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Erin Bartholomy Lynda Given Todd Krzyskowski Sean McCarthy Partner Partner Managing Director First Vice PresidentChapman and Cutler LLP Chapman and Cutler LLP Mesirow Financial Stifel, Nicolaus & Company, Inc.
May 20, 2010
Maximizing the Benefits of the Evolving American Reinvestment and Recovery Act of 2009
2
The Obama Administration’s $787 Billion Economic Stimulus Package, known as the American Recovery and Reinvestment Act, was signed into
Law on February 17, 2009 – Municipal Highlights
Eliminates AMT on Bonds Issued in 2009 and 2010
Introduces Taxable Bond Financing
Options for Tax-Exempt Issuers
Energy Infrastructure Bonds (QECBs)
(Capped Issuance)
Liberalizes Investment Rules for Financial Institutions
Qualified Zone Academy Bonds
(QZABs)(Capped Issuance)
Increases Annual “Bank Qualified” Bond Limit to $30 Million for 2009-10
The primary purpose of the Recovery Act is to Prompt Immediate Capital Formation Efforts by State & Local Governments using expanded TAXABLE borrowing alternatives to stimulate the economy and put people back to work……
Build America Bonds (BABs)
(Uncapped Issuance)
Qualified School Construction Bonds
(QSCBs)(Capped Issuance)
Recovery Zone Facility Bonds
(RZFBs)
33
The Stimulus Plan Provides State & Local Governments Including School Districts the Opportunity to Capture All of the Federal Subsidy that Was
Traditionally Shared with Tax Exempt Investors
Note: While State & Local Governments can benefit, the financing alternatives were geared to be REVENUE NEUTRAL to the U.S. Treasury, but actual impact has been more costly
Tax-Exempt Investors
State, School District, and Other Local Governments
State, School District, and Other Local
Governments
Includes:
Build America Bonds Energy Conservation Bonds Qualified School Construction Bonds Qualified Zone Academy Bonds Expanded “Bank Qualified” Bonds
Allocation of Federal Subsidies - Traditional Tax-Exempt
Allocation of Federal Subsidies - New Taxable Alternatives
4
The Borrowing Alternatives Provided by the Stimulus Plan are All TAXABLE and Must be Compared to Traditional Tax-Exempt
Alternatives – At the Margin Taxable Bonds are the base level of borrowing cost for issuers
Various borrowing options provide an approximate subsidy in the current market defined as a percentage of taxable bonds
* Treasury guidance and allocation still to be published on Recovery Zone BABs
100%
80%
65%75%
55% 55%60%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
TaxableBonds
Tax-ExemptBonds
BABsInvestor
Tax CreditSubsidy
BABs IssuerSubsidy
QECBs70%Tax
CreditSubsidy
QSCB 100%Tax Credit
Subsidy
RecoveryZone BABs
IssuerSubsidy*
Per
cent
age
of T
axab
le B
onds Subsidy Above Traditional Tax-Exempt Bonds
55
The Federal Stimulus Plan Provides Maximum Opportunity to Capture Federal Tax Subsidies at the Local Level
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
Recovery Zone Economic Development BondsYield (RZEDs) (45% Issuer Subsidy - "Super BABs")Net BAB Yield (35% Issuer Subsidy)
Taxable Muni Yield
Tax-Exempt Yield
Tax Credit Bonds
The benefit that the Federal Stimulus Plan aims to provide at the local level
which typically has gone to tax-exempt investors
66
The Illinois State Toll Highway Authority is Estimated to Have Saved Over $60,000,000 in Interest Costs Through the Use of BABs
Issuers with solid credit ratings should expect the same percentage level of savings versus traditional tax-exempt bonds subject to market conditions at the time of financing
BAB 65% Net Tax-Exempt Yield Est. BAB Est. BABMaturity Amortization Yields BAB Yield Yield* Benefit Savings % Savings $
01/01/19 21,940,000 5.293% 3.440% 3.550% 0.110% 0.89% 190,000$
01/01/20 18,460,000 5.293% 3.440% 3.750% 0.310% 2.69% 500,000$
01/01/21 15,105,000 5.293% 3.440% 3.890% 0.450% 4.17% 630,000$
01/01/22 16,975,000 5.293% 3.440% 4.020% 0.580% 5.69% 970,000$
01/01/23 13,830,000 5.293% 3.440% 4.150% 0.710% 7.32% 1,010,000$
01/01/24 13,690,000 5.293% 3.440% 4.280% 0.840% 9.05% 1,240,000$
01/01/32 67,230,000 6.184% 4.020% 4.990% 0.970% 13.07% 8,780,000$
01/01/33 70,105,000 6.184% 4.020% 5.020% 1.000% 13.75% 9,640,000$
01/01/34 262,665,000 6.184% 4.020% 5.050% 1.030% 14.42% 37,880,000$
500,000,000$ 12.17% 60,840,000$ * - Estimated Trading Spread of 65 Basis Points Over AAA MMD . Subject to change based upon market conditions.
