Lenders LearnTM 13 Lending to Municipalities...Your State Association Presents Lenders Learn TM Chapter 13 Lending to Municipalities Program Materials Use this document to follow along

Your State Association Presents

Lenders LearnTM Chapter 13 Lending to Municipalities

Program Materials

Use this document to follow along with the webinar. Please test your system before the broadcast. Be sure to

print enough copies for all listeners. Chapter 13 of the Lenders LearnTM secured lending guide is provided as a

separate handout.

August 24, 2016 Presenter: Robin Russell

Technical Support (for faster service please submit inquiries via email or online): (Registration & Tech Support): Email- [email protected], Phone- (877)988-7526 FOR ADDITIONAL ASSISTANCE PLEASE REFER TO OUR FAQs

mailto:[email protected]

https://bankers.confedge.com/ap/eSite/?i=faq

About Lenders LearnTM

Lenders LearnTM provides lenders and compliance officers with a deep understanding of secured lending. For each of the 15 core courses (30 hours total), attendees receive a copy of the slides and at least one chapter from Robin’s new 2016 Multistate Secured Lending Guide.

Once you have completed the core curriculum, you will have a 17 chapter reference. Whether your bank registers for one or all 15 webinars, you will find the information practical and valuable. See below for 2016 broadcast dates.

1: Basic Business Entities (1/21)2: The UCC for Lenders (2/3)3: Loan Doc 101: The Basics (2/10)4: Loan Doc 101: Business Collateral (2/23)5 & 6: Loan Doc 101: Perfection by Possession & Control (2/18) 7 & 8: Basic RE Loan Documentation (3/2 & 3/3)9: Oil & Gas Lending (4/6) 10: Agricultural Lending (4/18)11: Commercial Loan Documentation (5/3 & 5/4)12: Letters of Credit (5/17)13: Lending to Municipalities (8/24)14, 15, 16: Basic Bankruptcy for Bankers (11/2)17: Loan Participations (11/15)

Also Recommended: • Top Loan Documentation Mistakes (TBD),• Advanced Commercial Loan Documentation (6/1)• Understanding Commercial Loan Documents (9/20)• Understanding Real Estate Loan Documents (9/22)• Commercial Real Estate Loan Documentation (12/7)

All programs will be recorded and available for viewing after the broadcast date. If you would like to complete the Lenders LearnTM curriculum and missed the webinar, please visit the on-demand catalog to register.

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Lending toMunicipalities

Robin RussellAndrews Kurth LLP

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Robin Russell

ROBIN RUSSELL Robin is a fellow in the American College of Bankruptcy. She combines a depth ofexperience in bankruptcy restructuring and litigation with financial transactions. She has representedcorporate debtors, liquidating trustees, bondholders, unsecured creditors' committees, bank groups,private equity funds, landlords, trade creditors and bidders for estate assets in Chapter 11 and Chapter 7bankruptcy proceedings and has litigated fraudulent conveyance and preference claims in bankruptcy anddistrict court. She has also represented banks, institutional lenders and corporate borrowers in commercialloan transactions and debt restructurings. Robin is the principal author of Thomson Reuters’ Texas Practice

Guides for both Creditors’ Rights and Financial Transactions and the Texas Bankers Association’s TexasSecured Lending Guide, Texas Real Estate Lending Guide, Texas Problem Loan Guide and Texas Account

Documentation Guide. She is a frequent speaker on banking, bankruptcy and financial restructuring relatedtopics, an elected member of the American Law Institute and has served as a Chapter 7 Trustee. Robinreceived her LL.M. in Banking Law from Boston University and her J.D. from Baylor University where shewas Editor in Chief of the Baylor Law Review and the highest ranking graduate in her class. Prior to joiningthe firm she clerked for the Texas Supreme Court.

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NoticeThis presentation is designed to provide accurate and

authoritative information in regard to the subject matter

covered. It is provided with the understanding that

neither the presenter nor your State Bankers Association

is engaged in rendering legal, accounting or other

professional advice or service. If legal advice or other

expert assistance is required, the services of a competent

professional person should be sought — from a

Declaration of Principles Adopted by the American Bar

Association and a committee of Publishers and

Associations.

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Key Topics for Today• Overview

• Understanding Government Financial Statements

• Statement of Net Position

• Statement of Activity

• Government Funds Financial Statement

• Proprietary Funds Cash Flow Statement

• Basic Financing Alternatives

• Tax Exempt Status

• Underwriting

• Debt Restructuring Issues

• Avoid Becoming a “Municipal Advisor”

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Overview• The market for credit services to municipalities is large

and stable.

• Lending to municipalities can be safe, sound, and profitable while also helping your Bank enhance its reputation and image within your community.

• Historically, municipal lending has been in the form of long-term bonds.

• Bank financing will most frequently provide financing for capital projects/improvements (example: new roof for city hall) or for purchases of equipment (example: new fire trucks).

