Bond Issue Basics:
A Debt and PlanCon Primer
Against the Backdrop of the
Great Recession
By
Christopher Brewer, Esq.
Dinsmore & Shohl LLP
All Debt is a Loan of Money
Returned in Installments
at a cost -- of Interest
If you have ever taken a home mortgage,
then you have experienced all of the
elements of any bond issue.
The difference is one of amount and the
mechanics needed to accommodate
large amounts.
Finding Your Lender

Is Financing packaged with Asset?
(Xerox, GE Capital, Dell)

Is Amount under $1.5 MM?

Is Term under 5 years?
Survey/Seek Proposals from Banks
Recognize Bank’s Own Tax Position/Portfolio Needs





Variable Rate (Under 70% of Taxable)
Rate Reset (3 to 5 years)
Make whole provision on prepayment
Transfer of accounts
Bank Fees
If not a Bank Loan, perhaps a Bond Pool?
Uneeda
Bond Issue?
If so, you need bond investors.
How do you find them?
Taxpayers
School District
Investment Banking Firm
Bond Investors
BANK LOAN – Single Creditor, Single Interest
Rate, Monthly Cycle, Equal (Level) Payments,
Standard Period (Term)
PRIVATE OFFERING – Limited Number of
Investors, Blend of two Alternatives
BOND ISSUE – Multiple Investors, Multiple
Interest Rates, Semi-Annual Cycles, Customized
Payments, Customized Term
Alternative Methods of Finance
Direct Source
vs.
Brokered Source
Public Offering of School District Bonds
Terminology Translator
Home Mortgage
Bond Issue
Mortgage Application
Collateral
Co-signer
Credit Score
Payment
Principal Amortization
Interest Rate
APR
Prepayment
Penalty
Bank Fee
Points
Title Opinion
Servicing Agent
Official Statement
Security
Bond Insurance/Letter of Credit
Credit Rating
Debt Service
Principal Maturity
Coupon (Rate)
Yield
Redemption/Call
Premium
Discount
Original Issue Discount
Bond Opinion
Paying Agent
Alternative Amortization Structures






