INFRASTRUCTURE PUBLIC FINANCE 101 AMERICAN PLANNING ASSOCIATION 2017 - - PowerPoint PPT Presentation

INFRASTRUCTURE PUBLIC FINANCE 101

9109946

MODERATOR: LOURDES GERMAN, LINCOLN INSTITUTE OF LAND POLICY PANELISTS: SUSAN KENDALL, FIRSTSOUTHWEST GERRARD BUSHELL, DASNY RICHARD FROEHLICH, NEW YORK CITY HOUSING DEVELOPMENT CORPORATION

AMERICAN PLANNING ASSOCIATION 2017 NATIONAL PLANNING CONFERENCE

HOW ARE COMMUNITIES USING PUBLIC FINANCE?

MUNICIPAL DEBT PAYMENTS IN LIEU OF TAXES PAY-AS- YOU-GO / CURRENT REVENUE

PUBLIC- PRIVATE PARTNER

• SHIP

LAND VALUE CAPTURE POOLED PROGRAMS

INFRASTRUCTURE PUBLIC FINANCE 101

9109946

MODERATOR: LOURDES GERMAN, LINCOLN INSTITUTE OF LAND POLICY PANELISTS: SUSAN KENDALL, FIRSTSOUTHWEST GERRARD BUSHELL, DASNY RICHARD FROEHLICH, NEW YORK CITY HOUSING DEVELOPMENT CORPORATION

AMERICAN PLANNING ASSOCIATION 2017 NATIONAL PLANNING CONFERENCE

Bonds, Private Activity, P3 and TIF Richard Froehlich, NYC HDC COO and General Counsel

What are Municipal Bonds?

• An IOU or obligation of the Issuer to repay the

purchaser (with interest) over the life of the bond

• Issued in order to finance a public purpose like

roads, bridges, schools and affordable housing

• Interest is usually tax exempt and attractive to

high income people and corporations

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Who is the Issuer?

• A Government or Governmental Entity
• Governmental Entities or Instrumentalities are

created by the state or locality to perform tasks (including financing the task) for the government

• Called a Conduit when the issuer has no
• bligation to repay the debt because a specific

revenue source is pledged to the bondholders

• HDC is a public benefit corporation which

makes it a governmental entity of NYS.

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Public Authorities

• Somewhat autonomous organizations of a state or a locality that is

created to perform functions that the government wants that can be generally financed by the issuance of municipal bonds

• Created under state or local law with rules and regulations

established by the legislature. Legislature may limit powers. Why?

• Quasi public because they are formed to do things for

governmental purposes but often not a direct part of the government

• Usually controlled by a board selected by Governor or Mayor and
• ther elected officials
• Authority has a trust relationship with the public that purchases the
• bonds. That autonomy matters to bondholders. Why?

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Public/Private Partnerships for Providing Affordable Housing

• HDC can use the issuance of private activity tax

exempt bonds coupled with low interest loans and low income housing tax credits to spur the development and preservation of affordable housing

– Bond proceeds are used to finance new construction or acquisition/rehabilitation of housing for persons with low and moderate incomes – HDC profits coupled with City capital fund low interest loans

• Private Developers (either charitable or profit-

motivated entities) own such developments.

– Rules require different levels of affordability and compliance is monitored by HDC.

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Private Activity Bonds

– Relate to bonds issued for private benefit – Usually projects that will be owned or controlled by private entities – Most regulated as you can only finance certain kinds of projects and there must be a public good related to the project.

• Kinds of private activity bonds:
• Multifamily rental housing
• Bonds for public works (but privately controlled)
• Single Family MRB

– 1st time homebuyers – limits on mortgages

• Airport facilities
• Transportation facilities
• Stadiums
• Qualified industrial development
• Qualified student loans

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Private Activity Bonds for Housing

• Qualified residential rental projects:

– Bond proceeds are used to finance new construction

• r acquisition and rehabilitation of housing for

persons with low and moderate incomes

• To be for low and moderate income persons:

– 20% of the units must be for people earning 50% of median income or 40% of the units must be for people earning 60% of median income

• in NYC, it is 25% at 60% of median income because

this is such a high-cost region

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• Public Private Partnerships (P3)

– P3’s are contractual agreements between a public agency and a private entity that allow for greater private participation in the delivery of projects – More than a Design-Bid-Build

What is a P3?

