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Levies and Bonds: The Impact of the Current Economic Condition August 13, 2009 Jon Gores Senior Vice President (206) 389-4043 [email protected] Washington State Washington State University University

Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

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Page 1: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

Levies and Bonds: The Impact of the Current Economic Condition

August 13, 2009

Jon GoresSenior Vice President(206) [email protected]

Washington State Washington State UniversityUniversity

Page 2: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

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Outline Election Research

School Capital Financing 101

Bond Issue Planning—Projected Tax Rates

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Election Research

Election Date Research

Multiple Ballot Measures

Tax Rate vs. Election Success

Economy vs. Election Success

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Election Timing

When should we run our Bonds?

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Voting PatternsAll Bond Issues Passed by Purpose

48%

25%

38%

43%

14%

100%

17%

47%

36%

69%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fire200

General154

Hospital 43

Jail 18

Library 44

Park 106

Police 13

School 999

Street 22

W&S 12

Per

cent

Pas

sed

Years 1992 through May 2009, inclusive.

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Voting PatternsBond Issues Passed by Year

Schools Only

39%

23%

40%45%44%

38%

45%

37%

46%45%

34%

53%

43%

38%41%

24%28%

38%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

199286

199373

199499

199562

199678

199778

199855

199959

200040

200139

200243

200353

200434

200534

200660

200750

200835

200928

Per

cent

Pas

sed

Years 1992 through May 2009, inclusive.

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Voting PatternsBond Issues Passed by Month

Schools Only

27%

0%

37%

44%

52% 52%

27%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

February278

March159

April48

May275

August1

September109

November130

Per

cent

Pas

sed

Years 1992 through May 2009, inclusive.

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Multiple Propositions on Same Ballot

58.62%

Average Approval RateMultiple Issues

52.34%

Average Approval Rate Single Issue

No. of Issues Passed Failed

20 7 13

Example:

PROPOSITION 2

BONDS FOR NEW STADIUM AND MULTIPURPOSE FIELD

The Board of Directors of ABC District No. 1 adopted Resolution No. 11-07/08, concerning a proposition to finance a new stadium and multipurpose field. This proposition would authorize the District, only if Proposition 1 is approved, to construct and equip a new High School Stadium and synthetic turf multipurpose field; issue no more than $4,000,000 of general obligation bonds maturing within 20 years; and levy annual excess property taxes to repay the bonds, all as provided in Resolution No. 11-07-08. Should this proposition be:

Approved………. ____

Rejected………...____

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Multiple Ballot Measures

Should M&O Levies, Capital Projects Levies and Bonds Be

Separate Elections?

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M&O/Bonds on the Same Ballot

M&O and Bond Levies on the Same BallotPassage Rates

80.2%83.6%

34.3%38.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Separate Proposition Average Joint Proposition Average

Paas

age

Rat

es (

%)

M&O Bonds

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M&O and Capital Levies on the Same Ballot

M&O and Capital Levies on the Same Ballot Passage RatesAs of May 2009

67.0%

75.1%

65.0%

61.5%

67.8%

59.2%

71.1% 70.8%

67.9%

80.6%

59.3%61.1%

67.0%

62.2%

64.9% 65.5% 65.5%

60.2%

70.7%68.3%

67.0%

83.1%

58.1%

63.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SeparateProp.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average

% P

assa

ge

M&O Capital Levies

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M&O and Transportation Levies on the Same Ballot

M&O and Transportation Levies on the Same Ballot Passage RatesAs of May 2009

62.9%65.7%

61.3%

65.2%

68.9%

61.7%

51.1%

68.3%65.8%

61.2%

0.0%0.0%

63.5%

62.0%61.4%

64.9%

70.3%

62.3%

54.5%

67.9%66.2%

60.8%

0.0%0.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SeparateProp.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average

% P

assa

ge

M&O Transportation Levies

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Do tax rates or the economyinfluence voters?

Controlling Tax Rates

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79% 75% 77%

68%

75%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1995 1997 1999 2001 2003

If you knew the passage of the levy won’t increase the tax rate for homeowners?

Tax Rate Changes

% In Favor2003 Eiland Survey

60%

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The absolute size of the tax rate may be less important than the change in rates.

There is very little correlation between the total tax rate and election success. That is, the amount of the total tax rate does not appear to influence voters as much as the stability of the tax rates.

Tax Rate Research

Correlation between Total Tax Rate and Election Success

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

$9.26 $11.17 $11.47 $11.87 $12.58 $13.04 $13.08 $13.32 $13.81 $13.89 $14.17 $14.36 $14.57 $15.35 $16.67

Total Tax Rate

Per

cen

tag

e o

f Y

es V

ote

s, 2

00

0

Ele

ctio

ns

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Stable tax rates lead to greater success at election time.

Districts with smaller tax rate changes have more success passing levies.

Tax Rate Change

This is reflected in the voter survey data. The correlation of real dollar change in tax rates from 1992-97 with election results

demonstrates that stable tax rates lead to greater election success.

