OFFICE OF THE MAYOR CITY AND COUNTY OF HONOLULU 530 SOUTH KING STREET, ROOM 300 - HONOLULU, HAWAII 96813 PHONE: (808)768-4141 FAX: (808)768~4242 INTERNET: ROY K. AMEMIYA. JR. MANAGING DIRECTOR KIRK CALDWELL MAYOR GEORGETTE T. DEEMER DEPUTY MANAGING DIRECTOR November 5, 2018 The Honorable Ernest Y. Martin Chair and Presiding Officer and Members Honolulu City Council 530 South King Street, Room 202 Honolulu, Hawaii 96813 Dear Chair Martin and Councilmembers: write to inform you that, upon serious consideration of all options to fund the $44 million required by the Federal Transit Administration to show, by November 20, 2018, that the City and County of Honolulu (?City?) is ?fully committed? to the Honolulu Rail Transit Project (the ?Project?), I have decided to cause the sale and issuance of general obligation commercial paper within the coming week in order to meet that FTA requirement. The FTA stated in separate letters dated October 26, 2018, to Chair Martin and to me that: funds will be considered committed once they are fully available for the project, without any other approvals needed. Under the process identified by the City, in which it decided to issue bonds for the project, FTAwould consider the funds committed once the bonds have been issued and the funds are available to the project. This principle was discussed in an April 16, 2018, meeting between Acting Administrator and Mr. Robbins, which was also attended by Chairman Martin, and US. Senator Brian Schatz. During that meeting, Chairman Martin committed to completing the budget process by July 2018. Budget Chair Trevor Ozawa also attended that April 16 meeting and made the same commitment. have taken to heart the stern warning that, ?[ajbsent a viable path forward, FTA may proceed with the remedies set forth in the Full Funding Grant Agreement for this project.? The Honorable Ernest Y. Martin Chair and Presiding Officer and Members November 5, 2018 Page 2 After balancing financial impacts to the City and legal concerns, the issuance of $44 million in general obligation tax-exempt commercial paper is, overall, the most transparent and cost effective, has the least negative impact on the City?s fiscal stability and bond rating, and raises the least number of legal issues. considered three other options that had been suggested by others, including certain Councilmembers, but either this $44 million funding did not qualify under the applicable law or was, as a policy matter, not a wise decision, including given the time constraint and the need to make the funds fully available to the Honolulu Authority for Rapid Transportation for the Project. The ?Rainy Day? or ?Fiscal Stabilitv Fund? The so-called ?rainy day? or ?fiscal stability fund? is created by ordinance. it is a ?reserve for fiscal stability fund [that] is designated for economic and revenue downturns and emergency situations, and fund monies may be appropriated by ordinance only when one or more of the conditions identified in subdivisions (1), (2) or (3) are See Revised Ordinances of the City and County of Honolulu 1990, as amended Chapter 6, Article 56. From a legal perspective, the conditions relate to significant economic events, such as when the total value of net taxable real property declines by two percent or more from the preceding fiscal year, significant revenue declines, such as if the state transient accommodation tax revenues decline by five percent or more from the preceding fiscal year; or emergencies declared by the President of the United States or the Governor due to a natural disaster or unfunded mandates enacted by the state or federal government, imposed after the enactment of the City and County of Honolulu's fiscal year budget, and require outlays prior to the start of the subsequent fiscal year. There is a critically important fiscal reason the conditions to use this fund are extremely limited: this fund is one of the City?s reserves that help to establish its fiscal stability and, therefore, provide a basis for the City?s good bond ratings. In their August 7, 2018 credit report the Moody?s investor Services stated that ?stable reserve levels? are a credit strength of the City. in the report, they also pointed out that a factor that could lead to a downgrade of the City?s bond rating is a ?deterioration of financial operations and reserve levels.? From a legal perspective, none of those conditions currently exist to trigger the use of the fund. While one might think that the letter is an ?unfunded mandate,? it is not. The Honorable Ernest Y. Martin Chair and Presiding Officer and Members November 5, 2018 Page 3 The Unfunded Mandates Reform Act of 1995 was adopted in an effort curb the practice of imposing unfunded Federal mandates on States and local governments." UMRA defines a mandate as any provision in legislation, statute, or regulation that would impose an enforceable duty on state, local, or tribal governments or the private sector, or that would reduce or eliminate the amount of funding authorized to cover the costs of existing mandates. The letter requiring the City to ?fully commit? to assessment in its updated Recovery Plan dated September 15, 2017 (the ?2017 Recovery Plan?), of the City?s subsidy in fiscal years 2018 and 2019 in the total amount of $44 million is not legislation, statute, or regulation that has been ?enacted.? More importantly, the requirement to fully commit to the $44 million was not ?imposed after the enactment of the City and County of Honolulu's fiscal year budget,? as would be required under the ordinance to qualify as an unfunded mandate. The FTA states in its letter: has stated clearly in previous communications, funds will be considered committed once they are fully available for the project, without any other approvals needed. Under the process identified by the City, in which it decided to issue bonds for the project, FTA would consider the funds committed once the bonds have been issued and the funds are available to the project. This principle was discussed in an April 16, 2018, Clearly, Chair Martin, Councilmember Ozawa and have known, since at least the April 16 meeting, that the FTA wanted the City to show its commitment to fund the $44 million. The only issue that required clarification