Massachusetts Municipal Auditors and Accountants Association Annual Meeting South Yarmouth, Massachusetts June 11, 2018 Peter Frazier, Managing

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1 Massachusetts Municipal Auditors and Accountants Association Annual Meeting South Yarmouth, Massachusetts June 11, 2018 Peter Frazier, Managing Director

2 Bonds and Notes An interest bearing promise to pay a sum of money on a specific date Bonds maturity greater than one year Notes maturity one year or less Typically sold in $1,000 or $5,000 denominations

3 Types of Bonds and Notes Differentiated by Source of repayment Underlying security

4 Types of Notes Bond Anticipation Notes* State Aid Anticipation Notes Federal Aid Anticipation Notes Revenue or Tax Anticipation Notes * BANs can be rolled for 10 years

5 Legal Factors What laws govern the borrowing process? State Local municipalities derive their powers from the state Chapter 44, 70B, and Special Acts debt limits, purposes and terms Federal Public Purpose vs. Private Activity Tax-exempt vs. taxable 8038G Disclosure (SEC, MSRB) Local Charter and bylaws authorization procedures, referendum periods,

6 Chapter 44, Sections 7 & 8 Describes almost all of the purposes for which a city or town can borrow. Maximum borrowing term of purposes based on the useful life of the asset financed. DOR provides guidance Municipal Relief Act (2010) Many terms were increased Municipal Modernization Act (Nov. 2016)- Borrowing Purposes Consolidated Treatment of Premiums changed Surplus Proceeds De Minimus Increased

7 Chapter 44, Sections 7 & 8 Chapter 44, Section 7 Inside the Debt Limit Limited to a Maximum of 5% of EQV Tax supported purposes Building, Land Acquisition, Equipment, Recreation, etc. Chapter 44, Section 8 Outside the Debt Limit Most Limited to a Maximum of 10% of EQV Revenue supported purposes Water, Sewer, Electric, Solid Waste, etc

8 Massachusetts School Building Authority Chapter 70B replaced old School debt reimbursement program (Ch. 645) Provides pay-as-you build grants (40% to 80% of eligible project costs) Collaborative process 30 Year Maximum Borrowing Term

9 Community Preservation Act ( CPA ): Ch.44B Funds appropriated and spent for: Open Space Historic Restoration Affordable Housing Requires majority approval of both the local legislative body and voters at the next regular municipal or state election Primary source of revenue = property tax surcharge (max 3%) Secondary source = Annual distributions received from the state Can t be repealed while bonds are outstanding

10 Level Debt vs. Level Principal Structures Total Debt Service Comparison $10,000,000 General Obligation Bonds 10 Year Bonds 20 Year Bonds Years Equal Principal Level Debt Equal Principal Level Debt 1 $1,322,200 $1,221,424 $912,500 $786,710 A 2 1,309,300 1,219, , , ,291,200 1,218, , , ,268,000 1,222, , , ,239,800 1,220, , , ,207,900 1,220, , , ,171,900 1,219, , , ,132,100 1,223, , , ,089,700 1,222, , , ,045,500 1,223, , , , , , , , , , , , , , , , , , , , , , ,450 $12,077,600 $12,212,099 $14,963,500 $15,768,264 B

11 Municipal Borrowing Flow Chart Town Determines Capital Project Project Identified Preliminary Modeling Tax Impact Rate Impact

12 Municipal Borrowing Flow Chart Town Determines Capital Project Bond Counsel: Drafts Vote Important! Bond Counsel should draft or review town meeting articles and votes

13 Municipal Borrowing Flow Chart Town Determines Capital Project Bond Counsel: Drafts Vote Town Meeting: Votes Authorization Borrowing Authorization requires 2/3 majority Debt Exclusion requires majority vote at regular or special town election

14 Municipal Borrowing Flow Chart Town Determines Capital Project Bond Counsel: Drafts Vote Town Meeting: Votes Authorization Bond Counsel: Provides Legal Requirements Letter Bond Counsel provides opinion on: Validity of borrowing Tax Exemption

15 Tax-Exemption Example Interest After- Interest Tax Tax After Tax Security Principal Rate Interest Rate Bill Taxes Yield Taxable Bond $ 1, % $ 44 32% $ 14 $ % Tax-Exempt Bond $ 1, % $ 30 32% $ - $ % Issuer Benefit $ 14 Fed Govt Cost $ 14

16 Arbitrage Rebate Difference Between Tax-Exempt Borrowing Rate and Investment Rate Profit must be rebated to the Federal Government (IRS enforces and audits) Get Cashflows by Purpose Spending Schedules for Bond Counsel Keep good records on interest earned (co-mingle vs. segregate proceeds)

17 Arbitrage Rebate - Exceptions, Spending Tests Exceptions Small Issuer (less than $5 million issued per calendar year) 10% in 6 months, 100% in 3 years Six Month Expenditure (RANs, Acquisition) 100% in 6 months 18 Month Expenditure (less than 75% construction) 10% in 6 months, 60% in 1 Year, 100% in 18 Months Two-Year Construction (More than 75% construction) 10% in 6 months, 45% in 1 Year, 75% in 18 Months, 100% in 2 Years

