Avon Grove School District Capital Project Financing Review June - - PowerPoint PPT Presentation

Avon Grove School District

Capital Project Financing Review

Kenneth A. Phillips Managing Director RBC Capital Markets 2101 Oregon Pike Lancaster, PA 17601 Tel: (717) 519-6001 ken.phillips@rbccm.com

June 5, 2018

John Frey Director PFM Financial Advisors LLC One Keystone Plaza, Suite 300 Harrisburg, PA 17101 Tel: (717) 232-2723 freyj@pfm.com Wes Hall Senior Analyst PFM Financial Advisors LLC One Keystone Plaza, Suite 300 Harrisburg, PA 17101 Tel: (717) 232-2723 hallw@pfm.com Allison Macchi Vice President RBC Capital Markets 2101 Oregon Pike Lancaster, PA 17601 Tel: (717) 519-6002 allison.macchi@rbccm.com

RBC Capital Markets / Public Financial Management 1 | Avon Grove School District

Bond Buyer 20 General Obligation Bond Index

57 Year Historical Perspective

Today’s 3.95% level is lower than 80.56% of historical rates since January 1961

Source: Bloomberg as of May 17, 2018 Weekly yields and indexes released by the Bond Buyer. Updated every Thursday at approximately 6:00pm EST. 20 Bond General Obligation Yield with 20 year maturity, rated Aa2 by Moody's Arithmetic Average of 20 bonds' yield to maturity.

Bond Buyer 20 GO Index since January 1961 % of Time in Each Range Since 1961

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%

Bond Buyer 20 GO Bond Index Today's Rate at 3.95%

Yield Range Less than 3.50% 10.12% 3.50% - 4.00% 10.25% 4.01% - 4.50% 10.82% 4.51% - 5.00% 10.09% 5.01% - 5.50% 14.06% 5.51% - 6.00% 9.79% 6.01% - 6.50% 7.58% 6.51% - 7.00% 6.91% 7.01% - 7.50% 6.25% 7.51% - 8.00% 3.67% Greater than 8.00% 10.45% Total 100.00%

RBC Capital Markets / Public Financial Management 2 | Avon Grove School District

Principal and Gross Outstanding Debt Service

Avon Grove School District Summary of Debt Outstanding - 2016-17 Principal Fiscal Yr. Ended G.O. Bonds Series of 2012 G.O. Bonds Series A of 2012 G.O. Bonds Series of 2014 G.O. Bonds Series of 2015 Total Issued Debt Service Current Long Term 06/30/2017 195,000 565,000 1,395,000 625,000 2,780,000 2,780,000 06/30/2018 205,000 570,000 1,420,000 645,000 2,840,000 2,840,000 06/30/2019 210,000 580,000 1,460,000 665,000 2,915,000 2,915,000 06/30/2020 205,000 595,000 1,500,000 700,000 3,000,000 3,000,000 06/30/2021 215,000 605,000 1,545,000 730,000 3,095,000 3,095,000 06/30/2022 225,000 620,000 775,000 750,000 2,370,000 2,370,000 06/30/2023 225,000 635,000 860,000 860,000 06/30/2024 645,000 645,000 645,000 06/30/2025 655,000 655,000 655,000 06/30/2026 670,000 670,000 670,000 06/30/2027 690,000 690,000 690,000 06/30/2028 705,000 705,000 705,000 Princ @ 6/30/2016 1,480,000 7,535,000 8,095,000 4,115,000 21,225,000 2,780,000 18,445,000 Less 2016/17 Princ (195,000) (565,000) (1,395,000) (625,000) (2,780,000) As of 6/30/2017 1,285,000 6,970,000 6,700,000 3,490,000 18,445,000 2,780,000 18,445,000 Avon Grove School District Summary of Debt Outstanding - 2016-17 Total Principal and Interest Fiscal Yr. Ended G.O. Bonds Series of 2012 G.O. Bonds Series A of 2012 G.O. Bonds Series of 2014 G.O. Bonds Series of 2015 Total Issued Debt Service Current Long Term 06/30/2017 222,650 717,890 1,578,850 752,500 3,271,890 3,271,890 06/30/2018 228,650 711,540 1,573,600 756,575 3,270,365 3,270,365 06/30/2019 229,500 710,040 1,576,850 753,600 3,269,990 3,269,990 06/30/2020 220,350 713,290 1,571,400 761,300 3,266,340 3,266,340 06/30/2021 226,150 711,290 1,575,950 762,700 3,276,090 3,276,090 06/30/2022 231,750 714,040 782,750 759,050 2,487,590 2,487,590 06/30/2023 227,250 716,490 943,740 943,740 06/30/2024 713,368 713,368 713,368 06/30/2025 709,554 709,554 709,554 06/30/2026 709,975 709,975 709,975 06/30/2027 714,503 714,503 714,503 06/30/2028 713,284 713,284 713,284 Total P & I @ 6/30/20 1,586,300 8,555,263 8,659,400 4,545,725 23,346,688 3,271,890 20,074,798 Less 2016/17 Paymen (222,650) (717,890) (1,578,850) (752,500) (3,271,890) As of 6/30/2017 1,363,650 7,837,373 7,080,550 3,793,225 20,074,798 3,271,890 20,074,798

