United States
Environmental Protection
Agency
Solid Waste And
Emergency Response
EPA 510-B-93-010
December 1993
&EPA Using Bonds To Close
The Gap
A Guide To Revenue
Options For State Fund
Administrators
-------
-------
Using Bonds To Close The
Gap
A Guide To Revenue Options For
State Fund Administrators
United States Environmental Protection Agency
Office of Underground Storage Tanks
December 1993
-------
Disclaimer
The mention in this guide of certain companies involved in bond issuance is for illustrative
purposes only. EPA has not evaluated and does not endorse the services of any of the companies
named. This document was prepared by ICF, Incorporated under EPA Contract Number 68-W3-
0019; the Project Officer was Lynn DePont.
IV
-------
Foreword
State financial assurance funds for underground storage tanks (USTs) pay for cleanups and
third-party liability costs associated with leaks of petroleum. This guide is intended to provide
administrators of these state funds with general information about a relatively new management
option. For some states, borrowing money through the issuance of bonds may prove to be a useful
tool in removing short-term reimbursement backlogs, thereby avoiding potential delays in cleaning up
UST sites. The bonds would be secured primarily with the fees collected by the state through the
UST program. Fund administrators can use this guide as a reference tool to aid them in deciding
whether to pursue this option.
The assistance of the following entities hi preparing this document is gratefully acknowledged:
Chapman and Cutler; Iowa Underground Storage Tank Program/Williams & Company; McCall,
Parkhurst & Horton, L.L.P.; Moody's Investors Service; Ohio Petroleum Underground Storage Tank
Release Compensation Board; PaineWebber, Incorporated; and Standard & Poor's Ratings Group.
_
-------
-------
r
Contents
Page
6
8
10
Getting Over The Hump 1
Why Use Bonds? 2
Debt—What Are The Options? 3
Debt Structure
Key Players
The Process
Advice From The Experts 15
Appendix A. Glossary Of Selected Terms A'1
Appendix B. State Government Contacts For Information On Issuing Bonds B-l
Tables
Table 1. Costs Of Issuing A Bond 2
Table 2. Other Debt Instruments 5
Table 3. List Of Required Documents 13
Figures
Figure 1. The Hump 1
Figure 2. Appropriate Usage Of Short-Term Notes Versus Long-Term Bonds 3
Figure 3.
What Is The Procedure For Issuing Bonds? 11
Vll
-------
-------
r
Getting Over The Hump
The creation of state assurance funds for underground storage tanks (USTs) has had a
significant impact on the regulated community in most states. State funds serve two purposes. First,
state funds give owners and operators an affordable way to comply with EPA's financial responsibility
requirements. ("Financial responsibility" means that UST owners or operators demonstrate that
adequate money is available for cleanup and third-party liability costs if a leak occurs.) Second, state
funds provide money to pay for cleanups. In fact, in 1992, states collected $1 billion in
revenue—generally from fees on gasoline sales, tanks, or both—to help owners and operators clean up
leaks. The flip side of this cleanup boom, however, is that claims for reimbursements of cleanup
costs have sometimes surfaced faster than the relatively stable supply of fund revenues, causing a
claims backlog, or "hump," as shown in Figure 1. This situation is exacerbated by the following
factors:
• The federal UST leak detection requirements mandated that all tanks be fitted with leak
detection equipment by December 1993. Many owners and operators who have already met
this requirement have learned that their tanks are leaking.
• Annual revenues for state assurance funds accumulate gradually and predictably. They may
not be able to handle a surge in demand for reimbursement.
• The reimbursement backlog may cause some owners and operators to defer cleanup. If state
UST funds are unable to reimburse all contaminated UST sites immediately, owners and
operators may choose to postpone their cleanup activities.
• Postponed cleanups can be more difficult and costly. When a cleanup is deferred, there is an
increased likelihood that contamination will spread, causing further environmental damage and
ultimately increasing the costs of cleanup.
Money
Fund
Revenue
Claims
Against
Fund
Time
Figure 1. The Hump
-------
-------
r
Why Use Bonds?
Issuing bonds can help a state assurance fund meet a heavy demand for cleanup
reimbursements by allowing a fund to borrow money now, securing the "loan" with a promise of
future revenues. As the hump gradually flattens out when leaks become less common (because of
replacement or upgrading of existing USTs), the revenues received in future years can be used to pay
back the bonds, plus interest and fees. It should be noted, however, that while a bond issue can act
as a stop-gap measure to address a short-term reimbursement backlog, it may not be a permanent
solution for fund solvency problems. There are costs associated with the issuance of bonds, which
include interest costs (the fee you pay the bondholders for the opportunity to use their money now) as
well as fees paid to bond counsel, underwriters, and rating agencies. (See Table 1.) For those short-
term funding lags, however, bonds may be well worth their price. Some questions to consider before
you—a state fund administrator—issue bonds include the following:
• Will the state assurance fund revenues, whether based on a fee per tank or a tax per gallon of
gasoline, remain relatively constant over the life of the fund?
• Will issuing bonds enable your state fund to obtain enough money to cover a short-term
increase in the number of claims for reimbursement?
• Will the bond issue be large enough to eliminate the reimbursement backlog, repay the bonds,
and allow for a cushion of revenue to meet claims associated with future UST releases?
(Also, note that bonds should not be issued beyond a sunset provision on a fund.)
Two additional points to remember are:
• Issuing bonds provides a one-time source of funds, in exchange for future revenues. While
issuing bonds may speed up claims processing, it does not solve any fundamental solvency
problems.
« The number of new leaks identified should decline dramatically after 1998, when all UST
systems must be upgraded. At that time, claims for cleanup reimbursements should be greatly
reduced.
Table 1 . Costs Of Issuing A Bond
Type Of Cost
Interest Costs
Bond Counsel
Underwriters
Rating Agencies
Amount Of Cost
Rates vary. Iowa's 1991 tax exempt issue was sold at 5.6%
Competitive selection or state may name bond counsel and negotiate fee
1 to 2 % of face amount of the issue
$5,000 to 50,000 per rating
These examples of issuance costs, which are estimated and subject to variation, are generally incorporated
into the overall principal amount of the bonds. Each party receives its fee after the bonds have been sold.
-------
-------
Debt—What Are The Options?
When issuing debt, a state agency has many types of debt instruments from which to choose.
The choice may depend on a variety of factors, such as the purpose of the debt, the agency's legal
authorization to issue debt, and the type of financial resources available for repayment of the debt.
Debt instruments are classified in two broad categories—long-term and short-term. Specific types of
debt instruments within each category are discussed below.
Long-Term Debt —Bonds
Long-term debt, or bonds, are generally issued with an average length of maturity of 10 to 30
years and, in most cases, are appropriate for use by state assurance funds. The choice of issuing
long-term versus short-term debt, however, is dependent upon the size and length of time it takes to
pay off the reimbursement backlog (hump). Generally, the larger the backlog (therefore, the greater
the amount of money needed to get rid of the backlog), the greater the need for longer term
financing. In some cases, however, short-term notes (of, for example, 1 to 3 years) may be adequate
to cover relatively small backlogs that take less time to pay off. Interest costs associated with
borrowing must also be considered as short-term debt generally will bear lower interest rates than
long-term debt. Given the level of demand on state UST assurance funds and the size of expected
backlogs, bonds may prove to be most adaptable to UST funding needs. Figure 2 shows when it may
be more appropriate to issue bonds versus notes.
$Size
Of Backlog
Time To Pay Off The Backlog
Figure 2. Appropriate Usage Of Short-Term Versus Long-Term Bonds
-------
The two types of bonds most likely be used by a state assurance fund are revenue bonds and
special tax bonds. These bonds are appropriate for two reasons: (1) they rely on the fund's
dedicated revenue sources (i.e., tank fees or gasoline fees), and (2) they are not considered general
obligations of the state, which means that the state would not be liable to repay the bonds if the issuer
defaulted on making a scheduled debt service payment. The characteristics of these two types of
bonds are described below.
Revenue Bonds
• Payable only from the revenues of a designated funding source (typically user fees paid by
customers). For example, revenue from future collection of bridge tolls could be pledged to
repay bonds used to build a bridge.
• May not count against the maximum amount of debt that the issuer is permitted to incur under
constitutional, statutory, or charter provisions.
• Generally do not require voter approval.
Special Tax Bonds
• Payable only from revenues of a specifically pledged tax, not from revenues derived from any
specific project. Special tax bonds differ from revenue bonds in that repayment is unrelated
to the revenue-generating capacity of the specific project being financed. For example, a state
government might purchase land for a park by using a revenue bond to be repaid from park
entrance fees or by using a special tax bond to be repaid from any type of special tax (such as
increased fees for hunting and fishing licenses).
