Financing Panel Association of Washington State Public Facilities Districts September 28, 2017

1. Financing PanelAssociation of Washington StatePublic Facilities Districts September 28, 2017 Marc Greenough, Foster Pepper PLLCAlan Dashen, Northwest Municipal AdvisorsSusan Musselman, PFM Financial AdvisorsRob Shelley, Piper Jaffray & Co.

2. Agenda • EHB 1201: Marc Greenough, Foster Pepper • Financing Considerations: Alan Dashen, Northwest Municipal Advisorsand Susan Musselman, PFM Financial Advisors • Market Update: Rob Shelley, Piper Jaffray & Co. • Post-Issuance Compliance: Marc Greenough, Foster Pepper

3. EHB 1201 • Passed House of Representatives 89-9 • Passed Senate 40-7 • Effective Date July 23, 2017

4. EHB 1201 • Amends RCW 82.14.390 and RCW 82.14.485 • What is the tax? • Who can impose the tax? (Section 1) • For how long may the tax be imposed? (Section 4) • For what purpose may the tax be used? (Section 5)

5. What is the tax? • A local sales and use tax of 0.033 percent • Offset against the state sales tax of 6.5 percent • In effect, a state subsidy that is a “tax expenditure”rather than a cash outlay

6. Who can impose the tax? Currently, four types of PFDs: • A PFD created before 7/31/02 under chapter 35.57 RCW or 36.100 RCW that commenced construction of a new regional center or improvement or rehabilitation of an existing regional center before 1/1/04 • A PFD created before 7/1/06 under chapter 35.57 RCW in a county or counties in which there were no other PFDs on 6/7/06 and in which the population of the PFD > 90,000, that commenced construction of a new regional center before 2/1/07

7. Who can impose the tax? Currently, four types of PFDs (continued): • A PFD created under RCW 35.57.010(1)(d)[a city located in a county with a population> 1 million, when the city has a total population< 115,000 but > 80,000, that commenced construction of a regional center prior to 7/1/08] • A PFD created before 9/1/07 under chapter 35.57 RCW or 36.100 RCW in a county or counties in which there were no other PFDs on 7/22/07 and in which the population of the PFD > 70,000, that commenced construction of a new regional center before 1/1/09 or before 1/1/11 (if the county was designated a disaster area in 12/07)

8. Who can impose the tax? • EHB 1201 does not change who can impose the tax • EHB1201 clarifies that the first type of PFD that may impose the tax (a PFD created before 7/31/02 that commenced construction of a new regional center or improvement or rehabilitation of an existing regional center before 1/1/04) must have commenced construction, improvement or rehabilitation of at least one project – not all projects – before 1/1/04 • Legislative approval of an earlier Attorney General’s Opinion and Thurston County Superior Court ruling

9. Who can impose the tax? • The Purpose of Post-Issuance Compliance Policies and Procedures • Review of Private Use Rules • Identifying Private Use Issues • Review of Arbitrage Rebate Rules • Identifying Arbitrage Rebate Issues • Summary of Compliance Tips

10. For how long may the tax be imposed? Currently: • The earlier of: (1) when the bonds issued for the construction of the regional center and related parking facilities are retired and (2) 25 years after the tax is first collected

11. For how long may the tax be imposed? EHB 1201 changes this to: • The earlier of: (1) when any bonds issued to finance or refinance the construction, improvement, rehabilitation, or expansion of the regional center and related parking facilities are retired and (2) 40 years after the tax is first collected

12. For how long may the tax be imposed?

13. For what purpose may the tax be used? Currently: • Purposes set forth in RCW 35.57.020: • To acquire, construct, own, remodel, maintain, equip, reequip, repair, finance, and operate one or more regional centers • Must be matched with an amount from other public or private sources equal to 1/3 of the tax collected

