School District of Palm Beach County, Florida Series 2017 TAN Sale September 26, 2017 PFM Financial Advisors, LLC 300 S. Orange Ave Suite 1170 Orlando, FL 32801 407.648.2208 pfm.com PFM 1
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. Amount 2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 - Shortfall General Fund Cash Flow Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Disbursements Receipts PFM 2
Summary of TAN Issuance Summary of Tax Anticipation Note Sales 2008-2016 Series Maturity Issue Amount Net Interest Rate Costs (1) Net Interest Cost (2) Interest Earned (3) Difference 2008 09/23/09 $ 85,000,000 2.13% $ 67,792 $ 1,624,846 $ 2,938,040 $ 1,245,403 2009 02/01/10 $ 85,000,000 0.31% $ 58,029 $ 68,638 $ 301,311 $ 174,645 2010 02/01/11 $ 115,000,000 0.26% $ 70,467 $ 82,225 $ 174,942 $ 22,250 2011 01/26/12 $ 115,000,000 0.13% $ 79,483 $ 48,875 $ 105,828 $ (22,530) 2012 02/01/13 $ 115,000,000 0.13% $ 79,455 $ 53,411 $ 92,636 $ (40,230) 2013 02/01/14 $ 115,000,000 0.13% $ 86,122 $ 49,450 $ 114,695 $ (20,877) 2014 02/01/15 $ 115,000,000 0.09% $ 78,568 $ 26,648 $ 77,465 $ (27,751) 2015 02/01/16 $ 115,000,000 0.08% $ 90,805 $ 29,756 $ 53,219 $ (67,341) 2016 08/31/17 $ 115,000,000 0.65% $ 94,655 $ 697,667 $ 1,058,630 $ 266,308 Notes: (1) Costs include Source Media (Bond Buyer), Bond and Note Counsel, Financial Advisory Services, Rating Services, and Printing (2) Interest Expense for the 2016 TAN is estimated at 0.65% (3) Interest Earnings for the 2016 TAN is estimated at 1%. PFM 3
Capital Markets PFM 4
What are the Capital Markets The Capital Market (securities markets) is 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. PFM 5
What is the role of the Capital Markets? PFM 6
Public Finance (Government Finance) Public finance (government finance) deals with budgeting the revenues and expenditures of a public sector entity, such as a school district, city or county. Florida School Districts, like any other legal entity, can take out loans, issue debt (with limitations) and invest. Schools in Florida generally issue debt called Certificates of Participation (COPs), while most other governments issue Bonds (Revenue or General Obligation). A bond issued by a public sector entity may give tax advantages to its owners, with interest earnings not subject to federal income tax. PFM 7
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 Dollar Amount Issued in 2016 ($ mil) Education $ 128,997.1 General Purpose $ 106,599.1 Transportation $ 50,895.2 Utilities $ 51,146.2 Health Care $ 49,592.0 Housing $ 19,186.5 Electric Power $ 14,210.0 Development $ 11,768.2 Public Facilities $ 9,949.4 Environmental Facilities $ 2,455.7 Total ($ mil) $ 444,799.4 Dollar Amount Issued in 2016 Transportation 11% General Purpose 24% Utilities 12% Education 29% Health Care 11% Housing 4% Electric Power 3% Development 3% Public Facilities 2% Environmental Facilities 1% PFM 8 Source: The Bond Buyer
Municipal Bond Finance Competitive Sale Bonds are sold through a competitive bidding process to the underwriter (or group of underwriters) providing the lowest borrowing cost Amount ($ Billions) 500 450 400 350 300 250 200 150 100 50 0 Decade of Municipal Bond Finance 55 80 93 62 73 83 99 75 76 86 61 65 109 51 178 158 164 112 61 126 90 76 274 261 280 208 146 146 162 144 150 173 119 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD New Money Refunding Combination PFM 9 Source: The Bond Buyer
