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Levies and Bonds: The Impact of the Current Economic Condition
August 13, 2009
Jon GoresSenior Vice President(206) [email protected]
Washington State Washington State UniversityUniversity
2
Outline Election Research
School Capital Financing 101
Bond Issue Planning—Projected Tax Rates
3
Election Research
Election Date Research
Multiple Ballot Measures
Tax Rate vs. Election Success
Economy vs. Election Success
4
Election Timing
When should we run our Bonds?
5
Voting PatternsAll Bond Issues Passed by Purpose
48%
25%
38%
43%
14%
100%
17%
47%
36%
69%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Fire200
General154
Hospital 43
Jail 18
Library 44
Park 106
Police 13
School 999
Street 22
W&S 12
Per
cent
Pas
sed
Years 1992 through May 2009, inclusive.
6
Voting PatternsBond Issues Passed by Year
Schools Only
39%
23%
40%45%44%
38%
45%
37%
46%45%
34%
53%
43%
38%41%
24%28%
38%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
199286
199373
199499
199562
199678
199778
199855
199959
200040
200139
200243
200353
200434
200534
200660
200750
200835
200928
Per
cent
Pas
sed
Years 1992 through May 2009, inclusive.
7
Voting PatternsBond Issues Passed by Month
Schools Only
27%
0%
37%
44%
52% 52%
27%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
February278
March159
April48
May275
August1
September109
November130
Per
cent
Pas
sed
Years 1992 through May 2009, inclusive.
8
Multiple Propositions on Same Ballot
58.62%
Average Approval RateMultiple Issues
52.34%
Average Approval Rate Single Issue
No. of Issues Passed Failed
20 7 13
Example:
PROPOSITION 2
BONDS FOR NEW STADIUM AND MULTIPURPOSE FIELD
The Board of Directors of ABC District No. 1 adopted Resolution No. 11-07/08, concerning a proposition to finance a new stadium and multipurpose field. This proposition would authorize the District, only if Proposition 1 is approved, to construct and equip a new High School Stadium and synthetic turf multipurpose field; issue no more than $4,000,000 of general obligation bonds maturing within 20 years; and levy annual excess property taxes to repay the bonds, all as provided in Resolution No. 11-07-08. Should this proposition be:
Approved………. ____
Rejected………...____
9
Multiple Ballot Measures
Should M&O Levies, Capital Projects Levies and Bonds Be
Separate Elections?
10
M&O/Bonds on the Same Ballot
M&O and Bond Levies on the Same BallotPassage Rates
80.2%83.6%
34.3%38.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Separate Proposition Average Joint Proposition Average
Paas
age
Rat
es (
%)
M&O Bonds
11
M&O and Capital Levies on the Same Ballot
M&O and Capital Levies on the Same Ballot Passage RatesAs of May 2009
67.0%
75.1%
65.0%
61.5%
67.8%
59.2%
71.1% 70.8%
67.9%
80.6%
59.3%61.1%
67.0%
62.2%
64.9% 65.5% 65.5%
60.2%
70.7%68.3%
67.0%
83.1%
58.1%
63.4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
SeparateProp.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average
% P
assa
ge
M&O Capital Levies
12
M&O and Transportation Levies on the Same Ballot
M&O and Transportation Levies on the Same Ballot Passage RatesAs of May 2009
62.9%65.7%
61.3%
65.2%
68.9%
61.7%
51.1%
68.3%65.8%
61.2%
0.0%0.0%
63.5%
62.0%61.4%
64.9%
70.3%
62.3%
54.5%
67.9%66.2%
60.8%
0.0%0.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
SeparateProp.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average
% P
assa
ge
M&O Transportation Levies
13
Do tax rates or the economyinfluence voters?
Controlling Tax Rates
14
79% 75% 77%
68%
75%
0%
10%
20%
30%
40%
50%
60%
70%
80%
1995 1997 1999 2001 2003
If you knew the passage of the levy won’t increase the tax rate for homeowners?
Tax Rate Changes
% In Favor2003 Eiland Survey
60%
15
The absolute size of the tax rate may be less important than the change in rates.
There is very little correlation between the total tax rate and election success. That is, the amount of the total tax rate does not appear to influence voters as much as the stability of the tax rates.
Tax Rate Research
Correlation between Total Tax Rate and Election Success
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
$9.26 $11.17 $11.47 $11.87 $12.58 $13.04 $13.08 $13.32 $13.81 $13.89 $14.17 $14.36 $14.57 $15.35 $16.67
Total Tax Rate
Per
cen
tag
e o
f Y
es V
ote
s, 2
00
0
Ele
ctio
ns
16
Stable tax rates lead to greater success at election time.
Districts with smaller tax rate changes have more success passing levies.
Tax Rate Change
This is reflected in the voter survey data. The correlation of real dollar change in tax rates from 1992-97 with election results
demonstrates that stable tax rates lead to greater election success.
