Title
2023 General Obligation Bond Program Development and Report of the Fiscal Capacity Committee
Description
This report provides information regarding a potential 2023 General Obligation Bond Program, documents the findings of the City Council-appointed Fiscal Capacity Committee, and requests direction from Mayor and City Council to the General Obligation Bond Committee.
THIS ITEM IS FOR DISCUSSION AND POSSIBLE ACTION.
Report
Summary
General Obligation (GO) Bond programs provide a mechanism to fund construction and rehabilitation of City facilities and infrastructure such as parks, libraries, fire stations, streets and storm drains. Bond programs require voter approval, and cannot be used to fund operating costs like staff salaries or to fund assets that are not owned by the City. Since 1957, the City's approved GO Bond programs have totaled $4.6 billion. The most recent GO Bond program for $878.5 million was approved by voters in 2006. This 16 year gap is the longest in the City's bond program history and has resulted in a significant amount of unfunded capital needs.
Prior to the COVID-19 pandemic, Mayor and City Council began to lay the foundation for a new GO Bond program, in recognition of the City's growth, aging facilities, and needed infrastructure. After a pause to assess the economic environment, efforts resumed over recent months by the Mayor and City Council-appointed Fiscal Capacity Committee. The committee has recently completed its work and report on its findings. On June 1, Mayor and City Council appointed the 2023 GO Bond Committee in preparation for the next steps towards bond program development.
REPORT OF THE FISCAL CAPACITY COMMITTEE
In March 2019, the Mayor and Council appointed a Public Safety Bond Executive Committee (Attachment A) to formulate recommendations for a potential November 2020 public safety bond election.
In October 2019, Mayor Gallego appointed a Public Safety Bond Fiscal Capacity Committee (Attachment B) (“the Committee”) to identify the financial parameters for any bond program and the capacity for operations and maintenance, and to report its findings to the City Council. The appointed Committee includes:
• David Krietor, Chair
• Ron Butler
• Deb Fisher
• MaryAnn Guerra
• Hope Levin
Committee meetings were held in December 2019 and January 2020 to formulate recommendations; however, the City paused these efforts as a result of uncertainty stemming from the COVID-19 pandemic. Subsequently, the City acquired the existing building at 100 W. Washington St. to ultimately replace police headquarters - addressing the most critical public safety need - and the Mayor and Council have expressed support for a broader scope of projects for a future GO Bond program. The Committee was renamed the Fiscal Capacity Committee and asked to assess the City’s capacity for a potential November 2023 bond program, irrespective of its scope.
Six total Committee meetings were held:
• Dec. 13, 2019
• Jan. 10, 2020
• Jan. 17, 2020
• Jan. 24, 2022
• Jan. 31, 2022
• Feb. 7, 2022
This report summarizes the information presented to the Committee by staff in January and February 2022, and the Committee's recommendations. Associated staff-provided materials and meeting minutes are transmitted as Attachment C.
Summary of Considerations
The principal and interest payments on GO Bonds are typically backed by secondary property taxes. Operations of City facilities are typically funded by General Funds and Special Revenue Funds.
The City's financial ability to implement a GO Bond program is dependent upon:
• The amount of secondary property tax revenue projected to be available to fund additional GO Bond principal and interest, and when it will be available.
• Whether the City can fund additional operations and maintenance costs associated with new systems and facilities.
• Implications on the City’s credit ratings.
• Constitutional debt limits.
Property Tax
The City levies a primary and a secondary property tax. The primary property tax is a revenue source to the General Fund, the Parks Fund, and the Library Fund. The City Charter limits the primary property tax rate to $1.00 per $100 net assessed value, plus an amount restricted to Library use. The Arizona State Constitution places an additional restriction on the City's primary property tax, calculated by formula. Based on the provisions contained in the City Charter and State Constitution, the City’s primary property tax levy is at its maximum allowable levy. The Fiscal Year 2021-22 primary property tax rate is $1.3055 per $100 net assessed value, generating a primary property tax levy of $193 million. Staff's property tax model assumes that the primary property tax levy will continue to be maximized.
The secondary property tax is a revenue source to pay principal and interest on general obligation bond debt. The City's Fiscal Year 2022-23 secondary property tax rate is $0.8141 per $100 net assessed value, generating a secondary property tax levy of $120 million. Current secondary property tax revenues are below annual debt service on outstanding general obligation bond debt; the remaining debt service is currently being paid by an accumulated general obligation bond reserve fund. As a result of a 2017 state law, that reserve fund is legally required to be reduced to 10 percent of annual principal and interest by the end of Fiscal Year 2022-23. Subsequent to Fiscal Year 2022-23, annual secondary property tax revenues will effectively be the sole funding source for annual debt service.
The amount of secondary property tax generated each year for a given tax rate is a function of:
• Annual appreciation on existing property
• New construction
• Assessment ratios established by the state legislature
The taxable value of existing property is the lesser of its full cash value determined by the County Assessor, or an amount 5 percent greater than the prior year's taxable value - this is referred to as limited property value. Citywide, full cash value is approximately 47 percent higher than limited property value. This provides a buffer against an economic downturn.
At its Feb. 7, 2022 meeting, the Committee endorsed the following valuation model assumptions:
• Annual net appreciation on existing property of 2.0 percent through Fiscal Year 2025-26 due to reductions to commercial property assessment ratios approved by the Legislature.
• Annual net appreciation on existing property of 3.0 percent thereafter.
• Annual year-over-year growth on new construction of 2.0 percent.
• No change to legislatively-determined assessment ratios after Fiscal Year 2025-26.
The resulting model was used to determine projected primary and secondary property tax rates for various bond program scenarios. The Committee reviewed various stress-test scenarios in addition to these baseline assumptions and determined that realistic stress-test scenarios did not materially impact the City’s fiscal capacity.
