SCHOOL BONDS UNDERSTANIDNG YOUR LOCAL DEBT. TALKING POINTS Who all is involved? Understanding how forecasting works Typical timeline Other key.

SCHOOL BONDS

UNDERSTANIDNG YOUR LOCAL DEBT

TALKING POINTS

Who all is involved?

Understanding how forecasting works

Typical timeline Other key details Types of bonds

TEA presentation on CABs

Region 6 Bonds Stats 50-cent test Ongoing matters Tax rate trends 84th Legislative

Session Municipal Advisor Regs

SCHOOL PERSPECTIVEFINANCIAL ADVISOR

THOUGHTS

WHO ALL IS INVOLVED?

Financial advisor Critical that ISD makes decisions and verifies

assumptions FA should provide advice

Bond counsel Provides legal opinion Facilitates IRS paperwork

Rating agency(ies) Underwriters Underwriter counsel

Only applicable for negotiated bond sales

CASH FLOW FORECASTING

Assessed valuations Be conservative Consider only forecasting out 5 years

Debt service schedule Existing debt coupled with new money sale Repayment structure - escalating or level

debt service State aid estimates Permanent School Fund (PSF) Insurance Tax collection rate Tax rate implications

TYPICAL TIMELINE

Preliminary analysis/discussion with FA

FA and ISD decide type of bond sale Competitive Negotiated

Board approves parameters (negotiated) Bond sale/refunding amount Designate pricing officer Interest rate Term of bonds

TYPICAL TIMELINE

Preliminary official statement review

Audited financial statement Current enrollment, financial, and tax data

Conference calls with rating agency(ies) 1-2 days before you will receive questions Trends and key indicators are focal points

Due diligence call with underwriter counsel

Pre-pricing call Review market conditions

Pricing of the bonds

OTHER KEY DETAILS

Bond purchase agreement Pricing certificate Verification report Official statement review Closing agreement

Wire funds to FA, bond counsel, rating agency, etc.

Pledged securities Don’t forget to contact the bank about the

transaction

OTHER KEY DETAILS

The ISD has choices throughout the process Call dates for the bonds Decision on bond type(s) to use Decision on debt structure Selection of paying agent Selection of underwriters

New money sales can result in capitalized interest Cash payment to the issuer to be used to

pay future interest (intended to keep tax rate down)

TOOLS FOR ISD’S…POLITICAL PLATFORMS FOR OTHERS

TYPES OF BONDS

TYPES OF BONDS

Current interest bond (CIBs) are bonds which principal and interest are due periodically.

Capital appreciation bonds (CABs) are bonds basically issued at a discount which have no principal or interest payments due until bond matures.

Some facts about CABs are as follow:

Depending on term of the bond, it can cost more than twice as much as a CIB of the same term

CABs do not count against debt limit until the year payment is due

TYPES OF BONDS

During the 83rd Session, Sen. Juan “Chuy” Hinojosa, D-McAllen, and Rep. Dan Flynn, R-Van, were trying to curtail the use of CABs by enacting the following:

Limit CAB percentage of bonded debt to 20%

Limit maturity date to no more than 20 years

Require school districts to post proposed bond sale details on their website and possibly board agenda

TYPES OF BONDS

Last year California Governor Jerry Brown approved a bill to limit CABs in the future.

Reduced term from 40 to 25 years

District repayment ratio must be less than 4:1 (interest to principal)

Requires an early repayment option

TYPES OF BONDS

While it is not a certainty, it is likely another CAB bill will surface during the 84TH Legislative Session.

HB 114 is in the works to be introduced

The TEA was asked to present to the SBOE in late September, 2013 and the following slides were major talking points during this meeting.

TEA PRESENTATION ON CAB’S

TEA PRESENTATION ON CAB’S

TEA PRESENTATION ON CAB’S

TEA PRESENTATION ON CAB’S

TEA PRESENTATION ON CAB’S

REGION 6 ESC BOND STATS

84% of Region 6 districts currently hold I&S debt

63% of Region 6 districts currently holding I&S debt have held CABs within the last five years

53% of Region 6 districts currently holding I&S debt are currently holding CABs

REGION 6 ESC BOND STATS

Average I&S rate is $0.1855

0-10 11-20 21-30 31-40 41-500

2

4

6

8

10

12

14

16

18

Region 6 I&S RatesNumber of Districts

I&S Rate

50-CENT TEST

When new debt is issued, I&S tax rate can’t exceed 50 cents per 100 dollar valuation

CABs are not subject to the 50 cent test until they reach maturity Provides relief to districts needing to build

before the valuations can support the debt

Districts are allowed to use EDA/IFA funds and eligible Tier I funds to pass the 50 cent test

ONGOING MATTERS

Annual Continuing Disclosure reports are required to keep investors informed on financial and operating information

Arbitrage – You can not earn higher interest on investment of your bond proceeds than you are paying in interest 3 year working capital exemption Small Issuer Exemption for <$5,000,000/yr. An amount not exceeding the lesser of 5% of

the sale proceeds of the issue or $100,000

TAX RATE TRENDS

TAX RATE TRENDS

84TH LEGISLATIVE SESSION

83rd Legislative Session (2013) Limit amount of CAB debt Limit term of CABs Increased information at voting locations and on

the ballot

84th Legislative Session (2015) 50 cent test GO Bonds to require 50% turn-out of registered

voters GO Bonds require super-majority to pass Elimination of CABs entirely?

Municipal Advisor “MA” Regulations

Generally, a municipal advisor is defined as a person who solicits or provides financial advice to municipal entities, or obligated persons, with respect to municipal financial products or the issuance of municipal securities.

Rule is an extension of the Dodd-Frank Act intended to increase transparency and protect issuers.

Verify that your MA is licensed here: http://brokercheck.finra.org/

ANSWERS

QUESTIONS?