City of Tucson Finance Proudly Presented By: Silvia Amparano, CPA, CPFO Finance Director Association of Government Accountants Southern Arizona Chapter October 12, 2016 1
Agenda Governmental Accounting Municipal Debt Bond Process Administration 2
What makes government different? 3
How is Government different from Private Sector? PRIVATE SECTOR Purpose - Profit Enhance wealth Choice in services Continuity in leadership No restrictions Budgets are Internal GOVERNMENT SECTOR Purpose-Public Service Provide Services Services-Law Continuity? Restrictions Budgets are External 4
Users of Accounting Information PRIVATE SECTOR Shareholders Securities Exchange Commission Lending Institutions Internal Management GOVERNMENT Taxpayers Mayor and Council Internal Management Investors Bond Rating Agencies Grantors Political Groups 5
Unique Characteristics of Governmental Accounting 1. Use of Fund Accounting 2. Measurement Focus and Basis of Accounting (MFBA) This is a fancy concept that tells accountants what to do.. Measurement Focus tells you WHAT Basis of Accounting tells you WHEN 6
What YOU Should Know! There Are Two Types of MFBA s in Governmental Accounting 1. Current Resources, Modified Accrual Short-term View 2. Economic Resources, Full Accrual Long-term View 7
Types of Funds Governmental Funds Used to account for tax-supported activities - General Fund, Special Revenue (Mass Transit, TCC, HURF), Debt Service, Capital Projects Proprietary Funds Enterprise Funds - Used to report an activity for which a fee is charged to external customers - Water, Environmental Services, Golf, Public Housing Internal Service - Used to report an activity that provides goods/services to other funds, departments, or agencies on a cost reimbursement basis - General Services, Self Insurance Fiduciary Funds Used to report assets held in trustee or agency capacity for other and which therefore cannot be 8 used to support the City s own programs Pension
Comprehensive Annual Financial Report (CAFR) 9
Required Components of CAFR Management s Discussion & Analysis Basic Financial Statements Government-wide Financial Statements Summary Fund Financial Statements Notes to the Financial Statements Detail 10
Municipal Debt 11
Generational equity Why issue debt? Current and future tax/rate payers contribute equally Inflationary cost avoidance Historically high in construction projects Improves cash flow Preserve cash for other uses Borrow to build (capital projects) Accelerates project timeline Borrowing costs Low rate environment favors debt issuance 12
What is a Municipal Bond? A security issued by states, counties, cities, or their agencies to finance public-purpose projects such as schools, roads, bridges, and airports Mechanism for obtaining money today Conversion of expected future revenue stream of income (whether from tax receipts, general fund revenues or other sources) into currently available funds for capital projects Promise to repay money On a date certain With interest at a specific rate From specific revenues Generally tax-exempt 13
Debt Policy Objectives Appropriate uses of debt financing Borrowing commits future budgets (potential economic constraint) Needs to be issued with caution; debt should not be issued for maturity longer than life of asset; preserve flexibility to finance future capital programs and requirements Guidelines that will result in lowest cost of borrowing for each transaction; assist in maintaining current credit ratings Pay-as-you-go can be as financially unsound as a careless use of debt 14
Municipal Debt Types General Obligation (GO) Debt - Secured by a state/local government pledge to use legally available resources, including tax revenues, to repay bond holders. Voter approved; State limitation Limited to % of Secondary Assessed Valuation (AV) Debt service paid by secondary property tax Typically highest-rated debt = lowest interest rates e.g., Road Recovery Bond Program Revenue Pledged Debt (Water, HURF) - Specific revenue stream pledged for debt service Voter approval may be required in certain issuances Reserve fund typically required 15
