City of Tukwila, Washington Bond Issuance Basics and Considerations - - PowerPoint PPT Presentation

City of Tukwila, Washington Bond Issuance Basics and Considerations

March 9, 2015

Presented by: Susan Musselman, Director Public Financial Management, Inc. (360) 445-0238 musselmans@pfm.com

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Overview of Topics

1) Introduction 2) Why Issue Bonds? 3) Debt Profile 4) Overview of Credit 5) Market Update 6) Bond Sale Process & Upcoming Transactions

Introduction

• PFM’s Seattle office first opened in 2001

– We expanded our Washington practice in 2013 with the acquisition of SDM Advisors

• PFM serves over 80 clients in Washington and Oregon, including:

– City of Marysville – City of Redmond – City of Bothell – City of Tukwila – City of Shoreline – City of Oak Harbor – City of Anacortes – City of Richland – City of Walla Walla – Skagit County – Whatcom County – Kitsap County – Clark County

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The PFM Group – The City’s Financial Advisor

• Registered “municipal advisor” (financial advisor) with the Securities and

Exchange Commission (SEC) and Municipal Securities Rulemaking Board (MSRB)

• Fiduciary responsibility to act in the client’s best interest, before, during, and

after any transaction

• New SEC Municipal Advisor Rule became effective July 1, 2014

– Establishes regulatory regime for municipal advisors (previously unregulated) – Prohibits underwriters/banks from providing “advice” except in very limited circumstances

• PFM serves as an independent financial advisor to each one of our clients

– Not affiliated with a broker-dealer (underwriter) or bank; no conflicts of interest as a result of such affiliation

PFM’s Role

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Role of Financial Advisor

Why Issue Municipal Bonds?

• Fund necessary, long-lived capital projects today, rather than waiting

and “saving up” tax revenues

• Spread the costs of facilities or infrastructure over a long period of

time

– Taxpayers/customers pay for facilities they currently use – “Inter-generational equity”

• Maintain flexibility and liquidity in fund balance
• Access capital at favorable interest rates

– Interest rates generally are near historic lows – Interest on municipal bonds is generally exempt from federal income tax, resulting in lower borrowing rates

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City’s Debt Profile

Outstanding General Obligation Debt

5 Series Name Outstanding Par Call Date Purpose Coupon Range Final Maturity LTGO Refunding Bonds, 2008 $3,450,000 n/a Advance refund LTGO Bonds, 1999 4.00 – 6.00% 12/1/19 LTGO Bonds, 2010A 380,000 n/a Acquisition & construction of Southcenter Parkway improvements; emergency preparedness facilities, fixtures, tech. 4.00% 12/1/15 LTGO Bonds, 2010B (Taxable BABs – Direct Payment) 3,970,000 6/1/20 3.61 – 5.41%* 12/1/24 LTGO Refunding Bonds, 2011 4,185,000 12/1/21 Advance refund LTGO Bonds, 2003A 1.25 – 4.00% 12/1/23 LTGO Bond, 2013 803,221 n/a Park district facility improvements (pool) 2.50% 12/1/22 LTGO Bond, 2014 (Taxable) 3,850,000 12/1/19 Tukwila International Boulevard – property acquisition 0.85 – 4.86%** LTGO Note, 2014 (Taxable)*** 2,250,000 anytime LIBOR + 1.00% 12/1/17 Subtotal $18,888,221 SCORE Bonds, 2009A $497,200 1/1/20 SCORE Facility 4.25 – 5.00% 1/1/22 SCORE Bonds, 2009B (Taxable BABs- Direct Payment) 5,933,200 1/1/20 SCORE Facility 4.117 – 6.616%* 1/1/39 Valley Com Refunding Bonds, 2010 220,000 n/a Advance refunding of Valley Communications Center 2000 Bonds 3.75% 12/1/15 Subtotal $6,650,400 Total – Non-Voted General Obligations $25,538,621 As of March 9, 2015. * Build America Bonds coupons are shown as gross rates, not reflecting Federal subsidy (35% prior to sequestration). ** A portion of the 2014 Bonds will have interest rates reset every five years, based on the Five Year Advance Fixed Bullet Rate, as published by the Seattle Federal Home Loan Bank. *** Non-revolving line of credit. Par amount reflects maximum available, not currently outstanding balance.

PFM’s PRICING GROUP

Outstanding General Obligation Debt

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Based on its current debt portfolio, the City will amortize approximately 66.4 % of outstanding LTGO debt within the next 10 years.

$0 $1 $2 $3 $4 $5 $6 Millions

Annual General Obligation Debt Service

$0 $5 $10 $15 $20 $25 $30 Millions

Outstanding General Obligation Bond Principal

General Obligation Bonds – Security

• Limited Tax General Obligation (LTGO) bonds: “full faith and credit”
• bligations of the City
• City has pledged to bondowners that it will levy property taxes in amounts

sufficient to pay debt service on bonds – Property tax pledge is limited by constitutional and statutory restrictions – Non-voted (councilmanic) general obligation – Not to be confused with voter-approved general obligation bonds, which carry an unlimited property tax pledge (not subject to constitutional and statutory limits)

• Other funding sources can (and often are) used to make debt service

payments, but are not specifically pledged as security for the LTGO bonds

• Statutory limits on amount of LTGO debt a city may incur:

– Limited to 1.5% of assessed valuation – City’s current limit is approximately $75.8 million – Outstanding LTGO obligations (including proposed 2015 Bonds) of approximately $30.9 million

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Water and Sewer Revenue Bonds

5 As of March 9, 2015. Series Name Outstanding Par Call Date Purpose Coupon Range Final Maturity Insurer Water and Sewer Revenue Bonds, 2006 $2,205,000 12/1/16 Design/construction of wastewater pumping facilities, force mains and sewer mains, lift stations, and storm drain and water line improvements 4.00 – 4.50% 12/1/26 FSA

• Revenue Pledge

– Secured by net revenue of the Waterworks Utility and surface water utility system – No pledge of taxes, City taxing authority, or any other City revenue source – Senior pledge, ahead of Public Works Trust Fund or other State loans

• Additional Bonds Test

– The City may issue additional parity Water and Sewer Revenue Bonds if net revenue meets a specific test set forth in the Bond Ordinance

• Debt Service Reserve Fund

– Additionally secured by a debt service reserve fund equal to the average annual aggregate debt service of all outstanding Water and Sewer Revenue Bonds – At the time the 2006 Bonds were sold, this requirement was $430,444

• Rate Covenant and Coverage Requirement

– Covenant to maintain annual net revenues of 1.25x or greater of annual debt service. – In 2012 and 2013, the City maintained aggregate debt service coverage of 7.16x and 9.27x, respectively

Local Improvement District Bonds

5 As of March 9, 2015. Series Name Outstanding Par Call Date Purpose Coupon Range Final Maturity Insurer Local Improvement District

• No. 33 Bonds (2013)

$6,082,500 n/a Public improvements within LID

• No. 33

3.15 – 5.375% 1/15/29 n/a

• Local Improvement District 33:

– Formed to improve urban access for the Southcenter area

• Secured by and payable solely from:

– Amounts deposited to LID Bond Fund (assessments made in LID 33, along with interest and penalties) – City’s Local Improvement Guaranty Fund

• Guaranty Fund funded at closing with $668,750 of bond proceeds

– If Guaranty Fund contains insufficient funds to make a payment on the Bonds, the City must issue interest-bearing warrants against the Fund in

• rder to meet such payments
• Rated “BBB” by Standard & Poor’s

Credit Overview

A1

Credit Strengths and Concerns – LTGO Bonds

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Strengths:

Tax base Moderately sized for the rating level Diversified revenue sources City benefits from creation of Tukwila Metropolitan Park District Manageable debt levels

Current Moody’s LTGO Bond Rating: Challenges:

Tax base concentration Contraction in assessed valuation and declines in general fund balances Trend prior to 2011-2012 Reserves below similarly-rated peers and reliance on economically- sensitive revenues

Aa3

Current Moody’s “Issuer” Rating:

Moody’s Investors Service last reviewed the City’s general obligation credit on December 18, 2012.

Moody’s Financial Ratio Analysis – Peers

• The City’s financial and debt ratios are generally in line with its peers in

Washington (cities with 15,000-25,000 population)

• The City’s outstanding debt per capita is relatively high
• However, this is tempered by the City’s more modest outstanding debt as a

percentage of its assessed value

• The City also compares favorably in the size of its budget

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Fiscal Year 2013 - General Fund Ratios Tukwila Anacortes Bainbridge Island Covington Mercer Island Port Angeles Moody's Ratings (UTGO / LTGO): Aa3 / A1 Aa3 / A1 Aa2/ Aa3 Aa2/ Aa3 Aaa / Aa1 Aa3 / A1 Financial Statistics & Ratios Total General Fund Revenues ($000) $64,938 $12,487 $15,690 $9,357 $23,982 $19,257 Total General Fund Balance ($000) $17,286 $9,767 $10,405 $5,917 $6,145 $5,848 General Fund Balance as % of Revenue 26.6% 78.2% 66.3% 63.2% 25.6% 30.4% Unassigned Fund Balance $15,318 $8,108 $7,995 $5,666 $3,017 $5,399 Unassigned Fund Balance as % of Revenue 23.6% 64.9% 51.0% 60.6% 12.6% 28.0% Unrestricted Net Assets ($000) $26,981 $12,500 $7,642 $8,969 $4,247 $13,024 Debt Statistics & Ratios Direct Net Debt Outstanding ($000) $31,439 $4,208 $22,301 $13,319 $17,526 $4,540 Direct Net Debt Per Capita ($) $1,591 $262 $961 $736 $771 $237 Direct Net Debt as a % of Full Value 0.7% 0.2% 0.4% 0.8% 0.2% 0.3% Debt Service as % of Operating Expenditures 6.7% 0.0% 42.3% 14.4% 0.0% 5.3% Payout, 10 Years, All Tax-Supported Debt (%), Current 66.4% 100.0% 82.5% 73.6% 76.3% 93.5% Tax Base Statistics and Ratios Full Value Per Capita ($) $234,556 $157,834 $225,573 $89,375 $387,448 $90,461 Total Full Value ($000) $4,636,000 $2,532,928 $5,232,391 $1,617,694 $8,802,828 $1,735,946 Demographic Statistics Actual/Estimated Population, Annual Value 19,765 16,048 23,196 18,100 22,720 19,190 Source: Moody's Financial Ratio Analysis database. City of Tukwila debt statistics adjusted for proposed 2015 LTGO Bonds.

Moody’s Financial Ratio Analysis – Medians

• When compared against Washington cities of all sizes, the City’s ratios are

more obviously in line with “Aa3” medians

10 Fiscal Year 2013 - General Fund Ratios Tukwila Washington City Medians Moody's Rating (UTGO): Aa3 Aa2 Aa3 A1 Financial Statistics & Ratios Total General Fund Revenues ($000) $64,938 $38,983 $37,216 $23,958 Total General Fund Balance ($000) $17,286 $16,141 $13,161 $5,638 General Fund Balance as % of Revenue 26.6% 41.4% 35.4% 23.5% Unassigned Fund Balance $15,318 $8,513 $13,160 $8,186 Unassigned Fund Balance as % of Revenue 23.6% 21.8% 35.4% 34.2% Unrestricted Net Assets ($000) $26,981 $21,951 $18,540 $11,044 Debt Statistics & Ratios Direct Net Debt Outstanding ($000) $31,439 $22,301 $27,790 $17,131 Direct Net Debt Per Capita ($) $1,591 $503 $488 $542 Direct Net Debt as a % of Full Value 0.7% 0.4% 0.5% 0.7% Debt Service as % of Operating Expenditures 6.7% 7.4% 5.6% 5.2% Payout, 10 Years, All Tax-Supported Debt (%), Current 66.4% 58.9% 63.2% 69.9% Tax Base Statistics and Ratios Full Value Per Capita ($) $234,556 $129,776 $97,317 $75,366 Total Full Value ($000) $4,636,000 $5,755,559 $5,545,240 $2,382,333 Demographic Statistics Actual/Estimated Population, Annual Value 19,765 44,350 56,981 31,610 Source: Moody's Financial Ratio Analysis database. City of Tukwila debt statistics adjusted for proposed 2015 LTGO Bonds.

Concerns:

Outsize reliance on a single customer (Boeing) Diluted somewhat through recent hotel and retail development Historical rate increases have been sporadic and relatively large Rate policy revised to target more modest rate increases on a more regular basis

Aa3

Credit Strengths and Concerns – Revenue Bonds

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Strengths:

Stable system Water supply and wastewater treatment contracts with Seattle and King County, respectively Minimal expected capital needs City expected to reach build-out within several years Strong financial and debt ratios Operating ratio well above rating median Ample cash balance (targeted at 9 months

• f operating costs)

Health debt service coverage in recent years Modest growth Approximately 1.2% annually Competitive rates

Current Moody’s Rating:

Moody’s Investors Service last reviewed the City’s general obligation credit on November 3, 2006.

Market Update

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Interest Rate Environment

Both taxable and tax-exempt yield rates remain close to historic ten-year lows.

0% 1% 2% 3% 4% 5% 6% Mar 2005 Sep 2005 Mar 2006 Sep 2006 Mar 2007 Sep 2007 Mar 2008 Sep 2008 Mar 2009 Sep 2009 Mar 2010 Sep 2010 Mar 2011 Sep 2011 Mar 2012 Sep 2012 Mar 2013 Sep 2013 Mar 2014 Sep 2014 Mar 2015

10 Year MMD "AAA“ GO Index vs. 10 Year Treasury Ten Years: March 2005 to 2015

10 Year MMD Index 10 Year Treasury Bond

Interest Rate Environment

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Interest rates remain generally attractive in a historical context, although rates in earlier maturities (<15 years) have risen over the past year. The chart below shows the MMD “AAA” General Obligation Index (the industry standard tax- exempt index) at various points over the last three years.

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 3 Years Ago 3/5/2012 2 Years Ago 3/5/2013 1 Year Ago 3/5/2014 Current 3/5/2015 1 Year Ago 3 Years Ago 2 Years Ago Current

Bond Sale Process

Bond Sale Process

• Identify both the funding need and repayment source/schedule
• Identify finance team (both legal and financial professionals)
• Develop documentation

– Bond ordinance – Preliminary (and, later, final) Official Statements – Ratings presentation – Notice of Sale/Bond purchase agreement

• Pass ordinance approving the bonds

– Approve bond sale terms by Council ordinance; or – Delegate authority to approve bond sale within key parameters (maximum size, true interest cost, and maturity)

• Receive rating(s)
• Post Preliminary Official Statement
• Sell bonds; sign Bond Purchase Agreement
• Closing
• A typical bond sale process takes approximately 2-3 months, depending on

the nature of the transaction

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Methods of Bond Sale

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• In a competitive sale, the issuer awards the bonds to whichever underwriter
• ffers the lowest True Interest Cost (TIC) at a predetermined bid date and time

– The issuer works with its financial advisor and bond counsel to structure the bonds, obtain a credit rating, prepare disclosure, and generally develop the transaction for sale – Bids are received from underwriters nationwide, with most bids arriving electronically within minutes or seconds of one another

• In a negotiated sale, the issuer selects an underwriter (or group of

underwriters) in advance of the sale date, then negotiates interest rates on the day of sale – Underwriter may be selected through a competitive process (e.g. RFP) – Underwriter may work with other members of the finance team to develop the bond structure, obtain ratings, prepare disclosure, etc. – On the day of sale, the underwriter obtains orders for the bonds from various investors, and in turn prepares a purchase offer for the issuer

• In a direct placement, the issuer sells bonds directly to a single investor,

typically a bank or other financial institution

Potential Upcoming City Financing

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• Limited Tax General Obligation Bonds, 2015
• Not to exceed par amount of $6.25 million, final maturity December 1, 2035
• Boeing Access Road Bridge retrofit project, Interurban Avenue

Improvement project, and other road construction and capital improvement projects as deemed necessary by the City

• 2016 capital budget includes $4.4 million in bonds to construct sidewalks and

underground utilities on 42nd Avenue South

• Potential refunding of Water and Sewer Revenue Bonds, 2006, to achieve debt

service savings

• Many municipalities consider the potential for issuing bonds ahead of schedule,

in order to lock in current market rates and avoid selling bonds in a time of rising interest rates

• Question: is it better to issue bonds early (and make additional interest

payments) or issue bonds later (and risk higher interest rates)?

• How much would rates need to rise between “now” and “then” in order to

be indifferent (break even?)

Refunding Analysis – Water & Sewer Rev. Bonds

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* Years 2016 - 2026 Savings do not include potential value of debt service reserve release.

Date Savings 12/1/2015 $ 5,751 12/1/2016 12,350 12/1/2017 12,350 12/1/2018 10,025 12/1/2019 7,550 12/1/2020 10,000 12/1/2021 8,900 12/1/2022 7,775 12/1/2023 11,600 12/1/2024 10,200 12/1/2025 8,750 12/1/2026 9,350 Total $114,601 Refunding Statistics (Estimated) NPV Savings $104,749 NPV Savings % 5.51%

• Avg. Annual Savings*

$9,895 Negative Arbitrage $49,546 Call Date 12/1/2016 Refunding Par $1,890,000 $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 Savings Refunding Debt Service Unrefunded Debt Service

On November 1, 2006, the City issued $3,180,000 in Water and Sewer Revenue Bonds to fund the Neighborhood Revitalization – Allentown and Foster Point Sewer Systems Project

• Callable Par: $1,910,000
• Call Date: 12/1/2016
• Interest Rates: 4.00 – 4.50%

Based on current market conditions, the City may refund the outstanding 2006 Bonds and realize modest debt service savings.

Susan Musselman Director (360) 445-0238 musselmans@pfm.com

Contact Information

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Duncan Brown Senior Managing Consultant (206) 858-5367 brownd@pfm.com