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01/06/2004 - City Council Finance Committee2 F i C; acity of eagan TO: Mayor Gegan City Councilmember Carlson FROM: City Administrator Hedges DATE: January 5, 2004 SUBJECT: Finance Committee Meeting January 6, 2004 MEMO The Finance Committee of the City Council is scheduled to meet at 4:15 p.m. on Tuesday, January 6, 2004. Enclosed on pages �_ through` is a copy of a memo form Director of Administrative Services VanOverbeke providing a status report on the transaction involving the lease/leaseback of water/wastewater infrastructure. Staff would like to discuss the process with the Finance Committee and receive any new or additional direction. At the direction of the City Council staff has been preparing information on the financing of the Community Center, Central Park, and related infrastructure for presentation at this meeting. An updated accounting of the status of the FF&E account will also be presented at the meeting. At the regular City Council meeting of December 15, 2003, discussion of a request by Coca-Cola to settle an outstanding $22,165.35 water/sewer utility bill for half, $11,082.67 was referred to the Finance Committee for discussion with Coca-Cola. Staff is requesting that a specific meeting date be set so Coca-Cola can be appropriately notified of the meeting. City Administra or t4drs Agenda Finance Committee January 6, 2004 4:15 P. M. City Hall Conference Room 2A & 2B I. Lease/Leaseback Transaction II. Community Center/Central Park Financing III. Set Date For Meeting With Coca-Cola IV. Adj ournment loop city of eagan TO: City Administrator Hedges FROM: Director of Administrative Services VanOverbeke DATE: January 2, 2004 SUBJECT: Lease/Leaseback Transaction Status MEMO After discussion at the Special City Council meeting held on August 26th, the concept of entering into a lease/leaseback transaction covering certain water and sanitary sewer infrastructure was directed to the Finance Committee which met on September 4, 2003. At the regular City Council meeting on September 16, 2003, authorization was given subject to City Attorney review and approval for the Mayor and City Clerk to enter into a letter of agreement with Allco for the purposes of evaluating the feasibility of a lease/leaseback transaction. At this time staff has not completed its review of the City Attorney comments regarding the letter; consequently it has not been signed. The letter of agreement is not a commitment to proceed with the transaction but gives Allco certain exclusive rights, if a transaction is undertaken. Eagan's position has been to go slow and to wait and see before getting too involved. In spite of the letter of agreement not being signed, Allco has continued to work with Eagan along with the other cities in proceeding with the transaction. The next step is a meeting scheduled for January 16th at which time an Allco representative will meet with staff to discuss the financial report and to inspect the utility infrastructure contemplated to be included in the lease/leaseback transaction. Enclosed on pages through are copies of two newspaper articles previously provided to the City Council that appeared in the St. Paul Pioneer Press on Tuesday, November 25th regarding consideration of certain lease deals by Minnesota cities including Eagan. Also enclosed on pages through is a copy of a LMC response to the newspaper articles. Given the concerns expressed in these articles and the criticism by both the State Auditor and Commissioner of Finance, it may be appropriate for the City Council to again consider the potential transaction and either affirm its current position or chose to withdraw from further participation at this time. (�'Vy Directo f Administrative Services VanOverbeke IN Pioneer Press 111/25/2003 1 Cities considering complex lease deals Page 1 of 4 t• ti; i• ['�i � � � :+ Ll u''•.`_ �� 4- �' =' � ;�r = •�- u U L Student Loan Cons011da[ on -if you have'$10,000 or more in student lwr have :started student loan repayment or are in your grace period, you may the Federal Student Consolidation Loam. Con_olidat"son can save you up t News I;., O i; fl R ° NI CR C4 17,14 I_P a Ka f l month and could possibly laser your interest rate to 1.6%. Click here for News I Bossiness I Sports I Entertainment I Living I Classifieds I Jobs I Cars I Homes News - — -- - Shopping • Breaking News Search Articles -last 7 days for Go . • Columnists Find a Jc • Iraq Back to Home > News > Tuesday, Nov 25, 2003 an Aparl • Local Local a Home, • Lottery • Nation/World Photos • Politics Posted on Tue, Nov. 25, PIIM PPX% Spon • Traffic 2003 • Weather • Weird News Cities considering complex lease deals Offer i Business BY PATRICK SWEENEY Comp1 Sports Pioneer Press Save u Entertainment your b,, Living Since early summer, about a dozen Minnesota cities, including St. Membi Classifieds Free c( Archives Paul, have been considering a New York investment firm's pitch: www.tax Contact Us Lease public sewer systems to private companies that will use the Shopping systems for tax deductions, and get significant payments up front. Travel The proposal, which could yield about $30 million for St. Paul, is Sell Ft attractive to cash-strapped cities. Burnsville, Rochester, Eagan and Paymc Duluth are considering.it as well, and other public-private If you I 7 -DAY ARCHIVE infrastructure deals have surfaced elsewhere in the country. annuity ............................... call us » Monday www.anr • Tuesday But a U.S. senator from Iowa recently assailed the lease arrangement » Wednesday as "good, old-fashioned tax fraud," and some Minnesota officials are » Thursday raising questions about it as well. IRS Ta » Friday Consu » Saturday The complicated financing plan calls for cities to lease the systems to Helping » Sunday private companies, then immediately lease them back and continue Nabon, operating them as the cities always have. IRS NE Pennie It would not be out -sourcing, sellingor privatizing sewer services. P � 9 Dollar wVAv.tax Instead, it would be purely a paper transaction constructed to allow tax deductions for depreciation to flow to the businesses leasing the sewers. Offer i "We're looking at it," St. Paul Mayor Randy Kelly said of the CC®m� Formes proposals. "It could be an opportunity for the city." AttornE For Yo At one point, Kelly and other supporters of building a new Minnesota vow n.bra Twins stadium in St. Paul considered the sewer lease as a possible component of the funding; he now says that is unlikely. Kelly stressed that city administrators have barely begun to '--- investigate a lease of the sewers and that any final deal is far off. "Clearly, I want to look at the risk to the city and the taxpayers," Kelly said. http://www.twincities.com/mld/twincities/news/local/7342632,htm 11/25/2003 3 Pioneer Press 111/25/2003 1 Cities considering complex lease deals Page 2 of 4 St. Paul has some history, not all of it favorable, with similar arrangements. In 1983, city officials sold the old St. Paul Civic Center to private investors for $33 million, then leased it back. A decade later, when the Civic Center needed improvements the private owners were unwilling to make, the city borrowed $65 million to buy back the building and pay off a dozen development projects its earlier sale had financed. The deals proposed to St. Paul and the other cities are similar to the Civic Center transaction and other traditional sale and lease -back contracts, except the cities would retain title to their sewers. For federal tax purposes, though, the long-term rental agreements businesses would sign with the cities would allow the businesses to claim depreciation on the public infrastructure. Top administrators of the Metropolitan Council also have been approached recently by several investment companies proposing lease deals for the council's regional sewer lines, sewage treatment plants and the new Minneapolis light-rail line. City councils in eight Minnesota cities, not including St. Paul, have voted to enter into agreements that could lead to leasing their sewers, but none is close to signing a final contract. Now, after harsh criticism of the leases last week by the chairman of the U.S. Senate Finance Committee, some city officials are taking a more skeptical look at the financing schemes. On Tuesday, Sen. Chuck Grassiey, an Iowa Republican, called the infrastructure lease proposals, which are surfacing all over the country, "good, old-fashioned tax fraud." His committee, which estimated lease -based tax shelters would cost the U.S. treasury more than $500 million over 10 years, approved legislation Oct. 1 that would dramatically curtail the tax benefits businesses now can reap through such leases. Despite Grassley's harsh language, cities throughout the United States have approved similar tax shelters involving the leasing of assets of big -city transit systems over the past two decades. And the Federal Transit Administration has approved many, if not all, of those leases. Transit systems that have leased their subways, buses and other property include Boston, New York, Chicago, Miami and Washington, D.C., according to promoters of the Minnesota lease plans. Jim Wavle, a spokesman for Allco Finance Corp., the small New York investment company