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Home My WebLink AboutCOW 2015-03-09 Item 2 - Powerpoint Presentation Shwon at Meeting - Bond Issuance Basics and ConsiderationsCity of Tukwila, Washington Bond Issuance Basics and Considerations March 9, 2015 Presented by: Susan Musselman, Director Public Financial Management, Inc. (360) 445 -0238 musselmans @pfm.com This page intentionally left blank. Overview of Topics 1) Introduction 2) Why Issue Bonds? 3) Debt Profile 4) Overview of Credit 5) Market Update 6) Bond Sale Process & Upcoming Transactions Introduction T F\I The PFM Group - The City's Financial Advisor • PFM's Seattle office first opened in 2001 — We expanded our Washington practice in 2013 with the acquisition of SDM Advisors • PFM serves over 80 clients in Washington and Oregon, including: City of Marysville City of Redmond City of Bothell City of Tukwila City of Shoreline City of Oak Harbor City of Anacortes City of Richland City of Walla Walla Skagit County Whatcom County Kitsap County Clark County iCITY OF Ma rysvi l l e WASHINGTON City of Bothell kift CIY sH0 TOF C Alfa) 4 Role of Financial Advisor • Registered "municipal advisor" (financial advisor) with the Securities and Exchange Commission (SEC) and Municipal Securities Rulemaking Board (MSRB) • Fiduciary responsibility to act in the client's best interest, before, during, and after any transaction • New SEC Municipal Advisor Rule became effective July 1, 2014 — Establishes regulatory regime for municipal advisors (previously unregulated) — Prohibits underwriters /banks from providing "advice" except in very limited circumstances • PFM serves as an independent financial advisor to each one of our clients — Not affiliated with a broker - dealer (underwriter) or bank; no conflicts of interest as a result of such affiliation 5 Why Issue Municipal Bonds? • Fund necessary, long -lived capital projects today, rather than waiting and "saving up" tax revenues • Spread the costs of facilities or infrastructure over a long period of time — Taxpayers /customers pay for facilities they currently use — "Inter- generational equity" • Maintain flexibility and liquidity in fund balance • Access capital at favorable interest rates — Interest rates generally are near historic lows — Interest on municipal bonds is generally exempt from federal income tax, resulting in lower borrowing rates City's Debt Profile Outstanding General Obligation Debt Series Name Outstanding Par CaII Date Purpose Final Coupon Range Maturity LTGO Refunding Bonds, 2008 $3,450,000 n/a Advance refund LTGO Bonds, 1999 4.00 -6.00% 12/1 /19 LTGO Bonds, 2010A LTGO Bonds, 2010B (Taxable BABs — Direct Payment) 380,000 n/a 3,970,000 6/1/20 Acquisition & construction of Southcenter Parkway improvements; emergency preparedness facilities, fixtures, tech. 4.00% 12/1/15 3.61 — 5.41 %* 12/1/24 LTGO Refunding Bonds, 2011 4,185,000 12/1/21 Advance refund LTGO Bonds, 2003A 1.25 — 4.00% 12/1/23 LTGO Bond, 2013 803,221 n/a Park district facility improvements (pool) 2.50% 12/1/22 LTGO Bond, 2014 (Taxable) LTGO Note, 2014 (Taxable) * ** 3,850,000 12/1/19 Subtotal 2,250,000 $18,888,221 anytime Tukwila International Boulevard — property acquisition 0.85 — 4.86 % ** LIBOR + 1.00% 12/1/17 Subtotal $6,650,400 Total — Non -Voted General Obligations $25,538,621 As of March 9, 2015. * Build America Bonds coupons are shown as gross rates, not reflecting Federal subsidy (35% prior to sequestration). ** A portion of the 2014 Bonds will have interest rates reset every five years, based on the Five Year Advance Fixed Bullet Rate, as published by the Seattle Federal Home Loan Bank. * ** Non - revolving line of credit. Par amount reflects maximum available, not currently outstanding balance. 5 SCORE Bonds, 2009A $497,200 1/1/20 SCORE Facility 4.25- 5.00% 1/1/22 SCORE Bonds, 2009B (Taxable BABs- Direct Payment) 5,933,200 1/1/20 SCORE Facility 4.117- 6.616 %* 1/1/39 Valley Com Refunding Bonds, 2010 220.000 n/a Advance refunding of Valley Communications Center 2000 Bonds 3.75% 12/1/15 Subtotal $6,650,400 Total — Non -Voted General Obligations $25,538,621 As of March 9, 2015. * Build America Bonds coupons are shown as gross rates, not reflecting Federal subsidy (35% prior to sequestration). ** A portion of the 2014 Bonds will have interest rates reset every five years, based on the Five Year Advance Fixed Bullet Rate, as published by the Seattle Federal Home Loan Bank. * ** Non - revolving line of credit. Par amount reflects maximum available, not currently outstanding balance. 