ABC’s of Municipal Financing

1. ABC’s of Municipal Financing Presented By: GFOAZ May 11, 2007

2. Types of Debt • Bonds • General Obligation (GO) • Revenue • Annually Appropriated Debt Service • Certificates of Participation (COPs) • Lease Purchases/Municipal Property Corporation (MPC) • Special Taxing Districts • Community Facilities Districts • Municipal Improvement Districts • State Programs • Greater Arizona Development Authority (GADA) • Highway Expansion and Extension Loan Program (HELP) • Water Infrastructure Finance Authority (WIFA) Page 1

3. General Obligation (GO) Bonds • Authorization: Election • Security: Full faith and credit of the City with a promise to levy secondary property taxes as necessary to repay debt. • Repayment Source: Debt service may be repaid with property taxes, or other revenues sources of the City. • Debt Capacity: Net Secondary Assessed Valuation • 20% Limit ~ Projects involving lighting, open space, parks, public safety, recreational facilities, transportation, water, and wastewater. • 6% Limit ~ Other general purpose improvements. Page 2

4. Revenue Bonds • Authorization: Election • Security: Pledge of specific revenues including: • Highway User Revenue Funds • Utility Revenues (Water, Sewer, other Enterprise Funds) • Repayment Source: Usually matches security pledge. • Debt Capacity: Coverage-driven ~ pledged revenues must exceed debt service by a certain factor. Varies by type of pledge. Page 3

5. Certificates of Participation (COPs) • Authorization: Council Resolution • Security: Annual appropriation to pay debt service from City’s General Fund. • Repayment Source: General Fund or other available funds of the City (other than property taxes). • Debt Capacity: Limited by general creditworthiness of the City and existing debt. Page 4

6. Lease Purchases/Municipal Property Corporation (MPC) • Authorization: Council Resolution and MPC Resolution • Security: MPC issues debt. City annually appropriates lease payments to the MPC with a pledge of specific revenues: • Excise Taxes • State shared revenues • Utility Revenues • Repayment Source: Usually matches security pledge. • Debt Capacity: Coverage-driven ~ pledged revenues must exceed debt service by a certain factor. Varies by type of pledge. Page 5

7. Community Facilities Districts (CFDs) • Authorization: • District Formation: • Property Owners petition to form CFD. • CFD voters authorize CFD formation. • Council forms CFD. • GO Bonds ~ CFD voters must authorize. • Special Assessment Bonds ~ CFD forms assessment area. • Security & Repayment Source: • GO Bonds ~ CFD Secondary Property Taxes. • Special Assessment Bonds ~ Assessments on CFD property owners. • Debt Capacity: Based on credit-worthiness of project. • GO Bonds ~ 60% * [Market Value of Property + Public Infrastructure] • Special Assessment Bonds ~ Value to Lien Ratio; example 3:1 Page 6

8. Municipal Improvement Districts (MIDs) • Authorization: • District Formation • Council adopts Resolution of Intent to form MID. • Property Owners may protest MID formation. • Council adopts Resolution Ordering Work. • MID issues Special Assessment Bonds • Security & Repayment Source: • Assessments on property owners within MID. • Contingent Liability of City’s General Fund if no other purchaser at foreclosure sale. • Debt Capacity: Limited by general creditworthiness of the City and project details. Page 7

9. Greater Arizona Development Authority (GADA) • Eligible Projects: All public infrastructure and facilities. • Program Features: • Subsidy of costs of issuance • “Pooled” with other loans • Intercept of State shared revenues in the event of default • Authorization: • Population 50,000 or More ~ Election • Population 50,000 or Less ~ Depends on security pledged. • Security: • Bonds (GO & Revenue Bonds authorized via election) • Annually Appropriated Debt Service (COPs & MPCs authorized by Council) • Special Taxing District (CFDs & MIDs via district formation) • Debt Capacity: Depends on repayment source. Page 8

