Bonds 101: An Overview of City Financing

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1 Bonds 101: An Overview of City Financing Presentation to the City of Yakima August 11, 2016 Deanna Gregory, Partner, Pacifica Law Group LLP (206) , Lindsay Sovde, Managing Director, Public Finance (206) ,

2 Disclosure Piper Jaffray is providing the information contained herein for discussion purposes only in anticipation of being engaged to serve as underwriter or placement agent on a future transaction and not as a financial advisor or municipal advisor. In providing the information contained herein, Piper Jaffray is not recommending an action to you and the information provided herein is not intended to be and should not be construed as a recommendation or advice within the meaning of Section 15B of the Securities Exchange Act of Piper Jaffray is not acting as an advisor to you and does not owe a fiduciary duty pursuant to Section 15B of the Exchange Act or under any state law to you with respect to the information and material contained in this communication. As an underwriter or placement agent, Piper Jaffray s primary role is to purchase or arrange for the placement of securities with a view to distribution in an arm slength commercial transaction, is acting for its own interests and has financial and other interests that differ from your interests. You should discuss any information and material contained in this communication with any and all internal or external advisors and experts that you deem appropriate before acting on this information or material. The information contained herein may include hypothetical interest rates or interest rate savings for a potential refunding. Interest rates used herein take into consideration conditions in today s market and other factual information such as credit rating, geographic location and market sector. Interest rates described herein should not be viewed as rates that Piper Jaffray expects to achieve for you should we be selected to act as your underwriter or placement agent. Information about interest rates and terms for SLGs is based on current publically available information and treasury or agency rates for open-market escrows are based on current market interest rates for these types of credits and should not be seen as costs or rates that Piper Jaffrey could achieve for you should we be selected to act as your underwriter or placement agent. More particularized information and analysis may be provided after you have engaged Piper Jaffray as an underwriter or placement agent or under certain other exceptions as describe in the Section 15B of the Exchange Act.

3 Overview of Bonds Security for the Bonds Different Ways to Borrow Money Types of Bond Sales Bond Ratings Snapshot of Bond Market Questions Agenda

4 What is a Bond? A Bond is a loan in the form of a security Structured to allow sale/placement with a wide array of investors Public sale to ultimate investors on open market Private placement with a bank (bank loan) Secured by a pledge of tax collections or revenues City is obligated to repay principal of the bond, plus interest, on certain payment dates Benefit receive project funding up front Authorized by State law May be issued as tax-exempt interest paid to investor holding City bonds is excludable from federal income taxation subject to federal tax law requirements Bonds are securities subject to federal securities laws

5 Key Considerations What is the State law authority? What is the credit? What is pledged to pay the debt? Excess property taxes, regular property taxes, utility revenues, other What are the terms? Interest rate, term, what are the needs of the City? What approval is necessary? Council approval, voted/nonvoter approved, other requirements Who is the bond(s) being sold to? Public sale to ultimate investors on open market Private placement with a bank (bank loan) What is the federal tax treatment? City bonds can be tax-exempt or taxable Depends on use of asset financed/goals of the City

6 Security for the Bonds UTGOs: Key Features Unlimited, Voter Approved Consumes UTGO debt capacity for general purposes UTGO debt capacity is greater than for non-voted general obligation bonds 2.5% of assessed value Only for capital purposes, other than replacement of equipment 60% voter approval Validation requirement Paid from excess property tax levy Outside of statutory or constitutional limits on regular property taxes Levy set at rate required to pay debt service 2.5% Assessed Valuation Up to 1.5% can be issued without voter approval

7 UTGOs: Process City Council must pass an election ordinance Contents: Proposes the form of the ballot measure requesting voter approval for the issuance of UTGO bonds and excess levies to pay debt service on the bonds. The ballot language consists of: An identification of the enacting legislative body (the City Council); A statement of the subject matter; A concise description of the measure (no more than 75 words long, prepared or approved by the city attorney); and A question (essentially, whether or not the proposition should be approved). Describes the capital project to be funded and outlines the circumstances, if any, under which the project may be changed Sets certain parameters for the bonds, including the maximum principal amount and term The approved election ordinance must be filed with the county Ballot may be submitted to voters no more frequently than twice a year Election Calendar

