Transit Task Force: Organizational Issues & Debt

August 26, 2015Department of Finance

www.montgomerycountymd.gov/finance

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Organization & Debt Issues

• Issue: Whether WGF Recommendations may require that the Transit Authority Debt be considered debt of the County.

• Why is this important• Balance Sheet Issue

– How debt is legally structured– Level of organizational control

• Rating Agency (RA) Issue– May 6 Presentation on Budget, Financing and Debt

issues referenced the RA criteria and the County’s current unadjusted Moody’s rating

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Organizational Control & Financial Reporting ImpactApproach to Analysis

Debt considered independent of the County ?

• GASB – Sets Standards• Component Unit =

– Discrete (separate column) or – Blended (part of County – like County fund/dept)

• Flowchart approach• Recommendations to support “Discrete”

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GASB Analysis Flow ChartGOVERNANCE

Is the Transit Authority (component unit’s) governing body substantively the same as the governing body of the Montgomery County Govt. (primary government) and (1) is there a financial benefit or burden relationship between the primary government and the component unit, or (2) does management of the primary government have operational responsibility for the component unit?

No Yes

Move to next slide Blended Component Unit

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GASB Analysis Flow ChartCUSTOMER BASE

Does the component unit provide services entirely, or almost entirely, to the primary government or otherwise exclusively, or almost exclusively, benefit the primary government even though it does not provide services directly to it?

Move to next slide Blended Component Unit

No Yes

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GASB Analysis Flow ChartDEBT REPAYMENT

Is the component unit’s total debt outstanding, including leases, expected to be repaid entirely or almost entirely with resources of the primary government*?

Discretely Presented Component Unit Blended Component Unit

No Yes

*”Resources of Primary Government” refer to how the resources are generated (e.g. By Council approval/imposition of tax rates) and not as to restrictions on use.

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Finance Analysis of WGF Recommendations

• Finance reviewed the Tentative Decisions of Working Group on Organization and Transfer of Functions regarding the establishment of a new transit authority to determine whether generally accepted accounting principles (GAAP) would require the entity’s debt be reported as the debt of the County government.

• Debt Structure: The review assumed that the report’s recommendation incorporated the Office of County Attorney’s opinion on issuing legally separate debt.

• Organizational Review: Therefore, the main GAAP consideration was whether the new entity would be a component unit of the County and, if so, whether it would be presented as a blended component unit or a discrete one. The latter presentation would be consistent with the WGF goal for debt reporting.

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Finance Analysis of WGF Recommendations• For GAAP purposes, a component unit is a legally separate

organization for which the elected officials of the primary government are financially accountable and therefore its financial reporting is included in the County’s financial statements.

• For financial reporting purposes, a blended component unit is essentially reported as if it were a department or fund of the primary government.

• A discretely presented component unit would be presented in the County’s financial report discrete (separate) from all other County financial statements. Hence, the entity’s debt would be reported separate from the County.

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Finance Analysis of WGF Recommendations• From the review, it was clear the new entity would be a component unit

of the County. However, the determination of whether it would be a blended or discretely presented component unit was not clear based on the wording of the report.

• Specifically, based on WGF recommendations regarding the imposition of property and excise taxes, GAAP may require the new entity be reported as a blended component unit of the County. Therefore, the debt would NOT be separately presented.

• The primary reason for this is that GAAP requires the entity’s debt be repaid with Non-County resources to be a discretely presented component unit.

• The County’s imposition of taxes used to either directly or indirectly fund the new Authority’s debt service could be considered the County using its resources to repay the debt.

• County resources are defined in reference to how the resources are generated not as to restrictions on use.

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Proposed Revision To WGF Section 22. (a) the County is authorized to create special taxing districts.

(b) the Authority is authorized under state law to impose a special real property tax within the geographic area(s) contained in the special taxing districts created by the County up to an amount not to exceed the maximum tax rates hereinafter set forth; with the maximum special tax rates which may be imposed by the Authority not to exceed 7¢ for a County-wide special taxing district; provided, further, that any tax rate set by the Authority shall be subject to the disapproval by the Council. If the tax rate imposed by the Authority is disapproved by the Council on or before June 15th in any fiscal year, the Authority shall be authorized to impose, and the County shall collect as the agent of the Authority, special real property taxes calculated at a rate or rates sufficient to enable the Authority to fully pay the Authority’s capital debt obligations for the current year’s budget, and the Council and Authority shall thereafter negotiate in good faith the terms of the County’s permanent approval of the imposition of the tax or taxes as applicable.

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Proposed Revision To WGF Section 2

2. (c) the Authority is authorized under state law to impose an excise tax within the geographic area(s) contained in the special taxing districts created by the County up to an amount not to exceed 30¢ per square foot subject to disapproval by the Council.

The authority shall submit to the Council for approval by February 1st any change in the excise tax rate that the authority proposes to take effect for the ensuing fiscal year. If the excise tax rate imposed by the authority is disapproved by the Council on or before June 15th, then the authority shall impose for the next fiscal year the same excise tax rate that was imposed during the preceding fiscal year.

The County shall collect the excise tax as the agent of the authority.

NOTE: Additional corresponding revisions to language in item #3, the CIP and budget process section, of the WGF report will be required.

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Proposed Revision To WGF Section 2

5. All dedicated transit revenues would be paid into one or more special funds of the Authority; the principal and income of which could only be used to fund authority activities and in accordance with authority bond indentures and related requirements.

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Proposed Revision To WGF Section 2• Comment: It should be noted that the enabling legislation

will continue to provide that the Council and Executive will have review and approval power over the authority’s:– capital improvement program, capital budget, operating

budget, – requests to authorize the authority to exercise the power of

eminent domain, and– the approval of the issuance of bonds by the authority.

• The enabling legislation will also include provisions requiring the authority to:– develop performance measures, and– file regular annual financial and management reports with the

County.

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Direct Debt: General Obligation Bonds Outstanding $1,947,490,000 General Obligation Variable Rate Demand Obligations 100,000,000 Short-Term BANs/Commercial Paper Outstanding** 0 2014 General Obligation Bonds 500,000,000 2014 General Obligation Refunding Bonds 297,990,000 Revenue Bonds Outstanding 196,875,000

Total Direct Debt $3,042,355,000

Overlapping Debt as of June 30, 2014 Gross Debt: Washington Suburban Sanitary Commission Applicable to Montgomery County 1,406,111,000 Housing Opportunities Commission 733,830,685 Montgomery County Revenue Authority 90,501,519 Maryland-National Capital Park and Planning Commission Applicable to Montgomery County 44,825,000 Kingsview Village Center Development District 1,570,000

West Germantown Development District 13,505,000 Towns, Cities and Villages within Montgomery County 142,656,981

Total Overlapping Debt $2,433,000,185 Total Direct and Overlapping Debt $5,475,355,185

Less Self-Supporting Debt: County Government Revenue Bonds as of June 30, 2014 196,875,000 Washington Suburban Sanitary Commission Applicable to Montgomery County 1,406,111,000 Housing Opportunities Commission 733,830,685 Montgomery County Revenue Authority 90,501,519

Total Self-Supporting Debt (2,427,318,204)

Net Direct and Overlapping Debt $3,048,036,981

Statement of Direct and Overlapping DebtAs of June 30, 2014

And Including 2014 General Obligation Bonds*

Rating Agency Assessment of DebtPreliminary Conclusion: The rating agencies would most likely view the Authority’s debt as “overlapping debt” and not direct debt. Before this conclusion is reached they would consider several factors:1. The level of independence of the Authority.

a) Council approval of tax increase and operating budgetb) Control of capital projectsc) Approval for projects requiring a tax increase

2. Rating agencies do consider overlapping debt in their ratiosa) How burdensome is the overall tax levy on the County?b) Tax burden compared to other AAA counties?

3. Does expanding the mission to other Transportation Projects decrease any burden on the County’s current General Fund? If so it would be viewed as “credit positive”.

4. Would additional projects result in expected economic development?a) Does the Authority and the related transportation projects generate additional future

revenues?a) Critical for justifying an increased debt burden.

5. Would the County ever have to step in and pay debt service or operating costs?6. Will creating a Transportation Authority allow the County to transfer current operating costs or

capital costs out of the general fund?7. Who appoints the members and can the County or County Council remove members before their

term expires?8. How involved will the County Executive or County Council be in running or overseeing day to day

operations?15

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Impact of Entity Accounting /Reporting of TA Debt

ACCT CONCLUSION - INDEPENDENT DISCRETE COMP UNIT BLENDED COMP UNIT

IMPACT ON: Net direct debt Yes – Of the Authority Yes – Of the Authority Yes – Of the CountySelf-supporting debt No * No * No *Overlapping debt Yes – Of the County Yes – Of the County No SAG No No NoRating Agency Impact No No Yes

*Taxes are assumed to be taxes of the Authority, that are collected and remitted to the Authority by the County, and are dedicated to the payment of debt service. Assumptions are based on latest discussion of proposed roles of State, County and Authority in the tax authorization & caps, rate setting, imposition, collection, and related processes.

NOTE: Results above are from initial research (using Moody’s definitions for classification of debt), and preliminary discussions with financial advisor.