AB 2197 Debt Disclosure Review and Recommendations – Repayment Not Probable
___________, 2014
__________________, Superintendent
_______________________ School District
[Street and number]
[City], CA [Zip]
__________________, Board President
_______________________ School District
[Street and number]
[City], CA [Zip]
Subject: AB 2197 Debt Disclosure Review and Recommendations — Repayment Not Probable
Dear ___________________ and _______________:
We have completed our review of your proposed borrowing. Enclosed with this letter you will find the AB
2197 Review Report with associated attachments reviewing your repayment schedules and providing you
with information on recommended practices from the Government Finance Officers Association (GFOA).
We appreciate your commitment to place this item on your board agenda for review with the board and
the public prior to the board’s consideration of any agreement to issue new debt. We respect your wish as
superintendent to provide this information to the board and the public. We have also enclosed the
management letter for your consideration and review with your board president.
Thank you for taking time to talk with me this afternoon. Based on your comments to me this afternoon on
the information we sent you last week, we are providing you with those same comments in final form. We
wish to respect your timelines for submission of materials for your board agenda and understand these
materials needed to be in your hand today.
We appreciate the opportunity to review your proposed borrowing and the opportunity to provide you with
our findings and comment.
Sincerely,
__________________
County Superintendent
___________________
Assistant Superintendent/Business Services
AB 2197 Debt Disclosure Review and Recommendations – Repayment Not Probable
cc: District
____________, Chief Business Official
AB 2197 Debt Disclosure Review and Recommendations – Repayment Not Probable
___________, 2014
__________________, Superintendent
_______________________ School District
[Street and number]
[City], CA [Zip]
__________________, Board President
_______________________ School District
[Street and number]
[City], CA [Zip]
Subject: AB 2197 Review – Management Letter Comments – Bond Anticipation Notes
Dear _____________ and _____________:
The ______________ County Office of Education has been working diligently and cooperatively with the
_______________ School District to understand the $________ million bond anticipation notes (BANs)
financing the district has proposed. The _________________ sincerely appreciates the district’s efforts to
provide information and respond to follow-up questions and information requests. These management
comments were prepared with the assistance of the _________ County Treasurers Office and
Government Financial Strategies.
The purpose of this discussion is to provide the district with information regarding the __________ County
Office of Education’s understanding of the transaction as reported in our AB 2197 Review, and further
articulate our conclusions and recommendations.
Debt Repayment Options
Issuing BANs at this time instead of general obligation (GO) bonds means that the total debt issuance
costs for Measure _______ will continue to increase the cost (the more transactions issued, the greater
the total issuance costs).
There are usually two reasons to issue BANs instead of GO bonds. One is if a school district does not
have sufficient bonding capacity to issue GO bonds. In this case, the district currently has $_____ million
of remaining unused bonding capacity. This exceeds the $________ million the district is planning to
issue for the current BAN. Therefore, bonding capacity is not a constraint.
A second reason why a school district may wish to issue BANs instead of GO bonds is if the issuance of
GO bonds would cause tax rates/levies to exceed legal limits and/or the estimated maximum
communicated to voters. In this case, both the legal limit and maximum communicated to voters (per the
tax rate statement for Measure ________ is $____________ per $100,000 of assessed value. Based on
the future assessed value assumptions the district is currently using for its BANs and 2016 GO bond
issuance plan, up to $_____ million of GO bonds can be issued now without exceeding the
$___________ per $100,000 of assessed value limitation. This exceeds the $__________ million the
AB 2197 Debt Disclosure Review and Recommendations – Repayment Not Probable
district is planning to issue. Therefore, from a legal and tax rate statement standpoint, tax rates are not a
constraint.
Prior Measure [measure name] Issuances
Since the approval of Measure _______ in ____________, the district has issued a total of four Measure
______-related financings, including two BANs and two GO bonds. It is estimated that the district’s
taxpayers have spent approximately $_______ million in issuance costs for these financings. With regard
to the two BANs issuances in particular, estimated costs of issuance total approximately
$_____________.1
The analyses reported previously in this report find that issuing BANs now instead of GO bonds means
that the total debt issuance costs for Measure _______ will continue to rise (the more transactions issued,
the greater the total issuance costs).
