LONG-TERM DEBT TRAINING Statewide Accounting and Reporting Services June 16, 2016

2

Agenda  Overview of Oregon Debt  Determining the Appropriate Fund Structure  Recording the Initial Debt Issuance  Recording Debt Service Payments  Refunding a Debt Issue  Recording Year End Transactions  Disclosure Requirements  Learning Opportunities 3

OVERVIEW OF OREGON’S DEBT 4

Outstanding Debt Balance Fiscal Year

Outstanding Debt Balance Fiscal Year 2003 and

Outstanding Debt Balance Fiscal Year 2003, 2012, &

Types of Long-term Debt  General Obligation Bonds  Revenue Bonds 8

General Obligation Bonds  Authorized by the Oregon Constitution  Are direct, general obligations of the State of Oregon  The full faith, credit, and taxing power of the State of Oregon are irrevocably pledged to pay the bonds  Includes governmental, business, and fiduciary activities 9

GO Bonds Examples:  Pension bond liability  Higher education facilities  Correctional facilities for adult and youth offenders  State hospital replacement  Statewide building projects  Seismic rehab of public schools and emergency buildings  Loan programs at Veterans’ Affairs, Housing, Energy, and DEQ  Computer systems 10

Revenue Bonds  Authorized by Oregon Statutes  Secured by pledge of revenues derived from the operation of the program funded by bond issuance  Includes both governmental and business activities 11

Revenue Bond Examples:  Lottery bonds finance education, economic development, state parks, light rail, acquisition of state forestland, watershed improvements, and economic development projects in rural and distressed communities  Highway user taxes bonds fund road building and improvement  Single family loans and multi-family housing projects 12

Lottery Revenue Bonds  Not general obligations of the state  Not secured or payable from fund other than amounts pledged  All contain a statement that says the state is not obligated to pay lottery bond principal, interest or premiums from any source other than the amounts pledged for payment and the full faith and credit or taxing powers of the State of Oregon are not pledged to the payment of lottery bonds 13

Other Types of Debt  Certificates of participation  Tax anticipation notes  Short term debt  Demand bonds  Conduit debt 14

Certificates of Participation  Authorized in ORS Chapter 283  Financing agreements normally secured by the asset being purchased or constructed  Includes both governmental purpose and business-type activities  Majority being refinanced and replaced with Q bonds 15

Historical COP Project Examples:  Computer and telecommunications systems  Capital construction  Building acquisition  Deferred maintenance  Equipment purchases 16

Anticipation Notes  Issued with expectation that: Government will receive specific resources in the near future These resources will be used to retire the liability  Often issued as part of a cash management strategy  Generally short term in nature 17

Demand Bonds  Allows bondholders to redeem bonds on the basis of terms specified in the bond agreement  Financial institution makes agreement to provide funds if the call is exercised  Can be long or short term depending on terms of agreement  Additional disclosure is required 18

Conduit Debt  Limited-obligation bonds or similar debt instruments that provide capital financing for third parties not part of the reporting entity  Issuer has no obligation for the debt  Debt repaid by third party  Not recorded in the financial statements but still must be disclosed 19

DETERMINING THE APPROPRIATE FUND STRUCTURE 20

Important Factors  Purpose of debt issuance  Source of funds for repayment  Legal requirements  Where cash is held  How costs are budgeted 21

Purpose of Debt  Governmental  Proprietary  Fiduciary 22

Source of Repayment  General fund appropriation  Lottery funds  Federal grants  Assessments  User charges  Program operations  Loan repayments 23

Governmental Funds  Requires at least two funds  “Project” funds for expenditure of proceeds  Debt service fund to record capitalized (accrued) interest received from proceeds and payment of principal and interest 24

Governmental (continued)  Possibly a third fund for reserves (debt service fund)  Possible a fourth fund for issuance costs (fund type as budgeted)  Government-wide Reporting Fund  To record long-term liability 25

Proprietary/Fiduciary Funds  Best to set up same number of D23 funds as governmental purpose  All would be in the same GAAP fund type  Enterprise Fund  Internal Service Fund  Pension Trust Fund 26

