Annual Debt Report. Business Services January 21, For the Period Ending June 30, Annual Debt Report.

Transcription

1 Annual Debt Report For the Period Ending June 30, 2013 Business Services January 21, Annual Debt Report.

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3 TABLE OF CONTENTS PREFACE... 1 SECTION I: GENERAL OBLIGATION BOND DEBT A. District s Bonded Debt Limitation and Assessed Valuation Growth... 2 B. Bonds Outstanding and Bonds Authorized but Unissued... 3 C. Intended Issuance of Bonds... 4 D. Tax Rate Performance for Outstanding Bonds... 5 SECTION II: CERTIFICATES OF PARTICIPATION ( COPs ), QZAB, QSCB DEBT A. COPs, QZAB, & QSCB Outstanding and Authorized but Unused... 5 B. Intended Issuances of COPs, QZAB, & QSCB Debt... 6 SECTION III: OTHER DEBT A. Refunding Lease Revenue Bonds... 7 SECTION IV. THE MARKET FOR THE DISTRICT S DEBT A. Municipal Bond Market... 7 B. Cost of the District s Fixed Rate and Variable Debt... 8 B.1 Fixed Rate Debt... 8 B.2. Variable Rate Debt... 8 SECTION V. THE DISTRICT S CREDIT RATINGS A. Long-Term Credit Ratings on General Obligation Bonds and Certificates of Participation... 8 B. Short-Term Credit Ratings on Tax and Revenue Anticipation Notes... 9 SECTION VI. DEBT RATIOS A. Debt Ratios... 9 B. HUSD s Compliance with Debt Management Policy; Debt Levels Compared to Other Issuers APPENDICES This and other financial and budget documents of the Hemet Unified School District are available at: The Hemet Unified School District Office is located at: 1791 W. Acacia Avenue, Hemet, CA (951) Annual Debt Report.

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5 Preface he Assistant Superintendent of Business Services must submit a Debt Report to the Board of Education and Superintendent annually in accordance with the District s Debt Management Policy. The fol- T lowing list identifies the information to be included in the report: Topic A listing of outstanding General Obligation Bond debt supported by voter-approved tax levies and a schedule of debt service requirements for this debt. Location in Report Section I.B. and Appendix 1 A listing of authorized but unissued general obligation bond debt Section I.B. A discussion of tax rates being paid by District taxpayers to service the District s General Obligation Bond Debt A listing of authorized but unissued debt that the Assistant Superintendent of Business intends to sell during the current and subsequent budget year and the projected increase in debt service as a result of those sales A listing of outstanding Certificates of Participation, QZAB, and Lease Revenue debt supported by the General Fund and/or developer fees and a schedule of debt service requirements for this debt Section I.D. Section I.C. and II.B. Section II.A., III and Appendix 3 A listing of authorized but unissued Certificates of Participation debt Section II.B. A description of the market for the District s General Obligation Bonds and Certificates of Deposit Section IV A discussion of the District s long-term credit ratings Section V Identification of pertinent debt ratios, such as debt service to General Fund expenditures, debt to assessed valuation of property and debt per capita Section VI A comparison of the District s debt ratios to those of other issuers Section VI.B. This report frequently uses the words bonds and debt interchangeably, even when the underlying obligation does not technically constitute debt under California s constitution. This conforms with market convention for the general use of the term debt and debt service as applied to a broad variety of instruments in the municipal market, regardless of their precise legal status. Debt excludes short-term obligations such as tax revenue anticipation notes (TRANs). The rating agencies and the investor community evaluate the District s debt position based on all of its outstanding debt whether or not such debt is repaid from taxpayerapproved levies, the General Fund or developer fee sources Annual Debt Report.

6 SECTION I: GENERAL OBLIGATION BOND DEBT A. District s Bonded Debt Limitation and Assessed Valuation Growth Education Code limits school district bonded debt at 2.5% of the value of taxable property (i.e., assessed valuation) in the district. The total assessed valuation of properties lying within the Hemet Unified School District s boundaries was $8.4 billion in This resulted in a bonded debt limitation of $210.6 million. Table 1 below presents the district s maximum debt versus current outstanding debt. The difference is the Legal Debt Margin. Chart 1, to the right shows that the Legal Debt Margin, the distance between the two lines, narrowed significantly in , but is projected to improve and regain a positive position even if the District issues the authorized amounts from the 2012 Measure U General Obligation in and In addition to the district debt issuance pattern, the Legal Debt Margin is greatly affected by assessed valuation growth within the District, which is depicted in Chart 2. Valuations increased 2.5% in This was the first increase since For projection purposes, assessed valuation is assumed to grow at the maximum 2% rate allowed under Proposition 13 for existing property plus additional growth from new construction and the sale and exchange of property. Historically, the annual growth in assessed valuation averaged 5.50% over the last 10 years and had an average decline of 5.06% over the last five years. Millions 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% % % % year average 5.50% 5-year average (5.06%) Chart 1 HUSD Debt Capacity vs. Projected Outstanding GO Bonds Debt Capacity with 2% AV Growth Projected Outstanding Principal of Measures E & T Chart 2 HUSD Change in Assessed Valuation Table 1 Bonded Debt Limitation and Legal Debt Margin, Fiscal Year Total Assessed Valuation $8,424,719,963 Bonded Debt Limitation (2.5% times Assessed Valuation) 210,619,999 Less: Outstanding General Obligation Bonds & BANS (166,062,393) Less: Amounts Available in Bond Interest and Redemption Fund (Fund 51) to Pay Principal (6/30/13) Annual Debt Report 2 (9,080,452) Equals: Legal Debt Margin $ 35,477,154

7 B. Bonds Outstanding and Bonds Authorized But Unissued As of June 30, 2013, the District had a total of $172,620,000 in voter authorized General Obligation Bonds outstanding. Included in this total, are $25 million in bonds issued as Bond Anticipation Notes under the federal Quality School Construction Bond (QSCB) program in July A detailed list of the District s outstanding General Obligation Bonds is shown in Table 2. Debt service requirements and additional details related to the district s General Obligation Bonds can be found in Appendices 1 and 2. Table 2 General Obligation Bond Issuance and True Interest Cost (as of June 30, 2013) The district placed a reauthorization of the $49 million of unissued 2006 General Obligation Bonds on the ballot in the November 2012 general election. The voters agreed to reauthorize the unissued bonds under a new bond. None of the reauthorized bonds have been issued. Table 3 presents overall highlights of the District s authorized but unissued bonds and Chart 3 in the next subsection depicts actual and projected issuance of bonds. Bond Issue Date of Issue Maturity Principal (Fiscal Amount Year) Issued Table 3 Outstanding Principal Authorized but Unissued General Obligation Bond as of June 30, 2013 Interest (%) 2002 GO Bonds - Series B 06/04/ ,000, , %-5.50% 2002 GO Bonds - Series C 05/26/ ,000, , %-5.00% 2002 GO Bonds - Series D 05/18/ ,000,000 2,760, %-5.00% 2002 GO Bonds - Series E 01/17/ ,000,000 5,120, %-6.50% 2006 GO Bonds - Series A 03/01/ ,000,000 55,630, %-5.75% 2006 GO Bonds - Series B 03/04/ ,000,000 37,605, %-5.25% 2010 QSCB BAN (2006 GO) 07/22/ ,000,000 25,000, % 2010 GO Refunding (2002-Series A) 2012 GO Refunding (2002 Series B &C) 07/28/ ,740,000 17,225, %-4.50% 07/18/ ,260,000 21,260, % -4.00% Total $202,000,000 $165,475, Measure E 2006 Measure T 2012 Measure U Voter Authorized Amount $ 60,000,000 $149,000,000 $ 49,000,000 Issued 60,000, ,000,000 Authorized But Unissued $0 $49,000,000 Measure U Re-Authorization ($49,000,000 Bond Anticipation Notes $ 25,000,000 Authorized but Unissued $0 $0 $24,000, Annual Debt Report. 1

8 C. Intended Issuances of Bonds Intended issuances are based on actual spending patterns and expenditure projections prepared by the Facilities Department and are subject to change. The district determined it was unlikely it would be able to issue the remaining $49 million in outstanding bonds from the Measure T authorization for many years because of the decline experienced in assessed valuations. As result, the district put forth a ballot to reauthorize the $49 million in outstanding 2006 bonds in the November 2012 election. Voters approved the reauthorization which allowed the district to issue the bonds under a new cap limitation. $25 million of the new authorization will be used to repay the 2010 Bond Anticipation Notes (BANs) that were issued under the federal Qualified School Construction Bonds (QSCB) program by July The district does not expect to issue any of remaining 2012 General Obligation Reauthorization Bonds for Measure U in the next two years. Bond Authorization and Authorization Year None Millions $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $- Table 4 Intended Issuances Chart 3 Hemet Unified School District Actual and Projected Issuance of General Obligation Bonds Actual Issuance * Fiscal Year 2002 GO Bonds 2006 GO Bonds 2010 QSCB 2012 GO Bonds FY Projected Issuance * $25m GO issued to repay QSCB in July 2015 Intended Issuances of Bonds Fiscal Years and No bond issuances are anticipated in either the or fiscal years. A detailed schedule of the projected annual payments for current and anticipated bond issuances can be found in Appendix 2. The Assistant Superintendent of Business regularly monitors market conditions for refunding opportunities that, pursuant to the Debt Management Policy, will produce at least a 3% net present value savings for each maturity of bonds refunded Annual Debt Report 4

9 D. Tax Rates on Outstanding Bonds Tax rates on outstanding bonds are calculated annually by the Riverside County Office of Education during the year-end closing process. The amount of outstanding bonds issued, bond debt scheduled payments, and assessed valuations are used to compute the tax rate. The tax rate is adjusted annually based on changes in amounts of outstanding bonds issued and assessed valuations. Per ballot language for the bonds, the targeted tax rate $100 (0.100) of assessed value for every $100 million in bonds issued. However, tax rates can exceed this limit if it is not sufficient to make the annual bond payments. The tax rate for was for $125,000,000, just slightly above the target of Table 5 below shows the computed and levied tax rates as well as the rates for the prior five years. Table 5 Annual Tax Rates on General Obligation Bond Debt Service Fiscal Year SECTION II : CERTIFICATES OF PARTICIPATION/QZAB/QSCB DEBT A. COPs and QZAB Outstanding Over the years, the District has issued Certificates of Participation (COPs) and Qualified Zone Academy Bonds (QZAB) to fund a variety of capital projects including construction of one high school, two middle school, several elementary schools, acquisition of portable classrooms, and construction and improvement of the District s Professional Development Academy, and Professional Development Service Center, along with numerous modernization and improvement projects. Debt service on COPs are paid from the Restricted General Fund with redevelopment pass-thru revenues the district receives from the City of Hemet. In seeking to achieve the benefits of a diversified debt portfolio, the District issued the 2006 COPs as a variable/swap (weekly) rate as authorized by the District s Debt Policy which is included in this report as Appendix 4. The District s policy states that variable rate COPs may be issued providing the total amount in that mode does not exceed 20% of the total principal of outstanding debt or $100 million, whichever is less. Tables 6 and 7 provide listings of outstanding COPs in fixed rate mode and variable rate mode, respectively. As of June 30, 2013, a total of $56,144,371 in fixed and variable rate COPs were outstanding. The debt service requirements on outstanding COPs can be found in Appendix 3. Issue Description Table 6 Fixed-Rate Certificates of Participation and QZAB Issuance and True Interest Cost (as of June 30, 2013) 2004 COPs (refunding 1993 COPs, multiple projects) 2005 QZAB COPs (Professional Development Academy) Outstanding Bond Indebtedness Date of Issue AV Maturity (Fiscal Year) 5 Principal Amount Issued Outstanding Principal Interest % 10/14/ $23,425,000 $18,255, %-4.625% 12/13/ $5,000,000 $2,710, % 2007 COPs (multiple projects) 11/21/ $4,610,000 $3,535, %-5.00% Total Computed Tax Rate Levied Tax Rate $ 116,370,000 $ 9,587,606, $ 165,880,000 $ 11,047,473, $ 153,105,000 $ 10,879,573, $ 150,455,000 $ 9,200,666, $ 146,980,000 $ 8,423,580, $ 146,980,000 $ 8,219,530, $33,035,000 $24,500, Annual Debt Report.

10 Table 7 Variable/Swap-Rate Certificates of Participation Issuance (as of June 30, 2013) Issue Description Date of Issue Maturity Principal (Fiscal Year) Amount Issued Outstanding Principal 2006 COPs (PDA & PDSC) 6/13/ $29,445,000 $28,650,000 Total $29,445,000 $29,340,000 Repayment of Certificate of Participation (COPs) bonds are made from Redevelopment funds. Before 2008, revenue from redevelopment agencies grew significantly with the rapid increase in property values in the region. At that time, the district had sufficient revenue from redevelopment agencies to cover debt payments for its COPs. When assessed property values fell during the recession that began in 2008, a corresponding decline in redevelopment receipts also occurred and they were no longer sufficient to cover COPs debt payments. A projected annual shortfall of approximately $1.4 million comes from the district s unrestricted general fund. In addition to the decline in redevelopment revenue, the closure of Redevelopment Agencies was mandated by legislation passed in This legislation diverted most redevelopment assets to the state. However, RDA payments that were previously obligated for debt service to local governments and school districts continue to be paid. Both redevelopment related receipts and debt service for current COPs are expected to remain flat through the remainder of their repayment periods until when only payments for the 2006 and 2007 COPs issuances remain. Both the 2006 and 2007 COPs will be fully repaid in based on their current payment schedules. * Chart reflects changes in debt payment schedule for 2006 COPS remarketed in July Millions $5.00 COPS Debt Service (General Fund) $4.50 $4.00 $3.50 $3.00 Annual Debt Service $2.50 $2.00 $1.50 $1.00 $0.50 $ Annual Debt Report 6

11 SECTION III : REFUNDING LEASE REVENUE BONDS Refunding Lease Revenue Bonds Outstanding The District issued Refunding Lease Revenue Bonds in 2005 to refund the 1997 COPs that were originally issued for construction of the district s Nutrition Center. Refunding Lease Revenue Bonds are similar to COPs except that they are repaid with a revenue stream produced by the project. Originally $5,205,000 in bonds were issued, the principal balance outstanding as of June 30, 2012 was $3,980,000, The 2005 Refunding Lease Revenue bonds debt service requirements are paid from the District s Cafeteria Fund. Lease Revenue Bonds Issuance (as of June 30, 2013) Issue Description Date of Issue Maturity (Fiscal Year) Principal Amount Issued Outstanding Principal 2005 Lease Revenue 11/22/ $5,205,000 $3,780,000 Total $5,205,000 $3,780,000 Interest % 3.40% % SECTION IV: THE MARKET FOR THE DISTRICT S DEBT A. Municipal Bond Market The District s bonds, COPs and tax revenue anticipation notes ( TRANs ) are issued and traded in the United States municipal bond market, a deep and highly liquid market. The major groups of investors in this market include insurance companies, mutual funds, hedge and arbitrage funds, investment banks, trust departments, investment advisors, individual investors, and money market funds. Each of these market participants may exhibit differing preferences for the structure and maturities of the bonds, COPs or TRANs that they may purchase. The borrowing cost that the District must pay its investors is a function of market interest rates levels, anticipated Federal Reserve policy actions and, most importantly, the investment community s perception of and demand for the District s credit. Investors demand rates of return on their investments commensurate with their perception of the District s ability and willingness to repay its obligations as well as the District s overall financial, debt, and economic performance compared to other issuers. The investment community has historically viewed the District s bonds and COPs as high quality investment grade securities, owing to the District s strong financial position, a good local economy, good access to voter-approved tax levies, and an excellent debt service payment record. Traditionally, the large numbers of investors residing in California and the State s progressive tax system have provided investors with incentives to purchase the District s bonds and COPs. During recent years, however, investor perception of California debt has weakened significantly due to the State s credit deterioration, investor concerns over the growing magnitude of the State s budget shortfalls and massive issuance of economic recovery bonds. The State s credit rating has continued to be downgraded by all credit rating agencies and ranks at or near the bottom compared to all other states. The State s borrowing costs have risen accordingly as did interest costs for issuers viewed as agencies of the State such as Hemet USD, even though district credit ratings remain very strong and well above those of the State. In April of 2010, the Governing Board of Hemet Unified adopted Resolution 2059 which established a fund balance policy and set the district s minimum fund balance at a level equal to 5% or 2% above the statutory minimum 3% fund balance level for a district of its size. This action, along continued fiscal responsibility have benefitted the district through improved credit ratings and lower interest rates for borrowing Annual Debt Report.

12 B. Cost of The District s Fixed Rate and Variable Rate Debt B.1. Fixed Rate Debt. All of the District s General Obligation Bond issues and all but one of its COPs issues carry fixed interest rates. Since reaching a cyclical high in 1999, fixed interest rates have fallen to historically low levels. The low rates helped the District achieve very low interest cost on its General Obligation Bonds when compared to industry benchmarks. The District s bonds have a term to maturity of 30 years. B. 2. Variable/Swap Rate Debt. Current statutory provisions make it impractical for the District to issue variable rate General Obligation Bonds, as ancillary costs such as remarketing fees, auction agent fees, and dealer fees cannot be paid from voter approved tax levies. Thus, with the vast majority of the District s debt necessarily being issued as fixed rate bonds, the District has looked to its COPs issuance program to achieve debt portfolio diversification in the form of variable rate COPs. The District has issued one series of variable/ swap rate COPs, as summarized earlier in Table 7. The interest rate on this COPs varies with the movement of interest rates at the short end of the yield curve, which until recently has resulted in low interest expense due to low market interest rates. Because of volatility in the financial market, interest rates for borrowing are less than favorable and letters of credit to protect investors have become increasingly costly. It is likely the district will need to remarket the 2006 COPs annually in order to maintain favorable letters of credit and interest rates. SECTION V: THE DISTRICT S CREDIT RATINGS A. Long-Term Credit Ratings on General Obligation Bonds and Certificates of Participation Long-term credit ratings provided by a rating agency are in independent assessment of the relative credit risk associated with purchasing and holding a particular bond through its scheduled term of repayment. Longterm credit ratings serve as unbiased opinions of a borrower s financial strength and ability to repay its debt on a timely basis. Long-term credit ratings are one of the most important indicators of creditworthiness readily available to the investment community and have a direct impact on the borrowing rates paid by the District. Credit Quality Tranches As of June 2013, the District had a credit rating of A from Standard and Poor s for it s general obligation bonds. It s rating for Certificate s of Participation is one step below at A-. Normally, General Obligation Bond ratings are typically a level or two higher than ratings assigned for COPs because of the credit strength of ad valorem taxes that are pledged to repay General Obligation Bonds compared to repayment of the COPs from the district s general fund. One critical component of a district s credit rating is its General Fund reserve balance. The district established a policy in April 2010 which set its minimum unrestricted General Fund reserve at 5%. This policy has enhanced the district s ability to maintain a strong credit rating during unfavorable economic times. District s G.O. Bond Ratings Highlighted in Blue District s COPs Ratings Highlighted in Green Best Quality High Quality Upper Medium Grade In recent years, Hemet has been able to increase its reserve balance despite severe budget cuts. The district s combined General Fund reserve as of June 30, 2013 was equivalent to 20.7% of total expenditures. The reserve balance is comprised of both restricted and unrestricted components. In the past, less than half of the general fund reserves were associated with the unrestricted general Medium Grade Below Investment Grade A- BBB+ BBB BBB- BB+ and lower fund. However, with reclassification of many state restricted funds to unrestricted dollars in , the unrestricted ending balance now makes up a majority of the total. For , the district s unrestricted balance was equivalent to 17.9% of combined general fund expenditures. The average unrestricted balance for unified school districts in California is %. S& P AAA AA+ AA AA- A+ A Annual Debt Report 8

13 B. Short-Term Credit Ratings on Tax and Revenue Anticipation Notes The District has issued tax and revenue anticipation notes ( TRANs ) annually since to fund short term cash flow deficits due to the timing of receipts of local property taxes and other revenues. The TRANs are issued to the District through the California School Cash Reserve Program sponsored by the California School Boards Association Finance Company in conjunction with US Bank and Piper Jaffray. In , the district was authorized for a total of $60 million in TRANs with a total of $46,175,000 issued. A regular TRANs was issued in July 2012 for $24.9 million and was repaid in January The cross-year TRANs in the amount of $21.3 million was issued in February 2013 to cover state apportionment deferrals from February through June. The cross-year TRAN was repaid in three monthly installments from June to August of SECTION VI: DEBT RATIOS A. Use of Debt Ratios Pursuant to the District s Debt Management Policy set forth in Section 3.08, the district will monitor certain debt factors and debt burden ratios, as well as periodically measure the District s debt performance against those debt factors and debt burden ratios. Measuring the District s debt performance through the use of debt ratios provides a convenient way to compare the district to other borrowers. The most common debt ratios applied to school districts are: Ratio of Outstanding Debt to Assessed Value. The formula for this computation is contained in Section of the Education Code. The ratio is calculated for both Direct Debt (i.e., general obligation bonds) and Combined Direct Debt (both general obligation bonds and COPs), the latter commonly referred to a Debt Burden in the California Municipal Statistics Overlapping Debt Statement. In addition, the ratio of Overall Debt Burden includes the District Direct Debt plus the Direct Debt of issuers whose boundaries overlap those of the District. It is important to monitor the levels and growth of Direct Debt and Overall Direct Debt as they portray the debt burden borne by our taxpayers and serve as proxies for taxpayer capacity to take on additional debt in the future. The District must be careful not to overburden its taxpayers by issuing debt too quickly or too frequently, for example. Ratio of Outstanding Debt per Capita. The formula for this computation is Outstanding Debt divided by the population residing within the District s boundaries. Ratios are computed for both Direct Debt Per Capita and Overall Debt Per Capita. It is important to monitor these ratios as they attempt to measure the degree to which debt is concentrated, i.e. whether it is spread across a large or small population. Ratio of Annual Lease Debt Service to General Fund Expenditures. The formula for this computation is annual lease debt service expenditures divided by General Funds (Unrestricted and Restricted) expenditures including interfund transfers as reported in the most recent annual financial report. Proportion of Fixed-Rate and Variable Rate COPs Issues. The Debt Management Policy requires the District to keep its variable rate exposure, to the extent not hedged or swapped to fixed rate, at or below 20% of principal outstanding COPs or $100 million, whichever is less. If variable rate debt is issued, the Assistant Superintendent of Business Services will periodically, but at least annually determine whether it is appropriate to convert the debt to fixed interest rates Annual Debt Report.

14 B. Hemet Unified School District s Compliance With Debt Management Policy, Debt Levels Compared to Other Districts Table 9 provides a summary of the District s performance against policy benchmarks, targets and ceilings for debt paid from the General Fund. The District s Debt policy establishes a target debt factor limit for COPs debt service, including QZAB and Lease Revenue Bonds, paid from the combined general fund at 3.00% with a cap of 4.00%. The policy, first approved in January 2009, showed the target dollar amount at $6.2 million. That figure has been revised in this report to reflect the amount equivalent to 3% of total general fund expenditures and uses at June 30, For the fiscal year , the percentage of COPs payments compared to total expenditures and uses of the combined general fund was 2.27% and actual payments were $4.0 million, below both the ceiling and target debt factors. Table COP Debt Limits Debt Factor Target Ceiling Actual as of June 30, 2013 (1) Over/(Under) Policy Ceiling COP Gross Debt Service Limit (Percentage) COP Gross Debt Service Cap (dollars) 3.00% 4.00% 2.27% $5,274,815 $7,033,087 $4,247,720 (1.58%) ($2,785,367) 1 Includes the annual base rental payments deposited in the sinking fund for the 2005 QZAB and the debt service payments for the 2005 Lease Revenue Bonds which are paid from the Cafeteria Fund (Fund 13) Annual Debt Report 10

15 Appendices Appendix 1... GO Bond Debt Service Schedules Appendix 2... Debt Service on Intended Sales/Unissued GO Bonds Appendix 3... COPs Debt Service Schedules Appendix Debt Policy Annual Debt Report.

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17 APPENDIX 1 Hemet Unified School District General Obligation Bonds, Semi-Annual Debt Service (As of June 30, 2013) Fiscal Year Election 2002 Election GO Bond 2012 GO Bond Aggregate Aggregate Ending June 30 Measure E Measure T Refunding Refunding Semi-annual Fiscal Year Series B-E Series A-B Series A 2002-Series B-D Debt Service Total Debt Service 8/1/2012 1,859, ,031, ,137, ,028, /1/ , ,192, , , ,155, ,184, /1/2013 1,450, ,097, ,167, , ,714, /1/ , ,150, , , ,642, ,357, /1/ , ,170, ,190, ,383, ,921, /1/ , ,096, , , ,561, ,483, /1/ , ,481, ,213, ,402, ,267, /1/ , ,798, , , ,237, ,505, /1/ , ,308, ,385, ,644, ,050, /1/ , ,984, , , ,395, ,445, /1/ , ,369, ,408, ,658, ,145, /1/ , ,931, , , ,317, ,463, /1/ , ,436, ,424, ,692, ,227, /1/ , ,878, , , ,236, ,464, /1/ , ,498, ,455, ,723, ,326, /1/ , ,821, , , ,149, ,476, /1/ , ,556, ,476, ,739, ,414, /1/ , ,751, , , ,052, ,467, /1/ , ,606, ,503, ,774, ,497, /1/ , ,679, , , ,948, ,445, /1/ , ,669, ,527, ,791, ,593, /1/ , ,604, , , ,840, ,434, /1/ , ,749, ,555, ,820, ,705, /1/ , ,524, , , ,726, ,432, /1/ , ,814, ,586, ,542, ,131, /1/ , ,450, , , ,606, ,737, /1/ , ,890, ,615, ,570, ,251, /1/ , ,374, , , ,482, ,734, /1/ , ,974, ,646, ,596, ,382, /1/ , ,294, , ,351, ,734, /1/ , ,069, ,635, ,841, /1/ , ,208, , ,250, ,091, /1/ , ,153, , ,940, /1/ , ,118, ,144, ,085, /1/ , ,253, ,054, /1/2030 8, ,024, ,033, ,088, /1/ , ,354, ,768, /1/ , , ,695, /1/2031-5,466, ,466, /1/ , , ,287, /1/2032-5,576, ,576, /1/ , , ,289, /1/2033-5,657, ,657, /1/ , , ,253, /1/2034-5,800, ,800, /1/ , , ,272, /1/2035-5,891, ,891, /1/ , , ,234, /1/2036-6,037, ,037, /1/ , , ,245, /1/2037-6,182, ,182, /1/2038-6,182, /1/2038-2/1/ /1/2039-2/1/ /1/2040-2/1/ $ 14,800, $ 163,065, $ 24,225, $ 27,051, $ 202,091, $ 202,091,130.34

18 APPENDIX 2 Hemet Unified School District Debt Service Requirements on Intended Sales of Authorized but Unissued Bonds During Fiscal Years and Fiscal Year Ending FY GO Bond Issuance Debt FY GO Bond Issuance Debt Total All New Bonds Debt 30-Jun Service Service Service $ - $ - $ -

19 Fiscal Year Ending June 30 APPENDIX 3 Hemet Unified School District Certificates of Participation Lease Obligations Gross Debt Service 1 As of June 30, 2012 Restricted General Fund (Redevelopment) 2, Lease Revenue - Cafeteria Fund Reimbursement Total All COPs Debt Service ,536, , ,904, ,567, , ,933, ,599, , ,967, ,607, , ,977, ,711, , ,078, ,734, , ,096, ,752, , ,119, ,765, , ,132, ,533, , ,899, ,553, , ,917, ,575, , ,941, ,602, , ,965, ,628, , ,998, ,652, , ,018, ,742, , ,108, ,854, ,854, ,512, ,512, ,228, ,228, ,306, ,306, ,417, ,417, ,349, ,349, ,324, ,324, ,386, ,386, ,404, ,404, ,027, ,027, $ 82,374, $ 5,498, $ 87,873, The district has assumed certain interest rates for the swap rate lease obligations included in the above table. 2 Includes the annual base rental payments deposited into the sinking fund for the 2005 QZAB 3 In the event that insufficient redevelopment revenue is available to pay the above lease obligations, the Unrestricted General Fund would need to cover the obligations

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21 Appendix Debt Policy Annual Debt Report.

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23 HEMET UNIFIED SCHOOL DISTRICT DEBT MANAGEMENT POLICY Prepared by: Business Services Board Approved: January 21,

24 Introduction The intent and purpose of having a Debt Management Policy is to make sure the Governing Board and the public are aware of the fiscal issues related to public finance borrowing. The policies set forth in this Debt Management Policy (the Policy ) have been developed to provide guidelines for the issuance of general obligation bonds, certificates of participation ( COPs ) and other forms of indebtedness by the Hemet Unified School District. While the issuance of debt can be an appropriate method of financing capital projects, careful and consistent monitoring of such debt issuance is required to preserve the District s credit strength and budget and financial flexibility. These guidelines will serve the District in determining the appropriate uses for debt financing and debt structures as well as establishing prudent debt management goals. The District s Debt Management Policy was first adopted on January 22, Section 2.04 requires the policy to be reviewed and updated annually and submitted to the Governing Board for approval. The Debt Management Policy being presented for 2013 contains some small revisions to the Policy originally presented and approved in Staff is recommending the board review and approve the 2013 Debt Management Policy guidelines for the issuance of various types of debt instruments, the measurement of the District s debt performance, the selection of financing team members and communication with municipal market participants such as rating agencies, bond insures, credit banks and investors. Background In 1993 the District issued a COP Refunding that was intended to be funded entirely with annual revenues received from the City of Hemet Redevelopment Agency. The District s redevelopment pass-through agreement provides annual receipts from a portion of the District s property tax revenue restricted for capital facilities funding only. Beginning in 1994, assessed valuation dropped providing a shortfall in revenues forcing the District to encroach on the General Fund to make debt service payments until Since 1997, no Unrestricted General Funds have been expended on COP debt service payments. The experience of the 1993 COPs is an important lesson on the need for careful analysis and conservative projections and why it is necessary to maintain reserves and contingency provisions. The District from that point forward has done an excellent job in management of debt and is compliant with all laws including preparing timely disclosure reports and arbitrage calculation reports. During the District s issuance of the 2007 COPs, Standard and Poor s Corporation (S&P) noted that the District did not have a Debt Management Policy. Staff surveyed districts in Riverside County (County) and discovered that there was no district in the County with a Debt Management Policy. To help ensure and possibly improve the District s creditworthiness, an established policy of managing the - 2 -

25 District s debt is essential. Staff has developed the Debt Management Policy as hereby presented based on the policy of the Los Angeles Unified School District but with changes that reflect both the size and demographics of the District. The District s general obligation bonds, Measure E (2002) and Measure T (2006) obtained an A- rating during early years and an AA- rating for its 2012 Measure U GO Bond reauthorization. These high credit ratings reduce the interest costs paid by the District on the amounts borrowed. Lower interest costs result in lower tax rates paid by the District s taxpayers and a reduced burden on the General Fund. These debt management policies are intended to maintain the District s high ratings so that access to borrowed funds is provided at the lowest possible interest rates. Traditionally, these policies are intended to set forth selection criteria for certain financial consultants and attorneys which will ensure a fair and open selection process, provide opportunities for all firms, including small business enterprises, to participate in District contracts, and result in the selection of the best qualified advisors. The District faces continuing capital infrastructure and cash requirements. In particular, the District is presently engaged in building new schools and modernizing schools with Facilities Improvement Program to be completed over the next several years. The costs of these requirements will be met, in large part, through the issuance of various types of debt instruments and other long-term financial obligations. Under voter approved bond Measure E in 2002, Measure T in 2006 and Measure U in 2012, the District was authorized to issue a combined $209 million in general obligation bonds for its Facilities Improvement Program and other capital and General Fund relief projects. Consequently, the District needs to anticipate increases in historical levels of such debt and other obligations, some of which may be repaid from the District s General Fund. With these increases, the effects of decisions regarding type of issue, method of sale, and payment structure become ever more critical to the District s fiscal health. To this end, the Board of Education of the District (the Board ) recognizes this Policy to be financially prudent and in the District s best economic interest. Article I. Purpose and Goals The purpose of the Policy is to provide a functional tool for debt management and capital planning, as well as to enhance the District s ability to manage its debt and lease financings in a conservative and prudent manner. In following this Policy, the District shall pursue the following goals: The District shall strive to fund capital improvements from referendum-approved bond issues to preserve the availability of its General Funds for District operating purposes and other purposes that cannot be funded by such bond issues. The District shall endeavor to attain the best possible credit rating for each debt issue (with or without bond insurance) in order to reduce interest costs, within the context of preserving financial flexibility and meeting capital funding requirements

26 The District shall take all practical precautions and proactive measures to avoid any financial decision which will negatively impact current credit ratings on existing or future debt issues. The District shall remain mindful of debt limits in relation to assessed value growth within the school district and the tax burden needed to meet long-term capital requirements. The District shall consider market conditions and District cash flows when timing the issuance of debt. The District shall determine the amortization (maturity) schedule which will best fit with the overall debt structure of the District at the time the new debt is issued. The District shall give consideration to matching the term of the issue to the useful lives of assets whenever practicable, while considering repair and replacement costs of those assets to be incurred in future years as an offset to the useful lives, and the related length of time in the payout structure. The District shall, when planning for the issuance of new debt, consider the impact of such new debt on overlapping debt and the financing plans of local, state and other governments which overlap with the District. The District shall, when issuing debt, assess financial alternatives to include new and innovative financing approaches, including whenever feasible categorical grants, revolving loans or other State/federal aid, so as to minimize the encroachment on the District s General Fund. The District shall, when planning for the sizing and timing of debt issuance, consider its liability to expend the funds obtained in an efficient and economical manner. The key financial management tools and goals that are intrinsic to the Policy include: A. Fund Balance Policy: The District recognizes the importance of emergency reserves that can provide a financial cushion in years of poor revenue receipts. Recommend a Reserve Fund Policy be developed and implemented for adoption by the Board. B. Capital Financing Plan: The Office of the Assistant Superintendent, Business Services will prepare a five (5) year Capital Financing Plan in conjunction with the capital budget. The Plan will detail the sources of financing for all facilities in the capital budget, establish funding priorities and review the impact of all borrowings on the District s long-term debt affordability ratios. The Plan will consider all potential sources of financing, including non-debt options and ensure that these financing sources are in - 4 -

27 accordance with the goals of this policy. The Office of the Assistant Superintendent, Business Services will review and revise the Plan annually. See Articles III and IV herein. C. Annual Debt Report: The Office of the Assistant Superintendent, Business Services will annually prepare for and submit to the Superintendent and the Board a Debt Report which reviews the outstanding debt of the District as further described under Section 4.02 herein. Article II. Authorization Section 2.01 Authority and Purposes of the Issuance of Debt The laws of the State of California authorize the issuance of debt by the District, and confer upon it the power and authority to make lease payments, contract debt, borrow money, and issue bonds for public improvement projects. Under these provisions, the District may contract debt to pay for the cost of acquiring, constructing, reconstructing, rehabilitating, replacing, improving, extending, enlarging, and equipping such projects, or to refund existing debt or to provide for cash flow needs. Legislation effective January 1, 2009 changed some reporting requirements for issuing non-voter approved debt, such as COPs that are secured by real property. AB2197 requires districts to notify the county superintendent of schools and the county auditor not less than 30 days prior to approving the issuance of such debt. Pursuant to this legislation the District will submit to the County Superintendent of Schools information regarding any new debt, including the type of debt to be issued, projects to be financed, funding sources for repayment along with a contingency plan should the original funding source not materialize, as well as multi-year budget projections for each fund pledged for the debt repayment. Section 2.02 Common Types of Debt Issuance A. Short-Term: The District may issue fixed-rate and/or variable rate short-term debt which may include tax and revenue anticipation notes ( TRANs ) when such instruments allow the District to meet its cash flow requirements. However, the District shall generally manage its cash position in a manner so that internally generated cash flow is sufficient to meet expenditures. The District may also issue commercial paper in the context of providing funding of shorter term acquisitions, such as equipment, or interim funding for capital costs that will ultimately be replaced with COPs. The District may also participate in an annual pooled financing of delinquent property taxes known as the Teeter Program to the extent that the Assistant Superintendent, Business Services determines such financing produces significant benefit to the District. B. Long-Term: Debt issues may be used to finance essential capital facilities, projects and certain equipment where it is appropriate to spread the cost of the projects over more than one budget year. In so doing, the District recognizes that future - 5 -

28 taxpayers who will benefit from the investment will pay a share of its cost. Projects which are not appropriate for spreading costs over future years will not be debt financed. Under no circumstances will long-term debt be used to fund District operations. The District may issue long-term debt which may include, but is not limited to general obligation bonds ( G. O. Bonds ), including general obligation bonds issued pursuant to Proposition 39. The District may also enter into long-term leases and/or COPs for public facilities, property, and equipment. C. Equipment Financing: Lease obligations are a routine and appropriate means of financing capital equipment. However, lease obligations also have the greatest impact on debt capacity and budget flexibility. Therefore, efforts will be made to fund capital equipment with pay-as-you-go financing where feasible, and only the highest priority equipment purchases will be funded with lease obligations. With the exception of leases undertaken through the District s standard procurement process, all equipment with a useful life of less than six years shall be funded on a pay-as-you-go basis unless the following conditions are met: i. In connection with the proposed District budget, the Superintendent makes the finding that there is an economic necessity based on a significant economic downturn, earthquake or other natural disaster and there are no other viable sources of funds to fund the equipment purchase. ii. The Board concurs with the Superintendent s finding in the adoption of the budget. iii. The various debt ceilings in Section 3.08 of this Policy are not exceeded. D. Lease Financing of Real Property: Lease financing for facilities is appropriate for facilities for which there is insufficient time to obtain voter approval or in instances where obtaining voter approval is not feasible. Such financings will be structured in accordance with Section 3.01 of the Policy. If and when voter approved debt proceeds become available subsequently, the District will use such proceeds to take out the financing where appropriate. E. Use of General Obligation Bonds: Voter-approved general obligation bonds typically provide the lowest cost of borrowing. General obligation bond debt to the extent authorized for the District requires either two-thirds approval of the voters (in the case of traditional general obligation bonds) or 55% approval of the voters (in the case of general obligation bonds issued pursuant to Proposition 39). In recognition of the difficulty in achieving the required two-thirds voter-approval or 55% voter approval, as the case may be, to issue general obligation bonds, such bonds will be generally limited to facilities and projects that provide wide public benefit and for which broad public support has been generated. F. Use of Asset Transfer COPs: The District will restrict the use of an asset transfer COPs to finance emergency capital needs for which there are no other viable financing options. Additionally, asset transfer COPs may be used if - 6 -

29 significant savings in financing costs can be generated compared to other financing alternatives. G. Pay-As-You-Go Financing: Except in extenuating circumstances, the District will fund routine maintenance projects in each year s capital program with payas-you-go financing. Extenuating circumstances may include unusually large and non-recurring budgeted expenditures, or when depleted reserves and weak revenues would require the delay or deletion of necessary capital projects. Pursuant to the State law, the District can issue either fixed-rate, variable rate or capital appreciation debt, depending on the applicable law. Section 2.03 State Law Section 18 of Article XVI of the State Constitution contains the basic debt limitation formula applicable to the District. Sections 1(b)(2) and 1(b)(3) of Article XIII A of the State Constitution allow the District to issue traditional general obligation bonds and Proposition 39 bonds, respectively. The statutory authority for issuing general obligation bonds is contained in Section et seq. of the Education Code. Additional provisions applicable only to Proposition 39 general obligation bonds are contained in Section et seq. of the Education Code. An alternative procedure for issuing general obligation bonds is also available in Section et seq. of the Government Code. The statutory authority for issuing TRANs is contained in Section et seq. of the Government Code. Authority for lease financings is found in Section et seq. of the Education Code and additional authority is contained in Sections et seq., et seq. and et seq. of the Education Code. The District may also issue Mello-Roos or Community Facilities District (CFD) bonds pursuant to Section et seq. of the Government Code. Section 2.04 Annual Review The Policy shall be reviewed and updated annually and presented to the Board for approval as necessary. The Assistant Superintendent, Business Services is the designated administrator of the Policy and has overall responsibility, with the Board s approval, for decisions related to the structuring of all District debt issues. The Assistant Superintendent of Business Services may delegate the day-to-day responsibility for managing the District s debt and lease financings. The Board is the obligated issuer of all District debt and awards all purchase contracts for GO Bonds, COPs, TRANs and any other debt issuances