Role of Financial Advisors

Transcription

1 Local School Finance Emporium Financial Advisor What You Need to Know May 2012 Keygent LLC 999 N. Sepulveda Blvd., Suite 570 El Segundo, CA (310) Role of Financial Advisors A financial advisor has a fiduciary duty to school districts; provides independent strategic and technical financial advice on all financings Structures and manages financings Prepares multiple financing structures to meet the district s capital needs Payments(tax levy or general fund), financing term, prepayment provisions, etc. Credit Ratings Prepares credit presentation that puts the district s best foot forward Important topics: District finances District debt District management Local economy Tax base Coaches district administration on how to present and answer questions from rating agencies 2 1

2 Role of Financial Advisors Ensures fair market interest rates are achieved Monitors bond sale and measures proposed interest rates to other comparable financings Ensures competitive financing fees Assesses financing fees, and if necessary, conducts requests for proposals from potential financing participants to obtain the most aggressive fee proposals 3 Financing Options California school districts have many options available to them in regards to funding and financing operating expenses, school modernization/construction, and equipment Long Term Financings (Capital Projects) General Obligation Bonds Certificates of Participation/Lease Revenue Bonds/Municipal Leases Mello Roos Bonds Short Term Financings (Capital Projects or Cash Flow) Bond Anticipation Notes Capital Notes Tax& Revenue Anticipation Notes Assessments (funds are available in the year that they are collected) Parcel Taxes 4 2

3 General Obligation Bonds General obligation bonds are debt financings repaid from property taxes which require voter approval. Bond programs are structured based on projections of: District facility needs Construction cash flow vs. timing and amount of bond sales Funds available to the District All sources of funding available for capital projects Authorization amount Usually split up into several issuances based on facility needs and bond program assumptions District assessed valuation ( AV ) Projected AV growth has a significant effect on the bond issuance schedule and amounts 5 General Obligation Bonds Tax rates Estimated to registered voters as part of bond measure Based on AV, bond issuance schedule and issuance amounts Municipal bond interest rates Function of: National and international financial market factors Tax status Length of bond repayment Bond type Redemption features 6 3

4 District Assessed Value Taxable base for determining amount of bonds that can be issued at a fixed tax rate Recent and historical increases/declines are considerations in projecting future AV In these times, districts should be cautioned against simply using long term growth statistics as the future growth assumption Sample annualized growth rates: 1 year: 3.25% 5 year: 2.19% 10 year: 5.20% 20 year: 4.25% 30 year: 5.64% Sample lowest rolling averages: 3 year: 1.00% 5 year: 0.23% 10 year: 2.78% 15 year: 4.29% 20 year: 4.14% District Total Assessed Value Fiscal Year Interest Rates Interest rates impact the amount of bonds that can be issued or the tax rate outcome Lower interest rates result in a larger amount of bonds for a given tax rate, or a lower tax rate for a given amount of bonds While interest rates are low, the interest rate differential between current interest bonds and capital appreciation bonds ( CABs ) is still near historic highs Bond Buyer General Obligation Bond Index (1) (50 Year History) Yield (%) Apr 62 Apr 64 Apr 66 Apr 68 Apr 70 Apr 72 Apr 74 Apr 76 Apr 78 Apr 80 Apr 82 Apr 84 Apr 86 Apr 88 Apr 90 Apr 92 Apr 94 Apr 96 Apr 98 Apr 00 Apr 02 Apr 04 Apr 06 Apr 08 Apr 10 Apr 12 (1) Index reflects average yield to maturity of a sample of 20 general obligation bonds with 20 year maturities rated Aa2 by Moody s Investors Service and AA by Standard & Poor s. Source: The Bond Buyer & Bloomberg. 8 4

5 Los Angeles County White Paper On May 16, 2011, the Los Angeles County Treasurer and Tax Collector published a white paper which outlined their opinion on bond financing worst practices Long dated CABs/high debt service to principal ratios CABs should not be utilized beyond 25 years if the District has legally available tax capacity under Proposition 39 Results in large debt service to principal ratios Treasurer has been weighing in on bond financings, insisting that districts utilize Proposition 39 tax rate capacity even if doing so exceeds the estimated tax rate represented to voters Projected Tax Rates Tax Rate (Per $100,000 of AV) Prior Election Bonds 9 Fiscal Year Voter Estimated Max Prop 39 Max Bond Anticipation Notes A bond anticipation note ( BANs ) is an interim financing that allows districts to expedite the receipt of bond proceeds Can only be utilized in conjunction with an existing bond authorization Short term debt for up to five years Must be repaid from issuance of bonds after five years or less Short term interest rates are currently very low Potential risk that long term interest rates may increase when bonds are issued to repay BANs Issuance of BANs does not count against remaining bond authorization Allows the District to access bond proceeds with minimal effect on taxes Allows for the flexibility to monitor future AV growth Credit rating agencies have recently been evaluating the creditworthiness of BANs based upon the amount of AV growth that would be needed to issue takeout bonds How much would AV need to drop in order for the district to not have the capacity to issue takeout bonds? 10 5

6 Tax and Revenue Anticipation Notes Tax and Revenue Anticipation Notes ( TRANs ) are short term financings used by school districts to manage cash flow deficits caused by a mismatch between revenues and expenditures Based on maximum projected cumulative cash flow deficit in general fund Timing of deficit determines if traditional TRANs or cross fiscal year TRANs Traditional TRANs are usually appropriate for districts that receive a significant portion of their revenue from property taxes Cross fiscal year TRANs are usually appropriate for districts that receive a significant portion of their revenue from the State 11 Parcel Taxes A parcel tax is a special tax that generates proceeds which can be used for virtually any purpose, such as: Certificated and classified salaries and benefits Books, materials and supplies Computers and other equipment Educational programs Usually a fixed rate per parcel of taxable property within District boundaries May be subject to annual inflation increases No maximum term of tax Certain exemptions allowed Requires approval of 2/3rds of District s registered voters 12 6

7 About Keygent Keygent specializes in performing independent strategic and technical financial advisory/structuring services for California educational entities Independent financial advisors with a sole focus on California education financing Wedonot serve as: Campaign strategist Special tax consultant State facility funding consultant Facility master plan developer Construction program manager Public finance group formed in March 2008 by former investment bankers with Piper Jaffray s California Education Group Since the inception of our firm, we have structured over 110 financings totaling over $2.2 billion Approximately $1.55 billion in successful bond authorizations for educational entities in counties of Alameda, Fresno, Los Angeles, Monterey, San Mateo, and Santa Clara for elections in 2010 and 2011 $1.6 billion in planned bond elections for