PRAG Report To City On Chargers' Tax Measure

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PUBLICRESOURCESADVISORYGROUP
MEMORANDUM
TO:
FROM:
SUBJECT:
MaryLewis,ChiefFinancialOfficeroftheCityofSanDiego
PublicResourcesAdvisoryGroup(PRAG)
SanDiegoIntegratedConventionCenterExpansion/StadiumandTourismInitiative
ImportantConsiderationsandRiskstotheCity
August15,2016
DATE:
At the Citys request, PRAG has reviewed portions of the: i)San Diego IntegratedConvention Center
Expansion/Stadium and Tourism Initiatives (the Initiative) financing approach for a combined
conventioncenterandChargersstadium(theProject)andii)samplecashflowanalysespreparedby
GoldmanSachs&Co.(GS),intheircapacityasfinancingandstructuringagentfortheChargersFootball
Company, LLC, that models the ability of the future transient occupancy tax (TOT) revenues levied
undertheInitiativetofundtheInitiativesrequirements.
Ourobjectivewastoreview,considerandanalyzetheaccuracy,rationaleandsuitabilityofthefollowing
assumptionsandprojectionsforanissuanceofTOTbackedrevenuebonds:
TOTtaxrevenueprojections(growthrate);
Debtserviceandbondstructuringassumptions;
DebtServiceCoverageratio;
Sizingandinterestrateassumptions;
Ratingimpacts,creditandmarketaccessimplicationsfortheCity;and
ProjectProFormascenarios
PRAGsfinancialanalysisexcludescertainProjectconsiderationsthatarealsorelevanttounderstanding
thefullscopeoftheCitysfiscalrisksrelatedtotheInitiative.OnekeyassumptionthatPRAGdidnot
independentlyverifyisthereasonablenessofthetotalProjectCostestimateof$1.8billion.Thiscost
estimatewasabasecaseProjectCostassumedinthecashflowsprovidedtousbyGS.Giventhatthe
ProjectCostisfundamentaltoallresults,itisveryimportantfortheProjectCosttoencompassnotonly
realisticcostsforthecorestadiumandconventioncenterexpansionprojectbutalsorealisticcostsfor
land acquisition, environmental mitigation, relocation of certain facilities and any ancillary capital
infrastructureimprovementsnotcurrentlyspecifiedintheInitiative.Inaddition,ouranalysisdidnot
consideranybroaderpotentialbenefits(directorindirect)oftheProjectonSanDiegoseconomyorthe
CitysGeneralFund.
ExecutiveSummary.
CashFlowConsiderationsandRisks.ThefinancingapproachincorporatedintotheInitiativerelieson
increasingtheCitysTransientOccupancyTaxrateby6%.Ofthenew6%levy,thefirst1%wouldbe
transferredoffthetoptotheTourismTrustFund(TTF).Theremaining5%wouldthenbeavailable
forthetransferofasecond1%totheTTF(afterthepaymentofdebtservice),whichtogetherwiththe
Page2of21(ExecutiveSummary)
initial 1%, would replace the current 2% Tourism and

Marketing District Assessment (TMDA), and for the
financing, planning, construction, operations and
maintenance(O&M)andfuturecapitalimprovement
costs (CapEx) of the Project. These TOT revenues
wouldbeusedonapaygobasisandtopaydebtservice
on TOTbacked revenue bonds. In addition, they are
required to be used in a certain order, with the Citys
general fund having the lowest priority in the flow of
funds,receivingrevenuesinagivenyearonlyifallofthe
prior requirements have been met as depicted in the
flow of funds chart to the right. Shortfalls in any year
must be replenished prior to the Citys general fund
receivinganymoney.
TheabilityoftheseTOTrevenuestomeettheInitiativesrequirementsistheprimaryfinancialriskfactor
totheCity.Asdiscussedbelow,basedonthisflowoffunds,thereisasignificantdifferencebetween
theabilityoftheTOTrevenuestocoverdebtserviceonthebondsandtheabilitytocoverallofthe
requirementsundertheInitiativethatmustbemetbeforeanyrevenuesflowtotheCitysgeneralfund.
Thiswillprimarilydependonacombinationofthreevariablesthathaveahighdegreeofuncertaintyat
thistimeincludingtheactual:i)ProjectCost(combinedconstruction,landacquisition,environmental
mitigation,ancillaryinfrastructure);ii)interestratesforthebonds(includingwhatportioncanbetax
exemptversustaxable);andiii)futureTOTrevenuegrowth.Ultimately,itwillbetheactuallevelofeach
ofthesethreevariablestogether,thatovertimewilldeterminewhethertheTOTrevenuescaninitially
fundtheProjectandthenmeetallfutureannualdebtservice,O&MandCapExexpenditures.TheCitys
generalfundwillonlyreceiveTOTrevenuesifthesethreeprioritybucketsaresatisfiedfirst.Asaresult,
PRAGbelievesthatgiventheirinherentuncertainties,itisimportantfortheCitytorelyonconservative
estimates of the interest rate, TOT growth rate and Project Cost assumptions to determine if any
revenueswillflowtothegeneralfundundertheInitiative.ItshouldbenotedthattheGSfinancialmodel
andcashflowsassumeataxexemptinterestrateon100%ofthebonds.Ifundertaxlawatthetimeof
issuance,alloraportionofthebondswererequiredtobeissuedonataxablebasis,costsoverthelife
ofthebondrepaymentperiodmayincreasesignificantlybasedonthissinglefactoralone.
Methodology.PRAGreviewedGSanalysisandassumptionsandwasgenerallycomfortablewith
theirbondstructuringassumptionsgiventhenatureofTOTbackedrevenuebondsandtheflexibility
tofinanciallyengineerthebondstructureclosertothetimeofsale.However,toprovidetheCity
withinformationontheassociatedrisks,inourview,itwasimportanttoanalyzeGSfuturerevenue
growth,interestrateandtheassumedProjectCostof$1.8B(forthecombinedconventioncenter
andstadiumconstruction,landacquisition,environmentalmitigationsandancillaryinfrastructure),
andtorunsensitivityanalyses.Asabaselineforouranalysis,wereviewedGSassumptionsfrom
oneoftheirbasecasescenariosdatedApril28thwhichassumedaninterestrateof4.25%,a$1.8
billionProjectCostandtheCitysFiveYearForecastofTOTrevenuesanda4%annualgrowthrate
thereafter, which is close to the Citys historical TOT revenue growth rate. We note that in our
opinion,eachoftheseassumptionsandallthreeofthemonacombinedbasisarenotconservative
foraProjectwiththislongofaleadtimeandaresubjecttosignificantchangeasdescribedfurther
below.
Asoftoday,variousaspectsofthecurrentProjectCostarestillbeingevaluatedandaresubjectto
changeovertime.Inaddition,GSTOTrevenuegrowthassumptionswouldbeconsideredoptimistic
by the rating agencies if relied upon for debt service coverage in a more standard TOTbacked
revenuebondstructure(whichlackedthecoveragebuiltintothisstructuretocoverO&M,CapEx,
etc.).Also,basedonahistoricalanalysis,while4.25%isareasonableratefor30yeartaxexempt
bondstoday,itisnotaconservativerateforlongertermplanningpurposesfora$1billion+dealthat
maycarryasizepenalty,islikelytobesoldsomeyearsinthefuture,hasthepotentialtorequirea
taxableportionandmayneedtobeamortizedlongertogeneratemorebondingcapacity.Asaresult,
PRAGwouldrecommendusinga5%interestrateforanybasecasescenarios.Forthepurposesof
ouranalysis,wehaveused$1.8billionastheProjectCostbutalso,inmanycasesintheExecutive
Summary,testeda20%increasetoevaluatetheimpactofhigherProjectCostsonoverallprojections.
Theselectionofa20%increasewasdoneforillustrativepurposesonly,andPRAGhasnoknowledge
astowhetherornotthe$1.8billionProjectCostora20%increaseinthecostestimatewouldbe
appropriate.Wenotethatinourdetailedanalysis,weprovidevariousothersensitivityrunsthat
reflectProjectCostincreasesthatrangebetween10%50%.
Analysis.PRAGsanalysistestedvariouscombinationsofthesethreevariablestoseeiftherewouldbe
sufficientrevenuesto:i)paythedebtservicecostsontheTOTbackedrevenuebonds(DebtService
Coverage)andii)tomeetdebtserviceandallrequirementsintheInitiative(OverallCoverage).