seeking to broker many of the lease deals in Minnesota, accused Grassley of ignoring that history and engaging in "improper and inflammatory political hype." http://www.twincities.com/mld/twincities/news/local/7342632.htm 11/25/2003 Pioneer Press 111/25/2003 1 Cities considering complex lease deals Page 3 of 4 But the lease proposals also are drawing fire from Minnesota officials. State Finance Commissioner Dan McElroy said last week that he questioned the legitimacy of leases on economic grounds. He called the tax benefits "synthetic depreciation" and said the cost to the federal government in lost taxes would be greater than any benefit the cities would receive. State Auditor Pat Awada, who began investigating the lease arrangements about a month ago, weighed in last week with her own criticism. In a memo to state Sen. David Senjem, R -Rochester, who requested the investigation, and to the chairmen of the House and Senate tax committees, Awada said the leases are allowed under federal law. But, she said, plans for cities to continue operating sewer systems that have been leased and then re-leased would raise numerous questions under state laws. She said the leases could affect the ability of cities to use tax-exempt borrowing to finance maintenance on their sewers, and she questioned whether the private involvement in sewer systems would strip them of the governmental immunity that limits damages plaintiffs can collect in lawsuits. Awada, a former Eagan City Council member, said she would advise anyone who asked her, including her former Eagan colleagues, to stay away from the leases. "It truly is a tax -evasion scheme that is being proposed by big banks," she said. The infrastructure lease plans were first brought to the Minnesota cities by the League of Minnesota Cities. The league, which lobbies on behalf of cities, contracted with Allco Finance Corp., an offshoot of an Australian company (the name stands for Australian Leveraged Leasing Company), to organize a consortium of smaller cities to pool their infrastructure to form a lease package big enough to attract bids from giant banks and corporations hungry for tax deductions. League officials say they are offering, not promoting, the leases to cities, but the league is scheduled to receive a fee equal to one-half of 1 percent of the value of any infrastructure that participating cities lease. 5t. Paul and the Metropolitan Council were approached separately by Allco and by other investment companies, and are not part of the league's consortium. Allco has promoted similar sewer system leases to cities throughout the Dakotas. http://www.twincities.corn/mld/twincities/news/local/7342632.htm 11/25/2003 9 Pioneer Press 111/25/2003 1 Cities considering complex lease deals Page 4 of 4 Tom Grundhoefer, general counsel for the League of Minnesota Cities, said city councils in eight cities have signed preliminary contracts granting Allco exclusive rights for two years to try to put together a lease deal involving their sewers. He said the eight are: Austin, Burnsville, Cannon Falls, Little Falls, Long Prairie, Owatonna, Rochester and St. Michael. City officials in Duluth and Eagan are considering similar agreements. Minneapolis City Coordinator John Moir said officials there were not interested in the lease proposals because they feared taking the sewers off the city's balance sheet as an asset would damage Minneapolis' credit rating. The Western Lake Superior Sanitary District, a sewage treatment district that serves Duluth and surrounding communities, also signed a preliminary agreement with Allco. "I would not describe our board as comfortable with the transaction, but they didn't want to lose the opportunity to provide some substantial funds for our users if this was all legal, ethical and acceptable to the federal government," said Kurt Soderberg, the sanitary district's executive director. Patrick Sweeney covers state government and politics. He can be reached at 651-228-5253 or psweeney@pioneerpress.com. 0 Im Q email this I print this I license this I reprint this News I Business I Sports I Entertainment I Living I Classifieds I Jobs I Cars I Homes rtl:'•:'."'_" About TwinCities.com I About the Real Cities Network I Terms of Use & Privacy Statement I At ' Ridder I Copyright http://www.twincities.com/mld/twincities/news/local/7342632.htm 11/25/2003 0 Pioneer Press 11/25/2003 1 How government lease -back plans work Page 1 of 2 _ v Student Loan Consolidation - Reduce your student Ivan L✓moi --1 l '' ,••7 t.- ti r' =.J -5 f-} : -•y � G by up to 54% and lock in an interest rate as love as 2.25%. Tj N, 9 p1 0, 0 T tl 17i g ° CI Or, N1 F"'i r0 P^, ? F Click here for more information News I Business I Sports I Entertainment I Living I Classifieds I Jobs I Cars I Homes News • Breaking News • Columnists • Iraq • Local • Lottery • Nation/World • Photos • Politics • Traffic • Weather • Weird News Business Sports Entertainment Living Classifieds Archives Contact Us Shopping Travel search Articles -last 7 days for r Go Siaoppanc Find a Jc Back to Home > News > Tuesday, Nov 25, 2003 an Apaarl Local a Home, Posted on Tue, Nov. 25, 2003 How government lease -back plans work BY PATRICK SWEENEY Pioneer Press The lease -back plans proposed to St. Paul, the Metropolitan Council and a number of Minnesota cities work this way: A city or the council would receive an initial lump -sum payment from a bank or a large business for a 99 -year lease of its sewer system, or perhaps the new light-rail line in Minneapolis. 7 -DAY ARCHIVE Under federal tax laws, the lease must be of very long duration for » Monday the bank or business to use depreciation on the public infrastructure >> Tuesday to offset income from other private ventures. And the lease would » Wednesday have to be for the public property's fair market value. » Thursday • Friday A small part of the payment — 3 percent to 4 percent for the sewers, probably more for the rail line — would be available to the city » Saturday immediately to use for other infrastructure spending or tax relief. Sunday The rest of the money would be invested in highly rated, private securities issued by another bank or a big insurance company. Interest earned on the investment, called a Guaranteed Investment Contract, would be used by the city to lease back the sewers from the business that sought the tax deduction. After 25 or 30 years, the point at which the depreciation would be wrung out of the sewers, the last money left in the city's investment would be used to make a balloon payment and allow the city to regain clear title to its sewers. The biggest risk for the cities, said David N. MacGillivray of Springsted Inc., an independent financial adviser to many of the cities considering the leases, is that the bank or insurance company issuing the investment contract would become insolvent. In that case, the money the city was counting on to pay off its lease and regain full ownership of the sewers would not be available. http://www.twincities.com/mld/twincities/news/local/734263 Lhtm O Advisc Expert by Lein CNN c financi; vVMV.evc Go Pu Daus Get Lis OTCBI a Reve vwww.Go Warrei Advisc Boutiqi manag advisor Concel 10 List WWW.Wa Busim ROMMM Biz Pie Incorp+ IP, Bar Contra FindLa ww w.finc 11/25/2003 Pioneer Press 111/25/2003 1 How government lease -back plans work Page 2 of 2 MacGillivray said cities could reduce or eliminate that risk by using U.S. government securities instead of private investments, but lower interest rates on the government securities would make the leases less attractive for the cities. For the businesses leasing the public Infrastructure, the attraction is tax deductions that are front -loaded into the early years of the lease. The businesses do not avoid taxes entirely, but the leases allow them to delay payment. The effect of that delay is to allow the businesses to earn interest or dividends for years on money they otherwise would be paying in taxes. When the businesses eventually pay the taxes, they do so with money that, because of inflation, is worth less. Patrick Sweeney covers state government and politics. He can be reached at 651-228-5253 or psweeney@pioneerpress.com. 0 Q email this I print this I license this I reprint this <'t.i;r?1;�:•r:: News I Business I Sports I Entertainment i Living I Classifieds I Jobs I Cars I Homes `'�i• t " About TwinCities.com I About the Real Cities Network I Terms of Use & Privacy Statement I At Ridder I Copyright http://www.twincities,com/mld/twincit es/news/local/7342631.htm 11/25/2003 Response to Yesterday's Pioneer Press Articles on Allco Leaseback Program rage i or Gene VanOverbeke From: Frazell, Kevin [KFrazell@LMNC.ORGj Sent: Wednesday, November 26, 2003 9:07 AM To: 'tom. hansen@ci.burnsvi lie. mn.us'; 'jimm@ci.owatonna.mn.us'; 'gneumann@ci.rochester. mn. us'; Winson, Mark;'bderus@ci.st-michael.mn.us; 'dlarson@cfalls.net; 'tdankert@ci.austin.mn.us'; 'kurt.soderberg@wlssd.duluth.mn.us;'dvenekamp@earthlink. net;'rcarison@cityoflittlefalls.com'; Gene VanOverbeke Cc: 'hedtke.andrea@dorseylaw.com';'lindgren.jay@dorseylaw.com; Kennedy, Dave;'sscofield@svtv.com'; 'jwavle@allcony.com'; Lake, Stephanie; Carlson, Gary; Grundhoefer, Tom; Board of Directors—LMC; Miller, Jim Subject: Response to Yesterday's Pioneer Press Articles