1. October 27, 2006 Overview of State Bond Financing Programs Laura Lockwood-McCall Director, Debt Management Division Office of the Oregon State Treasurer

2. 1 Introduction  Definitions  U.S. Debt Market  General Obligation Credits and Ratings  Oregon’s Bonding Process  Mechanics of a Bond Sale  Oregon’s Long-term Debt Trends  State Debt Ratio Comparisons

3. 2 What is a bond issue?  The process of issuing bonds is the process of borrowing money  Evidence of the issuer’s obligation to repay its debt  Pledge of general fund or specified resource  Specified schedule of principal and interest payments

4. 3 Why do governments issue bonds?  Major source of funding for a jurisdiction’s long-term capital needs  Allows assets to be acquired as needed rather than when enough cash has been saved  Spreads costs of a capital asset over time to all those who benefit from it  Short-term borrowings for smoothing out cash flow imbalances, not as a way to balance the budget!

5. 4 What types of projects are financed with tax-exempt bonds?  Interest on state and local bonds issued for “governmental purpose” capital projects are exempt from both federal and state taxation  Examples of public projects include schools, roads, bridges, city halls, court buildings, sewer and water facilities  Investors are willing to accept a significantly lower interest rate due to the double tax-exemption offered

6. 5 What is a private activity tax-exempt bond?  Certain “private activity” projects or programs that serve a larger public purpose may also be issued on a tax- exempt basis  Examples include financing of airports, ports, affordable housing, first time homebuyer mortgages, electric power generating facilities, convention centers and sports stadiums  Qualified 501(c)(3) organizations can also issue tax-exempt bonds for projects such as educational, health and cultural facilities (including Willamette University!)

7. 6 U.S. Bond Market Outstanding Bond Market Debt as of September 2005 * ($Trillions) Total: $24.7 Trillion Source: Bond Market Association * Figures may not add due to rounding ** Includes interest bearing marketable public debt only $5.0T $3.2T $2.5T $1.9T $2.2T 4.0T $5.7T

8. 7 U.S. Municipal Bond Market Owners of U.S. Municipal Securities as of June 30, 2005 * ($ Billions) Total: $2.1 Trillion Source: Bond Market Association *Figures may not add due to rounding ** Includes non-financial corporations, state and local government general funds & retirement funds, savings institutions, life insurance companies, private pension funds, brokers/dealers, etc. $815B $304B $323B $90B $141B $281B $168B

9. 8 What is a bond credit rating?  Credit ratings provide investors with an easily identifiable way to assess the degree of risk in an issuer’s securities  Three major firms in municipal market  Standard and Poor’s  Moody’s Investors Service  Fitch Investors Service  Different rating schemes, but same underlying theme:  AAA for highest rated securities  AA, A, BBB levels as perceived risk increases  BBB- is below investment grade

10. 9 What factors are considered by the credit rating agencies?  General Obligation Bonds  Financial performance of jurisdiction  Governance Framework/Management Practices  Debt burden  Economic base  Revenue Bond  All of the above, plus  Strength of specific revenue streams pledged  Legal, financial agreements  Rate covenants

11. 10 Recent Oregon G.O. Bond Rating History

12. 11 Legal Authority for State General Obligation Bond Programs  Oregon Constitution provides authority to issue general obligation (“GO”) bonds  Separate GO bond programs are created by constitutional amendments approved by State voters  The State unconditionally promises to pay debt service over the life of each GO issue from any legally available revenues  Debt limits linked to real market value (RMV) of property in the State  e.g., Higher Education (XI-G) Bonds 0.75% RMV = $ 2.48 B authorized Only $170 M in XI-G debt outstanding  Numerous other GO bond authorizations, each with hefty debt limits  More practical limits on outstanding debt established by State Debt Capacity Advisory Commission (SDPAC)  General Fund debt service as % of General Fund Revenues (5% max target)

13. 12 Oregon’s Bond Authorization Process  Oregon has disciplined debt management policies and procedures  Biennial budget process requires legislative authorization for all new bond issuances during a biennium (“bond bill”)  General obligation bonding programs currently focused on capital needs of higher education, community colleges  Revenue bond programs are created by statute that authorizes State agencies to pledge specific revenue streams for debt repayment  Appropriation credits generally used for funding construction of state prisons, other state office capital needs Governor Budget & Bonding Proposal Legislature Considers & Approves Budget & Bonding Proposal State Treasurer Issues State Bonds on behalf of State Agencies State Agencies Manage Bond Programs State Debt Policy Advisory Commission

