2022-05-17 CC Agenda SPC - Additional Information - Attachment D - New Tax Revenue Financing OptionswKNN
public finance
Date: January 28, 2022
To: Joseph Lil io, Director of Finance
The City of El Segundo
From: Mark Young, Managing Director
Larry Lom, Vice President
KNN Public Finance
Re: New Tax Revenue Financing Options
The City of El Segundo (the "City") is considering up to $100
million in financing for capital and infrastructure needs. The City
has also prepared for a study session of City Council a
memorandum, dated October 19, 2021, identifying potential
revenue enhancement options (the "Revenue Enhancement
Memo").
The potential new tax revenues could be the source of repayment
and may include ad valorem property taxes, Mello -Roos special
taxes, sales tax, utility users tax, parking tax, and cannabis tax.
For each tax, we discuss the estimated tax increase needed to
finance $100 million, or the amount of financing generated given
a fixed tax amount, as well as the types of bonds used to
effectuate the financing.
For purposes of quantifying the annual and total debt service cost
of a $100 million financing, we make the following bond
structuring assumptions:
1. The City's issuer credit rating of "AA+"
2. Tax -Exempt market rates as of January 28, 2022,
plus a 50-basis point cushion for market risk
3. 20-year and 30-year terms
4. 10-year optional call provision
5. Level annual debt service
The adjacent table includes the resulting debt service schedules.
Each of the following tax analysis uses these debt service
schedules to calculate estimated costs.
Debt Service Schedules
Bond Year
20-Year Term
30-Year Term
7/1/2023
$6,287,250
$4,898,975
7/1/2024
6,284,250
4,899,975
7/1/2025
6,284,750
4,896,975
7/1/2026
6,288,250
4,899,975
7/1/2027
6,284,250
4,898,475
7/1/2028
6,287,750
4,897,475
7/1/2029
6,288,000
4,896,725
7/1/2030
6,284,750
4,900,975
7/1/2031
6,287,750
4,899,725
7/1/2032
6,286,250
4,897,975
7/1/2033
6,285,000
4,900,475
7/1/2034
6,288,500
4,896,725
7/1/2035
6,286,000
4,896,725
7/1/2036
6,287,250
4,899,975
7/1/2037
6,286,500
4,900,975
7/1/2038
6,283,550
4,897,075
7/1/2039
6,285,950
4,900,475
7/1/2040
6,283,400
4,900,875
7/1/2041
6,285,900
4,898,275
7/1/2042
6,288,150
4,897,675
7/1/2043
4,898,925
7/1/2044
4,900,550
7/1/2045
4,899,800
7/1/2046
4,896,675
7/1/2047
4,901,175
7/1/2048
4,898,050
7/1/2049
4,896,300
7/1/2050
4,900,800
7/1/2051
4,901,250
7/1/2052
4,897,650
Total
$125,723,450
$146,967,675
2054 University Avenue, Suite 300 I Berkeley, CA 94704 I Main 510-839-8200
5901 West Century Boulevard, Suite 750 I Los Angeles, CA 90045 I Main 310-348-2901
A Limited Liability Company
New Tax Revenue Financing Options I January 28, 2022 1 pg. 2
General Obligation Bonds
General Obligation Bonds (GOs) are considered "debt" for purposes of the California
Constitutional Debt Limitation and require a 2/3'voter approval to be issued. GOs are secured by
an ad valorem property tax; the City and its General Fund are not obligated to repay debt service.
Ad valorem property taxes will be calculated annually by the Los Angeles County Auditor -Controller
and will be levied against the assessed value (AV) of the City. Generally, a tax rate is calculated each
year using the upcoming annual debt service due and the City's AV for the then current fiscal year
(i.e., AV * tax rate = debt service). For example, based on the City's Fiscal Year 2021-2022 AV of
$15,263,033,028, initial debt service will require an estimated tax rate of $41.193 per $100,000 of AV
assuming a 20-year financing, or $32.097 per $100,000 of AV assuming a 30-year financing.
20-Year Term Estimated
30-Year Term Estimated
2021-2022
Debt Service Tax Rate
Debt Service Tax Rate
Assessed Value
2023 Bond Year per $100,000
2023 Bond Year per $100,000
$15,263,033,028
$6,287,250 $41.193
$4,898,975 $32.097
AV Source: HcIL, Coren & Cone
When comparing residential and non-residential values, 23% of the debt service will be attributed to
residential properties and 77% of the debt service will be attributed non-residential properties.
20-Year Term
Estimated
30-Year Term
Estimated
Assessed Value
2021-2022
Debt Service
Tax Rate
Debt Service
Tax Rate
Category
Assessed Value
2023 Bond Year
per $100,000
2023 Bond Year
per $100,000
Residential
$3,443,837,640 23%
$1,418,608
$41.193
$1,105,368
$32.097
Non -Residential
11,819,195,388 77%
4,868,642
41.193
3,793,607
32.097
Total
$15,263,033,028 100%
$6,287,250
$4,898,975
AV Source: HcIL, Coren & Cone
Based on the assumption of level annual debt service, the tax rate will increase if total AV declines or
the tax rate will decrease if total AV increases. AV may be reassessed downward in a declining real
estate market or from a result of a successful appeal. However, under Proposition 13, AV may only
increase at a maximum of 2% each year for inflation until property ownership changes. When
property ownership changes, AV may be reassessed at the current market value.
As an indication of the current market value for detached single family residential properties, El
Segundo's 2020 median sales price was $1,554,750. Based on this median sales price and the initial tax
rates discussed above, the ad valorem property tax per $100,000 of AV is approximately $640 for a 20-
year financing or $499 for a 30-year financing. Again, the future tax rates will increase if AV declines
or decrease if total AV increases given a level debt service. The table on the following page provides a
range of AVs and their respective estimates for ad valorem property tax per $100,000 of AV.
WillVN
public finance
New Tax Revenue Financing Options I January 28, 2022 1 pg. 3
Tax Rate
Tax Rate
per $100,000
per $100,000
Assessed Value
$41.193
$32.097
$1,000,000
$412
$321
$1,250,000
$515
$401
$1,554,750 (median 2020 SFR sales price)
$640
$499
$1,750,000
$721
$562
$2,000,000
$824
$642
Median Price Source: HdL, Coren & Cone
Mello -Roos Special Tax Bonds
In lieu of a General Obligation Bonds, for which a tax rate is based on the City's assessed value, the
City may consider forming a Community Facilities District (CFD) under the Mello -Roos Community
Facilities Act of 1982, as amended (Mello -Roos Act), for the issuance of Special Tax Bonds. Such
bonds are payable from a special tax levied only on the properties within the boundaries of the CFD.
To establish a CFD the City will need to adopt local goals and policies for CFDs. There are additional
legislative actions required for the formation of a CFD, and generally include: adopting resolutions to
establish the CFD and incur bonded indebtedness; conducting a public hearing; conducting a 2/3rd
election; and administrative actions to form the CFD.
Generally, bonds may finance real or other tangible property and the financed property does not need
to lie physically within the CFD. CFDs may also collect a special tax for public services and
maintenance as well (i.e., public safety services and facilities maintenance). Special tax bonds may
finance property and facilities - not services, but a special tax collected for services may be pledged to
the debt service on bonds.
Tax rates are calculated based on formulas and characteristics of the properties within the CFD, which
is documented in the Rate and Method of Apportionment (RMA). RMAs and the tax rate calculations
are specific to each CFD. For example, tax rate formulas may include maximum tax limits or annual
adjustments for inflation; they may be categorized by property type such as residential, non-residential,
commercial or industrial; or they designate amounts by units or acreage of the property. There may
also be a maximum combined tax rate for bonds and services. Therefore, the City would need to
create some form of special tax equal to the debt service of the 20 or 30-year financing.
Lastly, the Mello -Roos Act restricts the structuring of the bonds to have semiannual interest payment
dates of March 1 and September 1, with annual principal payments on September 1. The RMA may
establish certain provisions for prepayment of the special tax by property owners.
W" KNN
public finance
New Tax Revenue Financing Options I January 28, 2022 1 pg. 4
Certificates of Participation / Lease Revenue Bonds
Certificates of Participation (COPS) or Lease Revenue Bonds (LRBs) are not considered "debt" for
purposes of the California Constitutional Debt Limitation and the issuance of these instruments do
not require 2/3'voter approval. COPS and LRBs use a lease -lease back structure between the City
and a non-profit entity (for COPS) or a joint powers authority (for LRBs) to create a payment stream
for financing. The City's General Fund secures repayment and the City would annually appropriate
and budget lease payments for debt service, subject to abatement to the extent the leased asset is no
longer usable because of damage or eminent domain.
