CADA Board of Directors March 24, 2017, Board Meeting AGENDA ITEM 8 CADA FINANCIAL FORECAST (FY THROUGH FY )

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1 March 15, 2017 TO: SUBJECT: CADA Board of Directors March 24, 2017, Board Meeting AGENDA ITEM 8 CADA FINANCIAL FORECAST (FY THROUGH FY ) CONTACT PERSON: Noelle Mussen, Controller RECOMMENDED ACTION: For information only. This report provides CADA s annual Ten Year Financial Forecast for discussion as CADA plans its business priorities for Fiscal Year through Fiscal Year BACKGROUND Each year, CADA updates its ongoing Ten Year Financial Forecast. The Forecast reflects changes in financial and economic conditions that affect CADA s general operations and development projects. The Forecast is a tool that aids in the preparation of the annual CADA budget proposal made by staff for review by the Board in June. Because development projects require advance funding, and since the timing of the resulting tax increment is uncertain, the Forecast analyzes the impact of all development projects on CADA s overall operations, including General Operations and Major Construction. POLICY ISSUES CADA is charged with implementing the residential and commercial components of the State s Capitol Area Plan and the City of Sacramento s R Street Corridor Master Plan in a manner that is fiscally, socially and environmentally sustainable, and that results in an attractive urban neighborhood that is affordable to a diverse population. To accomplish its mandate, CADA must ensure that its property management activities are costeffective and that its urban development activities are fiscally prudent. As a tool for ensuring that it is pursuing its mission in a fiscally responsible manner, CADA prepares a Ten Year Financial Forecast each year. The Forecast enables CADA to consider the needs of its aging housing stock and the implications of development and neighborhood investments on its long-term fiscal stability, and provides the basis for CADA s annual budget, which is presented to the CADA Board of Directors each June. Separate forecasts are provided for the Capitol Area (Attachment 1) and the R Street Area (Attachment 3) because Capitol Area tax increment (TI) cannot be used in the R Street Area without prior approval from the Department of General Services (DGS) and the two areas have different restrictions with regard to the use of 20% affordable housing set-aside funds.

2 CAPITOL AREA FORECAST (ATTACHMENT 1) This Forecast presents CADA operations and fiscal responsibilities in the Capitol Area in three segments: General Operations, Major Construction and Development. With regard to Tax Allocation Bond activities, CADA s on-going bond debt service is reported as an expense within General Operations. A portion of the remaining bond has previously been approved by the Board to be used in the R street Area for the 1717 S Street project. CADA has established a threshold for the Capitol Area below which its cash reserves should not fall. This threshold represents six months of operating expenses, or approximately $3.9 million. The last Forecast, which was prepared in 2016, projected CADA s financial reserves would decline, but available funds in the Year 10 would be $4.9 million, which was above the $3.9 million threshold. This year s Forecast shows a similar decline in fund balance throughout the ten years, but starts at a higher level than in last year s Forecast. Therefore, available funds throughout the 10 year period stay above the $3.9 million threshold by a greater amount, resulting in an ending balance of $5.2 million in available funds in Year 10, a $300,000 increase over last year s $4.9 million ending balance. This is due to net changes in assumptions in General Operations, Major Construction and Development; loss of rental revenue from the two development sites; changes in development project requirements one of which has a debt service component; cancellation of a development project; predevelopment of a affordable housing development site by CACDC; and a larger beginning available reserves balance than in the prior Forecast. The Capitol Area Forecast covering the period of FY (Year 1) through FY (Year 10) is presented in Attachment 1. In keeping with past Forecast practices, this Forecast does not