Funding Options for School Districts The combination of decreased capital funding and growing capital needs have resulted in significant increase in the number of school districts requesting voter approved alternatives General Obligation Bond programs: Significant capital requirements Increase in ad valorem taxes Usually for longer-life assets (new buildings) Sales tax referendums: Most popular No increase in ad valorem taxes Significant percentage of taxes may be paid by non-county residents Generally for pay-as-you go programs County Sales Surtax District Effective Date Tax Rate District Share Expiration Clay 2/1/2005 1 cent 10% 2039 Lake 1/1/2018 1 cent 50% 2032 Pasco 1/1/2015 1 cent 45% 2024 Seminole 1/1/2015 1 cent 25% 2024 G.O. Bond Programs District Referendum Passed Total Authorized Miami-Dade 11/6/2012 $1,200,000,000 Broward 11/4/2014 $800,000,000 School Sales Surtax District Effective Date Tax Rate Expiration Bay 1/1/2011 1/2 cent 2020 Brevard 1/1/2015 1/2 cent 2020 Calhoun 1/1/2009 1/2 cent 2018 Escambia 1/1/2018 1/2 cent 2027 Flagler 1/1/2013 1/2 cent 2022 Hernando 1/1/2016 1/2 cent 2025 Jackson 7/1/2016 1/2 cent 2025 Leon 1/1/2013 1/2 cent 2027 Liberty 1/1/2012 1/2 cent 2020 Monroe 1/1/2016 1/2 cent 2025 Orange 1/1/2016 1/2 cent 2025 Polk 1/1/2004 1/2 cent 2018 St. Johns 1/1/2016 1/2 cent 2025 St. Lucie 1/1/2006 1/2 cent 2026 Santa Rosa 10/1/1998 1/2 cent 2018 Volusia 1/1/2017 1/2 cent 2032 PFM 10
One County One Penny The School District of Palm Beach County One County One Penny Sales Tax Referendum Schools (50%)/County (30%)/Cities (20%) Expires in 2026 or until $2.7 billion is raised Capital Budget Cuts $865 million since 2008 Need $1.35 billion to improve technology and security: Facility Renewal Projects ($997,000,000) Technology ($133,880,000) School buses ($90,976,000) School Police and support vehicles ($12,000,000) Construction Projects ($60,000,000) Other ($51,000,000) PFM 11
Who buys tax-exempt bonds? Holders of U.S. Municipal Securities - 2012 Three classes of investors dominate the municipal market Households, consisting of individuals acting directly or through investment counsel Mutual Funds 28.6% Banking Institutions 10.7% Insurance Companies 12.4% Household proxies bond funds such as mutual funds, money market funds, bank personal trusts and investment trusts Individuals 44.7% Other 3.6% Institutions, particularly commercial banks and Holders of U.S. Municipal Securities - 2016 property and casualty insurance companies. Banking Institutions 15.0% Mutual Funds 23.6% Insurance Companies 13.5% Other 4.2% PFM 12 Source: Federal Reserve System Individuals 43.7%
Core Financing Team All financings require a core team that supports and advises the District Depending on the specific plan of finance, the team may need to be large School District of Palm Beach County School Board Financing Corporation Staff Bond Counsel Financing Consultants Financial Advisor Disclosure Counsel PFM 13
Potential Financing Team Members Verification Agent / Accountant Financial Advisor School Board Attorney Bond/Special Tax Counsel Registrar Paying Agent Escrow Agent PALM BEACH SCHOOLS Disclosure Counsel Underwriter Bond Insurers LOC/ Liquidity Providers Credit Enhancers Rating Agencies Trustee Trustee Counsel UW Counsel PFM 14
Different and Opposing Financial Objectives Underwriter Issuers Investors PFM 15
Is the Battle Really Between Good and Evil Underwriters or Investors? PFM 16
Trading Desk PFM 17
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 online 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. PNC Capital Markets. The underwriter who buys the loan is Sales Results Report $115,000,000 Due: 8/31/2017 Palm Beach Co SD, FL Tax Anticipation Notes, Series 2016 Sale Date: 9/21/2016 11:00 AM EDST Delivery Date: 10/11/2016 Dated Date: 10/11/2016 First Int. Date: 8/31/2017 Int Accrue Date: 10/11/2016 The results stated below show only bids submitted by BiDCOMP users Firm Bid Amount NIC PNC Capital Markets 115,000M 0.814250% called the highest bidder( i.e. best bid to the issuer). J.P. Morgan Securities LLC 115,000M 0.917750% Wells Fargo Bank, National 'Association 115,000M 0.928750% Bank of America Merrill Lynch 115,000M 0.937625% Citigroup Global Markets Inc. 115,000M 0.953625% Jefferies LLC 115,000M 0.953750% Morgan Stanley & Co, LLC 115,000M 0.957125% Oppenheimer & Co., Inc. 115,000M 0.960500% Stifel Nicolaus & Company, Inc. 115,000M 1.018875% PFM Raymond James & Associates, Inc. 115,000M 1.041375% 18
