Bond Financing

1. Bond Financing

2. SMSD Taxpayers Project Debt Service Assessment Annual Debt Payment Plus Interest Divided by District Valuation Equals Tax Rate Times Each Taxpayer Valuation Investors

3. Type of Bonds • General obligation bonds – subject to an election and taxpayers agree to pay whatever is necessary to pay the principal and interest when due. • Revenue bonds – not used by school districts. Repayment is based on a specific revenue source (e.g. utility assessments). • Lease purchase – does not require a vote. Repayment is based on a commitment of dollars from an existing fund of the district. Funds could be set aside in the capital outlay fund for technology and lease purchase financing could be used to purchase the items. Performance contracting will often use this type of financing (e.g. Lawrence athletic fields).

4. Rating • Prospective bond holders want information about the issuer before purchasing the bonds. • Moodys analyzes the district finances. • LARGE, WEALTHY TAXBASE FAVORABLY LOCATED IN JOHNSON COUNTY • SOUND FINANCIAL OPERATIONS WITH GROWING RESERVES; MODERATELY DECREASING ENROLLMENT • DEBT BURDEN EXPECTED TO REMAIN AFFORDABLE • A good rating will allow the district to finance its bonds at a lower rate. • If the rating is not expected to generate a lot of interest with potential investors, a district can purchase insurance that will provide more protection to the investor.

5. Official Statement

6. Debt Structure • When voters approve a bond issue, the amount is said to be “authorized”. • As bond sales are made under this authorization, they are called “issuances”. • As new debt is added, it is important to consider the tax rate that will be necessary to pay the principal and interest. If assessed valuation increases, the district can retire more debt with the same tax rate.

7. SMSD Outstanding Payments

8. Interest Rates - Premiums • Competitive sale vs. negotiated sale • The purchaser of bonds will assign an interest rate (coupon) to the bonds that make them more attractive to their clients. • The district considers the true interest cost when evaluating the best financing proposal. • A purchaser may have a high coupon rate, but will give the district a fixed amount of money at closing (premium) to lower the true interest cost. This concept is similar to the points paid on a home mortgage except that a premium is paid to the issuer of bonds.

9. Call Provisions and Refunding • The bonds may have a call provision. This allows the issuer to redeem the debt prior to the scheduled maturity date. If a district had outstanding bonds with a coupon well above the current interest rates, the issuer may choose to refund the bonds at the call date. • A “current refunding” is when the issuer completes a refunding within 90 days of the call date. • An “advance refunding” is when the issuer sells new bonds to establish an escrow account that provides for the payment of the original bonds when the call date approaches.

10. Tax Issues • Municipal bonds are exempt from federal and state income tax. • Any interest earnings in excess of the rate paid on the bonds (arbitrage) must be sent to IRS. • There are restrictions on private use of a building that was financed with tax exempt bonds. • There are restrictions regarding the sale of buildings financed with tax exempt bonds.