Education Infrastructure: Financing K-12
Capital Projects in Virginia
Lisa Williams, Partner, McGuireWoods LLC
Deidre Jett, Program Manager, Virginia Public School Authority,
May 21, 2015
Financing K-12 Capital Infrastructure
• What to do Before Issuing Debt
• Virginia School Financing Programs
• Other Financing Options
• Post-Issuance Considerations
2
Are You Smarter than a Kindergartener?
• Kindergarten – I need somebody to hold my hand
• Elementary – I know I don’t know
• Middle School – I know enough to be dangerous
• High School - I could teach the stuff
3
The Players
• Local Government
• School District
• Locality
• Bond Counsel
• Financial Advisor
• Local Government Attorney
• Others:
• Underwriter
• Trustee
4
Before the Financing
• Anticipated Draw-Down Schedule/ Negative Arbitrage
• Reimbursement Resolution
• Private Use: Management Contracts and Leases
• Other funding sources
• Debt Limit
• Referendum
• Local Politics
Engage Bond Counsel and Financial Advisors Early!
5
Virginia Public School Authority (VPSA)
• Pooled Financing
• Notes
• Stand Alone
• School Tax Credit
6
114 Localities Participate in VPSA’s Programs
Accomack County Albemarle County Alleghany County Amelia County Amherst County Appomattox
County Arlington County Augusta County Bedford County Botetourt County Bristol City Brunswick
County Buchanan County Buckingham County Buena Vista City Campbell County Caroline County
Carroll County Charlotte County Chesapeake City Chesterfield County Clarke County Covington City
Craig County Culpeper County Cumberland County Danville City Dickenson County Dinwiddie County
Essex County Falls Church City Fauquier County Floyd County Fluvanna County Franklin City Franklin
County Frederick County Fredericksburg City Giles County Gloucester County Goochland County
Grayson County Greene County Greensville County Halifax County Hanover County Harrisonburg City
Henrico County Henry County Highland County Hopewell City Isle of Wright County James City County
King George County King William County Lee County Lexington City Loudoun County Louisa County
Lunenburg County Lynchburg City Manassas Park City Martinsville City Mathews County Mecklenburg
County Middlesex County Montgomery County Nelson County New Kent County Newport News City
Northampton County Norton City Nottoway County Orange County Page County Patrick County
Petersburg City Pittsylvania County Poquoson City Portsmouth City Powhatan County Prince Edward
County Prince George County Prince William County Pulaski County Radford City Rappahannock
County Richmond City Richmond County Roanoke City Roanoke County Rockbridge County
Rockingham County Russell County Shenandoah County Smyth County Southampton County
Spotsylvania County Stafford County Staunton City Suffolk County Surry County Sussex County
Tazewell County Virginia Beach City Warren County Washington County Waynesboro City West Point
Town Westmoreland County Williamsburg-James City County Wise County Wythe County York County
7
VPSA - Pooled Bond Program
• Flagship program
• Established in 1962
• Virginia’s “Bond Bank” for K-12 School
• Fifty-one issues under the 1997 resolution
• $2.6 billion outstanding
8
VPSA’s Rating
• Bond ratings
– Fitch:
– Moody’s:
– S&P:
AA+
Aa1
AA+
• Rating Factors
– State Aid Intercept Provision
– Sum Sufficient Appropriation - Literary Fund
– Sum Sufficient Appropriation – Commonwealth of
Virginia General Fund
– Credit Strength the Commonwealth (AAA/Aaa/AAA)
9
VPSA Pooled Bond Program - Advantages
• VPSA manages the process
• No local bond referendum required
• VPSA achieves very competitive pricing
• Attractive financing rates for local governments
- No application fee or upfront VPSA cost of issuance fees
- Nominal Fee
• VPSA monitors arbitrage compliance (pooled arbitrage risk)
• Continuing disclosure
10
VPSA Pooled Bond Program
•
Finances all types of real and personal property for public schools,
including land, buildings and equipment
•
No referendum required for General Obligation (GO) bonds sold to VPSA
•
No collateral pledge
•
Credit enhancement through state-aid intercept and sum sufficient
•
Streamlined application process with no application fee
•
Decreased administrative burden on local officials for ratings, issuance,
arbitrage rebate compliance and continuing disclosure
•
Market access
• VPSA frequent issuer
• Cost effective for smaller sized financings
11
11
VPSA Pooled Bond Program - Process
• VPSA issues bonds
• Proceeds used to purchase local general obligation school bond
• Bonds issued twice a year
- May (applications due in March)
- November (applications due in September)
• Flexibility in debt service schedules
- Level principal
- Level debt service
- Wrap around structures and capitalized interest
• Able to finance projects in phases
• VPSA continually analyzes refunding opportunities
12
VPSA “Stand Alone” Program
•
VPSA serves as conduit for local issuer
•
Intended for highly rated issuers
•
Rating on the VPSA bond equal to the GO bond rating of the locality
•
VPSA purchases local GO school bond (no voter referendum required)
•
State Aid Intercept applies
•
Locality is responsible for the following:
•
VPSA fee
•
Cost of issuance (VPSA and Locality)
•
Arbitrage compliance
13
School Tax Credit Bonds
• Qualified Zone Academy Bonds (QZABs)
•
•
•
•
•
Administered with the Department of Education (DOE)
DOE determines eligibility
As low as 0% Interest
10% private contribution
Strict three year spending requirements
• Qualified School Construction Bonds (QSCBs)
• No additional federal authorization
14
School Technology Notes
• Administered through the Department of Education (DOE)
• Finances
• Computer-based instructional and testing system
• High-speed internet connectivity for public schools
• Authorization by the General Assembly
• Distribution by formula
• Matching grant program
• $67 M in FY 2015 and $72 M in FY 2016
• Debt service paid from Literary Fund appropriations
• Amortized over a five year term to approximate useful life
15
School Security Notes
• Administered through the Department of Education (DOE)
• Established in 2013 Appropriation Act
• $6 million annual authorization
• Annual competitive grants up to $100,000 per school division
• Debt service paid from Literary Fund appropriations
• Amortized over five years - sold with Technology Notes
16
Literary Fund Loans
• $52.884 Million for FY16
• Administered by DOE
• “First Priority” Waiting List projects
• Expect announcement after July 1st
17
Other Financing Options
What type of security will the Locality use to secure the
debt?