Level Principal
Level Debt Service
Wrap Around Debt Service
Phasing (first 2 to 3 years)
Match Debt to Useful Life; other Capital
Needs/Borrowings
Expected Financial Circumstances
1-Mar-10
PNC CAPITAL MARKETS
SAMPLE PA SCHOOL DISTRICT
Table of Sources and Uses
Series of 2010
A
Years
1
2
Level Annual
Debt Service
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Payment
Date
15-Sep-10
15-Mar-11
15-Sep-11
15-Mar-12
15-Sep-12
15-Mar-13
15-Sep-13
15-Mar-14
15-Sep-14
15-Mar-15
15-Sep-15
15-Mar-16
15-Sep-16
15-Mar-17
15-Sep-17
15-Mar-18
15-Sep-18
15-Mar-19
15-Sep-19
15-Mar-20
15-Sep-20
15-Mar-21
15-Sep-21
15-Mar-22
15-Sep-22
15-Mar-23
15-Sep-23
15-Mar-24
15-Sep-24
15-Mar-25
15-Sep-25
15-Mar-26
15-Sep-26
15-Mar-27
15-Sep-27
15-Mar-28
15-Sep-28
15-Mar-29
15-Sep-29
15-Mar-30
15-Sep-30
15-Mar-31
15-Sep-31
15-Mar-32
15-Sep-32
15-Mar-33
15-Sep-33
15-Mar-34
15-Sep-34
15-Mar-35
New Money Debt Service
B
Fiscal
Year
Par
Amount
D
Coupon
Rate (%)
2011
220,000.00
1.150%
2012
220,000.00
1.400%
2013
225,000.00
1.650%
2014
230,000.00
2.050%
2015
230,000.00
2.450%
2016
240,000.00
2.800%
2017
245,000.00
3.150%
2018
250,000.00
3.400%
2019
260,000.00
3.600%
2020
270,000.00
3.850%
2021
280,000.00
4.200%
2022
290,000.00
4.200%
2023
305,000.00
4.200%
2024
320,000.00
4.200%
2025
330,000.00
4.600%
2026
345,000.00
4.600%
2027
360,000.00
4.600%
2028
380,000.00
4.600%
2029
2030
2031
2032
2033
2034
2035
Totals
Term Bonds
C
$5,000,000.00
2024
2028
$1,195,000.00
$1,415,000.00
E
Interest
F
G
Debt
Service
H
Capitalized
Interest
88,822.50
88,822.50
87,557.50
87,557.50
86,017.50
86,017.50
84,161.25
84,161.25
81,803.75
81,803.75
78,986.25
78,986.25
75,626.25
75,626.25
71,767.50
71,767.50
67,517.50
67,517.50
62,837.50
62,837.50
57,640.00
57,640.00
51,760.00
51,760.00
45,670.00
45,670.00
39,265.00
39,265.00
32,545.00
32,545.00
24,955.00
24,955.00
17,020.00
17,020.00
8,740.00
8,740.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
88,822.50
308,822.50
87,557.50
307,557.50
86,017.50
311,017.50
84,161.25
314,161.25
81,803.75
311,803.75
78,986.25
318,986.25
75,626.25
320,626.25
71,767.50
321,767.50
67,517.50
327,517.50
62,837.50
332,837.50
57,640.00
337,640.00
51,760.00
341,760.00
45,670.00
350,670.00
39,265.00
359,265.00
32,545.00
362,545.00
24,955.00
369,955.00
17,020.00
377,020.00
8,740.00
388,740.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
$2,125,385.00
$7,125,385.00
$0.00
Gross Annual
Debt Service
397,645.00
395,115.00
397,035.00
398,322.50
393,607.50
397,972.50
396,252.50
393,535.00
395,035.00
395,675.00
395,280.00
393,520.00
396,340.00
398,530.00
395,090.00
394,910.00
394,040.00
397,480.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
$7,125,385.00
1-Mar-10
PNC CAPITAL MARKETS
SAMPLE PA SCHOOL DISTRICT
Table of Sources and Uses
Series of 2011
A
Years
1
Wraparound
Debt Service
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Payment
Date
15-Sep-11
15-Mar-12
15-Sep-12
15-Mar-13
15-Sep-13
15-Mar-14
15-Sep-14
15-Mar-15
15-Sep-15
15-Mar-16
15-Sep-16
15-Mar-17
15-Sep-17
15-Mar-18
15-Sep-18
15-Mar-19
15-Sep-19
15-Mar-20
15-Sep-20
15-Mar-21
15-Sep-21
15-Mar-22
15-Sep-22
15-Mar-23
15-Sep-23
15-Mar-24
15-Sep-24
15-Mar-25
15-Sep-25
15-Mar-26
15-Sep-26
15-Mar-27
15-Sep-27
15-Mar-28
15-Sep-28
15-Mar-29
15-Sep-29
15-Mar-30
15-Sep-30
15-Mar-31
15-Sep-31
15-Mar-32
15-Sep-32
15-Mar-33
15-Sep-33
15-Mar-34
15-Sep-34
15-Mar-35
15-Sep-35
15-Mar-36
New Money Debt Service
B
Fiscal
Year
Par
Amount
D
Coupon
Rate (%)
2012
35,000.00
1.150%
2013
30,000.00
1.400%
2014
30,000.00
1.650%
2015
35,000.00
2.050%
2016
35,000.00
2.450%
2017
35,000.00
2.800%
2018
40,000.00
3.150%
2019
40,000.00
3.400%
2020
40,000.00
3.600%
2021
40,000.00
3.850%
2022
45,000.00
4.200%
2023
45,000.00
4.200%
2024
45,000.00
4.200%
2025
50,000.00
4.200%
2026
50,000.00
4.600%
2027
55,000.00
4.600%
2028
55,000.00
4.600%
2029
455,000.00
4.600%
2030
475,000.00
4.800%
2031
495,000.00
4.800%
2032
520,000.00
4.800%
2033
545,000.00
4.950%
2034
575,000.00
4.950%
2035
600,000.00
4.950%
2036
630,000.00
4.950%
Totals
Term Bonds
C
$5,000,000.00
2025
2029
2032
2036
$185,000.00
$615,000.00
$1,490,000.00
$2,350,000.00
E
Interest
F
G
Debt
Service
H
Capitalized
Interest
116,688.75
116,688.75
116,487.50
116,487.50
116,277.50
116,277.50
116,030.00
116,030.00
115,671.25
115,671.25
115,242.50
115,242.50
114,752.50
114,752.50
114,122.50
114,122.50
113,442.50
113,442.50
112,722.50
112,722.50
111,952.50
111,952.50
111,007.50
111,007.50
110,062.50
110,062.50
109,117.50
109,117.50
108,067.50
108,067.50
106,917.50
106,917.50
105,652.50
105,652.50
104,387.50
104,387.50
93,922.50
93,922.50
82,522.50
82,522.50
70,642.50
70,642.50
58,162.50
58,162.50
44,673.75
44,673.75
30,442.50
30,442.50
15,592.50
15,592.50
116,688.75
151,688.75
116,487.50
146,487.50
116,277.50
146,277.50
116,030.00
151,030.00
115,671.25
150,671.25
115,242.50
150,242.50
114,752.50
154,752.50
114,122.50
154,122.50
113,442.50
153,442.50
112,722.50
152,722.50
111,952.50
156,952.50
111,007.50
156,007.50
110,062.50
155,062.50
109,117.50
159,117.50
108,067.50
158,067.50
106,917.50
161,917.50
105,652.50
160,652.50
104,387.50
559,387.50
93,922.50
568,922.50
82,522.50
577,522.50
70,642.50
590,642.50
58,162.50
603,162.50
44,673.75
619,673.75
30,442.50
630,442.50
15,592.50
645,592.50
0.00
$4,829,122.50
$9,829,122.50
$0.00
Gross Annual
Debt Service
I
J
Existing Annual
Debt Service
Combined
Debt Service
268,377.50
395,115.00
663,492.50
262,975.00
397,035.00
660,010.00
262,555.00
398,322.50
660,877.50
267,060.00
393,607.50
660,667.50
266,342.50
397,972.50
664,315.00
265,485.00
396,252.50
661,737.50
269,505.00
393,535.00
663,040.00
268,245.00
395,035.00
663,280.00
266,885.00
395,675.00
662,560.00
265,445.00
395,280.00
660,725.00
268,905.00
393,520.00
662,425.00
267,015.00
396,340.00
663,355.00
265,125.00
398,530.00
663,655.00
268,235.00
395,090.00
663,325.00
266,135.00
394,910.00
661,045.00
268,835.00
394,040.00
662,875.00
266,305.00
397,480.00
663,785.00
663,775.00
0.00
663,775.00
662,845.00
0.00
662,845.00
660,045.00
0.00
660,045.00
661,285.00
0.00
661,285.00
661,325.00
0.00
661,325.00
664,347.50
0.00
664,347.50
660,885.00
0.00
660,885.00
661,185.00
0.00
661,185.00
$9,829,122.50
$6,727,740.00
$16,556,862.50
Annual Debt Service Requirements
$ in 000's
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
Series of 2010 (Level)
SAMPLE PA SCHOOL DISTRICT
Series of 2011 (Wraparound)
2040
2039
2038
2037
2036
2035
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
$0
Alternative Credit Structures
General Obligations – Taxes
Special Obligations – Enterprise Revenues
Non-appropriation – Asset Backed
Alternative Issuers




