10:30 12:10 May 9, 2018 240 Complex 112 th Annual Conference May 6-9, 2018 St. Louis, Missouri Moderator/Speakers: Bryan Kidney Director of Finance, City of Lawrence, KS Lisa Marie Harris Director of Finance/Treasurer, San Diego County Water Authority Eric Johansen Debt Manager, City of Portland, OR Debt Management Best Practices
Debt Management Best Practices It is our goal today to answer your questions about public debt. Questions such as: Why issue municipal bonds? What does it mean to issue debt? Who is on the financing team? What does bond structuring mean? Do we have to go to market? How do bonds get sold? Ok, the bonds are issued! We re done, right? And more!!
Why Municipal Bonds? Governmental entities have been using debt (most often in the form of municipal bonds ) for over 200 years. What is the benefit of issuing bonds? Tax-exempt bonds offer lower interest rates than taxable debt Achieve intergenerational equity Bonds are a common way to fund public infrastructure, water and sewer systems, schools and other projects with high price tags and long useful lives.
What Does it Mean to Issue Debt? As a bond issuer, you are allowing your government to: Receive an infusion of cash from bond investors to fund capital projects In return, you promise to: repay the bond purchasers over time, with interest.
The Role of the Finance Officer Coordinate Internal Team Members (finance staff, local attorneys, project managers, etc.) Select and Assign Duties to Outside Finance Team Participants, and Manage Their Performance Manage the Financing Timeline Structure Financing Within Parameters of State and Local Law and Legislatively Adopted Policy
The Role of the Finance Officer Select the Method of Sale Negotiate Terms and Structure of the Transaction Ensure Consistent, Accurate and Complete Disclosure to Marketplace at Time of Sale Ensure Ongoing Disclosure (Annual Financial and Operating Data and Material Events) Oversee Disbursement of Project Funds Ensure Ongoing Tax Compliance (Rebate and Change in Use)
The Role of the Finance Officer Who is on the Financing Team? Bond Counsel Works directly for the Issuer. An attorney (or team of attorneys), typically with specialized experience in municipal financings, that generally issues two legal Municipal Advisor/ Financial Advisor Underwriter/ Investment Banker opinions in the offering A professional consultant that works directly for the Issuer. Must give fiduciary care in advising the Issuer by putting the Issuer s interests above their own financial interests in a transaction. The key conduit between the Issuer and ultimate investor. In a financing, they are ultimately working for the investors. The Underwriter, via the bond sale, agrees to buy the bonds and resell them to investors. Other Participants Paying Agent/Trustee Rating Agency Bond Insurance Provider or Other Credit Enhancer
GFOA Best Practices Selecting Bond Counsel Selecting and Managing Municipal Advisors Selecting and Managing the Method of Sale Selecting Underwriters for Negotiated Bond Sales Selecting Underwriter s Counsel
Who Should I Hire First? GFOA Best Practice Unless the issuer has sufficient in-house expertise and access to market information, it should hire a municipal advisor prior to undertaking a debt financing. Issuers Should Hire a Municipal Advisor (MA) and Bond Counsel Before Hiring Underwriter and Other Outside Professionals Municipal Advisor Should Assist With: Selecting the method of sale that best fits the financing Evaluating other members of the external financing team Selecting underwriting team (if negotiated sale) Providing expert advice regarding all aspects of the bond sale
Role of the Municipal Advisor Role May Vary According To: Expertise of issuer staff Type of bonds Method of sale Scope of services MA Relationship May Be Transactional or on a Retainer Basis MA has a Fiduciary Responsibility to Represent the Issuer, and Only the Issuer, in Debt Financings.
Municipal Advisor: Competitive Sale Helps Determine Timing of Offering (the Sale Date) Structuring the Bond Issue Assists in Preparing the Preliminary Official Statement (POS) Advertises Upcoming Bond Sale to Investor Community Makes a Recommendation to Issuer to Accept or Reject the Bid Completes Final Bond Structuring
Municipal Advisor: Negotiated Sale Helps Issuer Select the Underwriter through RFP Assists in Structuring the Bond Issue Assists in preparing the Preliminary Official Statement (POS) May Assist in Publicizing Upcoming Bond Sale to Investor Community Advises Issuer with Respect to Negotiation of Preliminary Pricing Scale Advises Issuer on Day of Pricing with Respect to Final Negotiation of Terms (Yields, Coupons, Call Features)
Best Practice Selecting Municipal Advisors GFOA Recommends That Issuers Hire a Municipal Advisor Prior to Undertaking a Debt Financing. Selection Of Municipal Advisor Should Be Based On Merit and Generally Done Through a Request For Proposals (RFP) Process. Experience with similar financings: type, size, structure, state Access to timely market information Independent vs. Broker/Dealer Advisors MA must be Registered with SEC and MSRB Pricing Advisor vs. Municipal Advisor
Best Practice Selecting Bond Counsel Selection of Bond Counsel Should Be Based On Merit and Generally Done Through a Request For Proposals (RFP) Process. RFP Should Address Scope of Services, Term of Contract, Evaluation Criteria and the Selection Process. May be managed by Finance Office and/or City Attorney Key Qualifications of Bond Counsel Include: Experience with similar financings: type, size, structure, state Specialized tax advice beyond normal bond counsel services Expertise in federal securities laws and regulations Be aware of relationships that might pose conflict of interest Determine If Other Specialty Counsel Is Needed: Disclosure Counsel Special Tax Counsel
Underwriter Role Based on Method of Sale Competitive Sale: Sale in which multiple prospective underwriters submit bids to purchase the bonds at a specified date and time. The underwriter that submits the lowest purchase price (TIC) is awarded the bonds for subsequent sale to investors. Negotiated Sale: Sale in which the underwriter is selected in advance of the bond sale, preferably through an RFP process. Underwriter assists financial advisor and issuer in structuring the bonds and preparing the bonds to be sold.
Best Practice Selecting Underwriters Unless the issuer has extensive in-house bond pricing experience and access to current bond market data, issuers should engage the services of a municipal advisor to assist in the negotiated sale process (if not already done). Recognize that the role of the underwriter and the municipal advisor are separate roles and cannot be provided by same party. Select underwriters through a Request for Proposals (RFP) that rewards firms with demonstrated experience underwriting the types of bonds the issuer proposes to sell. RFP promotes fairness, objectivity and transparency Look at past transactions and their performance vs competitive sales
Best Practice Selecting Underwriters Key Underwriter Selection Criteria May Include: Relevant experience with type of bonds being proposed. Experience should include both the firm s investment bankers and underwriters ( the desk. ) Understanding of the issuer s debt structure and financial situation Documentation of the underwriter s participation in the issuer s recent competitive sales or the competitive sales of other issuers in the same state. The proposed spread, or underwriter s discount, should be requested in the RFP, but should rarely be the primary decision criterion. Proposed spread is most useful in pricing negotiations, but not as a basis for selecting the underwriter.
Underwriter s Counsel Represents the Underwriter in a Negotiated Bond Sale May Prepare The Investor Disclosure Document (Official Statement), Bond Purchase Agreement, Agreement Among Underwriters and Related Documents Conducts Due Diligence on Behalf of the Underwriter Selected By The Underwriter; Cannot Be Same Firm as Bond Counsel
Best Practice Selecting Underwriter s Counsel Issuers Should Minimize Their Involvement If Desired, Develop List of General Criteria and Qualifications Review Underwriter Counsel s Scope of Services Set Appropriate Fee Arrangement Not to Exceed Have Policies and Procedures in Place to Minimize Conflicts of Interest
Other Financing Team Participants Disclosure Counsel Bond Insurer Liquidity or Credit Providers (variable rate debt) Investment Advisor Verification Agent (in case of refunding)
What Does Structuring Mean? The primary goal of an Issuer should be the proper administration of the bond issue at the least possible cost and interest rate Projects should be thoroughly reviewed: Scope Feasibility Cost Useful life of the asset Capacity to repay debt
What Does Structuring Mean? Sufficient revenues should be available to meet ongoing debt payments and jurisdiction needs to understand what type of revenues are pledged to support (or secure ) the debt. Various Types of Debt: Tax Exempt Municipal Bonds Taxable Bonds Direct Loans Other alternatives
Do We Have to Go to Market? Bank Loans can take on many forms and can typically be structured to provide the Issuer with flexibility regarding duration and repayment. may carry a fixed or variable interest rate are for a shorter duration than traditional bond sales and are usually in the five to ten year duration, While bank loans should be disclosed as part of a debt portfolio, they have no disclosure or continuing disclosure requirements. Inter-Fund Loans
How do Bonds Get Sold? Most local governments do not have the in-house expertise or resources to find investors for their proposed bond offerings, and will require the services of a specialized municipal securities dealer, underwriter or a syndicate of underwriters to sell the bonds for them. Competitive Bid Process Underwriters submit closed bids to the Issuer on the day and time designated in the official notice of sale. The bonds are awarded to the underwriter that has submitted the best price (i.e., the lowest true interest cost bid).
How do Bonds Get Sold? Negotiated Sale Process After the underwriter is selected, the Issuer and the underwriter will begin the process of structuring the bond issue and completing the other origination tasks. Bond Rating Municipal bond credit ratings measure the Issuer s risk of paying all interest and principal back to investors. Credit Rating Agencies
How do Bonds Get Sold? What are the Bond Ratings? Highest (AAA/Aaa) High (AA/Aa) Above Average (A) Medium (BBB/Baa) Anything below this is not considered Investment Grade ( Junk Bonds )
Ok, We Issued! We re Done, Right? The Issuer is more than just a participant in the sale of the bonds. The agency is the owner of the transaction and the obligor of the debt until maturity when the debt is fully repaid - perhaps a period of 20 to 30 years. Once the deal closes, staff will need to book the transaction in the general ledger/balance sheet.
