Bond Issue Planning Discussion

At the board work session on Monday, February 6th there was discussion of restricting the use of bond funds so that either bonds would not be sold, or issued bonds would be paid off early should proceeds not be needed for the proposed scope of the projects in the April 17th bond request.   Following that meeting I have discussed various options with Jim Bays, Faith Pettis (bond counsel), and Mark Prussing (financial advisor).

Based on those conversations I have put together a list of options, advantages/disadvantages of each, and a recommendation on how to proceed.

Options for Bond

 

There are four options to consider when it comes to a bond sale.

1)   Sell only the bonds we need, when we need them

2)   Sell the entire authorization and maintain those funds in the Capital Projects Fund, then:

a.     Maintain those funds in the capital projects fund and use them for other capital project's needs that may arise following a hearing that is required by statute and the bond resolution

b.     Upon acceptance of all projects authorized by the voters as defined in the bond resolution, transfer remaining funds into the debt service fund to pay debt on these and other bonds on their call date.

c.      Upon acceptance of all projects authorized by the voters as defined in the bond resolution, transfer remaining funds into the debt service fund and immediately pay off bonds which were marketed and sold as "callable bonds"

 

(these options may be combined into a ‘hybrid' of the above options")

 

Discussion

 

There are advantages and disadvantages to each of these approaches.  

 

1) Sell only the bonds we need, when we need them.

Advantages

Disadvantages

  • Bonds can be sold in $5000 increments. This means that bonds can be marketed and sold based upon bid prices and real costs, rather than the whole issue.

 

  • In order to sell bonds we must reasonably expect to spend 85% of the bond proceeds within three years. This acts as a governor on the issuance timing and amount.
  • Each bond issue has associated "issuance costs." These include the costs for bond counsel, Financial Advisor, Underwriter profit, etc. The total cost of issuance for small issuances may be disproportionately large to the benefits of parsing the sale into a series of small sales.

 


 

 

2a) Sell the entire authorization and maintain those funds in the Capital Projects Fund, then maintain those funds in the capital projects fund and use them for other capital project's needs that may arise following a hearing that is required by statute and the bond resolution

Advantages

Disadvantages

  • This provides the most flexibility and advantage to the district in the long term. Particularly with the age of other facilities in the district the funds may be helpful in addressing systems upgrades and replacements such as HVAC, boilers, etc.

 

  • This approach has potential to yield lower bond interest rates than option 1 or 2c. (1, because of the size of the associated bond sale(s) and 2c because of the surety of the call date for the investors)
  • There is an extra layer of accounting that is necessary to track and pay arbitrage rebates on the funds that are kept in the capital projects fund and earn any interest.

 

  • There is no benefit to the taxpayer in terms of lower taxes associated with unused bond proceeds.

 

2b) Sell the entire authorization and maintain those funds in the Capital Projects Fund, then upon acceptance of all projects authorized by the voters as defined in the bond resolution, transfer remaining funds into the Debt Service Fund to pay debt on these and other bonds on their call date.

Advantages

Disadvantages

  • This approach has potential to yield lower bond interest rates than option 1 or 2c. (1, because of the size of the associated bond sale(s) and 2c because of the surety of the call date for the investors)

 

  • There is a benefit to the taxpayer in terms of lower tax rates associated with the repayment of issued bonds.
  • There is an extra layer of accounting that is necessary to track and pay arbitrage rebates on the funds that are kept in the DSF and earn any interest.

 

  • There is potential with this approach to create a "roller coaster" impact on tax rates. It would be necessary, if possible, and depending on the amount transferred from CPF to DSF, to time the transfers over a number of years to avoid this impact.

 

  • The district would loose the advantage of flexibility in the use of funds identified under 2a.

 

  • This option would be very inefficient. Trying to retire debt after it is sold is an expensive option. Even for callable bonds, you generally would not be able to pay them off for 10 years. Investing at the low short-term rates would likely result in a lot of negative arbitrage for the period before the call date (difference between the investment rate and the rate you are paying on the bonds)- thus providing very little benefit for taxpayers.

 

2c) Sell the entire authorization and maintain those funds in the Capital Projects Fund, then upon acceptance of all projects authorized by the voters as defined in the bond resolution, transfer remaining funds into the debt service fund and immediately pay off bonds which were marketed and sold with a "Short Call""

Advantages

Disadvantages

  • This approach avoids the complications and disadvantages identified in option 2a and 2b. , specifically the arbitrage accounting and rebates and potential tax rate fluctuations.
  • Short Call bonds are much less attractive to buyers and potentially carry a markedly higher interest rate. Requiring a higher rate of taxation that would bonds sold under the other three options.

 

Recommendation:

 

My recommendation is that the board consider a hybrid approach of option 1 and option 2a and 2b.

 

1)   Divide the bond sale into a set of three issues:

 

a.     The first issue will be over half of the authorization.  This will likely take place in June 2012.   Funds will be used to pay the costs of site development, project development, and up to half of the anticipated construction costs.

 

b.     The second issue will be potentially up to the remainder of the authorization, (if it appears that all funds will be necessary to complete the scope of the proposed projects).  This will likely take place after the projects have been bid, in June or December 2014.   Funds will be used to pay the anticipated costs of completing construction.   If bids come in lower than the estimates then the issuance would be reduced commensurate with the lower bids.

 

c.      The third issue would be set, should there be remainder capacity from the authorization, to cover any exceptional change orders, or options that may occur in the course of construction that will necessitate additional funds beyond what was anticipated in the second issue.    It is likely that this third issue would be a smaller issue than the first two issues and may have slightly higher interest rates and issuance costs.  There is a potential advantage in the third sale if the issue is under $10 million in a calendar year that we may achieve a lower interest because of special tax status provided to banks who purchase small issues.

 

2)   Following a hearing, (required by statute) the board could consider transferring any remainder funds, into the Debt Service Fund to pay off the costs of bonds as they become due.   It is anticipated that the funds transferred would be smaller than if the entire issuance were sold, and not needed for the projects, thus mitigating the impacts of arbitrage and fluctuating tax rates.