Percentage of Yes Votes by Change in Tax Rates

50%

52%

54%

56%

58%

60%

-$2.47 -$1.07 +$0.03 +$1.51

Change in Tax Rates

Per

cent

age

of Y

es V

otes

, 199

2-19

97

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Consumer Confidence Index

Source: Reuters and TradingMarkets.com

20

40

60

80

100

120

140

1/1/

2000

4/1/

2000

7/1/

2000

10/1

/200

0

1/1/

2001

4/1/

2001

7/1/

2001

10/1

/200

1

1/1/

2002

4/1/

2002

7/1/

2002

10/1

/200

2

1/1/

2003

4/1/

2003

7/1/

2003

10/1

/200

3

1/1/

2004

4/1/

2004

7/1/

2004

10/1

/200

4

1/1/

2005

4/1/

2005

7/1/

2005

10/1

/200

5

1/1/

2006

4/1/

2006

7/1/

2006

10/1

/200

6

1/1/

2007

4/1/

2007

7/1/

2007

10/1

/200

7

1/1/

2008

4/1/

2008

7/1/

2008

10/1

/200

8

1/1/

2009

4/1/

2009

Con

sum

er C

onfi

den

ce I

nd

ex

Feb '0350.00%

Feb '0244.44%

Mar '0220.00%Mar '01

61.54%

Feb '0141.67%

Mar '0060.00%

Feb '0025.00%

Mar '0336.36%

Feb '0441.67%

Mar '040.00%

Feb '0575.00%

Mar '0560.00%

Feb '0650.00%

Mar '0662.50%

Feb '0752.94%

Mar '0733.33%

Feb '0840.00%

Mar '0815.38%

Feb '0914.29%

Mar '0950.00%

Apr '0974.52%

May '0933.33%

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Standard & Poor’s 500 Index

Source: Standard & Poor’s

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

Jan-

00

May

-00

Sep-

00

Jan-

01

May

-01

Sep-

01

Jan-

02

May

-02

Sep-

02

Jan-

03

May

-03

Sep-

03

Jan-

04

May

-04

Sep-

04

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

S&

P 5

00 I

nd

ex

Feb '0350.00%

Feb '0244.44%

Mar '0220.00%

Mar '0161.54%

Feb '0141.67%

Feb '0025.00%

Mar '0336.36%

Feb '0441.67%

Mar '040.00%

Feb '0575.00%

Mar '0560.00%

Feb '0650.00%

Mar '0662.50%

Feb '0752.94%

Mar '0733.33%

Feb '0840.00%

Mar '0060.00%

Mar '0815.38%

Feb '0914.29%

Mar '0950.00%

Apr '0974.52%

May '0933.33%

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Bond Election Results 2009: East vs. WestFebruary 2009

Western Washington Eastern Washington

Quillayute Valley Pass Royal Fail

Ocasta Fail College Place Fail

Mary M. Knight Fail East Valley (Spokane) Fail

North Mason Fail

March 2009

Western Washington Eastern Washington

Vashon Island Fail Kennewick Fail

Snoqualmie Valley Pass North Franklin Pass

Puyallup Fail Bickelton Pass

Tacoma Fail Davenport Pass

Auburn Fail Pateros Pass

Burlington-Edison Fail Spokane Pass

Sunnyside Pass

West Valley (Yakima) Fail

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Bond Election Results 2009: East vs. WestApril 2009

Western Washington Eastern Washington

Methow Valley Pass

May 2009

Western Washington Eastern Washington

Bainbridge Island Fail Kennewick Pass

Ocosta Fail Royal Fail

College Place Fail

Yakima Pass

TOTAL # of Issues # of Issues Passed

Western Washington 12 2

Eastern Washington 16 9

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Effects of the Simple Majority

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M&O Election Summary

2008

Total # of M&O Levies: 159

Total # of M&O Levies Passed: 155

Total # of M&O Levies Passed Below 60%: 65

2009

Total # of M&O Levies: 45

Total # of M&O Levies Passed: 44

Total # of M&O Levies Passed Below 60%: 12

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Do you agree or disagree that school districts get more money in taxes as property values go up?

Property Taxes

Agree Disagree

2005 Voters 66% 23%

2007 Voters 68% 20%

Source: Tom Eiland & CFM Consulting

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Property Taxes 101

Increases in Home Values Will Not Increase School District Tax Collections

Changes in home values don’t change the amount of taxes authorized.

Local school taxes can only be increased by a vote of the people. Changing property values will change tax rates, but not tax

collections. Tax collection impact

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$1,000 Levy

$250 $250 $250 $250

$100,000 $100,000 $100,000 $100,000

Property Taxes 101

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$1,000 Levy

$250 $250 $250 $250

$200,000 $200,000 $200,000 $200,000

Property Taxes 101

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$1,000 Levy

$187.50 $250 $250 $312.50

$150,000 $200,000 $200,000 $250,000

Property Taxes 101

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Property Taxes 101

$1,000 Levy

$200 $200 $200 $200 $200

$100,000 $100,000 $100,000 $100,000

$100,000

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Increase in Property Values Will Not Increase School District Tax Collections Changes in property values don’t change the amount of taxes authorized

Local school taxes can only be increased by a vote of the people

Changing property values will change tax rates, but not tax collections

Year Home Value Tax Rate Tax Bill

ABC School District Home Value 2008 $100,000 $5.00/$1,000 $500

Assume a 20% increase in Assessed Value for ABC School District

#1: 20% increase 2009 $120,000 $4.17/$1,000 $500

#2: 10% increase 2009 $110,000 $4.17/$1,000 $459

#3: 30% increase 2009 $130,000 $4.17/$1,000 $542

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Decrease in Property Values Will Not Decrease School District Tax Collections Changes in property values don’t change the amount of taxes authorized

Local school taxes can only be increased by a vote of the people

Changing property values will change tax rates, but not tax collections

Year Home Value Tax Rate Tax Bill

ABC School District Home Value 2008 $100,000 $5.00/$1,000 $500

Assume a 10% decrease in AssessedValue for ABC School District

#1: 10% decrease 2009 $90,000 $5.55/$1,000 $500

#2: 5% decrease 2009 $95,000 $5.55/$1,000 $528

#3: 20% decrease 2009 $80,000 $5.55/$1,000 $444

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Property Taxes 101

Summary

If your property value increases at a lower rate than the average increase for the school district, the amount of taxes you pay will decrease.

If your property value increases at a higher rate than the average increase for the school district, the amount of taxes you pay will increase.

