1998 REGIONAL SRF FINANCIAL
MANAGEMENT WORKSHOP
Philadelphia, Pennsylvania
June 10-12,1998
-------
1998 REGIONAL SRF FINANCIAL
MANAGEMENT WORKSHOP
Philadelphia, Pennsylvania
June 10-12,1998
-------
1S>98 SRF REGIONAL FINANCIAL MANAGEMENT WORKSHOP
REGION III AGENDA
JUNE 10-12, 1998
Session Time
I. Introduction 8:30 AM
II. Overview of CWSRF/DWSRF Financial Management 9:00
Break 10:15
III. Understanding SRF Financial Reporting and Auditing 10:30
Lunch 12:30
III. Understanding SRF Financial Reporting and Auditing - Continued 1:45
End of Day One 4:00
Day Two
IV. Current Issues/Challenges 8:30AM
• Structuring SRFs to Address Funding of Private Entities
• Credit Review of Private Loan Applicants
Break 10:00
IV. Current Issues/Challenges - Credit Review Concinued 10:15
Lunch 12:30
V. SRF-Related Bond Issuance and Bond Fund Management
• Leveraging Overview
• Bond Issuance Process
VI. Tax Issues and IRS Regulations Affecting SRF Programs 2:45
• Application to SRF Programs
• Current Issues: SEC Regulation
EndDayTwo 5:00
Day Three
VII. Current Issues/Challenges 8:30AM
• SRF Loan Portfolio Analysis
• Cash Investment Praccices
Break 10:00
VIII. SRF Planning: Use of Cash-Flow Modeling to Assess SRF Financial 10:15
Performance
Lunch
12:30
IX. Strategic Financial Management in Action:' Illustration/Case Study of
SRF Business Plan Development *
X. Closing Remarks ^ ^
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I. Introduction
Introduction
• Welcoming remarks (EPA/Home state)
• Introductions
I-1
-------
Workshop Objectives
• Provide financial training that focuses on
the needs of state CWSRF/DWSRF
personnel and EPA Regional personnel
• Explore a range of current financial
management topics
• Address needs of diverse target audience
Workshop Objectives
• Provide in depth training on selected topics
and allow for hands-on problem solving
exercises
• Involve speakers/instructors familiar with
SRF financial management
• Complement other DWSRF/CWSRF
workshops (Funding Framework, SRF 101,
CIFA National Workshop)
1-2
-------
II. Overview of
CWSRF/D WSRF Financial
Management
Financial Management Challenges
Facing the DWSRF/CWSRF
• Increasing funding capacity - earnings,
repayments, new capitalization
• Varying loan demand - level, timing, type of
demand
• Increased emphasis on funding NPS projects -
integrated priority setting
• Credit review of private entities applying for SRF
loans
• DWSRF implementation - combined financial
management, transfers, cross-collateralization
II-1
-------
Increasing Funding Capacity
• Annual capitalization continues to increase
funding capacity
- CWSRF total capitalization: $17.5 billion
(through '98)
• Federal:$ 14.55 billion
• State: $2.91 billion
- DWSRF total capitalization: $2.4 billion
(through '9 8)
• Federal:$2.0 billion
• State: $.40 billion
Increasing Funding Capacity
(continued)
CWSRF Capitalization History
($billions)
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Si Annual B Cumulative
II-2
-------
Increasing Funding Capacity
(continued)
• Leveraging has added to the funding
capacity CWSRF: $5.9 billion (FY97 net)
• Principal repayments and interest earnings
continue to grow: $4.2 billion (FY97)
• Total CWSRF funds available: $24 billion
in funding
Increasing Funding Capacity
(continued)
CWSRF Loan Repayments
($billions)
$5.00
$4.00
saoo
$200 ¦*
$1.00
$0.00
1989 1900 1991 1992 1903 1994 1996 1996 1907
@ Annual B Cumulative
11-3
-------
Increasing Funding Capacity
(continued)
CWSRF Assistance
($billions)
$20.00
$15.00
$10.00
$5.00
$0.00
1989 1990 1991 1992 1993 1994 1996 1996 1997
Si Annual H Cumulative
Varying Loan Demand
• Factors
- Local economic conditions
- Base level needs versus allotment levels
- Changing project implementation schedules
- Availability of other funding sources
- Attractiveness of SRF loan terms
- Experience with NPS project funding
• Creates a challenge of matching actual
demand and SRF funding
II-4
-------
Increased Emphasis on
Funding NPS Projects
• President's Clean Water Action Plan
• Funding Framework policy
• Voluntary implementation of integrated
priority setting systems
• Challenges
- More loans to manage
- Diverse customer base - public/private
- Small loans with differing sources of repayment
revenues/collateral
Credit Review of Private
Entities
• New to CWSRFs funding NPS-related
projects
• Funding private entities will be more
common in DWSRF
•New challenges:
- Credit review and security arrangement
- Loan portfolio tracking
- Using tax-exempt debt for leveraging and state
match
II-5
-------
DWSRF
Implementation
• Combined financial management
- Segregation
- Coordination
• Transfers
- Balancing objectives of program
• Cross-collateralization
- Assessment/implementation
Financial Management -
Different State
Approaches in Use
• Programs run separately by different
units/offices within state
• Combined financial management and
separate program management
• Programs run by same unit/office within
state
II-6
-------
Overview of Strategic Financial
Management Concepts and
Application to the SRF Program
• Loan terms - should they be adjusted?
• Investments - is current approach appropriate for
investment of SRF resources?
• Loan portfolio - any risk of default?
• Fund utilization - used effectively?
• Fund utilization - meeting demand?
• Leveraging - use leveraging/continuing to leverage?
• Borrowing for match - impact on fund?
• Sustainable funding - funding goals of SRF programs?
Loan Terms
• How are they established?
• Should they be adjusted?
• Considerations:
- Market rates for potential borrowers
- Level of demand for funding
- Impact on affordability
- Impact on SRF funding over the long-term
II-7
-------
Investment Return
• Frequently controlled by state investment
policies/bond indentures
• Management of fund should include tracking
of investments
- understand yields of SRF deposits versus market
rates
- determine process for crediting SRF with earnings
- understand risk associated with investments
- matching investments with recycling expectations
Fund Utilization -
Funds Committed
• Critical to manage level of fund
commitment
• Indicates high level of demand and effective
use of funds
• Manage assets:
- Cash and investments
- Debt service reserves
- Loans outstanding
- Undrawn federal grants and match
II -8
-------
Fund Utilization -
Funds Committed
(continued)
• Except debt service reserves, all are or will
become available for loans
• Measure fund utilization as ratio of loans
outstanding versus available assets
• Considerations
- Years in operation
- Balance between SRF and other funding
sources
- State plans on using recycled funds
Fund Utilization -
Meeting Demand
• Critical to determine if SRF provides the
right level of funding to the right mix of
borrowers
• Determine if and where excess demand
exists
- Categories
- Needs versus demand
II-9
-------
Fund Utilization -
Meeting Demand
(continued)
• Factors
- Enforcement generates borrower demand
- Favorable loan terms increase demand
- Economic growth stimulates demand
- Availability of alternatives affects demand for
SRF funding
• Responses
- Leveraging
- Adjust loan terms
- Adiust targeted categories of borrowers
Loan Portfolio
Management
• What tracking is done?
• How does state measure credit risk of SRF
loan portfolio?
• Bond ratings, where available, are helpful
- Bond ratings reflect underlying conditions of
loan recipients
- Rating agencies estimate default risk
- Bond ratings may not tell the whole story
11-10
-------
Loan Portfolio Management
• Does SRF track conditions of loan
recipients?
