Refunding Policies

Preliminary Financing Plan

The school district’s financial advisor must submit a refunding bond financing plan to the Kentucky Department of Education and to the SFCC, when the SFCC is involved in meeting a portion or all of the refunding bond debt payments. The refunding bond financing plan must include the following information:

  • A schedule of the prior bond payments, shown by the SFCC and local portions;
  • Call requirements of the prior bonds;
  • Estimated cost of escrow;
  • Sources and uses of funds of the refunding bonds;
  • Total interest cost savings report, nominal and net present value basis;
  • District’s interest cost savings report, nominal and net present value basis; and
  • SFCC interest cost savings report, nominal and net present value basis.

Districts may undertake composite refunding bond issues, where refunding bonds are blended with a bond issue that provides constructions funds. A blending of the refunding with the new issue could increase the future bonding capacity of the school system or meet a district’s special financing needs. The financing plan must demonstrate the interest cost savings are being met as though the bonds were not part of a composite issue.

Required Interest Cost Savings

Net present value (NPV) savings should be calculated by discounting the interest cost savings each fiscal year, at the average coupon of the refunding bonds, and on a semi-annual compounding basis. The NPV savings may be adjusted by adding back the accrued interest and any contingency paid to the district at closing due to bond rounding. The refunding bonds should be structured using a similar maturity as the refunding bonds for evaluation purposes.

The Executive Director may grant districts some leeway in applying the 5% NPV rule for school revenue refunding bond issues, especially in light of the remaining term of the bonds.

For example, suppose a school district has only 4 years remaining on a prior issue. The district plans to include a refinancing of these bonds in order to realize an interest cost savings, but also to increase their bonding capacity due to the 4 lean bonding years occurring as a result of this bond debt on their books. Otherwise, the district may have to delay the construction of a needed school until the prior bonds are paid in full. The district’s financial advisor could ask the Executive Director to approve issuing the bonds with a lower NPV.

Financing Plans

Financing plans must be submitted to the Kentucky Department of Education and the SFCC at least 3 weeks prior to the sale date of the refunding bonds. A cover letter including projected savings should accompany the schedules.

KDE or the SFCC, where the SFCC is involved in the debt participation, must notify the financial advisor at least 10 days prior to the bond sale if the refunding bond savings or structure does not meet the policies of KDE and the SFCC.

A copy of the preliminary official statement for the refunding bonds must be submitted to KDE and the SFCC, where SFCC is involved in the debt participation, at least 5 working days prior to the bond sale.

Refunding Bond Payment Dates

As a general rule, the principal and interest payment dates for the refunding bonds should be the same as the prior bonds. January 1 and July 1 payment dates should be avoided. If these were the payment dates on the prior bonds, the new payment dates should be moved to August 1 and February 1.

Problems also occur when refundings are conducted in the last quarter of a fiscal year. The Depository Trust and Clearing Corporation requires that a principal payment not occur before 90 days prior to the delivery date.

The normal remedy available to the financial advisor is to:

  • Have one short interest and principal payment sized to produce level savings;
  • Schedule delivery of the refunding bonds after the district and SFCC have made their scheduled payments; or
  • Avoid any interest or principal payments at all for the refunding bonds during this quarter.

This produces a larger savings up-front and in most instances will result in a lower overall gross savings, but equitable NPV savings.

Final Maturity of the Refunding Bonds

In refunding issues where the SFCC is a participant, the SFCC’s new payments cannot extend past the original fiscal year. The SFCC bond payment during a fiscal year cannot exceed the original amount.

In stand-alone refundings, local districts may not extend the term of the refunding bonds unless the refunding issue is a part of an overall restructuring plan.

Refunding Policies