(1) the School Code of the State of Illinois, as amended (the School Code );

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1 Public Finance Current Issues Related to Public Finance October 2009 Chicago 111 West Monroe Street Chicago, IL (312) FAX: (312) New York 330 Madison Avenue New York, NY (212) FAX: (212) Salt Lake City 201 South Main Street Salt Lake City, UT (801) FAX: (801) San Francisco 595 Market Street San Francisco, CA (415) FAX: (415) Borrowing Alternatives for Illinois School Districts The purpose of this Memorandum is to summarize the borrowing alternatives available to Illinois school districts. Under current law, such borrowings are governed by the provisions of the following laws: (1) the School Code of the State of Illinois, as amended (the School Code ); (2) the Local Government Debt Reform Act of the State of Illinois, as amended (the Debt Reform Act ); (3) the Property Tax Extension Limitation Law of the State of Illinois, as amended (the Extension Limitation Law ); (4) the Bond Issue Notification Act of the State of Illinois, as amended ( BINA ); and (5) the Internal Revenue Code of 1986, as amended (the Tax Code ), and the arbitrage and rebate regulations promulgated thereunder (the Federal Regulations ). Compliance with the School Code, the Debt Reform Act, the Extension Limitation Law and BINA is necessary for the borrowing to be valid and legally binding, and compliance with the Tax Code and the Federal Regulations is necessary for the interest on the borrowing to be exempt from federal income taxation. General Provisions Generally, the debt limit for elementary and high school districts is 6.9% of the equalized assessed valuation of the district and for unit school districts is 13.8% of the equalized assessed valuation of the district. Section 19-1 of the School Code includes numerous exceptions to the debt limit. In particular, a debt limit of 15% may be applicable when either of the following occur: (a) certain enrollment projections or increases exist, the Regional and State Superintendents concur with the school board s enrollment projections or increases and a majority of the electors approve the bond issue, or (b) the school board determines that additional facilities are needed to provide a quality educational program and 2/3 of the electors approve the bond issue. chapman.com 1

2 The School Code also permits certain school districts to have a debt limit higher than 6.9%, 13.8% or 15%, as applicable, if certain conditions are met. To explore these options, please contact one of our Public Finance attorneys. Tax anticipation warrants, general obligation warrants (except for refunding obligations issued pursuant to the Debt Reform Act), state aid anticipation certificates, personal property replacement tax notes, revenue anticipation notes and, generally, alternate bonds do not count against the debt limit of a district, but bonds (other than, generally, alternate bonds), installment contracts, leases, debt certificates, judgments, tax anticipation notes and teachers orders do count against the debt limit. Under the Debt Reform Act, whenever a school district is authorized to issue bonds (defined in the Debt Reform Act to include any instrument evidencing the obligation to pay money) without referendum, the district may add issuance costs (including underwriter s discount, bond insurance or other credit enhancement costs) to the estimated costs of the project. The district may pay such costs from bond proceeds. The Debt Reform Act also allows a school district to use bond proceeds for capitalized interest on its bonds for a period not to exceed the greater of two years or a period ending six months after the estimated date of completion of the project or accomplishment of the purpose for which the bonds are issued. The school board may provide for such capitalized interest without a prior appropriation. The Debt Reform Act also permits school districts to sell bonds at a discount. Whenever bonds are sold at a discount, the bonds must be sold at a price and bear interest at such rate or rates so that either the true interest cost (yield) or the net interest rate received upon the sale of the bonds does not exceed the maximum rate otherwise authorized by applicable law. Competitive sales of school district bonds are not required. In most cases, the School Code limits, by way of a formula or otherwise, the amount of bonds that a district may issue for a particular purpose. Issuance costs, capitalized interest and underwriter s discount, if financed out of bond proceeds, count against these limits imposed by applicable law and decrease the amount of proceeds available for a project. The Debt Reform Act extends the time within which a tax levy for general obligation or limited bonds must be filed. Prior to the passage of the Debt Reform Act, a school district was required to file any debt service levy with the county clerk on or before December 31 of a given year in order to have taxes extended for the payment of the bonds in the following year. The Debt Reform Act provides that districts are authorized to levy a tax for the payment of debt service on general obligation or limited bonds at any time prior to March 1 of the calendar year during which the tax will be collected. County clerks are required to accept the filing of such tax levy prior to March 1 notwithstanding that such filings occur after the end of the calendar year next preceding the calendar year during which the tax will be collected. In extending taxes for general obligation bonds, the county clerk must add to the levy for debt service on such bonds an amount sufficient, in view of all losses and delinquencies 2

3 in tax collection, to produce tax receipts adequate for the prompt payment of such debt service. Whenever the authorization of or the issuance of bonds is subject to either a referendum or a backdoor referendum held after August 13, 1999, the approval, once obtained, remains (a) for five years after the date of the referendum or (b) for three years after the end of the petition period for the backdoor referendum. A school district whose aggregate principal amount of bonds outstanding or proposed exceeds $10,000,000, may enter into agreements for interest rate swaps and other interest rate risk management tools with respect to any issues of its bonds. The bonds must be identified to the swap. Net payments under swap agreements are treated as interest for the purpose of calculating the interest rate limit applicable to the bonds, provided, that for this purpose only, the bonds are deemed to bear interest at taxable rates. Swap agreements and the payments to be made thereunder do not count against the debt limit of the district. A credit rating of school district debt by the New York rating agencies, Fitch, Inc., Moody s Investor s Service or Standard & Poor s, is not legally required, but a favorable rating may reduce the interest rate paid by a district. The rating agencies review the overall management, debt and financial picture of the district, including recent audits and fund balances. Bond insurance may also reduce the interest rate paid by a district on its debt. In connection with the issuance of its bonds, a school district may enter into agreements (credit agreements) to provide additional security or liquidity, or both, for the bonds, including municipal bond insurance, letters of credit, lines of credit, standby bond purchase agreements and surety bonds. A district may also enter into agreements for the purchase or remarketing of its bonds (remarketing agreements) providing a mechanism for remarketing bonds tendered for purchase. The term of the credit agreements or remarketing agreements may not exceed the term of the bonds, plus any time period necessary to cure any defaults under the agreements. Under Section 265(b)(3) of the Tax Code, banks and certain other financial institutions are not allowed any deduction for interest expense attributable to tax-exempt debt acquired after August 7, 1986, unless the small issuer exception applies. If a school district reasonably expects that it will not issue more than $10,000,000 of tax-exempt debt during the calendar year ($30,000,000 for calendar years 2009 and 2010) and it designates the debt as a qualified tax-exempt obligation pursuant to Section 265(b)(3), the restriction on the deduction for interest expense does not apply. Bond Issue Notification Act BINA requires school boards proposing to sell non-referendum general obligation bonds or limited bonds (other than refunding bonds) to hold at least one public hearing concerning the district s intent to sell the bonds. The secretary of the school board must publish notice of the hearing at least once in a newspaper of general circulation in the district not less than seven and not more than 30 days before the date of the hearing and must post notice of the hearing at the principal office of the school board at least 48 hours before the 3

4 hearing. Care must be taken to ensure that the notice appears above the name or title of the secretary of the school board. At the hearing the school board must explain the reasons for the proposed bond issue and permit persons to present written or oral testimony. The school board must then wait at least seven days following the hearing before adopting the resolution providing for the sale of the bonds. Limited Bonds School districts subject to the Extension Limitation Law are permitted to issue limited bonds. Limited bonds are issued in lieu of general obligation bonds that otherwise have been authorized by applicable law. They are payable from a separate property tax levy that is unlimited as to rate, but the amount of taxes that will be extended to pay the bonds is limited by the Extension Limitation Law. Limited bonds are payable from a school district s debt service extension base, which is an amount equal to that portion of the district s extension for the applicable levy year for the payment of non-referendum bonds (other than alternate bonds or refunding bonds issued to refund bonds initially issued pursuant to referendum). The balance of this memorandum describes numerous non-referendum financing alternatives that initially were not available to tax capped school districts under the Extension Limitation Law. Those obligations now may be issued as limited bonds upon compliance with applicable law. Short-Term Borrowings