1. 1998 Bond Sale/Springsted
85 E. SEVENTH PLACE SUITE 100
SAINT PAUL, MN 55101-2143
612-223-3000 FAX, 612-223-3002
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May 13, 1998
SPRINGSTED
Public Finance Advisors
Mr. Donald Ashworth, Manager
City of Chanhassen
P.O. Box 147
Chanhassen, MN 55317-0147
Re: Redevelopment Tax Increment Financing (TIF) District No.1 (Downtown)
Estimate of Financial Status
$-
Various State legislative actions and related property tax situations have required a review of
the current and estimated future financial status of the City's major TIF district, the Downtown
TIF District. This review was conducted by City staff; Kennedy & Graven, the City's legal
counsel for TIF and debt issuance; Tautges and Redpath, the City's auditor; and Springsted,
the City's financial advisor. The review is now complete, and this report summarizes its
findings. This report also summarizes certain courses of action that the City may wish to
consider relative to this District.
Dear Mr. Ashworth:
BRIEF HISTORY OF DOWNTOWN DISTRICT
The District is a "pre-1979" district, which means it was established prior to 1979 and is subject
to particular restrictions under statute. As a redevelopment district, it can receive TIF income
for a considerable time period. Current statute now restricts the collection of TIF income after
2000 to only that sufficient to pay debt service obligations outstanding prior to April 1, 1990, or
refundings of those issues. The statute further restricts that the collections will, in no event,
continue beyond 2009.
Over the last 20 years, the City has used the resources of this District to redevelop the
downtown, to construct related public infrastructure, and to provide development incentives on
both sides of Highway 5.
Over the last three years, a number of events relating to the state property tax system have led
to decreases in the amount of annual TIF revenues. Of particular importance are the following:
. Commercial-Industrial property tax relief brought about by state law changes to the tax
classification system, specifically from 4.6% to 3.5% (a potential reduction of 24% in tax
payments for this property class). This reduction has and is occurring over a multi-year
period.
. Increased state funding of education, leading to reduced reliance on the property tax.
. In addition, certain major commercial developments in the District have been successful
in appealing their market valuation downward or have been tax delinquent.
SAINT PAUL, MN . MINNEAPOLIS, MN . BROOKRELD, WI . OVERLAND PARK, KS . WASHINGTON, DC
IOWA CITY,IA
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City of Chanhassen
May 13, 1998
Page 2
These conditions singularly, and particularly in combination, have generallly caused the need
for this comprehensive review of this District's estimated future cash flow as to its capacity to
meet its scheduled obligations.
METHODOLOGY
The basic approach is to estimate the cash position of the total District activity from now
through the District's termination in 2004. To make these estimates, the study starts with a
beginning cash position, here January 1,1997 (last available audited date), then adds a variety
of revenues and subtracts a variety of expenditures.
The largest sources of revenue are from TIF revenues and from "Agreement Income."
Agreement Income results from an existing contract with Carver County dealing with the cost
sharing of certain road improvements. The two major expenditure categories are debt service
and developer incentives. Developer incentives are rebates of TIF revenues paid by specific
property owners based on contracts regarding their initial construction.
In addition to these four major categories, a large number of revenue and expenditure
categories exist but play a comparatively smaller role. City staff can best address exact
explanation of each category's origin, amounts, and impact.
The District has two major factual conditions that become aspects of this study. First, the
beginning cash position as of January 1, 1997 was $379,851. Second, as of December 31,
1997, the City had unfunded construction costs of $1.7 million.
The study presents two cash flow estimates. The first presents estimates without the impact of
the two major legislative changes. The second presents estimates given these and other
referenced changes, as well as after restructuring the City's debt service through refunding of
those issues which either legally or financially benefit the situation. This debt restructuring is a
summary of a more extensive effort at reviewing a large number of options and after legal
counsel has reviewed all statutory and contractual possibilities. As none of these efforts
completely remedy the situation, the objective of the refunding exercise is to shift the major
cash flow problems from the near term to spread them out over a longer repayment period.
The effect of spreading out principal payments over a longer period is to increase overall
interest costs.
ASSUMPTIONS
This analysis uses a large number of assumptions, anyone of which can markedly change the
conclusions. A listing of a portion of the assumptions follows.
General Assumptions
· No additional changes in statutory property tax classification ratios.
· No additional expenditures from this District other than those contained in the estimates.
· No additional changes in the property tax system or in the financing of school districts,
counties and cities which would lead to reductions in reliance on the property tax.
. No increases or decreases in the market values of properties within the District from
those payable in 1998.
City of Chanhassen
May 13,1998
Page 3
· A tax payment delinquency rate of 5% continues for the term of the District.
· No change in the interpretation of the Agreement and the relevant statutory provisions.
· All revenue collections and expenditure disbursements occur in the timeframes and in
the amounts estimated.
· TIF revenues are based on taxes payable in 1998, then factored down to the new
statutory provisions. The factoring for the new 1998 change is downward 10% based on
a 12.5% reduction in the commercial-industrial classification ratio, in part offset by
assumed slight increase in the property tax rate.