Legal Requirements  Debt service reserve  Sinking fund 27

Where Cash is Held  Because of cash controls in SFMA, Cash in Bank must be separated from Cash in State Treasury  Only way to separate is with different D23 funds 28

How Costs are Budgeted  Many times costs of issuance are required to be paid out of regular operating budgets  Some costs may be paid from separate appropriation but this is less common  Advanced refundings require the establishment of administrative limitation (could be more than one) in a non-limited fund 29

New Comp Object  1500 General Obligation Bonds (Dedicated Fund)  1501 General Obligation Bonds (Debt Service From General Fund) 30

RECORDING THE INITIAL DEBT ISSUANCE 31

Official Statement $171,595,000 State of Oregon 2015 Series F General Obligation Bonds March 31,

Official Statement ◦ Source of Funds: Principal amount of 2015 bonds $176,595,000 Net original issue premium 30,759,481 Total sources $207,354,481 ◦ Uses of Funds: Costs of construction and acquisition $206,378,603 Underwriter’s discount 568,177 Cost of issuance 407,701 Total uses $207,354,481 33

Official Statement ◦ Description of the 2015 Series F projects we will focus on:  Oregon Department of Correction, Deferred Maintenance (example)  Oregon Department of Revenue, Core Systems Replacement (exercise) 34

Department of Correction Deferred Maintenance ◦ Source of Funds: Principal amount of 2015 bonds $4,240,000 Net original issue premium 741,525 Total sources $4,981,525 ◦ Uses of Funds: Costs of Deferred Maintenance $4,961,000 Underwriter’s discount 11,455 Cost of issuance 9,070 Total uses $4,981,525 35

Project Funds - Proceeds ◦ T-code 567 To record face value of the bond - DR 0077 Cash in Bank 4,240, CR 3100 Rev Control – Cash 4,240, ( c/o 1500 GO Bonds – dedicated funds) ◦ Fund Type – Governmental (Capital Projects) 36

Project Funds - Premium ◦ T-code 567 To record the premium received on bonds - DR 0077 Cash in Bank 741, CR 3100 Rev Control – Cash 741, (c/o 1510 OIP – Bonds) ◦ Fund Type – Governmental (Capital Projects) 37

Project Funds – Issuance Costs ◦ T-code 568 To record the cost of issuance and the underwriter’s discount - DR 3500 Expend Control – Cash 20, (c/o 4050 Bond Costs) - CR 0077 Cash in Bank20, ◦ Fund Type – Governmental (Capital Projects) 38

Project Funds – Proceeds (Treasury) ◦ T-code 190 To record face value of the bond - DR 0065 Unreconciled Deposit 4,240, (debits to GL 0070 – cash deposit with treasurer after reconciling to Screen 13 in R*stars) - CR 3100 Rev Control – Cash 4,240, ( c/o 1500 GO Bonds – dedicated funds) ◦ Fund Type – Governmental (Capital Projects) 39

Project Funds – Premium (Treasury) ◦ T-code 190 To record the premium received on bonds - DR 0065 Unreconciled Deposit 741, (debits to GL 0070 – cash deposit with treasurer after reconciling to Screen 13 in R*stars - CR 3100 Rev Control – Cash 741, (c/o 1510 OIP – Bonds) ◦ Fund Type – Governmental (Capital Projects) 40

Project Funds – Issuance Costs (Treasury) ◦ T-code 167R To record the cost of issuance and the underwriter’s discount - DR 3500 Expend Control – Cash 20, (c/o 4050 Bond Costs) - CR 0065 Unreconciled Deposit 20, (credits to GL 0070 – cash deposit with treasurer after reconciling to Screen 13 in R*stars ◦ Fund Type – Governmental (Capital Projects) 41

Accrued Interest ◦ Record in the fund where principal and interest payments are made. ◦ T-code Cash held outside treasury ◦ DR GL 0077 – Cash in Bank ◦ CR GL1225 – Accrued Interest on Bonds sold (use GL 1235 for COPs) ◦ T-code Cash on Deposit with Treasury ◦ DR GL 0065 – Unreconciled Deposit ◦ CR GL 1225 – Accrued Interest on Bonds sold (use GL 1235 for COPs) ◦ Do not use GL 1230 (It is for year-end accruals) 42

