Capital Financing Options for Local Governments - Summer 2014 NCLGBA Conference

Funding Capital Projects

Kara A. Millonzi, Associate Professor of Public Law and GovernmentJuly 2014

[email protected]

Financing Options for Purchasing / Constructing Capital AssetsCurrent

RevenuesSavings Grants /

Gifts / Partnerships

Special Levies Borrowing Money

General Fund Revenues

Fund Balance Federal Grants Special Tax Districts

General Obligation (G.O.) Bonds

Enterprise Fund Revenues

Capital Reserve Fund

State Grants Special Assessments

Revenue Bonds

Private Grants Impact Fees / Development

Exactions

Special Obligation (S.O.) Bonds

Private Donations

“CrowdFunding”

InstallmentFinancings

(COPs, LOBs,)(Synthetic TIFs)

Public/Private PartnershipsReimbursement

Agreements

Downtown Development Projects

Project Development

Financings (TIFs)

Savings

Fund Balance (FB)

– Can be used for capital or operating expenses

– No legal limit on amount of FB for savings

• LGC prescribes minimum fund balance level for cash flow purposes

– No statutory process needed

Capital Reserve Fund (CRF)

– Dedicated to capital expenses only (forever), but can change type of capital expense at any time

– No legal limit on amount of $ in CRF

– Statutory process must be followed to create and maintain CRF (see G.S. 159-18 through -22)

CRF Ordinance / Resolution1. The purposes for which the fund is being created.

A board may accumulate moneys for multiple capital projects within a single capital reserve fund, but it must list each project separately.

2. The approximate periods of time during which the moneys will be accumulated for each purpose.

A board must provide a rough estimate of when moneys will be expended from the capital reserve fund for each capital project.

3. The approximate amounts to be accumulated for each purpose.

A board must provide a rough estimate of the total amounts it intends to save for each capital project.

4. The sources from which moneys for each purpose will be derived.

A board must indicate the revenue sources it intends to allocate to the capital reserve fund to finance each project (e.g. property tax proceeds, utility fees, local sales and use tax proceeds, grant proceeds, etc.).

CrowdFunding

Special Levies

Special LeviesSpecial Taxing Districts

(Service Districts)Special Assessments Impact Fees

• Unit may establish one or more taxing districts in the unit and levy additional property taxes in order to fund a project or provide services within the district to a greater extent than in the rest of the unit

• Tax rate assessed on same property tax base as general property tax(es)

• Limited to funding certain projects and services

• Special Assessments are levied against property to pay for public infrastructure that benefits the property

• Lien on property; collected in same way as delinquent property taxes

• Two different special assessment methods

• Limited to funding certain projects

• Impact fees are not authorized under general law in NC

• All units can impose fees/charges to cover capital costs of operating public enterprises

Service (Tax) DistrictsCounties

• Beach erosion control• Fire protection• Recreation• Sewage collection and disposal

systems• Solid waste collection and

disposal systems• Water supply and distribution

systems• Ambulance and rescue• Watershed improvement projects• Cemeteries

Municipalities

• Beach erosion control• Downtown revitalization• Urban-area revitalization• Transit oriented development• Drainage projects• Sewage collection and disposal

systems• Off-street parking facilities• Watershed improvement

projects

Service (Tax) District Process

1. Unit prepares report with map of district; statement that services needed to a greater extent in district; and plan for providing services in proposed district

2. Unit provides notice of report

3. Board holds public hearing

4. Governing board adopts resolution adopting district

5. District becomes effective at beginning of fiscal year

6. Board sets district tax rate each year

7. Unit must begin providing services within one year after levying district tax

Special AssessmentsTraditional Special Assessments

• Limited Statutory Purposes

• Generally No Petition Requirement

• Amount of assessment must be based on one or more statutory bases

• Unit must follow detailed statutory procedures before imposing assessments

• Unit must complete public improvement projects before assessments may be imposed

• Assessments often are paid in up to 10 yearly installments

New Special Assessments

• Expansive Statutory Purposes• Petition Requirement• Assessment method within discretion

of governing board, but must relate to benefit to properties assessed

• Unit must follow detailed statutory procedures before imposing assessments

• Unit may borrow money to front the costs of capital projects and may pledge assessment revenue as security for loans

• Unit may impose assessment before the capital projects are complete, based on estimated costs

• Assessments may be paid in up to 30 yearly installments

• Currently Expires July 2013

Traditional Assessment Projects

Newer Special Assessments

• Allows unit to do public infrastructure projects that benefit new development

• Unit is reimbursed for up to 100% of costs over time

• Payment expected to be made primarily by eventual property owners (not developer)

