The Michigan Legislature recently altered the School Bond Qualification and Loan Program through Public Act 437 of 2012 (effective December 31, 2012). This law caps the loan aspect of the Program when the total School Bond Loan Fund balance reaches $1.8 billion (expected to occur in 2014). Once the cap is reached, the State of Michigan will not permit new voted bond issues under the Program that project an anticipated borrowing. After June 30, 2016, that cap will expire. During the cap period, school districts may still “qualify” their bonds and receive the State’s credit rating even after the cap is reached, so long as no loan is projected.
The following summary addresses the most germane changes to the qualification process caused by PA 437.
Computed Millage Rate. When a district receives qualification for a bond issue expected to borrow from the Program, it will receive a “computed millage” rate, set by the Department of Treasury (not less than 7 mills and no more than 13 mills), which is the millage rate necessary to pay off all outstanding qualified bonds and Program loans no later than the mandatory final loan repayment date (72 months after the final maturity date of the bonds resulting in the first borrowing from the Program). Unlike the prior law, the final mandatory repayment date applies to all outstanding Program loans and bonds issued to refund Program loans as opposed to the individual bond issue being qualified. This change could make it very difficult for a district with an outstanding Program loan balance to issue more qualified bonds without increasing its millage rate.
Annual Recalculation. Previously, the “computed millage” was determined on the issue date of new bonds and applied throughout the life of the bonds or associated Program loan. Under the new law, however, “computed millage” will be recalculated annually and may change based on the issuance of additional qualified bonds, the refunding of any qualified bonds, changes in loan interest rates and, particularly, changes in taxable values. Accordingly, school districts that anticipate borrowing from the Program must also include ballot language indicating that the estimated computed millage rate may change based on such circumstances. The statute provides that districts must recalculate their computed millage annually beginning October 1, 2013. Because districts must file their resolutions certifying millage levies by September 30 each year, this office concludes that districts are not required to change their millage levies as a result of the recalculation until 2014. The Department of Treasury has indicated the millage recalculation will apply to the December, 2013 levy.
Prequalification. Districts will still have new money bond issues prequalified by the Department of Treasury, but only if the district can show that it will be able to repay all outstanding state loans and qualified bonds, including the proposed new bond issue, by the applicable final mandatory repayment date. In determining whether the district can meet the applicable final mandatory repayment date, each district will submit debt service projections prepared by its financial advisor using the following assumptions to arrive at the estimated computed millage: the average growth or decline in the district’s taxable value for the immediately preceding 5 years for the first 5 years of the proposed bonds and the average growth rate of the district’s taxable value for the immediately preceding 20 years for the remaining term of the proposed bond issue (but not less than 0% or greater than 3%). Additionally, the State Treasurer now has the discretion to refuse to prequalify a bond issue if it would have an “adverse financial impact” on the State, the school district, or the Program. In determining adverse financial impact, the Treasurer may consider whether the proposed bond and outstanding bonds and Program loans exceed 25% of the district’s taxable value at the time of issuance. The new law provides no other guidance on what is meant by the phrase “adverse financial impact.”
Cooling Off Period. Once a mandatory loan repayment date is established, it applies to all qualified loans of the school district, whenever made, until 30 days after the date the school district has no outstanding qualified loans and no outstanding debt incurred to refund those qualified loans. The State Treasurer is authorized to determine a later mandatory repayment date for a school district that agrees to a higher debt millage, not to exceed 13 mills, than its existing computed millage.
Refunders. Refunding bonds will receive qualification if they comply with the provisions of the Revised Municipal Finance Act (i.e., show a net present value savings) and the school district can show it will repay all outstanding qualified bonds, the proposed refunding bonds, and all State loans by the applicable final mandatory repayment date.
Fees. In addition to the current qualification fee, the Department of Treasury may now also charge a prequalification fee and an annual “loan activity fee” to pay for the administrative expenses of operating the Program.
There are several areas of the new law that need clarification and/or technical corrections. Thrun Law Firm’s finance attorneys are working with the Department of Treasury to work out the details of qualification under the new law to better inform our clients about the new program procedures.