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HomeMy WebLinkAbout3.0 Proposed Service Plan03/02/00 16:20 • • Sherman & Howard LL.c. Board of County Commissioners Garfield County 109 8th Street, Suite 200 Glenwood Springs, Colorado 81601 ATTORNEYS & COUNSELORS AT LAW 633 SSY0DIT68NTH &FNB87, SUITS 30o0 COWER, COLORADO 80302 TELEPHONE; 303 297.2900 FAX 3032980960 MINCES IN; COLORADO SPRINGS RENO • LAS VEGAS March 1, 2000 Re: Proposed Rose Ranch Metropolitan District Service Plan Ladies and Gentlemen: NO.772 [702 We are special counsel to the County with respect to the review of the above - referenced Service Plan for the proposed Rose Ranch Metropolitan District (the "District"). This letter is in response to a request from the County Attorney's office to review and comment on the Service Plan, with an emphasis on the financial provisions therein. I. IN GENERAL The District is proposed as anew entity to be approved at the upcoming May election, Unlike the districts about which we have advised the County in the past, this District is what is commonly referred to as a "developer district", in that initially there is a single (usually corporate) property owner, and the District is either totally or mostly undeveloped. As such, its assessed valuation is negligible until development occurs, and its ability to repay any debt issued is wholly dependent upon development. It is this fact that we believe is the most important issue for the County. The goal of the County should be to include in the Service Plan restrictions which will prevent the District from incurring indebtedness in such a manner that may result in unreasonable mill levies for the future residents and property owners of the District. We have also discussed several related issues with the County Attorney's office, primarily concerning operations and maintenance responsibilities, and it is our understanding that the financial projections to be included in the final version of the Service Plan will contemplate an increased level of operations and maintenance responsibilities of the District. The remainder of this letter will focus on the issues surrounding the issuance of debt by the District. II. RESTRICTIONS ON DEBT ISSUANCE IN THE SERVICE PLAN The proposed Service Plan contains material restrictions upon the issuance of debt by the District. In fact, as I have discussed with the County Attorney, the provisions in the Service Plan controlling the issuance of debt are almost identical to provisions we have advised be included in developer district service plans in previous advice rendered to the County. See Section Il of our advice letter to the County regarding the Spring Valley Sanitation District, dated February 23, 1999, and you will see that the example of restrictive provisions we included there are actually more liberal 03/02/00 16:20 • • Sherman & Howard 1..><..c. NO.772 [703 Garfield County, Colorado March 1, 1999 Page 2 than what the proponents of the District are here proposing. Essentially, the controls which are now contained in the Service Plan, and which we have recommended in the past, provide that until the District reaches what is defined as the "Debt Issuance Threshold", i.e., when its assessed valuation is at least twice the amount of its debt. Until that point, however, it is permitted to issue ad valorem tax supported bonds only in certain limited circumstances, as follows: 1. Limited Mill Levy Bonds - bonds secured only by a limited mill levy not in excess of 50 mills; 2. Rated Bonds - bonds which are rated in one of the top four categories by a nationally recognized rating agency; 3. Letter of Credit Secured Bonds - bonds secured by a letter of credit issued by a depository institution; 4. Insured Bonds - bonds which are secured by a policy of bond insurance. The most likely category which will be used by the District in the early stages of its development is number 1 above, Limited Mill Levy Bonds. Essentially, the District will obligate itself to impose only a limited debt service mill levy of 50 mills for payment of the debt until the Debt Issuance Threshold is reached. This means that prior to the date on which the Debt Issuance Threshold is reached, the District will be obligated to impose a debt service mill levy of up to 50 mills and no more. Even if that is insufficient to repay the debt, the District is not obligated to impose a higher mill levy. This essentially shifts the risk of a lack of development from the taxpayers of the District to its bondholders (or to the developer or other provider of any credit enhancement). While this normally means slightly higher borrowing costs for the District, it also protects those taxpayers from unreasonable mill levies, even if development does not meet expectations. In fact, it can actually enhance development in the early years because prospective property purchasers do not have the danger of unlimited mill levies. This limited mill levy arrangement differentiates this type of debt from the type which caused problems for so many people in the late 80's. I should note also that this type of provision has become very typical in Service Plans for developer districts. The other exceptions to the Debt Issuance Threshold are also designed to protect the property owners from unreasonable mill levies. If the bonds are rated, the County can take comfort in the fact that a rating agency has assured itself that the mill levies necessary to pay the debt will not become unreasonable. In practice, it is very rare to see rated bonds from any developer district, and I have seen that only where there is some sort of credit enhancement, or where the District's 03/02/00 16:20 • • Sherman & Howard L.L.c. NO.772 D04 Garfield County, Colorado March 1, 1999 Page 3 assessed valuation is already high enough to support the debt. If the bonds are secured by a letter of credit or insurance policy, this also has the effect of assuring that the mill levies will not get out of control because the provider of the credit enhancement is taking that risk rather than the property owners of the District. I note that the restrictions in the proposed Service Plan are consistent with, and in fact more restrictive than, the provisions of state law appertaining to special districts. The following is an excerpt from the portion of the Special District Act (Section 32-1-1101, C.R.S.) which places restrictions on the issuance of tax -supported bonds: "(6) (a) The total principal amount of general obligation debt of a special district issued pursuant to subsection (2) of this section, which debt is issued on or after July 1, 1991, shall not at the time of issuance exceed the greater of two million dollars or fifty percent of the valuation for assessment of the taxable property in the special district, as certified by the assessor, except for debt which is: (I) Rated in one of the four highest investment grade rating categories by one or more nationally recognized organizations which regularly rate such obligations; (II) Determined by the board of any special district in which infrastructure is in place to be necessary to constrict or otherwise provide additional improvements specifically ordered by a federal or state regulatory agency to bring the district into compliance with applicable federal or state laws or regulations for the protection of the public health or the environment if the proceeds raised as a result of such issue are limited solely to the direct and indirect costs of the construction or improvements mandated and are used solely for those purposes; (III) Secured as to the payment of the principal and interest on the debt by a letter of credit, line of credit, or other credit enhancement, any of which must be irrevocable and unconditional, issued by a depository institution: (A) With a net worth of not less than ten million dollars in excess of the obligation created by the issuance of the letter of credit, line of credit, or other credit enhancement; (B) With the minimum regulatory capital as defined by the primary regulator of such depository institution to meet such obligation; and (C) Where the obligation does not exceed ten percent of the total capital and surplus of the depository institution, as those terms are defined by the primary regulator of such depository institution; or (IV) Issued to financial institutions or institutional investors. (b) Nothing in this title shall prohibit a special district from issuing general obligation debt or other obligations which are either payable from a limited debt service mill levy, which mill levy shall not exceed fifty mills, or which are refmndings or restructurings of outstanding obligations, or which are obligations 03/02/00 16:20 • • Sherman & Howard LLe. NO.772 P05 Garfield County, Colorado March 1, 1999 Page 4 issued pursuant to part 14 of this article." As can be seen, there are several exceptions to the Debt Issuance Threshold in the statute which are not contained in the proposed Service Plan (e.g., the $2,000,000 de minimus limit). As a result, the provisions of this Service Plan are actually more restrictive than what state law would otherwise permit. It should be noted that upon reaching the Debt Issuance Threshold (i.e., assessed valuation which is twice the amount of the District's debt), the District will be able to issue unlimited mill levy bonds. However, when and if the District's assessed valuation reaches twice the amount of its debt, the bonds could be paid with a mill levy of approximately 50 mills, and thus this is also consistent with the County's desire to avoid a situation in which the District's mill levy would become unreasonable. For example, if the District had an assessed valuation of $10,000,000 and bonds outstanding in the amount of $5,000,000, and assuming a 8.00% borrowing rate (which is higher than would be expected in today's interest rate market), a level amortization of that debt over 20 years would require $509,261 annually to be produced, which translates into a mill levy of slightly over 50 mills, even assuming no further growth in assessed valuation. This release provision is very typical in this type of service plan because at that point, the District would be sufficiently developed, and could potentially reduce its borrowing costs (and thus its debt service mill levy) by issuing normal, unlimited mill levy bonds. III. CONCLUSION Based upon a review of the financial provisions of the Service Plan, we feel the limitations therein are consistent with the typical provisions most service plan providers include in developer district service plans for similarly situated districts, and will provide future taxpayers sufficient protection against unreasonable mill levies. Sincerely, SYERMAN & HOWARD L.L.C. Blake T. Jordan