..
--------- --------INVESTMENT BANKING
DIV ISIO N

Presentation to the State of Louisiana

Goldman, Sachs & Co.
March 2015

Goldman Sachs does not provide accounting , tax, or legal advice . Notwithstanding anything in this document to the contrary, and except as required to enable
compliance with applicable securities law, you (and each of your employees , representatives , and other agents) may disclose to any and all persons the US federal
income and state tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to
you relating to such tax treatment and tax structure , without Goldman Sachs imposing any limitation of any kind.

I

 ------------------INVESTMENT BANKING

Important Disclosures Regarding Goldman Sachs as
a Potential Underwriter for the State of Louisiana

I

o1v1s1oN

Goldman Sachs Is Not Acting as a Municipal Advisor
Goldman, Sachs & Co. ("Goldman Sachs") is providing the information contained in this document in
reliance on the exemption from the definition of municipal advisor in Section 15Ba1-1 (d)(3)(vi) of the
Securities Exchange Act of 1934, as amended (the "Act"). The information contained herein is for
discussion purposes only in anticipation of serving as underwriter to the State of Louisiana (the "Issuer") .
The primary role of Goldman Sachs, as an underwriter, is to purchase securities, for resale to investors,
in an arm's-length commercial transaction between the Issuer and Goldman Sachs and Goldman Sachs
will act is its own interest and has financial and other interests that differ from those of the Issuer.
Goldman Sachs is not acting as a municipal advisor, financial advisor or fiduciary to the Issuer or any
other person or entity and does not owe a fiduciary duty to the Issuer or any other person or entity with
respect to the information contained herein. Prior to taking any actions contemplated herein, the Issuer
should consult with its own financial and/or municipal, legal, accounting, tax and other advisors, as
applicable, to the extent it deems appropriate. If the Issuer would like a municipal advisor in this
transaction that has legal fiduciary duties to the Issuer, then the Issuer is free to engage a municipal
advisor to serve in that capacity. This material is not a commitment by the Issuer or Goldman Sachs to
undertake any transaction contemplated herein.

1

I

 - - -- - - - - - -- - - - - - - - Additional Important Disclaimers Regarding Our
Investment Banking Services and Distribution
Princioles

INVESTM ENT BANKING
. DIVISIO N

I

Investment Banking Division Communication
This communication, and any accompanying information , has been prepared by the Investment Banking Division of Goldman Sachs for your
information only and is not a product of the research departments of Goldman Sachs. All materials, including proposed terms and conditions , are
indicative and for discussion purposes only. Finalized terms and conditions are subject to further discussion and negotiation . Any opinions
expressed are our present opinions only and Goldman Sachs is under no obligation to update those opinions. All information , including any price
indications provided is supplied in good faith based on information which we believe, but do not guarantee, to be accurate or complete; we are not
responsible for errors or omissions contained therein. Certain transactions , including those involving derivatives, give rise to substantial risk and are
not suitable for all investors. Goldman Sachs does not provide accounting , tax or legal advice; however, you should be aware that any proposed
indicative transaction could have accounting , tax , legal or other implications that should be discussed with your advisors and lor counsel. Certain
provided information may be based on Goldman Sachs' own good faith understanding of the application of certain accounting rules as they apply to
qualifying hedges and non-hedging derivatives. Goldman Sachs makes no representation as to whether its understanding of certain accounting
rules is correct and , by providing such information, is not providing you with any accounting advice, including , without limitation , any advice
regarding the appropriateness of hedge accounting for a particular derivative transaction or the potential income statement impact of such derivative
transaction or the analyzed portfolio of transactions . In addition , we mutually agree that, subject to applicable law, you may disclose any and all
aspects of any potential transaction or structure described herein that are necessary to support any U.S. federal income tax benefits, without
Goldman Sachs imposing any limitation of any kind . We are under no obligation to extend , renew or otherwise restructure any proposed indicative
transaction. All information provided was supplied in good faith based on information which we believe, but do not guarantee, to be accurate or
complete ; however, we are not responsible for errors or omissions that may occur. Further information regarding this material may be obtained upon
request.
General Statement of Distribution Principles
Goldman Sachs is committed to managing securities offerings such that our clients are treated fairly and to conducting our business with integrity
and according to proper standards. Our policy is that the pricing of book-built securities offerings and allocations to investors should be transparent
to the issuer or seller(s), consistent with our responsibilities to our investing clients. We will endeavor to make available to the issuer or seller(s)
relevant information to make its own , independent decision with respect to the price, structure, timing and other terms of the offering . The investors
to whom we allocate securities may also be clients of Goldman Sachs or have other relationships with the firm . To the extent that actual or potential
conflicts arise between the interests of such investors and those of the issuer or seller(s) , we will endeavor in good faith to manage such conflicts
fairly. We will not make allocations as an inducement for the payment of excessive compensation in respect of unrelated services, in consideration
of the past or future award of corporate finance business, or expressly or implicitly conditional upon the receipt of other orders for investments or the
purchase of other services. Where we underwrite an offering or otherwise guarantee a price in connection with an offering , we will take into account
our prudential responsibilities to manage our risk properly when determining allocations and their manner and timing .
As part of the bookbuilding process , Goldman Sachs will engage in an ongoing dialogue with both the issuer or seller(s) and investors to determine
the appropriate final price of the offering . This dialogue typically involves various discussions with , and communications to , Goldman Sachs' clients
regarding the status of the bookbuilding, including overall demand and price sensitivity of that demand . If you have any questions regarding aspects
of the bookbuilding or allocation process, please do not hesitate to contact our Syndicate Desk.

21

 ------------------Table of Contents

I.

Potential Lottery Bond Issue

II.

Pension Buyout Considerations

Ill.

BlueCross BlueShield of Louisiana Considerations

IV.

Tobacco Financing

V.

Refunding Update

INVESTMENT BANKING
DIVISION

I

31

 I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I

<..9Z

zo
~U)

z<(>
OJO
1-

zw

~
1U)

w

>
z

Q)

::::J

en
en
-o
c
0

(!)

~

Q)
~

0

_J

ro
c

~

Q)

~

0

a..

 --~---------~-----Executive Summary

INVESTMENT BANKING I
·
DIVISION

•

Goldman Sachs previously proposed that the State consider a lottery bond issue to address budget challenges for
FY1 0, FY11 and FY12

•

Our proposals included ways the State can potentially enhance the performance of the lottery to meet debt service
requirements and maintain robust transfers to the Minimum Foundation Program ("MFP")

•

Based on Lottery revenue growth of at least 1.50% annually, the State could raise approximately $428 million and
preserve a minimum contribution to the MFP of $160 .2 million (FY13 level)

•

•

-

Debt service would be structured to escalate so that anticipated growth will meet the payments

-

Net revenues in excess of debt service and FY13 MFP payments can be used to either repay debt faster, or make
additional MFP contributions

The State can assume a conservative level of continued growth to pay debt service
-

The lottery has grown by a compounded annual growth rate of 3.5% annually since 2000

-

Issuing bonds against a lower growth rate helps mitigate risk of a slow-down in growth

-

For early years when growth will likely be insufficient to pay debt service, structural tools such as capitalized interest
or funding for lottery operation expenses can be used

Strong legal covenants and a conservative debt structure can achieve favorable ratings and investor acceptance
-

Rating agency views on lottery bond issues vary widely and each agency has a different focus and criteria

-

The State's debt service should be secured by a first lien on all net revenues (before all MFP deposits) which would
result in high coverage (5.0x+)

Potential Lottery Bond Issue

51

 ------------------Addressing Budgetary Relief Needs

INVESTMENT BANKING
DIVISION

•

The constitution dedicates lottery revenues to the Minimum Foundation Program

•

The State would have to dedicate proceeds to education

•

There are several ways the State may be able to use proceeds of a bond issue to address budgetary pressure, subject
to legal review

•

-

Proceeds could be used to pay for capital that would otherwise be funded from other State funds

-

Funds could be used to refund GO debt that funded education projects

I

Any funds that are used to pay operating expenses of the State may be subject to working capital rules , which generally
requires excess funds be used to repay debt in the future unless a deficit persists
-

The State and its legal team may not want to use a working capital borrowing for a variety of reasons , such as
constitutional restrictions on deficit borrowing and technical issues related to tracking funds

Potential Lottery Bond Issue

61

 ..
----------- ------Overview of Louisiana Lottery Corporation

INVESTMENT BANKING
DIVISION

I

($ in millions)

Historical Gross Lottery Revenues

FY2013 Uses of Funds 1

$600

"'
Ol

l

$500

r-0

l"'
r! ~

0

$400

tO

"'
"'

0

0

"'"'

"'
"'

~

g

$300

m

~

tA

~

~ ~

N

"'

~

~ ~ ~

a; ~ ~ ~ ~
N

- "'

tA

"'

d!j

~ ~ ~ ~ ~

~

Ell

N

::::

N

r-0

M

"'"' "'
"'

"'

"'"'

$200

$100

$0 · - - - - - - - - - - - - - - - - - - - - - NM~~m~romo~NM~~m~romo

~

mmmmmmmmoooooooooo~~

NM
~

~

mmmmmmmmoooooooooooooo
NNNNNNNNNNNNNN

Source: Louisiana Lottery 2013 CAFR; Fiscal Year Historical Lottery Sales (louisianalottery.com)
1
Note: Statutes require at least 35% gross revenues go to MFP.