Conventional vs. P3 Conventional Projects (design-bid-build) P3 Projects (design-build-finance-operate-maintain) Public sector takes on most risks (except construction) Risks shared between public and private sector Public Financing (mostly) Private Financing (mostly) Lowest Bidder Best suited/best value Operations and Maintenance (O&M) and

• ngoing rehabilitation (if any) carried out by

public agency once constructed O&M carried out by private sector; ongoing rehabilitation overseen by public sector stewardship of P3 agreement

4

Challenges in Using P3s

• Public acceptance
• Enabling Legislation
• Organizational Capacity
• Knowledge gap
• Different oversight/contract management approach required

High cost of private capital Revenue constraints

• Federal and state toll restrictions
• Revenue shortfalls due to lower tax receipts

Difficulty in predicting traffic and revenue Difficulty in identifying and pricing risk and proper risk allocation Long-term nature of P3 Agreements

• Concern about loss of upside revenue potential to public
• inability to anticipate future performance issues or public needs

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P3 Alternatives: Value vs. Risk/Responsibility

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Basics of Tax Increment Financing

• The name says it all.
• An area is designated for improvement
• Money is needed to develop the area
• Increased property tax revenues relating to

specific region are allocated to repay debt used to develop that area.

• A tool to capture the value of increased

development of the area

Benefits of TIF

• Infrastructure improvement.
• Industrial expansion.
• Downtown redevelopment.
• Historic preservation.
• Firm-specific subsidies.

TIF Advantages

• Allows government to borrow money to

encourage development without tapping regular budget and not subject to local bonding limits

• Reduces up-front costs of development and can

be used to pay infrastructure and related costs.

• A way to tap public redevelopment agencies that

may have earmarked funds.

• Don’t have to compete for $ during budget

season.

• Increases the tax base.

TIF Critique

• Are we siphoning tax revenues that may be

needed to cover additional costs to provide services (roads, schools, policing, etc.)?

• Risk that increments won’t materialize and then

the issuer or government must use other tax revenue to repay the debt.

• Is it worth the additional costs of administering a

special district?

• Will the type of development being subsidized

benefit the community it is in? Or is it Cronyism?

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Please visit our website: www.nychdc.com

Questions & Answers

Richard Froehlich Chief Operating Officer, EVP for Capital Markets, and General Counsel Phone: (212) 227-7435 Email: rfroehlich@nychdc.com

Contact:

INFRASTRUCTURE PUBLIC FINANCE 101

9109946

MODERATOR: LOURDES GERMAN, LINCOLN INSTITUTE OF LAND POLICY PANELISTS: SUSAN KENDALL, FIRSTSOUTHWEST GERRARD BUSHELL, DASNY RICHARD FROEHLICH, NEW YORK CITY HOUSING DEVELOPMENT CORPORATION

AMERICAN PLANNING ASSOCIATION 2017 NATIONAL PLANNING CONFERENCE

Contacts

Susan Kendall Director (617) 619-4419 Tel Susan.Kendall@hilltopsecurities.com

May 6, 2017

Infrastructure Public Finance 101

• Pay-as-you-go (Annual Operating Budget)

– Reserves

• Grants

– State – Federal

• Loans

– State Revolving Funds, WIFIA

• Public Private Partnerships (P3s)
• Long-Term Debt

– Municipal Bonds

• Tax-Exempt

– Bank Loans/Private Placements

Financing Municipal Assets—the Basics

• Easy access to established US Municipal Bond Market
• Tax-exempt status for most bonds
• Generally strong credit profiles with extremely low historical default rates
• Credit enhancement available

– Insurance – State intercept and enhancement programs

• Strong demand = low borrowing costs

Advantages to Financing with Municipal Bonds

• Who Will Issue the Bonds?

