SCHOOL DISTRICT OF PALM BEACH COUNTY, FLORIDA SERIES 2014 TAN SALE

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1 SCHOOL DISTRICT OF PALM BEACH COUNTY, FLORIDA SERIES 2014 TAN SALE September 10, 2014

2 Palm Beach County School District TAN Cash flow Tax Anticipation Notes are short-term financings that allow the District to pay operating expenses prior to receiving tax revenue. Since most of the money received is from property taxes and state funds, there is not a constant source of funding that exists throughout the year. 1,600,000 General Fund Cash Flow 1,400,000 1,200,000 1,000,000 Shortfall Amount 800, , , ,000 - Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Disbursements Receipts 1

3 Main Participants: Who is involved? Verification Agent / Accountant Financial Advisor Bond Counsel Tax Counsel Registrar Paying Agent Escrow Agent PALM BEACH SCHOOLS Special Counsel Underwriter Bond Insurers LOC/ Liquidity Providers Credit Enhancers Rating Agencies Trustee Trustee Counsel UW Counsel 2

4 Trading Desk 3

5 Pre-sale Rush and Submitting the Bid Initially the underwriter puts out a preliminary pricing wire to their sales force and traders. Initial coupons and yields are adjusted to reflect feedback from the sales force and traders. Pre-sale orders are entered from investors. With less than a minute to go, the underwriter finalizes the bid and submits it via the on-line system. At sale time the bidders are ranked in order of lowest to highest interest cost to the bidder. The sales results of a previous TAN sale are shown to the right. Morgan Stanley was the winning bidder (lowest TIC). The underwriter who buys the loan is called the highest bidder (i.e. best bid to the issuer). 4

6 AAA GO Yield Curve The chart below shows the progression of the AAA MMD index since September 9, This is a proxy for interest rates on the highest rated (AAA) municipal bonds. 5.00% 4.50% MMD AAA G.O. Curve 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% /9/ /9/2013 3/7/2014 6/9/2014 9/8/2014 5

7 MIG1 Yield Curve 0.25% Short-Term Yield Curve 0.20% 0.15% 0.10% 0.05% 0.00% /11/2013 9/8/2014 6

8 Pricing Lingo Quiz 1. A BP bump 2. A BP cut 3. A 5 handle 4. Block size 5. Going away order 6. Tighten 7. Loosen 8. Nickel 9. Sloppy 5% coupon Order to a buy and hold investor To subtract a basis point in yield Lower the yields Raise the yields Prices are too cheap/yields too high 5 basis points To add a basis point in yield Size of maturity or order 7

9 Market Overview

10 Less Education Results In Higher Unemployment The headline unemployment rate of 6.2% doesn t tell the entire story of the state of the labor force in America. While unemployment in all of the categories presented below has declined since peaking in August 2009, those with less education are being hit the hardest. Jobs that require more education remain in fairly high demand; unemployment for those with a bachelor s degree or higher reached just 4.8% in August On the other hand, the unemployment rate for those with less than a high school degree has remained at or over 11.0% for the past four years. 11 Unemployment rate in 2013 (%) Less than a high school diploma High school diploma Some college, no degree Median weekly earning in 2013 ($) Associate's degree Bachelor's degree Master's degree 777 1,108 1, Professional degree Doctoral degree 1,714 $1,623 All workers: 6.1% All workers: $827 Source: Bureau of Labor Statistics 9

11 Economic Summary Economic Conditions U.S. GDP grew 4% in the second quarter, a significant rebound from a wintry contraction of 2.1% in the first quarter; growth was generally consistent across the major components. The labor market remained robust in July with 209,000 nonfarm jobs added, marking six consecutive months that the economy added more than 200,000 jobs; Unemployment rate rose slightly to 6.2% on a modest increase in labor participation. Renewed geopolitical tensions in the Middle East are the source of heightened market volatility. The Federal Reserve noted an increase in economic activity as it further reduced its bond-purchasing program down to $25 billion a month; purchases are on track to be fully phased out in October. Market Reaction Aside from brief periods of geopolitical flight to quality, intermediate-maturity U.S. Treasury yields generally rose in response to stronger economic data producing negative returns across sectors; Municipal securities were the lone sector that experienced positive performance for the month. Short term yields remain anchored by Federal Reserve policy and decreased supply of U.S. Treasury and Federal Agency securities. Credit and Federal Agency spreads remained at historically tight levels as demand outstripped supply and investors continue to struggle to find yield. Equity indices reached new highs before pulling back in the last few trading days causing investors to worry about a possible correction. 10

