Economic Development -- Debt Financing of CharMeck Projects

[kermit 12526]

So, I don't know anything about debt finance or the details of the political / legal processes. Fortunately I know quite a few UPers do know a ton about this stuff so I'll ask the question: 

Charlotte is currently looking at a bunch of expensive projects (Convention center, transit build out, affordable housing, whatever David Tepper wants, etc.) and we are in a period of generationally low interest rates (Japan just started to turn a profit from its debts!) -- this seems like an important confluence of events. Particularly since CharMeck appears to have preferred pay as you go for most projects over the past 20 years (but I may be wrong about that) and also people seem to be very willing to bet on our growth streak continuing.

So do all bond issues in Charlotte need to be approved in a referendum?  Has the city said yet what the debt capacity on the tourism tax is? What type of interest rate would the city/county/CATS be looking at for transit construction debt and could CATS bonds be sold as General Obligation bonds or would they be required to be attached to a specific revenue stream?

If the city were a person it would be an excellent credit risk, but great credit ratings don't do anyone much good if they are not used. Given our AAA rating, what are the odds of Charlotte putting a bunch of necessary projects on the (proverbial) municipal credit card?

 

Edited September 27, 2019 by kermit

[kermit 12526]

Borrow money for the Silver Line now!

 

 

[Scribe 1775]

7 hours ago, kermit said:

Borrow money for the Silver Line now!

I think we should be funding the entire Big Bang at this point.   This might be our real chance to get a head start on the bigger plan!

Hell I would even say lets do the same for our greenways!

Edited March 6, 2020 by Scribe

[Madison Parkitect 1770]

I agree, the city should really take advantage of this if they're legally able to.

[NYtoCLT 226]

On 9/27/2019 at 2:12 PM, kermit said:

So, I don't know anything about debt finance or the details of the political / legal processes. Fortunately I know quite a few UPers do know a ton about this stuff so I'll ask the question: 

Charlotte is currently looking at a bunch of expensive projects (Convention center, transit build out, affordable housing, whatever David Tepper wants, etc.) and we are in a period of generationally low interest rates (Japan just started to turn a profit from its debts!) -- this seems like an important confluence of events. Particularly since CharMeck appears to have preferred pay as you go for most projects over the past 20 years (but I may be wrong about that) and also people seem to be very willing to bet on our growth streak continuing.

So do all bond issues in Charlotte need to be approved in a referendum?  Has the city said yet what the debt capacity on the tourism tax is? What type of interest rate would the city/county/CATS be looking at for transit construction debt and could CATS bonds be sold as General Obligation bonds or would they be required to be attached to a specific revenue stream?

If the city were a person it would be an excellent credit risk, but great credit ratings don't do anyone much good if they are not used. Given our AAA rating, what are the odds of Charlotte putting a bunch of necessary projects on the (proverbial) municipal credit card?

 

I can't speak to the political process here or how these things work in practice in NC in particular but I have worked on a number of large transformative projects  in other cities financed by TIF (Tax Incremental Financing) to pay the debt service on bonds for large development projects.  This is one method of making sure you have the revenue allocated to pay back the bond holders. 

For the uninitiated, the basic idea is that you sell bonds to investors and use the proceeds to fund public improvements (and/or sometimes going to developers for private infrastructure, but that is more controversial).  Then, the area around where the bond proceeds are invested is designated a special improvement district or some other term of art, where any increase in tax revenue over the previous assessed value will be specifically allocated to pay back the bonds.  For example, by building a beautiful park the surrounding parcels will go from being worth $100 to being worth $150, so taxes on the extra $50 will be used to pay back the bonds.  If the TIF proceeds aren't enough, there is usually a mechanism for levying special taxes on the parcels above what would otherwise be due.  In theory this makes it so the City doesn't see any decrease in its tax revenue to the general fund since the only funds being used to pay the bonds were created specifically because of the increase in value caused by the investment.

That is a simplified break down, but hits the broad strokes.  A couple of things though.  First, every State/City will have different authority/structure so it is not clear this is something Charlotte could necessarily do as of right.  I have no knowledge of NC/Charlotte processes.  Second, the biggest obstacles in getting this done is usually political.  Even though, as described above, there should be no "free money" given to developers since you aren't using general tax revenue, but just increased value, explaining that to voters is not easy.  This is often viewed as a hand out to the rich because land owners around the improvements see an increase in value because of government money.  In my experience, getting this done is extremely hard because of voters.

[CLT> 1681]

8 hours ago, NYtoCLT said:

I can't speak to the political process here or how these things work in practice in NC in particular but I have worked on a number of large transformative projects  in other cities financed by TIF (Tax Incremental Financing) to pay the debt service on bonds for large development projects.  This is one method of making sure you have the revenue allocated to pay back the bond holders. 

For the uninitiated, the basic idea is that you sell bonds to investors and use the proceeds to fund public improvements (and/or sometimes going to developers for private infrastructure, but that is more controversial).  Then, the area around where the bond proceeds are invested is designated a special improvement district or some other term of art, where any increase in tax revenue over the previous assessed value will be specifically allocated to pay back the bonds.  For example, by building a beautiful park the surrounding parcels will go from being worth $100 to being worth $150, so taxes on the extra $50 will be used to pay back the bonds.  If the TIF proceeds aren't enough, there is usually a mechanism for levying special taxes on the parcels above what would otherwise be due.  In theory this makes it so the City doesn't see any decrease in its tax revenue to the general fund since the only funds being used to pay the bonds were created specifically because of the increase in value caused by the investment.

That is a simplified break down, but hits the broad strokes.  A couple of things though.  First, every State/City will have different authority/structure so it is not clear this is something Charlotte could necessarily do as of right.  I have no knowledge of NC/Charlotte processes.  Second, the biggest obstacles in getting this done is usually political.  Even though, as described above, there should be no "free money" given to developers since you aren't using general tax revenue, but just increased value, explaining that to voters is not easy.  This is often viewed as a hand out to the rich because land owners around the improvements see an increase in value because of government money.  In my experience, getting this done is extremely hard because of voters.

The city used a synthetic TIF to fund part of the Brighwalk development (which included affordable housing), used a portion of STIF funding for the Metropolitan in Midtown, as well as a few other projects. Here's a list  (from 2013) of PPPs and shows the STIG as the Synthetic TIFs

An issue with the synthetic TIF in NC is that the value of property permitted to participate in the program is capped at 3 percent of the City’s total property tax levy in any given year. (which still is a decent amount) but for something like a transit line, they would likely go through the pain of creating a proper TIF district. Cities in NC, including Charlotte, tend to use Synthetic TIF instead of traditional forms of tax increment financing to bypass the complex public process for establishing a TIF district.