Discussion and possible action to: (a) adopt RES. 2018-50 authorizing and directing the transfer of surplus monies in the debt service fund of the City to an irrevocable trust fund to be used to defease a portion of certain General Obligation Bonds outstanding; appointing an escrow trustee, approving an escrow trust agreement for the safe keeping and handling of securities and money to be used to defease such bonds and authorizing the execution and delivery of such agreement; delegating to the Chief Financial Officer of the City the authority to determine various matters relating to such defeasance and ratifying all actions taken to further this resolution; and (b) approve a budget transfer of up to $10,500,000 from the General Fund Contingency account to the General Obligation Bond Debt Service Fund for the defeasance of a portion of certain outstanding General Obligation Bonds.

HB2011 which passed in April 2017, revising Arizona Revised Statutes (A.R.S) Section 35-458, imposed certain restrictions on taxes levied for General Obligation (GO) bonds and also imposed limitations on  GO Bond Debt Service Fund balances. With the passage of HB2011, the City is now required to:

(1) Limit the annual tax levy for GO bonds to the net amount necessary to meet annual principal and interest payments 

(2) Limit the GO Bond Debt Service Fund balance to 10% of current year's principal and interest payments.

The City's GO Bond Debt Service Fund has a balance in excess of the 10% amount allowed by HB2011.  In order to bring the fund balance into compliance with HB2011, staff is proposing utilizing up to $10,500,000 from the GO Bond Debt Service Fund to defease (pay down) a portion of the 2007 and 2010 outstanding GO Bonds. 

The attached resolution authorizes and directs the transfer of excess funds in the GO Bond Debt Service Fund to an irrevocable trust in order to defease a portion of the 2007 and 2010 outstanding GO bonds for compliance with HB2011.

Council is also asked to approve a budget adjustment and authorize the expenditure of funds for the defeasance.

GO bonds are issued for capital projects such as streets, traffic control, drainage, parks, and other public facilities. The debt service (principal and interest) on GO bonds are paid from a property tax levy which the City currently assesses at a rate of $1.25 per $100 of assessed value.

The City has maintained this tax rate of $1.25 since 2008 for payment of current and projected debt service on GO bonds. The $1.25 rate generates tax revenues in excess of actual debt service payments and as a result, the GO Bond Debt Service Fund has accumulated excess reserve funds.      

Moneys accumulated in the GO Bond Debt Service Fund must be used to pay principal and interest on GO bonds. In order to reduce the Debt Service Fund balance to the level allowed by HB2011, staff is proposing defeasance of a portion of the 2007 and 2010 outstanding GO bonds. 

A: (1) Adopt the Resolution authorizing and directing the transfer of surplus moneys in the debt service fund of the City to an irrevocable trust fund to be used to defease a portion of certain outstanding bonds of the City; appointing an escrow trustee, approving an escrow trust agreement for the safe keeping and handling of securities and money to be used to defease such bonds and authorizing the execution and delivery of such agreement; delegating to the Chief Financial Officer of the City the authority to determine various matters relating to such defeasance and ratifying all actions taken to further this resolution, and (2) Approve a budget transfer and authorize the expenditure of funds in the amount of up to $10,500,000 for the defeasance of a portion of certain outstanding GO bonds.   

B: (1) Do not adopt the Resolution authorizing and directing the transfer of surplus moneys in the debt service fund of the City to an irrevocable trust fund to be used to defease a portion of certain outstanding bonds of the City, and (2) Not approve the budget transfer and authorization of expenditure of funds in the amount of up to $10,500,000 for the defeasance of a portion of certain outstanding GO bonds.   

Finance staff recommends approval of the resolution and budget adjustment. 

The City's current debt service payments on outstanding GO bonds total approximately $16 million. With the passage of HB2011, the City is required to limit its GO Bond Debt Service Fund balance to $1.6 million (10% of the debt service amount) and limit the tax levy to not exceed the net amount necessary to meet annual debt service payments.

Given the limitations imposed by HB2011, the tax levy for debt service may fluctuate based on actual debt service requirements.

Budget appropriations in the amount of up to $10,500,000 are available in the General Fund Contingency and can be transferred, with Council approval, to the GO Bond Debt Service Fund to provide budget authorization for the defeasance expenditure. If approved, the budget adjustment will result in a budget appropriation transfer of up to $10,500,000 from the General Fund Contingency (1000-0300-570000) to the GO Bond Debt Service Fund accounts ($1,200,000 for account 5500-5500-560037 and $9,300,000 for account 5500-5500-560038) for defeasance of certain GO bonds.