Interest Rate Comparison BAB Benefit
The Illinois State Toll Highway Authority, Taxable Build America Bonds (BABs)Sold on May 12, 2009 - Interest Rate Comparison
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The Stimulus Plan Sunsets on December 31, 2010 So Planning Must Begin Now – Especially if You Need to Pass a Referendum!
2/17/2009
American Recovery and Reinvestment Act is signed into law
12/31/2010
Current expiration of BAB financing opportunities
Increase to $30 million Bank-Qualified Capacity for
2009
Increase to $30 million Bank-Qualified
Capacity for 2010
12/31/2009
February 2, 2010 Primary Election for Referendum Ballot Question November 2, 2010
General Election for Referendum Ballot Question
March 18, 2010 - HIRE Act signed into law, extending BABs for 3 years
12/01/2013?
Proposed extension of ARRA including BABs subsidy (at a
reduced level)
88
What are my capital financing needs/plans? Timeframe?
What is my current debt capacity?
What type of governmental unit am I?
-Home Rule vs. Non-Home Rule
-Tax-Capped vs. Non-Capped
Do I need to pass a referendum? Can the Stimulus Plan Help that Appeal?
Am I in touch with my State Representative on Tax Credit Bond Sponsorship?
-Will State Statute Change to Assist local issuers (e.g. longer maturities)?
What is my current debt structure?
-Upward Sloping, Downward Sloping, or Level
What tax rate impact can be achieved?
-Intergovernmental cooperation
Develop Your Thoughts and Engage Your Governing Body and Community; Next Steps & Key Questions to Think About
9
Forward Starting Swap Mechanics
Cash Flows for Taxable Build America Bonds and Their Accompanying Subsidy
Federal Treasury
Issuer Subsidy BABs
Bondholders
Direct Payment of 35% of Interest Paid
Federal Treasury
Investor Subsidy BABs
Bondholders
&
Tax Credit Holders
Tax Credit Equal to 35% of Interest Received
Taxable Fixed Interest Rate
Taxable Fixed Interest Rate
Traditional Fixed Rate Bonds
Bondholders
Tax-Exempt Fixed Interest Rate
Local Issuer
Local Issuer
Local Issuer
1010
Tax-Exempt Interest Rates Have Historically Carried Yields Lower than Their Taxable Counterparts
– The 30-Year US Treasury is a taxable interest rate and the 30-Year MMD is a tax-exempt interest rate for AAA rated issuers
Taxable and Tax-Exempt Interest Rates Over the Past 20 Years
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
30-Year Treasury 30-Year MMD
The Federal Stimulus was enacted when taxable interest rates were significantly below tax-exempt interest rates to eliminate the great benefit experienced by tax-exempt bond investors at the expense of issuers
11
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.020
09
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
Mill
ions
Outstanding City of Peoria GO Debt Service Theoretical BABs Debt Service Theoretical Additional Debt Issuance Capacity
Intergovernmental Communication and Good Debt Management Are Keys to Managing Overall Taxpayer Tax Rate Impact
Theoretical $10 million BAB Debt Service for a Sample Issuer and Additional Debt Issuance Capacity
A downward sloping debt profile coupled with minimal debt allows
an issuer to issue long-term debt and maximize the benefit from the
temporary Federal Stimulus with minimal tax rate impact
Note – Additional Debt Issuance Capacity includes principal and interest; assumes maximum annual debt service of $17.5 million, based upon largest annual outstanding Sample Issuer GO Debt Service plus theoretical $10 million BAB debt service