Ok, We Issued! We re Done, Right? Setting up a tickler file with key dates is helpful: When bond payments are due When continuing disclosure information needs to be filed During the period when there are unspent bond proceeds or reserve funds, staff will want to determine how these funds should be invested. Finally, the organization needs to keep detailed records as to how the bond proceeds were spent in order to comply with arbitrage law.
Debt Management Best Practices What to do after a bond has been issued? What do I need to know about continuing disclosure? Should we have policies and procedures to ensure compliance? Are there specific requirements for tax compliance? How should I invest my bond proceeds? What do I need to do to ensure timely debt service payments? When is the right time to talk about refunding? Other Requirements
What to Do After a Bond has Been Issued? Bonds issued by State and local governments are generally subject to ongoing monitoring and reporting Federal disclosure requirements SEC Rule 15c2-12 Compliance with federal tax requirements
What to Do After a Bond has Been Issued? Post issuance activities will generally fall into two categories: Qualified use of bond proceeds and bondfinanced property Arbitrage yield restriction and rebate Continuing Disclosure (CDA s)
What Do I Need to Know About Continuing Disclosure? Governments that issue bonds generally have an obligation to meet specific continuing disclosure requirements that are identified specifically in a continuing disclosure agreement (CDA) Certain financial information identified in CDA and material events are required to be submitted via EMMA https://emma.msrb.org/
Are There Specific Requirements for Tax Compliance? It is recommended that Issuers establish written policies and procedures to comply with post-issuance and ongoing requirements Identify single individual with primary responsibility for monitoring and compliance Create a checklist or inventory of requirements Document proof of intentional compliance
How Should I Invest My Bond Proceeds? Upon the issuance of bonds by a State or local government, the bond proceeds are usually deposited in various funds Considerations when making decisions to invest proceeds: Anticipated drawdown schedule of the proceeds Federal and State regulations governing the types of investments permitted Arbitrage yield State of local government s investment policy Requirements from rating agencies
How Should I Invest My Bond Proceeds? Those responsible for making investment decisions should coordinate closely with departments and staff that will be drawing down proceeds A written investment policy is the single most important element in a public funds investment program Issuers should become acquainted with federal tax law as it applies to arbitrage restrictions
How Should I Invest My Bond Proceeds? 2014 SEC Municipal Advisor (MA) Rule BE FAMILIAR! Limits communications that Brokers may have with Issuers Brokers can be considered MA s if they provide advice on investment of bond proceeds Brokers ask Issuers to indicate if funds being invested are bond proceeds
How to Ensure Timely Debt Service Payments? Issuers of government debt have a fiduciary responsibility to manage their funds in a manner that assures timely and accurate payment of debt service principal and interest GFOA recommends that Issuers: Establish procedures and appropriate contractual terms for making debt payments Use electronic funds transfers to ensure timely payments
When Is the Right Time to Talk about Refunding? Prior to maturity of the debt an Issuer will commonly have the opportunity to refinance the remaining debt at lower interest rates (called a refunding ) Typical Call 10 years Current Refunding GFOA Best Practice
When Is the Right Time to Talk about Refunding? Refunding of debt requires essentially the same process and effort as a new money issue Often there is only one opportunity to refund debt for significant interest savings Proceeds deposited in Escrow Account until Call Date Time Refunding to minimize Negative Arbitrage in Escrow
When Is the Right Time to Talk about Refunding? Refunding of debt requires essentially the same process and effort as a new money issue Often there is only one opportunity to refund debt for significant interest savings Proceeds deposited in Escrow Account until Call Date Time Refunding to minimize Negative Arbitrage in Escrow
Advance Refundings Eliminated after 12/31/17 Market solutions to achieve similar results Cinderella bonds Crossover refundings Taxable advance refunding GFOA Member Alert: Advance Refundings http://gfoa.org/member-alert-advancedrefunding
Other Requirements Bond Indentures Bond Ordinance/Resolution Requirements Notice/Reporting Coverage Ratio Additional Bonds Test Debt Service/Reserve Requirements Required Accounts Post-Issuance Policies and Procedures Best Practice
Other Requirements State/Local Law Requirements Public Notice Legal Debt Limits Debt/Investment/Other Policies Rating Agencies- Best Practice Investor Relations- Best Practice Financing Team Relationships
112 th Annual Conference May 6-9, 2018 St. Louis, Missouri Questions: Speakers will take questions and comments. This session is being recorded, please utilize the microphone in the aisle to ask all questions. Provide Feedback: Please take a few minutes to provide your feedback at www.gfoa.org/conf-eval Discuss/Comment: Join the discussion at #GFOA2018 Contact GFOA: To contact GFOA about session topics please email research@gfoa.org