to Meet Operating Expenses The following are ways that districts can borrow to meet cash flow needs. Federal Regulations require an analysis of the district s cash flow needs if the borrowing is on a tax-exempt basis. The arbitrage regulations provide that this need is determined by preparing month by month cash flow estimates for the fund for which the borrowing is to be made. The proceeds of the borrowing may be invested without regard to yield restriction if the size of the borrowing is not greater than the sum of (i) the projected greatest cumulative cash flow deficit during the thirteen months following the issuance of the bonds for the fund for which the borrowing is to be made and (ii) the lesser of (a) 5% of the actual total expenditures from such fund in the preceding fiscal year or (b) the amount of working capital reserve maintained in such fund as calculated in the manner specified in the Federal Regulations. Interfund loans are authorized by the School Code among the educational, operations and maintenance, transportation and fire prevention and safety funds. Such loans must be repaid within three years. The working cash fund can loan money to any fund in anticipation of taxes levied for such fund and in anticipation of personal property replacement taxes to be distributed to the district. Loans from the working cash fund must be repaid when the anticipated taxes are received by the district. The amount of such loans from the working cash fund must be taken into consideration when computing the amount of tax anticipation warrants and notes and personal property replacement tax notes that can be issued. 4

5 Interfund transfers are authorized by the School Code among the educational, operations and maintenance and transportation funds. A public hearing is required to be held prior to the adoption of the resolution authorizing the transfer and, after June 30, 2010, the transfer must be made solely for the purpose of meeting one-time, non-recurring expenses. Tax Anticipation Warrants are issued in anticipation of taxes levied but not yet collected. Such warrants may be issued in an amount up to 85% of the total amount of the tax levied for the particular fund against which the warrants are issued. Care must be taken that the amount of warrants also does not exceed 85% of (a) the district s last known equalized assessed valuation times (b) the maximum permitted tax rate of the district for the particular fund involved. The amount of transfers from the working cash fund to the particular fund against which the warrants are being issued should be subtracted from the amount authorized by the 85% formula. Warrants are payable solely from the taxes levied for the particular fund involved and such taxes must be set aside and held for payment of the warrants. Prior to the enactment of the Debt Reform Act, warrants were only payable in the numerical order of their issuance upon the receipt of the taxes being anticipated. The Debt Reform Act now permits warrants to have a specified maturity date. Federal Regulations place restrictions on the maximum maturity of warrants. Warrants bear interest, payable out of the taxes against which they are drawn, from their date of issuance until paid or, for warrants payable in numerical order without a fixed maturity date, until notice is given that the money for payment is available. In lieu of issuing tax anticipation warrants, a school board may issue notes, bonds, or other obligations (and in connection with that issuance, establish a line of credit with a bank or other financial institution) in an amount not to exceed 85% of the amount of property taxes most recently levied for educational, operations and maintenance, transportation, or other tax levy purposes or any combination thereof. Moneys borrowed must be applied to the purposes for which the tax or any combination of the taxes were levied and no other purpose. Further, all moneys so borrowed must be repaid exclusively from property tax revenues within 60 days after the property tax revenues have been received by the school board. Prior to borrowing or establishing a line of credit, the school board must authorize, by resolution, the borrowing or line of credit. The resolution must set forth facts demonstrating the need for the borrowing or line of credit, state the amount to be borrowed, establish a maximum interest rate limit and provide a date by which the borrowed funds will be repaid. The resolution must direct the relevant officials to make arrangements to set apart and hold the taxes or other revenue, as received, that will be used to repay the borrowing. In addition, the resolution may authorize the relevant officials to make partial repayments of the borrowing as the taxes or other revenues become available and may contain any other terms, restrictions, or limitations not inconsistent with the provisions of this paragraph. General Obligation Tax Anticipation Warrants are authorized by the Debt Reform Act. Such warrants bear a specified due date and are secured by a levy of ad valorem taxes upon all taxable property in the district without limit as to rate or amount. No additional money should accrue to the district as a result of the tax levied to pay general obligation warrants because when the warrants are issued, the county clerk is instructed to reduce the specific 5

