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ROUGH EDITED COPY
FEDERAL HIGHWAY ADMINISTRATION
VALUE CAPTURE SERIES: ASSESSING VALUE CAPTURE RISKS
WEDNESDAY, AUGUST 16, 2023,
JOB NO. 22439
CART CAPTIONING*PROVIDED BY:
LINDA M. FROST
on behalf of
MID-ATLANTIC INTERPRETING GROUP, INC.
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This transcript is being provided in rough-draft format. Communication Access Realtime Translation (CART) is provided in order to facilitate communication accessibility and may not be a totally verbatim record of the proceedings. Due to the nature of a live event, terms or names that were not provided prior to the assignment will be spelled phonetically and may or may not represent the true spelling.
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>> OPERATOR: Your conference will begin momentarily. Please continue to hold. Ladies and gentlemen, thank you for standing by. Welcome to the understanding Value Capture risks conference calm. At this time, all participants are in a listen only mode later we'll conduct a question-and-answer session. Instructions will be given during that time. If you require assistance, please star zero. Now I'll turn it over to the host, Pepper Santalucia.
>> PEPPER SANTALUCIA: Thanks, Greg. On behalf of the Federal Highway Administration. I would like to welcome you to assessing Value Capture risks. I'm with the Volpe center in Cambridge, Massachusetts and I'll be facilitating today's webinar, the webinar is scheduled to run for two hours until 3:00 p.m. eastern, we're recording the event and that will be posted on the FHWA Website. We'll provide the link to that page in the chat.
The slides will be available for download toward the end of the webinar and if you wish to use your attendance today toward continuing education or other training requirements, you can request confirmation of your attendance via e-mail, and we'll provide that e-mail address toward the end of the event.
Just for quick orientation to the webinar room in the top left cone of the screen, you should see a window called audio information, the phone number, if you want to listen to the webinar by phone, instead of through your computer speakers, the advantage of doing that is that you can ask questions verbally by phone at the appropriate time, unfortunately, we won't be able to take questions verbally from those of you who are listening through your computer, but you can use the chat window, the audience chat window in the lower left corner of the webinar room to submit questions or comments during the webinar. We will field a few questions at the end of each presentation, and we also have budgeted time for additional Q&A during the end of the event. If you don't have the time to address all of the questions submitted, we'll post written responses along with the webinar recording at FHWA Value Capture Website. If you want to see closed captioning during today's event, click on the CC icon along on the bar along the top of the webinar room, and in the menu that appears to select show captions from the dropdown menu.
With that, I'll go ahead and introduce our first presenter. Dr. Rafael Aldrete is senior research scientist at Texas A&M Transportation Institute and Texas A&M University systems regions fellow. He has more than two decades of experience in transportation research and management consulting, collaborating with local, state, national, and Federal agencies. His research involves around infrastructure finance and economic focusing on public-private partnerships and Value Capture. Rafael offered multiple primers and technical guidance documents for Value Capture applications and transportation. He's done that for both FHWA and TxDOT. He's the primary author on the FHWA primer in evaluating Value Capture risks published in 2022. That primer is the basis for his presentation he's about to give, and we'll make that primer available for download toward the end of that webinar.
Rafael, with that I'll turn it over to you.
>> RAFAEL ALDRETE: Thank you, Pepper. This webinar has two purposes first to provide primer the Value Capture risk and second the guidelines we follow. You can think of the presentation as part of the theory and following presentations of the practice.
Today's presentation is organizing sections. We'll begin with introduction to Value Capture, explore inherent relationship with risk and outline objectives of the overall discussion in my presentation. The next four sections delve into various risk categories that Value Capture may encounter. This helps streamline our understanding of potential challenges, for each category weird touch an example that shed light on Value Capture. Please note due to time constraints we won't delve into each and every example, but rest assured the presentation is live, but you'll see toward the end of the presentation we have all of the examples as well as examples that are included in the Value Capture primer. Sex 6 we have the primary risk categories which have been addressed in the webinar series in recent months for the past couple years, then wrap up with section 7 where we provide insights into capturing Value Capture funding strategy, and this involves tailoring strategies to the risks in each phase of the transportation life cycle.
So, without further ado, we'll get started. Value Capture is displayed. What we have, when the government invests in transportation infrastructure, this results in acceleration of development, and property value increases in the areas served by the project ingenious a whole. And also increases in business activity and employment. This, in turn results in an increase of the property owners, as land values increase, property values increase, as well as increases in sales for businesses, for retail businesses. This, in turn, leads to municipal government and state government tax revenue, from property taxes as well as from sales tax.
So, the Value Capture is a portion of the tax revenue invested in the infrastructure.
So, as we can see from the slide, Value Capture techniques rely on increases in property value, business activity, and the growth linked to the transportation infrastructure, and we use that to help fund the current and future transportation improvement.
In the primer, risk is defined as possibility of deviation in the actual project outcome, with the benefit and costs of each project stakeholder. Risk comprises the possibility of unexpectedly good outcomes as well as unexpectedly bad outcomes. Value Capture is linked to economic state and economic development. Risk is a component of it. Include but not limited to the locate of the project. The graphic dynamics within the project location, and economic activity in general.
Now, managing risks associated with Value Capture as a funding source is critical to maximize the productivity that generates the funding, and make sure Value Capture remains sustainable funding source. The objective of the primer is to help local government under different risks associated with different Value Capture techniques and learn how to build resiliency by adjusting Value Capture strategies to account for districts.
So, with this resiliency, t is about incorporating means to cost effectively deal with the potential deviations of actual outcomes that may affect the ability of the project to generate the revenue that was expected or -- and/or the ability to capture or use the values generated by the products.
Now, we'll get started with several market risks which consist of economic risks, real estate risks and local economic risks.
Macro-economic risks are risks related to shocks in economic growth and inflation at the national level, and some examples of this include economic recessions that impact employment and standing by developers and public in general, interest rate changes that impact the costs of borrowing, geopolitical events that disrupt supply chains or catastrophic events that disrupt economic activities.
I will skip this first example and jump to the second one. An example of macro-economic risks is real estate demand supply unbalanced that may be produced by events of national or international scope, that disrupt the balance between real estate demand and supply which have short and long-term effects. For example, the recent COVID-19 pandemic. On the demand side, in response to disruptive event, private and public employers suddenly out there, a work location policy such as work from home, and this results in households spending considerably more time at home and increasing the demand for housing, because people are spending more time at home, they tend to thinking or requiring more space.
Another example from this type of risk category, could be action that is taken during this catastrophic event, to reduce interest rates that support the economy which may result to increase demand to purchase new homes as mortgage rates drop.
On the supply side, the economic uncertainty generated by the disruptive event may discourage the homeowner, existing homeowners from selling their homes, therefore, reducing supply. So, we have additional factor, and on top of that, we may have impact on this event on the supply chain of construction materials may lead to increases in the cost of construction. Which, in turn exacerbates supply issues, increasing prices.
These disruptions in general, may also cause temporarily, or permanent impact on housing price, increasing municipal property tax appraisal, potentially benefits Value Capture techniques that rely on property taxes such as tax during financing, special assessment districts in areas where the proper dominated.
On flip side. The impact on commercial property from these types of events could be very different. For example, the disruptive event affects commercial property owners, revenue shortfalls, closures, and bankruptcies as a result of increased vacancy rates for retail and office space as well as hotel, and one of my colleagues' presentations will cover a very good example of this type.
It not only causes an immediate shock but leads to long-term changes on market rates of commercial property leading to lower property values. In the short term this has impact on revenues generated on techniques that rely on property or sales taxes within a limited geographic area from municipal, such as Timberwolves tax in a financing district or special assessment district where commercial property dominates. This flipside of residential and commercial, something you see before the pandemic.
Local comments may choose to allow taxpayers to apply for a plan for payments or move the payment deadline a few months out to make their payments. At least, those are examples what we saw during the pandemic, that local environments to be able to.
Now, real estate market risks, those are defined in the primer as regional or local real estate bubbles and boom and bust cycles that disrupt real estate development and economic activity within the community. So, not necessarily at the national level. These risks, revenues generated by Value Capture techniques that replay on property taxes and sales taxes. The market conditions may delay new development and make it very difficult to use Value Capture techniques, such as joint developments, to develop contributions that rely on gaining developer interest in investing in developing the area around the project.
