Bonds and Local Option Levies

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Bonds and Local Option Levies
Financial Planning
Bonds Ballots Workshop January 24-25, 2008
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What is a General Obligation Bond?

• Debt Service is repaid by a levy on all taxable
  property within issuers boundaries. Levy is
  unlimited as to rate or amount.
• Taxable value is Assessed Value not Real
  Market Value.
• Must be voter approved within double majority
  rules.
• Proceeds can only be used for capital
  construction and improvements (more on that
  later).
• Full Faith and Credit issues are not GOs.
• Bond levies approve a not-to-exceed par ()
  amount of bonds. Bond levy cannot approve a
  per thousand authorization.

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Legal Debt Capacity
General Obligation bonds are subject to statutory
debt limits.
Statutory Debt Limits (as of Real Market
Value) K-12 School Districts 7.95 Education
Service Districts 7.95 Community College
Districts 1.50 Cities 3.00 Counties 2.00
Note Only general obligation debt counts
towards this GO legal debt capacity. Full faith
and credit obligations and pension obligations do
not count. They may have their own single debt
limits for some issues. Realistically, voters are
your true constraint on GO debt.
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When to use GOs

• Educational Districts
• GOs are primary means for acquiring constructing/
  renovating facilities.
• General fund based transactions (FFCOs) give
  broad authority to borrow but are limited by
  squeeze on general fund resources.
• Cities and Counties
• GOs are only a part of wide arsenal of debt
  instruments.
• Typical use reserved for non-self supporting
  projects such as parks, libraries, jail, fire and
  police facilities.

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Who is on the Financing Team?
Financial Consultant and Bond Counsel are key
team members

• Financial Consultant (a.k.a Investment Banker
  or Financial Advisor)
• Works with Issuer to determine bond size and
  structure
• Assists Issuer in evaluating tax rate impacts
• Provides guidance on timing of sale
• Plans and executes the sale and coordinates
  closing of the Bonds
• If investment bank, may also underwrite bonds.
• Bond Counsel
• Provides guidance on eligible projects under
  Oregon law
• Assists Issuer in preparing ballot title
• Prepares legal documentation authorizing sale of
  bonds
• Provides guidance on federal tax law
  ramifications
• Provides investors with required validity and tax
  opinions

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Sizing Your Issue

• Step 1 Perform needs analysis and determine
  project costs
• Step 2 Add issuance costs assume
  1.00-3.00 of issue amount, depending on
  size and market conditions
• Step 3 Consider whether to adjust for
  anticipated interest earnings
• Step 4 Analyze tax impact and repayment
  structures
• Step 5 Iterate to alter tax rate impacts and
  to make changes to project list

Remember your maximum debt limits
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Debt Repayment Options

• Two most important things to remember
• Debt service repayment can be tailored to your
  specific and unique circumstances,
• and
• Structuring of repayment plan should take place
  simultaneously with sizing process. One
  informs the other.
• Proper structure of your debt service (before the
  election) may be crucial to your election success.

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Debt Repayment Options

• Considerations
• Length of Issue What maturity do you want?
• Useful life of items being financed
• Trade-off between annual and overall cost
• Specific community priorities and relationship
  with other outstanding debt
• Levy Impact
• Level debt vs. level levy structures
• Focus on single issue or combined debt burden?
• Future debt plans?
• Time of year of bond sale may effect first year
  levy

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Examples of Structuring Considerations
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Examples of Structuring Considerations
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Examples of Structuring Considerations
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Estimating Taxpayer Costs

• Options for providing cost data to patrons
  include
• Levy rate 2.00/1,000 assessed valuation.
• Most common approach
• Easy to remember
• But, no longer appears on tax bill
• Rates often change over life of issue
• Rounded annual dollar cost 300/year on 150,000
  property.
• Standardizes measurement
• Easy to extrapolate to other property values
• Monthly 25/month (or two large pizzas a
  month)
• Makes amount equivalent to other household
  expenses
• May make amount seem more manageable.

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Use of Proceeds

• Oregon Constitution restricts allowable uses of
  proceeds for GO bonds to capital construction
  and improvements.
• Capital construction and capital improvements do
  not include maintenance and repairs, the need
  for which could reasonably be anticipated or
  supplies and equipment that are not intrinsic to
  the structure.
• 60-day use of proceeds resolution and statute of
  limitations.