is the means by which the FTA would require the City to show that commitment. On March 2, 2018, I submitted my Executive Capital Improvement Program Budget to the Council. That budget included the $44 million for the Project. None of us in good faith can say that we did not know the FTA wanted to see the City?s commitment of $44 million when the Council passed that budget on June 6, 2018. Transfer of Funds from a City Fund to the HART Transit Fund A suggestion was made that the City simply transfer funds to transit fund established under the Revised Charter of the City and County of Honolulu 1973 (2017 Edition) (the ?Charter? or This option is not available forthe simple reason that the proviso under the Executive Operating Budget (Ordinance 18?23), Section 12(9) only allows transfers from one ?City fund? to another ?City fund.? The Honorable Ernest Y. Martin Chair and Presiding Officer and Members November 5, 2018 Page 4 Section 12(g) says in part: For the purposes of this subsection, ?City fund? excludes pension or retirement funds, funds under the control of any independent board or commission, funds set aside for the redemption of bonds or the payment of interest thereon, park dedication funds, or private trust funds. In the event there are monies in any City fund that, in the judgment of the Director of Budget and Fiscal Services, are in excess of the amounts necessary for the immediate requirements of the respective funds, and where, in the judgment of the Director of Budget and Fiscal Services, such action will not impede the necessary or desirable financial operations of the City, the Director of Budget and Fiscal Services may make temporary transfers or loans therefrom to the other funds of the City. transit fund is not a ?City fund.? transit fund is under the control of HART, which consists of ?a board of directors, executive director, and the necessary staff.? RCH Section 17-101. HART prepares its own annual operating budget and annual capital budget for the development of the Project. RCH Sec. The HART Board adopts those budgets and can request appropriations from the City. RCH Sec. and in fact, RCH Section 17-108 titled, ?Receipt and Disbursement of Funds,? provides that authority shall have management and control over the moneys made available to the authority in the special transit fund established to receive the county surcharge on state tax. The authority shall have the authority to receive and expend federal funds authorized for the development of the fixed guideway system.? Reopening the Executive Capital Improvement Budget On October 24, 2018, Chair Martin introduced Resolution 18-240, which proposes that unspecified provisions of the Charter be waived ?in order to allow the City to provide $44 million in City moneys, including but not limited to moneys from the City?s General Fund, to the Honolulu Authority for Rapid Transportation? for the Project pursuant to RCH Section 13422.1. That Charter section requires a recommendation from me, as Mayor, and a public hearing by the Council, which the Council has already scheduled for November 7. Statements by Councilmembers at its meetings held on October 30 indicate that the Council intended to use the waiver to reopen the Executive Capital Improvement Budget to provide $44 million in cash to HART. The Honorable Ernest Y. Martin Chair and Presiding Officer and Members November 5, 2018 Page 5 The reopening of the executive budgets is not prudent or advisable for both the Council and my administration a reopened budget makes the entire budget up for grabs, without limit. We have but 15 days left to fund the $44 million and we cannot be caught in budget negotiations. Furthermore, reopening of the budget at this point would require the Council to waive several Charter provisions which prescribe specific procedures for adoption of budget ordinances and supplemental budget ordinances. It would not be a wise precedent to waive and set aside these well-established procedures which incorporate a transparent public hearing process. It is not necessary to take this extreme measure to allow the use of City revenues for the Project in view of the Council?s adoption on October 30 of Bill 42, CD2 and the various bond resolutions, as were initially proposed by my administration. Although the Director of Budget and Fiscal Services could have sold the $44 million in bonds for HART when City?s bonds were sold in August without incurring approximately $200,000 - $500,000 in additional bond issuance costs as well as higher interest costs over the term of the bonds due to the increase in interest rates since August, it still makes more sense at this point to proceed with the sale of TECP. Sale and Issuance of TECP As stated above, after balancing financial impacts to the City and legal concerns, the issuance of $44 million in general obligation TECP is, overall, the most transparent and cost effective option, has the least negative impact on the City?s fiscal stability and bond rating, and raises the least number of legal issues. In March 2015, the Council adopted, by a 8-1 vote (Councilmember Ozawa voting yes and Councilmember Kobayashi voting no) the bill that became Ordinance 15-26, which amended Ordinance 01-28, as amended, authorizing issuance of TECP for the Project. In November 2015, the Council adopted, again by a 8-1 vote (Councilmember Ozawa voting yes and Councilmember Kobayashi voting no), Resolution 15-314 authorizing the BFS Director to issue and sell from time to time the TECP for the Project. The cost to issue the TECP is projected to be approximately $4,000 to $5,000. Interest rates on the TECP are anticipated to be between 1.5% to Current earnings on the cash in the fiscal stability fund are at approximately in other words, the financial impact of issuing TECP versus using cash from the fiscal stability fund is about the same. The City will refund the $44 million TECP with long term bonds in February 2019. The Honorable Ernest Y. Martin Chair and Presiding Officer and Members November 5, 2018 Page 6 Accordingly, I have directed the Director of Budget and Fiscal Services to immediately proceed with the sale and issuance of the TECP so that the November 20 deadline can be met. Sincerely, U. Kirk Caldwell Mayor