Walking a Straight Legal and Financial Line in 2018 California Local School Finance - CASBO
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John R. Baracy
Managing Director
Stifel
Adam Bauer
President & CEO
Fieldman & Rolapp & Associates
David G. Casnocha
Managing Shareholder
Stradling Yocca Carlson & Rauth
Walking a Straight Legal and
Financial Line in 2018 California
Local School Finance
The views and opinions expressed in this presentation are those of the authors and do not
necessarily reflect those of CASBO.
Table of Contents
Section Page Number
Section I: Prudent and Effective GO Bond Program Mechanics 3
Section II: 2017 Tax Cuts and Jobs Act Bill Summary and Other 2017 California Legislation 24
Appendix: California K-12 School Finance Resource Materials 34
Disclosure
Stifel, Nicolaus & Company, Incorporated (“Stifel”) has prepared the attached materials. Such material consists of factual or general information (as defined in the SEC’s Municipal Advisor Rule). Stifel is not hereby providing a
municipal entity or obligated person with any advice or making any recommendation as to action concerning the structure, timing or terms of any issuance of municipal securities or municipal financial products. To the extent
that Stifel provides any alternatives, options, calculations or examples in the attached information, such information is not intended to express any view that the municipal entity or obligated person could achieve particular
results in any municipal securities transaction, and those alternatives, options, calculations or examples do not constitute a recommendation that any municipal issuer or obligated person should effect any municipal securities
transaction. Stifel is acting in its own interests, is not acting as your municipal advisor and does not owe a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934, as amended, to the municipal entity or
obligated party with respect to the information and materials contained in this communication.
Stifel is providing information and is declaring to the proposed municipal issuer and any obligated person that it has done so within the regulatory framework of MSRB Rule G-23 as an underwriter (by definition also including the
role of placement agent) and not as a financial advisor, as defined therein, with respect to the referenced proposed issuance of municipal securities. The primary role of Stifel, as an underwriter, is to purchase securities for
resale to investors in an arm’s- length commercial transaction. Serving in the role of underwriter, Stifel has financial and other interests that differ from those of the issuer. The issuer should consult with its’ own financial and/or
municipal, legal, accounting, tax and other advisors, as applicable, to the extent it deems appropriate.
These materials have been prepared by Stifel for the client or potential client to whom such materials are directly addressed and delivered for discussion purposes only. All terms and conditions are subject to further discussion
and negotiation. Stifel does not express any view as to whether financing options presented in these materials are achievable or will be available at the time of any contemplated transaction. These materials do not constitute
an offer or solicitation to sell or purchase any securities and are not a commitment by Stifel to provide or arrange any financing for any transaction or to purchase any security in connection therewith and may not relied upon as
an indication that such an offer will be provided in the future. Where indicated, this presentation may contain information derived from sources other than Stifel. While we believe such information to be accurate and complete,
Stifel does not guarantee the accuracy of this information. This material is based on information currently available to Stifel or its sources and is subject to change without notice. Stifel does not provide accounting, tax or legal
advice; however, you should be aware that any proposed indicative transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and /or counsel as you deem appropriate.
2
2018 CASBO Annual Conference & California School Business Expo 2
SECTION I:
PRUDENT AND EFFECTIVE GO BOND PROGRAM MECHANICS
2018 CASBO Annual Conference & California School Business Expo
Factors Affecting California K-12 GO Bond Programs
GO bond programs are structured based on projections of:
Facility needs of District
The timing and amount of bond sales is influenced by the expenditure cash flow for the project
Other funds available to the district for facility purposes
District assessed value (“AV”)
Projected AV growth has a significant effect on the bond issuance schedule and amounts
Along with the amount of outstanding bonds, AV determines the statutory bonding capacity in any future fiscal year
Tax rates
Tax rate is calculated by dividing the aggregate annual bond payments by the District’s assessed value
Future tax rates are based on AV, timing of bond issuances, issuance amounts, and debt service payments
Municipal bond interest rates
Function of:
− National and international financial market factors
− District credit ratings
− Bond structure, including bond type, financing term and redemption features
− Tax‐exempt or taxable bonds
4
2018 CASBO Annual Conference & California School Business Expo 4
Role of Assessed Value & Property Taxes
Assessed valuation drives access to bond dollars
Voter Approved Authorization ≠ Cash Available Now
Faster AV growth allows earlier issuance
Slower AV growth or declines slow or reduce issuance
Ad Valorem Property Taxes
Ad valorem property taxes are typically represented as a rate per $100,000 of a property’s assessed value
Example: You own a house with a market value of $600,000 and an assessed value of $400,000, and the ad valorem tax is $30 per
$100,000 of assessed value. Your property tax will be $120. The ad valorem tax rate is applied to your assessed value ($400,000 ÷
$100,000) x $30=$120.
Relationship between assessed valuation growth and tax rates
Annual Assessed Valuation Growth at 2.00% Annual Declining Assessed Valuation at 2.00%
Debt Assessed Tax Rate Debt Assessed Tax Rate
Year Year
Service Valuation per $100,000 Service Valuation per $100,000
2017 $900,000 $3,000,000,000 $30.00 2017 $900,000 $3,000,000,000 $30.00
2018 900,000 3,060,000,000 29.41 2018 900,000 2,940,000,000 30.61
2019 900,000 3,121,200,000 28.84 2019 900,000 2,881,200,000 31.24
2020 900,000 3,183,624,000 28.27 2020 900,000 2,823,576,000 31.87
5
2018 CASBO Annual Conference & California School Business Expo 5Timing of Bond Sales and Effect
Identify facility needs
Expected timeframe for spending bond proceeds (3-year spend-down rule of IRS)
Useful life of projects funded with bond proceeds
Inflation risks
Inflation deteriorates the purchasing power of bond proceeds
The average annual increase in California’s Consumer Price Index for all urban consumers from 1955 to 2017 was 3.86%
Sample Impact of Construction Cost Inflation on Bond Proceeds
Purchasing Power in
2016 Dollars of Principal
Name of Year of Estimated Total Bond Amount of Bonds with Purchasing Power
Bond Series Issuance Principal Amount 3.86% Annual Inflation(1) Difference
Series A 2016 $100,000,000 $100,000,000 --
Series B 2018 100,000,000 92,428,996 ($7,571,004)
Series C 2020 100,000,000 85,431,193 (14,568,807)
All Bonds Total $300,000,000 $277,860,189 ($22,139,811)
(1) Average annual increase in California Consumer Price Index for all urban consumers from 1955 to 2017 was 3.86%. Average annual increase in Marshall & Swift Eight California Cities Index for Class B Construction from
1999 to 2018 was 4.27%.
