BOND
2009 SNW/WSPRA School Election Conference Making Sense of the Numbers September 10, 2009
Trevor Carlson Senior Vice President 206.689.2741 [email protected]
Annette Sommer Vice President 206.689.2776 [email protected]
About SNW We help school districts borrow money by planning, implementing and managing bond sales Bond underwriters and financial advisors Largest public finance firm in the Northwest In business for over 37 years Serving the financing needs of over 70% of school districts in the State of Washington
1
2
OVERVIEW OF BONDS
Planning a Bond Financing
3
The participants in a municipal bond sale include the following: The Architect provides cost projections based on the project scope. The Washington Office of Superintendent of Public Instruction (OSPI) provides the District with an estimate of State matching funds. The Underwriter provides financial planning and ultimately buys the bonds for resale to investors. The Bond Counsel prepares documents and provides a legal opinion that the bonds are legally issued and are exempt from Federal income taxes. The County Treasurer is the District’s treasurer and takes receipt of the bond proceeds. The ballot proposition must include the following information: The maximum amount to be borrowed The par amount of bonds sold Estimated costs/fees for bond issuance The maximum term of the bonds Legally can repay the bonds up to 40 years Match useful life of assets with the financing structure The uses of the bond proceeds Be specific enough to describe the project, but general enough in case you need the flexibility to change the use The use of State matching money The District’s unlimited authority to levy property taxes to pay debt service This is a very strong credit pledge – investors like this!
Overview of Bonds 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 districts have some control over taxpayer impacts Types of school district bonds Voted – Unlimited Tax General Obligation Bonds (UTGO) Non‐voted – Limited General Obligation Bonds (LGO) Voter‐approved bonds (UTGO) repaid with property taxes approved with a 60% yes vote, 40% validation 5.0% statutory debt capacity 40‐year maximum term Non‐voted bonds (LGO) repaid with existing revenue can’t be used for “new” construction 0.375% statutory debt capacity Capital projects levy one‐ to six‐year repayment no interest cost significantly reduced interest earnings life cycle mismatch simple majority
4
5
ELECTION PLANNING
Voting Patterns – Yearly Passage Rates School Bond Issues Passed by Year 1992 through May 2009, inclusive
On average, 38% of school bond elections pass in any given year.
*Through May 19, 2009.
6
Voting Patterns – When To Run A Bond School Bond Issues Passed by Month 1992 through May 2009, inclusive
Historically, spring elections have been the most favorable for bonds.
7
Voting Patterns – Multiple Ballots From February 2002 to May 2009, there were 418 bond measures on the ballot, of which 74 (or approximately 18%) were run with an M&O levy.
8
Election Planning Ideal Time Frame for Major Decisions
(1) (2)
Special elections Primary or presidential election
9
Election Planning
10
Election Results
11
When preparing for an election, it may be helpful to review the District’s historic passage rates. What types of challenges has the District faced in the past? Is there strong historic support by the community? Historically, by what margin has the District passed measures?
M&O
BOND Date
Par Amount
% Yes
Results
Date
Yes %
Results
May 97
$2,850,000
70.90%
PASSED
Feb 06
76.22%
PASSED
Feb 92
$2,000,000
73.00%
PASSED
Mar 02
72.92%
PASSED
Nov 92
$2,000,000
57.06%
FAILED
Feb 98
73.21%
PASSED
Feb 96
70.17%
PASSED
Feb 94
68.08%
PASSED
Feb 92
73.30%
PASSED
Feb 92
53.90%
FAILED
SNW Election Services
12
Pre‐Election Services Provide bond issue planning Attend community meetings Meet with Facilities Committee Act as resource to Election Committee – survey research Coordinate work with County Treasurer Apply for bond ratings and bond insurance
Post‐Election Services Coordinate financing team activities Prepare Official Statements Market bonds – find the investors Provide investment analysis Provide ongoing assistance: Debt Service Fund cash flow analysis SEC disclosure compliance Refunding analysis Arbitrage rebate assistance
13
BOND ISSUE PLANNING
Financial Plan
14
When creating a financial plan, there are a number of items that need to be considered. Project Budget What are the estimated costs of the project? What are the estimated revenues to help pay for the project? Bonds State match Investment earnings Impact fees Timing When do you need the money? What is the construction draw schedule? Tax law considerations Provide funds when needed for project costs (IRS 85% spend‐down within three years) Arbitrage rebate exemptions Spend‐down test Issuance amount (issue $15 million or less per year) Bond Tax Rate What is the impact of the project on property owners (taxpayers)? Tax rates are the standard means of communicating the tax impact on property owners. The tax rate will be affected by the assumptions used for the following: Interest rates Bond rating Assessed value Bond structure
Interest Rates
15
Lower interest rates in the market result in lower debt service payments on the bonds, which results in lower tax rates for property owners. Interest rates are estimated for planning purposes and then finalized when the bonds are actually sold (after the bond election).
Bond Rating Like your personal credit rating, a higher credit rating for the District results in a lower borrowing cost. With bonds, investors view the credit rating as an indication of risk (i.e., likeliness to default on payments). A higher bond credit rating results in lower interest rates because investors feel this is an indication of reduced risk. Therefore, the higher the District’s credit rating, the lower the interest rate on the bonds. The ratings use a letter system. The ones with only As in their rating are of high quality. The ones with a B in the rating are of medium quality. Bonds with a C are either low quality or extremely low quality. Bonds are commonly labeled either ʺinvestment gradeʺ or “speculative“ (often called ʺhigh yieldʺ instead). Historically, a District would pursue a underlying credit rating once it could qualify in the A category. If a District does not have an underlying credit rating, it is referred to as “non‐rated.”
16
What Do Bond Ratings Mean?
17
Moodyʹs Bond Ratings Aaa: Best quality, with the smallest degree of investment risk. Aa: High quality by all standards; together with the Aaa group, they comprise what are generally known as high‐ grade bonds. A: Possess many favorable investment attributes; considered upper‐medium‐grade bonds. Baa: Medium‐grade bonds (neither highly protected nor poorly secured). Bonds rated Baa and above are considered investment grade. Ba: Have speculative elements; futures are not as well‐assured. Bonds rated Ba and below are generally considered speculative. B: Generally lack characteristics of a desirable investment. Caa: Bonds of poor standing. C: Lowest rated class of bonds, with extremely poor prospects of ever attaining any real investment standing. Standard & Poorʹs Bond Ratings AAA: The highest rating assigned by Standard & Poorʹs. The bond issuerʹs capacity to meet its financial commitment is extremely strong. AA: Differs from the highest‐rated obligations only to a small degree. The bond issuerʹs capacity to meet its financial commitment on the bonds is very strong. A: Somewhat more affected negatively by changes in world and economic conditions than bonds in higher‐rated categories. However, the bond issuerʹs capacity to meet its financial commitment on the bonds is still strong. BBB: A bond rated ʹBBBʹ show signs of adequate financial protection. However, unfavorable economic conditions or changing circumstances are more likely to weaken the bond issuerʹs ability to meet its financial commitment. BB, B, CCC, CC, and C: Bonds with these ratings are regarded as having significant risk, even though they may have some positive qualities. ʹBBʹ indicates the lowest degree of risk and ʹCʹ the highest. D: A bond rated ʹDʹ is in payment default.
Source: http://www.aarp.org/money/financial_planning/sessionsix/bonds.html
Bond Rating Rating agencies consider the District’s debt, local economy, financial performance and governmental factors.
Rating options include: District’s underlying rating State guarantee (Aa1) Bond insurance (Aaa) Debt factors include: Debt repayment structure Debt burden Future capital needs Local economy factors include: Geographic location/proximity to transportation networks, cities, etc.
Infrastructure of area (roads, utility systems, transportation facilities)
Size/structure/diversity of tax base (concentration of largest
taxpayers) Population base (age, education, labor skills, income/wealth levels) Employment base (reliance on particular industries)
Financial performance factors include: Accounting and reporting methods Revenue/expenditure trends Annual operating and budgetary performance General fund balance Governmental factors include: Legal and political relationships between state and local levels of government
Tenure of governmental officials and frequency of elections Background and experience of key members of administration
18
Assessed Value
19
ABC School District No. 123 Assessed Value History 10‐year compound average growth rate (1998‐2008): 10.48% 5‐year compound average growth rate (2003‐2008): 12.82% District is on a 4‐year revaluation cycle by the County
Assessed Value
20
ABC School District No. 123 Assessed Value Projections Projected total assessed value growth Preliminary 2008: 45.46% growth Revaluation Year: 5.0% annual growth Non‐Revaluation Year: 1.0% annual growth Higher assessed values will lower the District’s tax rates (but not the overall payment). An individual’s taxes will be based on the assessed value of his or her own property. Dissecting the components that make up the assessed value growth will be important. How much of the growth is related to new construction versus increased value of existing properties?
