FINANCING CAPITAL PROJECTS: Strategies to Make Your Project a Reality Presentation at the 63 rd Annual Conference Intended for Information Purposes Only See Disclaimers Provided Herein December 7, 2016 Jack Truemper and Jason Holsclaw Stephens Inc. І Member NYSE, SIPC 111 Center Street Little Rock, AR 72201 800.643.9691
TABLE OF CONTENTS I. WHAT TO EXPECT FROM YOUR MUNICIPAL ADVISOR II. III. FINANCING CAPITAL IMPROVEMENT PROJECTS DISCLAIMERS 2
I. WHAT TO EXPECT FROM YOUR MUNICIPAL ADVISOR
WHAT TO EXPECT FROM YOUR MUNICIPAL ADVISOR MUNICIPAL ADVISORS HAVE AN EXPLICIT FIDUICIARY DUTY TO THEIR CLIENTS As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, financial advisors to public entities, such as public school districts known as a Municipal Advisor Representative ( MA ) are governed by a new set of rules. These rules establish standards of conduct for advisors, protect issuers from unfair and deceptive practices by professionals, and establish a clear fiduciary duty to their clients. With exceptions, anyone offering advice or recommendations to a municipal entity is defined as a municipal advisor and subject to these new rules. SELECT MUNICIPAL ADVISOR REQUIREMENTS: Municipal Advisor Representatives: Must pass Municipal Advisor Representative Exam, Series 50, demonstrating degree of knowledge and expertise (verify exam passage @ http://www.msrb.org/maregistrants.aspx) Must be licensed and registered with state and federal regulators Must act with a duty care - ensure financing options are suitable for the client Must act with duty of loyalty - deal honestly and with the utmost good faith and act in the client s best interest Must disclose any conflict of interest - such as any payments made by the MA to retain an engagement Must uphold explicit fiduciary duty to their clients - meaning the financial interest of the client comes before the interest of the MA 4
WHAT TO EXPECT FROM YOUR MUNICIPAL ADVISOR MUNICIPAL ADVISORS REPRESENT YOUR INTERESTS UNLIKE OTHER PROFESSIONALS BOND COUNSEL UNDERWRITERS TRUSTEE DEAL TABLE UNDERWRITERS COUNSEL FEASIBILITY CONSULTANT AUDITOR ARKANSAS SCHOOL DISTRICT MUNICIPAL ADVISOR CREDIT ENHANCER RATING AGENCY 5
WHAT TO EXPECT FROM YOUR MUNICIPAL ADVISOR MUNICIPAL ADVISORS SHOULD BE HIRED PRIOR TO DEBT FINANCING Many state and local governments and other municipal issuers choose to hire a municipal advisor to assist them in debt financings, including the structuring and issuance of municipal bonds. Once engaged, the municipal advisor is with you through the entire process as shown below. Some services you can expect include: (1) identifying and discussing financing options, (2) assisting with election campaigns, (3) preparing and reviewing of financing documents, (4) conducting continuing disclosure, and (5) monitoring the market for opportunities. Planning And Structuring Debt Issuance Process Post Issuance Compliance Market Watch - Select type of obligation - Structure and repayment options - Determine best method of sale - Facilitate credit rating enhancement process - Select other public finance professionals - Prepare and distribute official statement - Market the issue - Conduct bond sale - Coordinate Closing - Paying agent services - Continuing disclosure reporting - Arbitrage rebate monitoring - Investment services - Debt studies/debt service benchmarking - Call & defeasances - Monitor the market for future refunding and restructuring opportunities to capitalize on future savings opportunities Best Practice: The Government Finance Officers Association (GFOA) recommends that issuers hire a municipal advisor prior to undertaking a debt financing unless the issuer has sufficient in house expertise and access to current bond market information. 6
II. FINANCING CAPITAL IMPROVEMENT PROJECTS
FINANCING CAPITAL IMPROVEMENT PROJECTS TYPES OF PUBLIC SCHOOL DEBT FINANCING In general, Arkansas school districts can borrow money by issuing (1) non-bonded or (2) bonded debt. NON-BONDED DEBT Non-bonded or short-term debt is generally utilized for smaller projects or equipment purchases. With some exceptions, this type of borrowing may not exceed a 10 year repayment term. Neither voter nor ADE approval is needed. These types of debts include: Post-dated warrants, Installment contracts, Lease-purchase agreements, and State revolving loan. BONDED DEBT A bond is a contract between an issuer and an investor. A fundamental characteristic of most state and local government securities is their tax-exempt status; meaning the interest income is generally exempt from federal, state, and local 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. 8
FINANCING CAPITAL IMPROVEMENT PROJECTS Arkansas school districts generally have several options for issuing commercial debt, which include: 1. Election Options for Capital Improvement Projects New Millage Restructured Millage Restructured and New Millage 2. Non-Election Options for Capital Improvement Projects Second Lien Bonds Refunding (Refinancing) Bonds. In most instances, the Arkansas State Board of Education must approve the issuance of commercial bonds. 9
FINANCING CAPITAL IMPROVEMENT PROJECTS Seek voter approval to authorize the issuance of bonds secured by an additional millage. Tax Assessment 2015: $ 150,000,000 Please note that the information provided herein is for presentation purposes only and may not reflect current market conditions or actual construction amounts. Please consult with your municipal advisor to determine what is appropriate for your district. Debt Service Mills: 13.00 Additional Debt Service Mills: 2.00 Collections: 95% Fiscal Year Current Debt Service Series 2017 Restructuring ($12mm) Total Debt Service Revenues Coverage Surplus 2017 $ 62,935 $ 604,931 $ 667,866 $ 1,852,500 2.77 1,184,633.75 2018 $ 62,179 $ 1,392,025 $ 1,454,204 $ 2,137,500 1.47 683,296.24 2019 $ 61,423 $ 1,391,050 $ 1,452,473 $ 2,137,500 1.47 685,027.50 2020 $ 65,460 $ 1,394,400 $ 1,459,860 $ 2,137,500 1.46 677,640.00 2021 $ 64,410 $ 1,391,850 $ 1,456,260 $ 2,137,500 1.47 681,240.00 2022 $ 63,330 $ 1,393,625 $ 1,456,955 $ 2,137,500 1.47 680,545.00 2023 $ 62,250 $ 1,394,500 $ 1,456,750 $ 2,137,500 1.47 680,750.00 2024 $ 66,170 $ 1,394,475 $ 1,460,645 $ 2,137,500 1.46 676,855.00 2025 $ - $ 1,393,550 $ 1,393,550 $ 2,137,500 1.53 743,950.00 2026 $ - $ 1,391,725 $ 1,391,725 $ 2,137,500 1.54 745,775.00 2027 $ - $ 1,394,000 $ 1,394,000 $ 2,137,500 1.53 743,500.00 2028 $ - $ 1,390,150 $ 1,390,150 $ 2,137,500 1.54 747,350.00 2029 $ - $ 1,390,400 $ 1,390,400 $ 2,137,500 1.54 747,100.00 2030 $ - $ 1,394,525 $ 1,394,525 $ 2,137,500 1.53 742,975.00 2031 $ - $ 1,392,300 $ 1,392,300 $ 2,137,500 1.54 745,200.00 2032 $ - $ 1,393,950 $ 1,393,950 $ 2,137,500 1.53 743,550.00 2033 $ - $ 1,394,250 $ 1,394,250 $ 2,137,500 1.53 743,250.00 2034 $ - $ 1,393,200 $ 1,393,200 $ 2,137,500 1.53 744,300.00 2035 $ - $ 1,390,800 $ 1,390,800 $ 2,137,500 1.54 746,700.00 2036 $ - $ 1,392,050 $ 1,392,050 $ 2,137,500 1.54 745,450.00 2037 $ - $ 1,391,725 $ 1,391,725 $ 2,137,500 1.54 745,775.00 2038 $ - $ 1,394,825 $ 1,394,825 $ 2,137,500 1.53 742,675.00 2039 $ - $ 1,391,125 $ 1,391,125 $ 2,137,500 1.54 746,375.00 2040 $ - $ 1,390,850 $ 1,390,850 $ 2,137,500 1.54 746,650.00 2041 $ - $ 1,393,775 $ 1,393,775 $ 2,137,500 1.53 743,725.00 2042 $ - $ 1,394,675 $ 1,394,675 $ 2,137,500 1.53 742,825.00 10
FINANCING CAPITAL IMPROVEMENT PROJECTS Seek voter approval to authorize the issuance of bonds without increasing current millage. Please note that the information provided herein is for presentation purposes only and may not reflect current market conditions or actual construction amounts. Please consult with your municipal advisor to determine what is appropriate for your district. Tax Assessment 2015: $ 150,000,000 Debt Service Mills: 13.00 Collections: 95% Fiscal Year Bonded Debt Service ($17mm) Revenues Coverage Surplus 2017 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2018 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2019 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2020 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2021 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2022 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2023 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2024 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2025 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2026 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2027 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2028 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2029 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2030 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2031 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2032 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2033 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2034 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2035 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2036 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2037 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2038 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2039 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2040 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2041 $ 1,250,000 $ 1,852,500 1.48 602,500.00 2042 $ 1,250,000 $ 1,852,500 1.48 602,500.00 11