6
2018 CASBO Annual Conference & California School Business Expo 6Election Dates
Proposition 46
Generally any Tuesday
Proposition 39
Statewide primary, general or special elections
Election Date Filing Date
June 5, 2018 March 8 , 2018
November 6, 2018 August 9, 2018
Other dates only if it coincides with regularly scheduled districtwide election
7
2018 CASBO Annual Conference & California School Business Expo 7Statutory Debt Capacity
A school district’s bonding capacity is a statutory limit on the amount of additional general
obligation bonds that can be issued at a given point in time
State Education Code limits the amount of general obligation bonds that can be sold by a
unified school district and school district in a single fiscal year to a certain percentage of its
assessed valuation minus the amount of any outstanding general obligation bonds
2.50% of its assessed valuation for a unified school district
1.25% of its assessed valuation for elementary and high school districts
Statutory Bonding Capacity(1)
Fiscal Year 2017-18
Total Assessed Valuation $14,000,000,000
times 2.50% equals
Gross Bond Issuance Capacity for 2017-18 $350,000,000
minus
Outstanding Principal of Previously
$258,375,000
Issued General Obligation Bonds
Equals
Net Bond Issuance Capacity for 2017-18 $91,625,000
(1) Does not reflect a specific school district and is only for illustrative purposes
8
2018 CASBO Annual Conference & California School Business Expo 8Sample GO Bond Program
Sample Proposition 39 Election in November 2018 for a Unified School District
Financing Assumptions $30 Tax Rate $48 Tax Rate $60 Tax Rate
Amount of Bonds $169,000,000 $274,000,000 $345,000,000
Future AV Growth Rate 3.75% 3.75% 3.75%
Number of Bond Issues 4 4 4
Bond Amount and Issuance Date
Series A – February 2019 $42,500,000 $70,000,000 $85,000,000
Series B – August 2021 $42,500,000 $70,000,000 $85,000,000
Series C – August 2023 $42,000,000 $70,000,000 $85,000,000
Series D – August 2025 $42,000,000 $64,000,000 $90,000,000
Repayment Period per Series 30 Years 30 Years 30 Years
Aggregate Repayment Ratio 2.08-to-1 2.09-to-1 2.09-to-1
Compliant with AB 182 Yes Yes Yes
Estimated Ad Valorem Tax Rates
Median AV for Typical Home ($285,000)
Highest Annual Tax Rate $85.50 $136.80 $171.00
9
2018 CASBO Annual Conference & California School Business Expo 9Timing of Bond Sales and Effect
$274 Million Authorization, $48 Tax Rate
Tax Rate Per $100,000 of Assessed Valuation $60.00
$48.00
$36.00
$24.00
$12.00
$0.00
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
2052
2053
2054
2055
2056
2019 Series A Debt Service 2021 Series B Debt Service 2023 Series C Debt Service 2025 Series D Debt Service $48.00 Tax Rate
10
2018 CASBO Annual Conference & California School Business Expo 10Technology Financing Tools and Options
Proposition 39 General Obligation Bonds – Short Term Amortization (3-10 Years)
Provides a debt service repayment planned around the useful life of devices purchased
Allows for the District to take advantage of low interest rates
Available issuance amount will be determined by tax base, credit rating, outstanding parity debt, authorization, funding needs, and
interest rate environment
Technology Endowment Fund
3-10 year issuances that deposit money into an investment fund
The investment fund disperses money annually or periodically over the life of the bond
Since bond proceeds are invested, rather than spent, interest earning are constrained per Federal tax regulations
Funding amount and disbursements are heavily dependent on market rates
Other Methods of Issuance
District’s that do not have remaining authorization under Proposition 39 or do not have immediate plans to proceed with a
Proposition 39 election can issue Tech Bonds with other available revenue streams
Certificates of Participation (General Fund Obligation)
Mello-Roos Special Tax Bonds (Special Tax Obligation)
These methods are limited as many districts may not have available funds to pay debt service out of the General Fund and/or may
not have community facilities districts within district boundaries
11
2018 CASBO Annual Conference & California School Business Expo 11Illustrative Technology Bond Scenario
A new bond measure with an estimated tax of Issue Issue Date Proceeds
approximately $23 per $100,00 of AV, $2.0 million in Series A February 2019 $6,300,000
Series B August 2022 6,900,000
inflation-adjusted technology needs could be financed by Series C August 2025 7,500,000
the annually Series D August 2028 8,200,000
Assumptions: Series E August 2031 9,000,000
Series F August 2034 9,800,000
− 100% current interest bonds, 30 year program
Series G August 2037 10,700,000
− Interest rates: 3.0% - 4.0%(1) Series H August 2040 11,700,000
− Annual AV growth: 3.0% Series I August 2043 12,800,000
Series J August 2046 14,000,000
− Assumes 9% project cost escalation
$96,900,000
Estimated Tax Rates
$180
Tax Rate (Per $100,000 of AV)
$160
$140
$120
$100
$80
$60
$40
$20
$-
Series A Series B Series C Series D Series E Series F Series G Series H Series I Series J
(1) Assumes higher than market interest rates. Interest rates are subject to market fluctuations until bonds are sold.
