The Evolving Landscape of Facilities Financing in California

Transcription

1 Presentation to the San Mateo County Office of Education on: The Evolving Landscape of Facilities Financing in California January 23, Capitol Mall, 27th Floor Sacramento, CA Tel. (916) Fax (916) Avenue of the Stars, Suite 2100 Los Angeles, CA Tel. (310) Fax (310) Montgomery Street, 19th Floor San Francisco, CA Tel. (415) Fax (415)

2 Table of Contents I. Market Overview II. Bond Elections III. Hot Topics IV. AB 182 CAB Legislation V. Regulatory Environment

3 I. Market Overview

4 2013 Market Summary 6.0% 5.0% Jan 2013 Fiscal Cliff 30-Year MMD January December 2013 May 2013 Tapering talks begin; Buffet and Gross come out "against" bonds. Sep 5, 2013 MMD reaches highest point in 2013 (4.51%) Oct 2013 Fed gov t shutdown Interest Rate 4.0% 3.0% 2.0% 1.0% 0.0% Source: Thompson Reuters Jan-13 Feb - Mar 2013 Sequester Feb-13 Jun 2013 Major outflows from muni bond funds; historic rise in MMD at the end of the month. 30-yr MMD rises 60 bps in 4 trading days. Mar-13 Apr-13 May-13 Jun-13 Jul 2013 Detroit bankruptcy filing further rattles muni investors; outflows continue. Jul-13 Aug-13 Sep 18, 2013 Fed announces no tapering of its purchases, surprising market. Sep-13 Oct-13 Sep - Oct 2013 Puerto Rico bonds continue historic decline; more investors cash out their funds. Nov-13 Dec-13 3

5 II. Bond Elections

6 Types of General Obligation Bond Elections Prop. 39 Election Prop. 46 Election Voter Approval 55.0% 66.7% Board Approval 66.7% Simple majority Tax Rate Limitation Per Election Election Dates Use of Proceeds Additional Accountability Measures Unified: $60.00 Per $100,000 A.V. Elem./High: $30.00 per $100,000 A.V. Statewide, primary, general or special or regularly scheduled local Acquisition and improvement of real property, deferred maintenance, furnishings and equipment Annual independence performance and financial audit and a citizen s oversight committee No limitation Any Tuesday Acquisition or improvement of real property None Maximum Term of Repayment 40 years per bond issue 40 years per bond issue 5

7 School Bonds Elections Continue to Find Success Prop 39 Elections (Since 2012) Prop 39 Elections (Since 2000) 25% 17% 75% 83% 21 Successful Elections ($1.8 B Authorized) 7 Failed Elections ($388 mm Authorized) 615 Successful Elections ($81.8 B Authorized) 126 Failed Elections ($8.2 B Authorized) Prop. 39 bond elections continued to find success in 2012 and 2013 with a 75% pass rate Approved a total of $1.8 billion in new authorization 83% of all Prop. 39 bond elections have passed since 2000 Source: School Services of California 6

8 Bond Election Participants Pollster Conducts poll to test various projects/bond amounts and likelihood of a bond s passage Communications Consultant/Campaign Consultant Advises District during the pre-campaign period Communicates needs to the District s constituency during the informational period (nonadvocacy) Transitions to Campaign Consultant for the advocacy campaign Bond Counsel Prepares resolutions, ballot language, project list Advises on appropriateness of campaign literature Underwriter/Investment Banker Works with district and FA in designing financing plans and evaluating financing alternatives using knowledge of investor preferences Places bonds with investors and commits capital to support the bond sale Financial Advisor Fiduciary to the school district Helps develop analyze and make recommendations about the alternative financing techniques, and assist in structuring the financing 7

9 Municipal Advisor Rule Key Dodd-Frank reform, which defines who is a Municipal Advisor ( MA ) and requires registration of Municipal Advisors ( MA ) Rule will come into effect July 1, 2014 MA rule imposes fiduciary duty on municipal advisors who provide advice to governmental clients MA rule will impact the behavior of working group members, including underwriters Rule limits the types of advice that underwriters can provide and circumstances under which certain types of advice can be provided If not hired, underwriters cannot provide advice unless issuer has retained an MA If hired, underwriters can provide advice on that specific financing and can provide general advice if the issuer retains an MA that covers general advice If responding to an RFP underwriters can provide advice in response to the questions asked and can provide general advice if the issuer retains an MA that covers general advice 8

10 2014 Election Landscape Market professionals anticipate that 2014 will be a heavy election year for school bonds Two opportunities to hold elections (June and November) In general, school districts targeting a 2014 election have a financing team engaged by early 2014 June Elections November Elections Pros. Cons. Pros. Cons. Lower cost campaign Easier to influence voters If election fails can try again in November Lower voter turnout Voter demographic is older and less liberal Voter demographic is younger and more liberal Higher cost campaign Voter fatigue More competing measures 9