Results.Overall,giventheflowoffundsspecifiedintheInitiative,withonly1%ofthe6%ofthe
TOTlevyassociatedwiththeInitiativehavingpriorityoverdebtservice,thecreditqualityoftheTOT
backedrevenuebondsismuchmoreprotectedfromrevenueshortfallsandcostoverrunsthanOverall
Coveragewhichincludesdebtservice,thesecond1%transfertotheTTF,O&MandCapEx,allofwhich
havetobemetpriortotheCitysgeneralfundreceivinganyoftheseTOTrevenues.PRAGsanalysis
calculates a breakeven revenue decline percentage in other words, how much can TOT revenues
declineinyear1andstillmeetDebtServiceCoverageandOverallCoverage,assumingthatlongterm
TOTrevenuegrowthresumesinyear2.Wehaveprovidedamyriadofsensitivityanalyses(includedin
theDetailedAnalysiswhichstartsonpage6),buthavefocusedjustonachievingOverallCoverageinthis
ExecutiveSummary.(WehavealsoanalyzedTOTrevenuedeclinesinlateryears,butthoseresults,as
theyrelatetoOverallCoverage,areverysimilartoassumingaTOTrevenuedeclineinyear1.)Afew
examplesareprovidedbelowthatreflectafuturesituationwheretheCitycouldbedecidingwhetherto
proceedwithabondissuanceafterithasabettersensethanithastodayoftheactualProjectCostand
projectedinterestrate,butfutureTOTrevenueswould,ofcourse,stillremainuncertain.Usingvarious
differentassumptions,therearescenarioswhereOverallCoveragecouldnotbeachievedandnoneof
theseTOTrevenueswouldflowtotheCitysgeneralfund.
a) WhatHappensataLowerAnnualTOTGrowthRateAssumptionof2%anda5%InterestRate?If
we assume a more conservative 2% TOT growth rate beginning in year2, Overall Coverage is
moredifficulttomeet.Forexample,ata5%interestrateandthecurrentProjectCostestimate,
firstyearrevenueswouldneedtoincreasebyabout6%tomeetOverallCoverage.Assumingjust
a 20% higher Project Cost, first year revenues would need to be about 30% higher. In fact,
assumingalowerTOTrevenuegrowthof2%anda5%interestrate,norevenueswouldflowto
the general fund even if the Project Cost is todays estimate of $1.8 billion. We modeled
additional scenarios where Project Costs are more than 20% higher than $1.8 billion under
variousrevenuegrowthratesandinterestrateswhichareprovidedintheDetailedAnalysiswhich
startsonpage6.
b) WhatHappensataLowerAnnualTOTGrowthRateAssumptionof3%anda5%InterestRate?If
weassumea3%TOTgrowthratebeginninginyear2,OverallCoveragemayalsobedifficultto
meetdependingontheinterestrateandProjectCost.Forexample,ata5%interestrateandthe
currentProjectCostestimate,firstyearrevenuescoulddeclineinyear1byabout10%andmeet
OverallCoverage.However,ata5%rateanda20%higherProjectCost,firstyearrevenueswould
actuallyneedtoincreasebyabout10%ratherthanbeingabletowithstandadeclinetomeet
OverallCoverage.
c) HistoricalAverageTOTGrowthRateof4%:WhatHappensIftheInterestRateis5%atDifferent
Project Costs? If we assume the Citys longterm TOT growth rate would be 4% beginning in
year2anda5%interestrate,TOTrevenuescoulddeclineabout22% inyear1andstillmeet
OverallCoverage.However,iftheProjectCostwasmorethan30%higher,theTOTrevenues
wouldbeinsufficienttomeetOverallCoverage.
d) HistoricalAverageTOTGrowthRateof4%:WhatHappensIftheProjectCostis20%Higheror
more across Different Rates? If we assume the Citys longterm TOT growth would be 4%
beginninginyear2andthattheProjectCostis20%higherandvaryinterestrates,theratecould
beashighas6%andOverallCoveragecouldbemet.Alternatively,forarateassumptionof5%
anda20%increaseinProjectCost,firstyearrevenuescouldonlydeclinebyabout8%forTOT
revenuestostillmeetOverallCoverage.IftheProjectCostis30%higherwitha5%interestrate,
OverallCoverageisbarelymetwithessentiallynorevenuesflowingtothegeneralfund.
OtherFiscalConsiderationsandRisks. InadditiontoCashflowConsiderationsand Riskstherearea
numberofotherfiscalconsiderationsthatwethinkaresignificant.
i)CostSharing.TheGSfinancialmodelassumesa$1.8billiontotalProjectCost:theChargerswould
contribute$650milliontotheProject,and5%ofthe6%TOTincreaseintheInitiativewouldbeavailable
tofundorfinance$1.15billionofProjectCosts.ThoseProjectCostswouldincludeconventioncenter
constructioncosts,anyallocatedcostsinthecombinedconventioncenter/stadium,andallcostsforland
acquisition, environmental mitigation and ancillary infrastructure. On an ongoing basis, following
constructioncompletion,annualTOTrevenueswouldfundpredetermined,inflationadjustedannual
contributionsforO&MandCapExforboththeconventioncenterandthestadium.Assuming30year
bonds with 28 years after construction completion and an annual 2% inflation adjustment, the TOT
revenueswouldfund$450millioninconventioncenterO&MandCapExand$637millioninstadium
O&MandCapEx.Inaddition,totaldebtserviceontheportionoftheProjectCostthatwouldbebonded
forassuming30yearbondsat5%wouldcost$2.3billioninTOTrevenues.
ii)PostInitiativeTOTLevels.UndertheInitiative,thetotalCityTOTlevywouldbe16.5%,oneofthe
highestTOTratesoflargeurbancentersintheStateandnationallyaccordingtoaSeptember2015report
byaleadinglodgingconsultingfirm.TOTrevenuesrepresentanimportantrevenuesourcefortheCity
andincreasingthelevyforthispurposemayhaveanegativeimpactonitsabilitytolevyitforother
futurepurposes.Whiletherearemanyfactorsthatinfluenceindustrygroupsfromselectingconvention
locations,costsarecertainlyoneofthemandahigherTOTisacostcomponent.Asaresult,future
increasesforotherpurposesabove16.5%wouldhavetoconsiderhowhighthelevyalreadyisrelative
tootherconventionlocations.
iii) Citys General Fund Credit and Headline Risk. TOT revenues would be the only revenues legally
requiredtobeusedtomakethedebtservicepaymentsontheTOTbackedrevenuebonds.Whileitis
ourunderstandingthatspecialtaxsupporteddebtsuchasTOTbackedrevenuebondsisincludedby
someoftheratingagenciesintheircalculationofanissuersdirectdebtburden,basedonpreliminary
conversationswiththeratingagenciesandothermunicipalitiesexperience,wewouldnotexpectthe
issuanceofTOTbackedrevenuebondsalonetoimpacttheCityofSanDiegosgeneralfundratings.Also,
as noted above, if there ended up being related unfunded annual costs that result in general fund
expenditurepressure,oriftheratingagenciesconsidertheadditionalTOTlevyasreducingtheCitys
revenueraisingflexibility,therecouldbeanimpactontheCitysgeneralfundcreditquality.Inaddition,
asahighlyvisibleandverylargefinancing,theissuanceofover$1billionofbondsforthisProjectwould
likelyattractattentionandsubjecttheCitytoheadlinerisk.
iv)AlternativeBondStructures.WewouldsuggestthattheCitybeawarewhenreviewingGSstress
scenariosthatbondtermsaremodifiedtobeabletocontinuetomeettheInitiativesobjectives(e.g.,
higherinterestrateorProjectCost,longerbondterm).WhilePRAGisawareofanumberTOTbacked
bondsthathavebeenissuedorrestructuredas40yearbondsfromoriginalissuance,thatisconsidered
arelativelylongbondterm.Inaddition,whileitmaybepossibletoaddressforexample,costoverruns
orhigherinterestratesbyextendingthebondtermorwithadelayedfinancing,whichwouldresultin
additionalupfrontTOTs,itwouldalwaysbeattheexpenseofpublicfunds.Wenotethatitwouldalso
beimportantfortheleasewiththeChargerstobeatleastaslongasthebondterm.Otherwise,inthe
event the Chargers leave the stadium at the end of the lease and bonds remain outstanding, TOT
revenueswouldbetiedupandtheCitywouldhaveareducedcapacityatthattimetofinancecapital
expendituresneededtoattractanothertenantortootherwisedisposeofanunderutilizedstadium.