12
2018 CASBO Annual Conference & California School Business Expo 12A Technology GO Bond Case Study
In September 2013, Stifel assisted the Rosemead School District (the “District”) to issue bonds under
an existing Proposition 39 authorization (the “2008 Authorization”)
In preparing for the second issuance of bonds under the 2008 Authorization, the District determined a portion of the proceeds
would be dedicated to fund technology
To avoid the scrutiny of funding technology with long term bonds, the District issued two series of
bonds, Series B and Series T-1
Series B was issued as a 30 year bond to repay an outstanding bond anticipation note and Series T-1 was issued as a five year
bond to fund the cost of technology improvements
Series T-1 was able to fund $760,000 in technology improvements
Rosemead School District (Los Angeles County, California)
Election of 2008, General Obligation Bond Program – Debt Service Schedule / Estimated Tax Rates
Estimated Tax Rate per
$35.00
$30.00
$100K of AV
$25.00
$20.00
$15.00
$10.00
$5.00
$-
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043
Election of 2008 Prior Bonds Election of 2008, Series B (Infrastructure) Election of 2008, Series T-1 (Technology)
2018 CASBO Annual Conference & California School Business Expo 13What Type of Bond Securities Are Issued?
Primary Purpose
Provide access to LOWER annual tax revenues in the early years (1 to 25 years) available for
repayment for each Bond series
Primary Features
Investors receive SEMI-ANNUAL interest and ANNUAL principal payments
Represents lower bond interest rates available at issuance
Represents lower total bond payments to principal amount issued ratio
Primary Purpose
Provides access to HIGHER annual tax revenues in LATER years (25 to 40-years) available for
repayment of each Bond series
Primary Features
CABs pay both the INTEREST & PRINCIPAL on scheduled dates (Limited to 25 years after
January 1, 2014)
CCABs defer INTEREST for a period (10 to 20-years) and then convert to CIBs
14
2018 CASBO Annual Conference & California School Business Expo 14Difference in Bond Interest Rates by Types of Bonds
Current Interest Bonds and Capital Appreciation Bonds
Hypothetical Interest Rates as of March 22, 2018
General Obligation Bonds rated A+/A1
Maturity Current Interest Bonds Non-Callable Callable Convertible Capital
Year Maturities Maturities Appreciation Bonds*
Capital Appreciation Bonds
5 2.45% 2.81% n.a. n.a.
10 2.97% % n.a. n.a.
15 3.23% n.a. 4.17% 3.83%
25 3.46% n.a. 4.45% 4.11%
30 3.51% n.a. n.a. n.a.
*Conversion from CABs to CIBs in 10 years from closing date of bonds.
All numbers are preliminary and are subject to change. Tax-exempt interest rates were derived from spreads to the 'AAA' rated MMD Index of comparable recently priced financings and secondary market trades as of March 22,
2018. In no way does Stifel represent that the bonds would receive such pricing results.
15
2018 CASBO Annual Conference & California School Business Expo 15Recent History of CABs Issued by California School Districts
CABs as Percent of All School District
General Obligation Bonds CABs have been a component of school general
Number of obligation bonds for many years
All School Number of Percentage of
New Money Issues with All Issues Increased use of CABs corresponds with approval
Year
1995
GO Bonds
94
CABs
21
with CABs
22.3%
of Proposition 39 in November 2000
1996 92 19 20.7%
1997 139 41 29.5% Use of CABs rose in response to slowdown or
1998 193 51 26.4% decline of assessed valuation during recession
1999 177 49 27.7%
2000
2001
175
164
53
50
30.3%
30.5%
Frequency of CAB maturities longer than 30 years
2002 213 82 38.5% increased during the recession and legislative
2003 179 64 35.8%
2004 250 91 36.4%
approval of AB 1388 in 2009
2005 194 87 44.8%
2006 196 93 47.4% CAB issuance fell in late 2012 through the present
2007 198 96 48.5% partly due to media attention, political criticism and
2008 168 83 49.4%
2009 211 123 58.3% passage of AB182 in 2013
2010 142 77 54.2%
2011 169 101 59.8%
2012 120 49 40.8%
2013 188 40 21.3%
2014 116 19 16.3%
2015 170 29 17.0%
2016 122 13 10.7%
2017 259 20 7.7%
16
2018 CASBO Annual Conference & California School Business Expo 16Comprehensive School Bond Election Results
School District General Obligation Election Results:
January 1986 – November 2017
Proposition 46 Proposition 39
451 Issues 189 Issues
($19.9B Authorization) ($13.9B Authorization)
14.8%
45.7%
54.3%
536 Issues 85.2%
($23.8B Authorization) 1,087 Issues
($13.9B Authorization)
PASS FAIL
(1)
Proposition 39 elections commenced in Spring 2001.
Source: School Services of California 17
2018 CASBO Annual Conference & California School Business Expo 17Common Alternatives for Structuring GO Bonds, COPs, LRBs, BANs, and CFDs
All of These Financing Tools Can be Designed:
With special prepayment provisions that allow early prepayment from one or more sources in
exchange for a somewhat higher interest rate;
As taxable or tax-exempt bonds or notes;
Potentially as federal subsidy or tax credit bonds such as BABs, QZABs, QSCBs, etc;
As adjustable or fixed rate bonds or notes;
As bond insured or credit enhanced bonds or notes;
Various maturity dates according to the repayment plan;
As either CIBs or notes or Capital Appreciation Bonds (CABs) or notes;
Current interest bonds pay the investor interest every six months;
CABS provide a period of Non-Payment where interest accrues and compounds until maturity like a U.S. savings
bond;
18
2018 CASBO Annual Conference & California School Business Expo 18Using A Bridge Financing to Fund Capital Projects
Short-term loan issued by school districts and can be repaid from any legally available revenues
State School Facility Program funds, developer fees, District’s General Fund, etc.