RBC Capital Markets / Public Financial Management 3 | Avon Grove School District

Net Outstanding Debt Service

Reimbursement Amounts - Revenue Fiscal Yr. Ended G.O. Bonds Series of 2012 G.O. Bonds Series A of 2012 G.O. Bonds Series of 2014 G.O. Bonds Series of 2015 Total Reimb 06/30/2017 22,571 206,211 107,666 336,448 06/30/2018 22,706 201,328 106,038 330,071 06/30/2019 22,790 201,743 105,621 330,154 06/30/2020 21,882 201,046 106,700 329,628 06/30/2021 22,458 201,628 106,896 330,982 06/30/2022 23,014 100,146 106,385 229,544 06/30/2023 22,567 22,567 Total 157,987 1,112,102 639,305 1,909,394 PE% 19.35% 0.00% 24.93% 27.31% PE% Status Perm Est. Perm Perm AR% (2017-18) 51.32% 51.32% 51.32% 51.32%

Net Debt Fiscal Yr. Ended G.O. Bonds Series of 2012 G.O. Bonds Series A of 2012 G.O. Bonds Series of 2014 G.O. Bonds Series of 2015 Total Net Debt Service 06/30/2017 200,079 717,890 1,372,639 644,834 2,935,442 06/30/2018 205,944 711,540 1,372,272 650,537 2,940,294 06/30/2019 206,710 710,040 1,375,107 647,979 2,939,836 06/30/2020 198,468 713,290 1,370,354 654,600 2,936,712 06/30/2021 203,692 711,290 1,374,322 655,804 2,945,108 06/30/2022 208,736 714,040 682,604 652,665 2,258,046 06/30/2023 204,683 716,490 921,173 06/30/2024 713,368 713,368 06/30/2025 709,554 709,554 06/30/2026 709,975 709,975 06/30/2027 714,503 714,503 06/30/2028 713,284 713,284 Total 1,428,313 8,555,263 7,547,298 3,906,420 21,437,293

RBC Capital Markets / Public Financial Management 4 | Avon Grove School District

Act 1 Index

Avon Grove School District 5-Year Summary of Potential Act 1 Millage Impact at Index For Illustration Purposes Only 1 3 4 5 Fiscal Year Ending Allowable Real Estate Millage Increase Real Estate Millage Rate Allowable Real Estate $ Increase 06/30/2017 29.040

Actual

06/30/2018 Actual Index 3.30% 0.9583 29.770 1,772,892

Actual

06/30/2019 Assumed Index 3.10% 0.9229 30.693 1,707,310 06/30/2020 Assumed Index 3.30% 1.0129 31.706 1,873,800 06/30/2021 Assumed Index 3.50% 1.1097 32.815 2,052,946 06/30/2022 Assumed Index 3.70% 1.2142 34.030 2,246,217 06/30/2023 Assumed Index 3.90% 1.3272 35.357 2,455,236 Notes * Per the District Administration, assumes 1 Collected Mill = 1,850,000 $ * Does not include any applicable PDE exceptions * Historical Act 1 index for District below : Fiscal Year Allowable Act 1 Index 2018-19 3.10% 2017-18 3.30% 2016-17 3.20% 2015-16 2.40% 2014-15 2.80% 2013-14 2.30% 2012-13 2.20% 2011-12 1.80% 2 Adjusted Act 1 Index Historical Act 1 Index for AGSD