Short-Term Debt—Notes
As discussed above, short-term debt instruments such as notes typically run for 1 to 3 years
and may be appropriate for some state funds with relatively small backlogs that take less time to pay
off. Short-term debt typically has a lower interest rate than long-term debt because of the greater
certainty of repayment.
Tax And Revenue Anticipation Notes
• Tax Anticipation Notes (TANs), Revenue Anticipation Notes (RANs), and Tax and Revenue
Anticipation Notes (TRANs) are generally used to cover operating expenses and are secured
by taxes and other short-term revenues received within a short time period, usually less than
one year. For example, a state government expecting to receive substantial tax revenues
might issue TANs and use the proceeds to meet short-term cash flow needs.
Table 2 lists other debt instruments that are not generally appropriate for use by state
assurance funds.
-------
Table 2. Other Debt Instruments
Additional Long-Term Debt Instruments
General Obligation Bonds
Are called "full faith and credit" bonds because the obligation to repay is unconditional
and is based on the general credit and taxing powers of the borrowing government.
Have a lower interest rate than revenue or special tax bonds because of the
unconditional (i.e., general) obligation for repayment.
Are typically used to finance the capital portion of general governmental activities
(e.g., public buildings, roads, criminal justice facilities, schools).
Usually require voter approval.
Often have no direct correlation between the amount of debt issued and the value of the
project because they are not supported directly by the projects they finance.
Additional Short-Term Debt Instruments
BANs/GANs
Bond Anticipation Notes (BANs) and Grant Anticipation Notes (GANs) provide interim
financing for construction projects.
BANs are generally sold when long-term interest rates are high (in order to lower costs
for borrowing) and are secured by the revenue that will be raised by issuing long-term
bonds in the future.
GANs are secured by the future receipt of grants.
-------
-------
Debt Structure
Bonds (or notes) can be structured as either term or serial bonds with either fixed or variable
interest rates. The following definitions excerpted from Moody's on Municipals: An Introduction to
Issuing Debt, published by Moody's Investors Service and from other sources, have been included to
serve as a reference on basic bond structures1'2 Appendix A contains a more extensive list of terms.
Principal - The face amount of a bond or issue of bonds payable on stated dates of maturity.
Interest - Compensation for the use of borrowed money, generally expressed as an annual
percentage of the principal amount.
Amortization - The process of paying the principal amount of an issue of bonds by periodic
payments either directly to bondholders or to a fund for the benefit of bondholders. Payments are
usually calculated to include interest in addition to a partial payment of the original principal amount.
Term Bonds — Bonds coming due in a single maturity.
Serial Bonds ~ Bonds of an issue in which some bonds mature in each year over a period of years.
Maturity - The date upon which the principal of a municipal bond becomes due and payable to the
bondholder.
Fixed Interest Rate - A rate of interest payments that remains constant throughout the life of the
bonds.
Variable Interest Rate — A rate of interest, tied to an index or formula, that varies over time.
Redemption Provisions - The terms of the bond contract giving the issuer the right or requiring the
issuer to redeem (or call) all or a portion of an outstanding issue of bonds prior to their stated dates
of maturity.
Tender Offer - A proposal by the bondholder to sell his bond to the issuer for a stated price.
Debt Service — The amount of money necessary to pay interest on an outstanding debt, the serial
maturities of principal for serial bonds, and the required contribution needed to accumulate money to
repay term bonds.
Additional Bonds Test - A requirement that the issuer demonstrate that the revenue stream is
sufficient to pay for old bonds as well as new bonds before new bonds can be issued.
1 Moody's Investors Service, Inc. Moody's on Municipals: An Introduction to Issuing Debt. New York:
Moody's Investors Service, Inc., 1989.
2 Moody's Public Finance Department. Moody's on Revenue Bonds: The Fundamentals of Revenue Bond
Credit Analysis. New York: Moody's Investors Service, Inc., 1992.
-------
Iowa—A Case Study
To date, one state, Iowa, has issued bonds to support its state assurance fund. The bonds pay
for cleanups as well as support Iowa's loan guarantee program. Iowa worked through a state agency,
the Iowa Finance Authority, to issue two series of revenue bonds in 1990 and 1991. For its most
recent 1991 issue, Iowa chose to issue $20 million in revenue bonds, supported by a motor vehicle
sales tax along with its annual tank fee. The bonds are serial bonds amortized at 5.6 percent over a
20-year period with a term bond due in 2011. In Iowa's case, 25 percent of the motor vehicle tax
and 77 percent of the annual tank fee are pledged to bondholders. Iowa's first issue in August 1990
took 10 months to complete the bond process prior to sale. The 1991 issue took 60 days to complete.
Iowa's bonds are exempt from both state and federal tax. (The fact that Iowa's bonds were secured
with a revenue stream regarded as a general tax led to tax exempt status at both the state and federal
level.) In general, issuers may be able to save as much as 2 to 3 percent of the bond issue on tax-
exempt issues because of lower interest costs than on non-tax-exempt issues. Issuers can offer lower
interest payments on tax-exempt bonds because these bonds offer income equivalent to the after-tax
income on taxable bonds. Iowa removed the sunset provision (the date when fund programs expire
unless renewed by state legislatures) from its fund prior to issuing the bonds. In 1990, the Iowa issue
overcame constitutional opposition to using a gas tax when the legislature said that the motor vehicle
tax could be used for purposes other than road use (i.e., underground storage tanks).
Ohio—A Case Study
The Ohio UST Petroleum Release Compensation Board plans to issue a combination of serial
and term revenue bonds with maturities of 12 to 15 years. The bond amount will probably total $25
million, and the state may look into the purchase of bond insurance depending on initial reactions
from the rating agencies. The Ohio issue differs from the Iowa issue in that Ohio will rely solely on
tank fees paid by tank owners as opposed to Iowa's broader-based tax. As of late May, Ohio planned
to set aside $7.5 million in a reserve fund to pay back the bonds. In November 1991, the Ohio
Supreme Court ruled that the Ohio UST Petroleum Release Compensation Board does have the
authority to issue bonds because the tank fees backing the bonds were considered fees, not taxes. The
bond issue has been under development for two years. Ohio's bonds will not be exempt from federal
taxes.
-------
Key Players
The following terms identify key players in the process of issuing bonds and notes. Some of
these parties may participate throughout the entire process, while others may be involved in only one
or a few stages. Some of the terms and their definitions have been excerpted from Moody's on
Municipals: An Introduction to Issuing Debt, published by Moody's Investors Service. More
detailed descriptions of the roles of each of these parties may be found in the Glossary of Key Terms
(Appendix A).
State UST Fund Staff - Fund staff will request authorization from the state legislature (if needed)
to issue revenue bonds, decide on the amount of bonds to issue, and coordinate the actions of the
other key players to ensure that steady progress is made toward issuing the bonds.
State Finance Office, Treasurer - Many states have an office or agency of state government that
assists any state agency that seeks to issue revenue bonds. Such an office may provide assistance to
state UST fund staff in determining the appropriate size of a bond issue or in seeking the state
legislature's approval for bonding authority. In some cases, this office may manage many of the tasks
involved in issuing a bond. (See the list of state government contacts in Appendix B for information
on state agencies that may provide such assistance.)
State Office Authorized To Issue Bonds - Some state governments have an office or agency that
takes responsibility for issuing all bonds on behalf of the state government and its agencies. In these
states, the state UST fund would typically obtain approval for the bond issue, and the office that
issues bonds would manage all other required tasks. (See Appendix B for information on whether a
given state has a state office responsible for issuing all state bonds.)
Bond Counsel Or Bond Approving Counsel - An attorney (or firm of attorneys) retained by the
state to review legal issues pertaining to the issuance of bonds, the bond counsel provides the legal
opinion as to the validity and enforceability of the bonds under state law and a statement about
whether the interest on the debt is exempt from federal taxes.
Financial Advisor - A consultant who advises the bond issuer on financial matters such as the
appropriate size of a bond issue; its structure, timing, marketing, pricing, and terms; and bond
ratings. Under certain conditions the financial advisor may also serve as the underwriter.
Trustee - A financial institution with independent ability to act in a fiduciary capacity for the benefit
of the bondholders in enforcing the terms of the bond contract.
Underwriter - A dealer that purchases (underwrites) a new issue of municipal securities and offers it
for resale to the general public.
Bond Rating Agency - For a fee, a bond rating agency analyzes the financial characteristics of the
bond issuer and establishes a rating reflecting the estimated level of risk to bond purchasers; that is,
3 Moody's Investors Service, Inc. Moody's on Municipals: An Introduction to Issuing Debt. New York:
Moody's Investors Service, Inc., 1989.
8
-------
the likelihood that interest and principal payments on the bonds will be made on time. In some states,
municipal bonds are legally required to have ratings that show they are "investment grade." There
are three major bond rating agencies, Moody's Investors Services, Standard & Poor's Corporation,
and Fitch Investors Service, Inc. Issuers pay for ratings to make their bonds more marketable.