General Fund Liability
We are very concerned that the district may not be able to issue GO bonds in the amount and in the time
frame described in the proposed issuance. The district is not expected to have sufficient cash on hand to
satisfy the repayment of the BANs in the event the bond issue is unsuccessful at fully satisfying the
repayment of the BANs. Thus the district would have to borrow, presumably by again issuing certificates
of participation (COPs) for the amount needed. For example, were the district to borrow $______ million
for 30 years, fully amortized, assuming 15% for costs of issuance and a debt service reserve, and an
interest cost of 5%, the annual payment obligation would be approximately $__________.2
Government Finance Officers Association (GFOA) Best Practices
The GFOA, in its best practice for Selecting Financial Advisors (enclosed), “recommends that unless the
issuer has sufficient in-house expertise and access to market information, it should hire an outside
financial advisor prior to undertaking a debt financing.” The district has employed a financial advisor to
assist with the financing.
It appears that the district is planning to use the negotiated sale method to issue the BANs. In its
recommended practice for Selecting and Managing the Method of Sale of State and Local Government
Bonds (enclosed), the GFOA “recommends that issuers select a method of sale based on a thorough
analysis of the relevant rating, security, structure and other factors pertaining to the proposed bond
issue.” It is not known what process the district used to determine the method of sale.
Sincerely,
__________________
County Superintendent
___________________
Assistant Superintendent/Business Services
1
Costs of issuance for the [year A] BANs were not disclosed in the official statement. Therefore, issuance costs for the [year A]
BANs were estimated assuming a 1% underwriters discount (the same as for the proposed [year B] BANs and the same costs for
other items as reported for the proposed [year B] BANs (except bond counsel assumed to be $[amount]).
2
The Bond Buyer 20 Bond Index as of [date] is [percentage]. General obligation bonds maturing in 20 years are used to compile this
index. The index has an average rating equivalent to Moody’s Aa2 and S&P’s AA. Government Bonds (enclosed), the GFOA “ . . .
recommends that issuers select a method of sale based on a thorough analysis of the relevant rating, security, structure and other
factors pertaining to the proposed bond issue.”
AB 2197 Debt Disclosure Review and Recommendations – Repayment Not Probable
cc: District
____________, Chief Business Official
AB 2197 Debt Disclosure Review and Recommendations – Repayment Not Probable
___________, 2014
__________________, Superintendent
_______________________ School District
[Street and number]
[City], CA [Zip]
__________________, Board President
_______________________ School District
[Street and number]
[City], CA [Zip]
Subject: AB 2197 Review – Summary – 2012 Bond Anticipation Notes
Dear ______________ and _______________:
Introduction
The _________ County Office of Education has been working diligently and cooperatively with the
______________ School District (district) to understand the $________ million bond anticipation notes
(BANs) financing the district has proposed. The district has been helpful in providing information so that
an understanding of the transaction and repayment plan can be gained. The _____ County Office of
Education sincerely appreciates the district’s efforts to provide information and respond to follow-up
questions and information requests. These management comments were prepared with the assistance of
the __________ County Treasurers Office and Government Financial Strategies.
The purpose of this summary is to present the ____________ County Office of Education’s
understanding of the transaction, and to articulate our conclusions and recommendations.
Questions Addressed
Why is the District Borrowing?
The district is borrowing to repay certificates of participation (COPs) issued in ________.
What will the District’s Annual Obligation be?
The BANs are to be issued in ___________ and mature in __________. There would be no payments
due until maturity, at which time the entire principal and accrued interest would be payable. The district
reports that the amount owed would be $________ million. Of this, $________ million would be principal
and $__________ would be interest.
What is the Risk That the Annual Obligation will Vary from Year to Year, and by How Much?
The interest rate on the BANs would be fixed and therefore, once set, would not vary from year to year.
