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18a. Discuss CIP and Single Family Mortgage CITY OF --- I/ CHANHASSEN a I 690 COULTER DRIVE • P.O. BOX 147 • CHANHASSEN, MINNESOTA 55317 1 (612) 937-1900 MEMORANDUM 1 TO: Don Ashworth, City Manager FROM: Barbara Dacy, City Planner DATE: June 23, 1988 1 SUBJ: Discuss Capital Improvement and Single Family Mortgage Revenue Bond Program BACKGROUND The Carver County HRA has provided notice of the availability of 1 two programs for the city to participate. The first program is a single family mortgage revenue bond program and the second is a capital improvement loan program. ANALYSIS Single Family Mortgage Revenue Bond Program This program is currently being implemented in Dakota and Scott Counties . The program works as follows . The Carver County HRA, 1 on a first come, first serve basis, will provide the 30 year fixed rate mortgage loans at a rate substantially below market to local financial institutions for disbursement to first time home ' buyers . There are four eligibility requirements which are pre- sented on Attachment #1 from Miller and Schroeder Financial Inc. Note that the purchase price limitations are $93,510 for existing homes and $115,200 for new construction. These construction cost 1 limitations and the income limitations will make this program attractive for potential Chanhassen residents. ' Participation in this program would be consistent with the direc- tion in the City' s Comprehensive Plan to provide as many oppor- tunities as possible for single family home ownership at a ' reasonable means. Carver County has submitted its housing plan application to the Metropolitan Council and a public hearing will be conducted on July 26 , 1988. A total of ten million dollars is under application. This item will be presented to the HRA at ' their July meeting for their input. 1 I June 23 , 1988 Page 2 Capital Improvement Loan Program This program is similar to issuance of a general obligation bond; , however, Miller and Schroeder has indicated that a guaranteed investment contract by a highly rated bank or financial institu- tion will be arranged and that the "best possible GIC is obtained through a bidding process or other procedure designed to comply with the Internal Revenue Service market price rules" . Miller and Schroeder notes that there seven advantages to this program (Attachment #2) . However, it should be noted that the city is still governed by the statutory limits for incurring debt. The City Manager will provide an analysis of whether or not the city can participate in this program given our past bond activity. The Washington County HRA is currently participating in this program. ATTACHMENTS ' 1 . Letter from Miller and Schroeder dated April 27, 1988. 2 . Capital Improvement Loan Program description. 3 . Make Plans, A Capital Expenditure Funding Proposal dated April 25, 1988. 4 . Public hearing notice dated June 9 , 1988 . , MANAGER' S COMMENTS Single Family Mortgage Revenue Bond Program: Making this program ' available to Chanhassen residents is more of a policy question than financial. The mortgage revenue bonds proposed are exactly the same as the old "industrial revenue bonds" . When the federal government decided to cease tax exempt financing for quasi- governmental uses, almost every private (along with a number of governmental) programs were abandoned with the one exception - housing revenue bonds . The bonding process involves literally no staff involvement, has no potential for general obligation sup- port, and is backed solely by private capital. Again, a decision as to whether the City should be involved in this program is one of policy recognizing the qualification limitations set and the maximum loan amounts. Capital Improvement Loan Program: Should the City Council wish ' to pursue this program further, I would suggest that such be for- warded to the City' s bond consultant - LeFevere-Lefler Law Firm (Dave Kennedy) . I would have sent the materials to Dave and held the item off of this agenda if I could in any way support the program. I cannot support it. It is solely a means by which a bonding firm has attempted to gain additional bonding business during a period of weak and non-existent sales. I find no bene- fits in to our City, i .e. all of our issues for the past 5+ years have sold with a AAA rating and I know of no community with our bond rating which has not been able to sell bonds in the past 50 years. On the other side of the coin, I do see significant risk and, accordingly, could not see wasting the money for a legal opinion which I doubted seriously would be supported. If I am wrong and the City Council does wish to have a complete analysis made of the program, tabling is suggested to allow Mr. Kennedy to complete such. 0'k-" Toll Free Minnesota(800)862-6002 Toll Free Other States(800)328-6122 1 � Miler &Schroeder Financial Inc. Northwestern Financial Center•7900 Xerxes Avenue South•P.O.Box 789•Minneapolis,Minnesota 55440(612)831-1500 1 ' CARVER COUNTY HRA Single Family Mortgage Revenue Bond Program ' Presentation April 27, 1988 Mortgage revenue bonds are sold to provide a pool of funds which are used to acquire mortgage loans made by participating lenders to eligible homebuyers . The costs of issuing the bonds are paid by collecting commitment fees from participating lenders. These fees are recouped by lenders from buyers and sellers as individual mortgage loans close. ' The program would provide 30-year, fixed rate mortgage loans at a rate substantially below market. All loans would be FHA ' or VA insured. Downpayment and underwriting criteria for those programs will be followed. The individual loans would be pooled by a master servicer who would issue GNMA securities and sell the GNMA ' s to the program trustee . The GNMA securities act as credit enhancement for the program to attain a 'AAA' rating. In order to be eligible for the program, the applicant: 1. Must be a first-time homebuyer (cannot have had a present ownership interest in their principal ' residence in the last three years) . 2 . Must occupy the residence as their principal residence within 60 days of loan closing. 3 . Must meet income limits which are currently at $44, 770 on an adjusted basis and an absolute maximum ' income of $46, 805. 4 . Must meet purchase price limitations which are currently $93 , 510 for existing homes and $115, 200 for new construction. There are higher limits for 2 , 3 and 4-unit dwellings should the county include these types of structures. 1 Headquarters:Minneapolis,Minnesota ' Branch Offices:Solana Beach,California•San Francisco,California•St.Paul,Minnesota•Milwaukee,Wisconsin•Columbus,Ohio•Honolulu,Hawaii Mem�r of,he Secuririea Inn•.mr PnxerH,n Curp,mrinn yl I/ CAPITAL IMPROVEMENT LOAN PROGRAM The purpose of a Capital Improvement Loan Program (the "Program") is to provide participating issuers with an alterna- tive to traditional bond programs for use in financing capital improvement projects anticipated to begin in the next five years. The Program is designed to take advantage of defined current interest rates to promote development and facilitate long range planning projects . The Program is initiated by an underlying issuer such as a county, city, special authority or special district with the statutory authority to sell revenue bonds and participate in pooled financings. The Program creates an opportunity for the ' underlying issuer to be responsive to the needs of affiliated entities they may be unable to support directly. The Program can be an especially effective means to help ' smaller, non-rated issuers access reasonable financing as federal revenue sharing funds are eliminated, the new tax code begins to take effect and local governments are faced with residents demanding better services and lower taxes. As a participant, each issuer locks in the ability to finance projects at today's lower rates rather than spend time and money planning a project to be implemented in three years time when an increase in the cost of borrowing may reduce the size of the project or eliminate it altogether. The underlying issuer introduces the Program to potential participants . It is important to understand that those partic- ipants are never under any obligation to use Program funds and they assume no financial liability unless they decide to issue debt using the Program. ' Participating in the program requires only that each issuer identify any capital improvement projects they currently anticipate financing within the next five years. Information on the nature of the projects and estimated costs should be outlined. General and financial information on each partici- pant will be requested. Submitting this information does not in anyway obligate participants to use program funds or pay any fees . The Program' s structure is designed so that bond proceeds , are insured, by a bond insurance agency, allowing the bonds to obtain the most attractive interest rates . The bonds will be issued with a twenty-five to thirty year maturity. The first five years of the Program will be an Origination Period where participants can access the funds to finance capital improve- ment projects . The Program allows each participant flexibility in structuring the maturity schedule most desirable for their projects . The funds are available for a one year program, five or ten year program or any term program up to thirty years . II 47 (- ' When a participant decides that it is ready with a project the Program costs can be compared to then proceed rent market costs to determine which offering is the most ad- vantageous . Should the participant decide to use the Program it would proceed as it would under any other normal debt struc- ture, passing any necessary resolutions and entering into any ' documentation that may be required by state law. The funds to finance the project will be drawn down from the Program and only then, at the time of such draw, will the participant, as ' an issuer, assume an obligation to the Program. The amount of proceeds used plus cost of issuance fees will determine the cost to the issuer. ' Should a participant actually decide to use the Program it agrees to pay aa- 2-3% issuance fee based on the funds it draws down. Once again this fee is only paid by those receiving ' funds from the Program. Costs of issuance including attorney' s fees, trustee fees, printing costs and underwriters discount are paid when funds are drawn down. Should an issuer need less to finance a project than originally estimated the issuance fees are determined by the actual funds used. Should the issuer decide not to use any of the Program funds to finance an identified project or any project they will not be responsible ' for any costs of issuance. Beyond recognizing the potential savings between the defined Program interest rate and any future market rate it is also important to focus on the immediate advantages of using the Program rather than a more traditional financing. The bond insurance and "AAA" rating each project will carry deals effectively with market risk. The costs for each participant actually using Program funds is reduced to the extent that all costs are shared costs with other active issuers. In evaluating the potential benefits derived through participation in the Program please keep the following in mind: ' 1. The Program provides a source of low cost funds, and should interest rates rise protects capital improvement projects from higher financing fees. 2. Participating cities are under no obligation to use Program funds to finance any of their projects. ' 3 . Participating cities can more accurately predict future costs for planning the effect of projects on statutory ' debt limitations and levying taxes. 