6 tax rate by the percentage necessary to produce an amount to pay the principal of and interest on the warrants. A district may not issue general obligation tax anticipation warrants in excess of the 85% formula described above. Under the Debt Reform Act, a district may issue refunding warrants or general obligation bonds to refund warrants should taxes or other revenues be delayed or insufficient to pay the warrants. The refunding warrants or bonds may also be secured by a levy of ad valorem taxes upon all taxable property in the district without limit as to rate or amount. Warrants initially issued are not regarded as or included in any computation of indebtedness for the purpose of any statutory provision or limitation. Refunding warrants and general obligation bonds issued to refund warrants may be issued without regard to existing debt limitations. Upon being issued, however, such general obligation refunding bonds or warrants must be included and regarded as indebtedness. Tax Anticipation Notes, like general obligation tax anticipation warrants, have a fixed maturity date and are general obligations issued in anticipation of taxes levied but not yet collected. A district may issue notes in an amount, including principal, interest thereon and costs of issuance thereof, not exceeding 85% of the taxes levied for the particular fund against which the notes are issued. The amount of notes, including principal, interest and costs of issuance, also may not exceed 85% of (a) the district s last known equalized assessed valuation times (b) the maximum permitted tax rate of the district for the particular fund involved. No notes may be issued if there are tax anticipation warrants outstanding against the tax to be anticipated by the notes. Illinois law requires that the notes mature within two years. In addition, Federal Regulations place additional restrictions on the maximum maturity of notes. Tax anticipation notes are secured by the levy and collection of a direct annual tax upon all taxable property in the district sufficient to pay the principal and interest on the notes to maturity. As with general obligation warrants, no additional money should accrue to the district as a result of the tax because when tax anticipation notes are issued, it is the duty of the county clerk to reduce the specific tax rate by the percentage necessary to produce an amount to pay the principal of, interest on and costs of issuance of the notes. Unlike general obligation warrants, such notes count against a district s debt limit. Because general obligation tax anticipation warrants and tax anticipation notes are, and refunding warrants and general obligation bonds to refund warrants may be, secured by an unlimited property tax, they are subject to the requirements of the Extension Limitation Law and BINA and are, therefore, rarely issued. State Aid Anticipation Certificates are issued in anticipation of general state aid payments. The certificates may not be outstanding for more than 13 months and are payable solely from state aid payments. A district may borrow up to 100% of its July state aid payments, but these loans must be repaid by August 1. Federal Regulations may further reduce their term. The amount of certificates issued may not exceed 75% of the balance of state aid to be paid to the district for the year as certified by the State and Regional Superintendents after subtracting the amount of funds available for transfer from the district s working cash fund in anticipation of State aid to be paid to the district. In addition, the amount of certificates, plus the amount of the district s tax anticipation notes and tax anticipation 6

7 warrants outstanding for the year, may not exceed 85% of taxes levied by the district for that year. Personal Property Replacement Tax Notes may be issued in an amount not to exceed 75% of the entitlement of replacement taxes for the year anticipated. The amount of any transfers from the working cash fund in anticipation of replacement taxes should be subtracted from the amount authorized by the 75% formula. The entitlement amount must be certified by the Director of the Illinois Department of Revenue. The notes are payable from replacement taxes distributed to the district. Revenue Anticipation Notes may be issued in anticipation of revenue from a reliable source such as federal aid, State revenue sharing or local fees. The notes must mature no more than twelve months from their date of issue and must be authorized by a vote of at least two-thirds of the members of the school board. Revenue anticipation notes may not be issued after the revenue to be anticipated has become delinquent and may not be issued in an amount in excess of 85% of such revenues. The notes are payable solely from the revenues that have been anticipated. Teachers Orders must be issued to pay the wages of teachers when due, even though there is no money in the educational fund, and the orders become a liability of the district. When teachers orders are presented to the treasurer and cannot be paid because of lack