Potential Lottery Bond Issue

71

 -~------------~-~-Lottery Bond Program Strategy

INVESTMENT BANKING
DIVISION

•

We recommend that the State dedicate all net lottery revenues (MFP transfers) to pay debt service on a priority basis to
achieve favorable credit ratings

•

We presume the State would like to preserve the current level of funding to the greatest extent possible
-

•

$160 .2 million of funds were transferred to the MFP in FY13

The State can assume some level of continued growth to pay debt service
-

A minimum of approximately 1.5% growth would be needed to raise approximately $428 million and maintain current
MFP funding at $160.2 million, assuming a 30-year bond issue and 5.0x coverage

-

The lottery has grown by a compound annual growth rate of 3.5% annually since 2000

-

The State will be at risk that growth does not materialize

-

Growth will likely be insufficient to pay interest in early years
-

•

I

Using capitalized interest or funding lottery operation expenses for a few years can address this potential
shortfall

We presume the issue would not fall under the State's debt cap , but we recognize this must be evaluated
-

"Net state tax supported debt" means (i) general obligation bonds secured by the full faith and credit of the state, (ii)
debt secured by capital leases of immovable property payable by the state or annual appropriations of the state, (iii)
debt secured by statewide tax revenues or statewide special assessment,. (iv) any funds advanced by a political
subdivision in accordance with R.S. 47:820.2 (TIMED), and (v) bonds secured by self-supported revenues which in
the first instance may not be sufficient to pay debt service and will then draw on the full faith and credit of the state

Potential Lottery Bond Issue

al

 ----------~-----~-Potential Louisiana Lottery Bond Legal Structure

INvEsTMENT BANKING 1
DIVISION

Potential Covenants

Potential Flow of Funds
•

Additional Bonds Test (ABT): net revenues must exceed 3x
maximum annual debt service (MADS)

•

Fully Funded Debt Service Reserve Fund (DSRF)

•

Non-impairment Clause
The payout ratio of the Lottery can only be changed if
1. Net revenues are expected to increase as a result of
the change
2. Coverage exceeds 2x MADS

•

Future competing/similar state gaming enterprises would
provide security for the Lottery bonds first

Residual to the MFP and
other Recipients

Potential Lottery Bond Issue

91

 ------------------Louisiana Lottery Securitization Analysis

INVESTMENT BANKING
DIVISION

I

Structure Overview

•

Structure maintains a minimum $160.2 million annual transfer to the MFP

•

Assumes 1.5% annual growth in lottery receipts

•

A portion of the first 5 years of operating expenses of the Lottery Corporation funded from bond proceeds to achieve
sufficient revenues to pay debt service in those years
-

•

Amounts to 37% of projected operating expenses over that time

Structure provides exactly 5x minimum coverage (FY13 net revenues/MADS)

Assumptions
Security
Ratings

Net Lottery Revenues
Aa3/AA+/AA-

Maturity Structure

30-year level debt service , no
principal amortization for 5 years

Lottery Revenue Growth Rate
Proceeds Generated
ABT

1.5% annually
$465 million
3.0x

Results
MADS Coverage from FY13
Revenue Transfer to State
Ali-in TIC
Average Life
Maximum Annual Debt Service

Potential Lottery Bond Issue

5.0x

Sources & Uses
Par Amount
Net Premium

69,653,495

Total Sources

$467 ,683,495

Project Fund

$428,426,665

Capitalized Interest Fund
Issuance Costs

3.79%
21 years
$29 .6 million

$398,030,000

Total Uses

36,466 ,123
2,791 ,157
$467,683,495

10

1

 ~-

1- - ----- -- - ------ Louisiana Lottery Securitization Analysis

INVESTMENT BANKING
DIVISION

I

Summary of Projected Future Lottery Revenue Distribution

$40
Excess funded by capitalized interest or
bond fund ing of operating expenses

$35

I

I
I

I
I
I

$30

I

I
I
I
I

$25

~

..1-- - ...

'I
I
I

$20

$15

$10

$5

$0

I I

~

~

,

I

0

~

I!

P

~

~

I

I

~

~
-

I

I

~

~

I

1

~

'"),C)

ww~

'"),C)

~

Bond Principal

'"),C)

-

~

'"),C)

~

'"),C)

~

~

~

~

Bond Interest

~

~
-

~

~

~

~

~ ~

~

'"),C)

~

~

~

~

~

'"),C)

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

Net Lottery Revenues > $160.7 million , 1.5% annual growth

Note: Assumes same percentages of gross lottery revenues go annually toward prize payouts and operating expenses as in FY201 3 (- 50% Prizes, -1 5% Operating Expenses).

Potential Lottery Bond Issue

11 1

 -------------~----If Revenues Grow Slower than Expected ' Less
INvEsTMENT BANKING I
DIVISION
Revenues Will Be Available for the MFP from the Lottery
Revenues Available for MFP Transfers After Debt Service
Year

3% Growth

2% Growth

2016
20 17
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045

$167,752 ,869
170,492,006
173,351 ,012
176,334 ,049
179,445,411
182,584 ,037
185,986 ,203
189,666,529
193,637,495
198,811,495
205,660,842
212,722 ,525
219,993,711
227,4 77 ,252
235,191 ,442
243,139,270
251 ,319,178
259,750 ,316
268,426,548
277,372,710
286,578,114
296,068 ,307
305,838,329
315,899,216
326,267 ,262
336,943,775
347 ,940 ,834
359,265,796
370,931 ,560
382,946,319

$162 ,703,053
163,590,482
164,508 ,224
165,457,074
166,437,846
167,345,878
168,413,726
169,652,161
171 ,069,684
173,574,577
177,634,904
181 ,783,257
186,012 ,262
190,320,077
194,720 ,144
199,210,437
203,784,216
208,455,275
21 3, 211 ,945
218,073,344
223,022,876
228,079,984
233,233,398
238,487,641
243,852 ,274
249,321 ,650
254,900,663
260,589 ,251
266,392 ,646
272,311 ,124

Potential Lottery Bond Issue

1.5% Growth
$160,214,975
160,214,975
160,214,975
160,214,975
160,214,975
160,109,482
160' 130' 196
160,287,019
160,587,560
161 ,939,185
164,809,024
167,728,714
170,689,899
173,689,738
176,740,645
179,839,547
182,978,630
186,170,591
189,402,636
192,692,733
196,023,111
199,412,007
202,846,924
206 ,331 ,121
209,872 ,873
213,465,214
217 ,111 ,689
220,810,858
224,566,541
228,377,571

0% Growth
$152 ,896,615
150,383,615
147,832 ,920
145,243,965
142,616,175
139,843,475
137,156,975
134,565 ,975
132,077,475
130,598,225
130,594,725
130,597,975
130,598,975
130,594,225
130,595,475
130,598,975
130,596,225
130,599 ,225
130,594,475
130,599,225
130,594,975
130,599,225
130,598,725
130 ,595,975
130,598,475
130,598,475
130,598,725
130,596,975
130,596,225
130,594,475
12 1

 -------------~----Summary of Lottery Bond Issuers

INVESTMENT BANKING
DIVISION

•
\

State of
Florida

Underlying
Ratings at Issue

A1/AAA/A+

West Virginia Economic
Development Authority

I

II

..

.

State of
Arizona

State of
Oregon

A1/AAA/A+
(1st & 2nd liens)

A1/AA-/NR

Aa2/AAA/NR

Last Issue

3/20/2014

5/20/2014

6/15/2010

1/18/2015

Total
Outstanding Par

$2 ,615,292,000

$297,085,000
(all liens)

$425,420,000

$1 ,602,820,025

Final Maturity

2025

2040

2029

I
I
I
I

2030

I

Security

1st lien on net lottery
revenues

Net lottery revenues
(3 liens)

1st lien on net lottery
revenues

1st lien on net lottery
revenues, State moral
obligation to replenish
DSRF

DSRF
Requirement

MADS

MADS

None

MADS

Additional
Bonds Test

3.00x MADS

2.00x MADS
(all liens)

2.00x MADS

4.00x MADS

Potential Lottery Bond Issue

13 1

 -------------~-~-~Summary of Lottery Bond Issuers

INVESTMENT BANKING
DIVISION

I

Flow of Funds

Florida

•
.

