capital appreciation bonds (cabs): do they have a legitimate role in municipal & school finance...
TRANSCRIPT
Capital Appreciation Bonds (CABs):
Do They Have a Legitimate Rolein Municipal & School Finance
September 25, 2012
Capitol Public Finance Group · 1900 Point West Way, Ste. 273 · T (916) 641 2734 · capitolpfg.com
Introductions
Slide 2
Presentation Overview
Slide 3
Slide 4
Why Borrow?
• Spread Cost Over Many Budget Years
– Based on useful life of project
– Project of benefit to many years worth of students/citizens/taxpayers
• Revenues Received Over Time
• Conserve Cash/Cash Management
• Minimize Construction and Other Cost Increases
Slide 5
What Does a Borrowing Pay For?
Slide 6
Facility or Infrastructure Construction
Land Acquisition
Building Acquisition
Facility or Infrastructure Renovation, Upgrade or
Expansion
Capital Vehicles & Equipment Purchase
Traditional Types of Long-Term Debt:Voter/Landowner Approved Debt
Slide 7
Traditional Types of Long-Term Debt:Non-Voter Approved Debt
Slide 8
Interest Payment Methods on Bonds
Slide 9
Slide 10
Recent Headlines Have BroughtCABs into the Spotlight
Slide 11
General Obligation Bonds (GO Bonds)
• Voter approved, long-term debt– Authorized under one of two voter approval methods
Traditional 2/3
Prop. 39 – 55%
– Available only to schools
• Approval method determines rules by which bonds can be issued and proceeds can be spent– Bond proceeds can only be spent on projects
explicitly identified at the time the bond measure was approved
Slide 12
Issuing GO Bonds
• Taxpayers authorize an amount of total bonds to be issued– Issued in series over time
• Amount of issuance limited by legal bonding capacity
• Prop. 39 created additional limitations:
Slide 13
Proposition 39 Tax Rate Limitations
Type of DistrictTax Rate Limit (Per
$100,000 of Assessed Value
Unified School District $60
Union School District $30
Community College District $25
Understanding GO BondIssuance Constraints
• Bond debt is repaid by ad valorem taxes levied on all taxable property within a district’s boundaries
– Tax rates a function of annual bond debt service and total assessed value in the district
Slide 14
Slide 15
School District XYZ’s Used CABs toIssue Additional Bonds
When Otherwise Could Not Have• Had authorization for $15.2 million of bonds• Issued $8 million of bonds
– During a time when assessed value was rapidly increasing
• Assessed value began to decline and additional bonds were needed– Had already reached the maximum Prop. 39 tax rate
for the entire term of the bonds already issued
• Issued an additional $5 million of bonds using CABs
Slide 16
Assessed Value in Many CA Communities
Slide 17
$0
$100,000,000
$200,000,000
$300,000,000
$400,000,000
$500,000,000
$600,000,000
$700,000,000
$800,000,000
$900,000,000
$1,000,000,000
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
XYZ School DistrictDistrict-Wide Assessed Value Increased Rapidly from 2003-04 Through 2007-08 But Then Experienced a Significant Decline
8.74%
8.60%
19.07%
8.93% -7.33%
-9.91%
-6.39%-2.97%
Slide 18
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
XYZ School District GO Bond Debt ServiceSeries 2005 GO Bonds Have An Increasing Debt Repayment
Schedule Over 25 Years, Likely to Coincide With Assessed Value Growth Rate Assumptions Made at the Time of I ssuance
Total Annual Interest
Total Annual Principal
Repayment on capital
appreciation bonds begins
Debt Service Increases by an
Average of 5.76% Per Year
Slide 19
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
Per
$100,0
00 of
Assessed V
alu
eXYZ School District Has Exceeded its Prop. 39 Tax
Rate Limitations and Won't Be Able To I ssue Additional Bonds Into the Foreseeable Future
ACTUALPROJECTED - BASED ON 2% A.V. GROWTH
Slide 20
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
Debt Repayment on the Bonds Spans 40 Years and is Structured So Repayment Begins After the Series 2005
Bonds Are Paid Off
Total Annual Interest
Total Annual Principal
Minimal Debt Service Payments Through
2031 when the Series 2005 Bonds are Paid Off
$28.5 Million of Interest Will Be Paid on $4.4
million of Capital Appreciation Bonds
Debt Service Increases by an
Average of 5.05% Per Year
Slide 21
Total Series 2005 Debt Serivce
Total Series 2008 Debt Service
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
Debt Service on the Combined 2005 Bond Measure Bonds Increases at Approx. 4.6% Per Year, Likely to Coincide with Assessed Value Growth Rate Assumptions Made at the Time Bonds Were Issued
Combined DebtService Increases by an Average of 4.6%
Per Year
Comments on this OverallGO Bond Structure
• CABs used to enable the school district to issue bonds that it otherwise would not have been able to issue under Prop. 39– Don’t know what the communication to their
governing board and community was
– Don’t know what their project needs wereWere they already under contract?Was it for a necessary facility?Did they communicate to the community and
decided this was the best decision? The answers to these questions informs us as to
whether a responsible decision was made.
