Bond Issue Basics:Bond Issue Basics:A Debt and PlanCon PrimerA Debt and PlanCon PrimerAgainst the Backdrop of the Against the Backdrop of the

Great RecessionGreat Recession

ByBy

Christopher Brewer, Esq.Christopher Brewer, Esq.

Dinsmore & Shohl LLPDinsmore & Shohl LLP

All Debt is a Loan of MoneyAll Debt is a Loan of MoneyReturned in InstallmentsReturned in Installments

at a cost -- of Interestat a cost -- of Interest

If you have ever taken a home If you have ever taken a home mortgage, then you have mortgage, then you have

experienced all of the elements of experienced all of the elements of any bond issue.any bond issue.

The difference is one of amount and The difference is one of amount and the mechanics needed to the mechanics needed to

accommodate large amounts.accommodate large amounts.

Finding Your LenderFinding Your Lender

Is Financing packaged with Asset?Is Financing packaged with Asset?(Xerox, GE Capital, Dell)(Xerox, GE Capital, Dell)

Is Amount under $1.5 MM?Is Amount under $1.5 MM?

Is Term under 5 years?Is Term under 5 years?

Survey/Seek Proposals from BanksSurvey/Seek Proposals from BanksRecognize Bank’s Own Tax Position/Portfolio Recognize Bank’s Own Tax Position/Portfolio

NeedsNeeds

Variable Rate (Under 70% of Taxable)Variable Rate (Under 70% of Taxable) Rate Reset (3 to 5 years)Rate Reset (3 to 5 years) Make whole provision on prepaymentMake whole provision on prepayment Transfer of accountsTransfer of accounts Bank FeesBank Fees

If not a Bank Loan, perhaps a Bond Pool?If not a Bank Loan, perhaps a Bond Pool?

Uneeda Uneeda Bond Issue?Bond Issue?

If so, you need bond investors.If so, you need bond investors.

How do you find them?How do you find them?

Taxpayers

School District

Investment Banking FirmBond Investors

BANK LOANBANK LOAN – Single Creditor, Single – Single Creditor, Single Interest Rate, Monthly Cycle, Equal (Level) Interest Rate, Monthly Cycle, Equal (Level) Payments, Standard Period (Term)Payments, Standard Period (Term)

PRIVATE OFFERINGPRIVATE OFFERING – Limited Number of – Limited Number of Investors, Blend of two AlternativesInvestors, Blend of two Alternatives

BOND ISSUEBOND ISSUE – Multiple Investors, Multiple – Multiple Investors, Multiple Interest Rates, Semi-Annual Cycles, Interest Rates, Semi-Annual Cycles, Customized Payments, Customized TermCustomized Payments, Customized Term

Alternative Methods of Alternative Methods of FinanceFinance

Direct Source Direct Source vs. vs.

Brokered SourceBrokered Source

Public Offering of School District Public Offering of School District BondsBonds

Terminology TranslatorTerminology TranslatorHome MortgageHome Mortgage

Mortgage ApplicationMortgage ApplicationCollateralCollateralCo-signerCo-signer

Credit ScoreCredit ScorePaymentPayment

Principal AmortizationPrincipal AmortizationInterest RateInterest Rate

APRAPRPrepaymentPrepayment

PenaltyPenaltyBank FeeBank Fee

PointsPointsTitle OpinionTitle Opinion

Servicing AgentServicing Agent

Bond IssueBond IssueOfficial StatementOfficial Statement

SecuritySecurityBond Insurance/Letter of Bond Insurance/Letter of

CreditCreditCredit RatingCredit RatingDebt ServiceDebt Service

Principal MaturityPrincipal MaturityCoupon (Rate)Coupon (Rate)

YieldYieldRedemption/CallRedemption/Call

PremiumPremiumDiscountDiscount

Original Issue DiscountOriginal Issue DiscountBond OpinionBond OpinionPaying AgentPaying Agent

Alternative AmortizationAlternative Amortization StructuresStructures

Level PrincipalLevel Principal Level Debt ServiceLevel Debt Service Wrap Around Debt ServiceWrap Around Debt Service Phasing (first 2 to 3 years)Phasing (first 2 to 3 years) Match Debt to Useful Life; other Match Debt to Useful Life; other

Capital Needs/BorrowingsCapital Needs/Borrowings Expected Financial CircumstancesExpected Financial Circumstances

PNC CAPITAL MARKETS 1-Mar-10SAMPLE PA SCHOOL DISTRICT

Table of Sources and Uses Series of 2010 New Money Debt Service

A B C D E F G HPayment Fiscal Par Coupon Debt Capitalized Gross Annual

Years Date Year Amount Rate (%) Interest Service Interest Debt Service

15-Sep-10 88,822.50 88,822.50 0.001 15-Mar-11 2011 220,000.00 1.150% 88,822.50 308,822.50 397,645.00

15-Sep-11 87,557.50 87,557.502 15-Mar-12 2012 220,000.00 1.400% 87,557.50 307,557.50 395,115.00

15-Sep-12 86,017.50 86,017.503 15-Mar-13 2013 225,000.00 1.650% 86,017.50 311,017.50 397,035.00

15-Sep-13 84,161.25 84,161.25

4 15-Mar-14 2014 230,000.00 2.050% 84,161.25 314,161.25 398,322.5015-Sep-14 81,803.75 81,803.75

5 15-Mar-15 2015 230,000.00 2.450% 81,803.75 311,803.75 393,607.5015-Sep-15 78,986.25 78,986.25

6 15-Mar-16 2016 240,000.00 2.800% 78,986.25 318,986.25 397,972.5015-Sep-16 75,626.25 75,626.25

7 15-Mar-17 2017 245,000.00 3.150% 75,626.25 320,626.25 396,252.5015-Sep-17 71,767.50 71,767.50

8 15-Mar-18 2018 250,000.00 3.400% 71,767.50 321,767.50 393,535.0015-Sep-18 67,517.50 67,517.50

9 15-Mar-19 2019 260,000.00 3.600% 67,517.50 327,517.50 395,035.0015-Sep-19 62,837.50 62,837.50

10 15-Mar-20 2020 270,000.00 3.850% 62,837.50 332,837.50 395,675.0015-Sep-20 57,640.00 57,640.00

11 15-Mar-21 2021 280,000.00 4.200% 57,640.00 337,640.00 395,280.0015-Sep-21 51,760.00 51,760.00

12 15-Mar-22 2022 290,000.00 4.200% 51,760.00 341,760.00 393,520.0015-Sep-22 45,670.00 45,670.00

13 15-Mar-23 2023 305,000.00 4.200% 45,670.00 350,670.00 396,340.0015-Sep-23 39,265.00 39,265.00

14 15-Mar-24 2024 320,000.00 4.200% 39,265.00 359,265.00 398,530.0015-Sep-24 32,545.00 32,545.00

15 15-Mar-25 2025 330,000.00 4.600% 32,545.00 362,545.00 395,090.0015-Sep-25 24,955.00 24,955.00

16 15-Mar-26 2026 345,000.00 4.600% 24,955.00 369,955.00 394,910.0015-Sep-26 17,020.00 17,020.00

17 15-Mar-27 2027 360,000.00 4.600% 17,020.00 377,020.00 394,040.0015-Sep-27 8,740.00 8,740.00

18 15-Mar-28 2028 380,000.00 4.600% 8,740.00 388,740.00 397,480.0015-Sep-28 0.00 0.00

19 15-Mar-29 2029 0.00 0.00 0.0015-Sep-29 0.00 0.00

20 15-Mar-30 2030 0.00 0.00 0.0015-Sep-30 0.00 0.00

21 15-Mar-31 2031 0.00 0.00 0.0015-Sep-31 0.00 0.00

22 15-Mar-32 2032 0.00 0.00 0.0015-Sep-32 0.00 0.00

23 15-Mar-33 2033 0.00 0.00 0.0015-Sep-33 0.00 0.00

24 15-Mar-34 2034 0.00 0.00 0.0015-Sep-34 0.00 0.00

25 15-Mar-35 2035 0.00 0.00 0.00

Totals $5,000,000.00 $2,125,385.00 $7,125,385.00 $0.00 $7,125,385.00

Term Bonds 2024 $1,195,000.00

2028 $1,415,000.00

Level Annual Debt Service

PNC CAPITAL MARKETS 1-Mar-10SAMPLE PA SCHOOL DISTRICT

Table of Sources and Uses Series of 2011 New Money Debt Service

A B C D E F G H I JPayment Fiscal Par Coupon Debt Capitalized Gross Annual Existing Annual Combined

