Municipal Debt Advisory Commission

Transcription

1 Municipal Debt Advisory Commission 2008

2 Oregon Municipal Debt Advisory Commission 2008 Annual Report PUBLISHED MAY 2009

3 Members Carol Juang McCoog K&L Gates, LLC Chair Partner Public Member C. Lance Colley Oregon School Board Association Chief Operations Officer Oregon School Board Association Representative Alice Garrett Wells Fargo Bank, National Association Vice President and Manager Public Member Debra Guzman Tualatin Valley Fire & Rescue Chief Financial Officer Special Districts Representative Laura Lockwood-McCall Office of the State Treasurer Debt Management Division Director Treasurer s Designee Michael Long Klamath County Treasurer Association of Oregon Counties Representative Phyllis Shidler City of Klamath Falls Finance Director League of Oregon Cities Representative

4 Table of Contents Introduction....1 Roles & Responsibilities Debt Instruments Interest Rates Debt Issued Debt Outstanding....6 Advance Refunding Issue Purpose....8 Bond Counsel Financial Advisors Lead Underwriters Underwriter s Counsel

5 Introduction MDAC The Oregon Municipal Debt Advisory Commission (MDAC) was established in 1975 to assist local governments in the cost-effective issuance, sale, and management of their debt. The Commission is composed of seven members, including the State Treasurer, three local government finance officers, one representative for the special districts, and two other public members. The Debt Management Division of the Oregon State Treasurer s Office is staff to the Commission. State law ORS 287A.634 requires the MDAC to prepare an annual report describing activities of the Commission in the preceding year. OREGON ADMINISTRATIVE RULES To ensure that information contained in the Office of the State Treasurer/MDAC Debt System is as accurate as possible, a verification of local government districts and their debt is accomplished by MDAC staff. ORS 287A.640 states that: a public body shall verify, at the request of the commission, the information maintained by the commission or the State Treasurer on the public body s outstanding bonds. The information in the Debt System was updated and verified as of The next verification will occur in 2010 for data as of These district-by-district verifications are performed through the close collaboration of Debt Management staff and local government finance officials. The Department of Revenue also provides annual updates of Measure 5 real market values for preparing overlapping debt report information. Additional verifications are performed when bonds are called or when there are special circumstances that may require verification of outstanding debt. 1

6 Roles & Responsibilities State statue ORS 287A.634 empowers the Municipal Debt Advisory Commission to carry out the following functions: 1. Provide assistance and consultation, upon request of the state or of local government units, to assist them in the planning, preparation, marketing and sale of new bond issues to reduce the cost of the issuance to the issuer and to assist in protecting the issuer s credit. 2. Collect, maintain and provide financial, economic and social data on public bodies pertinent to their ability to issue and pay bonds. 3. Collect, maintain and provide information on bonds sold and outstanding and serve as a clearinghouse for all local bond issues. 4. Maintain contact with municipal bond underwriters, credit rating agencies, investors and others to improve the market for public body bond issues. 5. Undertake or commission studies on methods to reduce the costs of state and local issues. 6. Recommend changes in state law and local practices to improve the sale and servicing of local bonds. 7. Perform any other function required or authorized by law. 8. Pursuant to ORS Chapter 183, adopt rules necessary to carry out its duties. The MDAC strives to improve existing services and to initiate new programs aimed at lowering borrowing costs and improving debt management practices for local governments, particularly in the area of capital planning and debt administration. Staff publishes a schedule of upcoming municipal bond sales known as the Oregon Bond Calendar. The Bond Calendar lists state and local sales, enabling state agencies and local municipalities to minimize scheduling conflicts which may impact the marketability of their issues. The Bond Calendar also contains information regarding bond elections, and the Oregon Bond Index which charts Oregon municipal bond interest rates. The Bond Calendar is updated daily and is available online at: In 2006, the MDAC collaborated with the Oregon Law Commission to completely re-write the state laws related to bonds. There were no major policy changes, the laws were consolidated and better defined. These new laws were approved by the 2007 legislature. If any irregularities are found in the new laws which would prevent an issuer from issuing bonds, OAR states issuers may revert to the 2005 laws upon notification to the MDAC. On behalf of the MDAC, the Debt Management Division produces the Oregon Bond Education website (formerly the Oregon Bond Manual). The site is a resource for Oregon local governments for issuing and managing debt. In addition, MDAC staff monitors local and national bond markets and economic trends, advise agencies of market developments, and make municipal bond policy and legislative recommendations to the State Treasurer. The Oregon State Treasurer/MDAC staff maintains a database on debt issuance and debt outstanding for all Oregon municipal bond issuers. 2

7 Debt Instruments An example of an Appropriation Credit is a Certificate of Participation. Payments on these type obligations are subject to appropriation. It is not considered a default if an appropriation payment is not made. These obligations were more common before counties obtained the ability to issue "limited tax bonded indebtedness" or Full Faith & Credit Obligations. Conduit Revenue Bonds are "pass through" obligations of private parties that are secured solely by commitments of private entities. Examples: hospital facility authority revenue bonds, city conduit revenue bonds for nonprofit educational facilities. Dedicated Niche Tax Obligations are obligations that are secured solely by taxes other than property taxes that provide permanent (long term) financing. Examples: Tri-Met's payroll tax revenue bonds, urban renewal agency tax increment bonds, and city and county gas tax revenue bonds. Full Faith & Credit Obligations -Non-Self Supporting (FF&C (N)) are obligations that: (i) are secured by the issuer's full faith and credit or general fund; (ii) are not secured by any power to impose additional taxes outside constitutional limits; (iii) have no dedicated, sufficient source of payment; (iv) provide permanent (long term) financing; and (v) are legally binding obligations, rather than being "subject to appropriation." Examples: county full faith and credit obligations, some certificates of participation, or "limited tax revenue bonds." Full Faith & Credit Obligations -Self Supporting (FF&C(S)) are obligations that: (i) are secured by the issuer's full faith and credit or general fund; (ii) are not secured by any power to impose additional taxes outside constitutional limits; (iii) are expected to be 100% paid from sources other than property taxes; (iv) provide permanent (long term) financing; and (v) are legally binding obligations, rather than being "subject to appropriation.". Example: The City of Portland's limited tax revenue bonds that financed PGE park, paid from hotel/motel taxes. This category may include obligations historically referred to as: Limited Tax Revenue, or Full Faith and Credit Obligations. General Obligation -Non-Self Supporting (GO(N)) is any obligation that: (i) provides permanent (long term) financing, (ii) is secured by the power to levy unlimited, property taxes, and (iii) is expected to be paid from those property tax levies. Example: school district general obligation bonds. General Obligation -Self Supporting (GO(S)) is any obligation that: (i) provides permanent (long term) financing, (ii) is secured by the power to levy unlimited, property taxes, but (iii) is expected to be paid 100% from revenues other than property taxes. Example: city general obligation sewer bonds. Other is a financial obligation type that does not fit in any of the other categories currently tracked by the MDAC and is not expected to be used often. Revenue obligations that are secured and paid for solely by a stream of identified revenues (other than property tax or specific tax revenues) and provides permanent financing. Examples: sewer and water revenue bonds. Short Term Borrowings normally mature in less than 13 months from date of issue. Examples: TANs, RANs, TRANs and other short term borrowings in anticipation of revenues or long term take -out financing. 3

8 Interest Rates In 2008, long term rates fluctuated, but especially during the financial market crisis in the latter part of the year. In 2007, rates fluctuated by 73 basis points, while in 2008 rates fluctuated 186 basis points Start End High Low Avg Bond Buyer 20-Bond Index 4.32% 4.80% 6.01% 4.15% 4.85% Oregon Bond Index A-rated % 5.98% 6.11% 4.36% 5.03% History of Bond Buyer 20-Bond Index The Bond Buyer 20-GO Index represents an average interest rate on 20-year maturities of General Obligation bonds of 20 state and municipal issuers with ratings ranging from Aaa to Baa (average rating is approximately single A ). 2 The OBI 20 yr. represents an average rate on 20-year maturities of Oregon municipal general obligation bonds rated A, as reported to the Debt Management Division of the Office of the State Treasurer by six regional/northwest traders of Oregon bonds. 4