What are the Planned Repayment Sources?
AB 2197 Debt Disclosure Review and Recommendations – Repayment Not Probable
The district is planning to repay the BANs from a $________ million general obligation (GO) bond issue.
The total value at maturity is estimated to be $________ million in late [year].3 As will be discussed more
fully below, our analysis projects that the district will not be able to issue sufficient GO bonds to repay the
BANs.
Although the district is planning to repay the BANs from GO bond proceeds, Section 16 of the draft
authorizing resolution for the proposed BANs states:
In the event that there have been insufficient Pledged Revenues received by the Paying
Agent on behalf of the District by an Interest Payment Date to permit the payment of the full
amount required to be deposited on such Interest Payment Date, then the amount of any
deficiency in the Repayment Account shall be satisfied and made up from any other moneys
of the District lawfully available for the payment of the principal of the Notes and the interest
thereon on such date or thereafter on a daily basis.
Therefore, it appears that the repayment sources are the proceeds from a general obligation bond sale
and, to the extent this is not enough, the district’s general fund is liable for the remainder.
What is the Likelihood the Planned Repayment Sources will be Sufficient?
Repayment from GO Bonds
The first question is whether the district will be able to issue $_______ million of GO bonds in 2016. This
depends on the district’s future assessed valuation. Below is our analysis of whether the district will be
able to issue $_______ million of bond using the district’s assessed value assumptions and more
conservative assessed value assumptions.4
Analysis using District Assumptions
The district is assuming that growth/change in total assessed value will be 0% for 2012-13, 1% for 201314, 2% for 2014-15, and 4.45% annually thereafter (see attached bond analysis provided by the district).
Using these assessed valuation assumptions and the district’s interest rate assumptions, we project that
because of tax rate constraints, the district could only issue $_______ million of GO bonds in 2016,
which, after accounting for assumed issuance costs, would be expected to net $_______ million. This
amount is insufficient to repay the BANs.
It is noteworthy that, using the district’s assumptions, we estimate that the district could issue $________
million of bonds now in 20__ (as discussed above), but a lesser amount ($________ million) in 2016.
The reason the future amount is lower relates to the years in which additional bond debt services can be
added to the district’s existing Measure _______ bond structure for the Series 2008 and 2010 bonds. In
particular, since the tax levies for the existing Measure _______ bonds are projected to be in the $30
range for the next few years, which is significantly less than the $60 maximum, foregoing issuing bonds
now means that the ability to generate tax revenue for debt services during these years is lost. Since the
tax rates for the existing Measure _______ bonds are projected to increase, there is less room, within the
$60 cap, to fund debt service for a 2016 bond, leading to a lower issuance amount.
Analysis Using Information from the County of _______________
The district’s assessed valuation has fluctuated significantly since 1999, ranging from an increase of
24.89% in 2006-07 to a decrease of 12.13% in 2010-11. Most recently, total assessed value declined
5.25% for 2011-12. Given the significant fluctuations in the district’s tax base, current and potential near
3
Since the GO bond amount is essentially equal to the BAN repayment amount, it is not clear how costs of issuance (not including
underwriter’s discount) will be paid. In light of the California Attorney General’s March 1, 2011 letter regarding paying for costs of
issuance (e.g. financial advisor fees, bond counsel fees, etc.) with premium, our understanding is that this is not currently
permissible. However, our understanding is that the underwriter’s discount may be paid with premium.
4
Of note, the district’s projected tax rates do not accurately reflect the [county name] general obligation bond tax rate calculation
methodology. Specifically, the County of [county name] includes a 5% delinquency assumption in calculating general obligation
bond tax rates. The district’s calculations do not account for this. Our analysis using the district’s assessed value assumptions is
based on the County’s methodology.
AB 2197 Debt Disclosure Review and Recommendations – Repayment Not Probable
term economic conditions, and the potential general fund exposure if sufficient GO bonds cannot be
issued in 2016, it is prudent to not only be reasonably conservative with regard to assumed future
assessed value, but also to obtain the best possible estimate available. The County of __________,
which manages assessed values day to day, is in our opinion an appropriate source to obtain an estimate
of future assessed values.
