Perfecting the Recipe.

Best Practices for Managing Debt

After Your Bond Sale
Jeff Seeley & Andrea Uhl Ehlers

Ehlers School Finance Seminar

April 21, 2017

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 Introductions

Jeff Seeley
Ehlers Municipal Advisor serving both Wisconsin and
Minnesota school districts. School Business Official in
WI and MN prior to joining Ehlers.

Andrea Uhl
Ehlers Financial Specialist helping Minnesota school
districts design and implement financial solutions.

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 Todays Objectives

Issuing municipal
bonds may be the
largest financial
transaction of your life!

Dont just sail through

Understand your post issuance responsibilities

and responsible debt management practices.
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 Todays Objectives

Responsibilities as a an issuer with regard to disclosure

and post-issuance compliance
Primary disclosure
Secondary disclosure

IRS attention to arbitrage rules

Debt management and refunding

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 Basic Debt Terminology

General Obligation a municipal bond or note secured by

the full faith, credit, and taxing power of your district
Municipal Bonds a debt obligation issued by a school
district to finance capital improvements
Official Statement (OS) the primary offering document
prepared by the issuer
Callable subject to payment of the principal amount prior
to the stated maturity date
Non-callable cannot be called for redemption prior to the
stated maturity date

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 Basic Debt Terminology
Refunding refinancing of the callable maturities of an
existing debt obligation
Current Refunding refunding within 90 days of, or after
the stated call date
Advance Refunding refunding more than 90 days in
advance of stated call date
Continuing Disclosure obligation of an issuer to provide
both annual financial and operating data and to report any
material events as you promised in your OS
EMMA Electronic Municipal Market Access - the official
web portal of municipal finance, administered by the
Municipal Securities Rulemaking Board (MSRB)

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 Post Issuance Compliance

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 The Issuer (School District)

SEC requires full disclosure of vital information

to potential investors
Increased SEC interest in disclosure recently
Government Finance Officers Association
(GFOA) provides best practices

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 Disclosure

Federal Securities Laws apply to:

Primary Disclosure
Before and during the issuance of municipal bonds
Secondary (Continuing) Disclosure
Following the issuance of municipal bonds and throughout the
term of the bonds

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 Primary Disclosure The Official Statement

Review of Official Statements (OS)

Anti-fraud rules require issuers to review the OS
Carefully review and perform due diligence on all
information
Issuer signs certificates attesting that the OS is free of
material misstatements and omissions
Review obligation exists regardless of whether the issuer
receives assistance preparing the OS

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 Secondary Market Continuing Disclosure
Continuing Disclosure
Contract between an issuer of municipal securities and the
bond holders to provide ongoing disclosures, including
updated financial information

Purpose
For municipal issuers to provide ongoing information about
their debt
Ensure market transparency
Ensure bonds bought and sold by investors on the secondary
market are properly priced

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 MCDC Initiative

2014 - Municipalities Continuing Disclosure Cooperation

Initiative (MCDC)
SEC Enforcement Division allowed issuers and underwriters
to self-report inaccurate statements in OS about continuing
disclosure compliance
To date, the SEC has taken action against 73 underwriters
and 71 issuers

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 MCDC Initiative

What could this mean to issuers?

Injunctions to halt bond offerings in progress
Personal liability for not carefully reading documents you
sign
Prohibition against future debt
Civil penalties and ban

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 Continuing Disclosure
Exempt
Issues less than $1 million
Private placement (may require voluntary disclosure)
Limited Disclosure
Issuer with less than $10 million in outstanding debt
Audited financial statements
Event notices
Full Disclosure
Issuer with over $10 million in outstanding debt
Audited financial statements
Annual financial information and operating data
Event notices

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 Continuing Disclosure

Annually by the date listed in your OS(s) you should:

Review and catalog all ongoing continuing disclosure
information
Create a checklist or timetable with items promised in
Continuing Disclosure Certificates
Collect information and prepare reporting documents
Submit required continuing disclosure report and
financial information before the due date

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 Continuing Disclosure

In addition, issuers should:

Have written post issuance compliance policies and
procedures
Read and review all information in each OS and other
bond documents
Retain all documentation for life of bond plus 3 years
Consider professional assistance in completing
requirements

