2014 Fall Conference. What Does the Current Bond Market Look Like?

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1 2014 Fall Conference What Does the Current Bond Market Look Like? October 28, 2014 John R Baracy Managing Director California K-12 Education Group Stifel, Nicolaus & Company, Incorporated

2 Disclosure These materials have been prepared by Stifel, Nicolaus & Company, Incorporated ( Stifel ) for the client or potential client to whom such materials are directly addressed and delivered(the Issuer )in connection with an actual or potential issuance of municipal securities or engagement. These materials contain proposed terms and conditions that are indicative and for discussion purposes only. Finalized terms and conditions are subject to further discussion and negotiation. Stifel does not guarantee that all financing options will be available at the time of the contemplated transaction. These materials do not constitute an offer or solicitation to sell or purchase any securities and are not a commitment by Stifel to provide or arrange any financing for any transaction or to purchase any security in connection therewith. Where indicated, this presentation may contain information derived from sources other than Stifel. While we believe such information to be accurate and complete, Stifel does not guarantee the accuracy of this information. This material is based on information currently available to Stifel or its sources and we do not undertake to update the recipient of this presentation of changes that may occur in the future. Stifel does not provide accounting, tax or legal advice; however, you should be aware that any proposed indicative transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and /or counsel. Stifel is providing information for discussion purposes and is declaring that it has done so within the regulatory framework of MSRB Rule G 23 as an underwriter (by definition also including the role of placement agent) and not financial advisor, as defined therein, to the issuer for this proposed issuance of municipal securities. The primary role of Stifel, as an underwriter, is to purchase securities for resale to investors in an arm s length commercial transaction. Serving in the role of underwriter Stifel has financial and other interests that differ from those of the issuer. The issuer should consult with its own financial and/or municipal, legal, accounting, tax and other advisors, as applicable, to the extent it deems appropriate. 1

3 Municipal Market Overview 2014 has witnessed a slow glide down in yields a welcome relief from the 2013 interest rate volatility Municipal rates peaked in September 2013 but have trended lower since 30 year AAA rated Municipal Market Data (MMD) index reached two year high of 4.49% on 9/5/2013, 157 basis points lower as of 10/9/2014 Slope of the yield curve continues to flatten, but rates across the curve are still higher than the lows reached in May 2013 Investors added $788M to Municipal mutual funds last week Only 3 weeks in 2014 have seen net outflows from tax exempt funds Year to date net positive inflows of $16.6 billion High yield funds have been one of the larger beneficiaries AAA MMD 1 Index Recent Range Municipal Mutual Fund Flows 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2013 High (9/3/13) 2013 Low (5/1/13) Current 10/9/ ($ in Billions) 4 $106 billion in inflows (Jan Nov. 2010) $45 billion in outflows (Nov $61 billion in inflows (Sep Dec ) $16.6 billion in inflows (Jan Oct ) $65 billion in outflows ( May Jan. 2014) Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 1 MMD (Municipal Market Data) is an index of AAA rated general obligation bonds. Sources: Investment Company Institute, Thomson Financial. As of 10/9/

4 Municipal Tax Exempt Interest Rates 30-year rate reaches two year high of 4.49% on 9/5/2013; now 157 basis points lower 6.0% 30-Year AAA Municipal Market Data Index 7.0% 6.5% 6.0% 5.0% Average = 3.62% 4.0% 3.0% 2.0% Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug % 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% Average = 4.11% Max = 5.94% Min = 2.47% Current = 2.92% 2.0% Source: Thomson Financial as of 10/9/

5 Positive Theme in the Municipal Market Supply remains a very supportive technical factor New issue volume remains down SIFMA Municipal Bond Issuance Survey had forecast approximately $310 billion primary supply in 2014, comparable to 2013 issuance However, year to date 2014 primary market volume lower by 8% compared to same period in 2013 Negative net new issuance possible as total redemptions from refundings and maturities outpace total new supply Typical seasonal increases in issuance expected Increase in volume anticipated in the Fall of 2014 Municipal Market Annual Supply Bond Buyer 30-Day Visible Supply 1 ($ in Billions) Annual Average Issuance (Past 6 years): $363.3 bn 2014 Issuance (1/1-10/9): $223.7 bn (8% decline from 2013 same period) New Money Refunding (1/1-10/9) 2014 (1/1-10/9) ($ in Billions) Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 1 Long term issues only. Weekly averages of estimated 30- day visible supply. Sources: SDC, The Bond Buyer. As of 10/9/

