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“P3 101”Overview of Public Private PartnershipsJune 21, 2017

PFM Financial Advisors LLC/ Public Financial Management, Inc.

300 South Orange Avenue, Suite 1170 Orlando, FL 32801

407-406-5751pfm.com

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Table of Contents

I. What is a P3?A. BackgroundB. Common Misunderstandings/Misconceptions

II. How do Florida School Districts Typically Finance Capital Investment?

III. Is a P3 Right for You?

IV. Legal Considerations

V. Exhibits

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Goals for Today

• Understand

o What’s a P3?o The history and strategic aspects of Public Private Partnerships

o Capital funding options available to Districts (traditional, P3, other)o HB 7069

o The framework for determining whether a P3 is appropriate. If appropriate, the process for moving forward

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I. What is a P3?

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What is a P3?

• PARTNERSHIP - financial, legal, operational, etc., between a…

• PUBLIC Entity - city, county, school district, airport, toll road, etc., and a…

• PRIVATE Entity – typically for profit with expertise in the relevant business (construction, operation, etc.)

o P3s are contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery, financing and possible operation of capital projects

• Typical Characteristicso Long-term in nature (often 30 to 50 years or longer)o Projects are revenue generating

Dorms, toll roads, convention center hotelso Partners offer expertise related to the specific project that the local government does not

possesso Decision “drivers” include efficiencies (capital and operating), debt capacity, economic factors,

risk transfer, timing

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Public-Private Partnerships

• Definition - P3s are contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery, financing and possible operation of projects

• There are many different P3 structures, and the degree to which the private sector assumes responsibility—including financial or operational risk—differs from one application to another

• Additionally, different types of P3s are applicable to the development of new facilities and others P3 concepts to the operation or expansion of existing assets

• Key is to understand the elements of project delivery alternatives—Design, Build, Operate, Maintain and Finance—and how Project Finance/P3 techniques can be utilized in various combinations

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History of P3s

• Are P3s a new concept?o Yes and Noo No – Airports, seaports, toll roads, bridges, power generation/distribution P3s have existed for

decadeso Yes – Expansion into traditional governmental operations, particularly non-revenue generating

assets, is relatively new

• Why are P3s currently a “hot topic”?o Budget constraintso Project delivery challengeso Operational Risko Political priorities o Asset monetization (sale/lease of underutilized assets)

• Current Local P3so Examples:

Broward Convention Center/Hotel Florida Toll Roads (595 in Broward County, I-4 Ultimate) University dorms Solid Waste Miami Port Tunnel

o Many public entities have considered P3s for a wide range of services Few move forward after assessing policy and process

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Common Misunderstandings/Misconceptions

• There is always a benefit to the public entityo If “benefit” is narrowly defined, not alwayso If “benefit” is broadly defined, yes. “Strategic” benefit vs financial benefit

May include faster/more efficient delivery and/or projects that are important, but too risky for the government

• P3s are well defined and straight forward. “It’s just a common lease agreement”o In concept, but rarely true in realityo The scope of agreement is unique to the public entity’s goals

Full P3s that include construction, operation and maintenance require significant documentation (who pays to paint a wall, etc.)

Most P3 documents start with a blank piece of paper

• “P3 is not debt”, so it solves debt capacity issueso Occasionally this can be trueo In most situations, the local government challenge is a “Revenue” issue, not a debt capacity

issue

• “No impact on the District’s credit rating”o Rating agencies now focus on all long-term obligations, not just traditional debt

P3 structures and leases are reviewed during the credit rating process

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II. How Do Florida School Districts Typically Finance Capital Investment

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History of Florida School District Capital Finance

• Traditionally funding consisted of a combination of General Obligations Bonds, Sales Tax programs and Certificates of Participation (COPs)o Most Florida schools financed in the last 20 years were financed with COPs

o COPs debt service funded from Capital Outlay Millage Levy (COML)

• Example: Palm Beach County School District• 2008 to 2016 - Assessed value declines and decrease in COML from 2 mills to 1.5 mills

effectively shut off most financings because of (1) cash flow constraints and (2) rating agency concerns

$0$50

$100$150$200$250$300$350

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Cap

ital R

even

ues

(in M

illion

s)

Capital Outlay Revenue - Historic and Projected

Capital Millage Levy .25 mils for operations or capital .25 mils for critical needs

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Recent Legislative Action

• Impact of HB 7069 • COML allocated to Charters

• Drag on COML growth (could lead to material declines)• Negative impact on credit characteristics (credit ratings)

