Understanding Municipal Debt Compliance: Official Statement Key Points
Explore key aspects of municipal debt compliance, focusing on the Official Statement and its essential elements. Delve into issuer liabilities, disclosure obligations, material facts, and the crucial information provided in the Official Statement for potential bond purchasers.
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Securities Law and Tax Law Compliance Relating to Municipal Debt Misty Taylor Bryant Miller Olive Will Milford Bryant Miller Olive 111 Riverside Ave., Ste. 200 Jacksonville, FL 32202 (904) 384-1264 wmilford@bmolaw.com 255 South Orange Avenue, Ste. 1350 Orlando, FL 32801 (407) 426-7001 mtaylor@bmolaw.com GOVERNMENT FINANCE OFFICERS ASSOCIATION
Issuers & Securities Law GOVERNMENT FINANCE OFFICERS ASSOCIATION
Issuer Disclosure Obligations Preliminary and Final Official Statement (Primary Offering) Annual Continuing Disclosure Filings Periodic Notification of Material Events GOVERNMENT FINANCE OFFICERS ASSOCIATION
What is the Official Statement? The document provided to potential bond purchasers, wherein all material information necessary for the purchaser to make an informed decision to buy is disclosed. GOVERNMENT FINANCE OFFICERS ASSOCIATION
Official Statement Key Points SEC has made it very clear issuer is primarily liable for content of its official statement In authorizing the issuance of securities and related disclosure documents, a public official may not authorize disclosure that the official knows to be false; nor may a public official authorize disclosure while recklessly disregarding facts that indicate there is a risk that the disclosure may be misleading GOVERNMENT FINANCE OFFICERS ASSOCIATION
Official Statement Key Points Purpose is to describe the debt, issuer, and sources of repayment Disclose all material facts Rule 10b-5 Anti-fraud provisions Do notomit or misstate any material fact What is material? Important fact to investor in making a decision to purchase the bonds GOVERNMENT FINANCE OFFICERS ASSOCIATION
Official Statement Key Elements Description of bonds Security & source of repayment Estimated Sources & Uses Project Issuer Risk Factors Continuing Disclosure Concluding Information Tax matters Ratings Litigation Financial interests Appendices Economic, Financial & Demographic on Issuer Audited Financials Form of Bond Counsel Opinion Summary of Legals Credit Enhancement GOVERNMENT FINANCE OFFICERS ASSOCIATION
SEC Rule 15c2-12 Effective January 1, 1996 Designed to prevent fraudulent, deceptive, or manipulative acts or practices Requires municipal debt issuers to file updated financial information and operating data annually with EMMA (Electronic Municipal Market Access System) by a specified date and file material event notices. Requires underwriters to reasonably determine that the issuer has complied with the rule prior to offering for sale the related securities GOVERNMENT FINANCE OFFICERS ASSOCIATION
Requirements The issuer must enter into a written agreement for the benefit of the bond holders to do the following: Provide through a filing to the Electronic Municipal Market Access (EMMA) and to the appropriate State Information Depository (SID), if any, annual financial information or operating data presented in the Official Statement Submit audited financial statements to the EMMA system and respective SID when available, if not provided as part of the annual financial information listed above Submit a notification to the EMMA system and respective SID of any material event occurrence in a timely manner Submit a notification to the EMMA system and respective SID of failure to comply in a timely manner GOVERNMENT FINANCE OFFICERS ASSOCIATION
Material Events Material events related to bonds issued after 12/1/10, but submit the material event to the EMMA system within 10 business days of the event occurring. Some events need to be disclosed regardless if they are material or not: Principal and interest payment delinquencies Unscheduled draws on debt service reserves reflecting financial difficulties Unscheduled draws on credit enhancement reflecting financial difficulties Substitution of credit or liquidity providers, or their failure to perform Adverse tax opinions Defeasances Rating Changes GOVERNMENT FINANCE OFFICERS ASSOCIATION
