Municipal Bond Basics – A citizens guide to commonly asked questions, bond types discussed in the March 2016 undergrounding presentation, cost of issuance and citizens oversight committee. July 25, 2016

Funding Options or “Tool Box” Included Bond Financing – Frequently Asked Questions What exactly is bond financing? Bond financing is a type of long-term borrowing that is frequently used to raise money, primarily for long-lived infrastructure assets. They obtain this money by selling bonds to investors. In exchange, the investors receive a promise that they will be repaid with interest. Doesn’t using bonds cost more? Funding capital projects using bonds is definitely more costly than direct appropriations due to the interest that has to be paid. There is also a cost to hire consultants to issue the bonds. So, given the extra cost, why use bonds? It makes sense to pay the extra cost of using bonds when this expense is outweighed by the benefits of having the projects in place sooner than otherwise would be possible.

Bond Types from the “Tool Box” and More General Obligation (GO) Bonds Voter approval required - 2/3 vote. Generally have a slightly lower cost of borrowing than Revenue bonds. Ballpark average will be 0.2% points lower than Revenue bonds. Reserve fund not needed to effectively market the bonds. Amount of bonds required is based on the project plus issuance costs. New tax on the property tax bill. The amount is based on the assessed value of the home.

Bond Types from the “Tool Box” and More Revenue Bonds Bonds relying on a tax increase (Transient Occupancy Tax or Utility Tax) for repayment, may be approved by the City Council. This type of bond would not be typically seen in a general election. Voters must approve tax increases with a majority vote. Revenue bonds are paid off from a designated revenue stream. The revenue stream may already exist or be augmented by a new tax. Bond volume upsized over project costs for both issuance and cost of reserves. This type of bond may require a reserve. Repayment made from the city’s general fund. No impact on your property tax bill. Repayment is not made by the homeowner.

Bond Types from the “Tool Box” and More Special Tax (CFD) Community Facility District Commonly known as Mello-Roos. Voter approval required - 2/3 vote. Generally have a slightly higher cost of borrowing than Revenue bonds or General Obligation bonds. Special tax paid by parcels not currently undergrounded and estimated at about $600 to $800 per household per year. The amount of tax will not change. If assessed values change, the tax on a General Obligation bond can change (probably not that much). Bond volume upsized over project costs for both reserve and issuance costs. New tax on the property tax bill. The amount is fixed.

Cost of Issuance Tax-exempt municipal bonds are federally regulated securities. This is the most common type of municipal bond. Typical costs include; Fixed costs – Bond counsel, municipal advisor, disclosure counsel, fiscal agent /trustee, printing and miscellaneous. Variable costs – Engineer’s report, underwriter fees. A private placement or bank loan has a lower cost of issuance but repayment terms available rarely exceed 10 years. A loan from the City would cost even less. A loan from IBank would be subsidized by the state but would be limited in size and duration. Successful projects must show economic benefit to the state (ie improve employment or other general benefit).

How will the money be spent? This may be determined in advance and provided to voters for both a tax increase or a municipal bond. Citizens Oversight Committee may be formed to ensure that spending goes as planned. Key elements; Define purpose. Identify number of members (ex. 10 and maybe identify desirable backgrounds for some of the seats). List the duties and responsibilities. Define the selection process.

Thank You for allowing me to assist you with this information Thank You for allowing me to assist you with this information! Special thank you to Paul Pender, Vice President, Fieldman Rolapp Questions: Laura Parisi, CPA, CCMT, CFIP City Treasurer, City of Laguna Beach lparisi@lagunabeachcity.net (949)497-0327 (949)677-0327 cell