Arkansas School Boards Association

Transcription

1 Presentation to: Arkansas School Boards Association Public Finance Stephens December 9, 2015

2 Arkansas Public Education Funding Sources Local Property Taxes (Millage) State Foundation Aid/Categorical Funds Federal Targeted Funds Other Source: Source: Arkansas Arkansas Department of Education, of Annual Statistical Report, 2014/ /2014

3 ARKANSAS FUNDING OF K-12 EDUCATION (1) Assessed valuation. Total value of the real and personal property and utility carriers located within the boundaries of the school district. The total assessed valuation is key in calculating funding for school districts. (2) Millage or Mills. The tax rate that is applied to the assessed value of real and personal property, as well as utilities and carriers. Millage rates are expressed not as regular percentages, but in tenths of a percent. For example, one mill equals 1/10 of 1 percent (to calculate one mill multiply District s total assessed value by 0.001). (3) Miscellaneous Funds. Funds received from sources, such as federal forest reserves, federal grazing rights, payment in lieu of taxes, and severance taxes. (4) Average Daily Membership (ADM). ADM means the total number of days of school attended plus the total number of days absent by students in grades kindergarten through twelve (K-12) during the first three (3) quarters of each school year.

4 LOCAL FUNDING OF K-12 EDUCATION Local Property Tax (Millage) In Arkansas, each school district receives revenue from local property taxes. The tax rate is expressed in millage ( mills ), and the number of mills is determined annually by the district s patrons. In Arkansas, property is assessed at 20 percent of its market value. For example, a $100,000 house would have an assessed value of $20,000 as shown in the below table. Market Value of House $100,000 Assessed Value of House 20% x $100,000 = $20,000 Property tax rate of 1 mill $20,000 x = $20

5 LOCAL FUNDING OF K-12 EDUCATION Arkansas school boards can propose the following three (3) millage types: 1. Maintenance and Operation (M&O) Mills Amendment 74 requires each District to levy a minimum of 25 M&O mills, known as the Uniform Rate of Tax (URT). Under Arkansas law school districts are guaranteed tax collections at 98% on their first 25 M&O mills. 2. Debt Service Mills Voter approved millage that is used to pay a district s long term indebtedness. Any surplus revenue may be used for either additional debt service or M&O purposes. 3. Dedicated Maintenance and Operation Mills (capital outlays) Voter approved millage that can only be used for purposes specifically stated on the ballot.

6 LOCAL FUNDING OF K-12 EDUCATION As an example, the following table illustrates how a District s millage could be broken down: Uniform Rate of Tax (URT) Maintenance and Operation Mills Above URT 1.00 Total Maintenance and Operation Mills Dedicated Maintenance and Operation Mills 1.00 Debt Service Mills Total Mills 38.50

7 ARKANSAS FUNDING OF K-12 EDUCATION Academic Facilities Partnership Program As part of providing an adequate and equitable education to Arkansas public school children, the state is also required to provide access to adequate academic facilities and equipment. To do this, the General Assembly established the Academic Facilities Partnership Program, which provides state financial participation, in the form of cash payments, to a school district for eligible new construction projects. Arkansas share of participation is based upon a school district s academic facilities wealth index. A school district may apply for state financial partnership participation for projects that fall under one (1) of the following categories: Warm, safe, and dry; New facilities; Add-ons and/or Conversions; and Consolidation/annexation projects. For additional information, visit

8 Example Calculation of Academic Facilities Wealth Index Total Assessed Valuation of Property in School District A: $150,000,000 ADM: 2,500* Step 1: Determine value of 1 mill per student. 1 mill generates: $150,000 ($150,000,000 X.001) 1 mill per student in School District A equals: $60 (150,000 / 2,500) Step 2: Divide the value of 1 mill per student by the amount corresponding to the 95th percentile of the student millage rankings. 1 mill per student in School District A: $60 1 mill per student at 95th percentile: $ (Pulaski County Special) 60 / = School District A s Academic Facilities Wealth Index School District A s share of financial participation in an eligible facilities project = 37.60% State s share of financial participation in an eligible facilities project = 62.40% (100% %) *Act 2206 requires that a district s wealth index be annually calculated based on the amount 1 mill generates per ADM. The ADM is either the greater of the (1) prior year ADM or (2) prior 3 year average.

9 PUBLIC SCHOOL DEBT FINANCING In general, debt financing is a mechanism for obtaining money today with the promise to repay the money over time with interest. School districts may use borrowed funds to acquire land, construct new facilities, renovate and improve existing facilities, purchase new equipment and buses, and for various other purposes. In general, debt financing of public schools is conducted by issuing either: (1) non-bonded or (2) bonded debt.

10 TYPES OF PUBLIC SCHOOL DEBT FINANCING Non-bonded Debt Non-bonded or short-term debt is generally utilized for smaller projects or equipment acquisitions. With some exceptions, these types of borrowings must be repaid within 10 years. Postdated warrants Installment contracts Lease-purchase agreements Revolving Loan Note: A district's acquisition of energy conservation measures may be financed over a 20 year period. However, the repayment term of the financing shall not exceed the reasonably expected useful life of the energy facilities or equipment.

11 TYPES OF PUBLIC SCHOOL DEBT FINANCING Bonded Debt A bond is a contract between an issuer and an investor. The investor lends money to the issuer (school district) with the promise to pay the money back when the bond comes due (matures) and pay interest on the loan. A fundamental characteristic of most state and local government securities is their tax-exempt status. Interest income is generally exempt from federal, state, and local income tax. In Arkansas, school districts may issue commercial bonds for constructing and equipping school facilities, making repairs to existing facilities, and purchasing land, among other things. Districts generally have three (3) options for issuing commercial debt, which include: 1. Voted bond issue 2. 2 nd Lien bond issue 3. Refunding (Refinancing) bond issue

12 TYPES OF PUBLIC SCHOOL DEBT FINANCING Bonded Debt Voted Bond Issue Through a general or special election, the district may seek voter approval for a new millage and/or the issuance of bonds in order to produce project funds. A district may only seek voter approval for a tax levy. a) General Election. A district will hold its general election the third Tuesday of September each year to elect board members and/or consider a tax levy. b) Special Election. A special school election may be held on a date other than the third Tuesday of September for the purpose of seeking voter approval for a millage and/or issuance of bonds. However, the district must demonstrate a need for the special election and receive approval from the Commissioner of the Arkansas Department of Education.

13 TYPES OF PUBLIC SCHOOL DEBT FINANCING Bonded Debt 2 nd Lien (Construction) bond issue A district may have the ability to issue 2 nd lien bonds. This type of borrowing is repaid using excess debt service millage revenue, and the repayment term cannot exceed the final payment date of the District s existing bonds. Voter approval is not required. ARKANSAS SCHOOL DISTRICT Coverage Analysis/Surplus Revenue Tax Assessment 2012: $ 75,000,000 Debt Service Mills: Tax Collections: 95% Fiscal Year Bonded Debt Service Debt Service Revenues Coverage Ratio Excess Debt Service Revenue 2014 $ 500,000 $712, $ 212,500

14 TYPES OF PUBLIC SCHOOL DEBT FINANCING Bonded Debt Refunding (Refinancing) bond issue Depending on the interest rate environment, a district may be able to refinance or refund its existing debt at a lower interest rate in order to produce debt service savings. The repayment term remains the same as the issue being refunded. Voter approval is not required. ***Refunding opportunities should be continuously monitored by your administration and fiscal agent to identify potential cost savings for your district.

15 TYPES OF PUBLIC SCHOOL DEBT FINANCING Bonded Debt Key Debt Financing Terms and Practices Competitive Sale. In Arkansas, school district may only issue bonded debt through a competitive sale process, whereby a school district will invite interested underwriters to submit an interest rate bid. Financial Advisor or Fiscal Agent. Used interchangeably, the District s financial advisor or fiscal agent will work with your administration in analyzing its financing needs and capabilities and will provide advice on matters related to market conditions and financing structures. Underwriter. An underwriter is a company or other entity, such as an investment bank, that administers the public issuance and distribution of securities from the issuer (borrower). Redemption (Call) Provision/Date. Bonds may contain a provision that allows an issuer, at its option, to redeem or call bonds before they are due to mature. A district will generally not be able to take any action until the call date. To protect investors from call risk, districts will typically include a call feature that can be exercised 5 to 10 years from date of issue. Coupon (Interest Rate). Until a bond matures, the issuer agrees to pay the investor a stated amount of interest. This rate is set at issuance, and with some exceptions remains fixed for the life of the bonds.

16 BOND MARKET TRENDS No assurances can be given to the future directions of interest rates. Interest rates change daily with market conditions.

17 PUBLIC SCHOOL DEBT FINANCING Arkansas School District Enhancement Program ( Intercept Program ) The Intercept Program provides for undistributed state aid to be intercepted and diverted to bond holders in the event of payment default by a school district. For bonds issued after July 1, 2013, Act 110 requires Districts to submit their bond payment 15 days prior to the payment date in order to qualify for the Intercept Program. For those bonds issued prior to July 1, 2013, Moody s had withdrawn the credit rating on the Districts bonds unless the district has taken action to adopt an amending resolution to comply with Act 110. For those districts that agree to adopt the amending resolution, Moody s has reinstated the credit rating when requested. As such, Moody s Investor Services generally rates Arkansas school bonds that are backed by the Intercept Program as Aa2 a high quality credit rating. This credit rating generally results in a lower interest cost to the District at the time of issuance. ***The General Assembly recently enacted Act 110, which amended the Intercept Program to require that districts make their bond payments 15 days in advance of the payment date. Consequently, Moody s has to date assigned a credit rating of Aa2 to those bonds supported by the Program.

18 DISCLOSURES AND DISCLAIMERS (a) Stephens Inc. is not recommending an action to any school district, municipal entity or obligated person; (b) Stephens Inc. is not acting as an advisor to any school district, municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Exchange Act to any school district, municipal entity or obligated person with respect to the information and material contained in this communication; (c) Stephens Inc. is acting for its own interests; and (d) each school district, municipal entity or obligated person should discuss any information and material contained in this communication with any and all internal or external advisors and experts that the school district, municipal entity or obligated person deems appropriate before acting on this information or material. This report has been prepared solely for informative purposes as of its stated date and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in this material. Information included in the report was obtained from internal and external sources which we consider to be reliable, but we have not independently verified such information and do not guarantee that it is accurate or complete. Such information is believed to be accurate on the date of issuance of the report, and all expressions of opinion apply on the date of issuance of the report. No subsequent publication or distribution of this report shall mean or imply that any such information or opinion remains current at any time after the stated date of the report. We do not undertake to advise you of any changes in any such information or opinion. Additional information is available upon request. Member NYSE, SIPC.