Does the Locality want long-term debt or short-term/interim
financing?
18
Type of Security
• General Obligation
• County
- Referendum
- Virginia Public School Authority – No referendum requirement
• Cities, Towns and Counties that have elected to be treated as a City
- 10% Debt Limit
- Charter or Local Limitations
• Lease Revenue
• Locality is using its leasing power
• Pledges the source of revenue from the lease between the Economic Development
Authority/Industrial Development Authority and the Locality
• Locality’s financial obligations are subject to appropriation
• Commonly includes a leasehold deed of trust that pledges a leasehold interest in the school
to the lender
19
Public Issuance vs. Direct Bank Placement
Public Issuance
Direct Bank Placement
Schedule
Governed by the Locality’s ability to
update the Locality’s information
included in the Official Statement
Governed by the Bank’s term
sheet/commitment letter
Disclosure
Subject to Rule 15c2-12; must
provide continuing disclosure on
EMMA
Provide financial information to the
bank as requested; no public
disclosure required
Primary Documents
GO: Bond; Official Statement
GO: Bond
LRB: Bond, Indenture, Financing
Lease, Ground Lease, Deed of
Trust, Official Statement
LRB: Bond Purchase Agreement,
Financing Lease, Ground Lease,
Deed of Trust
Amortization
To maturity
Varies; Commonly subject to “put”
within 3 to 7 years
Par Amount
Small par amounts may not be cost
effective
Large par amounts are subject to
bank credit limits
Redemption/Prepayment
10 year par call is typical
Varies; Commonly prepayable at
any time but may include a
prepayment fee or make whole
20
Long-Term vs. Short-Term/Interim Financing
• Economic Life of the Assets
• Other funding sources
• Grants
• Literary Fund Loans
• Construction schedule
• Market Considerations
• Bond Anticipation Notes – Matures within Five Years
21
Post Issuance Compliance
• Compliance with Covenants in Bond Documents
• Key staff members need to know and understand the Locality’s
responsibilities under the bond documents
• Continuing Disclosure Requirements
• The SEC has become more vigilant in its desire for issuers to comply
with their 15c2-12 undertakings
• The Locality’s governing body should adopt written procedures to
ensure compliance
• VPSA will notify a Locality if it is deemed to be a Material Obligated
Person
• Direct Bank Placements require disclosure just be delivered to the bank
22
Post Issuance Compliance
• Compliance with Tax Covenants
• The IRS wants all issuers and borrowers to have post issuance
compliance policies for their tax-exempt financings
• Monitor Spending and Investment of Bond Proceeds
• Record Keeping – IRS wants all bond related documents to be held for
the life of the bonds plus three years (i.e. transcripts, invoices,
investment statements, correspondence, etc.)
• Change in use/Disposition of the assets
• GFOA/VGFOA
• Good resource for Best Practices
• Training
• When in doubt call your bond counsel or financial advisor
23
For More Information
VPSA
McGuireWoods
Deidre Jett
804-225-4928
Deidre.Jett@trs.virginia.gov
Lisa M. Williams
804-775-4702
lwilliams@mcguirewoods.com
Melissa Palmer
804-225-4926
Melissa.Palmer@trs.virginia.gov
Arthur E. Anderson
804-775.4366
aanderson.@mcguirewoods.com
Sandra Stanley
804-225-2268
Sandra.Stanley@trs.virginia.gov
T.W. Bruno
804.775.1853
tbruno@mcguirewoods.com
24
Questions
25