Bonds rated "investment grade" are generally considered "safe" investments and can be sold at a
lower interest rate than non-investment grade bonds.
The primary goal of rating agencies is to protect the interests of bondholders. Ratings give
indicators of the strength of the pledge to bondholders. This chart lists ratings in order of strength
(e.g., Aaa is a stronger rating than Aa) for two of the rating agencies. Generally, the broader the
revenue base sustaining the bonds, the greater the comfort level of the rating agencies. The rating
process takes on average 3 to 6 weeks for an official review. Rating agencies may also conduct a
preliminary review of the issue for a reduced fee. During a preliminary review, which may be 6
months prior to a formal rating request, rating agencies can work with an issuer to try to strengthen
the issue.
Bond Class
Moody's Ratings
Standard & Poor's Ratings
Investment Grade
Aaa, Aa, A, Baa
AAA, AA, A, BBB
Non-investment Grade
Ba, B, Caa, Ca, C
BB, B, CCC, CC, C, D
Bond Insurance Agency - A firm that provides noncancelable insurance contracts for an entire bond
issue. The insurer agrees to pay bondholders any scheduled payments for the bond as it becomes due
and payable, in the event the issuer is unable to pay. Six major bond insurance agencies are (1)
AMBAC Indemnity Corporation, (2) Capital Markets Assurance Corporation, (3) Financial Guaranty
Insurance Company (FGIC), (4) Financial Security Assurance Inc., (FSA), (5) Municipal Bond
Investors Assurance Corporation (MBIA), and (6) Capital Guaranty Insurance Company. Bond
insurance, which is available for a fee, can reduce the interest paid on bonds as well as increase the
marketability of the bond issue.
-------
The Process
A state assurance fund that issues bonds will need to complete a series of well-defined steps.
Legal and financial people who are familiar with issuing bonds (e.g., bond counsel and the financial
advisor or underwriter) will be able to provide detailed guidance. This section briefly describes the
major tasks in issuing a bond.4'5-6'7'8 The sequence of tasks is illustrated in Figure 3.
Step 1 - Evaluate The Need And Effectiveness Of Debt Issuance
The first step in issuing a bond is to determine the appropriateness of a bond issue in
addressing a need identified by the state UST fund. Then,
• Specify the need to be addressed by a bond issue.
• Estimate the expected stream of UST fund revenues.
« Estimate the expected stream of fund liabilities.
• Determine the size of the bond issue that can be supported by the revenue stream.
• Determine whether a bond issue could meet its intended goal (i.e., a reduction in a
reimbursement backlog and avoidance of cleanup delays).
Who can help: financial advisors and/or underwriters.
4 Moody's Investors Service, Inc. Moody's on Municipals: An Introduction to Issuing Debt. New York:
Moody's Investors Service, Inc., 1989.
5 Moody's Investors Service, Inc. An Issuer's Guide to the Rating Process. New York: Moody's Investors
Service, Inc., 1993.
6 Municipal Bond Investors Assurance Coiporation. Insured Financing Guide: Program Information for
Investment Bankers and Financial Advisers. Armonk, NY: Municipal Bond Investors Assurance Corporation,
1992.
7 M.R. Seal & Company. Independent Colleges Financing Report. Montpelier, Vermont: Vermont
Educational and Health Buildings Financing Agency, 1990.
8 Moody's Investors Service, Inc. Moody's on Revenue Bonds: The Fundamentals of Revenue Bond Credit
Analysis. New York: Moody's Investors Service, Inc., 1992.
10
-------
Do We
Need It?
!NO
Yes
Get help
from financial
advisors and/or
underwriters.
Can We
Issue Bonds?
!NO
Yes
Get help
from bond
counsel.
What Forms
And Documents
Do We Need?
, ^
Get help
frnm
Get
Rated
financing
Get help
from
financing
team- team.
I ' — ,
Sell the
Bonds
Get help
from
underwriters.
Public
ownership
of the bonds
Figure 3. What Is The Procedure For Issuing Bonds?
11
-------
r
Step 2 - Determine Legal Authority To Issue Bonds
The capability of an UST fund to issue debt is governed by state law. The fund must review
its enabling legislation to determine whether it has the authority to issue debt. In most states, the
fund will need to obtain statutory authority from the legislature to issue bonds.
• The legislature may establish a ceiling for total indebtedness by the state UST fund, require
voter approval for new bonds, or require that new bonds not lead to violation of covenants
contained in bonds issued previously by the state.
• The legislature may give authority to issue revenue bonds to the state assurance fund, to
another state agency, or to an autonomous authority. For example, in Iowa's case, the Iowa
UST program issued bonds through the Iowa Finance Authority. The legislature may also
create a new authority specifically to issue bonds on behalf of the state assurance fund.
Who can help: bond counsel.
Step 3 - Prepare Legal And Financial Documents
Most bonds are developed by a financing team consisting of the issuer, borrower (if separate
from the issuer), bond counsel, financial advisor, underwriter(s), and trustee. The financing team
will complete the following tasks:
• Choose a debt structure (e.g., maturity, type of security, redemption provisions, restrictive
covenants).
• Develop a financing plan.
• Outline a time schedule to issue the bonds.
• Determine tax status of bonds. Since the tax law changed in 1986, not all municipal bonds
are tax-exempt.
• Prepare drafts of legal and financial documents. Table 3 lists some of the documents that
may be needed.
• Contact rating agencies and credit providers.
Who can help: the financing team (bond counsel, underwriter, etc.).
12
-------
Table 3. List Of Required Documents
Required Documents
Notice of Sale
Official Statement
Trust Agreement
Loan Agreement
Bond Purchase Agreement
Legal Opinion
Important Supporting Documents
Bond Resolution
Escrow Agreement
Cash Flow Schedules
Audited Financial Statements
Operations Budget (most recent)
Capital Budget (or planning documents)
Step 4 - Obtain A Rating
Ratings are issued by bond rating agencies and are used by investors to determine whether
they will buy a particular bond. Ratings are initially made before issuance and are continually
reviewed and may be amended to reflect changes in the issuer's credit position. To obtain a bond
rating, the issuer must
• Request a rating.
• Provide the rating agency with information needed for credit analysis (including basic
disclosure documentation and information pertaining to state assurance fund finances and debt,
the local economy, and the administrative structure of the fund).
• Meet with ratings staff if necessary.
• Decide whether to seek credit enhancement. Credit enhancement means that bond issuers
purchase additional security for the bondholders, which can result in a lower interest rate on
the bond issue. Two credit enhancement instruments that can be used for debt issued by state
assurance funds include bond insurance and letters of credit. In both cases, issuers pay a fee
for the credit enhancement. In Iowa's case, the state motor vehicle tax backing the bonds was
considered to be a proven revenue source, which helped Iowa earn an A rating on its bonds
from Moody's. Iowa decided against credit enhancement because the possible savings in
interest costs would have been outweighed by the cost of credit enhancement. Credit
enhancement is generally not available for bonds below investment grade. Issuers generally
will not know whether to seek credit enhancement until late in the process when they have a
general idea of the bond's expected rating. In addition, authority to obtain credit
enhancement may be restricted by state law.
• Bond insurance (non-cancelable insurance issued by specialized companies) guarantees
payment of debt for the life of the issue.
13
-------
• Letters of credit are short-term (3- to 5-year) guarantees issued by commercial banks. If the
issuer fails to pay, the bank will pay the bondholders and seek repayment from the issuer.
Letters of credit are less likely to be used by state assurance funds because they are short-term
guarantees and would need to be renewed every 3 to 5 years.
Who can help: the underwriter and/or financial advisor can help the issuer obtain a good
rating from a rating agency.
Step 5 - Market And Sell The Bonds
When debt issues are ready to be sold:
• The official statement must be completed.
• Public notices may be required.
Who can help: the underwriter.
14
-------
-------
r
Advice From The Experts
Below are suggestions from professionals who work full-time on municipal bond issues. In
addition, advice from the Iowa and Ohio experiences has been included.
Advice From Bond Counsel
Hire members of the financial team early; they can help streamline the process for you. For
example, if state law does not allow bonds, bond counsel can help identify the solution to get
the appropriate legislation passed.
Try to get tax exempt status on the bonds in order to secure a lower interest rate.
Advice From Underwriters
• Hire the financial team early. Underwriters can be involved in the process when you are
obtaining your authorizing legislation.
• Get advice from experts you respect and trust.
Advice From Bond Rating Companies
Try to use broad-based revenue sources. For example, a gas tax that everyone in the state
pays at the pump may be preferred over a fee paid by a smaller sub-group of the overall
population.
• Try to use a known revenue stream with historical data that show that collections will be
adequate to repay the debt.
