GFOAz May 11, 2007 The ABC’s of Municipal Financing

GFOAz

May 11, 2007

The ABC’s of Municipal Financing

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The ABCs of Municipal Financing in Arizona

• Overview of Capital Project Needs

• Sources of Revenue

• Debt vs. Pay-As-You-Go

• Types of Debt

• Case Studies

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Public Infrastructure Needs for City of Phoenix

New Streets and ImprovementsFire and Police (Public Safety)Parks and Open SpacesWater, Sewer, Flood, Solid Waste Neighborhoods and HousingLibrariesEducation and Cultural FacilitiesAirport Improvements

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Revenue Sources to Pay for Infrastructure

Secondary Property TaxesLocal Sales (Excise) TaxesSpecial Designated Sales Taxes (Transit)State Shared RevenuesWater, Sewer, Solid Waste FeesAirport Fees and ChargesImpact or Development FeesOther User Charges

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Historical Secondary AVCity of Phoenix

0

2

4

6

8

10

12

14

1981 1985 1989 1993 1997 2001 2005

Fiscal Year

$ Billions

Based on Full Cash Value from County Assessors Office

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Historical Water Development Occupational FeesCity of Phoenix

0

2

4

6

8

10

12

1989 1992 1995 1998 2001 2004

Fiscal Year

$ Millions

Fees constant throughout period at $600 per equivalent 5/8 inch meter.

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How Can Revenue Sources be used to Fund

Infrastructure Needs?

Pay-As-You-Go (Cash)?

Debt Finance (Short or Long Term Borrowing)?

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• Capital needs can be met through current revenues and the annual budget process

• Revenue sources uncertain from year to year for debt service payments

• Issuing additional debt will jeopardize current credit rating

Reasons to Use Pay-As-You-Go or Cash for Capital Project

Funding

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Reasons to Use Pay-As-You-Go or Cash for Capital Project

Funding(continued)

• Municipal market is not favorable (high interest rates) or projects difficult to market

• Projects can be phased or deferred while revenues are collected

• The assets being funded have short lives

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• No interest costs

• No issuance costs

• No restrictive debt covenants

• No over-issuance of debt

• Projects not pursued until funds available

Advantages of Pay-As-You-Go Funding

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• Capital facilities are needed today (regulatory or growth pressures) and current revenues are insufficient

• Reliable future revenues are available to service the debt

• Issuance of debt will not jeopardize credit rating

Reasons to Consider Debt Financing

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• Favorable municipal bond market

• Assets financed are longer lived

• Assets needed for growth are paid by current and future residents (intergenerational equity)

Reasons to Consider Debt Financing

(continued)

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TYPES OF DEBT

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CASE STUDIES CITY OF PHOENIX

Public Process for G.O. Bond Program

Public-Private-Partnership for Downtown Development (CITYSCAPE)

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City of PhoenixGeneral Obligation Bond Program

Primary mechanism used historically to fund non-enterprise fund capital needs

Debt secured by secondary property taxes of City

Require voter approval

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History of Voter Approved G.O. Bond Programs

City of Phoenix

0

200

400

600

800

1000

1200

1981 1984 1988 2001 2006

Year

$ Millions

$436$525.7

$1057.4

$753.9$878.5

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Programs Funded by 2006 G.O. Bond Program

($ Millions)

Police, Fire, Homeland Security $ 177.0 20.2%

Education Facilities 198.7 22.6%

Library, Youth, Senior and Cultural Facilities

133.8 15.2%

Parks, Open Space & Recreational Facilities

120.5 13.7%

Streets, Storm Sewers, and Flood Protection

147.4 16.8%

Affordable Housing and Neighborhood Revitalization

85.0 9.7%

Computer Technology 16.1 1.8%

TOTAL $ 878.5 100.0%

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Public Review Process forGeneral Obligation Bond Program

City of Phoenix Departments develop requested capital projects

($3.2 billion in requests)

Operations and maintenance costs for projects developed

Citizen Bond Committee and subcommittees appointed (700 citizens, 17 subcommittees)

Fiscal Capacity Subcommittee reviews Assessed Valuation forecast and debt capacity analysis

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Subcommittees hold public hearings

Subcommittees recommend projects to Executive Committee

Executive Committee develops recommendation within fiscal capacity

Council approves Bond Program

Citywide vote on Bond Program

Public Review Process forGeneral Obligation Bond Program

City of Phoenix

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Financing Downtown Public/Private Partnership Project

(CITYSCAPE)

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CityScape Project Location

N

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Project to develop 3 blocks between in core of Downtown between Jefferson and Washington 1st Street and 2nd Ave.

Lead by Red Development in partnership with Baron Collier

Planned 2.5 million sq. ft. of four mixed use residential and commercial towers, including 150 room hotel and 220,000 sq. ft of retail space in core of downtown

Total project cost approximately $900 million

Cityscape Project

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Non-general fund City Excise Tax capacity leveraged for Convention Center Expansion and for backing of new Downtown Hotel

No reserves or pay-as-you-go funding available due to other City commitments

Speculative nature of the project and large financing required by the Developer (more than $800 million)

Uncertainty of revenue and sales tax generation from the project

Challenges of City Participation

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City purchases parking facilities upon completion of the following minimum improvements. 220,000 sq. ft of retail 500,000 sq. ft of commercial 500 unit residential tower and 150 room hotel

2,500 below ground parking spaces

Upgrades and repairs to Patriots Park Garage

Developer guarantees projected level of City sales tax revenues from project for first five years through a letter of credit (LOC) from a bank approved by the City. LOC burns off each year as sale tax targets are met.

City provides Government Property Lease Excise Tax (GPLET) to the Project.

City ParticipationTERMS OF DEVELOPMENT AGREEMENT

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City ParticipationTERMS OF DEVELOPMENT AGREEMENT

Developer prepays Phase II construction sales taxes that will be refunded in the event Phase II is constructed within five years.

City purchases parking facilities through the sale of $70 million in excise tax bonds and allots $2.5 million of Street G.O. Bonds and $4.0 million in 2006 G.O. Bonds approved for Patriots Garage rehabilitation.

City sells Jefferson Street garage near U.S. Airways Center to provide for $20 million to purchase additional underground parking from the Project.

Developer operates the garage and makes lease payments to the City.

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Questions?