Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09


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Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

  1. 1. Washington State University Levies and Bonds: The Impact of the Current Economic Condition August 13, 2009 Jon Gores Senior Vice President (206) 389-4043 [email_address]
  2. 2. Outline <ul><li>Election Research </li></ul><ul><li>School Capital Financing 101 </li></ul><ul><li>Bond Issue Planning—Projected Tax Rates </li></ul>
  3. 3. Election Research <ul><li>Election Date Research </li></ul><ul><li>Multiple Ballot Measures </li></ul><ul><li>Tax Rate vs. Election Success </li></ul><ul><li>Economy vs. Election Success </li></ul>
  4. 4. Election Timing <ul><ul><ul><ul><li>When should we run our Bonds? </li></ul></ul></ul></ul>
  5. 5. Voting Patterns
  6. 6. Voting Patterns
  7. 7. Voting Patterns
  8. 8. Multiple Propositions on Same Ballot Example: PROPOSITION 2 BONDS FOR NEW STADIUM AND MULTIPURPOSE FIELD The Board of Directors of ABC District No. 1 adopted Resolution No. 11-07/08, concerning a proposition to finance a new stadium and multipurpose field. This proposition would authorize the District, only if Proposition 1 is approved, to construct and equip a new High School Stadium and synthetic turf multipurpose field; issue no more than $4,000,000 of general obligation bonds maturing within 20 years; and levy annual excess property taxes to repay the bonds, all as provided in Resolution No. 11-07-08. Should this proposition be: Approved………. ____ Rejected………...____
  9. 9. Multiple Ballot Measures <ul><li>Should M&O Levies, Capital Projects Levies and Bonds Be Separate Elections? </li></ul>
  10. 10. M&O/Bonds on the Same Ballot
  11. 11. M&O and Capital Levies on the Same Ballot
  12. 12. M&O and Transportation Levies on the Same Ballot
  13. 13. <ul><li>Do tax rates or the economy influence voters? </li></ul>Controlling Tax Rates
  14. 14. <ul><li>If you knew the passage of the levy won’t increase the tax rate for homeowners? </li></ul>Tax Rate Changes % In Favor 2003 Eiland Survey 60%
  15. 15. <ul><li>The absolute size of the tax rate may be less important than the change in rates. </li></ul><ul><li>There is very little correlation between the total tax rate and election success. That is, the amount of the total tax rate does not appear to influence voters as much as the stability of the tax rates. </li></ul>Tax Rate Research
  16. 16. <ul><li>Stable tax rates lead to greater success at election time. </li></ul><ul><li>Districts with smaller tax rate changes have more success passing levies. </li></ul>Tax Rate Change <ul><li>This is reflected in the voter survey data. </li></ul><ul><li>The correlation of real dollar change in tax rates from 1992-97 with election results demonstrates that stable tax rates lead to greater election success. </li></ul>
  17. 17. Consumer Confidence Index Source: Reuters and
  18. 18. Standard & Poor’s 500 Index Source: Standard & Poor’s
  19. 19. Bond Election Results 2009: East vs. West February 2009 Western Washington Eastern Washington March 2009 Western Washington Eastern Washington Quillayute Valley Pass Royal Fail Ocasta Fail College Place Fail Mary M. Knight Fail East Valley (Spokane) Fail North Mason Fail Vashon Island Fail Kennewick Fail Snoqualmie Valley Pass North Franklin Pass Puyallup Fail Bickelton Pass Tacoma Fail Davenport Pass Auburn Fail Pateros Pass Burlington-Edison Fail Spokane Pass Sunnyside Pass West Valley (Yakima) Fail
  20. 20. Bond Election Results 2009: East vs. West April 2009 Western Washington Eastern Washington May 2009 Western Washington Eastern Washington TOTAL # of Issues # of Issues Passed Methow Valley Pass Bainbridge Island Fail Kennewick Pass Ocosta Fail Royal Fail College Place Fail Yakima Pass Western Washington 12 2 Eastern Washington 16 9