6 California 2014 Issuance Overview Par Amount (billions) General Obligation Bonds Refunding/New Money Issuance Trend $8 200 $7 $6 150 $5 $4 100 $3 $2 50 $1 $ Ref (Par) New Money (Par) Ref (Fin.) New Money (Fin.) Number of Financings Par Amount (millions) Certificates of Participation Refunding/New Money Issuance Trend $1, $800 $600 $400 $200 $ Ref (Par) New Money (Par) Ref (Fin.) New Money (Fin.) Number of Financings Par Amount (millions) Communities Facilities District Refunding/New Money Issuance Trend $ $500 $400 $300 $200 $100 $ Ref (Par) New Money (Par) Ref (Fin.) New Money (Fin.) Number of Financings Opportunities to issue new money depend on November elections 113 Prop 39 elections requiring 55% voter approval 39 parcel tax elections requiring 2/3 voter approval November 2014 Election Summary Parcel Tax Elections 39 26% Prop 39 Elections % 5

7 California School District General Obligation Bond Election Results School District General Obligation Election Results: January 1986 June 2014 Prop Prop Issues ($100.2 B Authorization) 83% 527 Issues ($23.2 B Authorization) 45.6% 54% 46% 17% 159 Issues ($10.1 B Authorization) 446 Issues ($19.2 B Authorization) PASS FAIL (1) Proposition 39 elections commenced in Spring Source: School Services of California 6

8 California Statewide Assessed Valuation Trends Many local governments in the State of California saw double digit growth in assessed valuations from This trend slowed or reduced to high single digit and double digit reductions during the recession but has bounced back in the last few years As shown below, all of the top 15 populated Counties in California sustained an increase (again) in assessed valuation from to County Alameda 4.77% 2.51% 1.58% 0.05% 2.14% 5.02% 5.96% Contra Costa 0.31% 6.97% 3.05% 0.37% 0.86% 3.73% 9.03% Fresno 1.49% 2.95% 0.76% 0.47% 0.00% 5.62% 3.75% Kern 5.89% 6.20% 4.63% 2.43% 7.50% 3.31% Los Angeles 6.95% 0.53% 1.81% 1.41% 2.24% 4.61% 5.47% Orange 3.89% 1.38% 0.54% 0.98% 1.92% 3.43% 6.36% Riverside 1.44% 10.49% 4.40% 1.25% 0.02% 4.21% 8.31% Sacramento 1.81% 7.15% 1.84% 3.65% 2.66% 4.10% 6.40% San Bernardino 5.20% 6.01% 4.32% 0.47% 0.80% 6.20% 5.93% San Diego 4.42% 2.40% 1.42% 0.40% 0.14% 6.02% 5.78% San Francisco 8.63% 7.08% 4.32% 0.49% 4.20% 4.60% 5.46% San Joaquin 0.81% 10.22% 3.81% 3.70% 0.33% 5.79% 8.93% San Mateo 7.99% 0.68% 1.44% 0.96% 3.33% 6.01% 5.61% Santa Clara 6.98% 0.14% 2.40% 0.90% 3.25% 8.35% 6.80% Ventura 3.17% 2.42% 0.26% 0.00% 0.60% 3.20% 5.70% *Source: County Assessor Websites/Urbics 7

9 Difference in Bond Interest Rates By Type of Bonds Current Interest Bonds and Capital Appreciation Bonds Hypothetical Interest Rates as of October 10, 2014 General Obligation Bonds rated A1/A+ Maturity Year Current Interest Bonds Capital Appreciation Bonds Non Callable Maturities Callable Maturities Convertible Capital Appreciation Bonds* % 1.75% n.a. n.a % 3.15% n.a. n.a % 4.20% 4.40% n.a % 4.75% 4.95% 4.65% *Conversion from CABs to CIBs in 10 years from closing date of bonds. All numbers are preliminary and are subject to change. Tax exempt interest rates were derived from spreads to the 'AAA' rated MMD Index of comparable recently priced financings and secondary market trades as of October 10, In no way does Stifel represent that the bonds would receive such pricing results. 8

10 Recent History of CABs Issued by California School Districts CABs as Percent of All School District General Obligation Bonds Number of All School Number of Percentage of New Money Issues with All Issues Year GO Bonds CABs with CABs % % % % % % % % % % % % % % % % % % % 2014* % CABs have been a component of school general obligation bonds for many years Increased use of CABs corresponds with approval of Proposition 39 in November 2000 Use of CABs rose in response to slowdown or decline of assessed valuation during recession Frequency of CAB maturities longer than 30 years increased during the recession and legislative approval of AB 1388 in 2009 CAB issuance fell in late 2012 through 2014 partly due to media attention, political criticism and passage of AB182 in 2013 * Through 3 rd quarter of 2014 Source: SDC as of 10/10/2014 9

11 AB 182 Impact Questions to Audience Slower access to unissued bonds for existing bond authorizations? Diminished purchasing power of bond proceeds? Smaller bond authorizations for future bond measures? Need to conduct multiple future bond elections to achieve adequate funding source for facility needs? Differential effects for low wealth and high wealth school districts Districts with smaller assessed valuations, more limited prospects for strong future assessed valuation growth, and lower credit ratings are likely to be affected more by the requirement to limit the length of bond maturities than larger, wealthier districts? 10

12 Bio John R. Baracy John R. Baracy Managing Director Stifel, Nicolaus & Company, Incorporated tel: e mail: jbaracy@stifel.com John R. Baracy is a Managing Director in the Los Angeles public finance office of Stifel. Mr. Baracy began his public finance career in 1994 and has experience in all facets of the municipal finance business. He specializes in the management, structuring and sale of California and Arizona K 12 Education and Community College District new money and refunding general obligation bonds, certificates of participation, tax credit bonds, Mello Roos bonds and tax and revenue anticipation notes. In addition to managing the introduction of these financings into the market, Mr. Baracy performs debt capacity, general obligation bond tax rate and credit analyses, charter school finance analyses, California K 12 education finance legislation analyses, and evaluates the investment of bond proceeds. Throughout his career, he has completed more than 350 financings totaling over $8 billion. Mr. Baracy graduated with a Bachelor of Science degree from Arizona State University with an emphasis in Finance. Mr. Baracy maintains his Series 7 and 63 licenses with FINRA and frequently presents for California K 12 school district advocacy groups such as C.A.S.H., CASBO, CSBA and CALSA. 11

13 Planning and Financing Your Future Program: Options to Consider CASH Fall Conference October 28, 2014 Presented by: Janet L. Mueller, Shareholder This training is provided for educational, compliance and loss-prevention purposes only and, absent the express, prior agreement of DWK, does not create or establish an attorney-client relationship. The training is not itself intended to convey or constitute legal advice for particular issues or circumstances. Contact a DWK attorney for answers to specific questions. Basic Financing Options Most common capital financing techniques: General Obligation Bonds 55% (Prop 39 Bonds); 2/3rds Bonds Variation: School Facility Improvement Districts Lease Financing/COPs Mello-Roos CFD/Special Tax Bonds 2 1

14 General Obligation Bonds What are they? Long-term voter approved debt repaid by property tax; Debt limited to: 2.5% of AV of taxable property in a unified district or 1.25% of AV in non-unified district Two options: 55% Voter approval (Proposition 39) 2/3rds Voter approval 3 General Obligation Bonds Bond funds may pay: Proposition 39: Construction, reconstruction, rehabilitation, or replacement of school facilities Includes FFE for school facilities Includes lease of real property for facilities But no teacher or administrator salaries or other school operating expenses Traditional Election: Acquisition and improvement of real property Includes fixtures, but not FFE 4 2

15 General Obligation Bonds Proceeds from either may pay: District employee salaries to the extent employees are engaged in construction-related services for bond-funded projects. Bond issuance and preparation costs. Costs incidental, but directly related, to bondfunded projects. Community Advocates for Responsible Education v. San Lorenzo Valley Unified School District (2006) 5 General Obligation Bonds Which type Traditional or Prop 39? Prop 39 Election: Much easier to pass at 55% approval; May be used for FFE and leases; But: Contains stricter accountability provisions; Maximum Tax Rates Limited Election Date Options Statewide primary, general or special elections (June, November in even years) Other dates only if coincide with regularly scheduled district-wide election 6 3

16 General Obligation Bonds Which type Traditional or Prop 39? Traditional Election: More flexibility in bond structure and repayment May be held on almost any Tuesday; But: requires two-thirds approval; No FFE or lease payments Prop 39 elections far more common and far more successful in passage 7 General Obligation Bonds 8 4

