DINUBA – To continue momentum in building all elements of the new Dinuba High School campus, the district received authorization for a financing agreement that will begin this month.
The Dinuba Unified School District (DUSD) Board of Trustees voted at its meeting Sept. 28 to approve the district entering into certificate of participation (COP) financing, which is a way school districts can borrow money without voter approval. Jenny Bruner, the vice president of Keygent LLC, a municipal advisory firm that worked with DUSD on the COP, presented to the board the basics of what the agreement entails.
“(A COP) acts as a lease mechanism where the district enters into a lease with a nonprofit, collateralizes a school site (and) makes payments,” Bruner said. “And then once those payments are done, the school site title is transferred back to the district.”
DUSD will use this COP to generate $15 million in funding that it can use for capital improvement projects, such as building athletic facilities on the new Dinuba High campus and addressing repairs and upgrades needed at other DUSD schools.
What is a COP?
COPs are a form of tax-exempt bonds that use lease agreements to generate funds that the district will eventually pay back.
Through the resolution approved by the DUSD Board of Trustees, the district will grant a leasehold interest in one of its school properties — Washington Intermediate School — to nonprofit organization the Public Property Financing Corporation of California (PPFCC). After the district generates funding, it will pay back the money it has borrowed to the nonprofit with interest per the terms of the lease agreement.
In some COP agreements, a municipality will give ownership of a property to the nonprofit it is entering into a lease agreement with, and will regain the property title in a lease-to-own format; however, in this case DUSD is not transferring ownership of its property to the nonprofit. Instead, DUSD is using that property as collateral, or assurance that the district will pay back the funds.
According to the executive summary of the DUSD 2023 COP Financing agreement prepared by the consulting law firm Stradling, Yocca, Carlson & Rauth, DUSD will sell certificates of participation to investors to generate the funding to finance its capital improvement projects. Those certificates represent interest the investor has in the lease payments that DUSD makes to PPFCC; investors then receive payment from PPFCC as the district pays off its debt.
“The COPs are structured as ‘asset transfer’ certificates since the project financed by the COPs is secured by other assets of comparable value,” the summary said. “Such a financing is very similar to a homeowner taking a home equity loan out of their primary residence in order to provide cash toward the purchase of a vacation home.”
DUSD’s COP terms
Bruner told the board that the district wanted to execute the agreement as soon as possible because interest rates continue to rise. By issuing the COPs now, the district can ensure it will have a lower true interest cost later on.
She said that the district would get started on executing the agreement immediately after it was approved and the interest rates and pricing would be locked in by Oct. 5. DUSD is required to notify the Tulare County Office of Education and the auditor/controller about its intent to issue COPs 30 days in advance, which Bruner said it had already done.
“Because construction costs are going up (and) interest rates are going up, you may incur some costs to issue the COP now, but if you paid it off with the bond in a year or so, you could save in the long run,” Bruner said.
According to the resolution approved by the board of trustees, the cost of issuing the COPs is estimated to be just under $400,000, which Trustee Bev Keel-Worrell expressed concern over.
“That’s $398,000 for issuance,” Keel-Worrell said. “That seems pretty high.”
Bruner explained that a COP agreement typically comes with a higher issuance cost than a general obligation bond because the district has to pay for a bond counsel, a financial advisor and fees that go with title insurance, bond insurance and debt surety.
The resolution approved by the board authorized issuance of COPs not exceeding a total of $17 million, so while the district plans to generate $15 million in funds for its projects, it will also be able to cover the cost of the COP issuance itself.
According to the executive summary of the agreement, the lease term is expected to end on June 1, 2048; however, the district has an prepayment option with a call provision that begins on June 1, 2024. This would allow the district to pay back the COP with funds from the general obligation bond DUSD is considering putting on the ballot in November 2024.
Bruner said the bond counsel would be drafting the COP so that the district can pay it off with a future bond or state proceeds.
Included in the resolution was a good-faith estimate from Keygent that said the anticipated true interest cost of the COPs will be 5.12%; the final borrowing rate will be determined once the COPs are sold to investors. With that interest rate, $398,613 in issuance costs and $15 million in proceeds from the COPs, the total payment amount by the 2048 lease end date would be $28.3 million.
According to data shown by Bruner, the district was also looking at a 15-year lease term, which would end with a total payment amount of $21.7 million.
The closing of the COP agreement is expected to be Oct. 26. The district will have funds secured approximately three weeks after the COP financing is sold to investors.