Pettus Independent School District Victor Quiroga, Jr. Senior Vice President victor.quiroga@frostbank.com Duncan M. Morrow Vice President duncan.morrow@frostbank.com 100 West Houston Street, Suite 110 San Antonio, Texas 78205 Phone: (210) 220-5718 Fax: (210) 220-4111 Information on School Bonds & Campaign Do’s & Don’ts Pettus Independent School District February 23, 2015

Table of Contents The Basics on Municipal Bonds Pettus ISD 2015 Bond Program & Bond Election Strategies

I. The Basics

What is a Municipal Bond? Municipal Bond – a debt security issued by a local governmental subdivision, such as a School District, to finance its capital expenditures. These expenditures may include the purchase of land, the construction and renovation of schools, athletic facilities and the purchase of personal property such as buses, portables, computers and furnishings.

Tax-Exempt Investments Purchasers of municipal bonds often benefit from favorable tax treatment on the interest income received. The Federal government (IRS) does not generally tax the interest payments. The tax treatment dates back to 1895 from the “Doctrine of Reciprocal Immunity” established by the Supreme Court.

Who buys Texas School Bonds? Typically, national or regional underwriters (investment banks) purchase school bonds from the District. These underwriters will then sell the bonds to mutual funds, other commercial/investment banks, insurance companies and individual investors.

Role: Provide capital to Borrowing Entity Bond Sale Process & Financing Team Participants Financial Advisor Role: Advises on structure, timing, marketing, price fairness, terms, ratings Bond Counsel Role: Provides opinion on tax-exempt status and validity of the bond issue Victor Quiroga, Jr. Duncan M. Morrow Pettus ISD Cash Bonds Underwriters Role: Prices/sells bonds to investors, and commits capital to “underwrite” unsold balances Cash Bonds Investors Role: Provide capital to Borrowing Entity Examples: Individual retail investors, banks, institutional entities (insurance companies, mutual funds)

Texas law dictates what financing tool and revenue source are allowed. Revenue Sources to Repay Debt Maintenance & Operations (“M&O”)Tax Rate Interest & Sinking (“I&S”) Tax Rate Texas law dictates what financing tool and revenue source are allowed.

Common I&S Fund Secured Financial Tools – Election Required Unlimited Tax School Building Bonds Bond election REQUIRED. Secured and repaid using the I&S tax fund. May finance any capital expenditure. Provides the most project flexibility. Receives the best interest rate of all the financing tools due to the PSF program and security mechanism. Borrowing constraint: Texas AG’s “50-cent test” Advantageous for Chapter 41 school districts, not subject to State recapture formulas.

Strong Underlying Security Pledge (Collateral): Texas School Bond Advantage Strong Underlying Security Pledge (Collateral): Voted bonds provide bond investors with an “unlimited tax pledge.” Permanent School Fund (PSF) Bond Guarantee Program: Allows for a “AAA” bond rating when selling your bonds. Provides the best market interest rate. Low cost to the District - $1,500 Application Fee. Only Voted bonds are eligible.

The Importance of a Strong Credit Rating Moody’s S&P Fitch Definition Aaa AAA Highest rating assigned. Aa AA Very strong security. Only slightly below best rating. A Average security, but more subject to adverse financial and economic developments Baa BBB Adequate capacity to secure debt. Adverse developments may affect ability to meet debt service requirements. Note: Moody’s uses the designation “1,” “2” or “3” to indicate greater strength within the “Baa,” “A” and “Aa” categories with “1” being the strongest. Standard & Poor’s and Fitch use “+” and “-” to indicate relative strength or weakness in the “BBB,” “A” and “AA” categories.

Interest Rate Historical Graph

II. Pettus ISD 2015 Bond Program & Bond Election Strategies

I&S Tax Rate Impact by Various Bond Amounts with a 30-Year Term:

Option 1: Sell $32.3 million of bonds in one sale *Incorporates impact of $32.3 million bond sale

Option 2: Installment sale strategy of $32.3 million in bonds *Incorporates impact of $32.3 million in bonds sold over 3 equal installments. Assumes stable property values of $485 million.

2014 $485 million Tax Base Composition – Who Pays for the Bond? For the $32.3 million bond program, Single-Family Residential homeowners will pay 3.64% or $1,175,720.

Chapter 41 School District Example (50% recapture*) Expenditure Cost Estimate Local M&O Tax Revenue Required if not funded with bond funds Cost with Voter Approved Bond HVAC System Purchase $1,000,000 $1,500,000 For Chapter 41 “Property Wealthy” Districts, the recapture formula does not apply to the I&S tax rate, therefore all I&S taxes collected locally, STAY LOCAL. *For illustration purposes

Key Factors to a Successful Bond Election Tax Impact Projections and Communication are vital to the success of a bond election Don’t waste time arguing with “NO” voters Mobilize the “YES” voters, make sure they are going to the polls COMPLACENCY is the #1 killer of bond elections Keep the Message Simple by Focusing on: The Problem 2. The Solution 3. The Cost to the Voter