Percentage of Yes Votes by Change in Tax Rates
50%
52%
54%
56%
58%
60%
-$2.47 -$1.07 +$0.03 +$1.51
Change in Tax Rates
Per
cent
age
of Y
es V
otes
, 199
2-19
97
17
Consumer Confidence Index
Source: Reuters and TradingMarkets.com
20
40
60
80
100
120
140
1/1/
2000
4/1/
2000
7/1/
2000
10/1
/200
0
1/1/
2001
4/1/
2001
7/1/
2001
10/1
/200
1
1/1/
2002
4/1/
2002
7/1/
2002
10/1
/200
2
1/1/
2003
4/1/
2003
7/1/
2003
10/1
/200
3
1/1/
2004
4/1/
2004
7/1/
2004
10/1
/200
4
1/1/
2005
4/1/
2005
7/1/
2005
10/1
/200
5
1/1/
2006
4/1/
2006
7/1/
2006
10/1
/200
6
1/1/
2007
4/1/
2007
7/1/
2007
10/1
/200
7
1/1/
2008
4/1/
2008
7/1/
2008
10/1
/200
8
1/1/
2009
4/1/
2009
Con
sum
er C
onfi
den
ce I
nd
ex
Feb '0350.00%
Feb '0244.44%
Mar '0220.00%Mar '01
61.54%
Feb '0141.67%
Mar '0060.00%
Feb '0025.00%
Mar '0336.36%
Feb '0441.67%
Mar '040.00%
Feb '0575.00%
Mar '0560.00%
Feb '0650.00%
Mar '0662.50%
Feb '0752.94%
Mar '0733.33%
Feb '0840.00%
Mar '0815.38%
Feb '0914.29%
Mar '0950.00%
Apr '0974.52%
May '0933.33%
18
Standard & Poor’s 500 Index
Source: Standard & Poor’s
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
Jan-
00
May
-00
Sep-
00
Jan-
01
May
-01
Sep-
01
Jan-
02
May
-02
Sep-
02
Jan-
03
May
-03
Sep-
03
Jan-
04
May
-04
Sep-
04
Jan-
05
May
-05
Sep-
05
Jan-
06
May
-06
Sep-
06
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
S&
P 5
00 I
nd
ex
Feb '0350.00%
Feb '0244.44%
Mar '0220.00%
Mar '0161.54%
Feb '0141.67%
Feb '0025.00%
Mar '0336.36%
Feb '0441.67%
Mar '040.00%
Feb '0575.00%
Mar '0560.00%
Feb '0650.00%
Mar '0662.50%
Feb '0752.94%
Mar '0733.33%
Feb '0840.00%
Mar '0060.00%
Mar '0815.38%
Feb '0914.29%
Mar '0950.00%
Apr '0974.52%
May '0933.33%
19
Bond Election Results 2009: East vs. WestFebruary 2009
Western Washington Eastern Washington
Quillayute Valley Pass Royal Fail
Ocasta Fail College Place Fail
Mary M. Knight Fail East Valley (Spokane) Fail
North Mason Fail
March 2009
Western Washington Eastern Washington
Vashon Island Fail Kennewick Fail
Snoqualmie Valley Pass North Franklin Pass
Puyallup Fail Bickelton Pass
Tacoma Fail Davenport Pass
Auburn Fail Pateros Pass
Burlington-Edison Fail Spokane Pass
Sunnyside Pass
West Valley (Yakima) Fail
20
Bond Election Results 2009: East vs. WestApril 2009
Western Washington Eastern Washington
Methow Valley Pass
May 2009
Western Washington Eastern Washington
Bainbridge Island Fail Kennewick Pass
Ocosta Fail Royal Fail
College Place Fail
Yakima Pass
TOTAL # of Issues # of Issues Passed
Western Washington 12 2
Eastern Washington 16 9
21
Effects of the Simple Majority
22
M&O Election Summary
2008
Total # of M&O Levies: 159
Total # of M&O Levies Passed: 155
Total # of M&O Levies Passed Below 60%: 65
2009
Total # of M&O Levies: 45
Total # of M&O Levies Passed: 44
Total # of M&O Levies Passed Below 60%: 12
23
Do you agree or disagree that school districts get more money in taxes as property values go up?
Property Taxes
Agree Disagree
2005 Voters 66% 23%
2007 Voters 68% 20%
Source: Tom Eiland & CFM Consulting
24
Property Taxes 101
Increases in Home Values Will Not Increase School District Tax Collections
Changes in home values don’t change the amount of taxes authorized.
Local school taxes can only be increased by a vote of the people. Changing property values will change tax rates, but not tax
collections. Tax collection impact
25
$1,000 Levy
$250 $250 $250 $250
$100,000 $100,000 $100,000 $100,000
Property Taxes 101
26
$1,000 Levy
$250 $250 $250 $250
$200,000 $200,000 $200,000 $200,000
Property Taxes 101
27
$1,000 Levy
$187.50 $250 $250 $312.50
$150,000 $200,000 $200,000 $250,000
Property Taxes 101
28
Property Taxes 101
$1,000 Levy
$200 $200 $200 $200 $200
$100,000 $100,000 $100,000 $100,000
$100,000
29
Increase in Property Values Will Not Increase School District Tax Collections Changes in property values don’t change the amount of taxes authorized
Local school taxes can only be increased by a vote of the people
Changing property values will change tax rates, but not tax collections
Year Home Value Tax Rate Tax Bill
ABC School District Home Value 2008 $100,000 $5.00/$1,000 $500
Assume a 20% increase in Assessed Value for ABC School District
#1: 20% increase 2009 $120,000 $4.17/$1,000 $500
#2: 10% increase 2009 $110,000 $4.17/$1,000 $459
#3: 30% increase 2009 $130,000 $4.17/$1,000 $542
30
Decrease in Property Values Will Not Decrease School District Tax Collections Changes in property values don’t change the amount of taxes authorized
Local school taxes can only be increased by a vote of the people
Changing property values will change tax rates, but not tax collections
Year Home Value Tax Rate Tax Bill
ABC School District Home Value 2008 $100,000 $5.00/$1,000 $500
Assume a 10% decrease in AssessedValue for ABC School District
#1: 10% decrease 2009 $90,000 $5.55/$1,000 $500
#2: 5% decrease 2009 $95,000 $5.55/$1,000 $528
#3: 20% decrease 2009 $80,000 $5.55/$1,000 $444
31
Property Taxes 101
Summary
If your property value increases at a lower rate than the average increase for the school district, the amount of taxes you pay will decrease.
