srvusd public financial management, inc. proposal to serve as financial advisor september 14, 2012
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SRVUSD
Public Financial Management, Inc.Proposal to Serve as Financial Advisor
September 14, 2012
2
PFM’s team has direct expertise and experience Under the guidance of the core team, the full resources and capabilities of PFM will be
committed to further the District’s objectives
Engagement Manager
Mike BerwangerManaging DirectorLos Angeles, CA
Credit Expertise
Eric EspinoSenior Managing Consultant
Los Angeles, CA
Project Team Support
Bob GambleManaging DirectorSan Francisco, CA
Project Lead
Laura FrankeSenior Managing Consultant
Los Angeles, CA
Quantitative Support
Hana HuConsultant
Los Angeles, CA
Pricing Support
Todd FraizerManaging Director
Charlotte, NC
Project Team Support
Mark PrussingSenior Managing Consultant
Seattle, WA
In Attendance
Co-Project Lead
Sarah HollenbeckSenior Managing Consultant
San Francisco, CA
3
I. Public Financial Management’s QualificationsII. Finance Plan ConsiderationsIII. Preliminary GO ProfileIV. Why PFM?
Table of Contents
4
I. Public Financial Management’s Qualifications
5
PFM is the nation’s largest independent financial advisory firm—with 32 offices and 467 employees throughout the United States—bringing a scale and presence unmatched by any of its competitors
The PFM Group was founded in 1975 on the principle of providing sound independent financial advice to state and local governments, and is comprised of Public Financial Management, Inc (“PFM”) and PFM Asset Management LLC (“PFMAM”)
PFM is the premier municipal financial and investment advisory firm
PFM Experience
1984-2011 Financial Advisory Volume/No. of Transactions Matrix
PFM Organizational Structure
The PFM Group
Public FinancialManagement, Inc.
PFM Asset Management LLC
FinancialAdvisory Services
StrategicConsulting Services
Asset Management
Structured Products
1984 - 2011 Financial Advisory Experience
Volume/Experience Matrix
National Financial Advisory Rankings
Source: Thomson Reuters
Transactions
Volume (in billions)
Public Resources Advisory Group
FirstSouthwest
RBC Capital Markets
P G Corbin
Lamont Financial
Ponder & Co
Kaufman Hall
Montague DeRose
Springsted Incorporated
Seattle-Northwest
AC Adv
PFM
KNN
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
18,000
- 30 60 90 120 150 180 210 240 270 300 330 360 390 420 450 480 510 540 570 600 630 660 690 720 750
• Doing business in CA since 1987• Perennially Top ranked CA FA firm• Top education FA nationally from 2001-2011• Financial Advisor to comparable sophisticated
issuers throughout the state• Bay area office is west coast hub
6
Although rankings provide a shorthand method of measuring success, it adds credence to our top billing when coupled with the length of service and level of satisfaction we provide our clients
As a result of the experience gained as such an active player in the markets, PFM offers the benefits of unrivaled levels of participation, preparation, strategy, and advocacy
PFM consistently ranks first among financial advisors
PFM 2011 Ranking Summary
Category By Par Amount
By No. of Transactions
Primary & Secondary Ed. #1 #1Overall Long-term #1 #1
Tax-Exempt #1 #1Taxable #2 #1
Negotiated #1 #1Competitive #1 #1New Money #1 #1Refunding #1 #1
Variable Rate #4 #1Revenue #1 #1
General Obligation #1 #2
National Municipal Financial Advisory RankingsSource: Thomson Reuters
National Municipal Financial Advisory RankingsSource: Thomson Reuters
2011 Year-end General Obligation Long-Term Municipal New Issues
2011 Year-end Overall Long-Term Municipal New Issues
7,545.6
3,918.8
58
448
3
11,650.7
11,948.4 415 PFM
Public Resources Advisory Group
FirstSouthwest
Peralta Garcia Solutions LLC
# transactions dollars in millions
18,438.2
9,263.5
119
614
24
20,854.7
39,632.1 758 PFM
Public Resources Advisory Group
FirstSouthwest
Govt Development Bank for Puerto Rico
# transactions dollars in millions
7
Familiar with all forms of debt and all applicable State laws Consistently the #1 Financial Advisor by transactions If State of CA deals are excluded, PFM is the top ranked FA by par issuance as well
PFM has extensive experience in California
6,190.6
3,964.0
2,248.1
1,625.9
1,263.2
1,092.3
961.6
877.0
46
96
100
27
39
62
21
41
37
17
11,853.4
7,511.3
Public Resources Advisory Group
KNN Public Finance
Montague DeRose & Associates LLC
Fieldman Rolapp & Associates
Keygent LLC
Backstrom McCarley Berry & Co
Dale Scott & Company Inc
