Public Works Academy Municipal Financing

1. Public Works AcademyMunicipal Financing Claire J. Hauge, OFM Director, Cowlitz County Clark Community College November 28, 2012

2. Municipal Financing So…You Need Money to Complete Your Project? Your project is designed & approved….. How will you finance it? This presentation discusses financing options - not the process of financing.

3. Municipal Financing Create A Finance Team Municipal financing is a complex mixture of state and federal law, and tax regulations. Documentation & paperwork is extensive. Finance Team: • Bond Counsel • Underwriter • Financial Advisor • Insurer • Trustee • Registrar

4. Municipal Financing Another option: LOCALProgram (Local Option Capital Asset Lending) www.tre.wa.gov/LOCAL • Offered by WA State Treasurer’s Office • Any municipal agency that can issue GO debt • Pooling projects into a single larger public offering • Reduces funding costs • Agencies get Program rating – Moody’s Aa2 • Simple • Restrictions apply – items financed, timing of sales, minimum borrowings

5. Municipal Financing Know Your Debt Limit Debt limit: the maximum amount of debt a taxing district may authorize for qualified purposes under state law. • Washington State Constitution Article VIII “State, County & Municipal Indebtedness” • RCW 39.36: Limitationof indebtednessprescribed • Statutes specific to your district • But know that financing(borrowing)doesnotcreatenewrevenue Your ability to borrow ≠ ability to pay.

6. Municipal Financing Know Your Debt Limit Most special purpose districts, but not all, have the authority to issue general obligation debt. Districts’ (except hospital) limit is equal to 3/8% of AV for non-voted debt and 1¼% of AV for voted debt. Any non-voted debt issued is included as part of the overall 1¼% limit. Hospital districts’ limit equal to 3/4% of assessed valuation for non-voted debt and 2½% for voted debt (RCW 39.36.020).

7. Municipal Financing Know Your Debt Limits • A ballot measure to issue voted debt must be approved by 60% of the voters, with a turnout of at least 40% voting in the last general election. • Property tax levied to pay debt service for voted debt is called an “excess levy” and is notsubject to: • the regular levy$5.90 limitation or • the one percent limit (RCW 84.52.056).

8. Municipal Financing Financing Options or Alphabet Soup? • LTGO - Limited Tax General Obligation Bonds • UTGO - Unlimited Tax General Obligation Bonds • Revenue Bonds • LID & ULID & RID - Assessment Bonds • Refunding Issues • Private Activity Bonds • BABs – RZEDBs – RZFBs – QECBs !! • Bank Loans & Lines of Credit, Interfund Loans, Grants & Government Loans • Lease-Purchase Agreements

9. Municipal Financing Financing Options • LTGO- Limited Tax General Obligation Bonds: • Debt authorized by district: resolution/ ordinance • Repaid with existing revenues • Long term, but less than the life of the asset financed • UTGO- Unlimited Tax General Obligation Bonds: • Debt authorized by voters in the district • Repaid with property taxes • Long term, but less than the life of the asset financed • Refunding Debt: • One bond issue redeemed and replaced by a new bond issue under conditions more favorable to the issuer.

10. Municipal Financing Financing Options Revenue Bonds: • Debt authorized by the district by resolution or ordinance • Repaid with pledge of revenues (income) from the asset financed • e.g. water system, conference center, landfill • Long term financing but not more than the life of the asset financed • Interest rates generally higher than L.T.G.O or U.T.G.O.

11. Municipal Financing Financing Options Revenue Bonds: • Debt Service Coverage Pledged • Net revenues are maintained in excess of debt service requirements to guard against shortfall in pledged revenues • Debt Service Reserve Fund Required • In the form of cash or a surety (insurance) policy • A percentage of the par amount • A percentage of the average annual debt service • An amount equal to the annual debt service

12. Municipal Financing And Still More Financing Options Explore special opportunities:(e.g. funds for specific projects, or special legislation like the American Recovery & Reinvestment Act). • Tax Exempt Private Activity Bonds • Small Issue Intangible Property Bonds • Build America Bonds • Recovery Zone Economic Development Bonds • Recovery Zone Facility Bonds • Qualified Energy Conservation Bonds www.commerce.wa.gov/bondcap

