26 okay very good. The upcoming cost of service will confirm whether this previous increases will be sufficient to support the future loan payments. Also, part of that analysis is to maintain proper reserve levels. Hopefully you can do your other capital needs beyond this treatment plant project through a PAYGO program. And also, as well know operational costs are increasing so that rate study will look at all of those things to develop the rates.
The core objective of any funding plan with respect to the treatment plant is threefold and certainly more actually but we want to create a funding plan that secures the most efficient lowest cost funding and secure favorable terms. Paramount to this process also is to secure and promote the most affordable rates possible for the city's sewer customers, and then also for the enterprise, the wastewater enterprise maintain long-term fiscal sustainability and operational flexibility. Later on we're going to go through three loan options But there may be others you want to discuss, but we wanted to just highlight the differences between several that have been considered. Before we get to the loan options, I want to just talk high level about various ways that projects are funded by public utilities.
Cash funding which is really a pay-as-you-go kind of program is often used to fund the smaller and recurring projects You know, the cash that you generate annually above and beyond operational costs is usually programmed to handle the lower cost types of projects that are needed. There's also alternative funding federal and state grants like USDA which has been investigated State Revolving Fund for clean water That's also a very good program that's offered by the state of California.
There are other grants as well, and those are usually the focused one there had been some federal programs that have been discontinued in the last year but federal what we call free and cheap opportunities is something that should be looked at to offset potential costs of funding. These programs are highly competitive usually and take a bit longer to process with the state or federal jurisdictions that are offering them. And like USDA, oftentimes you'll have to find interim construction funding because these other programs like to fund when the project is complete. And of course then there's the private markets bonds or loans Those are accessible sources.
They're usually higher cost than the alternative free and cheap money sources, but the timing is generally three to four to five months and that's relatively certain timelines. What is a wastewater revenue loan or bond or even a USDA loan? The purpose is to fund these larger projects. The repayment source, and I think this is important because we're going to use the terminology net revenues.
Net revenues is really your gross recurring revenues from rate payers and there are interest income in other sources but that's Your recurring revenues, less your recurring every year types of operating expenses. That equals your net revenues and that is the pledge that the city would make to what whatever your funding sources to repay the loan or bond that you might undertake in the future coverage ratio is another important point. You must maintain sufficient revenues or net revenues to cover debt service. Usually that means that you have excess amount over and above that debt payment, so typical terms are 110% to 125% coverage which means that you have $110 to $125 of net revenues for every hundred dollars of debt service that you're undertaking.
And then key legal covenants that usually are present in all of these types of loans or bonds is the rate covenant, which is maintaining that coverage that we just mentioned as well as an additional bonds test which imposes additional conditions before you're able to So where is the current status of the Wastewater Enterprise Fund? The enterprise fund struggled a bit before you implemented the rate increases, you were negative on your net revenues.
But that five year increase that the City Council approved translated into positive net revenues after 2023. As you can see on the right hand side, current fiscal 25. We don't have fiscal 26 in hand at this moment but fiscal 25, the most recent year of audits, you had a little bit over $1 million of net revenues. If you were to calculate a pledge for a new bond with that $1 million using 125% coverage That would translate to about 10 to $12.5 million of capacity for funding any type of large capital project that falls short of the $18.5 million that we're assuming for this analysis is the project costs. The 2022, just going back to the 2022 cost of service study Next page, projected that in 2026 you'd be about 1.6 million net revenues and 2.1 million of net revenues so once the fiscal 26 figures are tabulated at the end of this fiscal year you'll see where you stand up but there have been large increases in operational costs with respect to energy and power Sometimes labor as well, so it'll be important to see where that is prior to your cost of service study that you're contemplating doing.
That will be your baseline for the go forward look and once you have that in hand, your financing options would be re-evaluated. Your reserve levels are looking good as a percent of annual budget, the city has adequate reserve levels and the trend is good. That cost of service study that you approved in 2022 is having the desired effect notwithstanding that you've used some of your Thank you very much.
