CSMFO Magazine May 2018 by CSMFO Magazine

CSMFO C A L I F O R N I A

S O C I E T Y

O F

M U N I C I P A L

F I N A N C E

O F F I C E R S

M A G A Z I N E MAY | 2018 | ISSUE 20

5 Things to Consider for Your Debt Policies Page 22

Getting an IBank Loan: the Good, and The Unexpected

Creative Use of The Infrastructure Financing District

Page 36

Page 16

AND MORE!

CSMFO

CALIFORNIA SOCIETY OF MUNICIPAL FINANCE OFFICERS

M A G A Z I N E MAY | 2018 | ISSUE 20

2018-19 Board of Directors President Margaret Moggia, West Basin MWD President-Elect Joan Michaels Aguilar, City of Dixon Past President Drew Corbett, City of San Mateo Scott Catlett, City of Yorba Linda Carrie Corder, Cucamongo Valley Water District Jimmy Forbis, City of Gilroy Steve Heide, Chino Valley Fire District Richard Lee, City of South San Francisco Jennifer Wakeman, City of Lafayette Executive Director Melissa Dixon, MBA, CAE Editorial Designer Dayna Dixon Photographer David Blue Garrison Editors Marcus Pimentel, City of Santa Cruz David Cain, Retired Wing-See Fox, Urban Futures Inc. Jessie Soto, City of Santa Cruz Communication Committee Chair- Marcus Pimentel, City of Santa Cruz Vice Chair- Pamela Arends-King, South Coast Water District Vice Chair- Ernie Reyna, Western Riverside Council of Governments Janna Bogue, City of Thousand Oaks David Cain, Retired Karla Campos, City of La Quinta Wing-See Fox, Urban Futures Inc. Steve Heide, Chino Valley Fire District Nitish Sharma, City of West Sacramento James Russel-Field, City of Thousand Oaks Carol Williams, City of Ontario Additional Photography Pexels, Pixabay and Stocksnap Thank you to all the authors in this issue for sharing with us their time and expertise. If you have an idea for a future article, please contact Melissa Dixon at the CSMFO office at melissa.dixon@staff.csmfo.org. For more information on CSMFO or this Magazine, please contact the CSMFO office at 916.231.2137 or visit the website at www.csmfo.org. The views and opinions expressed in these articles are those of the authors and do not necessarily reflect the official policy or position of CSMFO.

CONTENTS MAY | 2018 | ISSUE 20

FEATURES

Creative Use of The Infrastructure Financing District... P.

5 Things to Consider For Your Debt Policies

Impact of Tax Reform on Tax-Exempt Debt P.

To P3 or Not To P3

CalPERS Amortization Schedules P.

Funding Your Water Wastewater or Utility Projects - Part 1

Getting an IBank Loan

Sponsored Article Why the Rules on Commercial Cultivation Make it a Risky Investment P.

Top Municipal Market Financing Team Participants P.

INSIDE CSMFO President Margaret Moggia’s Letter P.

Executive Director’s Letter P.

President Elect’s Letter

CDC Highlight Investment Accounting P.

Taking a Leadership Role - Nitish V. Sharma P.

CSMFO Shines A Spotlight On... Steve Heide P.

3 CSMFO MAGAZINE JANUARY 2018

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PRESIDENTâ&#x20AC;&#x2122;S LETTER Margaret Moggia

Happy Spring! Ahhhhh..... Spring. For most of us, we find ourselves busy this time of year both at work and home. It is a time to reflect on the past year and a time to plan for the future and it could not be more true than this year. Sure, I have the usual busyness from developing and presenting the annual budget to preparing for the year-end audit. It is also time to check in with staff on meeting and helping them achieve their individual SMAART (specific, measurable, achievable, agreed upon, relevant and time oriented) goals. In addition, I continue to support my agency through financial analysis for agreement negotiations, improving existing policies and procedures to increase the organizational effectiveness to lending a hand to my procurement division in seeking their first award. But, what has me most excited is the work to build out a new business outreach program to engage small and local businesses. This last goal is certainly interesting because it really expands my knowledge and creativity to build something outside of my traditional learning of debits and credits.

Simultaneously, this year also has me preparing for my daughter graduating from high school and her plans to attend college out of state. Where did the time go from watching her first steps to now watching her take her first steps into adulthood? It has given me time to pause to create those connections and prepare her for life miles away. Speaking of busy, our CSMFO board members and committees continue to impress me with their dedication to advancing the organization forward. I am fortunate to listen and participate on a few key activities that focuses on building on our successes and ready us for tomorrow.

In May, we will hear of the progress on the 2018 action plan and initiatives that will help shape our future and challenge ourselves to build our programs to meet our guiding values. I believe that by building programs and resources that help us get a higher competency level and our commitment to public service will not only allow us to connect to one another but gives us the tools to go back into our organization and find our passion. My hope is that you find a new project that engages you and gives you the drive to make a difference.

Since our own conference in February, I have had the distinct pleasure to represent CSMFO beginning with a mid-March visit to the Oregon GFOA conference and a late April visit to CMTA conference. I love being able to connect with like-minded individuals dedicated to public finance and see the same issues that go beyond our stateâ&#x20AC;&#x2122;s borders and get a deeper dive into certain topics. I am also excited to attend the National GFOA conference in St. Louis in May and to host nearly 300 attendees at the California reception. And I look forward to attending as many chapter meetings and meet my peers from throughout the state.

For me, my motivation comes from my volunteer work at CSMFO, CMTA and GFOA and using those experiences and connections so I am better prepared to take on new challenges like my business outreach development project and making sure I stay on top of those latest best practices to apply in the workplace.

What is great about all these opportunities is the ideas you gain from observing their programs and find where to incorporate them. For instance, I am excited about exploring how to incorporate the GFOA mentor program to match a mentor with first time conference attendees or to learn from other states on how they develop a state-specific certification program can be brought to CSMFO. Let me leave you with this challenge: find one new thing to challenge you and reap the benefits from digging deeper and see what you can accomplish. And then share your story - someone will be there to listen.

7 CSMFO MAGAZINE JANUARY 2018

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9 CSMFO MAGAZINE JANUARY 2018

EXECUTIVE DIRECTOR’S LETTER Melissa Dixon

Greetings from St. Louis! Okay, not really. I’m writing this from my office in Sacramento, California. But I was in St. Louis recently for the GFOA Annual Conference! It was my first GFOA experience, and I was thrilled to get to go. Previous to this, CSMFO’s was the largest conference I’d experienced; I can’t even imagine what planning a city-wide conference must be like. The planners indicated that for the conference next year in Los Angeles they’ve blocked 14,000 room nights. Hear that? Fourteen THOUSAND. CSMFO blocks somewhere around 2500. Seriously, the scale of this is mind-boggling to me. When I got to registration on Saturday before the “state representatives” meeting, I was struck by the size of it. The registration counter spanned the length of the entire wall, in a room nearly big enough to hold our general session. GFOA mails you your name badge in advance, and you’re supposed to bring that with you to registration to check in. I did that, and was greeted by someone from the St. Louis Convention and Visitors Bureau—I know, because she had a St. Louis shirt on instead of GFOA. And thinking about it, this makes sense. I mean, it’s unreasonable to think they bring enough staff with them every year to sufficiently handle 5,000 – 8,500 attendees. Using local resources is smart!

The state representatives meeting was interesting. GFOA discussed some of its initiatives, and I was happy to see that CSMFO is also embarking on some of the same. Student Engagement, for instance, is a big push for them. And in case you’re not aware, it’s also something CSMFO is beginning to tackle. We have created a page on our website for college students to upload their resumes, and from which CSMFO members can then offer internships. I’m really excited about this, as it’s a way to get potential new government finance professionals into our pipeline and familiar with both the profession and CSMFO. The opening keynote speaker on Sunday was Shawn Achor, whom I was excited to hear speak because I’ve seen his TED talk on happiness. Achor was really funny, but also had a lot of great information (and talked ridiculously fast, it was hard to keep up!). He questioned the fact that we set goals for ourselves and we tell ourselves that “happiness” means achieving that goal…but then once we hit the goal, we set a new goal. We constantly move the mark on ourselves, and as a consequence are tacitly sending home the message that it’s never okay to just be happy. So instead of focusing on goal after goal, try to be happy now. One way to do that is to practice being grateful. We’re inundated as a society by negativity, because only negative occurrences are considered “news”.

The whole experience in St. Louis sort of felt like CSMFO gave me a vacation with a bunch of my friends. Am I allowed to say that about a work trip??

He suggested that each day you list three things for which you’re grateful, and you do this consistently for (at least) three weeks. They have to be new/different things each time. By doing that, you’re literally training your brain to think of the good things that occur to you on a daily basis—whether it’s something big like getting a promotion or something small like someone allowing you to merge onto the freeway. If you train your brain to see the good, it’ll provide your life with a balance instead of just focusing on the negativity.

