments 2
worldwide. Using a combination of bonding and PAYGO provides several benefits versus 3
a PAYGO only approach. A combined approach allows projects to be built and put into 4
service more quickly and/or with less significant rate impact in the near term. Customers 5
receive the public benefit sooner, while both current and future users of the project receive 6
its benefits and pay for its use. In a PAYGO only approach, only current ratepayers pay 7
for the projects, but all future constituents receive the benefit. A combined approach is 8
also considered to be the more prudent financial practice by rating agencies and within the 9
business and finance communities. 10
Q12. If the District were to seek additional bond authorization, what in your opinion is the 11
amount of total authorization required? 12
A. To fully fund the CIRP projects planned through FY28, we would need additional bond 13
authorization of approximately $750 million. 14
Q13. How is the Rate Proposal structured to maintain the District’s current bond rating? 15
A. The District worked with its financial advisor, PFM, to develop a financing plan for the 16
Rate Change Proposal that, combined with proposed revenues and operating expenses, is 17
consistent with maintaining AA bond ratings based on similar issuers and feedback from 18
the District’s rating agencies. The rating agencies have all noted that the District’s current 19
credit rating could be compromised if projected senior debt coverage fell below projected 20
levels (Exhibits MSD51 and MSD52). In addition, the District is seeking to maintain a 21
strong liquidity position over the rate proposal period as it also has been noted that a 22
reduction in cash balances below historical norms could also pressure ratings. 23
24
Direct Testimony of Tim R. Snoke, MSD March 24, 2023
2023 Wastewater Rate Proceeding 5 MSD Exhibit No. MSD 3H
Q14. What is the potential impact of the proposed use of debt on the District’s current bond 1
rating? 2
A. Based on the most recent feedback we have from the rating agencies, we believe that the 3
combination of the proposed rate increases and the use of debt as outlined in the Rate 4
Proposal will allow the District to maintain strong credit ratings, commensurate with a AA-5
rated utility revenue credit. However, reductions to proposed revenues and/or increases in 6
operating expenses or future debt service costs beyond expectations could reasonably be 7
expected to lead to negative pressure, including potential downgrade, on the ratings and 8
increase future debt service costs. 9
Q15. Why is the District currently seeking additional debt authorization from the voters to 10
support the WW CIRP in its Rate Proposal? 11
A. The District’s CIRP includes substantial capital improvements over the near term. 12
Utilization of debt financing allows the District to fund these large near-term capital 13
improvements while moderating the rate increases imposed on customers. In contrast, use 14
of PAYGO only financing would require significantly higher rate increases through FY28. 15
Q16. Is this proposed Rate Change contingent upon voter approval of additional 16
wastewater bond issues? 17
A. The primary Rate Change Proposal assumes voter approval of additional wastewater bond 18
issues. However, if voters do not authorize additional bond issues, rates will increase more 19
quickly as the District will need to fund the CIRP through PAYGO only. An alternative 20
PAYGO only scenario is also detailed in the Rate Change Proposal (Section 7). 21
Q17. When will the voters have an opportunity to consider additional debt authority for 22
the District? 23
A. The Rate Proposal assumes that the District will ask the voters for additional debt authority 24
Direct Testimony of Tim R. Snoke, MSD March 24, 2023
2023 Wastewater Rate Proceeding 6 MSD Exhibit No. MSD 3H
prior to FY25. 1
Q18. How long would it take to obtain additional debt authority assuming the voters would 2
approve the required ballot initiative? 3
A. Passage of a revenue bond initiative will require a simple majority of the voters of the 4
District. The available election dates are in the following months: February, April, August, 5
and November. The District must file 10 weeks in advance of an election, and internal 6
legislative time will require an additional four to six weeks. Therefore, the minimum 7
amount of time required between Board of Trustees action on a rate proposal and holding 8
an election is approximately 16 weeks. Once the election is held, another four weeks 9
should be set aside to allow for the Election Commission to certify the results. Once the 10
election passes, bonds can typically be issued within 6-8 weeks. 11
Q19. What have been the voter approval margins of past bond authorization elections? 12
A. In February 2004 the District received voter authorization for $500 million of wastewater 13
revenue bond debt. This measure passed by about a 2:1 margin. In August 2008 the 14
District received voter authorization for an additional $275 million of revenue bonds by an 15
almost 3:1 majority. In June 2012 voters approved a $945 million bond authorization by 16
more than a 5:1 majority. In April 2016 voters approved a $900 million bond authorization 17
by more than a 3:1 majority. In April 2021 voters approved a $500 million bond 18
authorization by more than a 4:1 majority. 19
Q20. Does the proposed bond election impact the implementation date of proposed 20
wastewater charges? 21
A. The rate proposal assumes uninterrupted authority to access the capital markets to fund the 22
CIRP. If the District does not have the authorization required to issue bonds, rates will 23
have to increase more quickly to fund capital projects required to maintain compliance with 24
Direct Testimony of Tim R. Snoke, MSD March 24, 2023
2023 Wastewater Rate Proceeding 7 MSD Exhibit No. MSD 3H
the Consent Decree. 1
Q21. How are the outstanding revenue bonds being repaid and what is the current ratio of 2
net revenue to annual debt service? 3
A. The outstanding revenue bonds are being repaid according to an amortization schedule 4
established when the bonds were issued from revenue collected from wastewater user 5
charges. FY23 wastewater net revenue is expected to be approximately 3.0x FY23 senior 6
debt service costs and 2.0x FY23 total debt service costs. 7
Q22. How are the District’s revenue bond requirements being met and what terms were 8
considered in the Rate Change Proposal for potential future revenue bond issues? 9
A. The covenants in the District’s debt agreements require a minimum senior bond debt 10
coverage ratio of 1.25x and a minimum total bond debt coverage ratio of 1.15x. These 11
minimum levels are required just to avoid defaulting on the debt. To maintain the District’s 12
high credit ratings, revenue in the Rate Change Proposal has been set to achieve minimum 13
debt coverage ratios of 2.5x (senior bonds) and 1.8x (total bonds), a Days Cash on Hand 14
target of 550 days, and a minimum Operating Reserve of 60 days. The Rate Change 15
Proposal assumes that future senior lien revenue bonds will be issued with annual coupon 16
rates of 5.00 percent over a 30 year term. It also assumes level debt service over a 30 year 17
period for senior revenue bonds and over a 20 year period for subordinate bonds issued in 18
the FY25-FY28 cycle. Issuance costs are estimated to be about 1.00% of the total issuance 19
amount. 20
Q23. Are these estimates and costs reasonable in your opinion, based on your experience 21
with similar transactions? 22
A. Yes, these estimates and costs are reasonable and are consistent with recent previous Rate 23
Proposals and commitments made to the rating agencies and bond investors. 24
Direct Testimony of Tim R. Snoke, MSD March 24, 2023
2023 Wastewater Rate Proceeding 8 MSD Exhibit No. MSD 3H
1
Q24. Is the Proposed Rate Change consistent with and not in violation of any covenant or 2
provision relating to any outstanding bonds or indebtedness of the District? 3
A. Yes, the Rate Change Proposal is consistent with all outstanding bonds and indebtedness 4
and will not cause the District to violate any provisions or covenants related to said bonds 5
or indebtedness. Examples of provisions and covenants are requirements to provide 6
revenue to cover O&M expenses, to provide reasonable Revenue Fund reserves, to produce 7
Net Operating Revenues sufficient to meet minimum Debt Service Requirements, and to 8
make all required payments into Debt Service Reserve Accounts. 9
State Revolving Fund Financing 10
Q25. Could the District realistically expect to obtain any additional State Revolving Fund 11
(SRF) loans in the future if it was authorized to debt finance additional improvements 12
and if so, what is the potential magnitude of such loans within the next ten years? 13
A. Yes, the District can realistically expect to receive some SRF financing in the future. The 14
Missouri Department of Natural Resources will not guarantee the amount that will be 15
available so it is difficult to determine the extent of subsidized financing that will be 16
received. The Missouri SRF program has a limit to the amount of money it lends each year 17
and municipalities and programs throughout the State are all eligible to receive a portion 18
of the funding that is made available. In addition, not all projects are well suited for SRF 19
funding because there are federal requirements, such as American Iron and Steel, which 20
may increase project costs if SRF funding is used. The Rate Change Proposal assumes $43 21
million of SRF funding in FY25 and $30 million per year of SRF funding starting in FY26. 22
If the assumed level of SRF funding does not become available when needed, the District 23
will seek additional capital market financing instead. 24
Direct Testimony of Tim R. Snoke, MSD March 24, 2023
2023 Wastewater Rate Proceeding 9 MSD Exhibit No. MSD 3H
Q26. What are the benefits of participating in the SRF program? 1
A. The major benefit of participation in the SRF program is the up to 70% subsidy of interest 2
costs. Therefore, the true interest cost could be as low as 30% of the going rate for 3
municipalities with a similar credit rating and term structure. This allows annual debt 4
service of SRF loans to be similar to capital markets debt despite a 10 year shorter term, 5