Bond Structure State law gives districts great flexibility in determining bond structures. Options include: Level debt service Level tax rate Stepped level tax rate All levies
21
Bond Structure
Level debt service Annual principal and interest payments are the same in each year. As the assessed value increases, the tax rate decreases over time.
Level tax rate Annual principal and interest payments grow proportionally to the estimated growth in assessed value. Results in a level tax rate over time.
22
Bond Issue Planning
Stepped level tax rate Tax rate decreases in future year to accommodate future bond/levy needs.
All levies Tax rate “wraps around” outstanding levies to target an overall tax rate.
23
Bond Structure Planning – Case Study No. 1 Assumptions Interest Rates – current rates plus 50 basis points Bond Rating – State Guarantee Aa1/AA, District A3 Assessed Value – 2008: 45.46%, Reval Year: 5.0%, Non‐reval Year: 1.0%
24
Bond Structure Planning – Case Study No. 1 Level Tax Rate
25
Bond Structure Planning – Case Study No. 2 Assumptions Interest Rates – current rates plus 50 basis points Bond Rating – State Guarantee Aa1/AA, District A3 Assessed Value – 2008: 45.46%, Reval Year: 5.0%, Non‐reval Year: 1.0%
26
Bond Structure Planning – Case Study No. 2 Stepped Level Tax Rate
27
Bond Structure Planning – Case Study No. 3 Assumptions Interest Rates – current rates plus 50 basis points 2012 current rates plus 100 basis points Bond Rating – State Guarantee Aa1/AA, District A3 Assessed Value – 2008: 45.46%, Reval Year: 5.0%, Non‐reval Year: 1.0%
28
Bond Structure Planning – Case Study No. 3 Combined Level Tax Rate
29
Tax Impact Analysis – Case Study
30
This table shows the impact of the projected tax increase due to the new bonds for various home prices.
Next Steps Project Planning Refine project scope and local share of required funds Refine tax rate projections Looking Ahead Review the Debt Service Fund cash flow planning and budget Consider future financing and levy needs Election Resources Levy Library Free library of campaign materials to help pass school levies and bonds SNW funded the development and funds the ongoing maintenance http://www.levylibrary.org SNW Biennial Election Conference and Survey Voters polled on topics such as mood of voters, grading of schools, funding issues, property taxes Attending Facility / Bond Committee meetings Presentation of information at community and civic organization meetings County Assessor and Treasurer briefing Community Surveys
31
ARRA Bond-Related Provisions
32
Tax Credit Bonds
Subsidy Bonds
Build America Bonds
Direct Subsidy/ Tax Credit
Recovery Zone Economic Devp. Bonds (RZEDBs)
Direct Subsidy/ Tax Credit
Clean Renewable Energy Bonds (CREBs and New CREBs)
Tax Credit
Qualified Energy Conservation Bonds (QECBs)
Qualified School Construction Bonds (QSCBs)
Qualified Zone Academy Bonds (QZABs)
Tax‐Exempt
Recovery Zone Facility Bonds
Tax Credit
Tax Credit
9
9
9
9
9
9
9
9
Corp
501(c)3
Public Utilities 9
9
9
9 (co‐ ops)
$10.0 billion nationally
45%
Taxable debt with direct subsidy to issuer (interest cost refund) or tax credit to the investor. Permitted issuers are municipalities with populations in excess of 100,000 and counties. Issuer must designate Recovery Zone.
$2.4 billion nationally
70%
Qualified tax credit bond program for renewable energy projects. Deadline for applications is August 4, 2009.
70%
Qualified tax credit bond program for energy conservation projects, including transit, EE in public buildings and green community programs. No more than 30% may be issued as private activity bonds.
100%
Qualified tax credit bond program for school construction, repair and rehabilitation (includes land acquisition and equipment). Allocated based on Title 1 Grants.
100%
Qualified tax credit bond program for school renovation, equipment, teacher training and course materials for schools in empowerment zones or enterprise communities.
NA
Tax‐exempt bonds. Permitted issuers are municipalities with populations in excess of 100,000 and counties. Property may be privately owned; property must be constructed or retrofitted after Recovery Zone is designated.
9
9
$1.4 billion nationally. $25 million to WA, $17 million to OR and $6 million to ID.
(1) Only applies to cities/counties that are able to issue bonds on behalf of school districts.
