School Bonds 101

Session ID: FIN30 Session Title: School Bonds 101 Room: 104C Day: Saturday, April 6th, 2013 Time: 8:00 – 9:00 a.m.

These materials have been prepared by a CASBO Associate Member. They have not been reviewed by State CASBO

2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO

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Panel Participants

Ruth Alahydoian Vice President KNN Public Finance [email protected]

• Timothy Rosnick Deputy Controller Los Angeles Unified School District [email protected]

• Arto Becker, Esq.

Partner Hawkins Delafield & Wood LLP [email protected]

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Outline of Presentation

• Introduction to California School Finance • Bond Terminology & Parties Involved • General Obligation Bonds • Certificates of Participation • Hot Issues 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 2

California Constitution

• California Constitution, Article 16, Section 18a:

No county, city, town, township, board of education, or school district, shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds [55% for school districts under Proposition 39] of the voters of the public entity voting at an election to be held for that purpose…

• In other words, generally, public agencies can’t issue debt without voter approval.

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Exceptions to Voter Approval

• Borrowing for working capital (e.g., TRANs) is not considered debt because it is must be paid from same year revenues.

• Leases are not considered debt because they are contingent on use of equipment or property and are subject to annual appropriation and abatement.

– Lease revenue bonds – Certificates of Participation 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 4

What’s Available to a School District?

• Voter Approved Debt – General Obligation Bonds (GOBs) – Bond Anticipation Notes (BANs) – School Facility Improvement District (SFID) Bonds – Mello-Roos (Community Facility District (CFD)) Bonds • Non-Voter Approved Debt – Direct leases and lease revenue bonds (LRBs) – Certificates of Participation (COPs) • Working Capital – Tax and Revenue Anticipation Notes (TRANs) 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO

Sources/Types of Financing

Type of Financing

General Obligation Bonds

Voter Approved

X

Not Voter Approved Who’s responsible for repayment?

All Taxpayers X Taxpayers within specific SFID School Facility Improvement District Mello-Roos (Community Facility District Direct Lease Certificates of Participation or Lease Revenue Bonds X X X Property owners within CFD District District Tax and Revenue Anticipation Notes Bond Anticipation Notes Refundings – GOB or COP X X X X District Taxpayers; ultimately, General Fund if GOBs are not issued.

For GOB Refunding – Taxpayers For COP Refunding - District 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 6

Features

Typical Amount Type of Financing

General Obligation Bonds

Uses

Capital Projects on Voter List School Facility Improvement District Capital Projects on Voter List Mello-Roos (Community Facility District) Capital Projects Direct Lease Certificates of Participation Tax and Revenue Anticipation Notes Bond Anticipation Notes Refunding GOBs or Refunding COPs Capital Projects, may include equipment Capital Projects, may include equipment Cash flow deficit or working capital Capital Projects on Voter List Refinance existing bonds or COPs $500,000+ $500,000+ $500,000+ $50,000-$3M $3M+ $50,000+ $500,000+ $3,000,000+

Term

Up to 40 years (max Gov Code) Up to 25 years (max Ed Code) Up to 40 years (max) Up to 40 years (max) 2-10 years (typical) 5 - 30 years (typical) 1 year (typical) 15 months (max) Up to 5 years (max) Typically same as original issue 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 7

• • • •

Bond Terminology

Par, principal, maturity amount

– the principal amount issued and promised to be repaid to an investor on a date certain.

Interest rate, coupon

– the interest rate assigned to a particular maturity date. The principal maturing on that date pays the assigned interest amount to the investor.

– –

Current Interest Bonds

– interest is paid at least annually.

Capital Appreciation Bonds

– interest accrues at the assigned rate but is not paid until the final maturity date.

Yield –

the yield is the rate that the investor receives based on the interest rate and the price paid for the bonds.

Price

– Amount paid for bonds as a % of par. 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO

• • • • •

Bond Terminology, Continued

Premium

– when interest rates are higher than market yields for a particular maturity, bonds are sold at a higher price, and a premium in excess of the maturity amount is generated.

Discount

– when interest rates are lower than market yields for a particular maturity, bonds are sold at a discount, resulting in less than the full maturity amount being paid for the bonds.

“Call” or redemption features

– bonds can be prepaid on their “call” date. If not pre-payable, the bonds are “non-callable”.

Debt Service, bond repayment, amortization schedule

– the schedule of principal and interest payments.

