School Financing Information

July 27, 2010

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 School Construction Financing
http://www.doe.virginia.gov/support/facility_construction/literary_fund_loans/funding_options.pdf

School Construction Financing Options

~. Fm
L ocal Public School D ivisions

January 2008

Virginia Public Sc hool Authority

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School Construction Financing
Introduction

Local school d iv isions have the responsibility for controlling, erecting, furnishing,
equipping and maintaining necessary school buildings .

• School divisions in Virginia do not have taxing power or the ability to issue debt.

• There are three principa l financing approaches available:

• Cash - Use current local revenues (cash) to fund a ll or a portion of the capital
projects;

• Bonds - Borrow funds directly in the debt market or with a Literruy Fund direct
loan, tlu'ough the VPSA or through an IDA; or

• Bank Loan - Borrow funds via a direct bank loan.

• Cost, funding availability and timing considerations will influence the approach
followed.

1 Virginia Pub lic School Autho rity

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 School Construction Financing
Financing Options

lti I. General Obligation Debt (GO) - Secured by the full faith and credit of
an issuer with taxing power.
~;

f· .~ :J. -:~

,::. ~,; • Direct Local Goverrunent Borrowing: Issue and sell GO bonds directly in
either the public or private markets (may require voter approval to secure
GO pledge);

• L iterary Fund Direct Loan: For qualified projects bon'ow at below market
interest t"ates from the fund, administered by the Department of E ducation.
o Projects up to $7.5 million; $20 million cap by locality
o Interest rates are derived from the loca l composite index of a bility to pay,
and
o Subject to availability of funds.

• Virginia Public School Authority (VPSA): Borrow indirectly through the

pooled bond or subsidy programs of the VPSA.

2 Virginia Public School Au/hOl·ity

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School Construction Financing
Financing Options (cont'd)
II. Subject to A ppropriation Bonds - The credit quality will depend on the
reliability of the borrowing entity, usually at least one notch lower than a
Gen eral Obligation rating. It can result in a h igher cost of financing.
• Secured by the annual appl"Opriations of the borrowing entity instead of a
pledge of taxing power.
• Typically issued through local ind ustrial development authorities (IDA) OT
economic development authorities (EDA).
• The IDA borl"Ows the funds to construct the school and leases it to the school
division.
• There are added expenses with this borrowing source.
}» Additional fees include; IDA fees, trustee fees and possibly bond insurance
premiums in addition to the usual costs of issuance.
}» Additional debt may be required to provide capitalized interest during the
period of construction before lease payments start.
}» Market interest rates are generally less favorable than with general
obligation debt ofthe same issuer.

3 Virginia Public School Authority

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School Construction Financing
Virginia Public School Authority
Introduction

• The Virginia Public School Authority ("VP S A") , established in 1962, is a bond
bank which pwvides low-cost :fmancing of capital pwjects for primary and
s econdary public schools in Virginia localities.

• Pwvides financing to localities through the sale of bonds. With the proceeds
of its bonds, the VPSA purchases general obligation bonds from localities.

• Assists localities through -

o Pooled bond program;

o Interest rate subsidy program for projects on the Board of Education's
First Priority Waiting list (the "List");
o Stand alone bond pwgram; and,
o Educational Technology Notes.

4 Virginia Public School Authority

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School Construction Financing
Pooled Bond ProgralD
Key Features For Local Participants
• VPSA can finance all types of real and personal property for public schools
" including land, buildings and equipment.

• Under the State Constitution, local issuers of general obligation school bonds
are not required to obtain voter approval for bonds sold to the VPSA.

• VPSA's "double-A plus" bond rating provides very attractive interest rates for
participating localities.

• Semi-Annual SpringlFall bond issues have scheduled debt servIce in the

subsequent fiscal year to conform to local budgetary cycles.

5 Virginia Public Schoo l Authority

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School Construction Financing
Pooled Bond Program
Key Features For Local Participants (cont'd)
• VPSA provides structuring flexibility to respond to local Imancing needs.
o Maturity options, such as:
~ Standard 20 year maturity.
~ Intermediate range less than 20 years, as requested.
~ Extended 20+ year maturity to meet unique needs.
~ Level debt service or level principal.
~ Delayed principal repayment to meet unique needs.

• VPSA has initiated refunding activity when market conditions have been
favorable for debt service saving. Since 2003 over $34 .6 million in savings has
been returned to local participants.

• VPSA charges a fee of 10 basis points to cover the Authority's cost of issuance
and administrative expenses. They include: Financial Advisor; Bond Counsel;
Rating Agency fees; printing costs; etc.