- socioeconomic conditions/trends - e.g.,
employment
- user fee levels - e.g., percent increase over time
- debt conditions - e.g., debt per capita
- local financial management - e.g, property tax
collection rate
• Also measured by diversity of loans
Private Sector Loans Require a
Similar but Different Process
• Review the overall financial conditions of
business
• Security arrangements should be considered
• Default rates may be assumed depending on
the creditworthiness of loan recipients
ii-n
-------
Use of Leveraging
• Consider role of leveraging
• Leveraging decision factors
- Effective use of existing financial resources
- Strong current demand for additional loan
assistance
- Institutional capability to initiate and manage
leveraged SRF program
Use of Leveraging
(continued)
• Decision should reflect careful financial
planning
- Direct loan program versus a leveraged
program
- Matching funding levels from leveraging
scenarios with demand for assistance
- Disclosure of short-term benefits and long-term
costs of leveraging
11-12
-------
Borrowing/or State Match
• Options include
- Bonds issued directly by SRF
- State G.O. bonds repaid with SRF interest
earnings
• Assessment of state match borrowing
similar to leveraging assessment
• Decision should reflect careful financial
planning
- Determine impact on funding levels over time
- Determine impact on interest rate minimum
requirements
Sustainable Funding
• Project annual funding level resulting from
financial decisions
• Use financial planning/modeling to show
effects of:
- Loan terms - interest rate and repayment term
- Interest earnings on SRF funds
- Default assumptions to reflect portfolio of loans
- Use of match bonds repaid with SRF revenues
- Use of leveraging
11-13
-------
Sustainable Funding
(continued)
• Modeling shows
- relative impact of each decision
- cumulative impacts of each decision
II-14
-------
III. SRF Financial Reporting
and Auditing
Introduction
• Provide overview of governmental financial
reporting and how the SRF fits in
• Discuss fund structures that the SRF uses -
pros and cons
• Discuss use of audits to manage the SRF
• Discuss good internal control practices
• Use case study illustrations
in -1
-------
Financial Statements
• Users
• External
• Internal
Users
General public
(voters)
Program
(Management)
Granting Agencies
State regulators
Rating agencies
Debtors
- Underwriters and
issuers
- Bondholders
- Future bond purchasers
ID-2
-------
External
• Communicate financial and program
performance
• Demonstrate compliance
- SEC secondary market disclosure
- Debt covenants
- Program requirements
Internal
• Provide management with a basis for
decision making
• Monitor progress towards accomplishing
organization goals
m-3
-------
GAAP (Generally Accepted
Accounting Principals)
• Defined as: "conventions, rules and procedures necessary
to describe accepted accounting practices at a particular
time"
• Establishes the minimum requirements for fair presentation
of financial data in external financial reports
• Sets detailed parameters for development of financial
reports, fund structures and accounting process
• Is presented through pronouncements, interpretations,
technical bulletins, etc. of accounting profession
Accounting Standard Setting
Structure
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in-4
-------
Accounting Standard Setting
Structure
Private Sector
Advise
FAS AC :
: Private ;
Enteiprises
FAF
Operations
GASB
: FASB
: : State:,
Set
Standards
& Local
Government
Public Sector
FASAB
Standards
^r Advise
Set
Standards
GASAC
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Dreasury:
Approve
f Federal; -
Standard:
Government
4
FAF
FASAC
FASB
GASB
GASAC
FASAB
OMB
GAO
Financial Accounting Foundation
Financial Accounting Standards Board
Financial Accounting Board
Governmental Accounting Standards Board
Governmental Accounting Standards Advisory Counsel
Federal Accounting Standards Advisory Board
Office of Management and Budget
general Accounting Office
-------
Standard Setting Process
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-------
Standard Setting Process
Identify
Potential
Issues
'A
GASB \
Wish to
Pursue?./^
YES
NO
. .. ' Stop~~~T)
Add ISSU6
to Techncial
Agenda
Conduct
: Staff
Research
Need
More
. Info?.,
y ye$
"Discussion Memo"
of invitation to
Comment -
NO
-. is'
the Board^\^ NO
Ready 1o ~
Proceed?-/^
YES
Prelinninary Views
Exposure:
4
Evaluate
; Draft , .
Responses
Z3l
.. Evaluate :
Respbnses(lncludlng)^-
Public hearings]
Ready.
< ..to Issue a Final »-
Pronouncement?
YES
NO
New Idea .
