Local Agency Bonds - Municipalities

Issuing a bond The municipality decides an influx of cash is needed and decides to sell bonds in order to achieve this. Work with the city’s financial advisor to begin the bond issue process. Determine everyone’s role: What account will the money be deposited in? Who gets any interest revenue? Who will pay the bond payments? Sometimes there is more than one fund or office. Further details on bond issue guidance can be found in Bond Issues by a Municipality. Bond Issues by a Municipality - http://www.dot.state.mn.us/safinance/bond/bond-issue-guidance-city.pdf

Issuing a local agency bond Municipalities have the option of advancing state aid allotment funds up to the value of 5 years allotment or $4,000,000, whichever is less. This is interest free. Working with your DSAE and State Aid for Local Transportation. Are there other funding sources you are not aware of? If you use your allotment to make bond payments, how will that affect your future allotment funds? What if the ability to advance is removed in the future? Know the legal limit (statutes and rules) you can bond for.

Types of bonds Local Agency Bonds General Obligation Bonds The State of Minnesota is not a party to the bond issue, but the municipality can pledge repayment with it’s available annual state aid construction (principal) and maintenance (interest) allotments. General Obligation Bonds Backed by a pledge of the full faith and credit of the municipality and generally repaid with property tax levies

Things to remember Minnesota Statutes 162.18 State Aid Rule 8820.1500, Subp. 11 Maximum Annual Payment “The total maximum annual repayment of funds loaned from the transportation revolving loan fund plus state aid bond funds that may be paid with state-aid funds is limited to 90% of the amount of the county’s or municipality’s last annual construction allotment preceding the bond issue.” Calculate these: The average annual principal and interest payment over the life of the bond plus any other current bonds and/or TRLF loans 90% of the last CONSTRUCTION allotment issued to your city If the payments in #1 are less than #2, you have passed the test. If the payments in #1 are more than #2, the principal amount has to be reduced OR fund the payments with a local revenue source. MN Statutes 162.181 - https://www.revisor.mn.gov/statutes/?id=162.18 State Aid Rule 8820.1500 Subp. 11 - https://www.revisor.mn.gov/rules/?id=8820.1500

State Aid must receive Within 30 days of the local agency bond issue, the bonding company or the municipality must provide State Aid Finance with: A copy of the complete amortization (repayment) schedule A copy of the municipality’s resolution authorizing the bond sale Containing language pledging and creating a sinking fund (debt service fund) to repay the bonds

Local agency bond payment due The municipality must verify each payment as it comes due. Submit the Affidavit of Annual Bond Payment Request to State Aid Finance at least 30 days prior to the payment due date. If due in February it should be sent 60 days prior. E-mail the affidavit to John Fox at john.e.fox@state.mn.us. Affidavit of Annual Bond Payment Request - http://www.dot.state.mn.us/safinance/formsandresolutions.html#msas

Local agency bond set aside - construction After the new allotment is determined, the new year is “rolled over.” In this process, the following happens: Any advance of construction funds from the previous year is repaid first. From the remaining balance, if there is any, the bond principal due in the current year (March – next February) is “set aside” from the available allotment balance and held until it is needed. If there are insufficient funds to make the bond principal payment, funds will not be automatically advanced from the future year’s allotment. If an advance is needed you must send in an Advance Resolution.

Bond set aside - maintenance Interest payments due (for March thru February of the next year) are “set aside” from the available maintenance balance. If there are insufficient funds to make the bond interest payments, the interest payment will be paid short, leaving the unpaid balance due the responsibility of the county. If maintenance funds become available the next year, a written request may be submitted by January 1st and the unpaid portion from the previous year will be released after the new allocation have been entered. Maintenance funds are NEVER advanced.

Applying bond funds IMPORTANT Local agency bonds may be spent on anything that your state aid construction allotment can be spend on. On the State Aid Payment Request, use the “Local Agency Bonds Applied” line to enter the entire amount of contract costs funded from the bond. If using bond funds for engineering, right-of-way, or force account work enter “Local Agency Bond” in the funding column. No money will be paid to the city because the city received the bond proceeds for this. This process lets us know which projects these bond proceeds were used on. Costs are applied to the oldest bond first.

Applying bond funds (continued) The local agency bond remains a liability to the city on the city’s State Aid records until both: The bond principal is 100% repaid The bond principal is 100% applied to projects If the city repays any portion of the bond with local funds, That amount does not need to be “applied”, State Aid Finance must be notified to make the adjustment. SAAS Reports - http://www.dot.state.mn.us/safinance/saas.html

Applying bond funds (continued) It is HIGHLY recommended the bond principal is applied BEFORE issuing another bond to be repaid from State Aid allotments. Find your bond balances in SAAS Reports: Unpaid Principal & Payment Schedule: SAAS Report Bond Loan Schedule Current Principal & Interest Due: SAAS Report Bond Principal & Interest Due for 20XX Project Bonds are Applied to: SAAS Report Bond Applied Projects SAAS Reports - http://www.dot.state.mn.us/safinance/saas.html

State Aid Payment Request – Applying local agency bond funds

Refunding a local agency bond Over the life of a local agency bond, the interest rate or the need to reorganize debt may cause the municipality to refund or refinance the bond. The process is essentially the same as an initial bond issue. The same 90% test calculated for the original issue must be met by the refunding issue. Within 30 days of the new bond issue, the bonding company or the city must provide State Aid Finance with the new amortization schedule (for both the new and old bond) and another authorizing resolution or auditor’s certificate.

Local agency bond procedure changes made in 2013 In order to receive your bond principal and interest, the Affidavit of Annual Bond Payment Request form must be filled out. Payments are no longer released automatically the month prior to the due date. Must include the amount of principal and interest to be paid, which will be verified against the payment schedule we have on file. This needs to be sent in at least a month before each payment is due. We no longer automatically advance funds for the principal payments if there’s not enough money in your account. An Advance Resolution is required in order to receive the payment.

Questions? Cindy Degener cindy.degener@state.mn.us 651-366-4850