  21. 21. <ul><li>Effects of the Simple Majority </li></ul>
  22. 22. M&O Election Summary <ul><li>2008 </li></ul><ul><ul><li>Total # of M&O Levies: 159 </li></ul></ul><ul><ul><li>Total # of M&O Levies Passed: 155 </li></ul></ul><ul><ul><li>Total # of M&O Levies Passed Below 60%: 65 </li></ul></ul><ul><li>2009 </li></ul><ul><ul><li>Total # of M&O Levies: 45 </li></ul></ul><ul><ul><li>Total # of M&O Levies Passed: 44 </li></ul></ul><ul><ul><li>Total # of M&O Levies Passed Below 60%: 12 </li></ul></ul>
  23. 23. <ul><li>Do you agree or disagree that school districts get more money in taxes as property values go up? </li></ul>Property Taxes Source: Tom Eiland & CFM Consulting Agree Disagree 2005 Voters 66% 23% 2007 Voters 68% 20%
  24. 24. Property Taxes 101 Increases in Home Values Will Not Increase School District Tax Collections <ul><li>Changes in home values don’t change the amount of taxes authorized. </li></ul><ul><li>Local school taxes can only be increased by a vote of the people. </li></ul><ul><li>Changing property values will change tax rates, but not tax collections. </li></ul><ul><li>Tax collection impact </li></ul>
  25. 25. $1,000 Levy $250 $250 $250 $250 $100,000 $100,000 $100,000 $100,000 Property Taxes 101
  26. 26. $1,000 Levy $250 $250 $250 $250 $200,000 $200,000 $200,000 $200,000 Property Taxes 101
  27. 27. $1,000 Levy $187.50 $250 $250 $312.50 $150,000 $200,000 $200,000 $250,000 Property Taxes 101
  28. 28. Property Taxes 101 $1,000 Levy $200 $200 $200 $200 $200 $100,000 $100,000 $100,000 $100,000 $100,000
  29. 29. Increase in Property Values Will Not Increase School District Tax Collections <ul><li>Changes in property values don’t change the amount of taxes authorized </li></ul><ul><li>Local school taxes can only be increased by a vote of the people </li></ul><ul><li>Changing property values will change tax rates, but not tax collections </li></ul>Year Home Value Tax Rate Tax Bill ABC School District Home Value 2008 $100,000 $5.00/$1,000 $500 Assume a 20% increase in Assessed Value for ABC School District #1: 20% increase 2009 $120,000 $4.17/$1,000 $500 #2: 10% increase 2009 $110,000 $4.17/$1,000 $459 #3: 30% increase 2009 $130,000 $4.17/$1,000 $542
  30. 30. Decrease in Property Values Will Not Decrease School District Tax Collections <ul><li>Changes in property values don’t change the amount of taxes authorized </li></ul><ul><li>Local school taxes can only be increased by a vote of the people </li></ul><ul><li>Changing property values will change tax rates, but not tax collections </li></ul>Year Home Value Tax Rate Tax Bill ABC School District Home Value 2008 $100,000 $5.00/$1,000 $500 Assume a 10% decrease in Assessed Value for ABC School District #1: 10% decrease 2009 $90,000 $5.55/$1,000 $500 #2: 5% decrease 2009 $95,000 $5.55/$1,000 $528 #3: 20% decrease 2009 $80,000 $5.55/$1,000 $444
  31. 31. Property Taxes 101 Summary <ul><li>If your property value increases at a lower rate than the average increase for the school district, the amount of taxes you pay will decrease. </li></ul><ul><li>If your property value increases at a higher rate than the average increase for the school district, the amount of taxes you pay will increase. </li></ul><ul><li>Tax collection impact </li></ul>
  32. 32. Assessed Value Growth <ul><li>Current trends </li></ul><ul><li>Revalue cycle </li></ul><ul><li>New construction </li></ul><ul><li>Annual updates </li></ul>County Revaluation Cycles
  33. 33. Property Assessment Ratios by County Source: Washington State Department of Revenue.
  34. 34. Home Prices in Washington State Source: MSN Money: Home Prices by Metro Area, February 24, 2009. National: -3.4% Q4 2008; -8.2% 1 year Price appreciation as of December 31, 2008.