14. For what purpose may the tax be used? Currently: • “Regional center” means a convention, conference, or special events center, or any combination of facilities, and related parking facilities, serving a regional population constructed, improved, or rehabilitated after 7/25/99, at a cost of at least $10 million, including debt service • “Regional center” also includes an existing convention, conference, or special events center, and related parking facilities, serving a regional population, that is improved or rehabilitated after 7/25/99, where the costs of improvement or rehabilitation are at least $10 million, including debt service

15. For what purpose may the tax be used? Currently: • A “special events center” is a facility, available to the public, used for community events, sporting events, trade shows, and artistic, musical, theatrical, or other cultural exhibitions, presentations, or performances

16. For what purpose may the tax be used? EHB 1201 does not change the purposes for which the tax may be used

17. For what purpose may the tax be used?

18. What is the bottom line? • When the tax is extended for 15 years • Each $10,000 per month collected for 180 additional months = $1.8 million • Discounting at 5% reduces the present value by approximately half

19. Action items to consider • Review implementing legislation • Review notice to State Department of Revenue • Review undertakings to provide continuing disclosure • Review Contract Clause protections • Review capital plans • Review financial policies

20. Financing Considerations • New legislation allows PFDs to extend debt or borrow new money for an additional 15 years. • Extension of State Sales/Use Tax Credit Presents Opportunities and Challenges • Opportunities • Extend existing debt to lower annual debt service payments • Borrow additional funds for new projects or renovations • Challenges • Regulations related to financing & refinancing outstanding bonds • Adequacy of security for additional financing • City/County Guarantees • Rating considerations

21. Why Extend Debt? • Lower annual debt service payments • Lock in extended Sales/Use tax funds • Restructure existing debt

22. Refunding of Outstanding Debt • Bond issues have a call date • Bonds cannot be repaid until that date • PFD can refinance in advance of the call date • Called an Advance Refunding • PFD can wait until the call date • Called a Current Refunding • An advance refunding cannot be re-advance refunded with tax-exempt bonds

23. Advance Refunding • How an “Advance Refunding” works • New bonds are issued to replace outstanding bonds • Funds are placed in an escrow account until the call date • At the call date outstanding bonds are paid off • Disadvantage is that this is less efficient than a current refunding • The longer the time between refunding and the call date, the higher the cost • Before proceeding check the benefits of waiting • All other things being equal, waiting until the call date results in higher savings • If interest rates go down, savings could be higher • If interest rates go up, savings could be lower

24. Borrowing for Additional Projects • PFD needs to have bonds outstanding for existing project to keep State Sales/Use tax rebate • Before borrowing for a different project extend debt on existing project to keep rebate • PFD has ability to structure new debt to meet revenue sources • “Wrap” around existing debt • Backload debt by assuming a growth rate in Sales/Use Taxes • Use caution in determining growth rates, and/or the % of projected revenue to commit

25. Combining New Debt with Outstanding Debt

26. Bank Loans and Bond Issues • Prior to proceeding consider if a bank loan is lower cost than proceeding with a bond issue • Bank loans are generally less work • Bank loans are sometimes more cost effective, particularly for shorter terms (i.e. 10 year or less) and for smaller borrowing amounts • Recommend you shop for bank proposals and ensure banks know municipal market • Given the term of most PFD Bonds, it is likely that a bond issue will be more cost effective, but ask

27. Bond Ratings • Bond issues typically are rated by one or more rating agencies: • Moody’s Investors Service • S&P Global Rating • Fitch Ratings • Higher ratings result in lower interest and debt service • Factors to consider • Bonds issued by a City or County (or guaranteed by a City or County) may result in a higher rating and lower debt service • The more speculative the revenues, the lower the bond rating • Typical Rating Factors • Tax Base & Pledge • Legal Structure • Financial Metrics

28. Bond Ratings Moody’sS&P Global Aaa AAA Aa1 AA+ Aa2 AA Aa3 AA- A1 A+ A2 A A3 A- Baa1 BBB+ Baa2 BBB Baa3 BBB1

29. Contingent Loan Agreements • Each PFD has unique relationship with the entity that formed them • City • County • Combination • “In Bond Issuance of Greater Wenatchee Regional Events Center” • Court held that contingent loan agreement is debt of City • State created legislation, among other things, requiring Feasibility Reviews

30. Other Considerations • Potential limitations in Charter and Bylaws • Terms and conditions of Interlocal Agreements • Operating agreements • Other agreements with third-parties • Agreements regarding dissolution and/or disposition of facilities

31. Interest Rates • The Federal Reserve raised the target range for its federal funds by 25 basis points to 1.00 percent to 1.25 percent, during its June 2017 meeting. The June 2017 adjustment was just the fourth change to the target range since December 2008’s decrease to 0.0 percent to 0.25 percent.