• Any excess fee revenues revert back to the Literary Fund or the General Fund
as directed by the Appropriation Act.
6 Virginia Public School Authority

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School Construction Financing
I nterest Rate Subsidy Progr a m
Combination of V PSA and Liter ary F und Loan
."
• Developed in 1997 as a way to leverage amou nts available in the LiteralY Fund
., ,
,
to address backlog of school construction projects .
I
• The subsidy program is available for localities with projects on the List for direct
Literary Fund Loans.
• The purpose of the subsidy program is to fund Literary Fund Loan requests with
a combination of bond proceeds and a subsidy grant from the Literary Fund.
• Proceeds from subsidy transactions are comprised ofVPSA bond proceeds and a
subsidy grant fi·om the Literary Fund adding to the total amount o f the approved
project .
• Local participant debt s ervice is structured to be equivalent to what they would
have paid for a direct Literary Fund Loan.
• T h e subsidy provides the difference between the market rate of interest and the
composite interes t rate .
• Subsidy transactions are held in conjunction with VPSA pooled transactions
annually .
7 Virgin ia P u blic S c h ool Authority

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 School Construction Financing
Interest Rate Subsidy Program
Combination ofVPSA and Literary Fund Loan (cont'd)
• Advantages:

• Bon-ow for s chool construction at below market interest ra tes, Le_ Literary
Fund loan rates typically of2% - 4%.
,'~ ,~;
• • A subsidy loan does not count toward the $20 million outstanding Literary
,-
.
Fund cap per locality .

• Funds can be expended in accordance with the more flexible VPSA guidelines
';
for school capital expenditures.

• Item 135 of the 2007 Appropriation Act for the 2006-2008 biennirun authorized the
VPSA to provide interest rate subsidies to localities on the List_

• $15 .0 million available in fiscal year 2007 - $105.7 million of projects funded
on the List; and

• $20 _0 million available in fiscal year 2008 - $149.9 million of projects funded
on the List.
8 V ir gin ia P u blic S c h oo l Autho rity

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 School Construction Financing

Other Sources:
• Rural Development Funds – Not usually
available for schools and Montgomery
County does not qualify
• FEMA – collapse does not meet FEMA
threshold
• Actions by State or Federal Elected Officials

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County Debt

Montgomery County, " o;;,~~~!:cocJ";;,.,.

Virginia rl~
~..
~ \l
. ~ ,?j
Analysis of Proposed QSCB Projects \~~0 ~,"" .4~
on Debt Capacity and " /':~~e~
Debt Affordability .- .
April 26, 2010

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 County Debt
Capital Projects Funding - Impact on Key Debt Ratios
Montgomery County, Virginia
Debt Service as Percent of Expenditures Policy
Annual d ebt service expenditures for tax-
supported debt sbould not exceed 12 % oftotal
General Fund Expenditures plus School
Component Unit Expenditures.

Debt Service vs. Expenditures

14%
12% Year Total E xpenditures % Gro wth
10%
2011 S 146,496,5 55
8% 2012 146 ,496,55 5 0%
2013 146,496 ,555 0%
6% 201 4 146 .496 .5 55 0%
201 5 146,496,55 5 0%
4%
2%
Q1Yo
2000 2002 2004 2006 2008 2010 2012 2014

The highest point is estimated to be in 2012 at 11.9%,

If the QSCBs were not at 0% the County would be over the policy,

Prepared by: Davenport & Com pany LLC Page 7

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 County Debt
Future Debt Capacity
Montgomery County, Virginia

Future Debt Caoacity

2011 2012 2013 2014 2015

Debt vs. AV 65,364,628 15,276 ,43 1 15,875,60 6 15,945,783 16,384,404
Debt Service vs. E~peDditures 2. 108.620 1.73 4 .700 7.080,533 7.837.309 10.778,400

DS to Expenditures - C umulative 2,108.620 3.84 3 ,320 10,923 ,853 18,761 , 162 29,539,562

» Using a 20-year stTucture Debt Service vs. Expenditure is the limiting factor. If the
growth in the budget slows further, the capacity will shrink.
» This assumes 0% growth 2012-2015 .

Prc:pared by: Oavenpon &: Company LLC

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 County Debt
Rating Recalibration
Montgomery County, V ir g inia

» In the Sununer of2008 Moody's Investors Service announced they were recalibrating their
municipal rating scale to a global rating scale.
» Due to the fin ancial crisi s in the Fall of 2008 they put their effol1:s on hold.
» Recently they arul0wlced fuat they would be proceeding forward with this recalibration.
» Moody ' s is expected to have fueir Virginia ratings recalibrated in early May.
» Standard & Poor ' s has said their rating scale is on a global scale.
» Currently fue County enjoys ratings of Aa3 from Moody's and AA from Standard and
Poor's.

» For a rating of Aa3 Moody ' s has said it is possible to move up to a Aa2 . If so, fuis would
be on the same rating level as Standard & Poor's.
» This is not a rating upgrade.
» It is still unclear how tlus will affect fue trading levels of the County's bonds.

Prep3rcd by: OGvc:npon & Company LLC Page 9

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School Financing Information
July 27, 2010

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