Premiums Surplus Bond Proceeds Debt Exclusions

Transcription

1 Christopher C. Harding Commissioner of Revenue Sean R. Cronin Senior Deputy Commissioner Premiums Surplus Bond Proceeds Debt Exclusions Prepared for Massachusetts Municipal Auditors and Accountants Association March 13, 2018 PRESENTER Patricia F. Hunt, Tax Counsel, Bureau of Municipal Finance Law, Division of Local Services, MA Department of Revenue Supporting a Commonwealth of Communities P.O. Box 9569 Boston, MA (617)

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3 Supporting a Commonwealth of Communities Massachusetts Municipal Auditors and Accountants Association Premiums, Surplus Bond Proceeds and Debt Exclusions March 13, 2018 Agenda Borrowing - Overview Debt definition Legal authority to borrow Borrowing authorization votes Debt issuance Borrowing proceeds 1

4 Agenda Premiums Definition Treatment Before Municipal Modernization Act After Municipal Modernization Act Multi-purpose borrowings Restricted funds borrowings Borrowings subject to Prop 2 ½ debt exclusion Agenda Surplus borrowing proceeds Definition Treatment of surplus proceeds Restricted funds borrowings Borrowings subject to Prop 2 ½ debt exclusion 2

5 Borrowing What is Debt? Money one person, organization or government owes to another person, organization or government Borrower usually has a limited amount of time to repay with interest 3

6 What is Municipal Debt? Debt issued by cities, towns and districts to fund governmental obligations Funds advanced to government borrower by lender to finance asset acquisition or capital project Unconditional obligation to repay by government borrower by pledge of Full faith and credit (general obligation) raised by taxation if not funded (G.L. c. 59, 23; G.L. c. 44, 16) Particular revenue stream (revenue) of government borrower Tax exemption on interest for purchaser Legal Authority to Borrow No home rule power to borrow May only borrow as authorized by legislature Strict state regulation of borrowing Purposes Terms Payment structure Total authorized and outstanding debt (debt limit) 4

7 Legal Authority to Borrow General Laws G.L. c. 44, 1-28 (cities, towns & districts) G.L. c. 44B, 11 (Community Preservation Act) G.L. c. 71, 14D, 16(d) and (n) (regional school districts) G.L. c. 44, 28A (applicability of G.L. c. 44, issuance procedures to RSDs) G.L. c. 71B, 6(d) and (e) (MSBA school projects) G.L. c. 121B, 20 (redevelopment projects) Borrowing Authorization Cities, towns and improvement districts (G.L. c. 44, 1, 7 and 8) authorize debt by: 2/3 vote of all members of city council, with mayor s approval if required by charter 2/3 vote town or district meeting members present and voting by: Unanimous Actual counted 2/3 Declared 2/3 if authorized by by-law or vote (G.L. c. 39, 15) 5

8 Debt Issuance Local Officials Treasurer Prepare and issue notes or bonds Selectboard/Mayor/Regional School Committee/Prudential Committee Sign notes or bonds Debt Issuance Financial Advisors Assist municipal officials issue debt Advise on restrictions and options Work with bond counsel on legal and tax issues Prepare offering documents Prepare preliminary and final official statements Advise on selection of bids Prepare note and bond documents 6

9 Debt Issuance - Bond Counsel Advise on Borrowing purpose Town meeting warrant article, notices and vote Charter or by-laws State agency approvals (MFOB, DEP) Issue Legal Opinion Debt properly authorized and issued Interest is tax-exempt Borrowing Proceeds G.L. c. 44, 20 Expenditure of borrowing proceeds limited to Purposes specified in loan authorization Costs to prepare, issue and market bonds or notes Amended by Municipal Modernization Act: Treatment of premiums Use of surplus proceeds 7

10 Premiums What is a premium? When market borrowing interest rates are low, buyers (underwriters) of bonds (debt) may offer cash payments (premiums) in exchange for higher interest rate on bond to make bond more marketable A bond buyer may offer a premium to make its bid more competitive or to break a tie 8

11 What is a premium? Example City offers $2 million bond for sale Market interest rates are 1.5% Proposed buyer offers to buy bond at 2.5% rate of interest and to pay city premium of $100,000 If city accepts offer and issues $2m bond, bond will issue at 2.5% and city will receive cash from buyer of $2.1m (bond proceeds + premium) Premium Treatment Before Municipal Modernization Act - Premiums and accrued interest on bonds/notes sold before 11/7/2016 = general fund revenue Special rules for debt excluded under Proposition 2½ After Municipal Modernization Act - Premiums and accrued interest on bonds/notes sold on or after 11/7/2016 are not general fund revenue Two options for premium treatment 9

12 Premium Treatment (After Muni-Mod) - Two Options 1. Apply net premium (after issuance costs) and accrued interest to project costs and reduce borrowing authorization by like amount if legislative body vote so authorizes; or 2. Reserve net premium for appropriation for capital projects for which may borrow for equal/longer period than original loan Premium arising from restricted funds remains subject to restriction (Enterprise /CPA) If borrowing is subject of Prop 2½ debt exclusion, there may be a reduction in the annual excluded amount Example 1 (Premium Treatment) At its May, 2016 ATM, Anytown s legislative body voted to authorize $2 million borrowing for construction of a new police station On or after 11/7/16, the treasurer offers for sale $2 million permanent debt and receives an offer to buy the debt with a premium of $100,000 (after issuance costs) If the offer is accepted What are the options for treatment of the net premium? Do you need additional information? 10

13 Example 1 (Premium Treatment) Missing information --- Did legislative body vote include authority to apply net premium to project costs and reduce amount of borrowing authorization? If no, what are options for treatment of the $100,000 net premium? Example 1 (Premium Treatment) If legislative body vote did not authorize application of net premium to project costs and reduction of borrowing authorization by same amount Result = Only one option for treatment of the $100,000 net premium 1. Must reserve $100k net premium for appropriation for projects for which can borrow for same or longer term. Treasurer issues debt for $2 million and credits $2m borrowing proceeds to project construction fund. 11

14 Example 1 (Premium Treatment) If legislative body vote did authorize application of net premium to project costs and reduction of borrowing authorization by same amount: Result = Two options for net premium treatment 1. Apply $100k to project costs and reduce amount of debt authorization. Issue debt of $1.9 million and credit $1.9m + $100k premium to project construction fund. 2. Reserve $100k net premium for appropriation for projects for which can borrow for same or longer term. Issue debt of $2m and credit $2m to project construction fund. Example 2 (Premium Treatment) Multi-purpose bonds in the amount of $20,000,000 are sold on or after 11/7/16, for four projects: Project 1 - $500,000 Acquisition of Vehicles 5 yrs. Project 2 - $500,000 Acquisition of FD Pumper 20 yrs. Project 3 - $18,000,000 Acquisition of Land 30 yrs. Project 4 - $1,000,000 Municipal Building Construction 20 yrs. The legislative body votes authorizing the borrowings for projects 1, 2 and 4 included authority to apply premiums to project costs and reduce the amount of the borrowing authorization by like amount. A net premium of $1,000,000 is received. How is the net premium treated? 12

15 Example 2 (Premium Treatment) Step 1 - Allocate $1 million net premium among borrowing purposes - divide each original borrowing purpose amount by total original borrowing Borrowing Purpose Project 1 - Vehicles (5 yrs.) Project 2 FD Pumper (20 yrs.) Project 3 Land (30 yrs.) Project 4 Municipal Bldg. Constr. (20 yrs.) Original Allocation Percentage Borrowing Amount $500,000 $500,000/20,000,000 = 2.5% $500,000 $500,000/20,000,000 = 2.5% $18,000,000 $18,000,000/20,000,000 = 90% $1,000,000 $1,000,000/20,000,000 = 5% Net Premium Allocated 2.5% of $1m = $25, % of $1m = $25,000 90% of $1m = $900,000 5% of $1m = $50,000 $20,000, % $1,000,000 Example 2 (Premium Treatment) Step 2 Determine allowable treatment of allocated premium assigned to each project Same two options - If legislative body vote for project authorized application net premium to project costs and reduction of borrowing authorization, city/town may use this option. If not, must reserve net premium for appropriation for projects of equal or longer term. Project 1 - $500,000 Acquisition of Vehicles 5 yrs. Net premium allocated = $25,000 Yes borrowing vote authorization Project 2 - $500,000 Acquisition of FD Pumper 20 yrs. Net premium allocated = $25,000 Yes borrowing vote authorization Project 3 - $18,000,000 Acquisition of Land 30 yrs. Net premium allocated = $900,000 No borrowing vote authorization Project 4 - $1,000,000 Municipal Building Construction 20 yrs. Net premium allocated = $50,000 Yes borrowing vote authorization 13

