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PUBLIC FINANCE FOR TEXAS COUNTIES 92 nd County Judge and Commissioners Annual Conference September 30, 2014 Lubbock, Texas Presented By: Tom Pollan, Partner.

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Presentation on theme: "PUBLIC FINANCE FOR TEXAS COUNTIES 92 nd County Judge and Commissioners Annual Conference September 30, 2014 Lubbock, Texas Presented By: Tom Pollan, Partner."— Presentation transcript:

1 PUBLIC FINANCE FOR TEXAS COUNTIES 92 nd County Judge and Commissioners Annual Conference September 30, 2014 Lubbock, Texas Presented By: Tom Pollan, Partner Bickerstaff Heath Delgado Acosta LLP 3711 South Mopac Expressway Building One, Suite 300 Austin, Texas P: F: Vince Viaille, Managing Director Specialized Public Finance Inc Greenville Avenue, Suite 465 Dallas, Texas P: F:

2 OBJECTIVES Provide a brief overview of the key issues related to Public Finance Aspects for Texas counties 2

3 BEGINNING THE PROCESS Factors to Consider: ◦ Project to be Financed ◦ Size of Issue Needed ◦ Overall Debt Management Plan ◦ County’s Ability to Repay ◦ Future Debt Plans 3

4 WHO TO CONTACT “Your Team” Financial Advisor Bond Counsel They have a fiduciary duty to the County 4

5 PROFESSIONALS INVOLVED IN THE DEBT ISSUANCE PROCESS Financial Advisor Bond Counsel Underwriter/Purchaser Paying Agent Rating Agencies Bond Insurer/Credit Enhancement Companies Attorney General Architect/Engineer 5

6 COUNTY’S FINANCIAL ADVISOR The professional who will: ◦ guide the county through the economic side of the issuance process ◦ structure the form of the financing and recommend the type of issue to be used – G.O. Bonds, CO’s, Anticipation Notes, etc. ◦ conduct the competitive sale or negotiated sale or arrange for a private placement for funding ◦ assist with County’s CIP Process 6

7 COUNTY’S BOND COUNSEL ◦ The county’s lawyer in the transaction who will prepare the financing documents ◦ Provides the “Bond Opinion” which opines that the obligations were properly issued and if issued on a tax exempt basis, that the obligations are not subject to federal insurance taxation ◦ Must know local government law, federal tax law and securities law ◦ An Attorney-Client relationship must exist between the county and the county’s bond counsel ◦ The county has the right to select its own bond counsel ◦ Investors/purchasers require a legal and a tax opinion 7

8 BOND OPINIONS Bond Counsel will give a market opinion and a tax opinion that: ◦ County has complied with the law ◦ If issued as a tax exempt obligation, interest on the bonds is excludable from gross income of purchaser for purposes of federal income taxation ◦ Bonds are not private activity bonds 8

9 HOW ARE THE PROFESSIONALS PAID? Financial Advisor and Bond Counsel work on a contingent basis ◦ They are only paid if the bonds are issued and proceeds are delivered to the county Architects and other professionals generally do not work on a contingent basis ◦ They expect to be paid even if the bond issue does not pass 9

10 PROTECT YOURSELF Should you use a reimbursement resolution? Limit the amount owed to Architect and others if bond issue fails Build limits into contract Use a government friendly contract Do not simply sign all preprinted contracts WHEN DO YOU NEED MONEY? 10

11 WHO WILL BUY? Underwriters ◦ Then sells to customers/investors Local Banks United States Department of Agriculture’s Rural Development/Rural Utilities Service Texas Water Development Board 11

12 SALE OF DEBT OBLIGATIONS Competitive Sale Negotiated Sale Private Placement 12

13 BOND RATINGS Investment Grate Rating Designations of the Major Rating Agencies Moody’s Investors Service, Inc. Standard & Poor’s Corporation Fitch Investors Service, Inc. Definition AaaAAA Highest rating assigned. Very strong security. AaAA Very Strong security. Only slightly below best rating. AAA Average security but more subject to adverse financial and economic developments. BaaBBB Adequate capacity to secure debt. Adverse developments may affect ability to meet debt services requirements. Note: Moody’s uses the designation “1”, “2”, or “3” to indicate greater strength within the “Baa”, “A”, and “Aa” categories with “1” being strongest. Standard & Poor’s and Fitch use “+” and “-” to indicate relative strength or weakness in the “BBB”, “A”, and “AA” categories. 13

14 FINANCING METHODS General Obligation Bonds Revenue Bonds Certificates of Obligation Contractual Obligations Anticipation Notes (Tax Notes) Time Warrants Lease-Purchase Contracts 14

15 GENERAL OBLIGATION BONDS Are often referred to as “G.O. Bonds” Require an election Are backed by a pledge of ad valorem taxes Are best suited for major capital projects where the commissioners court believes that it is important to have the voters pass upon the project May be amortized over a 40 year period, but usually a shorter period of 15 to 20 years is used 15

16 REVENUE BONDS Are secured by a pledge of revenues from a project They are not subject to a demand for payment from taxes Usually they involve revenues from a public utility Primarily used by cities and special districts Few counties have projects that have sufficient revenues to pledge for payment of bonds 16

17 CERTIFICATES OF OBLIGATION Are often referred to as “Certificates” or “C.O.’s” Streamlined method of financing Require publication Do not require an election unless 5% of the registered voters petition Secured by ad valorem taxes, a revenue pledge or combination thereof May be amortized over a 40 year period, but usually a shorter period is used 17

18 ANTICIPATION NOTES Any lawful purpose Examples: ◦ construction of a public work ◦ purchase of materials, supplies, equipment, machinery, buildings, lands, and rights-of-way ◦ professional services such as engineers, architects, attorneys and financial advisors ◦ operating expenses ◦ Fund issuer’s cumulative cash flow deficit 18

19 ANTICIPATION NOTES Maximum term is 7 years for capital expenditures such as construction, equipment, professional services and 1 year for operating expenses and funding cash flow deficit Requires recommendation of county auditor or from chief budget officer if no auditor May be secured by a pledge of taxes or revenues, or both Most counties do not have a sufficient level of revenues to pledge so a pledge of taxes is usually made No election required No newspaper publication required 19

20 CONTRACTUAL OBLIGATIONS For Personal Property Only ◦ Equipment Secured by ad valorem taxes or revenue No election required Maximum term – 25 years Competitive with lease financing 20

21 TIME WARRANTS Older method of finance. Authorized under Chapter 262 of the Texas Local Government Code Time warrants are subject to publication requirements and are subject to voter petition which may require an election 21

22 TIME WARRANTS Disadvantages: ◦ Time Warrants are non-negotiable instruments ◦ Time Warrants may not be sold for cash ◦ Consequently, arrangements must be made with a vendor to accept the time warrant and a bank to buy the time warrant from the vendor 22

23 TIME WARRANTS Disadvantages: ◦ Time warrants often are prepared locally. As a consequence, there may not be all the formalities taken to ensure that the time warrant is a tax-exempt obligation.  The rates charged may be higher than market for a tax-exempt security  The time warrant may be for beyond one fiscal year, and the formality of an interest and sinking fund may not be established. This will render the time warrant invalid. 23

24 LEASE PURCHASE AGREEMENT/ INSTALLMENT SALES CONTRACT Permits the county to purchase goods over period of time Is not a pledge of taxes ◦ Unless for equipment and properly structured Is a maintenance and operations expense, not a debt service expense unless properly structured Attorney General approval is not required 24

25 LEASE PURCHASE AGREEMENT/ INSTALLMENT SALES CONTRACT Must be subject to annual appropriations (unless structured under the Public Property Finance Act) No requirement to continue Practical limits on the ability to discontinue Interest rates are often higher than a tax pledge obligation 25

26 REFUNDING BONDS Used to refinance the county’s outstanding bonds and other obligations Allows county to take advantage of lower interest rates Used to restructure debt payments No newspaper publication requirement No election requirement 26

27 BONDS AND OTHER DEBT INSTRUMENTS ARE SECURITIES Bonds are exempt from certain securities laws Bonds are subject to the anti-fraud provisions of the securities laws 27

28 OFFICIAL STATEMENT A document or documents prepared by or on behalf of the issuer of municipal securities in connection with a primary offering that discloses material information on the offering of such securities Investors may use this information to evaluate the credit quality of the securities Although functionally equivalent to the prospectus used in connection with registered securities, an official statement for municipal securities is exempt from the prospectus requirements of the Securities Act of

29 CONTINUING DISCLOSURE Requirement to provide financial information at least annually Requirement to report certain events within 10 days Set out in bond order or separate agreement Private placement may be exempt 29

30 MUNICIPAL SECURITIES RULEMAKING BOARD To promote better disclosure MSRB has established the Electronic Municipal Market Access System – “EMMA” ◦ Who must comply Service is free Filings must be made electronically 30

31 FEDERAL INCOME TAX ISSUES FOR MUNICIPAL BONDS 31

32 The County’s Duties do not end when the Bonds are Issued You MUST comply with requirements you promised in the bond documents that you would not let the bonds become taxable What may cause the problem – TURNOVER The personnel that were there when the bonds were issued have departed before the bonds are paid off You need to familiarize yourself with the requirements so that you can brief your successors 32

33 GENERAL TAX CONVENANTS No private activity use Will not permit the bonds to become private activity bonds No federal guaranty Will restrict the use of the proceeds to comply with the arbitrage requirements In the event of arbitrage will rebate the excess earning to the United States Will maintain the necessary records to permit the compliance with the tax exempt requirements for at least six years after the final principal and interest payment on the bonds 33

34 ARBITRAGE The practice of using bond proceeds to acquire higher yielding investments than the rate the government is paying on the bonds NO ARBITRAGE OF FEDERAL TAX CERTIFICATE REBATE SMALL ISSUER EXCEPTION – Under $5,000,000 34

35 IRS AUDITS Enforcement officials have targeted what they view as an abusive use of the municipal bond exemptions The focus is on arbitrage driven transactions where the bond proceeds are invested in higher-yielding instruments The agency has generally sought to settle such tax disputes with agreements in which the feds recoup any profits from the unauthorized investment, but they have threatened to go after bondholders if they cannot resolve the case otherwise 35


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