Let's Talk Municipal Finance - Issuing Bonds

Tuesday, April 4, 2017

In my previous installment, I discussed several financing alternatives available to municipalities and certain other governmental entities to supplement revenues from their tax base or user fees. One common option is the issuance of bonds, either independently, or through a pooled issuance. 

The Issuance of Bonds

The first step to issuing a bond is the approval process at the local level.  The process varies depending on the municipality or governmental entity’s charter, enabling statutes, and other protocols that may be applicable to the issuer. It may require a formal recommendation from the governing officers followed by a vote of approval at a meeting of the residents of a municipality, or an approval only from the governing  body of a governmental entity.  Municipalities should note that their ability to incur debt is not unlimited.  For example, municipal debt it is capped by statute at an aggregate of 7.5% of the municipality’s last full state valuation, subject to certain exceptions for, by way of example, debt incurred for school purposes, storm or sanitary sewer purposes or for energy facility purposes.  Certain bonds, such as those for school purposes, may be funded primarily through payments from the state rather than from tax revenues at the local level.

Independent vs. Pooled Issuance

A municipality or governmental entity may choose to issue bonds completely on its own or through a pooled issuance, such as those with the Maine Municipal Bond Bank or New Hampshire Municipal Bond Bank. Bonds issued independently are done so via either a “directed sale” using a financial adviser or a “negotiated sale” using an underwriter.  The use of a pooled issuance, however, can help decrease costs and achieve a higher credit rating, which translates to lower interest rates.  According to the Maine Municipal Bond Bank, while the average cost of an individual municipality’s issuing a bond on its own would be approximately $15,000-18,000, a pooled issuance costs a municipality only about $2500 to $5000 (the cost of local bond counsel).  

Following a pooled issuance, however, the municipality is subject to on-going administrative fees while the bond is outstanding, which are not incurred by the municipality if it chooses to issue the bonds independently. If the municipality or governmental entity chooses to issue bonds using a pooled issuance, it must go through an application and approval process with the entity facilitating the pooled issuance and, if approved, follow the issuance schedule of the facilitating body, which often limits the number of issuances each year.

Regardless of whether a municipality or governmental entity decides to issue bonds independently or as part of a pooled issuance, it is subject to certain obligations following the issuance of the bonds until their maturity date. These obligations include, in the case of tax-exempt bonds, adopting a post-issuance compliance policy intended to maintain the tax-exempt nature of the interest on the bonds.  The municipality or governmental entity may also be required to enter into a continuing disclosure agreement or continuing disclosure certificate, which require the issuer to comply with certain Securities and Exchange Commission reporting requirements.

In my next installment in this series, I will discuss anticipation notes, which are commonly issued directly through a bank.  Anticipation notes are a short-term financing alternative used in anticipation of upcoming bond proceeds or tax revenues.