School District Of Philadelphia Sinking Fund Tutorial School District of Philadelphia - PowerPoint Presentation

School District Of Philadelphia Sinking Fund Tutorial

School District of Philadelphia General Obligation Credit Daily Sinking Fund Deposits – Covenant and Mechanism ■ In 1982, the District covenanted to irrevocably direct the Revenue Commissioner of the City to pay all school taxescollected by the Revenue Commissioner (the School Tax Collector) directly to the GO bonds’ Fiscal Agent for deposit in theSchool District’s GO Bonds sinking funds■ The sinking funds’ daily deposit is equal to the pro‐rata amount required to be deposited on each City business day suchthat amounts will accumulate by 15 days before each interest and principal payment date (“Accumulation Date” or“Sinking Fund Deposit Date”) the interest and principal due on that date. For each fiscal year, the daily deposit amountsare set forth on a schedule delivered to the City Revenue Department by the School District as a part of the irrevocabledirection■ In order to ensure sufficient funds on each Accumulation Date, collections start six months prior to each sinking funddeposit date for interest and one year prior to each sinking fund deposit date for principal payment■ For example, collections for the $13.675 million principal payment due on June 1, 2017 started on May 17, 2016■ With 263 business days between May 17, 2016 and May 17, 2017 the daily deposit requirement for this principal payment is$51,996.20■ If a given day’s Daily Deposit Tax Revenues are insufficient to cover the daily deposit requirement, the covenant is notbreached; the shortfall is added to the subsequent day’s requirement until the deposit requirement is current■ As a result, each Sinking Fund is brought current as Daily Deposit Tax Revenues are collectedOnly when the sinking funds are current is the City Revenue Department permitted to transfer School Tax Revenues tothe District’s Operating Account

School District of Philadelphia General Obligation Credit 13 __________________________________________________________________ Daily Deposit Tax Revenues constitute a large portion of the District’s local revenuesOnly the school taxes collected by the City’s Revenue Commissioner, as tax collector for the District, are Daily Deposit TaxRevenuesSummary of Daily Deposit Tax Revenues ($000’s)Daily Deposit Tax Revenue Source FY17 Amount FY16 Amount Collector DescriptionSchool Real Estate Tax $721,234 $706,118 City as Collection Agent Tax on real estate in PhiladelphiaBusiness Use & Occupancy Tax $139,500 $139,500 City as Collection Agent Tax on the use of real estate within the SchoolDistrict for commercial or industrial activityLiquor Tax $65,650 $63,950 City as Collection Agent Tax on the sale of liquor by the drinkNon‐Business Income Tax $39,900 $39,800 City as Collection Agent Tax on the non‐business income of PhiladelphiaresidentsTotal Daily Deposit Tax Revenues $966,284 $949,368 ■ In addition to the School District taxes collected by the City as School Tax Collector for the District, the District also receives Local Revenues which are collected by the Commonwealth (School Cigarette Tax, up to $120 million from proceeds of a 1% City Sales Tax and the School District’s Public Utility Realty Tax)

School District of Philadelphia General Obligation Credit _________________________________________________________________________Daily Deposit Tax Revenues are received by the Fiscal Agent throughout the fiscal year■ School Real Estate Tax – annually assessed on all real estate located within City boundaries■ Rate is authorized by the City and levy is imposed by the School Reform Commission by June 30th of each year■ Assessments are certified on the first Monday of each October and taxes are levied for the calendar yearcommencing January 1 following the adoption of the June levy resolution■ Taxes are due by March 31st, however if paid by the end of February taxpayers are given a discount of 1%; if paidafter the end of March the amount due is subject to interest of 1.5% per month■ Business Use & Occupancy Tax – imposed on the use or occupancy of real estate within the City for the purpose ofconducting any business, trade, occupation, profession, vocation, or any other commercial or industrial activity■ Tax is due monthly■ Liquor Tax – imposed on the sale of liquor by the drink (rate is 10%)■ Tax is due monthly on the 25th of the month■ Non‐Business Income Tax – applied to the non‐business income of residents from the ownership, lease, sale ordisposition of certain real or personal property, including net income for dividends and interest on securities■ Tax is due April 15thLocal Tax Revenues by Month■ Based upon information from the School District, unaudited Daily Deposit Tax Revenues by month for FY16 are set forthbelow:

School District of Philadelphia General Obligation Credit __________________________________________________Section 696 of the PA School Code prevents the City from reducing the Daily Deposit Tax Revenues■ Since the District has been declared “distressed”, the PA School Code contains provisions that prevent the City from takingactions which would reduce any School District Taxes including the Daily Deposit Taxes, while the District is distressed■ Section 696 requires the City Council to authorize taxes in each fiscal year to yield School Tax Revenues (the Daily DepositTax Revenues plus any other school taxes authorized by the City) in an amount at least equal to the highest amount ofSchool Tax Revenues in the three preceding fiscal years and to maintain all other payments and grants to the SchoolDistrict at the same level each fiscal year■ As a result, Daily Deposit Tax Revenues cannot be reduced by City Council■ Below is a chart showing FY16’s unaudited Daily Deposit Revenues compared to existing GO debt service to project the debt service coverage provided by FY16 Daily Deposit Tax Revenues