Through the events of the few days, I ended up somehow being involved in GFOA’s planning for its 2019 Annual Conference, which is in Los Angeles. I’m prett y excited about it! We had a short meeting with the committee while in St. Louis, and some brainstorming emails back and forth since. I’m told that the current “biggest conference” award at GFOA goes to Chicago, with 8,500 attendees. But you know what I think? I think we can beat that, California. Let’s make California the state to beat for GFOA conferences. Who’s with me??

I particularly enjoyed that last part. I have three children, two of which are teenagers and pretty well steeped in “everything sucks”. My daughter is moody/pouty about it, while my son makes sarcastic jokes about things he finds lacking. Different responses, but from the same negative place. It’s frustrating as a parent to deal with that day in and day out. (We once took the kids on a vacation to Universal Studios Hollywood, which was a not-small expense. My daughter’s response when we got there was “Oh my gosh, I hate this hotel.” …Parenting is a marathon, not a sprint.) After seeing Achor speak, we’ve decided to implement a once-a-day “Tell me what you’re grateful for” exercise in our house. I expected to get pushback about it, but so far it’s going well. Every night results in them smiling as they recount their anecdotes and positive goings-on, which is a lovely change to how they act when left to their own devices! The CSMFO reception on Sunday evening was nice, if not-so-well attended. We received over 200 RSVPs, but got maybe 75% of that. I have some thoughts for what to do different next year in terms of timing on the event, but really I think the culprit was the thunder storm and sudden deluge that occurred about ten minutes before the start of the reception. It didn’t last very long, but I think by the time it was over people had already made the decision to stay in. As much as I’d like to, I can’t control the weather (or so my husband tries to convince me). On Monday night, I went to the Cardinals game with the Executive Committee and Past President John Adams, and met Terry Shea and Brad Rockabrand there as well. It was a horrible game, but going to any live sporting event is always fun, and the company was of course top notch. 11

CSMFO MAGAZINE JANUARY 2018

PRESIDENT ELECT’S LETTER Joan Michaels Aguilar

Diary of a CSMFO President Elect Wednesday March 28

Thursday March 29

A travel day down to Palm Springs to tour possible Thursday night venues. Melissa Dixon, Janet Salvetti and I fly down from Sacramento to Ontario and are met by Teri Antiecivich who is our ride out to the Springs. One thing we didn’t factor into the schedule was lunch – so a trip to In-N-Out Burger becomes an add-on. I help myself to another person’s well-done fries, not too bad if I say so myself. We can’t very well be hungry on a tour now can we? Marisa Antiecivich and Drew Corbett will be meeting us in Palm Springs. We check out the Hard Rock Hotel, the Rowan Hotel, space at the Spa Casino, a nightclub, and the event space at the Convention Center. Lots of ideas to contemplate which I think is a good thing. One of the challenges for Palm Springs is a noise ordinance which bans noise outside after 10 p.m. at night. This would hamper music/entertainment at certain venues.

We started out with a lovely breakfast at Date Restaurant at two tables with one table very focused on the business at hand. Later in the day Harriet Commons from the Program Committee joined our merry band to check out the conference space. A tour took place so that we learned the locations of the pre-conference for Tuesday, while we were reminded of the space and location of the exhibit hall and general session/keynote areas. Based on this information, a schedule can be developed using the information for each room, such as Smoketree A-C having room theatre style for 230 attendees while the Mesquite DE has room for 100 attendees theatre style. The hotel and convention staff provided an excellent tour and that led to lunch time back at Date. A lengthy discussion ensued on the format for the schedule, talked about having early bird sessions on Wednesday morning, and the membership orientation as a more intimate “fireside chat” with a couple of past presidents presiding.

While Drew had to leave us for his flight, Sarah Erck from SMA joined us (after driving down from a meeting with a client in the Central Valley) for the remainder of our Palm Springs time. We opted to dine at Eight4Nine which is the location for the President’s Dinner. This gave Janet, Sarah and Teri a chance to see the venue and all of us an opportunity to taste even more options for the President’s Dinner. We spent well over two hours between the various courses trying to be aware of what guests, including vegetarians, may like. The proprietor was very accommodating for our group, and for a Wednesday night, albeit spring break, the place was packed.

During this time, we discussed the option of screening one or both of the Guardians of the Galaxy films for the members, since we hear some people may not have seen it yet; it might be a fun diversion.

Thursday, April 12 We held our monthly Host Committee call and we have a full court press with all Committee members participating. Among this month’s topics for discussion are a preliminary review of the conference schedule which Harriet Commons graciously put together based on our in-person visit/tour in Palm Springs. This leads to a lengthy discussion which I love to see the dynamics and opinions of our team as we debate things. It got to the point that we needed to table this item to the next month. Exhibitor survey – we determined a survey was necessary to check with exhibitors on the opening time and we discussed the benefits of having a game or not having a game for members to participate. Keynote speakers – our sub-committee led by David Cain has been hard at work reviewing video clips, so we received an update on this topic and discussed the budget associated with the keynote speakers. This was followed by an update on the Thursday Night Event with past President Drew Corbett the key point person. More on this in future issues, but there is a consensus for a return to gambling at the convention center and having an after party at an off-site location. Stay tuned to see what develops!

As other past presidents have noted, conference planning takes time, and the efforts of many people. Thankfully, there are many who have been through this before. While our conference is in early January, we appear to be on or ahead of schedule in a few categories which makes me feel good, and glad I have such a great team supporting me. LATE BREAKING NEWS Back by popular Demand – Connie Podesta (Hall of Fame Keynote Speaker) returns with new material for our group “Life would be easy if it weren’t for Other People”. For those who missed her dynamic presentation in Sacramento she will thoroughly engage you. Some of us are still talking about working with circle, squares, triangles, or squiggles! Connie will be the keynote speaker at lunch on Thursday, January 10th. More to come in the next issue on Connie and our other speakers.

Swag items and bag give-aways – yes, we start thinking about these items this early. Hotel room block – for the Palm Springs conference there will be rooms at the primary conference hotel the Renaissance, the Hilton, which is right next door, the Hard Rock Hotel (a couple of blocks away), and at the Rowan which is a Kimpton boutique hotel newly opened just north of Palm Canyon Drive. Did you know that we expect Wednesday to be our peak hotel night with 700 room nights anticipated at all locations? 13 CSMFO MAGAZINE JANUARY 2018

INSIDE CSMFO

Career Development Committee Highlight Investment Accounting

Interviewed By Career Development Committee How did you get involved in municipal finance and accounting? My best friend since middle school Jonathan Foster, worked for Jennifer Farr and asked an instructor of me what I was doing after college, the Investment and suggested that I work for their Accounting class firm. My first client was a special offered in partnership district and I have always audited between CSFMO and local governments since leaving CMTA. college at the University of San Diego eleven years ago.

What do you know now that you wish you had known at the beginning of your career? The bigger picture-knowing how government works rather than concentrating on the debits and credits. One day I was bored and went to a City Council meeting and the meeting gave me a whole new perspective of our clients. I then started following City Council meetings in my hometown and this gave me a better idea of the operations of a government agency outside of Finance. I encourage all new hires at our firm to attend a City Council meeting in their town. Who should attend the Investment Accounting class? Anyone involved in either the decision-making or operational accounting side of investments. It is always good to take as a refresher and to get new techniques. As auditors, we see many different methods that may be helpful to someone in an agency that may only have exposure to one method.

What do you like about teaching? Finding new aspects of topics-when you teach you go into a topic feeling you have a pretty good handle on it, but then you always find something new when putting in the time and research prior to presenting

helping communiies fund tomorrow

What do you do for fun? Playing golf, fishing and vacationing in the Sierras with my wife and three children. Do you any training for other organizations? I have had two speaking engagements for the Institute of Internal Auditors (IIA) What are some things that people would be surprised to know about you? • I wanted to be an amateur bull rider and trained in Norco. • I am married to another auditor. • I have identical twin daughters Favorite Quote “The mountains are calling and I must go.” – John Muir The next Investment Accounting Training class will be held on June 14, 2018 at the Cucamonga Valley Water District in Rancho Cucamonga. This session will provide valuable and in-depth investment accounting training while providing the latest updates on GASB as it pertains to investments. They will share detailed concepts, real world examples, and reserve time to answer your questions. Participants will receive 4 hours of C.P.E. and lunch is included in the $75 registration fee. See the online CSMFO Events calendar to register and check out our other career development offerings. situations are never fun. Jonathan Foster, CPA, has ten years of audit experience, spending the majority of that time on audits for federal and local governments. The types of audits Mr. Foster is involved in include: financial audits of cities and special districts; grant specific audits of funds awarded by Federal, state, and county governments; Single Audits in accordance with Uniform Guidance. Mr. Foster is also a Comprehensive Annual Financial Report (CAFR) reviewer for the California State Municipal Finance Officer (CSMFO) award program and has presented for the various chapters of the Institute of Internal Auditors on topics such as internal controls and fraud. Mr. Foster has also worked on audits for the Special Inspector General for Afghanistan Reconstruction (SIGAR) and the Centers for Medicare and Medicaid Services. In addition to this he has been involved in SOC1 Type II audits (formerly SAS 70) for various government benefits administrators.

nbsgov.com | 800.676.7516

15 CSMFO MAGAZINE JANUARY 2018

FEATURED ARTICLE

Creative Use of The Infrastructure Financing District in The City of West Sacramento Written By Constantine C. Baranoff

Constantine C. Baranoff, City Attorney for the City of West Sacramento

In 2010, the City Council adopted a new master plan that included the dense commercial and residential development originally planned, along with a detailed infrastructure component utilizing multiple funding sources. In addition to tax increment, these funding sources included state and federal grants, the formation of a community facilities district, private equity, and City general fund money. The concept of bundling of revenues played a key role in the overall Bridge District financing plan.

This is the story of how the City of West Sacramento used tax increment in the post-RDA world to assist in the financing of its Bridge District, a 188acre former industrial area, located on the Cityâ&#x20AC;&#x2122;s waterfront. City leaders have had a vision to revitalize that area for quite some time. The Rivercats Baseball Stadium opened in 2000 and helped put the area on the map. However, despite vigorous efforts to jumpstart the Bridge District, the area lacked the infrastructure necessary to support the dense urban development.

Redevelopmentâ&#x20AC;&#x2122;s dissolution in 2012 created a large hole, that the City had to get around since tax increment represented a substantial piece of the Bridge District capital stack. Fortunately, the City had a history of combining its tax increment financing programs with other forms of public/ private financing.

City of West Sacramento - Bridge Distruct Development

City of West Sacramento - Bridge Distruct Apartments

City leaders and staff focused on finding alternatives with the goal of replicating RDA’s level of investment. This item was supplemented by the City putting forward an advisory measure to the voters asking if they wanted to continue using the revenues from redevelopment dissolution for the types of community investment projects that had been funded with tax increment. The community overwhelmingly supported the use of these funds for public investment.

In terms of forming the IFD, the process was quite rapid, taking only about 8 months. Two key reasons for the speed in forming the IFD was the ability to conduct a landowner vote, and the fact that a lot of the information necessary to create the IFD plan was already assembled. Under the IFD law, voters approved both the formation and issuance of bonds. The addition of the IFD to the Bridge District financing plan allowed tax revenue to remain a source of funding, and for a period of time longer than the term of the City’s former RDA. The City’s utilization of the IFD represents a use of tax increment in the post-RDA world and its use is part of a smart strategy to create an increase in the value of property in the Bridge District.

Based on the results of the advisory measure, staff identified the use of the classic infrastructure financing district tool (“IFD”) as a long-term tax increment solution. At the time, the IFD law prohibited its use in redevelopment areas so the City pursued a statutory amendment to allow for an IFD to exist in former redevelopment areas. Fundamentally, the IFD model worked in the Bridge District for the following reasons:

Constantine Baranoff is a shareholder of Kronick, who performs as the City Attorney for the City of West Sacramento and since the City’s inception 31 years ago. For the entirety of his 15-year legal career, Constantine Baranoff has represented municipal clients, including cities, special districts, school districts and other local government entities, in public finance/bond counsel work and public work facility and construction matters. He helped to form the State’s first enhanced infrastructure financing district for the City of West Sacramento. He also focuses on bond counsel work and Mello-Roos community facilities district formations, as well as advises various public agencies regarding EIFD formation and bond issuance. Constantine is an experienced negotiator and routinely negotiates multi-million dollar construction, architect and consultant contracts on behalf of school district clients, as well as cities and counties represented by the Firm.

1. Infrastructure Costs were Known. This provided the City the necessary information on how large the IFD had to be and the share of tax increment that needed to be budgeted. 2. O ther Sources of Revenue. In addition to tax increment from the IFD, the Bridge District plan had other sources of revenue that allowed a realistic financing plan to be implemented. 3. Property Tax Share. The City has a large share of the 1% property tax. 4. Services Mello-Roos Community Facilities District. At the same time as the IFD was being formed, the City worked to create a services Mello-Roos community facilities district (“CFD”). This CFD provided a funding stream for the services to be provided in the Bridge District.

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FEATURED ARTICLE

To P3 or Not To P3

Lessons learned in funding infrastructure to avoid the short end of the stick

Written By John Gross P3s are likely to be financially expensiveP3 typically use taxable financing. All things being equal, tax-free borrowing is always less expensive than taxable borrowing and taxable borrowing is always less expensive than equity funding. In some cases, P3s may be able to use tax-exempt funding, and there may be factors that somewhat offset these basic facts of financing, including risk allocation, interest during construction, and timing.

Public-Private Partnerships (P3s) can have substantial value when used to procure and deliver infrastructure, particularly if they are the only practical way to get a project done. John Gross, Finance But because of both their complexity Director/CFO for the and the fact that each P3 project is City of Long Beach, usually unique, they are often beyond California the expertise of government staff to analyze, structure, and negotiate without expert assistance (unless the government is satisfied with getting the short end of the stick). When considering a P3 project, the following are some things to consider.

P3s can address issues that may be politically impossible to otherwise address – By private control and/or contractual arrangement, P3s can avoid issues with governmental workforces, with political difficulty in setting market rates for revenue streams, with problems of getting funds approved for maintenance, etc. Risk transfer will likely be a significant issue – It is highly likely that risk transfer, both from and to the government, will be a significant issue. Some risk issues will be obvious; others will be subtle and difficult to detect. With sufficient time and effort, the government’s consultants (attorneys and risk experts) will hopefully detect and resolve the risk issues. The government will pay a cost for any risk transfer away from the government, and many decisions will need to be made about how much risk to accept. Another issue is that there may be temptation for the government to accept risk in the future (because no government official who made the decision will likely be around to pay the price if the risk decision doesn’t work out). This can really give a negotiating advantage to the private party.

A P3 may be the only way – There are often a number of ways to accomplish a typical infrastructure project. For a given infrastructure project, there may be different types of financing available, different types of procurement, and different models for operations. For some projects, not all options may be available, including due to timeframe or political requirements. When other options are not available, a P3 may be the only way to get a project done, or done within a set timeframe, financial, or political constraint. Before formally moving to a P3 due to constraints such as timeframe or politics, it may be advisable, if possible, to question how important and valuable it is to meet those constraints; once a government formally starts down a P3 route, it may be difficult, for a variety of reasons, to explore other options.

P3s may have tremendous flexibility to structure financing (the good) - This abilit y can help solve cash flow problems for government, reduce costs, or meet other constraints of the government.

P3s may have tremendous flexibility to structure financing (the bad) - P3s can be structured to push costs into the future, potentially in a manner that may not be financially prudent, but may be politically attractive. This problem can be masked by using what could be argued as artificially high discount rates when comparing future costs, thus undervaluing potential adverse impacts in the future. Additionally, the author would argue that some consultants may unintentionally use an artificially high discount rate that may not be suitable for P3 analysis. A high discount rate may be based on solid theory, but a theory designed for different purposes and situations.

Staff time and costs required to properly oversee P3 analysis and negotiation cannot be overstated- The amount of time from various high-level government staff to properly oversee project development, procurement, analysis, and negotiation cannot be overstated (regardless of the use of consultants). Both a financial and operational lead may be needed. Frequent policy level decisions will be needed and the decisionmakers will need to understand complex situations and alternatives. At some point, the governmental participants may be forced to cut corners because there is not enough time in the day. The private side will take advantage of that time constraint, every step of the way. Because of the complexity of P3s, it is likely to take more time to develop and deliver them than some other types of procurement (such as design-build), and the costs of consultants are likely to be more than a government is used to. These costs (for both the government and the private party) also mean that P3s are generally not suitable for small projects that cannot bear these high transaction efforts and costs.

Lifecycle will introduce complexities – Some P3s may tout both lifecycle management (keeping assets working and in good shape) and lifecycle cost savings. Value for Money (VfM) analysis is often used to show those apparent savings, as well as attempting to quantify risks. This is often done to compare P3s versus traditional government procurement. But there may be ways for governments to accomplish similar, if not identical, lifecycle savings. In addition, long-term forced and preset maintenance while good in many respects, does have some disadvantages, such as financial inflexibility. In any event, performance standards for lifecycle and maintenance built into the P3 contract are critical. But how well these performance standards work over the life of a contract may be questionable since the private party is usually much more knowledgeable than governments about lifecycle maintenance performance and associated contract terms, and the expert consultants a government uses may not be able to completely overcome that disadvantage.

Timeframe will be an issue – Using the “time is money” argument, the private party providing the P3 will typically push an aggressive timeframe. The timeframe, if not adjusted, may make it more difficult or impossible for the government to effectively analyze or negotiate. The government (and perhaps even the government’s consultants) will likely significantly underestimate the time required for project development, procurement, analysis, and negotiations. On the other hand, it is important to continues on next page

19 CSMFO MAGAZINE JANUARY 2018

This article provides a limited list of some of the matters to address when considering P3s. P3s can be very beneficial, particularly if they can deliver a valuable project that cannot otherwise be done, or if you can get a project built such as a toll road with minimal risks to taxpayers by having bondholders, equity, and operators take most of the risks. But there are many types of P3s and each will have significantly different characteristics. P3s are not boilerplate like a bond issue can be. P3s are extraordinarily complex (not just the financing). They are beyond the means of governments to analyze without a lot of assistance. Unfortunately, P3s may proceed in a manner that makes it difficult to properly analyze and negotiate. GFOA has a recommended practice on P3s which implies a similar level of caution as suggested in this article and provides quite a few suggestions. Even that best practice may understate the complexity and the issues. The GFOA best practice is at (http://www.gfoa.org/public-private-partnerships-p3).

remember there is a cost to delay, whether it is construction cost increases, uncertainty in interest rates, or the risk and costs the private party incurs. Another factor to be mindful of is that the private party will know the issues very well, while the public side likely will not. Also, be mindful that poor design or contract structuring will most often hurt the interests of the government and not the private party. You’ll get what you asked for and paid for, and it may not be enough – This sounds obvious and it is, but the implication is that costs will likely be higher than the contract provides. Be prepared for amendments. Because of time constraints, it is likely that some important items will be missed. Or it could be that the government’s management costs of the project will be higher than anticipated. Of course, this may not happen, but it is reasonably likely due to the lack of government experience, time pressures, and the complexity of P3s. Be wary of too much reliance on analytics, especially if you or others who may use it don’t fully understand it and its limitations – VfM is sometimes touted as a definitive answer to P3 analysis. VfM may be helpful, especially to identify and quantify risks, or to give a flavor of lifecycle savings, but be wary of it being used as a “be all and end all.” Consider it as just another analytical tool (with many input assumptions) that may or may not be appropriate to invest in. Similarly, you will need some kind of PV analysis, but be sure you understand and control the assumptions and know the implications of the different assumptions. For example, as mentioned previously, the author believes that too often a high discount rate is used which may not be an appropriate rate for P3 analysis.

In summary, there are many cautions in using P3s, but they are a powerful tool and can and should be considered for appropriate infrastructure projects. Because of their costs and complexities, not to mention their usually higher financing and transactional costs, a careful assessment should be made early on as to the necessity of exploring a P3 approach. Ideally, there should be a recheck along the way to ensure the P3 is still the best solution. The author, John Gross, is the Finance Director/CFO for the City of Long Beach, California, and has been heavily involved with two large P3 projects. He has spent many hundreds of hours working on them. Fortunately, he has been able to work with excellent consultants, attorneys, fellow dedicated employees, and very good P3 partners. John thanks Michael Palmieri of p3point for his willingness to review and provide valuable, constructive comments to drafts of this article.

Consultants are essential but are not a panaceaMost P3 expert consultants make money from P3s and are not necessarily unbiased. In addition, all consultants like to make their clients happy. The government client may be predisposed to doing a “deal” and may wish to ignore or downplay considerations such as risk or whether there are alternatives, etc. Also, if a consultant is given a cost constraint or a time constraint, meeting that constraint will be a primary goal. Keep those things in mind when selecting consultants, developing a consultant’s scope of work, and when receiving advice from consultants. Legal, Legal, Legal – It’s like “location, location, location” in real estate. Having an expert attorney, probably at least two, both who care beyond just being paid money, is crucial. My consistent experience has been excellent with having at least two or three attorneys, one or more with specific expertise and one with broad municipal expertise who then works very closely with city operational and financial staff as appropriate. Those government staff also have to be willing to spend the time necessary with the attorneys, and other consultants, in order to work out thorny issues.

INSIDE CSMFO

Taking on a Leadership Role NITISH V. SHARMA

Written By Nitish V. Sharma

Nitish V. Sharma, Budget Manager for the City of West Sacramento

I’ve worked for the City of West Sacramento for over 10 years and have been a member of CSMFO the entire time; however, my attendance was sporadic at best for the first few years of my membership. In 2017, the former Chapter Chair, Andrew Keys, current Deputy City Manager with the City of Lodi, decided to step down. I stepped in as Chapter Chair, with the indomitable Robin Bertagna, Director of Finance of the City of Yuba City, staying by my side as Vice-Chair. Robin’s experience and knowledge has been priceless while I was finding my footing. From trying to find locations that suited our region’s extensive boundaries, to finding guest speakers that highlight and focus on things that our members need to know, I’ve been working my way into a greater understanding of exactly what it means to be a member of the CSMFO family.

Now, after a year in the role of Chair, I would not qualify myself as an expert on anything- at least, not yet. Some of the best lessons learned have to do with making sure you have a good team to help you behind the scenes and an excellent sounding board to make sure that your next steps are in the right direction. The direction the Sacramento Valley Chapter is going in is hopefully one of learning, innovation, and camaraderie.

Nitish Sharma has been the Budget Manager for the City of West Sacramento since 2008 and has over 10 years of experience as a municipal finance officer in California. Prior to the City of West Sacramento, Nitish was a Senior Auditor with a top 25 regional accounting firm, Richardson and Company, LLP. Nitish is very passionate about serving the local government, implementing the Council’s vision, and exercising financially sound judgement. He is very excited about his role as a Chapter Chair for the Sacramento Valley region to continue the vision of the “CSMFO chapter as a resource for promoting excellence in government finance.” In his spare time, Nitish enjoys spending time with his wife and 2 children, ages 5 & 6.

21 CSMFO MAGAZINE JANUARY 2018

FEATURED ARTICLE

5 Things to Consider for Your Debt Policies Written By Bryan Gruber

Bryan Gruber, CPA is a Partner with Lance, Soll & Lunghard, LLP (LSL)

Issuance The issuance of municipal debt is a long-term financial decision that allocates future resources for the repayment of principal and interest. How does your policy provide for and ensure a proper analysis and evaluation of debt issuance? Does the policy analyze long-term affordability and consider flexibility for operations and other future projects? Does your policy require the analysis of alternative funding sources including grants and other arrangements in lieu of incurring debt? A well-designed policy should be specific as to how an evaluation is performed and include guidelines and measurement for financial policy goals and limitations. What percentages and thresholds do you use to evaluate and monitor total debt and annual debt service? A policy for debt refinancing should also include acceptable guidelines on the debt service savings.

Many local governments issue municipal debt to provide funding for various types of projects. It is something we all are very familiar with, but have you recently evaluated your policies surrounding debt? If, the answer is no, you may be at an increased risk for financial and compliance issues. In working with local governments over the years, we have seen a variety of compliance and financial issues that can arise from not having clear and specific policies for debt. How can your organization do better? Well, here are a few important considerations for your debt management policy.

Proceeds The use of bond proceeds is often restricted in the debt covenant. How does your policy ensure proper use? A policy should include specific accounting and internal controls necessary to safeguard use of proceeds for intended purpose. Items to consider include the use of segregated accounts and funds, reporting and budgets, and authorization, oversight and monitoring.

Credit Ratings Your organization should strive to achieve high credit ratings from rating agencies and have goals and policies to support that. Become knowledgeable about how and what rating agencies are analyzing and develop fiscal policies to achieve or maintain strong credit ratings. Another area to consider is how pension and other post-employment benefit obligations impact ratings with your organization.

Compliance Certain compliance and reporting is often contracted with outside consultants and specialists. Make sure your policy includes procedures to oversee and monitor the work being done. Identify the specific requirements and timelines for reporting and disclosure. Do not fully rely on consultants without being involved in the process and knowing key elements and timelines. Make sure you are up to date with SEC Rule 15c2-12 and proposed amendments in 2017 for event notices. Review https://emma.msrb.org/ and search your organization and make sure current information is being reported for your agency.

Good debt policies are critical to the financial health of local government. Make sure your policy is specific, includes policies that support fiscal health, and covers the requirements. LSL CPAs specializes in working with local governments and provides an array of audit and consulting services that are focused on you. If you need assistance, donâ&#x20AC;&#x2122;t hesitate to ask. Contact our dedicated government team with any questions. As always, we are here to help.

Bryan Gruber, CPA is a Partner with Lance, Soll & Lunghard, LLP (LSL), a leading CPA firm specializing in the audits of local governments for over 80 years. Bryan Gruber specializes in the audits of cities and special districts including CAFR and Single

Financial Timely financial reporting and disclosure is very important. Does your policy establish guidelines to ensure timely reporting? How? Does your policy consider reporting requirements with the Governmental Accounting Standards Board (GASB)? Different debt arrangements may require different disclosure including pledge revenue debt and debt refinancing. Know the requirements to ensure proper and timely reporting.

Audits and is well versed with the latest requirements from GASB, AICPA, and the GAO. He serves as a technical reviewer for the GFOA and is a regular speaker with CSMFO chapter meetings.

23 CSMFO MAGAZINE JANUARY 2018

FEATURED ARTICLE

Funding Your Water Wastewater or Utility Projects - Part 1 Written By Lora Carpenter and Robert Porr Today, California municipal water/wastewater utilities have numerous capital project funding vehicles. The public market offers traditional revenueLora Carpenter, supported bonds and certificates Assistant Vice of participation. Banks and other President, Fieldman, Rolapp & Associates. financial institutions, despite the recent tax law changes as part of the Federal Tax Cuts and Jobs Act (the “TCJA”), are capable of providing capital in select circumstances through direct loans (“Private Placements”); and the State of California offers funding through the Department of Water Robert A. Porr, Resources (“DWR”) and the State Senior Vice President, Water Resources Control Board Fieldman, Rolapp & (“SWRCB”). Other government Associates funding vehicles include the Infrastructure & Economic Development Bank (Ibank) and USDA Rural Development.

State funding because of low interest cost seems to be in greater demand than ever. Most recently, the federal government has introduced funding through the Water Infrastructure and Financing Innovation Act (“WIFIA”). It is worthwhile to note that the government subsidized funding options are for new qualifying infrastructure projects only. The traditional public and private instruments provide a fair share of funding for issuers in need of capital for new projects. Types of projects that would be suitable for this funding are: • Upgrades or enhancements to existing facilities, expansion or rehabilitation projects; • growth or development driven projects that are likely to be funded by one or a combination of developer contributions, impact fees, or debt secured/repaid with assessments subject to the value of the benefiting property compared to the amount borrowed; • water source, or water capacity acquisition or development projects including transmission lines within undisturbed areas (such projects may involve water rights or environmental issues that government financing sources might find challenging to support).

The traditional structure uses revenues generated from the operation of a water/wastewater system to provide the security to investors. Most frequently, the issuer first pays for operations and maintenance of the system from revenues and then pays investors from amounts remaining- what is typically defined as “Net Revenues.” To provide security, issuers typically pledge to meet certain financial covenants; the most important of which are the Rate Covenant and Additional Bonds Test (ABT). Through its Rate Covenant, an issuer covenants to charge customers at levels to generate Net Revenues equal to a specific percentage of annual debt service payments – traditionally in a range between 110% and 125%. The ABT requires an issuer to meet a historical performance test that is more or less aligned with the issuer’s Rate Covenant. The issuer must also certify that Net Revenues will be sufficient to make debt service on existing and prospective debt, plus a coverage amount.

REPORT PROGRAMMING & COMPILATION SERVICES

The availability of state and federal long-term, lowcost loans for local and regional projects allows issuers to obtain financing for water and wastewater infrastructure projects. WIFIA is a federal credit program that allows eligible borrows to obtain lowinterest-cost funding administered by the United States Environmental Protection Agency (EPA) for up to 49% of an applicant’s eligible project costs with the remaining 51% financed through alternative funding sources. There is a nonrefundable application fee required to be paid with an application submittal. The application fee for projects serving communities of less than 25,000 people, is $25,000 and for all other applicants, the application fee is $100,000. The application fee although non-refundable is credited to the credit processing fee. EPA will charge the applicant separate costs for its consultants to process the credit and prepare the loan documentation. The minimum and or “Practical” debt for WIFIA is $25 million. WIFIA offers a competitive interest rate equivalent to the treasury security of a similar maturity equal to the weighted average life of the loan. EPA may allow for structuring flexibility by permitting customized repayment schedules; borrowers may be able to defer repayment period for a period up to 5 years and make repayments over a 35-year period. The WIFIA program may permit the subordination of its loan.

Plus Much More! CPA SERVICES INCLUDE: •

Implementation of accounting systems;

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Implementation of internal auditing systems

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Comprehensive Annual Financial Report

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Chart of Accounts Design

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continues on next page

Tel: (424) 901-3440; Email: srahban@rahbancpa.com

25 CSMFO MAGAZINE JANUARY 2018

This is the first of a two-part series on funding Utility projects. The second part will be published in the July edition. Mr. Porr has been actively engaged in public finance since April of 1986. He has spent eight years as a public finance investment banker and more than sixteen years as a financial advisor. He focuses on public utilities in California and has completed more than $7.3 billion in water revenue financings during his career. Mr. Porr earned his undergraduate degree from Pace University in New York, NY and his Juris Doctorate from New York Law School in New York, NY. Mr. Porr holds the Series 50 License and is admitted to practice law in the State of New York. Ms. Carpenter has been active with the firm’s water and wastewater utility clients. She has worked on a variety of transactions which include both Revenue Bonds and Certificates of Participation and manages the technical aspects, transaction flow and implementation of financing strategies and credit analysis. Ms. Carpenter also provides non-transactional based financial advisory services to support Firm recommendations, including: financial modeling, long-term financial planning and policy review.

Tr u s te d . I nno v a ti ve.

Other forms of funding are through CoBank, established by Congress in 1969, it has evolved into a national cooperative bank governed by a Board and supported by stockholders to provide financial services to rural industries and local governments.

Co mp re he nsive.

WILLDAN

The State of California offers grant and loan programs through DWR and SWRCB with a minimum debt amount of $250,000. The SWRCB offers low cost financial assistance through the Division of Financial Assistance. Water and wastewater utilities can apply to either the Drinking Water State Revolving Fund or the Clean Water State Revolving Fund to fund eligible capital projects. There is no maximum on the amount of funding available to applicant, the sole limitation being availability of funding and an applicant’s ability to repay. The state programs allow repayment schedules of up to 30 years and the Issuer’s repayment begins one year after the completion of the project. Rate Covenants may be required with the state loan. The loan proceeds are paid after funds are expended towards the construction of the project. Therefore, understanding your cash flow is a major issue when determining if a state loan is appropriate for your agency.

Ms. Carpenter received her Bachelor of Science degree in Mathematics from Bucknell University and is a registered municipal advisor representative (Series 50 qualified).

www.willdan.com 26

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INSIDE CSMFO

CSMFO Shines a Spotlight on... Steve Heide

Finance Director, Chino Valley Fire District

Interviewed By James Russell-Field

Q2 – When and why did you first join CSMFO (and what has been your experience)?

Q1 – Tell the readers a little bit about yourself.

James Russell-Field, City of Thousand Oaks

Steve Heide Finance Director, Chino Valley Fire District

A2 – I first joined CSMFO in 2005, shortly after coming to work at the fire district. Low membership dues and lots of relevant training and networking opportunities made joining CSMFO a no-brainer.

A1 – I’ve been in municipal finance going on 14 years now and like I suspect is the case with a number of my colleagues, I never envisioned myself going to work for local government back in the day when I graduated from college and joined a CPA firm with a plan to rule the private industry world someday.

Q3 – What have you worked on in the last month? A3 – Lots of things. Being with a smaller agency, I wear many different hats and work on a lot of different projects and initiatives. With that said, it is budget season, so I would have to say more than anything else of late, it’s been budget, budget and more budget.

Outside of work, my wife of thirtyplus years and I are semi-empty nesters, with our son out of the house for a few years now and our daughter in college. Most people don’t know that I like to cook and I like to shop, especially for groceries. My family won’t go the grocery store with me because they say it takes too long for me to check out, as I thoroughly enjoy the meal planning and comparison shopping experience. When I retire someday, I hope to get more into the culinary arts. My first part-time job was working back-of-the-house at a restaurant, which so much fun. That was also my earliest training in how to multi-task, which was good life training for someone who’s hyperactive like me.

Q4 – What aspect(s) of your job do you enjoy the most? A4 – I enjoy the variety in my work and the people I work with. Working for a fire district, our running joke here in the finance department is that we’re putting out fires all the time. Our tools of choice, however, are a ten-key calculator and a computer, as opposed to a hose and water. It’s great to be part of an organization that helps save lives every day. We have a real family atmosphere here and that’s really nice. I also value that our board of directors and fire chief support and encourage my active involvement in professional organizations like CSMFO. Q5 – What has been your favorite project in your career? A5 – Hmmm…that’s a tough one. I’ve been blessed over the years with a number of opportunities to be involved in difference making projects. I currently serve as the treasurer of a non-profit fire foundation, an affiliated organization to the fire district, which raises funds for the benefit of the local community. I get to play a small part in this ongoing project, so to speak, which touches the lives of those in need in our community.

Q6 – What is the most challenging situation you’ve faced in your career?

A6 – Over the course of my thirty-year plus career, on a couple of occasions I’ve come into a new position and have uncovered embezzlement early on in my organizational tenure. Nothing too huge or costly from a fiscal perspective, but those situations are never fun. Q7 – What are some of the important issues you foresee in the future of California finance? A7 - I would have to say that the public pension crisis is the most universally significant challenge facing most governments in California and throughout the country for that matter. And speaking of retirement, we’re in the midst of a huge societal culture shift as boomers continue to retire and millennials come of age. While this is not an issue exclusive to local government, not only does this impact our agencies from a succession planning perspective, including our finance departments, but it also requires us to rethink traditional models of service delivery and methods of communication. This has both an indirect, and in many cases direct, fiscal impact.

BANKING RFP VALUATION SERVICES

Q8 – What do you enjoy outside of work? A8 – As mentioned previously, I enjoy cooking, although I must say that I’m a novice. I also enjoy my volunteer leadership role with CSMFO as a member of the board of directors. Beyond that, I like traveling, spending time with friends and family and following Los Angeles area sports, especially ice hockey and the L.A. Kings.

Plus Much More!

CPA SERVICES INCLUDE:

Q9 – Do you have a favorite quote?

ü Fully quantified scoring methodology

A9 –Not really a quote so much as a personal philosophy. I believe that everything has its time and place. Some might refer to this as God’s plan or divine intervention. Others might view this as chance or fate. I believe that a proverbial door opens when it’s meant to. As individuals, it’s then our free will if we want to walk through that door or not.

ü In-depth interview questions ü Ensure apples-to-apples comparison ü Design optimal bank account structure ü Recommendations for banking tools ü Design internal controls over banking

10 – If Hollywood made a movie about your life, what actor/actress would you like to see cast as you?

ü And much more!

Probably Justin Timberlake. While no one would mistake me as Justin’s double, he’s a man of many talents; talents which I don’t have, and I’d want people to assume I was that skilled.

WWW.RAHBANCPA.COM Tel: (424) 901-3440; Email: srahban@rahbancpa.com

29 CSMFO MAGAZINE JANUARY 2018

FEATURED ARTICLE

Impact of Tax Reform on Tax-Exempt Debt What Municipal Finance Officers Need To Know Written By Jenna Magan & John Stanley The Tax Cuts and Jobs Act was signed into law on December 22, 2017 (the “Act”). The Act made many changes to the Internal Revenue Code, including several that impact tax-exempt bonds and Jenna Magan, Partner, other tax-exempt debt (notes, loans, Orrick, Herrington & etc.). Since many municipalities Sutcliffe have issued tax-exempt debt, it is important for municipal finance officers to be aware of some key impacts that the Act may have on their debt portfolios.

John Stanley, Senior Associate, Orrick, Herrington & Sutcliffe

Elimination of Tax-Exempt Advance Refundings The Act’s most significant change relating to tax-exempt debt is the elimination of tax-exempt advance refundings. When tax-exempt debt is issued to refund (refinance) outstanding debt, that refunding is classified as an “advance refunding” if the new refunding debt is issued more than 90 days before the refunded debt is redeemed. Refunding debt issued no more than 90 days prior to redemption of the refunded debt is classified as a “current refunding.” Current refundings were not changed by the Act and are still allowed. The terms “redemption” or “redeemed” are typically used in bond financings to mean the same thing as “prepayment” or “prepaid.” The date that bonds are subject to redemption is referred to as a “redemption date” or “call date.”

Generally, fixed-rate bonds are sold with provisions that they cannot be called for redemption during the first ten years after issuance. Investors in fixed-rate bonds generally want to know that their investment can’t be prepaid for some period. Given the historically low interest rates in recent years, it has been possible to issue tax-exempt advance refunding bonds to generate debt service savings relative to the refunded bonds, even including the costs of establishing an escrow to defease the refunded bonds to the call date. Debt service savings frees up revenues for other lawful purposes, and so the ability to issue tax-exempt advance refunding debt has been an important tool for municipal finance officers. The following example shows the impact of the Act on a municipality’s ability to refinance existing bonds: City X issued fixed rate bonds in 2012, with an optional redemption call date on April 1, 2022. Prior to the Act, tax-exempt refunding bonds could be issued prior to 2022 to advance refund the 2012 bonds (although only one advance refunding in a string of refundings was allowed). Under the Act, new taxexempt refunding bonds can’t be issued to refund the 2012 bonds until 90 days prior to April 1, 2022 (the redemption date of the 2012 bonds) or January 1, 2022, which would qualify as a current refunding. There are alternative ways to refinance existing bonds that aren’t close to their redemption or call date, such as issuing taxable debt to refinance the existing taxexempt debt or other more complicated options. A competent bond counsel can assist municipal finance officers to assess these options.

permanent, automatic, formula-based rate increase or a one-time fee determined by the bank lender to be adequate to compensate it for the reduction in the relative value of its tax-exempt investment. We recommend that municipal finance officers review the terms of any privately placed tax-exempt debt to see if they contain these adjustment provisions or consult with bond counsel to assist them in this review.

Elimination of Tax Credit Bonds While not commonly used, prior law authorized the issuance of certain types of tax-credit bonds, where the investors received a federal income tax credit with respect to their investment rather than tax-exempt interest. Examples included Qualified Zone Academy Bonds (QZABs), Qualified Energy Conservation Bonds (QECBs), and New Clean Renewable Energy Bonds (New CREBs). The Act eliminated the ability to issue any of these types of tax-credit bonds after 2017.

Where these adjustments have occurred, we have seen certain municipalities and bank lenders negotiate to alter the effect of these adjustment provisions. Amending or waiving the adjustment provisions may impact the tax-exempt status of the debt. Prior to any amendment, the municipal finance officer should consult with bond counsel.

Change in Corporate Tax Rate May Trigger Increase in Interest Rates on Privately Placed Tax-Exempt Debt The Act reduced the maximum corporate tax rate from 35% to 21%. For bank lenders, this reduction increases the after-tax return on taxable investments, but does not affect the after-tax return on their taxexempt investments. As a result, the Act reduces the after-tax return on tax-exempt investments relative to the return on comparable taxable investments.

This is not an exhaustive discussion of all the impacts of the Act on tax-exempt debt. For additional information, please refer to our previous webinars The Tax Cuts and Jobs Act: The Impact Today and Strategies for Tomorrow; The Tax Cuts and Jobs Act: Impact on the Municipal Market or contact the authors.

Many municipalities have tax-exempt debt that was purchased by a bank or other financial institution (often referred to as a “private placement” or “direct purchase”) instead of sold in the public markets by an underwriter (often referred to as a “public offering”). Private placements or direct purchases can be an attractive borrowing option for government issuers and borrowers because they usually have lower transaction costs, as no offering document or ratings are required in most cases.

Jenna Magan is a partner in the Public Finance Department of Orrick, Herrington & Sutcliffe LLP and assists municipalities with their financing needs, including addressing any tax, securities or state law or contractual requirements for debt.

If your municipality has privately placed taxexempt debt, the interest rate on this debt may have increased effective January 1, 2018, when the Act went into effect. This is because the terms of privately placed tax-exempt debt may include a provision that adjusts the interest rate based on changes in the corporate tax rate. These adjustment provisions can take a variety of forms, including a

John Stanley is a senior associate in the Tax Department of Orrick, Herrington & Sutcliffe LLP and focuses on federal income tax issues for tax-exempt debt.

31 CSMFO MAGAZINE JANUARY 2018

FEATURED ARTICLE

CalPERS Amortization Schedules It’s All About the Base

Written By Kerry J. Worgan When reviewing their Annual Valuation Reports, most Employers understand their Unfunded Accrued Liability (UAL) position, but many have a hard time understanding their Kerry J. Worgan, FSA, amortization schedules as shown in FCIA, MAAA the accompanying table (see page 16 Supervising Pension of your non-pooled or page 9 of your Actuary pooled valuation reports). Actuarial Office CalPERS UAL Bases Each row or “Base” in this table represents a slice of the plan’s total UAL and provides a little history of how the UAL unfolded. An Experience Gain or Loss base gets created each year due to actual plan experience differing from

the expected plan experience, while an Assumption Change base emerges whenever plan assumptions are changed. Each base has an establishment date and an amortization period. A positive base (i.e., a loss) means the UAL has increased and results in additional amortization payments. A negative base (i.e., a gain) means the UAL has decreased and results in credits that serve to reduce amortization payments. The Amortization Period column is the remaining number of years required to pay off the base completely. The sum of all the bases on the valuation date equals the total UAL. New bases are established on each valuation date and amortization commences at the end of the following fiscal year. For example, a based established in the June 30, 2017 valuation will have its first payment in FY 2019-20. Interest adjustments are made for the two-year delay using the discount rate.

Amortization of UAL Bases Experience gains or losses are amortized over 30 years while assumption changes are amortized over 20 years. Currently each employs a 5-year ramp-up so in the first year a base is created, the payment is set at 20% of the ultimate required payment, increasing to 40% in the second year and continuing until reaching 100% of the required payment in the fifth year. Similarly, the last 5 years will be ramped down so that the required payment in the last year will be 20% of the required payment. This method was employed to dampen the volatility of investment returns or significant assumption changes on employer contributions. In addition, amortization bases are created using a “level percent of pay” approach which results in payment that increase annually by the payroll growth assumption.

