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

• 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 used to support the City’s own programs – Pension

8

Comprehensive Annual Financial Report (CAFR)

9

Required Components of CAFR

Summary Detail Management’s Discussion & Analysis Basic Financial Statements Government-wide Financial Statements Fund Financial Statements Notes to the Financial Statements

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
• f 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

18 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% Rio Nuevo - COPs $ 9,360,000 0.86% Improvement District $ 692,000 .06% Total $ 1,085,144,765 100%

• Sr. Lien Water

System Revenue Bonds & Obligations $441,870,000 Certificates of Participation $223,750,000 General Obligation Bonds $208,860,000

• Sr. & Jr. Lien

Highway User Revenue Bonds $69,790,000 Rio Nuevo Multipurpose Facilities District (TIF) $66,350,000

• Jr. Lien WIFA

Loans $52,476,965 Clean Renewable Energy Bonds $11,995,800 Rio Nuevo - COPs $9,360,000 Improvement District $692,000

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
• f 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

• Provides underwriting and/or

consulting services

• Prepares Official Statement on

behalf of Issuer

• Structures financing, markets

bonds, sets prices, sells bonds to investors Investment Banker

• Manages Due Diligence call and

prepares Bond Purchase Agreement

• Advises Underwriter on legal issues

Underwriter’s 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 Bond Counsel

• Commercial bank that maintains list
• f bondholders
• Pays principal and interest to

bondholders Bond Registrar and Paying Agent

• Selects financing team
• Determines borrowing

needs and key parameters

• f debt
• Authorizes issuance of

bonds Issuer

• Provides credit rating on

Issuer’s bonds and existing

• bligations

Rating Agency 23

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

BOND PROCESS: Overview

Step 6: Post closing

 Continuing disclosure

 Arbitrage rebate reporting

 Administration/Compliance

24

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

important

25

• 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

BOND PROCESS: Credit Quality Bond Ratings (cont’d.)

26

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 (cont’d.)

LONG-TERM CREDIT RATING SCALE RISK GRADE

Aaa AAA AAA Highest quality Investment Aa AA AA High quality A A A Strong Baa BBB BBB Medium grade Ba, B BB, B BB, B Speculative Junk Caa, Ca CCC, CC, C CCC, CC, C Highly speculative C D D Default

Decreasing Credit Quality, Increasing Yields

Credit Quality – Bond Ratings

(cont’d.)

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

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

Case Study

31

Road Bond Program

• 1) Identified a problem: failing streets. Estimated $400 million

need to repair.

• 2) Evaluated funding options. Researched and presented
• ptions 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

33

BOND PROCESS: Authorization

34

BOND PROCESS: Day of Pricing

Maturity (July 1) MMD (6/10) Par Amount (in 000's) Coupon Yield Spread to MMD (bps) Maturity (July 1) MMD (6/10) Par Amount Coupon Yield Spread to MMD 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 2026 2.58 7,500 4.000 3.580 100 2026 2.58 7,500 4.000 3.580 100

Pricing Summary: Tax Exempt Series 2012-A (2013) Bonds

Preliminary Pricing 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 Sale Date: June 11, 2013 $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 Sale Date: June 11, 2013 35

Major Institutional Buyers

36

37 Principal interest (c ) Principal Interest (d) 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 Schedule of Annual General Obligatin Bond Debt Service Requirements (a) City of Tucson, Arizona Fiscal Year Ending Combined Annual Debt Service Requirements General Obligation Bonds Outstanding (b) Plus: The Bonds

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

• Conservative original estimates
• Favorable bidding environment
• Lower prices of petroleum
• 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