Tax collection impact

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Assessed Value Growth

Current trends

Revalue cycle

New construction

Annual updates

County Revaluation Cycles

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Property Assessment Ratios by County

County2008

Assessed Value ($)2009

Assessed Value ($) Growth2008-09 Real

Property % of AVBenton 11,412,917,457 12,724,702,163 10.31% 90.8%Clark 48,017,610,071 47,499,875,673 -1.09% 92.7%Grays Harbor 5,484,425,084 6,378,701,895 14.02% 82.6%Kitsap 32,652,262,207 32,597,300,794 -0.17% 86.2%Lincoln 952,877,228 1,005,842,437 5.27% 88.4%Okanogan 2,932,413,568 3,464,159,689 15.35% 78.8%Pierce 89,354,870,537 92,604,618,893 3.51% 86.4%Snohomish 99,315,203,205 101,983,434,446 2.62% 91.5%Spokane 35,843,660,824 38,133,367,260 6.00% 78.4%Whatcom 21,624,902,725 23,721,082,080 8.84% 78.9%Yakima 13,676,652,623 14,532,869,569 5.89% 90.6%

Source: Washington State Department of Revenue.

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Home Prices in Washington State

Source: MSN Money: Home Prices by Metro Area, February 24, 2009.

National: -3.4% Q4 2008; -8.2% 1 year

MetroArea Ranking Q4 2008 1 Year 5 Years

Bellingham, WA 109 1.62 (0.63) 60.66 Bremerton-Silverdale, WA 226 (2.06) (7.53) 52.67 Kennewick-Pasco-Richland, WA 25 1.73 2.30 20.28 Longview, WA 197 (1.85) (4.78) 46.73 Mt. Vernon-Anacortes, WA 201 (2.93) (5.09) 52.56 Olympia, WA 164 0.02 (3.01) 56.23 Portland-Vancouver-Beaverton, OR-WA 204 (1.75) (5.20) 48.57 Seattle-Bellevue-Everett, WA 199 (1.56) (5.00) 48.55 Spokane, WA 135 0.41 (1.26) 59.94 Tacoma, WA 203 0.78 (5.11) 51.78 Wenatchee-East Wenatchee, WA 51 3.22 1.24 75.37 Yakima, WA 7 4.43 4.35 37.61

Price appreciation as of December 31, 2008.

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2009-2010 Special Election and Resolution Filing Dates

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Save the Date

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Capital Projects Financing

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Capital Financing Options

Most common Bonds

Voted Non-voted

Capital Projects Levy Less Common

Build America Bonds (BAB’s) Qualified School Construction Bonds (QSCB’s) Qualified Zone Academy Bonds (QZAB’s) Conditional Sale Contracts

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Types of School District Bonds– Voted- Unlimited Tax General Obligation Bonds (UTGO)– Non-voted – Limited General Obligation Bonds (LGO)

A. Voter approved bonds are (UTGO)– repaid with property taxes– approved with a 60% yes vote, 40% validation– 5% Debt Capacity

B. Non-voted bonds are (LGO)– repaid with existing revenue– can’t be used for “new” construction– 3/8 of 1% Debt Capacity

C. Conditional Sale Contracts– Considered “debt” (non-voted)– Payment from general district revenues– No maximum term (economic life)

Capital Financing Options

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40

D. Build America Bonds (BAB’s)– Taxable bonds with Government subsidy– All tax-exempt bond rules apply– IRS/Disclosure– Expires December 31, 2010

E. Qualified School Construction Bonds (QSCB’s)– Tax credit bonds– State allocation $164,100,000– Absence of current market– Expires December 31, 2010

Capital Financing Options

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F. Qualified Zone Academy Bonds (QZAB’s)– interest free loan– private partnership/free & reduced lunch– can’t be used for new construction– non-voted debt

G. Capital Projects Levy (no debt limit)– simple majority– two to six year repayment– no interest cost– frees up M&O funds– jump start capital plan

Capital Financing Options

Bonds are the primary method used by Washington school districts to finance the “local share” of capital projects because

– cash is generated up front

– payments can be spread over time, and

– districts have some control over taxpayer impacts

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Capital Financing Options—State Match (State Funding Assistance) State match for construction projects available to all school

districts

Study and survey grant

State match ratios from 20% to 90%--not dollar for dollar

Does state match create incentive for deferred maintenance?

Unhoused vs. modernization

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Ideal Time Frame for Major Decisions

Preparing for the Election

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The Participants

The Architect provides cost projections based on the project scope

The Underwriter provides financial planning and ultimately buys the bonds for resale to investors

Bond Counsel prepares documents and provides a legal opinion

The Financial Advisor represents the District during negotiations with the Underwriter

The County Treasurer is the District’s treasurer and takes receipt of the bond proceeds

Planning a Bond Financing

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The Ballot Proposition—Voted Bonds

1. Maximum amount to be borrowed

2. Maximum term of the bonds

3. Use of bond proceeds

4. Use of State matching money (Front Funded)

5. Unlimited Authority to levy property taxes to pay debt service

Planning a Financing

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PROPOSITION 1

SCHOOL DISTRICT NO. ___

BONDS FOR CONSTRUCTION OF SCHOOL FACILITIES

The Board of Directors of _____ School District No. ___, adopted Resolution No._____, concerning a proposition to finance construction of school facilities. This proposition would authorize the District to construct a new elementary school (Grades K-3) to replace _______ Elementary School on the existing site and construct additional classrooms to replace portable classrooms at _______ Middle School; issue no more than $19,544,500 of general obligation bonds maturing within 20 years; and levy annual excess property taxes to repay the bonds, all as provided in Resolution No.______. Should this proposition be:

Approved………. ____

Rejected………...____

Bond Proposition

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1. Maximum amount to be levied

2. Maximum term of the levy

3. Use of levy proceeds

4. Levy amount per year

5. Estimated tax rate per year

Ballot Proposition—Capital Projects Levy

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PROPOSITION __________

SCHOOL DISTRICT NO. ___

CAPITAL LEVY FOR TECHNOLOGY IMPROVEMENTS

The Board of Directors of ________School District No. ___adopted Resolution No. _____, concerning a proposition to finance technology improvements. This proposition would authorize the District to acquire and install technology and communication equipment and make other technology improvements and upgrades throughout existing school facilities to improve student learning, and levy the following excess taxes, on all taxable property within the District:

Capital Levy Proposition

Approximate LevyRate/$1,000

Collection Year Assessed Value Levy Amount

2009 $_________ $________2010 $_________ $________2011 $_________ $________2012 $_________ $________

All as provided in Resolution No. ___. Should this proposition be approved? LEVY . . . YES ___ LEVY . . . NO ___

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Capital Levy as Part of Long Range Financing Plan

YearBond AV ($000's)

Bond AV Growth Rate

M&O AV ($000's)

M&O Growth Rate M&O Levy Capital Levy Trans. Levy Existing Debt

Total Bond Levy M&O Levy Capital Levy

Trans. Levy Bond Levy Year

2000 3,500 3.00% 3,450 3.00% 4,500 - - 525 525 5,025 1.30 - - 0.15 1.45 20002001 3,623 3.50% 3,571 3.50% 4,658 - - 543 543 5,201 1.30 - - 0.15 1.45 20012002 3,840 6.00% 3,785 6.00% 4,937 - - 576 576 5,513 1.30 - - 0.15 1.45 20022003 3,917 2.00% 3,861 2.00% 5,036 - - 587 587 5,623 1.30 - - 0.15 1.45 20032004 4,073 4.00% 4,015 4.00% 5,237 - - 611 611 5,848 1.30 - - 0.15 1.45 20042005 4,358 7.00% 4,296 7.00% 5,604 - - 654 654 6,257 1.30 - - 0.15 1.45 20052006 4,707 8.00% 4,640 8.00% 6,052 - - 706 706 6,758 1.30 - - 0.15 1.45 20062007 5,131 9.00% 5,057 9.00% 6,597 - - 770 770 7,366 1.30 - - 0.15 1.45 20072008 5,644 10.00% 5,563 10.00% 7,256 - - 847 847 8,103 1.30 - - 0.15 1.45 20082009 5,644 0.00% 5,563 0.00% 7,256 - - 847 847 8,103 1.30 - - 0.15 1.45 20092010 5,644 0.00% 5,563 0.00% 7,256 - - 847 1,000 8,256 1.30 - - 0.15 1.45 20102011 5,757 2.00% 5,674 2.00% 7,401 1,500 - 1,094 1,094 9,995 1.30 0.26 - 0.19 1.75 20112012 5,872 2.00% 5,788 2.00% 7,550 1,500 - 1,116 1,116 10,165 1.30 0.26 - 0.19 1.75 20122013 5,989 2.00% 5,904 2.00% 7,701 1,500 - 1,198 1,198 10,398 1.30 0.25 - 0.20 1.75 20132014 6,109 2.00% 6,022 2.00% 7,855 1,500 500 733 733 10,588 1.30 0.25 0.08 0.12 1.75 20142015 6,231 2.00% 6,142 2.00% 8,012 1,500 - 1,246 1,246 10,758 1.30 0.24 - 0.20 1.75 20152016 6,356 2.00% 6,265 2.00% 8,172 1,500 - 1,333 1,333 11,004 1.30 0.24 - 0.21 1.75 20162017 6,483 2.00% 6,390 2.00% 8,335 1,500 - 1,389 1,389 11,224 1.30 0.23 - 0.21 1.75 20172018 6,613 2.00% 6,518 2.00% 8,502 1,500 500 947 947 11,449 1.30 0.23 0.08 0.14 1.75 20182019 6,745 2.00% 6,649 2.00% 8,672 1,500 - 1,506 1,506 11,678 1.30 0.22 - 0.22 1.75 20192020 6,880 2.00% 6,782 2.00% 8,845 1,500 - 1,566 1,566 11,911 1.30 0.22 - 0.23 1.75 20202021 7,017 2.00% 6,917 2.00% 9,022 1,500 - 1,627 1,627 12,150 1.30 0.21 - 0.23 1.75 20212022 7,158 2.00% 7,055 2.00% 9,203 1,500 500 1,190 1,190 12,393 1.30 0.21 0.07 0.17 1.75 20222023 7,301 2.00% 7,197 2.00% 9,387 1,500 - 1,754 1,754 12,641 1.30 0.21 - 0.24 1.75 20232024 7,447 2.00% 7,341 2.00% 9,575 1,500 - 1,819 1,819 12,893 1.30 0.20 - 0.24 1.75 20242025 7,596 2.00% 7,487 2.00% 9,766 1,500 - 1,885 1,885 13,151 1.30 0.20 - 0.25 1.75 20252026 7,748 2.00% 7,637 2.00% 9,961 1,500 500 1,453 1,453 13,414 1.30 0.19 0.06 0.19 1.75 20262027 7,903 2.00% 7,790 2.00% 10,161 1,500 - 2,022 2,022 13,683 1.30 0.19 - 0.26 1.75 20272028 8,061 2.00% 7,946 2.00% 10,364 1,500 - 2,092 2,092 13,956 1.30 0.19 - 0.26 1.75 2028

