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HomeMy WebLinkAboutMemo - Read Before Packet - 11/5/2013 - Memorandum From Mike Beckstead Re: Council Finance Committee Minutes Concerning The Capstone/Summit Loan Financial Management Policy Updates (Ura Agenda Item # 3)Finance Administration 215 N. Mason 2nd Floor PO Box 580 Fort Collins, CO 80522 970.221.6788 970.221.6782 - fax fcgov.com URA Finance Committee Meeting Minutes 9/16/13 11:00 to Noon CIC Room Council Attendees: Mayor Karen Weitkunat, Bob Overbeck Staff: Timothy Allen, Darin Atteberry, Mike Beckstead, Megan Bolin, Chris Donegon, Tom Leeson, Lawrence Pollack, Lance Smith, Steve Roy, John Voss, Katie Wiggett Others: Dale Adamy, Daniel Parsons Approval of the Minutes of May 20, 2013 Mayor Karen Weitkunat moved to approve the minutes for the May 20, 2013 meeting. Bob Overbeck seconded the motion. Minutes were approved unanimously. Prospect Station TIF Support Tom Lesson presented the Prospect Station Redevelopment Project, a project improving the SW corner of the Mason Trail and Prospect Road, including 32 residential rental units and 1 commercial/retail unit. The project has significant public benefits including blight remediation and infrastructure Upgrades. The total TIF Requested for this project is $494,000. This is a significant reduction from the original request of $772,879. Total TIF collection over the life of the project with 0% growth each year is forecasted at $865,340. The project will use combination lump sum payment and pay over time TIF reimbursement structure. Mike Beckstead noted that this project’s TIF Reimbursement Structure is a great example of Finance and Economic Development working together to improve City practices. Tom Leeson presented the following key reimbursement points: • Developer must obtain C.O. of building before URA will make lump sum payment • URA may pre-pay the reimbursement at any time • TIF projection is based on County Estimate of Value • Annual payment is fixed = $11,762 Tom Lesson noted that the City developed a hybrid structure because the developer began with the assumption that they’d get a total lump sum as had been done in the past. When Staff told them the City was planning on a pay as collected structure, the developer said he would have to walk away from the project. The hybrid method allowed the project to move forward. The City’s total obligation will be $494,000 plus financing costs estimated at $175,284. Based on current estimates including financing, 77% of the available TIF will be used to support the project. 2 URA Loan – Summit In September 2011, the Fort Collins Urban Renewal Authority (URA) approved a Redevelopment Agreement with Capstone Development Corp (Developer) for The Summit on College, a mixed-use student housing project in the Prospect South Tax Increment Financing (TIF) District. The Agreement obligated the URA to reimburse the Developer for up to $5 million of eligible costs upon completion of the project. The Developer obtained a Certificate of Occupancy for the project in August 2013 and is in the process of submitting their reimbursement request to the URA. When the amount of tax increment generated by The Summit was estimated in 2011, the URA used a methodology based on project costs and assumed 1% appreciation each year, for a total of approximately $8 million. It was anticipated that the URA would have to borrow from the City to pay the reimbursement to the Developer, and at the time, the financing charge on a $5 million loan was estimated to be $2.4 million. Based on the most recent August 2013 preliminary valuation from Larimer County, the project is estimated to generate $7 million of tax increment, creating a $1 million revenue shortfall from the original projection. Additionally, a combination of rising interest over the past two years (adding 71 basis points) and the City’s new interagency loan policy (adding 25 basis points), have increased the expected interest rate on the loan from the City from 4.0% to 4.96% increasing interest cost from $2.4M to $3.8M. Table 1 summarizes the difference between the original estimates and actual numbers: Table 1* – Note: numbers have been updated per latest interest rates 2011 Estimates 2013 Actuals Total Tax Increment $8 million $7 million Reimbursement Obligation $5 million $5 million¹ Financing Cost to URA $2.4 million $3.8 million Balance $0.6 million ($1.8 million) ¹ Subject to final verification by URA staff. *Number have been updated since the Between the decrease in tax increment revenue and increase in financing charge, the URA would be unable to afford the full debt obligation of a $5 million loan from the City under current investment policy interest rates. Consequently, City and URA staff have negotiated a loan agreement that allows the URA to uphold its reimbursement obligation to the Developer and remain financially solvent, while making a concerted effort to uphold the City’s interagency loan policy. Proposed Loan Agreement Terms The URA cash flow does not support a $5 million loan from the City based on the current interest rates and the current interagency loan policy. A new loan structure was developed that assigns an interest rate based on the known revenue stream and term, which turns out to be 2.68%. Since City policy would require 4.96% interest, this leaves a gap of $1.78 million. To fill this gap, the URA commits to pledge 50% of future unencumbered revenue from the Prospect South TIF District to the City. For example, assume the URA collects $1 million in revenue in a given year and owes the City a $400,000 payment on the Capstone loan; 50% of the remaining $600,000, or $300,000, would be paid to the City to help pay down the $1.78 million interest rate gap. This revenue share structure would continue for the life 3 of the Prospect South TIF District, or until the $1.78 million is paid in full, whichever happens first. While City and URA staff support the negotiated loan terms, the variation from current policy is duly acknowledged. Several practices have been put into place since approval of the Capstone Redevelopment Agreement to prevent the need for additional policy exceptions, including:  Tax increment estimates are based on Larimer County’s estimate of valuation that the Developer provides to the URA; the estimates assume 1% appreciation over the life of the associated TIF District.  Establishing a maximum percentage of tax increment that would be available to reimburse a project that includes a combination of both reimbursable costs to the developer and URA financing costs.  Establishing a maximum tax increment contribution percentage of the total project cost. These items, particularly the last two bullets, have been the topic of recent discussions between the City and URA, and staff is scheduled to present more detail to the Finance Committee for further vetting at an upcoming meeting. Bob Overbeck asked why the City would make an exception to common practices in this case. Mike Beckstead answered that the City has a commitment to the developer, and by making this exception, we can honor that commitment. The Mayor agreed that Council would need to know how this exception would affect City policies or practices. Is the City setting a precedent by making this exception? Mike Beckstead answered that, going forward, the City may limit itself to a 75% commitment to ensure that this situation never happened again. Next Steps Staff will work on drafting a policy for estimating TIF financing. Finance Administration 215 N. Mason 2nd Floor PO Box 580 Fort Collins, CO 80522 970.221.6788 970.221.6782 - fax fcgov.com Council Audit & Finance Committee Minutes 10/21/13 10:00 to 12:30 CIC Room Council Attendees: Mayor Karen Weitkunat, Bob Overbeck, Ross Cunniff Staff: Darin Atteberry, Mike Beckstead, Josh Birks, Marty Heffernan, Mark Jackson, Tom Leeson, Jessica Ping-Small, Peggy Streeter, Steve Roy, John Voss, Katie Wiggett Others: Dale Adamy, Kevin Jones (Chamber of Commerce) Approval of the Minutes Bob Overbeck moved to approve the minutes for the September 16 meeting. Mayor Karen Weitkunat seconded the motion. Minutes approved unanimously. *For timing purposes, the items were not addressed in the order they appeared on the agenda. Revenue Policy Review Jessica Ping-Small noted that the most significant change to the Revenue Policy is the inclusion of 5 revenue principles that give staff and City Council a foundation for making sound financial decisions that will provide the citizens of Fort Collins a diverse, stable and fair revenue stream equipped to provide the services necessary to keep Fort Collins great. She presented the following 5 principles: 1. Maintain a diverse revenue base 2. Maintain a stable revenue base 3. Cultivate revenue sources that are equitable among all economic levels 4. Generate adequate revenue to maintain core service levels 5. Maintain healthy reserves These principles were presented to Council Finance and the Futures Committee in 2012 and again to Council Finance in January 2013 as part of the ongoing revenue diversification study. Staff has incorporated suggested modifications in the policy. Mike Beckstead noted that the reason a “three-legged stool” approach was said to not be practical in Fort Collins is that municipalities that do incorporate such an approach depend on high property tax or a city income/occupational tax. Without those two taxes to depend on, across the Front Range, municipalities commonly depend on sales and use tax. Fort Collin’s revenue from sales & use tax is in 2 the lower end of the middle compared with other Front Range communities. Staff would like to maintain and continually improve Fort Collins’ diverse revenue base. Ross Cunniff suggested adding a sixth principle: “Fees for Service are fairly born by those who use those services.” While this guideline is addressed in the policy, it could be highlighted. Ross also asked to see the study on the impact taxing services would have in Fort Collins. Jessica will provide the study to Council Finance. Financial Management Policy Format and Introduction Mike Beckstead said that staff is in the process of updating and consolidating all the financial policies and bringing them to Council for approval. Staff has drafted an introduction to the Financial Policies that states Council’s ability to deviate from policy when it is in the City’s best interest. An example of the need for such a provision is seen in the current matter before the Council concerning the interest rate proposed on a loan between the City and the URA. A deviation from the current investment policy is proposed to Council because of short fall in estimated revenue and an increase in interest costs from the September 2011 estimates. Steve Roy added that Council has always had the ability to make an exception to policy per City Charter; however, it is advisable to incorporate and institutionalize language that allows Council to make those exceptions. Bob Overbeck said that he is concerned about there being too many exceptions or amendments made to City policy. The best practice would be to address any mistake made and insure that that mistake not be made again. Mike replied that Staff has learned many lessons through the Capstone Project. Evidence of what staff learned can be seen in the new policy that Josh Birks drafted for TIF’s that establishes clear boundaries for using that financing method. Also, staff now bases rates off of the County’s estimate of value which factors in revenue generation rather than the project cost. Council Finance appreciates staff’s transparency and willingness to continuously improve. Bob Overbeck requested that, in the future, Staff present stress tests for financing projects presented to the Council Finance Committee. New Fees Review Jessica Ping-Small noted that street maintenance is currently funded primarily through sales tax including the designated ¼ cent sales tax that has a sunset date of December 31, 2015 and the Keep Fort Collins Great sales tax. Although sales tax initiatives have been supported multiple times by citizens, relying on an expiring sales tax has risks such as revenue variability and potential expiration. Staff has explored the feasibility of a Street Maintenance Fee (SMF) to replace the ¼ cent designated sales tax. Jessica also noted that Park and Trail Maintenance is currently funded though the General Fund and $735K of Conservation Trust Funds that were diverted from trail construction in due to funding shortfalls. Staff has drafted a Park Maintenance Fee (PMF) to generate $735K annually which would allow the Conservation Trust Funding to go back to trail construction. Ross Cunniff noted that he certainly wants to fund Parks without using the Conservation Trust. However, discussing the two possible fees together may be confusing, so Ross suggested that Council Finance focus first on the more urgent matter of the sun setting street maintenance tax. Council Finance agreed that they want to discuss Park Maintenance separately at a later date and that they would like to be brought a broader discussion with all potential funding options. 3 Mike Beckstead called attention to the example fee breakdown for the Street Maintenance Fees. A triple bottom line analysis showed that this fee would be very hard on small businesses such as fast food businesses which would be required to pay $10,334 annually. Ross Cunniff noted that the cost of the fee would be pushed off to the customer, in that way non-residents would still pay the fee just like they currently pay the tax. Council Finance discussed various alternatives to the fee. Darin concluded that when the ¼ cent tax expires in December 31, 2015, the City has 3 options: 1. Continue the tax another term 2. Vote to continue the tax in perpetuity 3. Move to some other funding mechanism such as the proposed fee. Council will discuss the options at a work session in November. Staff will incorporate Council Finance’s suggestions into the presentation for November. Updates Mike Beckstead noted that the Long Range Financial Plan has been moved out to 2014 given other priorities in 2013. Completing this task will remain on Financial Services work plan but will be delayed. A matrix the details council priorities identified and discussed at the May Council retreat is being developed by Diane Jones and will be presented to the council at the November retreat. This matrix will illustrate how each of the priorities identified are addressed within the current budget, through the budget revision process or through staff goals. Staff will bring an appropriation for the Flood on November 19. The appropriation is still in development, staff anticipates the total appropriation will be around $2.7M with funding provided by FEMA and the state covering all but approximately $350K. Foothills Mall Financial Review Mike announced that there will be an Open House at the Mall on October 30 from 4-7 p.m. All are welcome to attend. He then explained that the planned development at Foothills Mall associated with the Redevelopment Agreement and incentive package approved by Council on May 7, 2013 has several modifications and revisions that will be going back to the Planning & Zoning Board in November 2013 and January 2014. These changes will have a minor impact on the financial incentive package. In summary, the deal is intact, there is no change to the incentive package, and the financial return to the City is substantially unchanged. Details from the discussion are highlighted below: 1. The Foothills Mall has reduced in size by approximately 10%. 2. The opening of the Mall is delayed approximately 1 year. 3. The Foothills Activity Center is planned at 18K square feet and to be located in between Macy’s and the planned parking structure. 4. Estimated sales per square foot have increased from $350 to $378 based on known tenants that will occupy the Mall. 5. The incentive value of $53M to support the public improvements is unchanged. 4 6. The par value of the bonds has declined slightly from $73M to $71M. 7. The maximum bond payment amount is unchanged at $180M 8. Sales tax remitted as part of the Sales Tax Revenue Pledge is unchanged at $9M. 9. Net new sales tax revenue has increased from $108M to $117M. This information will be brought to Council at the December 3 meeting. Next Steps Staff will add the tentative dates for all future policy updates to the long-term planning calendar. Staff will bring funding options for Park and Trail Maintenance to Council Finance as a separate discussion in the near future. Staff will also incorporate Council Finance suggestions to the Street Maintenance Fee presentation before bringing it to Council in November.