Lecture 1 Overview of the Municipal Bond Market

 $384 billion average annual issuance  $850 billion traded annually  13,256 issues annually  $2.9 trillion outstanding  87,500 state and local government in the U.S.  50,000 + with outstanding debt 2

Fixed Income Securities Market $38 Trillion U.S. Equities market $4.32 Trillion

 States  Local Governments  Municipalities 36,400  Counties 3000  School Districts 14,600  Special purpose 37,400  Parks  Libraries  Hospitals  Water, Sewer, Electric  Hospitals  Universities 5

6  To build hospitals  Roads  Libraries  Schools  Municipal Buildings and  Airports  Utilities

7 Source: Bond Buyer

8  Affordable taxpayer impact  Tax exemption/low-cost borrowing  Benefit received  Matching asset life with financing source

9  $5000 Minimum denomination  Serial Maturities / Self-Amortizing  10 to 20 years  Ten Year Call Protection  Registered / Global Book Entry  Tax Exempt  Double/ Triple  Coupon/Yield

 1895 Pollack vs. Farmer’s Loan and Trust Co.  Reciprocal Immunity Doctrine  Constitutional protection of Tax Exemption  1913 Sixteenth Amendment/Income Tax  Implementation of Pollack 12

 1933 Securities Act/Securities and Exchange Act  State and Local Government exempt from registration  1988 South Carolina vs. Baker  Overruled Pollack  Legislatively Protected

14 Tax-Free Yield 100% - Marginal Tax Rate Taxable Equivalent Yield 5% 1 —.39 5% %

General Obligation Bonds  States :Full Faith and Credit  Generally Income and Sales Tax  Constitutionally or Statutorily Protected  Local Gov’t:  Property Tax  Unlimited as to Rate or Amount  Statutory lien  Considered most secure investment 15

16 Revenue Bonds  Pledge a dedicated revenue stream to bond repayment  Business type activities/enterprise systems  Hospitals, universities, dorms,  Essential purpose monopolies e.g. water, sewer, and electric  Considered very equitable way to provide service-user pays only for what they use

17 Issuers State Governments State Authorities Local Governments Local Authorities Public Colleges Municipal Bond Dealers Investors Households Bond Funds Property and Casualty Insurance Companies Commercial Banks Others Secondary Market Paying Agent Principal and Interest BondsFunds BondsFunds

 Variety of Debt Financings  Revenue and Tax Backed  Enables up front capital to fund  Energy efficiency  Renewables  Clean water  Job creation

 State Revolving Funds  Qualified Energy Conservation Bonds  Clean Renewable Energy Bonds  Property Assessment Clear Energy  Energy Performance Service Contracts  Value Capture/ Tax Increment Financing

 Funds water and sewer projects  Enables Compliance with Federal Regulations  Clean water act  Drinking water act  Converts State and Federal Grants to revolving loans to do more projects  Leverages grants with bonds  Reduces borrowing costs and improves market access for smaller governments

 Requires allocation from Federal Government  Based on population of State  State allocates to cities with 100,000 pop.  Current amount is $3.2 bb  Only 20% used ($2.5bb remains)

 Sold as taxable bonds due to federal backing  Interest rate subsidy from the federal government (approx. 3% to 3.5%)  Projects must reduce energy usage by 20%  Term is 17 years so it allows for payback of investment  No statutory deadline

 Energy efficiency capital expenditures in public buildings(20% savings)  HVAC  Windows  Roofs  Energy management systems  Efficiency/energy reduction measures for mass transit  Energy efficiency education campaigns

 The city leveraged $6.25 million of its QECB allocation to finance half of a $12.6 million initiative to upgrade the energy efficiency of City buildings.  The upgrades to four city facilities are expected to deliver over $10 million of net savings,  Major step towards achieving the city’s goal of reducing government energy consumption by 30 percent by 2015.

 Similar to QZEBS  Taxable Bonds  Issued by public power utilities, electric cooperatives, mass transit  Treasury directly allocates $2.4 billion on a competitive basis  Time limits on issuance must be funded in 5 years  Interest rate subsidy similar to QZEBS

 Wind facility  Bio Mass  Geothermal or solar energy facility  Small irrigation power facility under  Waste to Energy  Qualified hydropower

 Projects have been funded in 24 states  The allocations for governmental borrowers range from $23,000 to $3.2 million  401 are for solar facilities, 99 for wind facilities, 23 for landfill gas facilities, eight for hydropower and one for an open loop biomass facility.  Washington Metropolitan Transit Authority $15 million in bonding  Solar energy equipment in six buildings at $75,000 per year, per building.

 Local governments issue debt secured by an opt in property tax on commercial or residential properties  Debt runs with the property(so encourages investment)  State must provide legislative authority  31 States have enabling legislation  District must be established and aggregation(a cost or downside)  Funds residential and commercial energy efficiency  Taxable and 20 year maturity(6%)

 Energy Efficiency  HVAC System  Smart energy management systems  Insulation  Windows  Solar Panels  Single Family Homes  Apartments and Condominiums  Commercial and retail buildings

 First Pace Bond in 2008 City of Berkeley, California  6000 Households  $10mm in 2011 to $55mm in 2013  200 buildings in 2014  projects  $121mm in outstanding bonds at present

 Prologis – largest warehouse owner in U.S.  $1.6mm in rooftop solar and LED Lighting at HQ  $98k per year in savings  Simon largest shopping mall owner  Three projects  California and Ohio  Hilton Hotels  Los Angeles  $7.0mm in upgrades  $800,000 annual savings in energy costs

 Deutsche Bank AG estimates that U.S. building owners will spend $280 billion through 2022 on systems that reduce power bills, including LED lighting, solar panels and software that manages electricity usage  Being fought by banks as additional lien on property  Freddie Mae and Freddie MAC will not guarantee

 Bonds are issued to provide energy efficiency  Savings retire bonds  Energy Service Company guarantees savings  Energy Service Companies  Siemens  Honeywell  Design, install and maintain equipment  Larger projects($500k Plus)  10 to 15 year payback

 Lighting  Insulation  Heating, Air Conditioning and Ventilation  Energy Management Systems and controls  Solar  Window, Door and roof replacement

 Douglas County School District, Nevada  12 Schools(6100 students)  $10.7mm projects  Lighting, HVAC, Energy Management, Solar  Phase 1$5.1mm  4.12% now 2.25%(refinance)  $450,000 in annual energy savings  15 year payback

 Done for economic development purposes  Secured by incremental growth in tax base  Mostly developer driven  Land acquisition/infrastructure  Must meet state eligibility requirements  Now being used for sustainability

 Can incentivize green development  Mixed Use with density/walkability  Multi Family Housing  Linking development with transportation Mass Transit stop Bike Racks Greenways or Sidewalks

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