GFOAZ

ABC’s of Municipal Financing

May 11, 2007

Presented By:

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

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

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

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

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

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

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

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

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

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

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 bothPage 11

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

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

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

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

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

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

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

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

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

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

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

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

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

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