MEMORANDUM. Response to School Board Questions on Master Lease Program

Transcription

1 MEMORANDUM To: From: RE: Vivian McGettigan Janet Romanchyk Joseph Mason David Rose Response to School Board Questions on Master Lease Program Date: July 31, 2007 cc: Christopher Kulp R.T. Taylor Davenport & Company LLC ( Davenport ), in our capacity as Financial Advisor to Fauquier County ( County ), has been asked by County Finance Staff to prepare certain background material for the School Board of Fauquier County ( School Board ) pertaining to the County s request that the School Board approve certain documents necessary to create a Master Lease Revenue Bond Financing program. This background material includes a recapitulation of summary advantages and disadvantages to this financing approach, an estimate of cost savings that may be derived from such a program, and a response to certain specific questions posed by School Board Members. In preparing this memorandum, Davenport consulted with Mr. Christopher Kulp, Esq. of Hunton & Williams, LLP, Bond Counsel to the County. Mr. Kulp provided a summary of the financing documents and approvals required of all parties to effectuate a Master Lease Program, which appears as Appendix A to this document. Davenport recommends that further detailed discussions regarding refinements to the Master Lease Program be held in close consultation with Mr. Kulp as his expertise with this type of financing will be critical to achieving the objectives of both the County and School Board. Master Lease Revenue Bond Program Advantages and Disadvantages Advantages Cost of Capital for School Projects Only is virtually the same for Master Lease Revenue Bonds and VPSA. 1

2 Permits Schools and Less Essential County Projects to be combined into one financing, thus providing economies of scale that translate into cost savings. County Projects can be financed more cost effectively if added to the Master Lease, compared to a second financing (ie; a bank placement). Future Refunding/Rating is directly controlled by the Locality vs. the State. Potential Future Savings would be approximately $2.5 million within the next 10 years. The County and School Board have maximum flexibility to structure and time their bond issues in a manner that corresponds to their own cash flow needs, not a schedule or structure that suit the state programs. Disadvantages A failure by the County to pay debt service puts the School Facilities at risk, although several factors mitigate this risk: o County would lose other facilities under the Master Lease; o Single appropriation for debt service precludes the County appropriating for one project and not another without defaulting on all bonds; o County would jeopardize its high investment-grade credit rating; and o We are not aware of any Virginia entity, state or local, ever failing to appropriate on a Lease Revenue Bond since the structure was introduced in the state. Coordination of multiple construction projects may result in some loss of future arbitrage earnings. Cost Savings A Master Lease Revenue Bond program offers the County ample savings by virtue of the ability to combine projects under one financing, compared to a two-financing approach that would include a VPSA bond issue and another financing for County general projects. These savings range from approximately $115,000 to $385,000, as documented in Davenport s July 6, 2007 memorandum to County Staff, which is attached hereto as Appendix B. Specific School Board Questions 1. How long would the School Facilities be used as collateral? Just as would be true for a mortgage on one s personal residence, there would be a lien on the property that extended until the loan is fully repaid. Master Lease Revenue Bond financings entail the use of a Ground Lease, which typically extends for a few years (attorneys usually use 10 years) beyond final maturity of the bonds. 2