If your property value increases at a higher rate than the average increase for the school district, the amount of taxes you pay will increase.
Tax collection impact
32
Assessed Value Growth
Current trends
Revalue cycle
New construction
Annual updates
County Revaluation Cycles
33
Property Assessment Ratios by County
County2008
Assessed Value ($)2009
Assessed Value ($) Growth2008-09 Real
Property % of AVBenton 11,412,917,457 12,724,702,163 10.31% 90.8%Clark 48,017,610,071 47,499,875,673 -1.09% 92.7%Grays Harbor 5,484,425,084 6,378,701,895 14.02% 82.6%Kitsap 32,652,262,207 32,597,300,794 -0.17% 86.2%Lincoln 952,877,228 1,005,842,437 5.27% 88.4%Okanogan 2,932,413,568 3,464,159,689 15.35% 78.8%Pierce 89,354,870,537 92,604,618,893 3.51% 86.4%Snohomish 99,315,203,205 101,983,434,446 2.62% 91.5%Spokane 35,843,660,824 38,133,367,260 6.00% 78.4%Whatcom 21,624,902,725 23,721,082,080 8.84% 78.9%Yakima 13,676,652,623 14,532,869,569 5.89% 90.6%
Source: Washington State Department of Revenue.
34
Home Prices in Washington State
Source: MSN Money: Home Prices by Metro Area, February 24, 2009.
National: -3.4% Q4 2008; -8.2% 1 year
MetroArea Ranking Q4 2008 1 Year 5 Years
Bellingham, WA 109 1.62 (0.63) 60.66 Bremerton-Silverdale, WA 226 (2.06) (7.53) 52.67 Kennewick-Pasco-Richland, WA 25 1.73 2.30 20.28 Longview, WA 197 (1.85) (4.78) 46.73 Mt. Vernon-Anacortes, WA 201 (2.93) (5.09) 52.56 Olympia, WA 164 0.02 (3.01) 56.23 Portland-Vancouver-Beaverton, OR-WA 204 (1.75) (5.20) 48.57 Seattle-Bellevue-Everett, WA 199 (1.56) (5.00) 48.55 Spokane, WA 135 0.41 (1.26) 59.94 Tacoma, WA 203 0.78 (5.11) 51.78 Wenatchee-East Wenatchee, WA 51 3.22 1.24 75.37 Yakima, WA 7 4.43 4.35 37.61
Price appreciation as of December 31, 2008.
35
2009-2010 Special Election and Resolution Filing Dates
36
Save the Date
37
Capital Projects Financing
38
Capital Financing Options
Most common Bonds
Voted Non-voted
Capital Projects Levy Less Common
Build America Bonds (BAB’s) Qualified School Construction Bonds (QSCB’s) Qualified Zone Academy Bonds (QZAB’s) Conditional Sale Contracts
39
Types of School District Bonds– Voted- Unlimited Tax General Obligation Bonds (UTGO)– Non-voted – Limited General Obligation Bonds (LGO)
A. Voter approved bonds are (UTGO)– repaid with property taxes– approved with a 60% yes vote, 40% validation– 5% Debt Capacity
B. Non-voted bonds are (LGO)– repaid with existing revenue– can’t be used for “new” construction– 3/8 of 1% Debt Capacity
C. Conditional Sale Contracts– Considered “debt” (non-voted)– Payment from general district revenues– No maximum term (economic life)
Capital Financing Options
40
D. Build America Bonds (BAB’s)– Taxable bonds with Government subsidy– All tax-exempt bond rules apply– IRS/Disclosure– Expires December 31, 2010
E. Qualified School Construction Bonds (QSCB’s)– Tax credit bonds– State allocation $164,100,000– Absence of current market– Expires December 31, 2010
Capital Financing Options
41
F. Qualified Zone Academy Bonds (QZAB’s)– interest free loan– private partnership/free & reduced lunch– can’t be used for new construction– non-voted debt
G. Capital Projects Levy (no debt limit)– simple majority– two to six year repayment– no interest cost– frees up M&O funds– jump start capital plan
Capital Financing Options
Bonds are the primary method used by Washington school districts to finance the “local share” of capital projects because
– cash is generated up front
– payments can be spread over time, and
– districts have some control over taxpayer impacts
42
Capital Financing Options—State Match (State Funding Assistance) State match for construction projects available to all school
districts
Study and survey grant
State match ratios from 20% to 90%--not dollar for dollar
Does state match create incentive for deferred maintenance?
Unhoused vs. modernization
43
Ideal Time Frame for Major Decisions
Preparing for the Election
44
The Participants
The Architect provides cost projections based on the project scope
The Underwriter provides financial planning and ultimately buys the bonds for resale to investors
Bond Counsel prepares documents and provides a legal opinion
The Financial Advisor represents the District during negotiations with the Underwriter
The County Treasurer is the District’s treasurer and takes receipt of the bond proceeds
Planning a Bond Financing
45
The Ballot Proposition—Voted Bonds
1. Maximum amount to be borrowed
2. Maximum term of the bonds
3. Use of bond proceeds
4. Use of State matching money (Front Funded)
5. Unlimited Authority to levy property taxes to pay debt service
Planning a Financing
46
PROPOSITION 1
SCHOOL DISTRICT NO. ___
BONDS FOR CONSTRUCTION OF SCHOOL FACILITIES
The Board of Directors of _____ School District No. ___, adopted Resolution No._____, concerning a proposition to finance construction of school facilities. This proposition would authorize the District to construct a new elementary school (Grades K-3) to replace _______ Elementary School on the existing site and construct additional classrooms to replace portable classrooms at _______ Middle School; issue no more than $19,544,500 of general obligation bonds maturing within 20 years; and levy annual excess property taxes to repay the bonds, all as provided in Resolution No.______. Should this proposition be:
Approved………. ____
Rejected………...____
Bond Proposition
47
1. Maximum amount to be levied
2. Maximum term of the levy
3. Use of levy proceeds
4. Levy amount per year
5. Estimated tax rate per year
Ballot Proposition—Capital Projects Levy
48
PROPOSITION __________
SCHOOL DISTRICT NO. ___
CAPITAL LEVY FOR TECHNOLOGY IMPROVEMENTS
The Board of Directors of ________School District No. ___adopted Resolution No. _____, concerning a proposition to finance technology improvements. This proposition would authorize the District to acquire and install technology and communication equipment and make other technology improvements and upgrades throughout existing school facilities to improve student learning, and levy the following excess taxes, on all taxable property within the District:
Capital Levy Proposition
Approximate LevyRate/$1,000
Collection Year Assessed Value Levy Amount
2009 $_________ $________2010 $_________ $________2011 $_________ $________2012 $_________ $________
All as provided in Resolution No. ___. Should this proposition be approved? LEVY . . . YES ___ LEVY . . . NO ___
49
Capital Levy as Part of Long Range Financing Plan
YearBond AV ($000's)
Bond AV Growth Rate
M&O AV ($000's)
M&O Growth Rate M&O Levy Capital Levy Trans. Levy Existing Debt
Total Bond Levy M&O Levy Capital Levy
Trans. Levy Bond Levy Year
2000 3,500 3.00% 3,450 3.00% 4,500 - - 525 525 5,025 1.30 - - 0.15 1.45 20002001 3,623 3.50% 3,571 3.50% 4,658 - - 543 543 5,201 1.30 - - 0.15 1.45 20012002 3,840 6.00% 3,785 6.00% 4,937 - - 576 576 5,513 1.30 - - 0.15 1.45 20022003 3,917 2.00% 3,861 2.00% 5,036 - - 587 587 5,623 1.30 - - 0.15 1.45 20032004 4,073 4.00% 4,015 4.00% 5,237 - - 611 611 5,848 1.30 - - 0.15 1.45 20042005 4,358 7.00% 4,296 7.00% 5,604 - - 654 654 6,257 1.30 - - 0.15 1.45 20052006 4,707 8.00% 4,640 8.00% 6,052 - - 706 706 6,758 1.30 - - 0.15 1.45 20062007 5,131 9.00% 5,057 9.00% 6,597 - - 770 770 7,366 1.30 - - 0.15 1.45 20072008 5,644 10.00% 5,563 10.00% 7,256 - - 847 847 8,103 1.30 - - 0.15 1.45 20082009 5,644 0.00% 5,563 0.00% 7,256 - - 847 847 8,103 1.30 - - 0.15 1.45 20092010 5,644 0.00% 5,563 0.00% 7,256 - - 847 1,000 8,256 1.30 - - 0.15 1.45 20102011 5,757 2.00% 5,674 2.00% 7,401 1,500 - 1,094 1,094 9,995 1.30 0.26 - 0.19 1.75 20112012 5,872 2.00% 5,788 2.00% 7,550 1,500 - 1,116 1,116 10,165 1.30 0.26 - 0.19 1.75 20122013 5,989 2.00% 5,904 2.00% 7,701 1,500 - 1,198 1,198 10,398 1.30 0.25 - 0.20 1.75 20132014 6,109 2.00% 6,022 2.00% 7,855 1,500 500 733 733 10,588 1.30 0.25 0.08 0.12 1.75 20142015 6,231 2.00% 6,142 2.00% 8,012 1,500 - 1,246 1,246 10,758 1.30 0.24 - 0.20 1.75 20152016 6,356 2.00% 6,265 2.00% 8,172 1,500 - 1,333 1,333 11,004 1.30 0.24 - 0.21 1.75 20162017 6,483 2.00% 6,390 2.00% 8,335 1,500 - 1,389 1,389 11,224 1.30 0.23 - 0.21 1.75 20172018 6,613 2.00% 6,518 2.00% 8,502 1,500 500 947 947 11,449 1.30 0.23 0.08 0.14 1.75 20182019 6,745 2.00% 6,649 2.00% 8,672 1,500 - 1,506 1,506 11,678 1.30 0.22 - 0.22 1.75 20192020 6,880 2.00% 6,782 2.00% 8,845 1,500 - 1,566 1,566 11,911 1.30 0.22 - 0.23 1.75 20202021 7,017 2.00% 6,917 2.00% 9,022 1,500 - 1,627 1,627 12,150 1.30 0.21 - 0.23 1.75 20212022 7,158 2.00% 7,055 2.00% 9,203 1,500 500 1,190 1,190 12,393 1.30 0.21 0.07 0.17 1.75 20222023 7,301 2.00% 7,197 2.00% 9,387 1,500 - 1,754 1,754 12,641 1.30 0.21 - 0.24 1.75 20232024 7,447 2.00% 7,341 2.00% 9,575 1,500 - 1,819 1,819 12,893 1.30 0.20 - 0.24 1.75 20242025 7,596 2.00% 7,487 2.00% 9,766 1,500 - 1,885 1,885 13,151 1.30 0.20 - 0.25 1.75 20252026 7,748 2.00% 7,637 2.00% 9,961 1,500 500 1,453 1,453 13,414 1.30 0.19 0.06 0.19 1.75 20262027 7,903 2.00% 7,790 2.00% 10,161 1,500 - 2,022 2,022 13,683 1.30 0.19 - 0.26 1.75 20272028 8,061 2.00% 7,946 2.00% 10,364 1,500 - 2,092 2,092 13,956 1.30 0.19 - 0.26 1.75 2028
Total School District Tax
Levy
Assessed Value Summary Bond Related LeviesTotal
School District Tax
Rate
Summary of Levy Amounts Summary of Levy Rates
Projected Tax RatesLevy / $1000 Assessed Value
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.80
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
M&O Levy Existing Debt Capital Levy Trans. Levy
50
Capital Levy to “Jump Start” Long Range Capital PlanCase Study:
Seek voter approval for a three year Capital Levy in 2010 Tax collection 2011, 2012, 2013 Place bond issue before voters spring 2013 Bond tax collection starts 2014
Tax Rates$3,635,000 Capital Levy approved Feb 2010Estimated tax rate: $0.50/$1,000Collection 2011, 2012, 2013
$17,500,000 Bond Issue approved Feb 2013Estimated tax rate increase over 2013: $0Estimated tax rate: $0.50/$1,000Collection 2014 through 2029
Results Voter approved tax increase with Simple Majority Bond issue is approved without tax increase with Super Majority
Projected Tax Rates
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Lev
y/$1
000
Ass
esse
d V
alue
Capital Levy 2014 Bond Issue
51
A. Projected Budget1. Estimated costs
2. Estimated revenues Bonds Local Share vs. Front Funded Investment earnings Impact fees
B. Projected Cash Flow1. Tax law considerations
Arbitrage Rebate Expenditure Rule
C. Projected Impact on taxpayers1. Levy rates are the standard means of communicating the tax impact
Tax rate per $1,000 Tax deduction
The Financing Plan
52
Assumptions for Tax Rate Planning
Interest Rates
Bond Rating
Assessed Value
Bond Structure
Financial Planning
53
Assumptions for Levy Rate PlanningA. Interest Rates
- Lower interest rates result in lower tax rates for bonds.- Interest rates are determined when bonds are actually sold.- Assumption: Current rates plus 1.5%
Financial Planning
Bond Buyer Index20-Year General Obligation Bond
(1 year history)
3.75
3.90
4.05
4.20
4.35
4.50
4.65
4.80
4.95
5.10
5.25
5.40
5.55
5.70
5.85
6.00
6.15
6.30
Au
g-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan
-09
Feb
-09
Mar
-09
Ap
r-09
May
-09
Jun
-09
Jul-
09
Au
g-09
Rat
es (
%)
Bond Buyer Index20-Year General Obligation Bond
(25 year history)
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
Au
g-84
Au
g-85
Au
g-86
Au
g-87
Au
g-88
Au
g-89
Au
g-90
Au
g-91
Au
g-92
Au
g-93
Au
g-94
Au
g-95
Au
g-96
Au
g-97
Au
g-98
Au
g-99
Au
g-00
Au
g-01
Au
g-02
Au
g-03
Au
g-04
Au
g-05
Au
g-06
Au
g-07
Au
g-08
Au
g-09
Rat
es (
%)
54
Assumptions for Levy Rate Planning (continued)B. Bond Rating
- A higher bond rating results in lower interest rates.- Assumption: Aaa (with bond insurance)
Aa1 (with State Guaranty)
A Guide to Bond Ratings
Moody’s Investors Service – Founded 1918
Highest Quality Aaa
Aa1, Aa2, Aa3
A1, A2, A3
Baa1, Baa2, Baa3
Lowest Quality NR (Nonrated)
Financial Planning
55
Bond raters consider local economy, district finances and other factors.
The Rating
DebtFactors
Economy
Governmental Factors
FinancialPerformance
Example:
Lake Washington Aa1 Auburn A1 Selah A3
Richland A1 Yakima A2 Ellensburg A3
Kennewick A1 Pasco A3 Riverview A1
Financial Planning
56
Bond RatingsDistribution of Underlying Ratings Among
Washington School Districts
Only 120 out of 295 districts have underlying ratings.
Source: Moody’s and Standard & Poor’s rating reports, 2008.
Moody's Standard &
Poor's% of WA
School Districts*Aaa AAA Insured OnlyAa1 AA+ 4.17%Aa2 AA 1.67%Aa3 AA- 10.83%A1 A+ 18.33%A2 A 28.33%A3 A- 35.00%
Baa1 BBB+ 1.67%Baa2 BBB 0.00%Baa3 BBB- 0.00%
Rating Levels
*Percent of the school districts in Washington State that are rated by one or both rating agencies.
57
Bond Rating Process
58
Bond InsuranceA very significant market change has occurred regarding the use of bond insurance:
Result Investors care much more about the fundamental underlying credit quality of the borrower.
Moody's S&P Fitch
ACA NR NR NR
Ambac Caa2 (Uncertain) CC (Neg) Withdrawn
Assured Guaranty Aa2 (Neg) AAA (Neg) AA (Neg)
BHAC Aa1 (Stable) AAA (Neg) NR
CIFG Ba3 (Uncertain) CC (Neg) Withdrawn
FGIC WR NR Withdrawn
FSA Aa3 (Neg) AAA (Neg) AA+ (Neg)
MBIA Baa1 (Uncertain) A (Uncertain) NR
Radian Ba1 (Stable) BBB- (Neg) Withdrawn
XCLA (Syncora) Ca (Uncertain) R Withdrawn(As of 8/10/09)Source: Bloomberg via Moody's, S&P and Fitch.
59
State Guarantee ProgramWashington School Districts are very fortunate to benefit from the State’s School Bond Guarantee program. Several features differentiate this program from other states:
State Rating Program Dynamics
Washington Aa1/AA+Established in 2000, full faith credit and taxing power, direct payment of debt service before default.
Oregon Aa2/AA-
Established in 1997, full faith credit and taxing power, direct payment of debt service before default. The State can reimburse itself by withholding operating appropriations to the district.
Texas Aaa/AAAEstablished in 1983, $17 billion of assets support school bonds, direct payment of debt service before default. The State will reimburse itself by withholding operating appropriations.
However, the State’s strong Aa1 rating is not guaranteed to remain stable indefinitely, and investors have become more keenly interested, since the bond insurer downgrades, in the borrower’s own ability to repay the debt.
60
Fund Balance--How Much is Enough?
A strong fund balance benefits the District through:
A higher bond rating (lower borrowing cost)
Reduced likelihood of short-term cash-flow crises
Credibility with major constituencies
Moody’s suggests that the Board adopt a formal policy to maintain a minimum general fund balance of between 5% and 10% of expenditures, depending on management’s assessment of its vulnerability to disruptions.
61
Fund Balance--How Much is Enough?National Median (School Districts, all ratings): 14.4%
National Median (School Districts, Aa1, Aa2, Aa3): 14.8%
National Median (School Districts, rated A1, A2, A3): 13.7%
Washington Median (School District, rated Aa1): 6.2%
Washington Median (School District, rated Aa2): 4.8%
Washington Median (School District, rated Aa3): 5.7%
Washington Median (School District, rated A1): 7.3%
Washington Median (School District, rated A2): 5.6%
Washington Median (School District, rated A3): 6.8%
Source: National data: Moody’s Investment Service Special Comment January 2009, “2008 Local Government national Medians”Washington data: Moody’s Investors Service, 2007.
62
Global Scale Ratings
Moody’s conducted an extensive default study, which showed that default rates in the municipal bond sector have historically (at least since 1970) been much lower than those in the corporate bond sector. This is especially true for UTGO and LGO debt, like the District’s bonds.
Moody's 10-year default rates
2.23%
0.56%0.29%
0.07%0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
Investment-Grade Corporate
Aaa-ratedCorporate
Municipal(excluding GO,water & sewer)
All Investment-Grade Municipal
Source: Moody’s Investment Service Special Comment June 2006“Mapping Moody’s U.S. Municipal Bond Rating Scale to Moody’s Corporate Rating scale and Assignment of Corporate Equivalent Ratings to Municipal Obligations.”
63
Financial PlanningC. Assessed Value
– Higher Assessed values will lower the District’s tax rates (but not overall payment).– An individual’s taxes will be based on the assessed value for their own property.
– Growth from new construction.
– Assessment cycle (Annual market based adjustment vs. periodic reassessment)
School District Assessed Value GrowthHistorical and Projected
10.53%
3.79%
10.38%
6.00%
7.00%
3.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
2004 2005 2006 2007 2008 2009 and thereafter*
64
Bond Structures
D. Assessed Value
Level Debt
Wrapped Level Debt
Level Levy*
Wrapped Level Levy*
* Can be for Debt Service Levy only or for combined total levy rate.
65
Level Debt
Results in level annual payments for the life of the bonds.
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Deb
t S
ervi
ce
$0.25
$0.30
$0.35
$0.40
$0.45
$0.50
$0.55
Tax
Rat
e
New Debt Tax Rate
66
Wrapped Level Debt
Results in level annual payments on all of the district's bonds
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Deb
t S
ervi
ce
$0.25
$0.30
$0.35
$0.40
$0.45
$0.50
$0.55
Tax
Rat
e
Existing Debt New Debt Tax Rate
67
Level Levy
Attempts to result in a level annual tax rate over the life for the bonds*
* Based on assessed value projections.
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Deb
t S
ervi
ce
$0.25
$0.30
$0.35
$0.40
$0.45
$0.50
$0.55
Tax
Rat
e
New Debt Tax Rate
68
Wrapped Level Levy
Attempts to result in a level annual tax rate for all of a district's bonds*
* Based on assessed value projections.
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Deb
t S
ervi
ce
$0.25
$0.30
$0.35
$0.40
$0.45
$0.50
$0.55
Tax
Rat
e
Existing Debt New Debt Tax Rate
69
D. Bond Structure– State law gives districts great flexibility in determining bond structures.
– Options frequently include: Level payments
Level rate for bonds only
Level rate for all levies
Option #1 Option #2 Option #3 Option #4 Option #5
DescriptionLevel Debt Base Case
Combined Level Tax Rate
Delayed Sale Combined Stepped
Level Tax Rate
Combined Level Tax Rate (All School Tax
Rates)
Combined Level Tax Rate (All School Tax
Rates)Total Authorization $70,000,000 $70,000,000 $70,000,000 $70,000,000 $70,000,000
$135,000,000Bond Sales:
June 2009 70,000,000 70,000,000 24,000,000 70,000,000 70,000,000December 2010 23,000,000December 2011 23,000,000December 2012 67,500,000December 2013December 2014 67,500,000
Levy Rates:2009 $2.82 $2.82 $2.82 $5.82 $6.68
Projected 2010 $3.35 $2.93 $2.96 $5.93 $6.792010 increase over 2009 $0.53 $0.11 $0.14 $0.11 $0.11
70
Option #5: Level Tax Rate (All)
$70MM
Proposed Bond Tax Rates
$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00$5.50$6.00$6.50$7.00$7.50$8.00$8.50$9.00
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
Lev
y/ $
1000
Ass
esse
d V
alue
2015 Bonds2013 Bonds2007 BondsExisting BondsM&O
71
Tax Impact AnalysisIssue Structure: Level Debt Service
Estimated 2010 Tax Rate Increase
Over 2009 Tax Rate (Bonds Only)
(per $1,000 assessed value): $0.53
Assessed
Value of
Property
Gross Property
Tax Increase
For Bonds
Monthly
Gross
Increase 25% 28% 33% 35%
-- Federal Income Tax Bracket--
$100,000 $53.00 $4.42 $39.75 38.16 $35.51 $34.45
150,000 79.50 6.63 59.63 57.24 53.27 51.68
200,000 106.00 8.83 79.50 76.32 71.02 68.90
250,000 132.50 11.04 99.38 95.40 88.78 86.13
300,000 159.00 13.23 119.25 114.48 106.53 103.55
Net Tax Increase from
Bonds After Allowing for
Income Tax Deduction
NOTE: Qualified homeowners may apply for a senior exemption. Please contact the County Assessor for details.
72
1. Construction Cash Flows Effect on tax rates Effect on project costs Effect on investment earnings
2. Other Levies M&O levy Other levies
3. Assessed Value Growth What is your county’s assessment practice/when will change? Source of new assessed value
4. Impact on Taxpayers Federal Income Tax deductibility Senior exemption
5. Financing Goals Tax rates? Interest rates?
Things to Consider
73
Refunding Overview
What is a refunding?
A refunding is a procedure whereby an issuer refinances an outstanding bond issue by issuing new bonds. Issuers refund bonds to reduce interest costs, and/or restructure the payment of the debt.
74
Refunding Bonds
There are two primary types of refundings: current refundings and advance refundings.
Current refundings — Under federal tax law, a current refunding is one in which the new refunding bond transaction is closed within 90 days of the refunded issue’s next available call date of the debt to be refunded.
Advanced refundings – Under federal tax law, an advanced refunding is one in which the new refunding bond transaction is closed more than 90 days before the first available call date of the debt being refunded.
75
Call Feature on Bonds
“Calling” a bond means to prepay it before its scheduled maturity date
Not all bonds can be called
Call feature is set prior to the sale of bonds– Which bonds can be called– Why they can be called– What price is paid to call the bonds
Example of typical call language: “Bonds maturing on and after December 1, 2009 are subject to redemption on or after June 1, 2009 at the price of par.”
76
Refunding Overview
ISSUER
Debt Service onOutstanding Bonds
New RefundingBonds
Special U.S. GovernmentObligation (SLGS) andT-Bills
Debt Service onRefunding Bonds
OldBonds
NewBonds
Debt Service onOutstanding Bonds
OldBonds
NewBonds
TO BUY
TO PAY
OWES
ISSUES
OWES
77
Points to Consider By law, advanced refundings are only allowed once before the call date.
– Must provide debt service savings annually
– Savings benefit only taxpayers
– Cannot extend term of the bonds
Impact on non-voted debt capacity—the “over issuance” of new bonds to pay cost of issuance and fund escrow is counted against non-voted debt capacity
Bond rating—is this the best time to have the District’s bond rating reviewed?
Future debt issuance and the impact of Federal Tax Law related to:
– Arbitrage rebate
– Bank Qualification
78
Selling the Bonds
Two Methods Competitive Negotiated
Competitive Sale Financial Advisor Bonds sold to highest bidder
Negotiated Underwriter Bonds sold to produce desired result
79
Competitive vs. Negotiated
Our school district clients care most about outcomes
Schools are different than the State, the largest cities or some counties
They have to care about managing tax rates in both the near and long term, because they (uniquely) have to go to the voters for approval of funds for a significant portion of their operating revenues
It is no coincidence that the extensive use of negotiated bond sale coincides with 20 years of voter generosity.
80
1st Independent BankAmerican Marine BankBaker Boyer National BankBank of AmericaCharles SchwabDiscover BrokerageFirst Security Investment Franklin Federal Tax Free FundICM Asset ManagementMontana Board of InvestmentsMontana Tax-Free FundNorthern State BankPEMCOPeoples BankSanta Barbara TrustSeattle Capital ManagementSterling Savings BankThornburg Investment ManagementUSAA Investment Management Co.Washington FirstWells Fargo Bank
WEST
AAL Capital ManagementAlliance Capital Management Co.Bear StearnsBessemer TrustBlackrockBoston CompanyColonial FundsDB Scudder of Boston, MADelaware Management Co.DreyfusEaton Vance MunicipalsFidelity InvestmentsGoldman Sachs Asset ManagementLord AbbettMD Sass Investors Services Inc.Navaid FinancialPioneering Management Corp.PNC BankSanford C. BernsteinU. S. Trust of New York
EAST
CENTRAL
Allstate Insurance Co.Bank OneFirst Security InvestmentHarris BankHeartland Advisors Inc.IDS Tax ExemptInvestors Fiduciary Trust Co.JanusNorthern Trust Co.Nuveen Advisory CorpSociety Asset ManagementState Farm Fire & CasualtyStein Roe & FarnhamStrong Capital ManagementU.S. BankUnited Savings & LoanVictory Capital ManagementVoyageur Asset Management
Selected representative institutional clients
Selected representative institutional clients
Selling the Bonds
81
Selling the Bonds
Source: D.A. Davidson Fixed Income Capital Markets
Bond Distribution--Who Buys Your Bonds2009
Insurance, 20%
Money Manager, 25%Agent, 1%
Retail, 5%
Broker-Dealer, 3%
Bank Trust, 15%
Bond Fund, 20%
Bank Portfolio, 10%
Corporation, 1%
Current Market
83
Current Market
Debt markets have changed significantly during the current economic cycle.