• Look for ways to increase security to bondholders: limit the annual.amount of bond
repayment relative to revenues, limit the ability to issue additional debt in the future, and
establish reserve funds to ensure that money will be available to pay interest and principal
when due.
• Bond rating companies can help to clarify and resolve ratings issues early in the process of
structuring a bond issue, while decisions that will affect ratings are still being made.
• Ratings are based mainly on whether fund revenues will cover bond payments (even at the
expense of any further cleanups). But bonds will receive a higher rating if projected revenues
will be adequate to pay for both bond repayments and future UST release cleanup expenses.
• Try to preserve the tax exempt status of your bonds.
15
-------
Advice From The Iowa State Assurance Fund Program
• Use a secure revenue stream preferably with a wide tax base and historical data to help
confirm projections of future revenue.
• Use bonds instead of notes to spread costs over time.
• Resolve legal and constitutionality issues early.
• Seek tax-exempt status to help sell the bonds.
Advice From The Ohio State Assurance Fund Program
• Seek professional help (especially bond counsel and underwriter) early.
• Start as early as possible to allow time to explore options.
• Emphasize the fact that fund expenditures will decrease after the 1998 deadline for tank
upgrading. Fewer leaks will occur after that year, freeing up fund revenues to repay bonds.
16
-------
Appendix A
Glossary Of Selected Terms
-------
-------
Appendix A
Glossary Of Key Terms1
Accrued Interest - In the sale of a new issue of municipal bonds, the dollar amount, based on the
stated rate or rates of interest, which has accrued on the bonds from the dated date, or other stated
date, up to but not including the date of delivery. See: Interest.
AMBAC Indemnity Corporation (AMBAC) - A company offering medium-term, non-cancelable
insurance contracts by which it agrees to pay bondholders all, or any part, of a scheduled bond
principal and interest payment as it becomes due and payable, in the event the issuer is unable to pay.
Bonds insured by AMBAC are rated AAA by Standard & Poor's.
Asset Guaranty Insurance Company - A company offering medium-term, non-cancelable insurance
contracts by which it agrees to pay bondholders all, or any part, of a scheduled bond principal and
interest payment as it becomes due and payable, in the event the issuer is unable to pay. Bonds
insured by AMBAC are rated AA by Standard & Poor's.
Amortization — The process of paying the principal amount of an issue of bonds by periodic
payments either directly to bondholders or to a sinking fund for the benefit of bondholders. Payments
are usually calculated to include interest in addition to a partial payment of the original principal
amount. See: Debt Service.
Authority — A unit or agency of government established to perform specialized functions, usually
financed by service charges, fees, or tolls, although it may also have taxing powers. An authority
may be independent of other governmental units, or it may depend upon other units for its creation,
funding, or operation.
Authorizing Resolution or Ordinance — With respect to an issue of municipal bonds, the document
adopted by the issuer which implements its power to issue the bonds. The actual granting of such
power may be found in the enabling provisions of the constitution, statutes, charters, and ordinances
applicable to the issuer. Adoption of an authorizing resolution or ordinance by the issuer's governing
body is a condition precedent to validation of the proposed bonds. See: Bonding Authority; Bond
Resolution.
Award — Acceptance by the issuer of an offer or bid by an underwriter to purchase a new issue of
municipal securities. Compare: Bid.
Balloon Maturity — A later maturity within an issue of bonds which contains a disproportionately
large percentage of the principal amount of the original issue. Provision is often made for payment of
the balloon maturity by making periodic payments to a sinking fund for the mandatory redemption of
specified amounts prior to their stated maturity.
1 Most of these definitions are excerpted from Moody's Investors Service, Inc. Moody's on Municipals:
An Introduction to Issuing Debt. New York: Moody's Investors Service, Inc. 1989.
A-l
-------
Basis Point - One basis point is equal to 1/100 of one percent. If interest rates increase from 8.00
percent to 8.25 percent, the difference is referred to as a 25 basis point increase. Compare: Point.
Bid — A proposal to purchase an issue of bonds offered for sale either in a competitive offering or on
a negotiated basis, specifying the interest rate(s) for each maturity and the purchase price which is
usually stated in terms of par value, par plus a premium, or par minus a discount. Compare:
Award.
Bond Counsel or Bond Approving Counsel - An attorney (or firm of attorneys) retained by the
issuer to give a legal opinion that the issuer is authorized to issue proposed bonds, the issuer has met
all legal requirements necessary for issuance, and interest on the proposed bonds will be exempt from
federal income taxation and, where applicable, from state and local taxation. Typically, bond counsel
may prepare or review and advise the issuer regarding authorizing resolutions or ordinances, trust
indentures, official statements, validation proceedings, and litigation; bond counsel may also prepare
the documents directly. Compare: Underwriter's Counsel.
Bondholder - The owner of a municipal bond, to whom payments of principal and interest are made.
Bonding Authority - The authority to issue bonds as granted by the issuer's governing body. The
agency may consult its enabling legislation to determine whether it already possesses bonding
authority. If not, it must obtain bonding authority from the state legislature. See: Authorizing
Resolution; Bond Resolution.
Bond Purchase Agreement - The contract between the underwriter and the issuer setting forth the
final terms, prices, and conditions upon which the underwriter purchases a new issue of municipal
bonds for reoffering to the investing public.
Bond Resolution or Ordinance - The documents) representing action of the issuer authorizing the
issuance and sale of municipal bonds. Issuance of the bonds is usually approved in the authorizing
resolution or ordinance, and the sale is usually authorized in a separate document known as the "sale"
or "award" resolution. All of such resolutions constitute the bond resolution, which describes the
nature of the obligation and the issuer's duties to the bondholders. State law may prescribe whether a
bond issue may be authorized by resolution, or whether the more formal procedure of adopting an
ordinance is required. See: Authorizing Resolution; Bonding Authority.
Broker - A person or firm, other than a bank, which acts as an intermediary by purchasing and
selling securities for others rather than for its own account.
Capital Guaranty Insurance Company — A company offering medium-term, non-cancelable
insurance contracts by which it agrees to pay bondholders all, or any part, of a scheduled bond
principal and interest payment as it becomes due and payable, in the event the issuer is unable to pay.
Bonds insured by Capital Guaranty are rated AAA by Standard & Poor's and Aaa by Moody's.
Capital Markets Assurance Corporation (CapMAC) - A company offering medium-term, non-
cancelable insurance contracts by which it agrees to pay bondholders all, or any part, of a scheduled
bond principal and interest payment as it becomes due and payable, in the event the issuer is unable to
pay. Bonds insured by Capital Guaranty are rated AAA by Standard & Poor's.
A-2
-------
Competitive Bid or Competitive Bidding - A method of submitting proposals to purchase a new
issue of bonds by which the bonds are awarded to the underwriting syndicate presenting the best bid
according to stipulated criteria set forth in the notice of sale. Underwriting bonds in this manner is
also referred to as a competitive or public sale. See: Bid. Compare: Negotiated Sale.
Costs of Issuance - The expenses associated with the sale of a new issue of municipal securities,
including such items as underwriter's spread, printing, legal fees, and rating costs. See:
Underwriter's Spread.
Coverage - The ratio of pledged revenues available annually to pay debt service, as compared to the
annual debt service requirement. This ratio is one indication of the margin of safety for payment of
debt service.
coverage = pledged revenues / debt service requirement
Credit Enhancement - The availability of additional outside support designed to improve an issuer's
own credit standing. Examples include bank lines of credit or collateralized funds.
Debt Limit — The maximum amount of debt which an issuer of municipal securities is permitted to
incur under constitutional, statutory, or charter provisions.
Debt Ratios - Comparative statistics showing the relationship between the issuer's outstanding debt
and such factors as its tax base, income, or population. Such ratios are often used in the process of
determining credit quality of an issue, especially in the case of general obligation bonds.
Debt Service - The amount of money necessary to pay interest on an outstanding debt, the serial
maturities of principal for serial bonds, and the required contributions to an amortization or sinking
fund for term bonds. Debt service on bonds may be calculated on a calendar year, fiscal year, or
bond fiscal year basis. See: Amortization.
"Double Barrel" Bonds — Bonds for which repayment is secured by both a general obligation pledge
and the revenues of a public enterprise. These bonds are generally issued in place of revenue bonds
but are easier to market because of the general obligation pledge.
Feasibility Study - A report of the financial practicality of a proposed project and financing thereof,
which may include estimates of revenues that will be generated and a review of the physical,
operating, economic, or engineering aspects of the proposed project.
Financial Advisor - With respect to a new issue of municipal bonds, a consultant who advises the
issuer on matters pertinent to the issue, such as structure, timing, marketing, fairness of pricing,
terms, and bond ratings. Such consultant may be employed in a capacity unrelated to a new issue of
municipal securities, such as advising on cash flow and investment matters. The financial advisor is
sometimes referred to as a fiscal consultant or fiscal agent. Municipal Securities Rulemaking Board
Rule G-23 provides that the financial advisor may: (1) negotiate an underwriting after certain
disclosures, approval of the issuer, and termination of the financial advisor relationship; and (2) bid in
a competitive underwriting if the issuer gives written consent before the financial advisor's bid is
submitted.
A-3
-------
Financial Guaranty Insurance Company (FGIC) — A company offering medium-term, non-
cancelable insurance contracts by which it agrees to pay bondholders all, or any part, of a scheduled
bond principal and interest payment as it becomes due and payable, in the event the issuer is unable to
pay. Bonds insured by FGIC are rated AAA by Standard & Poor's.
Financial Security Assurance Inc. (FSA) — A company offering medium-term, non-cancelable
insurance contracts by which it agrees to pay bondholders all, or any part, of a scheduled bond
principal and interest payment as it becomes due and payable, in the event the issuer is unable to pay.
Bonds insured by FSA are rated AAA by Standard & Poor's.
Financing Team - Consists of all parties needed to prepare a bond issue for public sale. Typically
includes representatives of the issuer, the borrower (if different from the issuer), the trustee, and the
underwriting firm, as well as the issuer's bond counsel and financial advisor.
Fiscal Consultant — See: Financial Advisor.
Interest — Compensation for the use of borrowed money, generally expressed as an annual
percentage of the principal amount. See: Accrued Interest; Interest Rate. Compare: Principal.
Interest Rate — The annual percentage of principal payable for the use of borrowed money.
Invested Sinking Fund — Fund established for the repayment of a term bond into which periodic
required deposits are made and invested and then used to call or redeem the term bond.
Investment Banker — The designation of a firm or an individual member of a firm that underwrites
new issues of municipal securities. See: Underwriter.
Issuer — A state, political subdivision, agency, or authority that borrows money through the sale of
bonds or notes.
Lease Rental Debt (or Certificates of Participation) — Long-term debt issues used for a wide range
of purposes from equipment acquisition to construction of major facilities requiring large capital
input. They generally do not require voter approval. They are normally issued by a government-
created independent authority to fund the acquisition or construction of a project, which is then leased
by the authority back to the government and repaid by the authority through lease payments made by
the government.
Legal Opinion or Legal or Approving Opinion — The written conclusions of bond counsel that the
issuance of municipal securities and the proceedings taken in connection therewith comply with
applicable laws, and that interest on the bonds will be exempt from federal income taxation and,
where applicable, from state and local taxation. The legal opinion is generally printed on the bonds.
Marketability - The ease or difficulty with which bonds can be sold in the capital market. A bond's
marketability depends upon such factors as its interest rate, security, maturity, timing of issuance,
volume of comparable issues being sold, and credit quality as determined or affected by the lien
status, tax or revenue base, and terms of the bond contract.
A-4
-------
Municipal Bond Investors Assurance Corporation (MBIA) — A company offering medium-term,
noncancelable insurance contracts by which it agrees to pay bondholders all, or any part of, a
scheduled bond principal and interest payment as it becomes due and payable in the event the issuer is
unable to pay. Bonds insured by MBIA are rated AAA by Standard & Poor's.
Municipal Bonds or Municipals — A general term referring to bonds of local governmental
subdivisions such as cities, towns, villages, counties, and special districts as well as states and
subdivisions thereof, which are exempt from federal income taxation.
Negative Covenants - Promises contained in the bond contract, whereby the issuer obligates itself to
refrain from certain acts. One common example of a negative covenant is a promise not to sell or
encumber a project whose revenues support bond repayment. Compare: Protective Covenants.
Negative Credit Factors — Those characteristics which could adversely affect the credit standing of
an issuer, such as declining population, decreasing revenue sources, regulatory restrictions on
operations of the issuer, poor debt ratios, and structural weaknesses of the issue, such as insufficient
coverage requirements, weak additional bonds tests, and subordinate lien position. Compare:
Positive Credit Factors.
Negotiated Sale — The sale of a new issue of municipal securities by an issuer through an exclusive
agreement with a previously selected underwriter or underwriting syndicate. A negotiated sale should
be distinguished from a competitive sale, which requires public bidding by the underwriters. Primary
points of negotiation for the issuer are the interest rate and purchase price, which reflect the issuer's
costs of offering its securities in the market. The sale of a new issue of bonds in this manner is also
known as a negotiated underwriting. See: Bid. Compare: Competitive Bid; Private Placement.
Notice of Sale — A publication by an issuer describing an anticipated new offering of municipal
bonds. It generally contains the date, time and place of sale, amount of issue, type of bond, amount
of good faith deposit, basis of award, name of bond counsel, maturity schedule, method, time and
place of delivery, and bid form.
"No Litigation" Certificate — Document provided at the closing of a bond issue which certifies that
there is no current litigation affecting the issuer's offering in any materially adverse way.
Offering Circular — A document generally prepared by the underwriters about an issue of securities
expected to be offered in the primary market. The document discloses to the investor basic
information regarding the securities to be offered and is used as an advertisement for the sale of
municipal bonds. It may also be used by dealers when reoffering large blocks of previously issued
securities in the secondary market. Compare: Official Statement; Preliminary Official Statement.
Official Statement or Final Official Statement or OS - Document published by the issuer which
generally discloses material information on a bond issue, including the purposes of the bond issue,
how the bonds will be repaid, and the financial, economic, and demographic characteristics of the
issuing government. Investors may use this information to evaluate the credit quality of the bonds.
Compare: Offering Circular; Preliminary Official Statement.
Par Value - In the case of bonds, the amount of principal which must be paid at maturity. Par value
is also referred to as the face amount of a security.
A-5
-------
Paying Agent - The entity responsible for the payment of interest and principal on municipal bonds
on behalf of the issuer. The paying agent is usually a bank or trust company but may be the treasurer
or some other officer of the issuer. The paying agent may also provide other services for the issuer,
such as reconciliation of the bonds and coupons paid with the sums of money paid to the paying agent
by the issuer, destruction of paid bonds and coupons, indemnification of the issuer for wrongful
payment, and registration of the bonds. Compare: Registrar.
Point ~ One percent of par value. Because bond prices are quoted at a percentage of $1,000, a point
is worth $10 regardless of the actual denomination of a bond. Compare: Basis Point.
Positive Credit Factors - Those characteristics which may provide strength to the credit of an issuer,
such as increasing tax base, diversification of industry in the region, favorable debt ratios, sound
financial operations and reporting, and structural strengths of an issue, such as strong additional bonds
and coverage tests, rate covenants, and superior lien status. Compare: Negative Credit Factors.
Preliminary Official Statement or Red Herring or POS - A preliminary version of the official
statement which is used by the issuer or underwriters to describe the proposed issue of municipal
bonds prior to the determination of an interest rate and offering price. The preliminary official
statement is a marketing tool used to gauge buyers' interest in the issue and is relied upon by potential
purchasers in making their investment decisions. Normally, no offer for or acceptance of bonds can
occur on the basis of the preliminary official statement, and a statement to that effect appears on the
face of the document in red print, which gives the document its nickname, Red Herring. Although
the preliminary official statement is technically a draft, it must be substantially in the same form as
the final official statement, and underwriters are reluctant to permit any substantial changes between
the preliminary and the final official statements. Compare: Offering Circular; Official Statement.
Principal ~ The face amount or par value of a bond or issue of bonds payable on stated dates of
maturity. See: Par Value. Compare: Interest.
Private Placement ~ A negotiated sale directly to an institution or private investor rather than
through a public offering. Private placements are typically used for small issues. The terms and
covenants for a private placement are negotiated directly with the purchaser.
Protective Covenants - Agreements in the bond contract which impose duties upon the issuer, in
order to protect the interests of the bondholders. Typical protective covenants relate to such items as
maintenance of adequate rates, segregation of funds, proper project maintenance, insurance, books,
records, and tests for the issuance of additional parity bonds. Compare: Negative Covenants.
Registrar - The person or entity responsible for maintaining records on behalf of the issuer for the
purpose of noting the owners of registered bonds. The paying agent frequently performs this
function. Compare: Paying Agent.
Securities and Exchange Commission or SEC - The federal agency responsible for supervising and
regulating the securities industry. Generally, municipal securities are exempt from the SEC's
registration and reporting requirements. However, the SEC has responsibility for the approval of
Municipal Securities Rulemaking Board rules and has jurisdiction, pursuant to SEC Rule 10b-5, over
fraud in the sale of municipal securities. See: 15 U.S.C. §78(d).
A-6
-------
Sinking Fund - An account, sometimes called a debt service fund, into which the issuer makes
periodic deposits to assure the timely availability of sufficient monies for the payment of debt service
requirements. The revenues to be deposited into the sinking fund and payments therefrom are
determined by the terms of the loan agreement.
Structuring an Issue - The process of formulating a bond issue within the issuer's legal and
financial constraints so the bonds are acceptable in the marketplace. In structuring a new issue of
municipal securities the issuer must determine such factors as maturities, the method of repayment,
redemption provisions, application of bond proceeds, security provisions, and covenants.
Syndicate - A group of underwriters formed to purchase collectively (underwrite) a new bond issue
from the issuer and offer it for resale to the general public. The syndicate is organized for the
purposes of sharing the risks of underwriting the issue and for obtaining sufficient capital to purchase
an issue.' One of the underwriting firms will be designated as the syndicate manager or lead manager
to administer the operations of the syndicate.
Taxable Bonds -- Refers to municipal bonds, the interest of which is subject to federal income
taxation under the Internal Revenue Code.
Tax-Exempt Bonds - Bonds whose interest is exempt from federal income taxation pursuant to
Section 103 of the Internal Revenue Code and may or may not be exempt from state income or
personal property taxation in the jurisdiction where issued. If the bond is exempt from state income
tax, it possesses "double exemption" status. "Triple exemption" bonds are exempt from municipal
income tax, as well as federal and state income tax.
Tax-Exempt Commercial Paper - Short-term debt used to meet working capital needs; has
maturities that typically range from 7 to 90 days, but may range up to 270 days. Often remarketed at
maturity for another short period. Usually supported by some kind of bank credit to provide payment
if (1) it cannot be remarketed, or (2) insufficient funds are available at maturity for repayment.
Trustee - A financial institution with trust powers which acts in a fiduciary capacity for the benefit
of the bondholders in enforcing the terms of the bond contract.
Trust Indenture - A contract between the issuer of municipal securities and a trustee, for the benefit
of the bondholders. The trustee administers the funds or property specified in the indenture in a
fiduciary capacity on behalf of the bondholders. The trust indenture, which is generally a part of the
'bond contract, establishes the rights, duties, responsibilities, and remedies of the issuer and trustee
and determines the exact nature of the security for the bonds. See: Trustee.
Underwriter — A dealer which purchases a new issue of municipal securities for resale. The
underwriter may acquire the bonds either by negotiation with the issuer or by award on the basis of
competitive bidding. See: Syndicate.
A-7
-------
Underwriter's Counsel - An attorney or law firm retained to represent the interests of the
underwriters in connection with the purchase of a bond issue. The duties of underwriter's counsel
may include review of the issuer's bond resolution or ordinance and documentation on behalf of the
underwriter, review of the official statement to determine adequacy of disclosure, negotiation of the
agreement among underwriters, and preparation of the due diligence opinion. Compare: Bond
Counsel.
Underwriter's Spread - This category of costs includes the management fee, sales compensation
("takedown"), underwriter's expenses, and underwriting risk.
Management Fee - This fee is paid to the managing underwriters for their contribution to
various tasks associated with bond issuance.
Sales Compensation - This is the commission a member of an underwriting group receives
for reselling bonds at the initially established reoffering prices. The amount of the selling
compensation will reflect the degree of difficulty in marketing the bonds.
Underwriter's Expenses - These are the aggregate out-of-pocket expenses incurred by the
underwriter in the structuring, underwriting, and marketing of the bond issues.
Underwriting Risk - This is compensation for the risks incurred by the underwriter in
underwriting the bond issue. Underwriting risk increases with the volatility of the market and
the complexity of financing.
Variable Rate Demand Obligation - A bond, note, certificate of indebtedness, certificate of
participation, or any other type of municipal debt issue that has a periodically varying interest rate
and a demand feature which allows the holder to require repurchase of the securities by the issuer,
either at specified times or at will. The demand feature reduces the interest rate.
A-8
-------
Appendix B
State Government Contacts For Information On
Issuing Bonds
-------
-------
Appendix B
State Government Contacts For Information On Issuing Bonds'
In preparing this chart EPA used the State Executive Directory, March -- June 1993, published by the Carroll
Publishing Company in Washington, DC.
State
Office
Phone
Number
Comments
Alabama
State Finance
Department
(205) 242-7160
This office will assist in determining the size of the bond issue that can
be supported by the revenue source. An agency must then seek approval
for bonding authority from the legislature. If the legislature approves,
the Director's Office of the State Finance Department will hire a
financial advisor and bond counsel and issue the bonds.
Alaska
State Bond Committee
(907) 465-4880
The Committee has statutory authority to issue general obligation and
revenue bonds. The Committee will (1) direct an agency to obtain
bonding authority from the legislature, if necessary, (2) help determine
the size of the bond issue that can be supported by the revenue source,
(3) contract for bond counsel, and (4) select an underwriting firm
through a competitive process. Those serving on the Committee are the
Commissioner of Revenue, the Commissioner of Administration, and the
Commissioner of Commerce and Economic Development.
Arizona
State Treasurer's Office
(602) 542-5815
The State Treasurer's Office would help propose legislation for bonding
authority. Legislation would invest bonding authority in either an
existing autonomous agency or an autonomous agency created
specifically for issuing bonds on behalf of an issuer.
1 Included are those states actively developing or using state UST Funds as of June 1, 1992.
B-l
-------
State Government Contacts For Information On Issuing Bonds
(Continued)
State Office
==^^==^^=
Arkansas Arkansas Development
Finance Authority
(ADFA)
Phone
Number
——
(501) 682-5900
Comments
====
This agency is the primary issuer of state government revenue bonds.
The ADFA would work with an agency to evaluate the amount of bonds
that could be issued. If the ADFA is authorized by its enabling
legislation, it could contract with bond counsel and underwriters on a
competitive basis and issue bonds on behalf of a state agency. If the
ADFA's enabling legislation does not authorize this type of issuance,
then the state agency must seek approval for bonding authority from the
legislature. The legislature would invest authority in whichever agency
it deems appropriate; however, the ADFA is the likely choice.
California
State Treasurer's Office,
Trust Services Division
(916) 653-3451
A state agency must seek approval from the legislature for bonding
authority which may be invested in the State Treasurer's Office, an
existing agency, or a new autonomous agency created specifically for
issuing the necessary bonds. The Treasurer conducts the sale of state
bonds, including contracting with a bond counsel and an underwriter.
Colorado
Department of
Administration (DOA),
Deputy Director's Office
OR
The Controller of
Administrative Services
(303) 866 3221
These two offices would assist an agency in determining the size of a
bond issue that can be supported by the revenue sources. If the
legislature approves a bond issue, it will invest bonding authority in the
DOA. The DOA has authority to contract with bond counsel and an
underwriter through a competitive bid process managed by its Division
of Purchasing.
(303) 866 2107
B-2
-------
State Government Contacts For Information On Issuing Bonds
(Continued)
State
Office
Phone
Number
Comments
Connecticut
State Treasury
Department, Debt
Management Division
(203) 566-5055
The Treasury Department issues the state's revenue and general
obligation bonds. It would assist an agency in determining the size of
bond issue that could be supported by the revenue source. The agency
would request authorization to issue bonds from the state legislature. If
authorization were granted, the agency would make a proposal to the
state Office of Policy and Management (OPM) for approval by the State
Bond Commission (SBC). OPM would then include the item on the
SBC agenda. (The OPM also staffs the SBC.) Once the item was
approved by SBC, bonds could be issued. The Treasury Department
would hire a bond counsel, while Treasury staff would manage all other
tasks reauired to issue bonds.
Delaware
Department of Finance,
Office of the Director of
Bond Finance
(302) 577-2074
This office would provide technical advice on the amount of bonds that
can be supported by the agency's revenue stream, and would help draft
the text of legislation to authorize a bond issue. A bond issue that was
authorized by the legislature would also need to be authorized by the
state's issuing officers (the Governor and other state officials). Once all
approvals were obtained, this office would put together a financing team
to issue the bonds.
Florida
State Board of
Administration, Division
of Bond Finance
(904) 488-4782
This office would assist an agency in drafting the legislative proposal for
bonding authority. Once the agency received bonding authority, this
office would help to (1) decide on the terms of the bond, and (2)
complete a revenue pledge guaranteeing bondholders that the agency will
repay the bond debts it incurs.
B-3
-------
State Government Contacts For Information On Issuing Bonds
(Continued)
State
Office
Phone
Number
Comments
Georgia
Financing and
Investment Commission,
Investment Division
(404) 656-2174
This office would assist an agency in analyzing how large a bond issue is
required, and would help prepare a request to the Office of Planning and
Budget and to the legislature for bonding authority. If authority was
granted, this office would manage all the tasks required for issuing a
bond.