10. Highway Expansion and Extension Loan Program (HELP) • Eligible Projects: Highway projects on the Federal Aid System, National Highway System, State Highway System, or designated as a state route. Project must be on ADOT’s State Highway Construction Program, ADOT’s State Transportation Improvement Plan, or Regional Transportation Improvement Plan. • Program Features: • Acceleration of highway projects • Shorter term loans – generally 5 to 7 years • Interest cost may be shared with Program • Intercept of HURF monies in the event of default • Authorization: Depends on security pledged. • Security: Depends on security pledged • Repayment Source: Depends on security pledged. • Debt Capacity: Depends on repayment source. Page 9

11. Water Infrastructure Finance Authority (WIFA) • Eligible Projects: Water and wastewater projects on WIFA Priority List. • Program Features: • Subsidization of interest cost • No closing costs charged by WIFA • Authorization: • Population 50,000 or More ~ Election • Population 50,000 or Less ~ Depends on security pledged. • Security: • Bonds (GO & Revenue Bonds authorized via election) • Annually Appropriated Debt Service (COPs & MPCs authorized by Council) • Special Taxing District (CFDs & MIDs via district formation) • Repayment Source: Depends on security pledged. • Debt Capacity: Depends on repayment source. Page 10

12. Public-Private Partnerships (PPP or P3’s) • What are Public-Private Partnerships? • Historically, any public infrastructure that included governmental and private financial involvement • More recently, often involve private developments with public participation to help economics/provide incentives (e.g. hotels, mixed use developments, etc.) • The newest wave … privatizations of publicly owned infrastructure (e.g. toll roads, parking garages, utilities, etc.) • Typical Elements of Development Driven Public-Private Partnerships • Debt issued by public entity for all or portions of related public infrastructure • Generally excise tax bonds, ID’s and CFD’s • Rebate of various transaction taxes such as sales, hotel or occupancy taxes • Usually a percentage of taxes generated • Usually for a set period, a maximum amount or both Page 11

13. Public-Private Partnerships (PPP or P3’s) • Typical Elements of Development Driven Public-Private Partnerships • Often constructed on land owned by public entity • Often look to use property tax abatement • May involve lease of portion of development by government entity • Provides both cash flow and credit benefit • Examples of Recent Privatizations • Chicago Skyway – 99-year lease by City of Chicago for 9-mile stretch of bridge and toll road generating an up-front payment of $1.8 billion to municipality • Indiana East-West Toll Road – 75-year agreement with $3.85 billion in upfront payment to State of Indiana • Chicago Parking Facilities – 99-year lease of four underground parking garages in downtown Chicago Page 12

14. Debt Versus Pay As You Go • A balancing act • No interest cost on pay as you go • But … also need to weigh: • Opportunity cost of use of current monies • Construction cost inflation • Value of accelerating projects and service delivery • Spreading the burden of long-term assets • Financial analysis/political philosophy is great • But in most case comes down to availability of current cash Page 13

15. Factors in Selecting the Right Debt Vehicle • Debt Capacity • What are the available capacities by debt type • Impact on credit • Leveraging balance • Cash Flow Considerations • Revenue sources available to pay debt service • Existing revenues versus new revenues • Voter Authorization • Willingness to seek authorization (or already in place) • Voter acceptance of project Page 14

16. Factors in Selecting the Right Debt Vehicle • Timing Needs • How quickly is the money needed? • How quickly can debt issue be completed? • Are bridge monies available? • Year end/expenditure limitation issues • Project Type • Revenue generating/enterprise related? • City-wide benefit or local? • Borrowing Cost • Interest rate considerations • Costs of issuance Page 15

17. Sealed Bid Versus Negotiated Bid • Two approaches to sales issuance from issuer standpoint • Sealed bid to purchase bonds • Negotiated bid to purchase bonds • Sealed Bid • Pick a date • Receive bids within set parameters • Best price among bids received • Negotiated Bid • Pick a firm or firms to underwrite purchase • Set initial market pricing • Actively determine a market level or market clearing price Page 16

18. Sealed Bid Versus Negotiated Bid • Reasons to Consider a Negotiated Bid • Particularly large or small transaction • Unusual or “story” credit • Infrequent or new issuer • Weak credit • More volatile interest rate market or rising market conditions • Targeting or broadening investor base • Ability to select underwriting team • Complete flexibility in timing • Reasons to Consider a Sealed Bid • State law requirement • May get “steal” in falling rate environment • For large issuers, may occasionally use a technique to judge underwriters Page 17

