Municipal Infrastructure Planning, Financing Alternatives and Bond Programs Under American Recovery

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2009 League of Arizona Cities and Towns Annual
Conference
Municipal Infrastructure Planning, Financing
Alternatives and Bond Programs Under American
Recovery and Reinvestment Act of 2009
Wednesday, September 2, 2009, 200 p.m. 315
p.m. Oro Valley, Arizona
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Overview of Presentation
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City/Town/County Bond Financing Alternatives and
Market Update
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Arizona City Town, CIP Financing Alternatives
Summary
(a) Election Permitted to be held on the First
Tuesday after the First Monday in November of
each year. (b) Election Permitted in March,
May, September and November. (c) Election not
required if population is less than 50,000.
Excise Taxes and Development Fees required by
WIFA Under Certain Circumstances. (d) Election
not required if population is less than 50,000.
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Arizona City Town, CIP Financing Alternatives
Summary
(a) Election Permitted to be held on the First
Tuesday after the First Monday in November of
each year. (b) Election Permitted in March,
May, September and November. (c) Election not
required if population is less than 50,000.
Excise Taxes and Development Fees required by
WIFA Under Certain Circumstances. (d) Election
not required if population is less than 50,000.
(e) Amortization Limited to Average Useful Life
of Assets Being Financed.
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Arizona Counties, CIP Financing Alternatives
Summary
(a) Includes Sanitary Districts, Domestic Water
Improvement Districts and other similar
Districts. (b) County Highway Acceleration
Financing Option Also Available. (c) Election
not required if population is less than 50,000.
(d) Election not required if population is lass
than 200,000
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ARRA 2009 Bond Programs
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Overview of ARRA Bond Provisions

• American Recovery and Reinvestment Act of 2009
  (ARRA)
• Enacted in February 2009
• Some regulations have been released, and others
  are in progress
• Bond Provisions
• General infrastructure
• Energy-related
• School-related
• Tax law changes
• Affects criteria for determining Alternative
  Minimum Tax (AMT) and Bank Qualified (BQ) status

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Taxable Bond Market Overview

• Investors
• 27 Trillion Market vs. 3 Trillion municipal
  market (outstanding securities)
• Bond funds, insurance companies, pension funds,
  foreign investors, corporations, individuals
• Broader audience than typical buyers of
  tax-exempt municipal bonds
• May not be familiar with municipal bond credits
• 27.7 billion issued (February 09 Present)
• 12 of total market issuance this year
• Investor preferences
• Liquidity
• Quality credits
• Size Varies

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• Tax credits may be stripped from the bonds and
  assigned to a separate owner. Tax credit bonds
  (except BABs) have a maximum maturity length
  (published daily on the Bureau of Public Debt
  website at https//www.treasurydirect.gov/govt/rat
  es/irs/rates_qtcb.htm). The maturity length has
  ranged from 14 to 16 years in recent years.
• Does not include additional Tax Credit Bond
  programs available to School Districts (Qualified
  Zone Academy Bonds and Qualified School
  Construction Bonds)

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Build America Bonds

• What Are Build America Bonds (BABs)?
• Taxable bonds with a federal subsidy of 35 of
  the interest cost
• Issuer can chose between two types
• Direct Payment issuer receives cash payment
  over life of bonds
• Tax Credit investor received tax credit over
  life of bonds
• No volume limit or allocation required
• Program expires at end of 2010
• What can be funded?
• Tax-exempt eligible capital projects,
  governmental purposes
• No private activity affordable housing, student
  loans, IDBs, 501(c)3 projects, private use

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Two Types of Build America Bonds

• Direct Payment BABs
• Limit of 2 for costs of issuance
• New money only, no refundings
• Arbitrage calculations based upon net payment by
  issuer
• Tax Credit BABs
• Tax credits can be stripped and sold separately
• Typical tax-exempt rules for capitalized interest
  and issuance costs
• Arbitrage calculations do not count tax credit
  benefits
• Refundings and reimbursement of capital
  expenditures made before February 17, 2009 are
  eligible
• Less efficient than Direct Payment BABs

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BABs Structuring Considerations

• Repayment Security
• Like all bonds, these require a repayment source
• Might include general obligation, tax increment,
  general fund, enterprise, or special tax revenue
  debt
• Application of federal subsidy
• Ongoing cash-flow for debt service or other
  purposes
• Inclusion in Additional Bonds Test will depend on
  documents
• Other issues
• Transfers risk of changes in U.S. Treasury rules
  over the life of the bonds from investor to
  issuer
• Documents or governing board resolutions
  requiring bonds to be issued only as tax-exempt
  may need to be amended

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Do BABs Make Economic Sense?

