Federal Budget Scoring. Kim Burke, The Craddock Group

Transcription

1 Federal Budget Scoring Anita Molino, Bostonia Partners Kim Burke, The Craddock Group December 7, 2017

2 Understanding Federal Budget Scoring and Its Influence on Federal P3s Introductions: Anita Molino, Bostonia Partners, Boston, MA Kim Burke, The Craddock Group, Washington, DC Session Summary: The federal budget scoring process is considered one of the primary barriers to the broader use of federal P3s. This session will address how the scoring process works and how it influences the federal P3 market. 2

3 What is Scoring? Scoring is the process of measuring the budgetary effects of pending and enacted legislation against a baseline CBO/OMB baseline is a projection of federal spending and receipts under current law Who does Scoring: Scorekeepers House and Senate Budget Committees Congressional Budget Office (Joint Committee on Taxation for revenue estimates) Office of Management and Budget 3

4 Interpreting Rules of Budgetary Scoring OMB CBO All financing proposals that are non-routine in nature and involve unique or unusual concepts or characteristics (OMB, A-11) Third Party Financing: Intermediary other than the U.S. Treasury can raise money in private capital markets on behalf of a federal program 4

5 Why do we do scoring (applicable laws)? The Constitution Antideficiency Act (codified in Chapters 13 and 15 of Title 31, United States Code) 11 USC 31 Congressional Budget and Impoundment Control Act of 1974 (Public Law ), as amended Balanced Budget and Emergency Deficit Control Act of 1985 Budget Enforcement Act of 1990 The Budget Enforcement Act of 1997 Government Performance and Results Act of 1993 Source: OMB, 5

6 Two Categories of Federal Spending Mandatory spending (also referred to as direct spending) Provided or effectively controlled by permanent law, requiring no annual action by Congress or President Typically, amount is based on eligibility criteria and payment formula Constitutes about two-thirds of federal spending Under jurisdiction of authorizing committees Discretionary spending Provided in appropriations acts, requiring annual action Amount is specified in appropriations acts Constitutes about a third of federal spending Under jurisdiction of Appropriations Committees 6

7 The Basics 7

8 Examples of P3 ( Alternative Financing ) Transactions Debt backed by full faith & credit of the US Capital leases Public/private partnerships Share-in-savings contracts Enhanced use leases Outlease/leasebacks Source: OMB Common characteristic defer cash payments while giving the Government the use of assets 8

9 OMB Review of P3s OMB bases determinations on: Amount of Government control Risk borne by the Government Government as a partner: Bears some risk of the project s failure Can minimize private sector risk by making sure that the Government always leases the space Source: OMB 9

10 Revenue generating EULs What is OK Non-federal income stream to support private borrowing Fee Simple Disposals Removing government expense for maintaining underutilized land) Unlocking previously unavailable real estate for other public or private use Exchange for property or services (GSA) Historic property outleasing (Section 111) Energy savings (including ESPCs) 10

11 Yes! ESPCs PPAs EULs for private use Energy EULs with minimum federal offtake Public-Public Partnerships (P4s) Generally, no Long term federal tenant leases Stand-alone utility projects under ESPC Government purchase of 100% of output from energy EUL New MHPI ground-up transactions But then again. this is Washington (read: subject to change) 11

12 OMB and CBO Scoring Actions related to P3s Program Execution within Existing Law: VA Enhanced Use Leasing with Trust Agreements and/or Leasebacks OMB changed scoring guidance in Circular A-11 to require stringent guidelines for leasebacks to require upfront scoring DoD Enhanced Use Leasing OMB changed scoring guidance in Circular A-11 for leasebacks upfront scoring Privatization of Army Lodging LLC OMB required upfront scoring of proposed transaction with LLC Legislative Proposals: Proposal Military Housing Privatization Permanent authorization of program (Ronald W. Reagan National Defense Authorization Act for 2005) GSA Property Reform Legislation (H.R. 3947, Federal Property Asset Management Reform Act of 2002) National Health Museum Act (H.R. 5164, Sep. 2004) Sale / leaseback of office space at Cotton Annex OMB or CBO Reaction CBO scoring report declared upfront scoring Congress passed legislation CBO scored at $6 billion 1 CBO scoring report declared upfront scoring at $173+ million 2 Congress did not pass legislation CBO scoring report declared upfront scoring of budget authority at $170 million 3 Congress did not pass legislation 1. CBO cost estimate: 2. CBO cost estimate: 3. CBO cost estimate: 12