Miami-Dade Schools 2017 TAN Example Where would your bid be? Above or below J.P. Morgan s? 1.00% 0.95% 0.90% 0.85% 0.80% 0.75% 0.70% Short-Term Yield Curve 0.88% 0.90% 0.91% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Sales Results Report $270,000,000 Due: 2/27/2018 School Boad of Miami-Dade County, FL Tax Anticipation Notes, Series 2017 Sale Date: 7/11/2017 11:00 AM EDST Delivery Date: 7/27/2017 Dated Date: 7/27/2017 First Int. Date: 2/27/18 Int Accrue Date: 7/27/2017 The results stated below show only bids submitted by BiDCOMP users PV Cost Firm Bid Amount NIC Difference Difference 1 J.P. Morgan Securities LLC $270,000M 0.902857% Lowest Cost Wells Fargo Bank, National Association $270,000M 0.923429% 0.020571% + 2,057 Bank of America Merrill Lynch $270,000M 0.954857% 0.052000% + 5,200 Barclays Capital Inc. $270,000M 0.966286% 0.063429% + 6,343 PNC Capital Markets $270,000M 0.968000% 0.065143% + 6,514 Morgan Stanley & Co, LLC $270,000M 0.980571% 0.077714% + 7,771 Citigroup Global Markets Inc. $270,000M 0.996000% 0.093143% + 9,314 1 The Present Value of 1 bps is: $10,000 PFM 19
Interest Rates Proxy for high quality governmental bonds Interest rates change daily and change based on the duration of the debt 3.50% Historical AAA G.O. MMD Yield Curve 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 September 22, 2016 December 22, 2016 March 22, 2017 June 22, 2017 September 22, 2017 Source: Thomson Reuters PFM 20
MIG1 Yield Curve Bond Pricing The School District of Palm Beach County Tax Anticipation Note, Series 2016 ----- FINAL NUMBERS Sale Date: September 21, 2016 Winning Bidder: PNC Capital Markets Bond Component Maturity Date Amount Rate Yield Price Maturity: 8/31/2017 115,000,000 2.000% 0.800% 101.059 115,000,000 1.00% 0.90% 0.80% 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% Short-Term Yield Curve 1 2 3 4 5 6 7 8 9 10 11 12 13 14 9/21/2016 9/22/2017 Source: Thomson Reuters PFM 21
Pricing Lingo Quiz 1. A BP bump 2. A BP cut 3. A 5 handle 4. Block size 5. Going away order 6. Tighten 7. Loosen 8. Nickel 9. Sloppy 5% coupon Order to a buy and hold investor To subtract a basis point in yield Lower the yields Raise the yields Prices are too cheap/yields too high 5 basis points To add a basis point in yield Size of maturity or order PFM 22
Less Education Results in Higher Unemployment The headline unemployment rate of 4.0% doesn t tell the entire story of the state of the labor force in America. While unemployment in all of the categories presented below has declined since peaking in August 2009, those with less education are being hit the hardest. Jobs that require more education remain in fairly high demand; unemployment for those with a bachelor s degree reached just 2.7% in 2016. On the other hand, the unemployment rate for those with less than a high school degree is at a staggering 7.4%. Unemployment Rate in 2016 (%) Median Weekly Earnings in 2016 ($) 7.4 5.2 Less than a high school diploma High school diploma 504 692 4.4 Some college, no degree 756 3.6 Associate's degree 819 2.7 2.4 Bachelor's degree Master's degree 1,156 1,380 1.6 1.6 Professional degree Doctoral degree 1,745 1,664 All workers: 4.0% All workers: $885 Source: Bureau of Labor Statistics PFM 23
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Market Overview PFM 25
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Current Market Themes U.S. economic conditions are characterized by: Moderate economic growth despite a rebound in GDP growth in Q2. Continuing labor market strength, but with only modest wage growth. Muted inflation pressures. Short-term U.S. Treasury yields react to debt ceiling uncertainty. Short Treasury rates (2 years and under) moved higher following the Federal Reserve s rate hikes in March and June, but longer-term yields fell due to moderating inflation expectations. Fed officials still forecast one more rate hike in 2017, according to the June dot plot, although the recently weakening inflation data is making the case less compelling. Market participants expect an announcement on a change in the FOMC balance sheet reinvestment plan soon. Geopolitical risks, with headlines from North Korea, have caused volatility to return to markets. The global growth outlook is brightening, led by the Euro-area. PFM 27