9 Debt Issued ($M) $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Local Government Debt Issued The largest category of local government debt issued in 2008 was revenue bonds with nearly $1.1 billion; conduit revenue bonds were next at over $815 million issued. (See page 3 for a description of the bond types). Local Debt Issued in 2008 Revenue Bonds $ 1,081,890,315 Conduit Revenue Bonds 815,605,000 General Obligation (N) 388,270,000 Dedicated Niche Tax Obligations 139,025,000 Full Faith & Credit Obligations (N) 109,050,710 General Obligation (S) 52,827,881 Full Faith & Credit Obligations (S) 40,210,000 Appropriation Credits / Other 1,025,000 TOTAL $2,629,818,906 PORT SCHOOLS HOSPITAL FACILITIES CITY ALL OTHERS In the November 2008 election, 67 bond issues were presented to the voters. Fourteen of the thirty-two school bonds passed. Cities were the leading issuer of new obligations in 2008, with over $910 million sold. Hospital Facilities were second with almost $800 million in new issues, and third was schools which totaled nearly $340 million. CITY $910,479,170 35% HOSPITAL FACILITIES $766,715,000 29% ALL OTHERS $342,569,145 13% PORT $270,855,000 10% SCHOOLS $339,200,591 13% As of The local government debt within three Oregon counties account for over 72% of all local debt issued in Issuers in Multnomah County led with $1.4 billion for 52% of the total. Issuers in Marion and Deschutes Counties sold the second largest debt by par amount at 11% and 9%, respectively. 5

10 Debt Outstanding SCHOOL $6,530,520,289 32% As of December 31, 2008, school districts and cities combined are responsible for over $11.1 billion of the total $20.1 billion in all outstanding local government debt in Oregon. ALL OTHERS $5,173,450,842 26% Billions COUNTY $1,140,503,228 6% Volume Outstanding HOSPITAL FACILITIES $2,595,443,762 13% CITY $4,631,496,681 23% The largest category of outstanding debt as of December 31, 2008 was revenue bonds with almost $5.9 billion outstanding, closely followed by general obligation (non self-supporting) with over $5.0 billion outstanding. Outstanding Local Debt (as of 12/31/08) Revenue Bonds $ 5,887,848,502 General Obligation (N) 5,011,001,378 Full Faith & Credit Obligations (S) 4,927,925,615 Conduit Revenue Bonds 2,775,871,596 Dedicated Niche Tax Obligations 567,117,886 Full Faith & Credit Obligations (N) 552,851,015 General Obligation (S) 268,316,262 Appropriation Credits 76,134,715 Other 4,347,832 TOTAL $20,071,414, Growth in local outstanding debt has averaged around 8% per year since This is mainly due to continued population growth in Oregon which necessitates investments in statewide infrastructure improvements, along with capital investments in schools and cities. 6

11 Advance Refunding Generally, advance refundings are executed to realize debt service savings when new bonds are sold at interest rates significantly below those of the original issue. An advance refunding may also be undertaken to effect a permanent reorganization of debt or to remove restrictive covenants. The Office of the State Treasurer is responsible for assessing the merits of proposed advance refunding issues and authorizing those having a significant beneficial impact. Refundings that result in clear public benefit and meet the requirements of OAR receive approval. As the table below shows, advanced refundings dropped off sharply starting in 2006 due to the upturn in longterm interest rates. The table below illustrates the number of local government advanced refundings reviewed, approved, and sold for the past 5 years. ($M) 1,800 1,600 1,400 1,200 1, Local Government Refunding Par Amount Net Present Value Savings of Advance Refundings Current Advance 70 Local Government Advance Refundings Year Number Issued *Net PV Interest Sold (millions) Savings (millions) , $ 174 $ $ 87 $ 2.1 *Def: The value of future interest costs saved in today's money. PV Savings ($M) Number Sold Savings Number Sold 7

