A measure.that would break up the Clark County School District, jammed through a few minutes before sine die in the Senate, has raised concerns among financial experts and rating agencies.
Whether this will give Gov. Brian Sandoval, a supporter of the concept, pause befroe signing it, and whether the governor believes he owes it to sponsor David Gardner, who voted for his tax plan, remains to be seen. But three items I have obtained indicate the concerns -- one a letter from respected bond Counsel John Swenseid before the vote, an immediate inquiry from Moody's afterwards and then a banking expert's analysis after talking to the rating agency. To wit:
Swenseid:
We have previously commented to you on AB 394, 1st reprint, in our letter dated May 21, 2015. Today you asked us to review the “mockup” proposed change to AB 394, 1st reprint mark up of AB 394 released today, designated “Proposed Amendment 7799 to Assembly Bill 394, First Reprint” (herein, the “Mockup”).
We believe the Mockup, like the First Reprint we commented on in out May 21 letter, will create significant uncertainties about the future nature of Clark County School District. This includes uncertainties about bonds issued after the passage of the Mockup (if it is passed) and bonds issued after the plan contemplated by the Mockup is implemented. Below is a brief summary of our concerns:
1. As described in the May 21 letter, Federal Securities Laws require that material uncertainties about the finances of Clark County School District be disclosed, as they may be material to an investor’s decision on whether or not to invest in a Clark County School District Bond. This disclosure will not be beneficial to the marketing of the District’s Bonds and may adversely affect the interest rate the District pays on its bonds.
2. Unfortunately, the changes in the Mockup do not alleviate our earlier concerns and does add other concerns that will be difficult to disclose in a way that is not negative for Clark County School District.
a. For example, The Mockup requires that the plan “authorize . . . precincts to share in any bonding capacity.” The Mockup does not say how this is to be done under the provisions of NRS as currently written, which authorize only bond issues secured by district wide revenues.
b. Changes to NRS are likely to be required to truly implement a fair “sharing” of bond capacity (given the locations of the properties that generate the tax revenues that go to repay bonds), but the Mockup seems to imply that a plan will go into effect once Board of Education Regulations are adopted, without, necessarily, any changes to NRS. See subsection 4 of Section 28. An advisory committee’s plan, and even the Board of Education Regulations presumably cannot override provisions of law, as written in NRS.
c. We previously raised a concern about language in AB 394 requiring the advisory committee to consider “The liability of a local school precinct with respect to any duties and obligations of the Board of Trustees of the Clark County School district which will be assumed by the governing body of a precinct.” Sec. 27(4)(b)(9) (emphasis added). We are unsure what “obligations” means here, but its meaning could have significant implications. Does “obligations” include bonds, and if yes, could precincts assume liability for the debt service of certain outstanding bonds of the District? If precincts assume liability, this may constitute an impairment of the District’s contract with such bondholders and could potentially lead to litigationbecause the security of the bonds could be impaired.
3. Further, as I mentioned on the phone today, the addition of the ability of any school district to consolidate with another school district, as provided in Section 20.15 and 20.20 creates another federal securities law disclosure issue for Clark County School District and other school districts in Nevada—what will the backing for a bond issued by a district that might consolidate be, the original district’s resources or a consolidated district’s resources? We also wonder whether this can be done (a consolidation that changes security for bonds) without impairing contracts with holders of outstanding bonds.
As before, we recommend that the ideas in the AB 394 and the new ones in the Mockup be studied and if appropriate, be included in a more specific plan brought to the legislature in 2017, for its consideration. Such an approach is unlikely to adversely affect bonds of Clark County School District or other Districts during the study period, and effects on finances and bonds after the proposed plan is implemented can be considered and weighed by the legislature in determining the best plan elements to include in future legislation.
It is much more palpable to disclose that a proposal for re-organizationof the District is being studied, rather than disclosing that a mandatory plan, whose significant financial details are unknown and uncertain, will be implemented once it is developed.
Sincerely,
John Swendseid
Sherman & Howard L.L.C.
50 West Liberty Street, Suite 1000, Reno, Nevada 89501
-----
Received by district and banking officials a few hours after passage:
I was wondering if you guys had a few minutes to talk about SB 394, what it means for the Clark County School District in the short- and long-terms, and how you guys are planning to proceed. Thanks. Best, Will
William Oh
Analyst | Public Finance Group
Moody's Investors Service
-----
And then this analysis after the call from Pat Zamora of Zion's Bank:
My major concern is that with the disclosure of AB 394 in the District's bond offering documents and the need to try to describe to the rating agencies what are unknowns that will develop over the next few years that AB394 will be a significant factor in being able to sell District bonds even if the District's rating would remain unchanged. AB 394 will only be one of a number of factors in determining the District's rating.
Because NRS 350 essentially requires the District to issue bonds through a competitive sale this means that the District is communicating with the rating agencies and underwriters and not directly with investors. The type of disclosure necessary could without any rating change cause underwriters to price the District's bonds with higher yields if the underwriters think it might be more difficult to place these bonds with investors. Another scenario is that underwriters might not submit bids for the bonds at all.
A worse case scenario would be all of these factors coming together. A downward change to the District's rating coupled with a underwriters pricing the risk of being able to place the bonds with investors and/or receiving no bids from underwriters or a throw away bids.
Also important to note on March 24, 2015 Moody's issued an Issuer In-depth report on the District and referred to the legislative authorization of the 10-year rollover authority as a "credit positive" by being able to address the school facility needs.
As you probably know the District has begun the process to authorize $500 million In bonds to begin projects that we are expecting to price in September.
A measure.that would break up the Clark County School District, jammed through a few minutes before sine die in the Senate, has raised concerns among financial experts and rating agencies.
Whether this will give Gov. Brian Sandoval, a supporter of the concept, pause befroe signing it, and whether the governor believes he owes it to sponsor David Gardner, who voted for his tax plan, remains to be seen. But three items I have obtained indicate the concerns -- one a letter from respected bond Counsel John Swenseid before the vote, an immediate inquiry from Moody's afterwards and then a banking expert's analysis after talking to the rating agency. To wit:
Comments: