Burlingame Unfunded Infrastructure Funding and Tax Options

BURLINGAME CITY HALL501 PRIMROSE ROAD

BURLINGAME, CA 94010City of Burlingame

Legislation Details (With Text)

File #: Version: 114-0313 Name:

Status:Type: Action Item Agenda Ready

File created: In control:8/29/2014 City Council

On agenda: Final action:9/15/2014

Title: Confirmation of Priority Rankings for Unfunded Needs Infrastructure Projects and Discussion ofPossible Funding Options

Sponsors:

Indexes:

Code sections:

Attachments: 1. Unfunded Needs Questionnaire, 2. Council Project Scoring Sheet, 3. Financing Mechanisms -Comparison Chart

Action ByDate Action ResultVer.

To: Honorable Mayor and City CouncilDate: September 15, 2014From: Lisa K. Goldman, City Manager - (650) 558-7204

Carol Augustine, Finance Director - (650) 558-7222Syed Murtuza, Public Works Director - (650) 558-7230

Subject:Confirmation of Priority Rankings for Unfunded Needs Infrastructure Projects and Discussion ofPossible Funding Options

RECOMMENDATION

Staff recommends that the City Council:

1. Review its rankings for the unfunded needs projects;2. Confirm the priority order;3. Discuss possible funding options; and4. Discuss how many projects it wishes to pursue at this time.

BACKGROUND

On November 18, 2013, staff presented the City Council with a list of 13 unfunded infrastructure projects, witha price tag of $103 to $118 million and asked the City Council to approve the list, the staff-developedprioritization criteria, and the process for prioritizing and developing a funding plan for the projects. The listincluded the following projects, with preliminary cost estimates:

Staff included the following projects in the list approved by the City Council:

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File #: 14-0313, Version: 1

Burlingame Community Center - $35M to $40M

Downtown Streetscape (side streets) - $25M

Downtown Parking Garage - $10 to $20 M

City Hall Safety Improvements - $11.5M

Downtown Parking Lots Resurfacing - $5.00M

New Bayview Park on State Lands Parcel - $4.00M

Main Library Millennium Upgrades - $3.50M ($1.2M available in CIP)

New Parks Yard - $3.40M

Fire Stations Improvements - $2.40M

General Plan Update - $2.00M

Police Station Improvements - $1.60M

Aquatics Center Improvements - $0.25M

Carriage House Improvements - $0.15M

The General Plan Update and the Library project were subsequently removed from the list.

In the spring, staff began a significant public outreach process to gauge the community’s support for thevarious projects. Staff gave presentations about the projects to 14 different community groups, and had tablesset up at a senior showcase at the Rec Center and at the Fresh Market during the Streets Alive event. At theend of each presentation, attendees were tasked with filling out a questionnaire (Exhibit 1) that asked whetherthey thought the various projects were very critical, somewhat critical, or not critical. 96 people returned thequestionnaire. An additional 534 people filled out some or all of the online survey that staff created andpublicized via the City’s eNews and through the newsletters of other organizations, like the BurlingameChamber of Commerce.

On August 18, 2014, staff presented the City Council with the combined results from the paper questionnairesand the online survey:

Very Critical Somewhat Critical Not Critical Rank by "VeryCritical" votes

BurlingameCommunity Center

136 250 167 4

DowntownStreetscape

137 255 159 3

Downtown ParkingGarage

211 181 158 1

City Hall 48 198 302 10

Parking LotResurfacing

72 243 234 9

Bayview Park 202 156 191 2

New Parks Yard 76 201 271 7

Fire StationImprovements

103 227 216 5



Police StationImprovements

90 243 212 6

Aquatic CenterImprovements

75 144 327 8

Carriage HouseImprovements

23 124 397 11

DISCUSSION

At the August 18 meeting, the City Council discussed the results of the outreach efforts and agreed to rank theprojects using a straight 1 through 11 ranking. Each Councilmember was given a Project Scoring Sheet(Exhibit 2) and asked to return it by August 29. The following table shows the individual results, followed by theoverall ranking of each project (derived by taking the average of all the scores).

Project Brownrigg Deal Keighran Nagel Ortiz AverageRanking

BurlingameCommunity Center

5 3 2 3 1 2.8

DowntownStreetscape

11 4 3 4 7 5.8

Downtown ParkingGarage

1 1 1 1 3 1.4

City Hall 2 8 8 2 2 4.4Parking LotResurfacing

8 5 7 8 4 6.4

Bayview Park 3 2 5 5 9 4.8New Parks Yard 7 9 9 9 10 8.8Fire StationImprovements

6 10 6 7 8 7.4

Police StationImprovements

4 7 4 6 5 5.2

Aquatic CenterImprovements

9 11 10 10 6 9.2

Carriage HouseImprovements

10 6 11 11 11 9.8

As can be seen above, the highest ranked project is the downtown parking garage, followed by theBurlingame Community Center and City Hall.

