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Ehlers Advisor • March 2008
<br />Ehlers Advisor • March 2008
<br />Facility Maintenance Funding
<br />(continued from page 1)
<br />The result is that - for every district in
<br />the state - the list of needs to be funded
<br />from operating capital each year costs
<br />many times the available revenue.
<br />There are some other sources of revenue
<br />available annually to districts for capital
<br />projects, but the uses are much more
<br />restrictive.
<br />• Health and safety revenue provides
<br />additional tax levy authority to pay
<br />for state -approved projects related to
<br />health and safety (e.g., hazardous
<br />substance removal, fire safety,
<br />indoor air quality improvements).
<br />• A small number of larger districts (23
<br />of 430 school districts) qualify for
<br />"alternative facilities revenue."
<br />These districts have the option to
<br />issue bonds or increase tax levies,
<br />without voter approval, to fund
<br />state -approved projects related to
<br />maintenance and health and safety.
<br />• Smaller districts qualify for a new
<br />deferred maintenance revenue
<br />beginning this fiscal year.
<br />Unfortunately, the state total of
<br />revenue is only $26 million.
<br />• The 2007 Legislature established a
<br />non -recurring formula for additional
<br />capital and technology aid, totaling
<br />$38 million for the current fiscal year
<br />and $52 million for next year.
<br />All these revenue sources combined still
<br />fall far short of funding the costs of
<br />school districts' capital needs. As a
<br />result, many maintenance projects (roof
<br />repair and replacement, flooring
<br />replacement, pavement repair and
<br />replacement, replacement of HVAC
<br />equipment, and others) are put off year
<br />after year, until emergencies occur and
<br />facilities begin to deteriorate
<br />significantly.
<br />Solutions
<br />The best long-term solutions to this
<br />problem would require legislative action,
<br />such as a substantial increase in the
<br />operating capital allowance, an
<br />expansion of the alternative facilities
<br />program to all school districts, or both.
<br />With the state's projected deficit and
<br />continued pressure to limit property
<br />taxes, however, such changes seem
<br />unlikely in the next year or two.
<br />In the meantime, the only option for
<br />districts to access significant additional
<br />revenue is through voter -approved
<br />referendums. It is often politically
<br />difficult for school districts to gain voter
<br />support for tax increases to fund
<br />maintenance projects. Unfortunately, it is
<br />often the only choice.
<br />There are three different types of
<br />referendums that allow school districts
<br />to increase their revenues, and all three
<br />can be used for capital expenses.
<br />• Bond referendums allow districts to
<br />issue bonds to finance capital
<br />projects. While primarily used for
<br />new school buildings and major
<br />additions and renovations, bonds can
<br />also be used to finance maintenance
<br />projects and equipment.
<br />• Operating referendums provide
<br />an annual source of revenue - a
<br />specified amount per pupil - to use
<br />for expenses of the district's
<br />general fund. While most often
<br />used for typical operating expenses
<br />(salaries, benefits, supplies), they
<br />can also be used to fund capital
<br />projects.
<br />• Capital project levies also provide
<br />an annual source of revenue, but the
<br />revenue must be spent on capital
<br />projects and is based on a specified
<br />tax rate. It is often used to fund
<br />technology expenses, but also can
<br />be used for maintenance and other
<br />facility projects.
<br />There are major differences among these
<br />three financing tools, in terms of how
<br />the revenue is received, whether they
<br />will qualify for state equalization aid,
<br />how the taxes are spread, and the
<br />impact on different types of taxpayers.
<br />Because of these differences, the
<br />solution that fits best varies considerably,
<br />depending on characteristics of the
<br />district and the types of projects being
<br />funded.
<br />Ehlers encourages school districts to take
<br />a long-term comprehensive approach to
<br />planning the funding of capital projects.
<br />We can assist districts with exploring all
<br />available options to access additional
<br />funds, designing the ideal financing plan
<br />to meet the district's goals, determining
<br />the impact on taxpayers, and presenting
<br />information to the public in a way that
<br />will help to gain voter support.
<br />For more information on these services,
<br />contact any of the financial advisors on
<br />the Ehlers Education Team.
<br />Mark Your Calendars for Ehlers 2008 School Finance Seminar!
<br />Ehlers' annual one -day school finance seminar, scheduled for March 20, 2008, is especially
<br />geared for school business officials, superintendents, and school board members.
<br />This year's theme is `STRATEGY.. The Name of the Game."A distinguished panel
<br />of experts will discuss school finance reform efforts in Minnesota.
<br />Additional sessions will focus on:
<br />• Capital funding options and approaches;
<br />• Budgeting and financial projections;
<br />• Group decision making;
<br />• Rules and regulations affecting bonds; and,
<br />• Use of comparative data for effective decision making.
