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HomeMy WebLinkAbout03 27 2017 Capital Financing PresentationOverview of Capital Financing Bond Issuance City of Prior Lake City Council Workshop March 13, 2017 Overview Debt Issuing Authority Method of Sale Structuring Provisions Issuing Process Bond rating Execution 2 Authority Borrowing money provides funds to finance needed capital improvements Debt obligates local revenues for many years in the future Unlike private companies, cities can’t simply take out a loan Public debt requires specific statutory authority Debt that results in issuance of municipal bonds is governed by federal securities regulations 3 Authority Three basic buildings blocks for debt: Legal authority to incur debt ▪Cannot borrow without specific statutory authority Tax treatment of interest on the debt ▪Governed by federal tax law Form of the debt under federal securities regulations ▪Municipal debt is not always a municipal security subject to a wide range of federal regulations 4 Authority Authority is not contained in a single section of state law General authority is provided in MN Statutes Chapter 475 Powers in Chapter 475 are typically linked to other statutory authority or to voter approval to issue bonds 5 Authority Statutory requirements vary by the type of authority used to issue the bonds, here are a few examples: Improvement Bonds require at least 20% of the costs of improvement is assessed to benefiting property and four-fifths vote to order the improvements following hearing Street Reconstruction Bonds require adoption of a street reconstruction plan approved by a four-fifths vote following hearing Capital Improvement Plan Bonds require adoption of a CIP plan and simple majority vote following hearing and there is a 30-day reverse referendum period Revolving Fund Bonds require at least 20% of the costs of improvement is assessed to benefiting property and four-fifths vote to order the improvements following hearing 6 Authority Continued Utility Revenue Bonds may be issued by a simple majority to build, construct, reconstruct, repair, enlarge, improve, or in any other manner to obtain sanitary sewer, water, and storm sewer facilities, and maintain and operate the facilities Equipment Certificates may be issued by a simple majority by a statutory city to purchase public safety equipment, ambulance, and other medical equipment, road construction and maintenance equipment, and other capital equipment, as well as computer hardware and software (the statute doesn’t define “other capital equipment”) ▪Reverse referendum period applies if the amount of the borrowing exceeds 0.25% of the estimated market value of taxable property within the city Abatement Bonds may be issued following a hearing by a simple majority and used to finance a variety of development activities and public improvements 7 Authority Bond series may include multiple purposes or use of different authority as part of one bond issuance Combining multiple purposes under one bond series reduces the cost of issuance and in some cases the market interest in the bond sale 8 Example Bond Series Total Issue Sources And Uses Improvement CIP Street Reconstruction Revolving Fund Water Revenue Sewer Revenue Issue Summary Sources Of Funds Par Amount of Bonds $5,480,000.00 $645,000.00 $1,030,000.00 $310,000.00 $1,025,000.00 $1,020,000.00 $9,510,000.00 Total Sources $5,480,000.00 $645,000.00 $1,030,000.00 $310,000.00 $1,025,000.00 $1,020,000.00 $9,510,000.00 Uses Of Funds Costs of Issuance 115,212.53 13,560.60 21,654.92 6,517.50 21,549.79 21,444.66 199,940.00 Deposit to Capitalized Interest (CIF) Fund 64,619.48 7,606.35 12,153.65 3,645.42 --88,024.90 Deposit to Project Construction Fund 5,300,000.00 620,000.00 1,000,000.00 300,000.00 1,000,000.00 1,000,000.00 9,220,000.00 Rounding Amount 167.99 3,833.05 (3,808.57)(162.92)3,450.21 (1,444.66)2,035.10 Total Uses $5,480,000.00 $645,000.00 $1,030,000.00 $310,000.00 $1,025,000.00 $1,020,000.00 $9,510,000.00 Method of Sale Primary Methods of Sale Competitive sale Negotiated sale Private Placement Government Finance Officers Association (GFOA) recommends that issuers select a method based on a thorough analysis of the following: Relevant rating Security Structure and other factors pertaining to the proposed bond issuance 9 Method of Sale 10 Competitive Sale Negotiated Sale Rating of the bonds is at least in single-A category Rating of the bonds is lower than single-A category Bonds are G.O. obligation or secured by a strong, known and long-standing revenue stream Bond insurance or other credit enhancement is unavailable or not cost- effective Structure of bonds does not include innovative or new financing features that require explanation Structure of the bonds has features that may be better suited to negotiation Issuer is well known in the market Issuer desires to target underwriting participation to include disadvantaged business enterprises or local firms Other factors that favor negotiated sale Summary of GFOA recommendations comparing methods of sale Method of Sale Statutory considerations for method of sale 11 Item Competitive Sale Negotiated Sale Sale process Bidding Direct negotiation Timing Set by Council Stay fixed to facilitate fair bid process Set by Council Possible to adjust up and during date of pricing Award True interest cost (TIC) of low bid City determination that bond purchase agreement is fair and reasonable Rescheduling City can cancel or postpone at any time Rescheduling requires new date and time for bids City can delay pricing for any reason Rescheduling involves coordinating underwriter commitment with City approval Unacceptable Results Council can reject bids and rebid at a later date or negotiate with an underwriter Pricing does not conclude until City is satisfied with the results No obligation to accept proposed bond purchase agreement Structuring Certain structuring provisions are required by state law First principal payment must occur