RBC Capital Markets / Public Financial Management 5 | Avon Grove School District

Effects of a Real Estate Tax Increase – Taxing to Index

Percent Change 2.50% Percent Change 3.10% Percent Change 3.30% Assessed Value Mill Total Tax Paid Assessed Value Mill Total Tax Paid Increase Assessed Value Mill Total Tax Paid Increase Assessed Value Mill Total Tax Paid Increase 50,000 29.04 $1,452.00 50,000 29.77 $1,488.50 $36.50 50,000 30.69 $1,534.64 $46.14 50,000 31.71 $1,585.29 $50.64 110,000 29.04 $3,194.40 110,000 29.77 $3,274.70 $80.30 110,000 30.69 $3,376.22 $101.52 110,000 31.71 $3,487.63 $111.42 Median 169,600 29.04 $4,925.18 169,600 29.77 $5,048.99 $123.81 169,600 30.69 $5,205.51 $156.52 169,600 31.71 $5,377.29 $171.78 225,000 29.04 $6,534.00 225,000 29.77 $6,698.25 $164.25 225,000 30.69 $6,905.90 $207.65 225,000 31.71 $7,133.79 $227.89 300,000 29.04 $8,712.00 300,000 29.77 $8,931.00 $219.00 300,000 30.69 $9,207.86 $276.86 300,000 31.71 $9,511.72 $303.86 Millage Change 0.73 0.92 1.01 Allowable Change 0.95 0.92 1.01 Difference 0.22 0.00 (0.00) Percent Change 3.50% Percent Change 3.70% Percent Change 3.90% Assessed Value Mill Total Tax Paid Increase Assessed Value Mill Total Tax Paid Increase Assessed Value Mill Total Tax Paid Increase 50,000 32.82 $1,640.77 $55.49 50,000 34.03 $1,701.48 $60.71 50,000 35.36 $1,767.84 $66.36 110,000 32.82 $3,609.70 $122.07 110,000 34.03 $3,743.26 $133.56 110,000 35.36 $3,889.24 $145.99 Median 169,600 32.82 $5,565.50 $188.21 169,600 34.03 $5,771.42 $205.92 169,600 35.36 $5,996.51 $225.09 225,000 32.82 $7,383.47 $249.68 225,000 34.03 $7,656.66 $273.19 225,000 35.36 $7,955.27 $298.61 300,000 32.82 $9,844.63 $332.91 300,000 34.03 $10,208.88 $364.25 300,000 35.36 $10,607.03 $398.15 Millage Change 1.11 1.21 1.33 Allowable Change 1.11 1.21 1.33 Difference 0.00 (0.00) 0.00 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021 2021-2022 2021-2022

RBC Capital Markets / Public Financial Management 6 | Avon Grove School District

Hypothetical Financing Plan to Generate $127 Million of Project Funds

Series 2019 Series 2020 Series 2021 Series 2022 Less: Total Net $23,765,000 $33,495,000 $33,535,000 $30,625,000 Interest Total Value of Total Total Budget Outstanding Par Amount Par Amount Par Amount Par Amount Earnings/ Net 1 Mill Mills New Mills in Dollars Surplus Date D/S (1) Debt Service (2) Debt Service (3) Debt Service (4) Debt Service (5) SD Reserves Debt (6) Required Mills Place Appropriated (Deficit) (7) 2015 4,573,814 4,573,814 1,845,000 2.48 0.000 2.44 4,499,955

• 73,859

2016 3,693,812 3,693,812 1,845,000 2.00 0.000 2.44 4,499,955 806,143 2017 2,935,443 2,935,443 1,845,000 1.59 0.000 2.44 4,499,955 1,564,512 2018 2,933,412 2,933,412 1,845,000 1.59 0.000 2.44 4,499,955 1,566,543 2019 2,932,952 2,932,952 1,850,000 1.59 0.580 3.02 5,585,150 2,652,198 2020 2,929,840 1,050,651 3,980,491 1,850,000 2.15 0.580 3.60 6,658,150 2,677,659 2021 2,938,207 1,146,165 1,446,825 5,531,198 1,850,000 2.99 0.580 4.18 7,731,150 2,199,952 2022 2,253,260 1,146,165 1,578,355 1,814,669 6,792,449 1,850,000 3.67 0.570 4.75 8,785,650 1,993,201 2023 920,703 1,400,965 2,568,155 2,521,105 2,419,118 9,830,046 1,850,000 5.31 0.570 5.32 9,840,150 10,104 2024 713,368 1,608,325 2,571,680 2,516,028 2,418,243 9,827,643 1,850,000 5.31 0.000 5.32 9,840,150 12,508 2025 709,554 1,612,760 2,567,855 2,518,550 2,420,130 9,828,849 1,850,000 5.31 0.000 5.32 9,840,150 11,301 2026 709,975 1,610,880 2,571,265 2,518,375 2,419,290 9,829,785 1,850,000 5.31 0.000 5.32 9,840,150 10,365 2027 714,503 1,602,938 2,576,838 2,515,675 2,420,813 9,830,765 1,850,000 5.31 0.000 5.32 9,840,150 9,385 2028 713,284 1,607,750 2,572,350 2,513,250 2,422,350 9,828,984 1,850,000 5.31 0.000 5.32 9,840,150 11,166 2029 2,319,125 2,571,750 2,515,125 2,422,875 9,828,875 1,850,000 5.31 0.000 5.32 9,840,150 11,275 2030 2,322,125 2,572,125 2,513,375 2,419,625 9,827,250 1,850,000 5.31 0.000 5.32 9,840,150 12,900 2031 2,321,625 2,569,250 2,518,375 2,418,250 9,827,500 1,850,000 5.31 0.000 5.32 9,840,150 12,650 2032 2,317,625 2,572,875 2,519,875 2,418,500 9,828,875 1,850,000 5.31 0.000 5.32 9,840,150 11,275 2033 2,319,875 2,572,750 2,517,875 2,420,125 9,830,625 1,850,000 5.31 0.000 5.32 9,840,150 9,525 2034 2,318,125 2,573,750 2,517,250 2,422,875 9,832,000 1,850,000 5.31 0.000 5.32 9,840,150 8,150 2035 2,317,250 2,575,625 2,517,750 2,421,625 9,832,250 1,850,000 5.31 0.000 5.32 9,840,150 7,900 2036 2,321,875 2,568,375 2,519,125 2,421,250 9,830,625 1,850,000 5.31 0.000 5.32 9,840,150 9,525 2037 2,321,750 2,571,750 2,516,250 2,421,500 9,831,250 1,850,000 5.31 0.000 5.32 9,840,150 8,900 2038 2,316,875 2,575,250 2,514,000 2,422,125 9,828,250 1,850,000 5.31 0.000 5.32 9,840,150 11,900 2039 2,317,000 2,573,750 2,517,000 2,422,875 9,830,625 1,850,000 5.31 0.000 5.32 9,840,150 9,525 2040 2,321,625 2,572,125 2,515,000 2,418,625 9,827,375 1,850,000 5.31 0.000 5.32 9,840,150 12,775 2041 3,501,250 3,907,125 2,419,125 9,827,500 1,850,000 5.31 0.000 5.32 9,840,150 12,650 2042 3,485,000 3,925,750 2,419,000 9,829,750 1,850,000 5.31 0.000 5.32 9,840,150 10,400 2043 1,850,000 0.00 0.000 5.32 9,840,150 9,840,150 2044 1,850,000 0.00 0.000 5.32 9,840,150 9,840,150 TOTAL 29,672,125 40,621,474 56,308,948 54,951,527 48,408,318 229,962,392 2.880

(1) Annual Net Debt Service for Series of 2012, 2012A, 2014, and 2015 Bonds. (2) Proposed Series of 2019, $23,765,000 dated June 1, 2019. Average Coupon 4.93%, Yield 3.87% (current rates + 75bps). Local Effort 100%. Project fund deposit = $25MM. (3) Proposed Series of 2020, $33,495,000 dated June 1, 2020. Average Coupon 4.90%, Yield 3.90% (current rates + 75bps). Local Effort 100%. Project fund deposit = $35MM. (4) Proposed Series of 2021, $33,535,000 dated June 1, 2021. Average Coupon 4.92%, Yield 3.92% (current rates + 75bps). Local Effort 100%. Project fund deposit = $35MM. (5) Proposed Series of 2022, $30,625,000 dated March 1, 2022. Average Coupon 4.92%, Yield 3.92% (current rates + 75bps). Local Effort 100%. Project fund deposit = $32MM. (6) FY2018-19 collect mill is worth $1,850,000 and it remains constant (per the administration January 2018) (7) Budget surplus (about $13.5MM) will be transferred to capital reserve to use for phasing in mills for the projects.

RBC Capital Markets / Public Financial Management 7 | Avon Grove School District

Effects of a Real Estate Tax Increase – Borrowing $127,000,000

Percent Change 2.50% Percent Change 1.96% Percent Change 1.92% Assessed Value Mill Total Tax Paid Assessed Value Mill Total Tax Paid Increase Assessed Value Mill Total Tax Paid Increase Assessed Value Mill Total Tax Paid Increase 50,000 29.04 $1,452.00 50,000 29.77 $1,488.50 $36.50 50,000 30.35 $1,517.67 $29.17 50,000 30.94 $1,546.81 $29.14 110,000 29.04 $3,194.40 110,000 29.77 $3,274.70 $80.30 110,000 30.35 $3,338.88 $64.18 110,000 30.94 $3,402.99 $64.11 Median 169,600 29.04 $4,925.18 169,600 29.77 $5,048.99 $123.81 169,600 30.35 $5,147.95 $98.96 169,600 30.94 $5,246.79 $98.84 225,000 29.04 $6,534.00 225,000 29.77 $6,698.25 $164.25 225,000 30.35 $6,829.54 $131.29 225,000 30.94 $6,960.66 $131.13 300,000 29.04 $8,712.00 300,000 29.77 $8,931.00 $219.00 300,000 30.35 $9,106.05 $175.05 300,000 30.94 $9,280.88 $174.84 Millage Change 0.73 0.58 0.58 Allowable Change 0.95 0.92 1.01 Difference 0.22 0.34 0.43 Percent Change 1.89% Percent Change 1.80% Percent Change 1.79% Assessed Value Mill Total Tax Paid Increase Assessed Value Mill Total Tax Paid Increase Assessed Value Mill Total Tax Paid Increase 50,000 31.52 $1,576.05 $29.23 50,000 32.09 $1,604.42 $28.37 50,000 32.66 $1,633.14 $28.72 110,000 31.52 $3,467.31 $64.32 110,000 32.09 $3,529.72 $62.41 110,000 32.66 $3,592.90 $63.18 Median 169,600 31.52 $5,345.96 $99.16 169,600 32.09 $5,442.18 $96.23 169,600 32.66 $5,539.60 $97.42 225,000 31.52 $7,092.22 $131.56 225,000 32.09 $7,219.88 $127.66 225,000 32.66 $7,349.12 $129.24 300,000 31.52 $9,456.29 $175.41 300,000 32.09 $9,626.51 $170.21 300,000 32.66 $9,798.82 $172.31 Millage Change 0.58 0.57 0.57 Allowable Change 1.11 1.21 1.33 Difference 0.53 0.65 0.75 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021 2021-2022 2021-2022

Hedging Strategies

RBC Capital Markets / Public Financial Management 9 | Avon Grove School District

Taxable Interest Rate Forecast

Bloomberg Median Taxable Interest Rate Forecast1 as of May 18, 2018

Actual Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Fed Funds* 1.75% 2.00% 2.20% 2.40% 2.60% 2.80% 2.90% 3.00% 3.00% 3.00% 3.00% Two-Year 2.27% 2.48% 2.64% 2.77% 2.91% 3.01% 3.12% 3.17% 3.20% 3.22% 3.20% Ten-Year 2.74% 2.99% 3.10% 3.18% 3.26% 3.32% 3.43% 3.47% 3.56% 3.57% 3.56% Thirty-Year 2.97% 3.21% 3.32% 3.41% 3.51% 3.60% 3.71% 3.79% 3.91% 3.96% 3.96%

[1] Consists of economic forecasts and projections from approximately 60 investment banking firms and financial institutions.

*For these purposes, indicates upper bound of Fed Funds range. Lower Bound Upper Bound July 2006 - Sept. 2007: 5.25%

• to -

5.25% December 2008: 0.00%

• to -

0.25% December 2015: 0.25%

• to -

0.50% December 2016: 0.50%

• to -

0.75% March 2017: 0.75%

• to -

1.00% June 2017: 1.00%

• to -

1.25% December 2017: 1.25%

• to -

1.50% March 2018: 1.50%

• to -

1.75%

Recent Fed Funds Rate History Forecast 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Fed Funds* Two-Year Ten-Year Thirty-Year

RBC Capital Markets / Public Financial Management 10 10 | Avon Grove School District

Overview of Interest Rate Hedging

• Long term interest rates remain near all-time lows in the U.S. Treasury and tax-exempt fixed rate bond markets.
• An issuer may have upcoming capital needs for which it is not yet ready to proceed with a financing.
• Act 23 allows local governments and school districts to use financial instruments to take advantage of market conditions and provide

additional options to traditional bond financing(see Pennsylvania Act 23).

• An issuer may utilize an interest rate swap to take advantage of today’s low interest rates as a way to “hedge” a future new money

issue or a bond refinancing.

• A decision to utilize a financial instrument today to hedge rates would be made to reduce the uncertainty of what the interest rate

environment will be at the time the new money or refinancing bonds are sold.

• This overview assumes that a forward starting swap would be structured as a mandatory cash settled transaction requiring the

District to “settle” the swap at the time the debt is issued in 2020 and 2021. Consequently, the District would only be in the swap contract for approximately 2/3 years.

• The primary benefit of hedging through an interest rate swap is that the District should be protected from a significant increase in

interest rates that would increase the debt service of the future issue and impact the affordability of the project. However, there is no assurance that an ICE LIBOR hedge (or any interest rate hedge for that matter) will move in complete lock-step with the District’s actual borrowing cost in the fixed rate tax-exempt market (commonly known as “basis risk”). Historically, relationships between ICE LIBOR and other interest rates have correlated but there are times when markets move independently (during the height of the credit crisis for example).

• Swap termination payment or receipt will be due whether the future bond issue closes or not.

RBC may be able to extend the termination date under certain circumstances.

• If there is “project risk”, risk that the project may not happen, the District should not consider an interest rate hedge.
• If the District is not concerned about a movement in interest rates impacting the affordability of the project, then there is no reason to

consider an interest rate hedge.

RBC Capital Markets / Public Financial Management 11 11 | Avon Grove School District

Discussion – Cash Settled Swap to Hedge New Money Project

• A cash settled swap should act as a hedge against rising interest rates. The “cost” of the hedge would consist of the forward

premium and swap execution costs. Swap Hedge Components:

• The forward premium (the cost for delaying the start of the swap until sometime in the future) is determined by the size of the

borrowing, the ultimate term of the debt being hedged, the length of the forward period and the shape of the yield curve at the time the swap is executed.

• 2020 Issue: approximately 5.1 bps forward premium in current market
• 2021 Issue: approximately 5.8 bps forward premium in current market
• The bank counterparty spread is added to mid-market swap rate and is also impacted by size and term of transaction and

length of the forward period-in most markets, the longer the forward period, the higher the cost.

• 2020 & 2021 Issues: estimating approximately 5 bps for counterparty spread
• Consequently, interest rates with a term equal to the term of the interest rate swap would need to increase by at least the

combined “cost” of the forward premium and the bank counterparty spread by the time the debt was issued (and the swap cash settled) or the issuer would owe a termination payment.