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U.S. Economy in 2017 Gross domestic product increased at an annualized rate of 3.0% in the second quarter of 2017, the fastest pace since 2015. Growth has averaged 2.2% over the last four quarters. The acceleration in Q2 GDP reflected positive contributions from personal consumption, nonresidential private investments, exports and federal government spending, offset by negative contributions from residential fixed investments, imports and state and local government spending. 6% U.S. Real GDP QoQ, SAAR Bloomberg Survey of Economists 4% 2% 2.7% 2.7% 2.0% 1.9% 1.2% 3.0% 0% -2% Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2013 2014 2015 2016 2017 20 Source: Bloomberg, as of August 2017. SAAR is seasonally adjusted annualized rate. Orange denotes rolling four-quarter averages. Source: Bloomberg, as of August 2017. SAAR is seasonally adjusted annualized rate. Orange denotes rolling four-quarter averages. PFM 29
Long-Term Rate History 16.00% 14.00% 12.00% 10.00% 10- Year Treasury Yields August 1970 through August 2017 The longest bull market in history 8.00% 6.00% 4.00% 2.00% 0.00% 2.27% 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 Aug '15 Aug '16 Aug '17 Source: Thomson Reuters PFM 30
Current Economic Conditions and the Business Cycle Peak Interest rates high Full employment High inflation Contraction Production slows Corporate profits fall Stock market losses Unemployment rises Interest rates decline Inflation falls 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 PFM 31
United States National Debt The United States national debt is $20.1 trillion. With a population of over 318 million people, the debt burden is greater than $63,200 per person. Below is a breakdown of the ownership of national debt by sector: Federal Reserve and Government Accounts 40.02% Foreign and International 30.74% Mutual Funds 8.14% Other 8.51% State and Local Governments 3.6% Private Pension Funds 2.26% Depository Institutions 3.25% Insurance Companies 1.67% State and Local Government Pension Funds 0.94% U.S. Savings Bonds 0.82% Source: Federal Reserve System PFM 32
Preparing for the Next Challenges Ultimately, there will be a price for all the federal help Drastically climbing federal debt and guarantees Debt up 146% in the past 10 years National Debt 20,000 18,000 16,000 Amount ($ Billions) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Debt Held by the Public Intragovernmental Holdings Source: Federal Reserve System PFM 33
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Debt Issuance Process PFM 35
Overview of Debt Issuance Process 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 Administration Obtain ratings Obtain credit enhancement, if needed Underwriter & investor out reach Sell & price the bonds 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)2-12 PFM 36
Syndicate of Underwriters Using a syndicate of underwriters can greatly improve the sale of bonds Individual firms may lack the ability to underwriter 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 PFM 37
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 PFM 38
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) 500 2 5 3 21 400 3 5 6 76 73 3 3 72 76 70 53 58 73 3 12 20 99 69 74 87 9 22 22 300 60 69 72 13 200 60 284 303 288 330 314 352 333 349 357 293 290 325 100 226 242 243 184 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD Negotiated Competitive Private Placement PFM 39 Source: The Bond Buyer
Questions? PFM 40