School District Itself
State Public School Building Authority*
Local Authority (Vo-Tech or Swap)*
Local Bond Pool Authority*
*School District delivers note/loan agreement
Uses
and
Construction Bids/Estimates
Land or Interest in Land
Sources
Cash Contribution
Grants
Construction Manager/Architect
Bond Proceeds
Furniture Fixtures & Equipment
Interest Earnings
Planning/Permits
Bond Discount
Bond Insurance
Legal (Bond and Local)
Rating Agency
Financial Advisor
Printing
Paying Agent
(One-Time vs. DrawDown Funding)
Designing Your Bond Issue
School District
Needs/Abilities/Goals
vs.
Bond Investor
Needs/Abilities/Goals
Market Reception
Case in Point : BABs in Europe
Yield Curve Positioning
Case in Point : Short tax-exempts; Long BABs
Alternative Bond Sale Methods
Negotiated (Private)
[Design / Build]
Competitive (Public)
[Design / Bid]
More Trust by School District
Less Risk on Banker
Less Trust by School District
More Risk on Banker
Components of Discount
Management (35%)
/
Underwriting (65%)
Planning for Construction Workbook
“PlanCon”
Capital Cost Reimbursement is “Pay-As-You-Go”
Little to no PDE input to bond structure
Payment must be from School District Revenues
(Not accrued or capitalized interest)
Full Cash by District = Full Cash by PDE (1 year rule)
Debt Amortization by District =
Debt Service Reimbursement by PDE
Eligible Project Costs
($ x students adjusted by certain costs)
Divided By
Total Project Costs
Project Eligible % x MVAR equals Effective Reimbursement
*Not available until receipt of bids (PlanCon G/H),
but PDE will reimburse prior payments
*Temporary Percentage until Final Accounting (PlanCon J)
Net Debt Service Solutions
*Watch assumptions
*Changes in Project Eligible % or MVAR
will distort net debt solutions
PlanCon D – Project Accounting
Based on Estimates
Fiscal Constraints
D-17
D-17
D-18
25% of Local Revenues
Test for Fiscal Distress
Mills on Market Value
(Local vs. Statewide)
Problematic for Poorer School Districts
Problematic for Debt Free School Districts
PlanCon G – Project Accounting Based on Bids
PlanCon H – Financing
PlanCon K – Refinancing
* “Never-Pay-More” Rule
Inclusion of New Money or Increase of Total Debt Service will
reduce Project Eligible %
* Pure Savings (whether up-front, over time or back-end) will
retain Project Eligible %
* Cost of Issuance on School District
* New debt service schedule may interrupt reimbursement
Act 1 Constraints
Act 1 does not limit what you can borrow;
it limits whether you can pay for it.
 Referendum
 Qualified Costs Limitation
 Phase-in/Wrap-Around Structures
(Capital Appreciation Bonds?)
(Creative use of Build America Bonds?)
Local Government Unit Debt Act
Limitations
Principal Amount Limits
Total School District Debt ≤ Last 3 years’ Average Revenues
x 2.25
PlanCon Subsidized Debt May be Excluded
Pay–Back Limits
Capitalized Interest – construction plus 1 year
Principal Deferral – 2 years or construction period plus 1 year
Final Maturity ≤ Useful Life
Total Debt Service – Level or Wrapped to Level
(Downward Cascading Permitted)
Local Government Unit Debt Act
Procedures
3 Day Advance Notice
 Board Resolution
Covenant to Budget, Appropriate and Pay
 “Acceptable” Purchase Proposal
 Post Adoption Notice
 15 Calendar day approval cycle
 Appeal to Commonwealth Court
 Advent of “Parameters” Resolution