not less than three years from the date of issue For bonds maturing 25 years or less, largest amount of principal due in any calendar year cannot be more than 5x the smallest amount, and 6x for bonds maturing 25 years or later Except as otherwise provided in state law, the City’s debt is subject to a debt limit which limits net debt to no greater than 3% of the estimated market value of taxable property in the municipality 12 Structuring Prior Lake has an adopted debt management policy which informs the structuring of bonds City will pay back debt within a period not to exceed the expected useful life of the capital improvement, with at least 50% of the principal retired within 2/3 of the term of the bond issue Total general obligation debt shall not exceed 3% of the total market value of taxable property in the City (statutory debt limit) 13 Structuring Prior Lake legal debt margin as of May 2, 2016 (from 2016A Official Statement) was $69.8 million of debt capacity 14 Structuring Principal (par amount of bonds) Payable annually with minimum $5,000 denominations Amount of principal due in any given year is a function of structuring the debt to meet project cash flow (i.e., debt service levy limitations) Level annual debt service (principal and interest) is common Interest First payment typically occurs within 12 months of date of issue Premium pricing Payment Dates Semi-annual debt service payment dates are set by the issuer 15 Structuring 16 Example Debt Service Schedule Date Principal Coupon Interest Total P+I Fiscal Total 05/30/2017 ----- 12/15/2017 --110,368.65 110,368.65 110,368.65 06/15/2018 --101,878.75 101,878.75 - 12/15/2018 865,000.00 1.500%101,878.75 966,878.75 1,068,757.50 06/15/2019 --95,391.25 95,391.25 - 12/15/2019 875,000.00 1.700%95,391.25 970,391.25 1,065,782.50 06/15/2020 --87,953.75 87,953.75 - 12/15/2020 885,000.00 1.850%87,953.75 972,953.75 1,060,907.50 06/15/2021 --79,767.50 79,767.50 - 12/15/2021 910,000.00 2.000%79,767.50 989,767.50 1,069,535.00 06/15/2022 --70,667.50 70,667.50 - 12/15/2022 920,000.00 2.150%70,667.50 990,667.50 1,061,335.00 06/15/2023 --60,777.50 60,777.50 - 12/15/2023 935,000.00 2.250%60,777.50 995,777.50 1,056,555.00 06/15/2024 --50,258.75 50,258.75 - 12/15/2024 960,000.00 2.350%50,258.75 1,010,258.75 1,060,517.50 06/15/2025 --38,978.75 38,978.75 - 12/15/2025 975,000.00 2.450%38,978.75 1,013,978.75 1,052,957.50 06/15/2026 --27,035.00 27,035.00 - 12/15/2026 1,010,000.00 2.600%27,035.00 1,037,035.00 1,064,070.00 06/15/2027 --13,905.00 13,905.00 - 12/15/2027 1,030,000.00 2.700%13,905.00 1,043,905.00 1,057,810.00 Total $9,365,000.00 -$1,363,596.15 $10,728,596.15 - Issuing Process Participants Bond counsel ▪Law firm with expertise in municipal securities law retained by an issuer Municipal advisor ▪Subject to certain exceptions, a party that provides advice to an issuer on the issuance of municipal securities that must be registered with the SEC as a municipal advisor ▪No federal or state requirement to retain a municipal advisor Underwriter ▪Purchases the bonds ▪An issuer may work directly with an underwriter on the purchase of bonds 17 Issuing Process Planning Determine the City’s source of advice and federal regulation requirements on those providing the advice Determine the project costs to be financed Consider options available to finance the project and why different options may matter Set size of issuance to cover construction costs, issuance costs, and possibly other funds Structure the bonds based on cash flow considerations for tax levies, special assessments, utility revenues, and other sources of revenue Consider other items such as capitalized interest, compliance with City policy, refunding of existing bonds, decision on rating, bond insurance, Council approvals, etc. 18 Issuing Process Issuance Costs Most often paid from bond proceeds ▪Underwriter’s discount ▪Municipal advisor / pricing opinion fee ▪Legal fee ▪Rating fee ▪Paying agent fee ▪Escrow agent fee ▪Other fees Total costs range may range from 2-3% of par amount 19 Issuing Process Preparation Set sale ▪Prior Lake has used in the past what is commonly referred to as “trigger” resolution Disclosure ▪Preliminary Official Statement (POS) Rating ▪Prior Lake holds a “AA+” rating from S&P and “Aa2” rating from Moody’s 20 Investment Grade Ratings Moody’s S&P Aaa AAA Aa1 AA+ Aa2 AA Aa3 AA- A1 A+ A2 A A3 A- Issuing Process Prior Lake Rating Rationale from S&P for AA+ rating (as of April 25, 2016) Very strong economy Strong management Adequate budgetary performance ▪Higher score in this rating category would require that the City’s revenues over expenditure increases compared to total expenditures Very strong budget flexibility Very strong liquidity Weak debt and contingent liability ▪Total governmental fund debt service at 24.2% of total governmental expenditures (e.g., higher score would require total governmental fund debt service to be below 15%) ▪Net direct debt at 173.6% of total governmental fund revenue (e.g., higher score would require net direct debt to be below 120%) ▪Approximately 74.0% of the direct debt is to be repaid within 10 years (a credit positive) Strong institutional framework (same for all cities in MN) 21 Execution Approval of underwriting terms Process for approval depends on whether a competitive sale or negotiated sale process Final terms of sale are set by resolution of the City Council Closing on the bonds is typically 3-4 weeks after the sale approval Debt management and establishment of accounts 22 The information contained in this presentation has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the material discussed. The opinions expressed herein do not necessarily reflect those of Northland Securities, Inc., and are subject to change without notice. Northland Securities, Inc. 45 South 7th Street, Suite 2000 Minneapolis, Minnesota 55402 800-851-2920 www.northlandsecurities.com/public_finance Questions 23 Tammy Omdal 612-851-4964 tomdal@northlandsecurities.com