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Municipal Bond Financing for Schools

Municipal Bond Financing for Schools. CAIS Trustee/School Heads Conference Marin Country Day School Fairmont Hotel, San Francisco January 26, 2008. Presentation Overview. Introduction/Background Strategic Planning Role of the Financing Team Issues Concerning Tax-Exemption

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Municipal Bond Financing for Schools

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  1. Municipal Bond Financing for Schools • CAIS Trustee/School Heads Conference • Marin Country Day School • Fairmont Hotel, San Francisco • January 26, 2008

  2. Presentation Overview • Introduction/Background • Strategic Planning • Role of the Financing Team • Issues Concerning Tax-Exemption • Financing Structures Available

  3. Introduction/Background - MCDS School Facts • 540 Students, K-8, Co-Educational, Established in 1956 • 100 Faculty and Staff (FTE) • “Involved” parent body • Strong Financial Condition • No Debt prior to the Bond Offering • $17.0 million Endowment • $17.0 million annual Budget (including $1.4 million Annual Campaign & $2.0 IT) • Capital Campaigns • Previous - completed $11.25 million campaign in 2003-04 • Current - $20 million (2/3’s complete after 1 year)

  4. Strategic Planning – Planning for the Future Campus Master Plan • Board approved Campus Master Plan in November 2006 • Three phases, 25 years to replace, add or improve buildings and landscape • Phase 1 addresses critical space needs Strategic Plan 2006 • MCDS undertakes a Strategic Planning exercise every 5 years • Current plan focuses on Curriculum, Technology, Environmental, Global Awareness & Teacher Training Step Forward Capital Campaign • Amount • Ideally • Realistically • Timing - Collections likely to lag spending

  5. Strategic Planning – Role of the Constituents Board Role • Committees, Planning, Setting of Priorities Staff Role • Program, Project, Coordination Parents, kids! • Committee Involvement, Fundraising, Expertise • Play space!@! Board Staff Kids Parents

  6. Strategic Planning – How are decisions made? Fundraising • Committees, Planning, Setting of Priorities Project Description • Program, Project, Coordination Financing Plan • Timing, Amount, Structure Funds Project Timing Program

  7. Role of Financing Team – Role of School Counsel Advisor to School Opinion for Bonds Coordination of Financing Team

  8. Roles of Parties to the Transaction School / Counsel Provides Information to Financing Team • History, description, current enrollment, Board/staff member biographies & cash flow projections Underwriter Works with School’s Financing Team to Determine Optimal Structure, then Coordinates Process & Schedule • Financing plan, timeline, conduit issuer application & offering document preparation Letter of Credit Bank • Provides letter of credit as security for school bond payments Bond/Disclosure Counsel Prepares Legal Documents • 2-3 financing team meetings to prepare and review financing documents • Loan Agreement, Trust Indenture, Offering Document, Board Resolutions Stone & Youngberg Underwrites Bonds and Sells to Investors

  9. Issues Concerning Tax-Exemption Lowest Cost Form of Borrowing for Eligible Nonprofit Organizations • As a 501(c)(3), MCDS can take advantage of its tax-exempt status • Independent schools have increasingly used for financing major capital projects The Window is Only Open for “Capital Projects” • Tax-exempt bond proceeds can only be used for bricks, mortar and associated soft costs (like architectural fees and upfront financing costs) Bonds Allow for Flexibility in Construction Financing • Provide a cushion for cost over-runs (vs. cash financing) • Construction outlays rarely matches the timing of pledge collections Efficient Management of Capital Structure • Matching assets with liabilities • Bond structures can be tailored to the financing needs of the organization

  10. Issues Concerning Tax-Exemption Approvals Required • MCDS Trustees • Financing Plan • Legal and Financing Documents • Conduit (ABAG) Issuer Board • Structure for selling the debt • Legal Structure • TEFRA Public Hearing • Held in area of jurisdiction (Marin County) • 14 day notice in local newspaper

  11. Issues Concerning Tax-Exemption Structure of the Financing • Conduit issuer and why it is needed • Restricted vs. Unrestricted fundraising • Documents • Indenture, Loan Agreement, Bond Purchase Agreement, Reimbursement Agreement, Remarketing Agreement, Official Statement!

  12. Issues Concerning Tax-Exemption Timing • Start construction immediately due to urgent needs and rapidly escalating costs Flexibility • Allows Capital Campaign pledges to be collected over several years Certainty • Funds shortfall, if any, between Capital Campaign and spending • Provides protection in event of cost overruns Fairness • Spreads cost of project over multiple generations Prudence • Common financing tool used by many peer schools

  13. Financing Structures Available Conduit Issuer Marketplace School Project Kids! Three Structures: • #2: Synthetic Fixed Rate • #3: Standard Fixed Rate • #1: Variable Rate

  14. Option #1: Variable Rate Issue Advantages Disadvantages • MCDS would enter the market with an “A1/P1” or better rating • Tax-exempt variable rates have been the lowest in the marketplace for last 10 years- 2.80% in today’s market (1/23/08) • Prepayment at any time without penalty • No funded “reserve fund” required- lower overall par amount • Little to no public disclosure • Short-form Official Statement • Extremely Competitive LOC Market at current time • Volatility of variable rates given a fixed revenue stream • Borrower must renew letter-of-credit or liquidity facility • If rating for the credit provider is downgraded, then debt is remarketed at higher rates • More complicated financing structure for future management/boards to understand

  15. Option #2: Synthetic Fixed Rate Issue Advantages • MCDS would enter the market with an “Aa” rating • MCDS can “lock-in” fixed rates at very low levels • MCDS can mix attractive variable rate debt with low fixed rates and achieve a balance between interest rate risk and benefits • Future boards/committees will understand payment methods more easily • MCDS can build in “optionality” Disadvantages • More complex financing process • Although rewards are worth the trouble • Issue is “non-callable” during the swap period (termination fees) • Basis Risk: Matching taxable and tax-exempt markets

  16. Option #3: Fixed Rate Issue Advantages • School controls structure • Lock-in interest rates • Certainty of annual payments for stable budgeting process • Future boards/committees will understand payment methods more easily Disadvantages • Currently, higher interest rates versus credit enhanced variable rate debt • Optional call feature requires the debt be outstanding for a length of 8 to 10 years • Funded debt service reserve fund needed (larger par amount), although net cash effect is 0 • Market dynamics make this a more difficult time to issue stand-alone fixed rate securities

  17. MCDS Considerations: Variable vs. Fixed Rate • Issue – Most Important Decision is Variable vs. Fixed Interest Rate • Two Choices • Interest Rate – Fixed, Variable or Combination • Duration - Fixed portion can be for as little as 5 years or as much as 30 years • Recommendation is to enter into a fixed rate contract for 80% of the debt for 30 years • Risk – If interest rates fall, MCDS is locked into a higher interest rate than variable and the loan will be more expensive to refinance or prepay

  18. Fixed Rate vs. Variable Rate Historical Relationship Between Fixed and Variable Rate Tax-Exempt Bonds

  19. Ongoing Responsibilities Investment Strategy for Capital Campaign Receipts Financial Covenants Bond Payment Mechanics Reporting Requirements Managing the Project

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