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.