Town of Hillsborough

• $4.63 million at 7.75% for 10 year term

• Funds will be used to establish parks and open space, construct and improve water, wastewater and drainage facilities, construct and improve streets, roads, and rights-of-way in the assessment district

• Assessments totaled $6.2 million on properties with 210 acre area, with payments over 10.5 years

Special Assessment Process

1. (Government receives petition)2. Unit determines scope and cost of project3. Board adopts preliminary assessment resolution4. Unit publishes notice5. Board holds public hearing6. Board adopts final assessment resolution7. Unit completes project8. Unit prepares preliminary assessment roll9. Unit publishes notice of assessment roll10. Board holds public hearing11. Board confirms assessment roll – assessments become lien

on property assessed

Special Assessments: Basis of Assessment

Traditional Special Assessments

1. Frontage abutting project, equal rate per foot

2. Area of land served, equal rate per unit of area

a. Can establish benefit zones

3. Value added to land (difference between appraised values before and after project), equal rate per dollar of value added

b. Can establish benefit zones

4. Number of lots served if involves extension of existing system to residential or commercial subdivision, equal rate per lot

5. Combination of the above bases

New Special Assessments

• Governing board establishes assessment method that most accurately assesses each lot or parcel of land according to the benefits conferred upon it by the project

Borrowing Money (Issuing Debt)

Borrowing Money (Issuing Debt) Can the borrowing method legally be used to fund project

(state law)?

What is the security for the borrowing (state law)?

What funds will be used to repay the loan (state law)?

Is voter approval required (state law)?

Is Local Government Commission approval required (state law)?

Is the borrowing method feasible (market)?

Is the borrowing method tax exempt (federal law)?

Borrowing Money (Issuing Debt)General

Obligation Bonds

Revenue Bonds

Installment Financings

Synthetic TIFs

Special Obligation

Bonds

Project Development Financings

Security Unlimited taxing power

Revenues from revenue-

producing asset or system

Some or all of financed property

Revenues other than unit-levied

taxes

Taxes on increased

valuation in defined area

Authorized Projects

Most capital projects

Revenue-generating

capital projects

Most capital projects

Solid waste, wastewater,

water, municipal

service district projects only

Specified capital projects

Voter Approval

Usually No No No No

LGC Approval

Always Always Sometimes Always Always

Special Limitations

Net Debt Limitation

Feasibility Studies

Covenants

Net Debt Limitation

Feasibility Studies

Covenants

Enhanced Security

Borrowing Money: G.O. Bonds

• Pledge of “full faith and credit”

• Can fund almost all capital projects

• Voter referendum almost always required

• Local Government Commission approval always required

Borrowing Money: Revenue Bonds• Pledge of revenue from

revenue generating asset or system

• Can only fund revenue-generating capital projects

• Voter approval never required

• Local Government Commission approval always required

• Times-coverage requirement

Borrowing Money: S.O. Bonds• Pledge any unrestricted

revenues except unit-levied taxes

• Can only fund landfills, water/sewer projects, BID projects and urban area revitalization projects

• Voter approval never required

• Local Government Commission approval always required

Borrowing Money: Installment Financings

• Pledge of financed asset

• Can fund almost all capital projects

– Essentiality principle

• Voter approval never required

• Local Government Commission approval sometimes required

Borrowing Money: Installment Financings

Simple Installment Financings

• Unit borrows no more than $10 million (tax-exempt) in calendar year (bank qualified)

• Borrow directly from vendor, bank, or lending institution

• Simple borrowing transaction

Certificates of Participation (COPs) Limited Obligation Bonds (LOBs)

• Unit borrows more than $10 million (tax-exempt) in calendar year

• Sell loan off to investors

• Complicated borrowing transaction

Borrowing Money: TIFs• Pledge of increased property

tax revenue from new private development

• Can fund certain capital projects

• Voter approval never required

• Local Government Commission approval always required

• Enhanced security usually required

• 5% limitation

Valu

ation

Proceeds allocated to pay off TIF bonds

Proceeds allocated to unit’s general fund

Enhanced Security

• Additional pledges– Financed asset

– Revenues other than unit-levied taxes

– Taxing power (if voter approval)

– Special assessments

• Minimum assessed value agreements

Valu

ation

Borrowing Money: Synthetic TIFs

• Installment Financing

• Anticipate using increased property tax revenue from new development to actually repay loan