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The views and opinions expressed in this presentation are those of the authors and do not necessarily reflect those of CASBO.
Walking a Straight Legal and Financial Line in 2018 California
Local School Finance The views and opinions expressed in this presentation are those of the authors and do not
necessarily reflect those of CASBO.
John R. Baracy Managing Director Stifel
Adam Bauer President & CEO Fieldman & Rolapp & Associates
David G. Casnocha Managing Shareholder Stradling Yocca Carlson & Rauth
2018 CASBO Annual Conference & California School Business Expo
Table of Contents Section Page Number
Section I: Prudent and Effective GO Bond Program Mechanics 3
Section II: 2017 Tax Cuts and Jobs Act Bill Summary and Other 2017 California Legislation 24
Appendix: California K-12 School Finance Resource Materials 34
Disclosure Stifel, Nicolaus & Company, Incorporated (“Stifel”) has prepared the attached materials. Such material consists of factual or general information (as defined in the SEC’s Municipal Advisor Rule). Stifel is not hereby providing a municipal entity or obligated person with any advice or making any recommendation as to action concerning the structure, timing or terms of any issuance of municipal securities or municipal financial products. To the extent that Stifel provides any alternatives, options, calculations or examples in the attached information, such information is not intended to express any view that the municipal entity or obligated person could achieve particular results in any municipal securities transaction, and those alternatives, options, calculations or examples do not constitute a recommendation that any municipal issuer or obligated person should effect any municipal securities transaction. Stifel is acting in its own interests, is not acting as your municipal advisor and does not owe a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934, as amended, to the municipal entity or obligated party with respect to the information and materials contained in this communication. Stifel is providing information and is declaring to the proposed municipal issuer and any obligated person that it has done so within the regulatory framework of MSRB Rule G-23 as an underwriter (by definition also including the role of placement agent) and not as a financial advisor, as defined therein, with respect to the referenced proposed issuance of municipal securities. The primary role of Stifel, as an underwriter, is to purchase securities for resale to investors in an arm’s- length commercial transaction. Serving in the role of underwriter, Stifel has financial and other interests that differ from those of the issuer. The issuer should consult with its’ own financial and/or municipal, legal, accounting, tax and other advisors, as applicable, to the extent it deems appropriate. These materials have been prepared by Stifel for the client or potential client to whom such materials are directly addressed and delivered for discussion purposes only. All terms and conditions are subject to further discussion and negotiation. Stifel does not express any view as to whether financing options presented in these materials are achievable or will be available at the time of any contemplated transaction. These materials do not constitute an offer or solicitation to sell or purchase any securities and are not a commitment by Stifel to provide or arrange any financing for any transaction or to purchase any security in connection therewith and may not relied upon as an indication that such an offer will be provided in the future. Where indicated, this presentation may contain information derived from sources other than Stifel. While we believe such information to be accurate and complete, Stifel does not guarantee the accuracy of this information. This material is based on information currently available to Stifel or its sources and is subject to change without notice. Stifel does not provide accounting, tax or legal advice; however, you should be aware that any proposed indicative transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and /or counsel as you deem appropriate.
2 2
2018 CASBO Annual Conference & California School Business Expo
SECTION I: PRUDENT AND EFFECTIVE GO BOND PROGRAM MECHANICS
2018 CASBO Annual Conference & California School Business Expo
GO bond programs are structured based on projections of: Facility needs of District The timing and amount of bond sales is influenced by the expenditure cash flow for the project
Other funds available to the district for facility purposes
District assessed value (“AV”) Projected AV growth has a significant effect on the bond issuance schedule and amounts
Along with the amount of outstanding bonds, AV determines the statutory bonding capacity in any future fiscal year
Tax rates Tax rate is calculated by dividing the aggregate annual bond payments by the District’s assessed value
Future tax rates are based on AV, timing of bond issuances, issuance amounts, and debt service payments
Municipal bond interest rates Function of: − National and international financial market factors
− District credit ratings
− Bond structure, including bond type, financing term and redemption features
− Tax‐exempt or taxable bonds
4
Factors Affecting California K-12 GO Bond Programs
4
2018 CASBO Annual Conference & California School Business Expo
Assessed valuation drives access to bond dollars Voter Approved Authorization ≠ Cash Available Now
Faster AV growth allows earlier issuance
Slower AV growth or declines slow or reduce issuance
Ad Valorem Property Taxes Ad valorem property taxes are typically represented as a rate per $100,000 of a property’s assessed value
Example: You own a house with a market value of $600,000 and an assessed value of $400,000, and the ad valorem tax is $30 per $100,000 of assessed value. Your property tax will be $120. The ad valorem tax rate is applied to your assessed value ($400,000 ÷ $100,000) x $30=$120.
Relationship between assessed valuation growth and tax rates
Annual Assessed Valuation Growth at 2.00%
Year Debt Service
Assessed Valuation
Tax Rate per $100,000
2017 $900,000 $3,000,000,000 $30.00 2018 900,000 3,060,000,000 29.41 2019 900,000 3,121,200,000 28.84 2020 900,000 3,183,624,000 28.27
Annual Declining Assessed Valuation at 2.00%
Year Debt Service
Assessed Valuation
Tax Rate per $100,000
2017 $900,000 $3,000,000,000 $30.00 2018 900,000 2,940,000,000 30.61 2019 900,000 2,881,200,000 31.24 2020 900,000 2,823,576,000 31.87
5
Role of Assessed Value & Property Taxes
5
2018 CASBO Annual Conference & California School Business Expo
Identify facility needs Expected timeframe for spending bond proceeds (3-year spend-down rule of IRS)
Useful life of projects funded with bond proceeds
Inflation risks Inflation deteriorates the purchasing power of bond proceeds
The average annual increase in California’s Consumer Price Index for all urban consumers from 1955 to 2017 was 3.86%
Sample Impact of Construction Cost Inflation on Bond Proceeds Purchasing Power in
2016 Dollars of Principal Name of Year of Estimated Total Bond Amount of Bonds with Purchasing Power
Bond Series Issuance Principal Amount 3.86% Annual Inflation(1) Difference Series A 2016 $100,000,000 $100,000,000 -- Series B 2018 100,000,000 92,428,996 ($7,571,004) Series C 2020 100,000,000 85,431,193 (14,568,807)
All Bonds Total $300,000,000 $277,860,189 ($22,139,811)
(1) Average annual increase in California Consumer Price Index for all urban consumers from 1955 to 2017 was 3.86%. Average annual increase in Marshall & Swift Eight California Cities Index for Class B Construction from 1999 to 2018 was 4.27%.
