The LOCAL Financing Program and School Bond Guarantee Program

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The LOCAL Financing Program and School
Bond Guarantee Program
Office of the State Treasurer, State of
Washington Michael J. Murphy, State
Treasurer National Association of State
Treasurers Roundtable Session
July 10, 2006
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Partnering with local government

• The Washington State Treasurers goal is to
  reduce costs to local governments and school
  districts through programs that increase access
  to low borrowing rates and guarantee
  voter-approved bond debt.
• The LOCAL Program
• The School Bond Guarantee Program

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LOCAL (Local Option Capital Asset Lending)

• A program of the Office of the State Treasurer to
  allow local agencies to finance equipment and
  real estate aimed at...
• Partnering with local government
• Being responsive to local need
• Providing access to national tax-exempt
  financing markets
• Offering lower interest rates through
  competitive bid offerings
• Posting programs interest rates to provide
  bellwether

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The Program
The lease-purchase program has been in existence
for state agencies since 1989. In 1998, the
Office of the State Treasurer initiated
legislation to expand the state lease-purchase
program to local governments.

• Offers option to join pooled financings for
  equipment or real estate.
• Provides access to national tax-exempt financing
  markets.
• Provides for contingent state payment pledge to
  maintain high credit quality.
• Offers low interest rates through competitive bid
  offerings.
• Local governments pay only incremental increases
  in costs of issuance.
• Incorporates input from a local government
  advisory group.

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LOCAL credit ratings

• Certificates of participation (COPs) for
  equipment and real estate are rated Aa2 by
  Moodys

• Moodys Aa2 rating is based on
• State Treasurer's strong administrative
  oversight
• Agency credit review
• Essential nature of equipment or real estate
  being financed
• General obligation pledge of local agencies
• Term of financing
• Contingent state payment pledge

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LOCAL ProgramCredit underwriting criteria

• In most cases, an A rating or better means
  instant eligibility
• Ratings below A or unrated require additional
  screening

• negative local and economic climate
• debt limits and levy rates maxed out
• technical default under existing bond covenants

• continuing history of operating deficits
• revenue vulnerability
• regular use of registered warrants
• ratepayer resistance

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Repaying the loan

• Use local government bonds payable system,
  states fiscal agent
• Electronic means of payment (ACH via BONY)
• Payments due June 1 and December 1

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LOCAL participants 91.55 million financed for
231 agencies since program launch in 1998
33,760,000
Other 14
24,841,000
20,273,000
70 School Districts 33
12,676,000
59 Cities 22
79 Fire Districts 27
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LOCAL financing trends 91.55 million financed
since program launch
30,292,000
Other 20
18,697,000
Buses Fire Trucks 33
15,868,000
8,210,000
Cars Trucks 9
18,484,000
Energy Updates 17
Real Estate 20
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The School Bond Guarantee Program

• A program of the Office of the State Treasurer
  that offers Washingtons school districts the
  states full faith and credit payment pledge for
  voter-approved bond debt.
• The 1999 Legislature passed Senate Joint
  Resolution 8206
• In November 1999, more than 60 percent of the
  states voters approved the Constitutional
  amendment required to pledge the states full
  faith and credit to guarantee school district
  debt
• To date 179 districts have issued debt totaling
  6.4 billion in bonds
• In 2005 the states financial analyst reported
  schools using the program saved over 20 million
  (NPV) even more now with 2 billion additional
  guaranteed

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• The School Bond Guarantee Program
• Benefits to school districts

• State guarantees payment of school districts GO
  debt
• Districts take advantage of states Aa1 bond
  rating (Moodys)
• Moodys and Standard Poors rate participating
  districts for a reduced fee
• With the guarantee in place, districts dont need
  to buy bond insurance
• Smaller issuers (typically non-rated) enjoyed
  present value savings in 2005 equaling 1.6
  percent of bonds sold

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The School Bond Guarantee Program

• Why buy bond insurance or a bond rating? Good
  questions
• Bond insurers claim savings on cost of issuance
• Bond insurance is cost-effective as long as
  the interest cost savings exceed the premium paid
  
• Lower interest rates through our program
• If they can trade at our rating, they dont need
  to buy a rating
• But really, why buy insurance?
• Theres never been a default of a school bond in
  Washingtons history why should a district pay a
  premium for an event that will never happen?
• The Association of Financial Guaranty Insurors,
  the trade association of municipal bond insurers.