Item 2F: Amendment to City of Eugene Debt Policies

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The IRS allows any governmental entity that can issue tax-exempt debt to provide conduit financing for these qualified private projects. Oregon law is more restrictive than the IRS, but the City has the authority to provide conduit financing. A conduit financing does not obligate the governmental issuer, and the conduit financing is not secured by any revenues or assets of the governmental issuer. The conduit financing is secured solely by the revenues and assets pledged by the private entity that benefits from the conduit financing. In Oregon, there are several conduit issuers that are active in the tax-exempt markets. The Oregon Facilities Authority is a conduit issuer for housing, health care, education and cultural facilities. The Oregon Economic and Community Development Department also acts as a conduit issuer for industrial projects that create jobs, and the Oregon Housing and Community Services Department acts as a conduit issuer for low-income housing projects. In addition, some local governments serve as conduit issuers. For instance, the Cascade Manor construction project was financed through tax-exempt bonds sold through the Hospital Facilities Authority of the City of Medford. Debt Policy The City’s debt policies contain a section on conduit financing, and that section is included as Attachment A. Minor changes were made in the 2004 policy update, including adding a definition of a conduit financing. The City has no prior experience with conduit financings. At the time of the 2004 debt policy update, use of the HUD Section 108 loan was not contemplated and was not taken into account in drafting the policy language. This section of the policy did not get any significant attention from the Budget Committee during the discussions. During the Section 108 discussions, staff consulted with bond counsel about this portion of the debt policies. It became apparent during those conversations that the current definition of conduit financing is not legally accurate and incorrectly classifies Section 108 as conduit financing. Section 108 is not conduit financing for two reasons: 1) a HUD Section 108 loan is taxable; and 2) a Section 108 loan requires the obligation of the City to pledge future Community Development Block Grant (CDBG) funds as security. (Conduit financing by definition is one that is tax-exempt and does not obligate the issuing jurisdiction at all.) If a legally accurate definition of conduit financing were to be included in the policy, the Section 108 would not fall under the conduit financing policy provisions. In order to remedy this issue, staff recommends that the council amend the debt policies to include a legally accurate definition of conduit financing. Attachment A includes the recommended policy change. RELATED CITY POLICIES This action is an action to amend the City’s debt policies related to conduit financing. The text of the current policy, along with proposed amendments, is included as Attachment A. COUNCIL OPTIONS The council may choose to adopt the amendment as proposed or to not adopt the amendment. If the amendment is not adopted, the City will have a policy with a legally inaccurate definition of conduit financing, and that inaccuracy will result in some financing mechanisms, such as the HUD 108 Loan, inappropriately falling under the conduit financing policy. If the HUD 108 Loan falls under the conduit financing policy because the suggested amendment is not approved, a policy waiver will be required to use that financing method. L:\CMO\2007 Council Agendas\M070514\S0705142F.doc