Alternatively, every Agency may make Additional Discretionary Payments (ADP’s) at any time in any amount toward their UAL bases. In deciding which base(s) to pay down, generally an ADP applied against the base with the longest remaining period will generate the greatest long-term savings for the plan, while applying an ADP against the base with the shortest remaining period will generate the greatest reduction in required payments in the short term. If you have any specific questions relating to your UAL Bases or UAL payments or are interested in reviewing potential ADP’s, I strongly encourage you to call your Plan Actuary (shown on page 1 of your report) who can help you determine the best options for paying off the bases for your plan.

A new Amortization Policy was adopted in February 2018, effective with the June 30, 2019 valuation. Asset gains or losses will be amortized over 20 years, with a 5-year ramp-up. The ramp down has been eliminated. Non-asset experience gains or losses will be amortized over 20 years without any ramps. The amortization period for Assumption Changes remains at 20 years. In addition, all payments for new bases established 6/30/19 or later will be determined on a “level dollar” basis instead of the “level percent of pay” approach.

Kerry Worgan has been with CalPERS since May of 2010. Through his role in the valuation services unit at CalPERS, Mr. Worgan has been involved in legislative costings, the preparation of the State and Schools Actuarial Valuation Reports, the valuation for the 1959 Survivor Benefit Program, the actuarial valuations of Public Agency plans and is a member of the Asset Liability Management Advisory Committee (ALMAC). Prior to joining CalPERS, Mr. Worgan served as a consulting actuary for 20 years in the Toronto office of Mercer (Canada) Ltd, a worldwide actuarial and benefits consulting firm. He has worked in the actuarial profession for over 33 years.

Additional Payments One important point to note is that the UAL payments provided in your valuation reports are the minimum required payments. As with the minimum payments on your credit card balance, paying only the minimum means that you will be paying a significant amount of interest. It is for that reason that the Actuarial Office introduced the Alternative Amortization Schedule (page 18 of your non-pooled reports or page 11 of your pooled reports). This schedule shows the potential savings that can be generated by an Agency electing to shorten the amortization period, effectively refinancing the debt over a reduced period (for example, 10, 15 or 20 years), what we call at CalPERS a “Fresh Start”.

Mr. Worgan is a Fellow of the Society of Actuaries (F.S.A.), a Fellow of the Canadian Institute of Actuaries (F.C.I.A.) and a Member of the American Academy of Actuaries (M.A.A.A.). He earned his Bachelors degree in Actuarial Science in 1985 from the University of Western Ontario in London, Ontario.

33 CSMFO MAGAZINE JANUARY 2018

FEATURED ARTICLE

Getting an IBank Loan the Good, and the Unexpected

Written By Tracy Cole

Tracy Cole, City of Santa Cruzâ&#x20AC;&#x2122;s Accountant II

Recently, the City of Santa Cruz successfully acquired two lowinterest loans through the California Infrastructure and Economic Development Bank, also known as IBank. Not only were the interst rates good, we had the flexibility to do a private placement which lowered our issuance costs. The first loan was approved in November 2014, in the amount of $14,130,000, to help pay for arterial road improvements. The second was granted March 2016 to support water department infrastructure improvements, in the amount of $25,000,000. Both loans utilized the Infrastructure State Revolving Fund (ISRF) Program offered by IBank. Ultimately the loans demonstrated that the amount of time and energy it takes to get through the loan process is long and a bit challenging, but worth it in the end for the low interest rates and flexible terms.

Be Prepared My first bit of advice is to be prepared. This was my first time being a part of a major financing initiative so I was not prepared for the amount of planning and paperwork that was necessary. The amount of documentation needed for loan approval is immense. And just when you think youâ&#x20AC;&#x2122;ve submitted all that they have asked for, they will ask for more. Luckily, IBank assigns one contact person per loan, so not having multiple people asking for the same information over and over was helpful. And be ready for questions. Be prepared to explain numbers and how you got to them. There was quite a bit of back and forth between IBank staff and our staff explaining projects and project totals as well as the fiscal health of the City of Santa Cruz. More than Just Finance Our Finance Department may be small when compared to other similarly sized jurisdictions. And since we centralize most aspects of finance (accounts payable/receivable, payroll, purchasing, risk management and revenue) while also providing contract services, we are a small and very busy office. As such, we really relied on the talents and operational knowledge from our Public Works and Water Department staff to fulfill a lot of the IBank requested documents. City staff were instrumental in providing detail that only their departments would know.

So if you don’t have a close connection with the department requesting the loan funding, you will once this process is over. Also, our Purchasing division provided detail that IBank needed regarding the bid package, such as the scope of work, bid pricing, change orders, bond riders, program specs and contracts. Our Risk division was also called in to review certificates of insurance and rental interruption insurance. I was so grateful to all the City staff that jumped in and helped to gather all the documentation that IBank was requesting and did it quickly.

Wonderful IBank Staff I really have to send a great big “thank you” to the IBank staff. Their patience really should be rewarded. There were many times they were asking for information that I had a hard time understanding their request. Again, this was my first time working on a loan and I often felt like everyone was talking in a foreign “debt” language. IBank staff had the ability to explain the documentation to me (dumb it down) so that I could figure out where to go to get that information.

Anticipate Process Time Luckily for us, our projects were not contingent on IBank loan approval. And that’s something to keep in mind. Our first roads loan took about 6 months to process and our water loan took 9 months to get from start to finish. IBank also has their process time that needs to be considered. They have board hearings that have to be scheduled and their own approval process. Not to mention our own City Council resolutions that had to be approved to move forward to take on the new debt. It was a symphony of perfectly (or not so perfectly) orchestrated timing with many moving parts.

Many Thanks I was grateful to be given the opportunity by our Finance Director, Marcus Pimentel, to jump into this new assignment. I will admit that I was a little scared at first and intimidated. But with the support of our own City staff and the gentle hand-holding from IBank employees, I was able to be a part of a new experience for me and gain more understanding of the debt process. Tracy Cole is the City of Santa Cruz’s Accountant II and has been in local government for 20 years. Tracy has been the City’s lead on debt issuance and debt management. She has also had been a city-wide Action Lab team leader and has served as primary budget lead for Police and Fire departments. She graduated from CSU Channel Islands with her Bachelor of Science Degree in Business. She loves living in Santa Cruz with all it has to offer, from the beaches to the mountain trails. She enjoys her Santa Cruz life with her husband, Matt, and her two kids, Rachel & Sam.

It’s Not Over Yet Once the loan is approved, be ready to have staff dedicate time to these loans. Besides the semi-annual loan payments, IBank also requires several compliance items. The annual budget is required no later than 60 days following adoption for every year. And an annual certification is also part of the compliance. This mandates submittal of your CAFR and various other certifications. So be ready for this all to be needed through the entire life of the loan. There are also the distributions to contend with. Our roads project was a multiyear project that required numerous distributions. We are working on our final distributions now. On the other hand, our water loan was for reimbursement for a major project that was nearly complete when the loan was approved.

37 CSMFO MAGAZINE JANUARY 2018

FEATURED ARTICLE

Top Municipal Market Financing Team Participants: Calendar Year 2017 Written By Jeff Field Editorâ&#x20AC;&#x2122;s Note: The following article was reprinted with approval and support by the California Debt and Investment Advisory Commission (CDIAC) from their February 2018 Debt Line issue.

Jeff Field, California Debt and Investment Advisory Commission (CDIAC)

Riverside and San Bernardino counties where issuance of PACE financings took off in 2013, This made BBK the leading bond counsel firm that year when measured by number of deals. BBK occupied the top spot until the middle of 2016, when it was supplanted by Jones Hall, who by that time had begun to serve as bond counsel for the PACE programs of the California Statewide Communities Development Authority (CSCDA) as well as the County of Los Angeles. In calendar 2017, Jones Hall maintained its lead over BBK as Californiaâ&#x20AC;&#x2122;s top bond counsel firm ranked by number of deals. Jones Hall was responsible for 28.6 percent of deals that used a bond counsel. Best Best & Krieger, still a heavy PACE player, ranked second with 26.1 percent of the deals. Orrick Herrington & Sutcliffe, Stradling Yocca Carlson & Rauth, and Quint & Thimmig rounded out the top five firms for the first half of calendar 2017 on a deal basis. These same five firms occupied the top five rankings in calendar year 2016

This report summarizes for the $78.5 billion issued by California state and local agencies which Bond Counsels, Financial Advisors and Underwriters were used during calendar year 2017.

California state and local agencies issued approximately $ 78.5 billion of long- and short-term debt in calendar year 2017, only a 0.3 percent decrease from the total volume in 2016.1 The nationwide picture also remained steady, declining a mere 1.6 percent from the previous year2.