Liability – Bond Payable ◦ T-code 504 To record face value of GO Bond liability -DR 3200 GAAP Revenue Offset 4,240, (c/o 1500 Bond Proceeds) - CR 1714 Bond Payable – NC 4,240, ◦ Fund Type – Government-wide Reporting Fund 43

Liability – Premium on Bonds ◦ T-code 504 To record the premium on bonds sold - DR GL 3200 GAAP Revenue Offset 741, (c/o 1510 OIP on Bonds) - CR GL 1713 Premium on Bonds 741, ◦ Fund Type – Government-wide Reporting Fund 44

Underwriter’s Discount or Issuance cost ◦ Expense at the time of issuance ◦ Capitalize prepaid insurance if any. ◦ Use T-code 514 ◦ DR GL 0602 – Prepaid Insurance ◦ CR GL 3600 – GAAP Expenditure offset ◦ (c/o 4050 Bond costs for bonds and c/o 4055 COPs cost for COPs) 45

Variations ◦ Cash in State Treasury  Uses different t-codes ◦ Other types of debt  Certificates of Participation  Uses different comp objects and general ledger accounts 46

Basic Accounting Entry DR Cash 4,961, DR Bond Costs 20, CR Bond Premium 741, CR Bonds Payable 4,240, To record debt issuance. 47

RECORDING DEBT SERVICE PAYMENTS 48

Where to Record Payments ◦ Governmental activities  Principal and interest payment in governmental fund  Liability adjusted in government-wide fund ◦ Proprietary funds  Payments and liability adjustments are recorded in the same fund 49

Principal and Interest ◦ Paid through DAS ◦ Paid by agency ◦ Comp objects – Interest expense  Bonds  COPs – 7300 ◦ Comp objects – Principal  Bonds  COPs

Principal & Interest Payment ◦ T-code 760 To record DOC second payment on Series E GO Bond - DR 3500 Exp Control – Cash 325, (c/o 7100 Principal) - CR 0070 Cash w/Treasury325, DR 3500 Exp Control – Cash 101, (c/o 7250 Interest) -CR 0070 Cash w/Treasury101, ◦ Fund Type – Governmental (Debt Service) 51

Principal & Interest Payment ◦ T-Code 761 To record the other side of debt service payment for DAS - DR 0070 Cash w/Treasury 325, CR 0501 A/R – Billed 325, DR 0070 Cash w/Treasury 101, CR 0501 A/R - Billed 101,

Lottery Bonds ◦ DAS transfers lottery monies (Revenue) to agency accounts using  T-code 185R – moves money out of DAS  DR GL 3550 Operating Transfer Out  CR GL 0065 Unreconciled Cash  T-code 186 -Deposit into agency  DR 0077 – Cash in Bank  CR 3150 Operating Transfer In control ◦ T-code 568 Agency record debt service payment  DR 3500 Expend Control – Cash  (c/o 7100 – Principal on Bonds, or c/o 7250 – Interest on Bonds)  CR 0077 Cash in Bank 53

Certificate of Participation ◦ COPs are issued through DAS ◦ T-code 760 To payment on COPs - DR 3500 Exp Control – Cash (c/o Principal, or Interest) - CR 0070 Cash w/Treasury ◦ T-Code 761 To record the other side of debt service payment for DAS - DR 0070 Cash w/Treasury - CR 0501 A/R – Billed 54

ACH Wire Payment – Outside Treasury ◦ T-code 167R (ACH wire transfer) - DR 3500 Exp. Control – Cash (c/o 7100 Principal Bonds) - CR 0065 Unreconciled Deposit ◦ T-code 167R (ACH wire transfer) - DR 3500 Exp. Control – Cash (c/o 7250 Interest Bonds) - CR 0065 Unreconciled Deposit 55

Transfer to Treasury – Suspense Account ◦ T-code 714 (BT with TC 715) - DR 3500 Exp Control – Cash (c/o 7100 – Principal Bonds) - CR 0070 Cash on Deposit with Treasury ◦ T-code 714 (BT with TC 715) - DR 3500 Exp Control – Cash (c/o 7250 – Interest Bonds) - CR 0070 Cash on Deposit with Treasury 56

Reduce Liability ◦ T-code 528 Reduce bond payable - DR GL 1714 Bonds Payable NC 325, CR GL 3600 GAAP Expend Offset 325, (c/o 7100 Principal) ◦ Government-wide Reporting Fund 57

EXERCISE 1 58

Exercise 1 ◦ Debt issuance – Series F GO Bond for Department of Revenue  Proceeds and issuance cost  Establish liabilities accounts ◦ Debt service payment – Department of Revenue ◦ Reduce liability ◦ Assume a governmental fund for Department of Revenue & DAS ◦ Issuance is through DAS and Wells Fargo 59

REFUNDING A DEBT ISSUE 60

Types of Refunding ◦ Current – Debt paid off immediately ◦ Advanced – Proceeds held by escrow for future payments 61

COPs Refunded with Q Bonds ◦ What GAAP fund accounts for the refunding debt? ◦ GAAP Fund 2003 – General Obligation Bond ◦ Report the debt itself in the Government-wide Reporting Fund ◦ What GAAP fund accounts for the payoff of old debt? GAAP Fund 2002 – Certificate of Participation Bond 62

COPs Refunded with Q Bonds (continued) ◦ Which GAAP funds report the deferred gain or loss on refunding? ◦ Government-wide Reporting Fund or Proprietary fund ◦ Deferred gain is recorded as Deferred Inflows – Gain on Debt Refunding ◦ Deferred loss is recorded as Deferred Outflows – Loss on Debt Refunding ◦ Do not net deferred gain and loss. ◦ Deferred gain or loss is amortized over the remaining life of old debt or refunding debt whichever is shorter 63

What Goes Where? Debt service fund ~ Cash transactions  Face value of refunding debt issuance  Premium or discount on issuance  Underwriter’s discount  Bond issuance costs  Remittance to Escrow for refunded debt 64

What Goes Where? Government-wide reporting fund / Proprietary fund ~ Use full accrual method  Establish refunding debt  Capitalize premium/discount  Remove old debt and contra accounts  Record deferred gain/loss on debt refunding 65

Example: Bond Refunding ◦ Old debt ~ Advance refunded 2009 Series A COP, Junction City Planning; Original face value was $4,745, ◦ New debt ~ Refunds COP with 2015 Series H GO Bond (XI-Q) for $1,514, ◦ Amount to escrow agent is $1,843,

Checklist for Recording Debt Review documents from DAS  Interagency Agreement (page 10)  Sources and Uses Statement (page 11)  Savings Summary (page 13)  Revised debt service schedules Set up new D23 funds if required 67

Checklist for Recording Debt Prior to recording the sale, reconcile GL accounts related to debt Using an amortization schedule amortize related debt accounts for old debt up to settlement date Verify the balances in amortized GL accounts Calculate percentage of refunded debt by dividing principal amount that is refunded by balance of old debt prior to sale. 68

Checklist for Recording Debt Prepare T-accounts to analyze transactions and ensure entries will result in accurate balances. (very helpful) Prepare batches to record:  Cash transactions  Removal of refunded debt and related accounts from books in government-wide or proprietary funds  Record refunding debt in government-wide or proprietary funds 69

Cash Transactions ◦ T-code 567 To record face value of refunding debt - DR 0077 Cash in Bank 1,514, CR 3100 Rev Control – Cash 1,514, (c/o 1505 Proceeds from Refunding Bond/COP Debt) ◦ Fund Type – Governmental (Debt Service) 70

Cash Transactions ◦ T-code 567 Record original issue premium - DR 0077 Cash in Bank 337, CR 3100 Revenue Control - cash 337, (c/o 1510 Premium on Bonds) ◦ T-code 568 Record underwriter’s discount and bond costs - DR 3500 Exp Control – Cash 8, (c/o 4050 Bond Costs) - CR 0077 Cash in Bank 8, ◦ Fund Type ~ Governmental (Debt Service) 71

Payment to Escrow Agent ◦ T-code 568 Record payment to escrow - DR 3500 Expend Control – Cash 1,843, (c/o 7050 Rfnd Pym to Escrow) - CR 0077 Cash in Bank 1,843, ◦ Fund Type – Governmental (Debt Service) 72