FINANCING CAPITAL IMPROVEMENT PROJECTS VOTER APPROVED BOND ISSUE Through a general or special election, the district may seek voter approval for a new millage, restructuring of existing millage, and/or the issuance of bonds in order to produce project funds. A district may only seek voter approval for a tax levy once a calendar year. a) General Election. A district will hold its general election the third Tuesday of September or the first Tuesday following the first Monday in November as the date of the annual school board election. For 2017, the date is Tuesday, September 19 or November 7. b) Special Election. A special election may be held on a date other than the third Tuesday of September for the purposes 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. 12
FINANCING CAPITAL IMPROVEMENT PROJECTS VOTER APPROVED BOND ISSUE Significant Dates for School Election Amendments 40 and 70 require that the district s proposed budget of expenditures reflecting the millage change be published no later than 60 days before the election. The Notice of Election is to be published once a week for three weeks, the first publication to be at least 20 days before the election. Notice of polling places must be published one time no more than 10 days and no less than 3 days prior to the election. It must be published in a newspaper(s) with general circulation in all counties in which any part of the territory of the district is located. County Board of Election Commissioners must ascertain and declare the results of the election and file the certification of election and one of the ballots with the County Clerk no earlier than 48 hours and no later than 10 days after the election. 13
FINANCING CAPITAL IMPROVEMENT PROJECTS BONDED DEBT SECOND LIEN (CONSTRUCTION) BOND ISSUE A district may have the ability to issue second lien bonds. This type of borrowing is repaid using surplus debt service millage revenue, and the repayment term cannot exceed the final repayment date of the District s existing bonds for which the existing millage is pledged. Voter approval is not required. Tax Assessment 2015: Debt Service Mills: ARKANSAS SCHOOL DISTRICT Coverage Analysis/ Debt Service Revenue $ 150,000,000 13.00 Collections: 95% Fiscal Year Second Lien Bond ($500,000) Current Debt Service Total Debt Service Revenues Coverage Surplus 2017 $ 62,935 $ 953,000 $ 1,015,935 $ 1,852,500 1.82 836,565.00 2018 $ 62,179 $ 953,975 $ 1,016,154 $ 1,852,500 1.82 836,346.24 2019 $ 61,423 $ 952,950 $ 1,014,373 $ 1,852,500 1.83 838,127.50 2020 $ 65,460 $ 951,475 $ 1,016,935 $ 1,852,500 1.82 835,565.00 2021 $ 64,410 $ 954,550 $ 1,018,960 $ 1,852,500 1.82 833,540.00 2022 $ 63,330 $ 951,950 $ 1,015,280 $ 1,852,500 1.82 837,220.00 2023 $ 62,250 $ 953,900 $ 1,016,150 $ 1,852,500 1.82 836,350.00 2024 $ 62,250 $ 950,175 $ 1,012,425 $ 1,852,500 1.83 840,075.00 2025 $ 62,250 $ 951,000 $ 1,013,250 $ 1,852,500 1.83 839,250.00 2026 $ 62,250 $ 951,150 $ 1,013,400 $ 1,852,500 1.83 839,100.00 2027 $ - $ 950,625 $ 950,625 $ 1,852,500 1.95 901,875.00 2028 $ - $ 954,425 $ 954,425 $ 1,852,500 1.94 898,075.00 2029 $ - $ 952,325 $ 952,325 $ 1,852,500 1.95 900,175.00 2030 $ - $ 954,550 $ 954,550 $ 1,852,500 1.94 897,950.00 2031 $ - $ 950,875 $ 950,875 $ 1,852,500 1.95 901,625.00 Please note that the information provided herein is for presentation purposes only and may not reflect current market conditions or actual construction amounts. Please consult with your municipal advisor to determine what is appropriate for your district. 14
FINANCING CAPITAL IMPROVEMENT PROJECTS 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 Arkansas Department of Education requires that a District save at least $100,000 or 5% of the total principal and interest over the life of the bond on the refunded issue before being able to conduct a refinancing of a bond issue. In general, these savings can be used to fund capital improvement projects. Voter approval is not required. ***Refunding opportunities should be continuously monitored by your municipal advisor to identify potential savings opportunities for the district. 15
III. DISCLAIMERS
DISCLAIMERS This information was 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. Neither Stephens nor its representatives provide legal, accounting, or tax advice. As such, please consult your tax advisor before making investment decisions. 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. Please consult with your municipal advisor regarding any questions. Member NYSE, SIPC. THIS MATERIAL IS INTENDED FOR INFORMATIONAL PURPOSES ONLY AND IS SUBJECT TO CHANGE WITHOUT NOTICE. 17