Tax rate, tax levy

– the rate that is applied to secured property to generate enough revenues to cover bond payments in the upcoming tax year. 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO

Parties Involved

Bond Counsel Financial Advisor Rating Agency Issuer

(Wants lowest cost)

Seller of Bonds (Borrower) Buyer of Bonds (Lender) County Treasurer/ Auditor Bond Trustee/ Registrar/ Paying Agent Disclosure Counsel Underwriter Investors

(Wants highest return)

Underwriter’s Counsel

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General Obligation Bonds

Voter Approval – 55% Threshold (Prop.39)

• • • • • Must be on “regularly scheduled local election date” Must specify a project list that can be monitored by an oversight committee – Projects may include furniture and fixtures, along with the usual capital expenditures that relate to facilities.

– Leases may also be allowed under Prop 39 Must have an oversight committee, with specific representation and reporting responsibilities Must have an annual bond audit Tax rate projected by district must not exceed: – $30 per $100,000 for elementary and high school districts – $60 per $100,000 for unified school districts – $25 per $100,000 for community college districts 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 12

Voter Approval – 2/3 Threshold

• Can be held on any Tuesday (except within 45 days of a State-wide election unless it is at the same time as the State-wide election) • Purpose can be very broad, but can only be acquisition and improvement of real property - no furniture or equipment • An oversight committee is not required • No limitations on tax rate 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 13

Basis of Repayment

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Ad Valorem

Taxation on all property within District – Tax is on

ad valorem

basis – often referred to as $’s per $100,000 of assessed value – Tax is set annually by County Auditor based on debt service requirements – County Tax Collector collects taxes and deposits for benefit of bond holder in

Interest and Sinking Fund

of district • Technically – District Fund • Practically – District has no access • Use limited to bond debt service only (Ed Code 15251) 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 14

Election Process

• Resolution Calling Election: School Board must approve the measure for the ballot at least 88 days prior to election date – Prop 39 election requires 2/3 approval of Board • No public funds can be used for advocacy, including calls by school officials during work hours • Personal time is OK • Board members can express their opinions during board meetings • Funding a campaign is a challenge – Bundled services – Campaign contributions from interested parties – AB 1045 (Norby) 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 15

Bond Issuance Process

• Once approved by voters, bonds may be issued in one or more series over time.

• If issued under Government Code (Gov. Code Section 53506) – County must allow districts to issue under government code.

– Issued directly by district. – Repayment may extend up to 40 years from bond issuance.

• If issued under Education Code (Ed. Code Section 15140) – Issued by County Board of Supervisors, at the request of the District UNLESS, – County Board of Supervisors has authorized school districts to issue independently.

– Repayment may extend up to 25 years from bond issuance.

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Bond Issuance –

Prior to Issuance

• Determining Amount to be Issued – Debt Capacity Constraints – can not issue debt if outstanding bonds would exceed legal limit (Ed Code 15268,15270 and 15102). • 1.25% of taxable A.V. for elementary & high school districts • 2.50% of taxable A.V. for unified school districts & community college districts – Tax Rate Constraints • Prop. 39 constraints per election • Other political promises made during an election • Tax rate estimates are based on projections of future A.V. growth – District will need to sign-off on reasonableness of projections 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 17

Bond Issuance –

Authorizing Resolutions

• District Resolution requesting the county to issue should include: – Tax-exempt commitments – Financing Parameters • Principal (not to exceed) amounts • Maturity dates • Interest rate parameters • Redemption provisions – Pledge to request tax levy sufficient to repay bonds – Approval of Form of Legal Documents – AB 1482 Compliance • Method of Sale & Reasons • Disclosure of consultants • Estimated costs of issuance 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 18

Bond Issuance –

Authorizing Resolutions, Continued

• County Resolution (and District Resolution, if issued under Government Code) should include: – Financing parameters (as in District Resolution) – Approval of Purchase Contract / Notice of Sale – Investment alternatives – Establishment of funds – Pledge of security 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 19

Bond Issuance –

During Issuance Process

• Official Statement (OS) – District disclosure document – Will include information on the County, particularly the County Investment Pool • Rating(s) – independent assessment of credit quality • Sale and Pricing – Competitive or negotiated – Ed. Code – County oversees pricing, signs off on final documents – Gov. Code – District oversees pricing, signs off on final documents 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 20

Bond Issuance –

Structural Issues

• Current Interest Bonds • Capital Appreciation Bonds (CABs) • Convertible Capital Appreciation Bonds (Convertible CABs) • Repayment terms (Gov. Code vs Ed. Code) • For refunding bonds - cash-out (Attorney General Opinion has squashed these) • 2% Cost of Issuance (COI) provision (Ed Code 15146(g)) • Limitations on the use of premium to pay COI 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 21

Bond Issuance -

After

Immediately after sale: • Closing documents and certifications • Wire information, deposit to appropriate accounts Annually: • Tax setting and tax collection • Account balance reporting to district • Arbitrage issues – interest earnings on both Building (Proceeds) Fund and Bond Interest and Redemption (Debt Service) Fund must be reported • Continuing Disclosure (District responsibility) 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 22

Tax Levy

• The county is obligated to set, levy and collect

ad valorem

taxes sufficient to repay the principal of and interest on the bonds, as such payments come due.

• Depending on the policies of the county, the county auditor determines the amount needed, and the county tax collector levies and collects the tax.

• A reserve is allowed within IRS parameters.

• Districts can request specific levy amounts, in anticipation of bonds to be issued in the coming year.

• Districts are required to report debt service adjustments due to refundings.

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GOBs – Use of Funds

• Bond proceeds are deposited to the District’s “Building Fund”.

– Proceeds are net of any premium held by the underwriter (underwriter’s compensation) – Costs of issuance, to the extent not paid by the underwriter, will be paid from bond proceeds (currently under consideration by State Attorney General) – Divergent views on ability to borrow for cash flow purposes (Ed Code 15146 (f)) • Any bond premium received by the District must be deposited to the bond debt service fund.

• Can only be spent on voter-approved projects (per the language and project list in the bond measure). • District is subject to IRS regulations, including arbitrage rebate, and will want to know interest earnings on this fund.

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Bond Anticipation Notes (BANs)

• • • • • • • • • BANs are authorized under Ed Code Section 15150 Allows District to access bond authorization without issuing long term bonds

District takes the risk that adverse conditions may make it difficult to issue long term bonds when the BAN matures.

Does not count against the authorization or debt capacity limit until the BAN is replaced with the actual bonds Repayment can extend for up to 5 years Renewal BANs Must have bond authorization to issue a BAN Principal is paid when District issues actual bonds Interest can be paid at maturity from proceeds of actual bonds, or from tax levy.

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Certificates of Participation

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Characteristics of COPs

• Similar to Lease Revenue Bonds.

• Asset (usually a school site) used to secure a lease.

• Non-profit financing corporation used as lessor – provides upfront payment (COP proceeds) in exchange for initial lease from District.

• District leases back property for annual lease payments.

• Non-profit assigns lease payments to trustee to pass on to COP holders.

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Flow of Funds- COP

School District

Lease of Property Lease-back of property

School Facilities Financing Corporation or JPA

Assignment of Lease

Lease Payments Upfront payment for project costs in exchange for future lease payments Investor Trustee

Certification of future lease payments 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 28

Basis of Repayment

• District’s own funds – General Fund – Developer Fees – Adult Education or other specific fund – Special Taxes 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 29

Issuance Process -

Authorization

• At least 30 days before Board approval of COPs, school districts must notify the County Auditor and the County Superintendent of Schools. (Ed Code 17150.1).

– County Auditor and COE have 15 days to comment publicly.

• Districts with “qualified” or “negative” certification in that fiscal year or the prior fiscal year cannot issue COPs (or TRANs) unless the COE determines that the District’s repayment is probable (Ed Code 42133).

• District Board must approve transaction and documents – Must be an action item (not consent) 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 30

COPs –

After Issuance

• District is required to provide a debt service schedule to the County Auditor-Controller. • Both proceeds and repayment funds are held by a Trustee, NOT the County.

• Eventually, after COPs are repaid, the lien on the property must be released, and title returned to the District.

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COP Do’s and Don’ts

• COPs are useful when: – Source of repayment is reliable – Project is not well suited to voter approval (size, limited applicability) • COPs are not appropriate when: – Source of repayment is uncertain – Size of project is so large (or project so unessential) that District’s General Fund would not be able to absorb payments if other payment sources were not available.

– Repayment term exceeds useful life of project.

– Project is not a capital project.

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GOBs & COPs - Characteristics

Characteristic

Voter Approval Required?

Repayment Source

GOBs

Yes Taxpayers

COPs

No District sources Use of Funds Repayment Term Capital projects, limited by bond language Up to 40 years, but no longer than 120% of useful life of project Capital projects as identified by District Board Useful life of project 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 33

GOBs & COPs - Process

Procedure

District Board Resolution County Board Resolution County Auditor Review County Office of Education Review Asset (Property) Transfer County Involved in Issuance?

Debt Service Provided to County County Involvement in Repayment

GOBs

Yes Maybe No No No Maybe Yes Yes

COPs

Yes No Yes Yes Yes No Yes No 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 34

Hot Topics

• CABs – Capital Appreciation Bonds – What are they?

– Why are they used?

– Why are they in the news?

• AB 182 – Proposed legislation – Repayment ratio and interest rate limits – Callable or non-callable bonds – Repayment term longer than 25 years • Costs of issuance paid from premium 2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 35