Infrastructure Financing: Current Issues

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Suzanna Arnold
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1 Wednesday MAY 24, :30-10:30 AM Infrastructure Financing: Current Issues MODERATOR SPEAKERS Susan Gaffney Charles Perl Deputy CFO, San Francisco Public Utilities Commission James McIntyre Head of Public Finance, Neighborly #GFOA2017

2 Current Infrastructure Financing Climate Conversation took center stage in 2016 General Election Issue tied to efforts in tax reform because of the municipal bond interest exemption 1. The exemption is an expense to the federal government 2. Yields a cost effective return through providing infrastructure to the State / Local Government / Political Subdivision Issuer 2

3 Tax-Exempt Bonds and Beyond The new Congress and Administration are curious about the various tools in the toolkit Focus on the difference between federal government funding infrastructure and tools provided to finance infrastructure GFOA Best Practices 3

4 Tax-Exempt Bonds and Beyond Constraints of budget climate and infrastructure development contributes to alternative financing resources Many jurisdictions are accessing capital in alternative ways. GFOA number one priority: DO NO HARM to the municipal bond interest exemption 4

5 GFOA 2017 Annual Conference Infrastructure Financing: Current Issues Managing Growing Needs in Changing Environment Charles Perl, Deputy Chief Financial Officer San Francisco Public Utilities Commission May 24,

6 II. SFPUC Overview (cont d.) Water Enterprise Wastewater Enterprise Power Enterprise Purpose Provides drinking water to SF residents/businesses (Retail) & 27 agencies in Alameda, Santa Clara and San Mateo Counties (Wholesale) Operates combined sewage and stormwater collection and treatment system serving SF residents/businesses Provides hydroelectric energy primarily to City municipal services & customers, plus certain retail customers Service Area Population 2.6 million 865,000 City government buildings, street & traffic lights, MUNI railway, SFO, redevelopment retail, irrigation districts FY 16 Revenues $423 million $262 million $126 million 10-Year Capital Program $1.7 billion $5.6 billion $573 million Bond Ratings AA-/S&P Aa3/Moody s AA/S&P Aa3/Moody s AA-/Fitch A+/S&P 6

III. 2016 Financing Highlights SFPUC issued over $1.46 billion of revenue bonds in 2016 $308.

(SSIP) Included Green Bonds for SSIP S&P upgraded rating to AA $893.

(WSIP) Total PV savings of $107 million benefits Retail & Wholesale Water Customers Structured for upfront

7 III Financing Highlights SFPUC issued over $1.46 billion of revenue bonds in 2016 $308.4 million Wastewater Revenue Bonds sold in May New money sale primarily funding Sewer System Improvement Program (SSIP) Included Green Bonds for SSIP S&P upgraded rating to AA $893.8 million Water Revenue Bonds sold in October Refunded bonds primarily funded Water System Improvement Program (WSIP) Total PV savings of $107 million benefits Retail & Wholesale Water Customers Structured for upfront savings $259.3 million Taxable Water Revenue Bonds sold in December Primarily refunded Taxable Water CP that funded private activity component of WSIP Included Green Bonds for WSIP 7

8 IV. Outstanding Debt Profile Water Wastewater Power $4.28 Billion $957 Million $65 Million Revenue Bonds 100% Revenue Bonds 100% CREBs, QECBs, NCREBS 39% Revenue Bonds 61% 8

9 V. Projected Long-Term Debt Needs* Other $147.0 million 9% Water Wastewater Power 10-Year CIP: $1.76B 10-Year CIP: $5.6B 10-Year CIP: $573M PayGo $584.4 million 33% Funded Debt $1.02 billion 58% PayGo $905.4 million 16% Funded Debt $4.69 billion 83% Other $25.0 million <1% PayGo $183 million 32% Other $8.1 million 1% Funded Debt $382.0 million 67% FY Bond Issue * Preliminary and subject to change Cash Funded 2018 $525M $56M 2019 $313M $52M 2020 $329M $52M 2021 $297M $39M 2022 $247M $48M FY Bonds/SRF Loans Cash Funded 2018 $488M $45M 2019 $590M $48M 2020 $788M $74M 2021 $751M $102M 2022 $644M $101M FY Bond Issue Cash Funded $33M 2019 $50M $20M 2020 $90M $20M 2021 $90M $17M 2022 $90M $18M 9

10 VI. Capital Financing Principles Capital financing guided by SF Charter principles to exercise prudent financial stewardship of SFPUC assets o Set rates to improve or maintain financial condition and bond ratings comparable to highly-rated utilities o Meet all bond indenture requirements and covenants o Provide sufficient resources, including reserves, for continued financial health consistent with good utility practice To meet these principles, SFPUC adopted financial policies to: o Foster financial sustainability o Support fiscal discipline o Maintain credit ratings at or above levels of highly-rated utilities 10

11 VII. Traditional Financing of CIP SFPUC has traditionally relied upon long-term fixed rate Revenue Bonds to finance capital programs Includes BABs issued for Water & Wastewater Enterprises Power Enterprise issued $25.3M of federal tax subsidy bonds (CREBs, NCREBs, QECBs) for qualified renewable energy projects SFPUC meets interim funding needs of capital programs with Commercial Paper supported by high-grade bank credit facilities 11

12 VIII. Case Study: Water System Improvement Program (WSIP) 20 year Seismic upgrade of Regional Water System that serves 2.6 million people in San Francisco, San Mateo, Santa Clara and Alameda Counties Regional system serves both retail and wholesale customers; many only have single water source 86 Projects 2 dams 3 tunnels 3 treatment facilities Pipelines, pump stations, reservoirs, tanks, etc. $4.8 Billion Budget with a final completion 2019 As of December 31, 2016, program is >90% complete 12

13 VIII. Case Study (cont d.) System Crosses 3 Major Faults 13

14 STORAGE PROJECTS Sunset Reservoir COMPLETE University Mound Reservoir COMPLETE Regional Groundwater Storage & Recovery (69% Complete) Lower Crystal Springs Dam COMPLETE Pulgas Balancing Reservoir Rehab COMPLETE Calaveras Dam Replacement (78% Complete) 14 14

15 TREATMENT PROJECTS HTWTP Long Term Improvements COMPLETE SVWTP Expansion & TWR COMPLETE Pulgas Balancing Reservoir Dechlor COMPLETE Tesla Treatment Facility COMPLETE 15 15

Complete) Bay Tunnel Alameda Siphon #4 New Crystal Springs Bypass

16 TRANSMISSION PROJECTS SAPL No. 3 Peninsula Pipeline Seismic Upgrade CSPL No. 2 SJPL System - Eastern Segment SJPL System - Western Segment CS/SA Transmission BDPL 5 East Bay New Irvington Tunnel (99% Complete) Bay Tunnel Alameda Siphon #4 New Crystal Springs Bypass Tunnel BDPL 3 & 4 Crossover / Isolation Valves 16 BDPL 5 Peninsula BDPL 3 & 4 Crossovers Seismic Upgrade BDPL 3 & 4 (98% Complete) 16

17 VIII. Case Study (cont d.) WSIP Budget & Financing History Year Appropriation ($) Bond Financing ($) 2002 Propositions A & E approved by voters ,793, ,713, ,815,000 Series 2006 A ,489,489, ,000,000 Series 2009 AB ,647,249,198 1,365,710,000 Series 2010 BDEFG ,715,000 Series 2011 A ,610,000 Series 2012 A ,178, ,074, ,350,000 Series 2016 C 17

18 VIII. Case Study (cont d.) WSIP Funding WSIP funded through the use of short- and long-term indebtedness, including: Commercial paper (CP) for interim project expenses, contract certification and releases / encumbrances Long-term debt for financing and refinancing of project costs, including: Tax-Exempt Revenue Bonds / Green Bonds Taxable Revenue Bonds / Green Bonds Build America Bonds Since 2006, 11 new money revenue bonds have been issued for WSIP, generating $3.7 billion in project fund proceeds 18

19 VIII. Case Study (cont d.) Project Phases Cost Project Management Construction Management Planning Environmental Right-of-Way Design Bid & Award Construction Closeout WSIP Overall Pre-Construction Cost WSIP Overall Construction Cost 28% or ($1,356M) 72% or ($3,489M) 19

20 VIII. Case Study (cont d.) Bond Project Spending & Funding 1,200,000 Annual Project Spending 1,000,000 ($ Thousands) 800, , , ,000 - FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 1,200,000 Annual Bond Funding ($ Thousands) 1,000, , , , ,000 - FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY

21 VIII. Case Study (cont d.) CIP Spending Sample Program WSIP Overall Program Cost $4.8 Billion/ ~18.5 Years Project Completion/ Closeout Peak CN spending June 2012 $117M Average Construction Spending $10M to $42M /month Planning and Design (low monthly expense rate) Note: Graph presents spending for the portion of the WSIP Overall Program. 21

22 IX. New Financing Approaches In the past 2 years, new financing tools supplement traditional financing methods, for new investors and / or lower borrowing costs Green Bonds o o o The SFPUC is a leader in issuance of municipal Green Bonds issued for each enterprise Expands investor base State Revolving Fund (SRF) Loans o o Low-cost 30-year loans for qualified clean water projects Benefits both Wastewater & Water Enterprises o 1st loan entered into in 2015, interest rate of 1.7% 22

