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The Port has a variety of resources available to fund its Capital Improvement Program (CIP).
Both the Aviation and Seaport Divisions rely on Net Income and Revenue Bonds. Seaport also utilizes the Tax Levy and General Obligation Bonds, while Aviation has access to FAA Grants and Passenger Facility Charges (PFCs). Due to the size of the CIP and capital capacity constraints, opportunities for Alternative Financing are sought where appropriate.
Net income for funding purposes represents the cash generated from the Port's business activities after payment of all expenses. It differs from the standard accounting concept of income in that it excludes non-cash items such as depreciation and amortization. It also includes non-operating items such as interest earnings. Net income can be used directly to fund capital projects (pay-as-you-go) or leveraged (borrowed against).
The Port may issue Revenue Bonds secured by a pledge of its future revenues to repay the bonds over time. In the Port's case, Revenue Bonds are issued on a consolidated basis; that is, they are backed by both Aviation and Seaport revenues regardless of the projects being financed. This results in a stronger credit and a lower interest rate on the bonds. Port Revenue Bonds are typically issued on a fixed-rate basis for a term of up to 25 years, although variable rate bonds and shorter-term notes also are issued to diversify the Port's capital structure and to reduce interest costs by appealing to a wider group of investors.
As a governmental agency, the Port can issue bonds for most projects on a tax-exempt basis, meaning that investors who hold the bonds pay no federal income taxes on the interest they receive. As a result, the Port is able to pay lower interest rates than are paid on taxable bonds, which provides for significantly lower financing costs. The use of tax-exempt financing, however, subjects the Port to complex federal regulations regarding the management and use of the bond proceeds.
The Port is authorized under Washington State law to levy property taxes within King County for general Port purposes. The allowable amount of the Tax Levy is generally subject to two limitations: 1) the total levy rate may not exceed $0.45 per thousand dollars of assessed value; and 2) annual increases in the amount of the levy are restricted to the lesser of inflation or 1%. The annual increase in the allowable levy is based on the amount of taxes that could have been levied in the previous year, even if the Port did not levy the full amount.
The Tax Levy is available for general Port purposes, but may not be used to pay debt service on Revenue Bonds. By policy the Port uses the levy solely for capital expenditures, environmental expenses and community investments. The Port's budget document provides more detailed information regarding the Tax Levy.
General Obligation (G.O.) Bonds are backed by the full faith and credit of the Port, including the Tax Levy. Due to the broader pledge, G.O. Bonds can be issued at lower interest rates than Port Revenue Bonds. The total amount of the Port's G.O. Bonds outstanding is restricted by statutory limitations based on the total assessed value of property in King County.
FAA Grants are available to fund a portion of eligible Airport capital improvements under the Federal Airport Improvement Program (AIP). The grants require Airport matching funds of 20%-30% and may be used for projects such as noise mitigation, safety enhancements and capacity improvements.
Passenger Facility Charges (PFCs) represent user fees of $4.50 per ticket collected from airline passengers traveling through Sea-Tac. The Airport's ability to impose PFCs must be approved by the FAA. PFCs must be used for specified projects meeting eligibility criteria similar to those used for FAA Grants.
Alternative Financing refers to off-balance-sheet funding mechanisms that don't rely on Port capital or credit capacity. This includes private or third party development, conduit financing (debt secured by a private company) or project financing (debt secured solely by project revenues).