Federal Tax Law
Interest earned on obligations of a state or local
government are excluded from gross income.
In 1914, a right of federalism?
In 2010, a federal subsidy and privilege
IRC Sections 103 and 141 through 150 contain
innumerable limits and conditions on the
privilege.
Primary Restriction - Arbitrage
Arbitrage is the practice of making money
by moving an item between markets
Marco Polo - tea ; Dutch colonists – beads
Local Governments – tax-exempt bond
proceeds into taxable investments
Abusive Device – issuing bonds sooner,
or in an amount larger, or allowing
them to remain outstanding longer,
than is necessary to accomplish the
governmental purpose.
Three Point “Reasonable
Expectations” Test

Substantial Binding Obligation to expend
5% incurred within 6 months

85% of proceeds expended within 3 years

Proceed with Due Diligence
“Reasonable” does not mean possible or promised;
it means “likely, as assessed by a third party
observer”
Arbitrage Rebate


Small issuer exemption ($5MM or $15MM
Construction)
Spending exemption
- 6 month
- 18 month
- 24 month construction
Refundings
Use of proceeds of new issue to prepay
previous issue
 Keys are Interest Rate and Redemption
Period
Current Refunding : Old Bonds
Paid off within 90 days of issue

Advance Refunding : Old Bonds
Paid off later than 90 days of issue
Build America Bonds
Must meet all regular Tax Exempt
Qualifications
Interest is Taxable
Federal Government will Reimburse
35% of Interest Expense
Qualified School Construction
Bonds
Primary compensation to investor is a
tax credit
“Supplemental Coupon” approximately
1.5 to 2.0%