Real estate market risks can significantly influence Value Capture. An example, we look at joint develop of the project at the union station in Columbus Ohio. Union station cap bridge two neighborhoods divided by interstate 670, leading to stark contrasts between two real estate markets. The area south of the business district and convention center, it's northern counterpart, suffers from real estate. The disparity for the City of Columbus to bridge the cap with the cap of union station. At the time it wasn't chapter territory. This was one of the retail ventures built over a highway. And the unique nature of the project heightened developer apprehension, especially the mismatched real estate profiles on either side of the interstate. There were questions that, questions about the commercial viability that in turn affected the potential lease rates and vacancy percentages that were expected and in turn, reduced the developer's expected ability. However, the project surpassed expectations, and it was in development dividing both regions, and the success was not a mere coincidence. The feasibility studies both the sponsor and developer, where tremendous assistance in choosing the right Value Capture technique, the right project and mitigate the district. That's one of the reasons this probably has been very successful.
Now, the last type of market risks local economic and demographic risks, these are defined in the primer, as regional or local economic shocks that result from structural changes to the economy and employment mix. As well as natural disasters and other causes.
So, some examples of these include the structural economic shift from manufacturing to services, as employment drivers at the national level, that, in turn, have resulted in unemployment in sectors of the workforce, let's say in industrial base, and eventual migration of population, and also socioeconomics. On the other hand, we have things that impact communities in general, but specifically businesses such as tourism industry. This is affected by Value Capture techniques especially those that rely on property taxes and sales taxes.
I'll skip this example and move to the next risk category. So, we're going to talk about legal and political risks. And we'll start with legal feasibility, and legislative risk, which are risks that may impact the ability of the local government to use a particular value cap our technique on a project or the ability to financing for a particular type of project.
Some examples include lack of clarity in state legislation prior to project implementation. Other changes in enabling legislation that take place prior to project implementation, and changes that affect businesses or incentives of businesses that are used to spur development.
And an example of this type of risk are the legal challenges in implementing transportation redevelopment zones that Texas has experienced. Counties in Texas are intended to provide partial funding or matching dollars in smaller communities with participation of the County where funding is difficult to make it happen.
TRZ legislation in Texas identifies counties as one of the entities with the ability to establish TRZ along with Port Authorities and municipals. However, the Texas constitution has also been interpreted as not allowing counties to use TRZ revenue for repayment of debt issued for a transportation project.
A constitutional amendment was approved by voters in 2021. It would allow them to be affected by property taxes, but the amendment was challenged in Court by advocacy Court with language used in the November ballot. Litigation is ongoing and Texas counties continue to be unable to successfully use the Value Capture tool,
So, the mitigation of these types of risk, what can be concluded from the experience, dealing with newly created local funding mechanism, conducting a thorough fees act assessment is important, as well as, in this case, checking with lenders, potential lenders that may have experienced similar situations from local environments that intended to use the funding mechanism in question, in this case transportation investment results.
I'll skip the example on naming rights, but it is included in the slide deck as well as the primer.
Now, let's move on to local political climates, and political feasibility risk, and these are risks that impact ability of local government to use or pursue a Value Capture technique as a result of temporary events or changes in the political climate, and they made leave changes in public support to a particular project, or to the Value Capture technique that is being proposed to fund the project and this could be the result of insufficient public awareness. Some examples here include elections at the local, state, or national level, public support for Value Capture technique, or for the project, by the public, changes in support for enabling legislation by the public, or by elected officials.
And example of this type of risk is implementation of transit improvement districts, to fund the metro project in Virginia. In addition to TIDs. They may get assistance from landowners and developer, why? Because it's a new tax. Mover, there are property owners within the district may argue neighbors outside the district, as well as future residents, have nothing else to pay in the fee well benefit or are benefitting from the improvement.
This can be translating to a lack of support by the developers, key to establishing the transit improvement district. The Virginia law in addition to establishing the TID, 51 percent of the commercial and Industrial real estate district must make for the district. This challenge was overcome with the help of developers by means of a TID. The group carried out the campaign to gather support required by other businesses to formulate the petition to Fairfax County. This was effective outreach identifying the challenges by the local environment was key to generate awareness of the project and potential benefits, therefore gaining support for implementation of the project and funding mechanism.
Economic and fiscal risks include economic growth impact, and fiscal impact risks. Economic growth impact and related risks directly affect ability to secure fund from lenders and financial markets due to discrepancies toward forecast development levels. This in turn leads to a situation in which the Value Capture technique generates revenue unexpected, making it impossible or very difficult to secure fund to fund the project, and some of the risks that call into this category include probably location, lack of proper, or complete feasibility study, as well as poor project selection which may be a consequence of feasibility studies short comings.
We have another example here of joint development, but I'll move on to the next risk category in the interest of time.
Now, with fiscal impact and risks, these are risks that affect the local government's ability to sustain basic services, as a result of commitments that are made to a particular project, or a particular funding mechanism. Situations that fall in this category include, overcommitting of future tax revenues to a project which in turn hamper ability to sustain other services in the community, as well as establishing too many tax increment financing districts that, overall may impact the capacity of the local government.
An example of these type of risks is when these projects do not spur the expected economic development that was originally expected. One study found -- and this study concluded in the primer, the study found in some instances, these projects do not generate economic development perspective when but-for test was completed. This means that the test projects within the test district were not what they were expected and therefore being subsidized by local governments by funds that might have been assigned to initial services. At this time, these should be funded for this project. This is a significant risk that can be managed by conducting much more rigorous studies based on realistic expectation, as well as testing the developer's assumptions about future development.
Now, policy and institutional risks, include social equity of environmental and sustainability concerns, and the transparent risks.
Social equity risks those generated by the Value Capture technique used for the project that ends up having disproportionate effect of low income or disadvantaged communities. So, this can happen through gentrification, lack of ability, impacts of right-of-way acquisition, and all of this, for example, noise impacts or impacts on cultural or historic sites.
An example of these type of risks is when the development associated with the Value Capture project affects low-income residents in tax and financing districts, for example. When the used to pay for a project in a neighborhood, this is done with photos. It may end up removing them from the zone from the district through gentrification. Some states like Utah have minimum requirement for affordable housing and requirements for housing and transit reinvestment zones. Similar requirements for taxing and financing in California and Oregon.
Now, transparency risks arise from limited transparency or communication of the cost of risk, the rationale for allocating risk, and the risk/return decision making which includes non-disclosure of unknown project risks.
Some examples of this include the failure to perform feasibility studies that include risk analysis and knoll properly informing the general public about the risks associated with the Value Capture technique used for the project itself.
Skip this slide, and the examples are included in the slide deck, and we move on to the matrix that we created in the primer that sub rises the category that are most relevant to Value Capture techniques in this webinar series. This matrix can be used, for example, when we have special assessment district, business improvement district, land value tax, sales tax districts. In all of these cases, these risks are affected by all four categories of risk. First, market risks, because property and sales tax revenue have state and economic growth, political risks, because some of these tools require new governance structures, such as boards that include non-elected officials that may seem exclusionary to the public. Economic risk, again, because revenues fall short, essential services throughout the municipality can be a risk and equity risks, because property values may displace certain residents. That's just an example of how to use this matrix as a quick reference.
I'll move on to the last section of my presentation, but this goes into the topic of building resiliency to our Value Capture strategy. And building resiliency into the Value Capture study is very important to maximize the revenue, the value generated by the project, but also the revenue and long-term success of using Value Capture as a funding source.
Building resiliency is about incorporating the means and this include tools and mechanisms that help the local environment. To deal cost effectively, again, what is key, cost effectively with potential deviations and actual outcomes that affect the ability of project to generate value expected, the revenue expected and ability of the local environment to actually capture the value generated.
This can be accomplished to what we call risk adjusted Value Capture study. And, in transportation projects, risks are segmented by the different project phases of each category. Common phases of a transportation project include PS&E, development, letting and award, construction and maintenance and operation, as illustrated on the screen. Alongside these phases we have the environmental compliance, and utilities process that are part of it.
For successful funding using Value Capture, risks emerge in each one may emerge in each one of these phases. So, a risk adjusted Value Capture strategy is a method that tailors risk management, days when each risk is most likely to appear and include identifying the risks affecting Value Capture, accessing those risk, meaning assessing their likelihood, and potential impact, allocating those risks, assessing the responsibility for related costs of benefits related to the risk, mitigating those risks, developing plan, action plans to address those risks if they materialize, and monitoring, which include monitoring indicators.
Managing risk assessment in the early phases of project, can amplify significantly in later stage, so, it is very important that the risks in the early stages of the project are assessed.
Most risks in the first four phases are related to process. For instance, the process project selection is chosen, have a much higher chance boosting economic growth, economic development than simple random choices.
In subsequent choices the risk may emerge that affect cost, the schedule or plans for the future development.
During construction and maintenance and operation, risks depend on a broader set of factors many outside of the local government. Delaying construction can shift expected revenues from Value Capture, while unforeseen activities like economic downturn can impact demand for real estate within the affected area.
So, addressing risks following the phased approach, allows for building resiliency into Value Capture.
And with that, I conclude my presentation, and I think we have about five minutes for questions.
>> PEPPER SANTALUCIA: Great. Thank you very much. Rafael. We do have a couple questions that came in right toward the end of the -- of your presentation. The first question from Marvin Williams, do caps require an aerospace agreement, can the cap be for profit within the interstate right-of-way? Those questions, do you have any thoughts on that one?
>> RAFAEL ALDRETE: So, the union cap project, there was a great deal of effort spent on figuring out how to deal with the air rights. And there was an agreement that was signed. They made it work. And the details of how that -- how that was done, are in the primer, but that's a very important question, and I'll get you more details once I check back my reference in the primer.
On the second question, the common risks of municipals, I question that, my answer is not comprehensive, but I give an example. In the case of expected results in the "but-for" test in the taxing and financing district. It is often lost in the development, particularly when most of the project developed is part of the district are not related to transfer station, because they are related to incentivizing commercial development, providing all of the tax breaks for businesses to locate, building facilities for retailer and so on. What is missed is being very thorough for expectations for development. This is a particular example where the revenues may fall short at the same time you have commitment made to bases to pay for certain parts from the project and that has resulted -- the appearance is resulted in significant public backlash against some much the -- in some locations. So, I would say if I could stress a part of this webinar, which of these risks I would say, in taxing and financing district, something we found time and time again in different case studies much.
>> PEPPER SANTALUCIA: Okay. Great. We'll be sure to come back to any questions that come in. I see Kate and Bill typing. But we will introduce our next presenter, and we will get to any additional questions at a later point.
Our next presenter will be Nora Wittstruck. Nora joined S&P Global Ratings in 2016 and senior Director for America's public finance. She's a subject matter expert on environmental, social, and governance risks and credit ratings for U.S. public finance. She also collaborates globally with other rating, practices to align use on these credit risks across sectors in geography.
Nora serves as analytical lead for New York City, and as a member are the analytical teams for the states of Texas, Missouri, and South Carolina. Prior to joining S&P Global, Nora worked in the state of Florida in division of bond finance as bond specialist. Division of bond finance is responsible for managing long-term debt for state agencies including Florida's Department of Transportation.
Nora, I turn things over to you.
>> NORA WITTSTRUCK: Thanks, Pepper. I'm really excited to be here today talking with you guys about your transportation projects funded, and I think I sort of serve as connective tissue between Rafael and John, who is going to speak on a particular project that was financed in reason toe. And I think what I would like to talk a little bit about today, after Ralph has given a very comprehensive and useful discussion of Value Capture over all, I'm going to talk a little bit about how funding, once the project is identified, what are the funding options, including tax increment districts, how are funding options different, how might issuers make decisions and mitigate risks mentioned by Rafael in his presentation.
So, you've done this great thing and gotten a really tool transportation project approved through a variety of different mechanisms, and this is not an exhaustive list, but it is quite usual to have projects approved through a local government, for example, maybe a City Council has decided they want to build a new thoroughfare, or interchange linking from a state highway, a dedicated funding source might be used for that, like a sales Tex Levy that could be voted by the voters in the area, but might be siphoning off a particular amount of sales tax that's already collected. There might be a transportation agency, a transit agency, or something like that, where the tools are Levied for a certain facility, but also there might be metropolitan planning organization, which is a regional organization, where multiple entities participate and are working toward a common goal for a transportation project, and then, of course, probably many of you are familiar with the Federal Highway administration on the line here with u-that the Federal Government also provides funding through the TIFIA loan process.
Once the project is approved and funding source is identified, because transportation projects are so huge and awfully usually expensive, given the infrastructure that is, you know, acquired by it, you might have to access the bond market to get funding off of this dedicated funding source that's been identified for the project. And that's where S&P Global Ratings might come into play, you would present the project, the funding source, all of the different bells and whistles around the project that are important to under from a rating agency perspective, for us to be able to assign a credit rating to the transaction, and that way you can borrow money from the market.
So, maybe the funding is dedicated sales tax revenue. There's lots of opportunities around using a sales tax Levy which Rafael also spoke about, specifically, this would be potentially a dedicated funding source, meaning that all of the money that's collected goes directly to either the, you know, different phases of the project, whether be design, whether be environmental study, whether it be actual construction, or potentially operations of the facility once it is complete.
Usually this funding source, if it is dedicated, accounted to are separately from general operation fund which is important from a reading analyst perspective, that that funding source would not be able to be clawed back for any particular reason, if maybe there's an event that require, you know, funding that was not identified in the original operating budget for the entity itself, and then also, typically, sales taxes, one of the things that Rafael had spoken about, was the demographic, and the economics of the service area, and typically, in growing communities, there's kind of that built-in organic growth with sales taxes, when people move there, they buy more things, they might spend more money, things like that, where the sales tax would sort of have that incremental growth on a year in, yearend basis. There could be issue, also risk us have to think about if you were to use this particular funding source. That could be the Levy might spot after a particular time especially if builders approved it. So, it might only be there for a 20-years period meaning you have to pay bond at a particular time.
As Rafael mentioned there might be economic shifts or shocks that occur that could affect the dedicated funding source. Finally, there could be an extreme weather event that could disrupt your collections. When Hurricane Harvey happened in Texas in 2017, we saw a number of people move because their phones were destroyed. He they moved from that funding source they declined during that time period until people were able to move back.
So, if you decide to use your dedicated funding source like sales taxes and came to the rating agency, we would apply priority lien revenue analysis, and there's really four factors for our analysis in that regard. First of all, the economic fundamentals. So, what is the size of the service area, where those taxes are collected from. Many of you might be aware of the project that's going on in Austin with CAP metro, they are building out transportation network and they are already collecting a sales tax to help support the project of that particular, you know, in Austin.
In addition to that, voters had, you know, approved a property tax as well to support the dedicated tax Levies, in our analysis, property taxes would be identified separately but the economic fundamentals of the City of Austin are humongous, it has great diversity in its economy, the individuals that lived there have a pretty good wealth and income threshold so they can spend more money, spend more money for the dedicated funding source and it is a huge metropolitan area, which is all seen as being beneficial under the priority lien revenue bond analysis.
We also look at revenue volatility, which is something Rafael mentioned, and that revenue volatility is, how does that funding source perform over a number of different economic cycles. Do we -- is it stable? Has it been more volatile over time, for sales tax, we view it as being a very stable funding source, and the fact even through COVID, it was a funding source that really performed quite well.
And then, of course, we look at coverage and liquidity, and based on the revenue you collect, based on how the debt service for the bond is structured, the cover fence that you tell bond holders that you adhere to, we really want to see that your funding source is, you know, several times the amount of debt service that you might have to pay.
We also look at other types from liquidity that might be available to bond holders like a debt service reserve fund. And finally, we think that there are some, you know, linkage to sort of the obligator who collects the tax, and we think about that within our analysis as well.
But this is really one example of a funding source, and the next funding source is particularly something that a transportation agency might use. There might be a network of toll road they can leverage that particular funding source to view expansions, or maintenance, or improvements on the road. The great thing about the whole revenue is that -- it usually is collected and dedicated specifically for that facility. So, you're thinking about, you know, irate the New Jersey Turnpike authority, the Garden State and Turnpike are a system of two road that cross New Jersey and are very important to the transportation network, not only within the state but in the nation as connected to I-95. The tools that are collected there, go directly back into that road for its maintenance.
Tolls can also be structured dynamically to account for period of increased traffic like rush hour so they can charge more during high period, they can charge less during period through the night, or something like that, where there is not as much traffic on the road. And the other thing that's great is that typically, if tolls are collected on a historical basis, entities have a good idea how much money they might collect in poll revenues, so they can sort of meet the demand the tolls are expected to provide for toll revenue.
There are risks if you're thinking of using toll revenue for debt issuance, that is demand can be a variable. So, just like you can size tools to be dynamic spaced on the amount of the traffic, you might create time where people aren't using the road at all. There was a toll bridge in Florida that got wiped by Hurricane Ian. So, over a period of time it couldn't collect tolls, so that could really affect the amount of money that's collected to support the debt service.
Also, many times people might say, you know what, the tools too high, I'm going to use the free option. Even if the free option takes a little longer or maybe doesn't go directly where you want it to. People might choose to use that option versus paying a toll.
Finally, as mentioned with the toll bring on Sanibel Island that happened in Florida, there are shocks that disrupt your ability to collect those tools and could ultimately affect the way we look at the credit rating when we apply our credit analysis.
If an entity is using a dedicated toll, we will apply what we call our transportation infrastructure Enterprise analysis and criteria, and similar to the priority lien criteria, there's going to be multiple factors we evaluate. Economic fundamentals stay pretty much the same, as we talked about earlier, as Rafael brought up as well in terms of how that service area generates revenue, it, you know, are the tolls affordable within that particular service area the other is market position and how the demand for that particular toll facility occurs. New Jersey Turnpike facility has very strong market position and we see that as being an essential part of the road network for the state that connects a very strong, you know, northern New Jersey to, you know, parts of the Caroline ins. It connects to New York City, which is an incredibly strong MSA. Metropolitan statistical area. And we look at management in governance. One of the things Rafael pointed out in his presentation is feasibility analysis. We think about feasibility analysis within the management and governance in a toll facility and management that oversees a total facility. Are they trying to mitigate risk by -- there's a question about what are the key risks that might be missed or overlooked when entering into Value Capture projects for transportation facility, and I think one of the things is maybe thinking about how, in the feasibility analysis, demands might change over different economic cycles. Are they hedging how, you know, shocks, or economic downturns might affect the revenues that support that service or is designed to support the Value Capture.
We also look at financial performance, which, again, is mostly around that service coverage. We look at how much debt and liability the toll facility might have outstanding generally, how much are they taking on, can they afford the debt and finally we look at liquidity and financial flexibility. And the reason we look at liquidity and financial flexibility, is because should something happen like an economic shock or extreme weather event where tolls cannot be collected, we want to make sure debt service can still be met on time. So, that's really important in our analysis, and ensuring that the toll facility kind of has a back-up plan if tolls can't be collected for a period of time.
So, tax increment revenue is sort of the third option that you might think about, and that's really, you know, a lot of what Rafael was talking about in terms of the Value Capture. And tax increment districts can be really helpful to metropolitan, you know, to metropolitan planning organizations, because they can span a larger area than a single service area. So, it could overlap areas, or it can be a smaller piece of a service area. And I would say that, you know, for opportunities, increment revenues, like I said, are only Levied within this specific project area, and revenue that's generated off the incremental value, is dedicated to the infrastructure within that project area.
And then finally, incremental value is sort of based on what is the initial value of the project area, and how much the infrastructure and development occur to create that increment, which, you know, the increment between the base value and the values that occur over time, are really where that revenue is generated from.
I think the risks here line up very well with what you heard in Rafael's presentation. So, the pace of development may not be the forecast for when the project area was created. So, if there's an economic downturn or something else during COVID, we see some tests that had delayed development of the result of people not wanting to invest during COVID, and sort of the unknown around the economic environment.
There also might be changes in state statutes, or assessment practices that influence the revenue from the tax increment values. And that can really, sort of occur without the people -- the entity overseeing the TIF, that really can occur without them knowing about it, and it can occur annually. We hope it doesn't when reading the TIP bonds but can definitely happen. And of course, economic shock did dampen the development, not pace of development but the economic revenue generated from the project area.
So, our TIP analysis is quite significant. There's a lot of things going on when we look at TIF districts in terms of a credit rating. A lot of it is around the probably area analysis. What are the general economic factors causing that area to go. And is there concentration in the types of entities located there. Is it mostly commercial development, a wide variety of commercial development or is there one entity in particular that sucks up most of the project area, maybe 50 percent of the project area value overall. Those are kind of all seen as risks because you're sort of putting all of your eggs in one basket if you while.
And what is the historical assessed valuation growth and future growth. That's your feasibility analysis. That's what Rafael was talking about in terms of understanding how the project area might develop over time and ensuring that this thinking about the risks of different pace than you might initially think around a project area.
We're also looking at management of the TIF. Do they have a broad authority to acquire and develop projects within that particular area? Do they have eminent domain, if necessary? It's always a very important aspect of our analysis, this is really what bond holders have to fall back on should something occur with the payment of debt service.
And then cumulative tax limits, so, taxes are collected at a rate, in the project area, on that incremental value. Can they raise that, if necessary? If the pace of development slows down, can they Doctor are they constrained by stat corner limitation on that?
There's a lot of things around this particular aspect of TIF analysis in our criteria that are really important to understanding how an entity is mitigating the risks that could occur with project area development.
We'll dive a little into a couple of other items that we look at which is financial operations and volatility ratios.
Financial operations are really around what are -- what's happening with the tax rates and project area? Are there a high number of delinquent taxes that are not being collected in the project area for some reason or not? What's the debt service coverage from the incremental value, and the debt service on the bond. And I'll say that, you know, not only is the incremental value potentially property tax, but could be sales tax as well. And I believe, Rafael mentioned, transportation, or TIDs that develop in Virginia. We have these in the Midwest, and one particular in Missouri, where they implemented this tax district, backed by self-taxes in the project area. That's really to think how they could accelerate their transportation project that were needed itself.
And the volatility, how volatile, as I mentioned, the project increment revenues that are, you know, generated from the project area, do the taxes tend to be more stable? Are they something elsewhere the volatility can be quite significant year in and year out.
And then, finally, I will touch on TIFIA loans, the hat tip to the Federal Highway Administration, the U.S. Department of Transportation oversees the TIFIA loan process. TIFIA loans are great, they are very low cost in terms of capital, they typically have a very flexible drawdown for the use of the proceed, sometimes people are -- sometimes entities are only using TIFIA loans as the backstop as the final piece of funding mechanism, and also entities only have to repay the amount of the TIFIA loan that they actually draw down. Unlike debt service and bond that are issued where you have to pay the debt service back no matter what, TIFIA loans you only are required to pay back what you actually draw down from that particular facility, or that -- almost like a line of credit.
There are some risks with TIFIA loans. Sometimes the time on this can be quite long. You have to sort of have the project identified for many years in advance before you can get the TIFIA loan approved. You may have to adhere to Federal procurement requirements, which sometimes are more stringent than local procurement requirement, and also, sometimes the documentation to the USDOT, I mean, they are giving you very low cost, you know, use of fund, so that sometimes the documentation around them, for the projects, can be more significant.
I'll say one other thing about TIFIA loans is people can backstop TIFIA loans with a variety of revenues they don't have to be back taxes or property taxes. They could be other types of revenues that will ultimately be the source of repayment if and when you draw down from the loan.
So, you might be thinking, that's a lot of information, Nora, I don't know which route to actually enter into. I think there's a lot of things you can think about. Transportation projects usually not approved overnight. They are usually in a long-term capital plan. There's a lot of steps to, you know, get a probably approved as well as doing all of the planning for it. You might have to acquire right-of-way, you might have to do environmental study. So, how you actually decide on a funding mechanism, and once you do, how can you mitigate some of the risks around that.
So, I would say if you're looking at, for the local, regional, project and you have support for it, that's a good time to be thinking about getting voter referendum for the dedicated funding source.
Many time we've seen, it happens in Austin, sometimes a referendum fails when talking a huge project like cap metro. The local community is very much in support of it. That can drive the decision on how you have to fund the probably ultimately.
I think there's also a few state statutes, and if there are state statutes in your state that limits the revenue flexibility to support that service cost. Maybe for a TIF you have statutory mechanisms in place where they say you can only raise property taxes on the incremental value in the project area a certain amount. If that's the case, maybe you're thinking about how you can transfer that risk to a private partner, through the procurement process. Or maybe, you know, you ultimately funded the service reserve fund, so that if you are under that revenue rating, flexibility inference, you have the debt service reserved to draw on in the case of the economic shock, or extreme weather event.
And then also, the private planning time horizon, are you thinking about funding this project in five years or tend years? When we talk to issuer, who want to do these types of things, we are always asking, how are you thinking about your capital plan, how are you prioritizing your resources to pay for these projects are you participating with a Federal or state partner in terms of paying for this project? And finally, the demographic composition of the service area, depending upon what that looks like for you, you might think, okay, the service area, can very easily afford a user-base tax or fee, and maybe that isn't the case. So, maybe that is a toll facility, where only the people driving on the road are happy to pay that tax or fee.
And I think with that, I'll wrap up my remarks and turn it over to John, but I'm also happy to answer any questions or comments about credit ratings generally, or, you know, how we apply different kind of criteria based on the revenue source for the debt service.
>> PEPPER SANTALUCIA: Great. Thank you very much. Go ahead. Rafael.
>> RAFAEL ALDRETE: Thank you, Pepper. Thank you, Nora. Let's see if we have any questions. I don't see any in the question pod, but I wanted to ask you -- you discussed undeveloped area versus developed area within a specific area. And that affecting risk rating, and you also talked about taxpayer concentration, and the different types of property values that can be used. Can you elaborate how these two things, developed versus undeveloped area, in a district and difference in the taxpayer base, are addressed in an analysis?
>> NORA WITTSTRUCK: Sure. Absolutely. So, Rafael is exactly right. Sometimes people come in and want a rating on an area where no development exists, and they have forecasts, what development is designed to do within the project area. Sometimes that's really great, because the incremental value that is derived from a project area that's fully undeveloped, is kind of like a blank slate, and the incremental value grows pretty quickly over time. However, there's a lot of risks to that. If you haven't done your feasibility analysis or haven't had sort of a lot of interest that's been garnered from private developers for that project area, it might be something that, in our analysis, we speak to as a risk. It might start out as a non-investment grade rating, which is the rating below triple B minus. If you know ratings triple A is the highest. Triple B minus is the lowest investment grade. So, while there's a lot of potential for incremental value growth there could be a lot of uncertainty. That's baked into the analysis at the start.
The other thing we typically see, if there's a lot of concentration in the existing face value of the project area. So, maybe it's an area that's very commercial, you know, it's got a lot of commercial real estate located there, so, maybe the base value is quite high, but the project area is very big so that concentration will sort of go down over time as the area that's undeveloped, garners additional development. I think if you know Atlanta, I believe where the Falcons play, and that downtown area is a whole tax increment district. It used to be very commercial, and I leave the base value was commit commercial concentrated now it is incredibly diversified, and the incremental value has shot up over time and it's been very good for that test. But I think the concentration is something that might initially be seen as a bit of a risk. As the project area gross and additional diversity is brought into that project area, then the ratings would probably go up over time, seeing -- depending upon whether the incremental value phase on that forecasted level, and the debt service on the bond, you know, is still healthy.
I hope that answers your question.
>> RAFAEL ALDRETE: It did. It was very thorough. Thank you, Nora.
>> NORA WITTSTRUCK: Sure.
Pepper?
>> PEPPER SANTALUCIA: Oh, yes. Sorry. Thank you for, Nora and Rafael, we're going move on to our third presenter for today, John Flansberg. He's works for the City of Reno and making sure they capitalize on funding opportunities for city and water programs. John began working for City of Reno in 2005 and served as director of public works in 2009. Prior to coming to Reno, he worked on increasing responsibility in planning, and managing infrastructure in both private and public sectors.
With that, John, I will turn things over you to.
>> JOHN FLANSBERG: Thank you, Pepper, appreciate that. Thank you, Nora and Rafael covering the risks that are critical to project planning. I'm happy to be here today to share the ReTRAC story.
City of Reno, I'll start with this front picture here. Which is the picture of the ReTRAC, which was a project in which we built a trench, if you will, through the middle of our city. And this picture kind of depicts where it is up a grade, as it is coming down that trench below, so that we can have better traffic flow, and I'll explain that a little further as I go forward.
Reno began as Lakes Crossing a location to cross the Truckee River for north-south travelers with Virginia city and mining boom of the come stock load. It is important for the mining companies to extend the railroad from California into Nevada. The Central Pacific Line reached Reno June 9th, 1868, less than four years after Nevada became a state. Reno existed on both sides of the track and river with businesses, churches, and hotels. And north of the track, University of Nevada Reno, located on a knoll just to the north.
You can see in the picture the railroad line that's -- the upper left, the picture of the railroad line going from left to right, and the river in the background from this picture, and then, of course, there's a historic photo of the railroad with multiple lines for train switching and the work that was done in offloading and making it a transportation facility.
Over time, Reno tends continued to expand a with completion of the highway Reno became the development between Sacramento and Salt Lake City. In 1929 Reno's optimism led to taking the slogan the biggest little city in the world.
In the 1930s withal legalization of gambling and passage of liberal divorce laws after six weeks of residency hotels and casinos began to build up in the down Tony area creating greater density between the railroad tracks and Truckee River.
The Union Pacific Railroad obviously is prominent in our region, and, again, Reno, not only from a highway perspective but also from the rail lines between the Bay Area and Salt Lake City and continues to be an important rail corridor from the port of Oakland to Salt Lake City Denver, and beyond.
Well, what is the need for ReTRAC? As, of course, we had the density and we kept building up and building out, and we had the large density in the downtown, with casinos and hotels and entertainment industry, we needed to look at something different, because more and more trains were coming through. Those trains were stopping traffic. Everything was on the surface. We had, in 2.25-mile stretch, we had 11 separate crossings that would hold traffic back for 15 minutes, and beyond. This, of course, prevented emergency vehicle access back and forth, and just the pedestrian and vehicle traffic going to and from.
You can imagine, in a situation like that, what this would do to your senses. You had the noise of the train, the whistles, the lights, you had the exhaust of the vehicles that they are waiting, so, definitely not a pleasant experience in what was -- what is our downtown.
And then to add to that, in 1996 there was a merger of Union Pacific and Southern Pacific which anticipated the trains doubling or tripling the amount of trail traffic coming through Reno.
Clearly, something needed to be done. So, faced with this new threat, and through legal challenges, the Union Pacific Consider and city began negotiations how to produce safety and there were differences with some wanting to see overpasses built over the tracks and you can imagine what that would look like in a dense urban area, having you an overpass 0 go over where the train was coming in.
Of course, a lot of people were for the project, and could see the benefits that would happen. Certainly, safety was at the top of the list, it was going to reduce those noises with the train down in a trench. It would allow for some of those properties on top of the trench for more development to occur and increasing values. And I think Rafael spoke as well as Nora about how sometimes these funding sources, when you see these values or benefits coming and what you can do with those.
And, again, I just -- you can't take away from the assaults of the senses of what it was like for the clanging bell, the lights flashing, the -- again, that exhaust, and the long waits, and the train whistles day and night through this area.
So, the project was to build a trench. It was 2.25 miles in our downtown stretch. Again, 11 different crossings represented by the yellow Xs on the slide. So, we'd have 11 street crossings or bridges over the trench. The trench was going be 54 feet wide so it would have enough room for at least two tracks so trains can pass at that location. And it was going to allow for increased train lengths and also the ability for double Decker train cars.
Prior to this, they only had single trains only to a single level, because of some tunnels to our west between Sacramento and Reno, and with the project announcement, the railroad got to work on actually expanding those tunnel heights so they could bring in the double Decker trains and increase their loads through there.
Of course, one of the big benefits of the project was instead of going slowly through our downtown blowing train whistles, it would become a quiet et cetera zone, all down in its own trench and this allows the trains to go at faster speed. So, the design speed was set at 60 miles per hour. This also was the first design build probably that the City of Reno took on. To give you the timing, it was back in 2002, when the contracts were signed, to get working on this project, and design build was still a fairly new project delivery method. So, this being our first one, it did allow us to construct the project in less time, shaving 18 months off the schedule.
Of course, we had our proponents to the project, but we also had the opposition, so, as you can imagine this project was front and center in the Court of public opinion, with concerns of affordability, lack of public trust on potential cost overruns and an election right around the corner. And, of course, any time you have an election, and you have that going on in your community, you're going to have -- those differences of opinion are only going to be highlighted in the headlines. And so, just sharing a few headlines here that occurred in and around this project.
With that opposition, the statements from the community, from some individual in the opposition was City Council was acting unilaterally on this project, that the project should go to a vote of the citizens. It was going to bankrupt the city. The trench was going to become a floodway. In 1997 we had a major flood in our downtown area, so, flooding was on the minds of folks, and the river being fairly close to the tracks, individuals were earning canned the trench was going to become flooded during those high weather events. Downtown business impacts during construction. We had opposition from some of the local businesses in the area. And there were even public petitions that were started in a lawsuit that went all of the way to Nevada Supreme Court to try to stop the city from issuing bonds to fund the project.
In November 2002, in our general election, there was an advisory question the County had put on for the project and only 37 percent of the voters approved of the project. Again, that was County-wide, however, it's interesting to note that there were three positions on the Reno City Council that were up for election that year, and all three of those candidates were pro ReTRAC and all elected to City Council, even if some other candidates stated they would do whatever they could to stop the project.
Well, as far as every project and getting approvals and finally moving into the stage of constructing, we need to have -- figure out how we're going to finance. And Nora talked about those things. In the ReTRAC project, we had dedicated revenue sources. So, the Nevada legislature, back in 1999, I remember 2002 was a lot of this opposition going on. But back in 1999 they approved -- legislature approved a 1/8 cent Washoe County sales tax. They also voted to impress pose a 1 percent room tax for a railroad grade separation project which was concentrated in the -- what was considered the benefit area of the City of Reno, and the city also created a special assessment district. And this was interesting finance. The City of Reno does a lot of special assessment districts. Primarily we do them in neighborhoods where we are going to be rehabilitating our roadways, and say we need to repair sidewalks that are in there, and sidewalks deemed to be owned by the property owners, the city takes care curb and gutters as part of drainage of the street facility. We have been using special assessment districts for many, many years and so we will set those up and assess the cost of the repairs to the property owners, and that goes on their property taxes.
So, it is not foreign to the City of Reno on how that process works, and we use it fairly frequently. But, it was different in this case, in that we were set up a special assessment district and the way they proposed it, was not just the businesses along the corridor, or in a special area, or how that might be, but they took noise readings, and they actually did it based on noise abatement, and the -- so, based on how close you were to the trench and how much noise was generated through a noise study, they actually created the special assessment district to, based on that noise, and based on what individuals would pay.
And finally, as part of a settlement negotiation with Union Pacific Consider there were lease revenues that the railroad had, and they were going to be part of the project, they were going to be transferring some of their parcels to the City of Reno for ownership and some other properties that they were not transferring but they had lease revenues on, they dedicated those lease revenues for a portion of it.
Those were the four categories of funding. And just to be clear, these were all dedicated sources. These weren't coming off of something that, you know, this wasn't in addition to, it wasn't a portion of self-tax that was already in place, or some other mechanism.
To specifically go through the room tax and I mentioned it was in a special area, the blue covers -- so, you can see the river going through, the railroad is just to the north of the river, and kind of that wider rectangle, if you will, a blue in the middle, and then the outlying areas, so, that was considered the benefit area. So, any hotels that generated room tax, would have I been additional 1 percent assessment for that.
And then, speaking to the lease revenue properties, the city again, various properties, were owned by the railroad, and transferred to the city and all of those leases and businesses that have been there for a long time began paying to the city. One of those parcels, for instance, had a concrete batch plant on it, there were others that restored materials for industrial construction businesses. There was a steel contractor who did steel for both vertical and horizontal construction, and they used primarily this right-of-way for storage from off of their businesses.
But those lease revenues, again, were going in to pay for part of the project.
So, once the revenue sources had all been identified, then can came down to the financing mechanisms and how to finance it. So, the instruments that were used were the -- were bonds, funded through the sales and room tax, dedicated sales, and room tax. The city received the first TIFIA loan, and that was also backed up by sales and room tax dedicated funding sources. Union Pacific Railroad put 17 million toward the probably for their specific infrastructure, the ballast and railroad ties, and special assessment district based on noise and noise abatement and cash interest and other funding was -- made up the difference of how we were funding the project.
Speaking specifically to the TIFIA loan, we actually had three options that we could have taken on this. We decided only to use the first, the 50.5 million based on sales and room tax. There was additional that could have been another 5 million secured from the lease income and another 18.8 that could have been from the tax assessments in the downtown area, but the City of Reno at that time only chose to go with the large loan, and the terms of that was 5.66 percent on a fixed interest rate, and that was secured in 2002.
The city was very grateful for the TIFIA loan, because it really helped to get this project, it was really needed to get this project going so it was a big help us to.
We also had some Federal grant, that would be in the cash interest and other funding, and we had, in '99, there was a funding for environmental impact statement to get going with that, and then, of course, for the construction, we did have a Transportation Equity Act, 21st century grant for less than 16 million to assist with the construction. So, with all of that inflation, our initial financing looked like this. We had a sales and room tax revenue bond that had been dedicated to the probably, those -- that was to help with expenses in the early going or some of the early design and concept plans and environmental work, and then in 2002, when the project was getting under way, we had the large sales tax and room tax, and then the subordinate lien on the TIFIA loan. And that was all in place and things were looking good. The probably got under way, and it was a smashing success. We finished it in three years’ time. It was on time, and within budget. The first train passed through in November of 2005, and it received the 2007 American Publish Works Association Project of the Year for transportation projects over 100 million.
And despite challenge, I don't want to downplay the challenges you have during construction, a lot of times we think of those as being bigger challenges. As an engineer, I think about that a lot. You think about a trench, you think about things like dewatering groundwater for excavation like this. You think about other things you might come across. We came across dark we uncovered a burial site from our indigenous peoples here from -- and they were heavily involved in the project, and we were able to relocate what we needed to relocate, and then preserve in place the other items throughout this project. And despite having two of the heaviest inters in northern Nevada history and seeing things like fluctuating costs of materials and Rafael talked about that we had a 12 percent rise in the cost of steel during this project, but all of those things we were able to work through during the construction and we finished, and it was a great success, and this should beet end of my presentation. But then we wouldn't really be talking about the risks of the other side of this equation.
So, we finished the project. People were very happy, because it had come in within the cost that was there, the idea of the cost overruns didn't come to fruition. So, with that, there were some things that, it would be nice now that we have the project built and can get, I am better idea and the public had certain idea. If we could put a lid over two of the sections, between two of the bridges of the streets that would open up more area for special events and other items and then screening materials on some bridges to make it less stark as it is going through. So, it was going to come up to 7, $8 million for those improvements, so they wanted to restructure the financing. But at this time also, simultaneous with the ReTRAC project, there was another publicly financed project. And there was almost $109 million bond that had been secured by room taxes for building a special event center and renovating the National Bowling Stadium. We have a large bowling stadium here that hosts the U.S. bowling Congress tournament, women's conference -- women's bowling tournaments every three years and men's every three years and we sometimes have other special events of using the bowling stadium, and the city and those in the downtown want to build a special event center for concerts. So, with that in mind, they were looking at where the probably came in, and being able to refinance, and we would be able to generate another $24 million to both do the ReTRAC project, as well as one project that hadn't been funded through the special event bonds was the ballroom project. In 2005, with refinancing the ballroom prom was also able to be built, and only extended the debt service by three years, and it was considered 0 to be a great success.
