CFLO Analysis and Short Term borrowing options

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Current Economic Conditions and How They
Affect My District Illinois ASBO Annual
Conference
Tammie Beckwith Schallmo, Vice President,
Managing Director, Public Finance Audra Hartman,
Vice President May 18, 2011
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An Overview How the Economy impacts State,
Local and Federal Revenue for Illinois School
Districts
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Current Economic Conditions State, Local and
Federal Revenue
State, Local and Federal Revenue

• Local Revenues
• Mostly local property taxes
• Corporate Personal Property Replacement Tax
  (CPPRT)
• Tuition, interest income, fees, rentals
• State Revenues
• General State Aid
• Categorical Grants
• Federal Revenues
• Categorical Grants
• Grants

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Current Economic Conditions State, Local and
Federal Revenue
State, Local and Federal Revenue for Illinois
School Districts

• Percentage of Local Revenue has increased over
  time
• While the State share has decreased
• And the Feds share has increased slightly

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Current Economic Conditions Local Revenue
Property Taxes
Local Revenue Property Taxes

• Economic boom in the 1990s and into the 2000s
• As property values increased, property taxes
  increased, and state revenues decreased
• General State Aid formulas key variables
• Attendance
• Property tax wealth per student
• We are now seeing the impact of lower housing
  prices, which has translated into lower EAVs, and
  the 2.70 CPI on 2010 property tax bills

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Current Economic Conditions Other Local Revenue
Other Local Revenue

• As the economy has been hit, so have other local
  revenue sources for school districts
• Investment income
• Rentals
• In some districts, fee revenue has increased in
  an attempt to offset other revenue losses

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Current Economic Conditions State Revenue -
CPPRT
State Revenue - CPPRT

• Collected from Illinois corporations
• Distributed to local government units
• Payment in lieu of taxes
• Allocation factors date back to programs
  inception
• Collections depend on Illinois business economy
• For fiscal year 2011, total CPPRT allocations for
  Illinois school districts increased by 21.5 over
  the prior year
• Per the Illinois Department of Revenues website,
  the increase is due to amnesty legislation and
  an improving economy
• Impacts General State Aid revenue for a district
• Fewer CPPRT dollars, increased GSA

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Current Economic Conditions State Revenue
Categorical Grants
State Revenue - Categorical Grants

• Originated to encourage districts to offer
  certain programs (eg special education,
  bilingual, transportation, lunch and breakfast
  programs)
• Entitlement grants (not competitive)
• Funding levels vary in the ISBE budget from year
  to year
• Number of children in need of services
• Health of state economy
• Statutes specify levels of payment
• But actual appropriations are made annually by
  the legislature
• Zero funding is possible
• Prorated funding developed over time as program
  costs began to exceed appropriated levels

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Current Economic Conditions State Revenue
Categorical Grants
State Revenue - Categorical Grants

• The State has been behind on Categorical payments
• Caught up on fiscal year 2010 payments
• Districts are owed three payments for fiscal year
  2011
• Impacts many districts cash flow position
• Additional credit concern for Districts who rely
  heavily on the state
• Short-term borrowing may be more difficult to
  achieve, as well as more costly
• How long will the state need to borrow to make
  payments to districts?
• How is your district budgeting for Categorical
  grants?
• Rating agencies are especially interested

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Current Economic Conditions Federal Revenue
Federal Revenue

• Largely tied to programs that support national
  educational goals and student achievement
• Often competitive grants
• What happens when the grant is gone?
• ARRA dollars
• Supplement, not supplant
• It was a short-term fix

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The Consumer Price Index
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Current Economic Conditions What is the
Consumer Price Index
What is the Consumer Price Index?

• The Consumer Price Index (CPI) is a measure of
  the average change over time in the prices paid
  by urban consumers for a market basket of
  consumer goods and services.
• The CPI reflects spending patterns for each of
  two population groups all urban consumers
  (CPI-U) and urban wage earners and clerical
  workers (CPI-W).
• The CPI-U represents about 87 of the total U.S.
  population.
• The CPI-U (unseasonal adjusted) is used to
  determine the limiting rate

Source The Bureau of Labor Statistics
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Current Economic Conditions What is the
Consumer Price Index?
What is the Consumer Price Index?

• The CPI market basket is developed from detailed
  expenditure information provided by families and
  individuals on what they actually bought.
• For the current CPI, this information was
  collected from the Consumer Expenditure Surveys
  for 2005 and 2006.
• About 7,000 families from around the country
  provided information each quarter on their
  spending habits in the interview survey.
• To collect information on frequently purchased
  items, such as food and personal care products,
  another 7,000 families in each of these years
  kept diaries listing everything they bought
  during a 2-week period.
• Over the 2 year period, then, expenditure
  information came from approximately 28,000 weekly
  diaries and 60,000 quarterly interviews used to
  determine the importance, or weight, of the more
  than 200 item categories in the CPI index
  structure.

Source The Bureau of Labor Statistics
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Current Economic Conditions CPI December 1,
2007 to December 1, 2008
Source The Bureau of Labor Statistics
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Current Economic Conditions CPI January 1,
2009 to Present Year Over Year
Source The Bureau of Labor Statistics
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Economic Update
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Current Economic Conditions QE2
Quantitative Easing 2

• The Fed has been buying 600 billion in long-term
  Treasuries, and has been reinvesting an
  additional 250 billion to 300 billion in
  Treasuries with the proceeds of its earlier
  investments
• The FED has announced that it will complete its
  purchases by June 30
• Interest rates declined, inflation expectations
  have risen, the dollar has depreciated and equity
  prices have risen all classic financial
  market effects anticipated

Source CNN Money, November 3, 2010
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Current Economic Conditions Housing Market
Housing Market

• As of February, U.S. home prices were just above
  the lows of April 2009
• 7th straight month of declines
• Housing values are down 32 from peak in May 2006
• Distressed sales now account for 30 of all
  transactions nationwide
• For housing prices to rise, the economy must
  continue to improve, as well as job growth
• Continued declines in the housing market will
  have a negative impact on EAV
• Excess supply versus lower buyer confidence

Source Standard and Poors Case-Shiller Index
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Current Economic Conditions Unemployment
Unemployment

• The national unemployment rate is nearly 1 lower
  than it was in November 2010
• U.S. unemployment was 8.8 for March and crept
  back up to 9.0 in April

Source The Bureau of Labor Statistics
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Current Economic Conditions Job Creation
Job Creation

• U.S. jobs were created at the fastest pace in
  five years in April
• Nonfarm payrolls increased by 244,000, the
  largest increase in 11 months
• Third straight month the economy added more than
  200,000 jobs
• Manufacturing jobs continue to trend up
• Local government has lost 416,000 jobs since
  September 2008
• Since February 2010, total payroll employment has
  risen by 1.8 million
• 4.3 people for every job, lower than the 6.9 to 1
  ratio in July 2009
• Bottom linelabor market conditions have
  improved, but there are still 13.7 million
  Americans out of work
• Will job creation accelerate for the remainder of
  2011?

Source The Bureau of Labor Statistics
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Current Economic Conditions Uncertainty
Its Still a Time of Uncertainty

• The U. S economy will continue to recover, but
  not as quickly as we have hoped
• Uncertainties remain
• Jobs
• Housing
• Oil and food prices
• The countrys federal deficit
• European sovereign debt crisis
• Other bumps along the road, such as the
  earthquake and tsunami in Japan

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Current Economic Conditions Components of
Economic Indicator Indices
Components of Economic Indicator Indices

• Components of Leading Economic Indicators
• Real money supply, interest rate spread, the
  index of consumer expectations, building permits,
  stock prices, index of supplier deliveries
  (vendor performance), average weekly
  manufacturing hours, average weekly initial
  claims for unemployment insurance (inverted), and
  manufacturers new orders for nondefense capital
  goods, and Manufacturers new orders for consumer
  goods and materials.
• Components of Coincident Economic Indicators
• Personal income less transfer payments,
  manufacturing and trade sales, employees on
  nonagricultural payrolls, and industrial
  production.
• Components of Lagging Economic Indicators
• Ratio of consumer installment credit to personal
  income, commercial and industrial loans
  outstanding, change in labor cost per unit of
  output, average duration of unemployment
  (inverted), average prime rate charged by banks,
  ratio of manufacturing and trade inventories to
  sales, and change in CPI for services.

Source The Conference Board
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Current Economic Conditions Current Readings of
Economic Indicators
Current Readings of Economic Indicators

• The Conference Board Leading Economic Index for
  the U.S. increased 0.4 in March
• Upward trend since the end of 2008
• The Conference Board Coincident Economic Index
  increased 0.2 in March
• Still 4.3 below its level at the beginning of
  the recession
• The Conference Board Lagging Economic Index
  increased 0.4 in March, following a 0.4
  decrease in January and a 0.3 increase in
  February

Source The Conference Board
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Current Economic Conditions Statistics to Watch
Statistics to Watch

• Consumer Sentiment (67.8 in April versus 65.5 in
  March and 75.5 in February recessionary levels
  are in the 50s)
• Consumer Spending (increased 0.6 in March,
  consensus was 0.5 increase, 9th straight month
  of increases)
• Retail Sales (Retail sales increased 0.5 in
  April, 0.6 consensus, ninth straight month of
  increases)
• Personal Income (increased by 0.5 in March, 0.4
  consensus)
• Stock Market
• Weekly Unemployment Claims
• The job market tends to lag the growth of the
  economy by six to nine months
• Inventory Reports and cardboard box demand

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Current Economic Conditions Statistics to Watch
Statistics to Watch

• Median Home Values
• Existing home sales increased 4 in March
• New home sales increased 11.1 in March to a
  300,000 annual rate 10.3. decline over March
  2010
• During boom new home sales were 1.0 to 1.5
  million annually or more
• Housing Starts (Up 7.2 in March but 9.1 below
  March 2010)
• Building Permits (increased 11.2 in March but
  13.3 below March 2010)

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Investing in the current market
for Illinois School
Districts
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Current Economic Conditions Planning is Key
Planning is Key

• Maintain a good CFLO
• Uncertainty in State funding
• GSA
• Categoricals
• Uncertainty in tax receipts
• Late Payments
• Appeals/Objections
• Maintain a good financial projection
• EAV changes
• State financial troubles
• Revenue growth vs. expenditure growth

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Current Economic Conditions Interest Rates
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Current Economic Conditions Interest Rates
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Current Economic Conditions Investment
Environment
Current investment environment

• In 2010 157 banks failed
• As of 05/06/11 40 banks have failed for the
  year
• FDIC Insurance
• Currently at 250k until December 2013
• Non interest bearing transactional accounts
• Beware of fees and net rate
• Collateral
• Third Party Safekeeping
• Collateral Mark to Market on a regular basis

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Current Economic Conditions Investment
Environment
General Investment Options

• Must follow State Statute
• Must follow District investment policy
• Do not recommend Commercial Paper at this time
• CDs
• Collateralized
• Insured
• AAA Money Market
• Government obligations
• Government agency obligations

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Borrowing in the current market
for Illinois School
Districts
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Current Economic Conditions Borrowing in the
Current Market
Borrowing in the Current Market

• From a national municipal market perspective,
  interest rates are still near historical lows
• The tax-exempt bond market has been very volatile
  over the last several months
• Weak supply is anticipated for the remainder of
  the calendar year however, it is anticipated to
  increase as the latent BAB effect dissipates
• BABs expired on December 31, 2010

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Current Economic Conditions Historical Interest
Rates
Per MMD as of May 11, 2011
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Current Economic Conditions The Illinois
Penalty
The Illinois Penalty

• Continues to challenge Illinois issuers, who
  continue to suffer for the States financial woes
• The penalty is averaging between 90 and 120 basis
  points
• Some investors will no longer buy any Illinois
  credits
• PIMCO, for example

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Current Economic Conditions Credit Spreads
Credit Spreads

• An underlying credit rating is essential for most
  financings
• Boards and administrators need to be mindful of
  their decisions and how they impact their
  Districts credit rating
• Doing so will impact its borrowing cost in the
  municipal bond market

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Current Economic Conditions Credit Spreads
Per MMD as of April 22, 2011
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Current Economic Conditions Challenges Going
Forward
Challenges Going Forward

• Identify purchasers for long-term municipal bonds
• Build America Bonds helped to provide additional
  buyers, however the future of BABs is uncertain
• Deficit reduction proposals in Washington
• Eliminate tax-exemption for future municipal bond
  issues
• Substitute with tax credit bonds
• Traditional tax credit bonds
• Direct pay tax credit bonds like BABs

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Questions?
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Disclaimer
The information contained herein is solely
intended to suggest/discuss potentially
applicable financing applications and is not
intended to be a specific buy/sell
recommendation, nor is it an official
confirmation of terms. Any terms discussed
herein are preliminary until confirmed in a
definitive written agreement. The analysis or
information presented herein is based upon
hypothetical projections and/or past performance
that have certain limitations. No representation
is made that it is accurate or complete or that
any results indicated will be achieved. In no
way is past performance indicative of future
results. Changes to any prices, levels, or
assumptions contained herein may have a material
impact on results. Any estimates or assumptions
contained herein represent our best judgment as
of the date indicated and are subject to change
without notice. Examples are merely
representative and are not meant to be
all-inclusive. The information set forth herein
was gathered from sources which we believe, but
do not guarantee, to be accurate. Neither the
information, nor any options expressed,
constitute a solicitation by us for purposes of
sale or purchase of any securities or
commodities. Investment/financing decisions by
market participants should not be based on this
information. You should consider certain economic
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consequences) prior to entering into any type of
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any prospective client perform its own research
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affiliates, to determine suitability of the
proposed transaction with respect to the
aforementioned potential economic risks and
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