5 Outstanding General Obligation Debt N $6 2 $5 $4 $3 $2 $1 $0 Annual General Obligation Debt Service • IM • • 1 • • • I • 111111!: ^c ^ o cc- c) C C C C C C ■ V- <0 N M M M CO 0) N 0D MM M M C C C C C C C C C C C C C C C C C C Outstanding General Obligation Bond Principal $15 $10 $5 $0 ^M ^ N n/V N N N N N co N 0 M M� 0D M� M M M M M C C C C C C C (Ni C C C C C C C C C C C C C C C C Based on its current debt portfolio, the City will amortize approximately 66.4 % of outstanding LTGO debt within the next 10 years. General Obligation Bonds - Security • Limited Tax General Obligation (LTGO) bonds: "full faith and credit" obligations of the City City has pledged to bondowners that it will levy property taxes in amounts sufficient to pay debt service on bonds — Property tax pledge is limited by constitutional and statutory restrictions — Non -voted (councilmanic) general obligation — Not to be confused with voter - approved general obligation bonds, which carry an unlimited property tax pledge (not subject to constitutional and statutory limits) • Other funding sources can (and often are) used to make debt service payments, but are not specifically pledged as security for the LTGO bonds • Statutory limits on amount of LTGO debt a city may incur: Limited to 1.5% of assessed valuation City's current limit is approximately $75.8 million Outstanding LTGO obligations (including proposed 2015 Bonds) of approximately $30.9 million Water and Sewer Revenue Bonds Series Name Outstanding Par CaII Date Final Purpose 1111111111 Coupon Range Maturity Insurer Water and Sewer Revenue Bonds, 2006 $2,205,000 12/1/16 Design /construction of wastewater pumping facilities, force mains and sewer mains, lift stations, and storm drain and water line improvements 4.00 — 4.50% 12/1/26 FSA • Revenue Pledge Secured by net revenue of the Waterworks Utility and surface water utility system No pledge of taxes, City taxing authority, or any other City revenue source Senior pledge, ahead of Public Works Trust Fund or other State loans • Additional Bonds Test — The City may issue additional parity Water and Sewer Revenue Bonds if net revenue meets a specific test set forth in the Bond Ordinance • Debt Service Reserve Fund — Additionally secured by a debt service reserve fund equal to the average annual aggregate debt service of all outstanding Water and Sewer Revenue Bonds — At the time the 2006 Bonds were sold, this requirement was $430,444 • Rate Covenant and Coverage Requirement Covenant to maintain annual net revenues of 1.25x or greater of annual debt service. In 2012 and 2013, the City maintained aggregate debt service coverage of 7.16x and 9.27x, respectively As of March 9, 2015. Rpm Local Improvement District Bonds Final Series Name Outstanding Par CaII Date Purpose MI la Coupon Range Maturity Insurer Local Improvement District I No. 33 Bonds (2013) $6,082,500 n/a 1Public improvements within LID No. 33 3.15 — 5.375% /15/29 I n/a • Local Improvement District 33: — Formed to improve urban access for the Southcenter area • Secured by and payable solely from: — Amounts deposited to LID Bond Fund (assessments made in LID 33, along with interest and penalties) — City's Local Improvement Guaranty Fund • Guaranty Fund funded at closing with $668,750 of bond proceeds — If Guaranty Fund contains insufficient funds to make a payment on the Bonds, the City must issue interest - bearing warrants against the Fund in order to meet such payments • Rated "BBB" by Standard & Poor's As of March 9, 2015. PFM Credit Overview T F\I Credit Strengths and Concerns - LTGO Bonds Moody's Investors Service last reviewed the City's general obligation credit on December 18, 2012. Strengths: Tax base Challenges: Tax base concentration Moderately sized for the rating level Diversified revenue sources City benefits from creation of Tukwila Metropolitan Park District Manageable debt levels Current Moody's "Issuer" Rating: Aa3 Contraction in assessed valuation and declines in general fund balances Trend prior to 2011 -2012 Reserves below similarly -rated peers and reliance on economically - sensitive revenues Current Moody's LTGO Bond Rating: Al J Moody's Financial Ratio Analysis - Peers • The City's financial and debt ratios are generally in line with its peers in Washington (cities with 15,000- 25,000 population) • The City's outstanding debt per capita is relatively high • However, this is tempered by the City's more modest outstanding debt as a percentage of its assessed value • The City also compares favorably in the size of its budget Source: Moody's Financial Ratio Analysis database. City of Tukwila debt statistics adjusted for proposed 2015 LTGO Bonds. PF11 Financial Statistics & Ratios Total General Fund Revenues ($000) $64,938 $12,487 $15,690 $9,357 $23,982 $19,257 Total General Fund Balance ($000) $17,286 $9,767 $10,405 $5,917 $6,145 $5,848 General Fund Balance as % of Revenue 26.6% 78.2% 66.3% 63.2% 25.6% 30.4% Unassigned Fund Balance $15,318 $8,108 $7,995 $5,666 $3,017 $5,399 Unassigned Fund Balance as % of Revenue 23.6% 64.9% 51.0% 60.6% 12.6% 28.0% Unrestricted Net Assets ($000) $26,981 $12,500 $7,642 $8,969 $4,247 $13,024 Debt Statistics & Ratios Direct Net Debt Outstanding ($000) $31,439 $4,208 $22,301 $13,319 $17,526 $4,540 Direct Net Debt Per Capita ($) $1,591 $262 $961 $736 $771 $237 Direct Net Debt as a % of Full Value 0.7% 0.2% 0.4% 0.8% 0.2% 0.3% Debt Service as % of Operating Expenditures 6.7% 0.0% 42.3% 14.4% 0.0% 5.3% Payout, 10 Years, All Tax - Supported Debt ( %), Current 66.4% 100.0% 82.5% 73.6% 76.3% 93.5% Tax Base Statistics and Ratios Full Value Per Capita ($) $234,556 $157,834 $225,573 $89,375 $387,448 $90,461 Total FuII Value ($000) $4,636,000 $2,532,928 $5,232,391 $1,617,694 $8,802,828 $1,735,946 Demographic Statistics Actual /Estimated Population, Annual Value 1 19,765 1 16,048 1 23,196 1 18,100 1 22,720 1 19,190 Source: Moody's Financial Ratio Analysis database. City of Tukwila debt statistics adjusted for proposed 2015 LTGO Bonds. PF11 Moody's Financial Ratio Analysis - Medians • When compared against Washington cities of all sizes, the City's ratios are more obviously in line with "Aa3" medians Source: Moody's Financial Ratio Analysis database. City of Tukwila debt statistics adjusted for proposed 2015 LTGO Bonds. Financial Statistics & Ratios Total General Fund Revenues ($000) $64,938 $38,983 $37,216 $23,958 Total General Fund Balance ($000) $17,286 $16,141 $13,161 $5,638 General Fund Balance as % of Revenue 26.6% 41.4% 35.4% 23.5% Unassigned Fund Balance $15,318 $8,513 $13,160 $8,186 Unassigned Fund Balance as % of Revenue 23.6% 21.8% 35.4% 34.2% Unrestricted Net Assets ($000) $26,981 $21,951 $18,540 $11,044 Debt Statistics & Ratios Direct Net Debt Outstanding ($000) $31,439 $22,301 $27,790 $17,131 Direct Net Debt Per Capita ($) $1,591 $503 $488 $542 Direct Net Debt as a % of Full Value 0.7% 0.4% 0.5% 0.7% Debt Service as % of Operating Expenditures 6.7% 7.4% 5.6% 5.2% Payout, 10 Years, All Tax - Supported Debt ( %), Current 66.4% 58.9% 63.2% 69.9% Tax Base Statistics and Ratios Full Value Per Capita ($) $234,556 $129,776 $97,317 $75,366 Total Full Value ($000) $4,636,000 $5,755,559 $5,545,240 $2,382,333 Demographic Statistics Actual /Estimated Population, Annual Value 1 19,765 1 44,350 1 56,981 1 31,610 Source: Moody's Financial Ratio Analysis database. City of Tukwila debt statistics adjusted for proposed 2015 LTGO Bonds. Credit Strengths and Concerns - Revenue Bonds Moody's Investors Service last reviewed the City's general obligation credit on November 3, 2006. Strengths: Stable system Concerns: Outsize reliance on a single customer Water supply and wastewater treatment (Boeing) contracts with Seattle and King County, Diluted somewhat through recent hotel and respectively retail development Minimal expected capital needs City expected to reach build -out within several years Strong financial and debt ratios Operating ratio well above rating median Ample cash balance (targeted at 9 months of operating costs) Health debt service coverage in recent years Modest growth Approximately 1.2% annually Competitive rates Historical rate increases have been sporadic and relatively large Rate policy revised to target more modest rate increases on a more regular basis Current Moody's Rating: Aa3 Market Update PF,1 Interest Rate Environment 6% 5% 4% 3% 2% 1% 0% 10 Year MMD "AAA" GO Index vs. 10 Year Treasury Ten Years: March 2005 to 2015 U) LO CO CO N- ti CO CO 0) 0) O O — — N N M CO d L() O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O N N N N N N N N N N N N N N N N N N N N N L Q L Q L Q L Q L Q L Q L Q L Q L Q L Q L C VJ C V/ C u) C VJ C VJ C U) C U) C U) C V/ C VJ C —10 Year MMD Index 10 Year Treasury Bond Both taxable and tax - exempt yield rates remain close to historic ten -year lows. Pf ,I 12 Interest Rate Environment The chart below shows the MMD "AAA" General Obligation Index (the industry standard tax - exempt index) at various points over the last three years. 