• Depends on market conditions at time of sale and
  each unique credit
• Key will be to make decision as close to bond
  sale as possible

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City of Mesa, AZ

• Revenue Bond Sale Summary
• 59,900,000
• Utility Systems Revenue Bonds, Series 2009

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29,800,000 City of Avondale, Arizona, General
Obligation Bonds, Series 2009 25-Year
Amortization, A (SP) A2 (Moody's) July 6,
2009 Competitive Bid Sale Results (a)
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Recovery Zones

• What is a Recovery Zone (RZ)?
• Area with significant poverty, unemployment,
  foreclosure activity or general distress
• Designated by the issuer no blight finding
  necessary
• An area economically distressed due to the
  closing of a military base
• An empowerment zone or renewal community area

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Issuing Recovery Zone Bonds

• Volume Cap on Total Issuance
• Recovery Zone Economic Development Bonds 10
  billion
• Recovery Zone Facility Bonds 15 billion
• Allocation Process
• Through states based on employment declines in
  2008
• To large cities gt100,000 population and counties
  based on relative employment declines within
  state
• Timeline
• Allocations and preliminary regulations expected
  in late April
• Program set to expire at end of 2010

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Arizona Recovery Zone Bond Allocations(1)
(1) Allocations made on June 12, 2009
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RZ Economic Development Bonds

• What are they?
• Taxable bonds with a federal cash subsidy of 45
  of the interest cost, payable to the issuer over
  the life of the bonds
• Similar to BABs but requires a local allocation
• Bond-funded projects subject to federal
  Davis-Bacon wages
• What can be funded?
• Tax-exempt eligible capital projects in a
  recovery zone
• Public infrastructure that benefits a recovery
  zone
• Job training and educational programs (including
  non-capital expenditures)
• Not permitted
• Refundings of outstanding debt
• Private activity uses

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Recovery Zone Facility Bonds

• What are they?
• Tax-exempt bonds to support qualified private
  activity
• Broad usage but requires a local allocation
• What can be funded?
• Depreciable property in a recovery zone
• Project must be constructed, renovated or
  acquired after the area has been designated as a
  recovery zone
• Not permitted
• Land
• Rental residential property
• Sin businesses golf course, massage parlor,
  liquor store, racetrack, suntan parlor, gambling
  facility, etc.

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Potential RZFB Projects
Images courtesy of Google images
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Private Projects Not Eligible
Images courtesy of Google images
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Improvement District Case Study An Economic
Development Perspective
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Improvement Districts

• History of Success
• ASU Research Park, Arizona Mills Mall, Papago
  Park Center
• Elliot Road Corridor, Scottsdale Road, Ellsworth
  Loop Road,
• Aspen Place.
• Public/Private Partnership
• Single Property Owner
• Coordinated Group of Property Owners
• Individual Property Owners
• How they Benefit?
• Large/Continuous Areas of Improvement vs
  Scalloped Improvements
• Infrastructure in place to support new
  development
• (Water, Sewer, Streets, Drainage, Etc.)
• Construction Costs Savings
• Low Interest Rate Financing

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IMPROVEMENT DISTRICTS
Town of Queen Creek, Arizona Opportunity for
Economic Development
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Town of Queen Creek, Arizona
Initial Project Funding
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Queen Creek 2006
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Queen Creek 2008
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Ellsworth Loop Road North of Ocotillo Road
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Ellsworth Loop Road Looking South
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Wal-Mart Target Centers
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IMPROVEMENT DISTRICTS
City of Flagstaff, Arizona Opportunity for
Economic Development
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Aspen Place at the Sawmill

• ID Infrastructure provided opportunity for new
  development

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IMPROVEMENT DISTRICTS
Town of Chino Valley, Arizona Opportunity for
Economic Development
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Chino Valley Water Sewer Improvement Districts

• Possible IDs to
• provide facilities
• adjacent to SR 89
• to encourage infill
• development

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District No. 1

• Sanitary Sewer Facilities
• Water Facilities

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District No. 2

• Sanitary Sewer Facilities

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District No. 3

• Sanitary Sewer Facilities

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TOWN OF MARANA, AZTangerine Farms Road ID
Project Summary Proceeds from the sale of the
Bonds will be used for the construction and
installation of a divided roadway, sidewalks,
medians, street lighting, pedestrian underpass
and traffic signal. These improvements will
establish approximately 3.8 miles of Tangerine
Road and Tangerine Farms Road as a four-lane
divided roadway from its intersection with
Interstate 10 into the Town.

• Location Marana, Arizona is located one mile
  north of Tucson, Arizona. The District comprises
  approximately 1,500 contiguous acres just east of
  I-10 and north of the Santa Cruz River.
• Bonds 25,774,000 of Improvement Bonds which are
  payable from assessments on the 242 different
  parcels in the District. The bonds have a
  special redemption feature that allows them to be
  called at any interest payment date if an
  assessment is prepaid by the owner of the parcel.
• SY Role Underwriter Worked closely with Town
  Staff, project consultants, assisted with Rating
  Agency presentations and prepared detailed
  materials for determination of the assessment
  prepayment structure. Although a land secured
  transaction such as this would normally carry no
  rating, Stone Youngberg initiated talks with
  the rating agencies and assisted the Town in
  pursuing a rating. After traveling to San
  Francisco with key Town staff members to meet the
  rating agencies and share a presentation
  highlighting the major attributes of the deal,
  the issue ultimately carried investment grade
  ratings of Baa1 (Moody's) and BBB (Fitch). This
  enabled our talented underwriting staff to get
  the Town the lowest interest rates possible.