Increased Operating Costs

Often times when constructing a new public facility, money needs to be found to operate it. Special attentionshould be given to the construction of new assets, as well as expanded assets, to ensure that the fundingnecessary to maintain them are considered in future operating budgets. Failure to do so could lead to costlydeferred maintenance problems, creating unfunded capital needs in the future. An example of a new project isBayview Park. The responsibility of maintaining additional park acreage will fall on the City’s Parks Division,accounting for approximately 7.5 percent of the current General Fund operating budget. An increase in the



Parks Division budget would put additional strain on the General Fund if off-setting revenues are not madeavailable. Even in the case of replacement facilities (which might require fewer repairs when new), additionalsquare footage, functionality or features might increase maintenance costs in the long term. An example ofdeferred maintenance can be seen in the City’s parking lots. Although $300,000 was included in the fiscalyear 2014-15 budget to support repaving of this important infrastructure asset, this is a maintenance effort thatwill not be effective until the lots are totally replaced at a cost of over $5 million.

Pay as You Go Funding

There are a variety of funding mechanisms available to the City to fund one or more of the projects listedabove. The City cannot at this time use the “ Pay as You Go ” concept to pay for the acquisition orconstruction of large capital projects, as current reserves are largely needed to address unexpected futureevents in a fiscally prudent manner. Pay as You Go (Cash) financing avoids the set-up charges and interestcosts inherent in a Pay as You Use (Debt) alternative, but requires the full cost of the asset to be paid at theoutset. This is seldom an option, but can be achieved by prudent saving in advance of the purchase. Usingcurrent revenues and sinking funds to save for future asset needs encourages good financial managementand planning. The City’s current operating budget provides only a very small surplus. Although expenditurereductions continue to be explored in all departments, a significant increase in General Fund revenues wouldbe needed to allow for such savings. Governments generally achieve additional revenue streams from raisingtaxes.

California cities do not have an inherent power to tax. The passage of Proposition 13 in 1978 created adistinction between “general” and “special” taxes.

A general tax is a tax imposed for general governmental purposes, the proceeds of which aredeposited into the General Fund. A majority vote of the electorate is required to impose, extend, orincrease any general tax. An election for a general tax must be consolidated with a regularly scheduledgeneral election of City Council members.

A special tax is a tax that is collected and earmarked for a specific purpose and deposited into aseparate account of the General Fund. A two-thirds vote of the electorate is required to impose, extend orincrease any special tax.

Possible tax measures include:

Local transactions and use tax increase - must be imposed at a rate of 0.125 percent or a multiplethereof.

Business License Tax increase - the City’s current collections from this general tax (generally $100 perbusiness) is slightly less than $1 million annually.

Utility User Tax - may be imposed on the consumption of any utility services. Different rates may applyto residential versus commercial users; usually a general purpose tax.

Parcel Tax - special, non-ad valorum tax. Can be a flat per-parcel rate or a rate that varies dependingupon use, size and/or number of units on each parcel.

While none of these possible tax measures would provide a sufficient amount to fund a capital project outright,the additional revenues could provide seed money for large projects, fund smaller projects, or generallyincrease the City’s debt capacity.



If the Council decides not to pursue additional revenue streams, some sort of debt financing will be needed toundertake projects that cannot be accommodated in the City’s five-year Capital Improvement Project (CIP)Plan budget. As the objectives of any debt issuance must be well thought out and fit within the goals of theCity, this report discusses the most popular types of financing techniques used for municipal facilities andother capital projects, and how each might contribute to furthering the various projects prioritized by theCouncil.

Examples of Financing Options

General Obligation (GO) Bonds may be sold by the state or any local public entity that has the legal authorityto levy ad valorem taxes on real and personal property located within its boundaries. Cities, counties, schooldistricts and some special districts may issue general obligation bonds to acquire, construct or improve realproperty. A two-thirds majority of those voting in a local election is needed to authorize general obligationbond issues for specific projects. General obligation bonds pledge a city’s General Funds and “full faith andcredit” (i.e., property taxing power) as security for payment of principal and interest to bond holders. As such,they are the most secure type of municipal security available and therefore attain the lowest interest costs ofany comparable long-term securities. Because general obligation bonds provide an ongoing revenue streamsized to accommodate the associated debt service, this financing mechanism has little impact on a localagency’s debt capacity. A recent analysis of the cost of a new GO Bond issuance estimates that a $20 millionbond would cost property owners $10-$13.50 (for 30 and 20 year bonds, respectively) per $100,000 inassessed value. For a $1 million single family home, this equates to a $100 - $135 tax annually. Eachadditional $10 million raised through a bond issuance equates to a $50 - $68 increase in the tax, collected bythe County via the annual property tax roll.

Special benefit assessments (also known as Special Assessments) can be levied only to acquire orconstruct public improvements that convey a special benefit to an identifiable group of properties. Specialbenefit assessments must be apportioned to the benefited properties based upon the respective benefitsreceived, and they must be levied on a uniform and consistent basis. Benefit assessment financing isapplicable when the value or benefit of the improvement can be assigned to a particular property, or district,rather than when the improvement is of benefit to the entire community. Each property owner is required topay an annual assessment, typically as part of the property tax bill. The sum of the individual assessmentsequals the debt service. An example of special benefit assessment financing is the Downtown BurlingameAvenue Streetscape project.

