New Clerk Academy

1. New Clerk Academy Key West, Florida

2. DEBT MANAGEMENT OVERVIEW

3. Objectives • Provide Overview of Debt Management Issues

4. Overview of Bond Progress • What is a Bond? • Similar to a home mortgage; long-term liability • Debt repaid from pledged revenues • Usually has maturity from 1-30 years • Many states issue primarily general obligation bonds(full faith and credit) • In Florida, general obligation bonds must be approved by voter referendum • Florida governments issue mostly revenue bonds (secured by a specific tax or enterprise fund revenue)

5. Characteristics of Municipal Bonds • Exempt from Federal (and in some cases state) income taxes. • Lower interest rates than corporate securities • Generally sold as serial bonds as opposed to term or bullet maturities • Exempt from SEC regulations (Tower Amendment) • Dealers regulated by MSRB (Municipal Securities Rulemaking Board

6. Types of Municipal Debt • Bonds classified by source of security • You can not pledge assets as security-only revenues • General obligation (full faith and credit) • Revenue bonds • Limited tax bonds • Enterprise bonds • Special assessment bonds • Housing Bonds • Special Assessment Bonds • Industrial Revenue Bonds • Lease/Purchase

7. Sources of Security • State Revenue Sharing • Guaranteed Entitlement • Second Guaranteed Entitlement • Additional State Revenue Sharing Funds • Local Government Half Cent Shared Sales Tax • Gas Taxes • One Cent Optional Sales Tax • Toursit Development Tax • Utility Revenues • Covenent to Budet and Appropropriate • Utility Tax Revenues

8. Overview of Bond Process • Bond History • Florida used to issue more general obligation bonds • Florida Constitution requires referendum due to bond defaults during the depression • As a state with many retirees, voters not inclined to vote for debt due to fixed incomes and lack of community ties • Florida governments needed to issue bonds to finance capital projects and began to use more revenue bonds to avoid referendum • Credits became more complex, and bond buyers began favoring the use of bond insurance

9. Clerk’s Role • Varies county to county based upon tradition, knowledge, skills and personalities. Know your role and ensure there is agreement with Board • Part of financing team • May prepare financing plan and participate in selection of external financing team • Responsible for financial disclosure • Signs bond documents at closing • Signs a statement of no omission of material facts

10. Finance Team • Principal Players • Staff • Bond Counsel • Financial Advisor • Underwriter • Disclosure Counsel/Underwriter’s Counsel • Rating Agencies • Consulting Engineer/Rate Consultant

11. Finance Team • Staff • Finance • Attorney • Administration • Operating department director • Role of Staff • Protect government’s interests • Obtain lowest borrowing cost (consistent with risk) • Liaison with board members

12. Finance Team • Bond Counsel • Prepares legal documents • Opines on validity of bonds • Opines on tax exemption • Helps develop structure of debt • Adequate disclosure is the responsibility of the issurer not bond counsel

13. Finance Team • Financial Advisor • Helps develop structure of debt • Variable vs. Fixed Rate • Level debt service for each issue or level for all outstanding debt • Coverage • Maximum maturity of bonds • Provides recommendation on economic feasibility of refunding • Helps with selection of finance team • Conducts document review • Coordinates ratings and bond insurance • Advises on fairness of pricing, terms and bond ratings

14. Finance Team • Underwriter • Purchases bonds from issuer for resale to investors • Underwriters represents the buyers, not the issurer • Based upon market demands, provide input into the structure of financing • Monitors outstanding debt for refunding opportunities • Conducts document review • Assists with ratings and bond insurance

15. Finance Team • Disclosure Counsel/Underwriter’s Counsel and Difference Between the Two • Assists with preparation of POS and OS • Provides knowledge of disclosure requirements (including continuing disclosure)

