Forebath: “Because of the SEC Subpoena we’re Not really Able to Access the Bond Market.”
City of Beaumont Audit and Finance Committee Transcript November 14, 2016
Below is the full transcript from the November 14, 2016, Beaumont Audit and Finance Committee in which Brian Forebath from the Law Firm of Stradling Yocca Carlson Rauth and Richard Wall from Albert Webb and Associates Consultants were brought in to explain the federal municipal bond industry to the Committee. Forebath revealed that the SEC is preventing the City from any participation in the bond industry.
‘…Halliwill: If I heard you correctly; with the existing bonds, we have a problem doing anything with these because of the SEC investigation?
Forebath: In terms of refunding them, yes.
Halliwill: Is that also attack our ability to finance the new ones?
1:00:00 Forebath: Yes is does. Currently until that’s resolved. We would advised the City currently that it would be imprudent and unwise for them to access the public markets while there’s an active SEC Investigation of the City.
Halliwill: How are Sundance and the other people in the Developments currently getting their money?
Forebath: They’re not currently getting their money. They formed CFDs and at some point in time they’ll come to Council to ask for the Issuance of Bonds and we’ll either be ready to go or not….’
7:45 Chair Diane Harris: Fiscal Year 2014/2015 Transition Audit [Transportation Audit]
8:00 Melana Taylor: As part of the Audit of the City for Fiscal Year 2015; one of the pieces is to issue an Audit Report, on it’s own, for the Transit Authority of the City of Beaumont. This is issued separately because once it is approved it will go to Riverside RCTC. They need that on their records, they have to make sure that the Audit is clear. This is the first draft of it for you to review. I’ve included a sheet on top that sort of tries to show you that there’s Operational Audited Financial Statements and there’’s a new standard that must be followed that was effective June 30, 2015, for what was called ‘GASB 68’.
9:00 Taylor: It has to do with valuing the pension and making sure that you record the entire responsibility; the liability based on actuarial. Lives, how long people will live, what the payouts need to be, that kind of thing. That piece of the standard had a huge impact on the Financial Statements; not just for Transit, but every government agency across the State. So I tried to show you that the two together, and then give you that total. That total then won’t be reflected on the Audit Statements that are behind it. I wanted you to have the opportunity to review it then have it Agenda’d and discuss it for our next meeting and make recommendations.
CFD Workshop Presentation:
11:00 Taylor: This Workshop is just for the Finance and Audit Committee for the CFDs. Kind of the basic information forms, what does it mean, how do they come together, and what are the requirements. We have Experts here that work with the City of these things at this time so you can listen to the presentation and ask them any questions you may have. There’s been some changes today. We were going to have Michael Busch here, but he is in the meeting and can not get here. He’s in the same meeting with Lloyd White and Mike Lara, so that’s why the three of them aren’t here this evening. The presentation is going to be given by two gentlemen; Rich Wall from Webb and Associates. They are the Bond Administrators for the City of Beaumont. The other is Brian Forebath. He is our Bond Attorney for the City of Beaumont.
12:00 Rich Wall: In June, 2015, we were engaged through an Emergency Contract to do the Annual Administration for the Fiscal Year 2015/2016 Special Tax Rolls for the CFD. Fast-forwarding through September where we participated in an RFP and competitive bid process. We were awarded a Contract to provide Tax Consulting Services for the following year and then in August of this year our Contract was extended to Fiscal Year 2017/2018, so we’re working a great deal with the City. We have a couple years’ knowledge under our belt.
14:00 Wall: State-wide; there are 891 Agencies that have over 1,300 separate bond Issues outstanding with over $16 Billion in Debt. In Riverside County there’s 40 Agencies that have over $3 Billion in bond debt outstanding. The City of Beaumont has one CFD 93-1 that’s sectioned into a series of Improvement Areas. There’s also now formed or in the process, of four (4) stand alone CFDs that are going to be part of the City. As of today; 29 of them have Bonds Issued with a little over $208 Million outstanding as of September of last year.
15:00 Wall: The CFD fundamentals; we’re just going to cover very high-level points that govern the CFDs, how they work and what types exist. The CFD is governed by a document called a ‘Rate and Method of Apportionment’ or RMA. That document establishes how the taxes will be calculated and sets the Maximum Special Taxes for the properties within the District. It is essentially an administrative roadmap on how to handle that District throughout its life. There are two different types of CFDs. They don’t necessarily need to be separate from each other, but there’s types you can levee a tax with. There’s the facilities, and then there’s a type you can levy for services.
