CMFO Debt Management

CMFO Debt Management

Tennessee State Funding Board

A board established by the state law which has authority to establish debt management policies for local governments

Transparency, Professional and Conflicts of Interest

Minimum required language for debt management policies must include these topics

Debt Analysis

A picture of the debt service health

Financial Ratios

A tool that maybe used to measure debt capacity and determine the ability to repay indebtedness

Debt Limit

A recommended cap on the amount of outstanding or planned obligations

Multi-year Debt Budget

A financial tool that reflects revenues, expenditures, and unrestricted fund balance over the debt term.

Credit Rating

This is a significant factor in determining the interest rate a local government pays to borrow money.

Capital Asset

Buildings, streets, water and wastewater facilities, heavy equipment , et al

Capital Improvement Plan

May include purchases, construction, replacement or improvement of capital assets

Construction Manager

A management firm, government employee, or an outside individual hired to oversee large capital projects

Capital Projects Fund

A fund commonly used to account for payments to contractors on large general government construction projects

Debt Service Fund

A fund commonly used to account for repayments of bonds and notes used to finance general government capital projects.

Go Bond

Debt issued to be repaid with general taxes

Negotiated Sale

An underwriter or bank is selected to purchase the debt

Revenue Bond

Debt issued to be repaid with the revenue generated by the capital project financed

Pay As You Go

Accumulating funds for projects or improvements for several years

Pay As You Use

Paying debt for capital assets while they are being used

Noncurrent

Obligation that is expected to mature more than one year from the current financial statement date

Capital Outlay Note

Debt issued to finance smaller or less expensive capital projects

Bond Counsel

Renders a legal opinion on the government’s legal authority to issue debt and whether it is tax exempt

Current

Obligation expected to mature within one year of the date of current financial statements

Competitive Sale

Bonds or notes are advertised for sale

Municipal Advisor

This person helps structure, size, and prepare the bond package, evaluate bids, for a competitive sale

Underwriter

Purchases the issue from the municipality and resells it to investors

Debt Purpose

Local Governments issue debt to finance land or construction projects (infrastructure), or purchase capital assets

• buildings

• parks & Rec

• Utilities

• Infrastructure

How will projects be funded?

• Tax revenue

• user rates

• cash reserves

• debt proceeds

How much should be borrowed?

Determine availability & capacity of:

• Life expectancy of the project

• unappropriated revenues

• effect on fund balance over time

• revenue generated by new project

• existing debt service

Financial Sustainability- Intergenerational Equity

• Capital projects have a life of several decades (30-50 Years)

• Cash reserves = burden on current and past generations

• Debt funding= burden on current and future generations

Debt

refers to borrowing money and repaying it with interest over a period of time.

The debt of local government entities can be issued for a very short term such as a few months, but certain types of debt of local government entities can have a term of up to `

40 years

Debt repayment periods can range from a few months to 40 years but cannot

exceed the life of the capital asset

intergenerational equity

be applied since local governments should distribute the cost and benefit of these assets across successive generations of taxpayers and rate payers who will benefit from their use

Pay as you go financing

asset that is purchased with cash reserves

Future generations will not pay their share of taxes or rates for the benefit of the asset ( Current revenue and reserves)

Pay as you use financing

capital project is funded entirely by debt

Has backloaded principle payments, then the current generation of citizens will not be paying their share of taxes or rates for the use of the assets (current revenue and debt)

Local governments should strive for an intergenerational equity through

a balanced revenue collection for capital projects/ by budgeting a portion of ongoing annual tax revenues combined with a portion of debt to finance the construction of long term capital assets.

• Local Government Public Obligations Act of 1986

• Consolidated statutes pertaining to debt obligations of the local government

• Adopted by Resolution/ Before approval a balanced budget must be adopted

• no limit or ceiling on amount of debt , except for Tax Anticipation Notes

• All interest income received by investors buying notes or bonds issued under this act is generally exempt from federal income taxes

Arbitrage

is the investment of proceeds of tax exempt debt at at higher interest rate than the interest being paid on the debt

State Debt Manual

approved by the State Funding Board and is updated by LGF on a regular basis. The manual provides guidance, procedures, and specific forms to be used by local governments issuing debt. The manual contains specific guidance on issuing certain notes and bond refunding transactions and should be used to assist debt issuers comply with state law.

Debt Reporting

• Report on debt obligation within 45 days after signing, including the governing body

• formerly called CT-0253

• report must be delivered to the governing body at an open public meeting

• if an open meeting is not scheduled within 45 day period, the municipality must provide each member of the governing body with a copy of this form before the end of the 45 day period

Finance Transaction

transaction in which a public entity issues, incurs, executes, or assumes a financial obligation

Obligations

means bonds, notes, and any other evidence of indebtedness lawfully issued, executed, or assumed by a local government

Default Reporting

• Failure to pay debt interest or principle on time= DEFAULT

• Report to LGF within 10 days of default, report must include:

• Contact information for the reporting entity, authorized rep, and preparer

• Name and amount of the defaulted debt

• Brief description of the type of debt

• Security Pledged

• Type of Interest

• Other information and in such a manner as required by the state funding board

Annual Budget Approval

• Balanced Budget

• Required LGF format

• GAAP Basis

• Adopted by 6/30

• Submitted within 15 calendar days of LGF

• After 2 months debt may not be issued

Balloon Indebtedness

• first principal payment is more than 3 years from issuance

• final principal maturity is 31 years or more after issue date

• P&I amortization schedule is not level or declining

requires state pre-approval, anti kicking the can act (back loaded debt)

Yes

Is Pay As You Go Financing Legal in Tennessee?

Current Debt Term

Matures in one year or less from current year financials The issuer of the debt promises to repay the amount of principle borrowed, plus interest, on a certain date

Non-Current Debt Term

Matures more than one year from current year financials

Bonds and most Notes

typically have longer terms than other debt agreements, a bond is the issuers promise to repay a set amount of money, plus periodic interest, on a specific date

Debt Issuance will be classified as current or noncurrent. The major factors to be considered are the following:

• amount of issuance

• specific type of asset

• asset life expectancy

• how the new debt will fit into the existing multi-year debt service budget or plan-term of bond/loan

• the revenue stream that will be used to repay the debt ( local taxes or customer fees and charges)

Notes

are typically short term debt instruments and will generally be less expensive to issue than bonds because the local government can handle the transaction with a local bank and absorb most, if not all of the cost of issuance

Interfund Loans

• State Law allows it

• Must follow LGF guidelines and be preapproved

• TCA sets minimum requirements

• Enterprise money is restricted- must be repaid with interest Interfund loans are financial arrangements between different funds within a local government, allowing for borrowing from one fund to another, subject to specific guidelines and legal requirements.

Bond Anticipation Notes (BANS)

• Temporary financing until bonds are issued

• may not exceed 2 years

• may save on cost including interest

• interim funding between the time they begin their project and the time the long term bond issue is complete and funds are received.

• may also roll the BANS into long term bonds and treat it as a long term liablity

• these notes are subject to the same restrictions as GO and revenue bonds related to exemption from federal income taxes

Capital Outlay Notes (CONS)

• Issued for purchase of capital assets with a shorter economic life

• vehicles or equipment

• generally over 1 year, but should not exceed the life of the project or 12 years, whichever is less

• land is limited to 10 years

• can be sold by competitive sale or informal bid if less than 5 million

• if over 5 million must be sold by competitive public sale only

• approval required

• resolution required

• notes are subject to the same restrictions as GO and revenue bonds for exemption of federal income taxes with state requirements

Grant Anticipation Notes (GANS)

• Issued to fund initial spending, when we know we are receiving a federal or state grant

• Must be executed not just rewarded

Tax and Revenue Anticipation Notes (TRANS)

• issued anticipation of collecting taxes and revenues

• must be paid by FYE in which they are issued

• sometimes called TANS

• may be done with interfund loans

• purpose for meeting appropriations made for the current fiscal year in anticipation of the collection of taxes and revenues

TRANS Requirements

• Pre approval

• must submit monthly cash flow analysis

• limited to 60% of appropriations

• must be paid by 6/30

• all previous TRANS must be paid off

• may be interfund loans

Revenue Anticipation Notes (RANS)

• A municipality having an electric or natural gas distribution system can issue a RAN

• May be issued for

  • electric or gas purchases (60% of budgeted purchases)

  • construction

  • addition

  • betterment

  • improvement

RANS

• electric and natural gas utilities

• secured solely with revenues recieved

• must have a positive ending net position in last audit, and positive change in net position on1 of 3 last FYs

Financing Lease Agreements

• uniformity in Local Government Lease Financing Act 2021

• Must be reviewed and approved by LGF, prior to board approval if:

• Individual agreements with principal over $100k

• and Multiple agreements with principal totaling over $100k in the FY

Lease

An agreement for use of property under which a public entity is the lessee, and a financing lease includes one of the following elements:

1. Rental payments include an identifiable interest

2. the local government has the right to purchase the property at a price not based on fair market value at time of purchase

CONS

A local Government can issue ____ to purchase a asset, as opposed to leasing the asset

40 Years

Financing leases for capital improvement property cannot exceed or the useful life of the project and must be approved by the governing body

Financing Lease Agreements

• Limited to the economic life of asset or 40 years whichever is less

• will likely be reported as a liability and an asset in the financial statements

• Not always the cheapest option

Loan Agreements

Is an agreement under which an entity agrees to borrow funds from a lender

• TML Bond Pool Loan Fund

• State Revolving Loan Funds

  • State Drinking Water Revolving Fund (DWSRF)

  • State Clean Water Revolving Fund (CWSRF) Loan

• Loan TN Chartered Public Building Authority (PBA) Loans

• Us Rural Development (RD) Loans

YES

Does a city with interfund loans need to have its budget approved by the State?

Tax and Revenue Anticipation Note

What does TRAN stand for?

A Revenue Anticipation Note could be issued for this:

• Construction line extensions

• Purchase natural gas

• Utility Public works construction

Bonds

• Typically long term debt instruments, issued to entities that have strong credit, those bonds are often sold to the public

• Typically have serial maturity dates

• Typically sold in $5,000 denominations

• Interest- usually, cannot be prepaid for a specified period of time

The Debt Resolution

• No requirement to be posted or published before adoption, Must be published after adopted to allow all eligible voters to call for a referendum

• Cannot be vetoed by the chief executive officer ( mayor or executive)

• takes only the a majority vote of the governing body

• may delegate authority to the chief executive officer of the local government to sell notes or bonds

• Bond resolution requires:

• • Amount or max amount of General Obligation (Go) Bond

  • Public works project being funded

  • Rate or max rate in interest

  • Brief description of how bonds will be repaid

Go Bonds

the debt resolution pledges the full faith, credit, and unlimited taxing power of the local government to all taxable property in the local government or a portion of the local government. The resolution for a bond issue may be prepared by the bond counsel and adopted at a regular or specifically called meeting

Go Bonds (General Obligation Bonds)

are usually issued for construction or improvements of buildings, parks, infrastructure, and other major capital improvements with an expected life of 12 or more years

• Usually for long lived and high cost capital assets

• pledges full faith and credit= unlimited taxing power and authority

• Bond holders may take issuer to court to raise taxes and pay debt

• Generally, interest income is exempt from federal income tax

• Maturity up to 40 years but may not exceed the life of the asset

Discount

The price of the bond varies with interest rate fluctuations. If the coupon interest rate is lower than the market interest rate at the time of a sale, the bond will be sold below par value (______)

Premium

If the coupon interest rate is higher than the market interest rate at the time of sale, the bond will be sold above par value (______)

Petition to require a referendum

Tennessee does not require a referendum for GO bond issues. However, the voters in a municipality may file a___________ on a debt issue.

General Obligation (GO Bond) Referendum

• Law allows citizens to petition for a vote on the debt

• petition submitted within 20 days of publication on resolution

• must be signed by 10% of registered voters

• If majority of voters do not approve the debt must stop

• Local government can try again after 3 months

Other Bonds

• Economic Development Bonds

• Industrial Development Corporations

• Tourism Development Authorities

Revenue Bonds

• May be repaid with taxes more than one revenue stream (double Barreled)

• may be issued through competitive or negotiated sale

• law allows debtor to put a lien on revenue stream, but cannot force tax increase

• upon default investors may petition court to appoint a receiver

• Capital projects that result in a dedicated stream of revenue from customers/rate payers utility funds, utility districts, utility systems, recreation, and parking facilities are most often financed by revenue bonds

Bond Covenants

• legally binding promises made by issuer to investors

• may require bond insurance

• may increase issue costs but reduce the interest rate

Debt Service Ratio

<1 = weak

1.25= minimum preferred

Closer to 2= Optimal

weak

<1

Min preferred

1.25

Optimal

Closer to 2

Any General Obligation Bond

Which Debt instrument is repaid with revenue raised by taxes not specific to the project that the debt funded?

$5,000

What is the par or face value of most municipal bonds?

Not less than 98%

Tennessee law requires all GO bonds issued by cities be sold for ______ of par value+ accrued interest

Restricted cash minimums- bond sinking funds

This is a type of Local government bond covenant

Debt Issuance Team

• Municipal advisor

• underwriter

• Bond counsel

Municipal Advisor

Competitive Sale

• Help structure size & time of bond

• Prepare bond package

• Present to rating agencies

• Evaluate Bids

• Complete Sale

Negotiated Sale

• The underwriter takes on many of these tasks

• May act as a liaison between underwriter and local government

Competitive Sale

• Must be used for initial GO Bond issues

• Allows any broker dealer/ dealer bank to bid on the issue

• Issue advertised for sale

• Awarded to the bidder offering the lowest interest cost

Compensation: The Spread

• Gross spread

• % of the issue amount

• sales commission/takedown

• management fee

• underwriting risk

• expenses for underwriter counsel and travel

Bond Counsel

• Provides a legal opinion on the validity of the bond issuance and if it is tax exempt

• hired by the issuer but looking out for the investors

• GFOA recommends using an RFP or RFQ process

underwriter

primary role in a negotiated sale is to market the bonds to potential investors.

Issuer Counsel

• Hired by the issuer to look out for the local government’s best interest

• Helps ensure compliance

bond documents

• official statement

• resolution

• notice of sale

• bond purchase agreement

The official statement

• discloses important pertinent information

• equivalent to a private sector prospectus

• prepared by Municipal Advisor

• Must meet SEC requirements

Reporting regulations

• U.S. Securities and Exchange Commission (SEC)

• securities act of 1933

• securities exchange act of 1934

Finance Team

• Requires accuracy

• no material misstatements or omissions

Who has the responsibility of making good disclosure?

Bond Resolution or Ordinance

• Part of the bond documents

  • must state

• Maximum $ amount to be issued

• statement of revenues to be used to pay the bond

• info on the project

• maximum interest rate allowed

Notice of sale

invites potential underwriters to bid on the issue