4 . Participating cities are at no financial risk for the Program until they actually draw funds; then their risk, as in any bond program, is limited to the amount of such draw. • r 1 5. The Programs bond insured "AAA" rating should be viewed favorably by bond holders. This is especially attractive for smaller non-rated issuers. 6. Participating cities have complete flexibility in structuring each projects maturity, dating and amount at the same financing cost. 7. The Program offers each participant the economic ' advantages associated with marketing larger sized issues. The greater the amount borrowed the less costly per dollar. The application process to participate in the. Program involves compiling the same type of information used for more traditional financings. The Project Questionnaire helps identify the estimated sizing, timing and maturity of capital projects, each participant is considering. In addition to the questionnaire, basic financial data is required by the bond insuring agency. A copy of your current budget, three most recent annual financial reports and a copy of your five-year capital improvement plan, should be submitted along with basic data normally included in an official statement. This Program offers the unique opportunity to each participant to plan for the future knowing at least in part what it will cost. 0114J 1 •. MAKE PLANSsm ' For Carver County, Minnesota A Capital Expenditure Funding Proposal Miller & Schroeder Financial, Inc. ' April 25, 1988 II MAKE PLANSsm I For Carver County, Minnesota I Miller & Schroeder Financial, Inc. is pleased to have the I opportunity to describe for you our proposal for financing future capital projects for Carver County, Minnesota . Since we have expended considerable time and expense in developing this program, we would appreciate your treating it as confidential . I We have developed a program which we feel will provide you an extremely advantageous method to assure the availability of U attractive financing for your future capital expenditure projects . It is called the "Miller & Schroeder program for the Advance Funding of Capital Expenditure Projects Largely II Assuring No Significant rate or cost increases" or "MAKE PLANS" . The program offers the following advantages : • You are assured of the future availability of an I attractive interest rate which is locked in today. • You are assured of the future availability of I long-term fixed-rate financing . • You are assured of the future availability of an II insured, "AAA" interest rate, even if your own credit rating should deteriorate. • You incur no significant costs until the bond proceeds I are actually used for your projects and, if you use the proceeds, the costs will be comparable to those for any bond issue. II • You are not obligated to use the bond proceeds for your projects if the projects do not materialize or if II more attractive financing is available at the time. The MAKE PLANS program allows you to more accurately plan your capital expenditure budget . The future cost of capital is I usually an unknown factor which is completely beyond control . Increases in interest rates can force you to decrease the amounts which you have budgeted for project costs or to abandon II worthwhile projects entirely. Now you can lock in the future availability of today' s attractive long-term interest rates . You can plan on tomorrow' s worst-case interest rate scenario being no worse than today' s best-case interest rates . I How To MAKE PLANS The first step to implement the MAKE PLANS program is to I identify the capital expenditure projects which you expect to fund in the future. We would recommend a five-year plan, II -1- II although a shorter period could be used. You would identify the capital expenditure projects which you expect to undertake during this period. For each project you would identify the nature and amount of the expenditure, the source of repayment and the desired time frame over which you would amortize the repayment . For example, you might estimate that a new public library will require $10 , 000, 000 in expenditures (excluding interest) commencing during 1989 and will be repaid from property taxes over a 15-year period commencing in 1990 . Similar information would be compiled and consolidated for all ' of your expected projects . In compiling this information it should be remembered that you are not obligated to follow through with all of the projects which you list . Obviously it is impossible to precisely estimate your future capital expenditures . Some ' projects may even require approval by voters at an election before they can be undertaken. There may also be other preconditions or requirements to implement the projects which are beyond your control . For purposes of this list, all that ' is necessary is your best estimate, your