16:00 Wall: When we’re talking facilities; that means that the CFD can issue bonds. It has maturity dates and it finances the construction and acquisition of public improvements or fees associated with that. The Services, on the other hand, they can not issue bonds. They generally do not have a maturity date. They will last as long as the Agency provides the Services. What they do is finance the ongoing maintenance such as the street sweeping, landscaping the parks, street maintenance, street lighting, and public services such as police and fire services. Public Improvements must have a useful life of five (5) years or greater and they need not be in the boundary of the actual CFD itself.
17:00 Wall: When you think of a CFD, a great way to think of it is that a Developer had to put in the streets, curb and gutter, sidewalks, the sewer lines, the water lines, the street lights, build a park. That would be the facilities that would be financed through these bonds. For the Services you would have police and fire services, a paramedic and ambulance services, and the ongoing annual maintenance to pay for the park, to pay for the street lights, to pay for the street sweeping and etc.
Male Board Member: Who sets the rate? An Agency, an Individual, Houdini?
18:00 Wall: It’s a process that’s developed by working with the Developer and the City. That Rate would be set in the Rate and Apportionment and when it goes to Council it’s then Adopted and Approved to be used. We’ll cover the actual formation process, but it’s essentially Approved by the Council in work with the Developer and Consultants to come up with that rate.
Male Board Member: What really determines the Rate? You can’t sell bonds if there’s not a sellable rate.
19:00 Brian Forebath, Stradling Yocca Law Firm: One is the Rate, which is the dollar amount of the taxes, and the other is the Interest Rate on the Bonds that are to be sold. The rate that’s on the taxes is determined by the voters, the registered – whoever’s authorized to vote in the District are the individuals that approve the rates. Those rates are established based on the values of the homes. That’s the rates on the taxes. But the rates on the bonds are established when the project’s fully developed, you’re going out to market and issue their bonds. What happens is the City will contract or hire an Bond Underwriter who will go out and sell and solicit bids on the bonds from their investors. In that point in time, once they’ve sold all the bonds there’s like a clearing rate, you sign a bond purchase contract between the City and the Underwriter to sell the bonds at an established interest rate.
29:00 Halliwill: When they originally formed the CFD 93-1, was there a vote of the People in the City to form that CFD?
Wall: Not with the People. The 12 Improvement Areas that formed this originally back in 1993; those property owners were the ones that voted to approve the CFD. Every subsequent property that came to the CFD and became Improvement Area 13 and 14 and so one; those property owners had the same policy and process outlined here. They were subject and voted to annex into the CFD as well.
Halliwill: So you’re saying just those12 property owners. There were 1,000 properties in Beaumont, but only those 12 property owners voted, the other people did not vote on that CFD.
30:00 Wall: So when we say just the owners voted; it was just raw land. There were no other property owners that were in there.
Nancy Carroll: You mentioned 2% as a guideline. At that window in time the property is given evaluated and the taxation is not intended to surpass the 2%, but if property value goes down later and somebody looks at the taxes that they’re paying then they could say to themselves: ‘I’m paying more than the 2% of the value of my property. So there’s influence of time and potential valuation that could or could not occur after the issuance of this at the 2%. Is that correct?
31:00 Wall: Depending on at any point in time, the market conditions, the economy, you could be above or below 2%. There’s no continuing to look to see if that needs to be adjusted. It’s 2% at the time we do the formation.
Carroll: And that valuation amount is set by the Developer who’s planning on developing the properties, correct?
Wall: The City – most agencies have goals and policies not to exceed the 2%, so they’re kind of set within the confines of that agency’s goals and policies. They were set the RMA and they would vote to Approve the RMA with that total.
32:00 Forebath: When the tax rates are being set the Developer will provide sort of what is their product mix; what they’re going to develop, what they’re going to build, what their projected pricing is of the units. Those sometimes can be tested by staff, sometimes there’s an outside consultant that can be hired for a price point study or a market absorption study consultant to verify those prices or not. That goes into the determination of whether or not what you set the price rates at, the special taxes at.