Right now, it grew from 1.1 million in 2022 and you're projected to be while you're at 2.5 million at the end of fiscal 25 I'm not sure where the projection will be but indications are that it might decline to 2.1 million So, getting into the four very high-level options just to provide contrast to the USDA loan that the staff has been pursuing for the last number of years. We wanted to show a bank loan which is also called a private placement.
They're usually limited to a shorter term, a 20 year term as standard using up a bond or public offering to investors We're showing a 30-year term and a 35-year term. And we have interest rates that we took a snapshot of earlier this month for the credit rating that we think is conservative for the city of Solvang. And then, of course, we also have the existing terms that we received in the letter of conditions from the USDA. And that has a 40-year term.
So the bank loan is the quickest option to execute. There's no credit rating, there's no investor disclosure that needs to be put together that goes out to the investors to sell the transaction. You have more flexible prepayment options for these bank loans and for the private placement bank loan as well as the public offerings you can bundle your construction financing into your permanent financing so you don't have to do something before the takeout like USDA requires. The cons right now are that the private placement market is showing higher interest rates and also as noted, you have a limitation on your max term of 20 years there are some banks that will go out to 25 not many and they charge a higher rate. So the assumption here is a 20-year loan at 5% rate I can read that the annual payment is about a million seven.
Okay, so public offering we're showing a 30 and 35 year. Currently, it's a lower cost option than USDA that's not usual but that just happens to be the case at this moment in time. Flexibility on the term, you can go up to 30, 35 years. 40 years is possible but it's not typical. Usually you're seeing these long-term financings by selling to investors at a 30 year term.
The cons are it's a longer process than a bank loan. You have to go through a lot more due diligence with respect to getting a credit rating and putting together disclosure for the investors And usually you have a prepayment lockout feature of 10 years that can be negotiated depending on the market. Sometimes you'll have to pay a little bit of interest rate penalty, but the 10-year lockout is typical and this assumption assumed an A plus credit rating which we think is conservative for the City of Solvang's Wastewater Enterprise and was showing 30- and 35-year terms. So, for the 30-year term if I can read that say $1,330,000 let me look at that make sure I'm reading correctly yeah a million three hundred thirty thousand dollar payment for 30 years a million two hundred fifty thousand For the 35 years, contrasting that with the $1.775 million for the direct bank loan placement which is over 20 years.
So USDA this is sort of a collapsed approach we're not we're bundling and trying to show an apples-to-apples comparison Although you do have to do an interim financing before USDA will take out the construction loan, but we bundled both where we're trying to show that there is pre-funded interest in all four of these options. The pros for a USDA is they will give you the longest term. That is the way they work.
For disadvantaged communities, that can be a very strong benefit. Usually they have the very low rate. Currently it's higher than one would expect but there is the opportunity once you lock in the USDA program that you can reset that down if rates go down prior to them funding the loan in a couple of years when you're done with construction. The cons are that it's a very long process, and it takes a lot of staff time and sometimes consultant time.
You do need to do the interim funding. There is no credit rating disclosure needed which I think is a positive. I'm not sure why that's in the cons but you may have to do the credit rating for the interim loan. So the assumptions here are 40 years At four and three quarters interest rate, that is the current quote from USDA. That 40 year program shows the lowest payment of about $1.1 million annually over 40 years, of course.
So we wanted to show all four of these and then stack them up and compare them. I think there's two things that are important to look at which The annual payment, that's what the rate consultant will be looking for and solving rates for when they conduct their analysis. But then also I think it's important to see what the total payments are over that loan term. So you can see we go from $1.7 million for the private placement all the way down to a $1,000,001 for the USDA 40-year But there is approximately $10 million more of interest paid over those extra 20 years that the public agency would be making those payments.
Glad to answer any questions on that slide, if there are any right now or we can answer them at the end.
