State & Federal Changes Affecting Public Finance
IASBO Spring ConferenceMay 18, 2011 2:15pm – 3:15pm
Marsalis 1 & 2
Bob Bergland
Senior Vice President
Hutchinson, Shockey, Erley & Co.
312.443.1566
Lynda Given
Partner
Chapman and Cutler LLP
312.845.3814
Paul Seymour
Business Manager
East Moline 37
309.792.2887
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Something Changes Every Year
Our presentation will review changes in public finance FY10 & FY11 (as it relates to school districts), including local option sales tax, changes to fund transfers, issuer compliance and continuing disclosure, and legislative proposals
Included are updates from the Capital Development Board (CDB), relevant extensions of current programs, and new developments in Springfield and Washington D.C.
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Build America Bonds (BABS) Qualified School Construction Bonds (QSCB’S) Interest rate penalty for Illinois bonds Bond Insurance Debt Service Extension Base (DSEB) Indexed to CPI 1% Local Option Sales Tax Transfers between WCF and operating funds HLS Transfers to O&M Lower EAV’s and Tax Rate Increases Focus on Issuer Disclosure and Continuing Disclosure Increasing Frequency of IRS Audits Regulation of Financial Advisors CDB and Construction Grants Overview Pending Legislation
Topics:
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Build America Bonds
Taxable bond program with 35% subsidy paid from Treasury (IRS)
Expired after 2010
The BAB program subsidized 2,354 issues and $181.5 billion of debt before January 1 expiration
$117B BABS in 2010; $26.04B in Illinois; $4.30B for IL Education
Based on the average yield of 6.2% under a Wells Fargo index tracking BABs, that implies $11.25 billion in annual interest costs and $3.94 billion in annual subsidies
Bills exist to extend program with lower subsidy; uncertain future
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Qualified School Construction Bonds (QSCB’s)
Tax credit instead of interest payment
Not allocated outside Chicago by the State
Chicago Public Schools sold $257mm at net rate of 1.27%
Expiration year end 2011; some bills seek to extend
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Bond Issuance Comparison Through April 2010-2011
Total 2010: $129.8B Total 2011 $61.1B
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Interest Rate Penalty for Illinois Bonds
Long-Term fiscal challenges at State not addressed
Large supply of bonds relative to soft demand
Illinois Rates up - exacerbated by deficits
SD budgets affected by significant state funding component
New taxes won’t increase school funding (backlog)
Penalty additional 1/4-1.00%* depending on maturity, credit quality
No legislative remedies yet to ease budget stress
CDS on 5-year bonds a/o 5-5-11: IL 167, TX 60, WI 93, CA 189, NY 98, PA 84
* Bond Buyer November 3, 2010
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Bond Buyer Index Last 12 Months Through April
Insert rate chart
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Bond Buyer Index Last 30 Years
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Debt Service Extension Base (DSEB) Indexed
In tax-capped counties, districts with DSEB indexed to CPI
2009 grew only 1/10%, 2010 grew 2.70%, 2011 will be 1.50%
Example: 1mm DSEB in 2008 grew by $1,000 in 2009, $27,027 in 2010 and another $15,420 in 2011 (new DSEB $1,043,447)
Compounding effect over time
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County School Facility Occupation Tax Law
Allows a county board to submit a ballot question to county voters to implement a sales tax for school facility purposes.
In 0.25% increments
Up to 1%
Tax imposed on the same general merchandise base as state sales tax, excluding titled or registered tangible personal property (such as vehicles, watercraft, aircraft, trailers, and mobile homes) and qualifying food, drugs and medical supplies.
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County School Facility Occupation Tax Law
School Facility Purposes
Acquisition, development, construction, reconstruction, rehabilitation, improvement, financing, architectural planning, and installation of capital facilities consisting of land, buildings, structures, and durable equipment
Also includes fire prevention, safety, energy conservation, disabled accessibility, school security, and specified repair purposes set forth under Section 17-2.11 of the School Code
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County School Facility Occupation Tax Law
Two ways to get question on ballot (regular elections only):
County Board may pass a resolution
School districts may pass resolutions
When school boards representing at least 51% of the student enrollment in the County adopt resolutions, the County Board must certify the question to the proper election authority
Enrollment means the head count of students residing in the County on the last school day of September of each year, which must be reported on the Fall Housing Report
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County School Facility Occupation Tax Law
Form of public question (prescribed in law)
Shall The County of _______, Illinois, be authorized to impose a retailers’ occupation tax and a service occupation tax (commonly referred to as a “sales tax”) at a rate of ___% to be used exclusively for school facility purposes?
