Proceeds of the bond sale are going toward various projects in the San Juan USD, including this construction of an outdoor amphitheater at Andrew Carnegie Middle School.

SAN FRANCISCO — Officials at a Sacramento-area school district believe they've hit upon a way to get more bang for the district's buck when it taps its bond authority.

By front-loading its bond repayment schedule with short-term debt, a much larger share of taxes San Juan Unified School District collects for its general-obligation bonds can go to principal instead of interest.

"The concept is really intuitive in a way," said Kent Stephens, San Juan USD's chief financial officer. "I've always concentrated on trying to pay debt off and prioritizing the construction plan."

The district of 45,000 students in the suburbs east of Sacramento applied that philosophy in the sale of $106 million of general obligation bonds last week.

Stephens said the project schedule drives the financing plan, and not the other way around.

"We want to maximize the amount of tax dollars being directly spent for construction, not finance costs," Stephens said. "In a district like San Juan which has $2 billion of long term capital needs, this philosophy is really the only practical way we can meet our objectives."

KeyBanc Capital Markets was underwriter and Capitol Public Finance Group, LLC was financial advisor.
"All in all, it was a very successful sale," said Geoff Urbina, managing director at KeyBanc. "We were able to achieve the goals of the district, meet the constraints, and really hold to the strategy that Mr. Stephens has laid out."

Of the $80 million Series 2, $43.7 million of principal will be retired within three years. Final maturity is 2027.

Jeff Small, managing partner at Capitol Public Finance Group, said the district took a "hybrid approach" to the deal, which combined the benefit of a short-term bond - in this case, a three-year bond - with a 10-year tail.

"In all, it's a 13-year bond with an average life of approximately five years," Small said. "The benefit of that is the district is able to borrow long-term money at a true interest cost of approximately 2.16% and a repayment ratio of approximately $1.11 for every dollar borrowed, which is substantially below what the repayment ratio would be had the district issued fully amortized bonds."

On Series 2, yields ranged from 0.22% with a 1% coupon in 2015 to 3.3% with a 3% coupon in 2027, according to Thomson Reuters data. On $26 million Series 1, yields ranged from 0.15% with a 2% coupon in 2014 to 3.38% with a 5% coupon in 2032.

Urbina estimated that the district saved $45 million in interest costs compared to a conventional 25-year amortization.

"The strategy that Mr. Stephens is instituting here really is focused on getting the most bang for your buck," Urbina said. "This means making sure that the most dollars can be put toward projects, versus pay interest costs, and I think that this is, in my view, palatable to taxpayers."

Proceeds will be used to finance construction projects throughout the district, including an engineering lab at San Juan High School, an all-weather track at Casa Roble Fundamental High School, and an outdoor amphitheater and performance area at Andrew Carnegie Middle School.

The $26 million series was authorized in a $350 million bond measure in 2002, and the $80 million series in another $350 million bond measure in 2012.

The bonds were approved under terms of California's 2000 Proposition 39, which reduced the threshold required to pass school district bond issues from two-thirds to 55%, and also capped the permitted tax rate for such bonds to $60 per $100,000 of assessed value.

That limit, exacerbated by depressed property values following the housing downturn, pressured many school districts. Some issued capital appreciation bonds in order to satisfy the tax rate limitation and maximize bond proceeds.

The poster child for expensive CAB issuances was the Poway Unified School District in San Diego County, which sold a $105 million CAB series in 2012 that will require nearly $1 billion in debt service payments by their 40-year maturity, without a call option.

"When school districts pass a bond measure, voters expect a lot of projects," Small said. "In order to maintain that tax rate of $60 per $100,000, what we saw here in California is that they were maxing out the tax rate - not just for 25 years, but all the way out to 40 years to maximize proceeds today, and that led to very high repayment ratios."

Bad publicity surrounding the Poway deal and others like it led to a law limiting school district CAB structures.

The San Juan district's approach stands in contrast, by focusing on minimizing the interest component in the school bond levy. San Juan USD has already received interest from other districts.

"Mr. Stephens is the facilitator of this methodology, which is an approach that's unique to the state," Urbina said. "I do think it's going to lead to a new paradigm for districts in California."

Stephens said he believes the structure would work for many, but not all, districts around the state.

"Every district is going to have to look at its own situation depending on size of their assessed valuation and the strength of their tax base," he said. "I think every district will have a different solution to their own individual needs."

Specifically, this strategy might work for districts that have large, long-term needs, like San Juan USD, he said. It might also work best for districts that have large broad-based tax bases and large assessed valuation. San Juan USD, for example, is able to collect about $17 to $18 million a year in tax proceeds for one single bond measure.

For a district that is growing fast and needs a lot of project money upfront, this might not be the right strategy, he added.

San Juan USD doesn't have any specific bond sales planned anytime soon, but with a $2 billion facility master plan over the next 40 to 50 years, the district will need new bond measures down the road.

The district has 44 elementary schools, 11 middle schools, and 9 high schools.

Stephens said the school board may discuss the possibility of another bond measure if it wants to continue the transition to a more pure "pay as you go" model.

"We think that if we're going to ask our voters and our taxpayers to pay $2 billion worth of construction costs, that it's our obligation, our stewardship, to reduce the interest costs on that $2 billion," Stephens said. "So that's really what is driving this methodology strategy, is our commitment to our taxpayers."

Moody's Investors Service rates the bonds Aa2, citing the district's very large assessed value that has resumed growth after going through multiple years of contraction.

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