<br />The seminar will be held at the Radisson Hotel in Roseville.
<br />For more information, to receive a brochure, or to register, please visit our
<br />Web site at www.ehlers-inc.com or call Lorraine Swenson at (651) 697-8500.
<br />What's All the Fuss About Bond Insurance?
<br />}; here have been numerous stories in the financial news in
<br />recent months about liquidity problems and rating
<br />downgrades affecting bond insurance companies.
<br />When municipal bonds are insured, it means that an insurance
<br />company has agreed to guarantee the timely payment of
<br />principal and interest on the bonds. The insurance company
<br />receives a fee for this service, usually paid by either the issuer
<br />of the bonds or the underwriter of the bonds at the time the
<br />bonds are initially sold. The insurance policy results in a
<br />higher rating on the bonds (usually a AAA rating) and
<br />therefore makes the bonds more attractive and marketable
<br />to investors.
<br />Some of the municipal bond insurance companies have also
<br />insured credit derivatives contracts and subprime mortgage -
<br />backed securities. There have been defaults in some of these
<br />derivatives and subprime securities, creating financial pressure
<br />on the insurance companies that insured them. This, in turn,
<br />has caused the rating companies (Moody's, Standard and
<br />Poor's, and Fitch) to downgrade the ratings on some of the
<br />insurance companies.
<br />Impact on Local Governments
<br />It will probably take some period of time before all the
<br />implications of these changes are sorted out. We are
<br />continuing to monitor trends in the markets, and will keep
<br />our clients informed of new developments. For now, we can
<br />summarize the impact in a few key points.
<br />1. You may have an obligation to disclose a downgrade of
<br />the rating on your bonds. All municipal bonds sold since
<br />1995 are subject to the "continuing disclosure"
<br />regulations of the SEC. One of the requirements of those
<br />regulations is the timely notification by the issuer of
<br />certain "material events," including any bond rating
<br />change. If any of your bonds were insured by an
<br />insurance company, and if the rating company that rated
<br />the bonds downgrades their rating for that insurance
<br />company, that is a material event that must be disclosed.
<br />If Ehlers already provides you with continuing disclosure
<br />services, we will file a material events notice on your
<br />behalf if one is required. If you are not an Ehlers
<br />continuing disclosure client, feel free to call us with
<br />questions.
<br />2. If you issued "fixed rate" debt, the payments on your
<br />existing debt will not change. Almost all debt issued by
<br />local governments in Minnesota is fixed rate debt. If you
<br />have any variable rate debt or swaps, your payments
<br />could change; if this happens, feel free to call us to help
<br />determine your exposure and your options.
<br />3. So far, the downgrades of the insurance companies have
<br />not impaired the ability of our clients to issue debt, and
<br />have had very little impact on interest rates or other costs
<br />of issuing debt. There is still strong demand for municipal
<br />bonds, with or without bond insurance. Several stable
<br />insurance companies have maintained their AAA ratings,
<br />and are still selling insurance, and new insurance
<br />companies are emerging (including a new company
<br />created by Warren Buffet and his Berkshire Hathaway
<br />company). It appears that investors are doing more
<br />research on the underlying credit ratings of bond issuers.
<br />This may lead to lower interest rates for highly rated
<br />bond issues, and slightly higher rates on lower rated
<br />issues.
<br />The table below summarizes the current ratings on the bond
<br />insurance companies, as of February 28, 2008.
<br />1
<br />i
<br />i
<br />ACA Financial Guaranty (ACM
<br />CCC
<br />Ambac Assurance Curp. Aaa AAA AA
<br />Assured Guaranty Corp.
<br />Aaa
<br />AAA
<br />AM
<br />CIFG Assurance North America
<br />Aaa
<br />AAA
<br />AM
<br />Capital Guaranty Insurance Company
<br />Aaa
<br />AAA
<br />AAA
<br />Capital Markets Assurance Corp. (CapMAC)
<br />Aaa
<br />AAA
<br />AM
<br />Financial Guaranty Insurance Company (FDIC)
<br />t3
<br />.
<br />AA
<br />Financial Security Assurance Inc. (FSA)
<br />Aaa
<br />AAA
<br />AM
<br />MBIA Insurance Corp.
<br />Aaa
<br />AAA
<br />AAA
<br />) Radian Asset Assurance Inc.
<br />Aa3
<br />AA
<br />A+
<br />XL Capital Assurance Inc.
<br />A3
<br />A
<br />• 2 •
<br />"Ratings shown in red above were downgraded since October 2007
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