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Determining Project Eligibility
Capital Construction and Improvements?
No
Ineligible
Yes
Furnishings
Other
Supplies Equipment
Maintenance Repairs
Intrinsic
Extrinsic
Anticipated
Street Highway Construction, Overlay
Reconstruction
Unanticipated
Public Safety Vehicles with 5 year Useful Life
For acquisition, construction, remodeling, or
because of damage to structure
Not for acquisition, construction, etc..
Required by damage, not expected when
constructed, prolongs life
Deducted as expense under IRS code, doesnt add
to value or prolong life.
Necessary to function, fixture
Ineligible
Eligible
Eligible
Eligible
Eligible
Eligible
Eligible
Ineligible
Ineligible
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Proposed Changes to Double Majority

• HJR 15 was approved by the Legislature and
  referred to the November 2008 ballot.
• If approved by voters (simple majority only
  required), double majority provisions of
  Measure 50 will be modified.
• Measure would allow all May and November
  elections in any year to be exempt from double
  majority requirements. For all September and
  March elections, the double majority requirements
  would continue to apply.
• If approved, affects all elections FOLLOWING
  November of 2008.

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2008 Election Schedule

• Check with your County elections office to verify
  filing deadlines.
• All elections are by mail.
• Applies to both GOs and Local Option Levies.

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What are your odds?

• Forty-eight percent of all GO Bonds from March
  2000 to November 2007 have passed.

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What are your odds?
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How Election Dates Affect Financing and Project
Timing

• Considerations
• Bond issues take 2-3 months to prepare and sell.
• Project timing and construction cash flow
• Tax levy timing and debt repayment
• Budgetary impacts
• Conclusions?
• Carefully consider impact of election date on
  ability to cash flow both project needs and debt
  service.
• How do your choices impact tax levy and perceived
  cost to taxpayer?

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Budget Law Compliance

• Specific local budget law provisions apply both
  to proceeds received from bond sale and payment
  of bond debt service.
• Funds to Establish (if necessary)
• Capital projects (used to receive and expend
  proceeds).
• Debt service (receive and expend taxes levied for
  debt service).
• Exemptions may apply
• For the expenditure of bond proceeds received
  during the fiscal year of passage
• For bonds issued to refund previous bonds

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Investment of Proceeds

• State and Federal laws require that interest
  earnings be used for either
• 1) projects allowed under ballot title, or
• 2) debt service payments (i.e, reduce the tax
  levy with remaining proceeds).
• Construction funds are subject to federal
  arbitrage/rebate rules.
• Maximizing earnings on proceeds is critical.
• Changes to (or creating an) Investment Policy
  need to be planned ahead of time.

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Investment Policy

• Should be in place prior to receipt of bond
  proceeds
• Governed by O.R.S. 294 statutes
• If investment horizon (construction period) is
  longer than 18 months, the policy needs to be
  sent to the Oregon Short Term Fund Board (STFB)
  for their review and comment.
• O.R.S. 294.035 dictates types of investment
  securities
• Short Term Fund Board has a sample policy on
  their website
• Other municipalities have sample policies on
  their websites

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Bond Issues Summary

• Engage experts early.
• Make sure your projects are allowable for general
  obligation bonds.
• Bond structures need not be one size fits all.
  Structure to your specific needs and
  opportunities.
• Recognize you are issuing securities that are
  subject to state and federal securities and tax
  laws.
• Think through election timing and relationship to
  project needs.
• Set up appropriate budget and investment
  procedures and construction funds/accounts.

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Local Options Overview

• Local option levies present an alternative for
  raising additional operating funds from property
  taxes.
• Cities, counties, special districts and community
  colleges have access to other types of revenues
  for school districts this is only direct option
  for additional operating cash.
• Created under Measure 50 in 1997 expanded to
  schools in 1999, modified in 2007 session.
• Available for operations (5 year limit), or
  capital (10 years or useful life of project,
  whichever is less).
• Can be levied as fixed dollar amount or rate per
  thousand.
• Subject to double majority voter approval, except
  for general elections (even years).

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Rules for Schools

• Under HB 2641, school district local option
  levies are now limited to lesser of
• 1,000 per student (ADMw), growing at 3/year
  starting FY 2009.
• 20 of State resources
• M5 limit of 5/1,000 real market value, less
  existing M50 collections.
• Equalization Grants provided by State for low
  property values districts. For the 2007-09
  biennium, 400,000 appropriation approved, plus
  8000,000 in special purpose appropriation which
  requires approval from the Emergency Board.
  Districts that had approved local option levies
  in 2006-07 received the following grants, paid
  from the 2005-07 biennium appropriation
• CROW-APPLEGATE-LORANE  20,164
• HOOD RIVER 346,517
• PENDLETON 129,769
• OAKLAND 129,769
• Total 522,114
• 2006-07 is the last year for Oakland.  Falls City
  starts in 2007-08 (3-year levy).
• For community colleges, local option limited to
  amount lost to Measure 50. Nominal amount in
  most cases.

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Rules for Cities, Counties, Special Districts

• Only limitation for cities, counties and special
  districts is 10/1,000 Measure 5 governmental
  limit.

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How much Measure 5 Local Option Capacity Exists?

• Each property has a Measure 50 tax rate (based on
  assessed value)
• Each property has a Measure 5 tax rate limit
  (based on real market value)
• Measure 5 rate limit must be equal to or higher
  than Measure 50 rate when translated to common
  base.

• Every property has its own unique gap between
  M50 rate paid and M5 limit, which changes every
  year based upon differential growth rates and
  changes in taxes levied.
• The total of all gaps for all properties in
  taxing district equals total local option
  capacity.

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Estimating Maximum Authority - Schools

• School Districts May Levy the Lesser of
• 1,000/student (ADMw)
• 20 of State resources
• Measure 5 limits for all education districts less
  existing Measure 50 collections for such
  districts.
• Example

Assumptions ADMw 5,400 State Resources
26.00 million AV 2.00 billion RMV
2.60 billion M50 Tax Rate for all education
districts 4.50
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Estimating Maximum Authority - Schools

• Dollars Per Student1,000 X 5,400 5.40m
• Percent of State Resources20 x 26m 5.20m
• Measure 5 LimitMeasure 5 maximum 5/1,000 x
  RMV
• 5/1,000 x 2.6 billion 13.00m
• Less Measure 50 collections for all education
  districts
• 4.50/1,000 x 2.0 billion 9.00m
• Measure 5 capacity 4.00m

• Limitation is Measure 5
• Maximum collection authority is 4.00 million

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Estimating Maximum Authority Cities, Counties,
Special Districts
Assumptions AV 2.00 billion RMV 2.60
billion Consolidated Governmental Permanent
Tax Rate 11.23/1,000
Allowable Measure 5 Collections 10/1,000 x
2.6 billion 26.00m Less Measure 50
Collections 11.23/1,000 x 2.0 billion
22.46m Local Option Capacity 3.54m
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Identically Valued Houses Can Pay Different
Amounts
House A
Total Education Rate 5.45 Total General
Government Rate 10.80
200,000 RMV - 155,000 AV
200,000 RMV M5 Education Tax Limit 5 x
200,000 1,000 M5 General Government Limit
10 x 200,000 2,000 155,000 AV Education
Taxes ( 5.45 x 155,000) 845 Local option
capacity 155 (1,000 - 845) Gen Govt
Taxes (10.80 x 155,000) 1,674 Local option
capacity 326 (2,000 - 1,674)
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House B
Total Education Rate 5.45 Total General
Government Rate 10.80
200,000 RMV - 170,000 AV
200,000 RMV M5 Education Tax Limit 5 x
200,000 1,000 M5 General Government Limit
10 x 200,000 2,000 170,000 AV Education
Taxes ( 5.45 x 170,000) 926 Local option
capacity 74 (1,000 - 926) Gen Govt
Taxes (10.80 x 155,000) 1,836 Local option
capacity 164 (2,000 - 164)
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House C
Total Education Rate 5.45 Total General
Government Rate 10.80
200,000 RMV - 190,000 AV
200,000 RMV M5 Education Tax Limit 5 x
200,000 1,000 M5 General Government Limit
10 x 200,000 2,000 155,000 AV Education
Taxes ( 5.45 x 190,000) 1,035 1,000 Local
option capacity 0 Already over
limit Gen Govt Taxes (10.80 x 190,000)
2,052 2,000 Local option capacity
0 Already over limit
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What Happens if Combined Levies Exceed Limit?
The Math of Compression

• Under Measure 50, if combined taxes on given
  property exceed Measure 5 limits, taxes are
  compressed until limits are reached.
• Local Option taxes are compressed first, even if
  they are compressed to zero, before permanent
  taxes are compressed.
• Permanent taxes are compressed on a pro rata
  basis. Urban renewal levies are compressed with
  permanent taxes.