Projected GO Debt Service Coverage based on FY16 Daily Deposit Tax Revenues ($000s)

School District of Philadelphia General Obligation Credit________________________________________________________Daily Deposit Tax Revenue Daily Sinking Fund Deposits for GO Debt

School District of Philadelphia General Obligation Credit________________________________________________________GO Debt is further supported by a State Aid Intercept backstop In the event that insufficient monies are on deposit in the GO Bonds’ Sinking Funds 15 days prior to a debt service payment date, the Fiscal Agent is required to trigger the State Aid Intercept provisions in Section 633 of the PA School Code.In this circumstance, pursuant to the Fiscal Agent Agreement, the Fiscal Agent will make demand of the Secretary of Education (“Secretary”) to cause the implementation of the pre‐default intercept provisions in Section 633 in advance of an actual debt service payment date. The Secretary will then “withhold out of any State appropriation due such school district” an amount needed to cure the deficiency and pay such amount over to the Fiscal Agent. The payment schedule of the District’s State Aid receipts provides coverage throughout the fiscal year from appropriations due to the District over the remainder of the fiscal year. In FY16 a historically long Commonwealth budget impasse meant no interceptable aid was made available to school districts until January 2016 and the remainder of a full year’s appropriation of the basic education subsidy was not madeavailable until May 2016. If the Fiscal Agent had needed to trigger the intercept provision in Section 633 prior to December 2015, no money would have been available to make an intercept payment. When the complete Commonwealth FY17 budget was ultimately passed, the Fiscal Code was amended with new intercept provisions that reduce bondholder exposure to the Commonwealth’s annual budget process.

School District of Philadelphia General Obligation Credit__________________________________________________________PA recently enacted new intercept provisions that strengthen the mechanism■ The Fiscal Code amendment (“Act 85”) enacted new intercept provisions that appropriate General Fund money to be used for intercept payments in the event the “annual appropriations for payment of Commonwealth money to school districts have not been enacted by July 1 and continue to be not enacted when a payment is due”.■ In order to fund the appropriation and make payments under an intercept statute or agreement during a budget impasse, the Department of Education must submit justification to each of the majority and minority chairs of the House and Senate Appropriations Committees.■ Upon receipt there is a 10 day review/comment period.■ The House and Senate committee chairs may comment, but have no power to deny or alter the funding of the appropriation■ In order to be eligible to receive intercept payments, school districts must submit information to the Department of Education summarizing their intercept‐eligible debt■ Format of this submission has been developed by the Department of Education, but until the new format is final, school districts must submit final official statements and loan documentation within 30 days of receipt of bond proceeds. ■ Interceptable aid when no education appropriations have been enacted is limited to 50% of the prior fiscal year’s state aid appropriation for each school district ■ For the District, such amount would be $772 million based on FY17’s appropriation ■ If a budget impasse were to occur on July 1, 2017, for example, when combined with Daily Deposit Tax Revenues , the effect of Act 85’s provisions would mean that the District’s bondholders have access to over $1.7 billion ■ Comprised of a combination of State appropriations (total aid = $1,544mm, 50% = $772mm) and Daily Deposit Tax Revenues ($966mm) without regard to the status of the Commonwealth’s fiscal year appropriations for education or the District’s operations

School District of Philadelphia General Obligation Credit ______________________________________________Act 85 Process and proceduresBefore amounts necessary to comply with the intercept statutes are appropriated in the absence of Commonwealth appropriations for education for the applicable fiscal year, certain conditions must be met, including:1. The Pennsylvania Department of Education (“PDE”) must submit justification to the majority and minority chairs of the appropriations committees of the Pennsylvania Senate and House of Representatives allowing ten (10) calendar days for their review and comment2. Each school district subject to an intercept statute or intercept agreement must deliver to PDE, in such format asPDE may direct, a copy of the final Official Statement for the relevant bonds or notes or the loan documentsrelating to the obligations, within thirty (30) days of receipt of the proceeds of the obligations.■ The District has not been advised as to whether PDE will submit a justification covering all school districts at the beginningof a budget impasse on July 1 of a fiscal year or on a case by case basis■ To help make sure the required justification is submitted timely the District will:■ Include in its (i) fiscal agent agreements for general obligation bonds; and (ii) direct pay intercept agreements forLease Revenue Bonds provisions requiring notice to be given to PDE that the justification required by Act 85 must besubmitted to the appropriation committee chairs immediately (if it has not already been submitted) so that the steps necessary for the intercept payment to be made by the applicable debt service payment date can be implemented in sufficient time ■ To comply with the PDE filing requirements the District will file hard copy of the Official Statements and applicable loan documents, including schedules of principal and interest payments and payment dates and sinking fund deposit dates for each series of outstanding obligations eligible for the benefit of the intercept provision ■ Any electronic filing with contain the same schedules