UTILITY SYSTEM IMPROVEMENT FINANCING

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1 UTILITY SYSTEM IMPROVEMENT FINANCING Stauder, Barch & Associates Ann Arbor 1

2 UTILITY SYSTEM FINANCING OPTIONS POSSIBLE FUNDING SOURCES Utility System Reserves Grants Bond Financing (Including SRF) Installment Purchase Financing 2

3 UTILITY SYSTEM FINANCING OPTIONS Voted Unlimited Tax General Obligation Bonds Capital Improvement Bonds Special Assessment Bonds Revenue System Bonds Contract (County-issued or Authority) Bonds Installment Purchase Contracts 3

4 Voted Unlimited Tax General Unlimited Tax Voter approved Obligation Bonds Levy debt millage at rate necessary to pay principal and interest on the bonds Issued to finance water and sewer utility improvements Subject to Statutory Limits 4

5 Capital Improvement Bonds Non-Voted General Obligation Bonds Public Act 34 of 2001 Revised Municipal Finance Act Finance cost of any capital improvement item Limited tax Cannot increase taxes above maximum rate Paid from existing tax and/or revenue sources Notice and 45 day referendum period Debt Limit: 5% of Community s SEV 5

6 Special Assessment Bonds Public Act 188 of 1954 Township Public Improvement Act or City or Village ordinance Finances various public improvements supported by special assessments (water, sewer, etc.) Principal and interest on the bonds is paid from annual special assessment collections Special assessment roll is pledged as security for the bonds Municipality may also pledge its full faith and credit as additional security (common practice) 6

7 Revenue Bonds Public Act 94 of 1933 Revenue Bond Act Issued to finance self-supporting public improvements Water and sewer systems Principal and interest on the bonds is paid from user charges and other revenues of the system (not tax revenues) Generally not considered a debt of the municipality s general fund Rates and charges must be set at an amount sufficient to pay at least 100% of operation, maintenance and debt service Typical Coverage 110% to 140% of Net Revenue 7

8 Revenue Bonds Bond Coverage Calculation: Operating Revenue 1,000,000 Plus Investment Income 20,000 Total revenue 1,020,000 Less Operating Expenses (800,000) Add Back Depreciation 100,000 = Net Revenue 320,000 Annual Bond Payment 250,000 Revenue Coverage over debt

9 County Issued Bonds Mechanisms for Local Units of Government to finance certain improvements through County. County/Local Unit enter into contract County issues bonds to acquire and construct public improvement LUG pays county semi-annually pursuant to contract; county in turn pays principal and interest on the bonds Public Act 185 of 1957 County Department and Board of Public Works Act Financing through county board of public works Water, sewer, refuse, lake or erosion improvements No notice, referendum or election required Public Act 342 of 1939 County Public Improvement Act Financing through a designated county agency: road commission, drain commissioner, board of public works Water, sewer, garbage or rubbish collection and disposal facilities Notice and 45-day referendum period required Public Act 40 of 1956 The Drain Code of 1956 Financing through County Drain Commissioner Drainage improvements, including certain sewage systems 9

10 Authority Issued Bonds Act 233 of 1955 Municipal Sewage and Water Supply Systems Two or more local units create a municipal authority to own or finance sewage disposal systems and water supply systems Authority/Local Unit enter into contract Authority issues bonds to acquire and construct project Local Unit pledges limited tax full faith and credit; Local Unit pays Authority semi-annually pursuant to contract; Authority pays principal and interest on bonds 10

11 Installment Purchase Contracts Public Act 99 of 1933 Purchase of Lands and Property for Public Purposes Act Financing Real or Personal Property Real Property Land or Buildings Personal Property Water Meters, Pumps, Generators, etc No notices or referendum required Maximum term of 15 years (County max is 10 years) Debt limit: 1.25% of municipality s taxable value 11

12 Competitive v. Negotiated Methods of Sale Competitive Sale Notice of Sale required to be published 7 days in advance Sale open to all possible bidders Negotiated Sale Flexibility in timing of sale Flexibility as to bond terms Purchaser selected in advance of sale; May be a local bank or underwriting firm 12

13 Private Placement Direct Sale of Bonds or IPA to Investor Typically Local Bank Reduced Issuance Cost Rate vs Cost Should be Analyzed All Legal Requirements Must Still be Followed 13

14 CREDIT RATINGS PURPOSE STATE LAW REQUIREMENTS ($5,000,000 +) INVESTMENT GRADE LINE INVESTMENT GRADE BBB OR HIGHER NON-INVESTMENT GRADE BB OR LOWER 14

15 COMPARISON OF BOND RATING SCALES Moody's Standard Fitch Investors & Investors Service Poor's Service Aaa AAA AAA Aa1 AA+ AA+ Aa2 AA AA Aa3 AA- AA- INVESTMENT GRADE A1 A+ A+ RATINGS A2 A A A3 A- A- Baa1 BBB+ BBB+ Baa2 BBB BBB Baa3 BBB- BBB- INVESTMENT GRADE LINE --> Ba1 BB+ BB+ Ba2 BB BB Ba3 BB- BB- B1 B+ B+ SPECULATIVE GRADE B2 B B RATINGS B3 B- B- Caa CCC CCC Ca CC CC C C C 15

16 CREDIT RATINGS ECONOMIC FACTORS Population, Age, Area Income and Housing Values Employment Character and Diversification Major Employers Employment Concentration Saturation Level - Ability to Grow % Unemployment and Trends Status of Infrastructure Economic Outlook 16

17 CREDIT RATINGS FINANCIAL FACTORS Revenue Sources Debt Structure and Debt Ratios Future Borrowing Needs - impact on Debt Load Financial Performance Revenue and Expense Trends Major Revenue and Expenditure Alterations Maintenance of Fund Balance 17

18 CREDIT RATINGS MANAGEMENT FACTORS Management Experience and Philosophy Annual Budgeting Procedure and Performance Effectiveness of Budgetary Controls Willingness to Make Budget Adjustments Investment Philosophy and Practices (Policy) Long Range Planning and Forecasting Labor Relations 18

19 CREDIT RATINGS BOND ISSUE SPECIFIC Legality of the Borrowing Security Factors - Numerous Levels versus Singular The Project Capital Budget - Adequacy of Funding Sources Necessity and Purpose of Borrowing Historical and Projected Coverage Customer Base Depth and Diversity Comparative Rates and Charges 19

20 QUESTIONS? 20