Description Taxable debt for governmental projects paired with a direct subsidy to issuer (interest cost refund) or tax credit to the investor. Tax‐exempt bond rules apply.
$11 billion in 2009, $11 billion in 2010. $164 million to WA, $112 million to OR and $37 million to ID in 2009.
9
% of Tax Credit / Subsidy
35%
$3.2 billion nationally. $68 million to WA, $39 million to OR and $16 million to ID.
9
9 (1)
Program Limit No volume cap. Direct subsidy BABs used for new money capital expenditures only. Tax credit BABs can be used for refunding and working capital.
9
Tax Credit
Tax‐ exemption
School Districts
Type
Cities/ Counties
Bond / Loan Provision
States
Affected Issuers
$15 billion nationally
ARRA - Overview
33
American Recovery and Reinvestment Act of 2009 was signed into law on February 17, 2009. Certain provisions in the Act were included to reduce borrowing costs for school districts. The programs and provisions applicable to school districts include: Build America Bonds (BABs) Bank‐Qualification Qualified Zone Academy Bonds (QZABs) Qualified School Construction Bonds (QSCBs) Clean Renewable Energy Bonds (CREBs) and Qualified Energy Conservation Bonds (QECBs)
Build America Bonds – Taxable Bond Option Allocating a portion of the long maturities to BABs may result in decreased total borrowing cost. There are two types of BABs for municipal issuers to consider: Issuer Subsidy BABs ‐ Municipal issuers sell taxable BABs and receive a subsidy directly from Treasury equal to 35% of the interest on the bonds. Investor Subsidy BABs ‐ Municipal issuers sell taxable BABs and the investor receives a tax credit equal to 35% of the interest received. The Issuer Subsidy BABs are expected to generate a lower overall cost of borrowing than the Investor Subsidy BABs. Subsidy received from Treasury can be used for purposes other than the payment of debt service. There is no volume cap on this program.
Recent Build America Bond transactions have been favorably received in the market. We expect the demand for these bonds to remain strong. Continued demand will lead to lower spreads to Treasury pricing. The decision to issue BABs would be a “game day” decision at the time of the bond sale. If it was cost‐ effective for the issuer to use this program at the time of the bond sale, it could be used.
34
Other Stimulus Package Provisions
35
In addition to the BABs program, the Act included several other provisions that might have applicability.
Increase in Bank Qualification (BQ) threshold Small issuer limitation for BQ status increased to $30 million of tax‐exempt debt issued within a calendar year BQ benefit varies depending on market conditions but may result in reduced borrowing cost for the school district Qualified Zone Academy Bonds (QZABs) Continuation and expansion of tax credit bond program started in 1998 Investor receives a tax credit in lieu of an interest payment Proceeds must be used for renovation or for equipping or training teachers and personnel at qualified schools $1.4 billion authorized for each of calendar years 2009 and 2010 The amount allocated to Washington State is allocated by OSPI to eligible school districts A qualified zone must be located in an empowerment zone or enterprise community, or have at least 35 percent of students eligible for free or reduced‐cost lunches Must obtain written commitments from private entities to make qualified contribution with a present value of not less than 10 percent of the bond proceeds
Other Stimulus Package Provisions
36
Qualified School Construction Bonds (QSCBs) New tax credit bond program Investor receives a tax credit in lieu of an interest payment Proceeds must be used to construct, rehabilitate, repair or acquire land for public school facilities $11 billion authorized nation‐wide for each of calendar years 2009 and 2010 $164,111,000 allocated to schools in Washington State for 2009 Allocation mechanism is administered by OSPI Bulletin No. 048‐09 (July 29, 2009) Sinking fund funded at a rate no faster than equal annual installments Current maximum term is 15 years Clean Renewable Energy Bonds (CREBs) Tax credit bond program Investor receives a tax credit in lieu of an interest payment Limited use for school districts; projects typically include wind, biomass, geothermal, solar, municipal solid waste, small irrigation power and hydropower $2.4 billion in CREBs authorized Qualified Energy Conservation Bonds (QECBs) Tax credit bond program Investor receives a tax credit in lieu of an interest payment Capital expenditures for reducing energy consumption in publicly owned buildings by at least 20% $3.2 billion QECBs authorized
Washington School Bond Manual
The manual is the result of a partnership between WSSDA and SNW. It provides critical information to those involved in financing education in the State of Washington and is a helpful resource for districts in maneuvering through the essential process of planning for bond measures. Second edition is now available For ordering information, contact David Brine at: [email protected]
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37
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QUESTIONS?
Trevor Carlson Senior Vice President 206.689.2741 [email protected]
Annette Sommer Vice President 206.689.2776 [email protected]
About SNW We help school districts borrow money by planning, implementing and managing bond sales Bond underwriters and financial advisors Largest public finance firm in the Northwest In business for over 37 years Serving the financing needs of over 70% of school districts in the State of Washington
1
2
OVERVIEW OF BONDS
Planning a Bond Financing
3
The participants in a municipal bond sale include the following: The Architect provides cost projections based on the project scope. The Washington Office of Superintendent of Public Instruction (OSPI) provides the District with an estimate of State matching funds. The Underwriter provides financial planning and ultimately buys the bonds for resale to investors. The Bond Counsel prepares documents and provides a legal opinion that the bonds are legally issued and are exempt from Federal income taxes. The County Treasurer is the District’s treasurer and takes receipt of the bond proceeds. The ballot proposition must include the following information: The maximum amount to be borrowed The par amount of bonds sold Estimated costs/fees for bond issuance The maximum term of the bonds Legally can repay the bonds up to 40 years Match useful life of assets with the financing structure The uses of the bond proceeds Be specific enough to describe the project, but general enough in case you need the flexibility to change the use The use of State matching money The District’s unlimited authority to levy property taxes to pay debt service This is a very strong credit pledge – investors like this!
Overview of Bonds 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 districts have some control over taxpayer impacts Types of school district bonds Voted – Unlimited Tax General Obligation Bonds (UTGO) Non‐voted – Limited General Obligation Bonds (LGO) Voter‐approved bonds (UTGO) repaid with property taxes approved with a 60% yes vote, 40% validation 5.0% statutory debt capacity 40‐year maximum term Non‐voted bonds (LGO) repaid with existing revenue can’t be used for “new” construction 0.375% statutory debt capacity Capital projects levy one‐ to six‐year repayment no interest cost significantly reduced interest earnings life cycle mismatch simple majority
4
5
ELECTION PLANNING
Voting Patterns – Yearly Passage Rates School Bond Issues Passed by Year 1992 through May 2009, inclusive
On average, 38% of school bond elections pass in any given year.
*Through May 19, 2009.
6
Voting Patterns – When To Run A Bond School Bond Issues Passed by Month 1992 through May 2009, inclusive
Historically, spring elections have been the most favorable for bonds.
7
Voting Patterns – Multiple Ballots From February 2002 to May 2009, there were 418 bond measures on the ballot, of which 74 (or approximately 18%) were run with an M&O levy.
8
Election Planning Ideal Time Frame for Major Decisions
(1) (2)
Special elections Primary or presidential election
9
Election Planning
10
Election Results
11
When preparing for an election, it may be helpful to review the District’s historic passage rates. What types of challenges has the District faced in the past? Is there strong historic support by the community? Historically, by what margin has the District passed measures?
M&O
BOND Date
Par Amount
% Yes
Results
Date
Yes %
Results
May 97
$2,850,000
70.90%
PASSED
Feb 06
76.22%
PASSED
Feb 92
$2,000,000
73.00%
PASSED
Mar 02
72.92%
PASSED
Nov 92
$2,000,000
57.06%
FAILED
Feb 98
73.21%
PASSED
Feb 96
70.17%
PASSED
Feb 94
68.08%
PASSED
Feb 92
73.30%
PASSED
Feb 92
53.90%
FAILED
SNW Election Services
12
Pre‐Election Services Provide bond issue planning Attend community meetings Meet with Facilities Committee Act as resource to Election Committee – survey research Coordinate work with County Treasurer Apply for bond ratings and bond insurance
Post‐Election Services Coordinate financing team activities Prepare Official Statements Market bonds – find the investors Provide investment analysis Provide ongoing assistance: Debt Service Fund cash flow analysis SEC disclosure compliance Refunding analysis Arbitrage rebate assistance
13
BOND ISSUE PLANNING
Financial Plan
14
When creating a financial plan, there are a number of items that need to be considered. Project Budget What are the estimated costs of the project? What are the estimated revenues to help pay for the project? Bonds State match Investment earnings Impact fees Timing When do you need the money? What is the construction draw schedule? Tax law considerations Provide funds when needed for project costs (IRS 85% spend‐down within three years) Arbitrage rebate exemptions Spend‐down test Issuance amount (issue $15 million or less per year) Bond Tax Rate What is the impact of the project on property owners (taxpayers)? Tax rates are the standard means of communicating the tax impact on property owners. The tax rate will be affected by the assumptions used for the following: Interest rates Bond rating Assessed value Bond structure
Interest Rates
15
Lower interest rates in the market result in lower debt service payments on the bonds, which results in lower tax rates for property owners. Interest rates are estimated for planning purposes and then finalized when the bonds are actually sold (after the bond election).
