New Governor, New Era for State/Municipal Partnership

Governor Janet T. Mills is being inaugurated today as Maine’s first female Governor. Municipal officials and leaders throughout the state should expect a more positive relationship between the Governor and the State of Maine and local municipal government during this new administration. As everyone is well aware, despite having been the former Mayor of Waterville, Governor Paul LePage had a very testy and unproductive relationship with municipalities throughout his tenure as Governor. He was generally opposed to revenue sharing for municipalities and went out of his way to foist responsibility onto municipalities for programs and the costs of those programs for which the State historically has taken responsibility. Governor Mills, in her interview with the Maine Municipal Association which occurred prior to the election, made it abundantly clear that she welcomes the support and advice of municipalities and fully intends to restore that relationship and stop the process of shunting costs onto local property tax payers. Since Governor Mills worked her way up through the ranks of local and state politics before becoming Attorney General and finally Governor, she has a keen understanding of what local officials go through and will likely be far more sensitive to those concerns than the previous administration.

Let’s Talk Municipal Finance – Tax Anticipation Notes and Bond Anticipation Notes

In this installment of the Let's Talk Municipal Finance series, I will discuss two short-term alternatives to the issuance of long-term bonds for municipalities to access needed funds. These alternatives have a shorter maturity period and are either anticipated to be repaid by long-term bonds or other municipal revenue.

Tax Anticipation Notes

Tax anticipation notes, commonly referred to as TANs, are a form of municipal borrowing with a maturity date often less than one year from the date of issuance, payable from anticipated tax revenues of the municipality. In Maine, the issuance of a TAN is authorized by 30-A M.R.S.A. § 5771. In addition to authorizing the issuance of a TAN, Section 5771 puts certain restrictions on both the amount and the maturity date – the amount of the TAN is limited in relation to the total tax levy of the municipality in previous years and the maturity date is generally limited to one month after the end of the municipal year in which the note was issued.

The interest on payments on TANs is excludable from gross income under section 103 of the Internal Revenue Code. Unlike bonds, most TANs are typically issued directly through a bank to which the payments of principal and interest will eventually be made. As the name suggests, the funds used to make those payments are limited by statute to those raised out of taxes paid to the municipality; however, unlike some bonds, the funds can be used for general municipal purposes and need not be tied to a specific purpose. Therefore, the process required for a municipality to issue a TAN is much simpler than that required of a long-term bond, although certain documents, including a legal opinion on matters such as the tax exempt nature of the interest paid on the TAN, are usually required by the bank.

Bond Anticipation Notes

Bond anticipation notes, commonly referred to as BANs, are also a form of municipal borrowing, but share more characteristics with long-term bonds than a TAN. The key difference between a BAN and a TAN is that the municipality usually cites a specific purpose for issuing the BAN, which must be the same purpose as the anticipated long-term bond that the municipality intends to eventually issue to repay the BAN. BANs are subject to statutory requirements under 30-A M.R.S.A. § 5772, including a maximum face amount of the BAN not exceeding the authorized amount of the anticipated bond and a maximum period of borrowing of three years. Some municipal charters may also contain additional requirements or limitations for the issuance of BANs.

Ethan Anderson practices with Preti Flaherty's Municipal Law and Business Law practice groups, focusing on public finance, mergers and acquisitions, and contract matters.

Let’s Talk Municipal Finance – Municipal Lease Purchase Agreements

In the last installment of Let's Talk Municipal Finance, I discussed municipalities and governmental entities that issue bonds, a form of municipal debt. An alternative to incurring municipal debt and less onerous option for a municipality that is, for example, looking to purchase a new piece of equipment, is a municipal lease purchase agreement. 

Like ordinary lease purchase agreements, municipal lease purchase agreements require payments for a set number of years to lease a piece of equipment. While some agreements are strictly lease agreements with no option to purchase, more commonly the agreements provide an option to purchase the equipment outright for a nominal price at the end of the term. While a municipality may enter into a lease purchase agreement without a vote of the residents, the allocation to pay the annual lease payments is included as a line item on the annual budget approved by the residents. In addition to the annual appropriation, the agreement must also be duly authorized by the municipality, which commonly means certain resolutions or ordinances must be adopted by the municipality’s governing body authorizing entrance into the agreement by certain officers of the municipality. 

Since payment of the lease is subject to annual appropriation in the municipal budget, municipal lease purchase agreements must contain a provision allowing for termination in the event that the residents fail to approve the appropriation for the following year’s annual principal and interest payments.  This allows the municipality to terminate the lease without penalty. Lending institutions are willing to enter into municipal lease purchase agreements because interest on the annual lease payments is tax exempt as a result of factors such as the municipality’s status as a governmental unit and the use of the equipment being purchased for a municipal or public purpose. 

Municipalities must also consider, however, that the administrative costs of issuing a municipal lease purchase agreement are often greater than those of issuing a bond, primarily because the process is less standardized. The municipality must negotiate individually with a lending institution. Further, the municipality’s legal counsel must review and draft documents and governing body authorizations that are acceptable to the municipality’s chosen lending institution and necessary to issue the opinion of legal counsel, which opines on issues such as due authorization and tax matters. For these reasons, if you are considering entering into a municipal lease purchase agreement, it is best to retain legal counsel at the very beginning of the process to ensure each of the documents and authorizations conforms to the necessary requirements.

Ethan Anderson practices with Preti Flaherty's Municipal Law and Business Law practice groups, focusing on public finance, mergers and acquisitions, and contract matters.