13. Municipal Financing Financing Options Assessment Bonds: • LID: Local Improvement Districts • ULID: Utility Local Improvement Districts • RID: Road Improvement Districts • Requires special assessment districts comprising the properties benefitting from the improvements • To develop and enhance specific infrastructure: • LID: e.g. water, sewer, storm sewer • RID: e.g. construction, installation, improvement, operation, and maintenance of street and road lighting systems for any county roads

14. Municipal Financing Financing Options Special Assessment Districts: • Formed when improvements will benefit primarily the property owners in the district • Created by a municipal government • Approved by both the local government and benefitted property owners • Assessments are levied against property in a specifically benefitted area Look-A-Likes: Late Comer Agreements (streets, transportation, utilities) Parking & Business Improvement Districts See MRSC Report No. 59 Revised; October 2009 “Local & Road Improvement Districts Manual”

15. Municipal Financing Financing Options • Bank Loans & Lines of Credit: • Terms negotiated directly with a local bank • Interfund Loans: • Internal loans between/among funds • 3 year repayment plan • State Auditor considers longer terms to be “permanent diversions” • Interest must provide reasonable return

16. Municipal Financing Financing Options • Lease-Purchase: • Authority to enter into leases must be expressly given in statute • Can be more costly than other types of financing • Typically used to finance: • Land, Buildings & Facilities • Equipment -Technology such as computers & telephone equipment

17. Municipal Financing Financing Options Government Grants & Loans • USDA pgms: http://www.rurdev.usad.gov/wa/ • Loans & grants • Public Works Trust Fund: www.pwb.wa.gov • Low interest loans (0.5% - 2% for 20 years) • Cities, Towns, Counties, Special Purpose Districts • Water, sewer, storm water, solid waste, bridges, roads, streets, energy efficiency projects • Intergovernmental (Gov’t-to-Gov’t) Loans • Interlocal Cooperation Act (RCW 39.34) • financing “joint & cooperative enterprises”

18. Bond Ratings Overview Bond Ratings – Why You Should Care Bond rating • Opinion provided by a Rating Agency • Assessment of a district’s credit quality. • Ability to meet future legal obligations and willingness of the municipality (bond issuer) to make timely debt service payments. • A rating helps prospective investors determine the level of risk associated with a given investment.

19. Bond Ratings Overview Bond Ratings – Why You Should Care Bond rating • A rating is not: • A recommendation to buy or sell • Guarantee of future performance • Endorsement of a public project or a public agency

20. 20 Bond Ratings Overview Moody’s Local Gov’t General Obligation Debt Methodology • What is a credit rating? • Measurement of the risk to a debt holder of not receiving timely payment of principal and interest on a debt security. • Four main categories • Categories assigned weighted averages, shown in chart. • Specific ratings: peer comparison, interactions of the individual factors and additional considerations. Source: Rating Methodology (October 2009) Moody’s U.S. Public Finance – General Obligation Bonds Issues by U.S. Local Governments

21. 21 Bond Ratings Overview Factor 1: Economic Strength (40%) • Economic Strength Subfactors: • Size and growth trend • Tax base size • Historic growth trend • Future growth potential • Type of economy • Industry concentration, taxpayer concentration • Stability • Socioeconomic and demographic profile • Population trend • Income, Poverty level • Full value per capita • Workforce profile • Unemployment rate Source: Rating Methodology (October 2009) Moody’s U.S. Public Finance – General Obligation Bonds Issues by U.S. Local Governments

22. 22 Bond Ratings Overview Factor 2: Financial Strength (20%) • Financial Strength Subfactors: • Balance sheet/liquidity • General fund balance as a % of General Fund revenues • Liquidity trend • Operating flexibility • Revenue raising flexibility • Local control over expenditures • Budgetary performance • Trend of structurally balanced operations • Exposure to volatile revenue streams • Property tax collection rates • Exposure to state aid reductions • Exposure to Federal expenditure cutbacks Source: Rating Methodology (October 2009) Moody’s U.S. Public Finance – General Obligation Bonds Issues by U.S. Local Governments

23. 23 Bond Ratings Overview Factor 3:Management&Governance(20%) • Management and Governance Subfactors: • Financial planning and budgeting • Trend of budget-to-capital performance • Existence of and adherence to policies and procedures • Multi-year budgeting practices • Debt management and capital planning • Multi-year capital planning practices • Management of risk related to variable rate debt and derivatives • Existence of and adherence to debt policies • Economic forecasting and monitoring • Monitoring of economic performance • Governance structure • Constructive relationship with elected officials • Disclosure • Timely disclosure of key documents Source: Rating Methodology (October 2009) Moody’s U.S. Public Finance – General Obligation Bonds Issues by U.S. Local Governments