3 Despite the term of the Ground Lease being longer than the final maturity on the bonds (ie; 30 years v. 20 years), once the bonds are fully repaid, the Ground Lease terminates and full ownership rights are restored to the School Board. The primary purposes of extending the Ground Lease past final bond maturity are to (1) allow projects to be added to the Master Lease, potentially without a need to amend the Ground Lease, and (2) to satisfy typical bond insurer and rating agency requirements. The specific question was posed regarding the length of time the schools would be used as collateral. By way of example, a Master Lease program is typically set up to offer the ability to do subsequent bond issues for at least two or three years after an initial financing. Assuming the 2007 financing has a bond maturity of 20 years, the School Facilities would be used as collateral on that financing for 20 years. If a 2009 financing was undertaken, also with a 20 year term, the School Facilities would be used as collateral for 22 years. It is important to note that there are areas of flexibility in Master Lease programs. If parties to the financing wish to shorten the length of the Master Lease program, or require a review of the program on a date certain, this can be accommodated within the documents. For example, the bond insurers or rating agencies might require that the Ground Lease extend five or 10 years beyond final maturity, but the documents could nevertheless call for all parties to approve a financing after three years. This effectively requires a programmatic review of the Master Lease program three years from now. Given that this is a new method of financing for both the County and the School Board, it seems reasonable that all parties would want to take stock of the efficacy of the program at some future date and affirmatively authorize any extension. 2. Does the School Board approve future resolutions under the Master Lease? The County and School Board have significant flexibility in how they set up a Lease Revenue Bond program. The ultimate legal structure is really a policy decision to be taken by the respective Boards. There are three primary alternatives: a) Stand-Alone Lease Revenue Bonds: The 2007 and subsequent transactions would each have their own collateral. A failure by the County to pay on one transaction would not effect the other transactions. This is not a true Master Lease structure. Stand-Alone financings are very effective and dozens of transactions have been completed in Virginia over the past few years. The one downside, as compared to a Master Lease, is that less essential (as deemed by the rating agencies) projects are sometimes difficult to include in a Stand-Alone financing unless a sufficient amount of essential assets (ie; schools, core government facilities) are being financed simultaneously. Note that to the extent there are School Facilities in any transaction, the County, the School Board, and the County Industrial Development Authority (IDA) would all be required to approve the financing. If there are no school projects in a transaction, the County and the IDA only would approve resolutions. 3

4 b) Master Lease Structure: The 2007 financing documents would be used as master financing documents. Each subsequent transaction would be secured by the same collateral in every other series of bonds (deemed cross-collateralized ). Debt service for all bonds would be paid in one lump-sum and a failure by the County to appropriate would put all projects, both School Board and County, at risk. If the County and School Board so desire, the Master Lease can be set up in a manner that requires the approval of all parties for any transaction contemplated to be done after three years have elapsed. This would effectively require a programmatic review of this financing method, irrespective of the term of the Ground Lease. At such time, the future capital program would be reviewed and if both Boards agreed that the Master Lease program had achieved its objectives, the program could be extended, perhaps for another five years. The key theme in this analysis is that the County and School Board have ample flexibility to structure a program that meets their respective needs. Davenport strongly recommends coordination with Bond Counsel to achieve the desired structure. 3. How will the School Board be kept whole regarding refunding savings? When VPSA completes a refinancing, it typically sends payment to local entities equal to its calculation of refunding savings. Payments on the local bond remain unchanged. Savings from a refunding of Lease Revenue Bonds could offer the same substantive result. Savings from a refunding can be structured to be taken in three primary ways: upfront/immediately, on a level annual basis over the remaining term of the bonds refunded, or backloaded. There is no material difference in the economic benefit based on how savings are allocated. There are a number of ways that the School Board can be kept whole. This issue is more of a policy question for the respective Boards and therefore we are not trying to be prescriptive. Below, we have outlined one potential approach. Fauquier County can structure its future refunding savings upfront to mirror the benefits of the VPSA approach. Any net savings from a refunding would be allocated pro-rata based on the County and School Board projects refinanced. The School Board s allocation would be set aside in a reserve for future school uses. Presumably, the School Board and County budget the full amount of debt service due in any given year. To the extent savings are derived from a future refunding, the upfront savings could be netted from the budgeted debt service and the resulting pro-rata net savings to the School Board would be set aside in reserve for future school use. 4

5 As mentioned, there are other methodologies for distributing savings that would ensure that all parties receive their fair share of the economic benefits of a refunding. The more critical issue is that under a Master Lease structure, the County and School can be proactive in taking advantage of refunding opportunities when conditions warrant, without having to rely on the Commonwealth. Appendix A: Hunton & Williams, LLP Overview Financing Structure of Series 2007 Bonds (1) Agreement of Trust (between the IDA and a corporate trustee) i) describes general bond provisions, establishes funds and describes role of the trustee. ii) each series of bonds would be issued pursuant to the terms of a supplemental agreement of trust. iii) bonds secured by pledge of payments received from the County under the Financing Agreement and leasehold interest in school buildings (2) Financing Agreement (between the IDA and the County) i) IDA loans the bond proceeds to the County ii) County agrees, subject to appropriation, to make payments to the IDA in amounts and at time sufficient to enable the IDA to pay debt service on the bonds when due. (3) Ground Lease (between School Board and IDA) i) School Board leases one or more school facilities to the IDA as security for 2007 bonds issued under the Agreement of Trust. ii) lease term typically 5-10 years longer than term of 2007 bonds (4) Financing Lease (between IDA and School Board) i) IDA leases school facilities back to the School Board. ii) lease term equal to term of Series 2007 Bonds iii) upon event of non-appropriation by County BOS under Financing Agreement, then Trustee can evict School Board from leased school facilities for up to final date of Ground Lease (5) Assignment of Rents and Leases (from IDA to Trustee) 5