18 Municipal Borrowing Flow Chart Town Determines Capital Project Bond Counsel: Drafts Vote Town Meeting: Votes Authorization Bond Counsel: Provides Legal Requirements Letter Treasurer: Satisfies Legal Requirements

19 Municipal Borrowing Flow Chart Town Determines Capital Project Bond Counsel: Drafts Vote Town Meeting: Votes Authorization Bond Counsel: Provides Legal Requirements Letter Treasurer: Satisfies Legal Requirements FA & Treasurer: Determines Terms of Bond Issue & Prepares OS

20 To borrow short or long term? Interest rate environment Size of project Spending schedule Budget constraints

21 Borrowing Alternatives Massachusetts Clean Water Trust Massachusetts Water Resources Authority State House Loan Notes Rural Development Loans State Qualified Bond Act

22 Borrowing Alternatives Massachusetts Clean Water Trust For Eligible Water, Sewer and Landfill projects DEP determines eligibility Interim loan financing 20 or 30 year level debt bonds 2% interest rate

23 Borrowing Alternatives State House Loan Notes & Serial Loans No Legal Opinion No Credit Rating Official Statement - Optional Low Issuance Costs Less liquidity (higher interest rates) Excellent for small, infrequent issuers No dollar limit, same term limits (limited by market demand)

24 Borrowing Alternatives Rural Development Loans Direct Loans from the Department of Agriculture Lender of last resort Eligibility for small, less affluent issuers 40 year maximum term Prepayable without penalty No Credit Rating Low Issuance Costs

25 State Qualified Bond Act Debt Service on Bonds paid directly by State Deducted from quarterly aid payments Programmatic Rating Aa2 / AA 10 to 30 year term Flexible principal structure Subject to Municipal Finance Oversight Board Approval (MFOB)

26 How is interest calculated? Each principal payment needs to be multiplied by the associated coupon rate. Take the total amount of interest and divide by 2 to obtain the semi-annual interest payment amount.

27 Municipal Disclosure History 1929: Stock Market Crash : Securities Act of 1933 The Securities Exchange Act of : New York City Defaults 1980 s: Washington Public Power Supply System Defaults 1989: SEC Rule 15(c) 2-12 Primary Disclosure 1994: New SEC Rule 15(c) 2-12 Continuing Disclosure 2009: Amendments to Rule 15(c) Annual Disclosure for all

28 Municipal Borrowing Flow Chart Town Determines Capital Project Bond Counsel: Drafts Vote Town Meeting: Votes Authorization Bond Counsel: Provides Legal Requirements Letter Treasurer: Satisfies Legal Requirements FA & Treasurer: Determines Terms of Bond Issue & Prepares OS Bond Counsel: Reviews OS

29 Municipal Borrowing Flow Chart Town Determines Capital Project Bond Counsel: Drafts Vote Town Meeting: Votes Authorization Bond Counsel: Provides Legal Requirements Letter Treasurer: Satisfies Legal Requirements FA & Treasurer: Determines Terms of Bond Issue & Prepares OS Bond Counsel: Reviews OS Rating Agency: Reviews OS & Final Docs., Assigns Rating

30 Moody s Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Bond Ratings Standard & Poor s AAA BBB- AA+ AA AA- A+ A A- BBB+ BBB

31 Yield Curves By Rating Percent Aaa Aa A Baa Year

32 Major Credit Factors Economy & Institutional Framework (40%) Management (20%) Finances (30%) Debt and Contingent Liabilities (10%)

33 Municipal Borrowing Flow Chart Town Determines Capital Project Bond Counsel: Drafts Vote Town Meeting: Votes Authorization Bond Counsel: Provides Legal Requirements Letter Treasurer: Satisfies Legal Requirements FA & Treasurer: Determines Terms of Bond Issue & Prepares OS Bond Counsel: Reviews OS Rating Agency: Reviews OS & Final Docs., Assigns Rating FA: Distributes OS to Underwriters FA & Treasurer: Conducts Bond Sale, Awards Bond Issue Underwriter: Resells Bonds Pending Settlement Bond Counsel: Prepares Bonds & Closing Papers Town Officials: Sign Bonds & Closing Docs. FA: Arranges Settlement with DTC Underwriter: Credits Bond Proceeds to Town Town: Pays Principal & Interest According to Schedule

34 Post Issuance Compliance Procedures Designed to provide effective management of post issuance compliance program for tax-exempt bond/notes in a manner consistent with state and federal laws in order to maintain tax-exempt status. Assign primary compliance officer(s) Retention of records (issuance documents, record of investments, records of compliance, etc.) Yield restriction requirements Monitor spending requirements of proceeds Rebate calculations Bond Counsel can provide a draft form of these procedures if they are not currently in place.

35 Recent Developments Municipal Modernization Act Surplus Proceeds Treatment Check for surplus balances (at least) annually Appropriate to another capital project or Sweep to debt service Bond and Note Premiums Use for project costs or Appropriate to another capital project Tax Reform of 2017 Advance Refunding Bonds Eliminated

DEBT MANAGEMENT EXAMINATION

DEBT MANAGEMENT EXAMINATION 1. Duration: a) is a measure of volatility of bond returns. b) is influenced by the coupon rate and yield to maturity. c) provides an approximation of the percentage price change in a bond due to a change