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Compression Example

• Assume AVRMV
• Tax Rates
• County Permanent Tax Rate 5.25
• City - Permanent Tax Rate 3.95
• Special District - Permanent Tax Rate .50
• 9.70
• City Local Option .40 .30
• Tax Consolidated Rate
  10.10 10.00
• City Local option collections compressed to .30
  to bring rate to 10.00
• Tax Rates
• County Permanent Tax Rate 5.25
• City Permanent Tax Rate 3.95
• Special District Permanent Tax Rate .50
• 9.70 Share Compressed To
• City Local Option .40 31 x .30 allowable
  levy .093
• County Local Option .90 69 x .30
  allowable levy .207

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Local Option Taxes are Unpredictable

• Because Measure 5 limits affect each property
  differently, the amount to be collected by a
  municipality can be very difficult to calculate
  and will vary from year to year, particularly if
  your capacity is narrow.
• For schools, and perhaps other jurisdictions,
  since some properties will already be at the
  limit, not everyone will pay local option tax,
  and some will pay more than others.
• Unless every property is raised to Measure 5
  maximum, municipality will not receive amount
  calculated as local option capacity under M5
  test for entire district.
• Municipality can only ensure maximum collections
  if it identifies property with lowest M5 tax rate
  and imposes the rate necessary to bring it to
  maximum rate (5/1,000 or 10/1,000).
• Compression may cause additional reductions if
  overlapping jurisdictions have competing levies.
• For schools, potential collections are higher
  than ever as the M5/M50 gap and other limitations
  have grown.

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Local Option What Can You Use it For?

• Operations
• May be used for any legally allowable operating
  expenses of an Oregon municipality.
• Capital
• May be used for broader list of capital items
  than GO bonds, as long as life of levy matched to
  life of item financed.
• No reason to use for items allowed by GO bonds,
  as local option is more unpredictable source of
  funds and subject to same voter test as GO.

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Lessons Learned and Avoiding Pitfalls

• Involve your community up front.
• Organize your Shakers Movers to carry the
  message.
• Keep it simple!
• Provide a tool to calculate individual property
  owner estimated tax. Focus your efforts on
• Educating the maybe voters
• Getting the voters to cast their ballots

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CET Overview

• New taxing authority for school districts
• Tax on new square footage
• Minimum Exemptions
• Dedicated to capital construction
• Locally determined

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CET Particulars

• Tax on new square footage
• Maximum of 1/sq. ft. residential
• Maximum of .50/sq. ft. non-res. (25,000 cap)
• Paid by person undertaking the construction at
  the time a permit is issued
• Minimum Exemptions
• Private Schools Public Bldgs HUD Affordable
  Housing Hospitals Churches Agriculture Bldgs
• Annual Rate Increases
• Increases in construction cost index
• Determined by Dept. of Revenue

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Steps for Implementation

• Enter into IGA with local governments
• Cities Counties
• Adopt long-term facilities plan
• No specific requirements in SB 1036
• Comply with SB 336 by 1/1/2010 (for SDs over
  2,500 ADM)
• Adopt by board resolution
• Enact construction excise tax
• Adopt by board resolution
• Involve your community!

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Intergovernmental Agreement

• Sample IGA at OSBA.org
• Enter into with local government that will
  collect the tax
• Must contain
• Collection duties responsibilities
• School District account to deposit funds
  frequency of deposits
• Administrative fee for local government no more
  than 1

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Allowable Expenditures

• Capitol Improvements
• Acquisition of Land
• Construction, reconstruction or improvement of
  school facilities and related costs
• Acquisition or installation of equipment,
  furnishings or other tangible property
• Payment of obligations to finance or refinance
  capital improvements
• Does NOT include operating costs or routine
  maintenance

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For Additional Information

• Seattle-Northwest Securities Corporation
• David Taylor 503-275-8303
• dtaylor_at_snwsc.com
• Carol Samuels 503-275-8301
• csamuels_at_snwsc.com
• Oregon School Board Association
• Angie Peterman 503-588-2800
• apeterman_at_osba.org
• David Williams 503-588-2800
• dwilliams_at_osba.org