Capital Appreciation Bonds - California Association of School

Report
School Bonds 101
Session ID: FIN30
Session Title: School Bonds 101
Room: 104C
Day: Saturday, April 6th, 2013
Time: 8:00 – 9:00 a.m.
These materials have been prepared by a CASBO Associate Member. They have not been reviewed by State CASBO
for approval, so therefore are not an official statement of CASBO.
2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO
Panel Participants
•
Ruth Alahydoian
Vice President
KNN Public Finance
[email protected]
•
Timothy Rosnick
Deputy Controller
Los Angeles Unified School District
[email protected]
•
Arto Becker, Esq.
Partner
Hawkins Delafield & Wood LLP
[email protected]
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Outline of Presentation
• Introduction to California School Finance
• Bond Terminology & Parties Involved
• General Obligation Bonds
• Certificates of Participation
• Hot Issues
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California Constitution
• California Constitution, Article 16, Section 18a:
No county, city, town, township, board of education, or
school district, shall incur any indebtedness or liability in
any manner or for any purpose exceeding in any year the
income and revenue provided for such year, without the
assent of two-thirds [55% for school districts under
Proposition 39] of the voters of the public entity voting at
an election to be held for that purpose…
• In other words, generally, public agencies can’t issue debt
without voter approval.
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Exceptions to Voter Approval
• Borrowing for working capital (e.g., TRANs) is not
considered debt because it is must be paid from
same year revenues.
• Leases are not considered debt because they are
contingent on use of equipment or property and are
subject to annual appropriation and abatement.
– Lease revenue bonds
– Certificates of Participation
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What’s Available to a School District?
• Voter Approved Debt
–
–
–
–
General Obligation Bonds (GOBs)
Bond Anticipation Notes (BANs)
School Facility Improvement District (SFID) Bonds
Mello-Roos (Community Facility District (CFD)) Bonds
• Non-Voter Approved Debt
– Direct leases and lease revenue bonds (LRBs)
– Certificates of Participation (COPs)
• Working Capital
– Tax and Revenue Anticipation Notes (TRANs)
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Sources/Types of Financing
Type of Financing
VoterApproved
Not VoterApproved
Who’s responsible for
repayment?
General Obligation Bonds
X
All Taxpayers
School Facility Improvement District
X
Taxpayers within specific SFID
Mello-Roos (Community Facility
District
X
Property owners within CFD
Direct Lease
X
District
Certificates of Participation or Lease
Revenue Bonds
X
District
Tax and Revenue Anticipation Notes
X
District
X
Taxpayers; ultimately, General Fund
if GOBs are not issued.
X
For GOB Refunding – Taxpayers
For COP Refunding - District
Bond Anticipation Notes
Refundings – GOB or COP
X
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Features
Type of Financing
Uses
Typical Amount
Term
General Obligation Bonds
Capital Projects on Voter
List
$500,000+
Up to 40 years (max Gov Code)
Up to 25 years (max Ed Code)
School Facility Improvement
District
Capital Projects on Voter
List
$500,000+
Up to 40 years (max)
Mello-Roos (Community
Facility District)
Capital Projects
$500,000+
Up to 40 years (max)
Direct Lease
Capital Projects, may
include equipment
$50,000-$3M
2-10 years (typical)
Certificates of Participation
Capital Projects, may
include equipment
$3M+
5 - 30 years (typical)
Tax and Revenue Anticipation
Notes
Cash flow deficit or working
capital
$50,000+
1 year (typical)
15 months (max)
Bond Anticipation Notes
Capital Projects on Voter
List
$500,000+
Up to 5 years (max)
Refunding GOBs or
Refunding COPs
Refinance existing bonds or
COPs
$3,000,000+
Typically same as original issue
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Bond Terminology
• Par, principal, maturity amount – the principal amount issued
and promised to be repaid to an investor on a date certain.
• Interest rate, coupon – the interest rate assigned to a particular
maturity date. The principal maturing on that date pays the
assigned interest amount to the investor.
– Current Interest Bonds – interest is paid at least annually.
– Capital Appreciation Bonds – interest accrues at the
assigned rate but is not paid until the final maturity date.
• Yield – the yield is the rate that the investor receives based on
the interest rate and the price paid for the bonds.
• Price – Amount paid for bonds as a % of par.
2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO
Bond Terminology, Continued
• Premium– when interest rates are higher than market yields for
a particular maturity, bonds are sold at a higher price, and a
premium in excess of the maturity amount is generated.
• Discount – when interest rates are lower than market yields for
a particular maturity, bonds are sold at a discount, resulting in
less than the full maturity amount being paid for the bonds.
• “Call” or redemption features – bonds can be prepaid on their
“call” date. If not pre-payable, the bonds are “non-callable”.
• Debt Service, bond repayment, amortization schedule – the
schedule of principal and interest payments.
• Tax rate, tax levy – the rate that is applied to secured property
to generate enough revenues to cover bond payments in the
upcoming tax year.
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Parties Involved
Issuer
(Wants lowest cost)
Bond Counsel
Financial
Advisor
County
Treasurer/ Auditor
Seller of Bonds (Borrower)
Buyer of Bonds (Lender)
Bond Trustee/
Registrar/
Paying Agent
Rating Agency
Underwriter
Investors
(Wants highest return)
Underwriter’s
Counsel
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Disclosure
Counsel
General Obligation Bonds
2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO
Voter Approval – 55% Threshold (Prop.39)
•
Must be on “regularly scheduled local election date”
•
Must specify a project list that can be monitored by an oversight
committee
– Projects may include furniture and fixtures, along with the usual capital
expenditures that relate to facilities.
– Leases may also be allowed under Prop 39
•
Must have an oversight committee, with specific representation and reporting
responsibilities
•
Must have an annual bond audit
•
Tax rate projected by district must not exceed:
– $30 per $100,000 for elementary and high school districts
– $60 per $100,000 for unified school districts
– $25 per $100,000 for community college districts
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Voter Approval – 2/3 Threshold
• Can be held on any Tuesday (except within 45 days
of a State-wide election unless it is at the same time
as the State-wide election)
• Purpose can be very broad, but can only be
acquisition and improvement of real property - no
furniture or equipment
• An oversight committee is not required
• No limitations on tax rate
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Basis of Repayment
• Ad Valorem Taxation on all property within District
– Tax is on ad valorem basis – often referred to as $’s per
$100,000 of assessed value
– Tax is set annually by County Auditor based on debt service
requirements
– County Tax Collector collects taxes and deposits for benefit
of bond holder in Interest and Sinking Fund of district
• Technically – District Fund
• Practically – District has no access
• Use limited to bond debt service only (Ed Code 15251)
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Election Process
• Resolution Calling Election: School Board must approve the
measure for the ballot at least 88 days prior to election date
– Prop 39 election requires 2/3 approval of Board
• No public funds can be used for advocacy, including calls by
school officials during work hours
• Personal time is OK
• Board members can express their opinions during board
meetings
• Funding a campaign is a challenge
– Bundled services
– Campaign contributions from interested parties
– AB 1045 (Norby)
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Bond Issuance Process
• Once approved by voters, bonds may be issued in one or
more series over time.
• If issued under Government Code (Gov. Code Section
53506)
– County must allow districts to issue under government code.
– Issued directly by district.
– Repayment may extend up to 40 years from bond issuance.
• If issued under Education Code (Ed. Code Section 15140)
– Issued by County Board of Supervisors, at the request of the
District UNLESS,
– County Board of Supervisors has authorized school districts to
issue independently.
– Repayment may extend up to 25 years from bond issuance.
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Bond Issuance – Prior to Issuance
• Determining Amount to be Issued
– Debt Capacity Constraints – can not issue debt if
outstanding bonds would exceed legal limit (Ed Code
15268,15270 and 15102).
• 1.25% of taxable A.V. for elementary & high school districts
• 2.50% of taxable A.V. for unified school districts & community
college districts
– Tax Rate Constraints
• Prop. 39 constraints per election
• Other political promises made during an election
• Tax rate estimates are based on projections of future A.V.
growth – District will need to sign-off on reasonableness of
projections
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Bond Issuance – Authorizing Resolutions
• District Resolution requesting the county to issue should
include:
– Tax-exempt commitments
– Financing Parameters
•
•
•
•
Principal (not to exceed) amounts
Maturity dates
Interest rate parameters
Redemption provisions
– Pledge to request tax levy sufficient to repay bonds
– Approval of Form of Legal Documents
– AB 1482 Compliance
• Method of Sale & Reasons
• Disclosure of consultants
• Estimated costs of issuance
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Bond Issuance – Authorizing Resolutions, Continued
• County Resolution (and District Resolution, if issued
under Government Code) should include:
–
–
–
–
–
Financing parameters (as in District Resolution)
Approval of Purchase Contract / Notice of Sale
Investment alternatives
Establishment of funds
Pledge of security
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Bond Issuance – During Issuance Process
• Official Statement (OS) – District disclosure document
– Will include information on the County, particularly the
County Investment Pool
• Rating(s) – independent assessment of credit quality
• Sale and Pricing
– Competitive or negotiated
– Ed. Code – County oversees pricing, signs off on final
documents
– Gov. Code – District oversees pricing, signs off on final
documents
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Bond Issuance – Structural Issues
• Current Interest Bonds
• Capital Appreciation Bonds (CABs)
• Convertible Capital Appreciation Bonds (Convertible
CABs)
• Repayment terms (Gov. Code vs Ed. Code)
• For refunding bonds - cash-out (Attorney General Opinion
has squashed these)
• 2% Cost of Issuance (COI) provision (Ed Code 15146(g))
• Limitations on the use of premium to pay COI
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Bond Issuance - After
Immediately after sale:
• Closing documents and certifications
• Wire information, deposit to appropriate accounts
Annually:
• Tax setting and tax collection
• Account balance reporting to district
• Arbitrage issues – interest earnings on both Building (Proceeds)
Fund and Bond Interest and Redemption (Debt Service) Fund
must be reported
• Continuing Disclosure (District responsibility)
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Tax Levy
• The county is obligated to set, levy and collect ad valorem taxes
sufficient to repay the principal of and interest on the bonds, as
such payments come due.
• Depending on the policies of the county, the county auditor
determines the amount needed, and the county tax collector
levies and collects the tax.
• A reserve is allowed within IRS parameters.
• Districts can request specific levy amounts, in anticipation of
bonds to be issued in the coming year.
• Districts are required to report debt service adjustments due to
refundings.
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GOBs – Use of Funds
• Bond proceeds are deposited to the District’s “Building Fund”.
– Proceeds are net of any premium held by the underwriter (underwriter’s
compensation)
– Costs of issuance, to the extent not paid by the underwriter, will be paid
from bond proceeds (currently under consideration by State Attorney
General)
– Divergent views on ability to borrow for cash flow purposes (Ed Code
15146 (f))
• Any bond premium received by the District must be deposited to
the bond debt service fund.
• Can only be spent on voter-approved projects (per the language
and project list in the bond measure).
• District is subject to IRS regulations, including arbitrage rebate,
and will want to know interest earnings on this fund.
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Bond Anticipation Notes (BANs)
•
BANs are authorized under Ed Code Section 15150
•
Allows District to access bond authorization without issuing long term
bonds
•
District takes the risk that adverse conditions may make it difficult to
issue long term bonds when the BAN matures.
•
Does not count against the authorization or debt capacity limit until the BAN
is replaced with the actual bonds
•
Repayment can extend for up to 5 years
•
Renewal BANs
•
Must have bond authorization to issue a BAN
•
Principal is paid when District issues actual bonds
•
Interest can be paid at maturity from proceeds of actual bonds, or from tax
levy.
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Certificates of Participation
2013 CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO
Characteristics of COPs
• Similar to Lease Revenue Bonds.
• Asset (usually a school site) used to secure a lease.
• Non-profit financing corporation used as lessor –
provides upfront payment (COP proceeds) in
exchange for initial lease from District.
• District leases back property for annual lease
payments.
• Non-profit assigns lease payments to trustee to pass
on to COP holders.
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Flow of Funds- COP
School Facilities
Financing
Corporation or
JPA
Lease of
Property
Lease-back
of property
Assignment
of Lease
Lease Payments
School
District
Investor
Upfront payment for project costs in exchange for future lease payments
Trustee
Certification of future
lease payments
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Basis of Repayment
• District’s own funds
–
–
–
–
General Fund
Developer Fees
Adult Education or other specific fund
Special Taxes
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Issuance Process - Authorization
• At least 30 days before Board approval of COPs, school
districts must notify the County Auditor and the County
Superintendent of Schools. (Ed Code 17150.1).
– County Auditor and COE have 15 days to comment publicly.
• Districts with “qualified” or “negative” certification in that
fiscal year or the prior fiscal year cannot issue COPs (or
TRANs) unless the COE determines that the District’s
repayment is probable (Ed Code 42133).
• District Board must approve transaction and documents
– Must be an action item (not consent)
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COPs – After Issuance
• District is required to provide a debt service schedule
to the County Auditor-Controller.
• Both proceeds and repayment funds are held by a
Trustee, NOT the County.
• Eventually, after COPs are repaid, the lien on the
property must be released, and title returned to the
District.
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COP Do’s and Don’ts
• COPs are useful when:
– Source of repayment is reliable
– Project is not well suited to voter approval (size, limited
applicability)
• COPs are not appropriate when:
– Source of repayment is uncertain
– Size of project is so large (or project so unessential) that
District’s General Fund would not be able to absorb payments if
other payment sources were not available.
– Repayment term exceeds useful life of project.
– Project is not a capital project.
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GOBs & COPs - Characteristics
Characteristic
GOBs
COPs
Voter Approval
Required?
Yes
No
Taxpayers
District sources
Capital projects,
limited by bond
language
Capital projects as
identified by District Board
Up to 40 years, but no
longer than 120% of
useful life of project
Useful life of project
Repayment Source
Use of Funds
Repayment Term
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GOBs & COPs - Process
Procedure
GOBs
COPs
District Board Resolution
Yes
Yes
County Board Resolution
Maybe
No
County Auditor Review
No
Yes
County Office of Education Review
No
Yes
Asset (Property) Transfer
No
Yes
Maybe
No
Debt Service Provided to County
Yes
Yes
County Involvement in Repayment
Yes
No
County Involved in Issuance?
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Hot Topics
• CABs – Capital Appreciation Bonds
– What are they?
– Why are they used?
– Why are they in the news?
• AB 182 – Proposed legislation
– Repayment ratio and interest rate limits
– Callable or non-callable bonds
– Repayment term longer than 25 years
• Costs of issuance paid from premium
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