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Getting Outside Your “Comfort Zone”

• Special Knowledge• Authority Purpose Security Limitations

• Voter Approval

• Refunding Bonds (Refinancing)

• Attorney General Approval

• Willingness to consider terms and conditions that are not normal for Bankers

• Significant effort to develop access to government leaders

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What is a Municipality?

A political unit such as a city, town,

township or village incorporated for

local self government.

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What is an Authority?• Unit or agency of government established

Toll Road Authority, Sports Authority and Port Authority to perform specialized functions, usually financed by service charges, fees or tolls, although the authority may have taxing “authority.”

• An authority could also be an enterpriseactivity that generates revenue from service provided and needed to pay debt service.

• Examples: water and sewer plants, electrical supply facilities, airports, port or rail terminals.

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Authority to Borrow• Express or implied statutory or constitutional authority

to borrow is needed from the state

– Identify legal authority to borrow

– Identify for what purpose money may be borrowed

– Identify requirements (i.e., notice, approval)

• A local government is bound by its charter plus state and federal laws

– Home rule city

– General law city

– Special law city

• Compliance with debt limits is required

• Voter approval/counsel approval/notice requirements

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Services Typically Provided by Municipalities

• Fire and Police Protection• Public Buildings such as Libraries• Utilities• School Systems• Airports• Lighting• Roads and bridges• Hospitals• Port Authorities• Industrial Development• Housing Development• Environmental Projects

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Activities of Municipalities

• Government Activities− General Government− Public Safety− Health and Sanitation− Cemetary− Public Works− Engineering Services− Culture and Recreation− Education− Community Redevelopment

• Business/Proprietary Type Activities− Water− Sewer− Parking Facilities

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Tax Exempt Status May be Available to:

• States

• Municipalities

• Counties

• Special Assessment Districts (SADs)

• Business Improvement Districts (BIDs)

• Redevelopment Districts

• School Districts

• Sports Authorities

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Loan Policy

Each Bank should decide and document its intentions and preferences with regard to credit for governmental entities taking into account:

• Each bank’s unique market

• Risk-to-reward tolerance

• Traditional underwriting requirements

• Needed discipline

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Special Issues for Financial Institutions

• Qualified tax-exempt obligations

• Pricing

• Booking as a loan vs. as an investment

− Is it registered?− Does it have a CUSIP number?− How is it structured?

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MUNICIPAL

BORROWERS

MUNICIPAL

FINANCIAL

EMERGENCY

AUTHORITY

CENTRAL

GOVERNMENT

INVESTORS/BANKS INVESTORS/

PARTICIPATING

BANKS

MARKET

REGULATORS

MUNICIPAL

ADVISORS

● Credit rating agencies

● Advisors

● OtherMUNICIPAL

FINANCIAL

EMERGENCY

Fiscal transfers

And programmes

Disclosure

Collateral

Policy and

legislation

Secondary

Transactions

Disclosure and

other regulations

Primary investments

● General obligation

debt

● Revenue/Enterprise

debt

● Equipment Leases

Disclosure and other regs.

Provide services

Legislation, appointment

and funding

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Understanding Government Financial Statements

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Revenue

• Municipality income statements should break down revenue by source:− Ad valorem property taxes

− Sales taxes

− Income taxes

− Licenses and fees

− Franchise taxes

− Service charges

− Fiscal aid

− Revenue sharing

− Grants/donations

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Ad Valorem Tax

• A tax calculated “according to value.” Ad valorem tax is based on an assigned market or assessed valuation of real property.

• The most significant tax that a local government can raise or lower without higher level government approval.

• Ad valorem taxes are often the budget balancing factor in local annual budgets.

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Assessed Value

The appraised worth of property set by a taxing authority for ad valorem taxation. The value established may or may not be close to the fair market value of the property.

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Millage Rate

A mill is a rate of tax equal to $1 for each $1,000 of assessed property value. The millage rate is the total number of mills assessed against this value.

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Intergovernmental Revenue

Revenue received from other governments for grants, shared revenues or payments in lieu of taxes.

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Fund Accounting• A unique and specialized type of accounting used by

municipalities and 501(c)(3) not-for-profit entities• Developed to allow revenues for a specific purpose or

restriction to be recorded in segregated accounts established to show appropriated or authorized money was spent in accordance with the stated purpose.

• Most entities use modified accrual basis accounting: Revenues are recorded when measurable and available, with expenditures (not expenses) charged against revenues.

• There can be any number of funds included in an entity’s financial statements.

• Bank should be aware of all types of funds the borrower entity maintains.

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General Fund

• Provides accounting results for most of the entity’s financial resources: property taxes, licenses and permits, local taxes, service charges, etc.

• Accounting for most municipality’s activities (police, fire, parks and recreation, etc.)

• Majority of revenue and expenditures pass through the General Fund for day-to-day operations.

• Fixed assets are likely accounted for in a separate fund account.• An analyst should expect to see a significant surplus in the General

Fund which would indicate favorable financial results and operations. Many perceive the “surplus” to be sort of a “savings account” for unforeseen or emergency situations.

• Entity’s financial strength (and bond rating) is usually determined by the strength of the General Fund account.

• Unrestricted Fund Balance-to-Revenue Ratio greater than 5% indicates financial strength.

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General Fund Balance

• The General Fund Balance is calculated as follows:Beginning Fund Balance

+ Current Year Revenues

- Current Year Expenditures

+ Financing Sources

- Financing Uses

+ Transfers In

- Transfers Out

= Ending Fund Balance

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Common Financial Ratios

• General Fund Balance/Total Expenditures Ratio

• Fund Balance/Annualized Payment

• Annual Debt Service/Total Revenues

• Debt Outstanding/Assessed Valuation

• Liquidity: Current Assets/Current Liabilities

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Debt Service Funds

• Created to account for payment of principal and interest on long-term debt (other than special assessments and revenue-supported bonds).

• New separate fund is created with each revenue bond with 10% of bond proceeds placed into the account to provide for debt service.

• Stability of revenue source and amount is the key.

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Special Revenue Funds(Enterprise or Proprietary Funds)

• Created to separately account for

− Specific revenue sources

− Finance activities or special projects defined or created by law or administration

• An enterprise fund is governmental accountingfund used to account for operations of an enterprise activity.

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Special Revenue Financing

Special revenue financing involves the following:• Receipts derived from the ownership, operation, or disposition

of projects or systems of the debtor that are primarily used or intended to be used to provide transportation, utility, or other services, including the proceeds of borrowing to finance the projects or systems;

• Special excise taxes imposed on particular activities or transactions;

• Incremental tax receipts from the benefitted area in the case of tax-increment financing;

• Other revenues or receipts derived from particular functions of the debtor, whether or not the debtor has other functions; or

• Taxes specially levied to finance one or more projects or systems, excluding receipts from general property , sales, or income taxes (other than tax-increment financing) levied to finance the general purposes of the debtor.

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Other Funds

• Funds for capital projects, trust and agency funds, intergovernmental service funds and/or special assessment funds expected to be relatively permanent activities which should be controlled by budgets.

• Transfers between accounts may or may not be legitimate.

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*Taken from What You

Should Know About Your

Local Government’s

Finances – A Guide to

Financial Statements, 2nd

Edition, Dean Michael Mead

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*Taken from What You Should

Know About Your Local

Government’s Finances – A

Guide to Financial Statements, 2nd Edition, Dean Michael Mead

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Local Government’s Finances

– A Guide to Financial

Statements, 2nd Edition, Dean Michael Mead

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Local Government’s

Finances – A Guide to

Financial Statements, 2nd

Edition, Dean Michael Mead

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*Taken from What You Should

Know About Your Local

Government’s Finances – A

Guide to Financial Statements, 2nd Edition, Dean Michael Mead

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Basic Financing Alternatives

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Common Types of Municipal Financing• General Obligation Notes (“GO”)/Certificates of Obligation (“CO”)

– Time limit

– Secured by taxes and/or revenue

• Anticipation Notes– Time limit

– Secured by taxes and/or revenue

• Enterprise/Revenue Notes– Secured by revenue from enterprise activity or other

– Time limit

• Equipment Lease/Installment Purchase/Contractual Obligation– Purchase of personal property

– Annual appropriation required

– Lien on personal property

• Conduit Financing– Special projects

– Transfer of loan proceeds to 501(c)(3)

• Bonds

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General or “Full Faith and Credit” Obligation

• A general obligation debt is a debt issued by local government units and typically secured by a pledge of the borrower’s ad valorem taxes.

• General obligation debt may require electorate approval.

• In the event of default, holders of general obligation debt have the right to compel a tax levy in order to provide funds to pay defaulted debt.

• Typically secured by a statutory lien to the extent of the pledged revenues collected.

• Typically no UCC-1 filing required.

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Anticipation Loan

A short-term loan with agreed upon repayment source being revenue from a specific source expected/“anticipated” in the near term, such as collected taxes, another loan, and revenue from another government source (federal).

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Security for Special Revenue Financing

• Receipts derived from the ownership, operation, or disposition of projects or systems of the debtor that are primarily used or intended to be used primarily to provide transportation, utility, or other services, including the proceeds of borrowings to finance the projects or systems;

• Special excise taxes imposed on particular activities or transactions;

• Incremental tax receipts from the benefitted area in the case of tax-increment financing;

• Other revenues or receipts derived form particular functions of the debtor, whether or not the debtor has other functions; or

• Taxes specially levied to finance one or more projects or systems, excluding receipts from general property, sales, or income taxes (other than tax-increment financing) levied to finance the general purposes of the debtor.

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Interim Financing for Public Improvements

• Local entities may wish to borrow interim construction funds for capital improvement projects for which other general obligation or revenue bonds have been authorized or for which a state or federal grant has been approved.

• Anticipation loans can provide credit to construct local improvements for which takeout financing is anticipated to be from sale of bonds based on either:− Unlimited tax pledge− Assessment bonds secured by a limited pledge

of taxes− Assessments only on the financed properties

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Lease Financing

• Bank purchases equipment (fire truck, school bus, etc.)

• Municipality enters into a lease with a term matching the useful life of equipment

• Municipality appropriates funds in annual budget to make payments

• “Interest” component of lease (i.e. lease payments – depreciation = interest) can be tax-exempt

• Municipality can purchase equipment at end of lease term for depreciated value which allows municipality to build equity

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Advantages of Lease Financing

• Due to requirement of annual appropriation of lease payments, leases are not considered as debt and are not subject to voter approval (confirm this is true in your state)

• Save time and expense

• Lower rates of interest

• Easier credit qualifications and documentation than for bond financing

• Some entities (library, fire and other special purpose entities) cannot issue bonds

• Bank has secured position, unlike with bonds

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Limited Recourse

The only recourse a Bank will have in a municipal lease transaction will be to foreclose on the leased property (in the event of non-appropriation). Terms that will mitigate risk:• Limit financing to essential equipment, which will reduce

possibility of non-appropriation.• Include in the lease agreement a non-Substitution clause

which states that if lessee decides not to appropriate payments for the upcoming year, the lessee will not be able to replace the equipment with same or similar services, until the next occurring renewal term ends.

• The lease agreement should also have a covenant requiring the lessee to give notice 90 days prior to the end of the current anniversary of lease term of its decision to not appropriate funds for the next fiscal year. This will obligate the lessee to appropriate the funds for the next 12 months, if the 90-day notice is not given.

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Risk of Non-Appropriation is Low

• The historical rate of non-appropriation is low.

• In 1998, .06% of leases were subject to non-appropriation (23 of 78,176 transactions).

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Lease Financing

• Not considered as debt to the municipality because the obligation to repay a lease is dependent upon an annual appropriation.

• There are a number of advantages to lease financing:� Avoid debt limitations because leases not considered debt� Avoid voter approval because leases not considered debt� Save time and expense because low cost of obtaining

credit� Immediate funding� Easier credit and documentation� Not all entities can issue� Offers lender a secured credit

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Lease Financing

• Accounting and legal advice should be part of the underwriting.

• Lease structuring greatly reduces risk of non-payment:

− Finance only essential equipment

− Non-substitution clause

− 90 day “cancellation” notice

− Deal structured as a lease purchase

− Leased property must be used for governmental purposes

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Tax Exempt Status

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Who Can Be a Borrower?

• Only interest on debt “issued by or on behalf of a state or local governmental unit” is tax exempt

• 501(c)(3) organizations can borrow on a tax-exempt basis only by involving a state or local governmental unit

• Typically the local government can only finance activities within their geographic boundaries

• State issuers can finance activities state-wide

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Federal Tax Law Requirements

• Must be an “obligation” under section 103 of

the Internal Revenue Code

• Must be an obligation of a state or political

subdivision

• Does entity have one or more sovereign

powers?

• If not, does entity qualify as “on behalf of”

borrower?

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Tax-Exempt Financings for 501(c)(3) Organizations

Conduits are needed. Possibilities include:

• Higher education facility corporations

• Health facilities development corporations

• Industrial development corporations

• Cultural education facilities finance corporations

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• Conduit assigns its rights/interests in pledge and/or mortgage provided by 501(c)(3) to Bank

• Conduit and sponsoring government entity have no responsibility for loan payments due to Bank except from 501(c)(3) payments made to conduit

• Loan may be “qualified tax-exempt obligation”

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General Structure of Tax-Exempt Financings for 501(c)(3) Organizations

• Conduit borrows from Bank by entering into loan agreement

• Conduit lends proceeds to 501(c)(3) organization

• Loan from Bank to conduit is secured by loan payments from 501(c)(3)

• Loan from conduit to 501(c)(3) is secured by lien on project and/or revenue stream of 501(c)(3)

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Sample Structure

BankLoan Participations

City

Non-Profit Corporation

501(c)(3)

Religious Order,

Guarantor

County

Hospital

Mortgage on asset

Pledge of revenue

Transfer of proceeds Transfer of proceeds

$loan

$loan

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General Structure of Tax-Exempt Financings for 501(c)(3) Organizations

• Major steps to follow:

− Bank and 501(c)(3) agree on terms

− Conduit is found or created

− Notice of public hearing(s) is published

− Public hearing(s) are held

− Conduit, sponsoring entity, and 501(c)(3) formally approve transaction

− Closing (funding) occurs

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• Religiously affiliated schools, universities, and other nonprofits cannot use tax-exempt borrowing for projects for:

− sectarian instruction

− places of religious worship

− facilities for divinity schools or classes

• But projects may be split so tax-exempt financing may be used on a portion

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Federal Tax Law Requirements

• Must not be a “private activity”− Must not meet private business use test

nor private security or payment test− Must not meet private loan financing test

• Or must be a permitted “private activity bond”− Qualified 501(c)(3) bonds / obligations− Includes obligations for exempt facilities

(i.e., hospital, nursing home, etc.) and qualified residential rental projects

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Restrictions on Unrelated Trade or Business

• Facilities can have many uses

• Too much “private” use can disqualify the loan from tax-exempt status

• No more than 5% of facility can be private use

• Examples: pharmacy or flower shop in hospital; gift shop or restaurant in museum

• Loan proceeds cannot be “arbitraged” (i.e., invested at higher interest rate)

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The Five Percent (5%) Rule

• Only 5% of loan proceeds can be used to acquire property that is not used by non-profit in furtherance of exempt purpose

• Only 2% of loan proceeds can be used to cover cost related to debt

• 2% counts against 5%, so using 2% for costs would leave only 3% for unrelated business

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Underwriting

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Credit Evaluation

Effective credit underwriting includes analyzing four key factors:

• Debt burden

• Financial operations

• Economic and social characteristics of the community

• Administrative, political and governmental factors

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How Much Should be Borrowed?

• Balance of Debt v Pay-as-Go

• Designation of Percent of Revenue to Capital

• Local Debt Limits

─ State Law

─ Local Charter

─ Voter Imposed Restrictions

• Debt Policy

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Optimum Municipal Debt Policies

• Proceeds from long-term debt will not be used for current, ongoing operations.

• Long-term borrowing will be confined to capital improvements too large to be financed from current revenues.

• Bonds will be paid back within a period not to exceed the expected useful life of the capital project.

• Where possible, special assessment, revenue, or other self-supporting bonds will be used instead of general obligation bonds.

• Good communication with bond rating agencies will be maintained, and a policy of full disclosure on every financial report and bond prospectus will be followed.

• Long-term debt issuance will have a level debt service with a life no greater than the expected life of the capital improvement being financed and no greater than 20 years.

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What Can the Municipality Afford?(benchmarks)

• Overall net debt as a percentage of assessed or market value

─ Should not be over 10% (unless single purpose self supporting)

• Overall net debt per capita (or household) as a percentage of per capita (or household) income

─ Should not be close to or over 15%

• Net Debt Service as a percentage of net operating revenues

─ 20% maximum

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Historic Revenue

Credit analysis should focus on historical revenue.

• Sales tax seasonality health

• Property tax revenues

• Timing of property tax receipts

• Stability of revenues

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Internal Controls

• Effectiveness and efficiency of operations

• Reliability of financial reporting

• Compliance with applicable laws and regulations

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Evaluating Financial Operations

• Does the municipality balance its budget each year?• Is there a healthy fund balance?• Is there a “rainy day” fund to help get the entity through Economic

fluctuations?• Is financial reporting timely and reliable?• Have annual financial reports received the Government Finance

Officers Association certificate of excellence?• Has the bank tracked the relationship between the entity’s budget

and the actual financial statements for the past three years?• What are the primary revenue sources? Are they diversified?• How much of tax revenues come from residential, commercial and

industrial sources?• How and how well does the entity collect its taxes?• Does the community have a poor track record of delinquent taxes

and properties abandoned for taxes?

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Evaluating Local Economy• Does the municipality have a broad economic base or is it a one-industry or one-

company town?

• How much of the real estate base depends on railroads, utilities or private corporations?

• What is the trend in building permits?

• What is the job trend over the past 5-10 years?

• What is the unemployment trend over the past 3 years?

• What is the impact of the imposition of federal or state mandates?

• Is out-migration an issue?

• What is impact of location?

• What is the per capita income levels versus state and national levels?

• What is the risk of socio-economic disasters?

• What is the risk of environmental problems or disasters?

• What programs or projects will voters support?

• What has been the growth in assessed valuation?

• Who are the major employers?

• What is the composition of employment by sector?

• Are there court decisions which could necessitate unanticipated expenditures?

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Leadership Structures

• Commission

• Mayor-Council

• Council-Manager

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Internal Control

• The lack of profit motive combined with budget constraints can result in a weak internal control environment which can undermine credit strength if the Bank has not become comfortable with the “very fabric of the organization.”

• Internal Control is an organization-wide concept and set of processes, procedures and controls intended to accomplish three types of objectives:− Effectiveness and efficiency of operations

− Reliability of financial reporting

− Compliance with laws and regulations

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Due Diligence Worksheet

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Due Diligence1 WorksheetMunicipality:

What services is the municipality responsible for providing? The most common municipal responsibilities are listed below. Check all responsibilities that apply to the municipality being assessed. If known, check E (for exclusive responsibilities) or S (for shared responsibilities). Write down any other responsibility not listed in the table.

_____________1 Based on Annex 1 to Making Cities work Assessment and Implementation Toolkit 2006.

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Due Diligence1 Worksheet (cont’d)

Relationship with higher level government:

(If yes, you should check E (exclusive) or S (shared) in the previous table of municipal service responsibilities)

In the cases of share responsibility, is there clarity in the respective roles of different levels of government? Decide.

What role does the state government have in regard to shared expenditure by the municipality?

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Due Diligence Worksheet (cont’d)

How much autonomy does the municipality enjoy in making service

delivery decisions?

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Intergovernmental Transfer Mechanism:

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Environment for Municipal Revenues

1. What taxes, if any, is the municipality legally authorized to levy?Check all that apply. Add any not listed below.

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2. What is the municipality’s tax autonomy?

In the table above, for each tax that the municipality levies, in the comment boxes, indicate with the appropriate letter which level of autonomy applies to each of the taxes as follows:

3. Check what applies:

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4. Have regulatory structures been established to set utility rates, user charges, and rates for other revenue sources? Does the framework specify: policies, procedures, pricing rules, regulatory system, billing and collection systems, periodic reviews and updates?

Describe.

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Environment for Municipal Borrowing

1. Fill out the following about municipal authority to borrow:

2. Fill out the following regarding the legal limitations on municipal borrowing.

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List the restrictions on municipal borrowing and the reasons for the restrictions. Add any other restriction(s) not listed below.

3. Fill out the following regarding restrictions on municipal borrowing sources

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4. Answer the following regarding approval procedures for municipal borrowing:

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5. Answer the following regarding municipal credit rating:

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Management of Municipal Financial Resources

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Municipal Revenues Trends

Fill out the following table. Data from this table will be used to answer questions 1 through 4 in section C.1. and, question 1 through 3 in section C.2.

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1. For all the taxes that the municipality is legally authorized to levy and collect, how do actual collections compare to total municipal revenue? Fill out the following table based on data from the table above.

2. For all fees and user charges (including utility payments, if applicable) that the municipality is legally authorized to levy and collect, how do actual collections compare to total municipal revenue? Fill out the following table based on data from the table above.

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3. What percentage of the municipality’s total revenue comes from property taxes? Fill out the following table based on data from the table above.

4. What percentage of the municipality’s annual budget comes from transfers from another level of government? Fill out the following table based on data from the table above.

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Trends in Financial Operating Positions of the Municipality

1. What is the trend in the municipality’s budgets? Are they in surplus or deficit?

2. Does the municipality fund recurrent (operating) expenditures through borrowing?

From the previous question indicate whether the current budget is in surplus deficit or balanced, if:

> 100, then deficit (-)

< 100, then surplus (+)

= 100, then balanced (=)

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Describe whether there are other sources that indicate that the municipality is funding current expenditures through borrowing. Explain.

3. What percentage of total municipal expenditure is capital expenditure?

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Municipal Debt Trends

1. Answer the following regarding debt trends of the municipality being assessed: What is the total debt outstanding?

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2. How does total debt service (repayments of principal and interest) compare to total revenue? How does total debt service compare to total expenditure?

3. Fill out the following on the trend on the municipality’s creditworthiness rating (if available):

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Debt Restructuring Issues

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Chapter 9 of the Bankruptcy Code

• Chapter 9 is intended for use solely by a municipality to adjust its debts

• “Municipality” means political subdivision or public agency or instrumentality of a state.

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Who May File Chapter 9 Bankruptcy?

• An entity that is a municipality

• Specifically authorized under state law to be a debtor

• Insolvent

• Willing to effectuate a plan of adjustment

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Creditors

• Debt Secured by Pledged Revenue• Debt Secured by Special Revenue• Secured Bond Debt• Debt Secured by Municipal Facility Lease

Financing• Administrative Expenses• Unsecured Debt including Unsecured Bond Debt

* Banks lending for conduit financing typically have no claim against municipality only against 501(c)(3) entity

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Avoid Becoming a “Municipal Advisor”

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Overview of Municipal Advisor Rules

• Municipal Advisor Provisions and SEC

− Section 975 of the Dodd-Frank Act amended Section 15B of the Securities and Exchange Act of 1934 (the “Exchange Act”)

− Amendment made it unlawful for “municipal advisors” to provide advice to, or solicit, municipal entities or obligated persons without registering with the Securities and Exchange Commission (the “SEC”)

− Effective Date – July 1, 2014

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What is a Municipal Advisor?

Municipal Advisor – means a “person” (who is not a municipal entity or employee of a municipal entity) that:

• Provides advice to or on behalf of a municipal entity or obligated person with respect to “municipal financial products” or the issuance of municipal securities, including advice with respect to the structure, timing, terms and other similar matters concerning such financial products or issues; and

• Undertakes the solicitation of a municipal entity.

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Examples of Municipal Advisors

Municipal Advisors include:

• Financial Advisors

• Guaranteed Investment Contract Brokers

• Third-Party Marketers

• Placement Agents

• Solicitors

• Finders

• SWAP Advisors

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Bank Exemption

• Banks are exempt from the MA Rule if:

− Extending credit (direct loan)

− Deposit accounts

− Sweep accounts

− Indenture Trustee

• Any broker-dealer acting as a Placement Agent for a “direct purchase” of a municipal security by a bank (as evidence of a direct loan) is subject to all MSRB Rules

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Sample Disclosure Language for Bank Direct Purchase of a Municipal Security

Role of Lender: In connection with the potential purchase of the [Bonds, Notes], the Lender shall act solely as purchaser of the [Bonds/Notes] for its own loan account (without a present intent to reoffer), and neither the Lender nor any of its affiliates shall act as a fiduciary for the Borrower or in the capacity of broker, dealer, municipal securities underwriter or municipal advisor. Neither the Lender nor any of its affiliates has provided, and will not provide, financial, legal, tax, accounting or other advice to or on behalf of the Borrower with respect to the proposed issuance of the [Bonds/Notes]. The Borrower shall represent in the [Bond/Notes] documentation that the Borrower has sought and obtained financial, legal, tax, accounting and other advice (including as it relates to structure, timing, terms and similar matters) with respect to the proposed issuance of the [Bonds/Notes] from its financial, legal and other advisors (and not the Lender or any of its affiliates) to the extent that the Borrower desired to obtain such advice.

Without limiting the generality of the foregoing, (a) neither the Lender nor any of its affiliates is recommending an action to the Borrower or any other person or entity obligated with respect to the [Bonds/Notes]; (b) neither the Lender nor any of its affiliates is acting as an advisor to the Borrower or any such obligated person or entity, and none of the Lender and its affiliates owes a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934, as amended, to the Borrower or any such obligated person or entity with respect to the information and material contained in this communication; (c) the Lender and its applicable affiliates are acting for their own respective interests; and (d) the Borrower and any such obligated person or entity should discuss any information and material contained in this communication with any and all internal or external advisors and experts that the Borrower or such obligated person or entity deems appropriate before acting on this information or material.

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Are you providing advice that requires registration?

Is it regarding:

• Issuance Municipal Securities

• Municipal Derivatives

• Guaranteed Investment Contracts

(GICs)

• Investment Strategies

o Proceeds

o Muni Escrow Investments

• Municipal Derivatives

Are you making a:

• Recommendation

• Suggestion

• Pitch

Are you providing:

• Education

• Advertising

Is an Exemption available?

• Banks:

o Extensions of credit (loans)

o Deposit Accounts

o Sweep Accounts

o Indenture Trustee

• Responses to RFPs or RFQ

• Independent Registered

Municipal Advisor

• Underwriter

• Swap Dealers and Commodity

Trading Advisors

NO

REGISTRATION

NEEDED

MUNICIPAL

ADVISOR

REGISTRATION

REQUIRED

Yes

Yes

No

No

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Consequences of Being a Municipal Advisor

• Must register with SEC and the Municipal Securities Rulemaking Board (“MSRB”)

• Cannot switch role to be an underwriter or placement agent (see MSRB Rule G-23)

• Subject to MSRB Rules:− A-13 – Payment of Assessment− G-3 – Broker-Dealer Qualifications− G-14 – Reports on sales− G-17 – Fair dealing− G-23 – Financial Advisors− G-32 – Transaction Reporting− G-34 – CUSIP Numbers required− G-37 – Ban on Political Contributions

• Fiduciary Duty to municipal entity and obligated persons

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Fiduciary Duty• Municipal Advisors have a fiduciary duty

− Generally encompasses a duty of loyalty and duty of care

− Duty of Loyalty – requires fiduciary to act in its clients’ best interests without regard to its own financial or other interests; disclose conflicts of interest that might impair ability to fulfill duty

− Duty of Care – fiduciary must be qualified to undertake engagement and consider alternatives that might better serve clients’ interests

− Proposed MSRB Rule G-42 (out for comment)

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Advisory Activities and Advice Standard

• Term “advice” is not defined in the Dodd-Frank Act.