6 i) IDA assigns its rights in the leases to the bond trustee for the benefit of the bondholders. (6) Leasehold Deed of Trust (from IDA to Trustee) i) IDA grants to the Trustee a leasehold interest in the leased properties for the benefit of the bondholders. 6

7 Approvals Required for Series 2007 Bonds IDA - adopts resolution approving forms of all documents to which it is a party; approving pricing parameters for Series 2007 Bonds School Board - adopts resolution approving forms of Ground Lease, Financing Lease and Assignment Agreement and authorizing School Superintendent to sign County BOS - adopts resolution approving all documents to which the County is a party or to which the County consents and approving pricing parameters of Series 2007 Bonds This Space Intentionally Left Blank 7

8 Appendix B Davenport July 6, 2007 Memo 8

9 Public Finance Department Post Office Box Richmond, Virginia One James Center 901 East Cary Street Richmond, Virginia MEMORANDUM To: Tony Hooper Vivian McGettigan Janet Romanchyk From: David Rose Joe Mason R.T. Taylor Re: Financial Cost/Benefit of Issuing One versus Two Financings for the Identified Capital Improvement Projects to be Financed this Fall 2007 Date: July 6, 2007 Overview: Enclosed, please find two scenarios that clearly identify the substantial financial savings to Fauquier County through a single Lease Revenue Bond issuance as opposed to two separate and distinct bond issues. The Range of Financial Savings is roughly between $100,000 and $400,000 of benefit to the County. The difference is based upon whether or not the County pursues a Level Debt Service structure or a Level Principal structure for the Private Placement of Non- VPSA eligible funds. Note: the larger savings occurs in the event of a level debt service approach. Conclusion: While experts may differ on exact interest rates or cost of issuance which in turn can alter these estimated savings to some degree greater or lesser for that matter, the results here are undeniable. A substantial savings will inure to the County in a single issuance strategy.

