C.A.S.H. 25th Annual Conference
Understanding School District Finance Presenters Sandi Burgoyne Poway USD
Dawn Vincent Stone & Youngberg LLC
February 24, 2004
What is Debt Financing? Mechanism for obtaining money today through an agreement to repay the money over time with interest Pledge of expected future stream of income or general fund pledge Through debt financing School Districts may: Acquire land Construct/improve buildings Install improvements and facilities Acquire equipment Fund working capital 1
How Does It Work? School Districts raise funds by issuing debt in the municipal market Investors make loans to School Districts by purchasing the debt (Bonds, Certificates of Participation, Leases) Most School District debt generates tax-exempt interest 2
1
Investors accept lower interest rates on tax-exempt debt Example: 3.65% tax-exempt interest rate = 6.15% equivalent taxable yield for investor in 35% tax bracket
A School District’s borrowing cost is lower than similar debt issued by banks and corporations (taxable debt) 3
Who Buys Debt? Individuals/Retail Investors Investors seeking wealth protection and tax free income
Institutional Investors Mutual Funds Insurance Companies Banks Financial Institutions 4
How is Debt Sold? Competitive Sale/Public Sale: The sale of debt to the bidder (Underwriter) presenting the best bid at a predetermined time and place Negotiated Sale: The sale of debt in which an Underwriter is hired early in the process to buy and market an issuer’s debt Private Placement: The direct placement of debt with one or a few investors 5
2
Financing Timeline DAY 1
TASK School District decides to finance a project
10
Finance Team is selected and assembled
15
Revenue stream securing the debt is identified and analyzed
21
Staff and the Finance Team determine the debt structure
28
Legal and disclosure documents are crafted 6
DAY
TASK
38
Credit ratings/bond insurance secured (if applicable)
45
Board approves the legal and disclosure documents and authorizes the debt issuance
52
Underwriter begins marketing the debt to investors (Negotiated Sale)
59
Underwriter commits to buy the debt from School District
75
Transaction is closed and the project is funded 7
The Financing Team Bond Counsel • Provides the legal opinion stating that debt is exempt from federal and state income taxes (California) • Provides legal parameters and guidelines to School District and Financing Team • Drafts legal documents pursuant to which debt is issued 8
3
Financial Advisor • Advises and assists in the formulation/ execution of financing plans • Does not purchase or underwrite debt • Role or necessity of financial advisor depends on (1) the needs of the School District, (2) the method of sale chosen and/or (3) the complexity of the financing 9
Underwriter • Purchases debt with the intent to resell to investors • In a negotiated sale the underwriter is hired early in the process and assists the other members of the financing team • In a competitive sale, the Underwriter simply delivers a sealed bid on the date of sale offering to purchase the debt at fixed interest rates and prices 10
Other Players • Disclosure Counsel
• Special Tax Consultant
• District Counsel
• Market Consultant
• Trustee
• Developer
• Underwriter’s Counsel • Appraiser • Rating Agency
• Bond Insurer
• Title Company
• Dissemination Agent 11
4
Financing Documents Bond Indenture/Trust Agreement Basic security document for debt
Bond Purchase Agreement Sets forth terms and conditions of debt sale to Underwriter
12
Official Statement Provides disclosure information to investors
Continuing Disclosure Agreement Required by Securities and Exchange Commission’s Rule 15c212 Annual Filings 13
The Bond Funds Project Fund Amount needed per construction bid or acquisition cost
Reserve Fund Required to protect the investor against a revenue/payment shortfall
14
5
Capitalized Interest Fund Used to pay interest on the debt for a specified period of time
Costs of Issuance Fund Fees and expenses associated with the sale of debt including: Bond Counsel
Trustee/Fiscal Agent
Disclosure Counsel
Appraisal (COPs, CFDs)
Ratings
Title Insurance (COPs)
Bond Insurance
Special Tax Consultant (CFDs)
Absorption Study (CFDs)
Preliminary and Official
Dissemination Agent Special Reports
Statement Printing Underwriter’s Discount 15