Statement
or Interpretation
s,°p )
. Evaluate
Responses
-------
Different Types of Funds
and Presentations
• Governmental Funds
• General
• Special Revenue
• Capital Projects
• Debt Service
Proprietary Funds
(accrual basis)
• Enterprise
• Internal service
in-6
-------
Financial Reporting Pyramid
Basis of Accounting -
Modified Accrual Basis:
• The modified accrual basis of accounting is followed in the
governmental fund types and expendable trust and agency
funds.
• Revenue is recorded when susceptible to accrual, i.e., both
measurable and available
• Available means collectible within the current period or
soon enough thereafter to be used to pay liabilities of the
current period
• The major sources of revenue which are susceptible to
accrual are property taxes and sales and use taxes
• Expenditures other than interest on long-term obligations
are recorded when the liability is incurred or the long-term
obligation paid.-
in-7
-------
Financial Reporting Pyramid
Condensed
Summary
Data
/ General Purpose \
' Financial Statements \
Combined Statements Overview
General. Purpose
Financial Statements
Combining Fund Statements -
By Fund Type
Individual Fund Account Group
Statements
Schedules
Transaction Data
(The Accounting System)
-------
Basis of Accounting -
Accrual Basis:
• The Accrual Basis of Accounting is utilized in the
Proprietary Fund Types and Pension Trust and
Nonexpendable Trust Funds
• Revenue is recognized when earned and expenses
are recognized when the liability is incurred
• Depreciation is computed and recorded as an
operating expense
• Expenditures for property and equipment are
shown as increases in assets and redemption of
bonds and notes as a reduction in liabilities
• Tap fees are recorded as contributed capital when
received
Differences
Measurement
focus
Fundamental
question
Terminology for
increases
Terminology for
decreases
Governmental Funds
Flow of current
financial resources
Proprietary Funds
Flow of economic
resources
Better or worse off
economically?
Revenues/gains
Expenses/losses
More or less
resources to spend in
the near future?
Revenues/other
financing sources
Expenditures/other
financing uses
m-8
-------
Tb« Rcpstin* Estty
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Central Fuitd
CAFR Fund Organization
Governmental Funds
General Fund
• Primary operating Fund of an entity
• There can only be one
• Includes all activities that are not required
to be reported separately
• Need a compelling reason to remove an
activity from the General Fund
in-9
-------
" The Reporting Entity
: Trust
Special
Enterprise
: Expendable
Trust
Capital
expendable
Trust .
Internal Service
General Fixed.
Assets
. General :
Debt Service
General Long-
term Debt
EL Proprietary Fund Types
A. Governmental Fund
C.vlFiduciary Fund Types
Trust and Agency Funds
CAFR Fund Organization
-------
Governmental Funds
Special Revenue Funds
• To account for specific revenue sources that
are restricted for a specified purpose
Governmental Funds
Capital Projects Funds
• Accounts for resources restricted for major
outlay
• An entity can have one or create a separate
Fund for each major project
ID - 10
-------
Governmental Funds
Debt Service Funds
• To pay principal and interest on debt in the
General Long-Term Debt Account Group
• A Special Assessment Fund may be
considered to be a debt service fund
Proprietary Funds
Enterprise Funds
• Used to account for activities that are
similar to business enterprises
• Cost of services is recovered through user
charges
in -11
-------
Requirements to Use
Enterprise Fund
• Activities charging user fees may use Enterprise
Fund accounting and financial reporting
• Activities must use Enterprise Fund accounting
and reporting if any of the following criteria is
met:
- Activities issues debt that is solely secured by net
revenue from activity fees and charges
- State law/regulation requires the activity recover costs
with user fees and charges
- The pricing policy of the activity establishes fees and
charges designed to recover the cost of providing
services, including:
• Capital use charges
• Debt service
Proprietary Funds
Internal Service Funds
• Primary services are provided to other
departments within the entity
• May provided services to external users also
• Cost of services is recovered through
charges to other departments
m-12
-------
Fiduciary Funds
• Nonexpendable Trust Funds
• Manages resources legally restricted for a
purpose
• Restricted by an outside third party
• Expendable Trust and Pension Funds
• Segregates expendable assets held in trust
Account Groups
(not funds)
• General Fixed Assets
• To account for fixed assets not recorded in
proprietary or trust funds
• Assets are generally purchased by
governmental funds and reflected as capital
expenditures in that fund
• General Long-Term Debt
• Accounts for unmatured long-term debt of
the government
in-13
-------
Special Revenue vs.