Certificates of Participation (COPs) provide long-term financing through a lease or installment saleagreement that does not constitute indebtedness under the California Constitutional debt limit and do notrequire voter approval. COPs allow the public to purchase participation in a cash flow stream associated witha lease or installment payments relating to the acquisition or construction of specific equipment, land orfacilities.

Lease Revenue Bonds are similar to Certificates of Participation. Instead of a third party lessor, the citycreates a “financing authority” as lessor to issue the bonds, construct the facility, and hold title to the facilityuntil the debt is retired. There is no separate revenue stream associated with this type of financing; bondcapacity is limited to the affordability of annual lease (debt service) payments. Under State law, the annuallease payments may not exceed the fair rental value of the leased asset, and the term of the bonds cannot



exceed the asset’s useful life.

Because lease revenue bonds do not provide a specific revenue stream, the City would have to consider itsdebt capacity prior to a new issuance of these bonds. Generally, there are two tests for measuring bondingcapacity: financial and legal. The financial test is one of affordability. Currently, the City’s lease revenue andpension obligation bond (POB) debt combined costs the General Fund nearly $4 million annually to service.When the current 2004 and 2010 series of lease revenue bonds mature in 2015 and 2021, an additional $1.1million will be available for debt service. Payments on the 2006 POB issue will start to decline significantly in2017, freeing up an additional $2.8 million in debt service payments in 2019 and beyond. The legal constraint(“Annual Fair Rental Value” test) measures compliance with state law, which states that the annual debtservice payments for lease revenue bonds may not exceed the fair rental value of the lease asset.

The Mello-Roos Community Facilities District Act of 1982 allows cities and other public agency issuers toform a separate district to finance certain public facilities and services on a pay-as-you-go basis or through theissuance of bonds. Community Facilities District (CFD) Bonds are financed by an annual special non-advalorem tax (such as a parcel tax) which is typically included on the property tax bill. Proceedings to authorizethe issuance of such bonds are undertaken simultaneously with the proceedings to form the communityfacilities district, and must be approved by two-thirds of the qualified electors voting on such question.

Revenue Bonds are issued to acquire, construct or expand public projects for which fees, charges oradmissions are received for use of the project. The bonds are evidence of direct municipal debt incurred inpurchasing or constructing a revenue-producing project, and are repaid from the income generated by use ofthat project or system. Because the debt service is directly paid from income generated by the facility, suchdebt is considered self-liquidating and generally does not constitute debt of the issuer. Revenue bonds aredesigned to finance facilities that provide benefits to a group of readily identifiable users. The credit isstrongest if the issuer is a monopoly provider of the service, the customer base is large, and the service is ofhigh essentiality. Water revenue bonds therefore tend to be stronger than parking revenue bonds. Projectstypically financed by revenue bonds include sewer systems, water systems, golf courses, parking facilities,ferry systems, and airports.

The chart attached to this staff report as Exhibit 3 provides a comparison of these major borrowingmechanisms for municipal capital projects, including their revenue source, approvals required, who pays,limitations and examples of each.

A Public/Private Partnership (P3) is defined as a contractual agreement between a public agency and aprivate sector entity. Through this agreement, the skills and assets of each sector (public and private) areshared in delivering a service or facility for the use of the general public. In addition to sharing in theresources, each partner shares in the risks and rewards potential in the delivery of services and/or facility.

P3s are organized along a continuum between public and private nodes and needs; therefore, eachagreement is unique. Initially used mainly for “fee producing” infrastructure projects (toll roads, watertreatment plants, etc.), P3s have more recently utilized development incentives from the public sector toencourage private capital investment to fund a wide variety of public infrastructure.

Next Steps



There are pros and cons associated with each of the funding mechanisms described above. Before the Cityfocuses on any particular type of funding, it is prudent to discuss whether the City Council wishes to focus onone project at a time, or whether it is interested in pursuing funding for multiple projects.

In addition, in order to assist the City in determining the optimal financing mechanisms for the capital projectsthe Council wishes to pursue, staff recommends the use of a financial advisor. A financial advisor should beable to provide an objective and informed review of all aspects of the financing. Although the financing optionschosen will not be delegated to any outside vendor, an advisor can assist in determining the best type offinancing for the City, selecting other finance professionals, and (if applicable) planning a bond sale andsuccessfully selling and closing the bonds. The Government Finance Officers Association (GFOA), aprofessional association of state and local finance officials, recommends as best practice that municipalissuers select advisors on the basis of merit using a competitive process. GFOA also recommends thatagreements with financial advisors include a provision “restricting any firm engaging in activities on behalf ofthe issuer that produce a direct or indirect financial gain for the firm, other than the agreed-uponcompensations, without the issuer’s informed consent.”

FISCAL IMPACT

The fiscal impact associated with the prioritization of these unfunded infrastructure projects is unknown at thistime, and will be determined as part of the financial analysis for the approved projects.

Exhibits:1. Unfunded Needs Questionnaire2. Council Project Scoring Sheet3. Comparison of Financing Mechanisms for Capital Projects


Documents

Burlingame Unfunded Infrastructure Funding and Tax Options