Years Date Year Amount Rate (%) Interest Service Interest Debt Service Debt Service Debt Service

15-Sep-11 116,688.75 116,688.75 0.001 15-Mar-12 2012 35,000.00 1.150% 116,688.75 151,688.75 268,377.50 395,115.00 663,492.50

15-Sep-12 116,487.50 116,487.502 15-Mar-13 2013 30,000.00 1.400% 116,487.50 146,487.50 262,975.00 397,035.00 660,010.00

15-Sep-13 116,277.50 116,277.503 15-Mar-14 2014 30,000.00 1.650% 116,277.50 146,277.50 262,555.00 398,322.50 660,877.50

15-Sep-14 116,030.00 116,030.00

4 15-Mar-15 2015 35,000.00 2.050% 116,030.00 151,030.00 267,060.00 393,607.50 660,667.5015-Sep-15 115,671.25 115,671.25

5 15-Mar-16 2016 35,000.00 2.450% 115,671.25 150,671.25 266,342.50 397,972.50 664,315.0015-Sep-16 115,242.50 115,242.50

6 15-Mar-17 2017 35,000.00 2.800% 115,242.50 150,242.50 265,485.00 396,252.50 661,737.5015-Sep-17 114,752.50 114,752.50

7 15-Mar-18 2018 40,000.00 3.150% 114,752.50 154,752.50 269,505.00 393,535.00 663,040.0015-Sep-18 114,122.50 114,122.50

8 15-Mar-19 2019 40,000.00 3.400% 114,122.50 154,122.50 268,245.00 395,035.00 663,280.0015-Sep-19 113,442.50 113,442.50

9 15-Mar-20 2020 40,000.00 3.600% 113,442.50 153,442.50 266,885.00 395,675.00 662,560.0015-Sep-20 112,722.50 112,722.50

10 15-Mar-21 2021 40,000.00 3.850% 112,722.50 152,722.50 265,445.00 395,280.00 660,725.0015-Sep-21 111,952.50 111,952.50

11 15-Mar-22 2022 45,000.00 4.200% 111,952.50 156,952.50 268,905.00 393,520.00 662,425.0015-Sep-22 111,007.50 111,007.50

12 15-Mar-23 2023 45,000.00 4.200% 111,007.50 156,007.50 267,015.00 396,340.00 663,355.0015-Sep-23 110,062.50 110,062.50

13 15-Mar-24 2024 45,000.00 4.200% 110,062.50 155,062.50 265,125.00 398,530.00 663,655.0015-Sep-24 109,117.50 109,117.50

14 15-Mar-25 2025 50,000.00 4.200% 109,117.50 159,117.50 268,235.00 395,090.00 663,325.0015-Sep-25 108,067.50 108,067.50

15 15-Mar-26 2026 50,000.00 4.600% 108,067.50 158,067.50 266,135.00 394,910.00 661,045.0015-Sep-26 106,917.50 106,917.50

16 15-Mar-27 2027 55,000.00 4.600% 106,917.50 161,917.50 268,835.00 394,040.00 662,875.0015-Sep-27 105,652.50 105,652.50

17 15-Mar-28 2028 55,000.00 4.600% 105,652.50 160,652.50 266,305.00 397,480.00 663,785.0015-Sep-28 104,387.50 104,387.50

18 15-Mar-29 2029 455,000.00 4.600% 104,387.50 559,387.50 663,775.00 0.00 663,775.0015-Sep-29 93,922.50 93,922.50

19 15-Mar-30 2030 475,000.00 4.800% 93,922.50 568,922.50 662,845.00 0.00 662,845.0015-Sep-30 82,522.50 82,522.50

20 15-Mar-31 2031 495,000.00 4.800% 82,522.50 577,522.50 660,045.00 0.00 660,045.0015-Sep-31 70,642.50 70,642.50

21 15-Mar-32 2032 520,000.00 4.800% 70,642.50 590,642.50 661,285.00 0.00 661,285.0015-Sep-32 58,162.50 58,162.50

22 15-Mar-33 2033 545,000.00 4.950% 58,162.50 603,162.50 661,325.00 0.00 661,325.0015-Sep-33 44,673.75 44,673.75

23 15-Mar-34 2034 575,000.00 4.950% 44,673.75 619,673.75 664,347.50 0.00 664,347.5015-Sep-34 30,442.50 30,442.50

24 15-Mar-35 2035 600,000.00 4.950% 30,442.50 630,442.50 660,885.00 0.00 660,885.0015-Sep-35 15,592.50 15,592.50

25 15-Mar-36 2036 630,000.00 4.950% 15,592.50 645,592.50 661,185.00 0.00 661,185.00

Totals $5,000,000.00 $4,829,122.50 $9,829,122.50 $0.00 $9,829,122.50 $6,727,740.00 $16,556,862.50

Term Bonds 2025 $185,000.00

2029 $615,000.002032 $1,490,000.002036 $2,350,000.00

Wraparound Debt Service

$ in 000's

SAMPLE PA SCHOOL DISTRICT

Annual Debt Service Requirements

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

2011

2012

2013

2014

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

Series of 2010 (Level) Series of 2011 (Wraparound)

Alternative Credit StructuresAlternative Credit Structures

General Obligations – TaxesGeneral Obligations – Taxes

Special Obligations – Enterprise Special Obligations – Enterprise RevenuesRevenues

Non-appropriation – Asset BackedNon-appropriation – Asset Backed

Alternative IssuersAlternative Issuers

School District ItselfSchool District Itself

State Public School Building Authority*State Public School Building Authority* Local Authority (Vo-Tech or Swap)*Local Authority (Vo-Tech or Swap)* Local Bond Pool Authority*Local Bond Pool Authority*

*School District delivers note/loan agreement*School District delivers note/loan agreement

Uses and SourcesUses and SourcesConstruction Bids/EstimatesConstruction Bids/Estimates Cash ContributionCash Contribution

Land or Interest in LandLand or Interest in Land GrantsGrants

Construction Construction Manager/ArchitectManager/Architect

Bond ProceedsBond Proceeds

Furniture Fixtures & Furniture Fixtures & EquipmentEquipment

Interest EarningsInterest Earnings

Planning/PermitsPlanning/Permits

Bond DiscountBond Discount (One-Time vs. Draw- (One-Time vs. Draw-

Bond InsuranceBond Insurance Down Funding)Down Funding)

Legal (Bond and Local)Legal (Bond and Local)

Rating AgencyRating Agency

Financial AdvisorFinancial Advisor

PrintingPrinting

Paying AgentPaying Agent

Designing Your Bond IssueDesigning Your Bond Issue

School DistrictSchool District vs. vs. Bond InvestorBond InvestorNeeds/Abilities/Goals Needs/Abilities/Goals

Needs/Abilities/GoalsNeeds/Abilities/Goals

Market ReceptionMarket ReceptionCase in Point : BABs in EuropeCase in Point : BABs in Europe

Yield Curve PositioningYield Curve Positioning

Case in Point : Short tax-exempts; Long BABsCase in Point : Short tax-exempts; Long BABs

Alternative Bond Sale Alternative Bond Sale MethodsMethods

Negotiated (Private) Competitive Negotiated (Private) Competitive (Public)(Public)

[Design / Build] [Design / Bid] [Design / Build] [Design / Bid]

More Trust by School District Less Trust by School More Trust by School District Less Trust by School DistrictDistrict

Less Risk on Banker More Risk on BankerLess Risk on Banker More Risk on Banker

Components of DiscountComponents of Discount

Management (35%) / Underwriting (65%)Management (35%) / Underwriting (65%)

Planning for Construction Planning for Construction WorkbookWorkbook“PlanCon”“PlanCon”

Capital Cost Reimbursement is “Pay-As-You-Go”Capital Cost Reimbursement is “Pay-As-You-Go”Little to no PDE input to bond structureLittle to no PDE input to bond structure

Payment must be from School District RevenuesPayment must be from School District Revenues(Not accrued or capitalized interest)(Not accrued or capitalized interest)

Full Cash by District = Full Cash by PDE (1 year Full Cash by District = Full Cash by PDE (1 year rule)rule)

Debt Amortization by District = Debt Amortization by District = Debt Service Reimbursement Debt Service Reimbursement

by PDEby PDE

Eligible Project CostsEligible Project Costs

($ x students adjusted by certain costs)($ x students adjusted by certain costs)

Divided ByDivided By

Total Project CostsTotal Project Costs

Project Eligible % x MVAR equals Effective ReimbursementProject Eligible % x MVAR equals Effective Reimbursement

*Not available until receipt of bids (PlanCon G/H),*Not available until receipt of bids (PlanCon G/H),

but PDE will reimburse prior paymentsbut PDE will reimburse prior payments

*Temporary Percentage until Final Accounting (PlanCon J)*Temporary Percentage until Final Accounting (PlanCon J)

Net Debt Service SolutionsNet Debt Service Solutions

*Watch assumptions*Watch assumptions

*Changes in Project Eligible % or MVAR*Changes in Project Eligible % or MVAR

will distort net debt solutionswill distort net debt solutions

PlanCon D – Project Accounting PlanCon D – Project Accounting Based on EstimatesBased on Estimates

Fiscal ConstraintsFiscal Constraints

D-17 D-17 25% of Local Revenues25% of Local RevenuesD-17D-17 Test for Fiscal DistressTest for Fiscal DistressD-18D-18 Mills on Market Value Mills on Market Value

(Local vs. Statewide)(Local vs. Statewide)

Problematic for Poorer School DistrictsProblematic for Poorer School DistrictsProblematic for Debt Free School DistrictsProblematic for Debt Free School Districts

PlanCon G – Project Accounting Based on PlanCon G – Project Accounting Based on BidsBids

PlanCon H – FinancingPlanCon H – Financing

PlanCon K – RefinancingPlanCon K – Refinancing

* “Never-Pay-More” Rule* “Never-Pay-More” RuleInclusion of New Money or Increase of Total Debt Service will Inclusion of New Money or Increase of Total Debt Service will

reducereduce Project Eligible % Project Eligible %

* Pure Savings* Pure Savings (whether up-front, over time or back-end) will (whether up-front, over time or back-end) will

retainretain Project Eligible % Project Eligible %

* Cost of Issuance on School District* Cost of Issuance on School District

* New debt service schedule may interrupt * New debt service schedule may interrupt reimbursementreimbursement

Act 1 ConstraintsAct 1 Constraints

Act 1 does not limit what you can Act 1 does not limit what you can borrow; it limits whether you can borrow; it limits whether you can pay for it.pay for it.

ReferendumReferendum Qualified Costs LimitationQualified Costs Limitation Phase-in/Wrap-Around StructuresPhase-in/Wrap-Around Structures

(Capital Appreciation Bonds?)(Capital Appreciation Bonds?)

(Creative use of Build America Bonds?)(Creative use of Build America Bonds?)

Local Government Unit Debt Local Government Unit Debt ActAct

LimitationsLimitationsPrincipal Amount LimitsPrincipal Amount LimitsTotal School District Debt Total School District Debt ≤ Last 3 years’ Average ≤ Last 3 years’ Average

Revenues Revenues x 2.25x 2.25PlanCon Subsidized Debt May be ExcludedPlanCon Subsidized Debt May be Excluded

Pay–Back LimitsPay–Back LimitsCapitalized Interest – construction plus 1 yearCapitalized Interest – construction plus 1 yearPrincipal Deferral – 2 years or construction period plus 1 Principal Deferral – 2 years or construction period plus 1

yearyearFinal Maturity ≤ Useful LifeFinal Maturity ≤ Useful LifeTotal Debt Service – Level or Wrapped to LevelTotal Debt Service – Level or Wrapped to Level(Downward Cascading Permitted)(Downward Cascading Permitted)

Local Government Unit Debt Local Government Unit Debt ActAct

ProceduresProcedures 3 Day Advance Notice3 Day Advance Notice

Board ResolutionBoard Resolution Covenant to Budget, Appropriate and PayCovenant to Budget, Appropriate and Pay

““Acceptable” Purchase ProposalAcceptable” Purchase Proposal Post Adoption NoticePost Adoption Notice

15 Calendar day approval cycle15 Calendar day approval cycle Appeal to Commonwealth CourtAppeal to Commonwealth Court

Advent of “Parameters” ResolutionAdvent of “Parameters” Resolution

Federal Tax LawFederal Tax Law

Interest earned on obligations of a state or Interest earned on obligations of a state or local government are excluded from gross local government are excluded from gross income.income.

In 1914, a right of federalism?In 1914, a right of federalism?

In 2010, a federal subsidy and privilegeIn 2010, a federal subsidy and privilege

IRC Sections 103 and 141 through 150 contain IRC Sections 103 and 141 through 150 contain innumerable limits and conditions on the innumerable limits and conditions on the privilege.privilege.

Primary Restriction - ArbitragePrimary Restriction - Arbitrage

Arbitrage is the practice of making Arbitrage is the practice of making money by moving an item between money by moving an item between marketsmarkets

Marco Polo - tea ; Dutch colonists – Marco Polo - tea ; Dutch colonists – beadsbeads

Local Governments – tax-exempt bond Local Governments – tax-exempt bond proceeds into taxable investmentsproceeds into taxable investments

Abusive Device – issuing bonds Abusive Device – issuing bonds sooner, or in an amount larger, sooner, or in an amount larger, or allowing them to remain or allowing them to remain outstanding longer, than is outstanding longer, than is necessary to accomplish the necessary to accomplish the governmental purpose.governmental purpose.

Three Point “Reasonable Three Point “Reasonable Expectations” TestExpectations” Test

Substantial Binding Obligation to Substantial Binding Obligation to expend 5% incurred within 6 monthsexpend 5% incurred within 6 months

85% of proceeds expended within 3 85% of proceeds expended within 3 yearsyears

Proceed with Due DiligenceProceed with Due Diligence

““Reasonable” does not mean possible or Reasonable” does not mean possible or promised; it means “likely, as assessed by a promised; it means “likely, as assessed by a third party observer”third party observer”

Arbitrage RebateArbitrage Rebate

Small issuer exemption ($5MM or Small issuer exemption ($5MM or $15MM Construction)$15MM Construction)

Spending exemptionSpending exemption

- 6 month- 6 month

- 18 month- 18 month

- 24 month construction- 24 month construction

RefundingsRefundings

Use of proceeds of new issue to Use of proceeds of new issue to prepay previous issueprepay previous issue

Keys are Interest Rate and Keys are Interest Rate and Redemption PeriodRedemption Period

Current Refunding : Old BondsCurrent Refunding : Old BondsPaid off within 90 days of issuePaid off within 90 days of issue

Advance Refunding : Old BondsAdvance Refunding : Old BondsPaid off later than 90 days of issuePaid off later than 90 days of issue

Build America BondsBuild America Bonds

Must meet all regular Tax Exempt Must meet all regular Tax Exempt QualificationsQualifications

Interest is TaxableInterest is Taxable

Federal Government will ReimburseFederal Government will Reimburse

35% of Interest Expense35% of Interest Expense

Qualified School Construction Qualified School Construction BondsBonds

Primary compensation to investor is a Primary compensation to investor is a

tax credittax credit

““Supplemental Coupon” approximately Supplemental Coupon” approximately

1.5 to 2.0%1.5 to 2.0%