Customizable repayment structure
Deferred payments, interest only payments, long-term loan payable in short-term, etc.
Can mitigate construction cost escalation
Payment of borrowing costs
Minimize costs
Delay bridge financing until amount and proceeds are needed
The table below provides a comparison of a sample bridge financing issuance versus project inflation costs
Sample Bridge Issuance vs. Project Inflation Cost Analysis
Estimated Total Principal
Year of Financed Financed Amount Amount of Bonds with Estimated Benefit
Takeout Amount plus Interest(1) 3.86% Annual Inflation(2) of Bridge Financing
2018 $10,000,000 - $10,000,000 -
2020 - $10,917,123 $10,786,900 ($130,223)
2021 - $11,255,873 $11,203,274 ($52,599)
2022 - $11,516,123 $11,635,720 $119,598
2023 - $11,693,873 $12,084,859 $390,986
2024 - $11,784,873 $12,551,335 $766,462
(1) Interest rate assumptions are based on current market conditions and similar credits for an ‘A+’ rated, insured COP.
(2) Average annual increase in California Consumer Price Index for all urban consumers from 1955 to 2017 was 3.86%.
19
2018 CASBO Annual Conference & California School Business Expo 19Bond Anticipation Notes (“BANs”)
Notes and renewals thereof must be payable not more than five years from the date of the
original issuance of the note
Total amount of notes or renewals thereof issued and outstanding may not exceed the total
amount of unsold (authorized) bonds
The proceeds from the sale of the notes must be used only for authorized purposes of the
bonds or to repay outstanding notes previously issued
Rating agencies have recently changed their criteria rating BANs which may lead to less
issuance
20
2018 CASBO Annual Conference & California School Business Expo 20How Debt Is Sold
Negotiated Sale Competitive Sale
Pre-Marketing Allows a week or more to answer Typically none -
investor questions “Call me if you buy it”
Couponing Underwriter can present different Goal is to win bid with the lower TIC;
options to weigh cost/benefit of TIC no ability to address optionality
vs. optionality
Sale Timing Sale date can be moved ahead or Sale date is determined at least a
pushed back depending on the week ahead of time and is hard to
market change without losing market
interest
Risk/Price Underwriter faces less risk and so Underwriter faces more market risk
can often charge lower fees
21
2018 CASBO Annual Conference & California School Business Expo 21Comparison of Sale Methods
Issuer received better pricing on negotiated financing for two comparable sales within
two weeks
AAA/AA+ rated Newport-Mesa Unified School District general obligation bonds
$18mm negotiated refunding and $32mm competitive new money
Spreads 5 to 8 bps less on negotiated issue vs. competitive issue
Underwriting fees for competitive issue more than $10/bond; less than $5/bond for negotiated sale
Negotiated Competitive
Issuer Newport-Mesa Unified School District Newport-Mesa Unified School District Spread
(Issue) General Obligation Refunding Bonds, Series 2017 General Obligation Bonds, Election of 2005, Series 2017 Difference
Par Amt $17,580,000 $28,130,000 (Negotiated
Pricing Date July 13, 2017 August 1, 2017
Lower Yields)
Year Par Coupon Yield AAA MMD Spread Par Coupon Yield AAA MMD Spread
2018 0.920 -92 700,000 5.000 0.790 0.850 -6
2019 1.060 -106 0.940 -94
2020 1.150 -115 1.030 -103
2021 1.250 -125 1.120 -112
2022 1.350 -135 70,000 2.000 1.120 1.210 -9
2023 1.480 -148 120,000 5.000 1.250 1.340 -9
2024 1.600 -160 170,000 5.000 1.430 1.500 -7
2025 1.740 -174 225,000 5.000 1.610 1.660 -5
2026 3,445,000 5.000 1.840 1.890 -5 1,550,000 5.000 1.800 1.800 +0 -5
2027 6,385,000 5.000 1.980 2.040 -6 1,935,000 5.000 1.950 1.950 +0 -6
2028 7,750,000 5.000 2.110 2.140 -3 2,180,000 5.000 2.100 2.050 +5 -8
2029 2.240 -224 565,000 5.000 2.200 2.150 +5
2030 2.330 -233 650,000 5.000 2.290 2.240 +5
2031 2.400 -240 740,000 3.000 2.720 2.310 +41
2032 2.470 -247 830,000 3.000 2.890 2.380 +51
2033 2.530 -253 910,000 3.000 3.000 2.440 +56
2034 2.590 -259 1,000,000 3.000 3.050 2.490 +56
2035 2.630 -263 1,120,000 3.000 3.080 2.520 +56
2036 2.660 -266 1,230,000 3.000 3.110 2.550 +56
2037 2.680 -268 1,340,000 3.000 3.130 2.570 +56
2038 2.700 -270 1,470,000 3.000 3.150 2.600 +55
2039 2.720 -272 11,325,000 3.000 3.170 2.620 +55
22
2018 CASBO Annual Conference & California School Business Expo 22California School Districts Overwhelmingly Use Negotiated Sales for GO Bonds
2015 to Present CA K-12 General Obligation Bond Issuances
Underwriter's Discounts ($ per 1,000 Bond)
Negotiated Competitive Difference
Average: $5.44 $9.07 ($3.63)
Weighted Average: $3.61 $5.27 ($1.66)
Source: Thomson Reuters
2015 to Present CA K-12 General Obligation Bond Issuance 2015 to Present CA K-12 General Obligation CAB Issuance
Negotiated and Competitive Market Share by No. of Issuances Negotiated and Competitive Market Share by No. of Issuances
1
1%
Negotiated Negotiated
185 Competitive
Competitive
18%
823, 109
82% 99%
Source: Thomson Reuters Source: Thomson Reuters
23
2018 CASBO Annual Conference & California School Business Expo 23SECTION II:
2017 TAX CUTS AND JOBS ACT BILL SUMMARY AND OTHER
2017 CALIFORNIA LEGISLATION
2018 CASBO Annual Conference & California School Business ExpoTax Reform’s Potential Impact on Municipal Market
Both House and Senate passed different versions of the bill in early December, budget
conferences made revisions in mid-December, and President Trump signed on December
22, 2017. These changes take effect January 1, 2018:
Provision Description Impact on Municipal Issuers and Market
Modifies seven brackets
