October 27, 2006

Overview of State Bond Overview of State Bond Financing ProgramsFinancing Programs

Laura Lockwood-McCall Laura Lockwood-McCall

Director, Debt Management DivisionDirector, Debt Management Division

Office of the Oregon State TreasurerOffice of the Oregon State Treasurer

2

Introduction

Definitions

U.S. Debt Market

General Obligation Credits and Ratings

Oregon’s Bonding Process

Mechanics of a Bond Sale

Oregon’s Long-term Debt Trends

State Debt Ratio Comparisons

3

What is a bond issue?

The process of issuing bonds is the process of borrowing money

Evidence of the issuer’s obligation to repay its debt Pledge of general fund or

specified resource Specified schedule of principal

and interest payments

4

Why do governments issue bonds?

Major source of funding for a jurisdiction’s long-term capital needs

Allows assets to be acquired as needed rather than when enough cash has been saved

Spreads costs of a capital asset over time to all those who benefit from it

Short-term borrowings for smoothing out cash flow imbalances, not as a way to balance the budget!

5

What types of projects are financed with tax-exempt bonds?

Interest on state and local bonds

issued for “governmental

purpose” capital projects are

exempt from both federal and state

taxation

Examples of public projects

include schools, roads, bridges,

city halls, court buildings, sewer

and water facilities

Investors are willing to accept a

significantly lower interest rate due

to the double tax-exemption

offered

6

What is a private activity tax-exempt bond?

Certain “private activity” projects or programs that serve a larger public purpose may also be issued on a tax-exempt basis

Examples include financing of airports, ports, affordable housing, first time homebuyer mortgages, electric power generating facilities, convention centers and sports stadiums

Qualified 501(c)(3) organizations can also issue tax-exempt bonds for projects such as educational, health and cultural facilities (including Willamette University!)

7

Treasury**16.4%

Mortgage Related23.3%

Federal Agencies10.3%

Money Market13.2%

Asset Backed7.8%

MunicipalSecurities

9.0%

U.S. Corporate20.2%

U.S. Bond Market

Outstanding Bond Market Debt as of September 2005* ($Trillions)

Total: $24.7 Trillion

Source: Bond Market Association * Figures may not add due to rounding** Includes interest bearing marketable public debt only

$5.0T

$3.2T$2.5T

$1.9T

$2.2T

4.0T

$5.7T

8

U.S. Municipal Bond Market

Mutual Funds

14.3%

Money Mkts15.2%

Closed-End Funds

4.2%

Commercial Banks7.0%

Prop. & Casualty

Insurance13.2%

Other**7.9%

Households34.6%

Owners of U.S. Municipal Securities as of June 30, 2005* ($ Billions)

Total: $2.1 Trillion

Source: Bond Market Association*Figures may not add due to rounding** Includes non-financial corporations, state and local government general funds & retirement funds, savings institutions, life insurance companies, private pension funds, brokers/dealers, etc.

$815B

$304B

$323B

$90B

$141B

$281B

$168B

9

What is a bond credit rating?

Credit ratings provide investors with an easily identifiable way to assess the degree of risk in an issuer’s securities

Three major firms in municipal market Standard and Poor’s Moody’s Investors Service Fitch Investors Service

Different rating schemes, but same underlying theme: AAA for highest rated securities AA, A, BBB levels as perceived risk increases BBB- is below investment grade

10

What factors are considered by the credit rating agencies?

General Obligation Bonds Financial performance of jurisdiction Governance Framework/Management Practices Debt burden Economic base

Revenue Bond All of the above, plus Strength of specific revenue streams pledged Legal, financial agreements Rate covenants

11

Recent Oregon G.O. Bond Rating History

Moody’s S&P Fitch1990 Aa (January) AA- AA (September)1991 Aa AA- AA1992 Aa AA- AA1993 Aa AA- AA1994 Aa AA- AA1995 Aa AA- AA1996 Aa AA (September) AA1997 Aa2 (April) AA AA1998 Aa2 AA AA1999 Aa2 AA AA2000 Aa2 AA AA2001 Aa2 AA AA2002 Aa2 AA AA2003 Aa3 (February) AA- (October) A+ (February)2004 Aa3 AA- A+2005 Aa3 AA- AA- (April)2006 Aa3 AA- AA-

12

Legal Authority for State General Obligation Bond Programs

Oregon Constitution provides authority to issue general obligation (“GO”) bonds

Separate GO bond programs are created by constitutional amendments approved by State voters

The State unconditionally promises to pay debt service over the life of each GO issue from any legally available revenues

Debt limits linked to real market value (RMV) of property in the State

e.g., Higher Education (XI-G) Bonds 0.75% RMV = $ 2.48 B authorized Only $170 M in XI-G debt outstanding

Numerous other GO bond authorizations, each with hefty debt limits

More practical limits on outstanding debt established by State Debt Capacity Advisory Commission (SDPAC)

General Fund debt service as % of General Fund Revenues (5% max target)

13

Oregon’s Bond Authorization Process

Oregon has disciplined debt management policies and procedures

Biennial budget process requires legislative authorization for all new bond issuances during a biennium (“bond bill”)

General obligation bonding programs currently focused on capital needs of higher education, community colleges

Revenue bond programs are created by statute that authorizes State agencies to pledge specific revenue streams for debt repayment

Appropriation credits generally used for funding construction of state prisons, other state office capital needs

Governor

Budget & Bonding Proposal

Legislature

Considers & Approves Budget

& Bonding Proposal

State Treasurer

Issues State Bonds on behalf of State

Agencies

State Agencies

Manage Bond Programs

State Debt Policy Advisory

Commission

14 17

Program

Amount Outstanding

(MM) Use of Funds

Main Source of

Repayment

Backup Source

of Repayment

Uninsured

Ratings 1

Board of Higher Education

$830 Higher education facilities

User charges, student building fees, gifts,

grants and legislative appropriati ons

State general obligation

M: Aa3 S: AA-

F: AA-

TANs $148 State cash flow management

All available revenues of State from taxes not

otherwise pledged

NA M: MIG1

S: SP-1+

F: F1+

COPs $1,040 State offices,

prisons, and equipment

Rent payme nts by the

user State Agencies, via legislative appropriation

NA M: A1

S: A+ F: A+

Appropriation Bonds $386 Restore cash balances during

2001 budget crisis

Legislative appropriation NA M: A1 S: A+

F: A+

Overview of Credits & Programs

____________________(1) “M” indicates Moody’s, “S” indicates Standard and Poor’s and “F” indicates Fitch.

State of Oregon Bond Issuing Entities

15 18

Overview of Credits & Programs

Program

Amount Outstanding

(MM) Use of Funds

Main Source of

Repayment

Backup Source

of Repayment

Uninsured

Ratings 1

Lottery Bonds $600 Economic development and

education

Lottery revenues after prizes and operating

expenses;

Direct appropriations

by Legislature

M: A1

S: AAA

F: A+

Highway User Tax

Revenue Bonds

$529 Restore highways;

$1.5 bn remaining unused authorization

Taxes and fees on fuel

and licenses, after certain expenses and formulaic set -asides; 3x

coverage test

NA M: Aa2/VMIG-1

S: AAA/AA+

F: AA/F-1+

Department of Veterans’ Affairs Bonds

$737 Make subsidized housing loans to military veterans

Pass -thru of mortgage payments

State General Obligation

S: Aa3/VMIG -1 M: AA-/A-1+

F: AA -/F-1+

Single and Multi -Family Housing

Bonds

$1,497 Finance mortg age loans for low -to-

moderate income residents and construction of low

rent housing developements

Pass -thru of mortgage payments

Reserve accounts / FHA

and other insurance proceeds from

mortgages / Lien on properties

Single Family: M: Aa2/VMIG-1

Multi-Fami ly:

Varries deal -to-deal

____________________(1) “M” indicates Moody’s, “S” indicates Standard and Poor’s and “F” indicates Fitch.

Other state agencies with active bond programs include Economic and Community Development Department, Department of Energy, Oregon Facilities Authority, and Department of Environmental Quality.

State of Oregon Bond Issuing Entities

16

Considerations when Selling State of Oregon Bonds

Method of Sale

Competitive vs. negotiated sale of bonds

Size and complexity of transaction

Market conditions

Competitive sales make sense if:

Frequent issuer with well-known credit

Stable interest rate environment

Negotiated sales make sense if:

Infrequent issuer

Dynamic interest rate environment

Complex transactions involving enhanced premarketing efforts

17

Timing of Sales of State Bonds

Authorization requirements

Program spending needs

Federal tax law considerations

State Treasurer’s office manages

overall state bond calendar

Goal -- keeping in-state retail

interest high for each sale

reduces overall interest cost

Helps state avoid pricing bonds

when other large transactions,

economic announcements are

impacting capital markets

Major State Bond Programs

Planned Issuance through

6/30/07

COPs $ 94 M

Lottery Bonds 183 M

Single Family Mortgage Program

300 M

GO Bonds/Veterans Mortgage Program

80 M

GO Bonds/Energy Loans

68 M

GO Bonds/Higher Education & Community Colleges

138 M

ODOT Bonds 350 M

Multifamily Housing Bonds

100 M

Total $ 1,313 M

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Who are the members of the financing team?

Financial advisor

Bond counsel

Underwriter(s)

Underwriters’ counsel

Trustee

Other consultants and professionals

And most important, the issuer!

19

What should an issuer look for in selecting the financing team?

Expertise in municipal capital markets

Understanding of jurisdiction’s objectives and needs

Experience with similar types of securities

Awareness of innovative financial methods which can reduce costs or provide financial flexibility

Ability to complete your financing on a timely basis

You get what you pay for – lowest cost providers don’t always save you money in the long run!

20

What types of documents are needed to publicly issue bonds?

Official statement

Bond resolution

Trust indenture

Notice of sale

Bond purchase agreement

Continuing disclosure agreement

Tax certificate

21

How does the State ensure bonds are priced fairly in a negotiated sale?

Financial advisors are hired who are independent of underwriters and are knowledgeable about the bond pricing process

Financial advisors monitor capital markets both prior to and after pricing to confirm that bonds are sold to underwriters at market levels Comparable issues also in market Bond market benchmarks

22

Trends in Oregon Bond Issuance

History of Total Obligations Outstanding

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

General Obligation Bonds Direct Revenue Bonds Appropriation Credits• Historically, most general

obligation debt linked to self-supporting Veteran’s Mortgage Bonds

• Growing use of revenue bonds to fund economic development, highways, mortgages for 1st time homebuyers

• Recent State budget crisis led to issuance of $450 M in appropriation deficit bonds and $2B in POBs in 2003

• On the horizon -- $1.9 B authorization for ODOT bridge and road improvements

23

Trends in General Obligation Bond Issuance

History of Outstanding General Obligation Debt

$0

$1

$2

$3

$4

$5

$6

$7

198519861987198819891990199119921993199419951996199719981999200020012002200320042005

In Billions

DVA Bonds All Other GO Debt Pension Obligation Bonds

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Trends in Appropriation Credits Issuance

History of Outstanding Appropriation Credit

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Millions

Certificates of Participation Appropriation Bonds

25

Trends in Direct Revenue Bond Issuance

History of Outstanding Direct Revenue Bonds

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

SF & MF Mortgage Bonds Lottery Bonds

Highway User Bonds EDD Bond Bank

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Calculation of Net Tax-Supported and General Fund Debt

Type & PurposeTotal

Gross DebtOutstanding

Net Tax-Supported Debt

General Fund Supported

Debt

General Obligation BondsGeneral Fund Supported

General Purpose Bonds $0 $0 $0Community College Bonds 2,675,000 2,675,000 2,675,000Higher Education Facility (XI-G) Bonds 170,163,993 170,163,993 170,163,993Pollution Control Bonds (85% of Total) 33,528,250 33,528,250 33,528,250DAS Oregon Opportunity Bonds 192,605,000 192,605,000 192,605,000DAS Pension Obligation Bonds (38% of Total)* 791,904,800 791,904,800 791,904,800