– Local Government

• General Obligation Bonds
• Enterprise Revenue Bonds
• Special Tax/Other Revenue Bonds

– State Government or Agency

• Pooled Financing
• Bond Bank

– Regional Solutions?

• School or Other District or Authority

Several Options to Consider for Government Bond Financings

• Multiple levels of approval are likely
• Clearly articulate impact of new projects and facilities on operating budget
• Understanding and consensus for goals and outcome
• Thorough understanding of big picture financial impact
• Consider stress testing scenarios

Approval Process is Key to Success

– 2016 was a record year of $445 billion in issuance – Previous record was $433 billion in 2010, largely due to BABs (Build America Bonds) program

US Municipal Bonds: $3.8 Trillion Outstanding

Source: The Bond Buyer

US Municipal Sector Is Small Relative to Other Sectors

$10,428 $7,561 $3,743 $11,493 $13,493 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 Treasuries Agencies and GSEs Municipal Securities Corporate and Foreign Bonds Mortgages Billions

Debt Outstanding by Sector, 2011Q4

Source: Federal Reserve

Municipal Market is Diverse

• State 40%
• Local Government 56%

State Governments 10% State Authorities 30% Counties & Parishes 6% Cities & Towns 16% Districts 17% Local Authorities 17% Colleges & Universities 3% Direct Issuers 1% Tribal Governments 0% Other Utilities 0%

Source: The Bond Buyer

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– Denotes relative credit quality – Assessment of issuers’ ability and willingness to repay debt in full and on time – Measure of expected loss

• Default probability times loss severity

– Independent opinion – Forward-looking projection – Used by investors as one component of investment decisions What is a Credit Rating?

Rating Process Call, meeting or visit Rating Released Preliminary Discussion Analysis Complete Analysis Rating Committee New Audit Received Surveillance or New Bond Sale Documents Received

Rating Relative credit risk Aaa/AAA Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk Aa/AA Obligations rated Aa are judged to be of high quality and are subject to very low credit risk A Obligations rated A are considered upper-medium grade and are subject to low credit risk Baa/BBB Obligations rated Baa are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics Ba/BB Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk B Obligations rated B are considered speculative and are subject to high credit risk Caa/CCC Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk Ca/CC Obligations rated Ca are highly speculative and are likely in, or very near, default with some prospect of recovery of principal and interest C Obligations rated C are the lowest rated class and are typically in default, with little prospect for recovery of principal or interest

Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category, the modifier indicates a mid- range rating, and the modifier 3 indicates a ranking in the lower end of that generic rating category

Long-Term Obligation Ratings Scale (Moody’s)

Muni and Corporate Rating Distributions (Moody’s)

Four Primary Credit Factors

RATING Debt Position Management Finances Economy

Updated General Obligation Factors/Criteria (Moody’s Investors Service)

Pension and Other Post-Employment Benefit (OPEB) Liabilities Have Growing Significance

Total US public debt lower than other major economies

Source: Trading Economics

• Governments exist in perpetuity
• Federal monetary policies benefit state and local economies
• State economies and those of large cities are broad-based and diverse
• State and local governments have strong mandates and incentives to pay

bond debt

• Debt service, even when combined with unfunded pension and OPEB

liabilities, is a small share of expense budgets

• State and local governments have a variety of powerful fiscal

management tools at their disposal

State and Local Governments Have Inherent Strengths

3 5

2015 Moody’s Default Study--Key Findings 1970-2015

• The number of US Municipal Bond defaults increased since the recession
• 4 defaults in 2015
• 0 defaults in 2014
• 7 defaults in 2013—including Detroit
• Average 4.5 defaults per year since 2008
• Total of 99 defaults from 1970-2015
• Average 2.15 defaults per year since 1970
• Default composition has shifted slightly
• Previous defaults were largely concentrated in the healthcare and

housing sectors (70% of all defaults)

• 14 general government defaults in the 1970-2015 period
• 9 general government defaults in the 2009-2015 period
• Ultimate recovery rates for municipal bonds are higher than those for senior

unsecured corporate bonds

• On average, municipal bonds recovered 65% versus 53% for corporate

bonds

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Default Counts by Sector: 1970-2015