32. Recent Economic Highlights • August Non-Farm Payroll released on 9/1 was +156k jobs versus an expectation of +180k. The national unemployment rate remains at 4.4%. • Inflation for the 12 months ended in August 2017 was 1.9%, below the Fed’s target of 2.0%. Removing food and energy the figure was 1.7% which is unchanged for the fourth month in a row. Continued monitoring of inflation will be important as a leading indicator of FOMC policy and interest rate direction. September CPI data is scheduled to be release on Friday, 10/13. • Notes from the FOMC meeting concluded on 9/21 indicate that the Fed’s outlook on the economy remains positive. They reiterated the possibility of one more rate increase in 2017 which somewhat surprised the market. Expectations for a December rate hike rose to 67% following the release of the FOMC statement. The Fed Funds rate target remains 1.00% to 1.25% • The Fed is moving forward with plans to “unwind” its balance sheet. The widely expected view is that this will cause bond yields to rise and equity prices to fall. However, during three rounds of quantitative easing the yield on the 10yr Treasury note moved higher, as QE boosted expectations of growth and inflation. With the Fed now unwinding its balance sheet the reverse may happen with rates potentially moving lower. • The next FOMC meeting is scheduled for 10/31-11/1.

33. Fed Funds Increase Probability

34. Tax-Exempt “AAA” MMD Interest Rates

35. Bond Rating Overview • Like your personal credit rating, a higher credit rating for a local government results in a lower borrowing cost. • With bonds, investors view the credit rating as an indication of risk (i.e. likeliness to default on payments). A higher bond credit rating results in lower interest rates because investors feel this is an indication of reduced risk. Therefore, the higher the District’s credit rating, the lower the interest rate on the bonds. • Historically, a PFD would pursue an underlying credit rating once it could qualify in the “A” category. If an entity does not have an underlying credit rating, it is referred to as “non-rated.”

36. PFD Ratings

37. Contingent Loan Agreements • Investors tend to like CLA’s • Who is providing the CLA? • More security for debt service repayment • Interest rates are generally lower for issues with CLA’s • More security means higher credit ratings • “Host” entity typically has a higher rating than PFD • CLA providers take additional risk • May have to make payment if PFD revenues fall short • Counts against debt capacity – may reduce flexibility to pay for other projects

38. Bond Sale Process - Negotiated • Prepare for the bond sale • FA/Underwriter works with the District to structure debt service; review the plan with the Board. • FA/UW/BC prepares the official statement; financing team reviews document. • Bond counsel prepares the bond resolution and legal opinion; resolution adopted by Board. • Appoint an underwriter or conduct RFP process. • The official statement is mailed/posted to prospective investors about one week prior to pricing. • “Price” the bonds • The order period runs for about one hour. • Underwriter presents the offer to purchase the bonds to District staff. • Staff gives the verbal award that the bond sale meets the District’s financing goals. • A staff member signs the bond purchase agreement. • After the bond sale • Bond counsel finalizes the closing documents. • The official statement is finalized and circulated to the investors. • Underwriter wires money to the District/Escrow Agent upon bond closing - approximately two weeks after pricing. • The District completes the project/bonds are refunded

39. Bond Sale Process - Competitive • Prepare for the bond sale • Financial advisor works with the District to structure debt service; review the plan with the Board. • Financial advisor prepares the official statement; District and bond counsel review documents. • Bond counsel prepares the bond resolution and legal opinion; resolution adopted by Board. • The official statement is mailed to prospective investors about one week prior to pricing. • “Price” the bonds • Notice of Sale is included in POS which includes bid parameters. • If an underwriter wants to place a bid, they will review the POS and Bid Form and register on IPREO. • At a predetermined date and time, underwriters will submit bids on IPREO. • The lowest bidder will purchase the bonds. • District staff signs certificate of award agreeing to terms of sale. • After the bond sale • Bond counsel finalizes the closing documents. • The official statement is finalized and circulated to the investors. • Underwriter wires money to the District/Escrow Agent upon bond closing, approximately two weeks after pricing. • The District completes the project/refunds the bonds

40. Purpose of Post-Issuance Compliance Policies • Revised Form 8038-G • Line 43: Written procedures relating to “remedial action” • Line 44: Written procedures relating to compliance with arbitrage rules

41. Purpose of Post-Issuance Compliance Policies • Provide Continuity of Attention • Allow the policies and procedures to survive employee turnover during the life of the bonds • Prevent or Avoid Violations • Promote Early Discovery of Violations • Regular review of federal tax law compliance • Correspond with required EMMA filing deadlines?

42. Review of Private Use Rules • No more than 10% of the proceeds of the bonds, measured on an annual basis and averaged over the life of the bonds • No more than 5% of bond proceeds if the use is unrelated to the governmental purpose of the bonds • More private business use may be allowed if no payments are made with respect to the use or if only de minimis payments are made (10% private payment test) • Cap of $15,000,000 for all private business uses

43. Review of Private Use Rules • For buildings, private business use generally is measured by percentage of space used in private business use averaged over life of bonds • May allocate equity to portions of building used in private business use • Management contracts that are not qualified can result in private business use of the entire building

44. Identifying Private Use Issues • Examples of arrangements that can result in private use include: • Private Ownership • Nonqualified management and service contracts • Leases, including cell tower leases • Naming rights • Preferential rates for certain customers • Use by federal government and nonprofits on preferential basis • Certain “take” and “take or pay” contracts for “output facilities” • Keep records of any contracts providing special legal entitlements to use property

45. Identifying Private Use Issues • Examples of arrangements that are not private use include: • General public use • Use by a person not engaged in a trade or business • Use by another state or local governmental entity • Use according to a uniformly applied rate schedule • Qualified management and service contracts • Certain short-term uses • Incidental use, such as advertising displays and vending machines

46. Identifying Private Use Issues • Educate users of property • Includes persons with authority to propose: • Any lease of the property • Operation or the property under a management or service contract • Any sale or other disposition of all or any part of the property • Involve legal counsel when new use arrangements proposed • “Was this property financed with tax-exempt bonds?”

47. Review of Arbitrage Rebate Rules • Arbitrage and Rebate rules apply to: • Earnings on investments of bond proceeds prior to being spent, and • Earnings on investments of certain revenues set aside to pay bonds • Rebate excess of amount earned over what would have been earned if invested at bond yield. • Generally not applicable since 2008, but future investment rates could be higher – e.g., on reserve fund investments

48. Identifying Arbitrage Rebate Rules • Maintain records for life of the bonds (including refunding bonds) plus three years • Records to be maintained include • Bond Transcript • Purchases and sales of investments made with bond proceeds and receipt of earnings on those investments • Records showing how bond proceeds were spent: purchase contracts, construction contracts, invoices, and records of “allocations”

49. Summary • Private Use Tracking and Post Issuance Compliance Procedures • Educate users of property • Keep post-issuance policies in places that assure continuity • Include responsibilities in job descriptions • Ensure both periodic and timely reviews • Arbitrage and Rebate • Spend bond proceeds first on capital improvements within three years • Deplete debt service funds annually • Reserve funds are subject to rebate (unless small issuer exception applies) • Keep records of expenditures and investments for life of the bonds (longer than issuer’s general record retention period)

50. Securities Law • Rule 10b-5: • Full and fair disclosure • Rule 15c2-12: • Official statement • Continuing disclosure