Kosmont Companies
Mailing Address: 1601 N. Sepulveda Blvd., #382 (424) 297-1070 Physical Address: 2301 Rosecrans Ave, Ste. 4140 Manhattan Beach, CA 90266 www.kosmont.com El Segundo, CA 90245 Memorandum
To: County of Sonoma
Christel Querijero, Deputy County Administrator
From: Kosmont Companies
Joseph Dieguez, Senior Vice President
Fernando Sanchez, Vice President
Date: August 5, 2024
RE: Santa Rosa Enhanced Infrastructure Financing District Partnership Considerations
I. BACKGROUND
Kosmont Companies (“Kosmont”) was tasked by the County of Sonoma (“County”) to evaluate the request from the City of Santa Rosa (“City”) for the County’s participation in an Enhanced Infrastructure Financing District (“EIFD”) within the City. Kosmont’s review has most recently focused on three aspects for the County’s consideration as discussed further in this high-level memorandum:
1. Discussion of a potential “inflationary baseline” approach for the County’s tax increment allocation
2. Review of a County General Fund Fiscal Impact Analysis as required by the County’s EIFD Participation Policy
3. Evaluation of the potential projects that could be funded by the EIFD.
I. INFLATIONARY BASELINE DISCUSSION
In listening to prior Board meetings regarding the EIFD and subsequently discussing with County staff, Kosmont is aware of the potential desire of a County tax increment allocation model that includes an “inflationary baseline”, whereby the County General Fund retains all property tax revenue growth within the EIFD boundary within a certain percentage growth range (e.g., 4% year-over-year growth), and only revenue growth above that inflationary baseline would be available to the EIFD at the determined percentage allocation (e.g., 25% or 50%).
Kosmont has evaluated this proposed approach in other jurisdictions, and the primary issue raised by Kosmont is related to underwriting from a public finance perspective. The 4% floating baseline County of Sonoma
Santa Rosa EIFD Partnership Considerations
August 5, 2024
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inherently means that the EIFD would only get a percentage of “whatever is left over” above the floating baseline. This stipulates that the “leftover” revenue stream could conceivably be zero in some years, and much greater in other years. This level of volatility presents a significant issue, particularly since EIFDs are a novel public financing tool, and the most acceptable bond payment structure from the municipal bond market perspective would be “level debt service” (i.e., the annual debt service would be very similar every year throughout the bond term, such as 30 years). Such a level, reliable payment structure would be highly difficult, if not impossible, to achieve when utilizing the inflationary baseline approach.
Kosmont’s suggestion is for the County to adopt a lower percentage allocation (e.g., 25% instead of 50%) in order to achieve an equivalent level of General Fund protection, because that reduced percentage is at least predictable from a municipal underwriter’s or bond-buyer’s perspective. EIFDs are typically meant to facilitate debt issuances, or at least provide for the option of debt issuance, and the inflationary baseline all but eliminates this option.
II. FISCAL IMPACT ANALYSIS AND COUNTY ALLOCATION
Kosmont and County staff agreed that the County General Fund Fiscal Impact Analysis is an essential critical path item, because this analysis informs the percentage allocation that the County can “afford” to allocate, which may in turn inform the list of potential projects that end up on the list (i.e., “what can the EIFD afford to fund”).
The City’s EIFD consultants will ultimately need certainty on district boundary, County percentage allocation, and other terms before the Fiscal Impact Analysis can be finalized, but in order to facilitate progress, County staff and Kosmont requested that the City’s consultants share a “preliminary draft” of a County General Fund Fiscal Impact with two alternative “placeholder” scenarios for County participation: 25% allocation and 50% allocation. Kosmont suggested the 25% allocation scenario, because the City’s proposal of 50% allocation implies that the County will allocate more dollars to the EIFD than the City, which is not consistent with other City/County EIFD partnerships across the State.
In July 2024, City staff was able to provide County staff and Kosmont with a draft County Fiscal Impact Analysis that was completed by the City’s consultants in late 2023 but not distributed due to lack of certainty around the County’s acceptable level of allocation. The analysis assumed a 50% allocation from the County, including the County’s allocation of Successor Agency residual revenues from within the EIFD boundary. Kosmont has reviewed the analysis in detail and has provided County staff with a summary of findings. At a high level, Kosmont found that the analysis made some assumptions that could be considered aggressive and other assumptions that could be considered conservative.