37

• Federal Tax Policy
• Distressed Cities and Bankruptcy
• Long-Term Liabilities for Pension and OPEB (Other Post-Employment

Benefits)

• Enterprise Risk
• Issuer disclosure to investors and muni bond market
• Infrastructure Finance
• Green Bonds
• Resident and Mini- Bonds

Other Hot Topics in Public Finance

38

MINIBONDS—CITY OF CAMBRIDGE, MASSACHUSETTS

City of Cambridge Minibonds—Pilot Program 2017

• Each year, Cambridge residents

wanted to buy the City’s bonds but could not always find them for sale through traditional muni market methods

• Bond sale limited to Cambridge

residents

• $1000 minimum denomination
• 5-year maturity at 1.6% per year
• Sold directly to residents through

Neighborly’s all-electronic platform

• The full $2 million sold out during the 5-

day order period (including a long holiday weekend)

Minibond Pilot Program is a Success

CITY OF CAMBRIDGE, MASSACHUSETTS $2,000,000 General Obligation Bonds, 2017 Series A (Minibond Program) Rated: AAA/Aaa/AAA

Issue: HilltopSecurities acted as financial advisor to the City of Cambridge, Massachusetts (“City”) for the negotiated sale of their General Obligation Bonds, 2017 Series A (Minibond Program) in the amount of $2,000,000 (the “Minibonds”). The Minibonds closed on March 8, 2017 and were a direct sale to City residents by Neighborly Securities. Challenges: Cambridge’s Minibond issue was the first underwriting for Neighborly, a start-up broker-dealer based in San Francisco, California. The City offered $2,000,000 of Minibonds in an untested market for $1,000 denomination, 5 year maturity, par structured bonds. Additionally, the market has traditionally been unfavorable for “resident” or Minibonds in Massachusetts. The City’s goal was to offer the Minibonds

• nly to residents of the City, maintain yields in line with “AAA” MMD and minimize additional issuance

costs. Resolution: Neighborly sold the Minibonds after a five day order period (including a three day weekend) to 239 investors with $2,034,000 in total orders. To help accomplish this feat, HilltopSecurities, the City and Neighborly worked closely with citizens, holding two well-attended public information sessions at City

• Hall. Additionally, HilltopSecurities worked with the City to leverage its established direct mail and social

media programs to advertise the investment opportunity. Neighborly opened accounts and evaluated potential investors for suitability. HilltopSecurities provided pricing guidance to the City and coordinated the sale of the Minibonds as part of a larger offering with another broker/dealer, adding further support had the sale not been successful.

• Bond Buyer http://www.bondbuyer.com/
• Bond Dealers of America http://www.bdamerica.org/
• Center for Retirement Research at Boston College http://crr.bc.edu/
• Governmental Accounting Standards Board www.gasb.org
• Municipal Securities Rulemaking Board Electronic Municipal Market Access (EMMA)

http://www.emma.msrb.org/Home

• Municipal Market Advisors http://www.mma-research.com/
• Rating Agencies

– http://www.moodys.com/ – http://ratings.standardandpoors.com/us-public-finance – http://www.fitchratings.com/ – http://www.krollbondratings.com/

Municipal Bond Resources

This material is intended for educational and informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific

• product. Information provided in this paper was obtained from sources that are believed to be reliable;

however, it is not guaranteed to be correct, complete, or current, and is not intended to imply or establish standards of care applicable to any attorney or advisor in any particular circumstances. The statements within constitute Hilltop Securities views as of the date of the report and are subject to change without

• notice. This presentation represents historical information only and is not an indication of future

performance.

Disclosure

INFRASTRUCTURE PUBLIC FINANCE 101

9109946

MODERATOR: LOURDES GERMAN, LINCOLN INSTITUTE OF LAND POLICY PANELISTS: SUSAN KENDALL, FIRSTSOUTHWEST GERRARD BUSHELL, DASNY RICHARD FROEHLICH, NEW YORK CITY HOUSING DEVELOPMENT CORPORATION

AMERICAN PLANNING ASSOCIATION 2017 NATIONAL PLANNING CONFERENCE