11 Steps to a Bond Election 1. Assemble Bond Team 2. Identify Facilities Needs a. Site needs survey and stakeholder input b. Develop Facilities Master Plan 3. Assess Community Support a. Conduct voter survey b. Community outreach 4. Develop Bond Program a. Conduct voter survey b. Community outreach c. Finalize Facilities Master Plan d. Finalize project list and prioritization of needs e. Determine size, tax rate target & bond issuance structure 5. Adopt resolution calling for bond election 6. Deliver resolution to San Mateo County Registrar 7. Voter Education & Campaigning a. Assemble campaign leadership b. Coordinate resources (people, funding, time) 8. ELECTION DAY 9. Sale of Bonds a. Find investors willing to purchase the District s bonds b. Structure each bond series within the parameters of the bond program June 2014 Election January 2014 February 2014 February 2014 February 2014 Early March 2014 March 7, 2014 March-May 2014 June 3, 2014 August-September 2014 November 2014 Election February 2014 March 2014 April-May 2014 June 2014 Late July 2014 August 8, 2014 August-October 2014 November 4, 2014 February-March

12 Preparing a Project List Proposition 39: Foothill-DeAnza (2009): The bond measure must include: a list of the specific school facilities projects to be funded The list is sufficiently specific if it includes: The types of projects to be funded such as "repair or replacement of leaky roofs. [I]t is unnecessary to inform the voter which roofs will be replaced and which will be repaired. San Diego USD (2013): Beware of under- or over-specificity: Renovate/replace stadium bleachers, including press box Upgrade fields, track, and courts for accessibility compliance Other costs incidental to and necessary for completion of the listed projects including field lighting Does not include stadium lights 11

13 The 75-Word Ballot Question Voters will only see the abbreviated 75-word question on their ballots Education Code 15122: A brief statement of the proposition, setting forth the amount of the bonds to be voted upon, the maximum rate of interest, and the purposes for which the proceeds of the sale of the bonds are to be used, shall be printed upon the ballot. Albany (1997): "Shall Ordinance be enacted to allow and regulate card room gaming in order to provide revenue for the City of Albany [and] create jobs?" The final phrase overtly endorsed arguments advanced by proponents of the measure" and "was a sufficiently egregious deviation from the prescribed form to fall outside the limits of substantial compliance." 12

14 Use of District Funds During an Election Permitted activities and expenditures of public funds relating to a bond measure election are limited to: Preparing impartial information for the public Making presentations to citizens groups Conducting polling to inform the Board's decision Writing a ballot argument Adopting a resolution supporting the bond measure Making facilities available to citizens groups Getting out the vote 13

15 III. Hot Topics

16 Taxable Refundings & Re-Approvals Taxable Refundings Refinance prior advance refunding transactions using taxable instead of taxexempt debt Provides an opportunity to take advantage of current all-time low interest rates to advance refund non-advanced refundable bonds De-Authorization and Re-Approval Hold a new election de-authorizing prior bonds that cannot be accessed and reapproving those funds at a new tax rate Allows school district to access unissued G.O. bond proceeds that have been approved but cannot be issued due to Prop. 39 tax rate restrictions 15

17 Technology Bonds School District facility bond programs are no longer just about brick and mortar construction bond funds can fund long-term classroom technology such as: Educational Technology Improvements Upgraded software (in classroom and administrative) Digital research centers Portable devices for students (tablets/ipads/laptops) Upgraded audio/video and presentation systems Upgrade and/or replace computers Technology Infrastructure Improvements Increased data storage Increased networking bandwidth Improvements to data centers Upgrade and expand wireless systems, telecommunications, internet and network connections Expand electrical, network and telephone service capacity G.O. bonds have a 3 year spend-down rule and bond maturity is limited to 120% of the useful life of the projects Addressing long-term tech needs can be accomplished by: Tranched bond issuances (i.e. every 3-5 years) Establishing a Technology Fund/Endowment 16

18 Technology Funds G.O. Bond proceeds are deposited into a Technology Fund held by San Mateo County The Investment Fund must be invested in other tax-exempt municipal bonds Investing in municipal bonds allows the school district to bypass Federal tax law which requires bond proceeds be spent within three years The school district then draws down bond funds and interest earnings over the long-term for ongoing technology needs (typically year period) G.O. Bond Proceeds County Tax Collector- Treasurer Technology Fund Investment Investment Returns Municipal Bond Portfolio Case Study: Mountain View-Los Altos Union High School District $2 Million Technology Fund set up in 2010 with Santa Clara County With interest earnings, funding annual $200,000 upgrades over an 11 year period 17

19 Borikas vs. Alameda USD School districts are authorized to levy voter-approved qualified special taxes, defined to be taxes that apply uniformly to all taxpayers or all real property within the school district Exemptions can be provided for senior citizens and certain disabled persons In June 2008 Alameda Unified School District ( District ) voters approved Measure H taxing residential and commercial/industrial parcels differential tax rates George J. Borikas filed a lawsuit in which he sought to have the special tax authorized by Measure H declared invalid Trial court ruled in favor of the District Court of appeals reversed decision, ruling that a tiered-rate parcel tax was invalid to the extent that it differentially taxed parcels The same attorneys who challenged the District s parcel tax have brought similar challenges against several other split roll or variable rate parcel taxes 18

