Case Study

Arizona School Facilities Board

In 2003, Public Financial Management ("PFM") was appointed by the Arizona School Facility Board (SFB), to develop a lease-to-own school financing structure pursuant to new state legislation. The SFB has recently exhausted its debt authorization under the prior revenue bond authority. Our first assignment was to work with the Board and bond counsel to outline all of the issues surrounding the use of collateral for the program. This was complicated since over 50 schools in more than 30 districts were involved in the program.

Traditional lease financings are dependent on the value of the underlying assets as collateral providing part of the security. Given the multiple jurisdictions, traditional collateral structures were not practical. In light of this finding, we developed a "collateral-light" strategy that avoided costs related to title insurance and appraisals and used an asset pool approach to relieve focus on any one school facility. This approach also saved over $2 million in interest and credit enhancement costs compared to a full "non-collateralized" approach.

We next developed a rating strategy in the face of a national crisis related to state credits. Although Arizona was on negative credit watch, with our refined approach to collateral we achieved A1/AA- underlying ratings and qualified for bond insurance. PFM conducted a competitive procurement for underwriters that resulted in a takedown of $1.50 per bond, the lowest we are aware of in the state. The initial series of bonds sold in January and the second series sold in August with true interest costs ("TIC"s) of 4.13% and 4.16% respectively.

To date, nearly $600 million in lease-to-own certificates have been issued, providing a cost effective means to address the mushrooming school construction needs in Arizona.