6
Timing of Bond Sales and Effect
6
2018 CASBO Annual Conference & California School Business Expo
Election Date Filing Date June 5, 2018 March 8 , 2018
November 6, 2018 August 9, 2018
7
Proposition 46 Generally any Tuesday
Proposition 39 Statewide primary, general or special elections
Other dates only if it coincides with regularly scheduled districtwide election
Election Dates
7
2018 CASBO Annual Conference & California School Business Expo
A school district’s bonding capacity is a statutory limit on the amount of additional general obligation bonds that can be issued at a given point in time
State Education Code limits the amount of general obligation bonds that can be sold by a unified school district and school district in a single fiscal year to a certain percentage of its assessed valuation minus the amount of any outstanding general obligation bonds 2.50% of its assessed valuation for a unified school district
1.25% of its assessed valuation for elementary and high school districts
8
Statutory Bonding Capacity(1)
Fiscal Year 2017-18
Total Assessed Valuation $14,000,000,000
times 2.50% equals Gross Bond Issuance Capacity for 2017-18 $350,000,000
minus Outstanding Principal of Previously
$258,375,000 Issued General Obligation Bonds
Equals Net Bond Issuance Capacity for 2017-18 $91,625,000
(1) Does not reflect a specific school district and is only for illustrative purposes
Statutory Debt Capacity
8
2018 CASBO Annual Conference & California School Business Expo
Sample Proposition 39 Election in November 2018 for a Unified School District
Financing Assumptions $30 Tax Rate $48 Tax Rate $60 Tax Rate
Amount of Bonds $169,000,000 $274,000,000 $345,000,000
Future AV Growth Rate 3.75% 3.75% 3.75%
Number of Bond Issues 4 4 4
Bond Amount and Issuance Date Series A – February 2019 $42,500,000 $70,000,000 $85,000,000 Series B – August 2021 $42,500,000 $70,000,000 $85,000,000 Series C – August 2023 $42,000,000 $70,000,000 $85,000,000 Series D – August 2025 $42,000,000 $64,000,000 $90,000,000
Repayment Period per Series 30 Years 30 Years 30 Years
Aggregate Repayment Ratio 2.08-to-1 2.09-to-1 2.09-to-1
Compliant with AB 182 Yes Yes Yes
Estimated Ad Valorem Tax Rates
Median AV for Typical Home ($285,000) Highest Annual Tax Rate $85.50 $136.80 $171.00
9
Sample GO Bond Program
9
2018 CASBO Annual Conference & California School Business Expo
$274 Million Authorization, $48 Tax Rate
10
Timing of Bond Sales and Effect
$0.00
$12.00
$24.00
$36.00
$48.00
$60.00
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
2052
2053
2054
2055
2056
Tax
Rat
e Pe
r $10
0,00
0 of
Ass
esse
d Va
luat
ion
2019 Series A Debt Service 2021 Series B Debt Service 2023 Series C Debt Service 2025 Series D Debt Service $48.00 Tax Rate
10
2018 CASBO Annual Conference & California School Business Expo
Proposition 39 General Obligation Bonds – Short Term Amortization (3-10 Years) Provides a debt service repayment planned around the useful life of devices purchased Allows for the District to take advantage of low interest rates Available issuance amount will be determined by tax base, credit rating, outstanding parity debt, authorization, funding needs, and
interest rate environment
Technology Endowment Fund 3-10 year issuances that deposit money into an investment fund The investment fund disperses money annually or periodically over the life of the bond Since bond proceeds are invested, rather than spent, interest earning are constrained per Federal tax regulations Funding amount and disbursements are heavily dependent on market rates
Other Methods of Issuance District’s that do not have remaining authorization under Proposition 39 or do not have immediate plans to proceed with a
Proposition 39 election can issue Tech Bonds with other available revenue streams Certificates of Participation (General Fund Obligation) Mello-Roos Special Tax Bonds (Special Tax Obligation) These methods are limited as many districts may not have available funds to pay debt service out of the General Fund and/or may
not have community facilities districts within district boundaries
11
Technology Financing Tools and Options
11
2018 CASBO Annual Conference & California School Business Expo
A new bond measure with an estimated tax of approximately $23 per $100,00 of AV, $2.0 million in inflation-adjusted technology needs could be financed by the annually Assumptions:
− 100% current interest bonds, 30 year program − Interest rates: 3.0% - 4.0%(1)
− Annual AV growth: 3.0% − Assumes 9% project cost escalation
(1) Assumes higher than market interest rates. Interest rates are subject to market fluctuations until bonds are sold.
$- $20 $40 $60 $80
$100 $120 $140 $160 $180
Tax
Rate
(Per
$10
0,00
0 of
AV)
Estimated Tax Rates
Series A Series B Series C Series D Series E Series F Series G Series H Series I Series J
Issue Issue Date Proceeds Series A February 2019 $6,300,000 Series B August 2022 6,900,000 Series C August 2025 7,500,000 Series D August 2028 8,200,000 Series E August 2031 9,000,000 Series F August 2034 9,800,000 Series G August 2037 10,700,000 Series H August 2040 11,700,000 Series I August 2043 12,800,000 Series J August 2046 14,000,000 $96,900,000
12
Illustrative Technology Bond Scenario
12
2018 CASBO Annual Conference & California School Business Expo
In September 2013, Stifel assisted the Rosemead School District (the “District”) to issue bonds under an existing Proposition 39 authorization (the “2008 Authorization”) In preparing for the second issuance of bonds under the 2008 Authorization, the District determined a portion of the proceeds
would be dedicated to fund technology
To avoid the scrutiny of funding technology with long term bonds, the District issued two series of bonds, Series B and Series T-1 Series B was issued as a 30 year bond to repay an outstanding bond anticipation note and Series T-1 was issued as a five year
bond to fund the cost of technology improvements Series T-1 was able to fund $760,000 in technology improvements
$- $5.00
$10.00 $15.00 $20.00 $25.00 $30.00 $35.00
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043
Estim
ated
Tax
Rat
e pe
r $1
00K
of A
V
Rosemead School District (Los Angeles County, California) Election of 2008, General Obligation Bond Program – Debt Service Schedule / Estimated Tax Rates
Election of 2008 Prior Bonds Election of 2008, Series B (Infrastructure) Election of 2008, Series T-1 (Technology)
A Technology GO Bond Case Study
13
2018 CASBO Annual Conference & California School Business Expo
Primary Purpose
Provide access to LOWER annual tax revenues in the early years (1 to 25 years) available for repayment for each Bond series
Primary Features
Investors receive SEMI-ANNUAL interest and ANNUAL principal payments
Represents lower bond interest rates available at issuance
Represents lower total bond payments to principal amount issued ratio
Primary Purpose
Provides access to HIGHER annual tax revenues in LATER years (25 to 40-years) available for repayment of each Bond series
Primary Features
CABs pay both the INTEREST & PRINCIPAL on scheduled dates (Limited to 25 years after January 1, 2014)
CCABs defer INTEREST for a period (10 to 20-years) and then convert to CIBs
14
What Type of Bond Securities Are Issued?
14
2018 CASBO Annual Conference & California School Business Expo
Current Interest Bonds and Capital Appreciation Bonds
Hypothetical Interest Rates as of March 22, 2018 General Obligation Bonds rated A+/A1
Maturity Year
Current Interest Bonds Non-Callable Maturities
Callable Maturities
Convertible Capital Appreciation Bonds*
Capital Appreciation Bonds 5 2.45% 2.81% n.a. n.a.
10 2.97% % n.a. n.a.
15 3.23% n.a. 4.17% 3.83%
25 3.46% n.a. 4.45% 4.11%
30 3.51% n.a. n.a. n.a. *Conversion from CABs to CIBs in 10 years from closing date of bonds. All numbers are preliminary and are subject to change. Tax-exempt interest rates were derived from spreads to the 'AAA' rated MMD Index of comparable recently priced financings and secondary market trades as of March 22, 2018. In no way does Stifel represent that the bonds would receive such pricing results.
15
Difference in Bond Interest Rates by Types of Bonds
15
2018 CASBO Annual Conference & California School Business Expo
CABs have been a component of school general obligation bonds for many years
Increased use of CABs corresponds with approval of Proposition 39 in November 2000
Use of CABs rose in response to slowdown or decline of assessed valuation during recession
Frequency of CAB maturities longer than 30 years increased during the recession and legislative approval of AB 1388 in 2009
CAB issuance fell in late 2012 through the present partly due to media attention, political criticism and passage of AB182 in 2013
16
Recent History of CABs Issued by California School Districts CABs as Percent of All School District
General Obligation Bonds
Number of All School Number of Percentage of
New Money Issues with All Issues Year GO Bonds CABs with CABs 1995 94 21 22.3% 1996 92 19 20.7% 1997 139 41 29.5% 1998 193 51 26.4% 1999 177 49 27.7% 2000 175 53 30.3% 2001 164 50 30.5% 2002 213 82 38.5% 2003 179 64 35.8% 2004 250 91 36.4% 2005 194 87 44.8% 2006 196 93 47.4% 2007 198 96 48.5% 2008 168 83 49.4% 2009 211 123 58.3% 2010 142 77 54.2% 2011 169 101 59.8% 2012 120 49 40.8% 2013 188 40 21.3% 2014 116 19 16.3% 2015 170 29 17.0% 2016 122 13 10.7% 2017 259 20 7.7%
16
2018 CASBO Annual Conference & California School Business Expo
School District General Obligation Election Results: January 1986 – November 2017
PASS FAIL
(1) Proposition 39 elections commenced in Spring 2001. Source: School Services of California 17
Comprehensive School Bond Election Results
17
45.7%
54.3%
Proposition 46
536 Issues($23.8B Authorization)
451 Issues($19.9B Authorization)
85.2%
14.8%
Proposition 39
1,087 Issues($13.9B Authorization)
189 Issues($13.9B Authorization)
2018 CASBO Annual Conference & California School Business Expo
All of These Financing Tools Can be Designed:
With special prepayment provisions that allow early prepayment from one or more sources in exchange for a somewhat higher interest rate;
As taxable or tax-exempt bonds or notes;
Potentially as federal subsidy or tax credit bonds such as BABs, QZABs, QSCBs, etc;
As adjustable or fixed rate bonds or notes;
As bond insured or credit enhanced bonds or notes;
Various maturity dates according to the repayment plan;
As either CIBs or notes or Capital Appreciation Bonds (CABs) or notes;
Current interest bonds pay the investor interest every six months;
CABS provide a period of Non-Payment where interest accrues and compounds until maturity like a U.S. savings bond;
18
Common Alternatives for Structuring GO Bonds, COPs, LRBs, BANs, and CFDs
18
2018 CASBO Annual Conference & California School Business Expo
Short-term loan issued by school districts and can be repaid from any legally available revenues State School Facility Program funds, developer fees, District’s General Fund, etc.
Customizable repayment structure Deferred payments, interest only payments, long-term loan payable in short-term, etc.
Can mitigate construction cost escalation Payment of borrowing costs Minimize costs
Delay bridge financing until amount and proceeds are needed
The table below provides a comparison of a sample bridge financing issuance versus project inflation costs
19
Using A Bridge Financing to Fund Capital Projects
19
(1) Interest rate assumptions are based on current market conditions and similar credits for an ‘A+’ rated, insured COP. (2) Average annual increase in California Consumer Price Index for all urban consumers from 1955 to 2017 was 3.86%.
Sample Bridge Issuance vs. Project Inflation Cost Analysis
Year of Takeout
Financed Amount
Financed Amount plus Interest(1)
Estimated Total Principal Amount of Bonds with
3.86% Annual Inflation(2) Estimated Benefit
of Bridge Financing 2018 $10,000,000 - $10,000,000 - 2020 - $10,917,123 $10,786,900 ($130,223) 2021 - $11,255,873 $11,203,274 ($52,599) 2022 - $11,516,123 $11,635,720 $119,598 2023 - $11,693,873 $12,084,859 $390,986 2024 - $11,784,873 $12,551,335 $766,462
2018 CASBO Annual Conference & California School Business Expo
Notes and renewals thereof must be payable not more than five years from the date of the original issuance of the note
Total amount of notes or renewals thereof issued and outstanding may not exceed the total amount of unsold (authorized) bonds
The proceeds from the sale of the notes must be used only for authorized purposes of the bonds or to repay outstanding notes previously issued
Rating agencies have recently changed their criteria rating BANs which may lead to less issuance
20
Bond Anticipation Notes (“BANs”)
20
2018 CASBO Annual Conference & California School Business Expo 21
How Debt Is Sold
21
Negotiated Sale Competitive Sale Pre-Marketing Allows a week or more to answer
investor questions Typically none -
“Call me if you buy it”
Couponing Underwriter can present different options to weigh cost/benefit of TIC
vs. optionality
Goal is to win bid with the lower TIC; no ability to address optionality
Sale Timing Sale date can be moved ahead or pushed back depending on the
market
Sale date is determined at least a week ahead of time and is hard to
change without losing market interest
Risk/Price Underwriter faces less risk and so can often charge lower fees
Underwriter faces more market risk
2018 CASBO Annual Conference & California School Business Expo 22
Comparison of Sale Methods
22
Issuer(Issue)Par Amt
Pricing DateYear Par Coupon Yield AAA MMD Spread Par Coupon Yield AAA MMD Spread2018 0.920 -92 700,000 5.000 0.790 0.850 -62019 1.060 -106 0.940 -942020 1.150 -115 1.030 -1032021 1.250 -125 1.120 -1122022 1.350 -135 70,000 2.000 1.120 1.210 -92023 1.480 -148 120,000 5.000 1.250 1.340 -92024 1.600 -160 170,000 5.000 1.430 1.500 -72025 1.740 -174 225,000 5.000 1.610 1.660 -52026 3,445,000 5.000 1.840 1.890 -5 1,550,000 5.000 1.800 1.800 +0 -52027 6,385,000 5.000 1.980 2.040 -6 1,935,000 5.000 1.950 1.950 +0 -62028 7,750,000 5.000 2.110 2.140 -3 2,180,000 5.000 2.100 2.050 +5 -82029 2.240 -224 565,000 5.000 2.200 2.150 +52030 2.330 -233 650,000 5.000 2.290 2.240 +52031 2.400 -240 740,000 3.000 2.720 2.310 +412032 2.470 -247 830,000 3.000 2.890 2.380 +512033 2.530 -253 910,000 3.000 3.000 2.440 +562034 2.590 -259 1,000,000 3.000 3.050 2.490 +562035 2.630 -263 1,120,000 3.000 3.080 2.520 +562036 2.660 -266 1,230,000 3.000 3.110 2.550 +562037 2.680 -268 1,340,000 3.000 3.130 2.570 +562038 2.700 -270 1,470,000 3.000 3.150 2.600 +552039 2.720 -272 11,325,000 3.000 3.170 2.620 +55
Spread Difference
(Negotiated Lower Yields)
Negotiated Competitive
July 13, 2017 August 1, 2017
Newport-Mesa Unified School DistrictGeneral Obligation Refunding Bonds, Series 2017
Newport-Mesa Unified School DistrictGeneral Obligation Bonds, Election of 2005, Series 2017
$17,580,000 $28,130,000
Issuer received better pricing on negotiated financing for two comparable sales within two weeks AAA/AA+ rated Newport-Mesa Unified School District general obligation bonds $18mm negotiated refunding and $32mm competitive new money Spreads 5 to 8 bps less on negotiated issue vs. competitive issue Underwriting fees for competitive issue more than $10/bond; less than $5/bond for negotiated sale
2018 CASBO Annual Conference & California School Business Expo 23
California School Districts Overwhelmingly Use Negotiated Sales for GO Bonds
23
823,82%
18518%
2015 to Present CA K-12 General Obligation Bond IssuanceNegotiated and Competitive Market Share by No. of Issuances
Negotiated
Competitive
Source: Thomson Reuters
10999%
11%
2015 to Present CA K-12 General Obligation CAB IssuanceNegotiated and Competitive Market Share by No. of Issuances
Negotiated
Competitive
Source: Thomson Reuters
2015 to Present CA K-12 General Obligation Bond Issuances Underwriter's Discounts ($ per 1,000 Bond)
Negotiated Competitive DifferenceAverage: $5.44 $9.07 ($3.63)Weighted Average: $3.61 $5.27 ($1.66)
Source: Thomson Reuters
2018 CASBO Annual Conference & California School Business Expo
SECTION II: 2017 TAX CUTS AND JOBS ACT BILL SUMMARY AND OTHER 2017 CALIFORNIA LEGISLATION
2018 CASBO Annual Conference & California School Business Expo
Both House and Senate passed different versions of the bill in early December, budget conferences made revisions in mid-December, and President Trump signed on December 22, 2017. These changes take effect January 1, 2018:
Provision Description Impact on Municipal Issuers and Market
Individual Income Tax Rates Modifies seven brackets
May reduce attractiveness of tax-exempt bonds (10% - 37%)
State and Local Tax Deduction (SALT) $10,000 cap for combination of state property tax, income and sales tax
deduction
May induce investors in high-tax states to seek more tax-exempt bonds
Corporate Tax Rate Reduce to 21% May lower attractiveness of tax-exempt bonds for corporations and insurance companies
Tax Credit Bonds Eliminates ability to issue QZABs,
CREBs, QSCBs, BABs, and other tax credit bonds
No changes to subsidy payments for bonds issued before December 31, 2017; may reduce incentive to fund energy
efficiency projects
Advance Refundings Eliminates tax-exempt advance refundings
Limits issuers to current refundings; may reduce feasibility of refundings and encourage use of taxable bonds or forward
delivery structures
Fiscal Impact Estimated to generate $1.5 trillion deficit over the next decade
Deficit of more than $150 billion in any year may trigger additional sequestration of Federal Subsidies for BABs and similar products; may increase Treasury borrowing needs
which may increase bond interest rates
25
Tax Reform’s Potential Impact on Municipal Market
25
2018 CASBO Annual Conference & California School Business Expo
2018 bond issuance volume is expected to be 20% - 25% lower in the aftermath of significant Q4 2017 issuance coupled with elimination of advance refundings and tax credit bonds
The bill does not cap or repeal municipal bond exemption, remaining one of the few tax-advantaged vehicles available for taxpayers
The reduction of corporate tax rate to 21% will likely reduce the appetite of bank portfolios and property/casualty insurance companies for tax-exempt municipals
34%
50%41%
38%27%
25%
8%7%
15%
16% 12% 14%4% 4% 5%
0%
20%
40%
60%
80%
100%
1997 2007 2017 Q3 2018+
Individuals* Mutual Funds (1) Banking Institutions (2) Insurance Companies (3) Other (4)
$1.3 Trillion $3.5 Trillion $3.8 Trillion
Source: SIFMA and the Federal Reserve System (1) Includes mutual funds, money market funds, closed-end funds and exchange traded funds. (2) Includes U.S. chartered depository institutions, foreign banking offices in the U.S., banks in U.S. affiliated areas, credit unions, and broker dealers. (3) Includes property-casualty and life insurance companies. (4) Includes nonfinancial corporate business, nonfinancial non-corporate business, state and local governments and retirement funds, government-sponsored enterprises and foreign holders. * Household holdings is revised up by about $840 billion, on average, from 2004 forward.
Changing Landscape of Municipal Bond Investors
? 26
Tax Reform’s Potential Impact on Municipal Market
26
2018 CASBO Annual Conference & California School Business Expo
The limitation to $10,000 of the State and Local Government Tax Deduction and/or property tax deduction cap and the mortgage interest deduction cap ($750,000 max mortgage) could put negative pressure on California local taxpayers and impact school districts’ ability to pass local bond measures and parcel taxes
The elimination of the tax credit bond programs increase the cost of borrowing for California school district facilities (QZABs and CREBs have been a tool for solar & energy efficiency projects in recent years)
The elimination of tax exempt advance refundings reduces the ability to restructure or refinance for savings on securities previously issued May create new call provision structure for selling new bond issues (i.e. going from 10 year call provisions to shorter call protection, 7, or
5 years)
Source: Thomson Reuters.
Share of California K-12 Bond Issues by Type
27
Tax Reform’s Potential Impact on CA K-12 School Districts
27
41% 63%
37% 49% 40%
62%
27%
18%
18%
43% 38%
18%
32% 18%
46%
7% 22% 20%
0%
20%
40%
60%
80%
100%
2012 2013 2014 2015 2016 2017
New Money Advance Refundings Current Refundings
2018 CASBO Annual Conference & California School Business Expo
Assembly Bill 1194 (Dababneh)
Tax Rate Statements must now include: The best estimate of the average annual tax rate that would be required to be levied to fund the bond issue over the entire
duration of the bond debt service The final fiscal year in which the tax is anticipated to be collected The best estimate of the highest tax rate that would be required to be levied to fund the bond issue, and an estimate of the
year in which that rate will apply The best estimate of the total debt service, including the principal and interest, that would be required to be repaid if all the
bonds are issued and sold
Assembly Bill 195 (Obernolte)
75-Word Ballot Statement: Must include the amount of money to be raised annually and the rate and duration of the tax to be levied for the bonds Must be a true and impartial synopsis of the purpose of the proposed measure Must be in language that is neither argumentative nor likely to create prejudice for or against the measure
28
New Legislation Impacting New CA K-12 Bond Elections
28
2018 CASBO Annual Conference & California School Business Expo
Unintended Consequences of AB 195
Confusion Possible emergency legislation (AB 2848 (Obernolte)) Requirement consumes 16-20 words of the 75 available ballot question words
New Legislation Impacting New CA K-12 Bond Elections
29
Sample School District Ballot Statement “To ______________________, shall this measure of the ______ School District issuing $______ in bonds at legal rates be adopted, levy on average ______ cents per $100 assessed value, $______ annually for ______ [e.g. modernization of school facilities], while bonds are outstanding, with annual audits, etc.?”
2018 CASBO Annual Conference & California School Business Expo
CONCLUSION: QUESTIONS AND DISCUSSION
2018 CASBO Annual Conference & California School Business Expo
John R. Baracy Managing Director Stifel, Nicolaus & Company, Incorporated Los Angeles, California tel: 213-443-5025 e-mail: [email protected] John R. Baracy is a Managing Director in the Los Angeles public finance office of Stifel. Mr. Baracy began his public finance career in 1994 and has experience in all facets of the municipal finance business. He specializes in the management, structuring and sale of California K-12 Education new money and refunding general obligation bonds, certificates of participation, tax credit bonds, Mello-Roos bonds and tax and revenue anticipation notes. In addition to managing the introduction of these financings into the market, Mr. Baracy performs debt capacity, general obligation bond tax rate and credit analyses, California K-12 education finance legislation analyses, and evaluates the investment of bond proceeds. Throughout his career, he has completed more than 500 financings totaling over $9.5 billion.
Mr. Baracy graduated with a Bachelor of Science degree from Arizona State University with an emphasis in Finance. Mr. Baracy maintains his Series 7, 50 and 63 licenses with FINRA and frequently presents for California K-12 school district advocacy groups such as C.A.S.H., CASBO, and CSBA. Mr. Baracy is currently a board member of the Coalition of Adequate School Housing (CASH).
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Bio
2018 CASBO Annual Conference & California School Business Expo
Adam Bauer President &CEO Fieldman, Rolapp & Associates Irvine, California tel: 909-660-7203 e-mail: [email protected] Mr. Adam S. Bauer, CIPFA, President and Chief Executive Officer, joined the firm in September 2004. Mr. Bauer has been involved with a variety of public agencies throughout the State of California, assisting them with their debt transactions and policy development. Mr. Bauer has two primary areas of expertise: public financings for school districts and land secured negotiations and financings. Mr. Bauer has specific expertise in public financings for school districts where he has developed capital facilities funding plans that incorporate General Obligation Bonds, Certificates of Participation, Community Facilities District Special Tax Bonds, and State funding. In addition to assisting School Districts with their debt transactions, Mr. Bauer has also negotiated mitigation agreements on behalf of school districts throughout the State of California. Mr. Bauer assists school districts with identifying the true cost of new developments and then negotiates on their behalf to structure mitigation agreements to meet their needs. Mr. Bauer also has specific emphasis in land secured financings. Mr. Bauer has been involved in all aspects of the formation of Community Facilities Districts and the issuance of debt, including those with multiple improvement areas, series of bonds and property owners. Furthermore, prior to joining the firm, Mr. Bauer acted as a Financial Advisor, Special Tax Consultant and Community Facilities District Administrator. While working as a Special Tax Consultant and Community Facilities District Administrator, Mr. Bauer served as project manager for more than 60 Community Facilities Districts for a variety of public agencies. Mr. Bauer is a regular speaker at California's Coalition for Adequate School Housing (CASH) and has been a speaker for California Debt Investment Advisory Commission (CDIAC). Mr. Bauer is co-chair of the Fiscal Management Strand of the Planning Committee for CASH, is a member of California School Board Association (CSBA), California Association of School Business Officials (CASBO) and Committee on Assessments Special Taxes and other Financing Facilities (CASTOFF). In addition, Mr. Bauer is a Registered Investment Advisor Representative (Series 65) and he holds the CIPFA designation as a Certified Independent Public Finance Advisor from the National Association of Independent Public Finance Advisors
Bio
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2018 CASBO Annual Conference & California School Business Expo
David Casnocha Managing Shareholder Stradling Yocca Carlson & Rauth San Francisco, California tel: 415-283-2241 e-mail: [email protected]
Mr. Casnocha is the managing shareholder of Stradling’s San Francisco office and a former member of the firm’s board of directors. David has practiced in public finance for more than 40 years and serves as bond and disclosure counsel to public agencies and underwriter’s counsel to both national and regional investment banking firms. He also has served as bond counsel to more than 600 school and community college districts in California. He has experience in primary and secondary school district financings, general obligation bonds, bond anticipation notes, certificates of participation, lease financings and tax and revenue anticipation notes. In addition, David has represented the California Education Facilities Authority on numerous private university financings and represents a range of nonprofit corporations that incur tax-exempt debt to finance their charitable purposes. As bond counsel to the California League of Community Colleges, he has helped design tax-exempt pool financings for tax and revenue anticipation notes, lease revenue bonds solar energy projects, and student housing. David also served as bond counsel on Other Post-Employment Benefit bond issues. He is experienced in a range of revenue bond financings for water, sewer and a variety of other enterprise systems.
Bio
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2018 CASBO Annual Conference & California School Business Expo
APPENDIX: CALIFORNIA K-12 SCHOOL FINANCE RESOURCE MATERIALS
2018 CASBO Annual Conference & California School Business Expo
Comparison of GO Bonds, COPs and Mello-Roos Bonds
CHARACTERISTICS GO BONDS COPS MELLO-ROOS Vote Required? Yes. No. Yes. Minimum Affirmative Votes Two-thirds of votes cast, or 55% of votes cast pursuant
to Proposition 39. N/A Two-thirds of votes cast.
Qualified Electors Registered voters residing in entire school district (or only portion of school district if establish school facilities improvement district pursuant to Ed. Code § 15300).
N/A
Registered voters in community facilities district (CFD), if 12 or more voters reside in CFD. If fewer than 12 registered voters reside in CFD, vote is of landowners, one vote per acre.
Boundary of Area to be Taxed Entire school district (or only portion of school district if establish school facilities improvement district pursuant to Ed. Code § 15300).
N/A
Territory of CFD, as defined by school board. CFD could be entire school district or a portion of district, including non-contiguous areas.
Basis of Tax Assessed value of property. N/A
Any reasonable method, except assessed value.
Method of Tax Collection Annual property tax bill. N/A Annual property tax bill. Can Seniors be Exempt from Tax? No. N/A Yes.
Typical Use of Technique Finance school facilities. Finance school facilities.
Finance school facilities.
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2018 CASBO Annual Conference & California School Business Expo
CHARACTERISTICS GO BONDS COPS MELLO-ROOS Facilities Eligible for Financing With 2/3 vote, purchase or improvement of real
property (purchase of land or construction of buildings). With 55% vote pursuant to Proposition 39, construction, reconstruction, rehabilitation, or replacement of school facilities, including furnishings and equipment, and the acquisition or lease of real property.
Any lawful purpose. Any facility with useful life of five years or more (including school furnishings and buses).
Can School Furnishings and Equipment be Financed?
No with 2/3 vote. Yes with 55% vote pursuant to Proposition 39.
Yes, without limitation. Yes, provided the equipment has a useful life of five years or longer.
Can Tax Revenues be Used for Purposes Other than Debt Service on Bonds?
No. No. Yes. Bond debt service and pay-as-you-go expenses.
Are Operating Expenses Eligible for Financing with Tax?
No. No. Yes. Maintenance of school sites and structures. Also, annual cost of administering the financing and the CFD.
Separate Authority Required to Issue Bonds?
No. School Board and County Office approval.
No.
Maximum Annual Tax Request Not limited with 2/3 vote. With 55% vote pursuant to Proposition 39, annual tax is limited to $30 per $100,000 of assessed valuation in elementary or high school district and $60 per $100,000 of assessed valuation in unified school district
N/A Voters must approve a maximum annual tax amount per taxable unit and a method for levying and apportioning the tax.
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Comparison of GO Bonds, COPs and Mello-Roos Bonds
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2018 CASBO Annual Conference & California School Business Expo
CHARACTERISTICS GO BONDS COPS MELLO-ROOS Type of Bond Sale Negotiated or competitive sale. Negotiated or competitive sale. Negotiated or competitive sale.
Debt Limit Amount of bonds outstanding at any time cannot exceed 2.5% of total assessed value in a unified school district or 1.25% of assessed value in a non-unified school district.
None. Value of property in the CFD subject to special tax must be at least three times the amount of outstanding bonds. Under certain conditions the school board can approve an amount of bonds exceeding this limit.
Bond Security School district's unrestricted ability to raise property taxes to meet debt service requirements. Property tax is a lien on property. County has authority to foreclose on lien for payment of delinquent taxes.
All legally available funds, including the General Fund, usually earmarked to State revenue, redevelopment pass-through, or other sources.
Mello-Roos special tax is a lien on property. School district has authority to initiate accelerated foreclosure on property for payment of delinquent taxes, so long as bonds have been issued by the CFD.
Maximum Term of Tax Levy As long as necessary to repay bonds authorized by voters.
N/A As long as necessary to repay bonds or to pay directly for facilities authorized by voters. Final year of tax must be specified.
Maximum Term of Bonds Up to 25 years under Education Code, or up to 40 years under Government Code.
Up to useful life of facility being financed.
40 Years.
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Comparison of GO Bonds, COPs and Mello-Roos Bonds
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2018 CASBO Annual Conference & California School Business Expo
Bond Type Feature Proposition 46 Proposition 39 Voter Approval Requirement 66.7% 55%
Election Date Restrictions All election dates, including special elections on any Tuesday
Regularly scheduled elections, primarily in even numbered years
Use of Bond Proceeds Acquisition and improvement of real property
Acquisition and improvement of real property; including furniture, equipment and leases
Limits on Amount of Annual Tax Rate None $30 per $100,000 (Elem/High) $60 per $100,000 (Unified)
Limits on Amount of Bonds Outstanding 1.25% of AV (Elem/High) 2.50% of AV (Unified)
1.25% of AV (Elem/High) 2.50% of AV (Unified)
Citizens Oversight Committee Optional Mandatory
Performance and Financial Audits Optional, except for annual report regarding expenditures of funds and status of projects
Mandatory
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Proposition 46 vs. Proposition 39 GO Bond Authorization
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2018 CASBO Annual Conference & California School Business Expo
Resolution of Issuance Provides Parameters of Sale (amount, max interest rate, term, cost of issuance) Authorized Officers
Bond Purchase Contract or Notice of Sale
Competitive vs. Negotiated Method Sets forth terms and conditions of debt sale to Underwriter including interest rates and
fees Security Covenants (School District duties and obligations) Denominations & Interest and Principal Payment Dates Project Fund Requisition Process for releasing funds Investment of Funds Remedies to investors defaults and non-performance Prepayment or Redemption terms
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Basic Legal Documents
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2018 CASBO Annual Conference & California School Business Expo
Official Statement Preliminary: Marketing/ Disclosure to Potential Investors Final: Delivered to Purchasers Marketing/ Sales/ Disclosure document Issuer’s Document
Continuing Disclosure Agreement Required by Securities and Exchange Commission’s Rule 15c2-12 Issuer’s Duty to file Annual Reports and to report Material Events
SB 1029 Debt Policy
Create and manage submission requirements annually for all debt issuances after January 1, 2017