on Allco Leaseback Program Greetings Everyone: As we previously informed you, reporter Patrick Sweeney of the Pioneer Press has been working on a significant article about the lease/leaseback program. That article appeared on the front page of the Pioneer Press yesterday (Tuesday, November 25). If you haven't seen it, the links to two articles are attached: Cities considering complex lease deals <http://www.twincities.com/mld/twincities/news/73.42632.htm> How government lease -back plans work <http://www.twincities.com/mld/twincities/news/local/734263 I.htm> Reprinted at the end of this e-mail is another article from yesterday's Chicago Sun -Times about the position of House Speaker Dennis Hastert defending these types of arrangements. You or your elected officials may be concerned about some of the issues raised in the Pioneer Press articles. Let me try to respond to some of the key issues: Philosophical Positions - We have admitted from the beginning that reasonable people can have differing opinions about the advisability of lease/leaseback tax deductions as sound federal tax policy. As you can see from the articles, Senator Charles Grassley of Iowa, Chair of the Senate Finance Committee, believes they are poor tax policy and should be eliminated. House Speaker Dennis Hastert believes they are just fine and a legitimate way for cities to raise much needed cash. LMC neither defends nor opposes making such tax shelters available. Our position continues to be that they are legally available under IRS Code, have been routinely used by other local governments around the country for over two decades, and are an open and above board transaction. Therefore, we believe that Minnesota cities who choose to participate in such a program should be able to do so unless and until Congress acts to change the tax code. Comparisons to "Shady" Tax Shelters - At the same time lease/leaseback is being discussed, the U.S. Congress has been holding hearings on a variety of "tax schemes" including testimony by anonymous witnesses, etc. Senator Norm Coleman chairs the Permanent Subcommittee on Investigations of the Senate Committee on Governmental Affairs, which has conducted some of these hearings. The subject matter covered by those hearings has had nothing to do with the type of lease/leaseback being offered by Allco, but the distinction can easily get lost on the casual reader. As we have previously informed you, our lease/leasebacks will be formally registered by Allco with the IRS. Dan McElroy Comments in the Pioneer Press - Commissioner McElroy is quoted as saying the legitimacy of the leases could be questioned on economic grounds, that the tax benefits are "synthetic 11/26/2003 I Response to Yesterday's Pioneer Press Articles on Allco Leaseback Program Page 2 of 3 depreciation," and the cost to the federal government in lost taxes would be greater than any benefit the cities would receive. This is not really very different from what Commissioner McElroy said to LMC staff when we met with him. He quickly indicated that from a tax policy standpoint he was not all that excited by lease/leaseback. However, he conceded that the tool is available under federal law and he did not object to Minnesota cities taking advantage of it, especially if they are clear with the public about what they're doing and if they put the money to good use, i.e. one-time capital projects. State Auditor Pat Awada Comments in the Pioneer Press - LMC staff has not talked directly with Auditor Awada, but has with her staff. We were aware they were taking a look at the propriety of the program. Auditor Awada's first point that the future ability to use tax-exempt financing for maintenance of leased facilities could be affected is one we have discussed at length. The Auditor is correct about that. The structuring of each cities' lease/leaseback program will take such future plans into account and upon presentation of a specific proposal, the ciIy will decide whether the program makes sense for them given those potential restrictions. The Auditor's second point about stripping leased operations from governmental immunity caps is not a concern shared by LMC legal staff. We doubt that simple lease/leaseback of the facility, where the city continues to hold title and is responsible for operations, would compromise any immunity protection. However, we will look at this carefully as the transactions are put together. St. Paul Civic Center - the unfortunate experience of St. Paul with sale/leaseback of the old Civic Center is mentioned in the article. While that transaction was broadly similar to what is being proposed by