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HomeMy WebLinkAboutIR 10084 INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 10084 To the Mayor and Members of the City Council January 9, 2018 r� Page 1 of 2 �i {i7 Y *a SUBJECT: IMPACT OF THE FEDERAL TAX CUTS AND JOBS ACT ON THE rrn CITY OF FORT WORTH'S BOND PROGRAM The recently passed Federal Tax Cuts and Jobs Act has several significant impacts on the City's bond program. These actions were closely monitored during the formation of the final legislation and opposition letters were sent to Representative Kevin Brady and Senator Orrin Hatch expressing our concerns on several of these points, which are more fully described below: 1. Private Activity Bonds Private Activity Bonds (PABs) are issued by or on behalf of local or state governments for the purpose of providing special financing benefits for qualified projects. The financing is most often for projects of a private use and the government generally does not pledge its full faith and credit. Examples include hospitals, universities, and corporations (such as the Housing Finance Corporation) which finance infrastructure projects. The most significant impact relating to the City with respect to PABs is the Dallas-Fort Worth Airport. The airport issues PABs to finance capital needs which include maintenance and expansion of infrastructure. The initial House proposal repealed the tax-exemption for PABs while the Senate version of the bill preserved this exemption. The elimination of the tax-exempt status of PABs would have increased the cost of debt financing, thus the City was opposed to the House version. The final approved version maintains the tax-exempt status of these debt instruments. 2. Advance Refundings Advance refundings are used by governments, including the City, to take advantage of favorable market conditions that allow for a new debt issue to refund an existing outstanding issue. When a refunded issue remains outstanding for a period of more than ninety (90) days, they are deemed "advance" refunded as compared to a current refunding, where the original debt is taken out immediately. Advance refundings have provided the City with significant savings over the past several years. Since 2015, we have completed 8 of these transactions, saving tax and rate payers a total of$493,014. Both the original House and the Senate versions included a repeal of the ability to complete an advance refunding. As a result of this, we opposed the legislation. The final legislation passed prohibits the City from completing advance refundings and provides no transition relief. 3. Tax Credit Bonds Another important finance mechanism used by public issuers are tax credit bonds. These are taxable instruments which allow either investors to receive a tax credit on their federal tax return or issuers to receive a refundable tax credit, each at a rate set by the U.S. Department of Treasury. While the City has no tax credit bonds outstanding, the ability to issue tax credit bonds provides flexibility as we formulate our annual debt program. The initial House version of the bill repealed the ability to issue tax-credit bonds. The Senate bill left tax credit bonds unchanged. The final approved version prohibits the issuance of tax credit bonds and provides no transition relief. ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 10084 To the Mayor and Members of the City Council January 9, 2018 r� Page 2 of 2 �i {i7 Y *a SUBJECT: IMPACT OF THE FEDERAL TAX CUTS AND JOBS ACT ON THE rrn CITY OF FORT WORTH'S BOND PROGRAM 4. Tax Exempt Bonds for Stadiums and Arenas States, counties, and cities have had the ability to issue tax exempt bonds for stadiums under the provision of stimulating economic development. While under the originally proposed House bill, the ability to issue tax exempt bonds for stadiums or arenas that are used by professional teams for at least 5 days in a year was repealed, the Senate version left existing laws in place. While no stadium financing is currently on the horizon for the City, during 2017 we completed the financing of Dickies Arena. Had the House version of the legislation passed prior to that financing, our ability to issue tax exempt bonds would have been compromised. Thus, the City opposed changing the existing laws. The final approved legislation leaves the ability to issue tax-exempt bonds for stadiums and arenas in place. 5. Repeal of Corporate Alternative Minimum Tax (AMT) and Reduction in Tax Rates Interest on PABs is generally subject to the AMT and interest on governmental bonds is includable to adjusted corporate earnings for AMT purposes. The final approved version of the Act generally repeals the corporate AMT, while also providing various tax rate reductions to individuals, corporations and certain other entities that are based on various formulas. Although it is too early to ascertain the impact of these provisions, both of these provisions affect the marketability of the Airport and the City's bonds. Generally, tax rate reductions increase an issuer's borrowing costs because bond buyers paying lower tax rates have less of an incentive to purchase tax-exempt bonds and a higher true interest rate must be offered by the issuer, while the repeal of the corporate AMT should help the marketability of the bonds. The Department of Financial Management Services looks forward to presenting our fiscal year 2018 debt plan to the Mayor and Council in early 2018 and will continue to monitor the effects of proposed legislation on our programs. If you have any questions, please call Aaron Bovos, Chief Financial Officer, at 817-392-8517. David Cooke City Manager ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS