11/8/2013 Bonds 101 Gary Olsen, Senior Financial Advisor/Vice President Jodie Zesbaugh , Financial Advisor Ehlers 2013 MASBO Fall Conference – November 15, 2013 1 Presentation Overview • Introduction and Background Information • Participants Involved in Issuing Debt • Debt Options, Rules and Regulations • Bond Ratings • Methods of Bond Sales • Questions 2 What is a Municipal Bond? • A pledge to repay a debt issue • Contract between the issuer and the bond holder • Typically, the pledge is a “general obligation” which is a full faith and credit debt pledge 3 1
11/8/2013 Guiding Principles • Debt Issuance and Management is most successful when you, the issuer • Understand your financing options • Receive clear information on implications of decisions • Have a basic understanding of the rules and regulations • Know who the participants are, their roles, whom each party “works” for, and how they are compensated • Generally understand how “bonds” are sold in the market 4 Why Borrow? • May be the only way the district can afford the cost of a project, improvement, or equipment • Few districts have sufficient funds available to pay for larger capital expenditures • Cost is spread out over a number of years • May allow for better management of tax rates • Avoids “roller coaster” effect on taxes • Matches the useful life of asset or improvement with who pays 5 Tax-Exemption • Interest paid to holders of many municipal obligations enjoys exemption from federal income taxation • An implicit subsidy exists from the U.S. Treasury to tax- exempt issuers • IRS has extensive rules and regulations regarding the issuance of tax-exempt obligations • In Minnesota, exempt from State income taxes 6 2
11/8/2013 Tax Exempt vs. Taxable Rates – 11/04/13 6.00 5.00 4.00 3.00 Tax-Exempt AAA Taxable AAA 2.00 Difference 1.00 0.00 Bloomberg, Municipal Market Data Yields 7 Debt Planning – Basic Topics to Discuss • Amount to borrow • Include all construction, cost of issuance, and soft costs • May be other items to capitalize • Sources of revenue • Tax levy (impact on taxes) • Other funding sources (impact on budget) • Term of repayment • Type of bond or borrowing and sources of revenue may dictate longest available term • Should not exceed useful life of asset financed 8 Debt Planning – Basic Topics to Discuss • Call provision • Determining which bonds can be “called” (redeemed prior to maturity), when they can be called and at what price • Existing and future debt considerations • Debt service impact on tax levy • Flexibility based on future financing needs 9 3
11/8/2013 Key Participants in Issuing Municipal Debt • Issuer (School District) • Financial Advisor / Municipal Advisor • Bond Counsel / Attorney • Rating Agencies • Purchaser (Underwriters, Broker/Dealers, Commercial Banks) • Paying Agent • Bond Insurers – Insurance for bond payments • Investors What are their roles, whom do they represent, and how are they paid? 10 Financial / Municipal Advisor • Professionals who offer advice on financial matters • Assists issuer in developing a finance plan and conducting the bond sale • Conducts a detailed assessment of client’s financial position, preferences, and objectives • Advises appropriate action(s) to meet client's objectives • Recommends one or more suitable financial solutions to match client’s needs • Coordinates financing and debt issuance process • Prepares official statement on behalf of issuer • Receives and evaluates proposals (competitive sale) or negotiates with purchaser (negotiated sale) • Coordinates closing of issue 11 Financial/Municipal Advisor • Represents the interests of the issuer exclusively in dealing with financial markets • Has a Fiduciary Duty to Issuer • Duty of Loyalty • Duty to deal honestly and in good faith with the municipal entity and to act in the municipal entity’s best interests • Duty of Care • Duty to exercise due care in performing its responsibilities • Advises in both debt and non-debt solutions • Provides official documentation for the bond issue 12 4
11/8/2013 Bond Counsel • Drafts required legal documents (i.e. notices, resolutions, certificates, etc.) on behalf of Issuer • Provides various legal opinions to the benefit of both Issuer and Buyer of debt obligations • Legal, valid and binding obligation of Issuer (valid contract) • Interest on bonds is exempt from federal and state income taxation • Opinions as relates to state and federal securities laws • Assists in preparation of closing documentation and actual closing of the transaction • Issuer pays Bond Counsel a flat fee for services, but the firm’s opinions accrue to the benefit of all parties to a transaction in one form or another 13 Rating Agencies • Three major rating agencies • Moody’s Investors Service • Standard & Poor’s • Fitch Investors Service • Provides an independent evaluation of the credit quality of each municipal debt issue • Called a bond or credit rating • Credit rating attempts to measure the risk of default on a debt issue 14 Purchaser • Firms that are initial purchasers of bonds are called Underwriters • Includes Broker/Dealers and Commercial Banks • Purchases bonds from issuer and generally resells to investors • Underwriter has financial and other interests that differ from those of issuer • Represents interest of investors, not issuer • D oes not have a fiduciary duty to issuer 15 5
11/8/2013 Paying Agent • Tracks and coordinates debt service payments for issuer • Submits invoices to issuer for principal and interest payments • Receives debt service payments from issuer • Makes principal and interest payments to bondholders on behalf of issuer • Required for Minnesota school districts participating in the state’s credit enhancement program • Not required if issuer is not participating in credit enhancement program 16 Debt Options, Rules and Regulations • Issuing Authority Comes from State Law • Spread throughout statutes based on issuer and obligation type • Tax Exemption Comes from Federal Tax Code • IRC Sections 103 and 141-150 17 Statutory Authority To Issue Debt • Building Bonds • MN Statutes Chapter 475 • Authorized by voter approval at special election / referendum • Used to finance purchase or construction of school buildings & facilities, renovation & improvement projects, infrastructure, and equipment 18 6
11/8/2013 Statutory Authority To Issue Debt • Alternative Facilities Bonds • MN Statutes Section 123B.59 • Authorized by approval of the Commissioner • Two programs • Full: repairs, maintenance, improvements and health & safety projects • Limited: health & safety projects greater than $500,000 per site 19 Statutory Authority To Issue Debt • Capital Notes / Certificates of Indebtedness • MN Statutes Section 123B.61 • Authorized by resolution of the Board • Used to purchase vehicles and equipment • Capital Facilities Bonds • MN Statutes Section 123B.62 • Authorized by approval of the Commissioner • Used to finance improvements to existing buildings, facilities, and sites 20 Statutory Authority to Issue Debt • Tax and Aid Anticipation Certificates • MN Statutes 123B.78 • Authorized by resolution of the Board • Used to cover cash flow operational deficits • Lease Purchase • MN Statutes 465.71 • Authorized by resolution of the Board • Used to finance the purchase of buildings, facilities, land, and equipment, construction & improvement projects 21 7
11/8/2013 Other Statutory References – Chapter 475 • 475.52 – Bond Issue Purposes • 475.53 – Limit on Net Debt • 15% of full market value of taxable property • 475.54 – Limitation on Term and Amount Maturing in Each Year • Generally 30 years • Complex rules regulating bond structure 22 Other Statutory References – Chapter 475 • 475.58 – Elections to Determine Issue • 475.61 – Tax Levies • Assess tax levy at 105% of debt service payments, less available funds • 475.67 – Refunding Bonds • For tax exempt general obligation refunding bonds issued more than 90 days prior to call date (advance refundings) • 3% present value savings requirement OR • Extend the maturity by at least three years 23 State and Federal Regulations • Credit Enhancement Program • Bank Qualification • Arbitrage • Continuing Disclosure • Reimbursement Regulations • Municipal Advisor 24 8
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