3 include the operation of CADA s Special Management properties. As reported in Attachment 1, the General Operations segment of the Forecast remains positive across the ten year period. Key assumptions, by segment, having a financial impact on Capitol Area cash reserves during the forecast period of FY through FY are as follows: GENERAL OPERATIONS General Operations consists of property management revenue and expenses (residential and commercial activity), tax increment revenue, and administrative and development support activities for the organization. General Operations can be impacted by major construction and development projects, increases or decreases in tax increment and property management revenue, and changes in the number of affordable housing units maintained within CADA-managed properties. Key Assumptions The Forecast assumes Rental Income will increase 2% per year to approximate inflation. The estimated rental income declines in Year 2, to reflect the demolition of the Site 21 residential building and parking lot, and in Year 7, to reflect the demolition of the Site 5/6 commercial buildings to make way for proposed new CADA development projects. The Forecast assumes the CADA Low Income Subsidy Program will remain in place during the entire 10 year period, with the subsidy balance increasing 2% per year. Tax Increment (TI) revenue in the Capitol Area in Year 1 is increased to reflect FY estimated levels, followed by 2% increases each year thereafter. TI revenue generated by development projects that are in progress is not included in this segment of the Forecast. This revenue is reported by project in the Development segment of the Forecast. However, the one TI pledge payment has been included in this section for $300,000 annually for EVIVA Midtown until Year 10, after which the subsidy ends. The $123,500 annual TI pledge from Legado de Ravel project has been declined by the developer as unnecessary and removed from the Forecast. Investment Earnings should continue to be low consistent with past years performance. Consequently, the Forecast continues to reflect an anticipated annual investment earnings rate of 2%. In addition to interest earned on operating reserves, the Forecast reflects a total of $15,000 of investment earnings from unspent bond proceeds in Year 1. With regard to Notes Receivable, throughout this Forecast period CADA will continue receiving $30,000 annual payments under the terms of the first Fremont Mews developer loan. The second Fremont Mews loan of $500,000, which was extended to FY 18-19, assumes the loan will be repaid on schedule. The Forecast assumes Salaries and Benefits will increase 3% per year with the exception of Retirement Benefits and Other Post Employment Benefit (OPEB) liabilities. Those have been adjusted based on information from CalPERS and current actuarial reports from CADA consultants. Year 1 is based on the current staffing structure and no other staffing changes are assumed for the remaining 10 years. For retirement benefits, according to the latest CalPERS actuarial report, CalPERS is billing CADA for the normal cost, or retirement cost estimated to vest by active employees in a

4 given year, as a percentage of payroll, but any unfunded liability is being billed at the calculated annual dollar value, which currently is amortized over 30 years. In this Forecast, staff has incorporated assumptions from CalPERS pertaining to the normal cost rates and the annual unfunded liability payment. The normal cost rate per the CalPERS actuarial report is 9.7% from Years 1-5, and staff assumed a.5% increase per year after that. The unfunded liability amount is from a 30-year amortization schedule from the CalPERS actuarial report. We also received notice from CalPERS of their intention to reduce the discount rate from 7.35% to 7.0% over the next three years. Staff incorporated the calculated average estimated impact this change would have on CADA. This will increase CADA s required contributions to both the normal cost rate and the unfunded liability, potentially increasing our total contribution over the ten years by $1.8 million as compared to the prior year forecast. OPEB Liabilities are projected to continue to be fully funded in a trust fund established through CalPERS. CADA s current OPEB actuarial report covers our current Annual Required Contribution (ARC) for FY 16-17, starting in Year 1, the annual amount is calculated by using the FY ARC and growing the liability 3% per year. CADA will continue to reimburse current retirement health benefits from the trust, starting at $145,000 per year and increasing by 5% per year. The Forecast assumes Outside Services accounts and Maintenance and Repair accounts will increase 3% per year. Utilities and Overhead are assumed to increase 2% per year, with one exception. The CADA Administrative Office rent is held flat in Years 1 2 in accordance with CADA s ten year lease with DGS, which contains no rent escalation. The lease was entered into with DGS in January 2010 and ends in Year 2. In the remaining years of the Forecast, staff assumes the rental expense will increase 3% each year. Starting in Year 1 total debt will decrease when the debt payments CADA is making on the second Capitol Lofts Brownfield Loan are completed. A further decrease will occur in Year 7 when the first Capitol Lofts Brownfield loan is completed. There will be a slight debt increase in Year 4 due to the note repayment on the 701 S Street CADA Maintenance Office loan. This loan has a balloon payment in Year 5 and the Forecast assumes the remaining balance of the loan will be refinanced at 7% for 20 years. Thereafter, CADA s continuing debt consists of the I-Bank loan and land loan debt paid by CADA to DGS for the East End Gateway Sites 1-3 projects. Tax Allocation Bond Debt Service has changed from the prior year Forecast. CADA refinanced the 2004 Tax Allocation bond in 2016 for a fixed lower interest rate over the same term of the original bond. This reduced the average bond debt payment from $788,000 per year to $655,000 per year throughout the Forecast. This change in debt service reflects a net savings of $1,320,000 over the next ten years. Also included in the Forecast is the debt service reserve beginning in the current year for two Special Management properties, Somerset Parkside and Biele Place. The existing annual reserves will be assumed to be $95,000 and $82,000, respectively, and will be set aside to pay the deferred debt on these projects that CADA will need to pay to HCD at the end of the revised regulatory periods. The Forecast assumes the debts will be paid off in 2038 when the CADA-DGS master lease for CADA-managed properties expires.