of funds, the treasurer endorses the orders over his or her signature not paid for want of funds, marks the date of presentation and records the endorsements. After an endorsement, the order bears interest at the rate established by resolution of the school board until the treasurer notifies the clerk or secretary, in writing, that he or she has funds to pay the order. The order does not bear interest after such notice is given to the clerk or secretary. Once the treasurer obtains sufficient funds to pay an order, he must set them aside and not use them to pay any other order until orders previously presented and not paid are paid or otherwise discharged. Prior to the issuance of such orders, the district should determine if a financial institution will accept the orders at the interest rate established by the school board. Teachers orders are often paid by the issuance of funding bonds. Long-Term Borrowings for Cash Flow Needs Federal Regulations require an analysis of the anticipated need for these borrowings. The bonds are secured by the levy of a direct annual tax on all taxable property in the district without limitation as to rate or amount or, for a district subject to the Extension Limitation Law, may be issued as limited bonds. Working Cash Fund Bonds are issued for the purpose of creating or increasing a working cash fund. The principal amount of working cash fund bonds to be issued cannot exceed 85% of the taxes permitted to be levied for educational purposes for the current year plus 85% of the last known personal property replacement tax entitlement minus the greater of (i) the principal amount of the district s working cash fund bonds outstanding or (ii) the amount to the credit of the district s working cash fund. Issuance of these bonds is subject to approval of the electorate if a petition with signatures of not less than 10% of the registered voters in the district is filed with the secretary of the school board within 30 days following publication of the district s intent to issue the bonds. 7

8 The working cash fund may be funded by the issuance of bonds or by the levy of an annual tax not to exceed.05% of the equalized assessed valuation of the district, or by both, if the aggregate amount to the credit of the working cash fund will not exceed the maximum amount permitted in the fund. Moneys in the working cash fund shall not be regarded as current assets available for school purposes and shall not be used by the school board in any manner other than to provide moneys with which to meet ordinary and necessary disbursements for salaries and other school purposes. The moneys shall be loaned to any fund for which taxes are levied in order to avoid the issuance of tax anticipation warrants and notes. Funding Bonds are issued to pay teachers orders or claims that cannot be met from current revenue. Before issuing funding bonds, the school board must adopt a resolution declaring its intention to issue bonds for the purposes provided. The notice of intent to issue the funding bonds must be published in a newspaper having general circulation within the district. The notice informs a district s voters both of the school board s intention to issue the bonds and that the bonds will be issued unless a petition requesting the submission of the proposition to issue the bonds is presented to the secretary of the board within 30 days from the date of publication of the notice. If a petition signed by at least 10% of the district s legal voters is filed requesting the school board to submit the proposition to referendum, the electors must approve the proposition at a regularly scheduled election before the bonds can be issued. Tort Judgment Funding Bonds may be issued without referendum for the payment of any tort judgments or settlements entered against or entered into by the district. Such bonds may be issued in an amount necessary to discharge obligations under such judgments or settlements. Insurance Reserve Bonds may be issued without referendum for the purpose of creating a reserve for the payment of any cost, liability or loss against which a district may protect itself or self-insure pursuant to Section of the Local Governmental and Governmental Employees Tort Immunity Act, as amended, or for the payment of which a district may levy a tax pursuant to Section of the Act, including any or all tort judgments or settlements entered against or entered into by the district. Such reserve fund, including interest earnings reasonably anticipated thereon, may not be funded in an amount in excess of that which is reasonably required for the payment of such costs (including costs of issuance of the bonds issued for the purpose of funding such reserve fund) as certified by an independent auditor, actuary or insurance underwriter. Furthermore, such reserve may not be increased beyond 125% of the auditor s, actuary s or insurance underwriter s estimated ultimate losses at the 95% confidence level. The Tax Code imposes significant restrictions on the ability of a school district to issue insurance reserve bonds on a taxexempt basis. Generally, in order to issue insurance reserve bonds on a tax-exempt basis, bond proceeds on deposit in the insurance reserve fund may be invested only in certain other tax-exempt obligations until the bonds are retired. Long-Term Borrowings for Capital Projects Federal Regulations generally permit the proceeds of borrowings for capital projects to be invested without any restriction as to yield for 3 years after the issuance of the bonds. 8