Municipal Debt Types (cont d.) Certificates of Participation (COPS) - investor purchases a share of the lease revenues of a program rather than the bond being secured by those revenues. Voter approval not required Debt service pledged from assets of the General Fund Annual appropriation feature No State-mandated limitation Limitation of issued debt based on affordability Most expensive e.g., Tucson Police Crime Lab, Fire Central (headquarters) 16
Issuance of Debt: Impact on Budget Results in budgeting for both a revenue and an expenditure : CAPITAL PROJECT: Revenue Borrowed funds (e.g., debt proceeds) used to pay for a capital asset Expenditure Capital project ******************** DEBT SERVICE: Revenue Secondary property tax (G.O. bonds) Water use charges (Water revenue bonds) General Fund (Certificates of Participation) Expenditure Debt service payments (payback of principal and interest on borrowed funds) per the debt amortization schedule 17
Principal Outstanding As of 7/1/16 Issue Type Principal Outstanding % of Total Sr. Lien Water System Revenue Bonds & Obligations $ 441,870,000 40.72% Certificates of Participation $ 223,750,000 20.62% General Obligation Bonds $ 208,860,000 19.25% Sr. & Jr. Lien Highway User Revenue Bonds $ 69,790,000 6.43% Rio Nuevo Multipurpose Facilities District (TIF) $ 66,350,000 6.11% Jr. Lien WIFA Loans $ 52,476,965 4.84% Clean Renewable Energy Bonds $ 11,995,800 1.11% Sr. & Jr. Lien Highway User Revenue Bonds $69,790,000 Jr. Lien WIFA Loans $52,476,965 Rio Nuevo Multipurpose Facilities District (TIF) $66,350,000 General Obligation Bonds $208,860,000 Clean Renewable Energy Bonds $11,995,800 Rio Nuevo - COPs $9,360,000 Sr. Lien Water System Revenue Bonds & Obligations $441,870,000 Improvement District $692,000 Rio Nuevo - COPs $ 9,360,000 0.86% Improvement District $ 692,000.06% Total $ 1,085,144,765 100% Certificates of Participation $223,750,000 18
Annual Debt Service Debt Type FY 2017 Debt Service General Obligation Bonds $ 33,674,343 Sr. Lien HURF $ 17,010,250 Water Sr. and Jr. Lien $ 45,239,364 Certificates of Participation (COPs) $ 24,614,411 Clean Renewable Energy Bonds (CREBS) $ 1,483,380 Rio Nuevo $ 9,189,455 Improvement Districts $ 424,125 Grand Total $131,635,328 19
The Basics: Bond Process & Administration 20
Key Concepts Purchasing Power Lender (individual or institution) forgoes for promise of later repayment Borrower receives $ now with an obligation to repay later Debt Service Interest payments plus periodic repayment of principal (loan) Amortization Spreading debt service payments over multiple periods as determined by a schedule Interest Rate Significant factor in context of borrowing; impacts economy 21
TERMINOLOGY Competitive Sales Method A sales method where the bonds are advertised for sale. The advertisement, by way of a notice of sale, includes both the terms of the sale and the terms of the bond issue. Any broker dealer or dealer bank may bid on the bonds at the designated date and time. The bonds are awarded to the bidder offering the lowest interest cost. Negotiated Sale Method In a negotiated sale, an underwriter is selected to purchase the bonds. The underwriter, in turn, sells the bonds to its investor customers. The terms of the bonds are tailored to meet the demands of the underwriter's investor clients, as well as the needs of the issuer. Negotiated sales also involve a process known as a presale in which underwriters seek customer indications of interest in the issue before establishing final bond pricing. The method of sale is known as a negotiated sale because the terms of the bonds and the terms of the sale are negotiated by the issuer and the bond purchaser. Closing The transaction is complete, documents are signed, funds and property, if applicable, are transferred between the parties. 22
