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The Latest News in Capital Planning & Bond Issues By: H. J. Umbaugh and Associates Michael C. Givler – Partner Darlene W. Janulis – Financial Consultant Impacting Capital Planning Issues Growth Alone No Longer Drives Bond Issues Facilities Management /Long Range Planning Trends

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The Latest News in Capital Planning & Bond Issues

By: H. J. Umbaugh and Associates

Michael C. Givler – Partner

Darlene W. Janulis – Financial Consultant


Impacting Capital Planning Issues

  • Growth Alone No Longer Drives Bond Issues

  • Facilities Management /Long Range Planning

  • Trends

    • Sports Parity

    • Science Education Improvements

    • Declining Population

    • ADA Compliance

    • Environmental Issues


Capital Planning Stages

  • Facility Review and Needs Assessment

  • Preliminary Election Analysis

  • Establish an Advisory Committee

  • Prioritize Projects

  • Impact Study

  • Budget and Timelines


Your Professional Team

Architect –

  • Review and analyze the schools’ construction and renovation needs

    Financial Advisor –

  • Capital project planning

  • Financial structuring

  • Millage impact analysis

  • Official statement


Your Professional Team

Bond Counsel – compliance issues

  • The district has the authority to issue the bonds.

  • The district’s bonds constitute legal, valid, and binding debt obligations of the issuer (the district).

  • The interest paid to the purchasers of the district’s bonds is exempt from federal income taxation.

  • Provide legal requirements related to election laws


Your Professional Team

Construction Manager/ General Contractor

  • Oversees construction by acting as an agent for the school district throughout the project

    Underwriter

  • Purchases the district’s bonds and re-offer them to the public


Selection Process

  • Interview

  • Negotiation

  • RFP

  • RFI

  • RFQ

  • QBS


Board of Education approves the projects to be pursued

  • Community forums

  • Focus groups

  • Contact your key communicators

  • Community Engagement


Methods of Funding Capital Projects

Sinking Fund

  • Affirmative vote of electors to authorize the district to levy funds

  • 5 mill maximum for a period of not more than 20 years

  • Limited use as defined in MCL380.1212 and ballot language


Methods of Funding Capital Projects

A sinking fund may only be used for purposes defined in MCL380.121 and is limited by the ballot language. Briefly these are the allowable purposes…..

  • Purchase of real estate for school building sites

  • Construction of new schools buildings

  • Addition to or remodeling to existing school buildings

  • Repairs completed by contracted sources

  • Wiring and material for installing technology


Methods of FundingCapital Projects

A sinking fund may not be used for

  • Equipment or software

  • Furnishing and equipping

  • General maintenance


Methods of FundingCapital Projects

Non-Qualified Bonds, Non-Voted

  • Affirmative vote of the District’s Board of Education - Resolution

  • Does not exceed 5% of the State equalized valuation (SEV) of the district

  • Not qualified for inclusion of the 7 mills use for borrowing from the SBQLP

  • Annual principal and interest payments are financed from existing funding sources.


Methods of FundingCapital Projects

Non-Qualified Bonds, Voted

  • Unlimited

  • Not more than 30 years

  • Affirmative vote of the electors

  • May not exceed 15% of the SEV

  • Does not go through the state qualifying process

  • Local board has the obligation to set the tax rate for principal and interest payment annually


Methods of FundingCapital Projects

Qualified Bonds - Voted

  • Unlimited

  • Not more than 30 years

  • SBQLP preliminary qualification review process

  • SLRF qualification granted by the State Treasurer

  • Affirmative vote of electors

  • District may request state qualification without the need to borrow from the State


Methods of FundingCapital Projects

Other financing sources:

  • Energy Conservation Notes

  • QZAB’s

  • Funds on Hand

  • Contributions


Use of Bond Proceeds for Capital Expenditure Purposes

  • New construction of buildings, or additions to existing school buildings

  • Refurbishing and remodeling existing buildings

  • Energy conservation improvements

  • Asbestos abatement

  • School buses

  • Purchasing land

  • Developing and improving sites


Use of Bond Proceeds for Capital Expenditure Purposes

  • Developing and improving athletic and physical education facilities

  • Developing and improving playgrounds

  • Purchasing loose furnishings and equipment

  • Purchasing technology with some limitations

  • Cost of the required audit

  • Refunding debt ( if Present Value Savings can be demonstrated)

  • Direct bond program costs: professional fees,

    election fees, cost of issuance etc., paid after the

    bond issue approval from bond proceeds


Capital Expenditures Can Not be Used for…

  • Maintenance, repairs or maintenance agreements

  • Supplies, salaries, service contracts, lease payments, installment purchase contracts

  • Automobiles, trucks, or vans

  • Other operating expenses like uniforms and textbooks

  • Upgrades to existing computer operating systems or application software

  • Computer training, computer consulting or computer maintenance contracts

  • Portable classrooms purchased for temporary use


School Bond Loan Program Overview

Qualification process – Time frame

  • Not less than 180 calendar days before the election, the District in conjunction with its bond counsel should contact the Dept. of Treasury, School Bond Qualification and Loan Program, to request a Preliminary Qualification meeting.

  • Submit completed draft application, including project proposals, financial tables, and enrollment projections

    to the office of the SBQLP no less than 3 business

    days prior to the prequalification meeting.


School Bond Loan Program Overview

Qualification process – Time frame

  • Not less than 30 calendar days before the requested approval date; the Board approved completed and signed official application (including all supporting documentation) must be delivered to the office for the SBQLP.

  • Not less than 60 or 70 days prior to election date; the District’s Board takes official action to call for the election on the bond proposal.


The Prequalification

Preliminary Qualification and Application (PQA) contains…

  • The proposed ballot language to be submitted to the electors

  • Description of the project(s) proposed to be financed

  • Pro forma debt service projection showing the estimated mills the district will levy to pay the qualified bonds

  • Evidence that the rate of utilization will be at least 85% for new buildings


The Prequalification

Preliminary Qualification and Application (PQA) contains…

  • Evidence of the cost per square foot – reasonable and applicable

  • Repayment schedule

  • Overall utilization rate of all school buildings

  • Total bond debt outstanding and taxable value

  • Debt service amortization schedules


The following parameters included in the Application are the result of the newly enacted legislation SB 406

  • Weighted average age of all school buildings

  • Taxable value per pupil

  • Environmental or usability problems

  • Architect’s analysis of the overall condition of the facilities to be renovated or replaced


The following parameters included in the Application are the result of the newly enacted legislation SB 406

  • Standard pro forma debt service projection

  • Evidence that the utilization rate would be at least 60% for renovated facilities

  • An amortization schedule demonstrating that the weighted average maturity of the qualified bond issue would not exceed 120% of the average reasonably expected useful life of the facility

  • Application fees


Special Circumstances:

  • Comparison of the current proposal to previous defeated proposal

  • Financial statistics outside of parameters


Treasury will take approximately 30 days to approval the Preliminary Qualification Application.

After the election and positive vote, final qualification approval is good for 180 days. District may reapply for qualification if bonds were not issued within 180 days.


Advantages in Qualifying the Bonds

  • District will receive a bond rating equal to the state’s credit rating

  • Usually results in a lower interest rates

  • Millage levied to repay the qualified bonds counts toward the 7 mill requirement

  • District may borrow from the state

    • After the minimum 7 mill threshold is reached or other agreed millage requirements


Disadvantages in Qualifying the Bonds

  • Subject to prevailing wage requirements, whether or not state school bond loan funds are borrowed

  • Cost of the qualification process


Disadvantages in NOT Qualifying the Bonds

  • Must use the districts rating and/or purchase municipal bond insurance

  • Cannot borrow from the SLRF in any instance for this bond issue where a bond payment cannot be met.

  • No credit towards the 7 mill for future participation and borrowing


In order to borrow from the state for debt service needs:

  • District must levy a minimum of 7 debt mills

  • Application approval from Treasury which includes

    • Information pertaining to qualified bonds outstanding

    • Debt service obligations

    • Taxable valuation

    • Debt mills

    • Tax collections and the districts’ loan needs


Legislation or Treasury Parameter

Amortization of Useful Life Requirements

PA 92 of 2005 or Treasury Parameters

Weighted average maturity of the bond issue doesn’t exceed 120% of the useful life of the facilities

Other changes in the School Bond Qualification, Approval and Loan Act:


Ballot Language

Cost per Square foot parameter

Must include disclosure for participation in the School Loan Revolving Fund and Conditions for borrowing

$158 for Genesee, Lapeer, St. Clair, Livingston, Oakland, Macomb, Washtenaw, Wayne, Monroe, $149 for all other counties

Other changes in the School Bond Qualification, Approval and Loan Act:


Default Provision

State shall withhold school aid payments to collect loan repayments, if not paid by District. Must repay the amount of the default plus 3%

Other changes in the School Bond Qualification, Approval and Loan Act:


False statements

Loan interest rate

Felony punishable by imprisonment, $5,000 fine, or both

Greater of 3% or cost of funds computed annually

Other changes in the School Bond Qualification, Approval and Loan Act:


Loan Repayment Date

Loan Repayment Invoice

Not later than 72 months after the final maturity of the bonds for which the loans were made

Semi-annual loan repayment invoices sent to school districts whose computed millage is sufficient to pay debt service on outstanding bonds

Other changes in the School Bond Qualification, Approval and Loan Act:


Loan reporting requirements failure to comply

Maximum bond term

May withhold state aid funds until district complies with reporting requirements

No maximum. Must comply with Municipal Finance Act maximum bond term of 30 years or the minimum period of usefulness of the improvement for which they are issued, whichever is less

Other changes in the School Bond Qualification, Approval and Loan Act:


Maximum millage levy

Minimum bond term

13.00 mills

None

Other changes in the School Bond Qualification, Approval and Loan Act:


Minimum millage for borrowing from The School Revolving Loan Fund (existing loans)

7.00 of the computed mills required to the repay loan no later than the date specified in the repayment agreement, which is 72 months after the final maturity of the bonds outstanding as of the effective date of the act.