Allco, there were important differences. In that case the investor had been granted "consent rights" over any improvements and the early termination provisions had not been set forth clearly in the original agreement. All of us representing you on this project will make certain your interests are fully protected and that all provisions that might affect future city options are transparent and clearly understood before you decide to execute the deal. LMC Fee - the Pioneer Press article mentions LMC's 1/2 of 1% fee (5 basis points). We have been very open from the beginning that LMC would receive such a fee upon closing as part of the incentive for our coordination of the program. Despite the potential significance of that fee (perhaps $500,000+) I hope it has always been clear that LMC is not pushing any city to participate. We have always taken the position that it is an opportunity that we felt compelled to bring to cities that might be interested. The proceeds of that fee will be used to benefit all LMC member cities, most likely through the special projects fund. There are no staff bonuses or commissions involved!!! Future of the Program - The Grassley bill ( S. 1637) referred to in the article has put a temporary damper on leaseback arrangement, and should it eventually become law, it would preclude us closing on the Allco program. However, as can be seen by Speaker Hastert's comments, it is by no means a done deal. Opposition from other Republican members of the House is growing. At this point we will continue to proceed with data collection and other steps of implementation, while keeping you fully informed of any developments on the legislative or other fronts. If you have any questions, please call me at 651-281-1215 or e-mail to kfrazell@lmnc.org. Kevin Hastert fighting effort to end sale-leaseback deals November 25, 2003 BY LYNN SWEET <mai Ito: isweet3422(cDaoLcom> Sun -Times Washington Bureau Chief 11/26/2003 ID Response to Yesterday's Pioneer Press Articles on Allco Leaseback Program Page 3 of 3 WASHINGTON — House Speaker J. Dennis Hastert is going to bat for Chicago and is opposing a measure that would make it harder for the city and the CTA to earn millions of dollars through a tax shelter that's under attack in the Senate. Leading that attack is Sen. Charles Grassley (R -Iowa), a critic of sale-leaseback shelters in general, and he is pushing for the Senate to eliminate these deals, retroactive to Nov. 18. Mike Stokke, deputy chief of staff for the speaker, said Hastert will not support Grassley's proposal and certainly is not interested in moving any effective date to Nov. 18. "We are certainly not looking for a retroactive tax increase," Stokke said. A sale/leaseback typically involves the sale of a major asset by its owner, which then leases back the same asset from the buyer. The public entity receives revenue from the sale, offset in part by lease payments, and the buyer receives a tax credit for investing in capital goods. The uncertainty surrounding the future of these deals — Chicago has two of them pending — has chilled all leaseback deals in the works and the city is hoping Hastert's opposition will at least give the city a chance to close the pending deals. The city is working two leveraged lease deals: for the CTA's Orange Line, where the city owns the right-of-way and the tracks; and for the computer network equipment for Chicago's new 911 and 311 emergency systems. "The kinds of revenues that they [the state and city] either gain or loose would be in the tens of millions of dollars, in this case, given today's situation, about $36 million," Stokke said. Since 1995, the CTA has earned more than $110 million in leaseback contracts covering rails, garages, maintenance shops, buses and equipment, said CTA spokesman Noelle Gaffney. Mayor Daley wrote Hastert last month and other members of the Illinois delegation asking for help to prevent the end of "leveraged lease and lease -to -service transactions," which the mayor said is a major source of non -tax revenues. Last month at a Senate hearing, an anonymous witness testified about the leaseback deals with private companies, and Grassley, the chairman of the Senate Finance Committee called the deals a "phony tax deduction." Kevin Frozell Director of Member Services League of Minnesota Cities 145 University Ave. W. St. Paul, MN 55103 651-281-1215 651-281-1296 (fax) kfrazell@lmnc.org This email has been scanned for all viruses by the MessageLabs Email Security System. For more information on a proactive email security service working around the clock, around the globe, visit http://www.messagelabs.com 11/26/2003