And with that, of course, the benefits of being able to refinance the ReTRAC event center bond, we could reduce the borrowing cost. We noticed we would be able to reduce our costs there. We would be able to fund the ballrooms, as I mentioned and do those other improvements and there were street improvements in the downtown core and it was really to really enhance and both arenas, area, destination, for entertainment and tourism. The other thing it did, is set up a 5-million-dollar stabilization fund which was important and became even more important later on.
So, with that, we entered into Goldman Sachs assisted with the city. We were able to change the financing structure, and I mentioned the special event bonds, that 109 million, approximately, but the ReTRAC project was all dedicated funding sources. So, I'm going stick with them the rest of the way. With that. I want to mention the special events because the city took that on but that add implications later.
With the refinancing of ReTRAC, the goal to put the lid and do some other things. With that, we were able to pay off the TIFIA loan, we had a better rate available at this time. We paid off the TIFIA loan, very grateful for that it helped us build the project to begin with. And we backed all of this with 2006A and 2006B for bond and 2006C tied to ReTRACs, and the 2006 ReTRAC lease revenue were separate, both lien room tax were fixed rates and special assist dance bond had their own schedule.
So, here we are, feeling pretty optimistic, we had these projects, and were able to finish the event center in 2007 and opened the Reno ballroom in 2008. The ballroom for smaller events and bigger for concerts. That came to fruition, and we were able to bring in great talent for those shows.
However, in the refinancing structure here, the city was going through Goldman Sachs was using a new funding structure, if not, wasn't new to financing public infrastructure, but they were auction rate securities, and many of you who know what an auction rate security is, it's an auction that takes place on some sort of interval. In our case it was weekly, it is used for long-term dark it's long-term variable rate bond but the auctions for the interest rates are held, in our case, weekly, and so, every week, I think it was like Tuesday at 10:00, the -- there would be an auction, and that would set the rates for that week on the auction rate securities, and really, these had been a pretty stable source of funding. In fact, there had only been four failures in action rate security market. Three of those -- since 1988, three were senior living and one was a corporate bond.
Then everything was looking good until it wasn't. And then in December 2007. Goldman Sachs contacted us and said there's some issues geeing on in auction rate securities. This is not just a one project or two. This is with the bond insurers in that market and there were some concerns about the credit risk they had on their books and there were only five bond insurer, so, Goldman Sachs is saying we recommend you restructure to variable rate demand obligation. Variable rate that goes on some sort of schedule but, had a lot less risk.
With that, though, the city was going to need a letter of credit, so, again, 2007, December, this was brought to our attention, we worked with the Bank of New York and were able to secure a letter of credit for the ReTRAC project and we converted that over to variable rate demand obligation bond in March of 2008 which I'm going to say is lightning speed for local government and government of any kind to make that happen. And what was beneficial, the auction rate securities, although they were very secure and had been for many years, they did have a provider that the rate could go as high as 15 if there was an auction rate, failure of the auction for -- at any time. So, we avoid the high interest rates and were able to move forward. I just have to stress this was the best deal we could get at this time.
Now, I'm going just pause here for a second because I'm going to go back to the 2005 special event bonds. Those were entirely dependent on room tax. They were considered more risky but also backed by sales tack. Where the ReTRAC bonds were specific and they were dedicated funding for that project and those were the only fund we had to rely on, and they were generated specifically for that project, these other problems that we had, they were backed by sales tax, and we were not able to get a letter of credit on those even though we tried all through 2008. And of course, many of you know, September of 2008 was the financial crisis, and those auction rates security bonds went to 15 percent so that special event project, we're paying those, and we were not able to secure a letter of credit for that project, until January of 2009.
With that, I want to show you snapshots of these different decision points.
So, it is 2008 we just restructured the bond. Here's what our revenues looked like at the time. In 2002 we started the project. 2003, kind of shows the sales tax revenues. This is again 1/8 cent sales tax for this project. Going up things looked good. 2007 flattened out and 2008 starts to go the other way.
Revenues from the room tax were looking fairly strong through this area, not having the same type, but seeing a little bit of a drop-off in that 2007, 2008 when things in the market became less sure
And this is refinancing structure from 2006 to 2008, what I talked about going to variable rate demand obligation bond.
So, here's how those will be set up. It was a variable rate. Again, the best we can get. One of the items you have with this type of financing is that with the letter of credit there's a cost to that, and there's also a cost of administering the variable rate’s structure, so, I'll talk a little about that when we get into a little later in the presentation, which is now.
So, here's the goal always had been, from 2008 that we were going to convert, as soon as favorable, to a fixed rate bond and it took us ten years to get there. So, in 2018, we were able to do that. But, going back in time, to 2008, we were not able to pay on that 2008B subordinate lien. We worked with Goldman Sachs, and they were able to carry that, but, of course, we were accruing interest through all of that time. We just didn't have the sales tax revenue, and that dedicated source to help paydown the amount we needed to or make payment on that part of the bond. We were able to make the 2008A payment.
In addition, both with the auction rate securities and with the variable rates, there was derivative swaps. And many of you probably, especially those in the finance world under that derivative swap, and just that that adds an additional risk. It also adds some safety net to the city to some degree, but also has a risk to it. And in this case, in the refinancing, there was a termination fee that needed to be paid, so, there was 8 million dollar that went toward that. Meanwhile through the 2008 bond, there was about a 2 million annually that we were paying administration fees, letter of credit fees, all of the other fees that went into that. And the result of those fees is that we were actually not paying the 2008B series. We're actually growing our debt instead of reducing our debt.
Another snapshot in time, in 2018, you can see through these years, from 2007 until 2017, basically, those years are similar, and everything in between is lower, so, basically a decade of revenue that came in, less than the projections, of course, that we had for them. And where things were at. So, in addition to the room tax, things were looking pretty good through 2008. And then, in 2009, '10, '11, '12, just during the reduction, during the great recession and people traveling less and less need for rooms. So, in 2018, we were able to refinance, and this is what our bond structure looked like, and if you're doing any math to figure out how much we had in debt here versus 2009, our debt had increased $40 million. And part of that was, when you're paying $2 million a year for administrative fees, that is taking a big chunk. So, with this -- and, again, this was always the goal to get into a fixed rate bond situation, we structured this to where the 2018A and B bonds would be paid every year, but 2018C and D would only be paid if there was funding remaining and if there was, we would pay the fee down and then D, and that's how we have been working since 2018.
So, finally, we had a financing structure that shielded the city from high risk of not meeting payment with the opportunity and higher sales tax years to paydown those 2018C and D bond at that higher interest rate.
And you think that would be the end of story, but we had a pandemic. In 2008, we were very susceptible in tourism and entertainment. But over time from 2008 to 2018 and '20 and beyond, Reno has really diversified into increasing amounts of industry, and industrial use. As many of you probably know, Tesla put their battery factory with Panasonic just to our east, and that brought a lot of other industry in. So, with that diversification, we didn't see the same issues happen in the pandemic we've seen before.
Of course, room taxes declined for two years. But our sales tax, actually increased because during the pandemic, people were out buying things. So, with that in mind, we actually saw those go up, and the city again had the dedicated fund and we never got into a situation where we needed to cover the ReTRAC debt with any other sources.
And to fill out that financial picture of revenues that came in, you see the high jumps in 2021 and 2022, so, we've been able to use that within our bond financing picture. The revenues from the room tax, again, the 2020, 2021 minimal years, then coming back in 2022, we have seen those sustain. And then I hadn't shown the special assessment districts, but special assessment districts are usually fairly steady. Those first couple years being really high, when individual have the opportunity to pay the debt directly and not have the other fees, so, we had higher individuals who were just paying that individual off in those two years, and then kind of normalized out since then.
Going back to the special assessment district, I do want to say that it looks like we'll be -- our final payment, our final assessment will be next year, and final bond payment will be in 2025. So, this one is also finished up.
