City of Lakeland, TN Capacity Model Fundamentals of Bond Issues

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Gwendoline Patrick
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PFM Asset Management LLC PFM Advisors 530 Oak Court Drive,

1 City of Lakeland, TN Capacity Model Fundamentals of Bond Issues August 19, 2014 Public Financial Management, Inc. PFM Asset Management LLC PFM Advisors 530 Oak Court Drive, Suite 160 Memphis, TN (p) (f)

Who is PFM? PFM is an independent, SEC registered investment and financial advisory firm. PFM does not underwrite bonds, which eliminates any potential conflict of interest.

2 Who is PFM? PFM is an independent, SEC registered investment and financial advisory firm. PFM does not underwrite bonds, which eliminates any potential conflict of interest. PFM is the nation s leading financial advisor for the past 15 consecutive years Clients get the independence of a financial advisor with market knowledge of an investment bank PFM executes over 60 transactions per month PFM has no conflict of interest between issuers and buyers of municipal bonds Select Other Clients in Tennessee include (but not limited to): State of TN Shelby County, TN Bartlett, TN Germantown, TN Collierville, TN Murfreesboro, TN Spring Hill, TN Clarksville, TN Chattanooga, TN 1

3 Lakeland Capacity Model In April 2014, PFM was engaged to provide a Debt Capacity Analysis Tool for the City of Lakeland, Tennessee. PFM developed a Debt Capacity Model within Microsoft Office Excel that includes multiple levels of functionality: Contains variable growth rate assumptions with respect to both revenues and expenditures; Calculates debt service associated with future projects based on the City s capital improvement plan; Adjusts for changes to the property tax rate. The Capacity Model was developed as a tool for the City s Administration to embark on multi-year financial planning for large capital projects. The Capacity Model utilizes the following growth rates: General Growth Tax Growth Modest 1.00% 1.96% Fair 2.00% 6.41% Aggressive 3.00% 9.83% General Growth applies to Revenues or Expenditures not associated with tax revenues. Tax Growth applies to tax revenues only. Growth assumptions are applied to the City s most recent audited financial statements (Fiscal Year 2013). 2

4 Lakeland Capacity Model - Assumptions Assumptions applied the City s Capacity Model: Capacity Model Assumptions General Growth Rate: GF Revs/Exps Modest at 1.00% Tax Growth Rate: Residential/Commercial Property Taxes Property Tax Rate Increase in FY 2016 (Fall 2015) Modest at 1.96% Average Assessed Value Growth $1.40 per $100 assessed value Future Commercial Growth Assessed Value increases by $32 million in FY 17 Future Sales Tax Growth Future Capital Needs Sales Tax increases approximately $230,000 in FY 17 due to new Commercial Growth $500,000 per year Future Bond Indebtedness $50 million borrowed in FY 16 (Fall 2015) Future Bond Indebtedness Structure 30 year; level debt service at 5.00% interest rate 3

5 Lakeland Capacity Model - Results Condensed Results from the Capacity Model: Debt Capacity Memo Preliminary Results For Model Purposes Only Modest Assessment Growth 1.96% 1.96% 1.96% 1.96% 1.96% 1.96% Total Residential Assessment 262,685, ,833, ,083, ,435, ,893, ,457, ,130,821 Total Commercial Assessment 36,559,800 37,276,372 38,006,989 38,751,926 70,751,926 72,138,664 73,552,582 Total Other Assessment 16,808,330 17,137,773 17,473,674 17,816,158 18,165,354 18,521,395 18,884,415 Property Tax Rate Collection Rate 99.92% 99.92% 99.92% 99.92% 99.92% 99.92% 99.92% Total Property Tax Collections 2,684,242 2,736,853 2,790,495 4,686,194 5,215,050 5,317,265 5,421,483 Modest Revenue/Expenditure Growth 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Other Revenues (Not Property Tax) 1 2,956,649 2,986,215 3,016,078 3,046,238 3,290,916 3,323,825 3,357,063 Total General Fund Revenues 5,640,891 5,723,069 5,806,573 7,732,432 8,505,965 8,641,090 8,778,546 Total General Fund Expenditures 2 3,699,193 4,485,135 4,520,002 4,555,603 4,601,159 4,647,171 4,693,642 Excess (Deficiency) of Revenues over Expenditures 1,941,698 1,237,933 1,286,572 3,176,829 3,904,806 3,993,919 4,084,904 Estimated Debt Service $50,000,000 3,478,250 3,478,000 3,475,750 Excess (Deficiency) of Revenues over Expenditures (Post DS) 426, , ,154 Footnote 1 Sales Tax Revenues increase approximately $230,000 in FY 17 due to additional commercial development. Footnote 2 Capacity Model includes additional Capital Spending in FY 14 of $500,000 and this number remains within the Model as an annual expenditure. 4

6 Lakeland Capacity Model Future Debt Snapshot Future Bond Indebtedness - $50 million borrowed in FY 16 (Fall 2015) Proposed Debt Service Tranche One Year Principal Coupon Interest Debt Service , % 2,673,250 3,478, , % 2,633,000 3,478, , % 2,590,750 3,475, , % 2,546,500 3,476, , % 2,500,000 3,480, ,025, % 2,451,000 3,476, ,080, % 2,399,750 3,479, ,130, % 2,345,750 3,475, ,190, % 2,289,250 3,479, ,250, % 2,229,750 3,479, ,310, % 2,167,250 3,477, ,375, % 2,101,750 3,476, ,445, % 2,033,000 3,478, ,520, % 1,960,750 3,480, ,595, % 1,884,750 3,479, ,675, % 1,805,000 3,480, ,755, % 1,721,250 3,476, ,845, % 1,633,500 3,478, ,935, % 1,541,250 3,476, ,035, % 1,444,500 3,479, ,135, % 1,342,750 3,477, ,240, % 1,236,000 3,476, ,355, % 1,124,000 3,479, ,470, % 1,006,250 3,476, ,595, % 882,750 3,477, ,725, % 753,000 3,478, ,860, % 616,750 3,476, ,005, % 473,750 3,478, ,155, % 323,500 3,478, ,315, % 165,750 3,480,750 50,000,000 40,433,000 90,433,000 5

7 Fundamentals of Bond Issues

8 Bond Issuance Purposes New Money Bonds Issued to fund capital projects such as roads, bridges, stadiums, schools, power plants, etc. Requires Initial Resolution (20-day wait period) and Authorizing Resolution (competitive bond sale) Refunding Bonds Issued to pay off existing bonds. The old debt service payments are replaced with new debt service payments. Most refundings are done to create debt service savings by issuing new bonds at a lower interest rate. High to Low Some refundings are done to get out of the restrictions/requirements of an indenture (an indenture defines the parameters for which issuers can issue bonds and the requirements for funding the bonds) on outstanding bonds If current market interest rates are higher than the rates on the existing bonds, this is a lowto-high refunding replacing low interest rates with higher rates for the purpose of getting out of the indenture Requires Authorizing Resolution Only 7

9 Common Bond Security Structures General Obligation Bonds Full Faith and Credit Pledge All legally Available Revenues Taxing Power Not Subject to Appropriation Appropriation (Lease) Bonds Special Obligation Pledge All legally Available Revenues No Taxing Power Subject to Appropriation Revenue Bonds Revenue Pledge Specifically Defined Revenue Source No Property Taxing Power Covenants to Ensure Revenue Sufficiency Not Subject to Appropriation 8

General Bond Terminology Principal or Par

Date Repayment Date of Bond Issue Coupon

semi-annually) on the Bond Issue Usually

principal and interest payments Annuity of

10 General Bond Terminology Principal or Par Amount Amount of the Bond Issue Maturity Date Repayment Date of Bond Issue Coupon Rate Annual Interest rate (paid semi-annually) on the Bond Issue Usually expressed as a percentage of Par Amount Price Amount an investor will invest in consideration of future receipt of principal and interest payments Annuity of Interest Principal Price= PV of Future Cash Flows (P& I) Maturity 9

11 Terminology Reference City of Germantown, Series 2011 MATURITIES, AMOUNTS, INTEREST RATES AND YIELDS Par Amount Maturity Date Principal Amount $6,025,000 GENERAL OBLIGATION BONDS, SERIES 2011 Due December 1 Amount Interest Rate Yield CUSIP No $ 240, % 0.350% QZ , RA , RB , RC , RD , RE , RF , RG , RH , RJ , RK ** 305, RL ** 310, RM ** 320, RN ** 330, RP ** 340, RQ , RR , RS ** 375, RT , RU4 Coupon Rate 10

12 Principal Amortization Structures Serial Bond Structure Term Bond Structure 0 Term Bond Sinkers 0 Bullet Maturity Structure 0 11

Principal Amortization Structures Individual investors invest in Bullet Bonds; a series of interest payments followed by a payment of the principal at maturity.

13 Principal Amortization Structures Individual investors invest in Bullet Bonds; a series of interest payments followed by a payment of the principal at maturity. Not every investor wants to invest for the same period of time. Some prefer to invest for 20 years Annuity of Interest Principal Others prefer a shorter ( or longer) period of time, i.e. 10 years 20 years (Maturity) Annuity of Interest Principal 10 years (Maturity) By issuing a Serial Bond (a collection of Bullet Bonds), an issuer can make many different bullet bonds available to investors interested in different investment horizons. Why would an issuer want to issue Serial Bonds, rather than 1 bullet bond for the full amount? Not many investors have $100MM ready to invest for 20 years. Creating serial bonds allows more investors to participate in the issuance, thus creating competition among investors which leads to better interest rates for the issuer. Allows issuers to spread out the payment of principal, rather than paying one lump sum. 12

14 Principal Amortization Structures From an issuer s perspective Example of what a Serial Bond could look like: Proposed Debt Service Tranche One Year Principal Coupon Interest Debt Service , % 2,673,250 3,478, , % 2,633,000 3,478, , % 2,590,750 3,475, , % 2,546,500 3,476, , % 2,500,000 3,480, ,025, % 2,451,000 3,476, ,080, % 2,399,750 3,479, ,130, % 2,345,750 3,475, ,190, % 2,289,250 3,479, ,250, % 2,229,750 3,479, ,310, % 2,167,250 3,477, ,375, % 2,101,750 3,476, ,445, % 2,033,000 3,478, ,520, % 1,960,750 3,480, ,595, % 1,884,750 3,479, ,675, % 1,805,000 3,480, ,755, % 1,721,250 3,476, ,845, % 1,633,500 3,478, ,935, % 1,541,250 3,476, ,035, % 1,444,500 3,479, ,135, % 1,342,750 3,477, ,240, % 1,236,000 3,476, ,355, % 1,124,000 3,479, ,470, % 1,006,250 3,476, ,595, % 882,750 3,477, ,725, % 753,000 3,478, ,860, % 616,750 3,476, ,005, % 473,750 3,478, ,155, % 323,500 3,478, ,315, % 165,750 3,480,750 50,000,000 40,433,000 90,433,000 13

15 Summary Capacity Model - Based on the Assumptions provided by the City and outlined page 3, the City would have sufficient revenues to cover the estimated ongoing expenditures, including the additional debt associated with the issuance of $50 million of municipal bonds. Future updates may be warranted to monitor the City s financial performance, such as FY 2014 financial data and/or reconciling information associated with the FY 2015 Budget to allow the growth rate assumptions to apply to the most recent financial data available. Municipal Bonds Bonds can be structured multiple ways and carry a variety of considerations associated with these options. For the purposes of the Capacity Model, PFM has assumed Bonds issued by the City will be a fixed rate and will amortize serially. PFM suggests that when the City is preparing to issue Bonds, they enlist a Financial Advisor to evaluate some of the following considerations: Fixed Rate versus Variable Rate debt and the overall debt profile of the City Optional redemption features associated with Fixed and Variable Rate Bonds Obtaining a credit rating and any credit enhancement, if needed Principal Repayment or Amortization Structure 14

$66,000,000 North Carolina Housing Finance Agency Home Ownership Revenue Refunding Bonds, Series 36 (Taxable Interest) (1998 Trust Agreement)

$66,000,000 North Carolina Housing Finance Agency Home Ownership Revenue Refunding Bonds, Series 36 (Taxable Interest) (1998 Trust Agreement) NEW ISSUE This Official Statement has been prepared by the North Carolina Housing Finance Agency to provide information on the Series 36 Bonds. Selected information is presented on this cover page for