Department: Community Development
Reference: Metro District Model Service Plan Amendments
To: Mayor Gregory Mills and Members of City Council
Through: Jane Bais DiSessa, City Manager
Marv Falconburg, AICP, Deputy City Manager
Holly Prather, AICP, Community Development Director
Prepared By: Mike Tylka, AICP, Senior Planner
Date Prepared: August 9, 2021
PURPOSE AND BACKGROUND
A special district is a quasi-municipal corporation and political subdivision of the State of Colorado that is formed to provide certain necessary public services and public infrastructure, including without limitation, parks and recreation, safety protection, sanitation, streets and water that the City is not providing. Special districts are formed and operated pursuant to specific statutory provisions enacted by the Colorado General Assembly. In order to create a special district within the boundaries of the City, the City Council must approve a Service Plan that governs the special district. State statutes set out certain terms and provisions that must be set forth in the Service Plan. The City has also historically required certain other provisions be included in a Service Plan for various policy reasons. In 2005, the City approved certain Special District Service Plan Approval procedures, together with an overall policy statement regarding special districts. In 2017, these prior City guidelines were superseded by a Model Service Plan that was approved by the City Council in order to reflect new policy goals by the City and to provide more consistency among the Service Plans that are submitted to the City and its review team.
Over the last year, certain applicants have requested variances from the Model Service Plan for their special districts. The City Council analyzed the facts presented by the applicants for these special districts and approved Service Plans that contained certain modifications or variations from the Model Service Plan. The purpose of the Study Session agenda item held on June 22, 2021 on this matter was to highlight three primary modifications or variations from the Model Service Plan that have been approved by the City Council in specific circumstances. These same variations from the Model Service Plan are now being requested by current applicants, and it is expected that future applicants will also request similar changes to their respective Service Plans. City staff is bringing forth a proposed amended Model Service Plan that reflects said variations for consideration based on the discussion held at the June 22nd Study Session. The goal is to provide consistent guidelines to current and future applicants for a special district, rather than granting variations to one applicant and potentially denying those same variations to another applicant. Under State law, when considering whether or not to approve a service plan for a special district, the City Council must avoid acting in a manner that is arbitrary, capricious or unreasonable.
STRATEGIC FOCUS AREAS
● Recognizable and Well-Planned Community
● Innovative, Data-Driven, Results Focused City Government
● Financially Responsible
● Supportive, Sustainable Infrastructure
CRITERIA BY WHICH COUNCIL MUST CONSIDER THE ITEM
Per the Special District Act, Article 1, Title 32 of the Colorado Revised Statutes, service plans must include the following items:
● Description of services,
● Financial information,
● Preliminary engineering or architectural survey showing how the services, are to be provided,
● Map of boundaries,
● Estimated population at build-out,
● Estimated assessed valuation at build-out,
● General description of facilities to be constructed,
● Estimated costs of land acquisition, engineering, legal and administrative costs, and costs related to the organization and initial operation of the district,
● Description and form of any proposed Intergovernmental Agreements (IGAs), and
● Other information set by State Statutes or required by the approving jurisdiction(s).
The proposed amended Model Service Plan does not remove any of the above items from its template.
PROPOSED AMENDMENTS
The proposed material changes included in the draft of the proposed amended Model Service Plan are in summary:
1.) Allowing Compound Interest on District Debt, except for Debt issued to the developer of the special district
2.) Changes to the Timing of Debt Issuance
3.) Clarification Regarding the Discharge of Debt
4.) Memorialization of the Notice of Inclusion and Accompanying Estimate of Property Taxes
Per legal counsel direction on metro district matters, there are a few other proposed changes that are minor and are simply to provide clarification to existing provisions. Please see the redlined attachment for further detail.
DETAIL ON PROPOSED MAJOR AMENDMENTS AND STAFF ANALYSIS
Members of the City’s Development Review Committee, Finance Department, and City Manager’s Office recently met with representatives from Elhers, the City’s Special District Financial Advisor, and Butler Snow, the City’s Special District and Bond Counsel, to discuss in depth the Model Service Plan amendment proposals that are being brought forward by the development community.
With the assistance of Butler Snow, the following text will provide more detail on the proposed amendments.
1.) Allowing Compound Interest
In Section V.B.1., the following language is included in the Model Service Plan:
“…Interest on any Debt of the District, or other District obligations payable in whole or in part from the revenues derived from the Debt Service Mill Levy, shall be simple per annum interest, and shall not compound….”.
The applicants for special districts, and their underwriters, have repeatedly asked the City to remove this prohibition against compound interest. The developer/applicant rationale for allowing compound interest on bonds issued by a special district is based on market expectations from potential investors. Bonds issued by special districts routinely allow compound interest, and investors expect these provisions in the bond documents, especially subordinate District bonds. Without compound interest, a District may not be able to issue the same amount of debt, and the interest rate required by investors might be higher. However, on the other hand, if interest is allowed to compound on District debt, the overall debt burden could increase.
The City allowed compound interest in connection with the First Amendment to the Service Plan dated July 7, 2020 for Brighton Crossing Metropolitan District Nos. 5 - 8, but only if the Districts entered into an intergovernmental agreement with the City. The specific language that was approved in the Brighton Crossing service plan was as follows:
“…Interest on any Debt of the District, or other District obligations payable in whole or in part from the revenues derived from the Debt Service Mill Levy, shall be simple per annum interest unless interest is allowed to compound in accordance with the terms and provisions of an intergovernmental agreement between the City and the District; provided, however, that any interest accruing on Debt originally issued to (or any other reimbursement obligation of the District payable to) a developer of property within the District shall not compound. To the extent the District enters into any annually appropriated developer reimbursement agreements, interest shall not accrue on any funds expended on behalf of or advanced directly to the District under such agreements….”
In the case of Brighton Crossing, the City Council allowed compound interest on District debt, provided that the Districts entered into an intergovernmental agreement with the City relating to an Amended Roadway Agreement applicable to the construction of 45th Avenue and Longs Peak Street (west of 50th Avenue and north of Bridge Street). This particular roadway improvement was very important to the City Council due to safety concerns and both the City and the applicant were able to negotiate an Amended Roadway Agreement that was acceptable to both parties.
The City has three options with respect to compound interest on District debt:
(1) Continue to prohibit compound interest and not amend the Model Service Plan. However, this may limit the ability of the District to issue enough debt to finance the infrastructure since the market expects compound interest. It may also mean that the District will pay a higher interest rate on the debt that it is able to issue.
(2) Allow compound interest, but only if the applicant enters into an Intergovernmental Agreement with the City to construct specific regional improvements desired by the City. This was the approach with Brighton Crossings, but may not be a desirable precedent for future districts. What if there are no special requirements for a particular special district - would that mean they would not be able to issue debt with compound interest? Could this lead to decisions that could be viewed as arbitrary, capricious or unreasonable?
(3) Allow both simple and compound interest, but no compound interest on debt owned by a developer, and no interest on funds advanced by the developer. This is the approach recommended by City staff. This approach allows the market to operate as expected by investors and also avoids any appearance of arbitrary decisions by the City Council. The suggested language would read as follows:
“Interest on any Debt of the District, or other District obligations payable in whole or in part from the revenues derived from the Debt Service Mill levy, may be simple per annum interest or compound interest; provided, however, that any interest accruing on Debt originally issued to (or any other reimbursement obligation of the District payable to) a developer of property within the District shall not compound. To the extent the District enters into any annually appropriated developer reimbursement agreements, interest shall not accrue on any funds expended on behalf of or advanced directly to the District under such agreements.”
Based on the discussion at the Study Session on the matter, the proposed amended Model Service Plan is written using the above third option labeled “(3)”.
2.) Changes to the Timing of Debt Issuance
In Section V.C.1., the following language is included in the Model Service Plan:
“No Debt Service Mill Levy shall be imposed by the District to finance Public Improvements until the City has approved a final plat and development agreement for the phase of development within the District Boundaries that include such Public Improvements.”
The City Council has previously approved the following changes to this provision of the Model Service Plan in connection with the First Amendment to the Service Plan for Brighton Crossing Metropolitan District Nos. 5-8:
“The Debt Service Mill Levy may be imposed by the District for the purpose of paying Debt to finance Public Improvements prior to the approval by the City of the City Approvals. However, proceeds of such Debt may only be utilized to finance those Public Improvements after first obtaining City Approvals for either (a) the phase of development in the Project Area where the Public Improvements are located or (b) those specific Public Improvements to be financed by such Debt.”
Section V.D.1 of the Model Service Plan sets forth certain parameters around the issuance of District Debt, as set forth below:
“All Debt issued by the District must be issued in compliance with the requirements of Section 32-1-1101, C.R.S., all other requirements of State law and the provisions of this Service Plan. In addition, the District shall not: (a) issue any Debt; (b) impose a mill levy for the payment of Debt by direct imposition or by transfer of funds from the operating fund to the debt service fund; (c) impose and/or collect any Fees to be used for the purpose of repayment of Debt, or (d) levy any Special Assessments, prior to the approval by the City of a final plat and development agreement relating to that phase of development within the District Boundaries that will be financed with such Debt, mill levy, Fees or Special Assessments.”
The City Council has previously approved the following changes to this provision of the Model Service Plan in connection with the First Amendment to the Service Plan for Brighton Crossing Metropolitan District Nos. 5-8:
“All Debt issued by the District must be issued in compliance with the requirements of Section 32-1-1101, C.R.S., all other requirements of State law and the provisions of this Service Plan. In addition, the District shall not utilize the proceeds of any Debt to finance or refinance the construction of Public Improvements prior to the approval by the City of the City Approvals relating to either: (a) the phase of development in the Project area where the Public Improvements are located; or (b) those specific Public Improvements to be financed or refinanced by such Debt.”
These revisions to the Model Service Plan that were approved in connection with the Brighton Crossing service plan would allow the Districts to issue Debt and impose property taxes and fees before the City approved a final plat or development plan that includes the Public Improvements to be financed with that Debt. These revisions allow the Debt to be issued, and taxes and fees to be imposed, prior to these City approvals, but would not allow the District to spend the proceeds of the Debt until these City approvals were received. The rationale for these revisions is to allow Districts to consolidate the Debt issuance, rather than returning to the market multiple times, which would increase costs of issuance and also possibly result in higher interest rates. The Districts would like the ability to access the capital markets at the times that are the most advantageous to the District and ultimately the taxpayers. The market will require that there is a reasonable basis to pay back the Debt - and that certain approvals have been obtained - before Debt can be issued.
City staff is comfortable with amending the Model Service Plan to conform to what was approved for Brighton Crossings.
3.) Clarification Regarding the Discharge of Debt
Section V.B.2., the following language is included in the Model Service Plan:
“The maximum term of any Debt issued by the District shall be forty (40) years, and any amount of outstanding principal and/or accrued interest that remains unpaid upon the final maturity date of any Debt shall be deemed to be forever discharged.”
The desire from the development community is to modify the above to the following:
“The maximum term of any Debt issued by the District shall be forty (40) years from the date of issuance. Notwithstanding the term of any Debt issued by the District, any amount of outstanding principal and/or accrued interest that remains unpaid upon the last day of the fortieth year following the year in which the Debt is issued shall be deemed to be forever discharged.”
The revision clarifies that the forty-year discharge period begins on the date the relevant Debt is issued. This would allow the District to issue different series of Debt that have different discharge dates. However, the Model Service Plan also provides that the District shall not impose a Debt Service Mill Levy for more than 40 years after the date on which the District imposed the initial Debt Service Mill Levy unless: (a) a majority of the Board imposing the Debt Service Mill Levy is comprised of End Users (i.e. resident homeowners, renters, commercial property owners or commercial tenants), and (b) the Board has voted in favor of extending the time that the Debt Service Mill Levy may be imposed for the payment of District Debt. By reading these two provisions together, although any Debt could theoretically be issued for 40 years from its issue date, it could not be secured by a Debt Service Mill Levy that extended beyond 40 years from the date the first Debt Service Mill Levy was imposed unless the Board of the District was controlled by End Users and they voted to extend the Debt Service Mill Levy. These two provisions give the Board flexibility to extend the Debt Service Mill Levy - which would allow the Debt to be issued during the time the Debt Service Mill Levy was being imposed, but not exceeding 40 years - if it is deemed to be advantageous by a Board that is controlled by the individuals that ultimately pay the taxes. This situation might occur with a refunding at a lower interest rate that would require the Debt Service Mill Levy be imposed for more than 40 years from the date of its first imposition.
The above proposed amendment is viewed as acceptable to City staff as it will provide clarity to the discharge of District debt.
4.) Memorialization of the Notice of Inclusion and Accompanying Estimate of Property Taxes
This revision formally incorporates additional notification requirements that have been included in recent intergovernmental agreements for service plans as requested in the past by City Council.
FINANCIAL IMPACT
Under the Model Service Plan, any debt issued under a Service Plan would continue to be subject to the maximum principal amount authorized in the Service Plan, the maximum debt service mill levy, the maximum term for imposing the debt service mill levy, and the discharge provisions. These provisions would continue to provide protections to the taxpayers of the special districts. If the City Council decided to amend the Model Service Plan in accordance with the above recommendations by City staff, none of these important safeguards would be removed.
The proposed amendments are designed to allow the District to access the capital markets with terms and provisions that are expected by potential investors, and at the times designed to allow the District to obtain the most favorable terms.
PUBLIC NOTICE AND INQUIRY
As this item is not a public hearing, no notice other than the posting of this item within the official Council agenda was provided.
STAFF RECOMMENDATION
City staff is recommending adoption of a resolution approving an amended Model Service Plan for special districts within the City of Brighton. Staff finds that the proposed amended Model Service Plan incorporates in a balanced manner the requests of the development community while keeping community safeguards in place.
OPTIONS FOR CITY COUNCIL CONSIDERATION
The City Council has the following four (4) options for consideration regarding the proposed amended Model Service Plan:
1. Approve via the attached drafted Resolution;
2. Approve via an amended or modified resolution;
3. Continue the item to a date certain; or
4. Deny the Resolution as drafted.
ATTACHMENTS
● Draft City Council Resolution
● Proposed Amended Metro District Model Service Plan
● Redline of 2017 Metro District Model Service Plan to 2021 Proposal
● Draft City Staff Presentation