What is a Credit Rating? Credit Ratings measure the probability of the timely repayment of the principal and interest on debt Ratings are initially assigned before debt issuance and are continuously reviewed to help investors determine bond value Ratings may be amended over time to reflect changes in the credit quality of debt
16
School Districts generally seek ratings from one or more credit agencies The credit quality of a School District’s debt is analyzed by independent rating services
17
6
Investment Grade Ratings The following are long-term investment grade ratings:
Moody’s Aaa Aa A Baa
Standard & Poor’s AAA AA A BBB
Fitch AAA AA A BBB 18
How to Get a Rating The Underwriter delivers credit materials to the rating agencies District representatives and the Financing Team meet with rating analysts Presentation of Credit Summary - a framework to assist analyst in reviewing the credit 19
Focus on unusual aspects of the credit or financial structure Review additional financial demands on the School District Address questions relating to State budget uncertainties 20
7
Common Financing Options General
Obligation Bonds
Lease
Financing/ Certificates of Participation (COPs)
Special
Tax Bonds/Mello-Roos
Qualified
Zone Academy Bonds
(QZABs) 21
GO Bonds Long term obligation (25 to 40 years) Secured by an Ad valorem tax on all taxable property with the School District’s boundary Ad valorem taxes create new revenue stream 22
Unlimited ability to raise taxes provides investors with greatest security and lowest borrowing cost School Facilities Improvement Districts (SFID) can be formed by School Districts to tax only a portion of their territory 23
8
Proposition 39 Approved by voters in November 2000 Lowers required voter approval threshold to 55% Establishes a maximum tax rate (per $100,000 of assessed value) $30 for elementary and high school districts $60 for unified school districts $25 for community college districts 24
GO Bond Uses Bonds issued pursuant to the 2/3’s voter approval may finance land acquisition purchase or construction of new school facilities renovation and repair of existing school buildings permanent improvements to school grounds
Bonds issued pursuant to Proposition 39 approval may finance All projects eligible for financing under 2/3’s voter approval PLUS Furnishing and equipping of school facilities Lease of real property for school facilities 25
Upcoming Election Dates Date of Election Any Tuesday* March 2, 2004 April 13, 2004* June 8, 2004* November 2, 2004 March 8, 2005* June 7, 2005* November 8, 2005* * May not be available for bond elections conducted pursuant to Proposition 39 26
9
COPs Long term obligation (up to 30 years) No voter approval is required to issue a COP COPs may be used to finance: Construction and acquisition of school facilities Purchase of equipment (relocatable, buses, computers) Refinancing of existing leases
27
COPs are secured by lease payments made by the School District for the use of the facilities or equipment Generally COPs are secured by the School District’s general fund - no new revenue source is created Can be used as a form of “bridge financing” prior to receipt of State funds or GO bond proceeds 28
COPs can be structured with a blended pledge of funds/revenues General Fund, Mello-Roos and RDA Pass-Through COP transactions can be structured and sold within 75 days 29
10
Special Tax Bonds Long term obligation (up to 30 years) Create new revenue streams that may be used for: Pay-as-you-go facilities and services A pledge to debt service 30
Can be created to include only a specified portion of the School District’s territory Mello-Roos district formations require a 2/3’s voter approval Generally require significant lead time prior to debt issuance 31
Elections are conducted based upon: One vote per acre (landowner/ developer Mello-Roos district) or Registered voter election (more than 12 registered voters in Mello-Roos district)
32
11
Mello-Roos districts may fund a wide variety of projects and services Land Acquisition
Furniture
Relocatable structures
School Buses
Building construction and improvements
Equipment (5 year useful life)
Recreational programs and library services
33
QZABs A Federal tax credit bond program created by Congress in 1997 Designed to increase graduation rates by rehabilitating facilities and upgrading equipment/technology Facilities located in empowerment zones/ enterprise communities or 35% of student body qualifies for free/reduced price lunches 34
QZABs are taxable and are generally privately placed with banks QZAB loans are interest free, only principal payments are required Investors receive the federal tax credit in lieu of interest payments 35