5 As reported in Attachment 1, this segment of the Forecast remains positive across the ten year period. MAJOR CONSTRUCTION The Capital Improvement Needs Assessment covering Fiscal Years through 20-21, and which was presented at the December 2016 Board meeting, has been updated and incorporated into this Forecast along with the assumption that the currently-budgeted major construction projects will be completed in Years 1 and 2. Usually, Special Management construction projects are funded through those properties operations. In this case, two of CADA s larger Special Management buildings, Somerset Parkside and Biele Place, do not generate sufficient revenues to fund required repairs. This requires capital improvements to be funded through CADA s general construction budget. These assumptions yield a total Major Construction outlay of $8.7 million over the 10 year period. This is a $1 million increase over the prior year Forecast. In the second five year period, the Forecast assumes that total capital improvement needs will be approximately $962,000 per year, plus a 1% inflationary increase per year. This is an increase from the prior year Forecast which assumed $700,000 in Year Five and increased 1% per year. This increase to the estimate is to reflect major construction expenditures that have been deferred for multiple years and now should be addressed. CADA s buildings are aging and some require significant systems replacement, repairs, or upgrades. Major Construction budgets remain active and open for three years and the cash flow for these expenditures is usually expensed over a three year period. Therefore, from Years 3 to 10, to better reflect the cash flow of CADA s major construction projects, total estimated project expenditures in each Forecast year are expended over a three-year period, generally with 25% expended in the first year, 50% in the following year, and 25% in the 3 rd year. DEVELOPMENT In this Forecast, Development projects are categorized by either Current or Neighborhood and Infrastructure Improvements Projects. While the Forecast includes some of the same projects as in prior years, some projects have had significant modifications due to varied issues including timing delays, project restructuring, and financing restructuring. For the current Forecast, assumptions for each development project are estimates based on information received from CADA project managers as of the end of February. Therefore, changes to development project assumptions that have occurred since February may not be reflected in the Forecast. Key assumptions for development projects (timing, revenues and expenditures) reflected in the current Forecast are shown below. Further detail for each development project is provided in Attachment 2. Current CADA Development Projects Current CADA Projects consist of the WAL (formally Capitol Lofts), Eviva Midtown (East End Gateway Site 1), Site 21 (14 th & N), and East End Gateway Site 5/6/7. For these projects, the Forecast projects $1.6 million in CADA net resources will be expended over the ten year period. This is a decrease from prior Forecasts that reflected a projected need of $5.2 million. The change is largely due to the removal of the Westminster project which was estimated to need $3.7 million in project

6 subsidy in the first two years. Other changes are due to the completion of the East End Gateway Site 1 & 4 projects and the removal of a proposed Mercury Cleaners parking lot project. The TI generated or to be generated by the projects and the loss of revenue due to the projects has been incorporated in the General Operations segment of the Forecast. WAL (formally Capitol Lofts) This project is complete and the only remaining expenses are reimbursement to the developer of the cost to construct parking on the B&G site and CADA s future receipt of annual rental payments from the Developer. These activities are incorporated in the General Operations segment of the Forecast. Eviva Midtown - East End Gateway Site 1 This project is complete and the remaining expenses are to close out the project. Current land loan payments are recognized in the Operations section of the Forecast, within current debt service. The tax increment estimate is based on projected net operating income (NOI), yielding a projection of $300,000 per year upon completion, increasing annually by 2%. This is offset by an annual $300,000 tax increment pledge to the developer for the full 10 years. The tax increment estimate is incorporated within the General Operations section of the Forecast. Mercury Cleaners This project has been changed from the prior Forecast. The proposed $226,000 investment for a surface parking lot similar to the 15 th & Q Street lot developed by CADA, has been removed and this site has been incorporated into the EEG Site 5 and 6 project as an additional component. Site 21 Following the Capitol Area Plan, this Forecast assumes a for-sale condominium project consisting of 48 market rate units with no retail component. The Forecast s tax increment estimate assumes a for-sale project with a $600,000 price per unit, yielding total projected tax increment receipts of $288,000 per year upon completion and sale of all of the condominiums in the project. It is assumed that 50% of the condominiums will be sold by FY with 50% of the annual tax increment received in FY and the full annual amount of tax increment received starting in FY Loss of the rental revenue of $212,000 due to removal of Senator Manor at 1320 N Street and the parking lot at 1330 N Street is incorporated starting in Year 4 within the Operations section of the Forecast. The negative affordable housing impact resulting from construction of an all-market rate project is estimated to be 12 units, yielding an annual impact of $54,000 per year increasing at 2% per year starting in FY This is assumed to be CADA s annual cost of providing offsetting affordable housing elsewhere within the CADA portfolio. The Forecast assumes a developer will purchase the land from CADA, and that CADA will purchase the land from DGS as part of a concurrent closing. The Forecast also assumes there will be no other subsidy to the developer from CADA as part of this project. The Forecast assumes that a developer will be selected by FY with a Development and Disposition Agreement (DDA) entered into by FY so construction can begin in FY and be completed by the summer of FY