So, ReTRAC today, where are we? Well, redevelopment, is about 12 years behind where we expected to see it. We have activated new development spaces we had with some of those properties, and putting the lids on, may not seem a lot to some but having a dog park in your downtown urban area was very popular. Some of the casinos converted to residential space, that's been important. There was a large mural painted on one of the lids for some of our special event, and just brings a conversation piece for folks coming down to this area, and I were just said, I don't think anybody can imagine today having the train going right through downtown without having the trench in place.
Shortly after the ReTRAC project, the city was able to, working with a developer, we were able to bring AAA baseball to Reno, so, the Arizona Diamondbacks AAA squad, Reno Ace's is in town and has been here for many years. The lower right picture is a live-work play space, that is under construction today, and so, we anticipated that to be built probably ten years ago, but with everything that happened it's taken until today for the probably, it is under construction and will be completed soon.
Some of the other areas that are on the upswing, to our west, along Fourth Street, which is very close to the railroad tracks there's a Neon Line District. We're seeing development in that area, and excited for the changes that will come from that.
And just getting into the final -- where we stand today in the financial picture, we have a balanced budget for the first time in FY-23 and '24. What I mean by balanced budget, on prior years we would rely on savings from the previous fiscal year, to carry us over to the current fiscal year, and we have not had to do that in the budget process and have been fully funding obligation notification this structure.
Also in the last five years, our increased sales tax revenues resulted with us paying down 2018 fee bonds by 12.8 million. The lease revenue bond was paid off in 2022 that debt is knowledge and session assessment district will end in 2024 and debt will be paid in 2025. Finally, the economic diversity from industry to distribution has helped us be more well-rounded.
And finally in retrospect, the freight interface between the rail and trucking, being close to California increased this area in the distribution hub, so, we have both air, rail, and trucking. That interface between rail coming in and trucking coming out. In certain industries has been an economic driver for us.
The greater use of the Port of Oakland has happened. That occurred resulting in more trains passing through downtown. And we don't even know it. It had a negotiable impact to our quality of life and downtown revitalization, because of that, just really, rarely, do we ever hear the train coming through. Maybe if you're at a baseball game and they're coming near the trench, they might blow the whistle.
And I was asked about, based on what Reno has learned from this project, and what has happened, how has it changed how Reno reacts to debt, and I asked that question of our financial advisory board last week, and really the answers that came back was, as a community, we've become more sophisticated. We under the financing options better, we know where the tough questions are to ask. We under, you know, we can look at it more fully from that great optimism that we have, as well as the glass half empty, and under if things don't go like they expect, what is going to happen with that. So, in that regard, I think we've been more resilient. And that wraps up my presentation, and happy to take on questions and just appreciate the opportunity to be here.
>> RAFAEL ALDRETE: Thank you, John for the presentation. I'm looking at the questions from the pod. We have the first one is, sorry, Okay, were the trains, freight, or passenger or both, and I think you did cover that.
>> JOHN FLANSBERG: Yeah. So, it was both.
>> RAFAEL ALDRETE: And another question, in the pod is, were you able to monetize the use of walls for art/ads and ad wrapping of vehicles? Some of the pictures have some ads.
>> JOHN FLANSBERG: Yeah, so, we didn't monetize that, but I would say that Reno really has a strong arts appreciation, so, we've got a strong arts group. If you want to call it monetizing, I suppose what has come out of it, is, individuals come here, actually, to do tours of the various murals that the city has in our downtown, and mid-town area, and so, it is actually has created some tourism, as well as the City of Reno host what we call art town every July, and it is a month-long festival celebrating the arts, and so I would say that the monetization has really come from helping to drive additional tourism.
>> RAFAEL ALDRETE: Thank you for the clarification. I do have another question for you. Can you talk a little bit more about communicating risk when it materialized to your elected officials and to the public, and the challenges associated with that, in both 2008, as well as 2019/2020.
>> JOHN FLANSBERG: Yeah, so, I would say very quickly, we -- when we found out, I mean, to be able to go from restructuring bonds, from a conversation in mid to late December, 2007, to having new bonds in place by March 2008, it was very quick, but it also happened in the public forum, and, you know, all of these bonds, you know, we talk about every day count, and most certainly it does, and some of those processes take time, and so, any time you go for a bond initiative, there's a first and second reading, in how we do those, they are front and center with the public so they understand, you know, where those risks are, and what the benefits are. So that conversation was had in the public, and the best way -- you just have -- you know, if you have bad news, bring it quickly.
>> RAFAEL ALDRETE: That's right. And I think, now we'll open it to questions related to any of the presentations. And I'll get it started with, the first one I see here, that was of interest to me, should one of the risks be business displacement? Are you aware for the solution for this? Of course, it is always a concern deal valuing property values that the business district will displace small businesses, an example how to deal with this. In Illinois, they -- the law, basically in practice, they have mitigated concerns about small businesses closing, by allowing the use of district revenues to provide residents with training geared toward the jobs expected to be created in the area. That's at least one way to address this type of risk.
The next question, what type of analysis is taken in consideration over the investment. I would say incorporate fiscal analysis to test the assumptions.
I hope that answers those questions, and then, the next question s-there a different type or name for entities that use state employee’s retirement fund to fund the statement funding probably, what are the risks of using them? This is comparing to public pension funds, and, as far as using them, I guess I'll answer with on a slightly related topic, these are funds that are seeking long-term revenue stable projects. So, again I would say, they are risk. Maybe, Nora, I don't know if you have experience with them, that you can maybe address it a little bit.
>> NORA WITTSTRUCK: Yeah. I will speak generally about this, because --
[ Laughter]
-- I know very little. But most pensions, do have sort of an alternate aspect of their portfolio where they have alternate investments. Sometimes as real estate, sometimes those are transportation projects, or P3. It just depends. I think typically what pension funds are looking for, in addition to like life insurance agencies and things like that, that purchase municipal bonds, as sort of the regular payment that comes from them, in the every six month coupon, and also the fact they can layer the long-term maturity like John was talking about long-term in municipal space versus corporate space which might have short-term bullet security, where they can layer needs of cash flow over a longer period of time. I don't know if that answers the question, but I think that's maybe what this question speaks to.
>> RAFAEL ALDRETE: Thank you. Them moving on to the next one, probably the last one, because we need to close the webinar, what are the sources for loans borrowed from the fund account, or if the fund account not available, what are the risks of borrowing in this calculation? I'm not sure I understand the second part of the question, but this looks like a question related to a particular state, and in most states, the highway fund is funded from a variety of sources that include the fuel taxes, registration fees, rate fees. Federal fund and loans, and all of the tax, but I'm not familiar with one that is dependent on a certain calculation. If you could clarify a little the question, we'll try to get it back to you.
Pepper, I think that's where we are in terms of the questions for now, because it's 2:56.
>> PEPPER SANTALUCIA: Yes, thank you very much, Rafael. We see more questions about auction rate securities. Looks like John had an opportunity to type in response. And looks like some of our attendees are very much appreciative of the Reno ReTRAC story, so, John, we really appreciate your participation today.
As I mentioned in the audience chat, you should now see a file share window on the left, and if you hover your mouse pointer over those files. You'll get -- you'll see an icon that's a downward pointing arrow. If you click on that, you'll be able to download both combined slides from today, as well as the primer, that was published in 2022, that served as the basis for Rafael's presentation today.
Down below, under -- in the web links window, you have a registration link, a link to a full description of our webinar series, in this year, calendar year 2023. You can sign up for webinars that are on the screen right now. September through December. You can also access recordings and slide from our earlier webinars this year.
Again, the web links also include a direct link to this risk primer on the FHWA Website, as well as a link to the Value Capture implementation manual that also includes a chapter on risk.
If you would -- if you want to get confirmation of your participation today, you can e-mail valuecapture@dot.gov. That's all one word, Value Capture. You can also use the e-mail address to provide feedback on today's event if the evaluation tool you can see in the webinar room doesn't work for you.
We would like to thank our presenters for giving us all of this valuable information today. I would also like to acknowledge the ongoing support of the FHWA web conferencing office, and the support of FHWA's every day counts program.
With that, that concludes today's webinar, we thank you for participating and hope you will be able to join us for another webinar maybe this year.
>> OPERATOR: Ladies and gentlemen that does conclude your conference for today, thank you for your participation and for using AF&T teleconference. You may now disconnect.
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