Summary.Giventheexcessrevenuesthatarebuiltintotheflowoffundswithonly1%ofthe6%TOT
levy having a higher priority than debt service,Debt Service Coverage is much stronger than Overall
Coverage. As a result, it is possible to present more conservative revenue projections to the rating
agenciesanddemonstratesufficientDebtServiceCoveragewhichisprimarilywhatthebondratingswill
bebasedon.However,OverallCoveragemustbeachievedpriortotheCitysgeneralfundreceivingany
revenues. In our analysis that varied GS assumptions, there were various scenarios where Overall
Coveragecouldnotbeachieved.PRAGbelievesthatgiventheirinherentuncertainties,itisimportant
fortheCitytorelyonmoreconservativeestimatesoftheinterestrate,TOTgrowthrateandProjectCost
assumptionsthanGSbasecaseassumptionstodetermineiftherewillbesufficientTOTrevenuesto
meetOverallCoverageandprovideTOTrevenuestothegeneralfund.Inaddition,thereisasignificant
amountoftimebetweennowandwhenbondswouldbeissued.Bythattime,withtheProjectCost
estimaterefinedandasignificantamountofinterestrateuncertaintyremoved,theCityshouldbeina
betterpositiontoassesstheriskparametersoftheoverallplanusinganupdatedversionofthetypeof
analysissummarizedaboveanddescribedinmoredetailinPRAGsDetailedAnalysisstartingonthenext
page.
Page6of21(DetailedAnalysis)
DetailedAnalysis.
Objective. PRAG was provided with various scenarios prepared by Goldman Sachs (GS) that
leverage the TOT revenues through the issuance of nonrecourse revenue bonds. The scenarios
assumed various construction start dates, bond issuance dates, and maturity dates as well as
different interest rates based on the various maturity dates, but consistently used the same
assumptionsintheirbasecasesregardingtheProjectCostasof2018,annualTOTrevenuegrowth,
thedebtserviceamortizationpattern,andthedebtservicecoveragerequirements.
TheobjectiveofPRAGsdetailedfinancialanalysisistoreviewGSanalysisandassumptions,assess
their reasonableness, identify the risk factors to the City in the financial model and cash flows
providedbyGSandprovidetheCitywithasensitivityanalysisthatvariestheimportantassumptions
anddemonstrateswhatmayhappentotherevenuestreamanditsabilitytomeettheannual:i)debt
servicepaymentsandii)inflationadjustedO&MandCapExcontributions.GiventheInitiativesflow
of fund requirements, only amounts in excessof debt service, the transfer to the TTF, O&M and
CapExwillflowtotheCitysGeneralFund.
ProForma. While we were provided a number of alternative scenarios prepared by GS, for this
purpose,wehavemodeledouranalysisonthescenarioprovidedbyGSdatedApril28,2016thathad
thefollowingassumptions:
IssuanceDate:
Maturity:
InterestRate:
TaxStatus:
CPI/CCIIncreases:
ProjectedRevenues
January2018
30Years
4.25%
100%Taxexempt
2%annuallyforO&MandCapEx
$120,343,000forthe6%TOTs(basedonCitysforecastof$210,600,000
for10.5%forFY2017(Citys5YearForecast)
20182021of5.5%,5.0%,5.0%and4.5%;4.0%thereafter(Citys5Year
Forecast)
TOTRevenueAnnual
GrowthRate:
DebtServiceAnnual
1%
GrowthRate:
MinimumDebtService
1.5x
CoverageRequirement:
DebtServiceReserve
50%MaximumAnnualDebtService(MADS)
Fund:
TOTBackedRevenueBonds.Toinformouranalysis,PRAGbeganbyreviewingtheratingagencies
methodologyonspecialtaxbonds,whichincludesTOTbackedrevenuebonds,aswellasanumber
ofthelargeTOTbackedrevenuebonddealsthathavebeenissuedoverthelastfewyears.However,
we note that to the best of our knowledge, there have not been any billiondollar TOTbacked
revenuebondtransactions,andatransactionofthissizemaywellcarryasizepenalty.Ageneral
summaryoftheratingagenciescriteriaisprovidedbelow.Attheoutset,wenotethatthereisno
onestandardwaytostructurehotelortransientoccupancytaxrevenuebonds.Adistinguishing
characteristicofTOTrevenuescalledoutbytheratingagenciesisthatitisanarrowandrelatively
volatile revenue stream. Given the Citys own history with TOT revenues, it is familiar with the
cyclicalityoftheserevenues.Asaresultofthenatureoftheserevenues,issuershaveapproached
structuring TOTbacked revenue credits in a number of different ways including funding full and
partiallyfundeddebtservicereservefundsaswellasadditionalreservefundsonataxablebasis,
providingbackuppledgesofotherrevenues,andseniorandsubordinatestructures.Inaddition,
issuers have structured both level debt and ascending debt service and have assumed both no
revenuegrowthandrevenuegrowthtocoverdebtservicetobestmeettheirownparticulargoals.
Issuers goals vary widely from wanting to maximize bond proceeds to targeting a maximum
contributionthatallowsformoreconservativebondstructures.
GeneralRatingCriteria.TOTbackedrevenuebondsareclassifiedasspecialtaxbondsintherating
agencies criteria. Within this category, TOT revenues are considered a touristrelated, relatively
narrow,economicallysensitive,andvolatilerevenuesource.
TheratingsonTOTbackedrevenuebondsgenerallydependonananalysisofthefollowing:
TaxBase:Size,depth,strength,andstabilityoftheeconomicbase;
Historic Performance: Stability/volatility of the revenues, historical growth rates, and tourism
characteristics;
Financial Metrics: Debt service coverage ratio (based on annual debt service and MADS);
recognizing the uncertainties of forecasting new growth, the ratings are typically based on
historical revenues coverage of MADS; however, pledged tax growth rates are examined and
somecreditmaybegivenforfuturegrowth;
Legal Covenants: Debt service reserve funds (DSRF), additional bonds test (ABT), where
excessrevenuesflowafterdebtservice(toeitheracceleraterepaymentortoanotherpurposes
suchasthegeneralfund);
PRAGs Analysis Approach. GS scenarios incorporate various bond structuring assumptions

includingdebtservicegrowth,thelengthoftheamortizationperiod,andthesizeofthedebtservice
reserve fund as well as assumptions about future revenue growth, interest rates, annual CPI/CCI
changes,andProjectCosts.
As noted above, there is not a standard way to structure hotel or transient occupancy tax
revenue bonds. GS bond structuring assumptions in the scenario that we have focused on
includinga30yearamortizationperiod,1%debtservicegrowthanda50%DSRF,arerelatively
reasonable and can and would likely be refined in the course of structuring the bonds. For
example,itmaybethatseniorandsubordinatebondswouldresultinanoveralllowerinterest
rate,debtservicegrowthcouldbeusedononeratherthanonbothliensordifferbetweenliens,
or a longer amortization period may provide the City or the structure with some additional
benefits. Given that GS assumptions were reasonable and will likely be subject to further
financial engineering prior to issuance, we were comfortable incorporating them into our
analysis.
Inourview,giventheirinherentuncertainties,itisGSotherassumptionsregardingfutureTOT
revenues, interest rates and Project Costs that are very important and should be analyzed to
providetheCitywithinformationontherisksassociatedwiththeInitiative.Toaddresssomeof
this,GShasovertimerunavarietyofscenarios,includingmostrecently,DownsideRevenue
ScenarioswhereindifferentassumptionsforfutureTOTrevenueswereused.
Ouranalysisfocusedonwhattheimpactwillbeondebtservicecoverage,OverallCoverage(debt
service,thesecond1%transfertotheTTF,O&M,CapEx)andgeneralfundrevenuesatdifferent
TOTrevenuegrowthrates,interestratesandProjectCostlevels.
Attheoutset:
WenotethatthefutureTOTrevenuegrowthassumptions,thecurrentProjectCostestimateand
a4.25%allininterestratereflectedinGSnumbersunderpintheabilityoftheInitiativetopencil
outfinancially.Asdiscussedfurtherbelow,inouropinion,eachoftheseassumptionsandall
threeofthemonacombinedbasisarenotconservativeforaProjectwiththislongofaleadtime
andaresubjecttosignificantriskofchange.
GiventheflowoffundsspecifiedintheInitiative,withonly1%ofthe6%ofTOTlevyassociated
withtheInitiativehavingpriorityoverdebtservice,theabilitytorepaydebtserviceonthebonds
(DebtServiceCoverage)ismuchmoreinsulatedfromrevenueshortfallsandcostoverrunsthan
OverallCoveragewhichincludesnotonlydebtservicebutalsothesecond1%transfertothe
TTF,andinflationadjustedO&MandCapExcontributions.
TheCitysgeneralfundreceivesnofundsunlessallthreebucketsarefilledfirst,includingfunding
upanyprioryearshortfallsonaprioritybasis.Ineachscenarioweanalyzed,wethereforelooked
atbothDebtServiceCoverageandOverallCoverage.Asdemonstratedinthechartstocome,
achieving Overall Coverage is significantly more difficult to achieve than just Debt Service
Coverage.
AsimplewaytothinkofthefundamentalrisktotheCityofrevenueprojectionsisthatlongterm
TOTrevenuegrowthisessentialtofullyfundallofthebucketssetforthintheInitiative,including
debtservice,thetransfertotheTTFandO&MandCapExsetasides.Thetablebelowusesan
example from GS analysis to show why this growth is essential. First, there are little excess
revenuesleftafterfundingallbuckets,evenassumingtherelativelyhealthyTOTrevenuegrowth
ratesreflectedintheCitysFiveYearForecast.Second,overtime,eachoftheusesisexpected
tocontinuetogrow,albeitatdifferentgrowthrates,withonlyoneofthesegrowthratestiedto
theTOTrevenuegrowthrate.IfTOTrevenuegrowthisslowerthanthesumofthegrowthofthe
otheruses,theamountsneededtofillthebucketswillquicklyovertakeavailablerevenues.
5%TOTRevenue
lessDebtService
less2nd1%toTTF
lessStadiumO&M/CapEx
lessCCO&M/CapEx
NettoGeneralFund
AmountsinYear4*
$116,619,000
(60,777,000)
(23,324,000)
(18,035,000)
(12,731,000)
$1,752,000
LongTermGrowthRate
1%peryear
EqualtoTOTRevenueGrowth
CPI&CCI(each2%inGSrun)
CPI&CCI(each2%inGSrun)
* BasedonamountsfromGSanalysisfor30yearbondfinancingat4.25%issuedin2018,followingassumed
growthof5.5%,5%and5%inyears2,3and4,respectively,CPIandCCIannualincreaseof2%.
BythetimetheCitywouldbereadytoissuebonds,withtheProjectCostestimaterefinedanda
significantamountofinterestrateuncertaintyremoved,theCityshouldbeinabetterposition
toassesstheremainingriskparametersoftheoverallplanusinganupdatedversionofthetype
ofanalysisdescribedbelow,focusingprimarilyonrisksrelatedtoTOTrevenueprojections.
Methodology:ToisolatetheimpactthatthevariousassumptionscanhaveonDebtServiceCoverage
and Overall Coverage, PRAG developed a number of sensitivity analyses for the various factors
discussedaboveincludingfutureTOTrevenuegrowthrates,ProjectCosts,andinterestrates.Our
approachwastocalculateabreakevenrevenuenumberforyear1orinotherwords,howmuch
canrevenuesdeclineorhowmuchwouldrevenuesactuallyhavetoincreasefromthecurrentFY
2017TOTrevenueforecasttomeettherequirementsundertheInitiative.Wehavealsoincludedan
analysisthatcomparestheresultsofrevenuedeclinesinlateryearsratherthaninitialdeclinesin
year1toillustratetheimpactofthetimingofdeclineschanging.
I. Sensitivity #1: TOT Revenue Growth Rates Impact on Debt Service Coverage and Overall
Coverage
Question:HowmuchcanTOTrevenuesdeclineinyear1assumingvariousTOTrevenuegrowth
rates beginning in year 2, GS 4.25% interest rate assumption and the current Project Cost
estimate?
AstheCityisaware,TOTrevenuesarearelativelyvolatilerevenuestreambutoverthelongrun
have shown substantial growth. In fiscal 2009 and 2010, the Citys TOT revenues declined
precipitously by 11.7% and 11.9%, respectively for a total decline over two years of 22.3%.
However, from fiscal 2010 through fiscal 2015, the Citys TOT revenues have increased by an
averageannualgrowthrateof8.6%.Giventhenatureoftheserevenues,webelievethatan
importantsensitivityanalysisshouldfocusonhowmuchTOTrevenuescoulddeclineinthefirst
yearandstillachieveDebtServiceCoverageandOverallCoverageinfullundervariouslongterm
TOTrevenuegrowthrates.Wecalculatedthebreakevenrevenuedeclineorincreaseinthefirst
yearassumingvariousTOTrevenuegrowthratesbeginninginyear2.Thisanalysislookedat
variouslongtermTOTrevenueannualgrowthratesin0.5%incrementsfrom04%startingthe
yearaftertheinitialdecline.WenotethatGSanalysisassumestheCitysFiveYearForecastof
TOTrevenuesfollowedby25yearsof4%annualgrowthforanaverageannualgrowthrateof
4.2%.
TOTRevenueGrowthRatesandCoverage.AsyoucanseeinChart1Aontheleftofthefollowing
page,underthisscenario,assuming0%TOTrevenuegrowthbeginninginyear2throughyear30,
revenuescoulddeclineinthefirstyearbyapproximately20%andachieveDebtServiceCoverage.
However,ifrevenuesincreaseannuallyby0.5%startinginyear2,revenuesinthefirstyearcould
declinefurther,byabout31%.From1%4%annualTOTrevenuegrowthbeginninginyear2,
revenuescoulddeclinebyabout40%inyear1.(Wenotethatthereasonthebreakevenrevenue
declinelevelsoffat40%isthatthedebtserviceshortfalloccursinyear1atthislevelofdecline,
priortoanyassumedincreasesinlateryears.)
Next,PRAGcalculatedhowmuchTOTrevenuescoulddeclineorneedtoincreaseinthefirstyear
toachieveOverallCoverage,assumingnoexcessfundsflowtothegeneralfundundervarious
longtermTOTrevenuegrowthratesthatstartinyear2.Similarly,thisanalysiswasalsorun
assuminglongtermTOTrevenueannualgrowthratesin0.5%incrementsfrom04%startingthe
yearfollowingtheinitialdecline.AsyoucanseeinChart1B,underthisscenario,ifrevenues
wereflattolessthan2%higherinyear2,revenueswouldactuallyneedtobehigherinyear1to
achieveOverallCoverage.ThismakessensegivenGS2%CPI/CCIgrowthassumptionappliedto
the annual O&M and CapEx contributions. If, however, TOT revenue growth averages 4%
beginninginyear2,revenuescoulddeclinebyabout26%inyear1.Thesetwochartsillustrate
how much harder it is to meet Overall Coverage than only debt service coverage and how
importantlongtermTOTrevenuegrowthistomeetingOverallCoverage.
Chart1A
MaximumInitialRevenueDecline
DebtServiceCoverageat1x
75%
75%
50%
50%
Chart1B
OverallCoverageat1x
33.3%
25%
25%
23.8%
14.9%
6.5%
0%
0%
25%
25%
0.0%
6.7%
20.4%
12.9%
50%
18.9%
26.3%
31.1%
40.4% 40.4% 40.4% 40.4% 40.4% 40.4% 40.4%
LongTermTOTGrowthRates
50%
LongTermTOTGrowthRates
II. Sensitivity#2:InterestRatesandProjectCostsImpactonDebtServiceCoverageandOverall
Coverageata2%LongTermTOTRevenueGrowthRate.
Question:HowmuchcanTOTrevenuesdeclineinyear1assumingaconstant2%TOTrevenue
annualgrowthratebeginninginyear2basedonvariousProjectCostincreasesandinterest
ratelevels?
