KEY ROLES

Underwriter
•  Reviews credit-worthiness of transaction
•  Structures financing and recommends best time to enter market
•  Oversees preparation of disclosure document
•  Purchases obligations from Issuer and resells to investors

Bond Counsel
•  Primary purpose is to issue opinion expressing that interest is tax-exempt
•  Ensures compliance with state and federal law
•  Helps structure financing

Trustee/Fiscal Agent
•  Banking institution which handles administrative functions and pays principal and interest to investors
•  In some instances, holds and disburses proceeds of the obligations

Rating Agency
•  If involved, reviews underlying credit of transaction
•  Assigns rating to obligations, which affects interest costs

Credit Enhancer
•  Highly rated entity
•  Risk Transference (e.g. lends its credit profile to the transaction in exchange for premium)
•  Insures the payment of debt service

KEY TERMS

Bond

The evidence of debt
Creates securities whereby an issuer agrees, by written contract, to pay a fixed principal sum on a specified date (maturity date) and at a specified rate of interest.

Pay-as-you-go:
A phrase that means that capital projects are being financed from current operating revenues or taxes rather than by borrowing.

Le•ver•age\N\
1: an inducing or compelling force
2: EFFECTIVENESS, POWER
3: the advantage gained by the use of a tool which provides benefit disproportionate to the energy or resources expended.

WHY DO PUBLIC AGENCIES USE TAX-EXEMPT FINANCING? 

To benefit from their tax-exempt status

• Preserve their cash reserves for other purposes or projects;
  ensure orderly expenditure of reserves
• Leverage financial assets, i.e. financing more capital projects
  than expenditure of cash reserves or current receipts would support.
• Avoid “phased” financing approach often dictated by
  pay-as-you-go alternative
• Debt/equity management, e.g. retention of equity implies financial flexibility & safeguards against financial exposure and uncertain events.
• Guarantees control over project since 100% funding is provided up-front.
• Asset/liability management, i.e. matching of short-term assets with short-term liabilities & long-term assets with long-term liabilities.  Ideal match applies the receipt of a long term revenue source (e.g. assessments or rates and charges) against a long-term liability (e.g. debt service).
• Place burden of costs on all beneficiaries of improvements, not just current users

FINANCING VS. "PAY-AS-YOU-GO”

• Financing is more expensive
• Financing provides greater flexibility
• Ability to adjust repayment schedule
• Easier to undertake large projects
• Ability to adapt to changing needs
• Minimize risk of construction cost increases

GENERAL OBLICATION (G.O.) BONDS

• Most secure obligation
• Requires 2/3rds vote of electorate
• Used only to acquire or improve real property
• Secured by unlimited ad valorem property tax

Advantages of G.O. Bonds
•  Lowest interest cost
•  Provides previously unavailable source of revenues (won't detract from other sources available to issuer)
•  No debt service reserve fund requirement

Disadvantages of G.O. Bonds
•  Schedule - usually 6 to 9 months
•  Difficulty in obtaining 2/3rds vote
•  Limitations on use of proceeds
•  Non-flexible formula for levy - uniform percentage of assessed value

ASSESSMENT BONDS

• Secured by Special Assessment Levied on Property
• Property must receive special benefit from project
• Assessment levied in proportion to benefit received
• Not a Tax
• Generally used to finance infrastructure (e.g. roads, parks, sewer, h2o, streets and lights, drainage, other utilities)
• Requires Prop. 218 attention
  
  

MELLO-ROOS BONDS

• Secured by special tax annually levied by issuer
• No requirement of establishing special benefit to property
• No gross lien on property
• Greater flexibility in structuring and phasing projects, spread of tax over different types of property
• Generally used to finance certain services (e.g. fire, police, library, and recreational services)

CERTIFICATES OF PARTICIPATION(“COP's”)

• Financing based on power of District to lease or purchase property
  • No voter approval required
  • Need to review enabling legislation for appropriate powers
• Used to finance capital facilities
• Governing board approval only
• Well recognized in tax-exempt market
• Facilitates legal and debt service structuring
• Easily marketed - competitive rates

LEASE-BASED COPs

• Subject of the lease is either facility to be built or acquired, or an existing facility
• District leases facility or property to another entity (e.g. CSDA Finance Corporation), which leases completed project back to District
• Lease payments assigned to trustee, which issues certificates evidencing right to share in such payments
• Annual payments must equal fair rental value
• Annual payments are made from general fund and other legally available funds of District
• Payments abated if project not available for use (e.g. damaged by fire)

Lease-based COPs: Advantages
•  No voter approval
•  Quick time schedule
•  Flexible structure
•  Finance wide variety of capital improvements
(e.g. pipelines, buildings, reservoirs)
•  Generally available to all Districts
•  Generally not subject to acceleration

Lease-based COPs: Disadvantages
•  Facility is security for financing and subject to encumbrance
•  Abatement risk usually requires rental interruption insurance
•  Requires capitalized interest until project completed

 
REVENUE -BASED COPs

  •  Used to finance facilities related to revenue producing enterprises (e.g. water or sewer systems)
•  Repayment limited to specific enterprise revenues

Revenue-based COPs: Advantages
•  No lien on non-enterprise revenues
•  Secured by rates and charges of enterprise
•  Generally considered very secure credit
•  Used for a wide variety of facilities
•  Generally viewed as a revenue bond without the necessity of a vote
•  No capitalized interest required

  Revenue-based COPs: Disadvantages
•  District obligated to raise rates and charges if revenue is insufficient
•  No abatement
•  Requires coverage factor of 1.10x – 1.25x
•  Limitations on issuance of additional debt
•  Not available to certain agencies because of debt limits in enabling legislation

GENERAL CONSIDERATIONS

• Source of debt repayment
• Existing users
• ates, charges, fees
• Future users
• connection fees, hook-up fees, assessments
• Mix of existing & future users
• all rates, charges, fees, connections and hook-up fees
• Direct beneficiaries
• All properties
• Property Taxes
• Debt Capacity (i.e ability to assume annual debt service obligation)
• Context & perspective (i.e. consider the future plans of the District)

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