2016-05-09-minutes-public-works-study-session

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particularly since they are uniquely qualified to be fully current on municipal law and the statutes affecting financing. Estsbfishing the Size of the Guaranty Fund or Reserve It will be assumed for the purposes of this section that underwriters and lenders will require the pledging of the guaranty fund or an adequate reserve for most f not all of the LID and ULID project financings a municipality is likely to undertake. There may be exceptions to this rule but a municipality should not assume that it could finance an LID without such a pledge prior to actually negotiating the financing with the provider. Establishing an appropriate balance for the fund is important to protect the municipality and the financing provider. If there is a perceived risk that the guaranty fund wil? be drawn upon to make the required interest and principal payments on the debt, the fund should be sized to avoid the potential: of being fully depleted. Typically. LID guaranty funds are set at or just below the maximum amount above which the debt would be considered arbitrage bonds under treasury regulations. This is approximately 1 D percent of the principal amount of bonds issued. Arbitrage should be considered when establishing the guarantyfund balance with the aid of your financing team and/or an arbitrage compliance specialist. For LIDs that have fully developed properties and a high ratio of property value to assessment, a large guaranty fund or reserve may not be necessary as it is unlikely a property owner would risk foreclosure on his/her property by defaulting on his/her assessment payments. Conversely, an LID with few property owners who have much to gain from the LID project and little to lose may decide not to pay, forcing large draws on the guaranty fund. If the fund or reserve is not largeenough, municipal funds, taxes, or in the caseof ULIDs>Utility Local Improvement Districts), utility revenues may be at risk. In today's economy, the risk of bankruptcy or bank foreclosure is greater than it has been in many years. Consideration of this risk must betaken into account when sizing the guaranty fund and analyzing the credit of the LID as a whole, whether it be a developer project or one with a large number of property owners or one with high value to assessment ratios. Bond counsel can provide guidance as to how the municipality can protect itself and the investor should this issue present itself. The financial advisor and the underwriters or lenders can also provide guidance that will assure the marketability of the LID when funding is to be obtained. For certain LID projects, the lack of a sufficient guaranty fund balance can be supplemented or replaced by alternate sources of security. These alternate sources are usually available to LIDS which have a single or few property owners of substantial means. The security enhancements may include: • letters of credit; • accelerated foreclosure agreements; • corporate guarantees; separate reserves. These enhancements are provided by the property owner and effectively increase the amount of money ava1able to make payments on the debt in the event of non-payment of assessments. However, accelerated foreclosure agreements are not available to the provider of the construction funding, as they require the establishment of an assessment lien. It is very importart that if it is determined that one of these enhancements will be needed, that it be X13 Local and Read Improvement Districts Manuel for Washington State Sixth Edition