Bonds 101May 5, 2011 WASBO Conference

What is Debt?

Defined

Debt means an obligation created by the loan of money that is secured by the school district’s taxes (or money in the GF, CPF or TVF) and full faith, credit and resources.

Security Instruments

A bond is a security instrument issued by the school district that evidences the obligation to repay the loan of money and includes:

Stated dollar amount to be repaid (principal)

Time principal is to be repaid (maturity)

Stated interest rate (coupon)

Other security instruments evidencing the repayment of a loan of money may include, among others, notes, capital leases or conditional sales contracts.

2

What are the Limitations on Indebtedness?

Municipal Purposes Washington Constitution provides that municipal indebtedness

(including school districts) may be incurred for municipal purposes only.

Debt Limit Washington Constitution (and other State laws) limit the amount of

debt that a school district may incur.

Voted Debt Limit. A school district may incur a total indebtedness, including voter-approved debt, not to exceed 5% of the assessed value of all taxable property within the district.

Non-voted Debt Limit. A school district may incur non-voted indebtedness not to exceed 3/8ths of 1% (0.00375) of the assessed value of all taxable property within the district.

3

What is Tax-Exempt Debt, and Why does it

Matter?

The interest on properly structured debt is exempt from federal income taxation.

Examples of properly structured debt: bond, note, lease purchase agreement, or conditional sales contract

Investors will accept a lower interest rate on tax-exempt debt than on taxable debt, which they would have to pay federal income tax on the interest.

4

Types of Debt - Overview

Unlimited Tax General Obligation (UTGO) Bonds.

Limited General Obligation (LGO) Bonds.

Short-Term Obligations (i.e., tax anticipation notes, bond anticipation notes and revenue anticipation notes).

Miscellaneous (i.e., capital lease, conditional sales contracts and lines of credit).

State Treasurer Program (State LOCAL Program).

5

Types of Debt - UTGO Bonds

Financing Mechanism

Use of Proceeds Term Length Considerations

UTGO Bonds Only capital purposes identified in RCW 28A.530.010(1)-(7)(e.g., construct new and modernize existing school facilities, and purchase land). Alteration of use of bond proceeds (and/or State match) is permitted after complying with statutory public hearing requirements. Replacement of equipment is prohibited.

Term must not exceed useful life of financed project - typically 20-25 years.

Requires 60% voter approval at specified election date (February, April, August and November), plus 40% voter turnout of last state general election. Repaid from annual excess property taxes unlimited as to rate or amount. Further secured by the district’s full faith, credit and resources. Total debt (including UTGO Bonds) must not exceed 5% of assessed value of taxable property within district. Federal tax law compliance.

6

Types of Debt - LGO Bonds

Financing Mechanism

Use of Proceeds Term Length Considerations

LGO Bonds Only purposes identified in RCW 28A.530.080 (e.g., modernize existing school facilities and purchase land). Replacement of equipment is OK. New construction prohibited. However, constructing new structural additions to existing school facilities is OK.

Term must not exceed useful life of financed project - typically 5-15 years.

Notice and public hearing required for bonds in the principal amount in excess of $250,000. No voter approval required. Repaid from existing money in GF, CPF or TVF. Excess taxes not available. Further secured by the district’s full faith, credit and resources. Must not exceed 3/8ths of 1% (.00375) of assessed value of taxable property within district. Federal tax law compliance.

7

Types of Debt – Short-Term Obligations

Financing Mechanism

Use of Proceeds Term Length Considerations

Tax Anticipation Notes (TAN)

Bond Anticipation Notes (BAN)

Both - Any lawful purpose. Replacement of equipment is OK for both.

TAN must be repaid within 6 months after the end of the fiscal year in which issued (If tax-exempt, IRS Tax Code limits term to 13 months). BAN usually will not exceed 5 years.

Both do not require voter approval (except for BAN issued in anticipation of UTGO Bonds). TAN repaid from taxes (and State apportionment). BAN repaid from future voted or non-voted bond proceeds. Further secured by the district’s full faith, credit and resources. TAN or LGO BAN must not exceed 3/8ths of 1% (.00375) of assessed value of taxable property within district. UTGO BAN must not exceed 5% of assessed value of taxable property within district. Federal tax law compliance.

8

Types of Debt – Short-Term Obligations

Financing Mechanism

Use of Proceeds Term Length Considerations

Revenue Anticipation Notes (RAN)

Any lawful purpose. Replacement of equipment is OK.

RAN usually will not exceed 5 years.

Voter approval not required. Typically repaid from non-local tax revenue (e.g., State Financing Assistance, Federal Impact Aid or grants). Not secured by the district’s full faith, credit and resources or money in the GF. RAN payable from revenues deposited into a “special fund” is not considered debt for debt limit purposes. Federal tax law compliance.

9

Types of Debt – Miscellaneous

Financing Mechanism

Use of Proceeds Term Length Considerations

Capital Lease Conditional Sales Contracts (a/k/a Financing Contracts)

Leases only to acquire real property, building space, portables, security systems, computers and other equipment. Conditional Sales Contracts only to acquire real or personal property Replacement of equipment is OK for both.