24. 24 Bond Ratings Overview Factor 4: Debt Profile (10%) • Debt Profile Subfactors: • Debt burden • Net direct debt as % of full value • Overall net debt as % of full value • Debt structure and composition • Amortization rate (10 years) • Liquidity and budgetary risk related to variable rate debt or derivatives • Debt management and financial impact/flexibility • Debt service as % of total operating expenditures • Other long-term commitments and liabilities • Pension funding ratio • Other post-employment benefits (OPEBs) Source: Rating Methodology (October 2009) Moody’s U.S. Public Finance – General Obligation Bonds Issues by U.S. Local Governments

25. Bond Ratings Overview Bond Ratings – Why You Should Care Top Ten Red Flags(Helen Cregger, Moody’s Investors Service 6/2002) • Deficit ending fund balances • Declining financial margins and decreased liquidity • Trend of operating losses; fund balance draw downs • Declines or large swings in collection of economically sensitive taxes • Rising mandated or fixed costs as a % of budget

26. Bond Ratings Overview Bond Ratings – Why You Should Care Top Ten Red Flags (cont’d) • Sharply increased debt obligations • Decreasing capital project outlay • Sales of assets for operating revenues • Increasing reliance on operating transfers • Pension deferrals or assumption charges

27. 27 Bond Rating Scales

28. 28 Bond Ratings Scales

29. Bond Rating Overview Rating Agencies Regulated by the SEC - Nationally Recognized Statistical Rating Organizations (NRSRO) • A.M. Best Company • Dun & Bradstreet • Egan-Jones Rating Company • Fitch Ratings • Japan Credit Rating Agency • LACE Financial Corp. • Moody’s Investors Service • Rating and Investment Information • Realpoint • Standard & Poor’s Ratings Services

30. Municipal Financing:After the Sale Duties don’t end after financing is secured Post-Issuance Compliance: • Spend-down Requirements • Limitations on the Use of Proceeds • Reporting Requirements • Investment / Yield Restrictions • Arbitrage Compliance • Records Retention • Policies & Procedures • Audits

31. Municipal Financing:After the Sale Duties don’t end after financing is secured Spend-down Requirements: • Generally, general obligation bonds are sold under “the three-year spend down rule” • A “reasonable expectation” that projects will be completed within 3 years • Check with your tax advisor & securities firm for requirements for your issue

32. Municipal Financing:After the Sale Duties don’t end after financing is secured Arbitrage Compliance: Arbitrage is the difference between the interest paid on tax-exempt bonds and the interest earned by investing the proceeds of the bonds in higher-yielding taxable securities. • Federal income tax laws generally restrict the ability to earn arbitrage in connection with tax-exempt bonds. • Regular reporting to the I.R.S. is required. • The IRS requires tax exempt issuers (with a few exceptions) to calculate arbitrage rebate liability every 5 years and at the final maturity of the debt. • If during the 5 years, a cumulative “positive” arbitrage has been earned, “positive” amount must be rebated to the IRS.

33. Municipal Financing:After the Sale Duties don’t end after financing is secured Continuing Disclosure • I.R.S. & S.E.C. rules require periodic and on-going disclosure of information related to municipal securities. • (Rule 15c2-12, Municipal Securities Disclosure of the Securities Exchange Act of 1934) • Information is provided to the marketplace from time to time by the issuer or any other entity obligated with respect to the securities (e.g. insurers). • Disclosures include, but are not necessarily limited to, annual financial information and material events. Internet web sitesec.gov/info/municipal.shtml

34. Municipal Financing:After the Sale Duties don’t end after financing is secured Material Event Disclosure These events may be considered material: • Principal and interest payment delinquencies • Non-payment related defaults • Unscheduled draws on debt service reserves reflecting financial difficulties • Unscheduled draws on credit enhancements reflecting financial difficulties • Substitution of credit or liquidity providers, or their failure to perform • Adverse tax opinions or events affecting the tax-exempt status of the security • Modifications to rights of securities holders • Bond calls • Defeasances • Release, substitution, or sale of property securing repayment of the securities • Rating changes and • Failure to provide annual financial information as required.

35. Municipal Financing “A journey of a thousand miles begins with a single step.” – Lao-tzu

36. Municipal Financing QUESTIONS ?