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School District Disclosure Documents and Duties
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2018 CASBO Annual Conference & California School Business Expo
Step 1: School District decides to finance a project
Step 2: Finance Team is selected and assembled
Step 3: Revenue stream securing the debt is identified/ analyzed
Step 4: Staff and Finance team determine debt
structure
Step 5: Election/ formation proceedings docs are prepared
and approved* Step 6: Voter Approval*
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Steps to Debt Issuance
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2018 CASBO Annual Conference & California School Business Expo
Step 7: Legal and disclosure documents are drafted
Step 8: Credit ratings/ bond insurance secured*
Step 9: Board approves the legal and disclosure documents and
authorizes debt issuance
Step 10: Underwriter begins marketing the debt to investors
(Negotiated Sale)
Step 11: Underwriter commits to buy debt from School District/Debt
Awarded to Underwriter (Competitive Sale)
Step 12: Transaction is closed and the project is funded
* If Applicable
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Steps to Debt Issuance
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2018 CASBO Annual Conference & California School Business Expo
Proposition 46 Requires simple majority approval of school board members
Proposition 39 Requires 2/3rds approval of school board members
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Board Approval
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2018 CASBO Annual Conference & California School Business Expo
The recession had a significant effect on the assessed value of most California school districts During the recession assessed values grew much slower or declined, but have returned to stronger growth in recent years
As shown below, 14 of the 15 largest counties in California experienced an increase in assessed valuation from 2014-15 to 2015-16
County 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Alameda 4.77% -2.51% -1.58% 0.05% 2.14% 5.02% 5.96% 7.80% Contra Costa 0.31% -6.97% -3.05% -0.37% 0.86% 3.73% 9.03% 7.53% Fresno 1.49% -2.95% -0.76% 0.47% 0.00% 5.62% 3.75% 4.15% Kern 5.89% -6.20% 4.63% 2.43% 7.50% 3.31% 5.98% -8.78% Los Angeles 6.95% -0.53% -1.81% 1.41% 2.24% 4.61% 5.47% 6.08% Orange 3.89% -1.38% -0.54% 0.98% 1.92% 3.43% 6.36% 5.89% Riverside 1.44% -10.49% -4.40% -1.25% -0.02% 4.21% 8.31% 5.85% Sacramento 1.81% -7.15% -1.84% -3.65% -2.66% 4.10% 6.40% 4.64% San Bernardino 5.20% -6.01% -4.32% -0.47% 0.80% 6.20% 5.93% 5.07% San Diego 4.42% -2.40% -1.42% 0.40% -0.14% 6.02% 5.78% 5.60% San Francisco 8.63% 7.08% 4.32% 0.49% 4.20% 4.60% 5.46% 6.50% San Joaquin -0.81% -10.22% -3.81% -3.70% -0.33% 5.79% 8.93% 2.86% San Mateo 7.99% 0.68% -1.44% 0.96% 3.33% 6.01% 5.61% 7.64% Santa Clara 6.98% 0.14% -2.40% 0.90% 3.25% 8.35% 6.80% 8.67% Ventura 3.17% -2.42% -0.26% 0.00% 0.60% 3.20% 5.70% 4.10%
(1) Source: County Assessor Websites and Urbics
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Assessed Value Trends
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2018 CASBO Annual Conference & California School Business Expo
Higher Credit Quality
Lower Credit Quality
Security Type General Obligation Bonds Leases & Certificates of Participation Land-Secured Bonds
Revenue Pledge Secured by an unlimited ad valorem property tax
Secured by annual appropriations from general fund or specific
revenues.
Annual special tax or assessment levied on property. Bonds are secured
by the value of taxable property in defined area and the ability to
foreclose on property for unpaid taxes.
Vote Required? Yes, either with a 2/3 vote or a 55% vote.
No. Governing Board approval is required without vote of registered
voters or property owners.
Yes. A 2/3 vote of registered voters or property owners for Community
Facilities Districts (CFDs) and simple majority vote for assessment districts
(ADs).
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Credit Quality of Facility Funding
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2018 CASBO Annual Conference & California School Business Expo
Rating Agency An independent service that provides a credit quality evaluation of bonds Recently changed rating scale to correspond with corporate ratings
Duties: 1.Reviews four broad factors to determine ratings.
The financial strength of the Issuer The economic health of the community Managerial and governance practices Debt position – direct and overlapping debt, overall debt to wealth position
2.Interviews Issuer, others 3.Assigns a letter of rating to bonds
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The Rating Process
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2018 CASBO Annual Conference & California School Business Expo
Rating Description Moody's Standard & Poor's Fitch
Investment Grade
Highest credit quality; issuer has a strong ability to meet its obligations. Aaa AAA AAA
Very high credit quantity low risk of default. Aa1 Aa2 Aa3
AA+ AA AA-
AA
High credit quality, but more vulnerable to changes in the business economy.
A1 A2 A3
A+ A A-
A
Adequate credit quality for now, but more likely to be impaired if conditions worsen.
Baa1 Baa2 Baa3
BBB+ BBB BBB-
BBB
Non-investment Grade
Below investment grade, but a good chance the issuer can meet commitments.
Ba1 Ba2 Ba3
BB+ BB BB-
BBB
Significant credit risk, but issuer is presently able to meet obligations.
B1 B2 B3
B+ B B-
BBB
High default risk. Caa1 Caa2 Caa3
CCC+ CCC CCC-
CCC CC C
Issuer failed to meet schedules interest or principal payments C D
DDD DD D
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Bond Credit Rating Spectrum
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2018 CASBO Annual Conference & California School Business Expo
School Facilities Improvement District (SFIDs) General obligation bond authorization for limited area within a school district
Bond election required among voters residing in the proposed SFID
General obligation bond authorization can be conducted using Proposition 46 or Proposition 39
Why form an SFID? School attendance area
Exclusion of existing CFDs
Feeder districts
Geographical / political jurisdictions
Areas of separate community identity
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School Facilities Improvement District
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