County of Sonoma
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Examples of assumptions that could be considered aggressive:
a) Static representation of county revenues and expenditures: As County revenues and expenditures are shown at buildout and stabilization of new development within the EIFD boundary, this point-in-time representation of the revenue/expenditure profile essentially assumes equivalent annual growth / escalation rates for County revenues and expenditures.
A more conservative approach could assume all or some categories of County expenditures growing at a faster rate than County revenues.
b) County expenditure categories and discounts in Attachment 1-B: This is an area where there is much room for subjectivity. Discounts are meant to represent economies of scales and acknowledgement that certain costs are not 100% variable (i.e., some costs are fixed).
Ultimately, the County’s Chief Financial Officer would need to be satisfied with the treatment of the different categories. As an example, Kosmont observed an assumption that Sheriff’s Office costs are 100% allocated to unincorporated jurisdiction and thus not showing an increased cost as a result of future development within the EIFD. Kosmont often finds that there are services provided by a sheriff’s office, such as detention services, that also apply in incorporated jurisdictions, and so we would expect that a minority share of this relatively larger expenditure category would still apply.
c) General government expenditures are estimated as a share of non-general government expenditures, which is typical. However, general government expenditures are discounted at 25% beyond the discounts already applied to the non-general government categories (i.e., discount on top of discount).
Examples of assumptions that could be considered conservative:
a) Low valuations assumed at $200,000 per unit and $225 per non-residential square feet: These seem to be based on existing averages, which usually do not accurately represent new development valuations.
b) Fiscal revenues focus only on property tax and a small amount of new investment income (not including other potential revenues, such as court fines, public safety sales tax, etc.). c) Property tax in-lieu of motor vehicle license fees (MVLF) does not seem to be evaluated, which would accrue to the benefit of the County General Fund, since these revenues are not proposed to be allocated to the EIFD.
d) Similarly to how Kosmont could point out that some of the County expenditures are being too highly discounted (to acknowledge fixed costs), arguments can be made that other categories could be more highly discounted.
Overall, Kosmont suggests that a fiscally conservative approach is to interpret that the aggressive assumptions noted above may outweigh the conservative assumptions noted above.
County of Sonoma
Santa Rosa EIFD Partnership Considerations
August 5, 2024
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Ultimately, the County Fiscal Impact Analysis at the 50% allocation level resulted in a narrowly positive impact on the County General Fund. At $214,126 net fiscal surplus based on annual revenues of approximately $2.8 million and annual expenditures of approximately $2.6 million, the resulting 1.08 revenue-to-expenditure ratio is very tight and does not leave significant “safety buffer” for the County to achieve a positive General Fund “return on investment”, if reality does not exactly follow projections, which seldom occurs.
In order to accommodate a “fiscal buffer” for the County and more closely align to the hypothetical “inflationary baseline” that was discussed in previous meetings, and to acknowledge the County’s existing policy of setting aside a portion of growth above budget assumptions for deferred infrastructure maintenance, all while still supporting a County position as an active economic development partner to the City, Kosmont would suggest that the Board consider an allocation percentage of 25% to 30%. This range more closely aligns with what Counties such as Los Angeles (20%-35%), Riverside (20%-25%), Madera (25%), and San Joaquin (20%-35%) have adopted, particularly in City/County partnership scenarios.
This range acknowledges that, while higher county allocation percentages such as 45%-50% may get a county closer to matching the city allocation percentage, such high percentages do not account for the fact that cities will be a larger beneficiary of other significant revenues, such as sales tax and transient occupancy tax, while the county must still provide costly municipal services that cities do not provide (e.g., health / human services, courts / probation / public defender / district attorney).
III. PROJECTS TO BE FUNDED BY THE EIFD
In Kosmont’s experience with formation and implementation of other EIFDs across the State, the level of specificity and detail on potential projects to be funded has varied highly at the formation stage.
Kosmont has found that EIFD infrastructure financing plans have benefitted from flexibility, particularly given the long-term (40+ year) nature of EIFDs and the inherent nature of tax increment to need time to “ramp up” before there is significant revenue to expend.
It is Kosmont’s experience that it is difficult in most circumstances to exactly define the projects and their corresponding costs at the time of district formation. Kosmont’s suggested approach has been to keep the project list more inclusive, “prioritize” the projects that the City and County want to see funded first, but very importantly, be very clear explicitly about which projects the City or County do NOT want to see on the list of potential projects to be funded (i.e., eliminate the non-starters).