• Advice Standard includes:

− General information that does not involve a recommendation regarding municipal financial products or the issuance of municipal securities

� Includes structure, timing, terms and other similar matters concerning municipal financial products or issuance of municipal securities

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Advisory Activities and Advice Standard (continued)

• Advice does not include the following:− Information of a factual nature without subjective

assumptions, opinions or views

− Information that is not particularized to a specific municipal entity or type of municipal entity

− Information that is widely disseminated for use by the public, clients or market participants other than municipal entities or obligated persons

− General information in the nature of educational materials

− Borrower promotional materials that are factual in nature

− The more individually tailored the communication, the more likely it will constitute advice

− Providing current market prices and yields on outstanding bonds or refunding analyses are acceptable

− May use disclaimers

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Exclusions from MA Rule

• Underwriters

• Investment Advisors registered under the Investment Advisors Act of 1940 providing investment advice

• Commodity trading advisors registered under the Commodity Exchange Act providing advice related to SWAPs

• Attorneys offering legal advice or providing services that are of a traditional legal nature

• Engineers providing engineering advice

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Exemptions from MA Rule

• Responding to RFPs (written or oral)

� applies to RFPs/RFQs solicited by a municipal entity

� covers “mini-RFPs” sent by municipal entity to firms already selected as part of an underwriting pool

− Municipal Entities or Obligated Persons relying on Independent Registered Municipal Advisors (“IRMA”)

− Public officials and employees, accountants, banks (except separately, identifiable departments and divisions) and SWAP dealers

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Underwriter Exclusion

• Brokers, dealers and municipal securities dealers serving as underwriters do not have to register as a Municipal Advisor

─ if advising activities involve the structure, timing and terms of a particular issue of municipal securities

• Exclusion begins when municipal issuer engages the underwriter on a particular transaction and continues until the end of the underwriting period for that transaction

• Broker-dealer firm selected to be part of a pool of underwriters, without being selected for a specific deal, does not constitute serving as an underwriter on a particular issue of municipal securities

• Exclusion does not extend to related issues or tranches for which the underwriter is not engaged

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Underwriter Exclusion (continued)

• Engagement of Underwriter

• “Engagement” by municipal entities varies widely

• Contractual agreement constitutes engagement

• Engagement to serve for some period of time or as a member of an underwriting pool does not meet the exclusion

• Expect practice to move toward more formal engagement letters

• Telephone call or email from an authorized official of municipal entity may be sufficient to establish engagement if underwriter has made the disclosures required by MSRG Rule G-17 (arm’s length commercial transaction, no fiduciary duty)

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• Underwriter exclusion allows the firm to provide advice in a non-fiduciary capacity for the following:

− Structure

− Timing

− Terms

− Preparation of rating strategies and presentations

− Preparation for and assistance with investor “road shows” and investor discussions

− Advice regarding retail order periods and institutional marketing (for negotiated sales)

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• Underwriter exclusion allows the firm to provide advice in a non-fiduciary capacity for the following (continued):

− Assistance in preparation of the preliminary and final official statement

− Assistance with closing, documents and opinions

− Coordination in obtaining CUSIP numbers and registration with the Depository Trust Company (“DTC”)

− Preparation of post-sale reports

− Structuring refunding escrow cash flows

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Activities Outside Underwriter Exclusion

• Advice on investment strategies

• Advice on municipal derivatives

• Advice on method of sale (competitive or negotiated)

• Advice on whether municipal entity or obligated person should approve or authorize the issuance of municipal securities

• Advice on bond election campaign

• Advice that is not specific to a particular issuance of municipal securities

• Assisting issues with competitive sales, including bid verification, true interest cost calculations, etc.

• Preparation of feasibility analyses

• Budget planning

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Independent Registered Municipal Advisor Exemption

• Independent Registered Municipal Advisor Exemption

− Applies when issuer or obligated person has hired an independent registered municipal advisor and has made that representation known in writing to the person (underwriter, bank, etc.) seeking to rely on the exemption

− A municipal advisor is “independent” of the person (underwriter, bank, etc.) if it has not been an “associated person” of the person (underwriter, bank, etc.) within the past two years

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Independent Registered Municipal Advisor Exemption (continued)

• In order to rely on the IRMA exception, person (underwriter or bank) must:

− Obtain written representation from issuer or obligated person that it is represented by and will rely on the advice of the IRMA

− Provide written disclosure to the issuer or obligated person and its IRMA that by obtaining the above written representation the underwriter or bank is not an MA and not subject to the fiduciary duty

− Written disclosure must be made at a time and in a manner reasonably designed to allow the issuer or obligated persons to evaluate the disclosure

− Municipal entity may provide the required representations (that it is relying on advice of its IRMA) by posting on its website

− IRMA does not need to be present for all discussions

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RFP Exemption

• Objective is identified in RFP

• RFP is open for a specified time period (up to six months is reasonable)

• RFP involves a competitive process and is sent to at least three reasonably competitive market participants or is publicly disseminated by posting on an official website

• Mini-RFP – one or more particular questions identified, is open for a set period of time (up to three months), sent to either the entire pool of pre-screened or pre-qualified market participants or at least three members of such pool

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