New Clerk Academy Key West, Florida

OVERVIEW DEBT MANAGEMENT

Objectives Provide Overview of Debt Management Issues

Overview of Bond Progress What is a Bond? Similar to a home mortgage; long-term liability Debt repaid from pledged revenues Usually has maturity from 1-30 years Many states issue primarily general obligation bonds (full faith and credit) In Florida, general obligation bonds must be approved by voter referendum Florida governments issue mostly revenue bonds (secured by a specific tax or enterprise fund revenue)

Characteristics of Municipal Bonds Exempt from Federal (and in some cases state) income taxes. Lower interest rates than corporate securities Generally sold as serial bonds as opposed to term or bullet maturities Exempt from SEC regulations (Tower Amendment) Dealers regulated by MSRB (Municipal Securities Rulemaking Board

Types of Municipal Debt Bonds classified by source of security You can not pledge assets as security-only revenues General obligation (full faith and credit) Revenue bonds Limited tax bonds Enterprise bonds Special assessment bonds Housing Bonds Special Assessment Bonds Industrial Revenue Bonds Lease/Purchase

Sources of Security State Revenue Sharing Guaranteed Entitlement Second Guaranteed Entitlement Additional State Revenue Sharing Funds Local Government Half Cent Shared Sales Tax Gas Taxes One Cent Optional Sales Tax Toursit Development Tax Utility Revenues Covenent to Budet and Appropropriate Utility Tax Revenues

Overview of Bond Process Bond History Florida used to issue more general obligation bonds Florida Constitution requires referendum due to bond defaults during the depression As a state with many retirees, voters not inclined to vote for debt due to fixed incomes and lack of community ties Florida governments needed to issue bonds to finance capital projects and began to use more revenue bonds to avoid referendum Credits became more complex, and bond buyers began favoring the use of bond insurance

Clerk’s Role Varies county to county based upon tradition, knowledge, skills and personalities. Know your role and ensure there is agreement with Board Part of financing team May prepare financing plan and participate in selection of external financing team Responsible for financial disclosure Signs bond documents at closing Signs a statement of no omission of material facts

Finance Team Principal Players Staff Bond Counsel Financial Advisor Underwriter Disclosure Counsel/Underwriter’s Counsel Rating Agencies Consulting Engineer/Rate Consultant

Finance Team Staff Finance Attorney Administration Operating department director Role of Staff Protect government’s interests Obtain lowest borrowing cost (consistent with risk) Liaison with board members

Finance Team Bond Counsel Prepares legal documents Opines on validity of bonds Opines on tax exemption Helps develop structure of debt Adequate disclosure is the responsibility of the issurer not bond counsel

Finance Team Financial Advisor Helps develop structure of debt Variable vs. Fixed Rate Level debt service for each issue or level for all outstanding debt Coverage Maximum maturity of bonds Provides recommendation on economic feasibility of refunding Helps with selection of finance team Conducts document review Coordinates ratings and bond insurance Advises on fairness of pricing, terms and bond ratings

Finance Team Underwriter Purchases bonds from issuer for resale to investors Underwriters represents the buyers, not the issurer Based upon market demands, provide input into the structure of financing Monitors outstanding debt for refunding opportunities Conducts document review Assists with ratings and bond insurance

Finance Team Disclosure Counsel/Underwriter’s Counsel and Difference Between the Two Assists with preparation of POS and OS Provides knowledge of disclosure requirements (including continuing disclosure)

Finance Team Rating Agencies Objective and expert evaluation of credit Insured Ratings – Based on rating of bond issuer Underlying Ratings – Based on rating of issuer and source of repayment of bonds Provide feedback on bond structure Improve efficiency of market Additional source of information for investors on suitability of investment Investment grade ratings enhance sale of bonds

Finance Team Consulting Engineer/Rate Consultant Necessary for certain construction projects Provides information on construction cost and rate implications Enhances credibility of project Helps develop structure of debt

Finance Team Paying Agent/Escrow Agent Invoices issuer when debt payment is due Makes payment to bondholders Holds refunding escrow on behalf of bondholders Sends redemption notice to bondholders for refunding

Finance Team Other Participants Accountants and Auditors Credit Enhancers (Insurance, Letters of Credit) Verification agents (refunding)

Finance Plan Topics Debt Management Plan Capital Improvement Plan Pledged Revenue Debt Structure Method of Sale

Finance Plan Debt Management Plan Recommended practices by GFOA and rating agencies Parameters for issuing debt and refunding Protects credit quality Provides basis for making decisions Demonstrates a commitment to long-term financial planning

Finance Plan Capital Improvement Plan Considerations Match projects with revenue sources Increased operating expenses from new projects Deferred maintenance items Prioritized and fully funded capital plans Debt service costs as percent of budget Balance financing sources Fund balances Levels, policies – formal vs. informal

Finance Plan Pledged revenue depends on … Type of project Availability of revenues to pledge Impact of debt service on operational funding Cash flow flexibility Bond Covenants New debt may be constrained by existing covenants Maximize future flexibility with new covenants Balance between flexibility and ratings. (The more flexibile your documents the more potential risk will be perceived by markets.)