Individual Income Tax Rates May reduce attractiveness of tax-exempt bonds
(10% - 37%)
$10,000 cap for combination of state
May induce investors in high-tax states to seek more tax-
State and Local Tax Deduction (SALT) property tax, income and sales tax
exempt bonds
deduction
May lower attractiveness of tax-exempt bonds for corporations
Corporate Tax Rate Reduce to 21%
and insurance companies
Eliminates ability to issue QZABs, No changes to subsidy payments for bonds issued before
Tax Credit Bonds CREBs, QSCBs, BABs, and other tax December 31, 2017; may reduce incentive to fund energy
credit bonds efficiency projects
Limits issuers to current refundings; may reduce feasibility of
Eliminates tax-exempt advance
Advance Refundings refundings and encourage use of taxable bonds or forward
refundings
delivery structures
Deficit of more than $150 billion in any year may trigger
Estimated to generate $1.5 trillion additional sequestration of Federal Subsidies for BABs and
Fiscal Impact
deficit over the next decade similar products; may increase Treasury borrowing needs
which may increase bond interest rates
25
2018 CASBO Annual Conference & California School Business Expo 25Tax Reform’s Potential Impact on Municipal Market
2018 bond issuance volume is expected to be 20% - 25% lower in the aftermath of significant Q4
2017 issuance coupled with elimination of advance refundings and tax credit bonds
The bill does not cap or repeal municipal bond exemption, remaining one of the few tax-
advantaged vehicles available for taxpayers
The reduction of corporate tax rate to 21% will likely reduce the appetite of bank portfolios and
property/casualty insurance companies for tax-exempt municipals
Changing Landscape of Municipal Bond Investors
Individuals* Mutual Funds (1) Banking Institutions (2) Insurance Companies (3) Other (4)
$1.3 Trillion $3.5 Trillion $3.8 Trillion
100% 4% 4% 5%
16% 12% 14%
80% 7%
?
8% 15%
27%
38%
60% 25%
50%
40%
41%
34%
20%
0%
1997 2007 2017 Q3 2018+
Source: SIFMA and the Federal Reserve System
(1) Includes mutual funds, money market funds, closed-end funds and exchange traded funds.
(2) Includes U.S. chartered depository institutions, foreign banking offices in the U.S., banks in U.S. affiliated areas, credit unions, and broker dealers.
(3) Includes property-casualty and life insurance companies.
(4) Includes nonfinancial corporate business, nonfinancial non-corporate business, state and local governments and retirement funds, government-sponsored enterprises and foreign holders.
* Household holdings is revised up by about $840 billion, on average, from 2004 forward. 26
2018 CASBO Annual Conference & California School Business Expo 26Tax Reform’s Potential Impact on CA K-12 School Districts
The limitation to $10,000 of the State and Local Government Tax Deduction and/or property tax
deduction cap and the mortgage interest deduction cap ($750,000 max mortgage) could put
negative pressure on California local taxpayers and impact school districts’ ability to pass local
bond measures and parcel taxes
The elimination of the tax credit bond programs increase the cost of borrowing for California
school district facilities (QZABs and CREBs have been a tool for solar & energy efficiency
projects in recent years)
The elimination of tax exempt advance refundings reduces the ability to restructure or refinance
for savings on securities previously issued
May create new call provision structure for selling new bond issues (i.e. going from 10 year call provisions to shorter call protection, 7, or
5 years)
Share of California K-12 Bond Issues by Type
100%
7%
18% 22% 20%
32%
80% 46%
18% 43% 18%
60% 38%
27%
18%
40%
63% 62%
49%
20% 41% 37% 40%
0%
2012 2013 2014 2015 2016 2017
New Money Advance Refundings Current Refundings
27
Source: Thomson Reuters. 2018 CASBO Annual Conference & California School Business Expo 27New Legislation Impacting New CA K-12 Bond Elections
Assembly Bill 1194 (Dababneh)
Tax Rate Statements must now include:
The best estimate of the average annual tax rate that would be required to be levied to fund the bond issue over the entire
duration of the bond debt service
The final fiscal year in which the tax is anticipated to be collected
The best estimate of the highest tax rate that would be required to be levied to fund the bond issue, and an estimate of the
year in which that rate will apply
The best estimate of the total debt service, including the principal and interest, that would be required to be repaid if all the
bonds are issued and sold
Assembly Bill 195 (Obernolte)
75-Word Ballot Statement:
Must include the amount of money to be raised annually and the rate and duration of the tax to be levied for the bonds
Must be a true and impartial synopsis of the purpose of the proposed measure
Must be in language that is neither argumentative nor likely to create prejudice for or against the measure
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2018 CASBO Annual Conference & California School Business Expo 28New Legislation Impacting New CA K-12 Bond Elections
Unintended Consequences of AB 195
Confusion
Possible emergency legislation (AB 2848 (Obernolte))
Requirement consumes 16-20 words of the 75 available ballot question words
Sample School District Ballot Statement
“To ______________________, shall this measure of the ______ School District issuing $______ in bonds at legal rates
be adopted, levy on average ______ cents per $100 assessed value, $______ annually for ______ [e.g. modernization of
school facilities], while bonds are outstanding, with annual audits, etc.?”