10 Scenario #1 - Level Principal Structure on the Private Placement 2 Issue Approach 1 Issue Approach Difference Fiscal Year Principal Interest LOC Total Principal Interest (1) Total Principal Interest LOC Total Principal Interest Total Principal Interest LOC Total ,142 13, ,142 13, (13,142) (13,142) ,300,242 39,425 2,339, , , , ,000 2,447,562 39,425 2,613, ,467,050 2,467,050 (127,000) 19,488 (39,425) (146,937) ,275,000 1,699,681 38,788 3,013, , , ,954 1,402,000 1,839,635 38,788 3,280,423 1,365,000 1,822,988 3,187,988 (37,000) (16,648) (38,788) (92,435) ,325,000 1,647,681 37,488 3,010, , , ,588 1,452,000 1,780,269 37,488 3,269,757 1,425,000 1,767,188 3,192,188 (27,000) (13,082) (37,488) (77,569) ,380,000 1,593,581 36,135 3,009, , , ,222 1,507,000 1,718,803 36,135 3,261,938 1,480,000 1,709,088 3,189,088 (27,000) (9,716) (36,135) (72,851) ,435,000 1,537,281 34,728 3,007, , , ,856 1,562,000 1,655,137 34,728 3,251,865 1,540,000 1,648,688 3,188,688 (22,000) (6,450) (34,728) (63,177) ,495,000 1,478,681 33,263 3,006, , , ,490 1,622,000 1,589,171 33,263 3,244,434 1,605,000 1,585,788 3,190,788 (17,000) (3,384) (33,263) (53,646) ,555,000 1,417,681 31,738 3,004, , , ,124 1,682,000 1,520,805 31,738 3,234,543 1,670,000 1,520,288 3,190,288 (12,000) (518) (31,738) (44,255) ,620,000 1,354,181 30,150 3,004, ,000 95, ,758 1,747,000 1,449,939 30,150 3,227,089 1,740,000 1,452,088 3,192,088 (7,000) 2,148 (30,150) (35,002) ,685,000 1,288,081 28,498 3,001, ,000 88, ,392 1,812,000 1,376,473 28,498 3,216,971 1,810,000 1,381,088 3,191,088 (2,000) 4,614 (28,498) (25,883) ,755,000 1,219,281 26,778 3,001, ,000 81, ,026 (1) 1,882,000 1,300,307 26,778 3,209,085 1,880,000 1,307,288 3,187,288 (2,000) 6,980 (26,778) (21,797) ,835,000 1,138,306 24,983 2,998, ,000 73, ,660 1,962,000 1,211,966 24,983 3,198,949 1,970,000 1,220,438 3,190,438 8,000 8,471 (24,983) (8,511) ,930,000 1,044,181 23,100 2,997, ,000 66, ,294 2,057,000 1,110,475 23,100 3,190,575 2,070,000 1,119,438 3,189,438 13,000 8,962 (23,100) (1,138) ,030, ,181 21,120 2,996, ,000 58, ,928 2,157,000 1,004,109 21,120 3,182,229 2,175,000 1,013,313 3,188,313 18,000 9,203 (21,120) 6, ,135, ,056 19,038 2,995, ,000 51, ,562 2,262, ,618 19,038 3,173,656 2,290, ,688 3,191,688 28,000 9,069 (19,038) 18, ,245, ,556 16,848 2,993, ,000 44, ,196 (1) 2,372, ,752 16,848 3,164,600 2,405, ,313 3,189,313 33,000 8,560 (16,848) 24, ,350, ,494 14,550 2,990, ,000 36, ,830 2,477, ,324 14,550 3,153,874 2,520, ,638 3,190,638 43,000 8,314 (14,550) 36, ,450, ,494 12,150 2,985, ,000 29, ,464 2,577, ,958 12,150 3,142,108 2,630, ,200 3,191,200 53,000 8,242 (12,150) 49, ,560, ,031 9,645 2,986, ,000 22, ,098 2,687, ,129 9,645 3,135,774 2,740, ,088 3,187,088 53,000 7,958 (9,645) 51, ,670, ,894 7,030 2,982, ,000 14, ,732 2,797, ,626 7,030 3,124,656 2,860, ,088 3,188,088 63,000 7,462 (7,030) 63, ,785, ,234 4,303 2,977, ,000 7, ,366 2,912, ,600 4,303 3,111,903 2,990, ,906 3,191,906 78,000 6,306 (4,303) 80, ,910,000 63,656 1,455 2,975, ,910,000 63,656 1,455 2,975,111 3,120,000 68,250 3,188, ,000 4,594 (1,455) 213, Totals 39,425,000 22,360, ,349 62,289,807 2,540,000 1,546,860 4,086,860 41,965,000 23,907, ,349 66,376,667 42,285,000 23,977,894 66,262, ,000 70,576 (504,349) (113,773) Key Observations: VPSA (Schools) Private Placement (Other) (3) Total - Scenario #1 Lease Revenue (Schools+Other) Scenario #1 Benefit / (Cost) over Scenario #2 (1) Interest Rates associated with a Public Issuance of Lease Revenue Bonds are fixed and known at the time of sale over the entire life of the loan. Whereas, most banks are only willing to "lock-in" a rate for 10 or 15 years, at which time the rate would "reset" or be negotiated based upon some market index on the Private Placement portion. The Interest Rate assumed for the Private Placement in this analysis is 5.80%. That represents a Non-Bank Qualified rate provided by Suzanne Ash with SunTrust of Richmond, Virginia as of June 22, For the purposes of this analysis, we have assumed that the rate remains at 5.80% eventhough the County would most likely be exposed to market rate movement after year 10 or 15. SunTrust Bank is one of many Local, Regional, and National banks that Davenport includes in the Competitive Solicitation process. (2) Due to the streamlined nature of the Private Placement approach, we have only reflected $40,000 in costs associated with the $2,500,000 issuance. These costs are typical for this type of transaction as follows: Davenport's Financial Advisory Services $25,000 and Bond Counsel $15,000. Note that with a Private Placement, Bond Counsel is not required to prepare any Offering Statement. Futhermore, no Rating Agency costs are required. (3) Scenario #1 assumes the Private Placement is structured on a Level Principal basis, while Scenario #2 is Level Debt Service.