12
Debt issuance authority must be established
The importance of Capital projects
Borrowing Options
• School Building Bonds
• Alternate Bonds
• Life Safety Bonds
• Working Cash Fund Bonds
• Debt Certificates
• Funding Bonds
ARRA and Illinois Law
122808242
13
Who is Using BABs
1,066 BABs transactions worth over $90 billion were priced from April 2009 to March 31, 2010
It is estimated that state and local governments will save approx. $12 billion in present value borrowing costs by using BABs compared to issuing solely traditional tax-exempt bonds
Proceeds must be issued to finance new money capital expenditures for which tax-exempt governmental bonds could be issued
14
When to Use BABs
Decision to issue BABs should be a “game day” decision at the time of bond sale. If it is cost effective for the district to use this program at the time of sale, it should be used.
Must analyze traditional tax-exempt and taxable Build America Bond scales to advise issuer-client and determine which financing option is the most economical.
Often, a blended transaction, which incorporates both BABs and tax-exempt bonds provides for the most economical financing solution.
15
Tax-Exempt vs. Taxable BABs Yields
Traditional Tax-exempt Bonds vs. Taxable BABs
Tax-Exempt vs. Taxable BABs Yield Curves
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028
Maturity
Yie
ld
Tax-exempt Yields Taxable Yields Taxable Yields Post 35% Subsidy
Crossover - BABs become more cost-effective
Taxable and tax-exempt yield curves are analyzed to determine to appropriate blend
16
Case Study: Jefferson County, Colorado
Jefferson County, Colorado
Certificates of Participation, Series 2009
Marketing Date: 10/20/2009
Credit ratings: Aa2/AA
Sold as 1 transaction with 2 separate series: Series A: $67,715,000 taxable COPs (Direct Pay
Build America Bonds) Series B: $8,765,000 tax-exempt COPs
Issuer saved nearly $4.5 million by issuing a combination of tax-exempt COPs and taxable direct pay Build America Bond COPs, rather than a tax-exempt only transaction
17
Maturity Schedule: Jefferson County COPs, Series 2010
Tax-Exempt
Taxable
Bond ComponentMaturity
DateAmount Rate Yield Price
Premium (-Discount)
12/1/2010 2,745,000 2.000% 0.900% 101.170 32,116.5012/1/2011 2,980,000 2.000% 1.250% 101.529 45,564.2012/1/2012 3,040,000 2.500% 1.650% 102.535 77,064.00
8,765,000 154,744.70
12/1/2013 3,115,000 3.100% 3.100% 100.00012/1/2014 3,180,000 3.300% 3.300% 100.00012/1/2015 3,250,000 3.750% 3.750% 100.00012/1/2016 3,325,000 4.200% 4.200% 100.00012/1/2017 3,420,000 4.350% 4.350% 100.00012/1/2018 3,515,000 4.900% 4.900% 100.00012/1/2019 3,625,000 5.000% 5.000% 100.00012/1/2020 3,745,000 5.150% 5.150% 100.00012/1/2021 3,870,000 5.350% 5.350% 100.00012/1/2022 4,005,000 5.500% 5.500%
35,050,000
12/1/2025 12,925,000 5.900% 5.900% 100.000
12/1/2029 19,740,000 6.250% 6.250% 100.000
76,480,000 154,744.70
Serial Bonds:
Term Bond Due 2025:
Term Bond Due 2029:
BAB Serial Bonds:
18
Net Debt Service: Jefferson County
Period Ending Principal Interest
Total Debt Service
35% Interest Subsidy
Net Debt Service
12/1/2010 2,745,000.00 4,044,741.21 6,789,741.21 -1,344,169.00 5,445,572.2112/1/2011 2,980,000.00 3,717,397.50 6,697,397.50 -1,253,629.12 5,443,768.3812/1/2012 3,040,000.00 3,657,797.50 6,697,797.50 -1,253,629.12 5,444,168.3812/1/2013 3,115,000.00 3,581,797.50 6,696,797.50 -1,253,629.12 5,443,168.3812/1/2014 3,180,000.00 3,485,232.50 6,665,232.50 -1,219,831.38 5,445,401.1212/1/2015 3,250,000.00 3,380,292.50 6,630,292.50 -1,183,102.38 5,447,190.1212/1/2016 3,325,000.00 3,258,417.50 6,583,417.50 -1,140,446.12 5,442,971.3812/1/2017 3,420,000.00 3,118,767.50 6,538,767.50 -1,091,568.62 5,447,198.8812/1/2018 3,515,000.00 2,969,997.50 6,484,997.50 -1,039,499.12 5,445,498.3812/1/2019 3,625,000.00 2,797,762.50 6,422,762.50 -979,216.88 5,443,545.6212/1/2020 3,745,000.00 2,616,512.50 6,361,512.50 -915,779.38 5,445,733.1212/1/2021 3,870,000.00 2,423,645.00 6,293,645.00 -848,275.76 5,445,369.2412/1/2022 4,005,000.00 2,216,600.00 6,221,600.00 -775,810.00 5,445,790.0012/1/2023 4,150,000.00 1,996,325.00 6,146,325.00 -698,713.76 5,447,611.2412/1/2024 4,305,000.00 1,751,475.00 6,056,475.00 -613,016.26 5,443,458.7412/1/2025 4,470,000.00 1,497,480.00 5,967,480.00 -524,118.00 5,443,362.0012/1/2026 4,645,000.00 1,233,750.00 5,878,750.00 -431,812.50 5,446,937.5012/1/2027 4,830,000.00 943,437.50 5,773,437.50 -330,203.12 5,443,234.3812/1/2028 5,030,000.00 641,562.50 5,671,562.50 -224,546.88 5,447,015.6212/1/2029 5,235,000.00 327,187.50 5,562,187.50 -114,515.62 5,447,671.88
76,480,000.00 49,660,178.71 126,140,178.71 -17,235,512.14 108,904,666.57
20
BABs ChallengesExtraordinary/make-whole calls are relatively expensive and
render the debt economically non-callable
Deals are managed off the taxable desk, yet subject to MSRB rules
After-market premium inherent in the taxable market
Deal features are currently evolving
Long-term risks due to potential changes in governmental policy, etc.
21
Need Qualified Zone Academy
100 Percent Test/Qualified Purpose/2 Percent COI
Expenditure Rules
Private Business Contribution
Certain Wage and Labor Standards Applicable
Bonds may either be traditional “tax credit” QZABs or “direct pay” QZABs
Qualified Zone Academy Bonds
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Supervision of an Eligible Local Education Agency (ISBE)
Application made to ISBE, ISBE grants allocation to individual Districts
Illinois allocation in 2009 $52,401,000, in 2010 $52,218,000
Designate a building or buildings as a qualified zone academy
Each academy must have 35% of students qualify for free or reduced priced lunch
10% Private Business Contribution Requirement
Qualified Zone Academy
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Rehab/Repair Public School Facility(Regulations Define Rehab) – Not New
Construction
Equipment
Development of Course Materials
Training Teachers/School Personnel
Qualified Purpose of Bond Proceeds
23
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100 Percent of Available Project Proceeds (“APP”) used for Qualified Purpose
APP=Par amount of Bonds less 2% permissible to pay costs of issuance
In General, Proceeds Must Be Spent Within Three Years
Binding Commitment to Spend At Least Ten Percent of Proceeds Within Six Months
Spend Proceeds With Due Diligence
Redeem Bonds with unspent proceeds after 3 years
Expenditure Rules
24
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Public/Private Partnership
Written Commitment from Private Entities
Contribution Must Have PV of at Least Ten Percent of Proceeds of Issue
Must Be a “Qualified Contribution”
Private Business Contribution
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Equipment
Technical Assistance to Develop Curriculum or Train Teachers to Promote “Market Driven” Technology in Classroom
Employee Services as Mentors
Internships/Field Trips, Etc.