16. Finance Team • Rating Agencies • Objective and expert evaluation of credit • Insured Ratings – Based on rating of bond issuer • Underlying Ratings – Based on rating of issuer and source of repayment of bonds • Provide feedback on bond structure • Improve efficiency of market • Additional source of information for investors on suitability of investment • Investment grade ratings enhance sale of bonds

17. Finance Team • Consulting Engineer/Rate Consultant • Necessary for certain construction projects • Provides information on construction cost and rate implications • Enhances credibility of project • Helps develop structure of debt

18. Finance Team • Paying Agent/Escrow Agent • Invoices issuer when debt payment is due • Makes payment to bondholders • Holds refunding escrow on behalf of bondholders • Sends redemption notice to bondholders for refunding

19. Finance Team • Other Participants • Accountants and Auditors • Credit Enhancers (Insurance, Letters of Credit) • Verification agents (refunding)

20. Finance Plan • Topics • Debt Management Plan • Capital Improvement Plan • Pledged Revenue • Debt Structure • Method of Sale

21. Finance Plan • Debt Management Plan • Recommended practices by GFOA and rating agencies • Parameters for issuing debt and refunding • Protects credit quality • Provides basis for making decisions • Demonstrates a commitment to long-term financial planning

22. Finance Plan • Capital Improvement Plan • Considerations • Match projects with revenue sources • Increased operating expenses from new projects • Deferred maintenance items • Prioritized and fully funded capital plans • Debt service costs as percent of budget • Balance financing sources • Fund balances • Levels, policies – formal vs. informal

23. Finance Plan • Pledged revenue depends on … • Type of project • Availability of revenues to pledge • Impact of debt service on operational funding • Cash flow flexibility • Bond Covenants • New debt may be constrained by existing covenants • Maximize future flexibility with new covenants • Balance between flexibility and ratings. (The more flexibile your documents the more potential risk will be perceived by markets.)

24. Finance Plan • Debt Analysis • Review outstanding debt • Identify any refunding candidates • Debt service pattern and revenue cash flow • Consider existing and future debt structures • Term of the debt (1-30 years) • Match life of the asset • Match duration of the pledged revenues

25. Finance Plan • Sale Process • Competitive • Negotiated • Private placement • Types of Debt • Fixed rate vs. variable rate • Rate swaps (fixed to variable or variable to fixed) • Tax-exempt vs. taxable

26. Bond Ratings • What is a Bond Rating? • Measure of risk to bondholders • Agencies: S & P, Moody’s and Fitch • Reflects issuer’s ability and willingness to repay debt on time and in full (who, how, what) • Denotes credit quality by rating level • Independent opinion (subjective process) • Forward looking projection • Each credit is unique

27. Bond Ratings • Bond rating is not… • …an audit • …a recommendation to buy, sell or hold a security • …static or permanent • …an opinion of a community’s quality of life • …a performance evaluation of current political leadership • …a judgment of quality of service delivery

28. Bond Ratings • Value of Bond Ratings • Lower interest rates on bonds if insurance purchased • Access to market for lesser known credits • More efficient secondary market trading • Increased investor demand • Some institutional investors can only purchase certain rated securities

29. Bond Ratings • Rating Process • Send bond documents to rating agencies • Analysis • Have conference call or meeting • Complete analysis • Rating committee • Rating released • Surveillance

30. Bond Documents • Bond Resolution or Indenture • Official Statement • Bond Purchase Agreement • Competitive Sale Documents • Continuing Disclosure Certificate • Other Documents

31. Bond Documents • Official Statement • Prepared by Disclosure Counsel or Underwriter’s Counsel • Not a sales document • Disclosure standard • No untrue statement • No material omission • Issuer is responsible for disclosure • Certificates and Opinions

32. Bond Documents • Bond Purchase Agreement • Contract between issuer and underwriter for negotiated sales • Prepared by underwriter’s counsel • Executed after pre-marketing period • Includes • Transaction terms • Responsibilities • Document requirements • “Outs”

33. Bond Documents • Competitive Sale Documents • Notice of sale • Summary notice of sale • Bid forms • Prepared by bond counsel and financial advisor

