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November 16, 2017

Q&A: Lyman Wray, Stephens Public Finance

PART I: Unique Financing Opportunities in Georgia 

Q:  What is the current environment of public finance in Georgia?  

A:  Overall, we’re starting to see less refinancing of prior debt to save money. The thought is that while there is still some opportunity for refinancing, interest rates are starting to increase and governments are moving slowly in retooling. We used to see local governments waiting to do refinancing first, however, now local governments are starting to look at using new money to replace outdated infrastructure, such as roads and utility systems. This trend has been slowly becoming more popular for projects where local governments are replacing aging infrastructure.

At Stephens, we’re focused on how we can alert local governments about the importance of being highly involved in new projects that involve infrastructure so that they don’t fall behind and end up with highly outdated infrastructure due to an unexpected event. We spend a lot of time talking to local governments before they even hire us to show them that it was a worthy choice to take on these projects and use Stephens. At Stephens, once we take on a project, we are there for the client whenever they need us, to process the deal and make the client feel supported and advised on the best decisions to make for their community.

Q:  Working in Georgia, there are unique ways that public finance deals are handled. For example, Atlanta and other local governments use the Special Purpose Local Option Sales Tax (SPLOST) as a means of generating additional revenue for some of the local governments’ infrastructure projects.  From your perspective, is this approach unique? 

A:  I think it's a very good funding technique, and one I’ve only seen in a couple of the states in which I’ve worked on public financing transactions. I’ve seen SPLOST, and similar sales taxes, much more prevalent in the state of Georgia compared to other states. Not only does Atlanta use it, but almost all the counties and cities in the state use it, as well as the schools. The good thing about it is that, being a sales tax, it allows for sometimes close to 50% of a project being funded by visitors buying goods and services just passing through your community or tourists visiting the area.

The special purpose local option sales tax comes up for a vote every few years for local governments and has to be approved by the people to be continued. We find that most people feel pretty positive about the tax and continue to vote for it, and it's a very good tool to use for securing more money for new public projects.

Q: Have you seen other states using this type of tax or is it unique to Georgia?

While I’ve seen the tax used in limited capacities in other states, one of the things Georgia does well is that it comes up for referendum every six years, which is a pretty quick turnaround. So, if a growing majority of residents don’t like the tax, it doesn’t stay on the books forever. However, I have noticed that once a local government adds the special purpose local option tax, rarely is it ever voted down. Some were disapproved during the Great Recession period from 2008 to 2012 because of economic hardships going on at the time but otherwise it’s been pretty favorable in Georgia.

Q:  It seems like this SPLOST tax, or others like it, would allow for more opportunities to do public finance projects because of the additional budget. Are you seeing that this is true and that the tax is benefitting communities overall?

A:  Definitely. I would advocate that all states have something like the SPLOST structure that Atlanta and other local governments have in place here in Georgia. Initially some governments thought they would not have to go to public finance firms and seek their help with these taxes and the additional funding coming from them—they would just be able to pay as they go and the cash flow would consistently come in. However, because of this tax, governments realized that they needed to show citizens quick progress, proving that the tax coming in was going towards something that will benefit the community.

The only way to prove this is to leverage that tax collection and borrow the money up front utilizing a public firm and pay for it over time with the receipts that they receive annually on a sales tax. So, at Stephens we’ve seen communities move towards this model more and more, allowing us to be more involved in those local option sales tax deals, more so in states that offer these sales tax options compared to those that don’t have it at all.

Q:  Are you noticing any other unique ways that states or communities are collecting funding for public works projects? 

A: Another unique way of funding we’ve seen that’s been utilized by more local governments now is what's called hospitality  and accommodation taxes, making it so that any time you stay at a hotel when traveling or eating and drinking in restaurants, you’ll have an accommodations or hospitality tax on your bill. These taxes are pooled together and go toward tourist projects, such as to build a new convention center, parking decks or a minor league baseball park.

PART II: The Importance of Infrastructure Maintenance

Q:  Infrastructure seems to be the first new money focus for communities. Do you think that that's true or are there other projects that are maybe more lifestyle oriented that are regularly a priority for communities?

A:  I think that infrastructure financings are going to continue to be the meat and potatoes of public finance. We did have a span in the last ten years or so where a lot of new city halls were built, but we don’t see that as much anymore. We’re seeing communities often put the infrastructure projects like sewer repairs or school renovations first because it’s what the town needs and the community members will immediately benefit from.

Q:  Georgia has seen a pretty significant growth particularly in urban areas, such as Atlanta, where the population has grown by twelve percent or so since 2010. Has that influx of population impacted the types of projects you’ve seen being developed?

A:  What’s unique to metro Atlanta is that because the area has experienced such rapid growth, we've seen in the last ten years some of the unincorporated areas of metro are not benefiting directly from the taxes that they pay. So, a number of new communities surrounding Atlanta organized and voted to form their own city. For example, we’ve seen this in the City of Sandy Springs, Georgia and John's Creek, Georgia.

These governments become almost ninety thousand people overnight from a general vote. Because the cities are so new, they have borrowing needs in order to keep up with their infrastructure projects and build their town’s necessities, like parks, parking decks and acquiring utility systems. We’ve seen this idea as a phenomenon of growth here driven by individual communities that want to form their own local government. Stephens and firms like us have been asked to underwrite or advise on their financings.

Q: How do you advise clients to ensure that they are staying on top of infrastructure projects regularly?

A: We advise these communities to stay proactive instead of reactive, particularly when it comes to infrastructure projects like water and wastewater systems and road repairs that if left unattended for significant amounts of time can catch up with  the community and present a real problem. Sometimes communities don’t think about the infrastructure needs they have until something happens. At Stephens, we try to help communities avoid this and consistently keep up with their infrastructure, sometimes on a yearly basis if needed, so they are able to offer the best quality of life for their citizens. 

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