11 Scenario #2 - Level Debt Service Structure on the Private Placement 2 Issue Approach 1 Issue Approach Difference Fiscal Year Principal Interest LOC Total Principal Interest (1) Total Principal Interest LOC Total Principal Interest Total Principal Interest LOC Total ,142 13, ,142 13, (13,142) (13,142) ,300,242 39,425 2,339,667 70, , ,867 70,547 2,447,562 39,425 2,557, ,467,050 2,467,050 (70,547) 19,488 (39,425) (90,484) ,275,000 1,699,681 38,788 3,013,469 74, , ,867 1,349,639 1,842,910 38,788 3,231,336 1,365,000 1,822,988 3,187,988 15,361 (19,922) (38,788) (43,348) ,325,000 1,647,681 37,488 3,010,169 78, , ,867 1,403,968 1,786,581 37,488 3,228,036 1,425,000 1,767,188 3,192,188 21,032 (19,393) (37,488) (35,848) ,380,000 1,593,581 36,135 3,009,716 83, , ,867 1,463,548 1,727,900 36,135 3,227,583 1,480,000 1,709,088 3,189,088 16,452 (18,813) (36,135) (38,496) ,435,000 1,537,281 34,728 3,007,009 88, , ,867 1,523,394 1,666,755 34,728 3,224,876 1,540,000 1,648,688 3,188,688 16,606 (18,067) (34,728) (36,188) ,495,000 1,478,681 33,263 3,006,944 93, , ,867 1,588,520 1,603,028 33,263 3,224,811 1,605,000 1,585,788 3,190,788 16,480 (17,240) (33,263) (34,023) ,555,000 1,417,681 31,738 3,004,419 98, , ,867 1,653,945 1,536,604 31,738 3,222,286 1,670,000 1,520,288 3,190,288 16,055 (16,316) (31,738) (31,998) ,620,000 1,354,181 30,150 3,004, , , ,867 1,724,683 1,467,365 30,150 3,222,198 1,740,000 1,452,088 3,192,088 15,317 (15,277) (30,150) (30,111) ,685,000 1,288,081 28,498 3,001, , , ,867 1,795,755 1,395,193 28,498 3,219,446 1,810,000 1,381,088 3,191,088 14,245 (14,106) (28,498) (28,358) ,755,000 1,219,281 26,778 3,001, , , ,867 (1) 1,872,179 1,319,969 26,778 3,218,926 1,880,000 1,307,288 3,187,288 7,821 (12,682) (26,778) (31,638) ,835,000 1,138,306 24,983 2,998, ,975 93, ,867 1,958,975 1,232,198 24,983 3,216,156 1,970,000 1,220,438 3,190,438 11,025 (11,761) (24,983) (25,718) ,930,000 1,044,181 23,100 2,997, ,166 86, ,867 2,061,166 1,130,882 23,100 3,215,148 2,070,000 1,119,438 3,189,438 8,834 (11,445) (23,100) (25,711) ,030, ,181 21,120 2,996, ,773 79, ,867 2,168,773 1,024,275 21,120 3,214,168 2,175,000 1,013,313 3,188,313 6,227 (10,962) (21,120) (25,856) ,135, ,056 19,038 2,995, ,822 71, ,867 2,281, ,101 19,038 3,212,961 2,290, ,688 3,191,688 8,178 (10,414) (19,038) (21,273) ,245, ,556 16,848 2,993, ,338 62, ,867 (1) 2,400, ,085 16,848 3,211,271 2,405, ,313 3,189,313 4,662 (9,773) (16,848) (21,958) ,350, ,494 14,550 2,990, ,347 53, ,867 2,514, ,013 14,550 3,207,911 2,520, ,638 3,190,638 5,653 (8,376) (14,550) (17,273) ,450, ,494 12,150 2,985, ,880 43, ,867 2,623, ,481 12,150 3,203,511 2,630, ,200 3,191,200 6,120 (6,281) (12,150) (12,311) ,560, ,031 9,645 2,986, ,965 33, ,867 2,743, ,934 9,645 3,204,543 2,740, ,088 3,187,088 (3,965) (3,846) (9,645) (17,456) ,670, ,894 7,030 2,982, ,635 23, ,867 2,864, ,126 7,030 3,200,791 2,860, ,088 3,188,088 (4,635) (1,039) (7,030) (12,703) ,785, ,234 4,303 2,977, ,923 11, ,867 2,990, ,178 4,303 3,195,404 2,990, ,906 3,191,906 (923) 1,728 (4,303) (3,498) ,910,000 63,656 1,455 2,975, ,910,000 63,656 1,455 2,975,111 3,120,000 68,250 3,188, ,000 4,594 (1,455) 213, Totals 39,425,000 22,360, ,349 62,289,807 2,540,000 1,817,338 4,357,338 41,965,000 24,177, ,349 66,647,144 42,285,000 23,977,894 66,262, ,000 (199,902) (504,349) (384,251) Key Observations: VPSA (Schools) Private Placement (Other) (3) Total - Scenario #1 Lease Revenue (Schools+Other) Scenario #1 Benefit / (Cost) over Scenario #2 (1) Interest Rates associated with a Public Issuance of Lease Revenue Bonds are fixed and known at the time of sale over the entire life of the loan. Whereas, most banks are only willing to "lock-in" a rate for 10 or 15 years, at which time the rate would "reset" or be negotiated based upon some market index on the Private Placement portion. The Interest Rate assumed for the Private Placement in this analysis is 5.80%. That represents a Non-Bank Qualified rate provided by Suzanne Ash with SunTrust of Richmond, Virginia as of June 22, For the purposes of this analysis, we have assumed that the rate remains at 5.80% eventhough the County would most likely be exposed to market rate movement after year 10 or 15. SunTrust Bank is one of many Local, Regional, and National banks that Davenport includes in the Competitive Solicitation process. (2) Due to the streamlined nature of the Private Placement approach, we have only reflected $40,000 in costs associated with the $2,500,000 issuance. These costs are typical for this type of transaction as follows: Davenport's Financial Advisory Services $25,000 and Bond Counsel $15,000. Note that with a Private Placement, Bond Counsel is not required to prepare any Offering Statement. Futhermore, no Rating Agency costs are required. (3) Scenario #2 assumes the Private Placement is structured on a Level Debt Service basis, while Scenario #1 is Level Principal.

12 Based upon 20-yr Level Debt Service Amortization Lease Lease VPSA Revenue VPSA Revenue Pool Bonds Pool Bonds "Local" Bond Costs Sources of Funds Underwriter's Discount 197, , Par Amount of Bonds $39,425, $39,780, Underwriter's Counsel 10, , Reoffering Premium 308, , Bond Counsel 10, , Total Sources $39,733, $40,091, Financial Advisor Not Required 70, Trustee 2, , Rating Agency Fees Not Required 60, Uses of Funds Bond Insurance (1) Not Required 124, Surety Bond Fee (1) Not Required 45, Total Underwriter's Discount (2) $207, $223, Costs of Issuance 40, , "Pool" Bond Costs Gross Bond Insurance Premium N/A 124, Surety Bond Fee N/A 45, Program Fees (3) 504, Not Required Deposit to Project Construction Fund 39,485, ,485, Bond Counsel (Co.'s portion) $15,000 (est.) Not Required Rounding Amount 1, , Financial Advisor $10,000 (est.) Not Required Trustee 2, Not Required Total Uses $39,733, $40,091, Terms & Conditions All Inclusive Cost (AIC %) 4.51 (4) bps Average Annual Debt Service $3,114, (4) $3,116, $2, Structure Flexibility Minimal Determined by County All-in Debt Service $62,289, (4) $62,336, $46, Establishing Call Provision Determined by State Determined by County Call Provision Flexibility Determined by State Determined by County Notes: For the purposes of this analysis, we have excluded herein the following: (c) It would be incorrect to assume that Davenport would "bill" the County now or in the future $85,000 for a single Lease Revenue Bond issuance. (1) The Bond Insurance (20bps) and Surety (1.50%) fees shown above are representative of the current market for similarly rated localities. (2) Underwriter's Counsel fee is reflected in the Underwriter's Discount. (3) The Pool Program administrator charges 10 basis points over the coupon for each maturity, payable semi-annually. The amount shown above is the total paid over the life of the debt. (4) These numbers reflect the 10bps administrative fee charged by the Pool Program administrator.