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PUBLIC FINANCE FOR TEXAS COUNTIES
92nd County Judge and Commissioners Annual Conference
September 30, 2014Lubbock, Texas
Presented By:
Tom Pollan, PartnerBickerstaff Heath Delgado Acosta LLP3711 South Mopac ExpresswayBuilding One, Suite 300Austin, Texas 78746P: 512-472-8021 F: [email protected]
Vince Viaille, Managing Director Specialized Public Finance Inc.4925 Greenville Avenue, Suite 465Dallas, Texas 75206P: 214-373-3911 F: 214-373-3913
OBJECTIVES
Provide a brief overview of the key issues related to Public Finance Aspects for Texas counties
BEGINNING THE PROCESS
Factors to Consider:◦Project to be Financed◦Size of Issue Needed◦Overall Debt Management Plan◦County’s Ability to Repay◦Future Debt Plans
WHO TO CONTACT
“Your Team”
Financial Advisor
Bond Counsel
They have a fiduciary duty to the County
PROFESSIONALS INVOLVED IN THE DEBT ISSUANCE PROCESS
Financial AdvisorBond CounselUnderwriter/PurchaserPaying AgentRating AgenciesBond Insurer/Credit Enhancement
CompaniesAttorney GeneralArchitect/Engineer
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
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
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
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
PROTECT YOURSELF
Should you use a reimbursement resolution?
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
WHEN DO YOU NEED MONEY?
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
SALE OF DEBT OBLIGATIONS
Competitive Sale
Negotiated Sale
Private Placement
BOND RATINGSInvestment Grate Rating Designations of the Major Rating
AgenciesMoody’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.
FINANCING METHODSGeneral Obligation BondsRevenue BondsCertificates of ObligationContractual ObligationsAnticipation Notes (Tax Notes)Time WarrantsLease-Purchase Contracts
GENERAL OBLIGATION BONDSAre often referred to as “G.O. Bonds”Require an electionAre backed by a pledge of ad valorem
taxesAre 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
REVENUE BONDSAre secured by a pledge of revenues from
a projectThey are not subject to a demand for
payment from taxesUsually they involve revenues from a
public utilityPrimarily used by cities and special
districtsFew counties have projects that have
sufficient revenues to pledge for payment of bonds
CERTIFICATES OF OBLIGATIONAre often referred to as “Certificates” or
“C.O.’s”Streamlined method of financing Require publicationDo not require an election unless 5% of
the registered voters petitionSecured by ad valorem taxes, a revenue
pledge or combination thereofMay be amortized over a 40 year period,
but usually a shorter period is used
ANTICIPATION NOTESAny 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
ANTICIPATION NOTESMaximum 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 requiredNo newspaper publication required
CONTRACTUAL OBLIGATIONS
For Personal Property Only ◦Equipment
Secured by ad valorem taxes or revenue
No election requiredMaximum term – 25 yearsCompetitive with lease financing
TIME WARRANTSOlder 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
TIME WARRANTSDisadvantages:
◦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
TIME WARRANTSDisadvantages:
◦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.
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
structuredIs a maintenance and operations
expense, not a debt service expense unless properly structured
Attorney General approval is not required
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
REFUNDING BONDSUsed to refinance the county’s
outstanding bonds and other obligations
Allows county to take advantage of lower interest rates
Used to restructure debt paymentsNo newspaper publication requirementNo election requirement
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
OFFICIAL STATEMENTA 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 DISCLOSURERequirement to provide financial
information at least annually Requirement to report certain
events within 10 daysSet out in bond order or separate
agreement Private placement may be
exempt
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
FEDERAL INCOME TAX ISSUES FOR MUNICIPAL
BONDS
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The County’s Duties do not end when the Bonds are Issued
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 – TURNOVERThe 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
GENERAL TAX CONVENANTSNo private activity useWill not permit the bonds to become private
activity bondsNo federal guarantyWill restrict the use of the proceeds to
comply with the arbitrage requirementsIn the event of arbitrage will rebate the
excess earning to the United StatesWill 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
ARBITRAGE
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
REBATESMALL ISSUER EXCEPTION – Under
$5,000,000
IRS AUDITSEnforcement 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