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County School Facility Occupation Tax Law
A majority of the votes cast needed to pass
County Board then may adopt an ordinance imposing the tax
The ordinance and the election results must be certified by the county clerk and filed with the Illinois Department of Revenue
If pass in April, 2011, file with IDOR on or before October 1, 2011, tax begins on January 1, 2012
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County School Facility Occupation Tax Law
Tax is collected by Department of Revenue and held by State Treasurer in the School Facility Occupation Tax Fund
By 25th of each month, DOR certifies to State Comptroller the amount to be disbursed to the Regional Superintendents of Schools for the counties where the tax has been imposed and collected during the second preceding calendar month
Within 10 days after receipt of certification from DOR, Comptroller causes ordersto be drawn for amounts contained in the certification
Within 30 days after receipt, ROE disburses sales tax proceeds to school districts
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County School Facility Occupation Tax Law
Distribution of funds
Distributed on enrollment basis
Only students residing in the County are eligible for funding
Need to determine distribution process with ROE
Districts must deposit the sales tax proceeds in a separate School Facility Occupation Tax Fund which may only be used for school facility purposes
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County School Facility Occupation Tax Law
New School Building Construction
No direct referendum required for new school building construction if building is completed with the expenditure of funds received from the sales tax.
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County School Facility Occupation Tax Law
Alternate Bonds
No backdoor referendum
Do not count against debt limit
Revenue stream must be not less than 1.25 times debt service of all alternate bonds payable from such revenue source
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County School Facility Occupation Tax Law
Duration
No limit in legislation
County Board may reduce or terminate tax at any time
Exception:
If a school board has issued bonds that are “backed” by proceeds of the tax, then County Board may not reduce or discontinue the tax if doing so would inhibit the ability of a school district to repay the outstanding bonds that are secured by the sales tax
If County Board reduces or discontinues the tax, another referendum must be held to increase or reimpose the tax
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SB 2170—Amendments to CFST Law
Deletes alternate bond backdoor referendum exception
County Board is taken out of the process of imposing the tax
ROE puts question on the ballot
If referendum passes, the tax is imposed
County board may, by referendum, reduce or discontinue the tax unless doing so will adversely affect a district’s ability to pay its bonds secured by the tax or necessitates the extension of property taxes to pay the bonds
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1% Local Option Sales Tax (Results through April 2011)1 Nov-08 1% Sales Tax Adams No 35-65
2 Nov-08 1% Sales Tax Calhoun No 36.2-63.8
3 Apr-11 1% Sales Tax Carroll No 872-1826
4 Nov-08 1% Sales Tax Cass Yes 57.6-42.4 1
5 Apr-09 1% Sales Tax Champaign Yes 13717-12168 16 Nov-08 1% Sales Tax Champaign No 38128-38428
7 Apr-11 1% Sales Tax Fayette No 1166-1641
8 May-09 1% Sales Tax Fulton No 3157-5696
9 Apr-11 1% Sales Tax Franklin Yes 4366-3393 1
10 Nov-10 .75% Sales Tax Iroquois No 105-14811 Nov-08 1% Sales Tax Iroquois No 40.8-59.2
12 May-09 1% Sales Tax JoDavies Yes 2937-2646 1
13 Nov-08 1% Sales Tax Kankakee No 32.8-67.2
14 Nov-10 1% Sales Tax Knox Yes 8416-7777 1
15 Apr-11 1% Sales Tax Logan Yes 1915-1241 1
16 Nov-10 1% Sales Tax Macon Yes 18566-17431 1
17 May-09 1% Sales Tax Macoupin No 4376-6397
18 Apr-11 1% Sales Tax Madison No 7406-30697
19 May-09 1% Sales Tax Marion No 2030-445820 Nov-08 1% Sales Tax Marion No 42.4-57.6
21 Apr-11 1% Sale Tax Mercer No 1130-2029
22 Nov-10 1% Sales Tax Montgomery No 3526-5812
23 May-09 1% Sales Tax Pike No 1780-259724 Nov-08 1% Sales Tax Pike No 47-53
25 May-09 1% Sales Tax Randolph No 1706-4163
26 Nov-10 1% Sales Tax Sangamon No 28139-34-969
27 May-09 1% Sales Tax Schuyler Yes 914-833 1
28 Apr-11 1% Sales Tax Shelby No 1445-1554
29 May-09 1% Sales Tax Tazewell No 5489-11793
30 Nov-10 1% Sales Tax Warren Yes 3012-2986 1
31 May-09 1% Sales Tax Washington No 1329-1957
32 May-09 1% Sales Tax Whiteside No 4227-517633 Nov-08 1% Sales Tax Whiteside No 42.5-57.5
34 Feb-08 1% Sales Tax Williamson Yes 9066-8324 1
10/34 10Success Rate: 29.41%
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Working Cash Fund Transfers
P.A. 96-1277, effective July 26, 2010
May abate WCF by resolution at any time
Transfer money to fund most in need
Must maintain .05% of EAV in WCF
Cannot have excessive accumulation of money in the transferee fund
Validates prior abatements
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School Fire Prevention and Safety Fund Transfers—Bonds
When purposes for which bonds were issued are “accomplished and paid for in full”
Remaining bond proceeds and interest earnings thereon must be:
(a) used for other authorized life safety purposes; or
(b) transferred to Bond and Interest Fund and used to pay life safety bonds
• Bond and interest levy to be abated within 30 days by the amount of the transfer
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School Fire Prevention and Safety Fund Transfers— Nickel Levy
P.A. 96-1474, effective August 23, 2010
Until June 30, 2013, following a public hearing, can transfer “surplus life safety taxes and interest earnings thereon” to the O&M Fund “for building repair work”
No corresponding O&M Fund abatement required
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Post Issuance Compliance — SEC
Continuing Disclosure
Increased Role of the SEC
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Continuing Disclosure Undertaking
Rule 15c2-12
EMMA – the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access system
Word-searchable PDF format
Over $10,000,000
Full continuing disclosure
Annual financial information
Audited financial statements
Reportable events
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Continuing Disclosure Undertaking (continued)
Over $1,000,000 but less than $10,000,000
Limited continuing disclosure
Financial information annually
Reportable events
Less than $1,000,000
No continuing disclosure
Consequences for failure to comply
Bondholder may sue for specific performance
Disclose failure in future disclosure documents
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Reportable Events
Principal and interest payment delinquencies
Non-payment related defaults
Unscheduled draws on debt service reserves reflecting financial difficulties
Unscheduled draws on credit enhancements reflecting financial difficulties
Substitution of credit or liquidity providers, or their failure to perform
Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security
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Reportable Events (continued)
Modifications to the rights of security holders, if material
Bond calls, if material, and tender offers
Defeasances
Release, substitution or sale of property securing repayment of the securities, if material
Rating changes
Bankruptcy, insolvency, receivership or similar event of the District*
______________________________
* This event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for the District in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the District, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the District.
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Reportable Events (continued)
The consummation of a merger, consolidation, or acquisition involving the District or the sale of all or substantially all of the assets of the District, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material
Appointment of a successor or additional trustee or the change of name of a trustee, if material
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Focus on Issuer Disclosure
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Increased Focus on Issuer Disclosure (Cont.)
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Increased Focus on Issuer Disclosure (Cont.)
http://emma.msrb.org
Electronic Municipal Market Access
Data base for official statements, continuing
disclosure, and pricing information:
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Post-Issuance Compliance — IRS
Designate someone as a “compliance officer”
Maintain and regularly review a checklist of matters related to the issuance of your tax-exempt or Build America Bond indebtedness
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Bond Audits
Receipt of IRS letter
Submission of bond documentation
Follow-up inquiry
Site visit
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Lower EAV’s and Tax Rate Increases
PTELL formula may result in some districts reaching statutory rate limit
Implications:
- Lose future revenue if “max rates” cap aggregate extension
- May make it difficult to pass referendum (home values down, rates up)
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Broker-Dealers (acting as underwriters or financial advisors) are regulated by Financial Industry Regulatory Authority (FINRA) and the SEC
Independent Financial Advisors have not been subject to regulation
Various regulatory options being reviewed*:
- Rule G-17** on fair dealing
- Expand rule G-37 on political contributions (“pay to play”)
- CE requirements, testing, professional and licensing requirements
- “Promote the mission of ensuring both issuer and investor protection”
Modifications to G-23 could also prevent/curtail FA from switching roles and becoming the underwriter
*October 12&14, 2010 Bond Buyer **G-rules refer to Municipal Securities Rulemaking Board regulations
Regulation of Financial Advisors
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Capital Development Board (CDB) and Construction Grants
State sold BABS, funded remaining 2002 list where uncompleted capital projects existed (23 total)
BAB’s sale restricted reimbursement to new money projects, but additonal funding coming from SB
Taxes funding new construction projects (SB 3097) challenged in court
Eighteen projects from FY03 list have been funded this fiscal year
Applications from FY04 will be contacted for updated application information in the future
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Other Capital Grants
Energy Efficiency Grants: FY10 Capital Bill provided $50mm matching grants for up to $250,000 ($30 distributed FY11, $20mm distributed FY12)
Maintenance Grants: FY10 Capital Bill provided $100mm for School Maintenance Grants (funds not yet released); $50,000 per district
Early Childhood Grants: FY10 Capital Bill provided $10mm for Early Childhood capital projects, based on need in the community served (90% grant, 10% match)
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Summary of Pending Legislation
School Consolidation (savings or retribution?)
1% County Option Sales Tax (amendments)
Possible extension of Build America Bonds (BABS) with subsidy changed
Tax Exemption on the bubble (permanent BAB?)
Extension of Tax Credit Bonds (QZAB)
Pension Funding (Local funding?)
Responsible budgeting could lower
“Illinois Penalty”, but might negatively
affect school/other funding
