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Home My WebLink AboutCAP 2016-05-09 Item 2E - Discussion - Financing Options for City FacilitiesCity of Tukwila INFORMATIONAL MEMORANDUM TO: Communfty Atfairs and Parks Committee FROM: Peggy McCarthy, Finance Director CC Mayor Ekberg DATE: May 3'2O16 SUBJECT: Facilities Plan Financing Options Allan Ekberg, Mayor ISSUE What is the difference in financing costs between the originally modeled 63:20 lease/LTGO bond (Limited Tax General Obligation) financing for the Public Works shops, as shown in the Facilities Plan [)raft submitted to Council on December 14, 2015, and financing comprised entirely of LTGO bonds? BACKGROUND In the Facilities Model Plan B. LTGO bonds were used to fund the $6.000 thousand and purchase for the Public Works shops. The design, permitting and construction costs of $20,625 thousand were funded through a 63:20 lease. The lease payments and debt service over the life of this debt totaled S46,974 thousand. DISCUSSION If LTGO bond financing were used to fund the entire project, (land and the design, permitting and conntruction), the debt service over the life of the debt would total $43,817 thousand. This is $3.157 thousand Iess than the 63:20/LTGO scenario. The annual debt service/Iease payment differentaF is $158 thousand for most of the years the bonds and lease are outstanding. Even though the 63:20 financing is more expensive than Councilmanic or voted bonds, the 63:20 financing is sometimes used when private sector involvement in developing a governmental facility is likely to provide significant benefits compared to a traditioral public approach. Some of these benefits include: • 63:20 financing could streamline delivery of a pnojeut, as an experienced developer, chosen via a request for proposals (RFP) process, would likely steward the process, • 63:20 financing shifts a significant amount of the p jecthokfronmtheQh/0odeveVopero. A page from the Facilities Plan discussing 63:20 financing is attached to this memorandum. CONCLUSION Information only. ATTACHMENT Pages 4 and 5 of the Facilities Model draft, submitted to Counci! December 14, 2015 Analysis: Comparison of 63:20/LTGO Financing with All LTGO Financing 28 INVESTING IN TUKWILA j ESSENTIAL GOVERNMENT SERVICES FACILITIES PLAN APPENDIX G - FUNDING AND PHASING OPTIONS FIGURE 2: EXISTING DEBT DEMAND COMPARED TO TOTAL DEBT CAPACITY, 2016-2041 (NOT INCLUDING ENTERPRISE FUNDS. IN MILLIONS) $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $- 2016 2021 2026 2031 2036 2041 *WM Existing LTGO Debt (balance outstanding) — — LTGO Capacity ($thousands) Total Debt Capacity (Stbousands) Source: City of Tukwila, 2015; Rice Fergus Miller, 2015; and BERK, 2015. Based on the overall CIP needs, a conceptual bond financing plan was developed for both phasing options which found that both options could be completed within existing LTGO debt capacity. However, as LTGO bonds are merely one financing option, it is still prudent of the City to consider additional financing options as port of its facilities phasing plan. Considerations: • One of the benefits of LTGO bonds is that they can be passed by councilmanic ordinance. • LTGO bond capacity is substantial, but limited. Currently, the City of Tukwila has $41.4 million in LTGO bond capacity. Given the flexible nature of LTGO debt it is an important tool for the City's ability to react to unexpected expenses. While the City has enough capacity to support either facilities option with LTGO dept, deploying too much of the City' bond capacity will limit its ability to respond to unexpected expenses. • Since bonds are debt, the added costs of interest will increase project costs long term. • The timing of repayment of bonds for these projects would align the projects' payees with the beneficiaries. 63-20 FINANCING 63-20 is a method of obtaining tax-exempt financing that allows public bonds to be used to construct public facilities If they are secured by a lease agreement. A nonprofit corporation issues tax-exempt debt on behalf of a political subdivision for the purpose of financing facilities. Generally, these bonds require a credit-worthy private developer that is willing to enter into a lease to support the bond offering. The nonprofit corporation also manages and operates the building over the lease term. The facility is transferred to the government entity once the debt is retired. The tenant is required to be either a governmental entity or a charitable organization. A minimum 90% of the space must be occupied by the governmental entity, as specified by "private use" requirements. DRAFT 1 Submitted to City Council December 14, 2015 4 29 .0 JO .0. gm, 2016 2021 2026 2031 2036 2041 *WM Existing LTGO Debt (balance outstanding) — — LTGO Capacity ($thousands) Total Debt Capacity (Stbousands) Source: City of Tukwila, 2015; Rice Fergus Miller, 2015; and BERK, 2015. Based on the overall CIP needs, a conceptual bond financing plan was developed for both phasing options which found that both options could be completed within existing LTGO debt capacity. However, as LTGO bonds are merely one financing option, it is still prudent of the City to consider additional financing options as port of its facilities phasing plan. Considerations: • One of the benefits of LTGO bonds is that they can be passed by councilmanic ordinance. • LTGO bond capacity is substantial, but limited. Currently, the City of Tukwila has $41.4 million in LTGO bond capacity. Given the flexible nature of LTGO debt it is an important tool for the City's ability to react to unexpected expenses. While the City has enough capacity to support either facilities option with LTGO dept, deploying too much of the City' bond capacity will limit its ability to respond to unexpected expenses. • Since bonds are debt, the added costs of interest will increase project costs long term. • The timing of repayment of bonds for these projects would align the projects' payees with the beneficiaries. 