210-11
FINANCIAL CONSIDERATIONS IN FORMING CITY LOCAL IMPROVEMENT DISTRICTS (L.I.D.) CURRENTLY UNDER REVIEW

Department: FINANCE

Effective Date:    8/01/85

Supersedes:    

Prepared by:    M. Mulcahy

Approved by:    Barbara Shinpoch

1.0 PURPOSE:

To establish financial criteria for proposed L.I.D. formations.

2.0 ORGANIZATIONS AFFECTED:

Public Works Department and Finance Department.

3.0 REFERENCES:

RCW 35.43, 35.23, 35.44, 35.45, 35.49, 35.54.

Resolution No. 2494.

4.0 POLICY:

4.1    It is the policy of the City to limit its financial responsibility in the case of a default on an L.I.D. assessment. Such protection will be provided in several ways: (1) the L.I. guaranty fund; (2) advance cash deposits by L.I.D. participants; (3) advance letter of credit agreement with L.I.D. participants; (4) refusal of a council to undertake L.I.D.s which are financially unsound.

4.2    The City will incur no costs beyond those of preparing the preliminary assessment roll until the L.I.D. ordinance takes effect, interim financing has been obtained and a take-out letter from the City's investment banker is obtained.

5.0 DEFINITIONS:

5.1    L.I.D.:

Local Improvement District.

5.2    Letter of Credit:

An agreement between the L.I.D. participant, the City, and a financial institution which promises payment to the City if the L.I.D. participant defaults on assessment payments.

5.3    Take-out Letter:

A letter from the City's investment banker promising to provide purchase proposals for future L.I.D. bonds which provide permanent financing for L.I.D. improvement projects.

5.4    Interim Financing:

Short term financing, usually in the form of interest bearing warrants or bond anticipation notes, which is used to construct the L.I.D. project, which will be replaced by permanent L.I.D. bonds at project completion.

5.5    L.I. Guaranty Fund:

A special fund of the City established to guarantee the payment of L.I.D. assessments. No minimum amount is established for this fund, but sufficient amounts must be maintained to insure the marketability of L.I.D. bonds. In an L.I.D. default, the assessment payments are made from the L.I. guaranty fund and, when exhausted, interest bearing warrants are issued on behalf of the L.I. guaranty fund to continue assessment payments. Such interest bearing warrants must be redeemed in the following budget year through a special property tax levy upon all citizens within the City.

6.0 PROCEDURES:

The following procedures are not intended to replace or augment existing L.I.D. requirements as established in state law but rather are additional requirements to insure the financial soundness of an L.I.D. before it is accepted by the City Council.

6.1    Upon receipt of an L.I.D. petition, the Public Works Department will gather the following information:

6.1.1    Number of property owners involved in the L.I.D.

6.1.2    Percent of the L.I.D. area already developed.

6.1.3    Nature of the requested L.I.D. improvements.

6.1.4    Age of the developed property within the proposed L.I.D.

6.1.5    Other L.I.D.s in the area.

6.1.6    Other assessments outstanding on the property in the L.I.D.

6.1.7    A preliminary estimate of approximate costs to construct the requested L.I.D.

6.2    Based upon the information provided by the Public Works Department in 6.1 above, the Finance Department, with assistance from the City investment banker, will perform the following financial test for each individual assessment on the preliminary assessment roll:

6.2.1    Foreclosure ratio test: The lower of the current assessed valuation or market value (as determined by a certified MAI appraiser) must be at least two times the estimated cost of the improvement. For example, for property with a current market value of $500,000, the maximum L.I.D. the City would accept without additional collateral would be for $250,000. The L.I.D. participant may provide additional collateral through cash deposits in an escrow account or letter of credit. In this case, the sum of the lower of the assessed or market value of the property plus the additional collateral must be twice the value of the improvements. If, at a later date, assessed value or market value (the lower of, as certified above) becomes two times the value of the improvement, then the additional collateral requirement is waived.

6.2.2    Collateral to insure assessment payments: If an assessment payment is not made by an L.I.D. participant, it may take as long as two years to foreclose on the property and use the foreclosure proceeds to satisfy the L.I.D. assessment. For this reason, it is necessary for the City to have access to sufficient funds to make the assessment payments on the L.I.D. bonds while undergoing this foreclosure procedure. This collateral will be provided as follows:

1.    For L.I.D.s for which the total assessment payments for a two-year period are less than $50,000, the L.I. guaranty fund will serve as sufficient collateral, and no additional collateral from the L.I.D. participant will be required.

2.    For L.I.D.s for which two years' assessment payments exceed $50,000, the L.I.D. participant must provide additional collateral above the $50,000 in one of two ways:

a.    Through a cash deposit placed in escrow payable to the City in case of L.I.D. default; or

b.    Through a letter of credit with a bank acceptable to the City.

3.    If at any time during the life of the L.I.D. assessment two years' assessment payments are $50,000 or less, the additional collateral requirements above are waived.

6.2.3    It is the intent that each and every assessment on the preliminary assessment roll meet the criteria in 6.2 above. However, the Council reserves the right to proceed with an L.I.D. if it is satisfied that a sufficient number of assessments do meet the criteria in 6.2 and it is in the City's best interests to do so.

6.2.4    Marketability of the future L.I.D. bonds: Before an L.I.D. will be accepted by the City, a take-out letter from the City's investment banker is required which promises that the investment banker will provide a proposal to purchase for resale the L.I.D. bonds which will provide permanent financing for the project. In determining whether such a take-out letter will be issued, the investment banker will consider the following factors:

1.    Property values within the L.I.D.

2.    Number of owners.

3.    Percent of L.I.D. already developed.

4.    Nature of the improvements.

5.    Age of the area to be improved.

5.    Other L.I.D.s in the area.

7.    Other assessments outstanding against the owner or property.

8.    Dollar size of the issue.

9.    Ability to offer the L.I.D. bonds at a discount.

10.    The length of the assessment roll.

11.    The guaranty fund balance.

7.0 SUMMARY:

The purpose of this policy is to evaluate preliminary L.I.D. applications to insure that:

1.    The participants can demonstrate the ability to pay their assessments.

2.    The value of the property to be improved is sufficient to pay for outstanding L.I.D.s in case of default.

3.    That both interim and long-term financing can be obtained for the L.I.D. project.

These three objectives are accomplished by tests in three critical areas:

1.    Foreclosure ratio as described in 6.2.1 above.

2.    Security for at least two years' L.I.D. assessment payments as indicated in 6.2.2 above.

3.    A determination that long-term L.I.D. bond financing is available as indicated in the take-out letter from the City's investment banker and as determined in 6.2.3 above.