1. KEEPING YOUR FINANCIAL SCORECARD Jenny Blankenship, CPA The PFM Group Handouts and presentation are available online at www.iowaleague.org

2. 2 Session Description Keeping Your Financial Scorecard The council needs to do financial planning, but where do you start? This session outlines some tools available to help councils better understand the city’s financial condition and how to plan for major projects.

3. 3 Outline  Understanding Your City’s Current Financial Condition  Capital Planning Considerations  Making the Decision to Borrow  Municipal Funding Sources (Internal and External)  Financing Infrastructure for Cities  Bonding Options  Post-Issuance Responsibilities

4. 4 Financial Planning at its Best…

5. UNDERSTANDING YOUR CITY’S CURRENT FINANCIAL CONDITION

6. 6 Financial Health Considerations  Stability of current tax base –Diverse larger taxpayers? –Stable home values?  General Fund –Revenues keeping pace with expenses –Operating surpluses or deficits –Current unreserved cash balance as a percentage of revenues  City’s Current Constitutional Debt Limit –State of Iowa: 5% of current fiscal year 100% Actual Valuation  Existing Debt –General Obligation Debt Current debt service levy tax rate –Enterprise Fund Revenue Debt Current revenue bond covenant requirements (debt service coverage ratios, debt service reserve fund, improvement fund, etc.)

7. 7 Financial Health Considerations Cont’d  Tax Increment Financing Districts –District valuation growth –District sunset –Outstanding obligations (debt, rebate agreements, etc.) –Current cash balance  Enterprise Funds –Current unreserved cash balance as a percent of O & M 4-6 months of operating expenses or approximately 50% of O & M expenses –Debt service coverage requirements SRF loans (1.10x coverage) Varies for revenue bonds (1.10x - 1.30x coverage)

8. CAPITAL PLANNING CONSIDERATIONS

9. 9 Capital Planning Considerations  Identify the optimal match of revenue sources with funding needs  Maximize the revenues available for funding capital projects  Maximize the amount of projects which can be funded  Provide the flexibility to accommodate changes in the actual capital needs or funding sources  Preserve the capacity to fund additional capital projects beyond the planning period  Achieve the lowest cost of capital

10. 10 Creating a Capital Improvement Plan  Use all information gathered (Road, Sewer, Water, Storm, etc)  Think about what is driving the timing of the improvements –Condition of the street? –Condition of the underground utilities? –Budget?  Use rankings to develop priorities  Evaluate annual budget based on priorities  Other Considerations –Public Input, Politics, Funding, Other…  Once created, the Capital Improvement Plan should: –Guide decisions for a minimum of 5 years –Include long range needs - 20 years & out –Be evaluated annually

11. MAKING THE DECISION TO BORROW

12. 12 Pay-As-You-Go vs. Debt Financing Debt Financing Pay-As-You-Go Construction or acquisition as revenues become available Current users bear cost Construction/acquisition capacity limited to available revenues Lower total cost Political and economic climate considerations Construction or acquisition as needed Reduced current payments Current and future users bear cost Enhanced construction/ acquisition capacity Useful life of assets financed

13. MUNICIPAL FUNDING SOURCES

14. 14 Internal Municipal Funding Sources  Property Taxes –Debt Service Levy  Local Option Sales Tax Revenues  Special Assessment Revenues  Urban Renewal Revenues  Utility Revenues –Water, Sewer, Stormwater, Electric, Gas or Communications  Road Use Taxes  Franchise Fees  General Obligation Bonding –Bonding options will be discussed later in more detail  Revenue Bonding –Bonding options will be discussed later in more detail

15. 15 External Funding Sources  Iowa Finance Authority  Community Development Block Grants (CDBG)  Federal earmarks  USDA Rural Development –Grants and loans  Source for other grant opportunities –Iowa Grants Enterprise Management System (GEMS) http://www.iagems.gov

16. FINANCING INFRASTRUCTURE FOR CITIES

17. 17 General Considerations for Issuing Debt  Start planning the financing early in the process –Leave time to set and hold public hearings and for other procedural steps  General Obligation Debt Capacity –5% of the 100% Assessed Valuation –General obligation, TIF revenue, local bank loans, leases and rebate agreements count against the debt limit –Revenue debt does not count against the debt limit –Annual appropriation debt Only current fiscal year debt service payments that have been appropriated count against the debt limit  Debt service levies are unlimited  May combine legal authorities –Larger bond issue may sell better –Consult with your Bond Counsel  Cumulative effect of debt –Look at long-term forecasting –Wrap proposed debt around outstanding debt

18. 18 General Considerations for Issuing Debt (Cont’d)  Term of debt –Shorter debt can result in a better interest rate and rating –Current outstanding debt –Future planned debt  Reimbursement resolutions –Do not need one to cover preliminary costs Preliminary costs incurred prior to the commencement of construction that do not require a reimbursement resolution include engineering, surveying, soil testing, reimbursement bond issuance and similar costs Land acquisition, site prep and similar costs incident to commencement of construction are excluded –Limited to 20% of bond issue –Look back window is 60 days –Reimbursed within the later of 18 months after you expended or 18 months after the construction is complete but no later 3 years Do not begin spending money without consulting with your bond counsel and financial advisor first.