Total General Fund Supported $1,190,877,043 $1,190,877,043 $1,190,877,043

Fully Self-SupportingState Highway Bonds $0 $0 $0Veterans' Welfare Bonds 757,690,000 0 0Higher Education Facility (XI-F) Bonds 595,923,724 0 0Pollution Control Bonds (15% of Total) 5,916,750 5,916,750 0Water Resources Bonds 1,356,000 1,356,000 0Elderly & Disabled Housing Bonds 213,580,000 0 0Alternate Energy Project Bonds 133,685,000 0 0DAS Pension Obligation Bonds (62% of Total)* 1,292,055,200 1,292,055,200 0

Total Self-Supporting $3,000,206,674 $1,299,327,950 $0

Total General Obligation Bonds $4,191,083,717 $2,490,204,993 $1,190,877,043

Revenue BondsDirect Revenue Bonds

Lottery Revenue Bond Program(s)** $600,555,000 $600,555,000 $0Highway User Tax I Revenue Bonds 174,500,000 174,500,000 0Highway User Tax II Revenue Bonds 355,085,000 355,085,000 0Transportation Infrastructure Bank 0 0 0Economic Development - Bond Bank 186,335,000 0 0Single-Family & Multi-Family Housing 1,520,641,073 0 0State Fair & Exposition Center Bonds 0 0 0

Total Direct Revenue Bonds $2,837,116,073 $1,130,140,000 $0

Conduit or Pass Through Revenue BondsEconomic & Industrial Development $683,185,401 $0 $0Oregon Facilities Authority 738,324,836 0 0Multi-Family Housing Programs 98,510,785 0 0

Total Conduit or Pass Through Revenue Bonds $1,520,021,022 $0 $0

Appropriation Credits Certificates of Participation (COP's) $1,040,030,000 $1,040,030,000 $1,040,030,000

Oregon Appropriation Bonds 385,865,000 385,865,000 385,865,000Total Appropriation Credits $1,425,895,000 $1,425,895,000 $1,425,895,000

Total Gross Debt $9,974,115,812

Total Debt - Less Conduit Revenue Bonds $8,454,094,790 $5,046,239,993 $2,616,772,043

*To conform to rating agency methodologies Pension Obligation Bonds are considered net tax-supported debt.** Rating agencies recognize that these programs are supported by a dedicated Lottery revenue source.

State of Oregon

Comparison of Total Gross Debt, Net Tax-Supported Debt and General Fund Supported Debtas of December 31, 2005 (all numbers to be updated subsequent to agency verification)

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State Debt Comparisons

Source: Moody’s State Debt Medians Reports, 1996 - 2005

Recent Trends in Oregon's Net Tax Supported Debt per Capita

$431 $422 $446 $505 $540 $541 $573 $606

$701 $703

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

M oody's M edian Year

Debt per Capita

POB Bonds

Oregon

Median Among 50 States

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State Debt Comparisons

Source: Moody’s 2003 State Debt Medians

Recent Trends in Oregon's Net Tax Supported Debt as a % of Personal Income

2.1% 2.1%1.9% 2.0%

2.2% 2.1%2.3% 2.2%

2.4% 2.4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

M oody's M edian Year

Debt as a % of Income

POB Bonds

OregonMedian Among 50 States

29

Where can I get more information on Oregon municipal bonds?

State Treasurer’s Office http://www.ost.state.or.us/divisions/DMD/index.htm Oregon Bond Calendar and Bond Index Oregon Bond Manual State Debt Policy Advisory Commission reports Municipal Debt Advisory Commission reports

GFOAhttp://www.gfoa.org/ An Elected Official’s Guide to Debt Issuance An Elected Official’s Guide to Rating Agency Presentations

OMFOAhttp://www.omfoa.org/ Annual spring conference Northwest Government Institute each fall