K&L Gates : Newsstand : Public Facilities Districts

Public Facilities Districts
Public Finance Alert

by Stacey H. Crawshaw-Lewis, Deanna L. Gregory, B. Gerald Johnson Jay A. Reich . May 2007

What Are Public Facilities Districts?
Public facilities districts (“PFDs”) are municipal corporations created by a city or county to perform specific statutory functions. RCW 35.57.010 (the “City PFD Statute”); 36.100.010 (the “County PFD Statute”). Under the City PFD Statute, PFDs can also be created jointly by a number of contiguous cities or by a combination of such cities and counties. The following article discusses PFDs created under the PFD statutes.

Unlike public development authorities created under chapter 35.21 RCW, PFDs are limited by statute to certain purposes. PFDs created under the City PFD Statute may only develop and operate “regional centers”. Regional centers are defined to include “convention, conference, or special events center, or any combination of facilities, and related parking facilities, serving a regional population constructed, improved, or rehabilitated after July 25, 1999, at a cost of at least $10,000,000, including debt service.” RCW 35.57.020(1).

PFDs formed under the County PFD Statute have slightly broader powers. County PFDs are authorized to develop and operate sports facilities, entertainment facilities and convention facilities in addition to “regional centers” as defined above, together with contiguous parking facilities. In other words, County PFDs can develop and operate sports, convention and entertainment facilities that do not meet the $10 million threshold and other specific requirements for regional centers (note, however, that the nonvoted sales tax under RCW 82.14.390 can only be used for qualifying regional centers, regardless of whether the tax is collected by a City PFD or a County PFD). Note also that chapter 36.100 RCW includes additional powers and restrictions applicable only to the baseball stadium PFD formed by King County.

Availability of State Sales Tax Credit; 2007 Legislative Amendments
PFDs are created to fulfill these statutory purposes: that is, to develop and operate regional centers or, in the case of County PFDs, to develop and operate other sports, entertainment or convention facilities. Many cities and counties have created PFDs primarily to access the state sales tax credit available to fund “regional centers” as defined in RCW 35.57.020. Prior to 2007, the City and County PFD statutes continued to permit formation of additional PFDs (except in King County) but the statutory deadlines for accessing the state sales tax credit had passed. In 2007, the Washington Legislature reopened the availability of the state sales tax credit for certain communities (including cities in King County) qualifying under specific population and other requirements. The 2007 amendments create opportunities for certain communities – such as the City of Kent and Lewis County – to use the state sales tax credit for new PFD projects. The 2007 amendments also authorized an additional state sales tax credit for certain existing PFD projects (namely in Yakima and Cowlitz County). The 2007 amendments are summarized under the heading “PFD Funding” below.

What Powers Do Public Facilities Districts Have?
The powers of City and County PFDs are generally provided in the City PFD Statute and the County PFD Statute, respectively. Under the general PFD statutes, PFDs may engage in any of the following:

Acquire, construct, own, remodel, maintain, equip, re-equip, repair, finance, and operate one or more regional centers (in the case of County PFDs, this authority is broadened to include sports facilities, entertainment facilities and convention facilities that don’t meet the regional center definition);

Buy or lease property;

As municipal corporations, to enter into interlocal agreements under chapter 39.34 RCW (in the case of County PFDs , this authority is to “enter into agreements under chapter 39.34 RCW for the joint provision and operation of such facilities”);

Impose charges and fees for the use of its facilities;

Accept gifts, grants, and donations;

Impose the following taxes: nonvoted sales tax, voted sales tax, parking tax, and admissions tax (County PFDs have the further authority to impose voted lodging taxes as well as voted property taxes);

Issue general obligation bonds (subject to debt limitations) and revenue bonds;

In additional to these specific powers, PFDs have the usual powers of corporations for public purposes, including without limitation, hiring staff and suing/being sued. Limitations on authority are often set forth in the ordinance/resolution forming the PFD or in the PFD charter.

How Are Public Facilities Districts Formed?
A city or county may form a PFD by ordinance or resolution. PFDs formed by more than one city (or a combination of cities and counties) are formed by interlocal agreement. The statute does not specifically contemplate the approval of a charter to govern the PFD, but most PFDs have charters and bylaws that fulfill this purpose.

How Are Public Facilities Districts Governed?
The City PFD Statute and the County PFD Statute set forth the procedures for selecting boards of directors to govern PFDs. City PFD boards consist of five or seven members (depending on whether they are single city, multi-city or combined city-county PFDs) selected by the city council (or county commissioners), a portion based on recommendations from local organizations such as local chambers of commerce, local economic development councils, and local labor councils.

