Integrity. Commitment. Performance.™

1 Integrity. Commitment. Performance.™

Current Economic Conditions and How They Affect My District

Illinois ASBO Annual Conference

Tammie Beckwith Schallmo, Vice President, Managing Director, Public Finance

Audra Hartman, Vice President

May 18, 2011


An Overview: How the Economy impacts State, Local and Federal Revenue for Illinois School Districts

Current Economic Conditions| State, Local and Federal Revenue


• Local Revenues– Mostly local property taxes– Corporate Personal Property Replacement Tax (CPPRT)– Tuition, interest income, fees, rentals

• State Revenues– General State Aid– Categorical Grants

• Federal Revenues– Categorical Grants– Grants

State, Local and Federal Revenue

Current Economic Conditions | State, Local and Federal Revenue


• Percentage of Local Revenue has increased over time• While the State share has decreased • And the Fed’s share has increased slightly

State, Local and Federal Revenue for Illinois School Districts

Current Economic Conditions | Local Revenue – Property Taxes


• Economic boom in the 1990s and into the 2000s– As property values increased, property taxes increased, and state revenues decreased

• General State Aid formula’s key variables– A

ttendance

– Property tax wealth per student

• We are now seeing the impact of lower housing prices, which has translated into lower EAVs, and the 2.70% CPI on 2010 property tax bills

Local Revenue – Property Taxes

Current Economic Conditions | Other Local Revenue


• As the economy has been hit, so have other local revenue sources for school districts– Investment income– Rentals

• In some districts, fee revenue has increased in an attempt to offset other revenue losses

Other Local Revenue

Current Economic Conditions | State Revenue - CPPRT


• Collected from Illinois corporations• Distributed to local government units• Payment in lieu of taxes• Allocation factors date back to program’s inception• Collections depend on Illinois business economy

– For fiscal year 2011, total CPPRT allocations for Illinois school districts increased by 21.5% over the prior year

– Per the Illinois Department of Revenue’s website, the increase is due to amnesty legislation and “an improving economy”

• Impacts General State Aid revenue for a district– Fewer CPPRT dollars, increased GSA

State Revenue - CPPRT

Current Economic Conditions | State Revenue – Categorical Grants


• Originated to encourage districts to offer certain programs (eg: special education, bilingual, transportation, lunch and breakfast programs)

• Entitlement grants (not competitive)• Funding levels vary in the ISBE budget from year to year

– Number of children in need of services– Health of state economy

• Statutes specify levels of payment• But actual appropriations are made annually by the legislature

– “Zero funding” is possible• “Prorated” funding developed over time as program costs

began to exceed appropriated levels

State Revenue - Categorical Grants

Current Economic Conditions | State Revenue – Categorical Grants


• The State has been behind on Categorical payments– Caught up on fiscal year 2010 payments– Districts are owed three payments for fiscal year 2011

• Impacts many districts’ cash flow position– Additional credit concern for Districts who rely heavily on the state– Short-term borrowing may be more difficult to achieve, as well as more

costly• How long will the state need to borrow to make payments to

districts?• How is your district budgeting for Categorical grants?

– Rating agencies are especially interested

State Revenue - Categorical Grants

Current Economic Conditions | Federal Revenue


• Largely tied to programs that support national educational goals and student achievement

• Often competitive grants• What happens when the grant is gone?• ARRA dollars

– Supplement, not supplant– It was a short-term fix

Federal Revenue


The Consumer Price Index

Current Economic Conditions | What is the Consumer Price Index


• The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

• The CPI reflects spending patterns for each of two population groups: all urban consumers (CPI-U) and urban wage earners and clerical workers (CPI-W). – The CPI-U represents about 87% of the total U.S. population. – The CPI-U (unseasonal adjusted) is used to determine the limiting rate

What is the Consumer Price Index?

Source: The Bureau of Labor Statistics

Current Economic Conditions | What is the Consumer Price Index?


• The CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought.

• For the current CPI, this information was collected from the Consumer Expenditure Surveys for 2005 and 2006.– About 7,000 families from around the country provided information each

quarter on their spending habits in the interview survey.– To collect information on frequently purchased items, such as food and

personal care products, another 7,000 families in each of these years kept diaries listing everything they bought during a 2-week period.

• Over the 2 year period, then, expenditure information came from approximately 28,000 weekly diaries and 60,000 quarterly interviews used to determine the importance, or weight, of the more than 200 item categories in the CPI index structure.

