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Financial Pacific - Municipal Bonds, state credit enhancement programs (third party)
 

Financial Pacific - Municipal Bonds, state credit enhancement programs (third party)

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    Financial Pacific - Municipal Bonds, state credit enhancement programs (third party) Financial Pacific - Municipal Bonds, state credit enhancement programs (third party) Document Transcript

    • Wealth Management Research 20 May 2011Municipal bonds Joseph Krist, analyst, UBS FSState Credit Enhancement joseph.krist@ubs.com, +1 212 713 3959Programs • Local governments are facing serious budget constraints • The scarcity of bond insurance has compounded the problem by eliminating the market’s traditional source of credit enhancement. • To allay investor concerns, municipal bond issuers have turned to state intercept programs with greater frequency. Local Bond Guarantee Programs in a Post-Financial Crisis WorldLocal governments are facing serious budget constraints andmunicipal bond investors are responding by demanding relativelyhigher yields for lower rated securities. The scarcity of bond insurancehas compounded the problem by eliminating the market’s traditionalsource of credit enhancement. To allay investor concern and toincrease the attractiveness of their bonds to investors, municipalbond issuers have turned to state intercept programs with greaterfrequency. Some of these programs have long and establishedhistories while others have been introduced more recently.State credit enhancement programs employ different mechanismsto guarantee all or part of the debt service obligation of localgovernments. The provisions are set forth by statute and vary acrossthe country. Some programs provide investors with a direct guaranteeof timely debt service while others promise only that portion ofstate aid that otherwise would be directed to the governmentalborrower. School districts, in particular, tend to be among thebiggest beneficiaries of credit enhancement programs. Most stateconstitutions specify that primary and secondary education is aprincipal function of state government so the provision of a stateintercept for the payment of school district debt service is reasonablywell-established.This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosuresthat begin on page 22.
    • Municipal bondsState credit enhancement programs employ different mechanisms toguarantee all or part of the debt service obligation of local governments.The provisions are set forth by statute and vary across the country.Some programs provide investors with a direct guarantee of timely debtservice while others promise only that portion of state aid that otherwisewould be directed to the governmental borrower. School districts, inparticular, tend to be among the biggest beneficiaries of creditenhancement programs. Most state constitutions specify that primaryand secondary education is a principal function of state government sothe provision of a state intercept for the payment of school district debtservice is reasonably well-established.State Aid intercept programsThe programs are structured to provide full and timely payment of debtservice directly to a paying agent, regardless of the amount ofundisbursed state aid due to the borrower at the time of intercept. Anexception is New York State where the mechanism is not triggered untilan issuer has defaulted on its general obligation debt. They are usuallyrated on a parity with appropriation debt that is issued directly by astate. 1 (CA, CO, MA, MS, MO, NJ)Withholding programsWithholding programs provide for payment of debt service only up toan amount equal to remaining undisbursed state aid. Program ratingsare on a parity with appropriation debt as the result of the requirementthat a participants available state aid cover debt service by at least 2xmaximum annual debt service 1 (GA,OH,IN, KY).Intercept or withholding programs which do not provide for full andtimely payment of debt service. 1 (NY, PA, VA)Standing and Annual Appropriation Programs are dependent on astates ability to use its cash reserves to make up any debt servicedeficiency for a participating local governments debt service payment.There is a distinction made between standing appropriation programswhich are rated on par with the states GO rating and annualappropriation programs which are subject to appropriation risk and arenotched one notch below the state GO rating level. Standingappropriation program ratings are not subject to appropriation risk andreflect both the states sovereignty and its constitutional obligation tofund education.8 (MI, MN, NJ, OR, SC, TX Higher Ed., WA, WV)State Permanent Fund Programs are constitutionally created, and thecorpus of the fund is leveraged to provide a full guaranty of aparticipating local governments debt service. 1 (NV, TXPSF, WY) Wealth Management Research 20 May 2011 2
    • Municipal bondsCalifornia Infrastructure Bank School Aid Intercept ProgramS&P: A+State Aid InterceptThe program is authorized under State Law AB 1554, as amended by AB1303. These statutes authorize the interception of state general fundmoney distributed to local school districts under Proposition 98. Thisprogram is open to school districts that have received emergency stateloans to continue operating. The program refinances loans made tofailing districts and districts receiving emergency loans must consent tostate oversight until the loans are repaid. Each bond issue backed underthe program is secured under a separate lease and bond indenture. Eachlease requires the school district to make lease payments equal to debtservice, plus operating costs for its leased asset, which is usually schoolbuildings and land. The participating school districts provide the statecontroller with a schedule of future lease payments, and the statecontroller intercepts state school aid in an amount equal to debt serviceand sends it directly to the bond trustee. The remainder of state aid isthen provided to the individual school district. 1Colorado State Aid Intercept ProgramMoody’s: Aa3 S&P: AA-State Aid InterceptUnless a school district opts not to participate, Section 22-41-110,C.R.S. (the Bond Payment Act) applies to general obligation bonds, suchas the Bonds, and certain elector authorized lease or installmentpurchase agreements issued or incurred by a school district on or afterJuly 1, 1991 (the School District Obligation.). The District will notify theState of its participation in the program in connection with the issuanceof the Bonds.Under the Bond Payment Act, if the paying agent with respect to aparticularSchool District Obligation has not received a payment on the SchoolDistrict Obligation on the business day immediately prior to the date onwhich such payment is due, the paying agent is required to notify theState Treasurer and the school district that issued the School DistrictObligation. The State Treasurer is then required to contact the schooldistrict to determine whether the school district will make the paymentby the date on which it is due. If the school district indicates to the StateTreasurer that it will not make the payment on the School DistrictObligation by the date on which it is due, the State Treasurer is requiredto forward to the paying agent, in immediately available funds from anylegally available funds of the State, the amount necessary to make thepayment of the principal of and interest on the School DistrictObligation.If the State Treasurer makes a payment on a School District Obligationunder the Bond Payment Act, he or she is required to withhold suchamount from the next succeeding payment to that school district of theState’s share of the school district’s Total Program Funding and fromproperty tax and specific ownership revenues collected by the countytreasurer on behalf of the district (except property taxes levied for thepayment of bonds) on each occasion on which the State Treasurermakes a payment on a School District Obligation on behalf of a district.The total amount withheld in each month from those sources shall notexceed one-twelfth of the amount forwarded (with certain limitedexceptions). The State Treasurer shall not withhold for more than 12consecutive months for each occasion on which the State Treasurerforwards amounts to pay School District Obligations. While thewithholding of Total Program Funding and property and specificownership tax payments by the State is limited to 12 monthly payments,the Bond Payment Act does not correspondingly limit the State’scontingent obligation to pay the School District Obligation. Wealth Management Research 20 May 2011 3
