City of Tucson Finance Proudly Presented By: Silvia Amparano, CPA, - PowerPoint PPT Presentation

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 GOVERNMENT SECTOR • Purpose - Profit • Purpose-Public Service • Enhance wealth • Provide Services • Choice in services • Services-Law • Continuity in leadership • Continuity? • No restrictions • Restrictions • Budgets are Internal • Budgets are External 4

Users of Accounting Information PRIVATE SECTOR GOVERNMENT • Shareholders • Taxpayers • Securities Exchange • Mayor and Council Commission • Internal Management • Lending Institutions • Investors • Internal Management • 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 - U sed 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 Fund Financial Statements Notes to the Financial Financial Statements Statements Summary Detail 10

Municipal Debt 11

Why issue debt? • Generational equity • 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 Clean Renewable Principal % of Energy Bonds Jr. Lien WIFA Issue Type Outstanding Total Rio Nuevo - $11,995,800 Loans COPs $52,476,965 Sr. Lien Water System Revenue Bonds & $9,360,000 Obligations $ 441,870,000 40.72% Rio Nuevo Multipurpose Improvement Facilities Certificates of Participation $ 223,750,000 20.62% District District (TIF) $692,000 $66,350,000 General Obligation Bonds $ 208,860,000 19.25% Sr. & Jr. Lien Highway User Revenue Sr. & Jr. Lien Highway User Revenue Bonds $ 69,790,000 6.43% Bonds Sr. Lien Water $69,790,000 System Revenue Rio Nuevo Multipurpose Facilities District (TIF) $ 66,350,000 6.11% Bonds & Obligations $441,870,000 Jr. Lien WIFA Loans $ 52,476,965 4.84% General Obligation Bonds Clean Renewable Energy Bonds $ 11,995,800 1.11% $208,860,000 Rio Nuevo - COPs $ 9,360,000 0.86% Certificates of Participation $223,750,000 Improvement District $ 692,000 .06% 18 Total $ 1,085,144,765 100%

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 $ 1,483,380 (CREBS) 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 Underwriter’s Counsel • Provides underwriting and/or • Manages Due Diligence call and consulting services prepares Bond Purchase Agreement • Prepares Official Statement on • Advises Underwriter on legal issues behalf of Issuer • Structures financing, markets bonds, sets prices, sells bonds to investors Issuer • Bond Counsel Selects financing team • Determines borrowing • Drafts Authorizing Resolution, needs and key parameters Rating Agency Legal Opinion and closing of debt documents • Provides credit rating on • Authorizes issuance of • Issuer’s bonds and existing Provides legal advice to issuer bonds based on existing federal, State obligations and local legislation and arbitrage/tax law Bond Registrar and Paying Agent • Commercial bank that maintains list of bondholders • Pays principal and interest to 23 bondholders