9 Such unrestricted yield investment is not permitted unless the district reasonably expects to expend the proceeds with due diligence within such 3 year period. A commitment to spend bond proceeds must be entered into within 6 months after the issuance of the bonds. Federal Regulations restrict the ability of a school district to use bond proceeds to reimburse itself for expenditures that were incurred prior to the date the bonds or other obligations were issued, unless the district, in compliance with the Federal Regulations, has adopted a resolution of intent to issue the bonds. Preliminary expenditures (e.g., architectural, engineering, surveying, soil testing and similar costs, but not including land acquisition or site preparation) may be reimbursed so long as such preliminary expenditures do not exceed 20% of the proceeds received from the sale of the bonds. Section 148(f) of the Tax Code requires school districts to rebate to the United States an amount equal to the sum of (A) the excess of (i) the amount earned on bond proceeds over (ii) the amount which would have been earned if such proceeds had been invested at the bond yield, plus (B) any income attributable to such excess. If this rebate requirement is not met, the bonds will be arbitrage bonds and the interest on the bonds will not be tax-exempt. However, arbitrage earnings need not be rebated to the United States if the expenditure of bond proceeds meets certain spend-down requirements, if the district reasonably expects to issue not more than $5,000,000 of tax-exempt bonds in a calendar year or if the district reasonably expects to issue not more than $15,000,000 of tax-exempt bonds in a calendar year, so long as the amount in excess of $5,000,000 is allocable to financing construction expenditures for public school facilities. Fire Prevention and Safety, Environmental Protection, School Security and Energy Conservation Bonds are issued to alter and repair existing school buildings and equipment for fire prevention and safety purposes, for the protection and safety of the environment pursuant to the Environmental Protection Act, for energy conservation and for school security purposes when there are not sufficent funds available in the operations and maintenance fund of the district, the school facility occupation tax fund of the district or the fire prevention and safety fund of the district. These bonds may be issued to replace all or a portion of an existing building, so long as the particular requirements concerning such replacement are met. The bonds are not subject to direct or backdoor referendum, but the architect s or engineer s estimate of cost of the construction must be approved by the Regional and State Superintendents. In addition, the work must be done pursuant to an order issued by the Regional Superintendent. The School Code also prohibits beginning work on health/life safety projects until the approvals from the Regional and State Superintendents have been obtained. Health/life safety funds may not be used for buildings that do not house students. Projects for school sidewalks, playgrounds, parking lots or school bus turnarounds require the school board to make certain findings following a properly noticed public hearing. The bonds are secured by the levy of a direct annual tax on all the taxable property in the school district without limitation as to rate or amount or, for a district subject to the Extension Limitation Law, may be issued as limited bonds. Building Bonds must be approved by referendum held at a regularly scheduled election. These bonds are issued to pay the cost of acquiring school sites and building, equipping, altering, repairing and reconstructing new and existing school buildings and additions. 9

10 The bonds are secured by the levy of a direct annual tax on all taxable property in the school district without limitation as to rate or amount. Public Building Commission (PBC) Revenue Bonds are not available to districts located outside the City of Chicago. Installment Contracts are authorized for the purchase of real or personal property. The maximum term of an installment contract is 20 years. A school district s payment obligation under an installment contract constitutes a binding and enforceable promise to pay the amount borrowed plus the interest thereon. The school district will be expected to agree to annually budget amounts to pay the principal of and interest on the installment contract. There is no separate levy available for the purpose of making such payments. A school district takes title to the project being financed under an installment contract as construction progresses. Therefore, an installment contract financing will be most useful only when referendum approval is not otherwise required under Section of the School Code to enable the district to construct the project. Leases of buildings, rooms, grounds