Idaho
State Treasurer's Office,
Investment Manager
(208) 334-3203
This office serves as a central registry of outstanding debt held by the
State of Idaho. Neither this office nor, apparently, any other state
agency provides assistance to agencies that are (1) seeking bonding
authority from the legislature, or (2) seeking assistance in issuing bonds.
However, this office would direct an agency to appropriate advisors
outside the state government. If it obtained legislative authority to issue
bonds, the agency would contract directly with bond counsel and an
underwriter to issue the bonds. The agency would be required to notify
the Treasurer's office of all outstanding debt.
Illinois
Bureau of the Budget
(217) 782-5888
Illinois has some bonds for environmental cleanup supported by a
portion of the state sales tax, and the agency or agencies that issued
these bonds presumably have bonding authority. The Bureau of the
Budget has statutory responsibility for issuing all state revenue bonds;
the Bureau manages all tasks needed to issue bonds.
Indiana
Indiana Public Finance
Office, Office of the
Liaison for Public
Finance
(317) 233-5090
A state agency would contact this office, which would actively guide the
agency through the process of issuing bonds. This office would choose
bond counsel and underwriters for the agency.
B-4
-------
State Government Contacts For Information On Issuing Bonds
(Continued)
State
Office
Phone
Number
Comments
Kansas
Kansas Development
Finance Authority
(KDFA)
(913) 296-6747
A state agency would need legislative authority to issue bonds.
Legislation would authorize the KDFA to manage the bond issuance on
behalf of the agency. The KDFA would determine the amount of the
bond issue, and hire a bond counsel and an underwriter.
Kentucky
Office of Financial
Management and
Economic Analysis
(502) 564-2924
This office would help an agency determine whether it has the legal
authority to issue bonds. If not, the agency would need to obtain
bonding authority. Once the agency has bonding authority, this office
would help to determine the amount of bonds that may be issued, and
would help in identifying and contracting with bond counsel and an
underwriter.
Maine
Treasury
(207) 287-2771
A state agency would need to obtain bonding authority from the
legislature. Once it obtains authority, the agency would contact the
Treasury, which would manage all aspects of a bond issue, including
contracting with bond counsel and an underwriter.
Massachusetts
Treasury
(617) 367-3900
A state agency would need to obtain bonding authority from the
legislature. Apparently neither the Treasury nor any other state agency
would be responsible for assisting in issuing bonds.
Michigan
Treasury, Municipal
Bond Authority
(517) 373-1728
A state agency would need to obtain legislation specifying that either (1)
the Treasury Department would issue bonds and disburse the proceeds to
the agency, or (2) the agency would issue bonds through a new or
existing authority. In the latter case, the agency's administrator would
oversee the bond issuance process.
B-5
-------
State Government Contacts For Information On Issuing Bonds
(Continued)
State
Office
Phone
Number
Comments
Minnesota
Department of Finance
(612) 296-8373
A state agency may need to obtain bonding authority from the
legislature. Apparently neither the Department of Finance nor any other
state agency would assist in issuing bonds. Any bonds issued would
have to be reported to the Department of Finance for accounting
purposes.
Mississippi
Department of
Environment, Office of
Executive Director
(601) 961-5000
A state agency would need to obtain bonding authority. There
apparently is no office of state government to assist in issuing bonds.
Missouri
Office of Administration,
Division of Accounting
(314)751-4761
A state agency may need to obtain bonding authority from the
legislature. There apparently is no office of state government to assist in
issuing bonds.
Montana
Department of
Administration
(406) 444-2032
This department recommends that an agency consult with a bond counsel
to determine whether bonding authority is needed or whether authority
may be available under existing statutes. In the future, the Attorney
General's responsibilities may be expanded to include performing the
work of a bond counsel. In either case, an agency would be responsible
for hiring an underwriter and managing all tasks involved in issuing a
bond.
Nebraska
Nebraska Investment
Financial Authority
(402) 434-3900
A state agency has two options. It may obtain bonding authority and
manage the bond issue, or it may request that the Nebraska Investment
Financial Authority obtain bonding authority on behalf of the agency, in
which case the Authority would manage the bond issue.
B-6
-------
State Government Contacts For Information On Issuing Bonds
(Continued)
State
Office
Phone
Number
Comments
Nevada
Treasurer
(702) 687-5200
A state agency would need to obtain bonding authority. Once it did so,
the Treasurer's Office would issue the bonds. A bond issue may require
approval by the Board of Finance.
New
Hampshire
State Treasurer's Office
(603) 271-2621
The State Treasurer's Office would help an agency seek bonding
authority; if the legislature granted authority, the Office would issue the
bonds.
New Mexico
State Board of Finance
(505) 827-4980
Currently the Board of Finance would assist an agency in determining
whether it is authorized to issue bonds, and what amount could be issued
based on the agency's expected revenue stream. This office would also
offer guidance in issuing bonds.
North Carolina
Department of the State
Treasurer, Division of
State and Local
Government Finance
(919) 733-3064
Bonding authority for a revenue bond issue is generally granted to the
State Treasurer's Office. In some cases, an autonomous agency may be
established to issue the bonds. The agency issuing the bonds will
manage all tasks required for the bond issue.
North Dakota
Industrial Commission,
Executive Director's
Office
(701) 224-3722
A state agency would need to obtain bonding authority. The legislature
could invest bonding authority in either the agency or the Industrial
Commission. The issuing agency would contract with a bond counsel
and underwriter. The Industrial Commission has some in-house legal
expertise for bond issues.
Oklahoma
State Bond Advisor
(405) 521-6198
A state agency would need to obtain bonding authority from the
legislature and both the Executive and Legislative Bond Oversight
Commissions. The agency would then select a bond counsel and
underwriter. The State Bond Advisor's Office must approve the pricing
of the bonds and the fees for all service providers.
B-7
-------
State Government Contacts For Information On Issuing Bonds
(Continued)
State
Office
Pennsylvania
Governor's Office of the
Budget
Phone
Number
(717) 7874472
Comments
=====
A state agency would prepare a request for bonding authority with
assistance from the Governor's Office of the Budget. If authority was
granted, the agency would issue the bonds. The Office of General
Counsel (within the Governor's office) would appoint a bond counsel
from among those recommended by the agency.
South Carolina
State Treasurer's Office,
Trust Operations
Division
(803) 734-2114
The Trust Operations Division of the State Treasurer's Office may help
the agency draft bonding authority legislation and lobby for its passage
in the legislature. The Budget and Control Board (consisting of the
Governor and other top state officials) must approve any bond issue; the
Board also serves as the issuing body for some bond issues. The Board
must also approve an agency's choice of bond counsel.
South Dakota
Bureau of Finance and
Management
(605)773-3411
A state agency would need to seek bonding authority which, if granted,
would most likely be invested in the State Building Authority (SBA).
The state agency which ultimately receives bonding authority is
responsible for managing all tasks required to issue the bonds.
Tennessee
Comptroller's Office,
Bond Finance Division
(615) 741-4272
There are four state-level debt issuers. The Tennessee Local
Development Authority, the School Bond Authority, and the Housing
Development Agency issue revenue bonds, while the Tennessee State
Funding Board issues general obligation bonds. Bonding authority for
other agencies is usually invested in one of these four agencies. Once
bonding authority was invested in an agency, the Bond Finance Division
would manage all of the tasks involved in issuing bonds, and would also
manage bond repayment.
B-8
-------
State Government Contacts For Information On Issuing Bonds
(Continued)
State
Office
Phone
Number
Comments
Utah
Governor's Office,
Director of the Office of
Planning and Budget
(801) 538-1562
The Director of the Office of Planning and Budget would bring an
agency's bond proposal to the legislature. If bonding authority was
granted, the State Bonding Commission (consisting of the Governor, the
State Treasurer, and an appointee of the Governor) would issue bonds.
The State Treasurer would contract with a financial advisor and the
Attorney General's Office would contract with a bond counsel.
Vermont
Office of Finance and
Management
(802) 828-2376
This office would assist a state agency by gathering information on the
agency's proposed bond issue and presenting it to the Governor. The
Governor would decide whether to present the proposal to the
legislature. If the legislature granted bonding authority, it would invest
the authority in the State Treasurer. With the Governor's approval, the
State Treasurer would issue bonds and contract with the bond counsel
and financial advisor.
Virginia
Department of the
Treasury, Division of
Debt Management
(804) 225-4927
The Virginia Resources Authority, an autonomous agency with authority
to issue revenue bonds, may be authorized to issue bonds for other
agencies. This office will also assist other agencies in approaching the
legislature to obtain bonding authority, which could be invested in either
the agency or the Virginia Resources Authority.
B-9
-------
State Government Contacts For Information On Issuing Bonds
(Continued)
State
=——
Washington
West Virginia
Wisconsin
Office
=
Office of Financial
Management
Governor's Office
Department of
Administration, Capital
Finance Office
Phone
Number
(206) 753-5459
(304) 558-2000
(608) 266-2305
Comments
=^ =====
A state agency would need to obtain bonding authority. The State
Finance Committee (SFC), consisting of the Governor, Treasurer, and
Lieutenant Governor, issues bonds pursuant to legislation granting
general bonding authority to a state agency. The Office of Financial
Management (OFM) would determine the priority of the issue, given the
state's other priorities. However, the OFM would not determine
whether the bonds should be issued or deferred. The Office.of the State
Treasurer would provide administrative support for the SFC. The SFC
would contract with an underwriting firm and the Attorney General's
Office would contract with a bond counsel to work with the SFC.
A state agency would first need to seek approval for bonding authority
from the Governor's Office. Next, it would need to obtain bonding
authority from the legislature. The agency would be responsible for
issuing the bond; there is apparently no state agency that provides
assistance in issuing bonds. The agency would need to report all debt
issued to the Office of Debt Management (ODM). The ODM resides
within the State Board of Investments, which has the responsibility to
report all debt issued by the State.
This office is responsible for all state bonds. Bonding authority would
be needed from the legislature; authority would typically be invested in
the State Building Commission (SBC). The Capital Finance Office of
the Department of Administration serves as staff to the SBC.
B-10
-------
State Government Contacts For Information On Issuing Bonds
(Continued)
State
Office
Phone
Number
Comments
Wyoming
Governor's Office,
Intergovernmental
Affairs Representative
(307) 777-7434
A state agency must seek the governor's sponsorship for legislation
granting bonding authority. The legislature may invest authority in the
agency it deems most appropriate. The Intergovernmental Affairs
Representative would assist in issuing bonds.
B-ll
-------
-------
Appendix C
Moody's Municipal Credit Report On
Iowa's Underground Storage Tank Revenue Bonds
-------
-------
Moody's
Iowa Finance Authority - State of Iowa
sale:
New Issue
$20,000,000
Credit Report
FILE COPY
January 16 WN OT CUT
Special Tax/State
Underground Storage Tank Fund Revenue Bonds,
1991 Scries A
date:
Expected through negotiation January 11
opinion:
Moody's rating: A
Underground Storage Tank Fund RAVMNM
A pledge of portions of motor vehicle sales taxes and
tank management fees provides upper medium grade
security. The amount required for debt service is
provided from a larger stream of available revenues
which would have to fall sharply to jeopardize the
pledged allocation. Future program requirements
could exceed the amount now available for debt
service, but a satisfactory additional bonds test pro-
vides adequate protective margins.
key facts:
analysis:
Pledged Revenue: 25% allocation of motor vehi-
cle use tax collccuons, to a maximum of $3 million
per fiscal quarter, and 77% allocation of annual tank
management fee collections.
Available Revenue: Over S29 million in fiscal
1990 calculated as 25% of that year's motor vehicle
use tax collccuons. Maximum amount allocablc from
this source is S12 million per year.
Net tax-supported debt
Net tax-supported debt as % of personal income
Net tax-supported debt per capita
Debt burden (%)
Personal income per capita (1989):
Personal income per capita as % of U.S.:
Population change, state, 1980-90 (prelim.):
Population change, U.S., 1980-90 (prelim.):
Amount
5115,863,000
0.3
S 42
0.2
$15,487
88
-43
10.3
Median
2.2
S349
1.0
-
The State of Iowa has had no general obligation
bonds outstanding since 1976, when Korean War
veterans bonus bonds reached final maturity. Consti-
tutional requirements and conservative practices have
limited (he state's general obligation borrowings to
minor amounts. In 1989 and 1990, the state made use
of lease obligations, particularly for correctional
facilities and, in 1990, began the use of these special
tax obligations. Its tax-supported debt ratios remain
quite low.
Underground Storage Tank (UST) Fund revenue
bonds now offered by the Iowa Finance Authority arc
limited special obligations, payable from pledged
-------
Special TcDtfState January 10,1991
Iowa Finance Authority - State of Iowa
revenues received by the authority and the Iowa
Comprehensive Underground Storage Tank Board.
Pledged revenues consist of a 25% allocation of the
sales taxes collected on new and used motor vehicles
(known as the use tax), up to a maximum of $3
million per fiscal quarter, and a 77% allocation of
annual revenues from the sank management fee
imposed on certain underground storage tanks, all to
be deposited in the UST Fund. The use lax allocation
is expected to be the principal revenue source of the
UST Fund. Bonds also benefit from a debt service
reserve, the Capital Reserve Fund, to be funded at the
lowest of (a) 10% of original principal amount, (b)
maximum annual debt service, or (c) 125% of aver-
age annual debt service.
Iowa imposes a use tax on sales of new and used
motor vehicles, as well as other personal property, at
a rate of 4% of the purchase price of the property.
The rate was increased from 3% to 4%, effective
March 1,1983. Iowa law was amended in 1990 to
provide that 25% of all revenue from the motor
vehicle use tax, up to $3 million per fiscal quarter, be
deposited in the UST Fund; the use tax allocation is a
continuing appropriation and such monies may not be
used for any other purpose. The allocation is pro-
vided from a large pool of available revenue for the
maximum $12 million available yearly; in the weak-
est of the last six fiscal years, the 25% allocation
would have provided no less than $21.5 million.
Thus, use tax collections would have to fall by over
44% from the weakest level of the last five years to
jeopardize the $12 million allocation. In addition, the
tank management fee, which officials project may
yield $800,000 yearly, would have to produce no
revenue.
The number of taxable motor vehicle transactions
shows an irregular trend of growth since the early
1980s, some 1.8% annually from fiscal 1981 to 1990. |
The combined reporting of taxable and exempt regis-
trations before July 1, 1978, complicates the analysis
of longer-term trends.
This bond program provides capital for the Iowa
Comprehensive Underground Storage Tank Fund,
established by law in 1989 to finance the cleanup of
existing releases of petroleum from underground
storage tanks, make financing available at affordable
interest rates for necessary tank improvements
required by federal law, and provide insurance covcr-l
age for petroleum releases to meet federal
requirements.
The full extent of UST program requirements — and
thus of its borrowing needs — cannot yet be deter-
mined. Debt service requirements of potential future
borrowings may well exceed the revenue stream now!
allocated, making necessary a broadening of the rcvcj
nue stream. The current S12 million limit on use tax
allocations may need to be increased, if program
requirements expand. However, adequate protective
margins arc provided for bondholders by a satisfac-
tory, two-licrcd additional bonds test: 1.0 limes cov-l
cragc of maximum annual debt service by the total o
use tax allocations and 80% of tank management fee
allocations actually deposited in 12 consecutive
months of the 18 months before issuance, and 1.5
limes coverage by the total of use tax collections
allocated by law (without regard to the maximum
amount set in the law, and assuming any subsequontl
increase in allocation percentage had then been in P
effect) and tank management fee allocations depos-
ited in a similar period.
-------
Special Tax/State January 10.1991
Iowa Finance Authority - State of Iowa
details of bond
sale:
Legal Name of Issuer: Iowa Finance Authority.
Security: Limited obligations of authority, payable
from pledge of revenues assigned under master
indenture.
Date of Bonds: January 1,1991.
Denomination: $5,000.
Annual Maturities 7/1: To be determined.
Interest Rate: To be determined.
Interest Payable: Scmiannually beginning July 1,
1991.
Call Features: Beginning July 1,2001 at 102%.
Trustee: Bankers Trust Company, Des Moines.
Paying Agent: Banker Trust Company, DCS
Moines.
Delivery: On or about January 24.
Bond Counsel: Davis, Hockcnbcrg, Wine, Brown,
Kochn & Shore, P.C., DCS Moines.
Financial Officer: Michael L. Fitzgerald, Stale
Treasurer.
Auditor: Richard D. Johnson, C.P.A., Auditor of
State (FY 1990).
Managing Underwriter: Piper, Jaffrcy &
Hopwood.
rating history: July 1990:
analyst: Steven Hochman
(212)553-0338
I The infonnalion herein has been obtained from sources believed to be accurate and reliiMe, but because of the possibility of human and mechanical error, its accuracy or completeness a not
I guaranteed. Moody's ratings are opinions, not iccccnmendalioni to buy or sell, and their accuracy it not guaranteed. A rating should be weighed solely as one factor in an investment decision.
and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling. Moct issuen of corporate bonds, municipal bonds and
~...; -. :_--.• J stock, and commercial paper which an rated by Moody'l Investors Service, Inc. have, prior to receiving the rating, agreed to pay a fee to Moody's for the appraisal anil riling
I services. The fee ranges from $1,000 to SI25.000.
I Copyright C1991 by Moody's Investors Service. Inc. Publishing and executive offices at 99 Church Street. New York. NY 10007
-------
------- |