12 Issue Purpose TOP ISSUERS BY PURPOSE IN 2008 Utilities City of Portland $333,015,000 Health Care HFA Multnomah County $212,165,000 Utilities City of Portland $195,700,000 Transportation Port of Portland $131,965,000 Health Care HFA Deschutes County $103,460,000 Health Care HFA City of Medford $102,700,000 Development City of Eugene $ 84,405,000 Utilities City of Portland $ 79,680,000 Health Care HFA City of Salem $ 75,000,000 In 2008, health care was the largest purpose of new local debt, with almost $718 million issued in 11 series. Multnomah County led the health care issuance with nearly $222 million. The next largest 2008 issuance category was education at just over $352 million. In 2008, capital construction for education facilities continued to be in the top position for outstanding debt. Pension obligations, sold to help fund retirement, was a close second. Bond Par in Millions $ Par Amount & Number of Issues Sold in 2008 Par Amount Number of Issues Number Sold OUTSTANDING BY PURPOSE (AS OF 12/31/08) Education $ 4,552,659,295 Pension 4,112,330,477 Health Care 3,174,531,188 Utilities 2,638,256,864 Public Facilities 1,538,353,507 Transportation 1,488,139,371 Development 758,849,485 Electric Power 591,140,901 General Purpose 556,458,941 Housing 412,703,145 Environmental 244,749,009 Unknown 1,662,620 Cash Flow 1,580,000 TOTAL $20,071,414,803 8

13 Bond Counsel Oregon Volume 2008 (State & Local) K&L Gates* 45.3% Bond Counsel firms are hired by local governments to advise them regarding the legal and tax aspects of a bond sale. Their work includes writing the legal opinion for the bond issue that describes its federal and state tax consequences and opinions that the bonds were legally authorized and issued. The table below summarizes Oregon municipal long-term financial obligation sales by volume for various Bond Counsel firms in Stoel Rives LLP 12.60% None 0.17% Hawkins, Delafield & Wood 8.85% Davis Wright Tremaine 0.05% Nixon Peabody 2.51% Orrick, Herrington & Sutcliffe 27.39% Mersereau & Shannon 3.17% Number of New Issues by the Top 3 (in volume) Local Government Bond Counsels in 2008 Mersereau Issuer Category K&L Gates * Orrick & Shannon Cities Comm. Colleges Counties Fire Districts Health / Hospitals Parks Ports Public Utility Schools / ESDs Others TOTAL Bond Counsel for Local Government by Volume 2005 Volume No Volume No Volume No Volume No. Preston Gates & Ellis, LLP 2,635,505, Preston Gate s & Ellis, LL P 1,125,804, K&L G ate s LLP * 1,739,201, K&L Gates LLP * 1,320,557, Orrick, Herrington & Sutcliffe 615,460, Orrick, Herrington & Sutcliffe 390,192, Stoel Rives LLP 229,596,142 2 Orrick, Herrington & Sutcliffe 1,064,972, M erse rea u & Shannon LL P 303,645, Stoel Rives LLP 174,406,711 3 Mersereau & Shannon LLP 203,671, Mersereau & Shannon LLP 126,245,710 6 Foster Pepper & Shefelman 44,130,000 3 Mersereau & Shannon LLP 101,956,010 9 Orrick, Herrington & Sutcliffe 190,887, Nixon Peabody 100,000,000 2 Hawkins, Delafield & Wood 26,640,000 1 Hawkins, Delafield & Wood 55,565,000 3 Foster Pepper & Shefelman 23,953,136 2 None 5,600,000 1 Nixon Peabody 23,115,000 2 Nixon Peabody 12,850,000 1 N ot Reporte d 10,110,000 3 Stoel Rives LLP 4,390,000 1 Stoel Rive s LLP 9,105,000 2 Miller Nash LLP 7,500,000 1 Priva tely Placed 5,217,016 5 Davis Wright Tremaine 1,851,000 4 Davis Wright Tremaine 2,626,549 4 Foster Pepper & Shefelman 6,170,000 1 Davis Wright Tremaine 1,907,000 4 Others 1,960,700 2 Privately Placed 4,346,000 2 Kirchner, Moore & Shefelman 430,000 1 * Formerly Preston Gates & Ellis, LLP. 9