12 U.S. Economy Surges in 2 nd Quarter of 2014 U.S. GDP grew 4% in the second quarter, a significant rebound from a wintry contraction of 2.1% in the first quarter. This quarterly expansion reflected upturns across the board including private inventory, exports, state and local government spending, and fixed investments. U.S. Real GDP QoQ % Change; Seasonally Adjusted Annualized Rate 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% Q2 Q3 Q4 Q1 Q2 Q3 Q4 Post Recession Average = 2.2% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 4.5% Q3 3.5% Q4-2.1% Q1 4.0% Q2 Q3 Bloomberg Survey of Economists Q4 Q1 Q Source: Bureau of Economic Analysis 11

13 Long-Term Rate History 16.00% 10-Year Treasury Yields August 1970 through August % 12.00% The longest bull market in history 10.00% 8.00% 6.00% 4.00% 2.00% 2.39% 0.00% Aug '70 Aug '71 Aug '72 Aug '73 Aug '74 Aug '75 Aug '76 Aug '77 Aug '78 Aug '79 Aug '80 Aug '81 Aug '82 Aug '83 Aug '84 Aug '85 Aug '86 Aug '87 Aug '88 Aug '89 Aug '90 Aug '91 Aug '92 Aug '93 Aug '94 Aug '95 Aug '96 Aug '97 Aug '98 Aug '99 Aug '00 Aug '01 Aug '02 Aug '03 Aug '04 Aug '05 Aug '06 Aug '07 Aug '08 Aug '09 Aug '10 Aug '11 Aug '12 Aug '13 Aug '14 Source: Bloomberg 12

14 Current Economic Conditions and the Business Cycle Peak Interest rates high Full employment Contraction Production slows Corporate profits fall Stock market losses Unemployment rises Interest rates decline Inflation falls High inflation We are here Expansion Corporate profits rise Stock market gains Consumer confidence improves Production increases Interest rates rise Unemployment falls Construction rebounds Inflation increases Trough Interest rates low High unemployment Low inflation 13

15 United States National Debt The US outstanding national debt is $17.3 trillion which means that with a population of over 300 million people, the debt burden is greater than $55,500 per person. Below is a breakdown of the ownership of national debt by sector: Federal Reserve and Government Accounts 41.5% Foreign and International 33.4% Depository Institutions 1.9% U.S. Savings Bonds 1.0% State and Local Governments 2.8% Private Pension Funds 2.9% State and Local Government Pension Funds 1.3% Insurance Companies 1.6% Other 6.9% Mutual Funds 6.5% Source: Federal Reserve System 14

16 Preparing for the Next Challenges Ultimately, There Will Be a Price for All the Federal Help Drastically Climbing Federal Debt and Guarantees Debt Up 140% in past 10 years 18, National Debt 16, , , , , , , , Amount ($ Billions) Debt Held by the Public Intragovernmental Holdings Source: Federal Reserve System 15

17 Capital Markets

18 What are the Capital Markets The Capital Market (securities markets) is the market for securities, where companies and the government can raise long-term funds. The capital markets include both the stock market and the bond market. The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded. The capital markets can be contrasted with other financial markets such as the money market which deals in short term liquid assets, and the derivatives market which deals in derivative contracts. Both the private and the public sectors provide market makers in the capital markets. Source: 17

19 Public Finance (Government Finance) Public finance (government finance) is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, such as a school district. Florida School Districts, like any other legal entity, can take out loans, issue bonds and invest. Based on the taxing authority of the entity, they issue bonds such as Certificates of Participation (COPs) or Revenue Bonds. A bond issued by a public sector entity may give tax advantages to its owners, with interest earnings not subject to federal income tax. Source: 18

20 Public Use of Debt Cities libraries, parks, roads, water and sewer plants, solid waste Counties many of the same plus courthouses and jails States roads, colleges, economic development (SCRIPPS), environmental land (SFWMD Everglades restoration) Not for Profit hospitals, nursing homes, low income housing developments Education capital construction and operating expenses Source: The Bond Buyer Public Facilities 2% Housing 4% Environmental Facilities 1% Electric Power 4% Dollar Amount Issued in 2013 Development $ 10,968.9 Education 90,754.8 Electric Power 11,872.6 Environmental Facilities 2,644.4 Health Care 28,933.1 Housing 14,067.4 Public Facilities 8,395.1 Transportation 53,385.4 Utilities 32,986.7 General Purpose 79,768.1 Total ($ mil) $ 333,776.5 Transportation 16% Health Care 9% Utilities 10% Education 27% General Purpose 24% Development 3% 19