16 Example 2 (Premium Treatment) Step 3 Determine Final Borrowing Amount - Apply allocated net premiums to project costs where borrowing vote so authorizes and reduce their borrowing authorizations Project 1 $500,000 Acquisition of Vehicles 5 yrs. Yes borrowing vote authorization Apply $25,000 net premium to project costs & reduce borrowing Final project debt issued $475,000 Project 2 - $500,000 Acquisition of FD Pumper 20 yrs. Yes borrowing vote authorization Apply $25,000 net premium to project costs & reduce borrowing Final project debt issued $475,000 Project 3 - $18,000,000 Acquisition of Land 30 yrs. No borrowing vote authorization $900,000 net premium must be reserved for appropriation for capital projects for which can borrow for 30 years or more Final project debt issued $18,000,000 Project 4 - $1,000,000 Municipal Building Construction 20 yrs. Yes borrowing vote authorization Apply $50,000 net premium to project costs & reduce borrowing Final project debt issued $950,000 Final amount multi-purpose bond = $19,900,000 Example 3 (Premium Treatment) Same multi-purpose borrowing as in the previous example, but none of the borrowing authorization votes for any of the projects include authority to apply net premium to project costs and reduce borrowing authorization How is premium treated? 14

17 Example 3 (Premium Treatment) Project 1 $500,000 Acquisition of Vehicles 5 yrs. No authority to apply premium to project costs Must reserve $25,000 net premium for appropriation for projects for which may borrow > 5 years Final project debt issued $500,000 Project 2 - $500,000 Acquisition of FD Pumper 20 yrs. No authority to apply premium to project costs Must reserve $25,000 net premium for appropriation for projects for which may borrow > 20 years Final project debt issued $500,000 Project 3 - $18,000,000 Acquisition of Land 30 yrs. No authority to apply premium to project costs Must reserve $900,000 net premium for appropriation for projects for which may borrow for > 30 years Final project debt issued $18,000,000 Project 4 - $1,000,000 Municipal Building Construction 20 yrs. No authority to apply premium to project costs Must reserve $50,000 net premium for appropriation for projects for which may borrow for > 20 years Final project debt issued $1,000,000 Final principal amount multi-purpose bond = $20,000,000 (No reduction from original) Example 3 (Premium Treatment) What will the reservations look like? Project 1 $25,000 net premium Project 2 - $25,000 net premium Project 3 - $900,000 net premium Project 4 - $50,000 net premium Reserved for appropriation for capital projects for which may borrow > 5 years Reserved for appropriation for capital projects for which may borrow > 20 years Reserved for appropriation for capital projects for which may borrow > 30 years Reserved for appropriation for capital projects for which may borrow > 20 years 15

18 Example 4 (Premium Treatment) Same multi-purpose borrowing as in the previous example, but the land acquisition project is funded with Community Preservation Funds Does this change the treatment of the $900k net premium allocated to this project? Example 4 (Premium Treatment) Yes - if project funded with restricted funds, restriction stays with reserved premium $18,000,000, 30-year borrowing to acquire land for community preservation purposes (CP funding). No borrowing vote authority to apply premium to project costs & reduce borrowing authorization. Must reserve $900k net premium for appropriation for capital projects For which may borrow for > 30 years Which may be funded with community preservation funds Recommendation of community preservation committee (CPC) required for appropriation 16