14 Financial Advisors ($M) The Financial Advisor (FA) is a consultant who advises an issuer on matters pertinent to the security, structure, timing, marketing, fairness of pricing, terms, and ratings on a bond issue. FAs may also serve as agent for the issuer during the pricing of negotiated bonds. In 2008, most local issuers chose to use a Financial Advisor. However, the City of Portland sold 5 of their 9 issues in 2008 without the use of an outside contracted financial advisor. Volume FA Used vs. Not Used on Local Debt Issuances 3,000 2,500 2,000 1,500 No FA FA 2008 Local Debt Issues by Sale Type Competitive Negotiated Issuer Category FA Used No FA FA Used No FA Total Cities Comm. Colleges Counties Fire Districts Health / Hospitals Housing Parks Ports Public Utilities Others Schools / ESDs Special Districts Urban Renewal TOTAL , Financial Advisors for Local Governments by Volume 2005 Volume No Volume No Volume No Volume No. None 1,643,740, None 861,570, None 916,101, None 684,716, Regional Financial Advisors 649,524, Regional Financial Advisors 264,192, Regional Financial Advisors 431,264, Public Financial Management 644,205,000 6 Charles Carter Company 530,367, Public Financial Management 230,000,000 1 Charles Carter Company 387,213, Seattle Northwest Securities 365,975, Western Financial Group 298,275, Charles Carter Company 158,766,293 8 Western Financial Group 211,467, Ponder & Company 252,700,000 4 Ponder & Company 170,000,000 2 Bond Logistix LLC 158,025,000 2 Seattle Northwest Securities Co 163,245,000 3 Bond Logistix LLC 184,710,000 3 Harden Financial Services 124,115,000 2 Western Financial Group 73,125, Wells Fargo Bank 130,215,000 3 Charles Carter Company 105,535,000 7 Wells Fargo Bank 79,320,000 1 J.P. Morgan Securities, Inc. 55,565,000 3 Public Financial Management 45,450,000 1 Kaufman Hall & Associates 103,460,000 1 Seattle Northwest Securities 49,755,000 3 Tom Lundberg 38,960,000 1 Piper Jaffray, Inc. 30,460,000 1 JP Morgan Chase 100,000,000 2 Others 117,092, Others 38,586,000 7 Others 89,558,136 6 Others 182,315,

