1. School Facilities Planning & Financing Workshop FUNDING CONSIDERATIONS September 15, 2016

2. Participants Bridget Ekstrom Senior Vice President, D.A. Davidson & Co. Dan Semmens Bond Counsel, Dorsey & Whitney LLP Julie Flynn Bond Program Officer, Montana Board of Investments Denise Williams Executive Director, MASBO Bridget Ekstrom Senior Vice President, D.A. Davidson & Co. Dan Semmens Bond Counsel, Dorsey & Whitney LLP Julie Flynn Bond Program Officer, Montana Board of Investments Denise Williams Executive Director, MASBO 2

3. Debt Limitation Manhattan Elementary and High School Districts General Obligation Bonds GREATER OF CALCULATION 1 OR 2:ElementaryHigh School (1)CALCULATION 1: 100% of Taxable Valuation$7,152,270$11,135,219 (2)CALCULATION 2: 2016/17 Statewide Average Taxable Valuation Per ANB$33,670$82,390 X School District’s ANB for 2016/17 427 227 Total$14,377,090$18,702,530 X Debt Limit Rate of 100% 1.00 Maximum Debt Capacity$14,377,090$18,702,530 DEBT CAPACITY USING CALCULATION 2: Less: Outstanding Loans/Bonds$1,884,529$604,948 Debt Capacity Available for Project$12,492,561$18,097,582 2016 Bond Election Amounts$7,300,000$12,400,000 Debt Capacity Remaining$5,192,561$5,697,582 3 Calculation 2 provides the greater debt capacity and is used for Manhattan Schools

4. Mill Levy Impact of Bonds 4

5. Eligible Districts: ▫District mill value per ANB is less than the corresponding statewide mill value per ANB Eligible Debt: ▫General Obligation Bonds School Facility Maximum Entitlement Calculation: ▫$300 per ANB for Elementary ▫$370 per ANB for approved and accredited Junior High or Middle School ▫$450 per ANB for High School State share of entitlement: ▫(1-(district mill value per ANB/Facility guaranteed mill value per ANB)) School Facility Reimbursement: ▫State share of entitlement times the lesser of (i) the total facility entitlement or (ii) the district current year debt service obligation Pro Rata Allocation ▫the appropriation by the State Legislature each biennium ▫the amount of cash available in the school facility and technology special revenue account 5 Debt Service Guaranteed Tax Base Aid (“GTBA”) AKA: School Facility Reimbursements/State Aid for Debt Service

6. State Aid 6 Source: Montana Office of Public Instruction This estimate remains preliminary until the bond election is passed and the debt service budget is prepared. The district’s share of the bond payment is the ratio of the district mill value per ANB to the Statewide mill value per ANB. District’s whose mill value per ANB exceeds the statewide mill value do not qualify for Debt Service GTB state funding. The Pro-rate % is the percentage of state funding provided in the previous year.

7. GTB Facilities Estimates 7

8. Trends in State Aid for Debt Service 8

9. Bond Market Update “AAA” Municipal Yield Trends for 20-Year Maturity, 10-Year Maturity, 1-Year Maturity 9/09/2006 – 9/09/2016 2.08% 1.49% 0.62% Source: Thomson Reuters. 9

10. Sample Bond Market Rates Based on Rating Municipal Market Data Benchmark Information – September 9, 2016 Source: Thomson Reuters. "AAA"INSURED"AA""A""BAA" 1 20170.620.720.660.791.04 2 20180.700.810.760.901.17 3 20190.780.940.851.021.32 4 20200.891.100.981.201.50 5 20210.981.241.081.331.63 6 20221.111.401.231.491.77 7 20231.221.541.371.631.92 8 20241.321.721.511.812.08 9 20251.401.821.611.912.18 10 20261.491.911.712.002.28 11 20271.582.021.812.112.38 12 20281.662.121.902.212.46 13 20291.732.201.972.292.53 14 20301.782.252.022.342.58 15 20311.832.302.072.392.63 16 20321.892.362.132.452.69 17 20331.942.412.182.502.73 18 20341.992.462.232.552.78 19 20352.042.502.282.592.82 20 20362.082.542.322.632.83 Sample Yield Curves Sample Credit Spreads 10