Inadditiontouncertainrevenues,theotherimportantuncertaintiestodayarewhattheactual
ProjectCostwillbeandwhatinterestrateswillbewhenthetimecomestoissuethebonds.To
analyzetheseassumptions,weheldtheannualTOTrevenuegrowthstartinginyear2constant
at2%.WethencalculatedhowmuchTOTrevenuescoulddeclineinthefirstyearandstillachieve
Debt Service Coverage and Overall Coverage under various interest rate and Project Cost
scenarios.ThesescenariosreflectasituationwheretheCityhastodecidewhethertoproceed
withabondissuanceatalaterdatewhenithasgottenabettersensethanithastodayofthe
actualProjectCostandprojectedinterestrates.Thisanalysisasksthequestionhowmuchcould
revenuesdeclineinyear1,assuminga2%annualgrowthrateinTOTrevenuesbeginninginyear
2basedondifferentProjectCostsandinterestrates?Wecalculatedthebreakevendecreaseor
increaseinrevenuesinyear1.
Forillustrativepurposes,wehaveshownfourcasesbelow.Thefirsttwo(2Aand2B)analyze
Debt Service Coverage and Overall Coverage based on a specific increased Project Cost and
differentinterestratesandthesecondtwo(2Cand2D)analyzedebtservicecoverageandOverall
CoveragebasedonaspecificinterestrateanddifferentProjectCosts.
Scenarios2Aand2B:IncreasedProjectCostatDifferentInterestRates.
Chart2Aassumesa20%increaseinProjectCostsandanalyzestheimpactthatinterestrates
between 4.256.25% have on Debt Service Coverage. It calculates how much revenues could
decrease or would actually have to increase in year 1 based on a 2% annual growth rate
thereafteratdifferentinterestratesandstillachieveDebtServiceCoverage.Forexample,asyou
cansee,tocoverdebtserviceata4.25%interestrate,theinitialrevenuedeclinecouldbeabout
20%butata5%interestrate,thedeclinewoulddropto12.5%andby6.25%,initialrevenues
wouldhavetobemodestlyhigher.
Next,Chart2Balsoassumesthe20%increaseinProjectCostsandinterestratesbetween4.25
6.25%andanalyzesOverallCoverageassuming2%annualTOTrevenuegrowththereafter.As
youcansee,thisanalysishasaverydifferentresultthaninChart2A.Assuming4.25%,thefirst
yearsrevenueswouldactuallyhavetobe22%higher(theycouldnotbelower)thanthecurrent
forecast. As interest rates increase, first year revenues would need to increase further. For
example,a5%interestratecombinedwiththe20%ProjectCostincreasewouldrequirefirstyear
revenuestobeabout30%highertoachieveOverallCoverage.Wedonotethatintheirscenarios,
GSproposesthatprincipalamortizationcouldbeextendedbeyond30yearstocompensatefor
higherinterestrates.However,aswehaveshown,formoremodestforecastsoflongtermTOT
revenuegrowth(suchas2%peryear),evenatcurrentrecordlowinterestratesofabout4.25%,
initialTOTrevenueswouldhavetobehighertofullyfundalloftheInitiativesrequirements.
Chart2B
Chart2A
OverallCoverageat1x
+20%ProjectCost;
2%TOTGrowthYear2andAfter
+20%ProjectCost;
2%TOTGrowthYear2andAfter
75%
75%
50%
50%
25%
25%
46.0%
39.6% 42.8%
33.4% 36.5%
30.4%
27.4%
21.6% 24.5%
1.8%
0%
25%
0%
1.2%
6.9% 4.1%
12.5% 9.8%
15.2%
20.5% 17.9%
50%
25%
50%
InterestRates
InterestRates
ThetwochartsabovealsoillustratehowmuchharderitistomeetOverallCoveragethanjust
debtservicecoverage.Wedonotehowever,thathigherannualTOTrevenuegrowthrateswould
significantlyimprovetheresults.Wehaveprovidedascenariobasedon4%TOTrevenuegrowth
inSensitivity#3below,whichrepresentsaproxyforthelongtermactualhistoricaverageofthe
CitysTOTrevenuegrowthrate.
Scenarios2Cand2D:IncreasedInterestRateatDifferentProjectCosts.
Chart2Cassumesahigherinterestrateof5%(versusGSsassumptionof4.25%)andlooksatthe
impactofdifferentProjectCostincreasesbetween0and50%.Itcalculateshowmuchrevenues
coulddecreaseinyear1assumingthe2%annualTOTrevenuegrowthratethereafteranda5%
interestrateatdifferentProjectCostsandachieveDebtServiceCoverage.Forexample,atno
changetotheProjectCost,theinitialdeclinecouldbeabout34%;however,withabouta30%
increaseinProjectCosts,TOTrevenuescouldnotbelowerthanthecurrentprojectionforyear1
andstillachieveDebtServiceCoverage.
Chart2D.IncreasedInterestRateatDifferentProjectCosts(OverallCoverage).Chart2Dassumes
the higher interest rate of 5% (versus Goldmans 4.25%) and looks at the impact of different
ProjectCostincreasesbetween0and50%.Itcalculateshowmuchrevenuescoulddecreaseor
wouldhavetoincreaseinyear1assumingthe2%annualTOTrevenuegrowthratethereafter
and still achieve Overall Coverage, assuming no excess funds flow to the general fund. For
example,asyoucansee,at5%,evenatthecurrentProjectCost,revenueswouldhavetobe
higherinyear1toachieveOverallCoverage.
Chart2D
OverallCoverageat1x
Chart2C
5%InterestRate;
2%GrowthYear2andAfter
75%
5%InterestRate;
2%GrowthYear2andAfter
75%
63.4%
53.2%
50%
50%
42.3%
30.4%
18.5%
25%
20.2%
25%
6.5%
9.3%
0%
0%
1.6%
12.5%
25%
50%
25%
23.4%
34.3%
50%
ProjectCosts
ProjectCosts
Scenarios2Cand2DcanberunbasedondifferentannualTOTrevenuegrowthrates(higheror
lower than the 2% assumed here). One key observation is that low longterm TOT revenue
growthrates,asprovidedinthe2%scenarioabove,wouldhaveamaterialimpactontheability
tofullyfundallcostsforevenmodestincreasesintheProjectCostorbondinterestrate.In
Sensitivity#3below,wealsoprovidedascenariothatisbasedona4%TOTrevenuegrowthrate
whichisaproxyfortheCityslongtermhistoricTOTrevenueaveragegrowthrate.
III. Sensitivity#3:InterestRatesandProjectCostsImpactonOverallCoverageat3%and4%
LongTermTOTRevenueGrowth
Question:HowmuchcanTOTrevenuesdeclineinyear1assuminghigherTOTrevenueannual
growth beginning in year 2 based on various Project Cost increases and interest rate levels
ratherthanthe2%TOTrevenuegrowthrateassumedinSensitivity#2?
Scenarios3Aand3B:IncreasedProjectCostatDifferentInterestRates(OverallCoverage).
Chart3Aassumesa20%increaseinProjectCostsandinterestratesbetween4.256.25%witha
3%TOTrevenuegrowthrateinyear2andthereafter.WeanalyzedOverallCoverageanditis
analogoustoChart2B.Forexample,assuminga4.25%interestrate,thefirstyearsrevenues
wouldneedtobeabout2%highertoachieveOverallCoverage.Atahigher5%interestrate,first
years revenues would need to be even higher, increasing by about 10% to achieve Overall
Coverage.
Chart3Busesthesame20%increaseinProjectCostandinterestraterangeasChart3A,butata
higherlongtermTOTrevenuegrowthrateof4%.Asaresult,assuminga4.25%interestrate,
revenuescoulddeclinebyabout13%andachieveOverallCoverage.Ifthedeclinewaslessthan
about13%withthe4.25%rate,excessrevenueswouldflowtothegeneralfund.Ratescould
increasetoabout6%,andthefinancingstructurecouldprovideOverallCoverage.
Chart3A
OverallCoverageat1x
Chart3B
OverallCoverageat1x
+20%ProjectCost;3%TOTGrowth
+20%ProjectCost;4%TOTGrowth
75%
75%
50%
50%
25%
2.1%
4.5%
7.0%
19.8% 22.5%
14.6% 17.2%
9.5% 12.0%
25%
1.1%
0%
0%
25%
25%
50%
50%
InterestRates
13.4% 11.7% 10.0%
0.8%
4.5% 2.7%
8.2% 6.4%
InterestRates
Scenarios3Cand3D:IncreasedInterestRateatDifferentProjectCosts(OverallCoverage).
Chart3Cassumesthehigherinterestrateof5%(versusGS4.25%)andaTOTrevenuegrowth
rateof3%andlooksattheimpactofdifferentProjectCostincreasesbetween0and50%andis
analogous to Chart 2D. It calculates how much revenues could decrease or would have to
increaseinyear1assuminga3%annualTOTrevenuegrowthrateinyear2andthereafteranda
5%interestrateatdifferentProjectCostsandstillachieveOverallCoverage,assumingnoexcess
fundsflowtothegeneralfund.Forexample,ata20%higherProjectCost,a5%allininterest
rateanda3%TOTrevenuegrowth,revenueswouldneedtobeabout10%highertoachieve
OverallCoverage.Ata4.25%interestrate,thebreakevenProjectCostcouldbeabout10%higher
andthefinancingstructurecouldprovideOverallCoveragebasedoncurrentTOTrevenues.
Chart3DissimilartoChart3CbutassumeshigherTOTrevenuegrowthof4%.Inthisscenario,
TOTrevenuescoulddeclinebyabout8%inyear1andachieveOverallCoverage.Ifthedecline
waslessthanabout8%ata5%rate,excessrevenueswouldflowtothegeneralfund.Ata5%
interest rate, the breakeven Project Cost could be by about 30% higher and the financing
structurecouldprovideOverallCoverage.
Chart3C
OverallCoverageat1x
Chart3D
OverallCoverageat1x
5%InterestRate;3%TOTGrowth
5%InterestRate;4%TOTGrowth
75%
75%
50%
39.4%
50%
29.4%
19.4%
25%
25%
9.5%
0%
6.1%
0%
0.5%
25%
13.2%
10.5%
25%
50%
22.4%
15.3%
8.2%
1.1%
50%
ProjectCosts
ProjectCosts
Asyoucansee,witha4%TOTrevenuegrowthrateassumptionbeginninginyear2,theInitiative
parametersperformsignificantlybetter.However,theactualProjectCostandbondinterestrateat
thetimeofsalewillalsobesignificantdeterminantsoftheabilitytomeettheannualflowoffunds
intheInitiative.
IV. Sensitivity#4:TimingofRevenueDeclineImpactonOverallCoverageat4%LongTermTOT
RevenueGrowthRate.
Question:HowwouldmodifyingthetimingoftheTOTrevenuedeclineaffecttheresultsshown
inearliersensitivityanalyses?
Scenario4:IncreasedProjectCostandInterestRatewithDifferentTimingofTOTRevenueDecline
(OverallCoverage)
Toaddresstheissueofthetimingoftheassumedrevenuedecline,weanalyzedthechangesin
resultsforonespecificcaseinScenarios3Band3DwithdifferenttimingfortheonetimeTOT
revenue decline. For this purpose, we have selected the case where there would be 20% of
additionalProjectCostanda5%interestrate.Inaddition,weassumeda4%annualincreasein
TOTrevenuesintheinterveningyearspriortotheonetimedecline,aswellas4%TOTrevenue
growth after the decline. This choice is again deliberate and intended to reflect the Citys
historicallongtermTOTrevenueperformance.TheanalysisthenfocusesonbothachievingDebt
ServiceCoverageonlyandachievingOverallCoverage.
Chart4A
MaximumOneTimeRevenueDecline
Chart4B
MaximumOneTimeRevenueDecline
OverallCoverageat1x
+20%ProjectCost;5%InterestRate
4%TOTGrowthAllOtherYears
+20%ProjectCost;5%InterestRate;
4%TOTGrowthAllOtherYears
75%
75%
50%
50%
25%
25%
0%
0%
25%
12.5%
15.0%
17.5%
19.9%
22.2%
7.1%
7.3%
7.6%
7.8%
8.0%
8.6%
9.7%
10
25%
26.6%
32.8%
50%
50%
1
3
4
YearofDecline
10
YearofDecline
LongerdelaysinthetimingofthedeclineinTOTrevenuesproducebetterresultsaslongasTOT
revenuegrowthwashealthyleadinguptothedecline.AsyoucanseeinChart4A,achangeinthe
timingoftheassumedrevenuedeclinehasaverymaterialimpactontheabilityofthestructureto
withstanddeclinesinrevenuesandstillachieveDebtServiceCoverage,butasyoucanseeonChart
4B,amuchsmallerimpactontheabilitytodosowithrespecttoOverallCoverage.Thisreflectsthe
factthatdebtservicedependsoneachyearsannualrevenues,whereasOverallCoveragedepends
oncumulativerevenuesoveralongerperiodoftime.Overall,theimprovementinaggregatecash
flowfordelayeddeclinesinrevenuesislimited,andtheProjectwouldstillbevulnerabletointerest
rateandProjectCostincreasesabovetheassumptionsusedinGSanalysis.
Results, Assumptions and Other Considerations. The discussion below analyzes these results,
considersthereasonablenessofGSinterestrateandrevenuegrowthrateassumptionsanddiscusses
otherpossibleotherconsiderations.
AnalyzingtheResults.Asdiscussedabove,theresultsoftheanalysiswilldependheavilyonthe
combinationofassumptionsabouti)ProjectCost,ii)futureTOTrevenuesandiii)bondinterestrates.
Atthistime,thereissignificantuncertaintyasitrelatestoeachofthesevariables.Together,thisis
athreedimensionalriskfactorbecauseultimately,itwillbetheactuallevelsofeachofthesethree
variablesovertimethatwilldeterminewhethertheTOTrevenuescaninitiallyfundtheProjectand
thenfundallfuturerequirementsthatmustbemetbeforetheCityreceivesresidualTOTrevenues.
Asshownabove,therecanbemanyscenarioswhereOverallCoveragewouldnotbeachievedbased
ondifferentassumptionsforthethreevariables.Itispossibletoconstructanendlessnumberof
differentcombinationsoffactorstodemonstratesuchresults.Tofocusinoneachfactor,wehave
determinedbreakevenlevelsforonevariableholdingtheothervariablesconstantandhighlighted
twostraightforwardapproachestolookingattheresultsforanyscenario.Thefirstapproachisto
knowhowlargeachangeinoneassumption(i.e.,ProjectCostorinterestrate)couldbeuntilOverall
Coverageisnolongerachievable,andthesecondistoknowhowmuchofadeclineorincreasein
TOTrevenuesbeneededbeforetheCitysgeneralfundwouldreceiveanyresidualTOTrevenues
overthelifeofthebonds(i.e.,30years).Atthetopofthefollowingpageareselectedexamplesof
ouranalysisabovethatfocusonOverallCoverage,lookingattheresultsusingthetwoapproaches
justdescribed.
Scenario1B:For+0%ProjectCostand4.25%interestrate,longtermTOTrevenuesmust
growatleast2%peryear,orrevenuescoulddecline26.3%inyear1iflongtermrevenue
growthwere4%peryear.
Scenario2B:For+20%ProjectCostand2%longtermTOTrevenuegrowth,interestrates
mustbelessthan4.25%,orrevenueswouldneedtoincrease30.4%inyear1ataninterest
rateof5%.
Scenario2D:Fora5%interestrateand2%longtermTOTrevenuegrowth,ProjectCostmust
belessthanthecurrentestimate,orrevenueswouldneedtoincrease6.5%inyear1atthe
currentProjectCostestimate.
Scenario3A:For+20%ProjectCostand3%longtermTOTrevenuegrowth,interestrates
mustbelessthan4.25%,orrevenueswouldneedtoincrease9.5%inyear1ataninterest
rateof5%.
Scenario3B:For+20%ProjectCostand4%longtermTOTrevenuegrowth,interestrates
couldbe6%,orrevenuescoulddecline8.2%inyear1ataninterestrateof5%.
Scenario3C:Fora5%interestrateand3%longtermTOTrevenuegrowth,theProjectCost
couldbeincreasedby10%,orrevenuescoulddecline10.5%inyear1atthecurrentProject
Costestimate.
Scenario3D:Fora5%interestrateand4%longtermTOTrevenuegrowth,ProjectCostcould
beincreasedby30%,orrevenuescoulddecline22.4%inyear1atthecurrentProjectCost
estimate.
InterestRateandRevenueGrowthAssumptions.
4.25%InterestRateAssumption.BasedoncurrentlowinterestratesandtheresultsofotherTOT
backed revenue bond transactions, a 30year all taxexempt financing with the GS structure and
Alevelratingscouldreasonablybeexpectedtohaveanaggregateinterestof4.25%orlesstoday
therateGSassumedintheirbasecases.However,tothebestofourknowledge,therehavenot
beenanybilliondollarTOTbackedrevenuebondtransactionsintheUS,andatransactionofthis
sizemaywellcarryasizepenalty.Inaddition,aclearriskiswheregeneralmunicipalmarketinterest
rateswouldbewhentheCitywasreadytobringthetransactiontomarket.Inaddition,ifallora
portion of the Project financing was required to be taxable, the interest rate increase could add
significantcosttothefinancing.Ratherthantryingtoguessatfutureinterestrates,weusedhistoric
datatoprovideaframeworkformeasuringpotentialchangesinfutureinterestrates.Ouranalysis
overlayscurrentestimatedspreadsforanAratedtaxexemptTOTbackedrevenuebondfinancing
ontotheindustrybenchmarkoftheAAAmunicipalmarketdata(MMD)indices,weightedbased
ontheGSstructuretocalculatethehistoricaggregateinterestcostforsuchafinancing.Theresult
is a series of rates that could be considered proxies for the interest cost of the GS structure at
differentpointsintimeinthepast.Thetableatthetopofthefollowingpagelooksatthepercent
oftimeoverthelast5,10and20yearperiodsthroughMay24,2016,aswellassince1990,thatthe
calculatedratesintheserieswouldhavebeenbelowcertainlevelsnamely,4.25%,5%and6.25%.
Inaddition,itprovidesthemedianrateforeachtimeperiod.
5yearhistory
10yearhistory
20yearhistory
Since1990
PercentileRank
4.25%
5.00%
6.25%
52%
90%
100%
26%
53%
98%
13%
26%
80%
10%
20%
90%
Median
Rate
4.24%
4.96%
5.57%
5.95%
Asshowninthetableabove,4.25%wouldbeequaltoorhigherthanthecalculatedrates52%ofthe
timeduringthelastfiveyears.Inotherwords,4.25%isveryclosetothemedianrateoverthisperiod.
Forlongerperiodsofanalysis,suchasoverthepast10years,4.25%wouldbeequaltoorhigherthan
only26%ofthecalculatedrates.A5%interestratewouldbeamoreconservativeestimateoffuture
ratesbasedonthelastfiveyearscapturingmorethan90%ofthecalculatedratesoverthepastfive
yearsand53%oftheratesoverthelast10years.Giventheseresults,PRAGwouldrecommendthat
abasecasescenariohaveahigherratethan4.25%foranypreliminaryanalyses.
Inaddition,wenotethatiftaxablebondswererequiredtobeissuedtofundsomeportionofthe
ProjectCost,theinterestcostcouldalsoincrease.Theextentofsuchanincreasewilldependonthe
proportionoftaxexemptversustaxablebondstobeissued,aswellastheamortizationpatternof
eachtypeofbond.Furthermore,totheextentthattheamortizationofthebondsmustbeextended
toincreasecapacitytofinanceadditionalProjectCostsortocompensateforotherfinancialstresses,
theinterestratecouldreasonablybeexpectedtoincreaseaswell.
FiveYearForecastFollowedby4%AnnualGrowthRate.Ashighlightedintheanalysisabove,(Charts
1Aand1B)theriskoflowerTOTrevenuegrowththanprojectedismuchgreateronOverallthanon
just Debt Service Coverage. Given the Initiatives flow of funds, while the rating agencies would
certainlyusemoreconservativeTOTrevenueprojectionsinanalyzingDebtServiceCoverage,they
wouldlikelynotbeconcernedabouttheabilityoftherevenuestopaydebtservice.Wenotethat
theratingagenciescouldbeprovidedwithmoreconservativerevenueprojectionsthanthescenarios
presentedtodemonstrateresidualsrevenuesflowingtotheCity.However,totheextentthatthe
numbers in the Initiative accurately reflect the Citys future O&M and CapEx costs and they run
scenariosthattestOverallCoverage,theratingagenciesmaybeconcernedthattheseadditional
costsmayputexpenditurepressureontheCitysgeneralfund.
OtherFiscalConsiderationsandRisks.AsnotedintheExecutiveSummary,inadditiontoCashFlow
ConsiderationsandRisksthereareotherconsiderationsthatwethinkaresignificant.
AlternativeBondStructures.WewouldsuggestthattheCitybeawarewhenreviewingGSstress
scenariosthatbondtermsaremodifiedtobeabletocontinuetomeettheInitiativesobjectives
(e.g.,higherinterestrateorProjectCost,longerbondterm).WhilePRAGisawareofanumberTOT
backedrevenuebondsthathavebeenissuedorrestructuredas40yearbondsfromoriginalissuance,
thatisconsideredarelativelylongbondterm.Inaddition,whileitmaybepossibletoaddressfor
example, cost overruns or higher interest rates by extending the bond term or with a delayed
financing,whichwouldresultinadditionalupfrontTOTs,itwouldalwaysbeattheexpenseofpublic
funds.WenotethatitwouldalsobeimportantfortheleasewiththeChargerstobeatleastaslong
asthebondterm.Otherwise,intheeventtheChargersleavethestadiumattheendofthelease
andbondsremainoutstanding,TOTrevenueswouldbetiedupandtheCitywouldhaveareduced
capacity at that time to finance capital expenditures needed to attract another tenant or to
otherwisedisposeofanunderutilizedstadium.Inaddition,wenotethatadelayinconstruction
withmildinflationaryincreasesinProjectCostisnotastressscenario.Followingthestartofthe
collectionoftheTOTrevenuesonJanuary1,2017,constructiondelayspriortotheissuanceofbonds
wouldcauseTOTrevenuestoaccumulateandthenusedforpaygoexpenditures,whichwouldin
turnreducetheamountofbondsthatwouldneedtobeissuedandpossiblyallowexcessrevenues
tobereleasedtotheCitysgeneralfundintheearlyyears.
CitysGeneralFundRatings.ItisourunderstandingthatspecialtaxsupporteddebtsuchasTOT
backedrevenuebondsisincludedbysomeoftheratingagenciesintheircalculationofanissuers
directdebtburden.However,basedonpreliminaryconversationswiththeratingagenciesanda
reviewoftheCityofOrlandosexperiencewithhoteltaxbackedbonds,whilewecouldnotsayfor
sure, we would not expect the issuance of TOTbacked revenue bonds to impact the City of San
Diegosgeneralfundratings(unlessasnotedabove,additionalcostsrelatedtotheProjectresultin
general fund expenditure pressure). For perspective, a brief summary of the City of Orlandos
experienceisasfollows.In2008,theCityofOrlandoissued$310.9millionofTOTbackedrevenue
bondsthroughthreeseriesofbondssenior,secondandthirdlienTouristDevelopmentTaxRevenue
Bonds. While insured by Assured Guaranty, they also received underlying ratings from Moodys,
S&P,andFitch,respectively,ofA3/A/A+ontheseniorlien,Baa1/BBB+/Aonthe2ndlienandBBB+
(S&P) on the 3rd lien. Subsequent to issuance however, the TOT revenues declined precipitously
duringtherecessionandtheratingsweredowngraded.AsofMay31,2016,theseniorlienbonds
wereratedBaa2/BBB/BBB,the2ndlienbondswereratedBa2,BBB,andBBBandthe3rdlienbonds
wereratedCCC+byS&P.TheCityofOrlandosissuercreditratingsarecurrentlyratedAa1,AA+and
AAA and were not impacted by the negative credit developments on the Citys hotel taxbacked
bonds.Notwithstandingthisexample,whileonlyTOTrevenueswouldbelegallyrequiredtomeet
thedebtservicepaymentsonTOTbackedrevenuebondsandnottheCitysgeneralfund,asahighly
visibleandverylargefinancing,theissuanceofover$1billionofbondsforthisProjectwouldlikely
attractattentionandsubjecttheCitytoheadlinerisk.
CostSharing.TheInitiativerequires$12and$17millionannually(plusannualCPI/CCIincreases)to
besetasidefortheconventioncenterandstadiumO&MandCapExexpendituresrespectively,prior
toanyfundsbeingreleasedtotheCitysgeneralfund.Asnotedabove,lookingata30yearperiod
with 28 years after construction completion and an annual 2% inflation adjustment, the TOT
revenueswouldfund$450millioninconventioncenterO&MandCapExand$637millioninstadium
O&MandCapEx.Inaddition,totaldebtserviceontheportionoftheProjectCostthatwouldbe
bondedforassuming30yearbondsat5%wouldcost$2.3billioninTOTrevenues.PRAGhasno
knowledgeofthereasonablenessofthesecostassumptionswithrespecttoeitherparty.
PostInitiative TOT Levels. Under the Initiative, the existing 2% TMD assessment would be
eliminatedandreplacedwiththenew6%levy,foratotalCityTOTlevyof16.5%.At16.5%,this
wouldbeoneofthehighestTOTratesintheStateandnationallyaccordingtoaSeptember2015
lodgingstudy.TOTrevenuesrepresentanimportantrevenuesourcefortheCityandincreasingthe
levyforthispurposemayhaveanegativeimpactonlevyingitforotherpurposesinthefuture.While
therearemanyfactorsthatinfluenceindustrygroupsfromselectingconventionlocations,costsare
certainlyoneofthemandahigherTOTisacostcomponent.Asaresult,futureincreasesforother
purposes above 16.5% would have to consider how high the levy already is relative to other
conventionlocations.
Conclusion.PRAGsanalysisisbasedonourunderstandingoftherequirementsoftheInitiatives
flow of funds and GS analysis dated April 28, 2016. As noted above, a key characteristic of the
InitiativeisthatbasedonGSprojectionswhilea5%TOTlevygeneratesalargeamountofrevenues
relative to debt service, the Initiative also requires funding an operating reserve, the second 1%
transfertotheTTF,andinflationadjustedannualO&MandCapExcontributions,whichinaggregate
are almost equal to GS estimated annual debt service cost. The flow of funds that has been
presentedtotheCityreflectsTOTrevenueprojectionsbasedontheCitys5YearForecastfollowed
by4%annually,whichisconsistentwiththeCityslongtermhistoricgrowthrate.Theseprojections
resultinascenariowithsufficientrevenuestomeetOverallCoveragewithincreasingamountsof
excessrevenuesflowingtothegeneralfund.Whileweunderstandthejustificationfortheserevenue
projections, if presented to the rating agencies in a more standard TOTbacked revenue bond
structure(whichlackedtheadditionalrevenuesbuiltintothisstructurethatarerequiredtocover
O&M,CapEx,etc.),revenueprojectionswiththesegrowthrateswouldnotbereliedupontoratethe
bonds.However,giventheexcessrevenuesbuiltintotheflowoffunds,itwillbepossibletopresent
more conservative revenue projections to the rating agencies and demonstrate sufficient Debt
ServiceCoveragewhichiswhatthebondratingswillprimarilybebasedon.
While the rating agencies may focus on Debt Service Coverage, PRAGs analysis varied the
assumptionsandanalyzedbothDebtServiceCoverageandOverallCoverage.GiventheInitiatives
requiredflowoffunds,themostcriticalelementstomeetingtheInitiativesfundingrequirements
aretheactualProjectCost,theassumedrevenueprojectionsandinterestrates.WhilePRAGwas
generallycomfortablewithGSbondstructuringassumptions(i.e.,30yearamortizationperiod,1%
debtservicegrowthanda50%MADSDSRFthatcouldalsoberefinedinthecourseofstructuringthe
bonds),webelievedthatitwasimportanttoanalyzetheimpactthatdifferentrevenueprojections,
ProjectCostsandinterestrates(allofwhichhaveahighdegreeofuncertaintyatthistime)hadon
meetingtheInitiativesrequirements.Atthistime,webelievethatitisnotpossiblefortheCityto
knowiftheprojectedrevenuestreamwouldbesufficienttomeetOverallCoverage.Oursensitivity
analysis considered different i)Project Costs, ii)future TOT revenue growth rates and iii)interest
ratesandfoundmanyscenarioswheretherewouldbeinsufficientfundstomeetallrequirements.
PRAGbelievesthatgiventheirinherentuncertainties,itisimportantfortheCitytorelyonmore
conservative estimates of the interest rate, TOT growth rate and Project Cost assumptions to
determine if there will be sufficient TOT revenues to meet Overall Coverage and provide TOT
revenues to the general fund. We believe that it is critical for the City to have much greater
confidenceintheestimatedProjectCost.Asaresult,theCitymaywanttoconsiderprocuringthe
services of project consultants with expertise in stadium and convention center construction to
betterevaluatetheProjectCostestimate.Inaddition,giventheamountoftimebetweennowand
when the bonds would be issued, it seems appropriate that any analyses be based on a higher
interestratethanGS4.25%toprovideprotectionfrominterestraterisk.Wewouldrecommend
using a 5% rate for any base case analysis. It is also important for the City to see what Overall
Coveragelookslikeatdifferentlevelsoffuturerevenuesandastheratingagencieswould,determine
thelevelofgrowththatitwouldbecomfortableassuming.WenotethatbythetimetheCitywould
bereadytoissuebonds,withtheProjectCostestimaterefinedandasignificantamountofinterest
rateuncertaintyremoved,theCityshouldbeinabetterpositiontoassesstheriskparametersofthe
overallplanusinganupdatedversionofthetypeofanalysisdescribedabove.Inaddition,giventhe
complexitiesoftheInitiativeandthevarietyofTOTbackedrevenuebondstructuresthathavebeen
usedinthemarket,tobecomfortablewiththeriskprofile,PRAGsuggeststhattheCityconsider
pursuing an indicative rating from one of the rating agencies prior to making a decision to issue
bonds.
Glossary.
AdditionalBondsTest(ABT):Abondcovenantunderwhichadditionalbonds(securedfrom
thesamerevenuesource)mayonlybeissuediftherequirementsofthetestcanbesatisfied
followingtheissuanceofsaidadditionalbonds
CapEx.Capitalexpenditures
DebtServiceCoverage.TheabilityoftheInitiativesannualTOTrevenuestopaytheannual
principalandinterestrequirementswhendueandinfullontheTOTbackedrevenuebonds
at1xcoverage
Debt Service Reserve Fund (DSRF). A fund typically funded with bond proceeds that is
establishedandmaintainedforthesolepurposeofpayingdebtservice,intheeventpledged
revenuesareinsufficient
GS.GoldmanSachs&Co.,[anadvisortotheChargers]
Initiative.SanDiegoIntegratedConventionCenterExpansion/StadiumandTourismInitiative
Integration Allocation. A $350 million City contribution for the stadium portion of the
Project,whichisexpectedtobefundedbytheTOTbackedrevenuebonds
MaximumAnnualDebtService(MADS).Asofthedateofcalculation,thelargestamountof
debtserviceonoutstandingbondsscheduledtobepaidinanyoneyear
O&M.OperatingandMaintenanceexpenditures
Overall Coverage. The ability of the Initiatives annual TOT revenues to pay the annual
principalandinterestrequirementsasdescribedinDebtServiceCoverageabove,aswellas
to annually fund in full the other Initiative requirements including the initial 1% TMF, the
second 1% TMF and the annual inflation adjusted O&M and CapEx contributions at 1x
coverage.OnlyafterthesebucketsarefilledwouldtheCitysgeneralfundreceiveanyof
theseTOTrevenues.
Project.CombinedexpansionoftheCitysconventioncenterandanewChargersstadium.
ProjectCosts.ThecostsofthecombinedconventioncenterandanewChargersstadium,
includinglandacquisitionandenvironmentalmitigations,relocationoftheMTSbusyard,and
thecostsforrequiredancillarycapitalinfrastructure.
TMDA.Current2%TourismandMarketingDistrictAssessment
TOT.TransientOccupancyTax
TTF.SanDiegoTourismTrustFund

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PRAG Report To City On Chargers' Tax Measure

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11500WESTOLYMPICBOULEVARD,SUITE502

initial 1%, would replace the current 2% Tourism and

PRAGs Analysis Approach. GS scenarios incorporate various bond structuring assumptions

13.4% 11.7% 10.0%

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