HomeMy WebLinkAboutItem 2F: Amendment to City of Eugene Debt Policies
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UGENE ITY OUNCIL
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GENDA TEM UMMARY
Amendment to City of Eugene Debt Policies
Meeting Date: May 14, 2007 Agenda Item Number: 2F
Department: Central Services Staff Contact: Sue Cutsogeorge
www.eugene-or.gov Contact Telephone Number: 682-5589
ISSUE STATEMENT
The City Council is requested to amend the City’s debt policies related to conduit financing in order to
make the definition of conduit financing legally accurate.
BACKGROUND
In connection with City Council approval of an ordinance authorizing the HUD Section 108 Loan, the
issue of the applicability of the City’s debt policies was raised. As a reminder, in February 2006, the
City received notice of award of a $2 million Brownfield Economic Development Initiative (BEDI)
grant to assist redevelopment projects within the City's two urban renewal districts. BEDI funds must be
used in conjunction with, and for projects financed by, a HUD Section 108 guaranteed loan commitment
(Section 108). The council approved an ordinance authorizing the Section 108 on February 26.
When the City first reviewed use of a Section 108 loan as a way to finance economic development
efforts in the downtown area in 2005, the issue of the conduit financing policy was raised and staff
recommended that the council waive this policy when it approved a Section 108 loan. The council did
not waive the policy when it approved the ordinance authorizing the Section 108 loan and asked that the
issue of the debt policies be brought back for subsequent approval.
In a memorandum dated April 9, 2007, Sue Cutsogeorge alerted the council that the issue of a debt
policy amendment would be brought to the council as a consent calendar item on May 14. The body of
this Agenda Item Summary restates the information included in that April 9 memorandum.
Background on Conduit Financings
The Internal Revenue Service (IRS) allows certain private entities to access tax-exempt financing
through a governmental entity. These financings are called conduit financings, because the
governmental entity acts as a “conduit” through which the private entity can receive lower-cost tax-
exempt financing.
Only a few types of private projects are eligible for conduit financing, including small manufacturing
facilities, facilities owned and operated by qualified 501(c)(3) organizations, certain kinds of low-
income housing projects, and other projects that can be financed with “qualified bonds” as defined in the
Internal Revenue Code. Conduit financing is generally used for capital and construction-related
projects.
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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.
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CITY MANAGER’S RECOMMENDATION
The City Manager recommends approving the proposed policy change.
SUGGESTED MOTION
Move to direct the City Manager to amend the City’s debt policies regarding conduit financing, as
included in Attachment A.
ATTACHMENTS
A. Excerpt on conduit financing from the City’s debt policies, adopted February 2004 by the Budget
Committee, marked to show suggested amendment
FOR MORE INFORMATION
Staff Contact: Sue Cutsogeorge
Telephone: 682-5589
Staff E-Mail: Sue.L.Cutsogeorge@ci.eugene.or.us
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ATTACHMENT A
Excerpt on Conduit Financing from the City’s Debt Policies
Adopted February 2004 by the Budget Committee
Marked to Show Suggested Amendment
Conduit Financings
1.Conduit financings are financings that the City provides for the benefit of non-governmental
entities to allow those non-governmental entities to obtain low cost, tax-exempt financing.
Conduit financings are not secured by any revenues or assets of the City except revenues and
assets provided by the non-governmental entities that benefit from the conduit financings.
The United States Internal Revenue Code substantially limits the ability of the City to provide
conduit financing; conduit financings are only available for small manufacturing facilities,
facilities used by qualified 501(c)(3) organizations, certain kinds of low income housing
projects, and other projects that can be financed with “qualified bonds” as defined in the
Internal Revenue Code.
Conduit financings are defined as bonds issued by the City to finance a
project to be used primarily by a third party, usually a corporation engaged in a private enterprise.
2.Recognizing that the City is able to issue debt for broad purposes, it may be appropriate to enter into
a conduit financing on behalf of another party when the City Council determines that the proposed
project will provide a general benefit to City residents and/or the City economy.
3.Conduit financing will be considered only when a project is consistent with the city’s overall service
and policy objectives.
4.The City should not incur any moral or financial obligation under a conduit borrowing.
5.The City will only consider conduit financings that will insulate the City from any credit risk.
6.Any financing issued through the City must qualify for an investment grade rating by one of the
nationally recognized statistical rating agencies or provide alternative credit enhancement from a
third party satisfactory to the City or a corporate guaranty if the corporation carries an investment
grade rating.
7.All expenses related to conduit financing will be borne by the third-party applicant for whom the
debt is being issued.
8.The City will establish review procedures of the requesting party for projects, including adherence to
public contracting requirements, development of a financial feasibility study of the project, and
submission of annual financial statements to ensure the ability to repay the debt.
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