Bonds & TIFs SDML Finance Officer s School 2018 Presented by: Tom Grimmond Ray Woody Woodsend Senior Vice President Senior Vice President 5/30/2018 1 Bonds Definition:--SDCL 6-8B-1(1). Bond any obligation for the payment of a specified sum of money at a specified future date, for the repayment of money borrowed by a public body, issued by a public body pursuant to authority granted in law including but not limited to revenue, assessment, and general obligation bonds. Election Requirement for Issuance SDCL 6-8B-2 states: Unless otherwise provided, no bonds may be issued either for general or special purposes by any public body unless at an election sixty percent of voters of the public body voting upon the question vote in favor of issuing the bonds. General Obligation (GO) bonds which can be issued for any municipal purpose, require a 60% vote and are debt. Bonds subject to otherwise provided. 1. Additional 10% debt limit for Utility bonds as provided for in Article XIII. Sec. 4 of Constitution with majority election. 2. Bonds that statutes authorizing issuance specifically exempt from elections including sales and gross receipts tax SDCL 10-52-2.10 & 10-52A-14 which are the most used. 5/30/2018 2 Sales Tax & Gross Receipts Tax Bonds Under S.D.C.L. 10-52 Sales Tax Bonds can be used for any municipal purpose. Gross Receipts Tax Bonds must only be used for purposes listed in S.D.C.L. 10-52A-2 and 14. Generally a municipality may not want to use these bonds for projects that do have another source for repayment, i.e. utilities, and parking. In South Dakota these bonds count against 5% debt limit and although exempted from election requirement by authorizing statutes they are subject to referendum. Occasionally, to avoid the need for an election, to avoid increasing user fees or to obtain better interest rates, sales tax bonds have been issued and therefore the sales tax is pledged to repayment of the bonds, the municipality actually uses other revenues to the extent available to make the payments, i.e. utility, parking, etc. 5/30/2018 3 1
Revenue Bonds of Municipal Utilities and Telephone System For Utilities describe in SDCL 9-40-1 and 9-41-1 for Telephone Systems, if system revenues are pledged to the repayment the bonds, a 60% voter approval is required and the bonds are considered as debt under the Constitution. SRF Loans (although technically bonds) are exempted from the election by statute but subject to referendum and unless qualify as described below are debt. *Also, for water, sewer, and disposal of other waste see section on Sale Lease-Back for additional information. If only revenues from the improvement constructed with bond proceeds are pledged to the repayment, the bonds are not considered debt and are exempted by statute from an election but are subject to referendum. These can be accomplished basically two ways. One is, if new facilities serve only the area where the improvements are constructed, then revenues from only that area served by the improvements could be pledged to the repayment. However this is generally too small of a project and the rates would have to be quite high to raise enough money to cover repayment. If improvements benefit the entire system, the city can enact a surcharge on the entire system and pledge the net revenues of the surcharge to pay bonds used to pay for the construction. 5/30/2018 4 Special Assessment Bonds SDCL 9-43 provides for the use of special assessments for the payment of the cost of local improvements on property adjoining or benefiting from the improvements. The statutory requirements leading to the leveeing of assessments must be strictly followed and are rather complex. Special assessments can be set up to be payable and collected by the county auditor (Plan One) or by the municipal finance officer (Plan Two) in annual installments not exceeding 40 years. The special assessments are a continuing lien on the property for 15 years from the due date of the last installment. A municipality can issue special assessment bonds payable from special assessments and these do not count against the 5% debt limit because they are a debt of the property owner not the city and by statute are exempted from an election but subject to referendum. With a 60% election, the city can issue GO bonds that are debt to pay the cost of the improvements. 5/30/2018 5 Special Assessment Bonds (continued) A city may also issue sales tax bonds to pay for the improvements along with leveeing assessments and use the assessments to the extent available to pay or reimburse the sales tax fund. This may be necessary to secure new development but the city takes the risk that the development does not occur as soon or as anticipated and therefore it does not get the replacement funds as anticipated. There are some special requirements regarding special assessments for streets in SDCL 9-45, sidewalks in 9-46, water in 9-47-5 directs to follow provisions for sewers in 9-48, and for public convention halls in 9-53. 5/30/2018 6 2
Parking Facilities Parking revenue bonds payable from net revenues can be authorized by ordinance and SDCL 9-51-21 provides the bonds authorized by SDCL 9-15-13 through 19 are not debt. SDCL 9-51-14 allows net revenues (from new facility, existing facilities, and on street parking), which meet the requirements including sound accounting practices to be defined in the ordinance, to be pledged. The bonds by statute are exempt from an election but are subject to referendum. With a 60% election, the city may issue general obligation bonds to be used alone or in conjunction with net revenues as set forth in the bond ordinance for the acquisition, construction or improvement of parking facilities. The amount payable from the tax levy would constitute 5% debt. Sales tax bonds could be used and parking revenues used as available to reimburse. These would be debt and subject to referendum. 5/30/2018 7 Auditorium and Convention Centers SDCL 9-52 in general applies to auditoriums without any definition of what that might include, however 9-52-1.1 was added in 1972 to allow up to a 30 year lease that could include an option to renew or purchase for the acquisition of such facilities. The rent to be paid from the general funds or from any fund established for maintenance or construction by the municipality. If not made subject to annual appropriation needs election and would constitute debt. This lease authority made subject to a right of the city to not renew on an annual basis was upheld in 1974 by Supreme Court as not being debt. SDCL 9-52-3 thru 27 provides for the issuance of revenue bonds and provides that they will be sold as provided by SDCL 6-8B but provides for an election with only a majority vote. It specifically provides that the city may not incur any indebtedness for these bonds and that the credit or taxing powers shall not be pledged for the payment. Since these facilities just do not provide sufficient revenues, bonds have not been issued using this source of revenue. *See next slide entitled Sale and Lease-Back 5/30/2018 8 Sale and Lease-Back In 1984 SDCL 9-52 was amended to include Sections 9-52-29 thru 31 which authorized a municipality by ordinance certain powers granted to the State in 1983 as relating to the acquisition, lease, sale and lease-back relative to a municipality s auditorium or convention center and all related facilities. The term cannot exceed 30 years as that is what is allowed the State. SDCL 9-52- 31 states that the powers are in addition to all other powers of the municipality and their exercise shall only be subject to such restrictions provided by the Constitution and are not subject to any restrictions or procedural requirements prescribed by any other law. This therefore exempts these financings from election requirement and if they are made subject to annual appropriation (typically done by allowing municipality to terminate lease on an annual basis) they also do not constitute debt. SDCL 9-40-37 added similar language for water and water supply as well as for collection, treatment, and disposal of sewage and other domestic, commercial, and industrial wastes. 5/30/2018 9 3
Lease-Purchase Agreement SDCL 9-21-18.1 enacted in 1995 and as amended in the 2018 Legislative to read as follows: The provisions of 9-21-18 or any other provision of law notwithstanding, any municipality may enter into a lease-purchase agreement for a term of years, not exceeding ten years for equipment and twenty years for an improvement to real property, for the purchase or lease by the municipality of real or personal property. Any lease-purchase agreement for a term exceeding one year requires the approval of more than sixty percent of the members-elect of the governing body of the municipality (otherwise provided). If this lease is longer than one year and is not subject to annual appropriation, it is bond and is a debt that would count against the 5% debt limit. 5/30/2018 10 Promissory Notes A municipality may borrow from any source willing to lend by issuing a promissory note. 1. They are not considered debt because of issuance limitations and are only payable from the sources provided in 9-25-13. 2. The money borrowed may not exceed 95% of the anticipated special assessment bond proceeds or 95% of uncollected taxes levied by the municipality for the current year plus receivables* of the fund, including state and federal grant monies that have been earned by the municipality or committed by them but not collected. 3. They are to be issued in accordance with chapter 6-8B but no election is required. 4. The notes shall not be for longer than 5 years except for loans authorized by the U. S. Dept. of Agriculture which may not exceed 10 years. * This means a city is able to borrow more earlier in the year before people have paid part of their annual property taxes, sales taxes are not a receivable until item is purchased and the tax paid and utility fees are not a receivable until billed. 5/30/2018 11 Economic Development Projects SDCL 9-54 provides that municipalities may issue revenue bonds payable from project revenue relating to a broad range of projects as set forth in the statute. They do not count against the debt limit since they are not a debt of the municipality and they are by statute exempt from an election requirement although would be subject to referendum. They can be for a project in the municipality or within its environs without regard to distance if governing body declares it would promote the welfare of the municipality. If on behalf of 501 (C) (3) nonprofit corporations projects mainly for health care, nursing homes, and housing under the statute can be issued so interest is tax exempt from federal tax. No maximum issue size limit but they do count against a municipality s annual $10 million allocation of Bank Qualified Bonds. Bonds related to taxable entities have limitation as to size and need to secure part of the State s annual allocation from the US government in order to be tax exempt. Very limited usage under federal law to have the interest tax exempt. The most common for cities may be for specialized sewer or water improvements necessary for a manufacturing facility. State and federal law must be carefully followed especially for tax exemption. 5/30/2018 12 4
