I went to see a fight and a bond deal broke out Getting projects funded or debt refinanced post 2018 tax reform

2017 Tax Reform On December 22, 2017, President Trump signed The Tax Cuts and Jobs Act into law with an effective date of January 1, 2018 Some of the key provisions of the Act include: Provision Description Impact on Municipal Issuers and Market Individual Income Tax Rates Modifies seven brackets May reduce attractiveness of tax-exempt bonds (10% - 37%) State and Local Tax Deduction (SALT) $10,000 cap for combination of state property tax, income and sales tax deduction May induce investors to seek more tax-exempt bonds in high-tax states Corporate Tax Rate Reduces to 21% May lower attractiveness of tax-exempt bonds for corporations and insurance companies Tax Credit Bonds Eliminates ability to issue QZABs, CREBs, QSCBs, BABs, and other tax credit bonds No changes to subsidy payments for bonds issued before December 31, 2017; may reduce incentive to fund energy efficiency projects Advance Refundings Eliminates tax-exempt advance refundings Limits issuers to current refundings; may reduce feasibility of refundings and encourage use of taxable bonds or forward delivery structures Fiscal Impact Estimated to generate $1.5 trillion deficit over the next decade Deficit of more than $150 billion in any year may trigger additional sequestration of Federal Subsidies for BABs and similar products; may increase Treasury borrowing needs which may increase bond interest rates

2017 Tax Reform (continued) The corporate tax rate change has greatly impacted banks and their municipal holdings. Prior to 2011, U.S. bank holdings of municipal bonds and loans were less than $250 billion1. In 2017, this figure was approximately $560 billion1. Issuers with municipal loans held by banks with “gross-up language” are currently being contacted by banks about the possibility of increasing their respective interest rate. A common interest rate formula found in these documents outline a 22% increase to the interest rate so that the banks can maintain return similar to the levels before the Act. Hypothetically, an issuer with a 5% cost of funds could see it go up by more than a full percentage point. In anticipation of the Act’s effective date, issuers rushed to bring deals to market in 2017. This was particularly true with respect to tax-exempt advance refunding transactions. The municipal bond market experienced a record breaking $62.5 billion of volume in December 2017, surpassing the prior record of $54.7 billion recorded in December 1985. Issuance since the end of 2017 has slowed dramatically. Municipal Supply in 2017: $410 billion Est. Municipal Supply in 2018: $323 billion (>21% year-over-year decrease) 1 https://www.bloomberg.com/news/articles/2018-02-15/big-banks-got-huge-tax-cuts-then-hiked-cities-interest-rates

If tax-exempt advance refundings are a thing of the past, what are my refinancing options now? Tax-Exempt Current Refunding: Wait out the call protection period and, if market conditions permit, execute a tax-exempt current refunding not more than 90 days before the bonds become subject to optional redemption. Tax Exempt Forward Delivery Bonds: Execution of a contract between the borrower and a lender to lock in rates and terms now on a bond issue to be closed/delivered at a predetermined future date. In this scenario, the closing/delivery date would occur within 90 days of the first optional redemption date of the bonds to be refunded thereby effecting a current refunding of such bonds and allowing for a tax exempt refinancing. What would this look like and what are some of the risks? Cinderella Bonds: A current issuance of refunding bonds characterized by a taxable interest mode until the call date of the refunded bonds at which point the taxable interest mode converts to a tax-exempt interest mode until the final maturity of the refunding bonds. Taxable and tax-exempt rates are set at the execution of a term sheet for private placements or on the date of sale for a publicly issued bonds. Who buys these things? Taxable Advance Refunding: If market conditions permit, execute an immediate advance refunding using taxable bonds. Beyond saving money, why else would I want to refund my tax exempt bonds with a taxable instrument?

Fed Funds Rate Everybody keeps talking about how it’s going up, but what is it? According to U.S. regulations, lending institutions have to hold a percentage of their deposits with the Federal Reserve every night. Requiring a minimal level of reserves helps stabilize the financial sector by preventing a run on banks during times of economic distress. What happens when a U.S. bank is short on cash at a given time? It has to borrow it from other lenders. The Fed Funds Rate is simply the rate one bank charges another institution for these unsecured, short-term loans. I’m not a bank borrowing from another bank, so I don’t have to care about the Fed Funds Rate. Right? Good guess, but wrong. The Fed Funds Rate is actually one of the most important interest rates in the U.S. economy since it affects monetary and financial conditions which, in turn, have a bearing on critical aspects of the broad economy including employment, growth, and inflation. The Fed Funds Rate also influences short term interest rates, albeit indirectly, for everything from home and auto loans to credit cards. So as a consumer, I know I need to care about the Fed Funds rate because it impact things like car loans, credit card rates, and student loans. But as a local government finance professional, do I need to worry if it impacts my City’s/County’s/District’s/State’s cost of funds? Of course … or we wouldn’t have put it in this presentation! While tax exempt rates may not move proportionately with adjustments to the Fed Funds Rate, potential broader economic impacts which can be influenced by such adjustments can also impact the cost of borrowing for South Carolina local governments. Okay, so I need to care about the Fed Funds Rate. What’s it been doing lately? The Fed Funds Rate has increased 6 times since December 2015, most recently from 1.50% to 1.75% during the March 21, 2018 meeting. The next Federal Open Market Committee meeting announcement is schedule for May 2nd. Market prognosticators expect 2 or 3 additional rate hikes in 2018 (likely coming in June and December). So the Fed Funds Rate has been going up since before the Tax Act. What have tax exempt municipal rates been doing since the Tax Act took effect? Source: Investopedia.com / Time.com/money