19. 19 General Considerations for Issuing Debt (Cont’d)  Bond ratings are important –Smaller communities are now being rated –Pricing difference between non-rated and ‘A’ is, on average, around 25 bps 25 bps equals approximately $15,290 in savings on a $1 million bond over ten years –Rating Criteria include: Economic data; financial policies & practices; debt management; and administration Many issuers are obtaining ratings for the first time and are receiving pricing benefits that far outweigh the cost of obtaining a rating.

20. 20 Competitive vs. Negotiated Sale  Simple or well-known bond structure  Stable market conditions  Fixed Rate Debt  Typically has lower gross spread for underwriting costs  Prices obtained offer potential bidders equal opportunity and yields the lowest price for the Issuer Complex bond structure Volatile market conditions Variable rate debt Typically has higher gross spread for underwriting costs Leaves room for criticism as to not receiving the best available rates for the Issuer Competitive Sale Negotiated Sale

21. BONDING OPTIONS

22. 22 General Obligation Bonds  Authority found in Division III of Chapter 384 of Code of Iowa  Backed by general credit and taxing powers of governmental entity  Counts against general obligation debt capacity  Must levy a debt service levy unless other abatements are available, for example: –Utility revenues; special assessments; local option sales tax revenues; road use tax fund revenues; or urban renewal revenues More secure credit structure Requires taxing authority 60% voter approval required (depending on the project) Property tax based

23. 23 Sample General Obligation Debt Capacity

24. 24 Sample Tax Analysis

25. 25 Revenue Bonds  Authority found in the Code of Iowa –Chapter depends on revenue source  Does NOT count against general obligation debt limit (with the exception of TIF Revenue Bonds)  Debt to be paid solely by the revenues of the system or the source for which the debt is being issued –Utility revenues (water, sewer, storm water, etc.); Local Option Sales Tax revenues or urban renewal revenues Backed by specific revenue stream Matches sources of payment for bonds to the project financed Users pay cost of project and financing Variety of revenues could be pledged to pay debt service Covenants could limit bonding capacity

26. 26 Urban Renewal Bonds (TIF)  Authority found in Division III of Chapter 384 and Chapter 403 of Code of Iowa –Must have an urban renewal area set up before project is started and project must be located within the area –Must publish notice of proposed debt issuance and hold a meeting to take action –Must receive any oral or written objections, after which the City may either proceed with debt issuance or abandon the proposal –Decision may be appealed to local district court within 15 days

27. 27 Sample TIF Cashflow

28. 28 Local Option Sales Tax Bonds  Authority found in Chapter 423B of Code of Iowa  May be issued as General Obligation or Revenue Bonds –Bonds can only be issued for the purposes described in the ballot –Bonds cannot be issued for the portion of tax revenues designated for property tax relief

29. 29 Sample Local Option Sales Tax Cashflow

30. 30 Utility Revenue Bonds  Authority found in Division IV of Chapter 384 of Code of Iowa  Repaid by revenues of utility –Water –Sewer –Stormwater –Electric –Gas –Communications  Utility revenue debt requires issuer to establish covenants –Debt service reserve fund –User rates –Parity Test  Not general obligation debt and does not count against the general obligation debt capacity

31. 31 Revenue & Rate Analysis Considerations  Usage  Structure of rates –Base rates –Usage only  Growth of current expenses  Debt service coverage –1.10x required for SRF –Minimum 1.30x recommended for revenue bonds  Capital outlays –Pay-go –Bonding  Other transfers –General fund, etc.  Ending Cash –50% of O & M –4-6 months of reserves

32. 32 State Revolving Fund Types of Loans:  Planning and Design Loans –0% for up to 3 years –Can be rolled into SRF Loan or paid with permanent financing  Construction Loans –3% interest rate –Origination fee of 1% + 0.25% servicing fee  SRF Source Water (SWP) Protection –0% interest rate –Up to 20 years –For purchase of land or easements, or to fund SWP practices –Based on approved SWP plan  Types of projects for SRF Nonpoint Source Loans –Stormwater best management practices –Brownfield cleanup –Landfill closure –Others

33. 33 State Revolving Fund, Cont. SRF Loan Programs:  Clean Water SRF –Loans for the following types of projects Publicly owned wastewater treatment facilities Sewer system rehabilitation New systems for unsewered communities Stormwater management for water quality  Drinking Water SRF –Loans for the following types of projects Improvements to public water supply systems Consolidations and connections Source water protection

34. 34 Sample Enterprise Fund Cashflow

35. 35 Sample Enterprise Fund Cashflow

36. ISSUER RESPONSIBILITIES

37. 37 Issuer Responsibilities Keep in mind that once debt is issued, you have certain responsibilities for the life of the debt: –Disclosure Requirements (All Debt Issued Over $1 million) Final official statement Annual continuing disclosure filings via EMMA Material event notices via EMMA –Bond Covenants (Revenue Debt Only) Debt service reserve fund balances User rates and charges Debt service coverage ratios Parity test for new debt issuance –Rating Agency Updates (Rated Debt Only) Periodic credit reviews

38. QUESTIONS? For More Information, please contact: Jenny Blankenship, CPA The PFM Group Phone: 515-724-5734 E-mail: blankenshipj@pfm.com