County PFD boards also consist of five or seven members (depending on ratio of the population of the largest city in the county to total county population). Specified numbers of the members are appointed by the county council and, in some cases, the largest city’s council and other boardmembers. In the case of the Washington State Major League Baseball Stadium PFD, specified numbers of members of the board are appointed by the governor and the county executive subject to confirmation by the county council. If a County PFD imposes a lodging tax, then the board must include a representative of the lodging industry. The authority that cities and counties have to appoint PFD boardmembers is a key control, under the City PFD Statute and the County PFD statute, over the PFD.

PFD Funding
As noted above, City PFDs are authorized only to do regional centers. County PFDs are also authorized to do other convention, entertainment and sports facilities and contiguous parking. Regional centers are specifically defined in the City PFD Statute. PFDs can develop more than one regional center, but each regional center must satisfy the following requirements embedded in the regional center definition.

Convention, conference, or special events centers (the statute was amended in 2002 to add a definition for special events center: “a facility, available to the public, used for community events, sporting events, trade shows, and artistic, musical, theatrical, or other cultural exhibitions, presentations, or performances”);
Related parking facilities;
Serving a regional population;
Constructed, improved, or rehabilitated at a cost of at least $10 million, including debt service;
Conclusively presumed to serve a regional population if the total public cost is at least $10 million.

RCW 82.14.390 allows PFDs to impose a 0.033 percent nonvoted sales tax to be used to finance regional centers. The tax is not a new tax from the perspective of taxpayers, as it operates as a credit against the amount that would otherwise be remitted to the state. RCW 82.14.390 places additional restrictions on regional center projects financed with this tax.

Prior to amendments in 2006 and 2007, to access the nonvoted sales tax the PFD must have been created before July 31, 2002 and the PFD must have commenced a regional center project before January 1, 2004. The statute was amended in 2006 effectively to permit Wenatchee ’s recently formed public facilities district to impose the sales tax.

The statute was amended again in 2007 to provide access to the state sales tax credit to three categories of PFDs.

Kent/Federal Way. First, the amendments permit cities in King County with populations between 80,000 and 115,000 (basically Kent and Federal Way) to form PFDs to access the state sales tax credit, if such city commences construction of a regional center by July 1, 2008.

Lewis/Grant/Island Counties. The 2007 amendments also permit formation of a PFD by September 1, 2007 under either the City PFD or County PFD statute in a county in which there is no PFD, if the population is greater than 70,000 and if construction of a new regional center is commenced by January 1, 2009 (this section was designed to fund the Lewis county equestrian center but, according to the state fiscal note, Grant and Island Counties meet the requirements, assuming that the 2009 deadline for commencing construction of a regional center is met).

Yakima/Cowlitz County. Under the 2007 amendments, in a county with population under 300,000, existing PFDs created (in case of City PFD) before August 1, 2001 and (in case of County PFD) before January 1, 2000 can impose an additional state sales tax credit (in addition to the 0.033%) if the PFD has a population between 90,000 and 100,000 and commences rehabilitation or improvement of an existing regional center with less than 2,000 seats by January 1, 2009. The additional credit is 0.025% for the City PFD and 0.020% for the County PFD. According to the state fiscal note, the two PFDs that may qualify are Yakima and Cowlitz County.

General Requirements. There are additional statutory requirements applicable to the state sales tax credit:

The facility must be financed over no more than a 25‑year period (because the tax expires when the bonds issued for the construction of the regional center and related parking facilities are retired, but not more than 25 years after the tax is first collected);
The amount of sales tax collected by the PFD must be matched with a one-third match from other public or private sources (not including other nonvoted PFD taxes). The match can be in cash or in-kind. The match is measured against collections, and so presumably can be met (and must be adjusted) over time as collection occurs.
If both a County PFD and a City PFD impose the 0.033% state sales tax credit within the same area, the City PFD tax is credited against the County PFD ’s tax.