reasonable expectation as to your future projects . ' In consultation with you, we will review the amount of funding and amortization schedule requested by you and other public issuers in the same geographic area which you may wish to include, if any, and the other issuers ' creditworthiness , ' and determine which projects and issuers should be consolidated for efficient and economical funding through the MAKE PLANS program. As described in more detail below, we will then, in ' consultation with you, select a master issuer which can issue revenue bonds for all of the issuers and projects prior to the issuers themselves issuing bonds to fund the projects . We will ' refer herein to this master issuer as the "MAKE PLANS Overall Master Agency, " or MOMA, and its obligations as the MOMA bonds, and to you and the other issuers whose projects will be prefunded as the "Planned Undertaker of Public Projects ' Issuers, " or PUPPIs , and your and their obligations as the PUPPI bonds . We will arrange for the issuance of a guaranteed investment contract (a "GIC") by a highly rated bank or financial institution. We will assure that the best possible GIC is obtained through a bidding process or other procedure designed to comply with the Internal Revenue Service' s market price rules . The GIC will provide that the proceeds of the MOMA bonds will be invested with the GIC issuer for a period of up to five years, corresponding with the capital expenditure funding period for the origination of PUPPI bonds . The GIC issuer will pay a rate of interest equivalent to the yield on ' the MOMA bonds and the insurance premiums on the MOMA bonds . Accordingly, there will be no arbitrage profit, but the interest on the GIC will be sufficient to pay the interest on the MOMA bonds and the insurance premiums on the MOMA bonds . -2- At the time that the MOMA bonds are issued, you will have no ' obligation to repay them; initially, the exclusive source of repayment will be the GIC. With your permission, we will approach the bond insurance companies . Our goal will be for them to both approve the GIC issuer and to preapprove all of the potential PUPPI issuers as insurable credits . This will assure that the funds raised through the MAKE PLANS program will be available when needed to fund projects . We have already obtained the agreement of some of the bond insurers to accept this preapproval concept . The MOMA bonds would then be issued as long-term, fixed rate, insured obligations . The size of the issue would be sufficient to provide for the funding of all of the expected PUPPI issues . The maturity of the issue would be long enough to allow for repayment over the desired amortization schedules of the potential PUPPI issuers, with one or more term or "bullet" maturities . As your capital expenditure projects come on line and need ' to be funded, you would go through all of your regular bonding procedures . All required votes would be taken, approvals obtained, state law requirements satisfied, documents executed and opinions delivered. At the point where you would either put your bonds up for public bid, in the case of a public sale, or negotiate with an underwriter, in the case of a private or negotiated sale, you would be obligated to contact the Trustee for the MOMA bond issue. You would not be obligated to sell your PUPPI bonds to the MOMA bond trustee, but obviously would want to do so if the rates are attractive and competitive at the time. The MOMA bond trustee will be obligated to bid on your bonds at an interest rate designed to let you take full advantage of the interest rate which was pre-established on the MOMA bonds . If you sell your PUPPI bonds to the MOMA bond trustee, you would in connection with the sale become obligated at that time to pay your pro rata share (based on the ratio of the amount of the PUPPI bonds to the amount of the MOMA bonds) of the original costs of issuance of the MOMA bonds, including the bond insurance premium, as well as the costs of issuance of the PUPPI bonds . If you accept the bid from the MOMA bond trustee, your ' PUPPI bonds will be purchased. A portion of the proceeds of the MOMA bonds which had been temporarily invested in the GIC would be available to fund such purchase. When the PUPPI bonds are issued and purchased, the MOMA bond trustee will accommodate whatever amortization schedule you have selected for your PUPPI bonds by notifying the owners of the MOMA bonds of sinking fund maturities which will correspond in time and amounts to your repayment of the PUPPI bonds . This will insure parity between the bond issues so that the MOMA bonds will -3- ' always be fully secured by payments under the GIC, payments under the PUPPI bonds or some combination of the two . ' Accordingly, the insurer of the MOMA bonds will be fully secured by obligations of its approved credits : the GIC issuer and the PUPPI bonds . ' If interest rates rise, or remain constant, over the next five years , the MOMA bonds will have locked in an attractive interest rate at which you can fund your capital projects . If, ' on the other hand, interest rates fall so far that despite the economies of scale available through the MAKE PLANS program it is more attractive for you to sell your bonds to someone else, ' you are free to do so . You will have incurred no cost or obligation with respect to the MAKE PLANS program (other than your commitment to give the MOMA bond trustee a chance to bid on your PUPPI bonds and the nominal expense of your providing the information requested to set up the program) . In that case, the MOMA bonds would be fully paid and redeemed within five years from the proceeds of the GIC. ' MAKE PLANS For Minnesota ' In order to implement the MAKE PLANS program in Minnesota, it will be necessary to identify a MOMA bond issuer under state law. Based upon our discussion with bond counsel, we recommend that the MOMA bond issuer be the Carver County HRA and the Bonds be issued pursuant to Minnesota Statutes, Section 469 . 