2018 CASBO Annual Conference & California School Business Expo 29CONCLUSION: QUESTIONS AND DISCUSSION 2018 CASBO Annual Conference & California School Business Expo
Bio
John R. Baracy
Managing Director
Stifel, Nicolaus & Company, Incorporated
Los Angeles, California
tel: 213-443-5025
e-mail: jbaracy@stifel.com
John R. Baracy is a Managing Director in the Los Angeles public finance office of Stifel. Mr. Baracy began his public finance career in 1994 and has
experience in all facets of the municipal finance business. He specializes in the management, structuring and sale of California K-12 Education new
money and refunding general obligation bonds, certificates of participation, tax credit bonds, Mello-Roos bonds and tax and revenue anticipation
notes. In addition to managing the introduction of these financings into the market, Mr. Baracy performs debt capacity, general obligation bond tax rate
and credit analyses, California K-12 education finance legislation analyses, and evaluates the investment of bond proceeds. Throughout his career, he
has completed more than 500 financings totaling over $9.5 billion.
Mr. Baracy graduated with a Bachelor of Science degree from Arizona State University with an emphasis in Finance. Mr. Baracy maintains his Series 7,
50 and 63 licenses with FINRA and frequently presents for California K-12 school district advocacy groups such as C.A.S.H., CASBO, and CSBA. Mr.
Baracy is currently a board member of the Coalition of Adequate School Housing (CASH).
31
2018 CASBO Annual Conference & California School Business ExpoBio
Adam Bauer
President &CEO
Fieldman, Rolapp & Associates
Irvine, California
tel: 909-660-7203
e-mail: abauer@fieldman.com
Mr. Adam S. Bauer, CIPFA, President and Chief Executive Officer, joined the firm in September 2004. Mr. Bauer has been involved with a variety of
public agencies throughout the State of California, assisting them with their debt transactions and policy development. Mr. Bauer has two primary areas
of expertise: public financings for school districts and land secured negotiations and financings. Mr. Bauer has specific expertise in public financings for
school districts where he has developed capital facilities funding plans that incorporate General Obligation Bonds, Certificates of Participation,
Community Facilities District Special Tax Bonds, and State funding. In addition to assisting School Districts with their debt transactions, Mr. Bauer has
also negotiated mitigation agreements on behalf of school districts throughout the State of California. Mr. Bauer assists school districts with identifying
the true cost of new developments and then negotiates on their behalf to structure mitigation agreements to meet their needs. Mr. Bauer also has
specific emphasis in land secured financings. Mr. Bauer has been involved in all aspects of the formation of Community Facilities Districts and the
issuance of debt, including those with multiple improvement areas, series of bonds and property owners. Furthermore, prior to joining the firm, Mr. Bauer
acted as a Financial Advisor, Special Tax Consultant and Community Facilities District Administrator. While working as a Special Tax Consultant and
Community Facilities District Administrator, Mr. Bauer served as project manager for more than 60 Community Facilities Districts for a variety of public
agencies. Mr. Bauer is a regular speaker at California's Coalition for Adequate School Housing (CASH) and has been a speaker for California Debt
Investment Advisory Commission (CDIAC). Mr. Bauer is co-chair of the Fiscal Management Strand of the Planning Committee for CASH, is a member of
California School Board Association (CSBA), California Association of School Business Officials (CASBO) and Committee on Assessments Special
Taxes and other Financing Facilities (CASTOFF). In addition, Mr. Bauer is a Registered Investment Advisor Representative (Series 65) and he holds the
CIPFA designation as a Certified Independent Public Finance Advisor from the National Association of Independent Public Finance Advisors
32
2018 CASBO Annual Conference & California School Business ExpoBio
David Casnocha
Managing Shareholder
Stradling Yocca Carlson & Rauth
San Francisco, California
tel: 415-283-2241
e-mail: dcasnocha@sycr.com
Mr. Casnocha is the managing shareholder of Stradling’s San Francisco office and a former member of the firm’s board of directors. David has practiced
in public finance for more than 40 years and serves as bond and disclosure counsel to public agencies and underwriter’s counsel to both national and
regional investment banking firms. He also has served as bond counsel to more than 600 school and community college districts in California. He has
experience in primary and secondary school district financings, general obligation bonds, bond anticipation notes, certificates of participation, lease
financings and tax and revenue anticipation notes. In addition, David has represented the California Education Facilities Authority on numerous private
university financings and represents a range of nonprofit corporations that incur tax-exempt debt to finance their charitable purposes. As bond counsel to
the California League of Community Colleges, he has helped design tax-exempt pool financings for tax and revenue anticipation notes, lease revenue
bonds solar energy projects, and student housing. David also served as bond counsel on Other Post-Employment Benefit bond issues. He is
experienced in a range of revenue bond financings for water, sewer and a variety of other enterprise systems.
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2018 CASBO Annual Conference & California School Business ExpoAPPENDIX:
CALIFORNIA K-12 SCHOOL FINANCE RESOURCE MATERIALS
2018 CASBO Annual Conference & California School Business ExpoComparison of GO Bonds, COPs and Mello-Roos Bonds
CHARACTERISTICS GO BONDS COPS MELLO-ROOS
Vote Required? Yes. No. Yes.
Minimum Affirmative Votes Two-thirds of votes cast, or 55% of votes cast pursuant N/A Two-thirds of votes cast.
to Proposition 39.
Qualified Electors Registered voters residing in entire school district (or N/A Registered voters in community facilities
only portion of school district if establish school facilities district (CFD), if 12 or more voters reside in
improvement district pursuant to Ed. Code § 15300). CFD. If fewer than 12 registered voters
reside in CFD, vote is of landowners, one
vote per acre.