• Unlike many swaps, a cash settled swap will be terminated upon issuance of the long-term fixed rate bonds (if not before), therefore

swap related risks are limited to the period between swap execution and the cash settle termination date.

• While cash settled swaps have unrecoverable forward premium and transaction costs, this can be compared to the unrecoverable

costs from negative arbitrage in advance funding of capital project – for example, the cost incurred through negative arbitrage when an issuer chooses to borrow funds for a new money project before the funds will be needed for the project.

• Under a forward cash settled swap, no payments are exchanged until the cash settle date when the bonds are issued.

RBC Capital Markets / Public Financial Management 12 12 | Avon Grove School District

Cash Settled Swap Mechanics

• RBC makes a termination payment to the issuer
• The termination payment is used to reduce the size of the bond issue
• The resulting debt service on the smaller issue at higher rates approximates the expected net debt service on

the larger bond issue at current tax-exempt market rates Swap market rates are HIGHER than the hedged rate

• The issuer makes a termination payment to RBC
• The termination payment is funded from cash, thus increasing the bond issue size.
• The resulting net debt service on the larger bond issue at lower rates approximates the expected net debt

service on the smaller bond issue at current tax-exempt market rates Swap market rates are LOWER than the hedged rate

Bond Maturity 1 2 3 Forward Period The issuer can cash settle the swap anytime during the forward period Fixed Rate Bond Issuance Size with cash received or cash paid applied to bond issue Today Execute Forward Starting Swap (no payments exchanged) 1 2 3 Today: The issuer executes a forward starting synthetic fixed rate swap with RBC Forward Period: Any time during forward period, the issuer terminates the swap prior to issuing fixed rate bonds at prevailing market. The issuer either receives or makes payment to RBC and the swap is terminated. Fixed Rate Bond Issuance: The issuer issues fixed rate bonds using proceeds from RBC as source of funds, or funds termination payment due RBC from cash. Issuer RBC Floating Rate Fixed Rate

RBC Capital Markets / Public Financial Management 13 13 | Avon Grove School District

3-year Forward, 13 Year Average Life 80% ICE LIBOR Index as the Hedge

2.88% current Bond Rate 2.99% “Hedged” Rate Interest Rates

Issuer cost

0.11% Cost of Hedge

Hedge protects against market rates going higher

Fixed cost

ABC’s of a ‘Cash Settled Hedge’

“Hedged Rate” 13 Year MMD of 2.53% + 35 bps issuer spread to MMD = 2.88% Bond market rate + 0.11% forward premium & dealer spread = 2.99% all-in Hedged borrowing rate On Bond Pricing Date

• Swap terminated at market value; Issuer makes or receives a payment at

bond closing − If applicable ICE LIBOR swap rates rise more than 11 bps and the market value of the swap is in favor of Issuer, RBC makes a payment to Issuer − If applicable ICE LIBOR swap rates do not rise more than 11 bps and the market value of the swap is in favor of RBC, Issuer makes a payment to RBC Result Issuer achieves (approximately) today’s interest rates plus the hedge cost which is incorporated into the bond deal

* Market conditions as of May 31, 2018.

RBC Capital Markets / Public Financial Management 14 14 | Avon Grove School District

Summary of Cash Settle Analysis

Avon Grove School District Financing Comparison1 1 2 3 4 5 6 7 8 Cash-settled Hedge Cash-settled Hedge Cash-settled Hedge Cash-settled Hedge Scenario 1A Scenario 1B Scenario 1C Scenario 1D Scenario 2A Scenario 2B Scenario 2C Scenario 2D (Current Rates) (Current -50bps) (Current +50bps) (Current +100bps) (Current Rates) (Current -50bps) (Current +50bps) (Current +100bps)

Par Amount: $67,030,000 $66,985,000 $67,075,000 $67,125,000 $67,740,000 $71,280,000 $64,515,000 $61,570,000 All-in TIC:2 4.42% 3.93% 4.92% 5.42% 4.53% 4.57% 4.51% 4.50%