Proprietary Fund (enterprise)
• Special Revenue Fund (modified accrual)
• Pros
- Easier for internal users within the State
- Has an actual to budget comparison
• Cons
- All financial resources are included as revenue
- No statement of cash flow
- Long-term debt is not recorded in the fund
- Principal payments on debt are an expenditure
Proprietary Fund
(accrual basis)
Pros
• Business presentation
• All activity is reflected within
one fund
• Presents a cash flow statement
• Focus is on user charges
• Includes all assets and
liabilities
• Segregates contributed equity
• Income statement clear
presents net operating revenue
"net investment income"
Cons
• Use of enterprise funds are
optional under GAAP and
States might not want to use
them
• Budget presentation may need
to be on a different basis if
presented
ID - 14
-------
Using Nonexpendable
Trust Funds
• Pros
- Statements are structured like a business
- All activity is reported within one fund
• Cons
- SRF is not legally structured as a trust
Types of Operations Commonly
Seen in Either Special Revenue
Funds or Enterprise Fund Types
• Golf course operations
• Transportation
• Recreation activities
• Revolving loan funds
• Student lunch programs
in -15
-------
Transportation Funds
• Have user fees
• Have capital maintenance requirements
• But are often special revenue funds because
user fees do not cover costs and rolling
stock will be replaced by grants
Enterprise vs. Special
Revenue Example
• City of A
in -16
-------
Why Select Enterprise Status?
• Who are the most important users of financial
statements?
• Bond markets
• What would there financial statements look like if
this was a business ?
• A Bank
• The SRF is intended to be self sufficient to
continue without future supplements
• Banks have trust departments
• Key financial information is "net interest revenue"
Break Out Session
• Identify the following
1) Where is the SRF accounted for ?
2) Type of Fund used - Governmental or
proprietary ?
3) Dollar value of loans outstanding ?
4) Dollar value of State and Federal Capitalization ?
5) Gross profit ?
in -17
-------
The City of A, Golf Course
""he City of A has issued bonds to construct a new golf course. What would be
difference between a special revenue fund and an enterprise fund presentation ?
On January 1,1998 $1.2 million in General Obligation bonds are issued at 10%. Total iss
cost were $50,000. Interest payments are due July 1 and January 1, with principal paymen
beginning January 1, 1999.
Balance Sheet as of 1/1/98
Cash
Bond issuance costs
Enterprise
Fund
1,150,000
50,000
Special
Revenue
Fund
1,150,000
Total assets
1,200,000
1,150,000
Bonds Payable
Retained earnings/fund equity
1,200,000
1,150,000
Total liabilities and equity
1,200,000
1,150,000
Income Statement as of 1/1/98
Operating income
al income
0
0
Operating expenses
Total expenses/expenditures
0
0
Income before other financing sources
and uses
0
0
Other financing sources and uses
Bond proceeds
Bond issuance costs
1,200,000
(50,000)
1,150,000
Net income
0
1,150,000
The Enterprise fund will also need to produce a cash flow statement.
-------
The City of A, Golf Course
•«e course is completed in the beginning of May.
first interest payment has been made on July 1.
.. .e course does very well and brings in total fees of $150,000
in its first month of operation.