152 to 469 . 165 as amended. You and the other potential PUPPI issuers in Carver County would issue obligations to finance ' various capital projects, which obligations would be acquired by the HRA' s revenue bond proceeds (the MOMA Bonds) . We are also comfortable that other Minnesota legal ' questions concerning the structure of the transaction can be readily answered. For example, it should be possible to accommodate public bidding requirements . Why MAKE PLANS? ' The advantages of the MAKE PLANS program for you are clear. Under the program, you are protected against future increases in interest rates . You are protected against the future unavailability of long-term credit. You are even ' • protected against future adverse developments concerning your own credit rating. All these protections are provided at no risk and no significant cost to you. ' Miller & Schroeder Financial , Inc . is willing to forego current underwriting fees in order to have the opportunity to earn underwriting fees in the future when this program proves ' useful to you. Despite the fact that the program is virtually cost-free to you unless it is used, Miller & Schroeder Financial, Inc. may receive a fee at the time the MOMA bonds are issued, for arranging investments on behalf of the GIC ' -4- provider. Such fees would not be the responsibility of the MOMA issuer or the PUPPI issuers . At the times that PUPPI bonds are issued, we will be paid an underwriting commission comparable to that which you would pay anyone to purchase your bonds . We are so confident that you will find the MAKE PLANS program attractive and use it, especially in a period of rising interest rates , that we are willing to take the risk that you will not use the program and not pay us an underwriting fee. What We Need From You To MAKE PLANS , If you wish to pursue the MAKE PLANS program, we need two types of information from you. In order to size the MOMA bond issue, we need a description of the amounts, timing and pur- poses of your expected capital expenditures over the next five years, as well as the anticipated sources and timing of repay- ment . In order to group appropriate PUPPI issuers and obtain advance credit approval from a bond insurer, we also need all of the municipal credit information which you would typically provide to your bond rating agency or bond purchasers . If you have issued bonds recently based on the same repayment sources which you would be using, please provide us with the Official Statements . Please also provide us with your financial state- ments for the past three years, your current budget, a list of your largest taxpayers, employment and economic data, informa- tion on your current indebtedness, etc. Please feel free to call with any questions concerning the ' program or the required information. The contact persons are: Laura Pioske (612) 893-8955 ( ) John Wenker (612) 893-8537 Denice Holstad ( 612) 893-8530 Miller & Schroeder Financial, Inc. 7900 Xerxes Avenue, South Minneapolis, MN 55431 Telephone: (800) 328-6122 We hope you will find this program attractive and look ' forward to working with you as your investment banker to provide for your future capital expenditures . 1 0130J ' -5- IHOUSING AND REDEVELOPMENT AUTHORITY a�.0- . C OF,y�'1 T. I 308 North Broadway % 7 District 1 - Rick Murray Carver,MN 55315 z �j _ District 2- Duane Schumacher (612)448-7715 - District 3 - Peg Boyle 1 ti Ty District 4- Robert Borak f- District 5-Norman Paul-Culver.(°`'� Exec. Dir. -Scott Knudson COUNTY OF CARVER II IINOTICE OF PUBLIC HEARING ON A HOUSING PLAN AND A COUNTYWIDE SINGLE FAMILY HOUSING PROGRAM UNDER MINNESOTA STATUTES, CHAPTER 462C, AS AMENDED. II NOTICE IS HEREBY GIVEN that the Board of Commissioners of the Carver County I Housing and Redevelopment Authority (the "BRA") will meet on Tuesday, July 26, 1988, at 7:00, p.m., in the County Board meeting room at the Carver County Courthouse, Chaska, Minnesota, for the purpose of conducting a public I hearing on the adoption of a housing plan and a single family mortgage revenue bond program, each prepared in compliance with Minnesota Statutes, Chapter 462C. The program provides for issuance by the HRA of revenue bonds in an amount not exceeding $10,000,000 (the "Bonds") to undertake a program II of making or purchasing mortgage loans made to acquire single family housing in Carver County by low or moderate income persons or families. The Bonds shall be limited obligations and the Bonds and interest thereon shall I be payable solely from the revenues pledged to the payment thereof. No holder of any such bonds shall ever have the right to compel any exercise of the taxing power of the HRA to pay the Bonds, or the interest thereon, 1 nor to enforce payment against any property of the HRA except revenues of the program. All persons interested may appear and be heard at the time and place set I forth above. • June 9, 1988. IBy: Scott L. Knudson, Executive Director II II - II II 1 . __, 9 I Equal Opportunity Employer JUN 0 1988 CITY OF CHANF-,ASSt_ia 1 1 1 Ga°t 11111101r 11111mr-