www.tpfa.texas.gov

www.tpfa.texas.gov

Texas Public Finance Authority Agency Orientation April 2010 Texas Public Finance Authority Dwight D. Burns Executive Director 463-5700 Susan K. Durso General Counsel 463-5681

John HernandezDeputy Director 463-3101 Gabriela Klein Sr Financial Analyst 463-3142 Loan Nguyen Financial Analyst 463-8297 Chris Gilliland MLPP Coordinator 463-5695 Ophelia Guerrero Financial Reporting 305-9469 Pamela Scivicque Business Manager 463-3141 Ricky Horne Budget Analyst 463-3925 Paula Hatfield Executive Assistant 463-3143 www.tpfa.state.tx.us [email protected] 2 Agenda I.Debt

Overview II.TPFA Debt Programs III.TPFA Debt Issuance Process IV.Financing Documents V.Ongoing Debt Administration 3 Texas Public Finance Authority 1. 2. 3. 4. State agency created in 1983 by the Texas Legislature Seven-member board of directors appointed by

the Governor; 15 FTEs Provides capital financing to other state agencies, as directed by the Legislature Capital financing used to: construct, acquire, or renovate facilities and equipment; make loans or grants; provide capital funding for programs such as unemployment compensation, workers compensation, and other insurance programs. 4 TPFA Client Agencies 1. 2.

3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.

Adjutant General/Military Facilities Commission Cancer Prevention and Research Institute of Texas Department of Aging and Disability Services Department of Agriculture/Texas Agricultural Finance Authority (TAFA) Department of Public Safety Department of State Health Services Health and Human Services Commission Midwestern State University School for the Blind and Visually Impaired School for the Deaf State Preservation Board Stephen F. Austin State University Texas Department of Criminal Justice Texas Department of Transportation/Office of the Governor (Colonias Roadway Grant Program) Texas Facilities Commission Texas Historical Commission Texas Military Preparedness Commission (Texas Military Value Revolving Loan Fund) Texas Parks and Wildlife Department Texas Southern University Texas Windstorm Insurance Association

Texas Workforce Commission Texas Youth Commission TPFA Charter School Finance Corporation 5 I. Debt Overview TPFA Debt Instruments Bonds: Long term (5+ years), fixed or variable interest rate Notes: Intermediate Term (1-5 years), fixed or variable interest rate

Commercial Paper: Short Term (1-270 days), variable interest rate 7 Commercial Paper (CP) Functions like a bank line of credit; funds are borrowed as agency needs them to pay invoices Maturity ranges from 1 to 270 days At each maturity the CP can be paid off or reissued (rolled over) at a new interest rate

Issued in tranches as small as $1,000,000 and in $100,000 increments 8 Refunding Bonds Refinance - Issue new bonds to pay off old bonds Lower interest rate Change Bond Covenants Change Repayment Schedule (Restructure) Fix out commercial paper One Time - Federal tax law prohibits tax-exempt bonds issued after 1986 from being advance refunded more than one time.

9 II. TPFA Debt Programs TPFA Debt Management Policy TPFA uses a combination of fixed and variable rate debt Commercial Paper also used to provide exposure to variable interest rates Long-term fixed rate bonds issued to fix out commercial paper, provide additional CP capacity or lock in low, long term interest rates Currently: $1.86 billion fixed rate, $360 million variable rate 11

TPFA Debt Programs 1. 2. 3. 4. General Obligation Lease Revenue University Revenue Financing Systems Master Lease Purchase Program 12 1. General Obligation Bonds What are GO Bonds? Constitutional Pledge: Legally secured by a constitutional pledge of the first monies coming into the State Treasury that are not

constitutionally dedicated for another purpose Voter Approval: Must initially be approved by a 2/3 vote of both houses of the legislature and by a majority of the voters; after this approval, debt may be issued in installments as determined by the issuing agency or institution Used to finance general government functions: prisons, veterans housing and land programs, parks, roads, grants and loans 14 Current TPFA GO Programs As of 3/31/10 Program Purpose Authorized

Issued Unissued General Government $850,000,000 Art. III, Sec 50-f (2001) Repair, Construction, and Equipment for specified State Agencies $850,000,000 $750,001,702 $99,998,298 General Government

$1,000,000,000 Art III, Sec. 50-g (2007) Repair, Construction, and Equipment for specified State Agencies $1,000,000,000 $360,580,000 $639,420,000 Colonias Roadway Grants $175,000,000 Art. III, Sec 49-l (2001) Grants to specified

border counties for county roads $175,000,000 $124,000,000 $51,000,000 Texas Military Value Revolving Loan Fund $250,000,000 Art. III, Sec 49-n (2003) Loans to defense communities affected by BRAC $250,000,000 $49,595,000

$200,405,000 Cancer Research $3,000,000,000 Art III, Sec. 67 (2007) Fund the Cancer Prevention and Research Institute of Texas $3,000,000,000 $12,700,000 $2,987,300,000 15 General Government Agencies

Texas Constitution Art. III, Sections 50-f (2001) and 50-g (2007) Texas Facilities Commission State Preservation Board Adjutant General's Dept. Texas Dept. of Criminal Justice Dept. of Public Safety Texas Youth Commission Dept. of Agriculture

(Art. III, Sec.50-f only) Texas Historical Commission Dept. of State Health Services Dept. of Aging and Disability Services (Art. III, Sec.50-f only)

Parks and Wildlife Dept. Texas School for the Deaf Texas School for the Blind and Visually Impaired 16 2. Revenue Bonds What are Revenue Bonds? Legally secured by a specific revenue source Do not require voter approval Enterprise Activities: utilities, airports, toll roads, colleges and universities Lease Revenue or Annual Appropriation

Bonds 18 Examples of TPFA Revenue Bonds 1. 2. 3. 4. Lease Revenue Bonds University Revenue Financing Systems Master Lease Purchase Program Other programs Example: Texas Workforce Commission 19 TPFA Lease Revenue Bonds

TFC Since 1985 for State Office Buildings TPWD 1998 $60m Repair and Rehabilitation SPB 1997 $80m Texas State History Museum TDCJ 1998 lease refunding TMFC Armory Construction/Improvements (now Adjutant General) THC - $9m Admiral Nimitz Museum (TPWD transfer) DSHS 1996 and 1998 $40m for Health Laboratory 20 TPFA Lease Revenue Bonds TPFA Lease Payments Debt Service

Investors BOND LEASE Client Agency Legislature Appropriates Funds for Lease Payments 21 TPFA Lease Revenue Bonds 1. 2. 3. 4.

5. 6. 7. TPFA issues bonds TPFA provides bond proceeds to client agency to construct or acquire the facility TPFA takes title to the facility TPFA leases the facility to the client state agency Legislature appropriates lease payments to the client state agency each biennium (no legal obligation to do so) Client agency makes lease payments to TPFA TPFA uses lease payments to pay debt service on the bonds 22 Texas Public Finance Authority Remaining Revenue Bond Debt Service

80,000,000.00 70,000,000.00 60,000,000.00 DSHS THC TPWD TDCJ SPB TBPC 50,000,000.00 40,000,000.00 30,000,000.00 20,000,000.00 10,000,000.00

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 excludes universities 23 3. University Bonds University Debt Midwestern State University Stephen F. Austin State University Texas Southern University Revenue Financing System, which includes Tuition Revenue Bonds 25

University Debt Revenue Bonds: Under Chapter 55 of the Education Code, universities may issue revenue bonds or notes to finance permanent improvements for their institution(s). Most universities have established system-wide revenue financing programs that pledge all system-wide revenue, except legislative appropriations to the repayment of the revenue bonds and notes (Revenue Financing System). Tuition Revenue Bonds (TRB): The Legislature may also authorize tuition revenue bonds, usually for specific purposes or projects, and appropriate general revenue to offset the institutions debt service; legislative appropriations made directly for debt service would be unconstitutional. Universities issue TRBs under their revenue financing systems. PUF/HEAF: The University of Texas and Texas A&M Systems may issue

obligations backed by income from the Permanent University Fund (PUF), in accordance with Texas Constitution, Art. VII, 18. Texass other institutions may issue Higher Education Assistance Fund (HEAF) bonds, in accordance with Texas Constitution, Art. VII, 17. TPFA does not issue HEAF bonds. 26 4. Master Lease Purchase Program Chris Gilliland, Program Coordinator [email protected] 512.463.5695 MLPP Agenda 1. 2. 3. 4.

Program Overview & Eligible Projects Financing Process Using MLPP for Energy Performance Contracts Implementing a Master Lease and Program Mechanics 1. Program Overview & Eligible Projects Lease Purchases Lease purchases are the purchases of assets over time through lease payments that include principal and interest. Lease purchases are typically financed through a private vendor or through TPFAs Master Lease Purchase Program.

Examples: State prisons and office buildings have been financed using lease-purchasing; equipment, vehicles, software financed through the TPFAs Master Lease Purchase Program Master Lease Purchase Program The Master Lease Purchase Program ("MLPP") is a lease revenue financing program established in 1992, primarily to finance capital equipment acquisitions by state agencies. (Texas Govt. Code, 1232.103.) MLPP also may be used to finance other types of projects that have been specifically authorized by the Legislature

and approved by the TPFA Board. The financing vehicle for the MLPP program is a taxexempt revenue commercial paper program. (Commercial paper is a short-term variable rate debt instrument) Who May Use MLPP? State Agencies and Universities A state agency" is any board, commission, department, office, agency, institution of higher education, or other governmental entity in the executive, judicial, or legislative branch of state government. MLPP is not available to political subdivisions; i.e., junior colleges, community colleges, cities, counties, school districts. MLPP - What May Be Financed?

Equipment - fixed asset, other than land or a building, used by a state agency to conduct state business. The term includes computer equipment. Texas Govt. Code Sec. 1232.003(7). Computer equipment - Telecommunications device or system, automated information system, hardware and software. Texas Govt. Code Sec. 1232.003(5). Energy Saving Performance Contracts, as defined by Texas Govt. Code Sec. 2166.406 (for state agencies) and Texas Education Code Sec. 51.927 (for institutions of higher education). Other projects, such as real estate or construction, may be financed through MLPP if the specific project has been authorized by the Legislature and approved for MLPP financing by the TPFA Board.

Examples of MLPP Projects Computer Hardware (not associated with data consolidation) Computer Software Telecommunication Equipment Vehicles Energy Retrofit Projects, including Energy Savings Performance Contracts HVAC, chillers, boilers Heavy Machinery

Office Equipment Furniture and Equipment Eligibility Project Cost (Contract/PO) $10,000 minimum Individual Item Cost $100 minimum Useful life 3 years minimum Assets Financed via MLPP 1992 - 2009

140,000,000 120,000,000 100,000,000 80,000,000 60,000,000 40,000,000 20,000,000 Telecomm Software Computers Aircraft Vehicles Furniture & E... Energy Retrofi...

0 History of MLPP Volume History of MLPP Volume As of 08/31/2009 $60,000,000 700 600 $50,000,000 500 $40,000,000 400 $30,000,000 300 $20,000,000 200 $10,000,000

100 $0 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Fiscal Year Value of Leases Processed Number of Leases Processed 2. Financing Process The Master Lease Process Agency Procures Project Agency

Agency makes Lease Payments to TPFA (GR appropriation) Vendor TPFA pays Vendor, takes title to Project and leases it to Agency Lease Title TPFA Payment TPFA issues Commercial Paper CP Dealer/ Paying agent

TPFA pays Debt Service $ Master Lease Commercial Paper Master Lease Payments TPFA collects lease payments at 6.0% * 5.0% interest rate (rate as of March 2010) 1.0% administrative fee Lease payments are collected annually, on August 1st.

Leases can be prepaid at any time without penalty * TPFA may adjust the lease payments under a lease supplement as a result of a change in market interest rates, a refinancing, or a change in administrative costs. When lease payments are adjusted, TPFA will provide an amended amortization schedule reflecting the adjusted lease payments to each client agency. MLPP Rebate A rebate is credited to each lease payment. The rebate amount is the difference between the interest rate charged and the actual rate paid by TPFA on the CP, plus any interest earnings on project and administrative funds, during a specific year.

Effective interest rate, i.e. the interest rate less the rebate amount, is usually lower than the 5% rate. Rebate Example: FY 2006 (Applied to 08/01/07 lease payment) Total Interest Collected (@5.0%): $4,039,000 Total Interest Paid (3.1% Wtd. Avg.):

$3,237,000 Interest Earnings on Project Fund: $276,000 Total Amount available to Rebate: ($4,039,000 - $3,237,000 + $276,000 = $1,078,000) Rebate distributed on a pro-rata basis to leases outstanding on next lease payment date (August 1); applied as credit to lease payment. 3. Using MLPP for Energy Performance Contracts Legal Authority Energy Performance Contracts are authorized in: - Texas Govt Code Ch. 2166.406 (state agencies) - Texas Education Code Sec. 51.927 (institutions of

higher education) Specifically authorize lease purchase financing, including TPFA MLPP Related Authority Govt Code 2113.301 State Agency capital projects may be financed with utility savings. FY 2010-2011 Appropriations Act, Art. IX, Sec. 14.03(k), p. IX-58 appropriations for utilities can be used for MLPP payments for EPC. Energy Conservation Plan required by Executive Order RP-49 (November 2005) and

Resource Efficiency Plan required by State Energy Conservation Office rules. 34 TAC ch.19 MLPP Energy Projects University of North Texas May 1997 UNT Health Science Center Dec 1999 TSTC - Harlingen March 2000

Texas Woman's University July 2001 Lamar University May 2004 Parks and Wildlife Dept. July 2004 DADS/DSHS overseen by HHSC Oct 2004

Midwestern State University Sept 2005 Angelo State University Sept 2006 TSTC - West Jan 2007 Texas Tech University May 2007 $ 9,050,000 $ 3,200,000 $ 990,755 $ 16,530,143 $ 13,747,258

$ 1,350,000 $ 74,780,270 $ 3,700,000 $ 8,000,000 $ 1,400,000 $ 583,643 Other Resources State Energy Conservation Office (SECO) http://seco.cpa.state.tx.us/sa/sa_pc.php Bond Review Board application for lease purchaces related to energy savings performance contracts http://www.brb.state.tx.us/bfo/allforms.aspx 4. Implementing a Master

Lease and Program Mechanics Steps to implement a Master Lease financing 1. Notify TPFA: 2. Resolution: Agency governing body must adopt a Resolution authorizing 3. Bond Review Board approval: 4. Master Lease Agreement:

5. Acquisition: 6. 7. Lease Supplement: Agency submits Lease Supplement to TPFA. Payment: TPFA processes the Lease Supplement and pays the vendor Inform the MLPP Program Coordinator of your intent to finance as soon as feasible. the participation in MLPP and approve the request(s) for financing. Required if the project is over $250,000 or the term of the lease is more than 5 years (www.brb.state.tx.us) Signed by the authorized agency representative who is named in the Resolution. (First financing only) Agency must follow its normal procurement procedures. TPFA has no involvement in the client agency procurement process.

using the due date determined by the agency. TPFA returns a copy of the lease supplement, which includes a copy of the purchase voucher and amortization schedule, to the Agency. Sample Resolution and Master Lease Agreements can be found on our website: www.tpfa.state.tx.us/ masterlease.aspx Existing MLPP Agencies For those agencies that have previously used the Master Lease Purchase Program: Review your agencys MLPP Resolution for: 1. Agency Name 2. If the Resolution is not an evergreen resolution, check: a) Project scope b) Dollar limits c) Expiration date Bond Review Board

Process Agency Submits Notice of Intent to BRB Agency Submits BRB State Lease Purchase Application Contact TPFA for debt repayment schedule Attend BRB Board Planning Meeting Attend BRB Board Voting Meeting BRB Approval Letter issued Agency submits Final Report to BRB Calendar of Submission Deadlines and Meetings www.brb.state.tx.us/agency/calendar.html

Lease Processing A Lease Supplement is required with an original signature. Document Order Page 1 of Lease Supplement BRB Approval letter (if required) Project Information Sheet (page 2 of lease supplement) Original Invoice Memo waiving 30 day prompt payment (if applicable) Any agency correspondence Project Payment Analysis (if more than 1 payment will be processed for a project)

Budget information and signature page supplement) (last page of lease Project Payment Analysis This report is used to track the remaining project balance. This report should include: Amount approved by BRB Itemized lease supplements and amounts Description of purchase Invoice number Remaining project balance

Sample Project Payment Analysis Pmt # Vendor Invoice # Beginning Balance Invoice Amt Running Bal $2,500,000 1 Dell564939 2 Dell564941 $150,000 Hughes 564942 $100,000

Total Pmt #2 $250,000 3 Hughes $75,000 564945 Total Contract/Authorization Total Leases Processed Balance Remaining as of _/_/_ 2,425,000 Lease Desc Dell Servers

Mainframe Installation 2,175,000 $175,000 Equipment 2,000,000 $2,500,000 500,000 $2,000,000 HVAC Draw Schedule Update TPFAs Program Coordinator may periodically request updates regarding your agencys financing plans.

This information is used to manage the timing of issuing commercial paper and to keep the cost of borrowing at a minimum. Sample Amortization Schedule Agency 300 ABC Agency Description ABC Asset Lease # Purchase Date

Maturity Date Admin Rate Interest Rate Vendor Price 2CP-3000 04/16/2010 08/01/2024 1% 5% 370,093.21

Tran Date Outstanding Balance Payment Due Principal Interest Admin Amt Rebate 08/01/2010 370,093.21 23,660.55 17,150.97

5,424.65 1,084.93 0 08/01/2011 352,942.24 39,185.04 18,008.51 17,647.11 3,529.42 0

08/01/2012 334,933.73 39,004.97 18,908.94 16,746.69 3,349.34 0 08/01/2013 316,024.79 38,815.88 19,854.39

15,801.24 3,160.25 0 08/01/2014 296,170.40 38,617.33 20,847.11 14,808.52 2,961.70 0

08/01/2015 275,323.29 38,408.85 21,889.46 13,766.16 2,753.23 0 08/01/2016 253,433.83 38,189.96 22,983.93

12,671.69 2,534.34 0 08/01/2017 230,449.90 37,960.13 24,133.13 11,522.50 2,304.50 0

08/01/2018 206,316.77 37,718.80 25,339.79 10,315.84 2,063.17 0 08/01/2019 180,976.98 37,465.40 26,606.78

9,048.85 1,809.77 0 08/01/2020 154,370.20 37,199.33 27,937.12 7,718.51 1,543.70 0

08/01/2021 126,433.08 36,919.95 29,333.97 6,321.65 1,264.33 0 08/01/2022 97,099.11 36,626.62 30,800.67

4,854.96 970.99 0 08/01/2023 66,298.44 36,318.60 32,340.70 3,314.92 662.98 0

08/01/2024 33,957.74 35,995.21 33,957.74 1,697.89 339.58 0 Lease 2CP-3000 552,086.62 370,093.21 151,661.18

30,332.23 Debt Service Transfer TPFA will notify agencies of the anticipated transfer date prior to August 1st of each year. TPFA will initiate a transfer in USAS via a journal voucher. An example of the voucher is provided below: Agency Fund T-Code AY COBJ Client 448 AY 7964 347 449 AY 3964 AOBJ Client TPFA

Index/PCA Client Agency Client TPFA will forward copies of the transfer document to the agency MLPP contact after all transfers have processed. MLPP Reporting Requirements AFR see section 6.13 in the July 2009 Reporting Requirements for Annual Financial Reports of State Agencies SPA see section 1.8 in the February 2008 SPA Process Users Guide

Summary Eligibility Recap Project Cost (Contract/PO) $10,000 minimum Individual Item Cost $100 minimum Useful life 3 years minimum Debt Service Summary

Collected Annually on August 1st Interest Rate* (currently 5%) Administrative Fee* (currently 1.0%) TPFA calculates rebate, credits the difference between the actual short-term interest rate and the designated fixed interest rate.* TPFA initiates the lease payment transfer in USAS. TPFA forwards copies of transfer. * The Authority may adjust the lease payments under a lease supplement as a result of a change in market interest rates, or a refinancing, or a change in administrative costs. When such adjustment in lease payments is effected, the Authority, concurrently with establishing the new interest rate, will provide an amended amortization schedule reflecting the adjusted lease payments to each client agency.

Questions & Answers BREAK III. TPFA Debt Issuance Process TPFA Debt Issuance Process 1. 2. 3. 4. 5. 6. 7. Legislature authorizes the project or program and the issuance of debt Agency governing body adopts a resolution authorizing request for financing*

Agency submits request for financing to TPFA TPFA Board approves request, determines type of debt instrument and sale process TPFA structures the debt issue Bond Review Board approves issuance of debt Financing Documents (Bond sale/closing) * GO Bonds appropriated by Art. IX, Sec 17.11, GAA, 81st Leg., R.S., need LBB approval of projects before bonds are issued. 66 1. Legislative Authorization Four Components of Legislative Authorization The Legislature must authorize the specific project for which bonds are to be issued and either the estimated cost of the project or the maximum amount of debt that can be issued for a project or program

Approve the project* Approve the use of bond financing* Appropriate bond proceeds Appropriate debt service *In Statute or Appropriations Bill 68 Legislative Authorization Legislature must approve the project and use of bond financing; appropriate debt service and bond proceeds GO Bonds Lease Revenue Bonds

Tuition Revenue Bonds Project Authorization Agency Agency University Proceeds Appropriated Agency Agency University

TPFA Lease Payment appropriated to Agency Reimbursement appropriated to University Debt Service Appropriated 69 Appropriations Refer to handouts for examples of appropriation of bond proceeds and debt service

70 Pre-planning for new bond authority Project description What do you need the money for? Timing of funding How much money will the agency need? When is it needed? Special information Eg.: use of facility by entities other than state or local governments; management contracts; repayment sources

other than General Revenue Agency Contacts Finance/Budget and Accounting, Project Manager, and General Counsel 71 Requesting New Bond Authority Agency should provide TPFA staff with: 1. a draft of proposed authorizing language (Statute or Appropriations Act), 2. the amount requested, 3. a short description of the project, 4. a projected quarterly expenditure schedule, and,

5. an estimate of when the bond proceeds will be spent. TPFA will prepare an issuance schedule and corresponding debt service estimates Note possible non-general revenue funds that might be used for debt service The earlier TPFA is involved in the process, the more likely it can achieve an efficient, cost effective financing. 72 Existing Bonds Debt Service GO Bonds: TPFA will estimate debt service on outstanding GO bonds and CP, and will include in TPFAs LAR.

Revenue Bonds: On or before April 1 preceding each regular Legislative session, TPFA will notify client agency of the lease payment due in the next biennium. Agency must request this lease payment in its LAR. If the agency has not issued or encumbered all bond proceeds prior to the end of the biennium, the agency needs to ensure its ability to issue and expend those proceeds for the project in a subsequent biennium is continued; usually done by U.B. rider in agencys bill pattern. If the full amount authorized has not been approved by TPFA and BRB prior to the end of the biennium, agency will need to ensure the authorization is continued; also usually done in the agencys bill pattern. 73

2. Agency Resolution Agency Resolution Governing body of the agency adopts a resolution Authorizes the agency to submit the request for financing to TPFA and delegates authority to sign required documents and take other required action to accomplish the financing Specifies the amount of the request and the legal authority for project and financing May also need to adopt a Reimbursement Resolution (resolution declaring expectation to reimburse expenditures with proceeds of future debt( See Examples (Handouts and www.tpfa.state.tx.us/sampledocs.aspx) 75

3. Request for Financing Request for Financing The Request for Financing is required by TPFA Board Rules, 34 Texas Admin. Code, Section 221.3 (www.tpfa.state.tx.us/statutes.aspx) Submit at least 12 weeks before funds are required TPFA Board meets monthly. TPFA staff will review request in draft form and include on agenda if received at least 18 days before the board meeting 77 Request for Financing The package should include:

Signed Agency Resolution delegating authority Legal Authority for Project Project Analysis (i.e., Project Description and Project Budget) Disbursement (also referred to as Expenditure or Draw) Schedule See example in handouts 78 4. TPFA Board Approval 4. TPFA Board Approval TPFA Board meets monthly currently 1st Thursday of the month Client agency staff should attend the TPFA meeting and be prepared to make a short

presentation and answer questions. Recommended staff attendance, as applicable Finance, budget or accounting Construction or Project Manager Legal 80 4. TPFA Board Approval Approve Request for Financing Determine debt instrument: Commercial Paper or Bonds Select Method of Sale: Competitive or Negotiated Select Financing Team Financial Advisor

Bond Counsel Underwriting Team 81 TPFA Debt Issuance Process (Recap) 1. 2. 3. 4. 5. 6. 7. Legislature authorizes the project or program and the issuance of debt Agency governing body adopts a resolution authorizing request for financing* Agency submits request for financing to TPFA TPFA Board approves request, determines

type of debt instrument and sale process TPFA structures the debt issue Bond Review Board approves issuance of debt Financing Documents (Bond sale/closing) * GO Bonds appropriated by Art. IX, Sec 17.11, GAA, 81st Leg., R.S. need LBB approval of projects before bonds are issued 82 5. Structure the Bond Issue 5. Structure the Bond Issue Bonds vs. Commercial Paper (see handouts) - Expenditure Schedule - Arbitrage Rebate Debt Service Appropriation Legal requirements or constraints (federal

tax law as well as state law) 84 Sizing the Bond or CP issue TPFA determines the amount of debt to be issued based on: Client agency expenditure schedule Federal arbitrage guidelines Market conditions Net Funding: Bond Proceeds + Interest Earnings = Total Expenditure

Proceeds and interest earnings are appropriated to the agency on whose behalf they are issued.* * SB1, Art. IX, p.IX-40, Sec. 8.09 Acts, 81st Leg. R.S. (2009) 85 Advantages of CP Lower debt service Only borrow amount needed to pay invoices for a few months at a time

Short term variable interest rates are usually much lower than long term fixed interest rates Flexible: debt can be issued or paid off with very short notice and cost Helps comply with arbitrage rebate requirements; less arbitrage rebate means more available interest earnings in the project fund 86 6. Bond Review Board Approval 6. Bond Review Board Approval

Application due the first Tuesday of the month in which the applicant requests BRB consideration TPFA staff prepares and submits the application Planning Session - Usually the second Tuesday of odd numbered months: January, March, May, July, September, November. No vote is taken at this meeting. TPFA staff and client agency staff attend the planning session to present the financing and the project. BRB Meeting - Usually the Thursday of the week following the Planning Session. BRB votes on the application. Usually, if all questions have been answered, client agency attendance at voting meeting not required. 88 IV. Financing Documents (Bond Sale/Closing)

Major Documents in Bond Issue Request for Financing Memorandum of Understanding between TPFA & Client Agency Agencys Reimbursement Resolution (if necessary) Financing Agreement (GOs) or Lease

Agreement (appropriation-backed lease revenue bonds) Resolution of the TPFA Board authorizing the issuance and sale of the Bonds and the terms and conditions thereof Official Statement Tax or Arbitrage Certificate 90 Memorandum of Understanding Required by Texas Government Code, Section 1232.102 Sets out the respective rights and responsibilities of the Agency (to construct and manage projects) and the Authority (to issue and administer the debt) Required for GO and Revenue Bond Issues that finance construction projects Only one MOU adopted by each agency

per Financing Program 91 Financing Agreement (GO Bonds) Sets out the conditions of the financing Rights and Obligations of the Agency o Complete the Project and spend the money o Operate, maintain, use the Project for intended, specified governmental purposes o Comply with tax covenants Helps TPFA comply with federal tax law requirements

92 Financing Agreement (GO Bonds) Article III: Use of proceeds and restrictions on the use of project Article IV, Sections 4.03 and 4.04 maintaining the tax-exempt status of the bonds Article V: Records Retention Exhibits: A. B. C. D. E.

F. G. Description of the Project Project Completion Schedule Approvals Disbursement Certificate Status Report Project Completion Certificate Project Substitution Certificate (See Sample Financing Agreement Handout) 93 Lease Agreement (Revenue Bonds) TPFA leases the financed facility to the Agency Agency obligated to: o

o o Make rent payments (for debt service and property insurance) Operate, maintain, use the Project for intended, specified governmental purposes Comply with tax covenants 94 Each Financing Agreement is on website http://www.tpfa.state.tx.us/agreements.aspx 95 Other Major Documents Resolution of the TPFA Board

Official Statement authorizing the issuance and sale of the Bonds and the terms and conditions thereof A document prepared by or on behalf of the issuer of municipal securities in connection with a primary offering that discloses material information on the offering of such securities Tax or Arbitrage Certificate A document executed by the issuer of tax-exempt municipal securities at the time of initial issuance certifying as to various matters relating to the arbitrage

rules under federal income tax laws 96 Bond Closing On the day of the closing, once all the legal documents are properly executed and after receiving the Attorney Generals approval, the underwriter wire transfers the bond proceeds to the appropriate parties to the transaction. Once confirmation has been received for the wire transfers, the issuer and the finance team call the Depository Trust Company (DTC), at which time the bonds are released and the transaction is recorded. Once TPFA has confirmation that bond proceeds have been deposited into its accounts, it can begin paying costs of issuance and transferring funds to the agency to pay for project related costs.

97 V. Ongoing Debt Administration Ongoing Debt Administration 1. Federal tax law compliance 2. 3. 4. 5. Use of the facility; sale/disposition of assets

Arbitrage rebate compliance: monitor expenditure and investment of proceeds Draw and spend bond proceeds Arbitrage rebate Pay debt service Financial reporting 99 1. Federal Tax Law Compliance 100 Tax Law Compliance Use of the Proceeds and Project

Proceeds may be spent only for governmental purposes (i.e., a purpose authorized by the Legislature) General rule for tax-exempt Bonds and CP: At least 90% of the proceeds must be used by State or Local Government Change in use (use or ownership of the facility by an entity other than state or local government) prior to maturity of the bonds must be approved by TPFA, in advance See private activity use handout 101 Tax Law Compliance Use of the Proceeds and Project

Tax exempt bond proceeds may be used only for tax-exempt purposes. Use of Project equals use of proceeds Change of Use may mean and include use of the project by non-governmental entity either on an on-going basis or by disposition of project Rules and requirements for continued administration are the provisions in each Financing Agreement, and each Lease Agreement. 102 Tax Law Compliance Disposition of the Asset

If an asset financed with bond proceeds is sold or disposed of prior to the retirement of the debt, federal tax law requires the proceeds of the sale to be used to acquire a substitute facility or retire the debt (contact TPFA early in the process) Requires Client Agency to maintain records showing how proceeds of bonds were spent; i.e., which facility or facilities were financed with each series of Bonds or CP tranche (i.e., fund number). Under the Financing Agreements and Lease Agreements Disposition is Change of Use. Agency is required to obtain prior approval of TPFA. 103 Continuing Disclosure SEC Rule 15(c) 2-12

Required by Securities and Exchange Commission Rule Unless exempt, issuers must file annual operating and financial information For most TPFA Bonds, Comptroller makes annual and quarterly filings In addition, TPFA files supplemental annual financial information for: Adjutant General Armory Improvement Revenue Bonds and DSHS (Health Lab Revenue Bonds) and certain Material Events such as rating changes, bond redemptions, etc. Universities (SFA, MSU, TSU) are required to file separately File on-line at http://emma.msrb.org 104

2. Draw and Spend Bond Proceeds 105 Disbursement (Draw) Draw - transfer of bond proceeds from TPFA to client agency Initiated by client agency using the Disbursement Certificate in the Financing Agreement New project funds are established with each new financing request

Set up approximately 10 business days after BRB approval GO Bonds: Financing Agreement Revenue Bonds: Lease Agreement Draw Contact: Loan Nguyen (512)463-8297 [email protected] 106 Sample Disbursement Certificate The undersigned hereby certifies, on behalf of the ___________________________ (the Qualified Agency), as follows: a) The capitalized terms in this Certificate that are not herein defined shall have the meanings defined in the Financing Agreement, dated as of _______________________, between the Qualified Agency and the Texas Public Finance Authority. b) The Qualified Agency (Agency No. _____) requests disbursement from the Project Fund to Pay Project Costs in the aggregate amount of $______________. The aggregate of all disbursements (including this disbursement) from the Project Fund requested by the Qualified Agency to date is $_____________.

c) Except as previously disclosed in writing to the Executive Director, the Qualified Agency is not in breach of any representation, warranty, or agreement in the Financing Agreement. d) The Qualified Agency reasonably expects to submit payment vouchers, in the aggregate amount of the disbursement requested by this Certificate, for the payment of the Project Costs for which disbursement is requested. e) For each item of Project Costs for which a disbursement of funds is requested, state the following information [attach separate sheet if necessary]: PCA | Appropriated Fund No. | Identification Agency Fund No. | AY | Amount of Disbursement | Project IN WITNESS WHEREOF, the undersigned executes this Certificate on the date shown below: ____________________________

Qualified Agency By: _________________________ Authorized Agency Representative Each Financing Agreement is on website: http://www.tpfa.state.tx.us/agreements.aspx Date: ________________________ 107 Flow of Funds TPFA Fund A Draw Client Fund A Expenditure

(Not a Transfer) Contractor 108 Spending the Proceeds All project related expenditures shall be processed out of the Project Fund established by TPFA. Client agencies shall establish collected revenue budgets in their respective Project Funds. Benefit appropriations shall be established by the client agency, within the Project Fund, as collected revenue and funded with bond

proceeds. (See: APS 019) 109 Status Report The periodic status report prepared by the Qualified Agency pursuant to this Lease/Financing Agreement shall contain the following information with respect to the Project: (1) identity of the Project (name, ID no., etc.); (2) fund number(s); (3) the budget amount for the Project (including adjustments, if any); (4) description of work category; (5) amount expended for reporting month; (6) total amount expended to date; (7) amount encumbered; (8) available balance; (9) percent work complete; and (10) narrative identifying any problems (including, without limitation, delays and cost overruns) and indicating whether such problems will substantially alter work schedule or costs.

Reports are usually due by the 15th of each month. Report deviations from the original expenditure schedule (10% or $1 million) directly to the Executive Director. GO Bonds: Financing Agreement Revenue Bonds: Lease Agreement 110 Project Completion Certificate Submit a project completion certificate upon completion of the financed projects or when no further proceeds will be expended for project costs.

Upon completion of the project, any unspent bond proceeds are transferred to the debt service fund and used to pay debt service. Goal: Close project funds within 3 to 5 years (for construction projects) GO Bonds: Financing Agreement Revenue Bonds: Lease Agreement 111 Form of Project Completion Certificate The undersigned hereby certifies, on behalf of Qualified Agency , as follows: a. The capitalized terms in this Certificate that are not herein defined shall have the meanings defined in the Lease/Financing Agreement, dated as of _____________, between the Qualified Agency and the Texas Public Finance Authority. b. The Project was completed on (or no further proceeds of the Bonds are to be expended for Project Costs as of)

________________________________ [insert date]. c. Except for $___________ (the Retainage), all Project Costs that have been incurred have been paid, and no further disbursements from the Project Fund for the payment of Project Costs will be necessary. d. The Retainage is sufficient to pay all claims (1) for the payment of any Project Costs that are not presently due, and (2) for the payment of any Project Costs the liability for which is being contested or disputed by the Qualified Agency. IN WITNESS WHEREOF, the undersigned executes this Certificate on the date shown below. ____________________________ Qualified Agency By:______________________________ Authorized Representative Date:_______________________________ 112 3. Arbitrage Rebate

What is Arbitrage? Arbitrage is the ability to invest lowyielding tax-exempt bond proceeds in higher yielding taxable securities, resulting in a profit (loss). Arbitrage rebate is the amount of profit earned from arbitrage that must be rebated to the federal government. 114 Arbitrage for Tax Exempt Bonds 6.00% 5.00% Fed Funds Target Rate Arbitrage Yield Yield Restriction

4.00% 3.00% 2.00% Arbitrage Rebate 1.00% 0.00% 3 3 3 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8 8 -0 p-0 c-0 r-0 n-0 p-0 c-0 r-0 n-0 p-0 c-0 r-0 n-0 p-0 c-0 r-0 n-0 p-0 c-0 r-0 n-0 n Ju Se De Ma Ju Se De Ma Ju Se De Ma Ju Se De Ma Ju Se De Ma Ju Source: Public Financial Management 115 Arbitrage Arbitrage is measured within an issue,

aggregated among funds Yield Restriction after third year restriction against investing above the bond yield Construction Funds temporary period allowed, typically 3 years; 5 years with certification Yield Reduction payments 116 Exceptions to Arbitrage Rebate Three exceptions apply to TPFA Financings: 6 month spending exception (MLPP) 18 month spending exception (Grants) 24 month spending exception (Construction) 117

Spending Exceptions Spending Requirements Benchmark 6-Month Spending Exception 18-Month Spending Exception 2-Year Spending Exception 6-months 100%

15% 10% 12-months 60% 45% 18-months 100%* 75% 24-months 100%* * Except for reasonable retainage (5% spent in 12 months) or de minimis amount (lesser of

3% or $250K, spent with due diligence) Source: Public Financial Management 118 24 Month Spending Exception for Construction Projects The interest earnings from an issue can be exempted from rebate if the gross proceeds are spent as illustrated The first three benchmarks include reasonably expected interest earnings based on the original

expenditure schedule Final benchmark is based on actual interest earnings 95% 100% 90% 75% 80% 70% 60% 45% 50% 40% 30% 20%

10% 10% 0% 6 Months 12 Months 18 Months 24 Months Benchmarks 119 Arbitrage Rebate Calculations Calculations are performed as of August 31st of each year. An amount sufficient to cover the rebate liability is transferred from the project fund to the rebate fund when a liability is recognized. Installments must be paid to the IRS at

least every 5th bond year. 120 4. Paying Debt Service Debt Service Appropriation . Debt Service GO Bonds Revenue Bonds TPFA Agency 122

Debt Service Dates General Obligation Debt October 1st & April 1st Revenue Debt* February 1st and August 1st Master Lease Purchase Program August 1st * TPFA initiates debt service transfers 2 to 50 days prior to the debt service due date. Texas Military Preparedness Commission, Texas Department of State Health Services (DSHS) are exceptions.

123 Debt Service Contacts Debt Service/Proceeds Contact: Pamela Scivicque, Business Manager (512)463-3141 [email protected] MLPP Debt Service Contact: Chris Gilliland, MLPP Coordinator (512)463-5695 [email protected] 124 5. Financial Reporting

Shared Funds Highlights of AFR requirements Introduction - Shared Funds A number of state funds are appropriated for use by more than one agency. These funds are called shared funds. These procedures ensure Cash in State Treasury is not double-counted and all shared fund activity is reported by the appropriate agency. Reporting Requirements for Annual Financial Reports of State Agencies and Universities Texas Comptroller of Public Accounts (CPA) 126 Agency Responsibilities

Controlling Agency = TPFA* The controlling agency is the agency required to reconcile the entire cash activity for the fund and report the Cash in State Treasury balance on the Annual Financial Report. The amount reported should also be reconciled to the Texas Annual Cash Report. Non-Controlling Agency = Client Agency A Non-Controlling Agency is any other state agency authorized to spend money from a shared fund but is not the controlling agency. The agency should not report the shared Cash in State Treasury balance on the Annual Financial Report. Source: Reporting Requirements for Annual Financial Reports of State Agencies and Universities Texas Comptroller of Public Accounts (Pages 3.26-3.27 July 2009) * Universities and Texas Parks & Wildlife Department are exceptions . 127 Non-Controlling Agencies

Any cash balance should be reclassified with a shared cash adjustment. (T-Code 654/655; GL 0047) Non-controlling agenciesare subject to the Inter-fund Activities deadline. Source: Reporting Requirements for Annual Financial Reports of State Agencies and Universities Texas Comptroller of Public Accounts (Page 3.29 July 2009) 128 Agency Coordination The recording of transfers and Due-To/Due-From are required to be coordinated between the controlling agency and each of the non-controlling agencies and are subject to the Interfund Activities deadline so that Transfers-In are equal to Transfers-Out and Due-To /Due-From accounts are

equal. This includes the accrual for expenditures. The coordination for recording purposes may be done on a regular basis as determined by the controlling agency but must be coordinated at least annually during the preparation of the Annual Financial Report. Source: Reporting Requirements for Annual Financial Reports of State Agencies and Universities Texas Comptroller of Public Accounts (Page 3.29 July 2009) 129 Fixed Asset Reporting General Obligation Bonds Revenue Bonds University Revenue Bonds

Enter Fixed Assets in SPA Client Client Client Report Fixed Assets in AFR Client Client Client Agency Responsibility 130

Bond Schedules Agency Responsibility Prepare Bond Schedules* General Obligation Bonds Revenue Bonds University Revenue Bonds TPFA** TPFA**

Client * The scope of the statewide audit includes tests for compliance with the covenants of general obligation and revenue bond issues of the State. Therefore, it is essential for each agency that issues bonds to include their bond schedules in their Annual Financial Report. ** Exceptions include the Texas Workforce Commission and the Texas Military Commission. Source: Reporting Requirements for Annual Financial Reports of State Agencies and Universities Texas Comptroller of Public Accounts (July 2009) p8.37 131 Pledged Revenues The following agencies/universities will provide TPFA with information regarding pledged revenues and related expenditures at fiscal year end: Department of State Health Services Texas Parks & Wildlife Department

132 Deadlines 08/31/CY Prior to August 31, review USAS balances and record corrections 09/26/CY Inter-fund Activities confirmed & entered into USAS 10/01/CY Deadline for early submission (simplified reporting)

11/20/CY USAS and interagency transaction certification (full reporting) 11/20/CY AFR Due (full reporting) Source: Reporting Requirements for Annual Financial Reports of State Agencies and Universities Texas Comptroller of Public Accounts (July 2007) 133 AFR Contact TPFA Annual Financial Report Contact: Ophelia Guerrero, Chief Accountant (512)305-9469 [email protected] 134 Frequently Asked Questions

What is the remaining constitutionally authorized debt that has not been appropriated by the Legislature? 50-f is fully appropriated 50-g $318,597,705* appropriation remaining Any proceeds exceeding this amount require a Constitutional Amendment. Updates provided on website: *http://www.tpfa.state.tx.us/pdf/GO%20Autho_Unissued.pdf 135 FAQ? Why is the agency assigned more than one project fund? To avoid commingling of bond proceeds, a new fund is established for each new bond appropriation.

Projects may be financed with both fixed-rate bonds and commercial paper. A separate fund is required for each issue. 136 FAQ? What does a refunding issue mean to me? TPFA refunds debt to lower interest costs. Agencies must certify there has been no change in use. A new project fund is not required. 137 Summary of Timelines Sample CP Timeline Date

Event 5/31/2009Legislature authorizes project and debt* 7/06/2009Agency governing body adopts a resolution 7/13/2009Agency submits request for financing to TPFA TPFA Board approves request, determines type of debt instrument and 8/06/2009 sale process August 2009TPFA structures the debt issue 9/01/2009TPFA submits BRB application 9/08/2009BRB planning session 9/17/2009BRB approves issuance of debt 9/22/2009Issue CP/Deposit proceeds in project fund * GO Bonds appropriated by Art. IX, Sec 17.11 GAA, 81st Leg., R.S. need LBB approval of projects before bonds are issued. 139 Sample Bond Timeline Date Event 5/31/2009Legislature authorizes project and debt* 7/06/2009Agency governing body adopts a resolution

7/13/2009Agency submits request for financing to TPFA TPFA Board approves request, determines type of debt instrument and 8/06/2009 sale process August 2009TPFA structures the debt issue 9/01/2009TPFA submits BRB application 9/08/2009BRB planning session 9/17/2009BRB approves issuance of debt 10/05/2009Bond sale 10/27/2009Closing/Deposit proceeds in project fund * GO Bonds appropriated by Art. IX, Sec 17.11 GAA 81st Leg., R.S. need LBB approval of projects before bonds are issued. 140

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