7 East End Gateway Site 5/6 The Forecast assumes this project will be 60% market rate and 40% affordable using 4% tax credit financing and will contain a total of 100 units. This project would meet its own affordable unit requirement and create 15 additional affordable units. The project will require a net investment outlay of approximately $3.1 million over the 10 year period and will continue to run negative throughout the whole 10 years, mostly due to the anticipated debt service payment for the land from CADA to DGS. The Forecast makes the conservative assumption that there will be no tax increment generated by this project as the assumption is that the project will be primarily an affordable project. The Forecast assumes loss of the rental revenue due to removal of Hand-in-Hand, Enterprise and Simon s Bar & Café in Year 7. This assumption is contained within the Operations section of the Forecast. The Forecast assumes CADA will purchase a clean site from DGS through debt financing for $110 per square foot at an interest rate of 6% for a term of 20 years, which is within CADA s remaining life as a Joint Powers Agency. Land and $1.3 million in project assistance will be granted to the developer as part of CADA s subsidy. The subsidy would be funded by the reallocation of the Mercury Cleaners remediation reserve, which is no longer needed, to a new affordable housing reserve. Then, over the next 7 years, an additional $130,000 per year will be deposited into this reserve for a total of $1.3 million by FY The Forecast assumes a developer is selected by FY 19-20, with the DDA completed by FY so construction can begin in FY and be completed by the winter of FY Westminster This was a proposed mixed-income rental project in the prior year Forecast. This project will not be moving forward and has been removed from the current Forecast. Neighborhood and Infrastructure Improvement Projects Neighborhood and Infrastructure projects consist of Roosevelt Park, O Street Streetscape, Street Light Improvements, and 16 th Street Streetscape projects. For these projects, $2.2 million in CADA net resources will be expended during the ten year period. The infrastructure improvement projects in the Capitol Area Roosevelt Park, O Street Streetscape, 16 th Street Streetscape and Street Light Improvements are collectively projected to require the $2.2 million investment for potential grant matches, infrastructure improvements and site improvement costs. This will be partially offset by a $200,000 reimbursement from the 16 th Street Strategic Growth Council streetscape grant to reimburse CADA for costs it has already advanced for this project. Other projects Fremont Park, Utility Box Art, 16 th Street Light rail improvements Projects included in the prior Forecast have been completed and removed from this Forecast. The Block 222 project is considered inactive for this Forecast. R STREET FORECAST (ATTACHMENT 4) As mentioned earlier, because of different restrictions on the utilization of tax increment generated within the R Street Area, the R Street Area Forecast is presented separately from the Capitol Area Forecast. The R Street Forecast includes two segments -- Unrestricted Funds (80% of TI) and Set- Aside Funds (20% of TI).

8 As illustrated in the table below, the net result of the activities planned on R Street in this year s Forecast is positive cumulative fund balances in both the Unrestricted and the Affordable Housing Set-Aside segments throughout the ten year period. The restricted balance gets very close to zero in Year 1. The R Street Forecast presented in Attachment 3 provides the revenue and expenses projected for this ten year period. Project-specific detail for R Street Area Development Projects is provided in Attachment 4. UNRESTRICTED SEGMENT ASSUMPTIONS The Forecast reflects increased tax increment levels in FY and it assumes tax increment levels will increase 2% each year thereafter. Streetscape projects represent the largest expenditure from R Street Unrestricted Funds, for a total of $1.9 million in Year 1, consisting of $995,000 in matching funds for the Phase III construction grant, $550,000 in additional expenses not covered by the grant to complete the last block of streetscape improvements on R Street, and $325,000 to complete the street bollard project and other street furnishings and art. In the prior Forecast the streetscape project was followed by $900,000 in expenditures for alleyway improvements in Years 7 8. Alley improvements have been removed, and the Forecast assumes there will be no further major CADA projects planned in the R Street Area. As a result, remaining funds in the reserve should be approximately $7 million by Year 10. This Forecast proposes a transfer of $662,000 in bond proceed from the Capitol Area to the R Street Area to be used for infrastructure projects. This will free up unrestricted R Street