15 Lead Underwriters Local Government Issues Top 5 Underwriters by Volume State Agency Issues 1 The Lead Underwriter s (UW) role is to purchase securities from the issuer for resale to investors. The table below summarizes Oregon municipal long-term financial obligation 2008 sales by Lead Underwriter (sole credit to Lead Underwriters). Cain Brothers & Company $221,645,000 Citigroup $465,050,000 Prager, Sealy & Co. LLC $106,400,000 Merrill Lynch $241,195,000 In 2008, there were 69 negotiated sales, 10 competitive sales, and 30 privately placed local government transactions. Seattle Northwest Securities $319,558,881 Banc of America $155,929,900 Local Government Underwriters by Sale Type in 2008 Private Rank by Volume Neg Comp Placement 1. Citigroup Global Markets Merrill Lynch Lehman Brothers Seattle NW Securities Cain Brothers & Company All Others TOTAL Lehman Brothers $333,015,000 Merrill Lynch $450,263,000 Goldman Sachs & Co. $264,670,000 Citigroup Global Markets $269,855,000 Lead Underwriters for Local Government by Volume 2005 Volume No Volume No Volume No Volume No. Seattle Northwest Securites 2,202,510, Merrill Lynch 719,010,000 9 Seattle Northwest Securities 892,193, Citigroup 465,050,000 9 Banc of America 259,814, Seattle Northwest Securities 456,254, Citigroup Global Markets 263,610,000 3 Merrill Lynch 450,263,000 6 Merrill Lynch 207,780,000 4 UBS Financial Services 183,995,000 4 Banc of America 196,598, Lehman Brothers 333,015,000 1 First Albany 144,850,000 1 Banc of Ame rica 152,451, None 149,090,000 1 Seattle N or thwest Sec urities 319,558, Morgan Stanley 139,115,000 3 Bear, Stearns & Co., Inc. 71,630,000 1 JP Morgan 124,295,000 1 Cain Brothers & Company 221,645,000 2 UBS Financial Services 116,976,000 4 Ziegler Securities 39,765,000 4 UBS Financial Services 119,000,000 1 Goldman Sachs & Company 211,645,000 2 JP Morgan Chase 92,115,000 2 A.G. Edwards & Sons, Inc. 38,960,000 1 A.G. Edwards & Sons, Inc. 90,215,000 2 Banc of America 186,380, Bear, Stearns & Co., Inc. 79,320,000 1 Wells Fargo Bank, NA 37,390,000 2 Wedbush Morgan Securities 88,410, Morgan Stanley 118,820,000 2 RBC Capital Markets 58,570, Cain Brothers & Company 35,000,000 2 Piper Jaffray, Inc. 68,800,000 5 Piper Jaffray, Inc. 71,835,000 6 Other 305,808, Other 144,335, Other 418,491, Other 254,408, Excludes Housing Draw Down Bonds 11

16 Underwriter s Counsel An Underwriter s Counsel is an attorney or firm who is selected by, and represents, Underwriters in a negotiated bond sale. Their primary role is to assure adequate disclosure and to assist in the underwriter s due diligence process. Oregon s Local Government engagement of an Underwriter s Counsel appears to have increased in In 2007, 50% of issuers used Underwriter s Counsel; in 2008, this usage increased to 67%. Underwriter s Counsel Usage in Oregon 1 (%) Did Not Use Used Use of Underwriter s Counsel for Underwriters Counsel Equal to Each Manager (Proportionate) Par Amount (US$ mil) Mkt. Share Number of Issues Orrick Herrington & Sutcliffe LLP Foster Pepper PLLC Chapman and Cutler LLP Kutak Rock LLP KMZ Rosenman- Katten Muchin Zavis Rosenman Sidley Austin LLP K&L Preston Gates Ellis LLP Hawkins Delafield & Wood LLP Jones Day Eichner & Norris PLLC Fulbright & Jaworski LLP Subtotal with Underwriters Counsel 2, Subtotal without Underwriters Counsel 1, Total 3, Source: Thompson Financial,

17 The Debt Management Division (DMD) of the Oregon State Treasurer s Office serves as staff to the Municipal Debt Advisory Commission. The DMD implements policies and administrative rules promulgated by the Commission. The DMD staff consists of: Laura Lockwood-McCall Director Larry Groth Deputy Director Lee Anaya Debt Program Analyst Alice Bibler Debt Program Analyst Matthew Harris Debt Program Coordinator Nicki McMillan Debt Management Assistant In accordance with the Americans with Disabilities Act, this material is available in alternate format and media upon request. For more information: Phone: (503) TTY: (503) or write: Oregon Office of the State Treasurer Human Resource Manager 350 Winter Street NE, Suite 100 Salem, OR The Office of the State Treasurer (OST) makes all efforts to ensure the accuracy of the data, but it has not been audited and should be read with caution. OST assumes no liability for any inaccuracies. We cannot guarantee full compliance with state reporting requirements, so debt issue listings may not be exhaustive. Reported issue costs may not be final figures. 13