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HomeMy WebLinkAbout101-Prop 1A Securitization Program Report.pdf SARATOGA CITY COUNCIL MEETING DATE: October 21, 2009 AGENDA ITEM: DEPARTMENT: Finance & Administrative Services CITY MANAGER: Dave Anderson PREPARED BY: Mary Furey DIRECTOR: Mary Furey SUBJECT: Proposition 1A Securitization Program RECOMMENDED ACTION: Review Prop 1A Securitization program option, adopt resolution, and approve purchase and sale agreement to participate in the securitization program. REPORT SUMMARY: Proposition 1A Parameters Under Proposition 1A of 2004, the Legislature is prohibited from reducing the share of property taxes from cities, counties, and special districts to schools and other non-local government functions. However, the Legislature may alter the allocation of property taxes if: 1. The Governor issues a proclamation of “severe fiscal hardship” 2. The Legislature enacts an urgency statute suspending Proposition 1A property tax protection with 2/3 vote of each house; and 3. The Legislature enacts a law providing for full repayment of the “borrowed funds” plus interest within three years. As part of the State of California’s 2009/10 budget adoption package all three of the above conditions were met thereby allowing the State to borrow of up to 8% in property tax monies (approximately $1.9 billion statewide). Each local agency’s amount is based on their total ad valorem property tax revenue, which includes the amounts transferred to Property Tax revenues for the VLF Swap and the Triple Flip. The borrowed tax revenues will be shifted to fund schools and non-local government programs that would otherwise be funded from the State’s General Fund. Under Proposition 1A, borrowed funds must be repaid with interest, within three years – meaning repayment would likely be in June, 2013. Fiscal Impacts For the City of Saratoga, this borrowing will impact the General Fund as well as seven Landscape & Lighting District Funds that receive property tax monies, as shown in the following table provided by Santa Clara County’s Controller-Treasurer Office: City of Saratoga 659,696$ Azule L&L 2,031 Saratoga Village L&L 4,855 Quito L&L 4,317 Village Parking L&L 3,023 Greenbriar L&L 473 Manor Drive L&L 326 Fredericksburg L&L 57 TOTAL of estimates 674,778$ Proposition 1A Loan Estimates Securitization Program In conjunction with the budget passage, a provision called “Proposition 1A Securitization” was approved which created an option for local agency relief from the financial burden created by the forced property tax borrowing. This provision authorizes cities, counties, and special districts to sell their State repayment obligations to the California Statewide Communities Development Authority (California Communities), a joint powers authority (JPA) sponsored by the League of California Cities and the California State Association of Counties. Local agencies have the option of participating in the securitization program and receiving 100% of their share of property tax allocation in the current year, or waiting until the State pays the funds back, with accrued interest. Under the securitization program, California Communities will issue bonds and remit the cash proceeds to participating local public agencies on approximately January 15, 2010 and May 1, 2010, in coordination with the dates agencies normally receive property tax payments. Legislation requires that local agencies participating in the securitization program receive 100% of their Proposition 1A receivables; there are no fees or costs or discount penalties to cities, counties, and special districts for receiving property tax securitization funding. On September 25, 2009, the State’s Department of Finance established an interest rate of 2% at which the state will repay local governments that do not assign their Proposition 1A receivables to the California Communities JPA. For the City’s General Fund share, this interest earning from the State will equate to approximately $13,194 per year, and from $1 to $97 dollars per year for the seven Landscape & Lighting Districts each year – for an estimated total of $13,500 per year. These earning however, are offset by the loss of interest that would be earned from LAIF as the City will either use funds that are currently invested in LAIF for operational expenses, or the property tax funds received from California Communities that would be invested in LAIF until used for operations. At this point in time, LAIF earnings have dropped to an historic low (since it began in 1977) of about .90% for the quarter. While it is likely that interest rates will be slow to increase over the next three years, it is unlikely that rates will stay at these historic low rates for the next three years given the investment expertise in the LAIF agency. The interest earned by holding the receivable therefore is expected to decrease from the net of the State’s 2% interest rate less the LAIF interest rate, with a potential to become negative - depending on when LAIF rates exceed a 2% return on investments. Additional concerns to consider are that although the City Council was proactive in planning for the Proposition 1A suspension with the authorization to utilize the Economic Uncertainty Reserve funds to offset the State’s property tax borrowing, the use of the reserve would reduce Council’s flexibility for the next three years, and potentially longer if the State is not prompt in repaying the loan. From an accounting perspective, if the City participates in the program, we would be selling the receivable and therefore would book the funding as property tax revenues in the current year. If the City does not participate, we could not book the revenue under modified-accounting rules (as it is a long-term receivable), which will skew the financial records for years to come. And on a political level, Santa Clara County staff is strongly encouraging all cities to participate in the securitization program as it sends a clear message to the State and residents that property tax funding is essential to local governments in order to maintain operations. At this point, staff from Santa Clara County and most if not all of the cities will recommend participation in the securitization program, and are awaiting Board or Council approval. Program Participation To participate in the Proposition 1A Securitization program, local agencies are required to approve a Council resolution (Attachment A) authorizing the sale of the Proposition 1A receivables to California Communities by the end of October, 2009, and to approve and sign the Purchase and Sale Agreement (Attachment B). A synopsis from California Communities of the two documents is also attached (Attachment C). Because of the need to maintain the uniformity of documents among all participating local agencies, the Proposition 1A Securitization Program requires that the documents be approved exactly in the form provided without any modifications. The documents were reviewed by legal counsel on behalf of the League of Cities and while the City cannot rely on that review as any sort of guarantee, that review plus the fact that California Communities was created by and for local governments, and the number of local governments participating in the program all work to limit the risks to the City. Signed documents must be received by the bonding agent by November 6, 2009. FISCAL IMPACTS: · If Council approves participation in the Proposition 1A Securitization Program, Property Tax revenues will be assigned and subsequently received in a timely manner · If Council does not approve participation in the Proposition 1A Securitization Program, property tax revenues will not be received in the current year, and the Economic Uncertainty Reserve will be utilized to provide funding for operations. CONSEQUENCES OF NOT FOLLOWING RECOMMENDED ACTION: The City of Saratoga will not participate in the Proposition 1A Securitization Program ALTERNATIVE ACTION: N/A FOLLOW UP ACTION: If Council approves resolution to participate in the Proposition 1A Securitization Program, staff will complete paperwork to enroll in the program. ATTACHMENTS: Attachment A – Resolution Attachment B – Purchase and Sale Agreement Attachment C – Synopsis of Resolution and Purchase and Sale Agreement documents