    • Municipal bondsIf the State Treasurer is required to make a payment on a School DistrictObligation, the State Department of Education is required to initiate anaudit of the school district to determine the reason for the nonpaymentof the School District Obligation and to assist the school district, ifnecessary, in developing and implementing measures to assure thatfuture payments will be made when due. In addition, if the State isrequired to withhold from a school district’s Total Program Fundingpayment because of the school district’s failure to collect property taxeslevied in accordance with law for the school district’s bond redemptionfund, the school district may transfer any such delinquent property taxeslater collected from the school district’s bond redemption fund to itsgeneral fund.The State has covenanted with the purchasers and owners of a SchoolDistrict Obligation that it will not repeal, revoke, rescind, modify oramend the Bond Payment Act so as to limit or impair the rights andremedies granted under the Bond Payment Act. The Bond Payment Actprovides, however, that it shall not be deemed or construed to requirethe State to continue the payment of State assistance to any schooldistrict or to limit or prohibit the State from repealing, amending, ormodifying any law relating to the amount of State assistance to schooldistricts or the manner of payment or the timing thereof. The BondPayment Act further provides that it shall not be deemed or construedto create a debt of the State with respect to any School DistrictObligation within the meaning of any State constitutional provision or tocreate any liability except as specifically provided in the Bond PaymentAct. 2Georgia State Aid Intercept ProgramMoody’s: Aa1 S&P: AA+WithholdingEligible financings include any bonded indebtedness that the localschool district elects to have covered by the program. (S&P) Pursuant toSection 20-2-480 of the Official Code of Georgia Annotated a schooldistrict will notify the State of Georgia Board of Education of theproposed issuance of Bonds and authorize and direct the Board towithhold from the District sufficient monies from any stateappropriation to which the District may be entitled and to apply somuch as shall be necessary to the payment of the principal and intereston the Bonds then due. If the Board is notified by the paying agent forthe bonds that the District has failed to effect the punctual payment ofthe principal of or interest on the bonds, the State of Georgia Board ofEducation is authorized to withhold and shall withhold from any stateappropriation to which the District may be entitled and apply so muchthereof as shall be necessary to the payment of the principal andinterest on the Bonds then due. All funds received by the paying agentfrom the State of Georgia Board of Education must be held by thepaying agent in trust until the debt service is paid.The amounts subject to interception by the State of Georgia Board ofEducation for the benefit of the owners of bonds depends upon theamount and timing of annual appropriations made by the GeneralAssembly of the State of Georgia to an issuer. 4The paying agent must notify the board if monies held in the sinkingfund are insufficient to make timely payment of principal and interest nolater than the 15th day of the month before the scheduled debt servicepayment date. Upon notification, the state transfers to the paying agentthe lesser of an amount sufficient to make the debt service payment, orthe balance of any funds due the local school district under any stateeducation appropriation authorized for the current fiscal year. 1 Wealth Management Research 20 May 2011 4
    • Municipal bondsIndiana State Aid Intercept ProgramS&P: AA+WithholdingIndiana Code Title 20, Article 48, Chapter1, Section 11 provides that theDepartment of Local Government Finance shall review levies andappropriations of school corporations for lease rental purposes. In theevent a school corporation fails to levy and appropriate sufficient fundsfor such purpose, the Department of Local Government Finance shallestablish levies and appropriations sufficient which are sufficient to paysuch obligations. The Act further provides that upon a failure of anyschool corporation to make lease rental payments when due and uponnotice and claim, the Treasurer of the State of Indiana shall make suchpayments from the funds of the State (“the State Intercept Program”).Such payments are limited to the amounts appropriated by the GeneralAssembly for distribution to the school corporation from State funds inthe calendar year. Such lease rental payments would be deducted fromState distributions being made to the school corporation. 3All school corporations are eligible for the program rating enhancement,provided state aid levels are equal to or greater than maximum annualdebt service requirements. State aid coverage of maximum annual debtservice on outstanding and proposed program bonds must be at least2x. 1Kentucky State Aid Intercept ProgramMoody’s: Aa2 S&P: A+WithholdingLegislation revised in 1994 covers all school district general obligationand lease-secured bonds if a district meets the following criteria: 1) itmust levy a minimum equivalent tax rate of 25 cents as defined byKentucky Revised Statutes 157-615; and 2) all new revenue generatedby any tax increase required to meet the minimum equivalent tax ratemust be placed in a restricted account for school building constructionbonding. On June 30 of each year the district must transfer all availablelocal revenues to a restricted account for school building construction.The program is based on the requirement for the state to withholdappropriated state aid if a school district is unable to meet debt servicerequirements. In connection with each program bond issue, thecommission must send to each board of education at least thirty daysbefore the due date of any payment a notice of the date and amount tobecome due and to require acknowledgement; and to receive from theboard of education in the event of failure, satisfactory evidence thatsufficient funds have been transmitted or will be transmitted to thecommission or its agent, to pay debt service and administrative costswhen due, as provided in the lease. The commission must also notifyand request that the department withhold from the board of educationa sufficient portion of any un-disbursed funds then held or allocated toit. 1Kentucky State Aid Intercept Program for CommonwealthUniversitiesMoody’s: Aa3 S&P: A+WithholdingState Legislation revised in 2004 (Kentucky Revised Statutes 160A.550-164A.630) established a debt service withholding mechanism to coverdebt obligations of the commonwealths universities. Under KRS164A.608, if a university is unable to pay principal and interestpayments when due or fails to send to the paying agent bank or trusteethe debt service or any payment when due as required by the bondresolution, the paying agent bank or trustee shall notify the secretary ofthe Finance and Administration Cabinet in writing and request that thecabinet withhold or intercept from the governing board a sufficientportion of any appropriated state funds not yet disbursed to the Wealth Management Research 20 May 2011 5
    • Municipal bondsinstitution to satisfy the required payment on the bonds. The bondindenture must require the university to make sufficient sinking fundpayments thirty days prior to debt service due date. If sufficient moniesare not available 30 days prior to the debt service date, the trustee mustbe directed to transfer funds from a debt service reserve (to be fundedat maximum annual debt service) to the sinking fund to prevent adefault on the bonds. Ten days prior to the debt service due date, thetrustee must notify, in writing, both the university and thecommonwealths Secretary of the Finance and Administration Cabinetof such an event and request that amounts be sent to the trusteepursuant to KRS section 164.608 to cure the deficiency or to restore theamount transferred from the debt service reserve fund. 1Massachusetts Qualified Bond ActMoody’s: Aa3 S&P: AA-State Aid InterceptSection 19A of Chapter 44 of the Massachusetts General Laws providesa mechanism by which any sums payable (or estimated to becomepayable during the then current fiscal year) from the State treasury toany city, town or district, including a regional school district (hereinaftersometimes called the "issuer") may be diverted directly to the payingagent for bonds or notes of the issuer if it is determined that the issueris unable, or is likely to be unable, to pay principal or interest, or both,on those bonds and notes when due. Sums paid to the paying agent areheld by it in trust solely for payment of principal and interest and areexempt under the act from any levy, taking, sequestering or otherapplication.The mechanism is activated when the treasurer of the issuer certifies tothe manager or mayor of a city, the selectmen of a town, or thecommittee or commissioners of a district that it appears to the treasurerthat the issuer is, or is likely to be, unable to pay the principal or intereston any bonds or notes when due. If, after investigation, such official orbody agrees, he or they, must certify the inability or likely inability to theState Commissioner of Revenue. The Commissioner of Revenue mustundertake an investigation of the circumstances and, if theCommissioner concurs, the amount of the shortfall and the name of thepaying agent is certified to the State Treasurer who proceeds asdescribed herein. The act does not provide for the initiation of theprocess by any party other than the issuer.If the sums available to be paid to the paying agent from the Statetreasury in any fiscal year are not sufficient to cover the entire amountof principal and interest due, payment to the paying agent must bemade as soon as possible in the following year from sums otherwisepayable to the issuer in such year.The sums payable from the State treasury to the issuer are determinedor estimated on the basis of the total state distribution to the issuer,after deduction of any sums owed the State by the issuer and deductionof charges to and assessments made against the issuer under State law.The State has not agreed to maintain any level of distribution to cities,towns, and districts and all such distributions are subject to annualappropriation by the State Legislature. 5 Wealth Management Research 20 May 2011 6
    • Municipal bondsMichigan State School Bond Loan Fund ProgramS&P: AA-Standing AppropriationPursuant to Article IX, Section 16 of the Michigan Constitution of 1963,if for any reason school district will be or is unable principal and intereston bonds when due, the school district shall borrow and the State ofMichigan shall lend from the School Loan Revolving Fund established bythe State, an amount sufficient to enable the school district to make thepayment. Article IX, Section 16 of the State Constitution asimplemented by Act 112 of the Public Acts of Michigan, 1961, asamended, authorizes the State, without the approval of its electors, toborrow from time to time such amounts as shall be required, pledge theState’s full faith and credit and issue its notes and bonds therefore, forthe purpose of making loans to school districts as provided under suchsection. 1Minnesota School District Credit Enhancement Program( MSDCE)S&P: AAAStanding AppropriationMinnesota Statutes, Section 126C.55, provide for payment by the Stateof Minnesota in the event of a potential default of a school districtobligation (the “State Payment Law” or the “Law”). The provisions ofthe State Payment Law shall be binding on a District as long as anyobligations of the issues remain outstanding. Under the State PaymentLaw, if a District believes it may be unable to make a principal or interestpayment for these issues on the due date, it must notify theCommissioner of Education as soon as possible, but not less than 15working days prior to the due date, (which notice is to specify certaininformation) and will use the provisions of the Law to have the State ofMinnesota make payment of the principal and interest when due. TheDistrict also covenants in the Resolution to deposit with the payingagent for the issues three business days prior to the date on which apayment is due an amount sufficient to make that payment or to notifythe Commissioner of Education that it will be unable to make all or aportion of the payment.The Law also requires the paying agent for these issues to notify theCommissioner of Education if it becomes aware of a potential default inthe payment of principal and interest on these obligations, or if, on theday two business days prior to the payment date, there are insufficientfunds to make the payment or deposit with the paying agent.After receipt of a notice which requests a payment pursuant to the Law,after consultation with the paying agent and District, and after verifyingthe accuracy of the information provided, the Commissioner ofEducation shall notify the Commissioner of Finance of the potentialdefault. The State Payment Law provides that “upon receipt of thisnotice...the Commissioner of Finance shall issue a warrant and authorizethe Commissioner of Education to pay to the paying agent for the debtobligation the specified amount on or before the date due. Theamounts needed for purposes of subdivision are annually appropriatedto the Department of Education from the state general fund.” 6 Wealth Management Research 20 May 2011 7
    • Municipal bondsMinnesota County Credit Enhancement ProgramS&P: AAAStanding AppropriationFor specified debt obligations of a county to be covered by MinnesotaStatutes, Section 446A.086, the county must enter an agreement withthe authority obligating the county to deposit with the paying agentthree days before the date on which the payment is due an amountsufficient to make that payment; notify the authority, if the county willbe unable to make all or a portion of the payment; and include aprovision in the bond resolution and countys agreement with thepaying agent for the debt obligation that requires the paying agent toinform the commissioner if it becomes aware of a default or potentialdefault in the payment of principal or interest on that issue or if, on theday two business days before the date a payment is due on that issue,there are insufficient funds to make the payment on deposit with thepaying agent. After receipt of a notice of a default or potential defaultin payment of principal or interest in debt obligations covered by thissection or an agreement under this section, and after consultation withthe county, the paying agent, and after verification of the accuracy ofthe information provided, the authority shall notify the commissioner ofthe potential default. The notice must include a final figure as to theamount due that the county will be unable to repay on the date due.Upon receipt of this notice from the authority, the commissioner shallissue a warrant and authorize the authority to pay to the paying agentfor the debt obligation the specified amount on or before the date due.The amounts needed for the purposes of this subdivision are annuallyappropriated to the authority from the general fund. The commissionermay reduce, by the amount paid by the state under this section onbehalf of the county, plus the interest due on the state payments, thecounty program aid under section 477A.0124. The amount of any aidreduction reverts from the appropriate account to the state generalfund.A qualifying debt obligation under the statute includes a generalobligation bond issued by a county, a bond to which the generalobligation of a county is pledged under section 469.034, subdivision 2,or a bond payable from a county lease obligation under section 641.24,to provide funds for the construction of: (1) jails; (2) correctionalfacilities; (3) law enforcement facilities; (4) social services and humanservices facilities; (5) solid waste facilities; or (6) qualified housingdevelopment projects. 7Mississippi State Aid Capital Improvement Bond ProgramS&P: AA-State Aid InterceptSection 31-25-27(13) of the Mississippi Code requires that state-appropriated monies received by a borrower must provide at least 2xmaximum annual debt service (MADS) coverage on the debt service ofthe proposed and any other debt issued by the borrower under theprogram. The bond indenture must require the district to make sinkingfund payments sufficient to pay upcoming debt service at least 35 daysprior to any debt service due date; it must also require the trustee forthe bonds to immediately notify the State Treasurer of a paymentinsufficiency 35 days before debt service is due and to request monies tocure the deficiency; and must also require the State Treasurer to sendwithheld or intercepted monies directly to the trustee, within 30 days ofreceipt of the notice of insufficiency from the trustee. 1 Wealth Management Research 20 May 2011 8
    • Municipal bondsMissouri Direct Deposit of State Aid ProgramMoody’s: Aa1 S&P: AA+State Aid InterceptPursuant to Section 360.111 et seq of the Revised Statutes of Missouriand related statutes (the “Deposit Law”), the State of Missouri (the“State”) and the District may agree to transfer to a Missouri bank, asdirect deposit trustee (the “Deposit Trustee”), a portion of the District’sState aid payments and distributions normally used for operationalpurposes (“State Aid”) in order to provide for payment of debt serviceon the Bonds. On the date of issuance of the Bonds, the District willenter into a Direct Deposit Agreement (the “Deposit Agreement”) withthe Office of the Treasurer of the State of Missouri (“Treasurer’sOffice”), the Department of Elementary and Secondary Education of theState of Missouri (“DESE”), the Health and Educational FacilitiesAuthority of the State of Missouri (the “Authority”) and the DepositTrustee. Under the Deposit Agreement, the District will pledge its StateAid to the payment of the Bonds. The Deposit Agreement will providethat each month during the period March 2011 through December2011, one-tenth (1/10th) of the debt service due on the Bonds onSeptember 1, 2011 and March 1, 2012 will be deposited with theDeposit Trustee. Thereafter, beginning in March 2012, one-tenth (1/10)of the annual debt service to be paid on the Bonds is to be depositedwith the Deposit Trustee in each month of the ten month period ofMarch through December of each year that the Bonds are outstanding.Amounts of State Aid to the District in excess of the one-tenth (1/10th)monthly deposit will not be deposited with the Deposit Trustee but willbe transferred directly to the District as has historically been the casewith all State Aid.Each month, pursuant to the terms of the Deposit Agreement, DESE willadvise the Treasurer’s Office of the amount of the District’s State Aid tobe deposited with the Deposit Trustee for the purpose of paying theBonds, as specified in the Deposit Agreement. If there is a shortfall in amonthly payment, it is to be made up in the succeeding monthlypayment of State Aid. Following receipt of the deposits, the DepositTrustee will invest the amounts for the benefit of the District inpermitted investments under the State of Missouri Statutes. The DepositTrustee will transfer to the Paying Agent the amount necessary forpayment of debt service on the Bonds no later than one business dayprior to each payment date with respect to the Bonds. The Districtremains obligated to provide funds to the Paying Agent for debt serviceon the Bonds if the amounts of State Aid transferred are not sufficientto pay the Bonds when due. 8Nevada School District Bond Guarantee ProgramS&P: AAAState Permanent FundThe Permanent School Fund is funded primarily by escheated estates,gifts and proceeds from the sale of federal lands. Interest on the fund isused to support education in the State. As of March 1, 2010, the PSFhad a balance of $305,388,239 consisting of a proportionate share ofthe State of Nevada’s general fund in the amount of $22,678,239 (the“General Fund Investments”) and $282,710,000 invested in securitieswith maturities ranging from March 2, 2010 through October 3, 2016with an average maturity of 2 1/4 years (the “SPSF Investments”). TheSPSF Investments had an average balance for the period of March 1,2009 through March 1, 2010 of $272,566,940. As of March 1, 2010the SPSF Investments were invested in Federal Home Loan Banksecurities, Federal Farm Credit Bank securities, Federal NationalMortgage Association securities, and United States Treasury Bills with anaverage yield of 2.52%. Pursuant to the provisions of the PSF GuaranteeAct the maximum amount of principal that can be guaranteed by theState for any school district is limited to $40,000,000. Further, the totalamount of bonds that can be guaranteed by the State is limited to250% of the balance in the PSF. Based on the March 1, 2010 balance of Wealth Management Research 20 May 2011 9
    • Municipal bonds$305,388,239, the maximum principal that can be guaranteed isapproximately $763,470,598. As of March 1, 2010, $181,902,000 inbonds has been guaranteed, or authorized by the State Board ofFinance to be guaranteed, by the PSF. 9New Jersey Additional State Aid Bonds ProgramS&P: AA-AppropriationThe New Jersey Additional State Aid Bonds Program is authorized byNew Jersey Statutes 18A: 64A-22.1. Additional state aid bonds requirethe state to appropriate funds to pay debt service for school districtbonds and for county GO bonds issued on behalf of community collegedistricts. Within 10 days of issuing bonds secured by this program, thecounty treasurer or the treasurer of any other legally empowered issuershall provide the state treasurer with a debt service schedule and thename and address of the paying agent. The state treasurer willappropriate and pay to the county, on or before the payment date, anamount equal to the payment due. The county, or other legallyempowered issuer, shall use these funds solely for the timely payment ofdebt service to the paying agent. 1New Jersey Fund for the Support of the Free Public SchoolsProgram Chapter 72S&P: AA-State Aid InterceptAll school bonds are secured by the School Bond Reserve (the “SchoolBond Reserve”) established in the Fund for the Support of Free PublicSchools of the State of New Jersey (the "Fund") in accordance with theNew Jersey School Bond Reserve Act, N.J.S.A. 18A:56-17 et seq. (P.L.1980, c. 72, approved July 16, 1980, as amended by P.L. 2003, c. 118,approved July 1, 2003 (the "Act")). The recent amendments to the Actprovide that the Fund will be divided into two School Bond Reserveaccounts. All bonds issued prior to July 1, 2003 shall be benefited by aSchool Bond Reserve account funded in an amount equal to 1-1/2% ofthe aggregate issued and outstanding bonded indebtedness of counties,municipalities or school districts for school purposes (the "Old SchoolBond Reserve Account") and all bonds, including the Bonds, issued onor after July 1, 2003 shall be benefited by a School Bond Reserveaccount equal to 1% of the aggregate issued and outstanding bondedindebtedness of counties, municipalities or school districts for schoolpurposes (the "New School Bond Reserve Account"), provided suchamounts do not exceed the moneys available in the Fund. If amunicipality, county or school district is unable to make payment ofprincipal of or interest on any of its bonds issued for school purposes,the trustees of the Fund will purchase such bonds at par value and willpay to the bondholders the interest due or to become due within thelimits of funds available in the applicable School Bond Reserve accountin accordance with the provisions of the Act.The Act provides that the School Bond Reserve shall be composedentirely of direct obligations of the United States government orobligations guaranteed by the full faith and credit of the United Statesgovernment. Securities representing at least one-third of the minimalmarket value to be held in the School Bond Reserve shall be due tomature within one year of issuance or purchase. Beginning with thefiscal year ending on June 30, 2003 and continuing on each June 30thereafter, the State Treasurer shall calculate the amount necessary tofully fund the Old School Bond Reserve Account and the New SchoolBond Reserve Account as required pursuant to the Act. To the extentmoneys are insufficient to maintain each account in the School BondReserve at the required levels, the State agrees that the State Treasurer Wealth Management Research 20 May 2011 10
    • Municipal bondsshall, no later than September 15 of the fiscal year following the June30 calculation date, pay to the trustees for deposit in the School BondReserve such amounts as may be necessary to maintain the Old SchoolBond Reserve Account and the New School Bond Reserve Account atthe levels required by the Act. No moneys may be borrowed from theFund to provide liquidity to the State unless the Old School BondReserve Account and New School Bond Reserve Account each are at thelevels certified as full funding on the most recent June 30 calculationdate. The amount of the School Bond Reserve in each account ispledged as security for the prompt payment to holders of bondsbenefited by such account of the principal of and the interest on suchbonds in the event of the inability of the issuer to make such payments.In the event the amounts in either the Old School Bond Reserve Accountor the New School Bond Reserve Account fall below the amountrequired to make payments on bonds, the amounts in both accounts areavailable to make payments for bonds secured by the reserve.The Act further provides that the amount of any payment of interest orpurchase price of school bonds paid pursuant to the Act shall bededucted from the appropriation or apportionment of State aid, otherthan certain State aid which may be otherwise restricted pursuant tolaw, payable to the district, county or municipality and shall not obligatethe State to make, nor entitle the district, county or municipality toreceive any additional appropriation or apportionment. Any amount sodeducted shall be applied by the State Treasurer to satisfy the obligationof the district, county or municipality arising as a result of the paymentof interest or purchase price of bonds pursuant to the Act. 10New Jersey Qualified Bond ProgramMoody’s: A1 S&P: AA-State Aid InterceptBonds secured under this program are entitled to the benefits of theMunicipal Qualified Bond Act, Public Law 1976,c.38 as amended.Pursuant to the Act, a portion of city, township, and other localmunicipality qualified state aid is to be withheld by the State Treasurerand forwarded to the paying agent for the Bonds on or before theprincipal and interest payment dates.Each municipality which issues qualified bonds shall certify to the StateTreasurer the name and address of the paying agent, the maturityschedule, interest rate and dates of payment of debt service on suchqualified bonds within 10 days after the date of issuance of suchqualified bonds. After receipt of such certificate the State Treasurer shallwithhold from the amount of business personal property taxreplacement revenues, gross receipts tax revenues, municipal purposestax assistance fund distributions, State urban aid, State revenue sharingand any other funds appropriated as State aid and not otherwisededicated to specific municipal programs payable to such municipalityan amount of such business personal property tax replacementrevenues, gross receipts tax revenues, municipal purposes tax assistancefund distributions, State urban aid, State revenue sharing and any otherfunds appropriated as State aid and not otherwise dedicated to specificmunicipal programs which will be sufficient to pay the debt service onsuch qualified bonds as the same shall mature and become due. TheState Treasurer shall, on or before each principal and interest paymentdate, forward such withheld amounts to the paying agent for suchqualified bonds for deposit to the account established with such payingagent for the purpose of paying the debt service on such qualifiedbonds. From the time withheld by the State Treasurer all such businesspersonal property tax replacement revenue, gross receipts tax revenues,municipal purposes tax assistance fund distributions, State urban aid,State revenue sharing and any other funds appropriated as State aid andnot otherwise dedicated to specific municipal programs so withheld andpaid or to be paid to and held by the paying agent shall be exempt from Wealth Management Research 20 May 2011 11
    • Municipal bondsbeing levied upon, taken, sequestered or applied toward paying thedebts of the municipality other than for payment of debt service on suchqualified bonds. From the time withheld by the State Treasurer thebusiness personal property tax replacement revenue, gross receipts taxrevenues, municipal purposes tax assistance fund distributions, Stateurban aid, State revenue sharing and any other funds appropriated asState aid and not otherwise dedicated to specific municipal programs sowithheld and paid or to be paid to the paying agent shall be deemed tobe held in trust for the sole purpose of paying the debt service on suchqualified bonds. 11To qualify for this program, an issuing municipality must obtain approvalfrom the state for the planned capital improvements and anticipateddebt service schedule. The state treasurer will forward withheld amountsto the paying agent for payment of debt service on or before eachprincipal and interest payment date. The balance of the state aid is thensent to the municipality. The aid revenue from the state must be at leastequal to 1x maximum annual debt service. 1New York State Aid Intercept ProgramS&P: AState Aid InterceptSection 99b of the state finance law authorizes the aid withholding andspecifies the procedures that would be followed should the state berequired to make a debt service payment for a participating district. AllNYS school districts are eligible for this program. Upon notification of adefault by a school district, the state comptroller is required to deductfrom the next state aid payment due to the school district an amountsufficient to meet any debt service deficiency. If this aid payment doesnot cover the obligation, the balance would be deducted from thesucceeding allotment. The funds would be forwarded directly to thepaying agent, and the comptroller would notify the school district of thepayment. A technical default can occur on New York school district GObonds. State finance law does not contain any provisions to activate themechanism before actual default. The minimum guarantee program,however, reflects the fact that a prompt cure of any such default isassured. 12Ohio State Aid Intercept ProgramMoody’s: Aa3 S&P: AA (post 2004 bonds) AA- (pre-2004 revision bonds)The Ohio Credit Enhancement Program authorizes a school district ortwo-year community or technical college to enter into an agreementthat allows the state to withhold state education funds due to thedistrict under chapter 3317 of the revised Ohio Administrative Code andto apply those funds to the districts debt service payments. Additionalrevisions to Section 3301-8-01 of the Ohio Administrative Code adoptedin March 2004 require 2.5x maximum annual debt service coveragelevels. 1To participate in the Credit Enhancement Program, school districts mustmeet the following Criteria:(1) The amount of Foundation Program Payments received by a schooldistrict for the current fiscal year reduced by any current year deficitreported on the five year forecast must exceed by a ratio of at least 2.5to 1 the outstanding maximum annual debt service on the proposedobligations and on any additional outstanding obligations secured by apledge of Foundation Program Payments; and (2) The projected amountof Foundation Program Payments remaining to be distributedin the current fiscal year reduced by any deficit reported on the five yearforecast must exceed the debt charges remaining to be paid in that Wealth Management Research 20 May 2011 12
    • Municipal bondsfiscal year by a ratio of 1.25 to 1.The Department, the School District, and the Bond Registrar will enterinto an agreement pursuant to Revised Code Section 3317.18 (the"Agreement") providing for the withholding and deposit of funds thatwould otherwise be due the School District under Revised Code Chapter3317 ("Foundation Program Payments") for the payment of debt servicecharges on the Bonds in the event the School District is unable to makedebt service payments on the Bonds. If the School District is unable tomake debt service payments on the Bonds, and payment will nototherwise be made pursuant to a credit enhancement facility, theAgreement provides that the Department will promptly pay to the BondRegistrar the lesser of: (i) the amount due for debt service charges onthe Bonds or (ii) the amount of Foundation Program Payments due theSchool District for the remainder of the fiscal year.As part of the Agreement, the School District will covenant that it willnot pledge Foundation Program Payments as primary security for anyadditional obligations having a claim on the Foundation ProgramPayments on a parity with the Bonds unless the criteria lasted above aremet in regards to the proposed obligations and any obligations to whichFoundation Program Payments are already pledged as primary security.This covenant will not prevent the School District from issuingobligations having a claim on Foundation Program Paymentssubordinate to that of the Bonds (such as a solvency assistanceadvance).The Agreement will be irrevocable as long as any of the School DistrictsBonds are outstanding. If Foundation Program Payments are paid to theBond Registrar pursuant to the Agreement, the Department is requiredto evaluate the School Districts inability to meet the debt servicepayments and to recommend corrective actions to be implemented bythe School District. Under the Agreement, the Department will beobligated only to redirect funds to the Bond Registrar which wouldotherwise go to the School District. The existence of the Agreementdoes not make the Bonds obligations, debts, or pledges of the faith,credit, or taxing power of the State, and the holders or owners of theBonds have no right to have taxes levied or appropriations made by theState legislature for the payment of debt service on the Bonds. TheAgreement and any payments by the State under it do not constitutethe assumption by the State of any debt of the School District. 13Oregon School Bond Guarantee ProgramMoody’s: Aa3 S&P: AA-AppropriationArticle XI-K of the Constitution of the State of Oregon allows the Stateto guarantee the general obligation bonded indebtedness of schooldistricts, education service districts, and community college districts inorder to secure lower interest costs on general obligations bonds ofsuch districts. Payment of the principal of interest on the bonds whendue is guaranteed by the full faith and credit of the State under theprovisions of the Oregon School Bond Guaranty Act – Oregon RevisedStatutes (ORS) 328.321 to 328.356 (the “Act”). As provided for inSection 328.326(1)(a) of the Act: The State Treasurer may, by issuing acertificate of qualification to a school district, pledge the full faith andcredit and taxing power of the State to guarantee full and timelypayment of the principal of, either at stated maturity or byadvancement of maturity pursuant to a mandatory sinking fundpayment, and interest on school bonds as such payments shall becomedue, except that in the event of any acceleration resulting from defaultor otherwise, other than an advancement of maturity pursuant to amandatory sinking fund payment, the payments guaranteed shall bemade in amounts and at such times as such payments would have beendue had there not been such an acceleration. Wealth Management Research 20 May 2011 13