Isom Advisors Inc
Tamalpais Advisors
2011 and 2012 YTD Combined Overall Long-Term Municipal New IssuesNational Muncipal Financial Advisory Ranking -- Equal Credit to Each Financial AdvisorSource: Thomas-Reuters
PFM
2012 YTD Overall California Long-Term Municipal New Issues
8
PFM is a full service independent financial advisor and would offer the District a complete platform of services and expertise
With a myriad of business lines, PFM has resources to meet client needs at every level
Our client relationships go beyond just bond transactions
Structured ProductsAdvisory Services
FinancialAdvisory Services
Debt Portfolio Management
New Issuance and Refunding/Restructuring
Analysis
Pricing Analysis/Benchmarking
Valuation of Call Options
Capital Budgeting
Debt Policy Development
Transaction Management
Future Perfect Modeling
InvestmentAdvisory Services
Asset/Liability Management
Investment Management
Structured Investment Contracts
Escrow Optimization and Structuring/Restructuring
Derivative Products Analysis/Execution
Competitive Bidding Services
Strategic Municipal Consulting
Multi-Year Strategic Financial and Management Plans
Labor Negotiation Support
Operational Review and Analysis
Budget Development and Performance Benchmarking
Revenue Enhancement
Capital Planning
Privatization Analysis
Fixed-Income Portfolio Structuring/Management
Cash Management
Investment Policy Development
Cash Flow Forecasting
Arbitrage Rebate Compliance
Accounting/Record-keeping Services
9
Technical Capacity
Asset/Liability Model
Debt Profile
Refunding Screen
Option Adjusted Yield Model
Forward Rate Model
Cash Optimization Models
Debt Capacity Models
Capital Planning Models
Determine proper mix of fixed and variable rate assets and liabilities to minimize risk
Determine capacity to issue debt given revenue projections, rating considerations, and current market conditions
Monitor refunding candidates on a maturity-by-maturity and aggregate basis
Determine apples-to-apples comparison of different coupon and yield structures
Evaluate the costs and benefits of different financial structures given several inputs and constraints
Analyze the financial and credit impacts of financial alternatives on an issuers budget
PFM has invested a great deal in industry leading technology and proprietary models. We devote significant time and effort into training our professionals PFM works diligently to be at the forefront of financial advisory firms and investment banks The breadth and depth of these tools are unmatched in the Financial Advisory marketplace
The PFM Analytical Toolbox: Development of Specialized Models - PFM is an industry leader in developing specialized models for our clients Creation and Evaluation of Databases - PFM creates comprehensive databases to evaluate and compare current market pricing
indications versus numerous indices and selected comparable securities and to monitor and track variable rate demand bond and swap performance
Weighted Student Finding Provides valuable funding allocation tool for Districts based on site and student profile data
10
The Quantitative Strategies Group (“QSG”)
Dedicated QSG Professionals Monitor municipal market in order to stay abreast of new and emerging
products and strategies Administer the firm’s extensive three-month training program for new and
lateral hires Hosts PFM’s training seminars for clients, with topics spanning from the
basics of transaction management to policy level considerations Customized solutions:
Advanced financial analysis Commercial and proprietary software Individualized quantitative solutions for each client
Extensive quantitative capabilities allow us to provide services which address Capital financing strategies Strategic planning and budgeting Investment management strategies
Structuring and Analytical Tools
DuBois Brown & Co. (DBC)SwapViewer
MBRMProprietary ALM model (Excel-based)Proprietary FRM model (Excel-based)
Proprietary OAY model (Excel-based)
Proprietary MBM Insurance model (Excel-based)Proprietary Refunding Efficiency (Excel-based)
Market Research and Data Sources
Thompson Municipal (TM3)The ConsensusDelphis Hanover
Securities Data, J.J. Kenny Secondary Market Data
Bond Buyer Indices and Data
BloombergTradeWeb
CDA Spectrum Bond WatchRating agency services
11
Structuring and Analytical Tools
DuBois Brown & Co. (DBC)SwapViewer
MBRMProprietary ALM model (Excel-based)Proprietary FRM model (Excel-based)
Proprietary OAY model (Excel-based)
Proprietary MBM Insurance model (Excel-based)Proprietary Refunding Efficiency (Excel-based)
Market Research and Data Sources
Thompson Municipal (TM3)The ConsensusDelphis Hanover
Securities Data, J.J. Kenny Secondary Market Data
Bond Buyer Indices and Data
BloombergTradeWeb
CDA Spectrum Bond WatchRating agency services
Dedicated QSG Professionals Monitor municipal market in order to stay abreast of new and
emerging products and strategies Administer the firm’s extensive three-month training program
for new and lateral hires Hosts PFM’s training seminars for clients, with topics spanning
from the basics of transaction management to policy level considerations
Customized solutions: Advanced financial analysis Commercial and proprietary software Individualized quantitative solutions for each client
Extensive quantitative capabilities allow us to provide services which address Capital financing strategies Strategic planning and budgeting Investment management strategies
The Quantitative Strategies Group (“QSG”)
12
PFM brings the value of independence to pricing
PFM has an independent in-house bond pricing group and prices more transactions than any Wall Street firm PFM averaged nineteen transactions per week last
year and is averaging fifteen transactions per week this year
Our Pricing Group serves the same role as underwriters; however, PFM is not engaged in any trading or market making activities. PFM works solely as a financial advisor and does not underwrite bonds
At PFM we believe that independence and experience are at the core of good advocacy We provide aggressive and informed representation to
our clients in the pricing of securities PFM’s only role is to meet the goals of our clients
Unbiased advice—no conflicts of interest Track record of long-term client-focused service No negotiated underwriting pressure—underwriters
have to meet the goals of two clients: the issuer and the investor
Negotiated PricingOr
CompetitiveSale Process
Pricing Analysis
Analyze Results vs.
Market & Historical
Quantitative Pricing Analysis
1. Establish Pricing Strategy & Goals2. Bond Structure
PricingPreparation
1. Current Market 2. Data Feeds
3. Analysis4. Target Scales
Underwriter Performance Evaluation
1. Feedback to Underwriters
2. Reward Strong Performance
Program Design
Determine Mix of Competitive and
Negotiated Sales & Strategy
2011 Year-end PFM vs. Underwriters Overall Long-Term Municipal New Issues
36,017.9
35,350.6
21,320.0
385
332
352
242
37,785.6
39,632.1 758 PFM
J P Morgan Securities LLC
Citi
Bank of America Merrill Lynch
Morgan Stanley
# transactions dollars in millions
13
II. Finance Plan Considerations
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Capital Budget Planning
PFM Approach to Developing a
Plan of Finance
PFM Approach to Developing a
Plan of Finance
Develop Financing and Debt Objectives
Review Capital Budget
Debt Capacity Analysis
Debt Profile
Asset Profile
Financial Risk Management Analysis
Analyze Capital Structure Alternatives
Develop Appropriate Policies
Identify Optimal Financing Structures
Execute Transaction Plan
Monitor Debt Asset/ Swap Portfolios
Stra
tegic P
lann
ing
Trans
actio
n M
ana
gem
ent
PFM can quickly integrate with the District’s current planning efforts and is ready to help adapt them over the coming years as conditions change
Pro-active management of refundings Long-term planning efforts must maintain flexibility
Economic Assessed Value State Funding
Policy Understand scope and timing of capital program Tax rate constraints
15
SRVUSD’s Credit Profile
Very strong management practices have guided SRVUSD through a difficult funding environment Strong reserve fund balances are key to high ratingsState Budget Issues
SRVUSD Credit Concerns
Wealth levels of district are above city and county due to wealthy communities within District Unemployment levels are improving There remains high demand for classes
Weak Economy
Very large and diverse tax base serving a more dense population than other districts in the state Direct debt levels are moderate for rating category and agencies are aware of existing authorization and
debt issuance plans
Relatively High Debt Levels
Lower capital costs during recession allow management to take advantage of cost savings on larger projects Capital projects are essential for maintaining and modernizing a large and growing systemSignificant Capital Plan
Current Ratings
Moody’s S&P
Aa1 AA
Mitigants / Allaying Actions
16
Rating Agencies and Dodd-Frank
Dodd Frank Act created an office of Credit Ratings within the Securities Exchange Commission (SEC) to oversee new rules targeting Credit Rating Agencies (CRA) New SEC Office
Dodd-Frank as well as EU guidelines for structured finance products have resulted in CRAs initiating more frequent and “off-cycle” reviews of municipal issuers
12 -18 month max period before a review is conducted for most issuersFrequent Rating Reviews
Much of the recent criteria changes or proposals by the CRAs have centered on trying to fit issuers and ratings into a ”box”
There is also a move to be more quantitative with scoring of credit factors driving ultimate ratings Rigid Rating Criteria
Relationships with analysts have become noticeably formal and much of the interaction is driven by internal CRA processes Formal Relationships
New disclosure requirements are being implemented with more to come and which are placing more demands on staff
CRAs requesting quarterly disclosure of financial performance from issuers in many casesIncreased Disclosure
New Financial Regulations and Impact on Credit Rating Process
17
Issuers are taking a more proactive stance to investor relations; however, many still focus on credit and investor outreach only at the time of a bond sale Communication with investors should not be a
one-time event as the bonds are being sold For certain issuers with frequent borrowing needs
PFM is emphasizing a long-term approach to managing investor and rating agency relations
An Investor Relations Strategy is Important and Often Overlooked
Pre-Sale Post-Sale “Off-Sale”
• Advance notification of bond sales, appropriate timing of release of the POS
• Frequent outreach by underwriting syndicate
• Targeted approach to certain pre-identified investors
• Feedback about couponing, maturities, use of insurance, and other parts of the structure
• Investor roadshows and Q&A sessions
• Independent plan for retail outreach
• Strategic use of advertising and internet
• Analysis of orders and allotments: what institutions purchased the bonds, how much went to retail investors, what type of retail investors participated
• Solicitation of investor feedback on the sale and why they did or did not buy bonds
• Database of bondholders• Analysis of post-sale trades
• Continued dialogue with certain bondholders
• Monitor secondary market activity
• Maintain database on bondholders
• Investor meetings and presentations
• Facility tours for institutional investors
• Monitoring of investor types and classes
• General feedback from investors on what they are looking for and what their limitations are
Anaheim
• Present the credit• Address specific
questions and concerns
• Keep investors informed about and comfortable with long-term direction of District
Investors
• Indicate the types of structures they are interested in
• Provide feedback on the credit
• Ask questions directly rather than through a broker
18
III. Preliminary GO Profile
19
Couponing Considerations
Today’s market is dominated by callable premium bond structures, which typically carry a 5% coupon
Par bonds increase cost of capital but lower interest only period annual cost
PFM can work with the City and its underwriter to reduce the impact of the callable premium structure where possible at no added cost premium
Since par bond are not the coupon of choice in today’s market it is not realistic to assume that all bonds can be sold as par bonds with no yield premium
5% Coupons Par Bonds
ARB Yield 3.614% 3.995%
Total Debt Service $ 413,369,878 $ 437,692,935
Interest Only Period Annual Cost $ 16,057,750 $ 15,601,200
SAMPLE
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Capital Appreciation Bonds
CABs price at a premium to CIBs ranging from 4bps to over 100bps While they meet near term goals of limited debt service impact they have a long term cost Finding the right blend that balances these two competing goals can be part of the planning effort
San Ramon School District (Aa1/AA)
9/14/2012
MMD
9/13/2012
Tax Exempt Spread
Tax Exempt
Yield CAB YieldConv CAB
Yield
5 2017 0.72 18 bps 0.90 1.25
10 2022 1.84 31 bps 2.15 2.80
20 2032 2.56 35 bps 2.91 3.91 3.41
30 2042 2.98 30 bps 3.28 4.28 3.68
Scales should be used for estimation purposes only. Assumptions for these projections are based on the best available information under current market conditions. No representation is made that these assumptions will prevail for the proposed transaction. Changes to these assumptions may have a
material impact on the proposed transaction.
21
Capital Structure and Considerations SAMPLE
$0
$50,000,000
$100,000,000
$150,000,000
$200,000,000
$250,000,000
$300,000,000
$350,000,000Total Existing Debt Service as of 01-01-2012
2004A_B (Election 2003) 2005A (Election 2001) 2007A (Election 2001)2008 E1 (Election 2001) 2003 A_B_C (Election 2003) 2006E (Election 2003)2008 F1 (Election 2003) 2008F2 (Election 2003) 2009A (Election 2008)2009B (Election 2008) 2010E (Election 2008) 2010C (Election 2008)
Total Par Outstanding – $3.5 billion
Election of 2001: $1.09 billion Election of 2003: $791 million
Election of 2008: $1.625 billion issued to date; $1.875 billion in remaining
authorization
Escalating annual debt service in upcoming years, which assumes stable tax rate and stable growth in A.V.
Current economic climate may challenge A.V. growth
22
Bonding Capacity Analysis SAMPLE
Tax Rate Impacts
Impact of $400 mm New Money Issue on Annual Levy per $100,000 A.V.
AuthorizationCurent Tax Rate per $100,000 AV
Tax Rate after New Money Issue
Tax Rate after NM and Refunding
Election of 2001 12.19$ 12.46$ 12.46$ Election of 2003 9.81 9.90 9.81 Election of 2008 17.90 21.33 21.33 Total 39.90$ 43.69$ 43.60$ * Assumes Assessed Value remains $ 582,024,613,832 for FY13
A.V growth assumes to remain flat for the next several years
The District averages $300-400 million per issue
A $400 million new money issue (30 years @ 5%) would increase annual tax levy by 9.5% from $39.9 to $43.69. If a refunding were issued simultaneously, annual tax rate would be $43.60.
23
Financing Considerations SAMPLE Structuring considerations will be largely driven by the policy consideration of balancing near-term debt
service costs versus longer-term affordability
Propose level aggregate debt service with the underlying assumption of flat A.V. growth
$400 mm New Money30 year fixed rate
$0
$50,000,000
$100,000,000
$150,000,000
$200,000,000
$250,000,000
$300,000,000
$350,000,000
2004A_B (Election 2003) 2005A (Election 2001) 2007A (Election 2001)2008 E1 (Election 2001) 2003 A_B_C (Election 2003) 2006E (Election 2003)2008 F1 (Election 2003) 2008F2 (Election 2003) 2009A (Election 2008)2009B (Election 2008) 2010E (Election 2008) 2010C (Election 2008)2010D (Election 2008) 2012 400MM Wrap DS
Total Aggregate Debt Service with New Money Issue
$0
$50,000,000
$100,000,000
$150,000,000
$200,000,000
$250,000,000
$300,000,000
$350,000,000
2004A_B (Election 2003) 2005A (Election 2001) 2007A (Election 2001)2008 E1 (Election 2001) 2006E (Election 2003) 2008 F1 (Election 2003)2008F2 (Election 2003) 2009A (Election 2008) 2009B (Election 2008)2010E (Election 2008) 2010C (Election 2008) 2010D (Election 2008)2012 400MM Wrap DS 2012 Ref (Election 2003)
Total Aggregate Debt Service with 2012 NM and Refunding
$400 mm New Money with Refunding of2003 Series A B&C
24
Refunding Analysis Approach SAMPLE
1. Series by Series Analysis
2. Maturity by Maturity Analysis
3. Option Value Analysis
5. Identifying Other Benefits
6. Big Picture Structuring
4. Marginal Savings Analysis
PFM’s Approach to Refunding Analysis
We performed a preliminary, comprehensive maturity-by-maturity refunding analysis of the District’s outstanding long-term debt using our proprietary model to identify either
Savings as a percentage of refunded par Net present value (“NPV”) savings as a percentage of the imbedded call option value for each maturity which
measures refunding efficiency
The District has done a good job of optimizing its refunding opportunities to date Near term opportunities exist
Generally, we suggest our clients consider refunding bonds that produce 3% or greater savings depending on circumstances
We may still suggest that our clients consider refunding a bond with less than 3% savings if a refunding would capture a significant amount (generally around 60- 70%) of the theoretical call option value
25
Series 2003A B&C are refunding candidatesSAMPLEPreliminary Refunding Analysis of Series 2003
A_B_C
Par $ 67,965,000
Average Annual Debt Service $ 6,067,344
Gross Debt Service Cost $ 92,021,383
All-In TIC 2.96%
Average Annual Savings $ 492,732
Net PV Savings $ 6,497,035
Gross Savings $ 7,883,717
Percentage Savings of Refunded Bonds 9.42%
Savings will continue to increase, all else constant, as the call date nears and the escrow period is shortened The recent pull back in rates has had a significant impact on savings
Option value is another consideration that PFM’s proprietary refunding screen can analyze in detail
As shown in the analysis below, 15 maturities totaling $62.9 million in PAR generate an estimated $6.5 million in NPV savings
26
Outstanding Debt
PFM will be with SRVUSD every step of the way as SRVUSD considers various financing strategies
Series Name Indenture Issue Size Delivery Date Final Maturity Outstanding Par Next Call Date Refunding Status
Advance Forward Current Non-Callable
Series 2010 Lease Revenue QSCB 25,000,000 7/20/10 5/1/27 24,640,000 - - - - 24,640,000
Series 2001 Certif icates of Participation 20,870,000 12/21/01 2/1/22 13,390,000 - - - 13,390,000 -
Series 1998A General Obligation Bonds 70,000,000 7/9/98 7/1/18 21,579,896 - - - - 21,579,896
Series 2003A General Obligation Bonds 72,000,000 3/1/03 8/1/28 250,000 - - - - 250,000
Series 2004A General Obligation Bonds 100,000,000 10/28/04 8/1/29 1,500,000 - - - - 1,500,000
Series 2006A General Obligation Bonds 88,000,000 8/2/06 8/1/31 65,980,000 8/1/2016 52,280,000 - - 13,700,000
Series 2012 General Obligation Bonds 167,945,000 7/17/12 8/1/29 163,850,000 8/1/2022 - 96,205,000 - 67,645,000
27
IV. Why PFM?
28
PFM is Uniquely Qualified to serve as Financial Advisor to SRVUSD
Technical sophistication to address complex concerns Well versed in structuring and pricing complex instruments like CABs and Convertible CABs
Greater California presence than any other financial advisory or investment banking firm Monitoring CAB dynamics and potential regulatory changes in CA Over 40 California based professionals
All the services of a broker-dealer, but without the conflicts District expertise – local and education specific Independent pricing group – your desk Successful rating agency and investor strategies Credit market expertise – national leverage Modeling and technical expertise – an extension of your staff
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