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Home My WebLink AboutIR 8829INFORMAL REPORT TO CITY COUNCIL MEMBERS any . BACKGROUND To the Mayor and Members of the City Council Leh 4 z-�� Page 1 of 7 SUBJECT: GAS WELL LEASE REVENUES FINANCIAL MANAGEMENT POLICY In follow -up to the December 12, 2006 City Council briefing on the Gas Well Lease Revenues Financial Management Policy, the Council requested that staff conduct further research on fund/asset encumbrances and deed restrictions to confirm mandates which restrict funds and determine if any (conditional) flexibility in the use of these funds may exist. The Council also asked that staff explore endowment fund alternatives. Specifically the Council has asked what conditions must be met for use of Water & Sewer Funds (including Lake Worth) for general city improvements and what might be the financial benefits derived from a general city endowment fund (a park endowment fund currently exists within the policy adopted in April 2005). This report provides a summary of currently restricted funds, appropriation alternatives, endowment opportunities and recommendations. FUND USE - RESTRICTED AND NONRESTRICTED Research has confirmed that revenues derived from airport properties are clearly restricted by the US Department of Transportation, Federal Aviation Administration Federal Register. Revenues derived from park properties which have received Department of Interior, National Park Service or Texas Parks & Wildlife Department grant funds are restricted by the Land and Water Conservation Fund and Texas Recreation and Parks Account grants manuals established by the Federal Register and Texas Parks and Wildlife Code, respectively. Other funds /assets including Solid Waste, Golf Enterprise and "general" city properties are restricted by local policy only (current gas well lease revenues from the Southeast Landfill are earmarked for debt service on the SALT Road construction bonds). Non -grant funded parks are restricted by local policy and/or deed restrictions (Law & PACS are conducting additional deed research on the latter). In regards to the Water & Sewer Fund, the City Attorney has determined that "the revenues generated by the oil & gas leases on property owned by the Water Department may be used for general or specific purpose once the Master Ordinance (Ord. No. 10968 adopted December 10, 1991) and bond covenants have been met..." In essence, once all financial obligations established by the Master Ordinance and bond covenants have been addressed, the City may use any excess revenues for any lawful purpose including the transfer of those funds to the General Fund. Notwithstanding the fact that Chapter X, Section 3 of the City Charter restricts revenues generated on property owned by the Water Department to the utility, Section 1502.059 of the Texas Government Code allows for transfer of such funds to the municipality General Fund. In essence the City is preempted from this type prohibition. ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS To the Mayor and Members of the City Council • ::_ Page 2 of 7 SUBJECT: GAS WELL LEASE REVENUES FINANCIAL MANAGEMENT POLICY SUMMARY OF FUNDS, RESTRICTIONS AND 20 YEAR PROJECTIONS The following provides a summary of Lease revenues projected over the next twenty (20) years for all funds /assets. The first grouping includes those assets where there is no allocation flexibility; the second grouping includes those funds where there is conditional allocation flexibility. Mandated and conditional restrictions are identified for each farnd/asset [000's omitted]. Fund /Asset Aviation Nature Center Grant Parks Water & Sewer — General Water & Sewer — Lake Worth Solid Waste Parks — General Golf Enterprise Fund General City property Restriction Federal Mandates Federal/State Mandates Federal /State Mandates Subtotal Master Ord. /Bond Covenants Master Ord./Bond Covenants Bond Covenants Local Policy/Deed Restriction Local Policy Local Policy Subtotal Total CAPITAL NEEDS AND FUNDS USE CRITERIA Estimated Revenues $120,000 $220,000 $36,000 $376,000 $58,000 $182,000 $34,000 $57,000 $5,000 $30,000 $366,000 $742,000 Based on Council discussion it appears that there is a preference to balance near term capital needs with a long -term investment strategy. Construction of new roads, reconstruction of existing roadways and dredging of Lake Worth have been the primary capital projects mentioned for near term expenditures. Underwriting of such improvements is complicated by fund/asset restrictions, particularly the anticipated revenues from airport properties and grant - restricted parks, including the Nature Center. Communicating such restrictions is difficult, at best. If we are to realize a substantial near term capital improvement program for general city facilities and infrastructure, utilization of unrestricted Water & Sewer funds, including those derived from Lake Worth, will be necessary. Further, the appropriation of both general city properties and unrestricted park land revenues for general city projects i.e. streets, and for a citywide endowment fund will enable the city to diversify capital expenditures and investments. (It is assumed that any redirected unrestricted parkland revenues would be replenished with grant restricted park revenues specifically to underwrite bonus dollars for the well park site in accordance with current policy). ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS e"i rays To the Mayor and Members of the City Council , :: • Page 3of7 SUBJECT: GAS WELL LEASE REVENUES FINANCIAL MANAGEMENT POLICY With respect to near term one -time expenditures, we continue to recommend a very conservative fiscal spending policy. Other than the fund policy reserve requirement listed as item 1 below, the other criteria are not listed in any specific priority: 1. Replenish fund balance reserve requirement (must be fulfilled first) 2. Outstanding bond principal lump sum payment 3. Capital projects 4. Grant match to leverage capital project funds 5. Capital/special equipment with a minimum 10 year useful life 6. Technology with a minimum 5 -year useful life 7. Equipment fleet revolving replacement fund Reliance on gas well lease and ad valorem tax revenues to pay operating expenses, incur debt, reduce fees for service or reduce the property tax rate is not recommended due to the volatility of these revenues, change in production levels, market conditions, or combinations thereof result in the uncertainty of these revenues. Therefore, the City Manager believes that use of these funds in this manner would constitute poor financial policy. The temporary increase in revenues should be treated as excess revenues above and beyond the base capital and operating budget projections incorporated into the City's long range financial plan. ENDOWMENTS By far the most effective long term financial strategy which will enable the greatest leverage of gas well revenues is the establishment of an endowment fund(s). This investment model is best exemplified by private charities, foundations, universities, hospitals and cultural institutions. Whether funds are invested under the Public Funds Investment Act, which mandates no risk, short term fixed income investments (estimated 34% rate of return) or the Uniform Management of Institutional Funds pct, which allows for a more diverse equity to fixed income investment portfolio (estimated 5 -6% rate of return), the interest earned from the invested funds becomes a more reliable, long term revenue stream which allows for more alternative uses i.e. debt service payments, operating costs (if necessary), etc. Should the higher rate of return be preferred, the state property code which governs the institutional funds act would require amendment. Notwithstanding the growth of assets achieved in an endowment fund, there are fund management strategies which must be employed in order to achieve the `weal" value of the corpus over a period of time ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS To the Mayor and Members of the City Council M :: • Page 4of7 SUBJECT: GAS WELL LEASE REVENUES FINANCIAL MANAGEMENT POLICY i.e. actual asset value less inflation. Fund growth is affected by spending levels and strategies, continued or discontinued revenue stream, market return on investments and time of investment. Prudent financial management strategies which place a priority on reinvestment of interest into the corpus, are more likely to yield a "real" value asset level in future years. More liberal spending policies which expend too much of the earned interest will yield a growth in the corpus; however, the "real" value is likely to be eroded by inflation over time. FINANCIAL MANAGEMENT POLICY RECOMMENDATIONS Based on the above, changes in policy are recommended which would redirect some portion of the fund/asset revenues (wherein conditional flexibility exists) to citywide general fund capital improvement projects; financial management strategies which would dedicate approximately half of the revenues for endowment; and the adoption of a conservative expenditure policy based on the expenditure criteria outlined herein. The pursuit of changes in state law is also recommended which would amend the State Local Government and Property codes to allow for more flexible investment management strategies. The recommendations herein are based on the assumption that general revenues, fees and charges, and scheduled bond programs continue at the traditional level of growth and frequency absent any consideration or use of gas well lease revenues and/or ad valorem tax revenues generated from mineral valuations. The following provides an example of a gas well lease revenues expenditure and investments policy managed at a 50:50 expenditure to investment ratio over a twenty [20] year period [000's omitted]. Fund Expend 50% Invest 50% Total Aviation $60,000 $60,000 $120,000 Nature Center $110,000 $110,000 $220,000 Grant Parks $18,000 $18,000 $36,000 Water & Sewer General $29,000 $29,000 $58,000 Lake Worth $91,000 $91,000 $182,000 Solid Waste $17,000 $17,000 $34,000 Golf Enterprise Fund $2,500 $2,500 $5,000 Parks — general $28,500 $28,500 $57,000 General City Property $15,000 $15,000 000 30 000 Totals $371,000 $371,000 $742,000 Assuming that 100% of the interest earned is reinvested in an endowment fund corpus at a 5% rate of return, by year 20 the estimated corpus would amount to $700,000,000 or double the monies invested and the annual interest could amount to an estimated $35,000,000 per year. Given the conditional flexibility of ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS To the Mayor and Members of the City Council Page 5 of 7 SUBJECT: GAS WELL LEASE REVENUES FINANCIAL MANAGEMENT POLICY the Water & Sewer Fund, the projected $120,000,000 earmarked for expenditure could be further divided wherein $60,000,000 could be expended on Water & Sewer fund assets (including Lake Worth) and $60,000,000 on General Fund projects. Due to the federal & state mandated restrictions on the Aviation Fund, Nature Center and grant funded parks, a similar "split" of funds is prohibited (the possibility that all the interest earned on all funds whether they be mandated, restricted, conditionally restricted or local policy governed, could be earmarked for any use i.e. general city -wide asset improvements should be explored). The secondary split of the Water & Sewer funds (25% of the projected totals) combined with the parks general (unrestricted) funds, and the general city property funds would result in an estimated $103,000,000 general city property expenditure over the twenty [20] year period or approximately $5,000,000 per year. In summary, a 50:50 expenditure to investment financial management policy, over a twenty [20] year period, could result in the following financial outcomes (000's omitted). 50% of revenue expended on capital projects Aviation $60,000 Nature Center (& parks) $110,000 Grant Parks $18,000 Subtotal all restricted funds $188,000 Water & Sewer Enterprise General and Lake Worth properties $60,000 (25 %) Solid Waste Enterprise $17,000 Golf Enterprise $2,500 Subtotal conditionally restricted funds $79,500 Water & Sewer declared surplus General and Lake Worth properties $60,000 (25 %) Parks — general $28,500 General city property $15,000 Subtotal general city facilities and infrastructure $103,500 TOTAL 50% of revenue expended $371,000 Endowment Fund- cumulative amounts of 50% of revenue_ invested and 100% of interest earned reinvested into the corpus over twenty j201 years Appropriated $371,000 Interest 5% Earned $371,000 Total Endowment Fund $742,000 (Note: in year twenty [20] the annual interest would approximate at $35,000 per year). ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS • . • •- • • • s W • Recommended amendments to the Gas Wells Lease Revenues Financial Management Policy are outlined below. 1. Adopt a financial management strategy which would dedicate approximately half of the revenues toward one -time capital projects and half into a city-wide endowment fund(s). 2. Adopt a financial management strategy which would specify the annual review of the Water and Sewer Fund (W &S), and provided all conditions are met in accordance with the Master Ordinance, bond covenants and reserve requirement, declare any surplus revenue and appropriate such revenue into the W &S capital fund, a W &S endowment fund and the general fund capital improvement program fund. 3. Lift the Park Endowment Fund cap established under the current policy from $2,000,000 to $10,000,000 and revise the annual expenditure and reinvestment of interest requirement from a 75 %:25% mix to 0 %:100% mix. Include a sunset review of this financial investment strategy in five [5] years. Die to the volatility of gas well lease and ad valorem tax ;revenues the C'it.y Marnager believes the following would constitute poor financial policy and therefore should not be ;ncluded in the City's Finawricial Manaenent Policy- 1. reliance upon gas revenues to pay debt service, ISSUED BY THE CITY MANAGER FORT TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS To the Mayor and Members of the City Council MKT.-W. Page 7 of 7 SUBJECT: GAS WELL LEASE REVENUES FINANCIAL MANAGEMENT POLICY 3. Reducing fees for service based on a temporary increase in revenues from gas production. 4. Reducing the property tax rate based upon a temporary increase in property values related to mineral interests. 5. Implementing financial strategies that erode the "real" value asset of the endowment corpus due to inflation, investment of spending policies, by not reinvesting the interest. If you have any questions please contact Interim Finance Director Richard Zavala at 817 -392 -8313 Charle R. Boswell City Manager ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS