General Provisions for Illinois School Districts

This information is provided by Andrew Cubria from Hutchinson Shockey in Chicago. Huthinson Shockey is an expert on school district financing in the State of Illinois. Andrew works in the Public Finance area of the firm and thought this post would give investors insight into the issuance of public debt from the Public Finance perspective. This summary from Chapman Cutler deals with the Local Government Debt Reform Act for the State of Illinois and shows the complexities of rules and regulations regarding debt issuance. It is important for the Investment Banker to be well aware of these rules and to be able to work with the officials of the issuing municipality to ensure compliance with the law. Occasionally a banker will overlook one of these provisions before pricing, and a deal will not be able to close because of his/her oversight. This is a very rare event.

Courtesy of the law firm Chapman and Cutler L.L.P.

School Finance
General Provisions for Illinois School Districts

The Local Government Debt Reform Act of the State of Illinois, as amended (the “Debt Reform Act”)

Generally, the debt limit for elementary and high school districts is 6.9% of the equalized assessed valuation of the district and for unit school districts is 13.8% of the equalized assessed valuation of the district. Even though these are the standard debt limits, certain exceptions to the debt limit exist.

Tax anticipation warrants, general obligation warrants, state aid anticipation certificates, personal property replacement tax notes, revenue anticipation notes and, generally, alternate bonds do not count against the debt limit of a district, but bonds, installment contracts, leases, debt certificates, judgments, tax anticipation notes and teachers’ orders do count against the debt limit.

As written in the Debt Reform Act, whenever a school district is authorized to issue bonds without referendum, the district may add issuance costs at the expense of the issuer. Typical issuance costs which school districts are required to pay may include underwriter’s discount, bond insurance or other credit enhancement costs.

The Debt Reform Act also allows a school district to use bond proceeds for capitalized interest on its bonds for a period not to exceed the greater of two years or a period ending six months after the estimated date of completion of the project. One reason where it would make sense to capitalize interest is if a revenue bond is issued to fund a project where the stream of cash flows that are generated from that project do not exist for another 18 months. If this were the case, capitalized interest could be used so the issuer is able to meet principal and interest payments.

The Debt Reform Act also permits school districts to sell bonds at a discount. Whenever bonds are sold at a discount, the bonds must be sold at a price and bear interest at rates so that the true interest cost (TIC or yield) or the net interest rate (NIC) received upon the sale of the bonds does not exceed the maximum rate otherwise authorized by applicable law.
The Debt Reform Act extends the time within which a tax levy for general obligation or limited bonds must be filed. Prior to the passage of the Debt Reform Act, a school district was required to file any debt service levy with the county clerk on or before December 31 of a given year in order to have taxes extended for the payment of the bonds in the following year. The Debt Reform Act provides that districts are authorized to levy a tax for the payment of debt service on general obligation or limited bonds at any time prior to March 2 of the calendar year during which the tax will be collected. County clerks are required to accept the filing of such tax levy prior to March 2 notwithstanding that such filings occur after the end of the calendar year next preceding the calendar year during which the tax will be collected.

In extending taxes for general obligation bonds, the county clerk must add to the levy for debt service on such bonds an amount sufficient, in view of all losses and delinquencies in tax collection, to produce tax receipts adequate for the prompt payment of such debt service.

Whenever the authorization of or the issuance of bonds is subject to either a referendum or a backdoor referendum held after August 13, 1999, the approval, once obtained, remains (a) for five years after the date of the referendum or (b) for three years after the end of the petition period for the backdoor referendum.

A school district whose aggregate principal amount of bonds outstanding exceeds $10mm may enter agreements for interest rate swaps and other interest rate risk management tools with respect to any issues of its bonds. The bonds must be identified to the swap. Net payments under swap agreements are treated as interest for the purpose of calculating the interest rate limit applicable to the bonds, provided, that for this purpose only, the bonds are deemed to bear interest at taxable rates. Swap agreements and the payments to be made under swap agreements do not count against a districts debt limit.

Credit ratings for school districts are determined by rating agencies such as Fitch, Inc., Moody’s Investor’s Service or Standard & Poor’s. A credit rating is not legally required, but a favorable rating may reduce the interest rate paid by a district. The rating agencies review the overall management, debt and financial picture of the district, including recent audits and fund balances. Bond insurance may also be used to reduce interest rates paid by a district.

School Districts may also enter into credit agreements to provide additional security or liquidity, or both, for the bonds, including municipal bonds insurance, letters of credit, lines of credit, standby bond purchase agreements and surety bonds. A district may also enter into agreements for the purchase or remarketing of its bonds providing a mechanism for remarketing bonds tendered for purchase. The term of the credit agreements or remarketing agreements may not exceed the term of the bonds, plus any time period necessary to cure any defaults under the agreements

Under Section 265(b)(3) of the Tax Code, banks and certain other financial institutions are not allowed any deduction for interest expense attributable to tax-exempt debt acquired after August 7, 1986, unless the “small issuer exception” applies. The exception is applied if a school district reasonably expects that it will not issue more than $10 million of tax-exempt debt during the calendar year. If a district stays under this $10 million limit, “bank qualified” status is received, and the restriction on the deduction for interest expense does not apply.