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Tax Increment Revenue Concepts
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Tax Increment Revenue Concepts
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Tax Increment Revenue Concepts
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Tax Increment Revenue Concepts
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Tax Increment Revenue Concepts
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Tax Increment Revenue Concepts
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Arizonas Government Property Lease Excise Tax
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Arizonas Government Property Lease Excise Tax

• Summary of Tax
• In Arizona, property owned by a government in
  Arizona is constitutionally exempt from
  traditional ad valorem property taxes. However,
  if a city, town, county, or county stadium
  district leases a building it owns located on
  land owned by a political subdivision (a
  government property improvement), to be used
  for any commercial, residential rental or
  industrial purpose, including but not limited to,
  office, retail, restaurant, service business,
  hotel, entertainment, recreational, or parking
  use, the lessee (prime lessee) is subject the
  commercial governmental property lease excise tax
  (GPLET).
• The GPLET is based on the size of the facility,
  its age and its location, not its value. The
  following table delineates the tax rates for
  various uses

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Arizonas Government Property Lease Excise Tax

• The amount of tax computed using the preceding
  table may be reduced depending on the age of the
  facility (determined by the time since the
  original certificate of occupancy was issued) as
  delineated in the following table

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Arizonas Government Property Lease Excise Tax

• Additionally, the amount of tax computed using
  the two preceding tables may be further altered
  depending on the location of the facility as
  delineated in the following table

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Arizonas Government Property Lease Excise Tax

• General Applicability
• The annual amount of the GPLET is substantially
  lower than the traditional ad valorem property
  taxes that would be on such properties.
  Consequently, the prime lessees of these
  government property improvements experience a
  substantial, annual tax savings, even with the
  GPLET amounts.
• These potential tax savings often encourage
  private operators to undertake ventures they
  might not otherwise consider without the local
  governments ownership / lessor role. There are
  a variety of lease structures through which the
  tax savings are realized by the private
  operators.
• It is also important to note that some of the
  reductions in the GPLET described above can occur
  sequentially. For example, a facility in a
  single central business district in a slum or
  blighted area is initially exempt from the tax
  for eight years AND is also subject to the step
  down in rates in later years based on the age of
  the facility.

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Arizonas Government Property Lease Excise Tax

• Disposition of Revenues
• The GPLET tax monies collected are distributed to
  various local government on a percentage basis al
  delineated in the following table
• If the property is not in a city (town) or
  community college district or school district,
  the share is proportionately distributed to the
  other local governments.

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Planning Public Infrastructure Improvements
Importance of a Master Plan
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Municipal Infrastructure Planning

• Overall Master Plans
• Community-wide
• Based on estimated land uses General Plan /
  Specific Plans
• Adopted by Council enforceable
• Provides for orderly and efficient development
• Water, wastewater, transportation, drainage/flood
  control
• Also work with power and telecommunications
  companies
• Other Parks/trails, open space, communications
• Target Developing Areas
• Identify areas where development is likely
• Commercial and Industrial users
• Developer vs. Community Driven
• Appetite for Growth
• Development plans conform to Community master
  plans
• Understanding market conditions
• Regional master plans

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Municipal Infrastructure Planning

• Types of Funding Programs
• Improvement Districts (ID)
• Community Facilities Districts (CFD)
• Government Property Lease Excise Tax (GPLET)
• ARS 42-6201 et. seq.
• Government Lessor shall levy and collect an
  annual excise tax for the use of a government
  property improvement. (Tax rate varies per use)
• Ability to abate when part of a Single Central
  Business District (ARS 42-6209)
• GPLET Case Study City of Litchfield Park
• City-owned property for a City Hall expansion
• City
• Created a Single Central Business District
• Adopted a resolution of Slum Area (ARS 36-1471
  et. seq.)
• Adopted a Redevelopment Plan
• Includes additional City-owned property for an
  office/retail building
• City issues an RFQ for a qualified developer
• Developer chosen to design/build the City Hall
  addition and new office/retail

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Municipal Infrastructure Planning

• Negotiate Development Agreement that includes
  abatement of GPLET for a period of 8 years
• (Additional Successful GPLET Project City of
  Goodyear Cancer Treatment Centers of America)
• Extension of Existing Infrastructure
• Most efficient, if planning has been done
• Satellite Infrastructure
• May be necessary in large service areas
• More expensive
• Consider interim facilities
• Not impact fee reimbursable
• Initial revenue shortfall
• Decommissioning
• Cost of ultimate infrastructure Phasing of
  Infrastructure

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Municipal Infrastructure Planning

• Phasing of Infrastructure
• Ideally, size for ultimate service area
• Phasing of sewers to serve large areas may be
  necessary
• Wells, tanks and booster stations can be
  reasonably phased
• Water and wastewater treatment facilities should
  be phased
• Avoid small or dissimilar size phases
• Role of Engineer
• Retain consultant with relevant experience in
  master planning
• Water resources vs. transportation vs.
  drainage/flood control
• Manages master planning process
• Capital Improvement Program
• Process for identifying critical infrastructure
• Prioritization and scheduling
• Cost of construction
• O, M and R budget

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• Questions?