providing significant overall savings. The Department of Natural Resources will add a 6
0.5% annual administration fee. About 35% of the District’s debt funding has come from 7
the SRF program. 8
Q27. What are some of the potential disadvantages of participating in the SRF program? 9
A. The primary potential disadvantage is the interjection of the State’s administrative approval 10
requirements to the process. Also, SRF funds primarily are to be used for sanitary sewer 11
projects and may not be available for certain combined sewer projects. The available SRF 12
pool cannot possibly meet our entire borrowing needs. Moreover, the structure of the SRF 13
loans is also less flexible than that of revenue bonds. Terms do not currently exceed 20 14
years without added costs and typically require annual principal repayments that cannot be 15
deferred. Without consent of the State, the SRF bonds will not be callable, which means 16
there is no opportunity to refinance the debt for economic benefit when market conditions 17
warrant. Nor is there the chance to restructure the debt for any other purposes that might 18
be desirable without consent of the State. 19
Q28. What terms were considered in the Rate Change Proposal for potential future SRF 20
borrowings and, in your opinion, are these terms reasonable? 21
A. Future SRF loans are expected to have 20-year terms and a net effective annual interest 22
cost of less than 3% per year. Issuance costs are expected to be 0.65 percent of the total 23
SRF loan amount. These terms are reasonable because they reflect current subsidization 24
Direct Testimony of Tim R. Snoke, MSD March 24, 2023
2023 Wastewater Rate Proceeding 10 MSD Exhibit No. MSD 3H
by the State. Future subsidized rates could increase due to market conditions and/or 1
decreases in the State subsidy level. 2
Q29. Has the District submitted applications for additional SRF program loans? 3
A. Yes, the District has applied to have funds allocated to it in MDNR’s 2024 Intended Use 4
Plan. The District has submitted SRF applications on an annual basis and anticipates 5
continuing this process indefinitely whenever unused bond authorization is available and 6
suitable projects exist. 7
Q30. What level of SRF loans do you think could be available to the District on an average 8
annual basis if the District had additional bond authority? 9
A. Due to the uncertainty of future Federal funding associated with the SRF program, the 10
State’s ongoing need to balance its budget, and substantial capital improvement 11
requirements of other Missouri wastewater utilities, an estimate of the potential loans 12
available to the District cannot be reliably determined. However, the Rate Change Proposal 13
assumes $43 million of SRF issuance in FY25 and $30 million of SRF loans per year 14
thereafter will be available to fund a portion of the proposed CIRP during the next rate 15
cycle. 16
Q31. Are there any legal issues that could prevent or restrain the District from obtaining 17
State Revolving Fund (SRF) loans? 18
A. The District is not currently aware of any legal issues that would prevent it from obtaining 19
SRF loans. 20
Q32. Will any SRF loans continue to be issued on a junior lien basis to the Districtwide 21
revenue bonds? 22
A. Yes, we plan to continue to issue all available SRF loans on a subordinate basis to our 23
existing senior lien revenue bonds. 24
Direct Testimony of Tim R. Snoke, MSD March 24, 2023
2023 Wastewater Rate Proceeding 11 MSD Exhibit No. MSD 3H
Wastewater Additional Funding Sources 1
Q33. Are there any other financial contributions or grants the District could possibly 2
obtain? 3
A. Other than an American Rescue Plan grant of $3 million in FY25, the District does not 4
anticipate obtaining other financial contributions during the upcoming rate cycle, but the 5
District regularly monitors MDNR, EPA, and other entities for possible grant 6
opportunities. While the District has been able to take advantage of some MDNR 319 and 7
EPA State and Tribal Assistance Grants (STAG) in the past, there are very few grant 8
opportunities that match and could support the District’s core business and compliance 9
activities. 10
The District also has been successful in obtaining federal authorization to have the Corps 11
of Engineers construct improvements to certain District infrastructure. This authorization 12
has led to approximately $47 million in infrastructure projects constructed by the Corps 13
within the District’s combined sewer area over the last 22 years. The District works with 14
the Corps on an ongoing basis to maximize this federal benefit. 15
The District also has utilized low interest financing from EPA, through the federal Water 16
Infrastructure Finance and Innovation Act (WIFIA), for its wastewater infrastructure 17
capital program. Similar to SRF, this program provides capital program financing for the 18
ratepayers at a lower cost than traditional bond financing. 19
The District also maintains state and federal lobbying activities, one of the main goals of 20
which is to seek financial assistance for the District. 21
Q34. Does this conclude your testimony? 22
A. Yes, it does. 23
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