1. Roll Call.
   
   
2. Approval of Agenda.
   
   
3. Approval of Minutes for the meeting held on December 12, 2001.
   
   
4. Assessment Deferrals For Undergrounding Districts. – (McLean)
   
   
5. 2002 Five-Year Financial Model – Suggestion From City Council Regarding Dynamic Format And Content. (McLean)
   
   
6. Status report of economic trends that may have an impact on the City, including an overview of the attendance at the Contract Cities Legislative Conference by the Finance Director and several FAC Members. (McLean)
   
   
7. Public Comments.
   
   
8. Adjournment.

Staff Coordinator: Kathryn Downs, Accounting Manager

During its November 7^th discussion of utility undergrounding assessment districts (hereafter referred to as "UUAD’s"), the City Council assigned the Finance Advisory Committee (the "FAC") with the following task:

During its December 12^th meeting, the FAC asked Finance Staff to provide additional information regarding the financial impact resulting from the proposed policy to provide assessment deferral loans for eligible property owners within UUAD’s.

Several factors for consideration by the FAC include:

• Is the State Controller’s Office Property Tax Postponement Program a satisfactory alternative? The Program is available to senior citizens and the disabled with household income less than $24,000 annually. Additionally, the Program requires participants to file annual applications with the State. The Program will not cover the cost of connection fees (generally about $5,000).
• In the event the City adopts a policy for assessment deferrals loans, what would be the definition of "low household income"? The State definition currently established at $24,000? Should the City consider a higher "low income" threshold, such $35,000 or $50,000? At what level of household income could a senior household afford the annual assessment? Should all senior households be eligible, regardless of their respective household income? Should a disabled property owner be eligible, regardless of their respective household income?
• How much money should the City commit annually to pay assessments (in the form of assessment deferral loans) on behalf of eligible property owners?
• How many UUAD’s will be formed over the next 20 to 30 years? One each year? One every three years? The frequency and district size should be considered during the development of UUAD deferral program that includes assessment deferral loans.

The method Finance Staff used to calculate the pro-forma financial impact was not performed scientifically, but rather an estimation of likely factors. Finance Staff used the following assumptions provided by the Director of Public Works for its calculations:

• The estimated connection fee for each property is $5,000.
• The estimated construction assessment for each property is an additional $20,000.
• The estimated cost of bond issuance is $3,000 for each property.
• The estimated debt service reserve deposit required as security with the issuance of the assessment debt is $2,500 for each property.
• The term of the assessment bonds is assumed to be 20 years.
• The assessment bond interest rate is conservatively presented at 7% for purposes of the calculation.

Based on these assumptions, Finance Staff calculated an average annual assessment of $2,821 per property within a UUAD.

Finance Staff utilized census data to extrapolate the estimated number of households potentially eligible for assessment deferrals based upon age and household income. Using the simple extrapolation method and assuming an average assessment district size of 20 homes, the estimated number of households eligible for deferral is presented below. The estimated number of eligible households is multiplied by the calculated average annual assessment of $2,821 to determine the estimated annual assessment deferral.

There are two ways the City may fund deferred assessments:

• "Annual Deferral Agreement" option: Each year the City would fund the annual deferral on behalf of eligible property owners (in the form of assessment deferral loans). The commitment would continue to be in effect until the City exercises an option to cancel the agreement to pay all future assessments.

• "Deferral Fund" option: The City would fund assessment deferrals loans for eligible property owners for the entire term of the assessment district bond schedule. In order to choose this option, the City must deposit funds during the first year of UUAD equivalent to the entire stream of principal and interest assessment payments into a Deferral Fund on behalf of each eligible property owner.

The following assumptions were considered while preparing the tables below:

• The Public Works Director has suggested that the formation of one UUAD could begin each year, and would require 3 years to complete. Based upon discussion with both the Director of Public Works and the City Manager, UUAD’s may be formed in varying frequencies (e.g. 2 or even 3 could be formed during one year or one every 4 or 5 years). The financial impact presented below assumes that one UUAD is formed each year. Obviously, if one UUAD were formed every 3 years, the General fund impact would be one-third of the amounts presented below. If two UUAD’s were formed each year, the impact would be double the amounts presented.
• Repayment of the total assessment deferral loan owed the City would be required whenever the parcel of property is transferred, regardless whether by sale or otherwise. Current average life expectancy (for all races and both genders) is 77 years of age. For the sake of the following computation, with respect to the 55+ and 65+ categories, Finance Staff has assumed that repayment will take place when the eligible property owner (the borrower) reaches 77 years of age. There does not appear to be any other reasonable, simple method of estimating when a property may be sold or transferred, other than using life expectancy. For the all-age category, we have assumed repayment will occur 30 years after the initial assessment.

The annual financial impact using the Annual Deferral Agreement option is presented below, assuming one UUAD is formed each year. Assuming repayment for the 55+ and 65+ categories begins when a Year 1 participant reaches age 77, the proceeds received from assessment deferral loan repayments could be used to fund new assessment deferrals. For the 65+ categories, this occurs after 12 years. For the 55+ categories, this occurs after 22 years.

The average annual financial impact for using the Deferral Fund option is presented below:

The following additional information is offered for consideration of the ongoing financial impact upon the General fund resulting from UUAD deferrals:

• Is it prudent for the City to make the long-term commitment to pay assessments on behalf of eligible property owners pursuant to the Deferral Fund Option?
• Should the City’s proposed assessment deferral policy enable the City Council to choose either the Annual Deferral Agreement or Deferral Fund option when each UUAD is under formation? If only the Deferral Fund option is utilized initially, perhaps the City Council could elect the Annual Deferral Agreement when economic conditions warrant annual consideration of the cost of the assessment deferral policy.
• If the City selects the Annual Deferral Agreement option, property owners may be reluctant to participate in the deferral program because it does not provide them the security that goes along with the City’s commitment to pay the assessment for the entire term of the assessment district bond schedule. Depending on the ratio of potentially eligible property owners within the proposed UUAD, the lack of a long-term commitment by the City may impair an affirmative vote to form the district.
• The City certainly has the flexibility to choose individual options and program criteria for each UUAD. According to City Attorney, Mark Mandell: "A single policy, on the other hand, can provide more certainty for district proponents."
• In accordance with the proposed UUAD petition process, a group of property owners would notify the City of intent to form a district via an informal petition. Should the informal petition include a condition for participation in the UUAD based on the property owner’s eligibility to participate in an assessment deferral loan program? As such, this may be a useful planning tool to help determine whether or not one or more property owners would participate in an assessment deferral loan program, and the resulting cost to the City of providing assessment deferral loans for each UUAD.

Finance Staff offers the information described above for further consideration by the FAC. After its discussion, the FAC may wish to formulate a recommendation to the City Council or request additional information by Finance Staff, the City Attorney or the Director of Public Works.

Respectively Submitted,

Dennis McLean
Finance Director

Attachments:
December 12, 2001 Staff Report to FAC, ASSESSMENT DEFERRALS FOR UNDERGROUNDING DISTRICTS