Boundary of Area to be Taxed Entire school district (or only portion of school district if N/A Territory of CFD, as defined by school
establish school facilities improvement district pursuant board. CFD could be entire school district
to Ed. Code § 15300). or a portion of district, including non-
contiguous areas.
Basis of Tax Assessed value of property. N/A Any reasonable method, except assessed
value.
Method of Tax Collection Annual property tax bill. N/A Annual property tax bill.
Can Seniors be Exempt from Tax? No. N/A Yes.
Typical Use of Technique Finance school facilities. Finance school Finance school facilities.
facilities.
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2018 CASBO Annual Conference & California School Business Expo 35Comparison of GO Bonds, COPs and Mello-Roos Bonds
CHARACTERISTICS GO BONDS COPS MELLO-ROOS
Facilities Eligible for Financing With 2/3 vote, purchase or improvement of real Any lawful purpose. Any facility with useful life of five
property (purchase of land or construction of years or more (including school
buildings). With 55% vote pursuant to Proposition 39, furnishings and buses).
construction, reconstruction, rehabilitation, or
replacement of school facilities, including furnishings
and equipment, and the acquisition or lease of real
property.
Can School Furnishings and No with 2/3 vote. Yes with 55% vote pursuant to Yes, without limitation. Yes, provided the equipment has
Equipment be Financed? Proposition 39. a useful life of five years or longer.
Can Tax Revenues be Used for No. No. Yes. Bond debt service and pay-
Purposes Other than Debt Service on as-you-go expenses.
Bonds?
Are Operating Expenses Eligible for No. No. Yes. Maintenance of school sites
Financing with Tax? and structures. Also, annual cost
of administering the financing and
the CFD.
Separate Authority Required to Issue No. School Board and County Office No.
Bonds? approval.
Maximum Annual Tax Request Not limited with 2/3 vote. With 55% vote pursuant to N/A Voters must approve a maximum
Proposition 39, annual tax is limited to $30 per annual tax amount per taxable
$100,000 of assessed valuation in elementary or high unit and a method for levying and
school district and $60 per $100,000 of assessed apportioning the tax.
valuation in unified school district
36
2018 CASBO Annual Conference & California School Business Expo 36Comparison of GO Bonds, COPs and Mello-Roos Bonds
CHARACTERISTICS GO BONDS COPS MELLO-ROOS
Type of Bond Sale Negotiated or competitive sale. Negotiated or competitive sale. Negotiated or competitive sale.
Debt Limit Amount of bonds outstanding at any time None. Value of property in the CFD subject to
cannot exceed 2.5% of total assessed value special tax must be at least three times
in a unified school district or 1.25% of the amount of outstanding bonds. Under
assessed value in a non-unified school certain conditions the school board can
district. approve an amount of bonds exceeding
this limit.
Bond Security School district's unrestricted ability to raise All legally available funds, Mello-Roos special tax is a lien on
property taxes to meet debt service including the General Fund, property. School district has authority to
requirements. Property tax is a lien on usually earmarked to State initiate accelerated foreclosure on
property. County has authority to foreclose revenue, redevelopment pass- property for payment of delinquent taxes,
on lien for payment of delinquent taxes. through, or other sources. so long as bonds have been issued by
the CFD.
Maximum Term of Tax Levy As long as necessary to repay bonds N/A As long as necessary to repay bonds or
authorized by voters. to pay directly for facilities authorized by
voters. Final year of tax must be
specified.
Maximum Term of Bonds Up to 25 years under Education Code, or up Up to useful life of facility being 40 Years.
to 40 years under Government Code. financed.
37
2018 CASBO Annual Conference & California School Business Expo 37Proposition 46 vs. Proposition 39 GO Bond Authorization
Bond Type Feature Proposition 46 Proposition 39
Voter Approval Requirement 66.7% 55%
Election Date Restrictions All election dates, including special Regularly scheduled elections, primarily in
elections on any Tuesday even numbered years
Use of Bond Proceeds Acquisition and improvement of Acquisition and improvement of real
real property property; including furniture, equipment and
leases
Limits on Amount of Annual Tax Rate None $30 per $100,000 (Elem/High)
$60 per $100,000 (Unified)
Limits on Amount of Bonds Outstanding 1.25% of AV (Elem/High) 1.25% of AV (Elem/High)
2.50% of AV (Unified) 2.50% of AV (Unified)
Citizens Oversight Committee Optional Mandatory
Performance and Financial Audits Optional, except for annual report Mandatory
regarding expenditures of funds
and status of projects
38
2018 CASBO Annual Conference & California School Business Expo 38Basic Legal Documents
Resolution of Issuance
Provides Parameters of Sale (amount, max interest rate, term, cost of issuance)
Authorized Officers
Bond Purchase Contract or Notice of Sale
Competitive vs. Negotiated Method
Sets forth terms and conditions of debt sale to Underwriter including interest rates and
fees
Security Covenants (School District duties and obligations)
Denominations & Interest and Principal Payment Dates
Project Fund Requisition Process for releasing funds
Investment of Funds
Remedies to investors defaults and non-performance
Prepayment or Redemption terms
39
2018 CASBO Annual Conference & California School Business Expo 39School District Disclosure Documents and Duties
Official Statement
Preliminary: Marketing/ Disclosure to Potential Investors
Final: Delivered to Purchasers
Marketing/ Sales/ Disclosure document
Issuer’s Document
Continuing Disclosure Agreement
Required by Securities and Exchange Commission’s Rule 15c2-12
Issuer’s Duty to file Annual Reports and to report Material Events
SB 1029 Debt Policy
