4.001 Bonds & Certificates of Obligations

Report
PUBLIC FINANCE FOR
TEXAS COUNTIES
92nd County Judge and Commissioners Annual Conference
September 30, 2014
Lubbock, Texas
Presented By:
Tom Pollan, Partner
Bickerstaff Heath Delgado Acosta LLP
3711 South Mopac Expressway
Building One, Suite 300
Austin, Texas 78746
P: 512-472-8021 F: 512-320-5638
[email protected]
Vince Viaille, Managing Director
Specialized Public Finance Inc.
4925 Greenville Avenue, Suite 465
Dallas, Texas 75206
P: 214-373-3911 F: 214-373-3913
[email protected]
OBJECTIVES

Provide a brief overview of the key issues
related to Public Finance Aspects for
Texas counties
2
BEGINNING THE PROCESS

Factors to Consider:
◦
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Project to be Financed
Size of Issue Needed
Overall Debt Management Plan
County’s Ability to Repay
Future Debt Plans
3
WHO TO CONTACT
“Your Team”
Financial Advisor
Bond Counsel
They have a fiduciary duty
to the County
4
PROFESSIONALS INVOLVED IN THE
DEBT ISSUANCE PROCESS
Financial Advisor
Bond Counsel
Underwriter/Purchaser
Paying Agent
Rating Agencies
Bond Insurer/Credit Enhancement
Companies
 Attorney General
 Architect/Engineer
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5
COUNTY’S FINANCIAL ADVISOR
The professional who will:
◦ guide the county through the economic side
of the issuance process
◦ structure the form of the financing and
recommend the type of issue to be used –
G.O. Bonds, CO’s, Anticipation Notes, etc.
◦ conduct the competitive sale or negotiated
sale or arrange for a private placement for
funding
◦ assist with County’s CIP Process
6
COUNTY’S BOND COUNSEL
◦ The county’s lawyer in the transaction who will
prepare the financing documents
◦ Provides the “Bond Opinion” which opines that the
obligations were properly issued and if issued on a tax
exempt basis, that the obligations are not subject to
federal insurance taxation
◦ Must know local government law, federal tax law and
securities law
◦ An Attorney-Client relationship must exist between
the county and the county’s bond counsel
◦ The county has the right to select its own bond
counsel
◦ Investors/purchasers require a legal and a tax opinion
7
BOND OPINIONS

Bond Counsel will give a market opinion
and a tax opinion that:
◦ County has complied with the law
◦ If issued as a tax exempt obligation, interest
on the bonds is excludable from gross income
of purchaser for purposes of federal income
taxation
◦ Bonds are not private activity bonds
8
HOW ARE THE PROFESSIONALS
PAID?

Financial Advisor and Bond Counsel work
on a contingent basis
◦ They are only paid if the bonds are issued and
proceeds are delivered to the county

Architects and other professionals
generally do not work on a contingent
basis
◦ They expect to be paid even if the bond issue
does not pass
9
WHEN DO YOU NEED MONEY?

Should you use a reimbursement resolution?
PROTECT YOURSELF

Limit the amount owed to Architect and
others if bond issue fails

Build limits into contract

Use a government friendly contract

Do not simply sign all preprinted contracts
10
WHO WILL BUY?

Underwriters
◦ Then sells to customers/investors

Local Banks

United States Department of Agriculture’s
Rural Development/Rural Utilities Service

Texas Water Development Board
11
SALE OF DEBT OBLIGATIONS
12
BOND RATINGS
Investment Grate Rating Designations of the Major Rating Agencies
Moody’s Investors
Service, Inc.
Standard & Poor’s
Corporation
Fitch Investors
Service, Inc.
Definition
Aaa
AAA
AAA
Highest rating assigned. Very
strong security.
Aa
AA
AA
Very Strong security. Only
slightly below best rating.
A
A
A
Average security but more
subject to adverse financial
and economic
developments.
Baa
BBB
BBB
Adequate capacity to secure
debt. Adverse developments
may affect ability to meet
debt services requirements.
Note: Moody’s uses the designation “1”, “2”, or “3” to indicate greater strength within the “Baa”, “A”, and “Aa” categories
with “1” being strongest. Standard & Poor’s and Fitch use “+” and “-” to indicate relative strength or weakness in the “BBB”,
“A”, and “AA” categories.
13
FINANCING METHODS
General Obligation Bonds
 Revenue Bonds
 Certificates of Obligation
 Contractual Obligations
 Anticipation Notes (Tax Notes)
 Time Warrants
 Lease-Purchase Contracts

14
GENERAL OBLIGATION BONDS
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Are often referred to as “G.O. Bonds”
Require an election
Are backed by a pledge of ad valorem taxes
Are best suited for major capital projects where
the commissioners court believes that it is
important to have the voters pass upon the
project
May be amortized over a 40 year period, but
usually a shorter period of 15 to 20 years is
used
15
REVENUE BONDS
Are secured by a pledge of revenues from a
project
 They are not subject to a demand for
payment from taxes
 Usually they involve revenues from a public
utility
 Primarily used by cities and special districts
 Few counties have projects that have
sufficient revenues to pledge for payment of
bonds

16
CERTIFICATES OF OBLIGATION
Are often referred to as “Certificates” or
“C.O.’s”
 Streamlined method of financing
 Require publication
 Do not require an election unless 5% of the
registered voters petition
 Secured by ad valorem taxes, a revenue pledge
or combination thereof
 May be amortized over a 40 year period, but
usually a shorter period is used
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ANTICIPATION NOTES

Any lawful purpose
Examples:
◦ construction of a public work
◦ purchase of materials, supplies, equipment,
machinery, buildings, lands, and rights-of-way
◦ professional services such as engineers,
architects, attorneys and financial advisors
◦ operating expenses
◦ Fund issuer’s cumulative cash flow deficit
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ANTICIPATION NOTES
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Maximum term is 7 years for capital expenditures
such as construction, equipment, professional
services and 1 year for operating expenses and
funding cash flow deficit
Requires recommendation of county auditor or
from chief budget officer if no auditor
May be secured by a pledge of taxes or revenues,
or both
Most counties do not have a sufficient level of
revenues to pledge so a pledge of taxes is usually
made
No election required
No newspaper publication required
19
CONTRACTUAL OBLIGATIONS

For Personal Property Only
◦ Equipment
Secured by ad valorem taxes or revenue
 No election required
 Maximum term – 25 years
 Competitive with lease financing

20
TIME WARRANTS

Older method of finance. Authorized
under Chapter 262 of the Texas Local
Government Code

Time warrants are subject to publication
requirements and are subject to voter
petition which may require an election
21
TIME WARRANTS

Disadvantages:
◦ Time Warrants are non-negotiable
instruments
◦ Time Warrants may not be sold for cash
◦ Consequently, arrangements must be made
with a vendor to accept the time warrant and
a bank to buy the time warrant from the
vendor
22
TIME WARRANTS

Disadvantages:
◦ Time warrants often are prepared locally. As a
consequence, there may not be all the
formalities taken to ensure that the time
warrant is a tax-exempt obligation.
 The rates charged may be higher than market for a
tax-exempt security
 The time warrant may be for beyond one fiscal year,
and the formality of an interest and sinking fund
may not be established. This will render the time
warrant invalid.
23
LEASE PURCHASE AGREEMENT/
INSTALLMENT SALES CONTRACT
Permits the county to purchase goods
over period of time
 Is not a pledge of taxes

◦ Unless for equipment and properly structured
Is a maintenance and operations expense,
not a debt service expense unless
properly structured
 Attorney General approval is not
required
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LEASE PURCHASE AGREEMENT/
INSTALLMENT SALES CONTRACT

Must be subject to annual appropriations
(unless structured under the Public Property
Finance Act)

No requirement to continue

Practical limits on the ability to discontinue

Interest rates are often higher than a tax
pledge obligation
25
REFUNDING BONDS

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Used to refinance the county’s outstanding
bonds and other obligations
Allows county to take advantage of lower
interest rates
Used to restructure debt payments
No newspaper publication requirement
No election requirement
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BONDS AND OTHER DEBT
INSTRUMENTS ARE SECURITIES
Bonds are exempt
from certain
securities laws
Bonds are subject
to the anti-fraud
provisions of the
securities laws
27
OFFICIAL STATEMENT
A document or documents prepared by or on
behalf of the issuer of municipal securities in
connection with a primary offering that discloses
material information on the offering of such
securities
 Investors may use this information to evaluate the
credit quality of the securities
 Although functionally equivalent to the prospectus
used in connection with registered securities, an
official statement for municipal securities is
exempt from the prospectus requirements of the
Securities Act of 1933

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CONTINUING DISCLOSURE
Requirement to provide financial
information at least annually
 Requirement to report certain events
within 10 days
 Set out in bond order or separate
agreement
 Private placement may be exempt

29
MUNICIPAL SECURITIES
RULEMAKING BOARD

To promote better disclosure MSRB has
established the Electronic Municipal Market
Access System – “EMMA”
◦ Who must comply

Service is free

Filings must be made electronically

www.emma.msrb.org
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FEDERAL INCOME TAX
ISSUES FOR MUNICIPAL
BONDS
31
The County’s Duties do not end when the
Bonds are Issued

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You MUST comply with requirements you
promised in the bond documents that you
would not let the bonds become taxable
What may cause the problem – TURNOVER
The personnel that were there when the
bonds were issued have departed before the
bonds are paid off
You need to familiarize yourself with the
requirements so that you can brief your
successors
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GENERAL TAX CONVENANTS
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No private activity use
Will not permit the bonds to become private
activity bonds
No federal guaranty
Will restrict the use of the proceeds to comply
with the arbitrage requirements
In the event of arbitrage will rebate the excess
earning to the United States
Will maintain the necessary records to permit
the compliance with the tax exempt
requirements for at least six years after the final
principal and interest payment on the bonds
33
ARBITRAGE

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The practice of using bond proceeds to
acquire higher yielding investments than the
rate the government is paying on the bonds
NO ARBITRAGE OF FEDERAL TAX
CERTIFICATE
REBATE
SMALL ISSUER EXCEPTION – Under
$5,000,000
34
IRS AUDITS



Enforcement officials have targeted what
they view as an abusive use of the municipal
bond exemptions
The focus is on arbitrage driven transactions
where the bond proceeds are invested in
higher-yielding instruments
The agency has generally sought to settle
such tax disputes with agreements in which
the feds recoup any profits from the
unauthorized investment, but they have
threatened to go after bondholders if they
cannot resolve the case otherwise
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