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INSIDE
<br />THE
<br />l I
<br />Ehlers 2008
<br />School Finance
<br />Seminar
<br />Mark Your Calendars!
<br />Page 2
<br />Transportation
<br />Infrastructure
<br />Project
<br />Matches
<br />How do
<br />Municipalities
<br />Fund them?
<br />—Page 3
<br />I FOA
<br />Recommended
<br />Practices
<br />for Selecting and
<br />Managing the Method
<br />of Sate for Local
<br />Government Bonds
<br />— Page 4
<br />What's All
<br />the Fuss
<br />About Bond
<br />Insurance?
<br />— Page 5
<br />Ehlers Ranks
<br />in TOP TEN
<br />as Financial
<br />Advisor of
<br />Competitive Sales
<br />— Page 6
<br />MARKET
<br />UPDATE
<br />Ensuring the
<br />Health of
<br />) the Insurers
<br />— Page 6
<br />H RS
<br />ISOR
<br />Ehlers & Associates. Inc, — Leaders in Public Finance Since 1955
<br />By Joel Sutter and Tom Berge,
<br />Financial Advisors, Ehlers Education Team
<br />The 1-35 bridge collapse on August 1, 2007,
<br />reinforced the need for all levels of government to
<br />develop financial plans to adequately maintain
<br />public facilities and infrastructure.
<br />While public education may not be faced with a
<br />dramatic consequence such as a bridge collapse,
<br />access to adequate funding for maintenance of
<br />school facilities is a major problem for Minnesota
<br />school districts.
<br />Minnesota taxpayers have a huge investment in
<br />their school facilities. According to the Minnesota
<br />Department
<br />of Education,
<br />public school
<br />districts
<br />operate over
<br />164 million
<br />square feet
<br />of building
<br />space. With
<br />an average
<br />replacement
<br />cost estimated
<br />at $180 per
<br />square foot,
<br />the total
<br />replacement cost for those facilities is at
<br />nearly $30 billion.
<br />When school districts are able to keep up with
<br />routine maintenance on their facilities, it protects
<br />the public's investment. It also can help to maintain a
<br />healthier and more habitable learning environment,
<br />and improve the quality of education. Yet most
<br />school districts struggle to find resources to keep
<br />up with the significant costs of facility maintenance.
<br />What Should it Cost?
<br />The National Research Council, a private, nonprofit
<br />institution that provides science, technology
<br />and health policy advice under a congressional
<br />charter, states:
<br />"An appropriate budget allocation for routine
<br />Maintenance and Repair (M&R) for a substan-
<br />tial inventory of facilities will typically be in
<br />the range of 2 to 4 percent of the aggregate
<br />current replacement value of those facilities "
<br />If we apply even the low estimate of 2 percent
<br />to the estimated replacement value mentioned
<br />above, it would suggest that Minnesota
<br />school districts should be spending nearly
<br />$600 million a year on facility maintenance.
<br />The Minnesota Department of Education, in a study
<br />completed in the late 1990s, projected that $2.4
<br />billion in district facility repair and replacement
<br />work was needed by the year 2009. Given that
<br />state capital funding formulas have changed
<br />little since the time of the study and that
<br />maintenance costs have increased substantially,
<br />that number has undoubtedly grown.
<br />What Funds are Available?
<br />Unlike cities and counties, school districts do not
<br />generally have authority to raise taxes to fund
<br />capital improvements without voter approval. Most
<br />districts rely
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<br />many years has
<br />been operating capital revenue. Each
<br />district's revenue is determined primarily by
<br />enrollment, with a weighted facility component
<br />based on average building age. Statewide, this
<br />formula provides $194 million in revenue for the
<br />current fiscal year. This obviously falls far short of
<br />the funding needed for adequate facility
<br />maintenance. Furthermore, this is also the primary
<br />source of funding for all forms of equipment -
<br />including technology, furniture, instructional
<br />equipment, and maintenance equipment - and even
<br />for textbooks.
<br />Unfortunately, the revenue formula has remained
<br />essentially unchanged since 1992. Since then, the
<br />costs for most routine maintenance projects have at
<br />least doubled. For example, from 1992 to today the
<br />cost to replace a roof has grown from under $4 to
<br />over $10 per square foot; the cost to replace a
<br />single classroom unit ventilation system has grown
<br />from $12,000 to $25,000. At the same time, needs
<br />and expectations for computers and other
<br />technology have increased dramatically, as has the
<br />cost of textbooks.
<br />(FAC}LfTY MAINTENANCE FUNDING {continued on page 2)
<br />Ehlers Advisor • March 2008
<br />GFOA Recommended Practices for Selecting and Managing
<br />the Method of Sale for Local Government Bonds
<br />The Government Finance Officers Association (GFOA), an
<br />independent representative of local government finance
<br />professionals, has published an update to its recommended
<br />practices for selection of the method of sale for local
<br />government bonds.