12
Requires private business partnership contribution of at least 10% of the QZAB amount Since 1998, $327 million has been allocated to California school districts 36
Financing 101 - Must Do’s Talk to your peers about their financing experiences Conduct due diligence before selecting your financing team Carefully evaluate unsolicited proposals Review your legal and disclosure documents Understand your borrowing plan Ask a lot of questions - utilize your financing team
37
Questions and Answers
? 38
13
The Presenters Sandra “Sandi” G. Burgoyne Assistant Director of Planning
Poway Unified School District Ms. Burgoyne is currently the Assistant Director of Planning with the Poway Unified School District. She has been with the District for 30 years; the last five in Planning. Since 2001, Sandi has worked with the District Financing Team in issuing over $75,000,000 of CFD bonds within the 12 active CFDs in the District. She has also coordinated the formation of three new CFDs, amendment of Mitigation Agreements for two of the largest CFDs to include improvement areas to facilitate issuance of infrastructure bonds, and the formation of a PFA to generate funds for the construction of a new middle school. She was also involved with the formation of a SFID in all non-Mello-Roos areas of the District that resulted in a successful $198 million Proposition 39 General Obligation Bond election in November 2002. Sandi graduated from San Diego State University with a BS in Finance. Poway Unified School District The District is located in San Diego County. The District currently operates 21 elementary schools, 5 middle schools, 4 high schools, 1 continuation high school, an alternative education program and an adult education program. A new elementary school and a new middle school are presently under construction. An additional elementary school and the final high school for the District are in the planning phases. Total enrollment of approximately 33,049 students as of December 2004. The District has issued a variety of financings including COPs, Mello-Roos and SFID / General Obligation Bonds. 39
The Presenters Dawn Vincent Managing Director
Stone & Youngberg LLC Ms. Vincent has worked in municipal finance since 1985, joining Stone & Youngberg in 1989. Her efforts at the firm have focused on general government and land-secured transactions for California school districts and public agencies. She has been actively involved on 186 California financings totaling over $2.25 billion since joining Stone & Youngberg. Ms. Vincent has served as a both an investment banker and financial advisor to cities, counties and school districts. She has structured financings for public agencies that have issued debt for a variety of capital improvement projects secured by general and special taxes, general fund leases, tax increment, and special assessments. Ms. Vincent graduated with honors from the University of Santa Clara and has completed graduate studies at the University of Iowa. Stone & Youngberg LLC Founded in 1931, Stone & Youngberg LLC is the largest and most active regional investment bank in California with an exclusive commitment to providing financial services to public agency clients. Stone & Youngberg is owned and operated by its 14 managing directors, all of whom are actively engaged in the firm. The firm has 220 employees among its offices in San Francisco, Los Angeles, San Diego, Connecticut, Virginia and Phoenix. In 2003, Stone & Youngberg served as lead manager on 166 bond issues totaling over $3.5 billion and had secondary market trading volume exceeding $5 billion. The firm’s website is www.syllc.com.
40
Useful Websites Rating Agencies Fitch Investors Service, L.P. (800) 753-4824 www.fitchinv.com
Moody’s Investor Service (212) 553-0300 www.moodys.com
Standard & Poor’s Ratings Group (877) 299-2569 www.standardandpoors.com
State, Federal and Regulatory Websites California Debt and Investment Advisory Commission (916) 653-3269 www.treasurer.ca.gov/stocda.htm MSRB (703) 797-6600 www.msrb.org
California State Treasurer’s Office (916) 653-2995 www.treasurer.ca.gov Securities and Exchange Commission (800) SEC-0330 www.sec.gov
California Municipal Professionals’ Websites Jones Hall, LLP www.joneshall.com
Orrick, Herrington & Sutcliffe, LLP Stradling Yocca Carlson & Rauth www.orrick.com www.sycr.com Stone & Youngberg LLC www.syllc.com
41
14