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Financing your City’s path to excellence Part 1, the Introduction to Bonds

On Behalf of | Jun 1, 2017 | Statewide Interest

State of the art, new construction, revitalization – these terms can invoke visions of projects ending in red ribbon cutting ceremonies and increased community spirit in the minds of city leaders.  Sadly, too often those ribbon cutting projects fail to amount to anything but visions; despite the need for capital improvements. Many of you, as you began to read this article, were thinking about projects that your city should pursue. It is a shame to hear about great projects that never got started; especially at a time when West Virginia cities need a strong infrastructure and the starting point is simply a question of financing.

Many readers are unaware of how to use bonds to finance the new fire stations, police stations, parking garages, sewer line extensions, water plant upgrades, roads, schools, water parks, libraries, museums, stadiums, and hospitals that are needed in their communities. Thus, working in concert with the Municipal League, we are embarking on a mission to inform you, the municipal officer, about public debt financing.[i] Your project shouldn’t die simply because there was a lack of understanding about the public financing tools available.

This is the first article of a series that will appear in upcoming League Lites about the role of bond lawyers and why we need them, that STIFs aren’t something found at the morgue, how TIFs are similar but also different than STIFs, and the tax exempt and taxable financing options for your initiatives.[ii] There will be talk about taxes too. With that said, we promise to keep our articles short, be informative, and humorous at times. Let’s begin with municipal debt fundamentals.

Cities can’t simply borrow money: Federal and state law place limitations on a municipality’s power to borrow money. In order to finance public projects, municipalities issue securities. Purchasers of municipal securities, in effect, lend money to an issuing municipality in exchange for assurances that they will get their money back, with interest. A tax-exempt bond issue further sweetens the deal with the assurance that the interest income to the purchasers is exempt from federal income taxation.

You may use a variety of methods to fund your project, including grants and appropriations in addition to the issuance of tax-exempt municipal bonds. Your public finance lawyer will have an understanding of the types of financing options available. In that process, you will hear a lot of new terminology that is often descriptive of the transaction or structure.

Terms you will become familiar with are: general obligation bonds, special revenue bonds, lease revenue bonds, conduit bonds (commonly used in conjunction with 501(c)(3) nonprofits), refundings, working capital financings, special obligation bonds, variable rate demand bonds, and direct bank placements, among others. Some readers who have been around the financing block a few times will recall the Tax Credit and Direct Subsidy Bonds, referring to the Stimulus Act and Build America Bonds.

You likely meet more lawyers than you ever wanted. Be assured that they are all performing vital roles and representing parties necessary to making your project a success; not the least of which is preparing all the paperwork in accordance with all the regulations. This includes bond counsel, underwriter counsel, issuer counsel, trustee counsel, and bank counsel. You’ve achieved success when bond counsel renders an opinion that the bonds are a legal, valid and binding obligation enabling the financing. Congratulations, you are ready to break ground.

Municipals doesn’t just mean municipals: The sale of both long-term and short-term obligations (e.g. tax exempt bonds and notes) as a form of public debt financing is sometimes referred to as “municipals”. The term stems from municipalities issuing debt securities beginning in the 1800’s for traditional municipal functions. Taking advantage of municipal securities, cities made colossal investments in infrastructure allowing our country to grow.

Municipal bonds financed the projects that are the backbone of your city’s infrastructure.[iii] While partly tongue-in-cheek, municipals played a vital role in making America, and West Virginia cities, great.

In the present day, “municipal bonds” are issued by, or on behalf of a host of public entities, including state, county, city and any governmental entity so authorized, and are used for a variety of purposes.[iv] It would be interesting to know which West Virginia municipality issued the first public debt financing. If you think it is your community, we would love to hear the story.

The decision to finance/borrow: Notwithstanding the fact that there are certain risks (interest rate, default, inflation, call, maturity, liquidity risk, among others) together with the financing terms that you will need to evaluate carefully, the financing process will only occur when there is a need to finance “something”, whether that important something is a sewer line extension or a new city hall. You, the elected city official, are in the best position to determine the vital projects for your community. But that is the easy part.

Once the goal is set, you need to be motivated and strategic. A challenge; but one that can be overcome with your team. Your team will involve city council, the mayor and city staff, engineers, architects, underwriters, lawyers, accountants, and the community. And, don’t forget the bond holders – the ultimate purchaser investing in your city wants assurances they will get their money back – so they too influence the features of the financing.

In the end, your community will reap the benefits from the new city building, utility, recreational facility, hospital, school, road, or other amazing project that is sure to become a treasured addition to its citizens.

Ryan White and Mark Matkovich are members of White Law Offices PLLC, a boutique law firm focusing on public finance located in Charleston, West Virginia.

[i] Please be advised that this publication is for informational purposes only. It is provided with the understanding that the West Virginia Municipal League, Inc. and the authors are not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Adopted From a Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.

[ii] TIF and STIF are abbreviations referring to Tax Increment Financing and Sales Tax Increment Financing respectively. These fascinating financing methods will be discussed in upcoming League Lites.

[iii] According to NABL, in 2016 about $445 billion of bonds were issued by state and local entities.

[iv] According to NABL, there are about $3.7 trillion tax-exempt bonds outstanding, issued by about 51,000 state and local government issuers, ranging from villages, towns, cities, counties and states, as well as special districts and authorities, such as school districts and water and sewer public service districts.