34:00 Forebath: None of us were in the room in 1993 when this was all set up, so this is my submission based on what we’ve reviewed. In 1993 Beaumont had a lot of undeveloped property, a lot of raw land, and there was a vision, right or wrong, of infrastructure that needed to get in order to allow the development of that property. So they developed what was called a ‘Comprehensive Public Financing Plan’ that was done back in ’93, ’94, ’95. That sort of built this whole system to finance all of the backbone infrastructure that needed to go to be developed. This concept of having a majority of the City in the CFD order to contribute to the backbone infrastructure that allowed for the development of everything. At the time, whether right or wrong, it did allow for the construction of a lot of the public infrastructure that serves Beaumont today in some orderly way.
36:00 Male Board Member: I think it disenfranchised a lot of people that couldn’t vote on it. I just see it as a few people made a decision back at that point in time that has effected generations that have not had the right to vote. Everything I see here, everything you’re talking about, the People have the right to 2/3’s vote to say if they want their city to grow or whatever it may be; the Citizens should have the right. It disenfranchised a lot of people by just routing. Maybe it’s legal and there’s nothing we can do about it, but it just doesn’t seem right.
Female Board Member: There’s an area that are paying for Services, but they’re not paying for bonds – there’s a difference in the kinds of bonds, so there’s many, many properties in the City of Beaumont that don’t pay Mello Roos.
37:00 Forebath: I’m not sure when the Escalator kicked in. An Escalator is a mechanism to allow an Improvement Area to Issue more Bonds and they couldn’t without the Escalator. Essentially you have a stream of revenue that you’re going to bond against. If that revenues grow over time the bonds that you sell could have debt service that grows over time. If your debt service grows over time you can issue more bonds than if it was flat. After CFDs are formed we go about issuing bonds.
38:00 Forebath: The issuance of bonds is an action that’s approved by Council. The issuance of bonds is subject to Federal Securities Laws and has to comply with State Laws. The offering document, the Official Statement, is like a stock prospectus. This is what the Underwriter is going to go out and market the bonds to investors by.
43:00 Forebath: All the bonds were sold to a Financing Authority. So the CFD would sell bonds that were sold to a Financing Authority. The Financing Authority then sold the Bonds to the Underwriter who sold them to the Public.
55:00 Forebath: As you’re all aware; the SEC has an ongoing investigation of the City right now. They served a Subpoena and because of that Subpoena we’re not really able to access the bond market in a meaningful way to bring about those Refinancings. The goal is to work cooperatively with the Securities and Exchange Commission, get the Subpoena and Investigation resolved, favorably we hope. And then in that point in time be able to access the market again to do refinancing to lower debt service on the bonds, which would translate into savings to the individual property owners living in those Improvement areas.
Male Board Member: Can you set a whole new set of conditions based on this new refinancing pool?
56:00 Forebath: There’s some restrictions. The Mello Roos Act has certain provisions says you have to have debt service savings each year in order to refinance your bonds. So there ‘may’ be the ability, depending on how much savings there are, to eliminate or flatten the bonds so you don’t need the Escalator.
57:00 Male Board Member: Let’s say the residents in a certain district are willing to pay a couple hundred dollars for a couple years to get that reserve at the level where they won’t get hit every year with increased costs.
Forebath: We can’t do that at this point without going back to all the property owners and having a vote and an election to change the Rate and Method of Apportionment for Special Taxes.
Male Board Member: You’d have to then go back to the Residents to vote, obviously because it’s going to increase their costs, but if they did vote to do that it would be a possibility.
Forebath: It’s a possibility. It’s a costly thing; to have an election and go back and do it all.
Halliwill: If I heard you correctly; with the existing bonds, we have a problem doing anything with these because of the SEC investigation?
Forebath: In terms of refunding them, yes.
Halliwill: Is that also attack our ability to finance the new ones?
1:00:00 Forebath: Yes is does. Currently until that’s resolved. We would advised the City currently that it would be imprudent and unwise for them to access the public markets while there’s an active SEC Investigation of the City.
Halliwill: How are Sundance and the other people in the Developments currently getting their money?
Forebath: They’re not currently getting their money. They formed CFDs and at some point in time they’ll come to Council to ask for the Issuance of Bonds and we’ll either be ready to go or not.
Halliwell: So let’s say they sell out 80% of that development, do those 80% people have any say?
Forebath: No. The CFD’s been formed and there’s a tax on property. There’s an obligation from Pardee to reimburse them for infrastructure they put in.