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 Continuing Disclosure Event Notices
Mandatory Event Notices must be filed within 10 business
days of occurrence
Principal and interest payment delinquencies
Non-payment related defaults
Unscheduled draws on debt reserves, reflecting financial
difficulties
Unscheduled draws on credit enhancements, reflecting
financial difficulties
Substitution of credit or liquidity providers
Events affecting the tax-exempt status of bonds

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 Continuing Disclosure Event Notices (Cont.)
Mandatory Event Notices
Modifications to the rights of security holders
Bonds calls, if material, and tender offers
Defeasances
Release, substitution or sale of property securing
repayment of securities
Rating changes
Bankruptcy, insolvency, receivership or similar event
Merger, acquisition or sale of all issuer assets
Appointment of a successor or additional trustee or the
change of trustee name
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 Continuing Disclosure
Options for Complying with Continuing Disclosure
Requirements
District staff can prepare and file all required reports and
notices
Each issue may have different required information and filing
deadlines
Ensure all reports and required notices are filed within deadlines
and in the proper form
Contract with Ehlers or another financial services firm to
meet all requirements (called dissemination agent)
Make sure service provider has staff who specialize in continuing
disclosure and are familiar with requirements

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 Continuing Disclosure
http://emma.msrb.org/

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 Continuing Disclosure

Policies and Procedures for Disclosure

Identify compliance officer
Require compilation of all continuing disclosure
agreements
Require annual review of reporting requirements
Establish calendar or reporting dates
Establish procedures for monitoring material events
Compliance officer review of offering documents
Training and continuing education for personnel
Protocols for dissemination of public information

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 Disclosure Summary
Issuers responsible for both primary and continuing
disclosure
SEC expected to continue to increase enforcement
actions against issuers
Thoroughly review Official Statement when issuing debt
Understand continuing disclosure responsibilities and
timelines as identified in Official Statements
Take time to understand how to report through EMMA
Consider whether a dissemination agent is appropriate
When in doubt, call your bond counsel or finance
professionals

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 Investment of Bond Proceeds

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 Investment of Bond Proceeds
Integral part of properly managing funds from the sale of
the bonds during a capital project
A construction draw (project cash flow) schedule will aid in
developing and adjusting the investment plan
Goals of investment strategy (in order of importance)
1. Safety and security of funds invested: minimize investment risk
2. Investment earnings: maximize interest earnings

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 Investment of Bond Proceeds
Suggested Best Practice
Investment policy should include investment of bond proceeds
Policies and procedures should ensure that legal and
regulatory requirements are met, fair market value bids are
received, and issuer objectives for various uses of proceeds
are obtained

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 Investment of Bond Proceeds

Individual designated as responsible for investment of bond

proceeds should:
Monitoring of investment / custody of bond proceeds
Ensure proceeds drawdown is planned and recorded
Periodically report investment results
Maintain adequate records to comply with arbitrage
reporting and rebate requirements
Review investment policy to ensure compliance with
internal requirements and external regulations

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 Arbitrage and the IRS
Purpose of Arbitrage Rules
Prohibit abuse associated with investing proceeds of a tax-
exempt issue in higher yielding taxable securities (i.e.
arbitrage)
Prevent over-issuance
Limit investment earnings or profit

Two Categories of Requirements

Yield Restriction Requirements Govern when an issuer can
earn an investment return in excess of the bond yield
Rebate Requirements - Govern whether the issuer can keep
those profits as opposed to rebating them back to the IRS

Districts must be able to prove each tax-exempt issue complies

with requirements
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 Arbitrage

Rebate Requirements
Earnings permitted under the yield restriction rules must be
rebated to the IRS unless an exception applies
Small Issuer Exception
for schools, $15 million in annual tax-exempt debt, with no more
than $5 million non-construction bonds
6 month,18 month, and 2 year Spending Exceptions
Bona Fide Debt Service Fund Exemption

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 Arbitrage
6 month spending exception
100 percent within 6 months

18 month spending exception

At least 15 percent within 6 months;
At least 60 percent within 12 months; and
100 percent within 18 months

24 month spending exception

At least 10 percent within 6 months;
At least 45 percent within 1 year;
At least 75 percent within 18 months; and
100 percent within 2 years

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 Arbitrage
Yield Restriction Requirements
Proceeds may be invested at an unrestricted yield for a
finite period of time (i.e., the applicable temporary period)
Capital Project Funds
3 Year Temporary Period (5 years in certain circumstances)
Current Refundings
90 Day Temporary Period
Advance Refundings
30 Day Temporary Period
Use of SLGS

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 Arbitrage
Yield Restriction Requirements
Bona Fide Debt Service Fund
A bona fide debt service fund is a fund used primarily to achieve
a proper matching of revenues with principal and interest within
each bond year.
13 Month Temporary
Investment of unspent proceeds as of the expiration of
the temporary period must be yield restricted

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 Arbitrage
Arbitrage Deadlines
Any yield reduction or rebate payment must be remitted
to the IRS no later than 60 days after
Each five year anniversary date of the issue; or
Date which the Bonds are no longer outstanding,
whichever comes sooner

IRS Compliance Checks

Questionnaires
Audits and Examinations

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 Arbitrage
Potential Compliance Consequences:
Fines
Deem bonds taxable
Require bonds be removed from the market (must be
done with cash or taxable debt)
Lawsuits from bond holders
SEC investigation for failure to promptly disclose tax
risks
Credit ratings risks
Reputational risks to the issuer
Difficulty issuing bonds in the future

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 Arbitrage

Post Issuance Compliance Policy and Procedures

IRS reports most debt related violations occur after
bonds are issued
IRS believes issuers with written procedures have better
compliance
Form 8038-G and other series 8038 forms ask whether
policies or procedures are in place
Policies or procedures, if followed, assist with
compliance

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 Arbitrage

Policies and Procedures for Arbitrage

Establish written process to ensure compliance
Identify individual(s) responsible for monitoring compliance
Train such individuals and others whose actions could violate
rules
Account for expenditures appropriately
Keep records
Establish ticklers for monitoring and filing Forms 8038-T
Conduct periodic follow up training
Contact experts as questions or problems arise (consider
remedial action)

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 Debt Management and Refundings

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 Debt Management

Long Term Capital Planning

Consider options and building in future debt capacity

Plan bond elections and building projects around

decreases in existing debt to control tax impact (see
example on next slide)

Understand debt equalization aid formula and how

additional debt levies are affected

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 Debt Management
1.6 Proposed Net New Debt
Existing Commitments
1.4

1.2
Estimated Mill Rate

1.0

0.8

0.6

0.4

0.2

Year Taxes are Payable

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 Current and Advance Refundings

Opportunity for interest savings

Currently in a lower rate environment
Refunding bonds with the highest rates

Options
Advance refunding
Current refunding
Sensitivity analysis

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 Refundings

What is a Refunding
Refinancing of an existing bond/debt issue with
new bonds/debt
Similar to refinancing your home mortgage, but
more complex and subject to many federal and
state rules and regulations

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 Refundings
Purpose
Save Money
Reduce debt payments by issuing new bonds with lower interest
rates to pay off the old bonds with higher interest rates
Savings to the District, which reduce tax levies (and in some
cases, state equalization aid)
Restructure debt payment schedules
Extend a payment schedule
Shorten a payment schedule
Change the payments in certain years

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 Current and Advance Refundings

Is this the full picture?

Savings from
refunding

$200,000

Advance
(now)
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 Current and Advance Refundings
The Full Picture: Illustration of a Sensitivity Analysis
At Current Rates
Sensitivity
$400,000 0.00%
0.25% In this example,
Savings from 0.50% rates would have to increase
refunding 0.75% 1.25% in order to break even
1.00% on savings
$200,000 1.25%
1.50%
1.75%
2.00%
2.50%
2.75%
Current Advance
(18 months) (now)
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 Refundings
What should you do to make the best decision?
Proper timing = maximize savings
Involve Board or Finance Committee
Evaluate all applicable information to form the best decision
Analysis of savings on a refunding conducted now
Analysis of savings on a refunding conducted at the call date
Sensitivity analysis
Information on market conditions
Other debt issuance considerations/needs for all calendar years
between now and the year of the call date
All costs associated with both options, including
Issuance costs
Negative arbitrage
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 Bond Defeasance

Defeasance
Paying off all or a portion of a bond maturity prior to the
payment date
Involves establishing an escrow account
Use available cash (dont issue new debt)
Can use excess operating funds

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 Questions?
Jeff Seeley
Ehlers
Municipal Advisor
(651) 697-8585
E-mail: jseeley@ehlers-inc.com

Andrea Uhl
Ehlers
Financial Specialist
(651) 697-8542
E-mail: auhl@ehlers-inc.com

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