19 Treatment of Premiums Debt Excluded under Proposition 2 ½ (After Muni-Mod) Premium Treatment (Excluded Debt) Same Two Options 1. Apply net premium (after issuance costs) and accrued interest to project costs and reduce borrowing authorization by like amount if legislative body vote so authorizes; or 2. Reserve net premium for appropriation for capital projects for which may borrow for equal/longer period than original loan Premium arising from restricted funds remains subject to restriction (Enterprise /CPA) If borrowing is subject of Prop 2½ debt exclusion, there may be a reduction in the annual excluded amount 17

20 Premium Treatment (Excluded Debt) G.L. c. 44, 20 requires [a]dditions to the levy limit for a debt exclusion are restricted to the true interest cost incurred to finance the project. As a result, for excluded debt 1. If net premium & accrued interest applied to project costs and borrowing reduced, no reduction in amount of debt exclusion 2. If net premium & accrued interest reserved for appropriation, debt exclusion reduced as follows: a. If net premium & accrued interest at time of sale < $50,000, no reduction in annual excluded amount (de minimis exception) b. If net premium > $50,000, there will be a reduction in annual excluded amount Example 5 (Premiums and Excluded Debt) Legislative body authorizes $18 million borrowing for construction of police station, including authority to apply net premium & accrued interest to project costs and reduce borrowing authorization by same amount The voters approve debt exclusion for the borrowing under Prop 2 ½ On or after 11/7/16, treasurer offers the $18 million bond for sale and receives offer to buy the debt with premium of $800,000 What are the options for treatment of the net premium? 18

21 Example 5 (Premiums and Excluded Debt) Same Two Options 1. Apply net premium (after issuance costs) and accrued interest to project costs and reduce borrowing authorization by like amount if legislative body vote so authorizes; or 2. Reserve net premium for appropriation for capital projects for which may borrow for equal/longer period than original loan Premium arising from restricted funds remains subject to restriction (Enterprise /CPA) If borrowing is subject of Prop 2½ debt exclusion, there may be a reduction in the annual excluded amount Example 5 (Premiums and Excluded Debt) Option 1 - Apply $800k net premium to project costs and reduce borrowing authorization Treasurer reduces $18m borrowing by amount of $800k net premium to $17.2 million Treasurer receives $18m in cash ($17.2m borrowing proceeds + $800k premium) $18 million is credited to project construction fund to fund the project Because debt service will reflect the true interest cost incurred to finance the project, there is no reduction in the amount of the annual debt exclusion 19

22 Example 5 (Premiums and Excluded Debt) Option 2 - Reserve $800k net premium for appropriation (for projects for which may borrow for equal or longer time) Treasurer issues $18m debt Treasurer receives $18,800,000 cash ($18m borrowing proceeds + $800k premium) $18 million is credited to project construction fund to fund the project Debt service will not reflect true interest cost incurred to finance the project Because net premium > $50k, there will be a reduction in the annual debt exclusion No option to use reserved premium to pay debt service (as before Muni-Mod) Example 5 (Premiums and Excluded Debt) Calculation of annual debt exclusion reduction $18,000, year permanent bond issued $800,000 net premium (reserved for appropriation for projects for which may borrow equal / longer period) Interest payable over life of borrowing = $10,000,000 1 st fiscal year interest payment = $600,000 The reduction to fiscal year debt exclusion is Net premium $800,000 Divided by total interest over life of issue $10,000,000 Premium as % of interest 8% Fiscal Year Interest Due Premium Adjustment Fiscal Year Debt Exclusion Adjustment (Reduction) $600,000 8% $48,000 20

23 Example 5 (Premiums and Excluded Debt) Debt exclusion reduction ($48,000) Reported in Gateway on the DE-1 Gross debt service excludable for the fiscal year (principal and interest) is entered Debt exclusion reduction ($48,000) entered Net excluded debt service for the FY = gross debt service excludable minus $48,000 Calculation and exclusion reduction continues throughout life of the loan See IGR Treatment of Premiums Refunding Bonds 21

24 Premiums on Refunding Bonds Refunding bonds - used to refinance existing debt Separate statute governs refunding bonds - G.L. c. 44, s. 21A Requires proceeds of refunding bonds (including premiums received at issuance) be used to pay off bonds to be refunded, including principal, interest, redemption premium No option to reserve premium for appropriation; must use premium to pay off bonds to be refunded Flow Chart Treatment of Net Premiums and Accrued Interest Received on Bonds or Notes After Muni-Mod 22

25 Exercise Treatment of Premiums Exercise - Treatment of Premiums Multi-purpose bonds in the amount of $20,000,000 are sold on or after 11/7/16, for three projects: Project 1 - Acquisition of Land Community Preservation Funds - 30 yrs. $5,000,000 Project 2 - Municipal Building Construction 20 yrs. $10,000,000 Project 3 Dredging of Municipal Harbor 20 yrs. $5,000,000 The legislative body votes authorizing the borrowings for projects 2 and 3 included authority to apply premiums to project costs and reduce the amount of the borrowing authorization by like amount. A net premium of $1,000,000 is received. How is the net premium treated? 23

26 Exercise - Treatment of Premiums Step 1 Allocate the $1,000,000 net premium among the borrowing purposes Borrowing Purpose Project 1 - Acquisition of Land $5m - CP Funds - 30 yrs. Project 2 - Municipal Building Construction - $10m - 20 yrs. Project 3 Dredging of Municipal Harbor $5m - 20 yrs. Allocation Amount of Net Percentage (1) Premium Allocated (2) Note 1 Divide amount of each borrowing by total borrowing amount ($20,000,000) Note 2 Apply percentage to total net premium Exercise - Treatment of Premiums Step 1 Allocate the $1,000,000 net premium among the borrowing purposes Borrowing Purpose Project 1 - Acquisition of Land $5m CP Funds - 30 yrs. Project 2 - Municipal Building Construction - $10m - 20 yrs. Allocation Amount of Net Percentage (1) Premium Allocated (2) $5,000,000/ $20,000,000 = 25% $10,000,000/ $20,000,000 = 50% 25% of $1,000,000 = $250,000 50% of $1,000,000 = $500,000 Project 3 Dredging of $5,000,000/ 25% Municipal Harbor $5m - 20 yrs. $20,000,000 = 25% of $1,000,000 = $250,000 Total borrowing = $20,000, % $1,000,000 Note 1 Divide amount of each borrowing by total borrowing amount ($20,000,000) Note 2 Apply percentage to total net premium 24

27 Exercise - Treatment of Premiums Step 2 Determine allowable treatment of allocated premium assigned to each project If legislative body vote for project authorized application of net premium to project costs and reduction of borrowing authorization, city/town may use this option If not, must reserve net premium for appropriation for projects of equal or longer term Exercise - Treatment of Premiums Step 2 Determine allowable treatment of allocated premium assigned to each project Project 1 - Acquisition of Land $5,000,000 - CP Funds - 30 yrs. - $250,000 net premium No authority to apply net premium to project costs. Project 2 - Municipal Building Construction $10,000, yrs. - $500,000 net premium. Yes, authority to apply net premium to project costs. Project 3 Dredging of Municipal Harbor $5,000, yrs. - $250,000 net premium. Yes, authority to apply net premium to project costs. Allowable Premium Treatment 25