9 tax increment funds to be transferred to the Capital Area Community Development Corporation (CACDC) for the 1717 S Street Project due to cash needs for this proposed affordable project. CADA has received approval from DGS to use these proceeds in the R Street Area. AFFORDABLE HOUSING SET-ASIDE SEGMENT ASSUMPTIONS The Forecast reflects increases in tax increment levels in FY and it assumes 2% increases each year thereafter. Due to the anticipated funding needs of the proposed 1717 S Street affordable housing project, $662,000 in unrestricted tax increment funds is proposed to be transferred from the R Street unrestricted funds account to the CACDC. These funds are proposed to be expended in Year 1 for predevelopment costs. The prior Forecast incorporated the purchase and cleanup of the 1717 S Street site by the CACDC. This activity has been removed from the new Forecast since the purchase occurred in FY The Forecast now assumes the CACDC will expend approximately $770,000 for predevelopment expenses to prepare for project design and other materials CACDC and its partner will need in order to submit a request for Cap and Trade grants and for 4% Tax Credit funding. These costs will be funded from the current affordable housing reserve, current tax increment, and assistance from unrestricted tax increment funds. Construction expenses for the 1717 S Street affordable housing project have not been included in this Forecast. These costs will not be known until the project team is ready to submit funding applications. Likewise, the Forecast does not include tax increment, equity participation or management free revenue assumptions as they are unknown at this time. Staff has removed $121,510 in tax exempt bond proceeds from this Forecast since Tax Exempt proceeds cannot be transferred to a non-profit, including CACDC, unless the transfer is explicitly stated in the bond offering The 2004 Bond Offering did not provide for such a transfer. CONCLUSIONS The Capitol Area Forecast indicates there will be sufficient funds to meet the projected needs of CADA s General Operations and Development Projects during the ten year Forecast period. However, due to projected development and infrastructure project needs and increased major construction improvement needs for CADA s aging buildings across the whole Forecast, expenses will grow faster than revenue, which will require a large drawdown on reserves and current resources. By Year 10, available funds will come close to our required minimum reserve balance. If the projected projects and activities occur, CADA s ability to fund other projects or improvements into the future will be diminished. Therefore, it is imperative that CADA continue to carefully consider its commitments in the near future and that it undertake actions to realign its revenue and expense patterns if it wishes to achieve a minimum reserve balance larger than $5.2 million in Year 10. The R Street Area Forecast indicates that R Street requires bond funding from the Capitol Area to meet its projected expenditures for the development of the affordable housing project. After the purchase and predevelopment costs there is very little affordable housing funding available for additional equity needs for the proposed 1717 S Street project. In the second or third year there is more funding available in the unrestricted funds for this and other projects. In the short run, there will be no funds available in the R Street Area for any projects other than those assumed in this

10 Forecast. However, through growth in tax increment revenues, over a period of a few years, funds will become available. Due to the large cash flow needs, the general downward trend in available funds, and the need for CADA to remain fiscally viable if it is to achieve its objectives, it is imperative that CADA continue to carefully consider its current and future commitments, that it secure infrastructure grants and outside development funding when it can, and that it undertake actions to realign its revenue and expense patterns. STRATEGIC PLAN The Strategic Plan value most directly pertinent to this action is Fiscal Responsibility, by analyzing CADA s cash needs through an annual financial forecast will assist in the fulfillment of all of CADA s Strategic Plan goals. FINANCIAL IMPACT The purpose of the Financial Forecast presented at this meeting is to provide the Board and staff a broad understanding of the overall impact of currently envisioned projects and programs on CADA s financial well-being. As with any forecast, the impacts will be subject to refinement as projects are finalized and conditions change. Accordingly, while this document serves as a valuable reference, the specific financial impacts of proceeding on any project or program will be analyzed at the time decisions are made. ENVIRONMENTAL REVIEW Not applicable. The action before the Board is an administrative matter and is not a project subject to the guidelines of the California Environmental Quality Act. CONTRACT AWARD CONSIDERATIONS Not applicable. The action before the board does not involve contract awards. Attachments: 1. Capitol Area Forecast 2. General Fund Development Detail 3. R Street Area Forecast 4. R Street Development Projects