~

I

West Virginia

Arizona

M

Oregon

Gross Lottery Revenues

Minimum of 50% Paid
as Prizes

Maximum 15% Paid as
Operating Expenses

State Lottery Fund

Allocation to
Bond Fund for Debt Service

Allocation to
Other Funds

Community & Technical
College Higher Education
Commission Debt Service

Potential Lottery Bond Issue

14 1

 ..
...
---------- ---- --Summary of Lottery Bond Issuers

INVESTMENT BANKING
DIVISION

I

Summary of Rating Agency Commentary

--

It.
\

State of
Florida
•

•
•
•

•

West Virginia Economic
Development Authority

History of stable pledged
revenues with minor
fluctuation during

•

Prioritization of debt
service payments from
lottery revenues

recession
Strong growth of 7.8% in
FY2013

•

Robust debt service
coverage

•
Active bonds test for 3.0x
MADS
•
Active management of
state lottery program
Narrow source of
pledged revenues after
prizes and operating
costs

•

Highly sensitive to
broader economic
condition

•

Lack of cash-funded debt
service reserve on some
series

•

•
•

State of
Arizona

State of
Oregon
•

•

Non-impairment
covenant

•

•
State's diverse
population and growth
over past decade

Strong management of
WV lottery enterprise

•

Historically stable
performance

Integral role of lottery
revenues in state
operations

•

Satisfactory ABT (2x)

Lack of constitutional
protection of pledged
revenue stream

•
•
•

Lack of debt service
reserve fund

Long amortization
(30 years) given nature
of revenue
Lottery revenues derived
from discretionary
spending , sensitive to
economic factors

•

Additional competition
Lack of constitutional
protection or
dedication of
revenues
Lottery revenues
susceptible to
economic volatility

•

•
•
•

State constitution provides
1st lien for debt service
Statutory moral obligation
pledge to replenish debt
service underscores
legislature's support for
lottery bond program
Significant role of lottery
revenues in state operations
maintain incentive
Volatility due to consumer
driven pledged revenue
source
Expansion of Washington
lottery could increase
competition
Lottery sales dependent on
game diversity and steady
introduction of new games

Source: Latest Rating Agency Reports (Moody's, Fitch, S&P)

Potential Lottery Bond Issue

15 1

 I
I
I

I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I

<..9Z

zo
~U)
z<(>
mo
Izw
~

I-

U)

w

z>

-

en
c

....0
~

Q)

"0

en
c
0
0

....::::J
0

~

::::J

co
c
0

en
c

Q)

a..

 ------- -- - -- ---- - -Louisiana State Employees' Retirement System
("LASERS") Overview

INVESTMENT BANKING
DIVISION

I

Actuarial Assumptions
Actuarial Cost Method

Projected Unit Credit

Amortization Method

Level Dollar

Remaining Amortization Period

Weighted average of 19 years

Asset Valuation Method

5-year smoothing

Actuarial Rate of Return 1

8.00%

4.3%- 14%

Projected Salary Increases
Cost of Living Adjustment

Liability for pay adjustments already granted is included in the retiree reserve

Schedule of Funding Progress ($000s)
6/30/2013
Actuarial Value of Assets

6/30/2012

6/30/2011

$9 ,936 ,501

$9 ,026,416

$8 ,763 ,101

Market Value of Assets

$10 ,327,598

$9 ,515 ,774

$9 ,703,497

Actuarial Accrued Liability

$16 ,182,195

$16 ,157,898

$15 ,221 ,055

$6,441 ,317

$7 ,131,482

$6,457 ,954

60 .2%

55 .9%

57.6%

$1 ,951 ,988

$2 ,341 ,703

$2,408 ,840

330 .0%

304.5%

268 .1%

11 .8%

-0 .1%

23.2%

Unfunded AAL
Funded Ratio
Annual Covered Payroll
UAAL % of Covered Payroll
Investment Performance

1

Numbers reflect 2013 reports, prior to 71112014 drop to 7. 75%. Includes inflation at 3%
Sources: 2013 Louisiana CAFR and Actuarial Report

Pension Buyout Considerations

17 1

 ------------------Louisiana's Obligation to LASERS is an
Important Liability

INVESTMENT BANKING I
DIVISION

•

LASERS' $6.4 billion unfunded liability is Louisiana 's single largest liability at over 2x outstanding GO debt

•

To the best of our knowledge , this obligation is also the State's highest cost liability at an 8% accrual rate (going to
7.75% which will increase the size of the liability)

•

'Debt Service' payments required to defease this liability over 30 years are over $600 million annually through 2029 ,
consuming almost 10% of the State General Fund Expenditures
-

Louisiana is projected to pay $14 .1 billion in total over 30 years to extinguish the current UAL of $6.4 billion

•

The State's normal cost is approximately $130 million , which will create total payments to LASERS from the State of
over $750 million in the coming years

•

State law requires approximately 30% of the liability be amortized by 2029, creating further pressure on the State's
budget
Projected Payments to LASERS, Frozen Benefits, No Growth
900
800
700

iii
c

~
~

~

600
500
400
300
200
100

0

w~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~& ~~ ~~ ~~

~ ~ ~ ~ ~ ~ ~ ~ ~
~ ~ ~ ~ ~ ~ ~ ~ ~ ~
• Normal Cost ($127mm from FYB 20 13)

Pension Buyout Considerations

• Other UAL Payments ($4.6bn PV as of 6/30/201 3)

• 2029 UAL Amortization ($1.9bn PV as of 6/30/2013 )

18 1

 ------------------Rating Agencies Have Begun to Focus on
Pension Obligations as an Important Aspect
of State Debt
•

•

•

•

•

•

INVESTMENT BANKING
DIVISION

I

In April 2013, Moody's released revised criteria for evaluating pension obligations for states and local governments
Moody's makes 4 adjustments to pension obligations as part of its credit review
Multiple-employer cost-sharing plans liabilities allocated to specific government employees will be based on
proportionate shares of contributions
Accrued AAL's will be adjusted based on high-grade taxable bond index discount rate at date of valuation
Asset smoothing will be replaced by market or fair value
Resulting adjusted net pension liability will be amortized over 20 years using level dollar method
Pensions account for 10% of a state's overall rating scorecard
In November 2013, a second report provided commentary on the challenges of overlap between state and local
government pension funding liabilities
In July 2013, S&P released results of its 2013 50-state pension survey, highlighting the following key points:
US state pension funded levels have stabilized but improvement will take many more years
GASB changes (Statements 67 and 68) will introduce more volatility but should lead to better comparability and
disclosure
Continued liability management will important to achieving sustainability
States' funding policy decisions and discipline will be critical
DebUpension liability profile is one of 5 major rating factors
Key areas of review include funding of the ARC , pension reform , and discount rate
In July 2013, Fitch released a pensions update, noting several adjustments to pension obligations in its review
Use of 7% investment return for calculating AAL's
For cost-sharing plans, the state is allocated its portion of the system-wide liability
The sum of a state's net tax-supported debt and adjusted pension liability will be used as a comparative measure
Management and prior practices are key factors
Reforms to actuarial rate assumptions
ARC funding practices
Demographic pressure

Source : Rating agency pension criteria reports

Pension Buyout Considerations

"'

19 1

 ------------------The State Could Reduce its Pension Obligation
with an Optional Lump Sum Buyout
•

•

INVESTMENT BANKING
DIVISION

Plan would offer a lump sum buyout to certain classes of pension plan participants on an optional basis
-

This is a common corporate approach to reduce risk , achieve savings and other goals

-

It would be typical to offer an annuity as an alternative to a lump sum to participating members, and including this
alternative has a resulted in higher take-up rates

The lump sum payments would reflect the vested present value of benefits associated with that member
-

These benefits are calculated based on future defined benefit payments discounted at the actuarial rate of return
(8.0% for LASERS as of 2013 data) to the buyout date

-

Buyout offer could be more or less than present value in order to either encourage increased take-up (more than
present value) or savings per participating member (less than present value)

•

We believe the State can fund the unfunded portion of the lump sum payment (approximately 40% of the liability today)
with tax-exempt bonds

•

The funded portion of the lump sum payment can be funded with taxable bonds or plan assets

•

I

-

Any portion of the payout funded with plan assets will not provide actuarial savings, but can reduce the risk of
having to hit 8% compounded annual returns to breakeven to the projections

-

Any portion of the payout funded with taxable bonds will provide savings (or costs) equal to the return on the funds
left in the plan less the cost of the taxable bond issue

In general , the State's fixed savings (from the unfunded portion of participating members) are approximately equal to
what the UAL payments would have been for the members that elect to participate in the buyout, less the debt service
on the bonds used to fund that portion of the buyout
-

Many factors regarding the buyout plan design , take-up rates , and other factors can affect the results

-

Additional savings (or costs) will accrue on the amount funded with bonds that has existing plan assets backing the
liability

Pension Buyout Considerations

20 1

 ------------------Economics of a Debt Funded Employee Buyout

INVESTMENT BANKING
DIVIS ION

I

Overview

Assumptions
•

We assumed a 25% vested employee
participation rate translating to 20% of
actuarial liability
-

This is just a sample result, actual results
will likely vary materially

•

This results in a $3.2 billion buyout

•

We assume a transaction at FYB 2015 using
the actuarial projections for that date

•

We assume the buyout is funded with a mix
of $1.9 billion taxable bonds and $1 .3 billion
tax-exempt bonds

•

The Bonds are assumed to carry an
appropriation backing from the State

•

Savings are structured between 2015 and
2029 , when the State's ARC costs are
elevated

Pension Buyout Considerations

Comparison of Current ARC to Buyout

Plan Assets
$1.9 bn
(Earning 8%)

Currently
State is
responsible
for ARC

Plan Unfunded
Liabilities
$1 .3 bn
(Accruing at 8%)

Taxable Bond
Proceeds
$1 .9 bn

State
replaces
ARC with
cost of debt
used to
fund buyout

Tax-Exempt Bond
Proceeds
$1.3 bn

Bondholders

State pays 4.19% average bond
interest rate
to Bondholders

21 1

 ------------------Economics of a Debt Funded Employee Buyout

INVESTMENT BANKING
DIVISION

I

Unfunded Portion

Sample Economics
$58mm - $128mm

ARC at 8.00%

$58mm - $78mm

Annual Debt Service at Tax-Exempt Rates (3.67%)

$50mm

Average Annua l Savings (2015-2028)

$700mm

Total Savings

55.6%

Savings as % of $1.3bn UAL Removed

$540mm

PV Savings (State Cost of Capital (3.67%) PV Rate)

Comparison of ARC vs. Annual Debt Service
$140mm

-Bond OS

$120mm

-

ARC Removed

$100mm
$80mm
$60mm
$40mm
$20mm
$ - +-~--~~--~~--~~--~~--~~~~--~~--~~--~~--~~--~~--~~~

w~w~~ ~~ ~~ ~~

~ ~ 0
~ ~ ~ ~
~ ~ ~ ~ ~ ~ ~ ~

~ ~ ~ ~ ~ ~ ~ @ ~ ~ ~ #
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Note: PV to 61112015

Pension Buyout Considerations

22 1

 -----------------,-Economics of a Debt Funded Employee Buyout

INVESTMENT BANKING
DIVISION

I

Funded Portion

Sample Economics@ 8%
$88mm- $193mm

ARC at 8.00%

$88mm- $150mm

Annual Debt Service at Taxable Rates (4.52%)

$44mm

Average Annual Savings (2015-2028)

$610mm

Total Savings

32.3%

Savings as% of $1 .9bn UAL Removed

$450mm

PV Savings (State Cost of Capital (4.52%) PV Rate)

Savings/(Losses) Will Vary with Rates
$700
$600
$500
VI
c

~
~

$400
$300
$270

$200
$100

$0
$0
($100)

I

8%

6%

4.52%
($79)

($200)

Note: PV to 61112015

Pension Buyout Considerations

23 1

 ------------------Economics of a Debt Funded Employee Buyout

INVESTMENT BANKING
DIVISION

I

Combined Funded & Unfunded Portions

Sample Economics
$146mm- $321mm

ARC at 8.00%
Annual Debt Service at Taxable and Tax-Exempt Rates (4.19%)

$146mm - $224mm

Average Annual Savings (2015-2028)

$94mm

Total Savings

$1 .31bn

Savings as% of Total $3.2bn Buyout

42.0%

PV Savings (State Cost of Capital (4.19%) PV Rate)

$980mm

Comparison of ARC vs. Annual Debt Service
$350mm

-BondDS

$300mm

-

ARC Removed

$250mm
$200mm
$150mm
$100mm
$50mm
$ - +-~--~~--~~--~~--~~--~~--~--~~--~~--~~--~~--~~--~~~

w ~~

~ ~ 0
~ ~ ~ ~
~ ~ ~ ~ ~ ~ ~ ~

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ #
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

For the funded portion, savings assume LASERS earns 8%
Note: P V to 61112015

Pension Buyout Considerations

24 j

 ------------------Buyout Funding Cash Flows

Current Pension Example (60% Funded Ratio)

INVESTMENT BANKING
DIVISION

After $3.15 Billion Buyout

Pension Fund
$12.6 bn Liability

Pension Fund
$15.7 bn Liability

Plan
UAL
$6.30 bn

Plan
Assets
$9.45 bn
8.0% Projected
Interest
Earnings

8.0%
Calculated
State Cost

Pension Participants

Pension Buyout Considerations

I

Plan
Assets
$9.45 bn
8.0% Projected
Interest
Earnings

Plan
UAL
$3.15 bn
8.0%
Calculated
State Cost

Remaining Pension Participants

25 1

 ------------------Alternatively the Buyout Could be Funded by a
Combination of Debt and Plan Assets

After $3.15 Billion Buyout

Current Pension Example (60% Funded Ratio)

Pension Fund
$12.6 bn Liability

Pension Fund
$15.7 bn Liability

Plan
UAL
$6.30 bn

Plan
Assets
$9.45 bn
8.0% Projected
Interest
Earnings

INVESTMENT BANKING I
DIVISION

Plan
Assets
$7.56 bn
8.0% Projected
Interest
Earnings

8.0%
Calculated
State Cost

Plan
UAL
$5.04 bn
8.0%
Calculated
State Cost

Remaining Pension Participants

Pension Participants

Plan
Assets
$1.89 bn

$1.26 billion UAL is replaced by $1.26 billion bond proceeds, with a cost of debt of 3.67% compared to UAL cost of 8.0%
Pension Buyout Considerations

26 1

 - - - - - - - 1- - - - - - - - - - - Debt for the Buyout Can be Issued in Various
Ways

INVESTMENT BANKING
DIVISION

I

Considerations for Debt Issuance
Considerations

Benefits
Debt Issued by State

Debt Issued by Pension
Fund

•

More straightforward credit structure

•

Potential for better ratings or tighter pricing

•

Greater separation from Net State Tax
Supported Debt

•

Provides ability to track related debt separate
from State's general fund

•

Possibly not considered Net State Tax
Supported Debt

•

Legislation required
-

•

Legislation would need to carve out debt
for Net State Tax Supported Debt

Legislation required
Legislation would need to carve out debt
for Net State Tax Supported Debt

•

Legislation likely required

•

Possibly prohibited by Constitution

Options for Funding a Buyout
Benefits
Combination of Funding
from Debt and Plan
Assets

•

Lesser amount of debt to repay

•

All debt possibly tax-exempt if for unfunded
portion

•

Potential to increase funded ratio of plan
Since debt would fund the full buy-out,
assets currently associated with vested
benefits would be reallocated to remaining
plan obligations

Pension Buyout Considerations

Considerations
•

Reduction in assets
-

•

Funded rates remain the same

Debt for funded portion would be taxable
For that portion , savings would accrue to
the Pension Fund if its investment returns
exceed the cost of the taxable debt issued

27 1

 ------------------The Opportunity to Fund a Portion of the Buyout with
Tax-Exempt Bonds Drives Substantial Economic Gain
From This Strategy

INVESTMENT BANKING
DIVISION

•

The lump sum payment could be funded from a combination of plan assets (for the funded portion) and tax-exempt
bonds (for the unfunded portion)

•

We believe tax-exempt debt could be used to fund the buy-out representing the unfunded portion of the plan

•

The Tax Code allows Tax-Exempt bonds to be issued to permanently relieve an exempt issuer from a future liability
-

The issuer cannot benefit from the investment of bond proceeds

-

Payments should be made to a separate trust to handle payments made to terminated plan participants

-

The State may not have any control of the separate trust created for terminated plan participants

-

There should be a complete termination of the State's liability to participating member

-

There can be no recourse to the State once the trust is established

-

Proceeds should be used to pay for retiree benefits that have vested

-

Should any surplus funds exist, they cannot be transferred to the State

Pension Buyout Considerations

I

28 1

 ------------------Issues that the State Should Examine Prior to
Commencing an Offer
•

INVESTMENT BANKING I
DIVIS ION

An independent actuary should be engaged to help plan for the offering period
-

The actuary can analyze data and implement issues related to the offering period

•

The State should look to an actuary to estimate the success of the offering based on the plan 's specific data

•

The actuary should examine certain of the plan 's assumptions, such as its mortality rate , and help the State understand
the implications of those assumptions

•

The State should examine the liquidity in the plan and develop a funding strategy appropriate for the plan 's investment
portfolio

•

The State should have a clear and articulate strategy for issuing the debt funded portion of the buyout

Pension Buyout Considerations

29 1

 ----------------- ,- The Mechanics of the Offering Will be Critical to
its Success

INVESTMENT BANKING
DIVISION

•

Prior to commencing the process, the State should engage an administrator to examine the data related to vested plan
participants

•

The State should expect that the entire process will take between 3-4 months once the decision to proceed has
occurred

I

Typical Approach
•

Plan participants should receive a notice letting them know that a limited offering period is coming in the next few
months

•

Subsequent to their initial notification , a brochure with information about the offer will be sent to the plan participants
with complete information

•

Subsequent to the mailing of a more general brochure the plan participant will receive a specific information package
related to his particular offer

•

The State will create a window of between 30-60 days for plan participants to respond to the offer
-

•

Too much or too little of a window will affect the take-up rate

Settlement to plan participants will occur within one month after the expiration of the take-up window

Pension Buyout Considerations

3o 1

 _____ _____________ _
,

Issues Affecting the Take-up Rate

•

•

•

I

The buyout can be targeted solely to plan participants who are vested but no longer working for the State, as
complexities may arise for existing plan participants
-

•

INVESTMENT BANKING
DIVISION

However, the State could offer plan participants the opportunity to retire and take the lump sum payment

Certain classes of plan participants are more likely to take an optional buyout than other classes
-

Younger vested plan participants who no longer work for the State but are fully vested

-

Older plan participants who have accrued maximum benefit but are too young to receive annual payments

-

Plan participants who have a spouse that works

Mechanics of the offering period will affect the take-up rate
-

The window should represent a unique opportunity

-

The data related to plan participants has to be scrubbed and accurate

-

The communication with the plan participant has to be thorough ahead of the window and during the window
-

Studies suggest that constant and regular communication has a significant impact on take-up results

-

Call centers help plan participants make informed decisions

Adverse selection has not proven to be an important issue affecting plan participant or take-up
-

Adverse selection is more of an issue if a buyout is offered to a retiree group

Pension Buyout Considerations

31

1

 I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I

<.9Z

zo
~(f)
z<r:>
coo

1-

zw
2

1(f)

w

z>

(/)

c

0
.......

ro

s....

(])

"0
(/)

c

0
()

ro
ro

c

(/)

::l

0

_J
4-

0

"0
(])

..c
CJ)

(])

::l

ca

(/)
(/)

0s....
()
(])

::l

ca
-

 ------------------Considerations Regarding a Privatization of
BlueCross BlueShield of Louisiana

BCBSLA is a nonprofit mutual company, licensed by the
State of Louisiana
-

#1 in LA, 1.14 million members, $2 .6 billion premiums

•

Since BCBS plans were permitted to privatize in 1994, over
15 have been converted to publically traded companies

•

As a mutual, the company is technically owned by members

•

There is precedent for the sponsoring government and other
stakeholders to receive ownership rights in the
demutualization process

•

Some of the growth and success of the BCBS companies
was due to their special status with respect to taxes and
government treatment

•

The value of managed care businesses are at all-time highs,
and we would expect significant interest in BCBSLA from the
private sector

BlueCross BlueShield of Louisiana Considerations

I

Execution Process

Situation Overview
•

INVESTMENT BANKING
DIV ISION

•

Develop demutualization and privatization plan

•

Determine ownership structure and beneficiaries of sale
proceeds

•

Analyze sale alternatives , including IPO and direct sale

•

Make sure all stakeholders are on board

•

Execute desired program

33 1

 ------------------Precedent Transactions

•

INVESTMENT BANKING
DIVISION

I

Successful conversions include:
Colorado

Ohio

Connecticut

Parts of Virginia

Indiana

Wisconsin

Kentucky

California

Maine

Georgia

Missouri

New York

Nevada

Puerto Rico

New Hampshire
•

Many of the privatizations are now part of Anthem/Wellpoint
Anthem started as the BCBS mutual in Indiana and has since acquired at least 13 BCBS companies
In 2004, Anthem merged with WeiiPoint, which was a conversion of Blue Cross of California that was converted into a for-profit
entity in 1996

•

Several proposed conversions were unsuccessful for a variety of reasons

New Jersey- regulators unconvinced by claims that additional capital was needed ; strong provider opposition due to
Horizon's high market share and low reimbursement rates
North Carolina - regulators demanded 100% of stock be placed in a foundation ; BCBS regulations permitted a maximum of
5% ownership stake by foundations
Kansas - concern that conversion would result in large price increases due to high market share (in non-HMO market)
CareFirst (Delaware, DC , Maryland)- public outrage about intended executive bonuses
Premera (Alaska , Washington)- concerns about acquisition by out-of-state insurer and disagreements about how to put stock
into a foundation

BlueCross BlueSh ield of Louisiana Considerations

34 1

 I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I

<..'JZ

zo
z<t:>
~(/)

roo
1-

z

w
:::2:

tnw
z>

en

c
(.)
c
cu
c
u..
0

(.)
(.)

cu

..c
0

I-

>

 ------------------Tobacco Bond Market Update

INVESTMENT BANKING
DIVISION

I

Tobacco Securitizations by State

% ofMSA
State

Signed
MSA?

MSA
Allocation

Issued
Bonds

y
y
y
y
y
y
y
y
y

1.62%
0.34%
1.47%
0.83%
12.7%
1.37%
1.86%
0.40%
0.61 %
0.00%
2.45%
0.60%
0.36%
4.65%
2.04%

N

Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
D.C.
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana

N

y
y
y
y
y
y
y
y
y
y
y
y
y

Iowa
Kansas
Kentuck~

Louisiana
Maine
Maryland
Mass.
Michigan
Minnesota
MississiEEi
Missouri
Montana
Nebraska

N
N

y
y
y

0.87%
0.83%
1.76%
2.26%
0.77%
2.26%
4.04%
4.35%
0.00%
0.00%
2.27%
0.42%
0.59%

y

Issuance
Proceeds

Stream
Securitized

$108,560,000
$528,527,860

100%
80%

$86,850,160
$18,057,060,493

$5mm annuall~
100%

N

y
y
N
N
N

y

$760 444 037

100%

N
N
N
N

y

$1 503,460,000

100%

$1 ,504,843,237

100% (only 78%
pledged to
bondholders)

N
N

y

$973 620 000

60 %

N
N
N

y
y
N
N
N
N

State
Nevada
N. HamEshire
New Jerse~
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Penns~lvania

N

y

% ofMSA

$1 ,088,515,161
$756 955 000

24%

Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
American
Samoa
N. Marina
Island
Guam
US Virgin lsi.
Puerto Rico

Signed
MSA?

MSA
Allocation

Issued
Bonds

y
y
y
y
y
y
y
y
y
y
y
y
y
y
y

0.61 %
0.67%
3.87%
0.60%
12.76%
2.33%
0.37%
5.04%
1.04%
1.15%
5.75%
0.72%
1.18%
0.35%
2.44%

N
N

N

y
y
y

0.00%
0.44%
0.41 %
2.04%

N
N
N

y
y
y
y

y

Issuance
Proceeds

Stream
Securitized

$8,112,490,322

76% (1 00%*)

$9 215 901 ,374

100%

$5,727 943 408

100%

$846 735 738
$1 010 260 000
$1 010 260 000

100%
100%
100%

y

$1 ,613,560,392

2.05 %
0.89%
2.07%
0.25%

y
y
y

$486,890,000
$911 ,141 ,504
$1 473 235,000

50%
29.2% (floored at
$30mm

y

0.02%

N

y
y
y
y

0.01%
0.02 %
0.02 %
1.12%

N

N

y
N
N

y
N
N
N

y
y
y
N

100%

N

y
y
y

$62 657 077
$27,935,009
$1 ,447,965,375

100%
100%
100%

*New Jersey entered into a Bond Enhancement Memorandum in March 2014 in which the State pledged the remaining -24% of MSA re venues to Series 2007-1B and Series 20071C bonds.
Sources: Illinois Railsplitter Official Statement (CUSIP 75076PAT), Bloomberg. Data as of March 24, 2014.