84
20-yr Bond Buyer Index – 25-yr History Bond Buyer Index
20-Year General Obligation Bond(25 year history)
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
Au
g-84
Au
g-85
Au
g-86
Au
g-87
Au
g-88
Au
g-89
Au
g-90
Au
g-91
Au
g-92
Au
g-93
Au
g-94
Au
g-95
Au
g-96
Au
g-97
Au
g-98
Au
g-99
Au
g-00
Au
g-01
Au
g-02
Au
g-03
Au
g-04
Au
g-05
Au
g-06
Au
g-07
Au
g-08
Au
g-09
Rat
es (
%)
85
20-yr Bond Buyer Index – 1-yr History Bond Buyer Index
20-Year General Obligation Bond(1 year history)
3.75
3.90
4.05
4.20
4.35
4.50
4.65
4.80
4.95
5.10
5.25
5.40
5.55
5.70
5.85
6.00
6.15
6.30
Au
g-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan
-09
Feb
-09
Mar
-09
Ap
r-09
May
-09
Jun
-09
Jul-
09
Au
g-09
Rat
es (
%)
86
Combined Muni vs. Treasury – 10-yr
Interest Rates since 1999
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
7/30
/99
1/30
/00
7/30
/00
1/30
/01
7/30
/01
1/30
/02
7/30
/02
1/30
/03
7/30
/03
1/30
/04
7/30
/04
1/30
/05
7/30
/05
1/30
/06
7/30
/06
1/30
/07
7/30
/07
1/30
/08
7/30
/08
1/30
/09
7/30
/09
Rat
es
30-year Treasury 20-Bond Index
87
Combined Muni vs. Treasury – 2-yr
2-year History of Interest Rates
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.507/
30/0
7
9/30
/07
11/3
0/07
1/30
/08
3/30
/08
5/30
/08
7/30
/08
9/30
/08
11/3
0/08
1/30
/09
3/30
/09
5/30
/09
7/30
/09
Rates
30-year Treasury 20-Bond Index
88
Basic elements for an orderly Capital Market have been challenged Security – Confidence at being repaid
Liquidity – Ability to trade at reasonable price
Transparency – Access to information that might affect security/liquidity
Integrity – Belief in a “fair” market
Current Market
89
Security Confidence has decreased significantly Flight to “Quality” – meaning highest grade (Aa or better) Difficult and costly to find buyers of lesser quality bonds Cause:
Continued downgrading of Bond insurers Perception about current or future financial difficulties for municipalities Failure of “Derivative Products” causing increased interest costs for many
issuers
90
Challenges for Municipal Market Muni market is significantly different from Equity and Treasury Market
No central trading function
Variety of issuers and credits
Tax-exemption
New taxable products
Impact on supply-demand-pricing
91
Levy Library
http://www.levylibrary.org/
92
Levy Library
93
Levy Library
94
D.A. Davidson—Firm Update Founded in 1935 we have grown
from two employees to over 1,000 employees in the past 74 years.
We are a growing, vibrant employee-owned company with a capital base of over $130,000,000.
Most experienced K-12 finance team in the State focused on the needs of all school districts.
Depth of K-12 Finance Team: Our 8-person team has a wide range of experience, including a former school district official and a Moody’s rating analyst.
We were the leading underwriter of Washington school bonds in 2008.
2008 TotalsSenior Manager
3Piper Jaffray
12Seattle-Northwest
23D.A. Davidson & Co.
Washington Schools2008
As of May 2009Source: Securities Data Corporation
As of August, 2009Source: Thomson Municipal Market Data
*Includes Pooled Financing.
2009 TotalsSenior Manager
2Piper Jaffray
11Seattle-Northwest
29*D.A. Davidson & Co.
Washington Schools2009
95
D.A. Davidson Contact List
Northwest Education Finance Team
Jack Eaton
Senior Vice President
(206) 903-8698 phone
(206) 389-4040 fax
Jon Gores
Senior Vice President
(206) 389-4043 phone
(206) 389-4040 fax
Chad Cowan
Vice President
(206) 903-8697 phone
(206) 389-4040 fax
Maura Lentini
Vice President
(206) 903-8687 phone
(206) 389-4040 fax
Suzanne Eide
Vice President
(206) 903-8690 phone
(206) 389-4040 fax
Shandra Tietze
Associate
(206) 903-8695 phone
(206) 389-4040 fax
Maria Elvrum
Executive Assistant
(206) 389-4044 phone
(206) 389-4040 fax
Kelsey Draper
Administrative Assistant
(206) 903-8694 phone
(206) 389-4040 fax
96
Bio—Jon GoresMr. Gores joined D.A. Davidson & Co. in 2006 as a Senior Vice President in the Public Finance department. Previously, he was with Seattle Northwest Securities for 18 years as Vice President of Public Finance, where he served as Manager of the School Finance Group for Washington State schools. Jon has originated over 170 Washington school district financings in the past 5 years. Jon has been a school district public finance specialist since 1985. He has been instrumental in developing financing solutions for specific school district funding needs. His advocacy on behalf of school districts with the State legislature has resulted in the repeal of the law that caused the tax rate spike that districts encountered with a mid-year bond sale, and his lobbying the legislature has led to the expanded use of limited general obligation (LGO) debt. His efforts resulted in H.B. 1832, which allows school districts to use LGO debt for remodeling of and additions to existing facilities. Most recently Mr. Gores proposed legislation now in effect that allows a direct transfer of state forest revenue from the debt service fund to the capital projects fund.
Jon is a member of WASA, WSSDA, WASBO, and is a featured speaker at numerous conferences. He serves as a trustee of the Washington State School Boards Educational Foundation. He has been a guest lecturer at the University of Washington, WSU, and Seattle Pacific University and Seattle University. Mr. Gores served on the School Bond Guarantee Program advisory committee and was appointed to the Finance Committee for the Simple Majority.