• Impact over time can be material

0%

10%

20%

30%

40%

50%

60%

$-

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

FY18 FY20 FY22 FY24 FY26 FY28 FY30 FY32

Sample Revenue to Charters

Payment to Charters % Increase from Prior Year

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Rating Agency Considerations

• Rating Agency feedback• “The mandate is a credit negative for traditional school districts in Florida, as

many have significant charter enrollment and, as a result, will have to transfer a significant amount of revenues ticketed for capital projects to charters within their district.” (Source: Moody’s Investors Service)

School DistrictSchool District

Enrollment Ranking% of Students Enrolled in

ChartersEstimated % of Available Capital

Revenues Transferred to Charters*

Miami-Dade 1 17.6% 8.8%

Broward 2 16.9% 7.1%

Hillsborough 3 8.5% 0.0%

Orange 4 6.8% 3.0%

Palm Beach 5 10.9% 5.9%

Duval 6 10.4% 4.1%

Pinellas 7 5.7% 4.2%

Polk 8 13.4% 7.9%

Lee 9 13.4% 8.5%

Brevard 10 7.3% 0.0%

*Estimate includes the assumption that only 84% of charter enrollment is eligible for shared capital millage revenues, in line with the statewide average

Issuer: Aa2/STA

Moody's Rating

Issuer: Aa3/STA

Issuer: Aa2/STA

Issuer: Aa1/STA

Issuer: Aa1/STA

COPs: Aa3/NEG

Not Rated

COPs: Aa3/NOO

Issuer: Aa2/NOO

Issuer: Aa2/NOO

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Rating Agency Considerations

School DistrictSchool District

Enrollment Ranking% of Students Enrolled in

ChartersEstimated % of Available Capital

Revenues Transferred to Charters*

Miami-Dade 1 17.6% 8.8%

Broward 2 16.9% 7.1%

Hillsborough 3 8.5% 0.0%

Orange 4 6.8% 3.0%

Palm Beach 5 10.9% 5.9%

Duval 6 10.4% 4.1%

Pinellas 7 5.7% 4.2%

Polk 8 13.4% 7.9%

Lee 9 13.4% 8.5%

Brevard 10 7.3% 0.0%

*Estimate includes the assumption that only 84% of charter enrollment is eligible for shared capital millage revenues, in line with the statewide average

Issuer: Aa2/STA

Moody's Rating

Issuer: Aa3/STA

Issuer: Aa2/STA

Issuer: Aa1/STA

Issuer: Aa1/STA

COPs: Aa3/NEG

Not Rated

COPs: Aa3/NOO

Issuer: Aa2/NOO

Issuer: Aa2/NOO

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Rating Agency Considerations

• Charter growth is expanding beyond largest school districts and has grown to 10% of total enrollment

(Source: Moody’s Investors Service)

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III. Is a P3 Right for You?

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P3 Decision Process

• DBOMF - Key project componentso Designo Buildo Operateo Maintaino Financeo Critical note: Each project component is a discrete “in or out” decision. The

most effective P3 structures typically do not include all components• Develop Goals and Objectives

o What is the core challenge?o What strategic goals can be accomplished?

• Are the existing processes efficient, effective and applicable?

• What aspects of the project are appealing for private sector participation?

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Project Delivery Models

Traditionalpublic operations Privatized

Design-Bid-Build

PM/CM at Risk

Design-Build

Design-Build-Finance

Design-Build-Operate-Maintain

Public Private

Contracts

Concessions

Design-Build-Finance-Operate

Asset sales

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Key Considerations (Source: GFOA Advisory)1. Legal Authority – State/local/home rule2. Justification for Project – Is the project consistent with vision/goals and address a public

priority. 3. Competition – Will process be open? If not, why? 4. Expected Project Revenue – Assess full life cycle revenue5. Independent Analysis – Public or 3rd party review of revenues, assumptions, demand6. Method of Performance Monitoring – Is there a proper management structure and clear

methodology for evaluating financial and other performance7. Flexibility – Is the agreement flexibly enough to work through changes; early termination/buy

out8. Project Risks – Are risk transfer elements clear? What are the performance guarantees from

the private entity?9. Transaction costs – Fully defined? For smaller projects, fees and time required to negotiated

offset financial benefit10. Bond Rating Impact – What are positive/negative rating impacts? How are cash flows treated

for credit perspective?11. Public Participation and Disclosure – Is the process open to public scrutiny? Transparency?12. Availability of Assistance –Are there resources available to assist? Many small governments

do not have the resources to evaluate and draft documents.