Tobacco Financing

36 j

 ------------------Tobacco Bond Market Update

INVESTMENT BANKING
DIVISION

I

Market Snapshot and Sample Tobacco Securitizations
Secondary Market Performance (Past Year)

Buckeye Tobacco Settlement Financing Corporation

- 2Mar2015-i

. t-28Feb201482
8

CUSIP

Rating

Cou~on

Maturity

118217AN8

83/8-/8-

5.375%

6/1/2024

7.8

118217AP3

83/8-/8-

5.125%

6/1/2024

7.6

118217AQ1

83/8-/8

5.875%

6/1/2030

7.4

118217AR9

83/8-/8

5.750%

6/1/2034

7.2

118217AS7

83/8-/88+

6.000%

6/1/2042

7

118217AT5

83/8-/8

6.500%

6/1/2047

6.8

118217AU2

83/8-/8

5.875%

6/1/2047

6.6

118217AW8

NR/NR/8-

0.000%

6/1/2047

6.4 '2014

Golden State Tobacco Settlement Financing Corporation

2015

.---

Mar
Apr
May
Jun
Jul
Aug
Sep
Buckeyes 5.875-47 Goldens 5.125-47 Jerseys 5-41

Oct

Nov

Dec

Jan

Feb

Mar

Secondary Market Performance (Past Four Years)
- 2Mar2015-i

. t-2Mar201195
9
8.5

CUSIP

Rating

Cou~on

Maturity

38122NNY4

83/8/8

4.500%

6/1/2027

38122NNZ1

83/8-/8

5.000%

6/1/2033

38122NPCO

83/8-/8

5.300%

6/1/2037

38122NPA4

83/8-/8

5.750%

6/1/2047

38122NP82

83/8-/8

5.125%

6/1/2047

38122NP08

NR/CCC+/NR

0.000%

6/1/2047

8

New Jersey Tobacco Settlement Financing Corporation
7.5

6.5

6
5.5 '2011

Rating

Cou~on

Maturit

888808085

81/8/NR

4.500%

6/1/2023

8888080C3

81/8-/NR

4 .625%

6/1/2026

CUSIP

7

2012

2014

2013

Jul
Jan
Jul
Jan
Buckeyes 5.875-47 Goldens 5.125-47 Jerseys 5-41

201

--,-Jul

Jan

-,Jul

Jan

888808001

82/8-/NR

5.000%

6/1/2029

8888080E9

82/8-/NR

4.750%

6/1/2034

8888080F6

82/8-/NR

5.000%

6/1/2041

8888080G4

NR/CCC+/NR

0.000%

6/1/2041

Past performance is not indicative of future results.
Sources: Bloomberg, JJ Kenney, GS Securities Division data and calculations. All levels are indicative. Data as of 2 March 2015

Tobacco Financing

37 1

 - - -- - - -- --- --- ---- Tobacco Bond Market Update

INVESTMENT BANKING
DIVISION

I

The NPM Adjustment Settlement

The NPM Adjustment
•

The 1998 MSA agreement provided that manufacturers may reduce their annual settlement payments based on market share lost
to companies that did not sign the settlement.

•

The NPM is based on NPMs market share increases (measured by sales of cigarettes domestically) and serves to reduce PM
payments under the MSA in the event PMs lose market share to NPMs as a result of the MSA.

•

It is a mechanism for PMs to avoid a pricing disadvantage with respect to NPMs.

•

The NPM Adjustment is applied in subsequent years to the Annual Payment and Strategic Contribution Payment and is calculated
as: 3 *(Market share percentage lost- 2.0%)

The NPM Adjustment Settlement
•

On December 18, 2012 Altria , Reynolds and Lorillard filed 10-Qs detailing a proposed agreement regarding disputed MSA
adjustments.

•

The NPM Adjustment Settlement with the major tobacco companies was signed initially by 17 states as well as Washington , D.C.
and Puerto Rico . These states constituted the critical mass requ ired for the agreement to take effect. Oklahoma , Connecticut and
South Carolina signed later.

•

The NPM adjustment settlement addresses claims for the years 2003 to 2012 and , after a two-year adjustment period , introduce a
new method for calculating the MSA adjustment.

•

The NPM adjustment settlement calculates how companies could receive credits over the next five years for future payments . For
the April 2013 MSA payment to settling states : Reynolds used $202MM in credits ; Altria used $483MM ; and Lorillard used
$143MM in credits ..

Source: Issuer Official Statements; NAAG; 10-Q and 8-K filings of A/tria, Reynolds and Loril/ard, WSJ "Tobacco Firms to Recoup More than $1 .58 in Credits" 18 December 2012;
Reuters "Update 1- U.S. cigarette markers lose disputes with 9 states in tobacco deal," NJ Series 2007-18 and 1C Bond Enhancement Memorandum,
http://www.marketwatch.com/story/kentucky-becomes-twenty-third-msa-state-to-settle-npm-adj ustment-disputes-2014-06-12, GS Securities Division data and calculations as of 28
March 2014

Tobacco Financing

38 1

 - - - - - -- -- -- - -- -- .. -Tobacco Bond Market Update

INVESTMENT BANKING
DIVISION

I

The NPM Adjustment Settlement (Continued)

Impact on Tobacco Bonds Issued by Settling States
•

More than 20 states, including Alabama , Arizona , Arkansas, California , Connecticut, Georgia, Kansas, Kentucky, Louisiana ,
Michigan , Nebraska, Nevada , New Hampshire, New Jersey, North Carolina , Oklahoma , South Carolina , Tennessee, Virginia ,
West Virginia and Wyoming as well as Wash ington , D.C. and Puerto Rico , participated in the NPM Adjustment Settlement.

•

Settling states saw an increase in their April 2013 MSA payment as a result of the release from the Disputed Payments Account
fund.

•

There may be an increase in future payments due to the new NPM methodology that should significantly limit future NPM
adjustments due to better reporting and enforcement.

•

Note that most issues have only secured payments related to years after the issuance.

Impact on Tobacco Bonds Issued by Non-Settling States
•

There is no direct impact as the states will continue to use the existing NPM methodology; however, these states will likely benefit
from the improved enforcement by the settling states .

•

The NPM adjustment is state-specific. If a state both enacts and diligently enforces the MSA's Model Statute or a Qualifying
Statute, the state is exempt from the NPM Adjustment.

•

Each state is independently arbitrated for each year independently. The arbitration panel is currently hearing challenges related to
the 2003 sales year.

•

NPM adjustment arbitration processes currently underway (a significant amount of disputed payments is being withheld from the
States in escrow) will continue for non-settling states.

•

Some NPM adjustment arbitration results for 2003 hearings were announced in September 2013. New York, Iowa, Ohio,
Washington , Colorado , Illinois, Oregon , North Dakota and Maine won their cases. Indiana, (Kentucky), Maryland, Missouri, New
Mexico, Pennsylvania lost their cases.

Source: Issuer Official Statements; NAAG; 10-Q and 8-K filings of A/tria, Reynolds and Lorillard, WSJ "Tobacco Firms to Recoup More than $ 1.58 in Credits" 18 December 2012;
Reuters "Update 1- U.S. cigarette markers lose disputes with 9 states in tobacco deal," NJ Series 2007-1 8 and 1C Bond Enhancement Memorandum,
http://www.marketwatch.com/story/kentucky-becomes-twenty-third-msa-state-to-settle-npm-adjustment-disputes-2014-06-12, GS Securities Division data and calculations as of 28
March 2014

Tobacco Financing

39 1

 ------------------Goldman Sachs Tobacco Market Presence

•

INVESTMENT BANKING
DIVISION

I

Goldman Sachs is one of the largest participants in the secondary market for tobacco bonds
-

We estimate that Goldman Sachs is the #1 or #2 market maker of tobacco bonds

-

Our secondary market trading is approximately 15% of the market

-

This includes over $10bn of tobacco bond trades since 2010 with over 120 counterparties in over 3,000 separate trades

•

Our tobacco bond team includes three traders, a credit strategist, and a marketing team who work with buyers in the space
on a daily basis

•

We maintain a significant inventory of tobacco bonds and provide daily quotes on all major tobacco issues outstanding

•

The buyer base for tobacco bonds is limited to certain institutional buyers
-

These buyers include certain municipal bond funds and hedge funds

-

Goldman Sachs maintains an active relationship with all of these buyers and has worked to expand the buyer base over
time

Issuer
Guam
New Jersey
Guam
Northern Tob. (AK)
Railsplitter (IL)
Buckeye (OH)
Golden State (CA)
District of Columbia
Golden State (CA)
Michigan
Buckeye (OH)

Goldman Sachs' Market Share of Trading Volume Since 2010 for Select Tobacco Settlement Bonds
(Secondary market transactions with institutional cul)tomers -Excludes broker-dealer street trades)
Total Volume
Coupon
Maturity
CUSIP
($mm)
GS Volume ($mm) GS Market Share
95%
5.625%
6/1/2047
40064LAB8
$8.3
$7.9
77
5.000
6/1/2015
888808CWO
15.6
12.0
57
5.250
6/1/2032
40064LAAO
10.3
5.9
43
5.000
6/1/2032
66585VAV7
151.4
65.0
5.500
6/1/2023
75076PAS4
224 .2
86.6
39
5.750
6/1/2034
118217AR9
810.5
38
307.1
5.000
6/1/2033
38122NNZ1
1,269.0
423.5
33
0.000
6/15/2046
254842BB2
5,875 .2
1,685.3
29
5.750
6/1/2047
38122NPA4
2,148.8
529.6
25
23
6.000
6/1/2034
594751AF6
61 .9
14.4
22
5.875
6/1/2047
118217AU2
2,754.5
605.6

Source: 2013 MSRB data & Goldman Sachs calculations

Tobacco Financing

4o I

 ------------------Tax Considerations

•

INVESTMENT BANKING
DIVISION

I

In general , tax-exempt bond proceeds used to fund an operating expense of the issuer fall under "Working Capital" IRS
rules
-

Working Capital bonds require that the borrower's unrestricted funds do not exceed 5% of its budget

-

If unrestricted funds exceed 5% of the borrower's budget, the excess funds must be spent (typically to repay the
Working Capital bond issue) or invested in tax-exempt bonds

•

Using bond proceeds (not earnings) to directly pay for TOPS scholarships may be considered Working Capital under
IRS rules
-

Tax-exempt bonds can be used to make a grant to an unaffiliated party in which the issuer receives nothing in return

-

While the scholarships are a grant to the student, the use is restricted to certain institutions

-

Some of those institutions are controlled by the State, such as LSU , which may result in the conclusion that the
expenses paid are those of the State

Tobacco Financing

41

1

 ------------------Estimated Results in Today's Market

Sale Date: 1/1/2016

•

Final Maturity: 2051 (35 Years)