New Material Events Updated in May, 2010: New Material Events IRS proposed or final determinations of taxability Tender officers Bankruptcy, insolvency, receivership, or similar event of the obligated person Consummation of a merger, consideration, or acquisition, or certain asset ales, involving the obligated person, or entry into or termination of a definitive agreement to the foregoing (if material) Appointment of a successor or additional trustee or the change of name of a trustee (if material) GOVERNMENT FINANCE OFFICERS ASSOCIATION
Notice of Failure to Comply If the issuer fails to meet its annual filing requirements, the issuer must: Submit a notice of failure to comply with EMMA and the appropriate SID Complete and submit all past due filings prior to issuing debt Create procedures to ensure the failure to file will not reoccur Disclose its failure to comply in every Official Statement for 5 years GOVERNMENT FINANCE OFFICERS ASSOCIATION
Risks of Non-Compliance If the issuer fails to meet its annual filing requirements, the ease of selling its securities diminishes The underwriter is prohibited from bidding on or offering for sale the primary offering Rating agencies could assign a lower rating if the failed filings were deemed to be caused by poor management The investors may not show interest in securities where the required disclosure filings are not available In the event of a default, the investor could argue the required disclosure filings were not available for due diligence review Higher borrowing costs GOVERNMENT FINANCE OFFICERS ASSOCIATION
Debt Issue Exemptions Exemptions from annual filings and material event notices Debt issues with a total par amount of $1,000,000 or less Debt issues authorized in denominations of $100,000 if, Sold to no more than 35 persons who are believed to capable of evaluating risk and who are purchasing the securities for one account Have a maturity of 9 months or less, or May be tendered to the issuer at par value or above every 9 months until maturity Exemptions from annual filings but not material event notices Debt issues with a maturity 18 months or less GOVERNMENT FINANCE OFFICERS ASSOCIATION
Requirements on Underwriters Prior to bidding on or offering for sale municipal securities the underwriter must review the preliminary official statement ( POS ) and reasonably determine that issuer has complied with the rule The underwriter must send a POS no later than 1 business day after the request of a potential customer, if available The underwriter must receive the final official statement 7 business days after the purchase agreement and in sufficient time and quantity to accompany any confirmation that requests payment from any customer Issuers may now submit POS documents to EMMA. GOVERNMENT FINANCE OFFICERS ASSOCIATION
Tax Compliance Pre-Issuance Closing Documents Post-Issuance Compliance GOVERNMENT FINANCE OFFICERS ASSOCIATION
New Money Bonds What you can finance with Tax-Exempt Bonds What you can t finance with Tax-Exempt Bonds Reimbursement Official Intent Timing Functional Description of Property or Account Maximum Principal Amount of Debt Must actually reasonably expect to reimburse No later than 18 months after the later of date of expenditure or placed in service date of property (but not more than 3 years after date original expenditure is paid) Nature of Expenditure GOVERNMENT FINANCE OFFICERS ASSOCIATION
Refunding Bonds Tax-Exemption of Refunding Bonds depends on prior bonds Bond Counsel will trace back to original project Useful life considerations Current Refunding Less than 90 days Advance Refunding Greater than 90 days Limitation on number of Advance Refundings Yield Restriction Arbitrage Considerations Yield Restriction Final Arbitrage Calculation required on Refunded Bonds GOVERNMENT FINANCE OFFICERS ASSOCIATION
Tax Documents at Closing Tax and Non-Arbitrage Certificate Conduit Issue: separate certificates for Issuer and Borrower Contains reasonable expectations at time of closing Form 8038-G Must be filed by 15th day of second month after close of calendar quarter bonds are issued New boxes for written procedures GOVERNMENT FINANCE OFFICERS ASSOCIATION
Post-Issuance Compliance Record Retention Arbitrage and Yield Restriction Expenditure of Proceeds Private Use Remedies GOVERNMENT FINANCE OFFICERS ASSOCIATION