Bond Rating Like your personal credit rating, a higher credit rating for the District results in a lower borrowing cost. With bonds, investors view the credit rating as an indication of risk (i.e., likeliness to default on payments). A higher bond credit rating results in lower interest rates because investors feel this is an indication of reduced risk. Therefore, the higher the District’s credit rating, the lower the interest rate on the bonds. The ratings use a letter system. The ones with only As in their rating are of high quality. The ones with a B in the rating are of medium quality. Bonds with a C are either low quality or extremely low quality. Bonds are commonly labeled either ʺinvestment gradeʺ or “speculative“ (often called ʺhigh yieldʺ instead). Historically, a District would pursue a underlying credit rating once it could qualify in the A category. If a District does not have an underlying credit rating, it is referred to as “non‐rated.”
16
What Do Bond Ratings Mean?
17
Moodyʹs Bond Ratings Aaa: Best quality, with the smallest degree of investment risk. Aa: High quality by all standards; together with the Aaa group, they comprise what are generally known as high‐ grade bonds. A: Possess many favorable investment attributes; considered upper‐medium‐grade bonds. Baa: Medium‐grade bonds (neither highly protected nor poorly secured). Bonds rated Baa and above are considered investment grade. Ba: Have speculative elements; futures are not as well‐assured. Bonds rated Ba and below are generally considered speculative. B: Generally lack characteristics of a desirable investment. Caa: Bonds of poor standing. C: Lowest rated class of bonds, with extremely poor prospects of ever attaining any real investment standing. Standard & Poorʹs Bond Ratings AAA: The highest rating assigned by Standard & Poorʹs. The bond issuerʹs capacity to meet its financial commitment is extremely strong. AA: Differs from the highest‐rated obligations only to a small degree. The bond issuerʹs capacity to meet its financial commitment on the bonds is very strong. A: Somewhat more affected negatively by changes in world and economic conditions than bonds in higher‐rated categories. However, the bond issuerʹs capacity to meet its financial commitment on the bonds is still strong. BBB: A bond rated ʹBBBʹ show signs of adequate financial protection. However, unfavorable economic conditions or changing circumstances are more likely to weaken the bond issuerʹs ability to meet its financial commitment. BB, B, CCC, CC, and C: Bonds with these ratings are regarded as having significant risk, even though they may have some positive qualities. ʹBBʹ indicates the lowest degree of risk and ʹCʹ the highest. D: A bond rated ʹDʹ is in payment default.
Source: http://www.aarp.org/money/financial_planning/sessionsix/bonds.html
Bond Rating Rating agencies consider the District’s debt, local economy, financial performance and governmental factors.
Rating options include: District’s underlying rating State guarantee (Aa1) Bond insurance (Aaa) Debt factors include: Debt repayment structure Debt burden Future capital needs Local economy factors include: Geographic location/proximity to transportation networks, cities, etc.
Infrastructure of area (roads, utility systems, transportation facilities)
Size/structure/diversity of tax base (concentration of largest
taxpayers) Population base (age, education, labor skills, income/wealth levels) Employment base (reliance on particular industries)
Financial performance factors include: Accounting and reporting methods Revenue/expenditure trends Annual operating and budgetary performance General fund balance Governmental factors include: Legal and political relationships between state and local levels of government
Tenure of governmental officials and frequency of elections Background and experience of key members of administration
18
Assessed Value
19
ABC School District No. 123 Assessed Value History 10‐year compound average growth rate (1998‐2008): 10.48% 5‐year compound average growth rate (2003‐2008): 12.82% District is on a 4‐year revaluation cycle by the County
Assessed Value
20
ABC School District No. 123 Assessed Value Projections Projected total assessed value growth Preliminary 2008: 45.46% growth Revaluation Year: 5.0% annual growth Non‐Revaluation Year: 1.0% annual growth Higher assessed values will lower the District’s tax rates (but not the overall payment). An individual’s taxes will be based on the assessed value of his or her own property. Dissecting the components that make up the assessed value growth will be important. How much of the growth is related to new construction versus increased value of existing properties?