11. Rating Agency – Financial Management Assessment Revenue/Expenditure Assumptions for Annual Budgeting ▫How many years of history do you use when forecasting trends? ▫What outside sources of information do you use or consult? ▫What methodology do you use for budgeting (line item, zero base, etc)? Budget Amendments & Updates ▫As the fiscal year progresses, how often do you review your main revenues and expenditures? ▫How many times per year do you provide the board or council with budget-to-actual reports? ▫In case of an emergency, how quickly could an amendment to the budget be made? Long-Term Financial Planning ▫Is any type of multiple-year financial forecasting utilized? ▫How frequently are these projections updated? ▫If projections are done, are the results shared with the board or council and used for decision-making? Long-Term Capital Planning ▫Is a written, multiple-year capital improvement plan maintained? If so, how frequently is the plan updated? Investment Management Policies ▫Is there a formally approved investment management policy, or are the state guidelines simply followed when making investments? ▫How frequently is the board or council provided with information on the investment portfolio? (Specifically investment earnings and portfolio holdings) Debt Management Policies ▫Is there an approved debt management policy that goes beyond statutory limitations to restrict the structure or amount of debt issued? Reserve and Liquidity Policies ▫Has the board or council approved a formal fund balance or reserve policy? ▫If so, what is the minimum level of mandated reserves and why was that particular level chosen? ▫If no formal policy exists, is there a particular goal or target reserve level which the board keeps in mind? As part of the credit rating review process, S&P conducts a Financial Management Assessment (FMA) during the rating review process by determining what management policies and practices are in place, according to the following seven categories. Before issuing Bonds it will be worth the District’s effort to review the following and consider adopting some of the policies and practices that the rating agency views as favorable. 11

12. Primary Funding Mechanisms for Capital Projects General Obligation Bonds Building Reserve Levy Intercap Loan 12 Factors to consider when selecting a funding mechanism:  Urgency of need of funding (immediate or future)  Funding resources (eligible for State aid)  Election requirements  Cash flow of resources  Term limits on debt  Spending restrictions  Dollar limits on debt  Payment schedule

13. 13 Primary Funding Mechanisms for Capital Projects Intercap LoanBuilding Reserve LevyGO Bonds Election not required under certain circumstances; capital project in nature of vehicles, equipment or rehabilitation Election required Not eligible for State debt service aid Eligible for State debt service aid Full or partial cash drawsCash received over timeOften advanced all at one time Maximum term of 15 yearsMaximum term of 20 years, with couple of exceptions Maximum term of 20 years Loan repayment can be made from any legally available fund Financial transactions are made from building reserve fund only Project costs are paid from the Building Fund. Debt payments are made from Debt Service Fund Debt capacity limitations applyDebt capacity limitations do not applyDebt capacity limitations apply Dollar amount is limited to debt capacity; if used for other than rehabilitation, additional limitations Dollar amount is not limited to debt capacity Dollar amount is limited to debt capacity Principal and interest payments made semiannually. Variable interest rates No principal or interest paymentsUsually interest payments made semiannually and principal payments made annually; usually fixed rate

14. Procurement Select Project Team. Traditional Low Bid Delivery of Project. Energy Performance Contracts. Alternative Project Delivery Contracts. ▫Design-Bid ▫General Contractor Construction Management ▫Other Have Owner’s Representative? ▫Include Costs in Budget Using In-house Expertise. 14

15. INTERCAP Low-Interest Loan Program Variable Interest Rate ▫Rates change every February 16 ▫Average rate over last 15 years: 2.64% ▫Current rate: 1.55% 15-year Loan Term or useful life of project 197 different school districts have utilized INTERCAP 325 school loans of $45 million have been financed 12% of our $80 million portfolio is with schools www.investmentmt.com 15

16. INTERCAP 20-9-471 MCA – School may finance through INTERCAP without a vote for the following… ▫New and used vehicles and equipment ▫Remodel or Renovate within existing walls ▫Energy retrofit projects ▫Cash-flow purposes New construction and purchase of real property must be voter-approved Finance using ▫General Obligation Bonds ▫Building Reserve Fund Loan ▫General Fund Loan www.investmentmt.com 16

17. INTERCAP General Obligation Bonds ▫Title 20 Chapter 9 Part 4 MCA ▫15-year term or useful life of the project, whichever is less ▫Must be within District’s legal debt limit ▫Provide copy of Resolution calling for bond election  20-9-421 and 20-20-201 MCA ▫Copy of the Ballot ▫Notice of Election  Include when and where it was posted and published ▫Copy of Certificate of Election ▫Bond Counsel required at borrower’s expense www.investmentmt.com 17

18. INTERCAP Building Reserve Fund Loans ▫Title 20 Chapter 9 Part 502 MCA ▫Statute sets a 5-year limit for pledging the fund* ▫Loan maturity date will match levy expiration ▫For loan to be repaid with NEW levy, provide:  Copy of Resolution calling for the election  Copy of ballot, notice of election, where and when posted/published and certificate of election ▫For loan to be repaid with an EXISTING levy, provide:  Copy of Resolution calling for the election  Previous and current years’ balance sheet and income statements for the building reserve fund  Next year’s budget for the building reserve fund www.investmentmt.com 18

19. INTERCAP General Fund Loans ▫Title 20 Chapter 9 Part 471 MCA ▫15-year term, or useful life of project ▫Equipment, vehicles, renovation within existing building*  Provide previous and current years’ balance sheet and income statements for general fund ▫New construction and real property acquisition  Election information  New portion of building cannot constitute more than 20% of existing square footage  20% square footage limitation may not be exceeded within any 5- year period www.investmentmt.com 19