    • Municipal bondsA school district that is unable to transfer the scheduled debt servicepayment to the paying agent 15 days before the payment date shallimmediately notify the paying agent and the State Treasurer. The Actfurther specifies that if sufficient funds are not transferred to the payingagent as required, the paying agent shall notify the State Treasurer ofthat failure at least 10 days before the scheduled debt service payment.If sufficient monies to pay the scheduled debt service payment have notbeen transferred to the paying agent, the State Treasurer shall, on orbefore the scheduled payment date, transfer sufficient monies to thepaying agent to make the scheduled debt service payment. If sufficientmonies of the State are not on hand and available at the time the Stateis required to make a debt service payment under its guaranty on behalfof a school district, the State Treasurer may singly or in combination:Obtain from the Common School Fund or from any other State fundsthat qualify to make a loan under ORS 293.205 to 293.225, a loansufficient to make the required payment; borrow money, if economicaland convenient, as authorized by ORS 286A.045; issue State generalobligation bonds as provided for in Article XI-K of the Constitution andthe process for which is defined in the Act; and with the approval of theLegislative Assembly, or the Emergency Board if emergency funds arelawfully available for making the required payment in the interimbetween sessions of the Legislative assembly, pay monies from theGeneral Fund or any other funds lawfully available for the purpose orfrom emergency funds amounts sufficient to make the requiredpayment. 14Pennsylvania State Aid Intercept ProgramMoody’s: A1 S&P: AState Aid InterceptSection 633 of the Public School Code of 1949, as amended by Act 154of 1998 (the "Public School Code") presently provides that if any schooldistrict fails to pay or to provide for the payment of any indebtedness, atthe date of maturity or mandatory redemption, or any interest due onsuch indebtedness, in accordance with the schedule under which thebonds or notes were issued, the Secretary of Education of theCommonwealth shall notify the board of school directors of itsobligation and shall withhold from any Commonwealth appropriationdue such school district an amount equal to the sum of such principal orinterest due and shall pay such amount directly to the bank acting assinking fund depositary for the bond issue. 15South Carolina Education Finance ProgramMoody’s: Aa1 S&P: AAAppropriationArticle X of the Constitution of the State of South Carolina, 1895, asamended, provides:If at any time any political subdivision shall fail to effect the punctualpayment of the principal of or interest on its general obligation debt,then, in such instance, the State Treasurer shall withhold from suchpolitical subdivision sufficient moneys from any state appropriation towhich such political subdivision may be entitled and apply so much asshall be necessary to the payment of the principal and interest on theindebtedness of the political subdivision then due.The Constitutional intercept provisions are enhanced by Section 59-71-155 of the Code of Laws of South Carolina, 1976, as amended, whichapplies to all school district general obligation bonds outstanding. Underthe statutory enhancement, a County Treasurer is required to notify theState Treasurer on the fifteenth day prior to the due date of anypayment of principal or interest on school district general obligation Wealth Management Research 20 May 2011 14
    • Municipal bondsbonds if the County Treasurer or any other paying agent does not haveon deposit the sum required to make that payment. On the thirdbusiness day prior to due date of the payment, if the County Treasureror any other paying agent does not have on hand the amount requiredto effect such payment, the State Treasurer is directed to transfer to theCounty Treasurer from the general fund of the State the sum necessaryto effect such payment, provided that the total amount of the paymentsso transferred in any fiscal year may not exceed the amountappropriated in the State’s budget under the Education Finance Act forthat fiscal year.Thereafter, the State Treasurer shall withhold from the School Districtfrom funds payable to it from the State amounts necessary to reimbursethe general fund of the State for any amounts so advanced, plusinvestment earnings foregone by the State on such amounts pendingreimbursement. The provision contains a mechanism to reimburse theSchool District for such withholdings from taxes thereafter collected. Ifthere is an advance from the State Treasurer under these provisions, theCounty Auditor is directed to adjust the millage levied for the paymentof debt service on the bonds for the next fiscal year in order to file areport with the State Treasurer demonstrating compliance not later thanfive business days after millage is set for the next fiscal year. 16South Dakota State Aid Intercept ProgramS&P: AState Aid InterceptIf capital outlay certificates are issued to, or a lease-purchase agreement,or other financing arrangement is entered into with the Health andEducational Facilities Authority and a school district has pledgedfoundation program funds or other state aid provided under Title 13 tosecure its obligations under or pursuant to a lease, resolution,certificate, or other arrangement with the Health and EducationalFacilities Authority and there are amounts due but not yet paid by aschool district, no cash receipts from the collection of any taxes, fromfoundation program aid or state aid under chapter 13-13 or from thecollection of tuition charges may be expended for any purpose exceptpaying the amounts due under the lease, resolution, certificate, or otherarrangement as specified by written notice by or on behalf of the Healthand Educational Facilities Authority. In the event of a failure to payamounts due the Health and Educational Facilities Authority, moneysfrom foundation program aid or state aid under Title 13 shall first beapplied to pay the amounts which are due but not yet paid to theauthority, any trustee acting as a fiduciary on behalf of any holders ofbonds, notes, or other certificates in connection with any sucharrangement and any such holders. If this application is insufficient, cashreceipts from the collection of any pledged taxes and tuition chargesshall be applied to pay the amounts which are due but not yet paid tothe authority, any such trustee, and any such holders. 17Texas Higher Education Bond ProgramS&P: AAAppropriationAn amendment to the states constitution enhances debt obligations ofcertain public institutions of higher education. In accordance with ArticleVII, Section 17 of the Texas Constitution and the 1985 Excellence inHigher Education Act, there is a continuing annual appropriation of$100 million to support higher education. The 26 state universities thatdo not benefit from the Permanent University Fund--those outside theUniversity of Texas system and the Texas A&M system, each receive aportion of the annual $100 million appropriation. A maximum of 50%of each qualified institutions allocation may be pledged for debt serviceon bonds. a universitys board of trustees or a university systems board Wealth Management Research 20 May 2011 15
    • Municipal bondsof regents must file a claim in the amount of the next debt servicepayment with the state comptroller. Filing of a claim will enable thebond trustees to receive a warrant for payment directly from the state atleast 15 days prior to the principal and interest payment date. Bondsissued under Article 7, Section 17 of the state constitution are payablesolely from these constitutional appropriations. The legislature may notreduce the appropriation so as to impair the payment of the obligationscreated by the bonds or notes issued in accordance with Section 17 ofthe constitution. 1Texas Permanent School Fund ProgramS&P: AAAState Permanent FundThe PSF was created in 1854 by the State Legislature for the benefit ofpublic schools in Texas. Over the ensuing years, the PSF corpus hasgrown to $25.5 billion (market value) as of August 31, 2009, the latestfiscal year end. The Guarantee for School District Bonds (“the GuaranteeProgram” was authorized by an amendment to the Texas Constitutionin 1983 and by Subchapter C of Chapter 45 of the Texas EducationCode (“the Act”). If the conditions for the Guarantee Program aresatisfied, the guarantee becomes effective upon the approval of theBonds by the Attorney General and remains in effect until theguaranteed bonds are paid or defeased, by a refunding or otherwise.In the event of a default, holders of guaranteed bonds will receive allpayments due from the corpus of the PSF. Following a determinationthat a district will be or is unable to pay maturing or matured principaland interest on any guaranteed bond, the Act requires the District tonotify the Commissioner not later than the fifth day before the statedmaturity date of such bond or interest payment. Immediately followingreceipt of such notice, the Commissioner must cause to be transferredfrom the appropriate account in the PSF to the Paying Agent/Registraran amount necessary to pay maturing or matured principal and interest.Upon receipt of funds for payment of such principal or interest, thePaying Agent/Registrar must pay the amount due and forward thecanceled bond or evidence of payment of the interest to the StateComptroller of Public Accounts (“the Comptroller”). The Commissionerwill instruct the Comptroller to withhold the amount paid, plus interest,from the first State money payable to the District. The amount withheldwill be deposited to the credit of the PSF. The Comptroller must holdsuch canceled bond or evidence of payment of interest on behalf of thePSF. Following full reimbursement of such payment by the district to thePSF with interest, the Comptroller will cancel the bond or evidence ofpayment of the interest and forward it to the district. The Act permitsthe Comptroller to order a school district to set a tax rate sufficient toreimburse the Fund for any payments made with respect to guaranteedbonds, and also sufficient to pay future payments on guaranteed bonds,and provides certain enforcement mechanisms to the Commissioner,including the appointment of a board of managers or annexation of adefaulting district to another district.If a district fails to pay principal or interest on a bond as it is stated tomature, other amounts not due and payable are not accelerated and donot become due and payable by virtue of the district’s default. TheGuarantee Program does not apply to the payment of principal andinterest upon redemption of bonds, except upon mandatory sinkingfund redemption, and does not apply to the obligation, if any, of aschool district to pay a redemption premium on bonds.The capacity of the Fund to guarantee bonds under the Program islimited by State law and by IRS regulation. In 2007, legislation wasenacted that would permit the capacity of the Program to be increasedto an amount not to exceed five times the cost value of the PSF,provided that the increased limit does not violate federal law andregulation and does not prevent bonds guaranteed by the Guarantee Wealth Management Research 20 May 2011 16
    • Municipal bondsProgram from receiving the highest available credit rating. Since 2005,the Guarantee Program has twice reached capacity under IRS limits andin each instance the Program was closed to new bond guaranteeapplications until relief was obtained from the IRS. The most recentclosure of the Guarantee Program commenced in March 2009 and theProgram reopened in February 2010.Pursuant to an IRS Notice published in December, 2009 capacity limitswere proposed based on the cost value of the Fund multiplied by five.The capacity of the program will be limited to the lower of the StateCapacity limit and the IRS Limit. In May, 2010, the State Capacity Limitwas raised to an amount equal to three times the cost value of the PSF.The cost value of the Guarantee Program as of 12/16/2009 was USD23,463,749,653. At 8/31/2010, the PSF guaranteed USD49,301,683,338 of principal amount of bonds outstanding. 18Utah School Bond Guaranty ProgramS&P: AAAState Aid InterceptThe Guaranty Act establishes the Utah School Bond Default AvoidanceProgram (the “Program” or the “Utah School Bond GuarantyProgram”). The State’s guaranty is contained in Section 53A–28–201(2)(a) of the Guaranty Act, which provides as follows: The full faithand credit and unlimited taxing power of the state is pledged toguarantee full and timely payment of the principal of (either at thestated maturity or by any advancement of maturity pursuant to amandatory sinking fund payment) and interest on, bonds as suchpayments shall become due (except that in the event of any accelerationof the due date of such principal by reason of mandatory or optionalredemption or acceleration resulting from default o[r] otherwise, otherthan any advancement of maturity pursuant to a mandatory sinkingfund payment, the payments guaranteed shall be made in such amountsand at such times as such payments of principal would have been duehad there not been any such acceleration). In addition, the Guaranty Actprovides that the State pledges to and agrees with the holders of bondsguaranteed under the Guaranty Act that the State will not alter, impair,or limit the rights vested by the Program with respect to said bonds untilsaid bonds, together with applicable interest, are fully paid anddischarged.Under the Guaranty Act, the Business Administrator of the Board (the“Business Administrator”) is required to transfer moneys sufficient forscheduled debt service payments on the Bonds to the Paying Agent atleast 15 days before any principal or interest payment date for theBonds. If the Business Administrator is unable to transfer the scheduleddebt service payment to the Paying Agent at least 15 days before thepayment date, the Business Administrator must immediately notify thePaying Agent and the Utah State Treasurer (the “State Treasurer”) by (i)telephone and (ii) a writing sent by (a) facsimile transmission and (b)first–class United States mail. In addition, if the Paying Agent has notreceived the scheduled debt service payment at least 15 days prior tothe scheduled debt service payment date for the Bonds, then the PayingAgent must at least 10 days before the scheduled debt service paymentnotify the State Treasurer of that failure by (i) telephone and (ii) awriting sent by (a) facsimile transmission and (b) first–class United Statesmail. The Guaranty Act further provides that if sufficient moneys to paythe scheduled debt service payment have not been transferred to thePaying Agent, then the State Treasurer shall, on or before the scheduledpayment date, transfer sufficient moneys to the Paying Agent to makethe scheduled debt service payment. Payment by the State of a debtservice payment on the Bonds discharges the obligation of the Board tothe bondholders for that payment, to the extent of the State’s payment,and transfers the Board’s obligation for that payment to the State. Wealth Management Research 20 May 2011 17
    • Municipal bondsIn the event the State is called upon to make payment of principal of orinterest on the Bonds on behalf of the Board, the State will use cash onhand (or from other legally available moneys) to make the payment.Under the Guaranty Act, the State Treasurer is required to immediatelyintercept any payments from the Uniform School Fund or from anyother source of operating moneys provided by the State to the Board.The intercepted payments will be used to reimburse the State until allobligations of the Board to the State, including interest and penalties,are paid in full. The State does not currently expect to have to advancemoneys to the Board pursuant to its guaranty. If, however, at the timethe State is required to make a debt service payment under its guarantyon behalf of the Board, sufficient moneys are not on hand and availablefor that purpose, then the Guaranty Act provides that the State mayseek a short–term loan from the Permanent School Fund sufficient tomake the required payment (the Permanent School Fund is not requiredto make such a loan) or issue short–term State debt in the form ofgeneral obligation notes as provided in the Guaranty Act. The provisionsof the Guaranty Act relating to short–term debt provide that such debtwill carry the full faith and credit of the State and will be issued with amaturity of not more than 18 months so that the State could, ifnecessary, obtain liquidity financing on short notice. Under the StateConstitution, debt incurred for this purpose does not count toward theconstitutional debt limit of the State. 19Virginia State Aid Intercept ProgramS&P: AState Aid InterceptSection 633 of the Public School Code of 1949, as amended by Act 154of 1998 (the "Public School Code") presently provides that if any schooldistrict fails to pay or to provide for the payment of any indebtedness, atthe date of maturity or mandatory redemption, or any interest due onsuch indebtedness, in accordance with the schedule under which thebonds or notes were issued, the Secretary of Education of theCommonwealth shall notify the board of school directors of itsobligation and shall withhold from any Commonwealth appropriationdue such school district an amount equal to the sum of such principal orinterest due and shall pay such amount directly to the bank acting assinking fund depositary for the bond issue. Section 633 of the PublicSchool Code of 1949, as amended by Act 154 of 1998 (the "PublicSchool Code") presently provides that if any school district fails to pay orto provide for the payment of any indebtedness, at the date of maturityor mandatory redemption, or any interest due on such indebtedness, inaccordance with the schedule under which the bonds or notes wereissued, the Secretary of Education of the Commonwealth shall notify theboard of school directors of its obligation and shall withhold from anyCommonwealth appropriation due such school district an amount equalto the sum of such principal or interest due and shall pay such amountdirectly to the bank acting as sinking fund depositary for the bond issue.20Washington School Bond Guaranty ProgramS&P: AAAppropriationArticle VIII, section 1(e) of the Constitution of the State and the Actallow the State to guarantee any voted general obligation bonds issuedby the school district. Payment of the principal and interest on ProgramBonds when due is guaranteed by the full faith, credit, and taxingpower of the State under the provisions of the Act. The Act provides:The full faith, credit, and taxing power of the State is pledged toguarantee full and timely payment of the principal and interest onProgram Bonds as such payments become due. However, in the event ofany acceleration resulting from default, the payments guaranteed shallbe made in the amounts and at the times as payments of principalwould have been due had there not been any acceleration. The State Wealth Management Research 20 May 2011 18
    • Municipal bondsguarantee does not extend to the payment of any redemption premium.A County Treasurer who is unable to transfer to the paying agent fundsrequired to make any scheduled debt service payments on the ProgramBonds on or prior to the payment date, due to the lack of adequatefunds, is required to immediately provide notice to the State Treasurerand to the paying agent. If sufficient funds are not transferred to thepaying agent at the time required to make such scheduled debt servicepayment in a timely manner, the paying agent is required to make suchscheduled debt service payment and the State Treasurer is required totransfer sufficient money to the paying agent for such payment. 21West Virginia Municipal Bond Commission ProgramS&P: AA-AppropriationPursuant to Chapter 13, Article 3 of the Code of West Virginia, 1931, asamended, the West Virginia Municipal Bond Commission (the “BondCommission”) shall serve as fiscal agent for all issuers of generalobligation bonds issued by counties, municipalities, and school districtsof the State and is charged with the administration of the interest andsinking funds created to service the debt. The proceeds of taxes leviedfor debt service by the Board are collected by the Sheriff, who remits theproceeds to the Board Treasurer, who forwards the proceeds thereof tothe Bond Commission. The Bond Commission is required by law torender annually to each political subdivision having outstanding bonds astatement showing the levy required to pay the interest on and create asinking fund for the retirement of the outstanding bonds. The BondCommission customarily sets the levy rates at 110% of the annualprincipal and interest required so as to provide a margin to cover thestatutory 2 1/2% discount for early payment of taxes and any attritionoccasioned by delinquencies, improper assessments and exonerations.There has not been a default on the payment of principal or interest ofany general obligation bond in the State of West Virginia since the BondCommission commenced centralized supervision and administration in1921.Since 1933, the annual State of West Virginia Budget Bill has embodieda protective provision for certain State agency and taxing districtobligations, if deficiencies should arise. The following excerpt from the2010 Budget Bill is indicative: [Section 14]: There is hereby appropriatedto the governor a sufficient amount to meet any deficiencies that mayarise in the mortgage finance bond insurance fund of the West Virginiahousing development fund which is under the supervision and controlof the state municipal bond commission as provided by Chapter 31,Article 18, Section 20-b, of the code of West Virginia, or in the funds ofthe state municipal bond commission because of the failure of any stateagency for either general obligation or revenue bonds or any localtaxing district for general obligation bonds to remit funds necessary forthe payment of interest and sinking fund requirements. The Governor isauthorized to transfer from time to time such amounts to the statemunicipal bond commission as may be necessary for these purposes. 22Wyoming School District Bond Guarantee ProgramS&P: AAAState Permanent FundThe Wyoming School District Bond Guarantee Program (the “GuaranteeProgram”) was adopted by the Wyoming Legislature in 1994. TheGuarantee Program currently provides state credit support for generalobligation new money bonds issued by local public school districts on orbefore November 1, 2001 and general obligation refunding bonds tothe extent that they refund bonds issued on or before November 1,2001, and it further provides for the timely payment of principal of andinterest on such bonds as the same shall become due and payable in Wealth Management Research 20 May 2011 19
    • Municipal bondsaccordance with their terms.In accordance with Wyo. Stat. §9-4-1001 (the “School Bond GuaranteeStatute”) and the regulations (the “Bond Guarantee Regulations”)adopted by the Wyoming State Loan and Investment Board (the “StateLoan and Investment Board”) pursuant thereto, a district will make thefilings necessary to participate in the Guarantee Program. If the StateLoan and Investment Board grants the district’s application to participatein the Guarantee Program, the State of Wyoming (the “State”) shallassume responsibility for and make all payments to the district’s payingagent in theamounts necessary to pay principal and interest on the bonds, and thedistrict shall cause to be remitted to the State Treasurer, in immediatelyavailable funds not later than two (2) working days prior to the paymentdate, moneys sufficient to pay the principal of and interest on the bondscoming due. If the district fails to make such deposit, the State Treasureris required to forward to the Paying Agent, in immediately availablefunds, the amount necessary to make the payment of principal of orinterest on the bonds and the district’s next succeeding majormaintenance payment under Wyo. Stat. §21-15-109 and payment fromthe School Foundation Program Account under Wyo. Stat. §21-13-313shall be intercepted by the State Loan and Investment Board to providefor repayment. The loan shall not be deemed to be a general obligationof the district, and the State shall not require repayment from anysource other than as provided in the School Bond Guarantee Statute. 23Those programs which require the longest lead time and theleast legislative action on the part of the State offer the greatestlevel of comfort to bondholders. However, all of these programsare designed to assure that all of the enhanced debt is repaid infull and on a relatively timely basis regardless of the particularmechanics and requirements of the individual programs.Endnotes1 (S&P Criteria 2008, republished January, 2011)2 (O.S. Woodland Park SD, RE-2, 3/4/11)3 (O.S. South Bend Community School Corporation, 10/8/2010)4 (O.S. Bartow County School District, 11/9/2010)5 (O.S. Whitman-Hanson Regional School District, 1/4/07)6 (O.S. Independent School District No. 706, Virginia, Minnesota,2/18/11)7 (Minnesota Office of the Revisor of Statutes)8 (O.S., Carl Junction R-I School District of Jasper County, Missouri,2/24/2011)9 (O.S. Douglas County School District, Nevada, 3/10/2010)10 (O.S. The Board of Education of the Township of Alexandria in theCounty of Hunterdon, N.J., 2/25/2011)11 (Municipal Qualified Bond Act, N.J.S.A. 40A:3-1 et seq., 11/19/09))12 (Moody’s Investors Service, 2/2008)13 (O.S. Anthony Wayne Local School District, 2/3/11)14 (O.S. Linn County School District #9, OR, 3/1/2011)15 (Fleetwood Area School District O.S. 1/20/11)16 (O.S. Hampton County School District No. 1, 12/16/2010)17 (SL 1986, ch 124, § 3; SL 1989, ch 146, § 8; SL 1999, ch 84, § 7.)18 (O.S. Bryson Independent School District, 1/13/2011)19 (O.S. Garfield County School District, UT, 4/21/2011)20 (O.S. City of Norfolk, 3/9/11)21 (O.S. Ritzville School District No. 160-167 Adams and LincolnCounties, WA, 3/21/2011)22 (O.S. The Board of Education of the County of Marion, West Virginia,2/16/11)23 (O.S. Sweetwater County School District Number 2, WY, 3/10/2009) Wealth Management Research 20 May 2011 20
    • Municipal bondsAgency Ratings Rating Agencies Credit Ratings S& Moo Fitch / Definition P dy’s IBCA A Issuers have exceptionally strong credit quality. A Aaa AAA AAA is the best credit quality. A A Aa1 AA+ A+ A Aa2 AA Issuers have very strong credit quality. AInvestment Grade A Aa3 AA- A- A+ A1 A+ A A2 A Issuers have high credit quality. A- A3 A- BB Baa1 BBB+ B+ BB Baa2 BBB Issuers have adequate credit quality. This is the B lowest Investment Grade category. BB Baa3 BBB- B- BB Ba1 BB+ + BB Ba2 BB Issuers have weak credit quality. This is the highest Speculative Grade category. BB Ba3 BB- - B+ B1 B+ B B2 B Issuers have very weak credit quality.Non-Investment Grade B- B3 B- C Caa1 CCC+ C C+ C Caa2 CCC C Issuers have extremely weak credit quality. C C Caa3 CCC- C C- C CC+ C C Ca CC Issuers have very high risk of default. CC- Obligor failed to make payment on one or more D C DDD of its financial commitments. This is the lowest quality of the Speculative Grade category. Wealth Management Research 20 May 2011 21
    • Municipal bondsAppendixTerms and AbbreviationsTerm / Abbreviation Description / Definition Term / Abbreviation Description / DefinitionGO General Obligation Bond TEY Taxable Equivalent Yield (tax free yield divided by 100 minus the marginal tax rate)MMD Municipal Market Data Wealth Management Research 20 May 2011 22
    • Municipal bondsAppendixGlobal DisclaimerWealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions ofUBS AG (UBS) or an affiliate thereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is notintended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein is basedon numerous assumptions. Different assumptions could result in materially different results. Certain services and products are subject to legalrestrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. 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