20 IV. AB 182 CAB Legislation

21 What are CABs? What are Capital Appreciation Bonds ( CABs )? A special type of bond that defers payments until they mature Enables an issuer to structure bonds with debt service growing over time, in contrast to a more traditional level debt service structure Why are CABs used by school districts? Assessed value declines led to more CAB issuances as a way to comply with Prop. 39 tax rate limits o Relies on the assumption that A.V. will grow at the rate that debt service grows Since 2007, 200+ school districts have borrowed >$13.5 billion using CABs During that time, CABs represented 29% of all school bonds issued 20

22 Assembly Bill 182 Bill was signed into law by Governor Brown on October 2, 2013, and became effective January 1, 2014 Limitations: Caps final maturity of CABs to 25 years and CIBs to 40 years Maximum 4:1 payback ratio (total debt service vs. borrowed amount) and 8% interest rates 10-yr prepayment provision required for all CABs with >10-yr term For CAB issuances, additional analyses must be submitted to governing board: Comparison of the overall cost of CABs to CIBs Reason for issuing CABs Copy of the G-17 Disclosure Disclosure of the financing term, time of maturity, repayment ratio, and the estimated change in assessed valuation of local property 21

23 AB 182 Impact [XYZ School District] Potential impact to financing of school facilities statewide Delay in expected pace of financings until property values rebound Reduced risk that slow A.V. growth would push property tax rates up EXAMPLE: The [XYZ] School District passed a bond election in [2012] for [$125] million District s current financing plan is built on certain assumptions: Tax rate of [$60] per $100,000 of A.V. Assumes current A.V. of [$6.3] billion growing at [4.5%] annually Borrowing rates of [5.00%] for CIBs and [6.00%] for CABs Potential Impact of AB 182 Delay completion of [55%] of the projects by [2-6] years Overall bond repayment term would be shortened by [6] years Total payments would be lower by [$100] million spread over [33] years Expected decline in tax rates over time 22

24 V. Regulatory Environment

25 Increasing Focus on Disclosure Practices In 2013, there was an increased focus on the disclosure practices of municipal bond issuers in the primary and secondary markets Primary market disclosure Official Statements must be accurate and complete (no material omissions ) Issuer responsible for accuracy and completeness SEC has stated that this is the Issuer s document Reliance on professionals will not insulate issuers from fraud charges, especially if you did not give accurate information to the professionals Secondary market disclosure SEC does not directly enforce continuing disclosure agreements but failure to comply can result in collateral charges SEC took action against several issuers for failure to comply with ongoing disclosure responsibilities 24

26 Case Study: City of South Miami The City of South Miami ( the City ) participated in two conduit bond offerings in 2002 for mixed-use projects Bond counsel allowed participation because the City indicated tax-exempt proceeds would not be used for retail portion of the project The City made various misrepresentations and changes without notifying bond counsel, including: In 2002 the City loaned bond proceeds to developer In 2005 the City modified lease agreement, granting control of project to developer without notifying bond counsel Despite changes, the City signed annual certificate that no changes had occurred to the project Due to a high turnover rate of City finance staff, the City was unaware of various bond issues SEC found the City s conduct to be negligent and required City to retain independent third-party consultants for oversight of disclosure practices 25

27 Primary Market Disclosure Tips from the SEC Issuers should have written policies and procedures that, at a minimum: Clearly identify staff responsibilities Clearly state process to review and draft disclosure documents Provide training on disclosure responsibilities Practical training on the disclosure and financial reporting requirements of the federal securities laws and GASB Training for all team members involved in the disclosure process Focus on the big picture Completion of disclosure process checklist should not be the goal unto itself Identify the biggest financial problems the issuer is struggling with Confirm that issuer officials have brought everything to the team's attention Disclose bad news Securities laws require disclosure of all material facts to avoid presenting misleading information Source: Speech by SEC Staff: Lessons Learned from San Diego 26

28 Continuing Disclosure Increased focus on continuing disclosure practices Continuing disclosure requires bond issuers to disclose specific required events occurring after the issuance of bonds Includes rating changes, annual financial info, tax base data, defaults, etc. Case Study: West Clark Community Schools In a 2007 bond offering the district falsely stated it was in compliance with its secondary market disclosure obligations The district had in fact failed to meet continuing disclosure obligations for a 2005 bond offering SEC issued a cease and desist order against district and ordered district to file with SEC Recommendations from market professionals: Bond team conducts a comprehensive review of past practices Issuer engages a professional dissemination agent to file on its behalf Issuer passes a resolution formalizing its continuing disclosure procedures 27

29 QUESTIONS? Charlie Feinstein Katherine Perkins De La Rosa & Co. De La Rosa & Co. (415) (415) Jonathan Cristy Kronick, Moskovitz, Tiedemann & Girard (916)

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