A number of legal issues arise with respect to PFDs: whether a particular obligation is a debt of the PFD for the purposes of statutory debt limitations, whether the PFD can serve as a conduit funder (or must have an ownership interest in the facility financed), what qualifies for the required match under RCW 82.14.390 and the 2007 legislation permitting an additional state sales tax credit for the Yakima and Cowlitz County PFDs, what is required to satisfy the deadline for commencement of construction, how to accommodate the unusual PFD statutory authority to issue general obligation and revenue bonds, what constitutes a qualifying regional center, and how to address the credit risks associated with sales and lodging tax-backed bonds. There are additional legal, policy and financing issues that arise in any public/private transactions such as issues regarding the selection of private partners, gift of public funds questions, whether the project is a public work requiring competitive bidding, whether prevailing wages must be paid by the contractor, and the allocation of construction and operating risk.

What Resources Do Public Facilities Districts Have?
Unlike PDAs, PFDs have the power to impose both voted and nonvoted taxes. Like PDAs, PFDs also have authority to generate project revenues from user fees. Resources include:

Charges and fees for the use of facilities
Gifts, grants, and donations
State sales tax credit (up 0.033% of the sales price, plus an additional credit for certain PFDs under the 2007 legislation; Regional centers only)
Voter-approved lodging taxes (County PFDs only)
Voter-approved excess property tax levies (County PFDs only)
Admission taxes (up to one cent on twenty cents of admissions charges; Regional centers)
Parking taxes (up to 10%; Regional centers)
Voted sales taxes (up to two-tenths of 1%)

Can Public Facilities Districts Issue Tax-Exempt Bonds?
PFDs can issue tax-exempt or taxable bonds, either as general obligation bonds or as revenue bonds. General obligations are backed by the full faith, credit and resources of the PFD and are subject to statutory debt limitations. Any bonds backed by taxes are ordinarily viewed as debt subject to these limitations. Revenue bonds are not debt for the purposes of these debt limitations and are backed by net revenues of the project financed. PFDs may issue double-barreled bonds (for example, backed by both tax receipts and net project revenues).

Tax-exempt financing can reduce the cost of developing a regional center or other project. There are numerous federal tax law considerations that a PFD should take into account in order to take advantage of this resource. Generally, for bonds to receive tax-exempt status, the project financed by the bonds must be used for a public purpose, as opposed to a private activity. Private use restrictions applicable to other tax-exempt financings also apply to PFDs. Any management contract with a private party must meet the safe harbor requirements under the federal tax code.

What Are the Disadvantages of Forming a Public Facilities District?
Because of the limited statutory purposes of PFDs, PFDs can only be used in limited circumstances. In the case of City PFDs, and in the case of any PFD project financed with the nonvoted sales tax, projects must be relatively large (at least $10 million), must be either a convention/conference or special events center and must meet statutory deadlines for commencement of the project.

Another disadvantage of forming a PFD is the relatively low level of control the creating city or county has over the PFD and any PFD project. Although the creating municipality holds the power of appointing all or a portion of the members of the PFD board, generally the development, management, and operation of projects is in the hands of the PFD’s board. Contract or charter provisions may provide for oversight and control over the PFD. The practical utility of these controls may be limited. Should the city or county desire to take steps to enforce charter or contract provisions it will need to do so in a public setting, which may prove contentious. Likewise, any action to replace board members could be contentious in a public setting. The lack of control over the project and the PFD, however, may be beneficial for the city or county as it may reduce liability and financial risk to the city or county.

What Legal Requirements Apply to Public Facilities Districts?
As a municipal corporation and taxing district, PFDs are subject to all laws that apply to such entities, including open public record requirements under chapter 42.17 RCW (chapter 42.56 RCW effective July 1, 2006); open public meetings and other public process laws as provided in chapter 42.30 RCW; the prohibition on using PFD facilities for campaign purposes under RCW 42.17.130; to be audited by the State auditor and to be subject to various accounting requirements provided by chapter 43.09 RCW; and ethics requirements applicable to municipal officers under chapter 42.23 RCW.

A PFD is also subject to constitutional constraints imposed on local governments, primarily limiting the use of public funds. Article VIII, Sections 5, 7 of the Washington Constitution prohibit the lending of public credit or gift of public funds to private entities, with limited exceptions. Furthermore, Article VII, Section 1 and Article VIII, Section 6, require that public debt be incurred and taxes levied exclusively for public purposes. Such constitutional constraints are triggered particularly when a public/private partnership is formed due to the private sector involvement.

Contacts:
Stacey H. Crawshaw-Lewis, +1.206.370.7656, stacey.crawshaw-lewis@klgates.com
Deanna L. Gregory, +1.206.370.8128, deanna.gregory@klgates.com
B. Gerald Johnson, +1.206.623.7580, gerry.johnson@klgates.com

This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.