Finance Plan Debt Analysis Review outstanding debt Identify any refunding candidates Debt service pattern and revenue cash flow Consider existing and future debt structures Term of the debt (1-30 years) Match life of the asset Match duration of the pledged revenues

Finance Plan Sale Process Competitive Negotiated Private placement Types of Debt Fixed rate vs. variable rate Rate swaps (fixed to variable or variable to fixed) Tax-exempt vs. taxable

Bond Ratings What is a Bond Rating? Measure of risk to bondholders Agencies: S & P, Moody’s and Fitch Reflects issuer’s ability and willingness to repay debt on time and in full (who, how, what) Denotes credit quality by rating level Independent opinion (subjective process) Forward looking projection Each credit is unique

Bond Ratings Bond rating is not… …an audit …a recommendation to buy, sell or hold a security …static or permanent …an opinion of a community’s quality of life …a performance evaluation of current political leadership …a judgment of quality of service delivery

Bond Ratings Value of Bond Ratings Lower interest rates on bonds if insurance purchased Access to market for lesser known credits More efficient secondary market trading Increased investor demand Some institutional investors can only purchase certain rated securities

Bond Ratings Rating Process Send bond documents to rating agencies Analysis Have conference call or meeting Complete analysis Rating committee Rating released Surveillance

Bond Documents Bond Resolution or Indenture Official Statement Bond Purchase Agreement Competitive Sale Documents Continuing Disclosure Certificate Other Documents

Bond Documents Official Statement Prepared by Disclosure Counsel or Underwriter’s Counsel Not a sales document Disclosure standard No untrue statement No material omission Issuer is responsible for disclosure Certificates and Opinions

Bond Documents Bond Purchase Agreement Contract between issuer and underwriter for negotiated sales Prepared by underwriter’s counsel Executed after pre-marketing period Includes Transaction terms Responsibilities Document requirements “Outs”

Bond Documents Competitive Sale Documents Notice of sale Summary notice of sale Bid forms Prepared by bond counsel and financial advisor

Bond Documents Continuing Disclosure Certificate Annual financial information Material event notices Electronic Municipal Market Access (EMMA) Not required for private placements and variable rate debt

Bond Documents Other Documents Closing Documents Escrow Deposit Agreement Insurance Agreements Reserve Sureties Investment Agreements

Pricing and Sale Topics Bond insurance History and Current Status Underlying ratings Call features Method of sale Bond sale process

Pricing and Sale Ratings Investment grade ratings affect pricing (lower yields) Create more demand for and interest in bonds Greater universe of potential bond buyers Assist in attracting more bidders at competitive sale Rating upgrades signal positive trend to underwriters and investors

Pricing and Sale Call Features Optional redemption Issuer’s right to prepay after a stated date at specific price - Call Date – typically 8 to 10 years from date of issuance - Call Premium – typically 100 at par (100 percent)

Pricing and Sale Method of Sale Competitive Sale Underwriters bid against each other - Specific bid date and time - Sealed or electronic bid - Awarded by lowest true interest cost Negotiated Sale Underwriter chosen prior to sale Assists with structuring and pre-marketing Greater market timing flexibility Private Placement

Pricing and Sale Negotiated Bond Sale Process Establish target sale date Monitor market for favorable conditions Pre-marketing POS mailed and ed Marketing circular for sales people Communication with potential buyers -Conference calls -Direct mailings

Pricing and Sale Negotiated Bond Sale Process (continued) Day prior to sale have pricing call Underwriter and financial advisor Preliminary yields Establish pricing structure (“scale”) Sale at par Original issue discount Original issue premiums Retail order period Day prior to institutional order period Committed entirely to retail orders Priority for local or Florida residents

Pricing and Sale Negotiated Sale Day of pricing Underwriter and FA confirm initial pricing Underwriter “goes into market” around 9 a.m. Receives retail and institutional orders Individual investors Bond mutual funds Insurance companies Banks – own portfolios, trust departments

Pricing and Sale Negotiated Sale--Day of pricing (continued) Repricing Changes in market conditions Significantly more or less orders than bonds Yields may be decreased or increased based on orders Underwriter makes offer to underwrite to issuer Issuer gives verbal award Underwriter prepares final numbers Bond purchase agreement finalized and signed that afternoon or next day

Post Closing Topics Managing rating and rating agency relationships Maintenance of funds and accounts Other resolution requirements Arbitrage Investment of proceeds

Ongoing Requirements Maintenance of Funds and Accounts Construction Fund Revenue Fund Debt Service Fund Principal Account Interest Account Amortization Account Debt Service Reserve Account Rebate Fund Other accounts for enterprise activities

Ongoing Requirements Other Resolution Requirements Rate covenant Additional bonds (parity) test Permitted investments Restriction on asset sales Insurance or inspection requirements Audited financial statements

Secondary Market Disclosure Undertaking requirements is contact between you and bond holder Event disclosure

OnGoing Requirements Arbitrage Bonds issued tax-exempt If bonds proceeds invested taxable, interest earnings may exceed interest expense on bonds Creates positive interest gain (arbitrage) Interest in excess of bond yield must be rebated to IRS every five years

Ongoing Requirements Investments Tax-exempt vs. taxable returns Resolution restrictions Integrate bond investment restrictions into investment policies Legal restrictions and arbitrage Types of investments Purchasing investments

Conclusion Understand your role in the financing process Understand the bond documents and your ongoing responsibilities Define who speaks to the market on behalf of your government.