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HomeMy WebLinkAbout01/13/1997 BAKERSFIELD Randy Rowles, Chair Irma Carson Kevin McDermott Staff: Dolores Teubner AGENDA BUDGET AND FINANCE COMMITTEE Monday, January 13, 1997 12:15 p.m. City Manager's Conference Room Second 'Floor - City Hall, Suite 201 1501 Truxtun Avenue Bakersfield, CA 1. ROLL CALL 2. ' APPROVAL OF DECEMBER 9, 1996 MINUTES 3. PRESENTATIONS 4. PUBLIC STATEMENTS 5. DEFERRED BUSINESS A. ALTERNATIVE FUNDING SOURCES FOR THE PLAZA PROJECT - Tandy B. PROPOSED 1997 MEETING SCHEDULE 6. NEW BUSINESS A. REQUEST FOR TAX-EXEMPT FINANCING - Klimko B. SUMMARY OF ARENA FINANCING - Klimko 7. ADJOURNMENT DBT:jp FILE COPY DRAFT B A-K E R S F I E L D /? /~ / ,f - ~' / Patricia J. DeMond, Chair Alan Tandy, City Manager ,/ Irma Carson Staff: Dolores Teubner /" Kevin McDermott / / AGENDA SUMMARY REPORT BUDGET AND FINANCE COMMITTEE Monday, December 9, 1996 12:15 p.m. .. City Manager's Conference Room 1. ROLL CALL Call to Order at 12:20 p.m. Present: Councilmembers: Patricia J. DeMond, Chair; Irma Carson; and Kevin McDermott 2. APPROVAL OF THE NOVEMBER 18, 1996 MINUTES Approved as submitted. 3. PRESENTATIONS None 4. PUBLIC STATEMENTS None 5. DEFERRED BUSINESS A. BID PROTEST ORDINANCE The proposed amendment codifies the method by which the City currently handles bid protests. The protesting party has until 4:00 p.m. on the day the item will be heard at the Council meeting. The protest must be made in writing. The Committee DRAFT BUDGET AND FINANCE COMMITTEE Monday, December 9, 1996 Page -2- directed staff to include the protest process in the bid specifications. The revised ordinance was recommended to the Council for approval at the next meeting. 6. NEW BUSINESS A. CDBG/HOME AMENDMENT #2 Staff reviewed the proposed amendment, which includes the Restoration Community Projects, Inc. (RCPI) project that will provide transitional housing for alcohol and substance abusers; and the Affordable Homes, Inc. (AHI) project that consists of purchasing and completing the existing Gleaners Haven project, a transitional housing program for low-income women with children. The funds for these programs would come from reprogramming HOME funds from slow-moving projects such as the Multi-Family Rehab Program; New Construction Program; and from fund balance. It was recommended that the two applicants seek out additional funding from the County. It is the understanding of staff that the County may have some CDBG monies that are due to expire within six months that have not been earmarked for any projects. The Committee asked for a guarantee that local, on-site management would be part of both housing projects, and that staff structure the agreements so that if the projects were ever sold, the City would be repaid from any profit made on the resale. The Committee recommended the HOME amendment for approval by the City Council. The second part of the amendment was a proposal to reprogram $100,000 of CDBG funds to develop a Southeast Redevelopment Project Area. The Committee discussed the financial viability of redevelopment areas and some concern was expressed that unless significant tax increment was generated in the new areas that a project area would not provide a significant tool for attracting new business. Staff indicated that the City frequently came in second to other cities with redevelopment areas. The need for a Redevelopment Project Area in Old Town Kern was also discussed. On a majority vote the Committee recommended the proposal be brought to the City Council for consideration. B. AMENDMENT TO BIDDING PROCEDURES The proposed amendment is intended to codify current practice regarding routine and/or emergency repairs/maintenance on City facilities. The amendment also increases the threshold for bidding from $20,000 to $25,000, in that the limit has not been adjusted in seven years. BUDGET AND FINANCE COMMITTEE Monday, December 9, 1996 Page -3- -- The Committee requested amending the ordinance to allow adjustment to the threshold annually during the budget process. Staff assured the Committee that the proposal would not negatively affect contractors and that the proposed amendment does not alter current practice. Staff will work with the Contractors Association to resolve any concerns they may have. Unless substantial changes are made which require additional review by the Committee, staff will schedule the item for Council adoption. C. PROPOSED 1997 MEETING SCHEDULE The Committee voted to approve the January meeting only and let the new Committee review the full 1997 meeting calender. 7. ADJOURNMENT The meeting was adjourned at 1 '55 p.m. cc: Honorable Mayor and City Council DBT:ip BAKERSFIELD MEMORANDUM January 10, 1997 TO: Budget and Finance Committee Members Tandy, City Manager FROM: Alan RE: Council Referral on the Use of CDBG Funds for Centennial Plaza At it's regular meeting of December 18th, the City Council voted to approve a CDBG amendment that utilizes $575,000 (reduced from $666,000 by the motion) for the Centennial Plaza project. The motion referred the use of that CDBG money to the Budget and Finance Committee for further review. Since that referral the Chamber of Commerce has reached a decision to accept the City offer to purchase, but conditioned on no use of block grant funds. The staff has reviewed sources of payment for the Chamber building other than the block grant, and we recommend, as follows: 1) We believe that based on the time of year and experience to date, we can utilize $130,000 from Council Contingency. The balance should be held for contingencies the remaining 5¼ months. 2) We suggest that City Council instruct staff to use any additional one time revenues that might be realized to hold down borrowing. No sources are certain, but additional property sales or legal settlements could occur and, we believe, are likely. 3) The balance of the shortfall caused by the absence of CDBG funds, which would be a maximum of up to $530,000, should be covered by using cash on hand for the Plaza. The cash will no longer be available for the Arena, so the COP issue, or borrowing, will have to be increased accordingly. 4) The CDBG amendment should be modified to leave those funds in place for the slow moving projects - Lake Street, 121,186; Commercial Rehabilitation $100,950; Clearance and Demolition, $15,000; and First Time Home Buyers at $15,890. The remaining funds from surplus or terminated projects should be reprogrammed as a part of the 97~98 budget process. AT:rs PROPOSED BUDGET AND FINANCE COMMITTEE - 1997 MEETING SCHEDULE MONDAYS AT 12:15 PM COMMITTEE MEETING COUNCIL MEETING None January 8 January 13 January 22 February 10 February 19 None March 12 March 17 March 26 None April 9 April 14 April 23 None May 7 May 12 May 21 None June 11 June 16 June 25 None July 16 July 21 August 6 August 11 August 20 None September 10 September 15 September 24 None October 8 October 13 October 22 None November 5 November 10 November 19 None December 3 December 8 December 17 DBT:January 10, 1997 TYPICAL INSTALLMENT PURCHASE FINANCING I Investors I Certificate holders provide Trustee makes installment ,~ '~ the seller with the funds to payments to certificate ~r- .n~ purchase the property. holders. MONEY MONEY [Trustee BanklIN OUT Corporation ~ D.O/q I (Seller) Seller assigns the d~k / Seller uses proceeds to COPs payments I ~l~ acquire/construct pro- to a trustee. · perry for the purchaser. ~gZ~"'dJ I Corporation (Seller)I Property ] Purchaser makes ~ ~ Property is transferred by payments for the use of the I Municipality ] the purchaser via an property. Can be subject to [ (Purchaser) I installment-purchase appropriation, contract. The purchaser is the governmental entity that provides the revenue that secures certificate holders' principal and interest. CITY OF BAKERSFIELD AGENDA Januar~ 21, ~997 STAFF REPORT TO: City Council FROM: Staff RE: Camlu Retirement Apartments DATE: January 7, 1997 National Healthplex, Inc. ("NHI") has requested that the City of Bakersfield (the "City") provide it with financial' assistance in the form of tax-exempt bond financing to assist in the acquisition of the Camlu Retirement Apartments (the "Project"). NHI is a non-profit public benefit corporation which provides housing for seniors. The NHI is exempt from Federal income taxation under Section 501(c) (3) of the Internal Revenue Code of 1986, as amended. It was incorporated in 1989. NHI owns three similar projects which, its officers represent, are fully occupied. One of said projects is the Bakersfield Assisted Living Center which the City financed in 1991. The Project is a 110 unit unlicensed senior housing facility which was constructed in 1972. The Project was originally financed with a loan from a savings and loan association. Apparently, the savings and loan association foreclosed and subsequently, the responsibilities and liabilities of the savings and loan association were assumed by the Federal'Deposit Insurance Corporation ("FDIC"). The FDIC has given notice that it intends to auction said Project on January 30, 1997, and will submit a bid for the purchase of the Project. NHI is prepared to purchase the Project with short term financing and later refinance the Project with tax exemp~ bonds. In order to obtain a commitment from the short term lender, NHI must have a preliminary commitment from the City that it intends to issue tax exempt bonds to assist in the financing. -1- NHI now seeks preliminary approval of tax exempt bond financing from the City in the amount of $4,250,000. The Bonds would be secured by, and paid from, the rental proceeds from the Project. None of the City's funds would be pledged for the repayment of the Bonds. The tax code requires that in order to convert conventional financing to tax-exempt financing, an inducement resolution must be passed prior to, or within sixty days after, expenditure of the funds for purchase of the Project. An inducement resolution is not a final approval of the bond issue, but merely evidences the intent of the City at the time of approval of the resolution. Bond resolutions would be required for final approval after a properly noticed TEFRA hearing. Recommendation Staff recommends approval of the following resolution: RESOLUTION OF THE CITY OF BAKERSFIELD PRELIMINARILY AUTHORIZING THE ISSUANCE OF NOT TO EXCEED $4,250,000 MULTIFAMILY REVENUE BONDS IN CONNECTION WITH THE FINANCING OF THE CAMLU RETIREMENT APARTMENTS AND AUTHORIZING REPRESENTATIVES OF THE CITY TO TAKE ACTIONS INCIDENTAL THERETO BAKE\0003\DOC\2 1\7\97 300 law -2- RESOLUTION NO. RESOLUTION OF THE CITY OF BAKERSFIELD PRELIMINARILY AUTHORIZING THE ISSUANCE OF NOT TO EXCEED $4,250,000 MULTIFAMILY REVENUE BONDS IN CONNECTION WITH THE FINANCING OF THE CAMLU RETIREMENT APARTMENTS AND AUTHORIZING REPRESENTATIVES OF THE CITY TO TAKE ACTIONS INCIDENTAL THERETO WHEREAS, the City of Bakersfield (the "City) is a charter city and municipal corporation organized and existing pursuant to the laws of the State of California; and WHEREAS, by request to the City (the "Request"), National Healthplex, Inc., a non profit public benefit corporation ("NHI") has requested that the City assist in financing the acquisition of the Camlu Retirement Apartments (the "Project") located in the City of Bakersfield, California (the "City"), to be owned by NHI for use as an assisted living center for seniors; and WHEREAS, the City desires to encourage NHI to proceed with the Project to further the purposes of California law in promoting housing and services for seniors; and WHEREAS, the City reasonably expects that when the permanent financing contemplated hereunder is completed, certain expenditures of NHI on the Project will be reimbursed with the proceeds of the permanent financing; and -1- WHEREAS, to comply with the provisions of the Internal Revenue Code of 1986, as amended (the "Code") and the Treasury regulations thereunder, the City desires that this Resolution constitute its declaration of "official intent" to reimburse such expenditures with proceeds of the permanent financing for the Project. NOW, THEREFORE, THE CITY COUNCIL HEREBY FINDS, DETERMINE AND RESOLVES as follows: 1. Approval of the Project: Findings. Based upon representations made and information supplied by NHI on file with the City Clerk, the City hereby approves the Project and makes the following findings in connection therewith: (a) The City is authorized to issue multifamily revenue bonds for the acquisition and permanent financing of the Project. (b) The Project will promote the public purposes of the City by increasing the supply of adequate, safe, and sanitary housing for seniors. 2. Authorization of Bond Financing. The Request and permanent financing are hereby preliminarily approved, and the City preliminarily authorizes permanent financing for the Project which will: (i) not exceed a maximum aggregate principal amount of $4,250,000 and (ii) be accomplished by the issuance of bonds --2-- by the City (the "Bonds"), the interest of which is to be excluded from gross income for Federal income tax purposes. Such Bonds shall be issued in compliance with the California law and the Code, shall be subject to such terms and'conditions as NHI and the City approve by resolution and shall be payable solely from the revenues derived from payments to be made by NHI and other funds to be pledged pursuant thereto. This Resolution expresses the City's expectations as of the date hereof with respect to financing of the Project. Future events or extraordinary circumstances' beyond the control of the City may result in the Project being financed in a manner other than as described herein, and nothing contained herein constitutes an irrevocable commitment by the City to finance the Project. 3. Expenditures to be Reimbursed. NHI has expended and intends to obtain short term financing for all or a certain portion of the acquisition, construction and rehabilitation of the Project prior to issuance of the Bonds. NHI and the City reasonably expect that proceeds of the Bonds will be used to reimburse such expenditures. 4. Reimbursement Period. The reimbursement allocation to be made with respect to such expenditures will occur not later than eighteen (18) months after the later of: (i) the date on which the expenditure is paid by NHI, or (ii) the date on which the Project is placed in service, but in no event --3-- more than three (3) years after the original expenditure is paid. No reimbursement allocation will be made with respect to an expenditure paid prior to the sixty (60) day period preceding the date of this Resolution unless otherwise expressly permitted under Section 1.150-2 of the Treasury regulations. 5. Reimbursement Allocation. A written reimbursement allocation described in Section 1.150-2 of the Treasury regulations shall be made, being generally the transfer of the appropriate amount of Bond proceeds to reimburse the source of temporary financing obtained by NHI to pay the reimbursable costs of the Project. Each allocation shall: (i) be evidenced by an entry on the official books and records of the City maintained for the Bonds, and (ii) specifically identify the actual prior expenditure being reimbursed or, in the case of reimbursement of a fund or account in accordance with Section 1.150-2 of the Treasury regulations, the fund or account from which the expenditure was paid. Such allocation shall be made within thirty (30) days of the issuance of the Bonds. 6. Action by City Representatives. The appropriate officials of the City are hereby authorized and directed to take all. actions necessary to accomplish the purposes of this Resolution, including the negotiation of agreements in connection with the financing of the Project. 7. Severabili~y. If any provision of this Resolution is judicially determined to be invalid or unenforceable, such --4-- determination shall not affect the remaining provisions hereof, the intention being that the provisions hereof are severable. 8. Effective Date. The findings and determinations herein shall be final and conclusive. This Resolution shall take effect upon the date of its adoption. I HEREBY CERTIFY that the foregoing Resolution was passed and adopted by the Council of the City of Bakersfield at a regular meeting thereof held on , by the following vote: AYES: COUNCILMEMBERS NOES: COUNCILMEMBERS ABSTAIN: COUNCILMEMBERS ABSENT: COUNCILMEMBERS CITY CLERK and EX OFFICIO CLERK of the Council of the City of Bakersfield APPROVED on BOB PRICE MAYOR of the City of Bakersfield Countersigned: CITY ATTORNEY of the City of Bakersfield BAKE\0003\DOC\i 1\8\97 240 law -5- [ RRICK, HERRINGTON & SUTCLIFFE LLP January 3, 1997 Direct Dial (415) 773-5467 Gregory J. Klimko Finance Director City of Bakersfield 1501 Truxtun Avenue Bakersfield, CA 93301 Re: Summary of Legal Documents; Convention Center Expansion Project Dear Greg: As you requested, this ~etter provides a summary of the principal legal documents pertaining to the proposed issuance of certificates of participation (the "COP's") for the Convention Center Expansion Project. This summary should be regarded as preliminary, as further review of documents pertaining to the existing financing programs may require additional documents. Furthermore, I have not included refunding escrow agreements for any potential refundings as part of this financing program. The documents are summarized as follows: 1. Site Lease - The City (assuming the City is the current owner of fee simple title to the site for the expansion project facilities) will enter into a Site Lease with the Central District Development Agency (the "Agency"), under which the Agency obtains a site lease in such property and agrees to pay a nominal lease payment. 2. Lease Aqreement - The City and the Agency enter into the Lease Agreement, pursuant to which the Agency agrees to cause the construction of the project facilities on the site and, upon completion, to lease the completed facilities to the City. The City, in turn, agrees to make semiannual lease payments for the use and enjoyment of the facilities. In furtherance of assuring timely lease payments, the City agrees to annually budget for and to appropriate the lease payments from the general fund of the City. The Lease Agreement contains an abatement provision, pursuant to which the obligation to make lease payments is abated in the event that the City is deprived of the use and enjoyment Old Federal Reserve Bank Building · 4-00 Sansome Street · San Francisco. California 941!1-3143 Fdephone 415 392 1122 · Facsimile 415 773 5759 hosAngeies ° :\'ew York ° Sacramento ,, Silicon ~dlew . Singapore · ~.~.~shington, D.C. ['i]RRICK. HERRINGTON &z SUTCLIFFE LLP Gregory J. Klimko January 3, 1997 Page 2 of the project facilities for any period of time. Again, to assure timely payments to holders of the COP's in this circumstance, the City will be required to obtain and maintain rental interruption insurance, typically for an amount equal to either one or two year's lease payments. 3. Assiqnment Aqreement - To facilitate the usage of lease payment proceeds to pay the interest on and the principal of the COP's, the Agency will enter into an Assignment Agreement with the bank which serves as trustee (the "Trustee") for the COP's, pursuant to which the Agency assigns to the Trustee the entitlement to receive the lease payments from the City, thereby enabling the City to make the lease payments directly to the Trustee. 4. Trust Aqreement - The City, the Agency, and the Trustee enter into the Trust Agreement, which provides for administration of both (a) the proceeds of sale of the COP's to fund construction of the project facilities, establish the reserve fund for the COP's, and pay costs of issuance of the COP's and (b) the lease payments to pay the principal of and interest on the COP's. The Trust Agreement provides for administration of the COP's (changes of ownership, advance redemption, and like functions) and provides direction to the Trustee respecting actions to be taken in the event of default by the City with respect to lease payments or related obligations of the City pertaining to the financing program. 5. Aqency Aqreement - The final legal document is the Agency Agreement, pursuant to which the Agency appoints the City as its agent to actually hire the contractor and cause construction of the project facilities. The net result of these documents, as a practical matter, is that the Agency has no continuing function with respect to either the project or the financing program. Again, Greg, further review as we initiate the legal proceedings may suggest the need for further legal documents. I have not included mention of the Reimbursement Agreement, which, while important, is not regarded as a related to the issuance of the COP's. We will also have a continuing disclosure agreement S F'2-6884~. 1 ,~eo I ':1.1 '7 -.'~t-~ I l~l~l'7 [~RRICK. HERRINGT©N ~ SUTCLIFFE LLP Gregory J. Klimko January 3, 1997 Page 3 between the City and the Trustee, again not regarded as a basic legal document in the issuance of the COP's. I hope this summary is helpful, and look forward to our meeting on Friday, January 10, at 1:00 p.m., there at City Hall. In the meantime, I would appreciate receiving a preliminary title report respecting the real property which will be the site for the project facilities.  ~Y°Urs' / Samuel A. Sperry cc: Alan Tandy Janice Scanlan Bruce Graham Doug Houston Chuck Youtz S F'2-681M6.1 40213 - 17-S:~l-O 1103197 CALIFORNIA RISE OF COP FINANCINGS Restrictions in California on G.O. debt provide significant impetus for the use of COP financings. The underlying nature ora general obligation pledge, an ad valorem tax, is used with minor variation throughout the country. This pledge has historically been used to raise and secure large amounts of municipal debt. However, limits enacted by voters in the State of California distinguish the issuance of general obligation debt from many other jurisdictions. The limits in California apply to both the amount of debt that can be issued and the amount of ad valorem taxes that can be levied. On June 6, 1978 California voters approved Article Xlll A ("Proposition 13") which put stnngent limits on the amount of money that could be raised from property taxes. Article XIII A limits the amount of ad valorem taxes collected on any property to 1% of it's tull cash value. Full cash value is defined as the county assessor's valuation (full cash.value) for fiscal year 1975/76 or the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment. This value can grow up to 2% per year to account for inflation. It should be noted that for indebtedness approved by the voters prior to July 1, 1978 additional ad valorem taxes can be levied. On June 3, 1986 California voters further amended Article XIII A which relaxed limits on the issuance of general obligation bonds for the acquisition or improvement of real property. This amendment maintained a two-thirds approval requirement by the voters of the issuing jurisdiction to sell new general obligation bonds but allowed for the amount of ad valorem taxes to exceed the 1% of the full cash value limitation. These restrictions taken together are more'severe than those in many other states tbr the issuance of new general obligation debt. Most other states require a simple majority vote for approval. An overall limit on debt issuance is typically described in terms of a percent of assessed or market value -- which in practice is a very high limit seldom reached. Also many j ur(sd(ct(ohs, by definition, permit certain types of debt to be excluded from the limit calculation, for instance self-supporting debt. These are far more liberal "restrictions" than in the State of California. Restrictions on the issuance of general obligation debt, coupled with California's very large infrastructure financing needs, are a primary impetus/'or the increased use of lease-related financings in the State of California. \t~PR()PRIATION RISK IN CALIFORNIA C()P, I CALIFORNIA LEASE-BACKED COPs BACKGROUND & DESCRIPTION The State of California leads the nation in the issuance of lease financings in the form of either certificates of participation (COPs) or lease revenue bonds. The primary reasons for this reliance are the restrictions on the use of general obligation debt resulting from Proposition 13 and California's long-term infrastructure growth requirements. According to Standard & Poor's Corporation. based on issues they rated in 199 !, out of a total volume of $7.3 billion, lease transactions issued in California accounted for $2.9 billion -- qualifying for first place. Additionally, 50.3% of all lease transactions rated and 39.5% ot:the total volume originated in California. It should also be mentioned that outright defaults on California lease transactions have been rare. Even in the most prominent exam- ple, the Richmond Unified School Disu'ict, an out-of-court settlement may allow for a favorable conclusion. It is now expected COP holders will be paid in full pending legislation to allow issua~ce of a refunding series. NATURE AND STRUCTURE OF LEASES While lease transactions cover a wide spectrum of structures and features, "typical" lease issues have many features in common. First among these features is the structure -- lessee, lessor and trustee. The lessee is the entity leasing the project which will make · lease rental payments. The lessor is the nominal owner of the project and will receive rental payments. The trustee will act on behalf of the COP holders, all of the lessor's rights are assigned to the trustee including the collection of lease payments to make rental payments. The lease rental payments of the lessee are received by the trustee and used to pay debt service to the COP holders. The rental payments by the lessee can only be paid after they are appropriated. The trustee is technically the issuer of the COPs. Another common feature is the source of funds available to pay debt service -- which are any available monies in the lessee's general fund. The issuer is not mandated to raise taxes/revenues to pay debt service if needed. Additionally, there is appropriation risk. Funds available for debt service must be appropriated by the issuers' legislative body in order for them to be spent. However, in some transactions w including those which utilize existing facilities or pools of facilities with a value in excess of the borrowing -- there are considerable incentives to appropriate these funds. Another feature of COP's with appropriation risk is a provision for abatement of lease rental payments on a project in the event of damage or destruction of the facility -- the lessee must continue to pay even though the project is not available. Another feature common to many leases with appropriation risk is the remedy or remedies available to COP holders if there is non-appropriation or an event of default. Most often the remedy is for the trustee to sell or re-lease the facility or project for the benefit of the COP holders. (This remedy may not be practical should the facility be used/'or public safety or other purposes.) UNIQUE FEATURES OF CALIFORNIA LEASES The principal feature that is virtually unique to California leases is that most transactions covenant to budget and appropriate lease payments for the full term of the lease. Lease transactions in other states either covenant to budget lease payments only or use language less specific than "to covenant", i.e., to use best faith effort to budget and appropriate. An example of this is some leases in South Carotina which "intend to do all things lawfully within its power..." to make lease payments. This mitigation of appropri- ation risk is recognized by the rating agencies. For lease transactions other than those of California. rating agencies "step down" the rating typically by one full category, from the lessee's general obligation rating, to account for appropriation risk. For California this step-down is usually less than one full category, usually "two notches". Earthquake insurance is another significant, but not unique. difference for California leases. S&P, for instance, requires earthquake insurance on projects that it deems high risk. Part of the reason for this is the abatement provisions of most California leases. These provisions prevent the lessee from making rental payments if the prOJect is unavailable (damaged or destroyed). 2 \LEX. Bi.I, ~', x & .SONS INC()RI'ORATED THE NATURE OF APPROPRIATION RISK IN CALIFORNIA CERTIFICATES OF PARTICIPATION Within the State of California not all certificates of participation (COPs) are subject to appropriation risk. With regard to appropriation risk. COP financings can be divided into two categories: · those without appropriation risk and · those that do have appropriation risk. This article will address in general form how to distinguish between these two types of COPs. However. a case by case analysis of each issue's structure must be done to confirm the presence or lack of appropriation risk. APPROPRIATION RISK COPs COPs with appropriation risk generally contain the following three structural elements: · covenant to budget and appropriate; · abatement due to loss of business use or failure to complete a project; and · remedy for default based on possession of the financed project. Appropriation risk COPs are characterized by language stating that the issuer "covenants to budget and appropriate" from funds available in the general fund. It should be noted that the covenant to bud~,et and appropriate is almost unique to California leases and adds considerable strength to these COPs from a credit perspective. ~A key point to these COPs is the presence of abatement. Abatement refers to the ability of the issuer to stop making payments if the financed project is not available, e.g., through damage, condemnation, failure to complete construction and generally t'or any cause. Abatement is ~. key provision in California COPs as it is this provision that allows COPs not to be classified as debt under provisions of the State Constitution. This exception to the definition of debt is referred to as the Offner-Dean Lease Exception -- see page 13 for a detailed discussion. And lastly, these COPs are characterized by a remedy for default that allows the COP holders (usually through the trustee) to take possession and sell or re-let the financed project. Unlike a general obligation bond. COP holders do not have access to the tax base through mandatory tax increases as a remedy COPs WITHOUT APPROPRIATION RISK COPs without appropriation risk generally contain the following sn'uctural elements: · The obligation to pay is "absolute and unconditional" and based on an enterpris~ or "Special Fund Doctrine"* concept; · there is NO provision for abatement whether a facility is operating or operable: and · the remedy is typically a specific pledged revenue stream, such as revenues from a water and sewer enterprise fund -- not possession of the financed project. COPs without appropriation risk are characterized bv an obligation to pay that is "absolute and unconditional". This phrase usually indicates that there is no appropriation risk. This is usually reinforced bv legal documents associated with the transaction that spell out the "flow of funds". The flow of funds lays out a clear priority in which expenditures are to be made -- not subject to appropriation. ~' See page 11 for a detailed description of the "Special Fund Doctnne". · \t~I)R()I~RI-~,TI()N RISK 1N ('.\LIFORNI.-\ ('()lD, 3 These COPs are typically secured by enterprise funds such as solid waste or water and sewer systems. It is this pledge to repay from an enterprise fund and not the general fund that constitutes the exemption from the definition of debt in the State Constitution referred to as the "Special Fund Doctrine". These leases do not have abatement. Since these financings are exempt from the definition of debt that does not encompass the Offner-Dean Lease Exception they are not required to include abatement of COP payments as a structural element. See page t3 for an explanation of the Offner-Dean exception. The last structural element associated with these COP financings is the remedy in the event of default. The remedy in these financings is typically a net revenue pledge, or more infrequently a gross lien on a specific revenue stream, e.g.. a water and sewer enterprise fund. This type of remedy is identical to the central elements of the remedy in a revenue bond issue. In our opinion, from a credit perspective, if the above structural elements are present. COPs without