WHO S WHO IN CAPITAL FINANCING Investment Banker Provides underwriting and/or consulting services Prepares Official Statement on behalf of Issuer Structures financing, markets bonds, sets prices, sells bonds to investors Issuer Underwriter s Counsel Manages Due Diligence call and prepares Bond Purchase Agreement Advises Underwriter on legal issues Rating Agency Provides credit rating on Issuer s bonds and existing obligations Selects financing team Determines borrowing needs and key parameters of debt Authorizes issuance of bonds Bond Registrar and Paying Agent Commercial bank that maintains list of bondholders Pays principal and interest to bondholders Bond Counsel Drafts Authorizing Resolution, Legal Opinion and closing documents Provides legal advice to issuer based on existing federal, State and local legislation and arbitrage/tax law 23
BOND PROCESS: Overview Key Steps in Preparing for a Financing Step 1: Initial Process Engage financing team members Identify funding needs, repayment sources and appropriate bond structure Step 2: Preparation of legal documents Bond documents outline security pledge and flow of funds Preliminary Official Statement ( POS ) describes security, issuer, project and any potential risks Step 3: Rating agency and bond insurance conversations Introduce rating agencies to issuer s credit Secure rating and solicit bond insurance bids, if applicable Step 4: Board/Council approvals Approve financing terms and related financing documents Step 5: Bond marketing, pricing and closing Distribute POS to prospective investors Establish interest rates and final principal amounts on day of pricing Execute documents and deliver funds at closing, typically two weeks after pricing Step 6: Post closing Continuing disclosure Arbitrage rebate reporting 24 Administration/Compliance
Credit Quality - Bond Ratings Risk is important to both borrowers and lenders Three bond rating agencies Moody s, Fitch, and Standard & Poor s Highest rating possible is AAA Generally the City of Tucson s ratings fall in the AA range (+/-) Ratings can vary several notches (steps) Reflects the willingness and ability to pay the obligations Qualitative and quantitative factors Each debt issuance individually rated; rating relationship 25 important
BOND PROCESS: Credit Quality Bond Ratings (cont d.) Bond rating reflects default risk (controllable and uncontrollable) Higher rating = lower risk = lower interest rate Ratings based on risk factors in four categories: Economic & Demographic Factors (economy) Financial Analysis Fiscal Management (government) Debt (outstanding debt & issuance structure) Why governments care: Can translate into lower cost of borrowing A report card on fiscal health as seen by outside experts 26
Credit Quality Bond Ratings (cont d.) Standard & Poor s Rating Service Financial Management Assessment Strong Good/Standard Vulnerable Revenue and Expenditure Assumptions Budget Amendments and Updates Long-Term Financial Planning Long-Term Capital Planning Investment Management Policies Reserve and Liquidity Policies Debt Management Policies
Credit Quality Bond Ratings Decreasing Credit Quality, Increasing Yields (cont d.) LONG-TERM CREDIT RATING SCALE RISK GRADE Aaa AAA AAA Highest quality Aa AA AA High quality A A A Strong Investment Baa BBB BBB Medium grade Ba, B BB, B BB, B Speculative Caa, Ca CCC, CC, C CCC, CC, C Highly speculative Junk C D D Default
City of Tucson Bond Ratings (as of 6/30/16) 29
Bond Administration Use of Proceeds Timely and only for the stated uses Debt Service Interest payments due semi-annually, principle is due annually Compliance Continuing Disclosure Tax Exempt Status Additional Bonds Test Coverage Tests Accounting Entries and Footnote Disclosure GAAP & GASB Inquiry Response Rating Agencies, Bond Holders, Trustee, Citizens, IRS Ensure Program Commitments are Met Evaluate Outstanding Debt for Refunding Opportunities 30
