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Debt Management An issuer’s and an investor’s point of view Stifel NicolausJones HallFranklin TempletonCity of San José Sara Brown Managing Director Steve.

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Presentation on theme: "Debt Management An issuer’s and an investor’s point of view Stifel NicolausJones HallFranklin TempletonCity of San José Sara Brown Managing Director Steve."— Presentation transcript:

1 Debt Management An issuer’s and an investor’s point of view Stifel NicolausJones HallFranklin TempletonCity of San José Sara Brown Managing Director Steve Melikian Partner Jennifer Johnston Analyst, Municipal Bonds Peter Detlefs Debt Administrator

2 General Fund Financings in a Bankruptcy World

3 A Word About Lease Financings COPs / Lease Revenue Bonds were created to circumvent statutory limitations on debt issuance ▫Not considered “debt” because of judicially recognized exception to debt limit for leases Obligation to budget and appropriate the lease payment so long as city has use/possession of an identified asset ▫Because the lease payments must be appropriated annually, they are not binding on future councils ▫Market perceives a difference among city-owned assets: essentiality

4 Credit Market Concerns Reflect the Inherent Structure of this “Debt” No clear prioritization of debt repayment vs. other general fund expenditures Possible unwillingness to repossess the leased asset Possible inability to re-let the leased asset

5 Rating Agencies React Moody’s recently increased its differential between a city’s GO bonds and its general fund obligations, because leases: ▫are highly exposed to city’s general finances ▫compete with other city funding priorities ▫For most cities, the result is a 2-notch differential S&P has traditionally concluded on a 1-notch differential

6 Best of Times // Worst of Times Best of Times: 1.Interest rates in general are extremely low Worst of Times: 1.Relative to the general market, interest rates for general fund leases are higher  Wider spreads to MMD 2.Concerns about future downgrades

7 Investor Reaction Several large institutional funds will no longer purchase lease-backed obligations ▫Insurance provides no value For the most part, individual retail investors will not purchase lease transactions ▫Just too much risk ▫Maybe insurance will resurrect interest

8 Concerns Lead to Bifurcated Market Issuance w/ Relative Ease ▫Large transactions  > $50 million ▫Well-known municipality ▫Frequent participant in market → more secondary market liquidity Issuance w/ Market Challenges ▫Small transactions  <$30 million ▫Less-known municipality ▫Infrequent issuer → less secondary market liquidity

9 Bond Counsel “Clarifies” Bankruptcy Law

10 POTENTIAL AREAS OF SAVINGS IN BANKRUPTCY Labor Contracts Pensions (?) Retiree Health Care Bond Debt Service Constitutional Limitation on Debt Prevents Other Long-term General Fund Liabilities

11 Labor Contracts Cut Pay Cut Benefits Cut Employees

12 Pensions (?) Are Pensions protected in Bankruptcy? Two arguments against changing: ▫Pensions are contracts and have special statutory protection under State law that cannot be impaired ▫California courts have continually upheld the primacy of pensions, which should be honored by a Federal bankruptcy judge “Impairment” requires: ▫a legitimate fiscal crisis or emergency; ▫that the proposed solution is reasonable and necessary to address the fiscal crisis or emergency; and ▫That there is not a less intrusive way to accomplish the same result

13 Retiree Health Care Appears to have no similar (to Pensions) protection under California Law Stockton has reduced its payments for Retiree Health Care

14 Bond Debt Service Revenue Bonds with statutory liens are protected in a Chapter 9 Proceeding Sentiment is that G.O. Bonds are similarly protected since tax overrides can only be used for G.O. Bond Debt Service General Fund Obligations –COPs, Lease Revenue Bonds & POBs– are at risk Asset Essentiality becomes important as the bankrupt entity seeks to “walk away” from the lease

15 An Investor Explains It’s Decision Tree

16 Decision-Making Process Bond Security Issuer Credit Quality ▫Legal/structural framework ▫Financial position ▫Debt & pension burden Disclosure Market ▫Supply of alternative bonds ▫Retail Buy – Sell - Hold Bond Security Issuer Credit Quality ▫Demographics, economy & wealth indicators ▫Discussion with management Disclosure Market ▫Rates ▫Daily pricing of the funds Buy – Sell - Hold

17 How Have Things Changed? Insurance Ratings Media / Headline Risk Disclosure

18 Challenges Decision-making in a political environment Pensions, unions, long-term liabilities Bankruptcy Appropriation risk Essentiality Headlines/Media Partnerships between issuers and buyers

19 An Issuer Explains It’s Debt Management Procedures

20 Primary Disclosure Development of an Official Statement Appendix A – general City information prepared and updated by City staff Actively engage more staff in disclosure process ▫Budget Office ▫Retirement Staff ▫Public Works ▫City Attorney’s Office

21 Evolving Pension Disclosure Growth in sheer volume of pension disclosure ▫Between 2003 and 2013, increased from 2 pages to 40 pages Extensive review, each and every time enter the capital markets by: ▫Plan Actuary ▫Retirement Staff ▫City Attorney’s Office ▫Disclosure Counsel

22 Secondary Market Disclosure Annual Report pursuant to requirements of Continuing Disclosure Agreement Rating Agencies’ Periodic Review Comprehensive Annual Financial Report Material Event Notices

23 Reporting Publically available reporting and periodic education with City Council on matters related to disclosure and finances ▫Quarterly investment and debt reports ▫Comprehensive annual debt report ▫Monthly financial reports ▫Comprehensive staff reports highlighting key disclosure issues ▫City Council study sessions CAFR presented to City Council within 5 months after end of Fiscal Year

24 Key Points We ALWAYS Remember Disclosure is the CITY’S responsibility Cannot solely rely on consultants ▫Be active and INVOLVED in the process Disclosure is hard work and is NEVER done Disclosure is CRITICAL to the city’s success in the marketplace

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