17 General Obligation Bonds Prop 39 Bond Accountability Features/ Limitations Separate account/annual Report List of specific school facility projects to be funded Performance and Financial Audits Tax rate as must be projected to be no more than $30 for each $100,000 of assessed value Citizens Bond Oversight Committee (CBOC) 9 Functions of CBOC 10 5

18 Citizens Oversight Committee Purpose of COC is to inform the public about the expenditure of bond proceeds COC is not granted powers to determine how bond funds may be spent COC must issue a report at least once a year Meetings are subject to the Brown Act Board required to provide administrative and technical assistance to the COC 11 School Facility Improvement District What is it? An identified portion of a school district, within which a GO bond election may be held Allows the avoidance of Mello-Roos CFDs, if any; Allows District to tailor elections to the needs of particular sub-communities; May be used with Prop 39 or traditional bond election County Board of Supervisors must approve use Tax levied on SFID area only Taxes limited by SFID AV 12 6

19 School Facility Improvement District Process for SFID Form the SFID Prepare a map of the territory Adopt Resolution of intention Hold Public Hearing Adopt Resolution Ordering Formation Call the Election Same timing, process, and limits of whatever bond scheme is being used SFID must be officially approved as a Tax Rate Area with State Board of Equalization 13 Successful in November? 5 Post-Election Tips 1. Contact the ROV re: timing of vote canvass; Bring to Board for approval. 2. Board approval of canvass starts 60-day CBOC formation timeline; start identifying potential candidates now. 3. Consider Board policy or resolution to set process and terms for on-boarding the CBOC. 4. Decide timing for bond funds; when do you need the money? Also consider reimbursement. 5. Meet with Financial Consultant and Bond Counsel to decide timing, needs, structure. GO bonds take about 3 months to issue. 14 7

20 Lease Financing Certificates of Participation / Equipment Leases Finance mechanisms in which debt is repaid in the form of lease payments Voter approval not required if transaction meets specified legal requirements (not considered debt ) Used to finance real or personal property that may be leased Repayment is general fund obligation; typically the financed property is pledged as security for repayment 15 Lease Financing Certificates of Participation Complex variant on lease financing COP is evidence of a security interest in lease payments to be paid for the asset being financed Lease structure involves nonprofit corporation Underwriter markets COPs to investors Trustee pays investors 16 8

21 Lease Financing Certificates of Participation Advantages include: No voter approval requirement Use of funds is flexible Useful mechanism for bridge financing prior to receipt of State funds of GO bond proceeds May be structured with a blended pledge of revenues General Fund, Developer fees, Mello-Roos special taxes, RDA tax increment Can be structured and sold within 75 days 17 Lease Financing Certificates of Participation Disadvantages: COPs not generate revenue for debt service; They are a general fund obligation Encumber property until debt repaid Additional cost/expense for insurance, reserves and capitalized interest County review and notice process required Can be politically unpopular (know your Board before you try to issue) 18 9

22 Mello-Roos Special Tax Bonds What are they? Bonds that are payable from and secured by special taxes levied within a community facilities district ( CFD ) A CFD may encompass all, or only a portion of, a school district Proceeds may be used to finance the purchase, construction, expansion or rehabilitation of real or tangible property with an expected useful life of 5 or more years 19 Mello-Roos Special Tax Bonds Process Detailed, Time Consuming Requires the formation of a CFD and authorization of bond issuance Numerous steps involved, including landowner or registered voter election Develop Tax Formula ( RMA ) Create Map Adopt Resolution of Intention, Hold Public Hearing Adopt Resolution of Formation/Incur Bonded Indebtedness Call/Hold Election 2/3rds Vote Registered Voters or Landowners (if fewer than 12) Implement Tax Lien on Property 20 10

23 Mello-Roos Special Tax Bonds Advantages Flexibility in special tax formula; may be customized to unique circumstances Wide variety of projects may be financed Often used in conjunction with developers in undeveloped areas Disadvantages Time consuming formation of CFD 2/3rds voter approval required Minimum 3:1 value to lien ratio must be achieved to issue bonds CFD must be managed over time 21 Thank you! Janet L. Mueller Dannis Woliver Kelley 750 B Street, Suite 2310 San Diego, CA Tel jmueller@dwkesq.com 22 11