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 1 Year Apo 3 Years Aqo 1 2 3 4 5 6 7 8 9 1011 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 3 Years Ago 3/5/2012 2 Years Ago 3/5/2013 2 Years Ago Current 1 Year Ago 3/5/2014 — Current 3/5/2015 Interest rates remain generally attractive in a historical context, although rates in earlier maturities ( <15 years) have risen over the past year. 11 Bond Sale Process Bond Sale Process • Identify both the funding need and repayment source /schedule • Identify finance team (both legal and financial professionals) • Develop documentation — Bond ordinance — Preliminary (and, later, final) Official Statements — Ratings presentation — Notice of Sale /Bond purchase agreement • Pass ordinance approving the bonds — Approve bond sale terms by Council ordinance; or — Delegate authority to approve bond sale within key parameters (maximum size, true interest cost, and maturity) • Receive rating(s) • Post Preliminary Official Statement • Sell bonds; sign Bond Purchase Agreement • Closing • A typical bond sale process takes approximately 2 -3 months, depending on the nature of the transaction Methods of Bond Sale • In a competitive sale, the issuer awards the bonds to whichever underwriter offers the lowest True Interest Cost (TIC) at a predetermined bid date and time — The issuer works with its financial advisor and bond counsel to structure the bonds, obtain a credit rating, prepare disclosure, and generally develop the transaction for sale — Bids are received from underwriters nationwide, with most bids arriving electronically within minutes or seconds of one another • In a negotiated sale, the issuer selects an underwriter (or group of underwriters) in advance of the sale date, then negotiates interest rates on the day of sale — Underwriter may be selected through a competitive process (e.g. RFP) — Underwriter may work with other members of the finance team to develop the bond structure, obtain ratings, prepare disclosure, etc. — On the day of sale, the underwriter obtains orders for the bonds from various investors, and in turn prepares a purchase offer for the issuer • In a direct placement, the issuer sells bonds directly to a single investor, typically a bank or other financial institution Potential Upcoming City Financing • Limited Tax General Obligation Bonds, 2015 • Not to exceed par amount of $6.25 million, final maturity December 1, 2035 • Boeing Access Road Bridge retrofit project, Interurban Avenue Improvement project, and other road construction and capital improvement projects as deemed necessary by the City • 2016 capital budget includes $4.4 million in bonds to construct sidewalks and underground utilities on 42nd Avenue South • Potential refunding of Water and Sewer Revenue Bonds, 2006, to achieve debt service savings • Many municipalities consider the potential for issuing bonds ahead of schedule, in order to lock in current market rates and avoid selling bonds in a time of rising interest rates • Question: is it better to issue bonds early (and make additional interest payments) or issue bonds later (and risk higher interest rates)? • How much would rates need to rise between "now" and "then" in order to be indifferent (break even ?) PFM Savings • Refunding Debt Service • Unrefunded Debt Sery Refunding Analysis — Water & Sewer Rev. Bonds On November 1, 2006, the City issued $3,180,000 in Water and Sewer Revenue Bonds to fund the Neighborhood Revitalization — Allentown and Foster Point Sewer Systems Project • Callable Par: $1,910,000 • Call Date: 12/1/2016 • Interest Rates: 4.00 — 4.50% Based on current market conditions, the City may refund the outstanding 2006 Bonds and realize modest debt service savings. Date Savings 12/1/2015 $ 5,751 12/1/2016 12,350 12/1/2017 12,350 12/1/2018 10,025 12/1/2019 7,550 12/1/2020 10,000 12/1/2021 8,900 12/1/2022 7,775 12/1/2023 11,600 12/1/2024 10,200 12/1/2025 8,750 12/1/2026 9,350 Total $114,601 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 * Years 2016 - 2026 Savings do not include potential value of debt service reserve release. Refunding Statistics (Estimated) NPV Savings $104,749 NPV Savings % 5.51% Avg. Annual Savings* $9,895 Negative Arbitrage $49,546 Call Date 12/1/2016 Refunding Par $1,890,000 ice 1O , O 1O O 1O 1e BOO' , e 1e 900' 1e 100' =PT \1 19 Contact Information -PFM Public Financial Management, Inc. Susan Musselman Director (360) 445 -0238 musselmans @pfm.com Duncan Brown Senior Managing Consultant (206) 858 -5367 brownd @pfm.com 20