19. Sealed Bid Versus Negotiated Bid • The Market • Far more negotiated bids than sealed bids • Nationally • And in Arizona • Trend has been moving more in the direction of negotiated bids Page 18

20. Case Study – Bullhead City Wastewater System • Problem • Need to fund construction of City-wide wastewater system to replace individual septic system tanks to address DEQ consent decree • Issues • Significant capital funding need • Limited funding sources • No property tax • No significant wastewater enterprise revenues • Growing, but limited, sales tax revenues • No significant cash available for capital projects Page 19

21. Case Study – Bullhead City Wastewater System • Issues • Limited debt issuance opportunities • No interest in General Obligation Bonds • No property tax • Difficult voter authorization issues • No pledged revenues available for Wastewater Revenue Bonds • Limited excise tax bond capacity and competing needs for capacity • Financing Solution • Multi-phased/multi-pronged solution • Improvement District financings for main and collector system lines • 3 separate financings over multiple years for 3 areas of the City • Consistency among Districts in assessment methodology and amounts • Significant public outreach effort • Non-rated debt; difficult for public sale Page 20

22. Case Study – Bullhead City Wastewater System • Financing Solution (con’t.) • WIFA as ID Bond purchaser • Significantly lowered interest cost due to subsidy • Knowledgeable “private placement” purchaser of ID debt • Contribution of City HURF funds • For street improvements associated with installing sewer lines • City Excise Tax Revenue Bonds for wastewater plant improvements • Broader City contribution toward backbone wastewater system serving whole community • Limited use permitted retaining bonding capacity for other City capital needs • CDBG Grant monies • For on-lot improvements (removal of septic tanks on privately owned property) Page 21

23. Case Study – Pima County Spring Training Stadium Facility • Problem • Need to fund construction of Cactus League Spring Training Facility for Arizona Diamondbacks and Chicago White Sox • Issues • Significant capital funding need • Limited funding sources • No significant cash available for project • Anticipated negative cash flow from operations • No general sales tax Page 22

24. Case Study – Pima County Spring Training Stadium Facility • Issues • Limited debt issuance opportunities • No interest in General Obligation Bonds • No time for election/public vote • Difficult voter authorization issues • Limited alternative financing structures • Certificates of Participation, subject to annual appropriation, only viable approach • But poor project collateral • Financing Solution • Sale/lease-back of existing County facility • Need for essential project as collateral • County jail as selected facility Page 23

25. Case Study – Pima County Spring Training Stadium Facility • Financing Solution (con’t) • Public auction (sale) of County’s jail asset • Subject to lease-back under parameters established by County • Trustee submits bid on behalf of financing team • Title to property transfers back to County at end of financing term • Lease-back of facility by County securitized through issuance of Certificates of Participation • Subject to annual appropriation • Jail facility as collateral • Proceeds of Certificates of Participation paid by Trustee to County • Used by County to construct Cactus League facility Page 24

26. Contact Information • For questions or follow-up on these materials or to address any of your financing needs, please contact any of our Arizona-based specialists listed below: • Kurt Freund, Western Region Manager (602) 381-5365 • Shawn Dralle, Arizona Manager (602) 381-5362 • John Snider, Managing Director (602) 381-5361 • John Moore, Managing Director (520) 571-0626 • William Wildman, Managing Director (602) 381-5364 • Bruce Kelley, Managing Director (602) 381-5366 • Jeffrey Wagner, Managing Director (602) 381-5369 • Timothy Nelson, Director (602) 381-5342 • Nicholas Dodd, Vice President (602) 381-5360 • Jay Spector, Vice President (602) 381-5379 • Phong Pham, Associate Vice President (602) 381-5370 • Megan Wienand, Associate Vice President (602) 381-5367 • Rene Moreno, Associate Vice President (602) 381-5376 • Kathy Salcido, Associate Vice President (602) 381-5371 • Michael Vásquez, Analyst (602) 381-5373 Page 25