8 UTGOs: Benefits and Challenges Benefits Dedicated excess property tax stream of revenue for debt service payments over the life of the bonds Community support Challenges Requires 60% supermajority voter approval and validation

9 Security for the Bonds LTGOs: Key Features Limited (councilmanic) non-voter approved Consumes LTGO debt capacity Within the 2.5% of assessed value for general purposes, the City may, without a vote of the electors, incur general obligation indebtedness in an amount not to exceed 1.5% of assessed value Any municipal purpose Pledge to levy regular (nonvoted) taxes as necessary to pay debt service within legal limits: Statutory rate per thousand (e.g. $3.60/$1,000 AV) Aggregate rate limit ($5.90/$1,000) 101% limit on increases in dollar amount of levy (Eyman limit) Paid from general fund or other legally available revenues

10 LTGOs: Benefits and Challenges Benefits non-voted general obligation bonds (councilmanic) may be combined with other financing options to fund project costs does not require voter approval payable from and secured by general fund; all or a portion of the debt service could be paid from other sources Pledges, sales taxes, hotel/motel taxes Levy lid lift, not to exceed 9 years May provide additional flexibility when combined with other sources of funding Challenges Non-voted debt capacity constraints

11 Security for the Bonds Revenue Obligations: Key Features Enterprise fund obligations Water Sewer/wastewater Stormwater Other revenue-producing assets Pledge of net income of the enterprise Bond owners have a statutory lien on net revenues Parity lien protected through: Rate covenant (1.2x or 1.25x or ) Additional bonds test Other covenants

12 Security for the Bonds Revenue Obligations: Benefits and Challenges Benefits does not require voter approval does not count against voted or nonvoted debt capacity payable from dedicated stream of revenues pledged to special fund Challenges Can only be used for projects related to the applicable utility system Payable solely from rates received from customers Additional covenants (additional bonds test, rate coverage requirements)

13 Ways to Borrow Money Types of Public sale Bond Sales Bonds are sold to institutional and retail investors from around the US Process takes 6-8 weeks Official Statement Credit rating Interest rates are locked on pricing date can be fixed (for up to 30 years) or variable Typically, non-callable for 10 years if fixed interest rate

14 Ways to Borrow Money Types of Bond Sales Private placement/bank loan Sophisticated investor or bank lends money directly to City Offering document is a term sheet No credit rating Fixed or variable interest rates (term loan or line of credit) Set maturity or line of credit Shorter maturity for fixed interest rates (10-12 years) Process takes 4-6 weeks Interest rates are locked when City receives term sheet

15 Bond Ratings Ratings are essential to most bond sales Three primary rating agencies Moody s Standard and Poor s Fitch Meetings with analysts In-person visit Phone call City Ratings: General Obligation: Standard and Poor s: AA- Revenue (water and sewer): Standard and Poor s: AA- Analysts are your advocates Investment Grade Rating Categories Moody s S&P Fitch Aaa AAA AAA Aa1 AA+ AA+ Aa2 AA AA Aa3 AA- AA- A1 A+ A+ A2 A A A3 A- A- Baa1 BBB+ BBB+ Baa2 BBB BBB Baa3 BBB- BBB-

16 Interest Rate 11.50% 10.50% 9.50% 8.50% 7.50% 6.50% 5.50% 4.50% 3.50% Historic Interest Rates Bond Buyer Index General Obligation Bond Interest Rate Trends 4.50% 4.00% 3.50% 3.00% 2.50% Jul-15 Nov-15 Mar-16 Jul % Jul-96 Jul-01 Jul-06 Jul-11 Jul-16

17 Questions?