Business Improvement Districts (BID) SDCL 9-55-3 sets forth 10 uses of funds generated by a BID through the collection of special assessments and/or a general business license or occupation tax. Very specific rules concerning creation and the levying of special assessments as well as concerning adoption and levying of business licenses and occupational tax. 9-55-18.1 provides for the issuance and sale of bonds and requires approval of the majority owners of the assessable front footage or the users of a majority of the space in the district petition the municipality to issue such bonds. The most used has been for convention or event type centers. Unless the bonds are to be general obligations of the municipality with pledge of full faith and credit, no election is required but subject to referendum. 9-55-18.1 also allows municipalities to pledge BID special assessments or general business taxes to utility revenue bonds or tax increment bonds if the proceeds of the utility revenue bonds or tax increment bonds had been respectively used for improvements, in whole or in part, in the BID. 5/30/2018 13 Miscellaneous Bonds SDCL 9-38-60 through 75 authorizes bonds for swimming pools, requires 60% vote, must not constitute debt, and are payable from gross revenues but only after paying current expenses. SDCL 9-38-77 authorizes bonds for buildings and facilities for recreation and playground but provides that they must be done in the manner provided by 60 thru 74 above for swimming pools. None of the above are really useable because the fees necessary just are not likely obtainable. SDCL 9-38-76 does allow with a majority vote first and second class municipalities to issue bonds for gymnasiums or community house and the grounds therefore. If not subject to annual appropriation this is debt. Judgement Bonds 9-26-20 only majority vote of governing body & is debt. 5/30/2018 14 TIFs 5/30/2018 15 5
Creation of a Tax Increment (TIF) District Many changes were made to chapter 11-9 by the legislature in the 2018 session that will be effective July 1, 2018. The vast majority were in terminology and we have tried to use those as well as applicable substantive ones. A Municipality, for the purposes of SDCL 11-9, includes any incorporated city or town and any county. Some times, especially because of cities and towns debt limits, it may be desirable to have the county (generally with a lack of need for other debt capacity) create the district and authorize the financing. The planning commission (if none then the governing body) must start the process with a noticed hearing concerning the creation and the boundaries of the proposed district. The notice shall be published once, not less than 10 nor more than 30 days prior to the hearing in a legal newspaper. Before publication, a copy of the notice must be sent by first class mail to the chief executive officer and to the school board of each local governmental entity having power to levy taxes on property located within the proposed district. To implement the planning commission would designate the boundaries of its recommended district and submit to the governing body. 5/30/2018 16 Implementation and Findings in the Resolution To implement the governing body adopts a resolution which would: describe the boundaries, creates the district as of a given date, and assigns a consecutively numbered name starting with Number One. The aggregate assessed value of the taxable property in the district plus the tax increment base of all other existing districts does not exceed 10 percent of the total assessed value of all taxable property in the municipality. Not less than 25 percent, by area, of the real property within the district is blighted or not less than 50 percent, by area, of the real property in the district will stimulate and develop the general welfare and prosperity of the of the state through the promotion and advancement of industrial, commercial, manufacturing, agricultural, or natural resources and it is not necessary to identify specific parcels meeting the criteria. The improvement of the area is likely to significantly enhance the value of substantially all other real property in the district. A county may not create a district located, in whole or in part, within a municipality, unless consented to by resolution of the governing body. 5/30/2018 17 What Constitutes Blighted Any area, in which structures, buildings or improvements by reason of dilapidation, age, or obsolescence inadequate provisions for ventilation, air, sanitation, or open spaces-high density of population and overcrowding-conditions which endanger life by fire or other causes-any combination of such factors which is detrimental to public health, safety, morals, or welfare, is a blighted area. Any area, which by reason of-presence of a substantial number of substandard, slum, deteriorated, or deteriorating structures-predominance of defective or inadequate street layouts-faulty lot layout in relation to size, adequacy, accessibility, or usefulness-insanitary or unsafe conditions- deterioration of site or other improvements-diversity of ownership, tax, or special assessment delinquency exceeding fair value of the land-defective or unusual conditions of title-existence of conditions which endanger life or property by fire or other causes- any combinations of such factors substantially impairs or arrest the sound growth of a municipality, retards the provision of housing accommodations, or constitutes an economic or social liability is a menace to the public health, safety, morals, or welfare in its present condition or use is a blighted area. Open areas, which because of obsolete platting, diversity of ownership, deterioration of structures or site improvements, or otherwise, substantially impairs or arrests the sound growth of a municipality is a blighted area. 5/30/2018 18 6
