School Business Affairs September 2019

20 SEPTEMBER 2019 | SCHOOL BUSINESS AFFAIRS asbointl.org district bond issues that have been sold since the beginning of 2014, only 13 have been CABs, rep- resenting fewer than 2% of all K–12 issues sold during that time. To minimize the use of CABs, California passed a law in 2013 that reduces the maxi- mum length of maturity for CABs from 40 years to 25 years and limits a school district’s repayment ratio to no more than $4 in interest and principal for every $1 bor- rowed. Furthermore, it requires CABs with maturities longer than 10 years to include a prepay- ment option. Additionally, the California law stipulates that school districts must provide their boards of education with public reports that detail planned borrowings that involve CABs. Among other things, the analysis must include the cost of the bond issue, as well as the reason for using CABs. The goal of the law is to eliminate the heavy indebtedness that resulted from issuing CABs with final maturities of 25 to 40 years. Weighing Alternatives The regulatory landscape for municipal advisers has changed significantly during the past 10 years. One of the major outcomes of increased regulation is the stipu- lation that municipal advisers have a fiduciary duty to their clients, which means the adviser must place a school district’s interests ahead of its own. The adviser must also review reasonable financial alternatives to a financing. If a school district is con- sidering the use of a CAB structure, the municipal adviser should evaluate it against other structures (CIBs) and help the issuer weigh the advantages and disad- vantages of each option. When evaluating the use of When evaluating the use of CABs, the main focus should be on the difference in the financing cost. CABs, the main focus should be on the difference in the financing cost. In an ever-changing municipal bond market environ- ment, a school district must consider several variables when determining the most cost-effective financing plan for its capital improvements. Although the use of CIBs is commonplace, the sale of CABs may be more cost-effec- tive in some situations. A municipal adviser can help a district carefully analyze the pros and cons of CABs and determine the best overall financing approach. Tammie Beckwith Schallmo is senior vice president and managing director for PMA Securities LLC, Naperville, Illinois. Email: tammie@pmanetwork.com Robert E. Lewis III is senior vice president and managing director for PMA Securities LLC, Naperville, Illinois. INDE X OF ADVERT I SERS American Fidelity Assurance Company . back cover AEPA. page 21 CenterPointEnergy. inside front cover DecisionInsite, LLC . page 23 Harris School Solutions . page 3 Horace Mann. inside back cover KPE/PEPPM CSIU Cooperative . page 33 Office Depot . page 11 Voya Financial. pages 34–35 MONKEY BUSINESS/STOCK.ADOBE.COM

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