and appurtenances to be used by a district for the use of schools or for school administration purposes may be entered into for a term not exceeding 99 years under Section of the School Code. Appurtenances include those items of property related to or that are a part of a school building, rooms or grounds and that do not have a function other than with respect to such school facilities. A 2/3 vote of the full membership of the school board is required before the board may make or renew any such lease for a term longer than ten years. In addition, although the School Code permits such leases to extend for a period not exceeding 99 years, Section 8 of Article VII of the 1970 Constitution of the State of Illinois prohibits school districts from incurring debt payable from ad valorem property tax receipts in excess of 40 years. Therefore, the debt under any such lease (i.e., the principal amount of the borrowing and the interest thereon) must be repaid within 40 years. Leases of real or personal property, including a school site, building or equipment, may be entered into for a term not exceeding 20 years under Section 17(b) of the Debt Reform Act. As with installment contract financings, a school district s payment obligation under a lease is a binding and enforceable promise to pay, for which the school district agrees to budget funds on an annual basis. In addition, Section c of the School Code authorizes districts to levy an annual tax, in addition to any other taxes of the district, not to exceed.05% of the equalized assessed valuation of the district for the purpose of leasing educational facilities or computer technology or both. Districts may lease buildings, rooms, grounds and appurtenances to be used by the district for the use of schools or for school administration purposes and all equipment, fixtures, renovations, and improvements to existing facilities of the district necessary to accommodate computers, as well as computer hardware and software. The.05% tax rate may be increased to.10% with referendum approval. A school district subject to the Extension Limitation Law is, however, subject to the restrictions of that law and often is not able to access any new funds under Section c without referendum approval. 10

11 To the extent that the leased property constitutes a school building (rather than additions or improvements thereto), the ability of a school district to take title to the building at the end of the lease term used to be restricted by Section of the School Code, which provided that a school district could build, purchase or move a building for school purposes only upon the approval of the majority of the voters of the proposition at a referendum held for such purpose. Section now provides, however, that no such referendum is required if the purchase, construction or building of the school building is completed while the building is being leased by the school district. Debt Certificates may be issued by a school district to evidence the payment obligation of the district under an installment contract or lease. The school board may provide for the treasurer, comptroller, finance officer or other officer of the board charged with financial administration to act as counter-party to the installment contract or lease, as nominee seller or lessor. The installment contract or lease is then executed by an authorized officer of the district and is filed with and executed by the nominee seller or lessor. As the school board executes contracts for the acquisition and construction of the project to be financed (work contracts), the board orders those work contracts to be filed with the nominee seller or lessor. The nominee seller or lessor identifies the work contracts to the installment contract or lease. That identification permits the payment of the work contracts from the proceeds of the debt certificates. Debt certificates are paid from lawfully available funds of the district. A school district will be expected to agree to annually budget amounts to pay the principal of and interest on the debt certificates. There is no separate levy available for the purpose of making such payments. Sale-leaseback or lease leaseback agreements may be entered into by a school district to the extent permitted by Section 17(b) of the Debt Reform Act or other applicable law. A district may issue debt certificates to evidence its payment obligations under such agreements. Certificates of Participation ( COPs ) evidencing the repayment obligation of a school district under an installment contract or lease may be sold to the public. The district may enter into an installment contract or lease with a corporate trustee. COPs are issued by the trustee evidencing the repayment obligation under the installment contract or lease. For federal income tax purposes, the sale of COPs is viewed as the direct issuance of debt by the school district. For state law purposes, the outstanding principal amount of the installment contract or lease counts against the district s debt limit. The ability of a district under the Debt Reform Act to issue debt certificates evidencing the indebtedness incurred pursuant to the installment contract or lease should make the issuance of COPs (which require the use of a corporate trustee) unnecessary. Guaranteed Energy Savings Contracts are authorized (after a proposal and sealed bidding process) to implement energy conservation measures. Such contracts between a district and a qualified provider of the energy conservation measures must include a written guarantee from the qualified provider that either the energy or operational costs savings resulting from the project will meet or exceed within 20 years the cost of the energy conservation measures. The qualified provider is required to reimburse the school district for any shortfall of guaranteed energy savings projected in the contract. School districts may also 11

