Question 1

What is a Bond?

Accepted Answer

A Bond is a debt instrument representing a loan from an investor or group of investors to a corporate or governmental entity with a promise to repay at specified intervals with agreed upon interest rates and terms.

Question 2

How are Bonds sold?

Accepted Answer

Depending on the size, complexity, and purpose of a particular Bond issue, Bonds may be sold in a variety of ways, including public offerings, private placements, or in some situations, Bonds may even be Self-Purchased by the issuing entity.

Question 3

Who is involved in a Bond Issuance?

Accepted Answer

Issuing a Bond can often involve bringing together an entire financing team consisting of a Municipal Advisor, Bond Counsel, Underwriter, Disclosure Counsel, Rating Agency, Bond Insurer, Registrar/Paying Agent, Verification Agent, Feasibility Consultant, Escrow Agent, etc. The first step is to contact a qualified Municipal Advisor who can coordinate the efforts of the parties involved.

Question 4

What is Fiduciary Duty?

Accepted Answer

A fiduciary duty is a legal obligation to act in the best interest of another entity.  The fiduciary agent is required to employ a duty of care and a duty of loyalty to the issuer. In a municipal Bond transaction, municipal advisors are the only entity which serves in a fiduciary capacity to the issuing entity.

Question 5

What is an Underwriting Spread?

Accepted Answer

Underwriter's Spread or Underwriter's discount refers the fees paid to a broker-dealer/underwriting firm for completing a municipal bond transaction and may be comprised of Underwriter's Expenses, Management Fees, Takedown Fees, and Risk or Residual Fees. While this spread is typically disclosed to issuing entities at the time of sale, often times the greater cost of financing from a debt service perspective comes from the interest that is paid over the life of the financing. Unlike Municipal Advisors, underwriter's do not have fiduciary duty to the issuer and are therefore, not required to act in the issuer's best interests.

Question 6

My entity is subject to PTELL - can we borrow money?

Accepted Answer

Property Tax Extension Limitation Law (PTELL) entities have borrowing options available to them to complete projects. These options may be more limited than non-PTELL entities depending on the nature of the financing, the revenue streams available for repayment, and the issuer's Debt Service Extension Base (DSEB.)

Question 7

What is a Debt Service Extension Base (DSEB?)

Accepted Answer

For PTELL entities, the Debt Service Extension Base (DSEB) is the maximum amount that may be levied on an annual basis for the repayment of many types of Bonds. Certain types of Bonds do not count against the DSEB including: voted on General Obligation (GO) Bonds, Alternate Revenue Bonds, Health, Life, Safety, Bonds.

Question 8

What is a Bond Referendum?

Accepted Answer

A voting process which requires over 50% of the voters to approve a General Obligation Debt prior to issuance.

Question 9

What is a Call Date?

Accepted Answer

A call date is the first available date after which Bonds may be redeemed or refunded prior to maturity.

Question 10

What is an Advance Refunding?

Accepted Answer

An Advance Refunding is when Bonds are sold to refund existing debt prior to 90 days in advance of a call date. If working with tax-exempt debt, the refunding must be completed on a taxable basis, and the proceeds are placed in an escrow until the call date when the existing debt is fully defeased.

Question 11

What is a Non-Callable Bond?

Accepted Answer

A Non-Callable Bond is a debt that may not be redeemed prior to maturity at the option of the issuing entity.

Question 12

What is the difference between a Taxable and Tax-Exempt Bond?

Accepted Answer

Generally speaking, debt issued for capital purposes may be sold on a tax-exempt basis, whereas debt issued for operational purposes must be sold taxably. Since an investor who purchases tax-exempt debt gains the tax benefit on the interest earnings - they in turn are willing to offer a lower interest rate to the issuing entity to purchase this debt.

Question 13

What is a Continuing Disclosure Undertaking (CDU?)

Accepted Answer

SEC Rule 15(c)(2)-12 requires districts to provide certain disclosures to an electronic repository hosted by the Municipal Securities Rulemaking Board (MSRB) called the Electronic Municipal Market Access (EMMA.) Many entities are required to file an annual report to provide information relevant to investors. Finally, there is a list of “reportable events” that entities are required to disclose should any of them occur.

Question 14

What is Arbitrage?

Accepted Answer

Arbitrage with respect to securities generally applies when tax-exempt Bond proceeds are invested and earning a higher rate of return of interest than the corresponding Bonds are paying. This situation can create tax or rebate implications even for tax-exempt organizations.

Question 15

What are State and Local Government Securities (SLGS?)

Accepted Answer

Treasuries offered by the Federal Government that set interest rates at allowable levels to avoid arbitrage constraints.

Question 16

What is Bank Qualification (BQ?)

Accepted Answer

For an issuer who sells less than $10M in tax-exempt Bonds in a calendar year, the Bonds carry an additional designation of Bank Qualification. This designation assists in obtaining investors and can help lower the interest rate paid by the issuer on the debt.

Question 17

What is Bond Premium?

Accepted Answer

Premium is often sold in public offerings and occurs when the offering price of a security exceeds its par value. Premium is generated when the stated interest rate is higher than the yield (market demand.)

Question 18

What is a Par Bond?

Accepted Answer

A Bond which is selling for face value. The stated interest rate = yield, and no premium is generated by the sale.

Question 19

What is Yield?

Accepted Answer

Bond Yield is the actual economic benefit an investor demands in order to be willing to purchase a security or other debt.

Question 20

What is a Levy Year?

Accepted Answer

The Levy year is the year in which the property tax levy is based off of. This Levy is typically collected in the following calendar year.

Question 21

What is a Fiscal Year?

Accepted Answer

Many public entities use a fiscal year-end that is different from the calendar year-end. While a calendar year ends on December 31, many public entities in Illinois operate under a fiscal year-end of June 30. This can provide confusion for business officials in that the levy year is often a year prior to a calendar year, which is often a year prior to a fiscal year. If you have a question about the timing of a certain debt of your district please get in touch.

Question 22

What are Generally Accepted Accounting Principals (GAAP?)

Accepted Answer

Standards for preparing financial statements as required by the governmental accounting standards board (GASB.) In Illinois, other than Cook County, school districts are required to prepare financial statements in accordance with the accounting standards as promulgated by the Illinois State Board of Education (ISBE.) Ironically, these school districts receive an adverse opinion with respect to GAAP every year as the ISBE standards do not conform to the GAAP standards.

Question 23

What is a Maturity Date?

Accepted Answer

Bonds are typically sold using a 360 day year, 30 day month interest calculation. While there is some flexibility with the repayment terms depending on the type of debt and the purchaser, the most common payment terms are semi-annual payments of interest and annual payments of principal. The maturity date refers to the date on which principal is due on a debt.

Question 24

What is a Bond Rating?

Accepted Answer

For public offerings, typically an issuing entity will secure a Bond rating from a rating company. The rating agency then assigns an underlying rating to the issuer. Often times Bond insurance is obtained to enhance this underlying rating. The credit rating provides an indication to the investor as to the risk associated with purchasing the security. Generally speaking, the higher the credit rating, the lower the interest rate the issuer is able to achieve.

Question 25

What is EAV?

Accepted Answer

Equalized Assessed Valuation (EAV) refers to the taxable value of a particular property. To calculate the property tax revenue generated by a taxing body, take the EAV and multiply it by the tax rate of the particular entity.

Question 26

What is a Tax Base?

Accepted Answer

The total taxable value (EAV) of all properties located within a taxing body's borders.

Question 27

What is a Property Tax Abatement?

Accepted Answer

A taxing body may choose reduce property tax levies on existing debt by paying for all or a portion of the debt with a different revenue stream other than the Levy. In Illinois, Alternate Revenue Bonds are supposed to be abated every year rather than levied. Several other types of Bonds may be abated if the issuing entity has other available revenue streams for the repayment.

Question 28

What effect will issuing Bonds have on property taxes?

Accepted Answer

There are a variety of ways of paying for Bonds. The most common in Illinois is to Levy for the Bonds via a separate Bond and Interest Levy on all District residents. However, there are financing options available that do not increase property taxes if another revenue stream is available for the repayment. Additional strategies can be employed to help minimize the tax rate impact of issuing Bonds by looking for opportunities where existing debt is paying off, restructuring existing debt, or adjusting other levies to accommodate Bond payments.

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