28 Exercise - Treatment of Premiums Step 2 Determine allowable treatment of allocated premium assigned to each project Project 1 - Acquisition of Land $5,000,000 - CP Funds - 30 yrs. - $250,000 net premium No authority to apply net premium to project costs. Project 2 - Municipal Building Construction $10,000, yrs. - $500,000 net premium. Yes, authority to apply net premium to project costs. Project 3 Dredging of Municipal Harbor $5,000, yrs. - $250,000 net premium. Yes, authority to apply net premium to project costs. Allowable Premium Treatment Only 1 option - Must reserve $250,000 net premium for appropriation for: projects for which may borrow for 30 yrs. or more and are fundable by the CPA and are recommended for appropriation by the CPC Two Options 1. Apply net premium to project costs and reduce amount of each borrowing authorization or 2. Reserve net premium for appropriation for projects for which may borrow for equal or longer time than original project Exercise - Treatment of Premiums Step 3 Determine Final Borrowing Amount - Apply allocated net premiums to project costs where borrowing vote authorizes and reduce their borrowing authorizations Project Project 1 - Acquisition of Land $5,000,000 - CP Funds - 30 yrs. - $250,000 net premium No authority to apply net premium to project costs. Project 2 - Municipal Building Construction $10,000, yrs. $500,000 net premium applied to project costs. Project 3 Dredging of Municipal Harbor $5,000, yrs. $250,000 net premium applied to project costs. Final amount multi-purpose bond Final Amount of Borrowing 26

29 Exercise - Treatment of Premiums Step 3 Determine Final Borrowing Amount - Apply allocated net premiums to project costs where borrowing vote authorizes and reduce their borrowing authorizations Project Project 1 - Acquisition of Land $5,000,000 - CP Funds - 30 yrs. - $250,000 net premium No authority to apply net premium to project costs. Project 2 - Municipal Building Construction $10,000, yrs. $500,000 net premium applied to project costs. Project 3 Dredging of Municipal Harbor $5,000, yrs. $250,000 net premium applied to project costs. Final Amount of Borrowing $5,000,000 $9,500,000 $4,750,000 Final amount multi-purpose bond $19,250,000 Surplus Borrowing Proceeds 27

30 Surplus Borrowing Proceeds Completed Project Surplus proceeds definition Difference between amount borrowed and amount spent for each purpose for which the city/town has authorized debt Does not matter if sold in multi-purpose bond Amount of surplus determined at the time of project completion Surplus Borrowing Proceeds Completed Project - Surplus Proceeds Treatment Governed by G.L. c. 44, s. 20 (amended by Muni-Mod) Law, as amended, applies to all surplus proceeds regardless when debt authorized/sold or purpose completed Surplus proceeds are available funds for restricted purposes Surplus proceeds arising from restricted funds project (e.g., enterprise or CPA funds) remain subject to restriction 28

31 Surplus Borrowing Proceeds Completed Project - Surplus Proceeds Treatment Two Options Surplus proceeds in any amount may be appropriated for purpose for which loan may be incurred for equal or longer period than original loan (same as before Muni-Mod) If surplus is $50,000 or less (at project completion), it may be applied without appropriation to pay any debt service with approval of CEO (Selectboard/Mayor) (added by Muni-Mod) Surplus Borrowing Proceeds Completed Project - Surplus Proceeds Treatment Excluded debt under Prop 2 ½ debt exclusion G.L. c. 44, s. 20 requires that debt exclusion reflect true interest cost of borrowing If surplus proceeds from excluded debt are applied to the payment of debt service or appropriated for purpose which is not debt excluded, the debt exclusion may be proportionately reduced 29

32 Surplus Borrowing Proceeds Completed Project Surplus Proceeds Treatment Excluded debt under Prop 2 ½ debt exclusion If surplus < $50,000, no reduction in annual debt exclusion - whether applied to payment of debt service or appropriated to non debt-excluded project (de minimis rule) If surplus > $50,000 and appropriated for another debt-excluded project, no reduction debt exclusion If surplus > $50,000 and any part of surplus appropriated for a non debt-excluded project, there will be a reduction in debt exclusion Surplus Borrowing Proceeds Calculation of annual debt exclusion reduction $18,000, year permanent bond issued Project completed - $180,000 surplus proceeds remain City/town appropriates surplus for capital projects for which may borrow for equal or longer term none are debt-excluded 1 st fiscal year interest payment = $600,000 Surplus Proceeds $180,000 Divided by total amount borrowed $18,000,000 Surplus Adjustment 1% Fiscal Year Interest Due Surplus Adjustment Fiscal Year Debt Exclusion Adjustment (Reduction) $600,000 1% $6,000 30