Eliminate Old Debt ◦ T-code 528 to remove the COP payable in the Government-wide reporting fund - DR 1704 COP Payable - NC 1,590, CR 3600 GAAP Exp Offset 1,590, (c/o 7050 Rfnd Pym to Escrow) ◦ T-code 514 To remove partial premium on COP - DR 1703 Premium on COP83, CR 3600 GAAP Exp Offset (c/o 7050)83, ◦ Fund Type – Government-wide Reporting 73

Record New Debt ◦ T-code 504 To record the face value of the refunding debt in the Government-wide reporting fund - DR 3200 GAAP Rev Offset 1,514, (c/o 1505 Proceeds on Rfnd Bonds) - CR 1714 Bond Payable NC 1,514, ◦ T-code 504 To capitalize premium on bond - DR 3200 GAAP Rev Offset 337, (c/o1510 Premium) - CR 1713 OIP on Bonds Sold 337, ◦ Fund Type – Government-wide Reporting 74

Deferred Gain/Loss Calculation Face value of refunded debt1,590, Unamortized Premium on COP 83, Net Carrying Value1,673, (a) Bond Payable1,514, Original Issue Premium 337, Underwriter’s Discount (4,372.51) Costs of Issuance (3,705.27) Net Proceeds to Escrow 1,843, (b) Deferred Loss on Refunding (b - a) 169,

Deferred Gain/Loss on Refunding ◦ T-code 514 To record loss on debt refunding - DR 1000 Deferred Outflows-Loss on Debt Refunding 169, CR 3600 GAAP Exp Offset 169, (c/o 7050 Rfnd Pym to Escrow) ◦ Fund Type – Government-wide reporting 76

EXERCISE 2 77

Exercise 2 ◦ Record Cash Transactions ◦ Remove old debt ◦ Record refunding debt ◦ Record deferred gain/loss on refunding ◦ Assume Governmental Fund ◦ Issuance is through DAS and Wells Fargo 78

RECORDING YEAR END TRANSACTIONS 79

Premium Amortization Calculation  Original premium amount$ 319,  Amortized to date (133,996.02)  Amount written off with refunding ( 83,676.99)  Remaining premium amount $ 101,  Months outstanding on old debt 60  Months outstanding on new debt180  Amortization amount= ( $101, / 60 months ) X 3 months = $4,

Premium Amortization Entry  T-code 523 Record amortization of premium DR 1713 Premium on Bonds Sold CR 3600 GAAP Expenditure Offset ( comp obj 7450 Amort – Discount/Premium on Bonds) 81

…or Discount  T-code 520 Amortize discount Dr 3600 GAAP Expenditure Offset ( comp obj 7450 Amort Disc/Prem on bonds) Cr 1712 Discount on Bonds Sold 82

Loss Amortization Calculation  Net carrying value of old debt$1,673,  Net proceeds to escrow agent$1,843,  Deferred loss on refunding$ 169,  Months outstanding on old debt 60  Months outstanding on new debt180  Amortization amount= ( $169,463.33/ 60 months ) X 3 months = $8,

Loss Amortization Entry  T-code 520 Amortize deferred outflow loss on refunding Dr 3600 GAAP Expenditure Offset ( comp obj 7470 Amort Deferred Loss/Gain on Refunding) Cr 1000 Deferred Outflows-Loss on Debt Refunding 84

Interest Payable Calculation  New debt interest $36,  Remaining old debt interest 28,  Total interest payment$65,  Divide by 6 months $65,571.15/6=$10,  Multiply by 2 months $10,928.53*2=$21,

Interest Payable Entry  T-code 437 Establish estimated expense w/auto reverse DR 3505 Expenditure Control ( comp obj 7250 Interest bonds) CR 1230 Interest Payable – current 86

Current Liability Calculation  Principal payments due within one year = current liability  Reclassify current portion from noncurrent  New debt principal payment due in FY 17 $.00  Old debt principal payments due in FY17 315,  Balance to be reclassed $ 315,