12 enter into an installment payment contract or lease purchase agreement (not exceeding 20 years) for the purchase and installation of the energy conservation measures. To evidence such indebtedness, a school district may issue debt certificates without referendum approval. The school district is required to include in its annual budget any amounts payable under the guaranteed energy savings contract and related certificates. County School Facility Occupation Taxes may be used for school facility purposes. A county sales tax of up to 1% (the Sales Tax ) may be imposed by any county other than Cook County after the question of imposing the tax has been submitted to the electors of the county at a regular election and approved by a majority of the electors voting on the question. Once the sales tax is established, sales tax proceeds are disbursed to school districts within the county on an enrollment basis. The proceeds may be used for the acquisition, development, construction, reconstruction, rehabilitation, improvement and financing of land, buildings, structures and equipment. A direct referendum is not required for the construction of a building for school classroom or instructional purposes if the building is completed with the expenditure of funds received from the Sales Tax. Alternate Bonds may be issued pursuant to the Debt Reform Act and the School Code whenever a school district has a lawfully available revenue source sufficient to provide in each year an amount not less than 1.25 times (1.10 times if the revenue source is either (i) federal or state funds that the district has received in some amount during each of the three fiscal years preceding the issuance of the alternate bonds or (ii) revenues to be received from another governmental unit under an intergovernmental agreement) debt service on any outstanding alternate bonds payable from such revenue source and the alternate bonds to be issued. The revenue source must be pledged to the payment of the alternate bonds and the school board must covenant to provide for, collect and apply the revenue source to the payment of the bonds and an additional.25 times (or.10 times for a governmental revenue source as discussed above) debt service. The bonds are also payable from a full faith and credit tax levy. The intent is that the revenue source will be sufficient to pay the bonds so that taxes need not be extended for their payment. Alternate bonds must be issued for a lawful corporate purpose. They do not constitute debt for the purpose of any statutory provision or limitation unless taxes, other than a designated revenue source, are extended to pay them. The issuance of alternate bonds must be approved by referendum if the requisite number of voters in the district files a lawful petition with the secretary of the school board within 30 days following publication of the district s intent to issue the bonds. The publication is not required, however, if the proceeds securing the alternate bands are realized from the Sales Tax. Refunding Bonds may be issued to pay the outstanding bonds of a district in order to avoid a default, in order to restructure the debt burden of the school district or in order to reduce the interest costs of the district. Refunding bonds are not subject to direct or backdoor referendum. The bonds are secured by the levy of a direct annual tax on all taxable property in the district without limitation as to rate or amount or, for a district subject to the Extension Limitation Law, may be issued as limited bonds. The issuance of refunding bonds requires compliance with complex Federal Regulations. At the commencement of any refunding, a school district should consult bond counsel regarding the federal tax implications involved. 12 For additional information, please contact: Erin P. Bartholomy (312) bartholo@chapman.com Patricia M. Curtner (312) curtner@chapman.com Rose E. Gallagher (312) gallaghe@chapman.com Lynda K. Given (312) given@chapman.com Daniel L. Johnson (312) djohnson@chapman.com Kelly K. Kost (312) kost@chapman.com William M. Libit (312) libit@chapman.com Timothy V. McGree (312) mcgree@chapman.com Lawrence E. White (312) white@chapman.com This publication has been prepared by the Chapman and Cutler Public Finance Department to highlight, in summary form, current legal concepts and is not intended to provide legal advice. Pursuant to Rules of the Illinois Rules of Professional Conduct, this publication may constitute advertising material Chapman and Cutler LLP.