Case Study City of Tucson General Obligation Bonds $100 million authorization Approved by City voters in November 2012 $20 million issued in each of next 5 fiscal years 31
Road Bond Program 1) Identified a problem: failing streets. Estimated $400 million need to repair. 2) Evaluated funding options. Researched and presented options to Mayor and Council for consideration. 3) Conducted a statistically valid poll of voters to determine if there was a chance of a successful election. Election costs are high in terms of money, time and credibility 4) Determined the structure of the Road Bond Program and the impact on the tax rate, homeowner, outstanding debt levels, legal limitations. 5) Developed a recommendation for Mayor and Council approval, including important information gained from the polling such as size tolerance, need for clarity and accountability. 6) Developed a ballot question. 7) Began the educational aspect. 8) Crossed our fingers. 32
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BOND PROCESS: Authorization 34
BOND PROCESS: Day of Pricing Pricing Summary: Tax Exempt Series 2012-A (2013) Bonds Preliminary Pricing $20,000,000 City of Tucson, Arizona General Obligaton Bonds Tax-Exempt Series 2012-A (2013) Final Pricing* $20,000,000 City of Tucson, Arizona General Obligaton Bonds Tax-Exempt Series 2012-A (2013) Rating: Aa3 (Moody's) / AA (Fitch) / AA - (S&P) Redemption: 7/1/2013 at 100 Rating: Aa3 (Moody's) / AA (Fitch) / AA - (S&P) Redemption: 7/1/2013 at 100 Sale Date: June 11, 2013 Sale Date: June 11, 2013 MMD Par Amount Spread to Maturity MMD Par (6/10) (in 000's) Coupon Yield MMD (bps) (July 1) (6/10) Amount Coupon Yield 2024 2.33 $5,000 3.125 3.290 96 2024 2.33 $2,000 3.000 3.330 100 2024 2.33 2024 2.33 3,000 4.000 3.330 100 2025 2.46 7,500 4.000 3.460 100 2025 2.46 7,500 4.000 3.460 100 Maturity (July 1) Spread to MMD 2026 2.58 7,500 4.000 3.580 100 2026 2.58 7,500 4.000 3.580 100 35
Major Institutional Buyers 36
Fiscal Year Ending Schedule of Annual General Obligatin Bond Debt Service Requirements (a) City of Tucson, Arizona General Obligation Plus: Bonds Outstanding (b) The Bonds Principal interest (c ) Principal Interest (d) Combined Annual Debt Service Requirements 2013 $ 15,621,010 $ 9,798,233 $ 25,419,243 2014 18,690,000 9,107,504 $ 806,000 28,603,504 2015 20,060,000 8,156,644 780,000 28,996,644 2016 23,735,000 7,249,758 780,000 31,764,758 2017 25,665,000 6,088,971 780,000 32,533,971 2018 23,345,000 4,913,153 780,000 29,038,153 2019 25,585,000 3,848,311 780,000 30,213,311 2020 28,135,000 2,635,383 780,000 31,550,383 2021 23,485,000 1,312,463 780,000 25,577,463 2022 2,250,000 211,563 780,000 3,241,563 2023 2,500,000 107,500 780,000 3,387,500 2024 - - $ 5,000,000 780,000 5,780,000 2025 - - 7,500,000 600,000 8,100,000 2026 - - 7,500,000 300,000 7,800,000 $ 209,071,010 $ 53,429,483 $ 20,000,000 $ 9,506,000 $ 292,006,493 37
Accountability, Transparency are critical!! -Citizen Oversight Commission -Required Reporting -Defined what roads would be completed by year. -Purposely tied our own hands money could only be used curb-to-curb -Outside contractors required 38
Results to Date Bond funds will be used to restore, repair, and resurface Tucson City streets Approximately 130 miles of major street and 114 miles of neighborhood streets will be resurfaced $31 M additional work to be covered with existing program o Conservative original estimates o Favorable bidding environment o Lower prices of petroleum o Estimated average rate increase in 2012 was 33 cents now estimated at 28 cents. 39
Looking for a few good accountants Current Job Openings http://www.tucsonaz.gov/sigma/joblistings.aspx CITY BENEFITS Defined Benefit Pension Plan Medical Insurance Dental Insurance Life Insurance Long Term Disability Flexible Benefits Plan Worker s Compensation Employee Assistance Program Section 457 Deferred Compensation Plan 40
Questions? 41