Slide 22
Slide 23
School District QRS Issued CABs toMaximize Bond Proceeds
to Fund Necessary Projects• Small elementary school district with total
assessed value of $700 million– Prop. 39 tax rate cap of $30/$100,000 of a.v. limits
amount that can be issued
• All schools at capacity and need to construct new facility costing $20 million– State funds 40%, or $8 million (50% matching program
rarely provides 50% of actual school cost)– Developers fund 30%, or $6 million
• Used CABs to increase debt service annually to correspond to projected increases in a.v.
Slide 24
Slide 25
$-
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$0
$50,000
$100,000
$150,000
$200,000
$250,000
Tax R
ate
Per
$100,0
00 of
a.v
.
With a Fully Amortized Current Interest Bond, District QRS is Able to I ssue $3.6 Million of Bonds
I nterest
Principal
Tax Rates
Level Debt Service Payments Result in
Declining Tax Rates as Assessed Value Grows Over
40 Years
Prop. 39 Tax Rate Limit of $30/ $100,000
of a.v.
Slide 26
$-
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
Tax R
ate
s P
er
$100,0
00 of
a.v
.
By Using CABs, District QRS is Able to I ssue $5.6 Million of Bonds
CAB Interest
CAB Principal
CIB Interest
CIB Principal
Tax RatesEscalating Debt Service
Payments Result in Level Tax Rates at $30/ $100,000
of a.v. as Assessed Value Grows Over 40 YearsProp. 39 Tax Rate
Limit of $30/ $100,000 of a.v.
Comments on this OverallGO Bond Structure
• CABs used to enable the school district to fund the construction of a necessary school– Without CABs, this district would not have
been able to obtain enough money
• Even with the expensive cost of the CABs over 40 years, a conscious decision was made to issue the bonds in this manner
Slide 27
Slide 28
School District ABC Issued CABsto Maximize Tax Rates
• Large unified school district issues CABs as part of overall bond plan
• Limits term to 25 years
• CABs only a small part of the district’s overall debt portfolio
– Over $350 million of bonds, $26 million were CABs
• Layered on top of CIBs to level out debt service when combined with other bonds issued
Slide 29
Slide 30
$0
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
CABs Were Used to Make Overal Debt Service More Level Over 25 Years
CAB Interest
CAB Principal
CIB Interest
CIB Principal
Other Outstanding GO Bonds
CABs Were Used to Level Out Debt Service on
Overall Bond Measure
Comments on this OverallGO Bond Structure
• CABs were issued to level out overall debt service– Did not rely on estimated increases in
assessed value
• Overall debt repayment ratio less than 2:1
• Shorter term, 25 year, CABs
Slide 31
Other Uses of CABs
• Not only used in conjunction with GO Bonds
– COPs or revenue bonds
Often to defer repayment to match a specific revenue source
– Developer fees, CFD taxes, future capital contributions, etc.
– Federal Government issues them
Savings bonds
Have become prevalent for school GO Bonds because of the limitations of Prop. 39
Slide 32
Slide 33
CABs Can Be Issued Responsibly
• Communication and education is essential– Cost information
– Risks/benefits
– alternatives
• Need to consider the overall goals of the agency
• Enable projects to be constructed today to avoid construction cost escalation
• Spread project costs over several budget years– Consider inflation
Slide 34
Often Costly CABs Are IssuedWithout Proper Education
• Many board/community members do not understand the costs
– Don’t know the right questions to ask
• Industry professionals can encourage an issuance to profit from the financing
• Aggressive assessed value growth projections can compound the problem and cost.
Slide 35
Questions?