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					Budgetary Comparison Information - December 2001 Accounting Release

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                         June 2002
                         Advance Refunding Bonds

                         Issued To:

Search this site:                School District and BOCES Business Officials

                         Purpose of Bulletin

                         This bulletin explains the reporting requirements for advance refunding bonds. Many
                         school districts are issuing advance refunding bonds this year because the state is
                         changing how it calculates and pays building aid. Building aid, rather than being based
                         on actual debt service payments, will now be based on an "assumed amortization
                         calculation" that assumes that districts borrow money for the maximum period of
                         probable usefulness allowed by Local Finance Law section 11.00 and pays an assumed
                         interest rate. Details are on the State Education Department's website at

                         What are a "current refunding" and an "advance refunding"?

                         In a current refunding, the proceeds of the refunding bonds are used currently
                         (immediately) to redeem the old debt. In an advance refunding, the refunding bonds are
                         issued "in advance" of the actual redemption and placed in an escrow account pending
                         the call date or maturity date of the old debt.

                         Why do a debt refunding?

                         A debt refunding is usually done to extend the payout of the debt to the maximum legal
                         limit (A project with a period of probable usefulness of 25 years that was financed over
                         15 years is extended by 10 years to stretch-out the payments) or to achieve a present-
                         value savings (A time-value analysis of the stream of debt service payments is done on
                         the outstanding bonds and the proposed advance refunding bonds to determine whether
                         there's an economic savings) usually because of lower interest rates.

                         How is an advance refunding done?

                         In an advance refunding, bonds are refinanced (paid off) by issuing new bonds.
                         Typically, the proceeds of the new bonds are placed in an escrow account (in a bank or
                         trust company located and licensed to do business in New York State). After payment of
                         issuance costs, the proceeds are used by the escrow agent to purchase special United
                         States Treasury securities (generally directly from the Bureau of Public Debt, Division of
                         the U.S. Treasury Department). The escrow agent uses the principal and interest (1 of 3) [6/20/2002 3:12:03 PM]
Budgetary Comparison Information - December 2001 Accounting Release

                         collected on these to pay the outstanding "refunded" bonds. The refunded bonds, if they
                         are callable, are subsequently (on their call date) "called" for early maturity prior to
                         their stated maturity date. If the bonds are not callable, they can still be advance
                         refunded, but the escrow account is established to pay debt service on the refunded
                         bonds on each bond maturity date rather than an earlier "call date".

                         How is an advance refunding reported in financial statements?

                         The debt service fund reports revenues and expenditures equal to the bond proceeds
                         (See Form ST-3*):

                          Revenue Account              V980-5791          Proceeds of Refunding Bonds   Page 75, line 4
                          Expenditure Account          V522-9991.4        Payment to Escrow Agent       Page 80, line 77

                         If local funds are used to pay closing costs, the debt service fund reports:

                          Revenue Account           V980-5031            Interfund Transfer              Page 75, line 4
                                                    V522-9991.4          Fiscal Agent Fees               Page 75, line 8
                                                    V522-9991.4          Payment to Escrow Agent         Page 80, line 77

                         *Page and line references are to the Annual Financial Report (Form ST-3) for the year
                         ending June 30, 2002, The Statement of Non-
                         current Governmental Liabilities (page 116), which is the new schedule for the Long-
                         term Debt Account Group, should report the new debt, but not the old debt.

                         How is debt service paid on the refunded bonds?

                         Debt service payments on the refunded bonds are paid directly from the escrow
                         account. These are not included in the school district budget.

                         What Notes to Financial Statements are needed?

                         Audited statements should include a footnote using the following examples as a guide:

                         In the year the advance refunding takes place:

                         Note X: General Long-term Debt

                         On (month, date, year), $ xx.x million in general obligation bonds with an average
                         interest rate of x.x percent were issued to advance refund $ xx.x million of outstanding (2 of 3) [6/20/2002 3:12:03 PM]
Budgetary Comparison Information - December 2001 Accounting Release

                         bonds with an average interest rate of x.x percent. The net proceeds of $ x.x million
                         (after payment of $ x.x million in underwriting fees, insurance, and other issuance
                         costs) were used to purchase U.S. government securities. Those securities were
                         deposited in an irrevocable trust with an escrow agent to provide for all future debt
                         service payments on the bonds. As a result, the bonds are considered to be defeased
                         and the liability for those bonds has been removed from the financial statements. This
                         refunding (increases) (decreases) total debt service payments over the next xx years by
                         almost $ x.x million resulting in an economic (loss) (gain) (difference between the
                         present values of the debt service payments on the old and new debt) of $ x.x million.

                         In years following an advance refunding in which the old debt is still outstanding:

                         Note Y: Prior-year Defeasance of Debt

                         In prior years, certain general obligation bonds were defeased by placing the proceeds
                         of new bonds in an irrevocable trust to provide for all future debt service payments on
                         the old bonds. Accordingly, the liability for the defeased bonds, $ xx.x million, and the
                         trust account assets are not included in the financial statements.

                         Additional Information

                         Most questions can be addressed to the State Education Department or your bond
                         counsel, financial advisors, or independent auditor. If you require additional information
                         or need technical assistance, please contact the regional office that serves your county.

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