21 What is a bond? Simply put a bond is a loan. Buyer of the Bond is the lender or investor Seller of the Bond is the borrower or the issuer Principal or Face Amount or Par Amount Amount of loan Maturity date Repayment date of loan Annuity of Interest Nominal or Coupon rate Interest rate paid periodically on the loan Usually expressed as a percentage of par amount Price Amount a lender will lend in consideration of future receipt of principal and interest payments Yield Single rate that sets the PV of the principal and interest payments equal to the price Principal Maturity 20

22 Who buys tax-exempt bonds? Three classes of investors dominate the municipal market. 1. Households, consisting of individuals acting directly or through investment counsel 2. Household proxies bond funds such as mutual funds, money market funds, bank personal trusts and investment trusts Exchange-Traded Funds 0.3% Closed-end Funds 2.3% Money Market Funds 8.3% Mutual Funds 17.2% Nonfinancial Corporate Businesses 0.8% Nonfarm Noncorporate Businesses 0.2% Government- Sponsored Enterprises 0.9% State & Local Government General Funds 0.3% Rest of the World 1.6% Commercial Banks 10.6% Savings Institutions 0.1% Property & Casualty Ins. Companies 8.9% 3. Institutions, particularly commercial banks and property and casualty insurance companies. Households 44.3% Life Insurance Companies 3.6% State & Local Government Retirement Funds 0.2% Brokers & Dealers 0.5% Source: The Bond Buyer 21

23 Debt Issuance Process

24 Overview Plan of Finance Select the Team Determine project cost & timing Identify source of repayment Size & structure the bonds Determine method of sale Legal Framework Board approval, if required Public notice & hearing, if required Tax analysis & due diligence Prepare disclosure document (official statement) Marketing Obtain ratings Obtain credit enhancement, if needed Underwriter & investor out reach Sell & price the bonds Administration Closing/money transfer Invest bond proceeds Begin project & track progress Make principal & interest payments Monitor for refinancing opportunities Comply with Arbitrage Rebate Regulations (IRS/Tax Code) On-going disclosure by complying with SEC Rule 15( c)

25 Syndicate of Underwriters Using a syndicate of underwriters can greatly improve the sale of bonds Individual firms may lack the ability to underwrite entire transactions on their own Multiple firms can be strategically organized to garner broader retail interest Senior/Co-Senior Manager Leads syndicate Assists with structuring of bonds Assists with credit package Manage marketing of bonds and institutional investor communication Co-Managers Provide greater network to sell bonds Provide additional capital to underwrite bonds Provide additional color on marketplace Selling Group Firms with a strong local presence and healthy retail network Manage local marketing efforts Target retail investors 24

26 Rating Agencies Credit rating agencies are firms that analyze the probability of the debt instrument returning all of the principal to the investor Credit considerations may include: Management, governance and business strategy Market position Service area Financial position Debt and capital plan Legal framework INVESTMENT GRADE RATINGS MOODY S S&P FITCH Aaa AAA AAA Aa1 AA+ AA+ Aa2 AA AA Aa3 AA- AA- A1 A+ A+ A2 A A A3 A- A- Baa1 BBB+ BBB+ Baa2 BBB BBB Baa3 BBB- BBB- 25

27 Methods of Selling Bonds Competitive Sale Bonds are sold through a competitive bidding process to the underwriter (or group of underwriters) providing the lowest borrowing cost Negotiated Sale Bonds are sold through negotiations directly with one or more underwriting firms (investment banks) Private Placement Bonds are sold directly to an investor (typically a commercial bank), without involving an underwriting firm Amount ($ Billions) YTD Negotiated Competitive Private Placement 26

28 Pricing Lingo Quiz 1. A BP bump 2. A BP cut 3. A 5 handle 4. Block size 5. Going away order 6. Tighten 7. Loosen 8. Nickel 9. Sloppy 5% coupon Order to a buy and hold investor To subtract a basis point in yield Lower the yields Raise the yields Prices are too cheap/yields too high 5 basis points To add a basis point in yield Size of maturity or order 27

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