  35. 35. 2009-2010 Special Election and Resolution Filing Dates
  36. 36. Save the Date
  37. 37. <ul><li>Capital Projects Financing </li></ul>
  38. 38. Capital Financing Options <ul><li>Most common </li></ul><ul><ul><li>Bonds </li></ul></ul><ul><ul><ul><li>Voted </li></ul></ul></ul><ul><ul><ul><li>Non-voted </li></ul></ul></ul><ul><ul><li>Capital Projects Levy </li></ul></ul><ul><li>Less Common </li></ul><ul><ul><li>Build America Bonds (BAB’s) </li></ul></ul><ul><ul><li>Qualified School Construction Bonds (QSCB’s) </li></ul></ul><ul><ul><li>Qualified Zone Academy Bonds (QZAB’s) </li></ul></ul><ul><ul><li>Conditional Sale Contracts </li></ul></ul>
  39. 39. <ul><li>Types of School District Bonds </li></ul><ul><ul><li>Voted- Unlimited Tax General Obligation Bonds (UTGO) </li></ul></ul><ul><ul><li>Non-voted – Limited General Obligation Bonds (LGO) </li></ul></ul><ul><li>Voter approved bonds are (UTGO) </li></ul><ul><ul><li>repaid with property taxes </li></ul></ul><ul><ul><li>approved with a 60% yes vote, 40% validation </li></ul></ul><ul><ul><li>5% Debt Capacity </li></ul></ul><ul><li>Non-voted bonds are (LGO) </li></ul><ul><ul><li>repaid with existing revenue </li></ul></ul><ul><ul><li>can’t be used for “new” construction </li></ul></ul><ul><ul><li>3/8 of 1% Debt Capacity </li></ul></ul><ul><li>Conditional Sale Contracts </li></ul><ul><ul><li>Considered “debt” (non-voted) </li></ul></ul><ul><ul><li>Payment from general district revenues </li></ul></ul><ul><ul><li>No maximum term (economic life) </li></ul></ul>Capital Financing Options
  40. 40. <ul><li>Build America Bonds (BAB’s) </li></ul><ul><ul><li>Taxable bonds with Government subsidy </li></ul></ul><ul><ul><li>All tax-exempt bond rules apply </li></ul></ul><ul><ul><li>IRS/Disclosure </li></ul></ul><ul><ul><li>Expires December 31, 2010 </li></ul></ul><ul><li>Qualified School Construction Bonds (QSCB’s) </li></ul><ul><ul><li>Tax credit bonds </li></ul></ul><ul><ul><li>State allocation $164,100,000 </li></ul></ul><ul><ul><li>Absence of current market </li></ul></ul><ul><ul><li>Expires December 31, 2010 </li></ul></ul>Capital Financing Options
  41. 41. <ul><li>Qualified Zone Academy Bonds (QZAB’s) </li></ul><ul><ul><li>interest free loan </li></ul></ul><ul><ul><li>private partnership/free & reduced lunch </li></ul></ul><ul><ul><li>can’t be used for new construction </li></ul></ul><ul><ul><li>non-voted debt </li></ul></ul><ul><li>Capital Projects Levy (no debt limit) </li></ul><ul><ul><li>simple majority </li></ul></ul><ul><ul><li>two to six year repayment </li></ul></ul><ul><ul><li>no interest cost </li></ul></ul><ul><ul><li>frees up M&O funds </li></ul></ul><ul><ul><li>jump start capital plan </li></ul></ul>Capital Financing Options <ul><li>Bonds are the primary method used by Washington school districts to finance the “local share” of capital projects because </li></ul><ul><ul><li>cash is generated up front </li></ul></ul><ul><ul><li>payments can be spread over time, and </li></ul></ul><ul><ul><li>districts have some control over taxpayer impacts </li></ul></ul>
  42. 42. <ul><li>State match for construction projects available to all school districts </li></ul><ul><li>Study and survey grant </li></ul><ul><li>State match ratios from 20% to 90%--not dollar for dollar </li></ul><ul><li>Does state match create incentive for deferred maintenance? </li></ul><ul><li>Unhoused vs. modernization </li></ul>Capital Financing Options—State Match (State Funding Assistance)
  43. 43. <ul><li>Ideal Time Frame for Major Decisions </li></ul>Preparing for the Election
  44. 44. <ul><li>The Participants </li></ul><ul><ul><li>The Architect provides cost projections based on the project scope </li></ul></ul><ul><ul><li>The Underwriter provides financial planning and ultimately buys the bonds for resale to investors </li></ul></ul><ul><ul><li>Bond Counsel prepares documents and provides a legal opinion </li></ul></ul><ul><ul><li>The Financial Advisor represents the District during negotiations with the Underwriter </li></ul></ul><ul><ul><li>The County Treasurer is the District’s treasurer and takes receipt of the bond proceeds </li></ul></ul>Planning a Bond Financing
  45. 45. <ul><li>The Ballot Proposition—Voted Bonds </li></ul><ul><ul><li>1. Maximum amount to be borrowed </li></ul></ul><ul><ul><li>2. Maximum term of the bonds </li></ul></ul><ul><ul><li>3. Use of bond proceeds </li></ul></ul><ul><ul><li>4. Use of State matching money (Front Funded) </li></ul></ul><ul><ul><li>5. Unlimited Authority to levy property taxes to pay debt service </li></ul></ul>Planning a Financing
  46. 46. <ul><li>PROPOSITION 1 </li></ul><ul><li>SCHOOL DISTRICT NO. ___ </li></ul><ul><li>BONDS FOR CONSTRUCTION OF SCHOOL FACILITIES </li></ul><ul><li>The Board of Directors of _____ School District No. ___, adopted Resolution No._____, concerning a proposition to finance construction of school facilities. This proposition would authorize the District to construct a new elementary school (Grades K-3) to replace _______ Elementary School on the existing site and construct additional classrooms to replace portable classrooms at _______ Middle School; issue no more than $19,544,500 of general obligation bonds maturing within 20 years; and levy annual excess property taxes to repay the bonds, all as provided in Resolution No.______. Should this proposition be: </li></ul><ul><li>Approved………. ____ </li></ul><ul><li>Rejected………...____ </li></ul>Bond Proposition
  47. 47. <ul><li>1. Maximum amount to be levied </li></ul><ul><li>2. Maximum term of the levy </li></ul><ul><li>3. Use of levy proceeds </li></ul><ul><li>4. Levy amount per year </li></ul><ul><li>5. Estimated tax rate per year </li></ul>Ballot Proposition—Capital Projects Levy
  48. 48. <ul><li>PROPOSITION __________ </li></ul><ul><li>SCHOOL DISTRICT NO. ___ </li></ul><ul><li>CAPITAL LEVY FOR TECHNOLOGY IMPROVEMENTS </li></ul><ul><li>The Board of Directors of ________School District No. ___adopted Resolution No. _____, concerning a proposition to finance technology improvements. This proposition would authorize the District to acquire and install technology and communication equipment and make other technology improvements and upgrades throughout existing school facilities to improve student learning, and levy the following excess taxes, on all taxable property within the District: </li></ul>Capital Levy Proposition Approximate Levy Rate/$1,000 Collection Year Assessed Value Levy Amount 2009 $_________ $________ 2010 $_________ $________ 2011 $_________ $________ 2012 $_________ $________ All as provided in Resolution No. ___. Should this proposition be approved? LEVY . . . YES ___ LEVY . . . NO ___
  49. 49. Capital Levy as Part of Long Range Financing Plan
  50. 50. Capital Levy to “Jump Start” Long Range Capital Plan <ul><li>Case Study: </li></ul><ul><ul><li>Seek voter approval for a three year Capital Levy in 2010 </li></ul></ul><ul><ul><li>Tax collection 2011, 2012, 2013 </li></ul></ul><ul><ul><li>Place bond issue before voters spring 2013 </li></ul></ul><ul><ul><li>Bond tax collection starts 2014 </li></ul></ul><ul><ul><li>Tax Rates </li></ul></ul><ul><ul><li>$3,635,000 Capital Levy approved Feb 2010 </li></ul></ul><ul><ul><li>Estimated tax rate: $0.50/$1,000 </li></ul></ul><ul><ul><li>Collection 2011, 2012, 2013 </li></ul></ul><ul><ul><li>$17,500,000 Bond Issue approved Feb 2013 </li></ul></ul><ul><ul><li>Estimated tax rate increase over 2013: $0 </li></ul></ul><ul><ul><li>Estimated tax rate: $0.50/$1,000 </li></ul></ul><ul><ul><li>Collection 2014 through 2029 </li></ul></ul><ul><li>Results </li></ul><ul><ul><li>Voter approved tax increase with Simple Majority </li></ul></ul><ul><ul><li>Bond issue is approved without tax increase with Super Majority </li></ul></ul>
  51. 51. <ul><li>A. Projected Budget </li></ul><ul><ul><li>Estimated costs </li></ul></ul><ul><ul><li>Estimated revenues </li></ul></ul><ul><ul><ul><li>Bonds </li></ul></ul></ul><ul><ul><ul><li>Local Share vs. Front Funded </li></ul></ul></ul><ul><ul><ul><li>Investment earnings </li></ul></ul></ul><ul><ul><ul><li>Impact fees </li></ul></ul></ul><ul><li>B. Projected Cash Flow </li></ul><ul><ul><li>Tax law considerations </li></ul></ul><ul><ul><ul><li>Arbitrage Rebate </li></ul></ul></ul><ul><ul><ul><li>Expenditure Rule </li></ul></ul></ul><ul><li>C. Projected Impact on taxpayers </li></ul><ul><ul><li>Levy rates are the standard means of communicating the tax impact </li></ul></ul><ul><ul><ul><li>Tax rate per $1,000 </li></ul></ul></ul><ul><ul><ul><li>Tax deduction </li></ul></ul></ul>The Financing Plan
  52. 52. <ul><li>Assumptions for Tax Rate Planning </li></ul><ul><ul><li>Interest Rates </li></ul></ul><ul><ul><li>Bond Rating </li></ul></ul><ul><ul><li>Assessed Value </li></ul></ul><ul><ul><li>Bond Structure </li></ul></ul>Financial Planning
  53. 53. <ul><li>Assumptions for Levy Rate Planning </li></ul><ul><li>A. Interest Rates </li></ul><ul><li>- Lower interest rates result in lower tax rates for bonds. </li></ul><ul><li>- Interest rates are determined when bonds are actually sold. </li></ul><ul><li>- Assumption: Current rates plus 1.5% </li></ul>Financial Planning
  54. 54. <ul><li>Assumptions for Levy Rate Planning (continued) </li></ul><ul><li>B. Bond Rating </li></ul><ul><li>- A higher bond rating results in lower interest rates. </li></ul><ul><li>- Assumption: Aaa (with bond insurance) </li></ul><ul><li>Aa1 (with State Guaranty) </li></ul>Financial Planning A Guide to Bond Ratings Moody’s Investors Service – Founded 1918 Highest Quality Aaa Aa1, Aa2, Aa3 A1, A2, A3 Baa1, Baa2, Baa3 Lowest Quality NR (Nonrated)
  55. 55. Bond raters consider local economy, district finances and other factors. Example : Financial Planning The Rating Debt Factors Economy Governmental Factors Financial Performance Lake Washington Aa1 Auburn A1 Selah A3 Richland A1 Yakima A2 Ellensburg A3 Kennewick A1 Pasco A3 Riverview A1
  56. 56. Bond Ratings <ul><li>Distribution of Underlying Ratings Among </li></ul><ul><li>Washington School Districts </li></ul>Only 120 out of 295 districts have underlying ratings. Source: Moody’s and Standard & Poor’s rating reports, 2008. *Percent of the school districts in Washington State that are rated by one or both rating agencies.
  57. 57. Bond Rating Process
  58. 58. Bond Insurance A very significant market change has occurred regarding the use of bond insurance: Result Investors care much more about the fundamental underlying credit quality of the borrower.
  59. 59. State Guarantee Program Washington School Districts are very fortunate to benefit from the State’s School Bond Guarantee program. Several features differentiate this program from other states: However, the State’s strong Aa1 rating is not guaranteed to remain stable indefinitely, and investors have become more keenly interested, since the bond insurer downgrades, in the borrower’s own ability to repay the debt. State Rating Program Dynamics Washington Aa1/AA+ Established in 2000, full faith credit and taxing power, direct payment of debt service before default. Oregon Aa2/AA- Established in 1997, full faith credit and taxing power, direct payment of debt service before default. The State can reimburse itself by withholding operating appropriations to the district. Texas Aaa/AAA Established in 1983, $17 billion of assets support school bonds, direct payment of debt service before default. The State will reimburse itself by withholding operating appropriations.
  60. 60. Fund Balance--How Much is Enough? <ul><li>A strong fund balance benefits the District through: </li></ul><ul><ul><li>A higher bond rating (lower borrowing cost) </li></ul></ul><ul><ul><li>Reduced likelihood of short-term cash-flow crises </li></ul></ul><ul><ul><li>Credibility with major constituencies </li></ul></ul>Moody’s suggests that the Board adopt a formal policy to maintain a minimum general fund balance of between 5% and 10% of expenditures, depending on management’s assessment of its vulnerability to disruptions.
  61. 61. Fund Balance--How Much is Enough? National Median (School Districts, all ratings): 14.4% National Median (School Districts, Aa1, Aa2, Aa3): 14.8% National Median (School Districts, rated A1, A2, A3): 13.7% Washington Median (School District, rated Aa1): 6.2% Washington Median (School District, rated Aa2): 4.8% Washington Median (School District, rated Aa3): 5.7% Washington Median (School District, rated A1): 7.3% Washington Median (School District, rated A2): 5.6% Washington Median (School District, rated A3): 6.8% Source: National data: Moody’s Investment Service Special Comment January 2009, “2008 Local Government national Medians” Washington data: Moody’s Investors Service, 2007.
  62. 62. Global Scale Ratings Moody’s conducted an extensive default study, which showed that default rates in the municipal bond sector have historically (at least since 1970) been much lower than those in the corporate bond sector. This is especially true for UTGO and LGO debt, like the District’s bonds. Source: Moody’s Investment Service Special Comment June 2006 “Mapping Moody’s U.S. Municipal Bond Rating Scale to Moody’s Corporate Rating scale and Assignment of Corporate Equivalent Ratings to Municipal Obligations.”
  63. 63. Financial Planning <ul><li>C. Assessed Value </li></ul><ul><ul><li>Higher Assessed values will lower the District’s tax rates (but not overall payment). </li></ul></ul><ul><ul><li>An individual’s taxes will be based on the assessed value for their own property. </li></ul></ul><ul><ul><li>Growth from new construction. </li></ul></ul><ul><ul><li>Assessment cycle (Annual market based adjustment vs. periodic reassessment) </li></ul></ul>
  64. 64. Bond Structures <ul><li>D. Assessed Value </li></ul><ul><ul><li>Level Debt </li></ul></ul><ul><ul><li>Wrapped Level Debt </li></ul></ul><ul><ul><li>Level Levy * </li></ul></ul><ul><ul><li>Wrapped Level Levy * </li></ul></ul>* Can be for Debt Service Levy only or for combined total levy rate.
  65. 65. Level Debt <ul><li>Results in level annual payments for the life of the bonds. </li></ul>
  66. 66. Wrapped Level Debt <ul><li>Results in level annual payments on all of the district's bonds </li></ul>
  67. 67. Level Levy <ul><li>Attempts to result in a level annual tax rate over the life for the bonds * </li></ul>* Based on assessed value projections.
  68. 68. Wrapped Level Levy <ul><li>Attempts to result in a level annual tax rate for all of a district's bonds * </li></ul>* Based on assessed value projections.
  69. 69. <ul><li>D. Bond Structure </li></ul><ul><ul><li>State law gives districts great flexibility in determining bond structures. </li></ul></ul><ul><ul><li>Options frequently include: Level payments </li></ul></ul><ul><ul><li>Level rate for bonds only </li></ul></ul><ul><ul><li>Level rate for all levies </li></ul></ul>
  70. 70. Option #5: Level Tax Rate (All) $70MM
  71. 71. Tax Impact Analysis Issue Structure: Level Debt Service Estimated 2010 Tax Rate Increase Over 2009 Tax Rate (Bonds Only) (per $1,000 assessed value): $0.53 -- Federal Income Tax Bracket-- Net Tax Increase from Bonds After Allowing for Income Tax Deduction NOTE: Qualified homeowners may apply for a senior exemption. Please contact the County Assessor for details. Assessed Value of Property Gross Property Tax Increase For Bonds Monthly Gross Increase 25% 28% 33% 35% $100,000 $53.00 $4.42 $39.75 38.16 $35.51 $34.45 150,000 79.50 6.63 59.63 57.24 53.27 51.68 200,000 106.00 8.83 79.50 76.32 71.02 68.90 250,000 132.50 11.04 99.38 95.40 88.78 86.13 300,000 159.00 13.23 119.25 114.48 106.53 103.55
  72. 72. <ul><li>Construction Cash Flows </li></ul><ul><ul><li>Effect on tax rates </li></ul></ul><ul><ul><li>Effect on project costs </li></ul></ul><ul><ul><li>Effect on investment earnings </li></ul></ul><ul><li>2. Other Levies </li></ul><ul><ul><li>M&O levy </li></ul></ul><ul><ul><li>Other levies </li></ul></ul><ul><li>3. Assessed Value Growth </li></ul><ul><ul><li>What is your county’s assessment practice/when will change? </li></ul></ul><ul><ul><li>Source of new assessed value </li></ul></ul><ul><li>Impact on Taxpayers </li></ul><ul><ul><li>Federal Income Tax deductibility </li></ul></ul><ul><ul><li>Senior exemption </li></ul></ul><ul><li>Financing Goals </li></ul><ul><ul><li>Tax rates? </li></ul></ul><ul><ul><li>Interest rates? </li></ul></ul>Things to Consider
  73. 73. Refunding Overview <ul><li>What is a refunding? </li></ul><ul><ul><li>A refunding is a procedure whereby an issuer refinances an outstanding bond issue by issuing new bonds. Issuers refund bonds to reduce interest costs, and/or restructure the payment of the debt. </li></ul></ul>
  74. 74. Refunding Bonds <ul><li>There are two primary types of refundings: current refundings and advance refundings. </li></ul><ul><li>Current refundings — Under federal tax law, a current refunding is one in which the new refunding bond transaction is closed within 90 days of the refunded issue’s next available call date of the debt to be refunded. </li></ul><ul><li>Advanced refundings – Under federal tax law, an advanced refunding is one in which the new refunding bond transaction is closed more than 90 days before the first available call date of the debt being refunded. </li></ul>
  75. 75. Call Feature on Bonds <ul><li>“ Calling” a bond means to prepay it before its scheduled maturity date </li></ul><ul><li>Not all bonds can be called </li></ul><ul><li>Call feature is set prior to the sale of bonds </li></ul><ul><ul><li>Which bonds can be called </li></ul></ul><ul><ul><li>Why they can be called </li></ul></ul><ul><ul><li>What price is paid to call the bonds </li></ul></ul><ul><li>Example of typical call language: “Bonds maturing on and after December 1, 2009 are subject to redemption on or after June 1, 2009 at the price of par.” </li></ul>
  76. 76. Refunding Overview ISSUER Debt Service on Outstanding Bonds New Refunding Bonds Special U.S. Government Obligation (SLGS) and T-Bills Debt Service on Refunding Bonds Old Bonds New Bonds Debt Service on Outstanding Bonds Old Bonds New Bonds TO BUY TO PAY OWES ISSUES OWES
  77. 77. Points to Consider <ul><li>By law, advanced refundings are only allowed once before the call date. </li></ul><ul><ul><li>Must provide debt service savings annually </li></ul></ul><ul><ul><li>Savings benefit only taxpayers </li></ul></ul><ul><ul><li>Cannot extend term of the bonds </li></ul></ul><ul><li>Impact on non-voted debt capacity—the “over issuance” of new bonds to pay cost of issuance and fund escrow is counted against non-voted debt capacity </li></ul><ul><li>Bond rating—is this the best time to have the District’s bond rating reviewed? </li></ul><ul><li>Future debt issuance and the impact of Federal Tax Law related to: </li></ul><ul><ul><li>Arbitrage rebate </li></ul></ul><ul><ul><li>Bank Qualification </li></ul></ul>
  78. 78. Selling the Bonds <ul><li>Two Methods </li></ul><ul><ul><li>Competitive </li></ul></ul><ul><ul><li>Negotiated </li></ul></ul><ul><li>Competitive Sale </li></ul><ul><ul><li>Financial Advisor </li></ul></ul><ul><ul><li>Bonds sold to highest bidder </li></ul></ul><ul><li>Negotiated </li></ul><ul><ul><li>Underwriter </li></ul></ul><ul><ul><li>Bonds sold to produce desired result </li></ul></ul>
  79. 79. Competitive vs. Negotiated <ul><li>Our school district clients care most about outcomes </li></ul><ul><ul><li>Schools are different than the State, the largest cities or some counties </li></ul></ul><ul><ul><li>They have to care about managing tax rates in both the near and long term, because they (uniquely) have to go to the voters for approval of funds for a significant portion of their operating revenues </li></ul></ul><ul><ul><li>It is no coincidence that the extensive use of negotiated bond sale coincides with 20 years of voter generosity. </li></ul></ul>
  80. 80. 1st Independent Bank American Marine Bank Baker Boyer National Bank Bank of America Charles Schwab Discover Brokerage First Security Investment Franklin Federal Tax Free Fund ICM Asset Management Montana Board of Investments Montana Tax-Free Fund Northern State Bank PEMCO Peoples Bank Santa Barbara Trust Seattle Capital Management Sterling Savings Bank Thornburg Investment Management USAA Investment Management Co. Washington First Wells Fargo Bank WEST AAL Capital Management Alliance Capital Management Co. Bear Stearns Bessemer Trust Blackrock Boston Company Colonial Funds DB Scudder of Boston, MA Delaware Management Co. Dreyfus Eaton Vance Municipals Fidelity Investments Goldman Sachs Asset Management Lord Abbett MD Sass Investors Services Inc. Navaid Financial Pioneering Management Corp. PNC Bank Sanford C. Bernstein U. S. Trust of New York EAST CENTRAL Allstate Insurance Co. Bank One First Security Investment Harris Bank Heartland Advisors Inc. IDS Tax Exempt Investors Fiduciary Trust Co. Janus Northern Trust Co. Nuveen Advisory Corp Society Asset Management State Farm Fire & Casualty Stein Roe & Farnham Strong Capital Management U.S. Bank United Savings & Loan Victory Capital Management Voyageur Asset Management Selected representative institutional clients Selling the Bonds
  81. 81. Selling the Bonds Source: D.A. Davidson Fixed Income Capital Markets
  82. 82. Current Market
  83. 83. <ul><li>Debt markets have changed significantly during the current economic cycle. </li></ul>Current Market
  84. 84. 20-yr Bond Buyer Index – 25-yr History
  85. 85. 20-yr Bond Buyer Index – 1-yr History
  86. 86. Combined Muni vs. Treasury – 10-yr
  87. 87. Combined Muni vs. Treasury – 2-yr
  88. 88. <ul><li>Basic elements for an orderly Capital Market have been challenged </li></ul><ul><ul><li>Security – Confidence at being repaid </li></ul></ul><ul><ul><li>Liquidity – Ability to trade at reasonable price </li></ul></ul><ul><ul><li>Transparency – Access to information that might affect security/liquidity </li></ul></ul><ul><ul><li>Integrity – Belief in a “fair” market </li></ul></ul>Current Market