Other changes in the School Bond Qualification, Approval and Loan Act:


Minimum millage for borrowing from School Revolving Loan Fund (new bond issues contingent upon SRLF Participation)

Refunding non-qualified bonds as qualified

7.00 mills or the computed mills required to repay the loan within six years of the final maturity date of the new bonds

Not Allowed

Other changes in the School Bond Qualification, Approval and Loan Act:


Residual Funds

Variable Interest Rates/Swaps

May be used to pay for enhancements to projects describe in the ballot language, to pay debt service, or to repay the state

Allows payment of net interest obligations but does not include a termination payment related to the cancellation of an interest rate exchange of swap

Other changes in the School Bond Qualification, Approval and Loan Act:


Taxable value growth projections

Waiver requirements

Years 1-5: use average TV growth of previous five years. Years 6 +: use lesser of 3% of actual TV growth rate

No waiver requirements

Other changes in the School Bond Qualification, Approval and Loan Act:


Election Timelines

Additional Time Sensitive Items:

  • One business day following the bond election - Notify the SBQLP of the “unofficial” election results, pass/fail, total number of yes and no votes

  • Mail or fax signed copy of the official Canvass of the Election to the SBQLP after it is received from the Board of County Canvassers


Election Timelines

Additional Time Sensitive Items:

  • If successful – District must file an Application for Final Qualification of Bonds

  • Application qualification fees become due upon the sale of the bonds that have received preliminary qualification.


Advantages

Time the sale to market conditions

Develop pre-sale estimated interest rate

Fine tune debt service to prescribed millage levy

Adjust bond structure to market conditions

Tailor bonds to attract lower investor yields

Greater incentive to engage in presale marketing activities

Ensure that bonds are available to certain investors

Disadvantages

Staff time in the selection

Time spent on negotiating the sale

One bid for Board to review rather than multiple priced bids

Types of Public Sale

Negotiated Sale


Advantages

Multiple sealed bids

Competition

Less staff time selecting Underwriter

Less staff time conducting the sale

Bonds are awarded to

the underwriter based on the lowest True Interest Cost (TIC)

Disadvantages

Limited pre-sale distribution to investors

No control over local distribution

Sale time may be inflexible to market conditions

Bond structure inflexible to investor preference

“Risk premium capital”

built into bonds

Types of Public Sale

Competitive Sale Underwriter selection via auction


Current debt levy

Taxable Value Growth

Proposed borrowing amount

Debt millage goal

Estimated interest rate

Future capital needs

Financing alternatives

Options offered in the SBRL

Total interest costs

Technology, bus and equipment borrowing and repayment

Structuring the Bond Issue

Points to Consider


Members of your team:

Architect

Bond Counsel

Financial Advisor

General Contractor / Construction Manager

Underwriter

Related Costs:

Professional reports

Rating Agency fees

Printing costs

Notices and election costs

Department of Treasury fees

Bond registrar/paying agent

Capitalized interest

Credit enhancement

Understand Your Total Project Costs

Some basic expenses related to the bond sale and the construction projects are:


Bond Processing Investing

  • Do it yourself or investment professional?

  • Broker-Dealer

  • Financial Institution

  • Investment Advisor, Exempt or Registered


Conflict ofInterest – Dual Roles

  • Investment Advisor – Custodian Bank

  • Investment Advisor – Bid on Financial Services

  • Broker Dealers/Bankers – Board Members, Administrators, other employees

  • Financial Advisor – Investment Advisor


Arbitrage

Arbitrage is the profit from investing proceeds of tax exempt bonds, in taxable investments, at a yield higher than the yield on the tax exempt bonds.


Arbitrage

Bonds vs. Investments

Interest Payment Purchases

Principal Payment Sales/Maturities

Guaranteed Fees Interest Income

Equal Bond Yield Equal Investment Yield

5.0% Arbitrage 6.0% 5.0% No Arbitrage 5.0%

5.0 % Negative Arbitrage 4.0%


Questions or Comments

H.J. Umbaugh & Associates, LLC

517-321-0110 Lansing Office

Michael C. Givler – Partner

Darlene W. Janulis – Financial Consultant


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