63-20 FINANCING 63-20 is a method of obtaining tax-exempt financing that allows public bonds to be used to construct public facilities If they are secured by a lease agreement. A nonprofit corporation issues tax-exempt debt on behalf of a political subdivision for the purpose of financing facilities. Generally, these bonds require a credit-worthy private developer that is willing to enter into a lease to support the bond offering. The nonprofit corporation also manages and operates the building over the lease term. The facility is transferred to the government entity once the debt is retired. The tenant is required to be either a governmental entity or a charitable organization. A minimum 90% of the space must be occupied by the governmental entity, as specified by "private use" requirements. DRAFT 1 Submitted to City Council December 14, 2015 4 29 INVESTING IN TUKWIIA 1 ESSENTIAL GOVERNMENT SERVICES FACILITIES PLAN APPENDIX G - FUNDING AND PHASING OPTIONS 63-20 financed bonds have a higher interest rate and issuance fees due to the perceived higher level of risk compared to the general obligation bond, which has the full backing of the governmental jurisdiction. 63-20 financed bonds also have a small asset management fee associated with them. Benefits of 63-20 financing include the ability to realize construction cost savings through using a general contractor/construction manager (GC/CM) project delivery process compared to the design-bid-build model typically used for government facilities construction. Under this project delivery method, the general contractor guarantees a fixed price for the work and takes on the additional construction risk of subcontracting the project work. In addition, the contractor provides specialized project management, scheduiing, budgeting, and other advice early on and thrc!)ughout the project design process, which can result in a more efficient construction process and less costly project. This project delivery process is especially advantageous for unique or complex projects where governmental agencies may not have experience. The cost savings are not guaranteed, and they vary by project depending on the situation. Lastly, 63-20 bonds do not count towards a jurisdiction's debt limit, which is advantageous for jurisdictions with limited or no debt capacity. Considerations: 63-20 bonds may make sense when private sector involvement in developing a governmental facility is likely to provide significant benefits compared to a traditional public approach. These benefits may be most apparent for facilities that: • The obligation to pay rent is not a debt of the agency for the purposes of constitutional and statutory limitations on state debt. 63-20 bonds offer an option when the agency already carries the debt allowed by statutory regulation. • 63-20 financing could streamline delivery of a project, as an experienced developer, chosen via a request for proposals (RFP) process, would likely steward the process. • 63-20 financing shifts a significant amount of the project risk from the City to developers. • The timing of payment of the 63-20 lease established for a project would align the projects' payees with the beneficiaries. UNUMiTED TAX GENERAL OBLIGATION (UTGO) BONDS — (VOTED) Unlimited tax general obligation (UTGO) bonds are both a financing and funding source as their issuance includes the levy of an additional tax to repay them. These bonds require 60% voter approval and may only be used for capital purposes. When residents of a city vote for a bond issue, they are being asked to approve: (a) the issuance of a fixed amount of general obligation bonds and (b) the levy of on additional tax to repay the bonds, unlimited as to rate or amount. Once voter approval is obtained, a municipal corporation is still restricted by constitutional and statutory debt limits with these bonds. The statutory debt limits on this type of debt is 2.5% of the assessed value of property inclusive of any LTGO (non-voted) debt. The City currently has $32.4 million (2015$) in non-voter approved debt outstanding applicable to its UTGO debt. Debt Capacity as of May 2015 for UTGO Bond Debt is $90.1 million (2015$). This is not directly additive to LTGO debt capacity. Only $49 million (2015$) in UTGO bond capacity would be available if LTGO debt capacity was reached. DRAFT I Submitted to City Council December 14, 2015 5 30 City of Tukwila Facilities Plan Public Works Shops Comparison 0f63:J O Financing with All [TGF)Financing All Amounts are stated in $ Thousands Scenario 1. 63:20/LTGO Combination Scen rio 2. All LTGO LTGO 63:20 Leas Total LTGO Total Addition- to fund to fund design, to fund design, al Cos of land permitting, and permitting, and 63:20 construction construction Financing MINSMIn 2016 2017 2018 475 475 475 475 2019 475 475 663 663 2020 475 1'873 2,340 2'191 2,191 2021 475 1'873 2,349 2,191 2'191 2022 475 1,873 2,349 2,191 2^191 2023 475 1'873 2,349 2'191 2,191 2024 475 1'873 2'349 2'191 2,191 2025 475 1'873 2,349 2'191 2'191 2026 475 1'873 2,349 2,191 2'191 2027 475 1'873 2'349 2'191 2,191 2028 475 1.873 2,349 2'191 2'191 2029 475 1,873 2'349 2,191 2,191 2030 475 1,873 2'349 2,191 2,191 2031 475 1'873 2,349 2'191 2'191 2032 475 1,873 2.349 2,191 2,191 2033 475 1,873 2,349 I'I91 2.19I 2034 475 1'873 2,349 2'191 2'191 2035 475 1'873 2,349 2'191 2'191 2036 475 1,873 2,349 2^191 2,191 2037 475 1,873 2,349 2'191 2'191 2038 1'873 1'873 1'715 1,715 2039 1,873 1'873 1,528 1'538 $ 9,508 $37,46G $ 46,974 43,817 $ 43,817 3,157 Projected Cost of Public Works Shops in 2015 $ $ 26,625