14. 13 17 Overview of Credits & Programs ____________________ (1)“M” indicates Moody’s, “S” indicates Standard and Poor’s and “F” indicates Fitch. State of Oregon Bond Issuing Entities

15. 14 18 Overview of Credits & Programs ____________________ (1)“M” indicates Moody’s, “S” indicates Standard and Poor’s and “F” indicates Fitch. Other state agencies with active bond programs include Economic and Community Development Department, Department of Energy, Oregon Facilities Authority, and Department of Environmental Quality. State of Oregon Bond Issuing Entities

16. 15 Considerations when Selling State of Oregon Bonds Method of Sale  Competitive vs. negotiated sale of bonds  Size and complexity of transaction  Market conditions  Competitive sales make sense if:  Frequent issuer with well-known credit  Stable interest rate environment  Negotiated sales make sense if:  Infrequent issuer  Dynamic interest rate environment  Complex transactions involving enhanced premarketing efforts

17. 16 Timing of Sales of State Bonds  Authorization requirements  Program spending needs  Federal tax law considerations  State Treasurer’s office manages overall state bond calendar  Goal -- keeping in-state retail interest high for each sale reduces overall interest cost  Helps state avoid pricing bonds when other large transactions, economic announcements are impacting capital markets Major State Bond Programs Planned Issuance through 6/30/07 COPs$ 94 M Lottery Bonds183 M Single Family Mortgage Program 300 M GO Bonds/Veterans Mortgage Program 80 M GO Bonds/Energy Loans 68 M GO Bonds/Higher Education & Community Colleges 138 M ODOT Bonds350 M Multifamily Housing Bonds 100 M Total$ 1,313 M

18. 17 Who are the members of the financing team?  Financial advisor  Bond counsel  Underwriter(s)  Underwriters’ counsel  Trustee  Other consultants and professionals  And most important, the issuer!

19. 18 What should an issuer look for in selecting the financing team?  Expertise in municipal capital markets  Understanding of jurisdiction’s objectives and needs  Experience with similar types of securities  Awareness of innovative financial methods which can reduce costs or provide financial flexibility  Ability to complete your financing on a timely basis  You get what you pay for – lowest cost providers don’t always save you money in the long run!

20. 19 What types of documents are needed to publicly issue bonds?  Official statement  Bond resolution  Trust indenture  Notice of sale  Bond purchase agreement  Continuing disclosure agreement  Tax certificate

21. 20 How does the State ensure bonds are priced fairly in a negotiated sale?  Financial advisors are hired who are independent of underwriters and are knowledgeable about the bond pricing process  Financial advisors monitor capital markets both prior to and after pricing to confirm that bonds are sold to underwriters at market levels  Comparable issues also in market  Bond market benchmarks

22. 21 Trends in Oregon Bond Issuance Historically, most general obligation debt linked to self- supporting Veteran’s Mortgage Bonds Growing use of revenue bonds to fund economic development, highways, mortgages for 1 st time homebuyers Recent State budget crisis led to issuance of $450 M in appropriation deficit bonds and $2B in POBs in 2003 On the horizon -- $1.9 B authorization for ODOT bridge and road improvements

23. 22 Trends in General Obligation Bond Issuance

24. 23 Trends in Appropriation Credits Issuance

25. 24 Trends in Direct Revenue Bond Issuance

26. 25 Calculation of Net Tax-Supported and General Fund Debt

27. 26 State Debt Comparisons Source: Moody’s State Debt Medians Reports, 1996 - 2005

28. 27 State Debt Comparisons Source: Moody’s 2003 State Debt Medians

29. 28 Where can I get more information on Oregon municipal bonds?  State Treasurer’s Office http://www.ost.state.or.us/divisions/DMD/index.htm  Oregon Bond Calendar and Bond Index  Oregon Bond Manual  State Debt Policy Advisory Commission reports  Municipal Debt Advisory Commission reports  GFOA http://www.gfoa.org/  An Elected Official’s Guide to Debt Issuance  An Elected Official’s Guide to Rating Agency Presentations  OMFOA http://www.omfoa.org/  Annual spring conference  Northwest Government Institute each fall