The 14 districts of the Enhanced Infrastructure Financing District (EIFD) No.1 are shown above. The Infrastructure Financing District No. 1 (Bridge District) is within the EIFD and outlined in red. Graphic courtesy of the City of West Sacramento.

WEST SACRAMENTO, CA (MPG) – West Sacramento’s City Council made history at their May 21 meeting: $86.5-million worth of history.

The council unanimously authorized five bond issuance and sale resolutions unique to the public bond market in California. In essence, repayment of bonds will rely on a portion of tax increment revenues paid to the city by commercial property owners in two infrastructure financing districts created by the City Council, money pledged by the city for bond repayments that would normally be used in the city’s General Fund.

“You should be proud of the fact you were an initial adopter of this finance mechanism,” Ken Dieker, principal at Del Rio Advisors, LLC and a member of the city’s Finance Team, told the council.

West Sacramento Parks and Recreation Director Traci Michel stressed to council repayment of the debt service on the bonds does not come from a new tax on property owners. Instead, the revenues come from increases in the assessed value of the properties within the two districts.

The bonds would be issued by the districts and not an obligation of the city. The various goals for this type of financing point to a specific purpose.

“Generally, those goals include investment in infrastructure and economic development to capitalize private development, improve our local economy, increase revenues to the city and enhance residents’ quality of life,” Michel said.

She emphasized that “85% of bond funds must be spent on eligible projects within three years of bond issuance date.”

The largest of the districts is the Enhanced Infrastructure Financing District (EIFD) No. 1. Michel said that 14 different West Sacramento subareas, mainly commercial/industrial, make up Enhanced Infrastructure Financing District, one of which is the second district, Infrastructure Financing District (IFD) No. 1 (Bridge District). The Enhanced Infrastructure Financing District was created by council in 2016, while the Infrastructure Financing District was created in 2014.

According to a staff analysis, assessed property values in the Enhanced Infrastructure Financing District have grown an average of 7.3% since 2016, while the Infrastructure Financing District has averaged 16.1% since 2014. The larger Enhanced Infrastructure Financing District can issue up to $80 million in bonds while the Infrastructure Financing District is allowed to issue up to $6.5 million. But because the Infrastructure Financing District is part of the Enhanced Infrastructure Financing District, incremental tax revenue from property within the Infrastructure Financing District cannot be used to pay Enhanced Infrastructure Financing District bonds until the former’s term expires in 2047.

One of the challenges for the districts and the city is the makeup of taxpayers within the districts. In the Enhanced Infrastructure Financing District, 10 incremental property taxpayers are paying 25.3% of the total assessed value of just over $1.09 billion and 60.1% of the incremental assessed value. In the Infrastructure Financing District, the Top 10 property owners are paying 69.2% of assessed value of just over $196 million and 89.4% of incremental assessed value.

“So, your Top 10 taxpayers are paying a significant portion of the revenue that is supporting the (bond) credit,” Dieker said. “That is not that well diversified.”

Because of this, the Finance Team said it is likely that Standard & Poor’s Corporation would give a BBB- rating to the Enhanced Infrastructure Financing District bonds, a rating Dieker said is still investment worthy. The bonds might qualify for insurance, which would bring their rating to AA, as well as for a surety bond, which would replace a proposed cash fund reserve and allow more funds for projects.

According to the National Association of Surety Bond Producers, a surety bond is “a three-party contract by which one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee).”

While the not to exceed amount is $80 million, a BBB- rating would allow a “paramount” — the amount to be paid back at bond maturity or when the security is redeemed — of up to $56.19 million, with net proceeds for projects topping out at just over $50.03 million. With an AA rating, insurance and surety bond, those amounts increase to $57.225 million and over $55.35 million respectively.

“We do believe there is an economic benefit to purchasing the insurance,” Dieker said.

Because of the reliance on 10 taxpayers for the bulk of the district’s assessed value revenues, staff anticipate bonds for the Infrastructure Financing District “will be sold as non-rated securities much like the many bonds issued by the City for early development of Community Facilities Districts (CFD).” At not-to-exceed of $6.5 million, the Infrastructure Financing District par amount would be $4.635 million with net project proceeds tabbed at almost $3.85 million.

“These are both very young project areas, particularly the Enhanced Infrastructure Financing District which has so much capacity for growth and development,” Dieker said. “That credit should improve significantly over time.”

Both districts annual projected pledged revenues would increase when prior debt obligations within each are paid off. Infrastructure Financing District revenues would jump from $311,000 in 2028 to $500,000 in 2029 when Community Facilities Districts 12 obligations are paid, and again from $500,000 in 2037 to $940,000 in 2028 when Successor Agency obligations are paid.

Enhanced Infrastructure Financing District revenues increase from $4.299 million in 2037 to $8.151 million in 2038 with Successor Agency retirement, and $8.151 million in 2044 to $8.89 million in 2045 with the retirement of the Infrastructure Financing District. The Enhanced Infrastructure Financing District terminates in 2059-2070.

Revenues can also increase as assessed values grow through new development, property reassessments through sales and the “application of up to 2% of the annual inflationary increased allowed under Proposition 13.”

“We have a lot of work ahead of us,” Mayor Martha Guererro said. “I’m looking forward to seeing what we can accomplish with this new financing mechanism.”