TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL

FROM: DENNIS McLEAN, DIRECTOR OF FINANCE AND INFORMATION TECHNOLOGY

DATE: OCTOBER 7, 2003

SUBJECT: UTILITY UNDERGROUNDING ASSESSMENT DISTRICTS – PROPOSED ASSESSMENT LOANS

Staff Coordinators: Kathryn Downs, Accounting Manager

Gary Gyves, Senior Administrative Analyst

RECOMMENDATION

1. Direct staff to exclude a provision for assessment loans by the City in the proposed guidelines for Utility Undergrounding Assessment Districts; or
2. Return the matter to the Finance Advisory Committee to work with Finance Staff and its advisors to attempt to develop an assessment loan program that minimizes or eliminates the City’s use of General fund reserves.

BACKGROUND

The City Council previously directed staff to revise the proposed guidelines regarding Utility Undergrounding Assessment Districts ("UUAD’s") to include a provision for assessment loans ("Assessment Loans"). Finance has the following concerns regarding the implementation of an Assessment Loan program:

• After conducting extensive research, Finance Staff has found no other California city that provides Assessment Loans; therefore, the experience of other California cities is not available for guidance;
• Based upon an analysis of age and household income data contained in the 2000 Census and discussions with residents of the City that are interested in forming UUAD’s, Finance Staff believes that a significant percentage of the City’s property owners may be interested in participating in an Assessment Loan program; and
• Developing and administrating an Assessment Loan program will require a substantial effort and cost.

California Property Tax Postponement Program

Based upon discussion with many California municipal finance officers, Finance Staff has learned that other cities encourage property owners to consider use of the Property Tax Postponement program offered by the California State Controller’s Office. The California Property Tax Postponement program has the following limitations that may render it fairly useless to the property owners in the City:

• The eligibility criteria is limited to property owners occupying their personal residence who are blind, disabled or have reached age 62 with annual household income less than $24,000; and
• Property owners must apply (and qualify) for the program annually.

Economic Considerations Have Changed Since The City Council Directed Finance Staff To Develop An Assessment Loan Program

The following economic considerations have changed since the City Council directed Finance Staff to develop an Assessment Loan program:

• The City expects to realize a loss of nearly $1,000,000 of state shared revenue during FY03-04;
• The City is at risk of losing approximately $1.8 Million (annually) of state shared vehicle license fee ("VLF") revenue as a result of litigation filed by a taxpayer advocacy group, as well as a proposed statewide constitutional ballot measure;
• The FY 03-04 budget for the City includes no capital improvement projects, especially necessary storm drain, sewer and road improvements;

• The 2003 Five Year Financial Model that was prepared in conjunction with the FY03-04 budget also excludes capital projects and new operating programs;

• The FY03-04 state budget includes approximately $12 Billion of bond financing that is currently being litigated by taxpayer advocacy groups based upon the allegation that it is unconstitutional; and
• Based upon an analysis performed by the independent Legislative Analyst’s Office prepared in conjunction with the adoption of the FY03-04 California budget, State revenue is expected to decline further during FY03-04, therefore, additional revenue passed through to cities by the State continues to be subject to further risk.

DISCUSSION

Staff offers two basic alternatives for Assessment Loans:

• "Annual Agreement" option

Each year the City Council would decide whether or not to pay the annual UUAD assessment installment on behalf of eligible property owners, utilizing reserves from the City's General fund. The City's commitment would be for one year's assessment installment payment only.

Staff believes that resident’s are unlikely to participate in an Assessment Loan program if the City elects the Annual Agreement option.

• "Deferral Fund" option

The City would use General fund reserves to provide assessment installment payments on behalf of eligible property owners for the entire term of the assessment district bond schedule (about 20 years). In order to choose this option, the City would be legally required to deposit funds equivalent to the sum of all assessment installment payments into a Deferral Fund during the first year that an Assessment Loan borrower's loan request is approved.

An Overview About Proposed Assessment Loans

In the event the City Council elects to offer Assessment Loans, the terms, conditions and loan processing procedures would likely be the same regardless of whether the City Council selects the Assessment Agreement option or the Deferral Fund option. Eligibility criteria that the City Council may wish to consider include the following:

• Household income;
• Age;
• Disability;
• Available equity;
• Eligibility determined annually vs. upon initial application only; and
• The possibility of making Assessment Loans for only a portion of the assessment installment payment (partial loans).

The eligible property owner and the City would enter into a secured loan agreement similar to other standard single-family mortgage loans. The loan would be secured by the equity available on the assessed property, but be subordinate to any previous security interest recorded against the property (e.g. first and second mortgages). The loan balance owed the City would be increased with every assessment payment made by the City on behalf of the eligible property owner.

Cost Considerations of the Proposed UUAD Assessment Loans

The City’s cost of providing UUAD assessment loans would be affected by the following:

• Whether the City Council elects to adopt either the Assessment Agreement option or the Deferral Fund option;
• The frequency that proposed UUAD’s are formed (e.g. an average of one each year vs. one every three years);
• The size of any proposed UUAD (e.g. number of parcels);
• Engineering factors (e.g. hillside terrain, existing neighborhood grid) that affect the cost of the UUAD project;
• Financing costs, including bond issuance costs and interest rates;
• Whether the City establishes a limit for UUAD loans for either (1) each fiscal year in conjunction with adoption of the City’s annual budget and/or (2) its authorization to form each proposed UUAD;

• Establishing definitions of eligibility for assessment loans (e.g. age, disability, income threshold);

• The demographic mix of eligible property owners (age, household income) for each proposed UUAD; and

• The cost differences between choosing either the Annual Agreement option or the Deferral Fund option.

If the City Council directs staff to include a provision for Assessment Loans in the proposed guidelines for UUAD’s, it may wish to consider establishing a limit for the amount to be expended from the General fund reserves annually.

Exhibit A - Matrix of UUAD Loan Alternatives and Pro-Forma Cost Calculations

Finance Staff has attached Exhibit A - Matrix of UUAD Loan Alternatives and Pro-Forma Cost Calculations for both the Annual Agreement and the Deferral Fund options. Finance Staff utilized 2000 census data to extrapolate the estimated number of households potentially eligible for assessment loans based upon age and household income. The method utilized to calculate the pro-forma financial impact was not performed scientifically.

It appears likely that applications for Assessment Loans would be processed annually. Finance Staff does not have the resources to administrate the proposed Assessment Loan program. MDG Associates, the City's consultant that administrates the Home Improvement Loan ("HIP") program, has estimated that the processing time is about 5 hours for HIP loans. Due to the additional complexity of processing Assessment Loan applications, Finance Staff suggests that the processing time for UUAD loans would be at least 20 hours for each application. The City currently pays the HIP loan processing consultant $24,000 annually. If the City Council elects to establish an Assessment Loan program, the City could establish a loan-processing fee.

Exhibit B - Alternatives For Proposed Terms And Conditions For Assessment Loans

If the City Council elects to include a provision for Assessment Loans in the proposed guidelines for Utility Undergrounding Assessment Districts, staff seeks direction regarding the proposed terms and conditions for Assessment Loans as described in Exhibit B. Staff has attached Exhibit B - Alternatives For Proposed Terms And Conditions For Assessment Loans to this report to enable the City Council to consider the alternatives and provide Staff direction.

RECOMMENDATION BY THE FINANCE ADVISORY COMMITTEE

Finance Staff presented an overview regarding Assessment Loans and the attached Exhibit A - Matrix of UUAD Loan Alternatives and Pro-Forma Cost Calculations to the Finance Advisory Committee ("FAC") during a meeting on September 30, 2003. The FAC’s discussion with Finance Staff included:

• The fact that economic considerations have changed since the City Council directed Finance Staff to develop an Assessment Loan program;
• Questions and answers regarding the proposed UUAD guidelines;

• The cost differences between choosing either the Annual Agreement option or the Deferral Fund option;

• The pros and cons of using General fund reserves to finance Assessment Loans;
• Staff’s belief that resident’s are likely to not participate in an Assessment Loan program if the City elects the Annual Agreement option;

• The demographic mix of property owners (age, household income) that may be interested in an Assessment Loan program;
• The feedback provided to FAC members and Finance Staff from residents that some residents desire an Assessment Loan program that does not include age and household income eligibility limitations; and
• Whether or not private financing alternatives could be developed as an alternative to an Assessment Loan program requiring the use of General fund reserves.

Upon the conclusion of its discussion, the FAC acted to support Finance Staff’s recommendation (described at the beginning of this report) to:

1. Direct staff to exclude a provision for assessment loans by the City in the proposed guidelines for UUAD’s; or
2. Return the matter to the Finance Advisory Committee to work with Finance Staff and its advisors to attempt to develop an assessment loan program that minimizes or eliminates the City’s use of General fund reserves.

In the event the City Council agrees with the recommendation contained in this report, both Finance Staff and the FAC will attempt to develop a UUAD loan program that minimizes or eliminates the City’s use of General fund reserves. The matter would be agendized for the October 22^nd meeting of the FAC. Additionally, Finance Staff would request assistance from its financial advisor, Fieldman and Rolapp, as well as the City Attorney. Regardless whether or not the City Council elects to exclude a provision for assessment loans by the City in the proposed guidelines for UUAD’s or return the matter to the Finance Advisory Committee, Staff expects to proceed with completion of the UUAD guidelines for presentation to the City Council in the near future.

Respectfully Submitted,

Dennis McLean

Director of Finance and Information Technology

Reviewed,

Les Evans

Attachments

Exhibit A - Matrix of UUAD Loan Alternatives and Pro-Forma Cost Calculations

Exhibit B - Alternatives For Proposed Terms And Conditions For Assessment Loans