Create and manage submission requirements annually for all debt issuances after
January 1, 2017
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2018 CASBO Annual Conference & California School Business Expo 40Steps to Debt Issuance
Step 1: School District Step 2: Finance Team is
decides to finance a project selected and assembled
Step 4: Staff and Finance Step 3: Revenue stream
team determine debt securing the debt is
structure identified/ analyzed
Step 5: Election/ formation
proceedings docs are prepared Step 6: Voter Approval*
and approved*
* If Applicable
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2018 CASBO Annual Conference & California School Business Expo 41Steps to Debt Issuance
Step 7: Legal and disclosure Step 8: Credit ratings/ bond
documents are drafted insurance secured*
Step 10: Underwriter begins Step 9: Board approves the legal
marketing the debt to investors and disclosure documents and
(Negotiated Sale) authorizes debt issuance
Step 11: Underwriter commits to
buy debt from School District/Debt Step 12: Transaction is closed
Awarded to Underwriter and the project is funded
(Competitive Sale)
* If Applicable
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2018 CASBO Annual Conference & California School Business Expo 42Board Approval
Proposition 46
Requires simple majority approval of school board members
Proposition 39
Requires 2/3rds approval of school board members
43
2018 CASBO Annual Conference & California School Business Expo 43Assessed Value Trends
The recession had a significant effect on the assessed value of most California school
districts
During the recession assessed values grew much slower or declined, but have returned to stronger growth in recent years
As shown below, 14 of the 15 largest counties in California experienced an increase in assessed valuation from 2014-15 to 2015-16
County 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Alameda 4.77% -2.51% -1.58% 0.05% 2.14% 5.02% 5.96% 7.80%
Contra Costa 0.31% -6.97% -3.05% -0.37% 0.86% 3.73% 9.03% 7.53%
Fresno 1.49% -2.95% -0.76% 0.47% 0.00% 5.62% 3.75% 4.15%
Kern 5.89% -6.20% 4.63% 2.43% 7.50% 3.31% 5.98% -8.78%
Los Angeles 6.95% -0.53% -1.81% 1.41% 2.24% 4.61% 5.47% 6.08%
Orange 3.89% -1.38% -0.54% 0.98% 1.92% 3.43% 6.36% 5.89%
Riverside 1.44% -10.49% -4.40% -1.25% -0.02% 4.21% 8.31% 5.85%
Sacramento 1.81% -7.15% -1.84% -3.65% -2.66% 4.10% 6.40% 4.64%
San Bernardino 5.20% -6.01% -4.32% -0.47% 0.80% 6.20% 5.93% 5.07%
San Diego 4.42% -2.40% -1.42% 0.40% -0.14% 6.02% 5.78% 5.60%
San Francisco 8.63% 7.08% 4.32% 0.49% 4.20% 4.60% 5.46% 6.50%
San Joaquin -0.81% -10.22% -3.81% -3.70% -0.33% 5.79% 8.93% 2.86%
San Mateo 7.99% 0.68% -1.44% 0.96% 3.33% 6.01% 5.61% 7.64%
Santa Clara 6.98% 0.14% -2.40% 0.90% 3.25% 8.35% 6.80% 8.67%
Ventura 3.17% -2.42% -0.26% 0.00% 0.60% 3.20% 5.70% 4.10%
(1) Source: County Assessor Websites and Urbics
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2018 CASBO Annual Conference & California School Business Expo 44Credit Quality of Facility Funding
Higher Credit Lower Credit
Quality Quality
Leases & Certificates of
Security Type General Obligation Bonds Land-Secured Bonds
Participation
Annual special tax or assessment
Secured by annual appropriations levied on property. Bonds are secured
Secured by an unlimited ad valorem
Revenue Pledge property tax
from general fund or specific by the value of taxable property in
revenues. defined area and the ability to
foreclose on property for unpaid taxes.
Yes. A 2/3 vote of registered voters or
No. Governing Board approval is property owners for Community
Yes, either with a 2/3 vote or a 55%
Vote Required? vote.
required without vote of registered Facilities Districts (CFDs) and simple
voters or property owners. majority vote for assessment districts
(ADs).
45
2018 CASBO Annual Conference & California School Business Expo 45The Rating Process
Rating Agency
An independent service that provides a credit quality evaluation of bonds
Recently changed rating scale to correspond with corporate ratings
Duties:
1.Reviews four broad factors to determine ratings.
The financial strength of the Issuer
The economic health of the community
Managerial and governance practices
Debt position – direct and overlapping debt, overall debt to wealth position
2.Interviews Issuer, others
3.Assigns a letter of rating to bonds
46
2018 CASBO Annual Conference & California School Business Expo 46Bond Credit Rating Spectrum
Rating Description Moody's Standard & Poor's Fitch
Highest credit quality; issuer has a strong ability
Aaa AAA AAA
to meet its obligations.
Aa1 AA+
Very high credit quantity low risk of default. Aa2 AA AA
Aa3 AA-
Investment
A1 A+
Grade High credit quality, but more vulnerable to
A2 A A
changes in the business economy.
A3 A-
Baa1 BBB+
Adequate credit quality for now, but more likely
Baa2 BBB BBB
to be impaired if conditions worsen.
Baa3 BBB-
Ba1 BB+
Below investment grade, but a good chance the
Ba2 BB BBB
issuer can meet commitments.
Ba3 BB-
B1 B+
Significant credit risk, but issuer is presently
B2 B BBB
Non-investment able to meet obligations.
B3 B-
Grade
Caa1 CCC+ CCC
High default risk. Caa2 CCC CC
Caa3 CCC- C
DDD
Issuer failed to meet schedules interest or
C D DD
principal payments
D
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2018 CASBO Annual Conference & California School Business Expo 47School Facilities Improvement District
School Facilities Improvement District (SFIDs)
General obligation bond authorization for limited area within a school district
Bond election required among voters residing in the proposed SFID
General obligation bond authorization can be conducted using Proposition 46 or Proposition 39
Why form an SFID?
School attendance area
Exclusion of existing CFDs
Feeder districts
Geographical / political jurisdictions
Areas of separate community identity
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2018 CASBO Annual Conference & California School Business Expo 48You can also read