Any Other Property or Service …
Qualified Contribution
26
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Wage rate requirements and labor standards requirements under Subchapter IV of Chapter 31 of Title 40 of the United States Code apply to projects financed with proceeds of QZABs (Federal “Prevailing Wage”)
Certain Wage and Labor Standards Applicable
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Owners receive a federal tax credit instead of interest
Tax credit received on quarterly credit allowance dates
May be supplemental coupon also
Tax credit rate and maximum term published at www.treasurydirect.gov
Can carry forward unused portion of Tax Credit
May create a sinking fund invested at the published permitted sinking fund yield
Tax Credit QZABs
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Issuer receives direct payment from federal government
Payment is lower of actual interest or tax credit rate
De Minimus Premium Rules Apply
Must File Form 8038-CP
Maximum term published by Treasury
Current terms 17 year maturity 5.51% interest/tax credit rate
Direct Pay QZAB
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30
All of the rules applicable to tax-exempt bonds must be complied with Spending requirements
Arbitrage rebate
Private use and payment tests
Rules Applicable to Build America Bonds
30
31
Irrevocable election to treat the debt as BABs
2% Cost of issuance limitation
Includes bond insurance premium
Issue some bonds as taxable non-BABs
No more than a de minimis original issue premium allowed
Based on the definition of “issue price” based on reasonable expectations
First interest payment must be within one year of the date of issuance
Rules Applicable to Build America Bonds (cont’d.)
31
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Capitalized interest
Up to placed-in-service date of the financed project(s)
Complications with multiple projects and multiple placed-in-service dates
No CABs
Count against “small issuer” exception for rebate but NOT against the $30,000,000 annual BQ limit
Can be used for reimbursement
Can be used to refinance temporary short-term financings
Rules Applicable to Build America Bonds (cont’d.)
32
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Form 8038-B
Bond counsel files on the closing date
Includes a debt service schedule
Form 8038-CPMust be filed not less than 45 and not more than 90 days before
each interest payment date
The first 8038-CP should be filed no earlier than 30 days after the 8038-B is filed
IRS Forms; Filings
33
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A Build America Bond that the issuer designates as a Recovery Zone Economic Development Bond
National limit of $10,000,000,000
Allocation formula to each Illinois county
Issuer receives payment equal to 45% of interest paid on bonds paid directly by the U.S. Treasury (rather than 35%)
Proceeds must be used for one or more qualified economic development purposes in a recovery zone
Taxable Recovery Zone EconomicDevelopment Bonds
35
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“Qualified economic development purpose” means expenditures for purposes of promoting development or other economic activity in a recovery zone, including: Capital expenditures with respect to property located in the zone
Expenditures for public infrastructure and construction of public facilities
Expenditures for job training and educational programs
Wage rate requirements and labor standards requirements under Subchapter IV of Chapter 31 of Title 40 of the United States Code apply
Taxable Recovery Zone EconomicDevelopment Bonds (cont’d)
36
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Effects of the Proposed “Hiring Incentives to Restore Employment Act (HIRE)”
Proposed HIRE extends BAB program and direct-pay subsidy for three years Most likely that the Issuer subsidy will be reduced (25%-30%)
BABs program becoming model for other Federal programs
QSCB program restructured to provide direct-pay subsidy
Old QSCB program resulted in only $2.6 billion in issuance last year (out of $11 billion authorized)
Expectation of increased issuance due to new direct-pay subsidy feature
Issuers receive payments equal to the lesser of the actual interest rate of the bonds or the tax-credit rate for municipal tax-credit bonds 5.86% rate for a 17 year maturity (as of April 8th) Mesirow Financial estimates the State would price at 5.41% for a 17 year maturity
Important to consider timing: Tax credit yield is determined at closing rather than pricing
37