Project Plan The planning commission shall adopt a project plan and submit it to the governing body. The governing body must approve a project plan by resolution and it must contain findings that the plan is feasible and in conformity with the master plan, if any, of the municipality. The plan must list (1) kind location of all proposed public works and improvements in the district, (2) an economic feasibility study, (3) a detailed list of estimated project costs, (4) a fiscal impact statement showing the impact of the district, until and after the bonds are repaid, on all entities levying taxes on property in the district, (5) a description of the methods of financing all estimated project costs and the time when the related costs or monetary obligations are to be incurred. No expenditure in the plan may be provided for more than 5 years after the district is created unless an amendment is adopted by the governing body which may require a redetermination of the tax increment base. Project costs are any expenditures or monetary obligations made or estimated to be made by the municipality that are listed as grants or costs of public works or improvements within a district plus any incidental costs diminished by any income, special assessments, or revenue other than tax increments, received, or expected to be received, by the municipality in connection with the implementation of the plan. 5/30/2018 19 Project Plan (continued) SDCL 11-9-15 details and defines the following specific items to be project costs: (1) capital costs, (2) financing costs, (3) real property assembly costs, (4) professional service costs, (5) imputed administrative costs, (6) relocation costs, (7) organizational costs, and (8) payments and grants, at the discretion of the governing body, which are necessary or convenient to the creation of the district, the implementation of project plans, or to stimulate the general economic welfare and prosperity of the state. The plan shall also include: (1) a map showing the existing uses and conditions of real property in the district; (2) a map showing the proposed improvements and uses; (3) a map showing the proposed changes of zoning ordinances; (4) a statement listing changes needed in the master plan, map, building codes, and ordinances; (5) a list of estimated project costs; and (6) a statement of a proposed method of relocation of persons to be displaced. 5/30/2018 20 Determination and Allocation of Base & Positive Increments Upon creation of the district the finance officer files an application with the Department of Revenue, on a form provided by the department, requesting a determination of the aggregate assessed value of all taxable property in the district on the date the district was created and which upon certification to the finance officer shall constitute the tax increment base of the district unless the plan is amended and the base is required to be re-determined under SDCL 11-9-23. Taxes on the tax increment base will be allocated on an annual basis, as long as the district exists, to all governmental entities having the power to levy taxes on property in the district. From the date the district was created, taxes collected in excess of the tax incremental base (positive increment) is paid to the municipality and deposited in a special fund for the district until the municipality has been reimbursed for expenditures previously made, has paid all monetary obligations, and has retired all outstanding tax increment bonds. In no event will the positive increments be allocated longer than 20 years after the calendar year of creation. 5/30/2018 21 7
TIF Bonds & Miscellaneous Provisions For paying project costs the governing body may issue tax increment bonds (which includes any contract or agreement that provides for the payment of a specific sum of money at a specific future date) payable out of positive increments. Tax increment bonds, contracts, or agreements are authorized by resolution of the governing body without a requirement of voter approval but are subject to referendum. Tax increment bonds may not exceed aggregate project costs and may not mature later than 20 years from the date the district was created. No tax increments shall be used for the construction of residential structures. Any monies remaining in the special fund of the district after all project costs and all tax increment bonds have been paid or provided for, shall be paid to each taxing district in the amount to each respectively with due regard for what portion of the monies, if any, represent tax increments not allocated to the municipality and what portion, if any, represents voluntary deposits of the municipality into the fund. 5/30/2018 22 TIF Bonds & Miscellaneous Provisions (continued) The governing body should by resolution dissolve the district after payment or provision for payment of all projects costs, grants, and all tax increment bonds. SDCL 11-9-36 provides as follows: Tax increment bonds are payable only out of the special fund created under 11-9-31. Each bond shall state that the bond is only so payable out of the special fund and that the bond does not constitute a general indebtedness of the municipality or a charge against the municipality s general taxing power. However, in 1984 in a case involving Huron, the South Dakota Supreme Court ruled that tax incremental bonds are subject to the constitutional limitations. Bond Counsels generally take the position that contracts and agreements would be viewed the same by the Court. 5/30/2018 23 Dougherty & Company LLC 110 South Phillips Avenue Suite 203 Sioux Falls, SD 57104 605-339-9800 800-339-1111 tgrimmond@doughertymarkets.com rwoodsend@doughertymarkets.com tmorris@doughertymarkets.com 5/30/2018 24 8