34. Bond Documents • Continuing Disclosure Certificate • Annual financial information • Material event notices • Electronic Municipal Market Access (EMMA) • Not required for private placements and variable rate debt

35. Bond Documents • Other Documents • Closing Documents • Escrow Deposit Agreement • Insurance Agreements • Reserve Sureties • Investment Agreements

36. Pricing and Sale • Topics • Bond insurance • History and Current Status • Underlying ratings • Call features • Method of sale • Bond sale process

37. Pricing and Sale • Ratings • Investment grade ratings affect pricing (lower yields) • Create more demand for and interest in bonds • Greater universe of potential bond buyers • Assist in attracting more bidders at competitive sale • Rating upgrades signal positive trend to underwriters and investors

38. Pricing and Sale • Call Features • Optional redemption • Issuer’s right to prepay after a stated date at specific price - Call Date – typically 8 to 10 years from date of issuance - Call Premium – typically 100 at par (100 percent)

39. Pricing and Sale • Method of Sale • Competitive Sale • Underwriters bid against each other - Specific bid date and time - Sealed or electronic bid - Awarded by lowest true interest cost • Negotiated Sale • Underwriter chosen prior to sale • Assists with structuring and pre-marketing • Greater market timing flexibility • Private Placement

40. Pricing and Sale • Negotiated Bond Sale Process • Establish target sale date • Monitor market for favorable conditions • Pre-marketing • POS mailed and emailed • Marketing circular for sales people • Communication with potential buyers • Conference calls • Direct mailings

41. Pricing and Sale • Negotiated Bond Sale Process (continued) • Day prior to sale have pricing call • Underwriter and financial advisor • Preliminary yields • Establish pricing structure (“scale”) • Sale at par • Original issue discount • Original issue premiums • Retail order period • Day prior to institutional order period • Committed entirely to retail orders • Priority for local or Florida residents

42. Pricing and Sale • Negotiated Sale Day of pricing • Underwriter and FA confirm initial pricing • Underwriter “goes into market” around 9 a.m. • Receives retail and institutional orders • Individual investors • Bond mutual funds • Insurance companies • Banks – own portfolios, trust departments

43. Pricing and Sale • Negotiated Sale--Day of pricing (continued) • Repricing • Changes in market conditions • Significantly more or less orders than bonds • Yields may be decreased or increased based on orders • Underwriter makes offer to underwrite to issuer • Issuer gives verbal award • Underwriter prepares final numbers • Bond purchase agreement finalized and signed that afternoon or next day

44. Post Closing • Topics • Managing rating and rating agency relationships • Maintenance of funds and accounts • Other resolution requirements • Arbitrage • Investment of proceeds

45. Ongoing Requirements • Maintenance of Funds and Accounts • Construction Fund • Revenue Fund • Debt Service Fund • Principal Account • Interest Account • Amortization Account • Debt Service Reserve Account • Rebate Fund • Other accounts for enterprise activities

46. Ongoing Requirements • Other Resolution Requirements • Rate covenant • Additional bonds (parity) test • Permitted investments • Restriction on asset sales • Insurance or inspection requirements • Audited financial statements

47. Secondary Market Disclosure • Undertaking requirements is contact between you and bond holder • Event disclosure

48. OnGoing Requirements • Arbitrage • Bonds issued tax-exempt • If bonds proceeds invested taxable, interest earnings may exceed interest expense on bonds • Creates positive interest gain (arbitrage) • Interest in excess of bond yield must be rebated to IRS every five years

49. Ongoing Requirements • Investments • Tax-exempt vs. taxable returns • Resolution restrictions • Integrate bond investment restrictions into investment policies • Legal restrictions and arbitrage • Types of investments • Purchasing investments

50. Conclusion • Understand your role in the financing process • Understand the bond documents and your ongoing responsibilities • Define who speaks to the market on behalf of your government.