appropriation risk can be viewed as the equivalent of revenue bonds. (Note -- they are not the legal equivalent.) If properly structured, COPs without appropriation risk can be secured by revenue and be repaid even in bankruptcy proceedings involving a city, county or special district which may be the parent entity of the enterprise fund. 4 'xl_EX. 13R()\VN & .";()NS ISSUED AMOUNT DEVELOPMENT BONDS TITLE AND PURPOSE 11-19-81 $ 3,000,000 Historical Rehabilitation Floating Rate Revenue Bonds (Bell Tower Project), 1981 Series A with Final Maturity November 1,2011. Issued to finance the rehabilitation of Old Church Plaza to include a parking deck. (Municipal Code 3.44) 02-01-83 $1,600,000 Adjustable Rate Industrial Development Revenue Bonds (LOR, Inc. Project). Series 1983 with Final Maturity February 1, 2013. Issued to finance the acquisition and construction of a manufacturing and repair facility servicing the oilfield service industry. (Municipal Code 2.50) 04-01-83 $'1,400,000 Deposit With Lender Revenue Bonds (Bank of America National Trust and Savings Association). Issue of 1983 with Final Maturity April 1, 2003 issued to renovate and remodel The Kress Building (Kress Building Associates). (Municipal Code 3.50) 12-01-84 $35,000,000 Hospital Revenue Bonds (Greater Bakersfield Memorial 06-01-89 $20,000,000 Hospital), Series 1984 with Final Maturity January 1, 2014 and Refinanced Hospital Revenue Bonds (Bakersfield Memorial Hospital), 04-01-93 Series 1989 with Final Maturity January 1, 2019 to finance the expansion and upgrade of hospital facilities. (Municipal Code 3.60) 12-15-84 $ 4,500,000 Revenue Bonds (California Convalescent Hospital Project) 1984 Series with Final Maturity December 1, 2014. Issued to finance the acquisition and construction and equipping of a rest home on Mount Vernon (Penstar Group). (Municipal Code 3.60) 12-01-85 $ 2,000,000 Revenue Bonds (Heritage Convalescent Center Project), Series 1985 with Final Maturity December 1, 2005. Issued to finance the acquisition and construction and equipping of a convalescent hospital facility (Newport Federal). (Municipal Code 3.60) 07-01-88 $18,500,000 Hospital Revenue Bonds (Adventist Health System/West), 1988 Refinanced Series A with Final Maturity September 1, 2018. Issued to 05-01-93 Finance an ownership interest in San Joaquin Community Hospital. (Municipal Code 3.60) ISSUED AMOUNT DEVELOPMENT BONDS TITLE AND PURPOSE 01-01-91 $ 5,997,522 Certificates of Participation (Bakersfield Assisted Living Series A Center), 1991 Series A (4,695,562) with Final Maturity July Refinanced 1, 2020; B ($801,960) with Final Maturity April 15, 2021; and 07-01-93 C (500,000) with Final Maturity July 1, 1992. Issued to finance the construction and equipping of a residential care facility for the elderly (United Community Housing and Development). (Municipal Code 3.60) 09-01-92 $25,000,000 Hospital Revenue Bonds (Bakersfield Memorial Hospital) Series 1992A with Final Maturity January l, 2022. To finance the expansion and upgrade of existing fadlities (Municipal Code 3.60) 04-01-93 $71,200,000 Hospital Revenue Bonds (Bakersfidd Memorial Hospital) Series 1993Awith Final Maturity January 1, 2019. To refund $32,940,000 Series 1984 and $20,000,000 Series 1989 and provide $10,000,000 to finance a psychiatric hospital acquisition and improvements to the fadlities. (Municipal Code 3.6o) 05-01-93 $22,220,000 Hospital Revenue Refimding Bonds (Adventist Health Systems/ West) Series 1993 with Final Maturity March 1, 2019 issued to refinance $18,500,000 issued 07-1-88. (Municipal Code 3.60) 07-01-93 $6,600,300 Refunding Certificates of Participation (Bakersfield Assisted Living Center) 1993 Series A with Final Maturity July 1, 2020. To refund $4,695,562 of 1991 Series A and provide working capital. (Municipal Code 3.60) THE CERTIFICATE HOLDERS PROVIDE THE ................... - .... J THE CITY LEASES CDDA WITII FUNDS TO CITY I THE EXISTING IMPROVE THE INVESTORS (SITE LEASE) PROPERTY TO TIlE PROPERTY (COP) ............ CDDA FOR A NOMINAL FEE · THE CDDA USES THE CDDA CERTIFICATE PROCEEDS TO THE TRUSTEE I(LESSOR / SELLER)I IMPROVE TIlE PROPERTY RECEIVES THE (. il ' ASSIGNED LEASE PAYMENTS AND TRUSTEE MAKES INSTALLMENT PAYMENTS TO THE . v THE PROPERTY IS CERTIFICATE -. ,~ ~, TRANSFERRED TO THE CITY HOLDERS fi,, PROPERTY x'xx. BY A LEASE (INSTALLMENT ~',,.. ? PURCHASE) AGREEMENT ",, // ........... -. THE CITY PROVIDES THE CDDA THE REVENUE (LEASE ASSIGNS LEASE CDDA · CITY PAYMENTS) THAT PAYMENTS FROM (LESSOR / SELLER) (LESSEE / PURCHASER) SECURES THE THE CITY (FOR CERTIFICATE HOLDERS USE OF THE . _. (INVESTORS) PRINCIPAL IMPROVED & INTEREST PROPERTY) TO TIlE TR US rl'E E