33 Surplus Borrowing Proceeds Debt exclusion reduction Reported in Gateway on the DE-1 ($6,000) Gross debt service excludable for the fiscal year (principal and interest) is entered Debt exclusion reduction ($6,000) is entered Net excluded debt service for the FY = gross debt service excludable minus $6,000 Calculation and exclusion reduction continues throughout life of the loan See IGR Surplus Borrowing Proceeds Abandoned/Discontinued Project Definition - Project not completed, but no outstanding liability, city/town (by 2/3 vote) votes to abandon/discontinue project Treatment of unexpended loan proceeds May be appropriated for purpose for which may borrow for equal/longer time than original No option to apply proceeds to payment of debt service 31

34 Surplus Borrowing Proceeds Abandoned/Discontinued Project For debt-excluded borrowings If proceeds < $50,000, may appropriate for non debt-excluded project and no reduction in debt exclusion (de minimis rule) If proceeds > $50,000, appropriation for non debt-excluded project will result in reduction to debt exclusion Calculate and report reduction in same manner as for completed project surplus proceeds Exercise Surplus Borrowing Proceeds 32

35 Exercise - Surplus Borrowing Proceeds Facts $2 million borrowing authorized for construction of a police station $2 million permanent debt issued Project completed and $75,000 surplus Town meeting appropriates $25,000 from the surplus for another capital project for which town may borrow for a similar period of time Question - May the town apply the remaining $50,000 surplus to the payment of debt service with CEO approval? Exercise - Surplus Borrowing Proceeds No may only apply surplus to payment of debt service if surplus proceeds at time of project completion were < $50,000. Here, $75,000 surplus. Surplus Proceeds Treatment Completed Project Surplus proceeds in any amount may be appropriated for purpose for which loan may be incurred for equal or longer period than original loan If surplus is $50,000 or less (at project completion), may be applied without appropriation to pay any debt service with approval of CEO (Selectboard/Mayor) 33

36 Exercise - Surplus Borrowing Proceeds Facts $2 million borrowing authorized for acquisition of land with CPA funds $2 million permanent debt issued Project completed and $50,000 surplus Question - May the town apply the $50,000 surplus to the payment of any debt service with CEO approval? Exercise - Surplus Borrowing Proceeds No Town may not apply the $50,000 surplus to payment of any debt service When surplus proceeds arise from restricted funds project (CPA funds), surplus remains subject to restriction Town may only apply the $50,000 surplus to payment of debt service for another community preservation borrowing Upon recommendation of CPC and Approval of chief executive officer 34

37 Pending Legislation - SD 2466 & Supp. Budget Notes (BANs) Apply net premium & accrued interest to first payment of interest Bonds Net premiums and accrued interest < $50,000 may be applied to pay indebtedness with CEO approval (excluded and non-excluded debt) If < $50,000 & not applied to indebtedness or if > $50,000: Excluded debt Must apply premium & accrued interest to project costs & reduce borrowing (leg. body auth. no longer needed) Non excluded debt - Two options: Apply premium & accrued interest to project costs & reduce borrowing (leg. body auth. no longer needed) Reserve for appropriation to pay costs of project for which city/town has or may authorize a borrowing (borrowing period no longer relevant) The End 35

