2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO School Bonds 101 Session ID: FIN30 Session Title: School Bonds 101 Room: 104C Day: Saturday, April

2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO

School Bonds 101Session ID: FIN30

Session Title: School Bonds 101 Room: 104C

Day: Saturday, April 6th, 2013Time: 8:00 – 9:00 a.m.

These materials have been prepared by a CASBO Associate Member. They have not been reviewed by State CASBO for approval, so therefore are not an official statement of CASBO.

2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 2

Panel Participants• Ruth Alahydoian

Vice President

KNN Public Finance

[email protected]

• Timothy RosnickDeputy Controller

Los Angeles Unified School District

[email protected]

• Arto Becker, Esq.Partner

Hawkins Delafield & Wood LLP

[email protected]



Outline of Presentation

• Introduction to California School Finance

• Bond Terminology & Parties Involved

• General Obligation Bonds

• Certificates of Participation

• Hot Issues


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.


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

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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)


Sources/Types of Financing

Type of Financing Voter-

ApprovedNot Voter-Approved

Who’s responsible for repayment?

General Obligation Bonds X All Taxpayers

School Facility Improvement District X Taxpayers within specific SFID

Mello-Roos (Community Facility District X Property owners within CFD

Direct Lease X District

Certificates of Participation or Lease Revenue Bonds X District

Tax and Revenue Anticipation Notes X District

Bond Anticipation Notes X X Taxpayers; ultimately, General Fund if GOBs are not issued.

Refundings – GOB or COP XFor GOB Refunding – TaxpayersFor COP Refunding - District


FeaturesType of Financing Uses Typical Amount Term

General Obligation BondsCapital Projects on Voter List

$500,000+Up to 40 years (max Gov Code)Up to 25 years (max Ed Code)

School Facility Improvement District

Capital Projects on Voter List

$500,000+ Up to 40 years (max)

Mello-Roos (Community Facility District)

Capital Projects $500,000+ Up to 40 years (max)

Direct LeaseCapital Projects, may include equipment

$50,000-$3M 2-10 years (typical)

Certificates of Participation Capital Projects, may include equipment

$3M+ 5 - 30 years (typical)

Tax and Revenue Anticipation Notes

Cash flow deficit or working capital

$50,000+1 year (typical)

15 months (max)

Bond Anticipation Notes Capital Projects on Voter List

$500,000+ Up to 5 years (max)

Refunding GOBs or Refunding COPs

Refinance existing bonds or COPs

$3,000,000+ Typically same as original issue


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.


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.


Parties Involved

Bond Counsel

Rating Agency Underwriter

Seller of Bonds (Borrower)

Buyer of Bonds (Lender)

Financial Advisor

Issuer

(Wants lowest cost)

Investors(Wants highest return)

Bond Trustee/Registrar/

Paying AgentDisclosure

Counsel

County Treasurer/ Auditor

Underwriter’s Counsel


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

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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

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Basis of Repayment

• 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)

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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)

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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

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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

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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

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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

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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

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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)

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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


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

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School DistrictSchool District

School Facilities Financing

Corporation or JPA

School Facilities Financing

Corporation or JPA

InvestorInvestor

Trustee

Lease of Property

Assignment of Lease

Certification of future lease payments

Lease-back of property

Lease Payments

Upfront payment for project costs in exchange for future lease payments


Basis of Repayment

• District’s own funds– General Fund– Developer Fees– Adult Education or other specific fund– Special Taxes

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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)

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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 GOBs COPs

Voter Approval Required?

Yes No

Repayment Source Taxpayers District sources

Use of Funds Capital projects, limited by bond

language

Capital projects as identified by District Board

Repayment Term Up to 40 years, but no longer than 120% of useful life of project

Useful life of project

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Ruth Alahydoian

120% of useful life is the IRS requirement for any tax-exempt debt.


GOBs & COPs - Process

Procedure GOBs COPs

District Board Resolution Yes Yes

County Board Resolution Maybe No

County Auditor Review No Yes

County Office of Education Review No Yes

Asset (Property) Transfer No Yes

County Involved in Issuance? Maybe No

Debt Service Provided to County Yes Yes

County Involvement in Repayment Yes No

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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

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