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Analytical Comparison - P3 vs Traditional Project Delivery

• Key considerations when comparing traditional financing and a P3:o Construction costso Lifecycle costs (operation and maintenance); efficiencies and facility upkeepo Financing costs; debt capacity and debt priorityo Transferred risks and Retained risks

• Construction costs are typically lower using a P3• Financing costs are typically higher under the P3 model

o For the P3 model to be the most cost-effective, risk transfer needs to occur to the private entity

o Risk transfer is hard to define for k-12 school facilities

Traditional P3

Illustrative Public vs. P3 Cost Comparison

Risks Transferredto Private

Sector UnderP3

RetainedRisks

Financing Cost

Construction Cost

Lifecycle Cost

Construction Cost

Financing Cost

Lifecycle Cost

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IV. Legal Considerations

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Legal Considerations

• P3 vs Lease • Operating lease vs capital lease/purchase (ownership, property taxes,

procurement requirements, etc.)

• Unsolicited proposals

• P3 statutory protections

• SREF

• Cost Per Student Station

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Long-Term Operating Lease *F.S. 1013.15(2)(a)

Lease-Purchase F.S. 1013.15(2)(b)

Public-Private PartnershipF.S. 255.065

Standard ProcessCertificates of Participation

Site SelectionLessor (in the case of the current proposal)

Lessee (District) per offers received in competitive

process

District (through negotiation process)

District

Construction competitively bid consistent with Board policies

No requirementStatute contemplates that

building already existsDetailed competitive

process requiredYes

Obligation to Pay Property Taxes?

Yes No No No

Financing Taxable Taxable/Tax-Exempt Taxable Tax-Exempt

Direct Purchase of Construction Materials (Sales Tax exemption)

No No No Yes

Operating or Capital Budget Typically Operating Typically capital Typically capital Capital

Maximum TermNegotiable, not

specified in statuteLesser of useful life or 30

yearsNegotiable, not specified in

statuteN/A

Required to Comply with Cost/Student Station

No NoRequires additional

researchYes

Compliance with SREF required

No, but compliance with Florida Building Code and life safety

required

Yes Yes Yes

* As proposed by Public School Property Development

Comparison Table

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Takeaways

• P3’s can provide benefit to public entities

• Public entity must assess, identify and value the benefits/risks associated with the P3

• Risk transfer is a key factor. What risks can be transferred to the private entity (financial, operating, construction delivery, etc.)

• Evaluation Process is complicated and time consuming• Not a tradition procurement; significant legal and financial analysis required

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Thank You

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Exhibits

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Legal Considerations

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P3 Protections F.S. § 255.065

• Compliance with the P3 statute provides protections that should be considered in light of the proposed transaction.

• F.S. § 255.065(3) provides a procedure for an “unsolicited proposal” designed to promote an open and fair process.o The procedure for an “unsolicited proposal” permits the School Board to

establish a reasonable application fee for the consideration of an “unsolicited proposal,” including the right to request additional funds if the costs exceed the initial payment. (The funds are to be returned if the School Board does not evaluate the unsolicited proposal.)

o Receipt of unsolicited proposals must be advertised in newspapers of general circulation at least once a week for two weeks.

o The statute also requires a period of at least 21 days for other proposals to be made.

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P3 Protections

• The “unsolicited proposal” must contain:o Description of the project and a schedule for the project’s initiation and

completion.o Description of the method by which the private entity proposes to secure the

necessary property interests that are required for the project. o Description of the proponent’s plans for financing the project, including

sources of funds.o The proposed user fees, lease payments, or other service payments over the

term of the comprehensive agreement, and the methodology for and circumstances that allow changes in user fees, lease payments, or other service payments over time. (F.S. § 255.065(4))

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P3 Protections

• The P3 statute requires adequate information to determine the feasibility and valuation of the proposed project:o The School Board may require the proponent to provide a technical study

prepared by a nationally recognized expert with experience in preparing analyses for bond rating agencies. In evaluating the technical study, the School Board may rely upon internal staff reports prepared by personnel familiar with the operation of similar facilities or advice. (F.S. § 255.065(3)(f))

o The School Board must perform an independent analysis of the proposed project which demonstrates the cost effectiveness and overall public process before the procurement process is initiated or a contract is awarded. (F.S. §255.065(5)(d))

o The School Board must ensure that there is provision for the proponent’s performance and payment of subcontractors, including, but not limited to, surety bonds, letters of credit, parent company guarantees and lender and equity partner guarantees. (F.S. § 255.065(5)(b))