What is the Consumer Price Index?

Source: The Bureau of Labor Statistics

Current Economic Conditions | CPI: December 1, 2007 to December 1, 2008

14 Integrity. Commitment. Performance.™Source: The Bureau of Labor Statistics

CPI NSA M over M Y over Y YTD

December 1, 2007 210.036 -0.1% 4.1%

January 1, 2008 211.080 0.5% 4.3% 0.5%

February 1, 2008 211.693 0.3% 4.0% 0.8%

March 1, 2008 213.528 0.9% 4.0% 1.7%

April 1, 2008 214.823 0.6% 3.9% 2.3%

May 1, 2008 216.632 0.8% 4.2% 3.1%

June 1, 2008 218.815 1.0% 5.0% 4.1%

July 1, 2008 219.964 0.5% 5.6% 4.6%

August 1, 2008 219.086 -0.4% 5.4% 4.2%

September 1, 2008 218.783 -0.1% 4.9% 4.1%October 1, 2008 216.573 -1.0% 3.7% 3.1%November 1, 2008 212.425 -1.9% 1.1% 1.2%December 1, 2008 210.228 -1.0% 0.1% 0.1%

Current Economic Conditions | CPI: January 1, 2009 to Present Year Over Year


CPI NSA M over M Y over Y YTDJanuary 1, 2009 211.143 0.4% 0.0% 0.4%February 1, 2009 212.193 0.5% 0.2% 0.9%March 1, 2009 212.709 0.2% -0.4% 1.2%April 1, 2009 213.240 0.2% -0.7% 1.4%May 1, 2009 213.856 0.3% -1.3% 1.7%June 1, 2009 215.693 0.9% -1.4% 2.6%July 1, 2009 215.351 -0.2% -2.1% 2.4%August 1, 2009 215.834 0.2% -1.5% 2.6%September 1, 2009 215.969 0.1% -1.3% 2.7%October 1, 2009 216.177 0.1% -0.2% 2.8%November 1, 2009 216.330 0.1% 1.8% 2.9%December 1, 2009 215.949 -0.2% 2.7% 2.7%January 1, 2010 216.687 0.3% 2.6% 0.3%February 1, 2010 216.741 0.0% 2.1% 0.4%March 1, 2010 217.631 0.4% 2.3% 0.8%April 1, 2010 218.009 0.2% 2.2% 1.0%May 1, 2010 218.178 0.1% 2.0% 1.0%June 1, 2010 217.965 -0.1% 1.1% 0.9%July 1, 2010 218.011 0.0% 1.2% 1.0%August 1, 2010 218.312 0.1% 1.1% 1.1%September 1, 2010 218.439 0.1% 1.1% 1.2%October 1, 2010 218.711 0.1% 1.2% 1.3%November 1, 2010 218.803 0.0% 1.1% 1.3%December 1, 2010 219.179 0.2% 1.5% 1.5%January 1, 2011 220.223 0.5% 1.6% 0.5%February 1, 2011 221.309 0.5% 2.1% 1.0%March 1, 2011 223.467 1.0% 2.7% 2.0%April 1, 2011 224.906 0.6% 3.2% 2.6%


Economic Update

Current Economic Conditions | QE2


Quantitative Easing 2

Source: CNN Money, November 3, 2010

• The Fed has been buying $600 billion in long-term Treasuries, and has been reinvesting an additional $250 billion to $300 billion in Treasuries with the proceeds of its earlier investments

• The FED has announced that it will complete its purchases by June 30

• Interest rates declined, inflation expectations have risen, the dollar has depreciated and equity prices have risen – all “classic” financial market effects anticipated

Current Economic Conditions | Housing Market


Housing Market

Source: Standard and Poor’s Case-Shiller Index

• As of February, U.S. home prices were just above the lows of April 2009– 7th straight month of declines

• Housing values are down 32% from peak in May 2006• Distressed sales now account for 30% of all transactions

nationwide• For housing prices to rise, the economy must continue to

improve, as well as job growth• Continued declines in the housing market will have a

negative impact on EAV• Excess supply versus lower buyer confidence

Current Economic Conditions | Unemployment


Unemployment• The national unemployment rate is nearly 1% lower than it

was in November 2010 • U.S. unemployment was 8.8% for March and crept back up

to 9.0% in April

Current Economic Conditions | Job Creation


Job Creation• U.S. jobs were created at the fastest pace in five years in April

– Nonfarm payrolls increased by 244,000, the largest increase in 11 months– Third straight month the economy added more than 200,000 jobs– Manufacturing jobs continue to trend up– Local government has lost 416,000 jobs since September 2008

• Since February 2010, total payroll employment has risen by 1.8 million

• 4.3 people for every job, lower than the 6.9 to 1 ratio in July 2009

• Bottom line…labor market conditions have improved, but there are still 13.7 million Americans out of work

• Will job creation accelerate for the remainder of 2011?

Current Economic Conditions | Uncertainty


It’s Still a Time of Uncertainty• The U. S economy will continue to recover, but not as quickly

as we have hoped• Uncertainties remain

– Jobs– Housing– Oil and food prices– The country’s federal deficit – European sovereign debt crisis– Other bumps along the road, such as the earthquake and tsunami in

Japan

Current Economic Conditions | Components of Economic Indicator Indices


• Components of Leading Economic Indicators– Real money supply, interest rate spread, the index of consumer expectations, building

permits, stock prices, index of supplier deliveries (vendor performance), average weekly manufacturing hours, average weekly initial claims for unemployment insurance (inverted), and manufacturers’ new orders for nondefense capital goods, and Manufacturers’ new orders for consumer goods and materials.

• Components of Coincident Economic Indicators– Personal income less transfer payments, manufacturing and trade sales, employees on

nonagricultural payrolls, and industrial production.

• Components of Lagging Economic Indicators– Ratio of consumer installment credit to personal income, commercial and industrial

loans outstanding, change in labor cost per unit of output, average duration of unemployment (inverted), average prime rate charged by banks, ratio of manufacturing and trade inventories to sales, and change in CPI for services.

Components of Economic Indicator Indices

Source: The Conference Board

Current Economic Conditions | Current Readings of Economic Indicators


• The Conference Board Leading Economic Index for the U.S. increased 0.4% in March• Upward trend since the end of 2008

• The Conference Board Coincident Economic Index increased 0.2% in March– Still 4.3% below its level at the beginning of the recession

• The Conference Board Lagging Economic Index increased 0.4% in March, following a 0.4% decrease in January and a 0.3% increase in February

Current Readings of Economic Indicators

Source: The Conference Board

Current Economic Conditions | Statistics to Watch


• Consumer Sentiment (67.8 in April versus 65.5 in March and 75.5 in February; recessionary levels are in the 50s)

• Consumer Spending (increased 0.6% in March, consensus was 0.5% increase, 9th straight month of increases)

• Retail Sales (Retail sales increased 0.5% in April, 0.6% consensus, ninth straight month of increases)

• Personal Income (increased by 0.5% in March, 0.4% consensus)• Stock Market• Weekly Unemployment Claims

– The job market tends to lag the growth of the economy by six to nine months

• Inventory Reports and cardboard box demand

Statistics to Watch

Current Economic Conditions | Statistics to Watch


• Median Home Values• Existing home sales increased 4% in March• New home sales increased 11.1% in March to a 300,000

annual rate; 10.3.% decline over March 2010– During boom new home sales were 1.0 to 1.5 million annually or more

• Housing Starts (Up 7.2% in March but 9.1% below March 2010)• Building Permits (increased 11.2% in March but 13.3% below

March 2010)

Statistics to Watch


Investing in the current market for Illinois School Districts

Current Economic Conditions | Planning is Key


• Maintain a good CFLO– Uncertainty in State funding

• GSA• Categoricals

– Uncertainty in tax receipts• Late Payments• Appeals/Objections

• Maintain a good financial projection– EAV changes– State financial troubles– Revenue growth vs. expenditure growth

Planning is Key

Current Economic Conditions | Interest Rates


Historical U.S. Treasury Yield Curve

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

3 Month 6 Month 1 Year 2 Year 3 Year

05/13/11 05/13/10

Current Economic Conditions | Interest Rates


Fed Funds Implied Probability

58%55%

50%46%

40%45%44%42% 43% 44%

0%

14%9%

2%6%

0%

10%

20%

30%

40%

50%

60%

70%

06/22/11 08/09/11 09/20/11 11/02/11 12/13/11

FOMC Date

Decrease to 0.00

No Change - 0.25

Increase to 0.50

Increase to 0.75

Current Economic Conditions | Investment Environment


• In 2010 – 157 banks failed• As of 05/06/11 – 40 banks have failed for the year• FDIC Insurance

– Currently at $250k until December 2013– Non interest bearing transactional accounts– Beware of fees and net rate

• Collateral– Third Party Safekeeping– Collateral Mark to Market on a regular basis

Current investment environment

Current Economic Conditions | Investment Environment


• Must follow State Statute• Must follow District investment policy• Do not recommend Commercial Paper at this time• CDs

– Collateralized– Insured

• AAA Money Market• Government obligations• Government agency obligations

General Investment Options


Borrowing in the current market for Illinois School Districts

Current Economic Conditions | Borrowing in the Current Market


• From a national municipal market perspective, interest rates are still near historical lows

• The tax-exempt bond market has been very volatile over the last several months

• Weak supply is anticipated for the remainder of the calendar year; however, it is anticipated to increase as the latent “BAB effect” dissipates– BABs expired on December 31, 2010

Borrowing in the Current Market

Current Economic Conditions | Historical Interest Rates

34 Integrity. Commitment. Performance.™*Per MMD as of May 11, 2011

HISTORICAL INTEREST RATE COMPARISONMMD "AAA" Bond Index - Day to Day Comparison

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1 Year 5 Year 10 Year 15 Year 20 Year

Current Economic Conditions | The “Illinois Penalty”


• Continues to challenge Illinois issuers, who continue to suffer for the State’s financial woes

• The penalty is averaging between 90 and 120 basis points

• Some investors will no longer buy any Illinois credits– PIMCO, for example

The “Illinois Penalty”

Current Economic Conditions | Credit Spreads


• An underlying credit rating is essential for most financings

• Boards and administrators need to be mindful of their decisions and how they impact their District’s credit rating

• Doing so will impact its borrowing cost in the municipal bond market

Credit Spreads

Current Economic Conditions | Credit Spreads

37 Integrity. Commitment. Performance.™*Per MMD as of April 22, 2011

HISTORICAL INTEREST RATE COMPARISONMMD Bond Index By Rating Category

0.00%

1.00%

2.00%

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5.00%

6.00%

7.00%

AAA Insured AA A Baa

Current Economic Conditions | Challenges Going Forward


• Identify purchasers for long-term municipal bonds• Build America Bonds helped to provide additional

buyers, however the future of BABs is uncertain• Deficit reduction proposals in Washington

– Eliminate tax-exemption for future municipal bond issues– Substitute with tax credit bonds

• Traditional tax credit bonds• Direct pay tax credit bonds like BABs

Challenges Going Forward


Questions?

Disclaimer


The information contained herein is solely intended to suggest/discuss potentially applicable financing applications and is not intended to be a specific buy/sell recommendation, nor is it an official confirmation of terms. Any terms discussed herein are preliminary until confirmed in a definitive written agreement.The analysis or information presented herein is based upon hypothetical projections and/or past performance that have certain limitations. No representation is made that it is accurate or complete or that any results indicated will be achieved. In no way is past performance indicative of future results. Changes to any prices, levels, or assumptions contained herein may have a material impact on results. Any estimates or assumptions contained herein represent our best judgment as of the date indicated and are subject to change without notice. Examples are merely representative and are not meant to be all-inclusive.The information set forth herein was gathered from sources which we believe, but do not guarantee, to be accurate. Neither the information, nor any options expressed, constitute a solicitation by us for purposes of sale or purchase of any securities or commodities. Investment/financing decisions by market participants should not be based on this information.You should consider certain economic risks (and other legal, tax, and accounting consequences) prior to entering into any type of transaction with PMA Securities, Inc. or PMA Financial Network, Inc. It is imperative that any prospective client perform its own research and due diligence, independent of us or our affiliates, to determine suitability of the proposed transaction with respect to the aforementioned potential economic risks and legal, tax, and accounting consequences. Our analyses are not and do not purport to be appraisals of the assets, or business of the District or any other entity. PMA makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax, or accounting effects of consummating a transaction. PMA cannot be relied upon to provide legal, tax, or accounting advice. You should seek out independent and qualified legal, tax, and accounting advice from outside sources.If posted on a webpage, this information has been prepared for informational and educational purposes and does not constitute a solicitation to purchase or sell securities, which may be done only after client suitability is reviewed and determined. Services offered by PMA Securities, Inc. and this registered representative presenter, in particular, are available only in the following states: IL, WI. This information is not an advertisement of services available in any state other than those listed above.

Integrity. Commitment. Performance.™

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