The County of __________ estimates that net local secured assessed value will be flat (0% change) in
2012-13 through 2015-16, and increase 3% annually thereafter. Using these assessed valuation
assumptions and our interest rate assumptions, we project that because of tax rate constraints, the
district could only issue $________ million of GO bonds in 2016, which, after accounting for issuance
costs, would net $________ million. This is insufficient to repay the BANs.
We assume that the district is aware of the risk that sufficient GO bonds may not be issued, and the
potential liability to the general fund.
Repayment from General Fund-Backed Borrowing
If the district cannot issue GO bonds in 2016, another option is to again issue debt obligated by the
general fund, such as certificates of participation (COPs), or lease-purchase financing, to repay the BAN.
We estimate annual payments for such financing would be approximately $_________. The district’s first
interim budget report for 2011-12 reports general fund budget projections through 2013-14 and shows
that the district is projecting to deficit spend each year. In 2013-14, the district is projecting to deficit
spend by $__________, leaving an unrestricted ending balance of $_________, which includes
$_________ as a reserve for economic uncertainties. If deficit spending continues beyond 2013-14, there
may not be sufficient cash flow to support repayment of a COP.
Under the circumstances, we cannot confidently conclude that it would be affordable for the district to
take on the potential liability of choosing the COP option to repay the BANs.
What is the Cost of Funds and is this Reasonable?
Cost of funds includes interest costs/rates and upfront costs for issuing the debt.
Interest Rates
The estimated interest rate for the BANs is 3.5%. We appreciate that this might be a conservative
estimate. By way of comparison, a $2.2 million BAN issued by the _____________ School District
(______________County), priced on November 28 with a term of four years, had an interest rate of
3.15%. As another example, a $5 million BAN issued by the ________________ School District
(____________ County), priced on November 8 with a term of five years, had an interest rate of 2.80%.
Both of these school districts received the same A+ credit rating from Standard & Poor’s on their general
obligation bonds as [district name]. We have not analyzed whether these example interest rates are the
best that could be achieved; we simply note that recent comparable credit BAN issuances achieved rates
lower than 3.5%.
Costs of Issuance
The estimated issuance costs for the BANs total $_____________, including an underwriter’s discount of
$__________ (1% of the $_______ million principal amount). Also, we understand that the bond counsel
fee of $60,000 is $20,000 more than for the district’s previous BAN issuances because the proposed
2012 BAN includes the added complexity of defeasing the 1998 COP.
In comparison, the total costs of issuance for the ______________ School District’s $2.34 million BAN
(referenced above) were $137,000 and the total costs of issuance for the _____________ School
District’s $28.997 million of BANs (which were issued in two series) were $302,480. We have not
analyzed whether these example issuance costs are the best that could be achieved; we simply note that
the proposed costs of issuance for [district name] BAN are in line with other recent BAN issuances.
AB 2197 Debt Disclosure Review and Recommendations – Repayment Not Probable
Conclusion
As discussed above, even using the district’s assessed value growth assumptions, which are more
aggressive than appear to be justified under the circumstances, it is projected that the district will not be
able to issue sufficient GO bonds in 2016 to repay the BANs. Although it is theoretically possible that
assessed value will increases sufficiently to allow the issuance of the required amount of GO bonds,
based on the analysis set forth above, it is difficult to conclude that this is probable. Further, the
information provided does not support a finding that the district can afford to repay the BANs from its
general fund budget should GO bonds be insufficient.
Therefore, this office cannot conclude with confidence that the financing is affordable or that repayment is
probable.
Certainly, we invite corrections and comments to this report in the spirit of cooperation and illumination.
We welcome the opportunity to refine our understanding with further information and comment from the
district.
Sincerely,
__________________
County Superintendent
___________________
Assistant Superintendent/Business Services
cc: District
____________, Chief Business Official