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Home My WebLink About1993/06/14 - Agenda PacketAGENDA CITY OF RANCHO CUCAMONGA CITY COUNCIL ,~ .ria~ 1 Meeting June 14, 1993 - 6:00 p.m. Councll Chambers 10500 Civic Center Drive Rancho Cucamonga, California A. CALL TO ORDER Pledge of Allegiance 2. Roll Call: Buquet _, Alexander ,, Stout _, Wlllfams _, Gutierrez _. 1. FIRE DISTRICT TAX AND REVENUE ANTICIPATION PLOTE5 (TRANSI FTNANCING Ikbn J. Memo, City Ckrk of the Clty of Ranebo Cocsmoof(w, hereby certify that a true, accurate Copy o[the foredWn~ agmde was pasted aa.Tme 1[, 1889, ~e.mty-two (72) homy pefar to the maetWg per t3ovemmmt Code 64869 et 10600 CMc Curter IMve, Rancho Conmonq, CaR[otnfa. e.rr r yr nnive:na~ i.ui:nmurvve+ MEMORANDUM DATE: June 11, 1993 t; TO: Mayor and Members of the City Counol jack Lam, AICP, City Manager FROM: Jack Lam, AICP, City Mznager BY: Robert C. Do~z, Administrative Services Director SUBJECT: ~j$E DISTRICT TAX AND REVENUE ANTICIPATION NOTES TRAN Annually the Rancho Cucamonga Fire Protection District issues tax and revenue anticipation notes (TRANS). These notes are issued to provide assistance for cash flow purposes. The Fire Protection District does not receive property tax revenues for each fiscal year until approximately mid-December. The District does not have sufficient fund equity to complete a fiscal year without such short term borrowing. Accordingly, each year the TRANS aze issued anticipating revenues which are used to pay back the TRANS in December. The TRANS provide sufficient operating revenue for approximately six months beginning July 1st and ending December 31st. The uncertainty regarding the State budget, and therefore, the Fire Protection Budget, has required the bonding agency, Standard & Poors, to request a letter of commitment by the City of Rancho Cucamonga to accept the risk of reimbursing the District for the full amount of property taxes that may be transfersed by the State and which are committed via the TRANS even though we do not know the amount of property tax that might remain after State action. Note interest rating is scheduled Eor Tuesday, June 15, 1993, and the City was informed about this matter Thursday, June 10, ]993. Without such a letter of commitment, the District will drop from TRANS participation. findings The Rancho Cucamonga Fire Protection District receives approximately $5.6 million in property taxes as general fund revenue for operations. Additional revenues are derived from the two Mello-Roos Districts. The operational difficulty for the Fire District is that since it is property tax supported, revenues for property taxes are typically not paid until mid to late December. Accordingly, cash Flow for operations is six months in arrears each year. Fund equity is inadequate to allow the District to operate a full year without borrowing. In the past, the Fire Protection District has issued TRANS in anticipation of the property tax being made available six months into the year, at which time the TRANS are repaid. The second advantage to the issuance of TRANS is that the District gets pooled rates for the issuance which limits Fire District TRANS June I1, 1993 Page 2 our costs for the issuance, and the District is allowed to gain interest (the arbitrage) for the monies deposited from the TRANS. For fiscal year 1993/94, the proposed TRANS allocation would be for $2 million. This would be sufficient to carry the DisMct through the first six months while also using $500,000 of the existing fund balance of $1.2 million. The bistrict needs $2.5 million to operate for six months. dt is estimated that the existing reserve of $1.2 million will be augmented by an additional $110,000 by June 30th of this year for a net total of $1.324 million in reserve for the Fire Protection District (see attached worksheet). Sutro and Company, who is handling the issuance for the Fire Protection District, has been in contact with Standard k Poors, the rating agency for the TRANS. Sutro and Company has represented that Standard & Poors is concerned about the District's ability to repay the TRANS. Their concern is based on the May 20th revision of the Governor's budget which was released and discusses the proposition that city dependent fire districts property tax revenues will be allocated to their respective City and that the City can deade how to appropriate funds to the distriM. This situation makes it very difficult for Standard & Poors to provide a rating for any fire districts that are subsidiaries of a city agency. The City is not specifically guaranteeing repayment of the tax revenue anticipation notes, but is assuring that it wilt transfer property tax dollars received from the State on behalf of the district back to the district so that they may repay the note. In affect, however, the aty has then the obligation to reimburse $2 million to repay the TRANS due in December. Yet the City does not know what amount of property taxes will remain after any State action to make such a payment. 4T2HL1 The problem with initiating a contingent letter of reimbursement is two fold. First, the issuance of the TRANS would take place July. Accordingly, the City would need to obligate itself regardless of what the State may do to the property tax. The City may not have the revenues to pay such obligation, thereby risking default and/or loss of credit rating for both the District and the City. This uncertainty is by itself reason to not justify entering into such a letter of commitment. Furthermore, no financial officers of the City with a fiduciary responsibility to the City's General Fund can make such a recommendation for such exposure. While the City cannot provide such a letter, a plan must also be devised to insure operating revenues for the District. Fire District TRANS June 11, 7993 Yage 3 Plan of Action Fortunately, the Fire Protection District does have some reserves which will be augmented by fund balance at the end of this year to provs~9e an estimated amount of approximately $1.324 million for this emergency. While this will be insufficient to conduct the Dishict affairs for the first six months, it will nonetheless carry it through approximately September at which time both the City and the Fire District will know the status of the State's budget and it's implication to both the agencies. At that time the City Council may consider either loaning the Fire Protection District sufficient operating funds from the City's fund equity to continue operations for the remaining lwo or three months, or back up a 90 day TRANS sales depending upon what is in the best interest of both budgets. Such an agreement could be easily prepared at that time. Any loan would then be repaid through either the TRANS, property tax revenues, or through backfill utility tax revenues depending upon factors determined by the outcome of State actions. Utility taxes may restore the reserves over a period of time. Timing, then, is a major factor. There has been a lot of discussion recently regarding the reserves of the Fire Protection District; however, the bond rating service of Standard & Poors finds the fund balance for the Fire Protection District insufficient to support the issuance of the TRANS notes. If the District had reserves of y3 or $4 million the issue of commitment from the City to back the note would not have to be made. The District would have been able to sustain the TRADIS on it; own financial merit. In the future, opportunities to build a sufficient reserve should be capitalized on until such reserves negate the reed for any borrowing to operate the Agency. The only reason to do a TRANS would then be to take advantage of any arbitrage opportunities that might arise. Recommendation It is recommended that the City Council not commit to the unacceptable financial exposure of a July -December TRANS for the Fire District, and approve the plan of action as herein described. RCD/dah