MMD Yield Moves in 2018 and Credit Spreads Source: Thomson Reuters / SDC

Green Bonds What are they? Do they lower my cost of funds? Why would seek Green Bond designation? I want my next issuance of bonds to be designated as Green Bonds. How do I make that happen? Self-designation Second-party opinion Third-party designation Use of Proceeds Process for Project Evaluation and Selection Management of Proceeds Reporting Source: International Capital Market Association / Climate Bonds Initiative / Moody’s / S&P

$ $ $ $ $ Private Placement Placement Agent Sole Investor BOND INFORMATION BORROWER $ $ $

$ $ Traditional Public Offering $ $ $ $ $ $ Investment Banker $ Underwriter Multiple Investors $ $ BONDS $ INFORMATION BORROWER $ $ $ $ $ $ $ $ $ $ $

Public Offering Typical Retail vs. Institutional Distribution Source: Stifel

YOU MADE IT TO CLOSING – CONGRATS. Now What YOU MADE IT TO CLOSING – CONGRATS! Now What? The Fun is Just Getting Started!

Federal Tax Rules – Continued Compliance Adopt Written Procedures Blanket adoption by Council or Board for all tax exempt obligations; or Specific adoption by Council or Board for the specific issuance. Procedures should apply to bonds, leases or any other federal tax-exempt obligation

Federal Tax Rules – Continued Compliance Keep Accurate Records Keep records for as long as the applicable bonds are outstanding plus 3 years. This includes any bonds that refund the original bonds issued for the bond-financed property. 25-year bond issue – records likely need to be kept for 28 years!

Federal Tax Rules – Continued Compliance What Records to Keep? Bond Transcript Expenditure of bond proceeds Use of bond-financed property by public and private users All sources of payment for the bonds Sale or disposal of bond-financed property Investment of bond proceeds

Federal Tax Rules – Continued Compliance What Actions to Take? Monitor Arbitrage! More likely to be an issue in current rate environment. Arbitrage rebate is generally due at 5 year intervals. Arbitrage is difficult. Engage a rebate consultant. Don’t “wing it”

Federal Tax Rules – Continued Compliance What Actions to Take? Monitor Expenditure of Bond Proceeds! Three Year Temporary Period Rebate Exceptions 6 month 18 month 24 month

Federal Tax Rules – Continued Compliance What Actions to Take? Monitor Private Use! Keep track of which bonds (including refunding bonds) relate to which facilities/projects. Review once a year. Unexpected examples: Naming rights Use of facility by non-profit corporation Management contracts Leases, licenses and other arrangements Concession contracts Sale or disposal of bond-financed property

Federal Tax Rules – Take-Aways Compliance with federal tax rules does not end when the bonds are issued. It continues for the duration of the bonds and must be continuously monitored. Adopt Written Procedures Related to Tax Exempt Obligations to provide a framework for compliance. Review and follow your Written Procedures.

Continuing Disclosure Annual Reporting – usually 7 months after FY Listed events under Rule 15c2-12 Prepare Notice of Listed Event or notify Dissemination Agent File Notice of Listed Event on EMMA Voluntary Notices

Continuing Disclosure Listed Events: Principal and interest payment delinquencies; Non-Payment related defaults, if material; Unscheduled draws on debt service reserves reflecting financial difficulties; Unscheduled draws on credit enhancements reflecting financial difficulties; Substitution of credit or liquidity providers, or their failure to perform;

Continuing Disclosure Listed Events: Adverse tax opinions, IRS notices or events affecting the tax status of the security; Modifications to rights of securities holders, if material; Bond calls, if material; Defeasances;

Continuing Disclosure Listed Events: Release, substitution, or sale of property securing repayment of the securities, if material; Rating changes; Tender offers; Bankruptcy, insolvency, receivership or similar event of the obligated person;

Continuing Disclosure Listed Events: Merger, consolidation, or acquisition of the obligated person, if material; and Appointment of a successor or additional trustee, or the change of name of a trustee, if material.