•

Coverage Target: 1.70x

•

DSRF Earnings: 0%

•

Corporation Expenses: $0

•

Rating Target: A/888

I

Summary of Results

Key Assumptions
•

INVESTMENT BANKING
DIVISION

•

•

Tax-Exempt
-

Proceeds: $604 .1 million

-

TIC: 4.315%

Taxable
-

Proceeds: $547.8 million

-

TIC: 5.004%

40% Securitization Structure (Tax-Exempt) 1
-Principal

70,000
60 ,000

-

Interest

-

Revenues

~

50,000
40,000
30 ,000
20,000
10,000

llllllllllllllllllllllllllllll

··--

0 ,_-

~~~~~ww~~~~~~~~y~~@~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

1

Pledged TSRs from Tobacco Settlement Asset-Backed Refunding Bonds Series 2013A OS

Tobacco Financing

42 1

 ------------------Cash Flow Schedule

INVESTMENT BANKING
DIVISION

Tax-Exem~t

Year
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
Total

T oba cco Fin an cing

40% Pledged TSRs
58,247,499
58,315,998
61 ,442 ,837
61 '131 ,201
60,867 ,542
60,688 ,715
60,560 ,577
60,519,005
60,554 ,479
60,672 ,487
60,855 ,477
61 ,083 ,030
61 ,337,883
61 ,597,919
61 ,853,231
62 ,108,594
62 ,369 ,203
62,634 ,761
62,862 ,741
63 ,082,825
63 ,082 ,825
63,082 ,825
63,082 ,825
63,082,825
63,082,825
63,082,825
63,082 ,825
63,082 ,825
63,082,825
63,082 ,825
63,082 ,825
63,082,825
63,082,825
63,082 ,825
63,082 ,825
$ 2,169,028,382

Principal

$ 4,700,000
4,975,000
7,065 ,000
7,235 ,000
7,440,000
7,705,000
8,015 ,000
8,395 ,000
8,835,000
9,345 ,000
9,920,000
10,550,000
11 ,230,000
11 ,940,000
12,690,000
13,475,000
14,300,000
15,170,000
16,065 ,000
17,000,000
17,850,000
18,740,000
19,675,000
20 ,660 ,000
21 ,695,000
22,780,000
23,920,000
25 ,115,000
26,370,000
27,690,000
29 ,075,000
30,525 ,000
32,055,000
33,655,000
35,340,000
$ 591 ,195,000

Interest

$ 29,559,750
29,324,750
29,076,000
28,722,750
28,361 ,000
27,989,000
27,603,750
27,203,000
26,783,250
26,341 ,500
25,874,250
25,378,250
24,850,750
24,289,250
23,692,250
23,057,750
22 ,384,000
21 ,669,000
20,910,500
20,107,250
19,257,250
18,364 ,750
17,427,750
16,444,000
15,411 ,000
14,326,250
13,187,250
11 ,991 ,250
10,735,500
9,417 ,000
8,032 ,500
6,578,750
5,052,500
3,449,750
1,767,000
$ 684,620,500

Debt Service

$ 34,259,750
34,299,750
36 ,141 ,000
35 ,957,750
35 ,801 ,000
35 ,694,000
35 ,618,750
35 ,598,000
35,618,250
35 ,686,500
35,794 ,250
35,928,250
36,080 ,750
36,229,250
36,382,250
36,532,750
36,684 ,000
36,839 ,000
36 ,975,500
37 ,107,250
37 ,107,250
37,104,750
37,102,750
37,104,000
37 ,106,000
37 ,106,250
37,107,250
37,106,250
37 ,105,500
37 ,107,000
37,107,500
37,103,750
37 ,107,500
37 ,104,750
37 ,107,000
$ 1,275,815,500

I

Taxable
Coverage
1.70 X
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
170
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70

Principal

$ 5,750 ,000
5,940,000
7,930,000
7,950,000
8,060,000
8,220,000
8,480,000
8,800,000
9,180,000
9,625,000
10,125,000
10,735 ,000
11 ,395 ,000
12,080 ,000
12,800 ,000
13,555 ,000
14,345 ,000
15,180,000
16,030,000
16,910,000
17,710 ,000
18,605 ,000
19,545 ,000
20,530,000
21 ,570,000
22,660,000
23,805 ,000
25 ,010 ,000
26,275,000
27,600 ,000
28 ,995 ,000
30,465,000
32,000,000
33,620,000
35,320 ,000
$ 596,800,000

Interest

$ 28,509,589
28 ,362 ,389
28 ,210,325
28 ,007 ,317
27,743 ,377
27,475 ,785
27,140,409
26,794,425
26,435 ,385
26,060 ,841
25,668,141
25,191 ,254
24 ,685,635
24 ,148,931
23 ,579,963
22 ,977,083
22 ,338,642
21 ,662,993
20,948 ,015
20 ,193,002
19,396 ,541
18,501 ,300
17,560,817
16,572,818
15,535 ,026
14,444 ,663
13,299 ,200
12,095,857
10,831 ,601
9,503 ,400
8,108,220
6,642,523
5,102,517
3,484 ,917
1,785 ,426
$ 678,998,322

Debt Service

$ 34,259,589
34,302,389
36,140,325
35,957,317
35 ,803,377
35,695,785
35,620 ,409
35 ,594 ,425
35 ,615,385
35 ,685 ,841
35,793,141
35,926,254
36,080,635
36,228,931
36,379,963
36,532,083
36,683,642
36,842,993
36 ,978 ,015
37,103 ,002
37 ,106,541
37,106,300
37,105,817
37,102,818
37 ,105,026
37 ,104,663
37 ,104,200
37,105,857
37,106,601
37 ,103,400
37 ,103,220
37,107,523
37,102,517
37,104,917
37,105,426
$ 1,275,798,322

Coverage
1.70 X
1.70
1.70
170
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
170
1.70
1.70
1.70
1.70
1.70
170
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70
1.70

43 1

  

 

 

elepdn Sugpunpa 

 

NOISIAICI
DNINNVEI 

 

---- ---- ----- - -----GO Refunding Considerations

INVESTMENT BANKING
DIVISIO N

•

2009A, 2011A, 2012A and 2013A present $157.8 million in candidates with potential positive PV savings today

•

The tables below present two additional analyses with the respective assumptions: (1) Scenario 1: All candidates with
positive PV savings are refunded in 2016 (2) Scenario 2: Current rates decrease by 25 basis points
Series
2009A
2011A
2012A
2013A
Total

Series
2009A
2011A
2012A
2013A
2013C
Total

Total Par
$29,010
82 ,905
205,285
129,810
$ 447,010

Total Par
$ 29,010
82 ,905
205,285
129,810
42 ,145
$ 489,155

I

Base Case: Refunding Executed in 2015($000s)
Refunded Par Refunding Par Refunding Savings Savings Percent
$ 29,010
64,435
63,180

$ 27,273
63 ,682
62,443

1'125
$ 157,750

1' 135
$ 154,533

$60
612
516
2
$ 1,190

0.21 %
0.95
0.82
0.15
0.75%

Scenario 1: Refunding Executed in 2016($000s)
Refunded Par Refunding Par Refunding Savings Sav ings Percent
$ 29,010
82 ,905
107,985
1,225
42 ,145
$ 263,270

$26 ,630
78 ,983
105,466
1,200
41 ,714
$ 253,994

$ 1,019
2,930
2,445
41
321
$ 6,756

3.51 %
3.53
2.26
3.32
0.76
2.57%

Scenario 2: Refunding Executed in 2015, Rates Decrease by 25 bps ($000s)
Series
2009A
2011A
20 12A
2013A
2013C
Total

Total Par
$29,010
82 ,905
205 ,285
129,810
42 ,145
$489,155

Refunded Par Refunding Par Refunding Savings Savings Percent
$29,010
82,905
107,985
1,225
27,480
$ 248,605

$26,728
79 ,263
105,515
1,206
27 ,104
$ 239,816

$790
2,528
2,409
33
308
$ 6,068

2.72 %
3.05
2.23
2.67
1.12
2.44%

Rates as of February 2 7, 2015

Refunding Update

45 j

 ------------------GO Refunding in 2016 Considerations

•

INVESTMENT BANKING
DIV ISION

I

Assuming all $263 .3 million of candidates with positive savings in 2016 are refunded , the resulting PV savings represent
2.57% of refunded par
Current
Coupon

Call
Date

PV
Savings

Neg.
Arb.

Gross
PV
Neg
Savings Savings (%) Arb (%)
$ 2,040
4.43%
55 .67%

Series

Maturity

Par ($000)

2011A

9/1/2028

$20,415

5.0%

9/1/2020

$904

$ 1 '136

2009A

5/1/2028

14,150

4.125%

5/1/2019

548

646

1,194

3.87%

54 .10%

2011A

9/1/2029

21,460

5.0%

9/1/2020

819

1,260

2,079

3.82%

60 .59%

2013A

5/15/2026

1,025

5.0%

5/15/2023

39

30

69

3.77%

43.72%

2012A

8/1/2025

21 ,565

5.0%

8/1/2022

796

675

1,471

3.69%

45.87%

2011A

9/1/2030

22 ,560

5.0%

9/1/2020

742

1,384

2,126

3.29%

65 .09%

2009A

5/1/2029

14,860

4.250%

5/1/2019

471

734

1,205

3.17%

60 .93%

2012A

8/1/2024

21 ,050

5.0%

8/1/2022

535

482

1,017

2.54%

47 .38%

2012A

8/1/2026

22 ,115

5.0%

8/1/2022

561

876

1,437

2.53%

60 .98%

2011A

9/1/2026

18,470

4.125%

9/1/2020

464

799

1,263

2.51 %

63 .25%

2013C

7/15/2025

14,040

5.0%

7/15/2023

217

410

627

1.54%

65.43%

2012A

8/1/2023

20 ,565

5.0%

8/1/2022

270

257

526

1.31%

48.73%

2012A

8/1/2027

22 ,690

5.0%

8/1/2022

283

1,100

1,384

1.25%

79 .52%

2013A

5/15/2025

100

4.0%

5/15/2023

1

2

3

1.16%

62 .33%

2013A

5/15/2024

100

4.0%

5/15/2023

1

1

2

0.88%

47 .04%

2013C

7/15/2024

13,440

5.0%

7/15/2023

52

263

315

0.39%

83.50%

2013C

7/15/2026

14,665

5.0%

7/15/2023

52

569

621

0.36%

91 .58%

$ 6,756

$ 10,624

$ 17,380

2.57%

61 .13%

Total

$ 263,270

Rates as of February 27, 2015

Refunding Update

46 1

 ------------------TIMED Refunding Considerations

INVESTMENT BANKING
DIVISION

•

Series 201 OB presents $56.1 million in candidates with potential positive PV savings today

•

We highlight that while these candidates show potential PV savings, there is also significant negative arbitrage
associated with these candidates
Call
Date

PV Savings
Neg.
PV
($000)
Arb. ($000) Savings(%)

Maturity

Par ($000)

5/1/2027

$ 8,245

5.0%

5/1/2020

$ 357

$434

4.33%

5/1/2028

8,660

5.0%

5/1/2020

234

526

2.70%

5/1/2029

9,090

5.0%

5/1/2020

179

584

1.97%

5/1/2030

9,545

5.0%

5/1/2020

128

642

1.34%

5/1/2031

10,025

5.0%

5/1/2020

81

699

0.81 %

5/1/2032

10,525

5.0%

5/1/2020

40

755

0.38%

$ 1,020

$ 3,639

1.82%

Total

•

Current
Coupon

I

$ 56,090

We also ran two additional analyses with the respective assumptions:
___:_ Scenario 1: All candidates with positive PV savings are refunded in 2016
-

•

Scenario 2: Current rates decrease by 25 basis points

Results of potential savings in the 2010 B refunding are presented below, highlighting an opportunity to refund $177 .9
million in candidates with aggregate PV savings of $4.1 million in a 2016 refunding:

Scenario

Series Par ($000)

Base Case 20108
Scenario 1 20108
Scenario 2 20108

Refunded Par Refunding Par
($000)
($000)

PV Savings
($000)

$ 316,420

$ 56,090

$ 56,274

$ 1,020

316,655
316,420

177,945
161 ,620

177,634
161 ,599

4,128
3,428

PV Savings(%)
1.82%
2.32%
2.12%

Rates as of February 27, 2015

Refunding Update

47 1

 ------------------TIMED Refunding in 2016 Considerations

•

INVESTMENT BANKING
DIVISION

I

Assuming all candidates with positive savings are refunded , the resulting PV savings represent 2.3% of refunded par

Current
Call
PV
Maturity Par ($000) Coupon Date
Savings
5/1/2027
$ 8,245
5.0%
5/1/2020
$ 659

Neg.
Arb.
$ 378

Gross
PV
Neg
Savings Savings (%) Arb (%)
$ 1,038
8.00%
36.45%

5/1/2028

8,660

5.0%

5/1/2020

582

443

1,026

6.72%

43 .22%

5/1/2029

9,090

5.0%

5/1/2020

465

525

990

5.12%

53.00%

5/1/2030

9,545

5.0%

5/1/2020

422

578

1,000

4.42%

57 .81%

5/1/2031

10,025

5.0%

5/1/2020

382

631

1,013

3.81%

62.28%

5/1/2032

10,525

5.0%

5/1/2020

348

684

1,031

3.30%

66 .30%

5/1/2033

11 ,050

5.0%

5/1/2020

319

736

1,055

2.89%

69 .74%

5/1/2034

11 ,605

5.0%

5/1/2020

287

791

1,078

2.47%

73 .41%

5/1/2035

12,185

5.0%

5/1/2020

249

850

1,100

2.05%

77 .32%

5/1/2036

12,795

5.0%

5/1/2020

207

913

81 .50%

13,430

5.0%

5/1/2020

41

1,018

1'121
1,058

1.62%

5/1/2037

0.30%

96 .15%

5/1/2038

14,105

5.0%

5/1/2020

41

1,069

1'11 0

0.29%

96 .30%

5/1/2039

14,810

5.0%

5/1/2020

41

5.0%

5/1/2020

42

1' 164
1,220

96.45%

15,550

1' 122
1,178

0.28%

5/1/2040

0.27%

96 .59%

5/1/2041

16,325

5.0%

5/1/2020

42

1,237

1,279

0.26%

96.72%

$ 4,128

$ 12,153

$ 16,282

2.32%

74.65%

Total

$ 177,945

Rates as of February 27, 2015

Refunding Update

48 1