Post-Issuance Compliance Benefits of Written Procedures Check the box on 8038-G More lenient penalties for noncompliance Audit compliance will be easier Training new staff will be easier in the event of turnover GOVERNMENT FINANCE OFFICERS ASSOCIATION
Record Retention General Rule: Life of the Bonds plus 3 years If refunded, then extends to life of Refunding Bonds plus 3 years Note: this is different than State of Florida record retention guidelines What do you keep? Basic records relating to the bond transaction Documents evidencing the expenditure of bond proceeds Documents evidencing the use of bond-financed property by public and private sources Documents evidencing all sources of payment and security of the bonds Documents pertaining to the investment of bond proceeds How do you keep it? IRS Electronic storage guidelines GOVERNMENT FINANCE OFFICERS ASSOCIATION
What is Arbitrage? Arbitrage is the ability to earn profit by capitalizing in differences between investments or markets. In the case of public finance, Arbitrage refers to ability to profit from investment of tax-exempt bond proceeds in taxable securities. The ability to earn arbitrage depends on the relationship between taxable and tax-exempt rates and the shape of the yield curve. Positive arbitrage represents earnings above the arbitrage yield. Negative arbitrage represents earnings below the arbitrage yield (i.e., losses ). GOVERNMENT FINANCE OFFICERS ASSOCIATION
Arbitrage Rebate Compliance Activities Internal monitoring of rebate compliance Recommend annual calculations during construction period Set aside annual rebate liability in Rebate Fund Get it out of the Construction Fund Paying rebate is not bad, just need to monitor and pay as required Pay attention to requirements in Tax/Arbitrage Certificate GOVERNMENT FINANCE OFFICERS ASSOCIATION
How Do We Measure Arbitrage? Bond Yield vs. Investment Yield Bond Yield: Fixed Rate vs. Variable Rate Qualified Guarantee Fees Qualified Hedge Investment Yield Yield on Proceeds Proceeds Original/Sale Proceeds (including investment earnings) Transferred Proceeds Replacement Proceeds GOVERNMENT FINANCE OFFICERS ASSOCIATION
When is Rebate Calculated? Required: Recommended: Annually during construction period Every 5 years, and on Final Maturity Refunding Triggers New Final Maturity 8038-T: Only file if rebate is owed GOVERNMENT FINANCE OFFICERS ASSOCIATION
Exceptions to Rebate Six Month Spending Exception 18-Month Spending Exception 24-Month Spending Exception Small Issuer Exception GOVERNMENT FINANCE OFFICERS ASSOCIATION
Yield Restriction Separate from Arbitrage Rebate Temporary Periods GOVERNMENT FINANCE OFFICERS ASSOCIATION
Expenditure of Proceeds Reasonable Expectations vs. Actual Facts Best Practice: open communication with those responsible for spending the money Reallocation of Bond Proceeds GOVERNMENT FINANCE OFFICERS ASSOCIATION
Private Use / Payment Tests Private Business Use Test: No more than 10% of the proceeds of the Bonds can be used for Private Business Use Private Payment Test: No more than 10% of the payment of principal or interest on the Bonds is made or secured by payments for Private Business Use BOTH tests must be met in order to have Private Activity Bonds GOVERNMENT FINANCE OFFICERS ASSOCIATION
Private Business Use Private Business Use Test: No more than 10% of the proceeds of the Bonds can be used for Private Business Use Generally easier to measure than Private Payment Test Measurement Square footage Number of parking spaces in a garage Time Exceptions: Incidental Use Short-Term use General Public Use Qualified Management Agreements (Rev. Proc. 97-13) GOVERNMENT FINANCE OFFICERS ASSOCIATION
Private Loan Financing Test No more than the lesser of $5 million or 5% of the proceeds of the issue may be used directly or indirectly to finance loans to one or more governmental persons GOVERNMENT FINANCE OFFICERS ASSOCIATION
Remedial Actions Redemption of Nonqualified Bonds Alternative Use of Disposition Proceeds Alternative Use of Facility GOVERNMENT FINANCE OFFICERS ASSOCIATION
Other Matters VCAP Voluntary Compliance Agreement Program Audit GOVERNMENT FINANCE OFFICERS ASSOCIATION
Questions? Misty Taylor Bryant Miller Olive Will Milford Bryant Miller Olive 111 Riverside Ave., Ste. 200 Jacksonville, FL 32202 (904) 384-1264 wmilford@bmolaw.com 255 South Orange Avenue, Ste. 1350 Orlando, FL 32801 (407) 426-7001 mtaylor@bmolaw.com GOVERNMENT FINANCE OFFICERS ASSOCIATION