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P3 Protections

• Before approving the project, the School Board must determine that the proposed project: o Is in the public’s best interest. o Is for a facility that is owned by the School Board or for a facility for which ownership will

be conveyed to the School Boardo Has adequate safeguards to ensure additional costs or service disruptions are not imposed

on the public if the proponent defaults or the project is terminated by the School Board.o Has adequate safeguards to ensure that the School Board has the opportunity to add

capacity to the project. o Will be owned by the School Board upon completion, expiration, or termination of the

comprehensive agreement and upon payment of the amounts financed. (F.S. §255.065(3)(d))

• A responsible public entity may approve the development of an educational facility if:o There is a public need or benefit from the project of the type proposed.o The estimated cost of the project is reasonable.o The proponent’s plans will result in a timely acquisition, design, construction, equipping,

maintenance or operation of the project. (F.S. § 255.065(5)(e))

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State Building Code (SREF)

• All educational facilities constructed by the School Board must conform to the SREF. Sec. 1013.37, 1013.371, 1013.38 F.S.

• Any educational facility financed by the School Board through its master lease program must conform to SREF. Sec. 1013.15(2)(b) F.S.

• A School Board may rent or lease space, and fund it through the operational or capital budget. Sec. 1013.15(2)(a), F.S.

• “All newly leased spaces must be inspected and brought into compliance with the Florida Building Code pursuant to chapter 553 and life safety code pursuant to chapter 633”. Sec.1013(2)(a)1, F.S.

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Cost Per Student Station Limits

• Last year Section 1013.64(6)(b)1 imposed limits on the use of otherwise eligible funding sources to pay for new construction of educational plant space, where the costs per student station exceed certain statewide averages.o The list of prohibited funds includes virtually all capital outlay funding sources. o Effective July 1, 2017 a school district may not use funds from any source to pay for new

construction of educational facilities exceeding the adjusted average costs per student station, and in addition violation of the cost limits on new construction initiated on and after July 1, 2017 will be subject to additional sanctions.

o These sanctions for violations include loss of the allocations from the motor vehicle licensing tax ( CO&DS) for 3 years and being subject to a construction oversight committee for 3 fiscal years.

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State Survey Approval

• If the School Board were to finance the new high school through the master lease program, it would presumably pay for it with appropriations from its non-voted capital outlay funding under Sec. 1011.71(2)(COML).o In order to use such millage both the master lease and Sec. 1011.71(2)(a)

require that the project be State survey approved under Sec. 1013.31.

• It is not clear whether the proposed high school lease must appear on a state survey. It should, however, appear on the District Educational Facilities Plan. See Sec.1013.35(2)(a) where public private partnerships are listed as one of many options available to avoid the need for additional permanent student stations.

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P3 Process

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P3 Process: Valuation, Development & Execution

Transaction Execution

Transaction Development

Analysis and Valuation

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P3 Process: Analysis and Valuation

• Determine baseline project cost and timetable• Evaluate alternative delivery mechanisms• Research private sector interest and capabilities• Identify major stakeholders, key constituents

• Seek investor/operator feedback • Level of interest• Potential value add• Identify and catalog risks/concerns

Preliminary Market Outreach

Feasibility & Valuation

Program Development

• Define project/transaction objectives• Define public interest to be served/preserve (e.g. cost, availability of service,

reliability/safety)• Establish financial framework – Probably N/A for school districts

‒ Enterprise (toll, fare or other user fee supported)‒ Availability (tax/appropriation supported)‒ Hybrid (user fee & tax supported)

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P3 Process: Transaction Development

Procurement Design

Confirm Preferred Contract Structure

• Review Alternative Delivery Options ‒ Lease, Concession, Design-Build, Operate-Maintain

• Confirm preferred contract delivery structure• Update comparative value analysis

‒ Traditional delivery vs. proposed P3 delivery• Finalize preferred procurement process

‒ RFI/RFQ/RFP‒ Competitive, negotiated, BAFO (Best and Final Offer)

• Establish RFQ/RFP timeline• Initiate due diligence process• Assemble transaction team• Initiate stakeholder outreach & education• Maintain investor/operator outreach & feedback

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P3 Process: Transaction Execution

• Draft and circulate transaction documents‒ Concession agreements,‒ Operating standards‒ Project design specifications

• Elicit feedback and hold one-on-one meetings• Maintain communications with stakeholders /constituents• Amend and re-circulate documents• Finalize documents and transaction terms• Release RFP• Award and close

RFP Process

RFQ Process

• Draft & distribute RFQ• Pre-qualify bidding teams based on well defined criteria• Execute confidentiality agreements• Initiate due diligence information exchange

‒ Open and populate virtual data room