Bond Structure State law gives districts great flexibility in determining bond structures. Options include: Level debt service Level tax rate Stepped level tax rate All levies
21
Bond Structure
Level debt service Annual principal and interest payments are the same in each year. As the assessed value increases, the tax rate decreases over time.
Level tax rate Annual principal and interest payments grow proportionally to the estimated growth in assessed value. Results in a level tax rate over time.
22
Bond Issue Planning
Stepped level tax rate Tax rate decreases in future year to accommodate future bond/levy needs.
All levies Tax rate “wraps around” outstanding levies to target an overall tax rate.
23
Bond Structure Planning – Case Study No. 1 Assumptions Interest Rates – current rates plus 50 basis points Bond Rating – State Guarantee Aa1/AA, District A3 Assessed Value – 2008: 45.46%, Reval Year: 5.0%, Non‐reval Year: 1.0%
24
Bond Structure Planning – Case Study No. 1 Level Tax Rate
25
Bond Structure Planning – Case Study No. 2 Assumptions Interest Rates – current rates plus 50 basis points Bond Rating – State Guarantee Aa1/AA, District A3 Assessed Value – 2008: 45.46%, Reval Year: 5.0%, Non‐reval Year: 1.0%
26
Bond Structure Planning – Case Study No. 2 Stepped Level Tax Rate
27
Bond Structure Planning – Case Study No. 3 Assumptions Interest Rates – current rates plus 50 basis points 2012 current rates plus 100 basis points Bond Rating – State Guarantee Aa1/AA, District A3 Assessed Value – 2008: 45.46%, Reval Year: 5.0%, Non‐reval Year: 1.0%
28
Bond Structure Planning – Case Study No. 3 Combined Level Tax Rate
29
Tax Impact Analysis – Case Study
30
This table shows the impact of the projected tax increase due to the new bonds for various home prices.
Next Steps Project Planning Refine project scope and local share of required funds Refine tax rate projections Looking Ahead Review the Debt Service Fund cash flow planning and budget Consider future financing and levy needs Election Resources Levy Library Free library of campaign materials to help pass school levies and bonds SNW funded the development and funds the ongoing maintenance http://www.levylibrary.org SNW Biennial Election Conference and Survey Voters polled on topics such as mood of voters, grading of schools, funding issues, property taxes Attending Facility / Bond Committee meetings Presentation of information at community and civic organization meetings County Assessor and Treasurer briefing Community Surveys
31
ARRA Bond-Related Provisions
32
Tax Credit Bonds
Subsidy Bonds
Build America Bonds
Direct Subsidy/ Tax Credit
Recovery Zone Economic Devp. Bonds (RZEDBs)
Direct Subsidy/ Tax Credit
Clean Renewable Energy Bonds (CREBs and New CREBs)
Tax Credit
Qualified Energy Conservation Bonds (QECBs)
Qualified School Construction Bonds (QSCBs)
Qualified Zone Academy Bonds (QZABs)
Tax‐Exempt
Recovery Zone Facility Bonds
Tax Credit
Tax Credit
9
9
9
9
9
9
9
9
Corp
501(c)3
Public Utilities 9
9
9
9 (co‐ ops)
$10.0 billion nationally
45%
Taxable debt with direct subsidy to issuer (interest cost refund) or tax credit to the investor. Permitted issuers are municipalities with populations in excess of 100,000 and counties. Issuer must designate Recovery Zone.
$2.4 billion nationally
70%
Qualified tax credit bond program for renewable energy projects. Deadline for applications is August 4, 2009.
70%
Qualified tax credit bond program for energy conservation projects, including transit, EE in public buildings and green community programs. No more than 30% may be issued as private activity bonds.
100%
Qualified tax credit bond program for school construction, repair and rehabilitation (includes land acquisition and equipment). Allocated based on Title 1 Grants.
100%
Qualified tax credit bond program for school renovation, equipment, teacher training and course materials for schools in empowerment zones or enterprise communities.
NA
Tax‐exempt bonds. Permitted issuers are municipalities with populations in excess of 100,000 and counties. Property may be privately owned; property must be constructed or retrofitted after Recovery Zone is designated.
9
9
$1.4 billion nationally. $25 million to WA, $17 million to OR and $6 million to ID.
(1) Only applies to cities/counties that are able to issue bonds on behalf of school districts.