38 Flow Chart - Treatment of Net Premiums and Accrued Interest Received on Bonds or Notes Sold on or after November 7, See IGR and IGR Under G.L. c. 44, 20 (after the Municipal Modernization Act), net premiums and accrued interest on bonds or notes sold on or after 11/7/2016 are not general fund revenue. They must either be: 1. Applied to the costs of the project being financed by the bonds or notes and reduce the amount authorized to be borrowed for the project by like amount (only if the legislative body borrowing vote so authorizes); or 2. Reserved in separate fund for appropriation for capital projects: Project must be one for which may borrow for equal or longer period than loan for which premium received Premium arising from restricted funds project remains subject to restriction If borrowing is the subject of an approved Proposition 2½ debt exclusion, there may be a reduction in the annual excluded amount because G.L. c. 44, s. 20 requires [a]dditions to the levy limit for a debt exclusion are restricted to the true interest cost incurred to finance the excluded project. FLOW CHART 1 Was the borrowing a refunding bond issued under G.L. c. 44, 21A? If yes, go to 7. If no, go to 2. 2 Was the borrowing a single purpose borrowing? If yes, go to 3. If no, go to 8. 3 Did the legislative body vote that authorized the borrowing include authority to apply the net premium and any accrued interest to the costs of the project being financed by the bonds or notes and reduce the amount authorized to be borrowed for the project by like amount? If yes, go to 4. If no, go to 5. 4 Treasurer is to apply the net premium and any accrued interest to pay costs of the project being financed by the bonds or notes and reduce the amount authorized to be borrowed for the project by like amount. 5 Net premium and accrued interest must be reserved for appropriation for a project for which the city, town or district has authorized a borrowing, or may authorize a borrowing, for an equal or longer period of time than the original loan: a. AND - If the borrowing was funded through restricted funds, e.g., community preservation funds or enterprise funds, the reserved net premium and accrued interest remain subject to relevant restriction. The funds may be appropriated for capital projects for which the restricted funds may be spent and for which a loan has been, or may be, authorized for an equal or longer period of time than the loan for which the premiums were received. If the original borrowing is financed with community preservation funds, a recommendation of the community preservation committee is also required for any appropriation of the reserved premiums; b. AND - If the borrowing was the subject of an approved Proposition 2½ debt exclusion, go to 6. 6 When net premiums and accrued interest received on a borrowing subject to an approved Proposition 2 ½ debt exclusion are reserved for appropriation for capital projects for which a loan has been, or may be, authorized for an equal or longer period of time than the loan for which the premiums were received, then the amount of the annual debt exclusion will be reduced by a premium adjustment as follows: a. When the total net premium and accrued interest received at the time of sale is $50,000 or less, there will be no reduction in the annual excluded amount. (de minimis exception). b. When the total net premium and accrued interest received at the time of the sale is more than $50,000, there will be a reduction in the excluded amount calculated as shown in Exhibit A* below. Note: Net premiums and accrued interest reserved for appropriation are not available for appropriation for the payment of annual debt service of the project.

39 Flow Chart - Treatment of Net Premiums and Accrued Interest Received on Bonds or Notes Sold on or after November 7, See IGR and IGR Refunding Bonds - G.L. c. 44, 21A governs premiums received on refunding bonds and requires all proceeds of refunding bonds be used to pay off the bonds to be refunded. Proceeds of refunding bonds include premiums and accrued interest. Therefore, they must be used to pay off the bonds to be refunded. 8 Multi-Purpose Borrowings - For multi-purpose borrowings, the net premium and accrued interest are allocated to each individual borrowing based upon the proportion that the individual borrowing bears to the total amount borrowed. How a pro-rated premium is treated depends upon the borrowing to which it is allocated. If the borrowing is a refunding bond, see number 7 above for its treatment. For other borrowings, start with number 3 above and work your way through the flow chart. *Exhibit A Calculation of Premium Adjustment and Debt Exclusion Reduction A city or town, on or after November 7, 2016, sells permanent bonds payable in 20 years in the total principal amount of $18,000,000. It receives a net premium as part of the sale in the amount of $800,000 which is reserved for the appropriation of capital projects. The total interest payable over the life of the borrowing will be $10,000,000. The interest payable for the fiscal year is $600,000. The calculation to determine the adjustment of interest for the fiscal year debt exclusion is as follows: Calculation of Premium as Percentage of Interest Cost Net Premium $800,000 Divided by total interest over life of issue $10,000,000 Premium as % of interest 8% Calculation of adjustment of interest for debt exclusion: Fiscal Year Premium Debt Exclusion Adjustment Interest Due Adjustment (Reduction) $600,000 8% $48,000 The amount of the gross debt service excludable for the fiscal year (principal and interest) and the amount of the exclusion reduction ($48,000) are entered on the DE-1. The net excluded debt service will be the gross debt service excludable minus $48,000. The city or town will be required to continue to apply this premium adjustment to reduce the amount of the annual debt exclusion throughout the life of the borrowing.