13 Finance Options for Federal P3s Type of contract drives financing options: Debt financing lowest cost of funds Long term contracts not subject to scoring ESPC PPAs under 2922a Certain GSA and VA property leases Simple Debt/Equity models Long term government cashflows to be combined with modest equity component Military housing Equipment leases Complex capital stack Short or unpredictable cash flows Utilities privatization Renewable energy projects Enhanced use leases 13

14 P3 Capital Stack All the investment in the project company can have many different sources of capital; all debt, a simple debt/equity structure, or a more complex capital stack. The capital stack demonstrates a positive relationship between risk and return. Investment grade debt assumes the least amount of risk and requires lowest return Sponsor equity assumes the greatest risk and requires the highest return Sponsor Equity Sponsor Equity Preferred or Tax Equity Mezzanine Investment Junior Debt Investment Grade Debt

15 Risk and Return Private Sector Transaction Public-Private Risk Sharing Public Sector Transaction Expected Rate of Return UST Spread vtaxable Debt Taxable Debt Mezz Debt Preferred or Tax Equity Preferred or Tax Equity Sponsor Sponsor Equity Equity 100% Recourse to Government Risk to Investor 15

16 Accounting for Federal P3s Federal Government Budget considerations OMB Circular A-11, Exhibit B Accounting considerations FASAB / Public-Private Partnerships Disclosure requirements, April 2016 Federal financial accounting standards 49, effective September 2018 Establishes principals to ensure that disclosures about P3 s are presented and includes the exemption of certain arrangements from the P3 disclosure Private Sector Finance structure Equity Debt Guarantees Accounting considerations Balance sheet Recourse or non-recourse Reporting 16

17 Private Sector Accounting Under current GAAP accounting standards (ASC 840), contemplated transactions will be structured to meet off-balance sheet treatment subject to Sponsor accountants and auditors approval Service agreements meet both off-balance sheet and off-credit criteria Terms are not disclosed in Financial Statement footnotes Fair market value determination required for purchase option Under new accounting standards taking effect in 2019 (ASC 842), structure will be evaluated to determine if it contains an imbedded lease ASC 842 All leases, including operating leases will be consolidated on the balance sheet as a Right of Use Asset ( ROU ). Operating leases will continue to meet off-debt and off-credit treatment True Service Agreement ( off-balance sheet ) treatment still possible but may require multiple off-takers or sufficient 3 rd party revenue sources to meet economic benefits test Calculate lease value in consideration of variable payment and guarantees Fair market value determination required for purchase option 17

18 Debt Model Example Before ESPC Contract: Baseline Energy + Operations & Maintenance (O&M) costs During ESPC Contract: Energy + O&M cost savings utilized to pay debt service, ESCO services, and any remaining cost savings are captured by customer After ESPC Contract: All Energy + O&M cost savings captured by customer Before ESPC Contract During ESPC Contract After ESPC Contract Agency s Cash Flow ($) E + O&M Savings ESCO Services Financing Debt Service E + O&M E + O&M Cost Savings Savings E + O&M 18

19 Debt/ Equity Financing Structure Example Project Company SPV 19

20 GSA/VA Financing Structure 100% 90% Lump Sum Payment Second Tranche - A2 Note Interest Only Reduction in Rent Market Rent Cost of Construction (%) 60% First Tranche - A1 Note Interest and Principal Second Tranche - A2 Note Interest and Principal Rental Rate Construction Period Year 5 Year 10 Year 15 Year 25 Initial Lease Term Lease Renewal Term

21 Services Agreement Structure ESA Agreement and Ground Lease Services provided under ESA/PPA Utility service/savings Payments $ Performance / Savings Guaranty Federal Government Entity Utility service/savings Contractor Assignment of Assets and ESA Payments Funding Proceeds and O&M Payments $ EPC and O&M services SPE Debt Service Payments Applicable Grants or Tax Benefits Ownership Distributed Generation / Renewable Energy & ECM Assets 21

22 Finance & Contracting Options Enhanced Use Leases Power Purchase Agreements Government Ground Lease Power Sales Government Commercial Off-Taker Power Sales Developer/Special Purpose Entity O&M Fuel EPC Trustee PPA Payments Power Payments Trustee Debt Service Financier Debt Service REC Purchaser Tax Equity Debt Lender Sponsor Equity 22

23 Conclusions Scoring exists Transactions have to meet the guidelines Deal structuring and contract vehicles have evolved to accommodate scoring rules Financing has adapted to the rules, recognizing that private entity may need to absorb risk and/or contribute equity to make the transaction work It is generally recognized that current scoring guidelines are limiting use of federal P3s or making the use unnecessarily costly ( unintended consequences ) 23

24 Questions? Anita Molino, Bostonia Partners Kim Burke, The Craddock Group