• Est. Term Payment:3

n/a n/a n/a n/a $745,064 $4,498,632 ($2,679,411) ($5,807,785) Final Maturity: 11/01/2041 11/01/2041 11/01/2041 11/01/2041 11/01/2041 11/01/2041 11/01/2041 11/01/2041

06/30/2021 1,446,825 1,289,156 1,604,712 1,762,787 1,461,893 1,371,537 1,542,108 1,614,170 06/30/2022 3,393,024 3,112,430 3,674,358 3,961,210 3,434,467 3,390,246 3,518,081 3,595,169 06/30/2023 5,089,260 4,847,768 5,332,265 5,586,205 5,146,435 5,173,758 5,118,093 5,103,063 06/30/2024 5,087,708 4,848,330 5,329,573 5,577,995 5,143,995 5,174,528 5,118,843 5,097,918 06/30/2025 5,086,405 4,849,993 5,331,136 5,578,223 5,146,818 5,176,841 5,118,624 5,100,766 06/30/2026 5,089,640 4,846,690 5,336,640 5,581,905 5,144,140 5,173,805 5,117,765 5,097,780 06/30/2027 5,092,513 4,848,675 5,331,300 5,583,988 5,146,150 5,175,700 5,121,275 5,103,875 06/30/2028 5,085,600 4,846,313 5,330,663 5,580,075 5,143,200 5,172,563 5,119,788 5,095,075 06/30/2029 5,086,875 4,852,350 5,337,475 5,583,250 5,148,000 5,176,288 5,121,875 5,100,650 06/30/2030 5,085,500 4,846,475 5,330,800 5,582,000 5,140,000 5,166,975 5,116,388 5,098,650 06/30/2031 5,087,625 4,850,313 5,331,563 5,586,600 5,145,500 5,176,925 5,118,613 5,103,400 06/30/2032 5,092,750 4,853,413 5,334,075 5,586,450 5,148,875 5,180,575 5,122,863 5,104,300 06/30/2033 5,090,625 4,850,663 5,337,788 5,581,250 5,145,000 5,177,925 5,118,863 5,101,050 06/30/2034 5,091,000 4,851,838 5,332,425 5,580,400 5,148,500 5,173,863 5,121,200 5,103,050 06/30/2035 5,093,375 4,851,600 5,337,438 5,583,000 5,144,000 5,177,938 5,124,188 5,104,550 06/30/2036 5,087,500 4,849,725 5,332,275 5,578,450 5,146,125 5,174,813 5,117,550 5,100,100 06/30/2037 5,088,000 4,845,988 5,331,525 5,576,150 5,144,375 5,174,263 5,115,875 5,099,100 06/30/2038 5,089,250 4,849,938 5,339,225 5,589,750 5,148,250 5,175,838 5,123,200 5,100,650 06/30/2039 5,090,750 4,856,013 5,339,688 5,583,500 5,152,125 5,179,088 5,128,700 5,103,850 06/30/2040 5,087,125 4,849,100 5,327,775 5,581,950 5,140,875 5,168,900 5,117,238 5,098,100 06/30/2041 7,408,375 7,268,288 7,554,825 7,703,350 7,435,250 7,418,188 7,457,125 7,479,000 06/30/2042 7,410,750 7,280,200 7,536,713 7,673,500 7,436,375 7,433,575 7,439,100 7,446,900 111,260,475 106,245,254 116,374,234 121,581,987 112,390,348 112,764,127 112,117,350 111,951,165

1Assumes settlement on June 1, 2020 and June 1, 2021, current market rates +75bps. Assumed rating is "AA". Produces projects funds of $70 Million. 2Includes estimated termination values. 3 Termination payment/receipt due regardless of bond closing. Estimates above assume a parallel shift in the prevailing LIBOR curve. Historically, a parallel shift has not occurred and

therefore results will vary. Also, assumes a movement in the swap curve such that the increase or decreased in the applicable swap rate moves by the same amount as the indicated movement in the bond market.

RBC Capital Markets / Public Financial Management 15 15 | Avon Grove School District

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RBC Capital Markets / Public Financial Management 16 16 | Avon Grove School District

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