20. INTERCAP No deadlines 100% financing No up-front costs No pre-payment penalty Variable interest rate – currently 1.55% Maximum loan amount depends on legal debt authority Loan term maximum is 15 years, the useful life of the project, or other statutory limit Application on website www.investmentmt.com ▫Under $1 million, staff approved ▫Over $1 million, Board of Investments Loan Committee approved at quarterly meeting www.investmentmt.com 20

21. INTERCAP Montana Board of Investments Bond Program Office Louis Welsh Sr. Bond Program Officer lwelsh@mt.gov (406) 444-0891 Julie Flynn Bond Program Officer jflynn2@mt.gov (406) 444-0257 www.investmentmt.com 21

22. SCHOOL FUNDING INTERIM COMMISSION School Facilities – Findings Identified 3 “tiers” of facility needs: ▫Tier 1: Operations and regular maintenance (O&M) ▫Tier 2: Major maintenance ▫Tier 3: New construction State support of Quality Schools Facility Grant Program (QSFGP) has been inconsistent. Revenue stream for Debt Service GTB has decreased, leading to reduced reimbursement levels State should help fund these tiers 22

23. SCHOOL FUNDING INTERIM COMMISSION School Facilities – Findings (continued) Local effort in facilities (a.k.a. “skin in the game”) helps ensure prudent planning and ongoing maintenance Capital improvements planning is more effective when: ▫districts are provided greater budgetary flexibility ▫state support for school facilities is consistent ▫state programs are flexible ▫districts have a long-term facilities plan based on an updated facility condition inventory 23

24. SCHOOL FUNDING INTERIM COMMISSION Facilities - Recommendations LC ICAP – minor changes to the INTERCAP loan program LC EFBT – allow transfers from GF to Building Reserve LC GRT1 – replacing QSFGP with formula facility grant program requiring updated facility inventory and plan and local effort; revising revenue streams LC GRT2 – revising QSFGP to require updated facility inventory and plan and local match State policy needs to encourage local effort and long- range planning in managing and maintaining school district facilities 24

25. SCHOOL FUNDING INTERIM COMMISSION LC ICAP – minor changes to the INTERCAP loan program Can use to finance: ▫Construction of buildings used primarily for the storage and maintenance of vehicles and equipment ▫Cost of nonpermanent modular classrooms necessary for student instruction Allows an approved building reserve levy to be used to repay a loan for up to 15 years only for projects authorized by the voters. Allows repayment from “an applicable budgeted fund of the district” 25

26. SCHOOL FUNDING INTERIM COMMISSION LC EFBT – allow transfers from General Fund to Building Reserve Fund Similar to transfers to Compensated Absences Fund For major maintenance projects ▫Roofing systems ▫Heating, a/c and ventilation systems ▫Energy-efficient window and door systems and insulation ▫Plumbing systems ▫Electrical and lighting systems ▫Information technology infrastructure, including internet 26

27. SCHOOL FUNDING INTERIM COMMISSION LC GRT1– replacing QSFGP with formula facility grant program Eliminate School Facility and Technology Account Deposit riverbed and timber revenues in Guarantee Account (about $5 million) Guarantee Account pays $1 million technology payment to schools Guarantee Account sends the greater of $10 million of 20% of interest and income to new Facility Grant Program account ▫All districts get “credit” that flows with local planning and effort ▫Credit sits in a separate (new) account until claimed by the district Debt Service GTB is paid from the state General Fund 27

28. SCHOOL FUNDING INTERIM COMMISSION LC GRT2– revising QSFGP to require updated facility inventory and plan and local match Eliminates Facility and Technology Account Deposit riverbed and timber revenues in Guarantee Account (about $5 million) Guarantee Account pays $1 million technology payment to schools Creates School Debt Service Assistance Account ▫Funded with lottery net revenue (about $12 million) ▫Pays Debt Service GTB (about $10 million) 28

29. SCHOOL FUNDING INTERIM COMMISSION LC GRT2– continued Creates Major Maintenance Grant Program Account Intended funding is $10 million total from: ▫Overflow from SDSAA (about $2 million) ▫95 mills revenue captured from TIFDs (about $2 million) ▫Workers comp dividends (amount unknown) ▫Transfer from Guarantee Account to bring to $10 million 29

30. SCHOOL FUNDING INTERIM COMMISSION LC GRT2– continued ESTIMATED IMPACT ON STATE GENERAL FUND Gains/Savings(Losses) Loss of lottery net revenue$ 12 million Eliminates NRD payment$ 5 million Repeals STEM scholarship program$ 0.4 million “Captured” 95 mills from TIFDs$ 2 - $3 million Additional needed to replace lost revenue to Guarantee Account $ 2 million 30