Leases may not exceed 10 years (automatic renewal is OK). Conditional Sales Contract must not exceed useful life of financed project.

Both do not require voter approval. Leases – Analyze difference between “true lease” and “capital lease.” Both are repaid from the fund (GF, CPF or TVF) that incurs the obligation. Further secured by the district’s full faith, credit and resources. Both must not exceed 3/8ths of 1% (.00375) of assessed value of taxable property within district. Federal tax law compliance.

10

Types of Debt – Miscellaneous

Financing Mechanism

Use of Proceeds Term Length Considerations

Lines of Credit (draw down instrument) - evidenced by LGO Bonds or short-term obligations.

Same purpose as underlying bond or short-term obligation. Replacement of equipment is OK.

Same term length as underlying bond or short-term obligation.

Revolving or non-revolving? Repaid from same sources available to underlying bond or short-term obligation. Same debt limit as underlying bond or short-term obligation. Federal tax law compliance.

11

Types of Debt – State Treasurer Program

Financing Mechanism

Use of Proceeds Term Length Considerations

State of Washington LOCAL Program - (State Treasurer pools into larger offerings of securities - COPs).

Acquisition of real or personal property (e.g., school buses, land, HVAC systems, computers and portable classrooms) Replacement of equipment is OK (except if financing repaid by voter-approved taxes as part of a UTGO Bond – be careful).

Must not exceed useful life of financed project.

Execution of a conditional sales contract, a.k.a Local Agency Financing Contract, between the State Treasurer and district.

Repaid from the fund (GF, CPF or TVF) that incurs the obligation. Voter-approved taxes as part of a UTGO Bond may be available. Further secured by the district’s full faith, credit and resources.

Voter approval not required (except if financing repaid by voter-approved taxes as part of a UTGO Bond).

Must not exceed 3/8ths of 1% of assessed value of taxable property within district.

12

Things to Remember After the Bond Sale

Record Retention School districts are required to maintain a copy of the bond closing

transcript, as well as records relating to the investment and expenditure of bond proceeds. Records must be retained for the longer of the period required under the State

Archivist’s record retention schedule, or the period required by the IRS (i.e., 3 years after the final retirement of the bonds).

Note that records relating to the refunded bonds must be retained for 3 years beyond the final maturity of any refunding bonds.

Securities Law

School districts that sell bonds through the negotiated or competitive bid process usually will enter into a continuing disclosure undertaking to allow the underwriter to comply with Securities and Exchange Commission Rule 15c2-12.

Rule 15c2-12 requires school districts to file certain annual financial

information with and report certain events to the MSRB’s Electronic Municipal Market Access System (EMMA) - www.emma.msrb.org.

13

Things to Remember After the Bond Sale

Federal Tax Law

School district retains responsibilities to comply with federal tax law

requirements after the bonds have been issued:

Expenditure of bond proceeds.

Compliance with arbitrage and rebate requirements regarding

investment earnings on unspent bond proceeds.

Limits on Private Business Use

Procedures for Record-keeping

IRS encourages adoption of post-bond issuance compliance policy to

ensure that municipal issuers (including school districts) comply with all

of the foregoing federal tax requirements.

14

Resources

Best practices and comparisons:

Government Finance Officers

Association, www.gfoa.org offers ‘Best

Practices’ and a number of books on

debt issuance as well as other topics.

EMMA (Electronic Municipal Market

Access) is maintained by the MSRB

and posts official statements for many

municipal bonds.

WA Commerce Dept’s Bond Users

Clearinghouse database of WA bonds,

www.commerce.wa.gov

Finance professionals:

Bond counsel

Financial advisor

Underwriter

Classes offered from time to

time by:

Washington Finance Officers

Association: www.wfoa.org

WASBO

Manuals and model policies:

OSPI’s School Facilities Manual at

k12.wa.us

WSSDA’s School Bond Manual at

wssda.org

WMTA offers a model debt policy and

peer-review certification

www.wmta-online.com

Presenters

Cynthia Weed is a partner with the law firm of K&L Gates. Since 1978, she

has acted as bond counsel to public universities, colleges, school districts,

cities, towns, counties and special districts (ports, water, sewer, library and fire

protection) in Washington, Alaska, Oregon, Montana, California and Idaho on

municipal financings which include general obligation bonds, revenue bonds

and 63-20 financings. She received her J.D. from the University of Missouri –

Kansas City and her B.B.A. from the University of Wisconsin.

Jim McNeill is a partner with the law firm of Foster Pepper PLLC and

concentrates his practice on public finance, with a special emphasis on serving

as bond counsel to Washington school districts. Jim has substantial experience

advising Washington school districts on financing capital projects, including

bonds and capital levies. He received his J.D. from Gonzaga University School

of Law (1985) and his B.A. from Washington State University (1982).

16