Municipal Finance Update WEDA Winter Conference 2013 Stacey Lewis, Pacifica Law Group.

Municipal Finance UpdateWEDA Winter Conference 2013Stacey Lewis, Pacifica Law Group

Recent Developments

•In the category of old bad news (but improving prospects)▫Municipal bankruptcies/defaults

•In the category of potentially new bad news▫Federal legislation affecting tax exemption

•To end on less of a downer…▫Financing tools

•In the category of old bad news, but improving prospects:▫Municipal bankruptcies/defaults

Municipal Bonds Play Key Role in Funding Local Infrastructure•According to September 2009 PSRC

study:▫$9.1 billion in local infrastructure

investment in Washington since 1998, consisting of: Bonds (70%) Loans (e.g., PWTF) (23%) Grants (7%)

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Municipal Bond Defaults

•Municipal defaults are rare

Source: The Untold Story of Municipal Bond Defaults, Appleson, Parsons, and Haughwout (NY Fed Reserve Study, Aug. 15, 2012)

Defaults, By Type

Source: The Untold Story of Municipal Bond Defaults, Appleson, Parsons, and Haughwout (NY Fed Reserve Study, Aug. 15, 2012)

•These figures focus only on rated municipal bonds

•Nonrated bonds are more likely to default•Risk varies by credit type

“The biggest portion of defaults was associated with industrial development bonds, a type issued by a government authority on behalf of a company. That type of bond accounted for 28 percent of the defaults.”

▫Report by Fed. Reserve Bank of NY (Aug. 15, 2012)

Improving Prospects

•90% of public finance credits are rated A or higher

•S&P notes trend is towards stronger municipal credits▫"We anticipate that municipal bankruptcies

will continue to be few and far between" ▫“In the past year, there have been more

upgrades of public finance credits than downgrades” See also Municipal Bankruptcy: Standard and

Poor’s Approach And Viewpoint, Oct. 4, 2012

Washington Default•As discussed, defaults by municipalities

(as opposed to IDB borrowers) are rare•When a municipality defaults, its

noteworthy and may have ripple effects •Wenatchee Public Facilities District

▫Defaulted on notes issued to finance the Wenatchee arena

▫Default now cured -- voters approved a new sales tax, and the PFD issued bonds to refinance the defaulted notes

Implications for other Washington municipalities• Court decision (October 25, 2012)

▫Washington Supreme Court issued its decision In the Matter of the Bond Issuance of Greater Wenatchee Regional Events Center Public Facilities District 5-4 decision Held that a proposed contingent loan agreement

between the City and the PFD in which the City agreed to make loans to the PFD if and when necessary to pay debt service on the PFD’s bonds = a City debt

The Court held that the CLA, therefore, should be counted against the City’s nonvoted debt limit

Implications?▫Unlikely that cities and counties will enter

into new contingent loan agreements guaranteeing debt of public facilities districts or other entities

▫Restate debt capacity?

Ratings Agencies Respond•Moody’s Special Comment on Washington

Public Facilities Districts (May 2, 2012)▫“Many State of Washington municipalities

are experiencing pressure related to their guarantees of debt issued by public facility district (PFDs) enterprises that are now struggling. As a result, several city ratings throughout the

state have been lowered. While more downgrades are possible, we do not

anticipate further defaults in the near-term”

State Auditor Responds

•Audit Summary for Public Development Authorities and Public Facilities Districts (November 21, 2012)

Auditor Noted Concerns:

•Many PDAs and PFDs operate effectively

•Four areas of concern:▫“The entities that create them often do

not monitor PDA/PFD operations.” Effective monitoring: Everett, Bellingham

and Seattle Staff members engaged in PDA/PFD

operations and regularly attend meetings with auditors

Other Noted Concerns

•PDA/PFD Boards not involved in effective monitoring▫Business experience▫State law and regulatory understanding?

•Declining or distressed financial condition▫7 of 64 PDA/PFDs

•Noncompliance with laws and regulations▫Private business versus public entity

Report’s Recommendations to Cities and Counties• Ensure PDA and PFD appointed officials receive

training and guidance on what city, town or county laws are applicable.

• Ensure board members take an active role in monitoring PDA and PFD operations.

• Have elected officials and/or staff from the creating entity attend audit exit and entrance conferences.

• Monitor the financial health of the PDAs and PFDs.• Inform the State Auditor’s Office when a new

entity is created

Auditor’s Report:Recommendation to the Legislature•Consider changes to state law to

require creating entities to:▫Monitor the PFDs they have created.▫Establish an annual reporting requirement

for PDAs and PFDs to summarize operations for the creating entities.

▫Notify the State Auditor’s Office when PDAs and PFDs are created.

Other Audit Responses

•According to a recent review by the MRSC:▫29 cities have had audit findings noting a

“Decline in Financial Condition Due to Lack of Monitoring or Failure to Reduce Costs”

Legislature Responds?

•In the category of potentially more bad news:▫Federal legislation regarding tax exemption

Federal Tax Exemption

•Tax exemption of municipal bonds = forgone federal tax revenue, in the view of federal budget office

•OMB estimates = $26.2 billion in 2011•2013-2017, estimated to be $227.5 billion•10th largest tax expenditure

Private Activity Bonds Issued in 2009 and 2010

2009 2010•Total (billions): $11,951.2 $14,661.7 •Single-family Mortgage $3,571.2 $4,551.5•Multi-family Housing $1,153.8 $2,388.2 •Mortgage Credit Certificates $1,311.4 $2,085.6•Exempt Facilities $2,352.2 $1,802.0 •Other Activities $317.1 $1,232.5 •Student Loans $1,368.7 $1,110.8 •Housing not Classified $930.3 $825.2 •Industrial Development $946.5 $665.9

▫ Source: CRS Report for Congress (June 2012)

Existing Proposals

•Proposals to eliminate or cap benefit of tax exemption of municipal bonds▫Simpson-Bowles Commission: repeal of the

exclusion for interest on newly-issued state and local bonds.

▫President: limit the value of the exclusion

Timeline • First deadline:

▫ Sequester (March 1, 2013) and Expiration of Continuing Resolution (March 27, 2013)

▫ Seeking $85B in FY2013• Second deadline:

▫ May 19, 2013, federal debt limit expires  ▫ Congress has about 8-12 weeks in which they can take

other extraordinary measures ▫ "28% cap" likely will be on the table  ▫ $400-500B in potential savings

• 28% cap would apply retroactively to interest on all previously issued bonds as well as all future bonds. 

• Consider increased cost to local infrastructure, and impact on economic development

Municipalities Weighing In

•AWC Letter to Congressional Delegation (Dec. 12, 2012)

•APPA, National Governors Association, National League of Cities

•Other state and local government associations signed on to op-ed in Politico▫Cost of funding infrastructure

•To provide some good news:▫Financing tools

Tools

•ARRA Leftovers, including “Green Community Projects”▫Federal subsidy available for green

community projects▫Helped by recent IRS guidance, defining a

green community program•Community Facilities Districts•Transportation Benefit Districts

ARRA Leftovers

•Most of the ARRA tools are no longer available:▫Build America Bonds▫Recovery Zone Bonds▫Qualified School Construction Bonds

•Volume cap remains for some tools▫Qualified Energy Conservation Bonds

“Green community programs”▫Clean Renewable Energy Bonds

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Green Community Programs

•Qualified Energy Conservation Bond financing

•IRS Notice 2012-44 clarified what a green community program is

•King County considering adopting a program to certify green community projects

•Then eligible for financing through WSHFC

Transportation Benefit Districts

•Formed by cities, counties•Chap. 36.73 RCW•For the purpose of acquiring,

constructing, improving, providing, and funding transportation improvements

•Voted and nonvoted revenues▫Nonvoted: car tabs, impact fees▫Voted: sales tax, property tax

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TBDs

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Source: DOR

Community Facilities Districts• CFDs formed “to facilitate voluntary landowner

financing of community facilities and local, subregional, and regional infrastructure.”

• Petition by all of the owners of the property located within the proposed district.

• Alternative to a traditional local improvement district financing▫ No city guarantee fund to secure payments of

assessments ▫ Separate, independently governed, special purpose

district with landowner representation• City conducts a public hearing on the petition • To form, City must find the CFD is “in best interests

of” the City.• RCW 36.145

Here’s to a better 2013

•…

•Questions? [email protected]