Okaloosa County BOCC — October 6, 2015 — RESTORE Financing Alts 091615 Final2 — reading text

ERINL. DEADM To: Terrell Arline, Esq., Bay County Attorney From: Erin Deady, Esq. g_(’_ Amity Barnard, Esq. Mark Mustian, Esq. Re: Options for Advancing RESTORE funds within Federal Grant Programs Date: September 16, 2015 This memorandum provides a brief summary of funding mechanisms used in conjunction with federal grant programs to potentially accelerate the distribution of such funds. The purpose of the research is to potentially address needed flexibility in the distribution of Resources and Ecosystems Sustainability, Tourist Opportunities, and Revived Economies of the Gulf Coast States Act of 2012 (“RESTORE Act”) settlement funds. If the settlement is a 15-year level distribution, funding amounts may not be sufficient to cover project costs in any given year if they exceed that equal payment amount. This could present obstacles to project implementation if higher dollar amounts are needed to implement early projects. The other challenge is for counties to administer a 15-year program thus requiring larger administrative funds, longer staff time commitment, etc. In addition, in many cases it is likely that earlier implementation of environmental and economic restoration projects will compound benefits over time. The ultimate goal will be to achieve a settlement that is flexible to account for varying degrees of project funding needs, does not excessively prolong administration of a program that could waste administrative efforts and funds, and provides the maximum contribution to Gulf environmental and economic restoration. There may be alternatives that help address these issues. Specifically, this memorandum provides information on the following: e Grant Anticipation Revenue Vehicle (“GARVEE”)-like bonds; e Grant Anticipation Notes (“GANs”); and e Other “conduit” sources of financing. Additional research will likely be required to determine whether any of the mechanisms referenced below could be utilized similarly in the context of RESTORE implementation. One issue that will also warrant additional research will be how interest on financing can be treated in any of these repayment mechanisms, as well as any tax exemption impacts. Regardless, specific legal authority will be needed to expend settlement funds for debt services. Finally, the Gulf Coast Ecosystem Restoration Council (“Council”) and Treasury Standard Grant Terms and Conditions will have to be reviewed for any potential constraints on assignment of funds. I Grant Anticipation Revenue Vehicle Bonds GARVEE bonds are used to fund major capital projects with debt backed by future Federal-aid disbursements in highway projects (Title 23 grants). Section 311 of the National Highway System Designation Act of 1995 significantly expanded the eligibility of bond and other debt instrument financing ! National Highway System Designation Act of 1995, Pub. L. No. 104-59, §311, 109 Stat. 568 (1995). 1 costs for Federal-aid reimbursement. This change to the Federal-aid program was codified into permanent highway law asan amendment to 23 U.S.C. § 122, providing an explicit statutory authorization for this repayment mechanism’s use. GARVEE bonds come in several variations, including: short-term, long-term, backstopped, stand-alone, direct, and indirect GARVEE bonds. Bond-related costs eligible for Federal-aid reimbursement include interest payments, retirement of principal, and any other costs incidental to the sale of an eligible bond issue. GARVEE bonds may be issued on a tax-exempt basis. Pros of their use: There are several benefits to using a GARVEE-like bond, including: 1) accelerated project delivery, 2) cost savings as a result of acceleration, 3) ability to structure large projects that need a variety of financing tools, and 4) avoidance of bond referenda.? Notably, they also allow for reimbursement of interest costs. Cons of their use: Enabling legislation is required at the state level for state transportation departments to issue GARVEE debt. In Florida, Section 215.616, Fla. Stat. (state bonds for federal aid highway construction) was first passed in 1999 and authorizes the pledging of future Federal-aid reimbursements to pay debt service for GARVEE bonds.? This provision caps the annual debt service at 10% of annual Federal highway apportionments and limits bond terms to twelve (12) years.* For use in the RESTORE context, similar state legislation may be required. Examples for a GARVEE-type structure include: e Issued in over 25 states in the U.S. including Georgia, Alabama, and Mississippi in the Southeast; e Florida — as of the most recent 2014 Florida Department of Transportation’s Debt & Debt-like Financing Report, no bonds have been issued in Florida under the state’s GARVEE statute; and e Need specific legal authority to issue tax-exempt GARVEE-like bonds. . Grant Anticipation Notes GANs are revenue bonds backed by anticipated grant receipts. They are most frequently used by transit agencies to borrow against future Federal formula or grant funding (Federal Transit Administration Title 49 grants). GANs have also been used (less frequently) in hospital and school construction financing. One specific form of GAN was originally made possible by the establishment of program funding firewalls in the Transportation Equity Act for the 21st Century (“TEA-21"). These transit bonds are limited to a shorter duration (1-2 years since subject to the Congressional appropriation process) and do not include debt-related financing costs such as interest and issuance costs.’ Pros of their use: Several benefits of GANs include: 1) accelerated project delivery, 2) cost savings through acceleration, 3) ability to fund larger projects, and 4) avoidance of bond referenda. GANs have been used more frequently in capital projects other than transportation projects. 2 Puentes, R. & Warren, D., Today’s Roads with Tomorrow’s Dollars: Using GARVEE Bonds to Finance Transportation Projects (March 2005), available at: http://www.brookings.edu/~/media/research/files/reports/2005/3/transportation%20puentes/20050322 garvee.pdf 3§ 215.616, Fla. Stat. (2015). 41d. 5 U.S. Department of Transportation, Federal Highway Administration, Federal Debt Financing Tools website, available at: http://www.fhwa.dot.gov/ipd/finance/tools programs/federal debt financing/garvees/. Cons of their use: At least on the TEA-21 program, debt related financing costs cannot be reimbursed. GANs are also of a shorter duration and subject to Congressional appropriation. Similar to GARVEEs, GANs would likely require some type of implementing state legislation which specifically may include a longer payback period and address the interest payment issues. Examples where GANs have been used include: e New Jersey Transit — first state to issue bonds backed solely or primarily by anticipated Federal formula funding in 1997. Since 1997, over $3.2 billion in GANs have been issued with terms ranging from 3-15 years and principals ranging from $18-450 million. e Fort Myers, FL — This municipality, through Chapter 22, Article II, Division 7, § 22-161 of its Code of Ordinances, provides express authorization of the use of GANs for the purpose of meeting expenses of the City (up to $10 million aggregated) in exchange for a revolving loan. 1. “Conduit” Sources of Funds/Bond Pools There may be other sources of funds that can be used to accelerate RESTORE project implementation on the premise that future grant funds could repay debt incurred by a local government. The Florida Municipal Loan Program (“FMLP”) is a program sponsored and administered by the Florida League of Cities, Inc. (“League”). The FMLP was established in response to numerous requests from small and medium size cities. Proceeds from this program can be used for a variety of purposes including: capital improvements, renovations, additions, and refinancing of existing debt. The minimum loan size is only $3,000,000. Financing is structured as an insured fixed rate issue and has a final term of up to 30 years. The League, as Administrator, handles all the administration, hiring of bond professionals, continuing disclosure, investment of proceeds, and arbitrage rebate calculations. The Florida Municipal Loan Council has authorized and validated the issuance of up to $1.25 billion in revenue bonds. Any local government may apply for these funds. Florida Trust’s Short Term Bond Fund, formerly FLGIT, was formed in 1992 and is a member governed, pooled investment program. Florida Trust’s Day to Day Fund was created in January 2009 to provide a fiscally conservative diversification option for Florida local governments. Additionally, the Section 108 Loan Guarantee Program provides a way to “advance” funds in the form of a loan, with repayment by future grant funds. Section 108 loans are a component of the Community Development Block Grant (“CDBG”) program, and provide communities with financing for economic development, housing rehabilitation, public facilities, and other large-scale development projects. The flexibility of this program makes it one of the most important public investment tools offered to local governments by the U.S. Department of Housing and Urban Development. This program allows local governments to transform a small portion of their CDBG funds into federally-guaranteed loans large enough to pursue physical and economic revitalization projects. Local governments pledge current and future allocations as security for the loan. As of March 2011, over 1,800 commitments had been made totaling $8.5 billion, with $2.4 billion in loans outstanding. Pros of their use: Established entities and alternatives with familiarity within the market. Cons of their use: The same issues with federal authorization and tax exemption apply. V. Other Considerations There appear to be no limitations in the RESTORE Act or the Interim Treasury or Council regulations preventing use of these tools. Additionally, there are only limited references to use of bonds (or debt financing) in the Uniform Guidance in 2 C.F.R. Part 200° which does not reveal any express prohibition on the use of bonding against future grant revenues.” This is consistent with the fact that such practices are already being used in other federal granting programs (Title 23 and 49 discussed above), programs which would also be subject to the Uniform Guidance. Note though that in both instances, express federal authorization was provided to permit fund expenditures for debt services. Though not prohibited in the Uniform Guidance, federal authorization will likely be required to expend funds for debt services under the RESTORE Act. Pertinent sections of the Uniform Guidance referencing bonds and debt financing include: e §200.304: Bonds in Subpart D—Post Federal Award Requirements: allows the federal awarding agency to include a provision on bonds in certain circumstances; e §200.325 Bonding Requirement: specific to construction contracts and subcontracts; e §200.449 Interest in Subpart E — Cost Principles: prohibits reimbursement of costs incurred for interest on borrowed capital, temporary use of endowment funds, or the use of the non-Federal entity’s own funds but allows reimbursement of financing costs (including interest) to acquire, construct, or replace capital assets, subject to specific conditions; and e § 200.427 Bonding costs in Subpart E — Cost Principles: allows bonding costs in certain circumstances. & Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, 2 C.F.R. Chapter |, Chapter II, Part 200, et al. (2013). 7 Note that the language in § 200.449 suggests that interest reimbursement may be problematic but additional research is necessary to determine whether the language provides an impediment to using a technique such as GARVEE bonds in RESTORE Act grants. 4