  89. 89. <ul><li>Confidence has decreased significantly </li></ul><ul><li>Flight to “Quality” – meaning highest grade (Aa or better) </li></ul><ul><li>Difficult and costly to find buyers of lesser quality bonds </li></ul><ul><li>Cause: </li></ul><ul><ul><li>Continued downgrading of Bond insurers </li></ul></ul><ul><ul><li>Perception about current or future financial difficulties for municipalities </li></ul></ul><ul><ul><li>Failure of “Derivative Products” causing increased interest costs for many issuers </li></ul></ul>Security
  90. 90. <ul><li>Muni market is significantly different from Equity and Treasury Market </li></ul><ul><ul><li>No central trading function </li></ul></ul><ul><ul><li>Variety of issuers and credits </li></ul></ul><ul><ul><li>Tax-exemption </li></ul></ul><ul><ul><li>New taxable products </li></ul></ul><ul><li>Impact on supply-demand-pricing </li></ul>Challenges for Municipal Market
  91. 91. Levy Library
  92. 92. Levy Library
  93. 93. Levy Library
  94. 94. D.A. Davidson—Firm Update <ul><li>Founded in 1935 we have grown from two employees to over 1,000 employees in the past 74 years. </li></ul><ul><li>We are a growing, vibrant employee-owned company with a capital base of over $130,000,000. </li></ul><ul><li>Most experienced K-12 finance team in the State focused on the needs of all school districts. </li></ul><ul><li>Depth of K-12 Finance Team: Our 8-person team has a wide range of experience, including a former school district official and a Moody’s rating analyst. </li></ul><ul><li>We were the leading underwriter of Washington school bonds in 2008. </li></ul>2008 Totals Senior Manager 3 Piper Jaffray 12 Seattle-Northwest 23 D.A. Davidson & Co. Washington Schools 2008 As of May 2009 Source: Securities Data Corporation As of August, 2009 Source: Thomson Municipal Market Data *Includes Pooled Financing. 2009 Totals Senior Manager 2 Piper Jaffray 11 Seattle-Northwest 29* D.A. Davidson & Co. Washington Schools 2009
  95. 95. D.A. Davidson Contact List <ul><li>Northwest Education Finance Team </li></ul>Jack Eaton Senior Vice President (206) 903-8698 phone (206) 389-4040 fax [email_address] Jon Gores Senior Vice President (206) 389-4043 phone (206) 389-4040 fax [email_address] Chad Cowan Vice President (206) 903-8697 phone (206) 389-4040 fax [email_address] Maura Lentini Vice President (206) 903-8687 phone (206) 389-4040 fax [email_address] Suzanne Eide Vice President (206) 903-8690 phone (206) 389-4040 fax [email_address] Shandra Tietze Associate (206) 903-8695 phone (206) 389-4040 fax [email_address] Maria Elvrum Executive Assistant (206) 389-4044 phone (206) 389-4040 fax [email_address] Kelsey Draper Administrative Assistant (206) 903-8694 phone (206) 389-4040 fax [email_address]
  96. 96. Bio—Jon Gores Mr. Gores joined D.A. Davidson & Co. in 2006 as a Senior Vice President in the Public Finance department. Previously, he was with Seattle Northwest Securities for 18 years as Vice President of Public Finance, where he served as Manager of the School Finance Group for Washington State schools. Jon has originated over 170 Washington school district financings in the past 5 years. Jon has been a school district public finance specialist since 1985. He has been instrumental in developing financing solutions for specific school district funding needs. His advocacy on behalf of school districts with the State legislature has resulted in the repeal of the law that caused the tax rate spike that districts encountered with a mid-year bond sale, and his lobbying the legislature has led to the expanded use of limited general obligation (LGO) debt. His efforts resulted in H.B. 1832, which allows school districts to use LGO debt for remodeling of and additions to existing facilities. Most recently Mr. Gores proposed legislation now in effect that allows a direct transfer of state forest revenue from the debt service fund to the capital projects fund. Jon is a member of WASA, WSSDA, WASBO, and is a featured speaker at numerous conferences. He serves as a trustee of the Washington State School Boards Educational Foundation. He has been a guest lecturer at the University of Washington, WSU, and Seattle Pacific University and Seattle University. Mr. Gores served on the School Bond Guarantee Program advisory committee and was appointed to the Finance Committee for the Simple Majority.