· TIF revenues for now occurring and future development, not contained in the above pay
1998 amounts, are separately listed as "Additional Tax Increment."
· Delinquent tax revenues are City staff estimates of currently delinquent taxes.
· Sale of property is a City staff estimate of the proceeds of existing City parcels in the
District.
· Loan Program is a 1997 receipt from Market Square.
· HRA Administration is the estimated annual cost per City policy.
· Excess Referendum Payments reflect transfers to the Chaska School District under an
existing agreement regarding certain TIF revenues. The City staff is recommending that
under the terms of the agreement no such TIF revenues exist, as such no payments are
warranted.
RESULTS OF ANALYSIS
This analysis first covers the estimated future cash flow of the District prior to the legislative
changes. Exhibit 1 shows the results of this first portion of the analysis.
While this exhibit is prior to legislative changes, it does reflect the impacts of several major
commercial-industrial property owners who have successfully appealed to reduce their property
valuations. This exhibit and the next assume the City finances its current $1,700,000
construction deficit in 1998, with repayment occurring through 2004 from first TIF income and
then Agreement income.
Exhibit I estimates that the City moved into a negative cash position in 1997, with such position
moving lower to reach a maximum negative cash position of $2,680,520 in 2000. The District
potentially recovers in 2004, with a positive cash position of $1,636,101.
The second portion of the analysis covers the estimated future cash flow of the District after the
legislative changes and with the potential of refunding certain outstanding bond issues to shift
cash flow deficiencies to later years. The outstanding issues, which are potential candidates for
refunding, are the Taxable G.O. TIF Bonds, Series 1993A and the G.O. TIF Bonds, Series
1995A. These are the only outstanding issues, which under State and federal tax laws can be
advance refunded. It must be clear that the purpose of refunding these issues is to delay cash
outflows to later years. This is accomplished by delaying the payment of principal, which in
itself leads to greater interest costs. Therefore, these potential refundings ultimately would
result in higher overall cash outflows.
City of Chanhassen
May 13, 1998
Page 4
Exhibit 1/ estimates that the City has a maximum negative cash position of $2,840,582 in 2004,
with the difference being that the cash position is estimated to be positive through 2002.
The causes for these cash position changes are predominately twofold. First, recall that Exhibit
I estimates a condition prior to state actions which, if the estimates of TIF increment are
compared over the period 1997-2000, represents a revenue loss of approximately $2,187,000.
The state actions also reduce the Agreement Income by approximately $1,135,000 over the
term based on the current contract calculation. Second, Exhibit 1/ reflects the refunding of two
outstanding issues, with previously described overall higher interest rates.
CONCLUSIONS
The City has several options in addressing this estimated situation. These options include
actions directly within its scope, as well as those involving other governmental entities. The
following are not necessarily an exhaustive listing but do represent choices affecting either
revenues or expenditures. These options are put forth from purely a financial viewpoint, without
consideration of other factors.
Those options which are more under the City's direct control would include:
· evaluating the appropriateness of the refundings to reduce the magnitude of the
near term cash positions;
· evaluating the potential of funding all or a portion of the current construction cash
deficit from other sources, if available;
. determining if any other properties in the District could be developed or developed to
a greater extent to generate more TIF income;
. monitoring the property tax valuation appeal process to appropriately contest
changes; and
· evaluating the non-debt service expenditures as to amount and duration.
Those options, which would include other govemmental entities or use of new statutory powers,
are:
· renegotiating the Agreement with Carver County as to the amount and duration of
Agreement income;
· evaluating the City staffs recommendation on the excess School District referendum
payment; and
· evaluating the potential use of new statutory powers enacted by the Legislature in
anticipation of the adverse impacts on TIF districts created by their other actions.
The Legislature enacted three potential remedies. We understand these remedies must be
acted upon in sequential order as described herein. One legislative action permits the sharing
of TIF revenues among districts if available TIF revenues exist and the deficiency can be
demonstrated to result from these legislative actions. Another action permits the establishment
of a special property-taxing district within a deficient TIF District under a number of conditions,
such as the existence of developer or assessment agreements. Finally, failing the above
City of Chanhassen
May 13, 1998
Page 5
remedies, the state has established a special fund, but its resources are very limited given the
potential problems that exist statewide.
Numerous cities in Minnesota are facing similar situations in their TIF districts as a result of the
state actions in the property tax area. Springsted and the other members of the Review Team
trust this analysis provides the City with the information necessary to respond to these state
actions.
Springsted, as well as all other members of the Review Team, are prepared to discuss any
aspects of these estimates, as well as the appropriateness of pursuing those listed above and
any other options.
Respectfully,
(-J¿ \l\-J I), \ \,-~
"-- ¡<T\.IC\ \ r<:_~ì.-' \ ,,,,"Ç" J's.-
- avid N. MacGillivray, Principal ,/'
Client Representative
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