Total School District Tax

Levy

Assessed Value Summary Bond Related LeviesTotal

School District Tax

Rate

Summary of Levy Amounts Summary of Levy Rates

Projected Tax RatesLevy / $1000 Assessed Value

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

M&O Levy Existing Debt Capital Levy Trans. Levy

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50

Capital Levy to “Jump Start” Long Range Capital PlanCase Study:

Seek voter approval for a three year Capital Levy in 2010 Tax collection 2011, 2012, 2013 Place bond issue before voters spring 2013 Bond tax collection starts 2014

Tax Rates$3,635,000 Capital Levy approved Feb 2010Estimated tax rate: $0.50/$1,000Collection 2011, 2012, 2013

$17,500,000 Bond Issue approved Feb 2013Estimated tax rate increase over 2013: $0Estimated tax rate: $0.50/$1,000Collection 2014 through 2029

Results Voter approved tax increase with Simple Majority Bond issue is approved without tax increase with Super Majority

Projected Tax Rates

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Lev

y/$1

000

Ass

esse

d V

alue

Capital Levy 2014 Bond Issue

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51

A. Projected Budget1. Estimated costs

2. Estimated revenues Bonds Local Share vs. Front Funded Investment earnings Impact fees

B. Projected Cash Flow1. Tax law considerations

Arbitrage Rebate Expenditure Rule

C. Projected Impact on taxpayers1. Levy rates are the standard means of communicating the tax impact

Tax rate per $1,000 Tax deduction

The Financing Plan

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52

Assumptions for Tax Rate Planning

Interest Rates

Bond Rating

Assessed Value

Bond Structure

Financial Planning

Page 53: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

53

Assumptions for Levy Rate PlanningA. Interest Rates

- Lower interest rates result in lower tax rates for bonds.- Interest rates are determined when bonds are actually sold.- Assumption: Current rates plus 1.5%

Financial Planning

Bond Buyer Index20-Year General Obligation Bond

(1 year history)

3.75

3.90

4.05

4.20

4.35

4.50

4.65

4.80

4.95

5.10

5.25

5.40

5.55

5.70

5.85

6.00

6.15

6.30

Au

g-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan

-09

Feb

-09

Mar

-09

Ap

r-09

May

-09

Jun

-09

Jul-

09

Au

g-09

Rat

es (

%)

Bond Buyer Index20-Year General Obligation Bond

(25 year history)

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

14.00

Au

g-84

Au

g-85

Au

g-86

Au

g-87

Au

g-88

Au

g-89

Au

g-90

Au

g-91

Au

g-92

Au

g-93

Au

g-94

Au

g-95

Au

g-96

Au

g-97

Au

g-98

Au

g-99

Au

g-00

Au

g-01

Au

g-02

Au

g-03

Au

g-04

Au

g-05

Au

g-06

Au

g-07

Au

g-08

Au

g-09

Rat

es (

%)

Page 54: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

54

Assumptions for Levy Rate Planning (continued)B. Bond Rating

- A higher bond rating results in lower interest rates.- Assumption: Aaa (with bond insurance)

Aa1 (with State Guaranty)

A Guide to Bond Ratings

Moody’s Investors Service – Founded 1918

Highest Quality Aaa

Aa1, Aa2, Aa3

A1, A2, A3

Baa1, Baa2, Baa3

Lowest Quality NR (Nonrated)

Financial Planning

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55

Bond raters consider local economy, district finances and other factors.

The Rating

DebtFactors

Economy

Governmental Factors

FinancialPerformance

Example:

Lake Washington Aa1 Auburn A1 Selah A3

Richland A1 Yakima A2 Ellensburg A3

Kennewick A1 Pasco A3 Riverview A1

Financial Planning

Page 56: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

56

Bond RatingsDistribution of Underlying Ratings Among

Washington School Districts

Only 120 out of 295 districts have underlying ratings.

Source: Moody’s and Standard & Poor’s rating reports, 2008.

Moody's Standard &

Poor's% of WA

School Districts*Aaa AAA Insured OnlyAa1 AA+ 4.17%Aa2 AA 1.67%Aa3 AA- 10.83%A1 A+ 18.33%A2 A 28.33%A3 A- 35.00%

Baa1 BBB+ 1.67%Baa2 BBB 0.00%Baa3 BBB- 0.00%

Rating Levels

*Percent of the school districts in Washington State that are rated by one or both rating agencies.

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57

Bond Rating Process

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58

Bond InsuranceA very significant market change has occurred regarding the use of bond insurance:

Result Investors care much more about the fundamental underlying credit quality of the borrower.

Moody's S&P Fitch

ACA NR NR NR

Ambac Caa2 (Uncertain) CC (Neg) Withdrawn

Assured Guaranty Aa2 (Neg) AAA (Neg) AA (Neg)

BHAC Aa1 (Stable) AAA (Neg) NR

CIFG Ba3 (Uncertain) CC (Neg) Withdrawn

FGIC WR NR Withdrawn

FSA Aa3 (Neg) AAA (Neg) AA+ (Neg)

MBIA Baa1 (Uncertain) A (Uncertain) NR

Radian Ba1 (Stable) BBB- (Neg) Withdrawn

XCLA (Syncora) Ca (Uncertain) R Withdrawn(As of 8/10/09)Source: Bloomberg via Moody's, S&P and Fitch.

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59

State Guarantee ProgramWashington School Districts are very fortunate to benefit from the State’s School Bond Guarantee program. Several features differentiate this program from other states:

State Rating Program Dynamics

Washington Aa1/AA+Established in 2000, full faith credit and taxing power, direct payment of debt service before default.

Oregon Aa2/AA-

Established in 1997, full faith credit and taxing power, direct payment of debt service before default. The State can reimburse itself by withholding operating appropriations to the district.

Texas Aaa/AAAEstablished in 1983, $17 billion of assets support school bonds, direct payment of debt service before default. The State will reimburse itself by withholding operating appropriations.

However, the State’s strong Aa1 rating is not guaranteed to remain stable indefinitely, and investors have become more keenly interested, since the bond insurer downgrades, in the borrower’s own ability to repay the debt.

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60

Fund Balance--How Much is Enough?

A strong fund balance benefits the District through:

A higher bond rating (lower borrowing cost)

Reduced likelihood of short-term cash-flow crises

Credibility with major constituencies

Moody’s suggests that the Board adopt a formal policy to maintain a minimum general fund balance of between 5% and 10% of expenditures, depending on management’s assessment of its vulnerability to disruptions.

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61

Fund Balance--How Much is Enough?National Median (School Districts, all ratings): 14.4%

National Median (School Districts, Aa1, Aa2, Aa3): 14.8%

National Median (School Districts, rated A1, A2, A3): 13.7%

Washington Median (School District, rated Aa1): 6.2%

Washington Median (School District, rated Aa2): 4.8%

Washington Median (School District, rated Aa3): 5.7%

Washington Median (School District, rated A1): 7.3%

Washington Median (School District, rated A2): 5.6%

Washington Median (School District, rated A3): 6.8%

Source: National data: Moody’s Investment Service Special Comment January 2009, “2008 Local Government national Medians”Washington data: Moody’s Investors Service, 2007.

Page 62: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

62

Global Scale Ratings

Moody’s conducted an extensive default study, which showed that default rates in the municipal bond sector have historically (at least since 1970) been much lower than those in the corporate bond sector. This is especially true for UTGO and LGO debt, like the District’s bonds.

Moody's 10-year default rates

2.23%

0.56%0.29%

0.07%0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

Investment-Grade Corporate

Aaa-ratedCorporate

Municipal(excluding GO,water & sewer)

All Investment-Grade Municipal

Source: Moody’s Investment Service Special Comment June 2006“Mapping Moody’s U.S. Municipal Bond Rating Scale to Moody’s Corporate Rating scale and Assignment of Corporate Equivalent Ratings to Municipal Obligations.”

Page 63: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

63

Financial PlanningC. Assessed Value

– Higher Assessed values will lower the District’s tax rates (but not overall payment).– An individual’s taxes will be based on the assessed value for their own property.

– Growth from new construction.

– Assessment cycle (Annual market based adjustment vs. periodic reassessment)

School District Assessed Value GrowthHistorical and Projected

10.53%

3.79%

10.38%

6.00%

7.00%

3.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2004 2005 2006 2007 2008 2009 and thereafter*

Page 64: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

64

Bond Structures

D. Assessed Value

Level Debt

Wrapped Level Debt

Level Levy*

Wrapped Level Levy*

* Can be for Debt Service Levy only or for combined total levy rate.

Page 65: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

65

Level Debt

Results in level annual payments for the life of the bonds.

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Deb

t S

ervi

ce

$0.25

$0.30

$0.35

$0.40

$0.45

$0.50

$0.55

Tax

Rat

e

New Debt Tax Rate

Page 66: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

66

Wrapped Level Debt

Results in level annual payments on all of the district's bonds

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Deb

t S

ervi

ce

$0.25

$0.30

$0.35

$0.40

$0.45

$0.50

$0.55

Tax

Rat

e

Existing Debt New Debt Tax Rate

Page 67: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

67

Level Levy

Attempts to result in a level annual tax rate over the life for the bonds*

* Based on assessed value projections.

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Deb

t S

ervi

ce

$0.25

$0.30

$0.35

$0.40

$0.45

$0.50

$0.55

Tax

Rat

e

New Debt Tax Rate

Page 68: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

68

Wrapped Level Levy

Attempts to result in a level annual tax rate for all of a district's bonds*

* Based on assessed value projections.

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Deb

t S

ervi

ce

$0.25

$0.30

$0.35

$0.40

$0.45

$0.50

$0.55

Tax

Rat

e

Existing Debt New Debt Tax Rate

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69

D. Bond Structure– State law gives districts great flexibility in determining bond structures.

– Options frequently include: Level payments

Level rate for bonds only

Level rate for all levies

Option #1 Option #2 Option #3 Option #4 Option #5

DescriptionLevel Debt Base Case

Combined Level Tax Rate

Delayed Sale Combined Stepped

Level Tax Rate

Combined Level Tax Rate (All School Tax

Rates)

Combined Level Tax Rate (All School Tax

Rates)Total Authorization $70,000,000 $70,000,000 $70,000,000 $70,000,000 $70,000,000

$135,000,000Bond Sales:

June 2009 70,000,000 70,000,000 24,000,000 70,000,000 70,000,000December 2010 23,000,000December 2011 23,000,000December 2012 67,500,000December 2013December 2014 67,500,000

Levy Rates:2009 $2.82 $2.82 $2.82 $5.82 $6.68

Projected 2010 $3.35 $2.93 $2.96 $5.93 $6.792010 increase over 2009 $0.53 $0.11 $0.14 $0.11 $0.11

Page 70: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

70

Option #5: Level Tax Rate (All)

$70MM

Proposed Bond Tax Rates

$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00$5.50$6.00$6.50$7.00$7.50$8.00$8.50$9.00

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

Lev

y/ $

1000

Ass

esse

d V

alue

2015 Bonds2013 Bonds2007 BondsExisting BondsM&O

Page 71: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

71

Tax Impact AnalysisIssue Structure: Level Debt Service

Estimated 2010 Tax Rate Increase

Over 2009 Tax Rate (Bonds Only)

(per $1,000 assessed value): $0.53

Assessed

Value of

Property

Gross Property

Tax Increase

For Bonds

Monthly

Gross

Increase 25% 28% 33% 35%

-- Federal Income Tax Bracket--

$100,000 $53.00 $4.42 $39.75 38.16 $35.51 $34.45

150,000 79.50 6.63 59.63 57.24 53.27 51.68

200,000 106.00 8.83 79.50 76.32 71.02 68.90

250,000 132.50 11.04 99.38 95.40 88.78 86.13

300,000 159.00 13.23 119.25 114.48 106.53 103.55

Net Tax Increase from

Bonds After Allowing for

Income Tax Deduction

NOTE: Qualified homeowners may apply for a senior exemption. Please contact the County Assessor for details.

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72

1. Construction Cash Flows Effect on tax rates Effect on project costs Effect on investment earnings

2. Other Levies M&O levy Other levies

3. Assessed Value Growth What is your county’s assessment practice/when will change? Source of new assessed value

4. Impact on Taxpayers Federal Income Tax deductibility Senior exemption

5. Financing Goals Tax rates? Interest rates?

Things to Consider

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73

Refunding Overview

What is a refunding?

A refunding is a procedure whereby an issuer refinances an outstanding bond issue by issuing new bonds. Issuers refund bonds to reduce interest costs, and/or restructure the payment of the debt.

Page 74: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

74

Refunding Bonds

There are two primary types of refundings: current refundings and advance refundings.

Current refundings — Under federal tax law, a current refunding is one in which the new refunding bond transaction is closed within 90 days of the refunded issue’s next available call date of the debt to be refunded.

Advanced refundings – Under federal tax law, an advanced refunding is one in which the new refunding bond transaction is closed more than 90 days before the first available call date of the debt being refunded.

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75

Call Feature on Bonds

“Calling” a bond means to prepay it before its scheduled maturity date

Not all bonds can be called

Call feature is set prior to the sale of bonds– Which bonds can be called– Why they can be called– What price is paid to call the bonds

Example of typical call language: “Bonds maturing on and after December 1, 2009 are subject to redemption on or after June 1, 2009 at the price of par.”

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76

Refunding Overview

ISSUER

Debt Service onOutstanding Bonds

New RefundingBonds

Special U.S. GovernmentObligation (SLGS) andT-Bills

Debt Service onRefunding Bonds

OldBonds

NewBonds

Debt Service onOutstanding Bonds

OldBonds

NewBonds

TO BUY

TO PAY

OWES

ISSUES

OWES

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77

Points to Consider By law, advanced refundings are only allowed once before the call date.

– Must provide debt service savings annually

– Savings benefit only taxpayers

– Cannot extend term of the bonds

Impact on non-voted debt capacity—the “over issuance” of new bonds to pay cost of issuance and fund escrow is counted against non-voted debt capacity

Bond rating—is this the best time to have the District’s bond rating reviewed?

Future debt issuance and the impact of Federal Tax Law related to:

– Arbitrage rebate

– Bank Qualification

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78

Selling the Bonds

Two Methods Competitive Negotiated

Competitive Sale Financial Advisor Bonds sold to highest bidder

Negotiated Underwriter Bonds sold to produce desired result

Page 79: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

79

Competitive vs. Negotiated

Our school district clients care most about outcomes

Schools are different than the State, the largest cities or some counties

They have to care about managing tax rates in both the near and long term, because they (uniquely) have to go to the voters for approval of funds for a significant portion of their operating revenues

It is no coincidence that the extensive use of negotiated bond sale coincides with 20 years of voter generosity.

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80

1st Independent BankAmerican Marine BankBaker Boyer National BankBank of AmericaCharles SchwabDiscover BrokerageFirst Security Investment Franklin Federal Tax Free FundICM Asset ManagementMontana Board of InvestmentsMontana Tax-Free FundNorthern State BankPEMCOPeoples BankSanta Barbara TrustSeattle Capital ManagementSterling Savings BankThornburg Investment ManagementUSAA Investment Management Co.Washington FirstWells Fargo Bank

WEST

AAL Capital ManagementAlliance Capital Management Co.Bear StearnsBessemer TrustBlackrockBoston CompanyColonial FundsDB Scudder of Boston, MADelaware Management Co.DreyfusEaton Vance MunicipalsFidelity InvestmentsGoldman Sachs Asset ManagementLord AbbettMD Sass Investors Services Inc.Navaid FinancialPioneering Management Corp.PNC BankSanford C. BernsteinU. S. Trust of New York

EAST

CENTRAL

Allstate Insurance Co.Bank OneFirst Security InvestmentHarris BankHeartland Advisors Inc.IDS Tax ExemptInvestors Fiduciary Trust Co.JanusNorthern Trust Co.Nuveen Advisory CorpSociety Asset ManagementState Farm Fire & CasualtyStein Roe & FarnhamStrong Capital ManagementU.S. BankUnited Savings & LoanVictory Capital ManagementVoyageur Asset Management

Selected representative institutional clients

Selected representative institutional clients

Selling the Bonds

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81

Selling the Bonds

Source: D.A. Davidson Fixed Income Capital Markets

Bond Distribution--Who Buys Your Bonds2009

Insurance, 20%

Money Manager, 25%Agent, 1%

Retail, 5%

Broker-Dealer, 3%

Bank Trust, 15%

Bond Fund, 20%

Bank Portfolio, 10%

Corporation, 1%

Page 82: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

Current Market

Page 83: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

83

Current Market

Debt markets have changed significantly during the current economic cycle.

Page 84: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

84

20-yr Bond Buyer Index – 25-yr History Bond Buyer Index

20-Year General Obligation Bond(25 year history)

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

14.00

Au

g-84

Au

g-85

Au

g-86

Au

g-87

Au

g-88

Au

g-89

Au

g-90

Au

g-91

Au

g-92

Au

g-93

Au

g-94

Au

g-95

Au

g-96

Au

g-97

Au

g-98

Au

g-99

Au

g-00

Au

g-01

Au

g-02

Au

g-03

Au

g-04

Au

g-05

Au

g-06

Au

g-07

Au

g-08

Au

g-09

Rat

es (

%)

Page 85: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

85

20-yr Bond Buyer Index – 1-yr History Bond Buyer Index

20-Year General Obligation Bond(1 year history)

3.75

3.90

4.05

4.20

4.35

4.50

4.65

4.80

4.95

5.10

5.25

5.40

5.55

5.70

5.85

6.00

6.15

6.30

Au

g-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan

-09

Feb

-09

Mar

-09

Ap

r-09

May

-09

Jun

-09

Jul-

09

Au

g-09

Rat

es (

%)

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Combined Muni vs. Treasury – 10-yr

Interest Rates since 1999

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7/30

/99

1/30

/00

7/30

/00

1/30

/01

7/30

/01

1/30

/02

7/30

/02

1/30

/03

7/30

/03

1/30

/04

7/30

/04

1/30

/05

7/30

/05

1/30

/06

7/30

/06

1/30

/07

7/30

/07

1/30

/08

7/30

/08

1/30

/09

7/30

/09

Rat

es

30-year Treasury 20-Bond Index

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Combined Muni vs. Treasury – 2-yr

2-year History of Interest Rates

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.507/

30/0

7

9/30

/07

11/3

0/07

1/30

/08

3/30

/08

5/30

/08

7/30

/08

9/30

/08

11/3

0/08

1/30

/09

3/30

/09

5/30

/09

7/30

/09

Rates

30-year Treasury 20-Bond Index

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Basic elements for an orderly Capital Market have been challenged Security – Confidence at being repaid

Liquidity – Ability to trade at reasonable price

Transparency – Access to information that might affect security/liquidity

Integrity – Belief in a “fair” market

Current Market

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Security Confidence has decreased significantly Flight to “Quality” – meaning highest grade (Aa or better) Difficult and costly to find buyers of lesser quality bonds Cause:

Continued downgrading of Bond insurers Perception about current or future financial difficulties for municipalities Failure of “Derivative Products” causing increased interest costs for many

issuers

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Challenges for Municipal Market Muni market is significantly different from Equity and Treasury Market

No central trading function

Variety of issuers and credits

Tax-exemption

New taxable products

Impact on supply-demand-pricing

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Levy Library

http://www.levylibrary.org/

Page 92: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

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Levy Library

Page 93: Wsu Levies&Bonds Impact Crnt Econ Condtn 8 13 09

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Levy Library

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D.A. Davidson—Firm Update Founded in 1935 we have grown

from two employees to over 1,000 employees in the past 74 years.

We are a growing, vibrant employee-owned company with a capital base of over $130,000,000.

Most experienced K-12 finance team in the State focused on the needs of all school districts.

Depth of K-12 Finance Team: Our 8-person team has a wide range of experience, including a former school district official and a Moody’s rating analyst.

We were the leading underwriter of Washington school bonds in 2008.

2008 TotalsSenior Manager

3Piper Jaffray

12Seattle-Northwest

23D.A. Davidson & Co.

Washington Schools2008

As of May 2009Source: Securities Data Corporation

As of August, 2009Source: Thomson Municipal Market Data

*Includes Pooled Financing.

2009 TotalsSenior Manager

2Piper Jaffray

11Seattle-Northwest

29*D.A. Davidson & Co.

Washington Schools2009

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95

D.A. Davidson Contact List

Northwest Education Finance Team

Jack Eaton

Senior Vice President

(206) 903-8698 phone

(206) 389-4040 fax

[email protected]

Jon Gores

Senior Vice President

(206) 389-4043 phone

(206) 389-4040 fax

[email protected]

Chad Cowan

Vice President

(206) 903-8697 phone

(206) 389-4040 fax

[email protected]

Maura Lentini

Vice President

(206) 903-8687 phone

(206) 389-4040 fax

[email protected]

Suzanne Eide

Vice President

(206) 903-8690 phone

(206) 389-4040 fax

[email protected]

Shandra Tietze

Associate

(206) 903-8695 phone

(206) 389-4040 fax

[email protected]

Maria Elvrum

Executive Assistant

(206) 389-4044 phone

(206) 389-4040 fax

[email protected]

Kelsey Draper

Administrative Assistant

(206) 903-8694 phone

(206) 389-4040 fax

[email protected]

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Bio—Jon GoresMr. Gores joined D.A. Davidson & Co. in 2006 as a Senior Vice President in the Public Finance department. Previously, he was with Seattle Northwest Securities for 18 years as Vice President of Public Finance, where he served as Manager of the School Finance Group for Washington State schools. Jon has originated over 170 Washington school district financings in the past 5 years. Jon has been a school district public finance specialist since 1985. He has been instrumental in developing financing solutions for specific school district funding needs. His advocacy on behalf of school districts with the State legislature has resulted in the repeal of the law that caused the tax rate spike that districts encountered with a mid-year bond sale, and his lobbying the legislature has led to the expanded use of limited general obligation (LGO) debt. His efforts resulted in H.B. 1832, which allows school districts to use LGO debt for remodeling of and additions to existing facilities. Most recently Mr. Gores proposed legislation now in effect that allows a direct transfer of state forest revenue from the debt service fund to the capital projects fund.

Jon is a member of WASA, WSSDA, WASBO, and is a featured speaker at numerous conferences. He serves as a trustee of the Washington State School Boards Educational Foundation. He has been a guest lecturer at the University of Washington, WSU, and Seattle Pacific University and Seattle University. Mr. Gores served on the School Bond Guarantee Program advisory committee and was appointed to the Finance Committee for the Simple Majority.