Fiscal Year 2013-14 LAUSD Debt Report and Debt Management Policy Changes Presentation to the Budget, Facilities and Audit Committee Office of the Chief Financial Officer May 7, 2015
District s Debt Policy Featured as One of the Best In February 2014, the California Debt and Investment Advisory Commission (CDIAC) published a study of local California agency debt policies Ø LAUSD was featured as one of three agencies with exemplary debt management policies (1) Researchers scored the policies on the basis of whether they incorporated 30 best practice factors Among the agencies that scored at least 15 out of the 30 points, LAUSD was the ONLY school district to meet that threshold LAUSD s score was 28 Ø In addition, the District s debt policy requires a Debt Report to be issued annually LAUSD s debt report informs the Board and the public about a variety of debt factors and performance 2
Key Components of the District s Debt Management Policy Ø Outlines the policy and legal guidelines surrounding the District s issuance of debt California school district debt is generally limited to voter approved general obligation bonds (GOs) and certificates of participation (COPs) for long- term projects and tax and revenue anticipation notes (TRANs) for cashflow management, as necessary Education Code limits general obligation bonds to 2.5% of assessed valuation (debt capacity) Proposition 39 limits tax rates for each voter approved GO bond measure to $60/$100,000 of assessed valuation for unified school districts Ø Establishes credit- worthy parameters for the District s debt issuance Ø Requires the annual preparation of a Debt Report Ø Financing team selection approach 3
Key Components of the District s Debt Management Policy (Cont d) Ø Debt refunding and restructuring approach Prioritizes economic refundings that save the District or taxpayers money Establishes refunding parameters for strategic use of refunding options limited by tax law Ø Includes the District s Tax Compliance and Continuing Disclosure Procedures Pursuant to federal tax laws, tax- exempt bonds are limited in what they can be used for Pursuant to federal securities laws, municipal bond issuers must disclosure annual financial and operating data to the market Important to have written procedures in place for compliance 4
Board Approved Debt Management Policy Changes Ø Updated to incorporate the requirements of AB182 which was enacted in 2013 - limits capital appreciation general obligation bonds (CABs) to have a maximum maturity no longer than 30 years (LAUSD has never issued CABs) Ø Updated to incorporate new SEC guidance that went into effect in 2014 that to facilitate continued open communication with underwriters, municipal issuers must engage an Independent Registered Municipal Advisor ( IRMA ) Ø Added an appendix to the Debt Management Policy that addresses the District s Continuing Disclosure Procedures Federal law requires governments that issue debt to provide annual financial and operating data to the market 5
What are the Purposes of the Annual Debt Report? As noted, the District s Debt Management Policy requires a Debt Report to be issued each Fiscal Year that provides a: 1. Detailed overview of the District s outstanding debt (General Obligation Bonds (GO Bonds) and Certificates of Participation (COPs)); 2. Summary of the District s statutory Debt Limit and Debt Capacity; 3. Review of the District s tax rate performance on each of its GO bond measures; 4. Summary of debt service savings for taxpayers or the District due to refundings; 5. Review of the District s debt ratio performance compared to large school districts in the nation; and 6. Review of the District s credit ratings. 6
1. Overview of Outstanding Debt as of June 30, 2014 General Obligation Bonds (G.O. Bonds) Certificates of Participation (COPs) Number of Outstanding Series 44 10 Total Par Amount Outstanding $10,545,135,000 $365,859,000 FY 2013-14 Debt Service $878,638,868 $47,101,978 Debt Service Paid By Taxpayers General Fund, Developer Fees and Cafeteria Fund All Fixed Rate Debt? Yes Yes 7
2. Debt Limit and Debt Capacity Ø Only GO Bonds are considered debt under the legal definition of debt Ø At June 30, 2014, District s Legal Debt Margin was about $2.0 billion of new GO Bonds (based on Fiscal Year 2014-15 assessed valuation and currently outstanding bonds, the District s current Legal Debt Margin is about $3.0 billion) Issuance can occur only if it is not expected to result in a property tax rate higher than $60 per $100,000 of assessed valuation by bond measure Bonded Debt Limitation and Legal Debt Margin Total Assessed Valuation As of June 30, 2014, in $000 s $503,677,920 Bonded Debt Limitation (2.5% times Assessed Valuation) $12,591,948 Less: Outstanding General Obligation Bonds (10,545,135) Equals: Legal Debt Margin (1) $2,046,813 Ø Under the District's Debt Management Policy, maximum annual debt service on COPs is limited to 2.5% of general fund expenditures or $105 million; is of June 30, 2014, maximum annual COPs debt service was $55.4 million (0.97% of general fund expenditures) (1) The District s Comprehensive Annual Financial Report ( CAFR ) reports these figures differently by adjusting them for unamortized bond premiums and discounts and amounts available in the Bond Interest and Redemption Fund to pay bond principal. 8
3. Tax Rate Performance Ø Tax rates paid by District taxpayers to pay G.O. Bond debt service are expressed as $/ $100,000 of assessed valuation (AV) in the Debt Report For example, a tax rate of $60/$100,000 of AV means an owner of a $300,000 property pays 3 times $60, or $180, in the given year Ø The District has outperformed the projected tax rates estimated at the time of each bond election Bond Measure Total Authorization ($Billions)(1) (A) Estimated Maximum Tax Rate per $100,000 of AV at Time of Bond Election (B) Actual Maximum Tax Rate per $100,000 of AV to Date (C) Current Tax Rate per $100,000 of AV (FY2014-15) Difference (C) minus (A) Prop BB $2.400 $67.46 $50.55 $28.49 ($38.97) Measure K $3.350 $60.00 $46.72 $40.24 ($19.76) Measure R $3.870 $60.00 $52.69 $40.59 ($19.41) Measure Y $3.985 $60.00 $53.23 $37.56 ($22.44) Measure Q $7.000 $60.00 None yet issued None yet issued Not Applicable (1) As of June 30, 2014, no remaining unissued bonds under Prop BB and Measure K; $235.205 million of remaining Measure R authorization; and $442.765 million of remaining Measure Y authorization 9
4. Refunding Savings Ø Finance regularly monitors market conditions for opportunities to refinance outstanding debt at lower interest cost Ø In 2013-14, the District issued $1.6 billion of refunding GO bonds that generated $172 million of nominal savings. Debt Refunded (since 1991) Number of Series Nominal Savings G.O. Bonds 16 $408 MN COPs (includes restructurings) 20 Approx. $378 MN* * Represents savings to the General Fund, $372 MN of which was attributed to shifting the cost of COPs debt service from the General Fund to general obligation bonds. Ø On May 6, 2015, the District sold $326.045 million of General Obligation Refunding Bonds. The sale will generate $80.967 million of savings over the life of the bonds for the benefit of the District s taxpayers. 10
5. Debt Ratio Performance Ø District s debt ratios are higher than policy benchmarks primarily because LAUSD has the largest school district capital program in the nation Debt Burden Ratio Direct Debt to Assessed Value Overall Debt to Assessed Valuation Direct Debt Per Capita Overall Debt Per Capita Policy Benchmarks for District s Direct and Overall Debt (As of June 30, 2014) Benchmark s Value LAUSD Actual (1) Benchmark Moody s Median for Aa Rated School Districts With Student Population Above 200,000 1.24% 2.17% Standard & Poor s Mean for AA Rated School Districts With Student Population Above 150,000 1.50% Moody s Median for Aa Rated School Districts With Student Population Above 200,000 3.24% 3.84% Standard & Poor s Mean for AA Rated School Districts With Student Population Above 150,000 3.20% Standard & Poor s Median for AA Rated School Districts With Student Population Above 150,000 $736 $2,346 Standard & Poor s Mean for AA Rated School Districts With Student Population Above 150,000 $847 Standard & Poor s Median for AA Rated School Districts With Student Population Above 150,000 $1,665 $4,163 Standard & Poor s Mean for AA Rated School Districts With Student Population Above 150,000 $2,639 (1) The District s Comprehensive Annual Financial Report ( CAFR ) reports these figures differently by adjusting outstanding bonds and COPs for amounts held in sinking funds and redemption accounts. 11
Debt Ratio Performance (cont d) Ø When the first Debt Report was issued in FY 2004-05, the District s debt ratios were closer to the policy benchmarks 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Significant bond issuance made the ratios go up Over time, as bonds get repaid and AV increases, the ratios should decline (unless more bonds are authorized and issued) Moody's Median Direct Debt to AV Moody's Median Overall Debt to AV 2005-062006-072007-082008-092009-102010-112011-122012-132013-14 $5,000 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 S&P's Median Direct Debt per Capita S&P's Median Overall Debt per Capita 2005-062006-072007-082008-092009-102010-112011-122012-132013-14 Direct Debt to Assessed Value Overall Debt to Assessed Valuation Direct Debt Per Capita Overall Debt Per Capita 12
6. Ratings Long-Term Credit Ratings 1 (District's G.O. Bond Ratings Highlighted in Red) (District's COPs Ratings Highlighted in Blue) (1) Moody's S&P Best Quality Aaa AAA Aa1 AA+ High Quality Aa2 AA Aa3 AA- A1 A+ Upper Medium Grade A2 A A3 A- Baa1 BBB+ Medium Grade Baa2 BBB Baa3 BBB- Below Investment Grade Ba1 and lower BB+ and lower (1) S&P rates COPs one notch lower than the rating on general obligation bonds, whereas Moody's rates COPs two notches lower than the rating on general obligation bonds. Ø District s GOs have high quality ratings Ø District s COPs have upper medium grade ratings Ø Outlook on all ratings is stable Ø The District also receives ratings on its short- term debt (TRANS). The District has always received the highest possible ratings of MIG1 (Moody s) and SP- 1+ (S&P) on its TRANs. 13
Debt Report Conclusions The Fiscal Year 2013-14 Debt Report shows: 1. As of June 30, 2014, the District had capacity to issue about $2.0 billion of new GO bonds (1), assuming such issuance stays within Proposition 39 tax rate requirements; 2. Tax rates paid by taxpayers on the District s GO Bonds have generally been lower than estimated at the time of each bond election; 3. District s debt ratios are higher than national benchmarks, primarily due to LAUSD s massive bond program compared to other rated school districts; and 4. District s credit ratings remain strong and stable. (1) As of today, capacity for new GO Bonds is almost $2.97 billion, due to ongoing pay down of prior bonds and increased assessed valuation in Fiscal Year 2014-15. 14
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