West Contra Costa USD Presentation to the Facilities Subcommittee September 25, 2012

West Contra Costa USD and CABs Presentation to the West Contra Costa Unified School District Facilities Subcommittee | page 1  The topic of capital appreciation bonds has been covered at each of the last two facilities subcommittee meetings.  Articles regarding financings done by the Poway Unified School District began to appear in early August.  The articles focused attention on a number of relatively common practices in California school district bond financed that tend to increase overall taxpayer costs over time.  Among such practices include long terms for bond repayment, debt service obligations that escalate over time, and, specifically, the use of long-dated capital appreciation bonds.  There continues to be widespread fall-out in this regard.

Rationale for Issuing CABs  The District’s past use of CABs were each driven by unplanned for or unanticipated circumstances.  Some of the District’s 2002 Measure D Bonds were issued as CABs in order to accelerate bond issuance during a period of strong tax base growth.  Some of the District’s 2005 Measure J Bonds were issued as CABs in order to keep the District’s bond program moving in the wake of unprecedented tax base declines.  A small portion the District’s 2005 Measure J Bonds were issued in order to allow the District to issue some 2005 Measure J Bonds as QSCBs in June Presentation to the West Contra Costa Unified School District Facilities Subcommittee | page 2

Limiting Reliance on CABs in the Future  The best way for the District to limit its use of CABs in the future is to do what it can to avoid the situations that have led to their use in the past.  Seek smaller authorizations relative to tax base size or plan to implement bond programs over an extended period of time.  Establish tax rate targets below Proposition 39 maximums ($60 per $100,000 of assessed value for unified school districts).  Structure early bond issues to maximize collections in early years and to leave a “window” for future issues.  Adopt a more modestly paced construction program, and be willing to slow projects further upon negative news for future tax base growth.  Accelerate the overall bond program with additional authorizations rather than with accelerating bond issuance. Presentation to the West Contra Costa Unified School District Facilities Subcommittee | page 3

2010 Measure D and 2012 Measure E  Each of the past two bond measures have been relatively large vis- à-vis the size of the District’s tax base, but were developed with specific elements of prudent debt management in mind.  Both bond programs were built around then-current assessed values and relatively conservative debt structures (4% long-term escalation over 30 year terms for each issue).  Both bond programs were designed to fund twelve year capital programs (with bonds issued in five relatively equal sized installments issued in alternate years).  Both bond programs targeted tax rate maximums ($48 per $100,000 of assessed value in each case) well below the Proposition 39 maximum.  Both authorizations were sought while some prior bonds remained authorized but unissued. Presentation to the West Contra Costa Unified School District Facilities Subcommittee | page 4

2010 Measure D  2010 Measure D has already been accelerated to some degree with the issuance of the Series A Bonds in the amount of $100 million. Presentation to the West Contra Costa Unified School District Facilities Subcommittee | page 5

2012 Measure E  2012 Measure E was also designed around the concept of a twelve year capital program.  The advantages of a longer term bond program is that it generates additional revenues within a given tax rate constraint.  A single issue with a 30-year term and an estimated $48 per $100,000 assessed value tax rate would have generated $265 million in proceeds.  Bond issues may be up-sized if tax base growth during the implementation period exceeds original projections.  The District retains flexibility to adjust such programs incrementally over time. Presentation to the West Contra Costa Unified School District Facilities Subcommittee | page 6

Proposed Issuance Schedule  Assuming that 2012 Measure E is approved by voters, issuing some of each authorization in alternate years seems like a reasonable strategy. Presentation to the West Contra Costa Unified School District Facilities Subcommittee | page 7

Bonding Capacity Waiver  The District will need to achieve another bonding capacity waiver in order to issue any additional bonds under 2012 Measure E.  The District currently has $796 million in bonds outstanding and a tax base of $23.6 billion (3.41%).  Over time, the District will pay down bonds and the District’s tax base is expected to grow.  By tax year , the District might have $523 million in bonds outstanding (based on existing debt) and a tax base of $34.9 billion or more (market will allow for an additional $350 million in bonds under the statutory minimum).  A decision as to how much of a bonding capacity waiver to request should be made in early November (the District’s application is expected to be due in mid-December).  It is possible that a changing political climate will impact the willingness of the State Board of Education to grant bonding capacity waivers. Presentation to the West Contra Costa Unified School District Facilities Subcommittee | page 8

Alternative Strategies  There are a number of alternatives to the proposed issuance schedule.  Issuing bonds annually and/or alternating between one authorization and the other would remain most consistent with the proposed program.  The proposed program could be re-built around more conservative assumptions (shorter terms for each series or annual escalation of debt service at a lower rate) or more aggressive assumptions (vice-versa) by slowing or accelerating annual bond issuance.  The District could choose to re-establish its tax rate target for either or both bond measures.  The District could choose to shift gears and pursue that “maxes out” (or more nearly “maxes out”) revenues generated over the short term (though at an increased risk of having to suspend or otherwise re-think the program in the future). Presentation to the West Contra Costa Unified School District Facilities Subcommittee | page 9

2005 Measure J  For a variety of reasons, the issuance of the remaining $75 million of 2005 Measure J Bonds is less attractive option at this time. Presentation to the West Contra Costa Unified School District Facilities Subcommittee | page 10

Proposed Legislation  According to news reports, Assembly Member Ben Hueso (D- Chula Vista) plans to introduce legislation regarding school district bond finance in December.  Limit bond maturities to 25 years or less.  Require sign-off by third-party government entity on school district financings.  Establish maximum ratio of 4 to 1 for debt service required to principal generated (assuming no inflation).  Reduce maximum allowable nominal interest rates to 8% (currently 12%). Presentation to the West Contra Costa Unified School District Facilities Subcommittee | page 11

BABs and QSCBs  The financing team is just learning that subsidy payments for BABs and QSCBs are among the federal spending reductions to be made through “Sequestration”.  The overall reductions in payments are expected to be approximately 7.6%.  Such reductions will offset $68 million in federal subsidies owed to the District over time (approximately $4 million per year in ).  Any short-falls will be made up from increased to future tax rates.  The District has set aside a one-year reserved for QSCB subsidies. Presentation to the West Contra Costa Unified School District Facilities Subcommittee | page 12

Decreases in AVs  The primary reason for the use of CABs in connection with the 2005 Measure J bond program was that assessed values in the District decreased significantly beginning in Presentation to the West Contra Costa Unified School District Facilities Subcommittee | page 13