<br />Debate among financial advisors, underwriters, and issuers as
<br />to the appropriateness of competitive vs. negotiated sales will
<br />undoubtedly continue. However, the GFOA, through this
<br />latest update to its recommended practices, has provided
<br />definitive guidance as to what is in the best interests of local
<br />governments and the taxpayers they serve.
<br />As noted in their Recommended Practice document:
<br />"There is a lack of understanding among many debt
<br />issuers about the appropriate
<br />roles of underwriters and
<br />financial advisors in the
<br />fiduciary relationship that each
<br />has or does not have with
<br />respect to local government
<br />issuers. The relationship between
<br />the issuer and financial advisor is
<br />one of "trust and confidence"
<br />which is in the "nature of a
<br />fiduciary relationship." This is in
<br />contrast to the relationship
<br />between the issuer and an
<br />underwriter where the
<br />relationship is one of some
<br />common purposes but also some
<br />competing objectives, especially at
<br />the time of bond pricing."
<br />Guidelines for a Negotiated Sale
<br />The GFOA recognizes there may be appropriate conditions
<br />when a negotiated sale would be in the best interests of a
<br />local government. However, they provide ten guidelines that
<br />should be considered and followed when the negotiated
<br />method of sale is chosen. A complete copy of the
<br />Recommended Practices is available on the GFOA website at
<br />www.gfoa.org. Key recommendations related to use of the
<br />negotiated sale method are:
<br />• Issuers should engage a financial advisor to counsel them
<br />as to whether a competitive or negotiated sale is most
<br />appropriate based on their specific circumstances. It is
<br />also recommended that the issuer enter into a written
<br />contractual relationship with a financial advisor (a firm
<br />unrelated to underwriters), to advise the issuer on all
<br />aspects of the sale, including selection of the
<br />underwriter, structuring, disclosure preparation and bond
<br />pricing.
<br />• Due to inherent conflicts of interest, the firm acting as a
<br />financial advisor for an issuer should NOT be allowed to
<br />resign and serve as underwriter for the transaction being
<br />considered.
<br />• Due to potential conflicts of interest, the issuer should
<br />enact a policy regarding whether and under what
<br />circumstances it will permit the use of a single firm to
<br />serve as an underwriter on one transaction and a
<br />financial advisor on another transaction.
<br />When Underwriters Must Resign as Financial Advisors
<br />The Municipal Securities Rulemaking Board (MSRB) has had a
<br />rule in place for many years (Rule G-23) that requires
<br />underwriters to resign their role as the financial advisor when
<br />underwriting a negotiated sale for an issuer.
<br />This rule has been loosely followed by the underwriting
<br />community such that it has been common practice for
<br />underwriters to serve as a financial advisor in the preparation
<br />and planning for a new borrowing followed
<br />by their resignation just prior to the
<br />execution of the negotiated sale,
<br />followed by their inunediate "rehire"
<br />as the financial advisor after the sale.
<br />Many local government officials may
<br />not even be fully aware that this
<br />resignation and reengagement has
<br />occurred (even though it is
<br />supposed to be executed in writing).
<br />the latest update to its
<br />ommended practices, the GFOA
<br />ommends AGAINST allowing an
<br />underwriter to engage in the practice
<br />of resigning for the one-time deal,
<br />only to be "rehired" immediately
<br />thereafter. In fact, it calls into
<br />question the practice of having a firm serve as
<br />underwriter on one transaction and financial advisor on
<br />another transaction.
<br />Should Issuers be Their Own Financial Advisors?
<br />The GFOA also cautions issuers from serving as their own
<br />financial advisor unless they have at least the following skills
<br />and information:
<br />• Access to real-time market information (e.g. Bloomberg)
<br />to assess market conditions and proposed bond prices;
<br />• Experience in the pricing and sale of bonds, including
<br />historical pricing data for their own bonds and/or a set of
<br />comparable bonds of other issuers in order to assist in
<br />determining a fair price for their bonds; and
<br />• Dedicated full time staff to manage the bond issuance
<br />process with the training, expertise and access to debt
<br />management tools necessary to successfully negotiate the
<br />pricing of their bonds.
<br />Ehlers is an independent financial advisory firm with over 50
<br />years experience representing public issuers. Ehlers is NOT an
<br />underwriter and has never served as an underwriter on any
<br />public finance transaction. Ehlers has the independence and
<br />all of the capabilities set forth above to ensure that our client
<br />issuers avoid transactions and bond terms that may principally
<br />benefit the underwriter. Our experience allows our clients to
<br />receive the best pricing available in the market at the time of
<br />sale for both negotiated and competitive sales.
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