23 IX. New Financing Approaches (cont d.) Variable Rate Financing o Long-term debt currently all fixed rate capacity for variable rate exposure o Lower cost debt, especially in rising interest rate environment Direct Bank Loans o Used for interim borrowing, supplements CP Programs o Draws can be cheaper than issuing CP; unutilized vs utilized pricing WIFIA Loans o Lower borrowing costs 23

24 X. Ongoing Debt Administration Ongoing administration is significant administrative responsibility Growing debt load and increasing regulatory mandates have made debt administration more complex and challenging Expanding disclosure responsibilities Bond proceeds spending: Tax compliance, Green Bonds 24

25 XI. Looming Challenges Increasing disclosure obligations & monitoring o o SEC regulations MCDC Tax reform o o o o Possible changes may impact value of tax-exempt bonds State income tax deduction Changes to personal income tax brackets Worst case scenario - complete elimination of taxexemption 25

26 XII. What Will the Future Bring? Legal/tax/regulatory changes Burden of debt administration Tax reform may require planning changes Tax reform may open up new markets & investors beneficial for Green Bonds 26

27 XIII. Conclusion Municipal finance impacted by many events that may lead to increased costs, project deferrals Municipalities may need to seek financing alternatives o Greater reliance on financial advisors and bond counsel will be needed Stay close to your governing bodies & stakeholders transparency must be maintained Proactive engagement 27

28 Government, Finance, and Technology Funding infrastructure and finding capital

29 The uniqueness of the municipal bond market Neighborly May 24,

30 Neighborly believes in a marketplace of partnerships Neighborly May 24,

31 Communities Telling Stories and Sourcing Capital with Municipal Bonds Neighborly May 24,

32 Neighborly May 24,

33 Neighborly May 24,

34 Neighborly May 24,

35 Neighborly May 24,

36 Neighborly May 24,

37 Technology for Government is Evolving Neighborly May 24,

38 What is blockchain? Blockchain Will Become the Beating Heart of the Global Financial System - World Economic Forum One thing is clear: Blockchain and smart contracts could catapult the securitization industry into a new digital age - Chamber of Digital Commerce Neighborly May 24,

39 Better Market Participant Communication Better pathways for the exchange of capital and information, Distributed Ledger Technology, could facilitate more transparent markets for issuing and trading municipal bonds Neighborly May 24,

40 Why are bonds complicated? Neighborly May 24,

41 Thinking about smarter contracts Neighborly May 24,

42 A Bond is a contract, Blockchain is a smarter contract Smart contracts must be developed together with the issuer, investor, advisor, legal, technology communities agreeing on a set of standards that can be implemented with the consideration of all market participants. Smart Contracts: Legally-binding agreements Efficiencies in execution Standardization More automation of clearing and settling Improved security, privacy, AML safeguards, and regulatory compliance Live transparency for market participants and regulators into market activity Markets and money are becoming more programmable Neighborly May 24,

43 The Municipal Market and Washington, D.C. Neighborly May 24,

44 How can we support and invest in our infrastructure? Neighborly May 24,

45 Budget Uncertainty Impacts Infrastructure Investments Brookings Neighborly May 24,

46 Finding new investors, thinking about new tools Neighborly May 24,

47 An Answer: International Capital Compressed international yield environment and desire to own United States sub-sovereign debt has spurred international investment in munis. Neighborly May 24,

48 An Answer: Affinity Capital The growth in social-impact investing has added a mandate for many international and impact-minded domestic buyers Neighborly May 24,

49 . but issuers need tools and sources of capital. Washington policies both inform the financing mechanisms we use to fund infrastructure and impact what they cost. What tools are being discussed? Revive the direct-subsidy market with taxable bonds Promote public-private partnerships (P3s) in key projects Support private activity bonds (PABs) Remove the Alternative Minimum Tax (AMT) New taxes to fund infrastructure Environmental impact bonds / social impact bonds Neighborly May 24,

50 The good news is we agree. Republicans Infrastructure Proposal: Accelerate GDP growth and support state and local government capital projects with changes to tax policy, regulation, and capitalizing on lower energy costs. Democrats Infrastructure Proposal: Accelerate GDP growth and support state and local government capital projects with changes to tax policy, regulation, and capitalize on lower energy costs. Neighborly May 24,

52 Questions?

Infrastructure Financing: Current Issues

Wednesday MAY 24, 2017 8:30-10:30 AM Infrastructure Financing: Current Issues MODERATOR SPEAKERS Dan Huge Public Finance Director, Indiana Finance Authority Charles Perl Deputy CFO, San Francisco Public