Operations and Maintenance
The primary property tax rate is currently maximized and is fully used to pay for existing programs and services. The primary property tax rate could therefore not be used as a source of new operations and maintenance revenue for new systems and facilities, absent a corresponding reduction in existing programs and services. The City’s ability to absorb new operations and maintenance costs in the future is indeterminate. At its Feb. 7, 2022 meeting, the Committee recommended the City Council minimize new operations and maintenance commitments for bond program projects.
Program Scope
As program content was outside the scope of the Committee's charge, the Committee did not review the magnitude or merit of identified public safety capital needs or non-public safety capital needs. The Committee recommends that City management review all public safety and non-public safety capital needs prior to convening the GO Bond Program Executive Committee.
Ballot Timing
The Fiscal Capacity Committee unanimously recommended the City Council develop a bond program for a November 2023 election.
Tax Rate Informational Requirements
Projected tax rates relayed in this report are based on the valuation assumptions endorsed by the Committee.
State Statute places different restrictions on assumptions conveyed in materials distributed to voters. For the first five years, growth assumptions in voter materials cannot exceed the average appreciation in the past ten years; thereafter, growth assumptions in voter materials cannot exceed 20 percent of the average appreciation in the past ten years. Modeled growth assumptions endorsed by the Committee for the first five years are functionally equivalent to those required by statute, while modeled growth assumptions thereafter are substantively higher. As a result, projected tax rates conveyed to voters in later years will be overtly higher than those the Committee believes are likely. Nevertheless, the statutorily required assumptions do not materially change the City’s capacity for a November 2023 bond program.
Program Sizing and Bond Sale Timing
After reviewing property tax revenue models and remaining debt service on existing general obligation bonds, at its meeting on Feb. 7, 2022, the Fiscal Capacity Committee unanimously recommended the City Council develop a $500 million bond program for a November 2023 election.
Absent unanticipated Legislative changes, or severe economic changes, the Committee determined that a $500 million bond program can likely be supported without any increases to the current secondary property tax rate of $0.8141 per $100 of net assessed valuation. Peak debt service is not anticipated to rise substantially beyond the status quo maximum annual debt service of $155 million. A bond program of this magnitude is not expected to adversely impact the City’s bond ratings.
Further, the Committee advises this approach strategically positions the City for subsequent bond elections in five year increments with values of approximately $500 million each. Financial models indicate that routine bond programs of this magnitude will continue to be sustainable without any material increases to property tax rates, assuming no significant legislative changes.
2023 BOND PROGRAM DEVELOPMENT
The City's bond processes have traditionally been community-driven. Accordingly, on June 1, the Mayor and City Council appointed a citizen's 2023 GO Bond Committee and eight subcommittees:
• Arts and Culture
• Economic Development and Education
• Environment and Sustainability
• Housing, Human Services and Homelessness
• Neighborhoods and City Services
• Parks and Recreation
• Public Safety
• Streets and Storm Drainage
City staff have begun the process of identifying critical unfunded capital projects. Subject to the approval of the Mayor and City Council, the Bond Committee and program-area subcommittees would be tasked with reviewing these projects, and recommending funding priorities based on the needs of the community. Bond Committee and subcommittee meetings would be held in public, with opportunities for citizens to provide input both in person and virtually, from August through November. The Bond Committee would provide recommendations to the Mayor and City Council at the Policy Meeting on Dec. 6, 2022. The Mayor and City Council would ultimately determine bond propositions and corresponding values to be proposed to voters in the November 2023 General Election. The findings of the Fiscal Capacity Committee are recommended as the financial framework for the Bond Committee.
Community Engagement and Next Steps
As mentioned earlier, community input is a priority to ensure bond projects reflect the needs of Phoenix residents. Staff has developed a robust communications and engagement plan, which provides multiple ways for residents to provide feedback on proposed bond projects. The plan includes the following:
- Dedicated GO Bond website to include instructional video
- GO Bond interactive tool (available on dedicated website) to allow residents to prioritize and recommend projects
- Press releases/PHX Newsroom
- Social media outreach
- Targeted emails
- Radio ads and interviews
- Print ads - Arizona Republic, AZCentral, AZ Informant, La Voz, Prensa
- Grocery TV ads
- Flyer distributions via multiple City departments
- PAYS Newsletter
Additionally, community input will be solicited at all bond committee meetings, which will be open to the public and residents will be able to attend in person or virtually to request to speak or provide written comments. Bond Committee meetings are scheduled to take place beginning in August 2022 though early November 2022. Information about bond committee meetings, including the schedule and instructions on how to participate will be made available on the GO Bond dedicated website in July 2022 prior to committee meetings commencing in August 2022.
Recommendations from the GO Bond Executive Committee are tentatively scheduled to be presented to City Council in December 2022. Upon Council approval of bond propositions, staff will bring the form of the ballot and publicity pamphlet materials to the Council for approval in the Spring 2023 in preparation for the November 2023 General Election.
RECOMMENDED ACTION
Consistent with the recommendations of the Fiscal Capacity Committee, staff recommends the Mayor and City Council direct the 2023 GO Bond Committee to:
• Review citywide unfunded capital needs, excluding Aviation, Phoenix Convention Center, Public Transit, Wastewater, and Water facilities, but including cultural facilities managed by the Phoenix Convention Center;
• Exclude project proposals that would result in net new ongoing operating costs, except in critical cases;
• Identify the highest priority unfunded capital needs totaling $500 million for a November 2023 bond election; and
• Report findings and provide recommendations to the Mayor and City Council by Dec. 6, 2022.
Department
Responsible Department
This item is submitted by City Manager Jeffrey Barton, and the Budget and Research and Finance departments.