Because certain taxes discussed in the Revenue Enhancement Memo are considered "general" taxes,
the use of these revenues is unrestricted. The City may choose to annually budget these tax revenues
for debt service repayment if desired. The following discussion assumes such revenues are budgeted
for debt service.
Sales Tax: According to the Revenue Enhancement Memo, the City expects a new sales tax measure
to provide revenue of approximately $3 million to $9 million annually.
Sales Tax
1 0.25%
1 0.50%
0.75%
Estimated Tax Revenue
1 $3,062,500
1 $6,125,000
$9,187,500
Source: The City
Based on this information, we can prorate a sales tax to support annual debt service. Assuming a 20-
year financing and the maximum annual debt service of $6,288,500, we estimate a sales tax
requirement of approximately 0.514%. Assuming a 30-year financing and the maximum annual debt
service of $4,901,250, we estimate a sales tax requirement of approximately 0.400%.
Sales Tax
1 0.25%
1 0.40010%
1 0.50%
0.51335%
1 0.75%
Estimated Tax Revenue
1 $3,062,500
1 $4,901,250
1 $6,125,000
$6,288,500
$9,187,500
Utility Users Tax: According to the Revenue Enhancement Memo, the City expects each 1 %
increase in utility users tax (UUT) to generate revenue of approximately $388,000 for residential
services and $2,146,500 for non-residential services.
Each 1% UUT Increase
Residential
Non -Residential
Estimated Tax Revenue
$388,080
$2,146,500
Source: The City
Based on this information, we can extrapolate revenue for each additional 1% increase in UUT as
shows in the table on the following page. Assuming residential services and non-residential services
have equal tax increases, a 20-year financing with a maximum annual debt service (MADS) of
$6,288,500 would require increases of approximately 2.5%; and a 30-year financing with a MADS of
$4,901,250, would require increases of approximately 1.95%.
WillVN
public finance
New Tax Revenue Financing Options I January 28, 2022 1 pg. 5
UUT Increase
Residential
Non -Residential
Total
MADS
1
$388,080
$2,146,500
$2,534,580
1.95
$756,756
$4,185,675
$4,942,431
$4,901,250
2
$776,160
$4,293,000
$5,069,160
2.50
$970,200
$5,366,250
$6,336,450
$6,288,500
3
$1,164,240
$6,439,500
$7,603,740
If the City raises its UUT by 2.5%, then the highest non-residential rates for gas and electric would
increase from 3% to 5.5%. This is still relatively low when compared to other Los Angeles cities listed
in the Revenue Enhancement Memo; many cities have rates ranging from 7% to 10%.
Parking Tax: According to the Revenue Enhancement Memo, the City estimates a 10% parking tax
rate would generate average annual revenue of $1.7 million. This amount is not sufficient to support
debt service for $100 million of financing. However, if the $1.7 million of parking revenues were to
support debt service, it could provide financing of approximately $27 million for a 20-year term or
$34.6 million for a 30-year term.
Financing Amount
20-Year Term $27,012,265
30-Year Term $34,625,545
Cnnehicinn
If the City's financing will be secured by any of the potential new tax revenues, feasibility of voter
approval (i.e., tax amounts and any term limits) should be considered. Also, if the City desires to
eliminate any General Fund exposure, then an ad valorem tax (General Obligation Bonds (GOs)) or a
Mello -Roos special tax (special tax bonds) is appropriate. New general taxes (sales tax, UUT, parking
tax and cannabis tax) may be budgeted for the repayment of Certificates of Participation (COPS) or
Lease Revenue Bonds (LRBs), but the General Fund is the ultimate security in the event there are
revenue shortfalls. If voter approval of any tax is not achieved, the City may still issue COPS or LRBs
depending on the ability of the General Fund to afford debt service and the schedule of the City's
financing needs.
W" KNN
public finance
New Tax Revenue Financing Options I January 28, 2022 1 pg. 6
Given the different credit and legal structures of each financing instrument, there are implications for
the credit rating and cost of borrowing. GOs are the highest rated and provide the lowest costs of
funds. COPs and LRBs are typically rated one "notch" below GOs and the cost of borrowing is
slightly higher. The credit rating and cost of borrowing of a Mello -Roos special tax bond will depend
on the characteristics of the properties within the Community Facilities District.
We hope this memo has been informative. Please let us know should you have any questions or
further requests.
�illVN
public finance