Current Liability Entry  T-code 475R & 475 To record current portion of bonds payable for year-end reporting DR 1714 Bonds Payable – Noncurrent CR 2951 System Clearing GL DR 2951 System Clearing GL CR 1276 Bonds Payable-Current 88

Arbitrage Rebate Payable  Arbitrage rebate payable represents amounts due to the Internal Revenue Service for interest earned on unspent bond or COP proceeds that exceeds legally allowable returns.  Liability must be adjusted at least annually. 89

Arbitrage Rebate Entry (part 1)  T-code 526 Record the full amount of the liability Dr 3200 GAAP Revenue Offset ( comp obj 0800 Interest on Investments) Cr 1719 Arbitrage Rebate Payable 90

Arbitrage Rebate Entry (part 2) 91  T-code 475R/475 To reclassify the current portion of the liability Dr 1719 Arbitrage Rebate Payable CR 2951 System Clearing DR 2951 System Clearing Cr 1619 Arbitrage Rebate Payable-Current

Reclass Cash in Bank  Wells Fargo statement- → Reclass in R*Stars  Cash balances held at Treasury → Disclosure  COP certificate accounts and XI-Q bond funds-DAS will provide necessary information 92

Reclass Cash in Bank Entry  T-code 474R/474 To reclassify cash to restricted Dr 2951 System clearing CR 0077 Cash in Bank DR 0928 Cash-Restricted Cr 2951 System Clearing 93

DISCLOSURE REQUIREMENTS 94

Changes in Debt Outstanding 95

Changes in Debt Outstanding 96

DAFR 6610 & DAFR 6620 GL AcctGL ACCT Title Prior Year Current Year 1276BONDS PAYABLE-CURRENT - (325,000.00) 1713PREMIUM BONDS SOLD - (722,986.86) 1714BONDS PAYABLE-NONCURRENT - (3,915,000.00) DAFR REVENUE Compt ObjCompt Obj Title Current Year 1501GENERAL OBLIGATION BONDS (4,240,000.00) 1510OIP-BONDS (741,525.45) DAFR EXPENDITURE Compt ObjCompt Obj Title Current Year 4050BONDS COSTS 20, PRINCIPAL-BONDS AMORT-DISCOUNT/PREMIUM ON BONDS 18,538.14

Debt Repayment Schedule 98

Payment Schedule 99

Debt Refunding 100

Savings Summary 101

Refunding Memo 102

Defeased Debt 103

Defeased Debt Schedule 104

Plan of Refunding 105

DISCLOSURE BLOOPERS LEARNING OPPORTUNITIES 106

Changes in Debt Outstanding 107

6610/6620 Doesn’t Match 108

6610/6620 Doesn’t Match (continued) DAFR 6620 GL AcctGL ACCT Title Prior Year Current Year 1276BONDS PAYABLE-CURRENT - (595,000.00) 1714BONDS PAYABLE-NONCURRENT (21,745,000.00) (33,212,938.29) (33,807,938.29) 1713PREMIUM BONDS SOLD (2,942,781.30) (4,791,346.94) DAFR REVENUE Compt ObjCompt Obj Title Current Year 1500LONG TERM DEBT ISSUED (3,900,000.00) 1505PROCEEDS FRM REFUNDING (8,162,938.29) (12,062,938.29) 1515DEBT ISSUANCE PREMIUM-PROP (1,995,172.24) DAFR EXPENDITURE Compt ObjCompt Obj Title Current Year 7450AMORT-DISC/PREM ON BONDS 146,

6610/6620 Doesn’t Match (continued) 110

Balances Don’t Agree 111

Netted Additions/Deductions 112

Netted Additions/Deductions (continued) 113

Refunding Disclosure Issues 114

Refunding Disclosure Issues (continued) 115

Refunding Disclosure Issues (continued) 116

Refunding Disclosure Issues (continued) 117

Refunding Disclosure Issues (continued) 118

Zero Balance 119

Duplication of Work 120

Proceeds being used for: 121

Does it make sense? 122

Questions? 123

Resources ◦ OAMs: ◦ Bonds and Certificates of Participation ◦ Arbitrage ◦ Debt Refunding ◦ Government Finance Officers Association Governmental Accounting, Auditing, and Financial Reporting Blue Book ◦ SARS analyst 124

125