Ranking of bond counsel firms by par amount issued produced an entirely different result. Orrick was the leading firm in California. In fact, deals in which Orrick served as bond counsel accounted for $35.4 billion, almost four times the amount of the second ranking firm, Stradling Yocca Carlson & Rauth. Jones Hall, Hawkins Delafield & Wood, and Kutak Rock LLP placed third, fourth and fifth, respectively. BBK dropped back to 10th based on par value. Bond counsels participated in 97.6 percent of the reported financings in California during 2017, a slight decrease from the 98.1 percent for 2016.

BOND COUNSELS In 2017, the issuance of Property Assessed Clean Energy (PACE) bonds continue to account for much of the activity in California. PACE3 allows a local public agency to issue loans to individual property owners for the purpose of making energy efficiency improvements. While the principal amounts are often low, the structure of the transactions accounted for hundreds of debt issuance reports submitted to CDIAC. Best Best & Krieger (BBK) served as bond counsel to PACE programs in

FINANCIAL ADVISORS As was the case in 2016, California’s leading financial advisory firm for 2017 based on deal count was The PFM Group/Public Financial Management, Inc. (PFM). PFM continued to hold the top spot while increasing its total deal count by 23 percent to 665 as compared to 542 in 2016. PFM serves as the financial advisor on the PACE programs in Riverside and San Bernardino Counties, which constituted 88 percent of the deals in which they participated. Urban Futures/Isom Advisors, Fieldman, Rolapp & Associates; and KNN Public Finance (KNN), placed second, third and fourth respectively based on deal count. Public Resources Advisory Group (PRAG) continued to maintain the fifth spot in 2017. When measured by volume issued, PRAG was California’s top financial advisory firm, participating in 54 deals with a total par amount of $17.6 billion. KNN, PFM, Fieldman Rolapp, and Montague DeRose & Associates LLC complete the top five on a par amount basis.

CDIAC relies on the accuracy of the information submitted on the Report of Final sale to analyze market trends for California public issuers. Most of the information noted above can be accessed through the California State Treasurer’s online data portal DebtWatch, http://www.debtwatch. treasurer.ca.gov. CDIAC provides information, education and technical assistance on debt issuance and public fund investments to local public agencies and other public finance professionals. Among the many programs, CDIAC has organized educational seminars focusing on public finance matters, the debt issuance process, and public funds investments. These trainings are offered throughout the year at various locations in the State Debt Line is a legislatively-mandated monthly newsletter providing a calendar listing of all proposed and sold debt issues reported to CDIAC, as required by law, as well as summary tables and articles related to debt issuance and public fund investment.

Based on number of deals, financial advisors participated in 60.2 percent of the reported public debt issuance during 2017, a 3 percent decrease from 2016. Based upon par amount issued, financial advisory firms participated in 85.4 percent of the debt issued in 2017. This figure was also a 3 percent decrease from the 2016 share.

California issuance numbers include all debt reported to CDIAC as of January 4, 2018 pursuant to CA Govt. Code §8855(j), including long-term and short-term financings and private placements. 1

UNDERWRITERS Stifel Nicolaus & Company, Inc. (Stifel) and RBC Capital Markets were California’s top two underwriting firms for 2017, as measured by number of deals with 232 with 114 deals respectively. Stifel and RBC together underwrote 39 percent more deals than the remaining three of the top five firms combined. Those were Morgan Stanley & Co., Raymond James & Associates, and Piper Jaffray & Co.

SIFMA data “US Municipal Issuance” https://www.sifma.org/wpcontent/uploads/2017/06/municipal-us-municipal-issuance-sifma.xls. 2

Governed by Street and Highways Code Section 5898.28.

Banks or other entities purchased the debt not purchased by underwriters. In these sales, there was no firm identified as an underwriter on the Report of Final Sale submitted to CDIAC. 4

Citigroup Global Markets eclipsed all other underwriting firms on a par value basis by purchasing 14.2 percent, or approximately $9.3 billion, of California’s debt involving an underwriter. In 2017, underwriters purchased 83.6 percent of the state’s municipal offerings by par amount.4 No participation by an underwriter was reported on 2,087 deals totaling approximately $12.9 billion in par value. 39 CSMFO MAGAZINE JANUARY 2018

JOB OPPORTUNITIES Deputy Finance Director, Ralph Andersen & Associates Salary Range: The annual salary range is $107,195 to $130,296. Application Deadline: 29-Jun-18

Chief Financial Officer, Contra Costa County Salary Range: Annual salary range: $112,056 to $143,016 Application Deadline: Wednesday, June 20, 2018

PROJECT MANAGER (Finance Department), Spin Recruitment Advertising Salary Range: $135,143 - $165,936 Annually Application Deadline: 15-Jun-18

Payroll Manager, City of Santa Rosa Salary Range: 6,992.42 - $9,233.25 Monthly Application Deadline: 6/12/2018 Director of Audit Services, Avery Associates Salary Range: The salary is up to $206,044 annually, dependent on qualific Application Deadline: 20-Jun-18

Payroll Accountant, City of Glendora Salary Range: $4,668.00-$5,674.00 Monthly Application Deadline: June 15, 2018 at 4:00 p.m. Accounting Supervisor, City of Glendora Salary Range: $70,833.00-$86,098.00 Annually Application Deadline: June 21, 2018 at 4:00 p.m.

Accounting Supervisor, HAYWARD AREA PARKS AND RECREATION DISTRICT Salary Range: $87,888 - $106,812 (additional 2% increase effective 7/1/18) Application Deadline: 11-Jun-18

Senior Accounting Technician, Glendora Salary Range: $3,699.00-$4,497.00/monthly Application Deadline: June 21, 2018 at 4:00 p.m.

Finance Director, City of Seaside Salary Range: $156,060 Annually Application Deadline: Priority Screening, June 17th

Accountant, San Marcos Salary Range: $61,911.32 - $80,780.22 Annually Application Deadline: 6/26/2018

Director of Finance and Budget, City of Yakima Salary Range: $104,561.60 - $133,452.80 Annually plus benefits Application Deadline: Open until filled - Priority screening by 6/18/18

Payroll Manager, Santa Ana Salary Range: $8,798 - $10,696 per month Application Deadline: 17-Jun-18 Accounting Manager, City of Lodi Salary Range: 95,937 - 116,612 Application Deadline: Open Until Filled

Executive Director/ Ratepayer Advocate, City of Los Angeles Salary Range: $199,758 TO $292.069 Application Deadline: MONDAY, JUNE 25, 2018 @ 4:00 P.M.

Community Choice Energy Accounting Manager, Coachella Valley Association of Governments Salary Range: Starting - $80,443 Application Deadline: June 1 2018

Senior Analyst, Department of Finance-Purchasing, City of San Jose Salary Range: $85,529.60-$104,208.00 Application Deadline: 6/3/2018 at 11:59pm

Senior Accountant, Vallejo Salary Range: 71,498.13-86,906.25 Application Deadline: 4-Jun-18

Program Manager-Purchasing, San Jose Salary Range: $93,204-$114,753 Application Deadline: 6/3/2018 at 11:59pm

Accountant, Vallejo Salary Range: 61,648.60-74,648.60 Application Deadline: 6/1/2018

Accountant, SACOG Salary Range: $6199 - $7535 Application Deadline: 5/25/2018

Finance Manager, City of Murrieta Salary Range: $97,341 - $118,319 Annually Application Deadline: 5:00 p.m. (PDT) on June 11, 2018

Finance Manager, Central Contra Costa Sanitary District Salary Range: $12,243.66 - $14,882.26 plus excellent benefits Application Deadline: 1-Jun-18

Budget Manager, Milpitas Salary Range: $96,897 ? $127,545 Annually Application Deadline: Monday, June 11, 2018 Financial Analyst (Accountant), City of Visalia Salary Range: $5,933 - $7,459 Monthly Application Deadline: 11-Jun-18 Finance and Treasury Manager, Santa Barbara Salary Range: $126,059 - $153,226 Annually Application Deadline: Open until filled. Apply Friday, June 15, 2018 for priority Principal Procurement and Contract Administrator, Southern California Regional Rail Authority Salary Range: $86,894.00 - $135,763.00 Annually Application Deadline: Continuous Finance Manager, City of Saratoga Salary Range: $124,153 to $150,883 effective July 1, 2018 Application Deadline: Open until filled Finance Director, City of Davis Salary Range: $10,134.90 - $12,319.04 Monthly Application Deadline: 6/20/2018 Accountant, Helix Water District Salary Range: $67,356 - $85,968/annually Application Deadline: May 31, 2018 at 5:00 P.M. Accounting Supervisor, Orange County Sanitation District Salary Range: 113713.6 Application Deadline: 23-May-18

41 CSMFO MAGAZINE JANUARY 2018

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