Description Taxable debt for governmental projects paired with a direct subsidy to issuer (interest cost refund) or tax credit to the investor. Tax‐exempt bond rules apply.
$11 billion in 2009, $11 billion in 2010. $164 million to WA, $112 million to OR and $37 million to ID in 2009.
9
% of Tax Credit / Subsidy
35%
$3.2 billion nationally. $68 million to WA, $39 million to OR and $16 million to ID.
9
9 (1)
Program Limit No volume cap. Direct subsidy BABs used for new money capital expenditures only. Tax credit BABs can be used for refunding and working capital.
9
Tax Credit
Tax‐ exemption
School Districts
Type
Cities/ Counties
Bond / Loan Provision
States
Affected Issuers
$15 billion nationally
ARRA - Overview
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American Recovery and Reinvestment Act of 2009 was signed into law on February 17, 2009. Certain provisions in the Act were included to reduce borrowing costs for school districts. The programs and provisions applicable to school districts include: Build America Bonds (BABs) Bank‐Qualification Qualified Zone Academy Bonds (QZABs) Qualified School Construction Bonds (QSCBs) Clean Renewable Energy Bonds (CREBs) and Qualified Energy Conservation Bonds (QECBs)
Build America Bonds – Taxable Bond Option Allocating a portion of the long maturities to BABs may result in decreased total borrowing cost. There are two types of BABs for municipal issuers to consider: Issuer Subsidy BABs ‐ Municipal issuers sell taxable BABs and receive a subsidy directly from Treasury equal to 35% of the interest on the bonds. Investor Subsidy BABs ‐ Municipal issuers sell taxable BABs and the investor receives a tax credit equal to 35% of the interest received. The Issuer Subsidy BABs are expected to generate a lower overall cost of borrowing than the Investor Subsidy BABs. Subsidy received from Treasury can be used for purposes other than the payment of debt service. There is no volume cap on this program.
Recent Build America Bond transactions have been favorably received in the market. We expect the demand for these bonds to remain strong. Continued demand will lead to lower spreads to Treasury pricing. The decision to issue BABs would be a “game day” decision at the time of the bond sale. If it was cost‐ effective for the issuer to use this program at the time of the bond sale, it could be used.
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Other Stimulus Package Provisions
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In addition to the BABs program, the Act included several other provisions that might have applicability.
Increase in Bank Qualification (BQ) threshold Small issuer limitation for BQ status increased to $30 million of tax‐exempt debt issued within a calendar year BQ benefit varies depending on market conditions but may result in reduced borrowing cost for the school district Qualified Zone Academy Bonds (QZABs) Continuation and expansion of tax credit bond program started in 1998 Investor receives a tax credit in lieu of an interest payment Proceeds must be used for renovation or for equipping or training teachers and personnel at qualified schools $1.4 billion authorized for each of calendar years 2009 and 2010 The amount allocated to Washington State is allocated by OSPI to eligible school districts A qualified zone must be located in an empowerment zone or enterprise community, or have at least 35 percent of students eligible for free or reduced‐cost lunches Must obtain written commitments from private entities to make qualified contribution with a present value of not less than 10 percent of the bond proceeds
Other Stimulus Package Provisions
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Qualified School Construction Bonds (QSCBs) New tax credit bond program Investor receives a tax credit in lieu of an interest payment Proceeds must be used to construct, rehabilitate, repair or acquire land for public school facilities $11 billion authorized nation‐wide for each of calendar years 2009 and 2010 $164,111,000 allocated to schools in Washington State for 2009 Allocation mechanism is administered by OSPI Bulletin No. 048‐09 (July 29, 2009) Sinking fund funded at a rate no faster than equal annual installments Current maximum term is 15 years Clean Renewable Energy Bonds (CREBs) Tax credit bond program Investor receives a tax credit in lieu of an interest payment Limited use for school districts; projects typically include wind, biomass, geothermal, solar, municipal solid waste, small irrigation power and hydropower $2.4 billion in CREBs authorized Qualified Energy Conservation Bonds (QECBs) Tax credit bond program Investor receives a tax credit in lieu of an interest payment Capital expenditures for reducing energy consumption in publicly owned buildings by at least 20% $3.2 billion QECBs authorized
Washington School Bond Manual
The manual is the result of a partnership between WSSDA and SNW. It provides critical information to those involved in financing education in the State of Washington and is a helpful resource for districts in maneuvering through the essential process of planning for bond measures. Second edition is now available For ordering information, contact David Brine at: [email protected]
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QUESTIONS?