Balance Sheet as of 7/1/98
Cash
Fixed assets
Bond issuance costs
Enterprise
Fund
30,000
1,200,000
50,000
Special
Revenue
Fund
30,000
Total assets
1,280,000
30.000
Bonds Payable
Retained earnings/fund equity
Total liabilities and equity
1,200,000
80,000
1,280,000
30,000
30,000
Income Statement as of 1/1/98
Operating income
interest income
al income
150,000
10,000
160,000
150,000
10,000
160,000
Operating expenses
interest expense
Capital expenditures
20,000
60,000
20,000
60,000
1,200,000
Total expenses/expenditures
Income before other financing sources
80,000
1,280,000
and uses
80,000
(1,120,000)
Other financing sources and uses
Bond proceeds
Bond issuance costs
1,200,000
(50,000)
1,150,000
Net income
80,000
30,000
The Enterprise fund will also need to produce a cash flow statement.
-------
The City of A, Golf Course
"**ar end entries are made for the following:
record amortization and depreciation.
. .ccrue interest payable.
Special
Enterprise
Revenue
Balance Sheet as of 7/1/98
Fund
Fund
Cash
320,000.00
320,000.00
Fixed assets
1,200,000.00
Bond issuance costs
50,000.00
Accumulated depreciation and amortization
(45,000.00)
Total assets
1,525,000.00
320.000.00
Bonds payable - current portion
100,000.00
Bonds Payable - long term
1,100,000.00
Accrued interest payable
60,000.00
Retained earnings/fund equity
265,000.00
320,000.00
Total liabilities and equity
1,525,000.00
320.000.00
income Statement as of 12/31/98
rating income
500,000.00
500,000.00
^rest income
15,000.00
15,000.00
Total income
515,000.00
515,000.00
Operating expenses
85,000.00
85,000.00
Interest expense
120,000.00
60,000.00
Depreciation - course
40,000.00
Amortization - issuance costs
5,000.00
Capital expenditures
1,200,000.00
Total expenses/expenditures
250,000.00
1,345,000.00
Income before other financing sources
and (uses)
265,000.00
(830,000.00)
Other operating sources and uses
Bond proceeds 1,200,000.00
Bond issuance costs (50,000.00)
1,150,000.00
Net income 265,000.00 320,000.00
The Enterprise fund will also need to produce a cash flow statement.
-------
Unique Aspects of the
Drinking Water Program
Unique Aspects of the
Drinking Water Program
• Set asides
• Link deposits
in -18
-------
Set Asides
• Can be used for both grants and/or loans
• Up to 31% of the DW grant can be used for
set asides
• Removes funds from the SRF
• State match of 20% still needs to go to the
SRF Fund
Financial Reporting -
Set Asides
• The reader should be able to determine
• What set asides are being used for
• How the matching requirement is be met
in -19
-------
Accounting for Set Asides
• The Fund structure will be dependent on the
nature of the set aside transactions
• Grants
- Recorded as a revenue and expenditure
- Record in the same fimd that administrative set asides
have been recorded in
• Loans
- A perpetual revolving loan program
- But can't be recorded in the SRF fund
- Once funds are recorded in the SRF fund they can't be
removed
- Record in a separate fund on the same basis as the SRF
fund
Colorado Reports
• Combining schedule of balance sheet (p33)
• Combining schedule of revenue, expenses,
and changes in retained earnings (p34)
ID - 20
-------
INTENDED
•USB PLAN-
20* STATE
MATCH
(baud an
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gimUl
CAPITALIZATION
GRANT
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(batad cn oiobnonl)
10%, 4 nriclud (ma to ana) by Suit tat
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DWSRF
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' 30% cuft b* utnl Im OiMdviaiitiipsd
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i* land AcqututurawM
* SW Hfotodnn Uhhim
-------
Linked Deposits
• Program transfers cash as collateral to the bank to
guarantee
• Interest rate paid on deposit is below market
• Advantage of transferring loan administration to
bank
• Risk of loss is still the SRF's
• Risk of loss of interest if deposits are returned
timely as payments are made by borrowers
• Accounting for linked deposits
• Reflected as cash with trustee
• Disclose the nature of the transaction
Audits and Single Audit
in-21
-------
Audits and Single Audits
• Purpose of Audits
• Ensures that your financial statements are
fairly presented
• Provides user of financial statements with
assurance concerning their reliability
Audit Procedures
• Inspection
• Observation
• Inquiry
• Confirmation
• Reperformance
• Analytical tests
in-22
-------
The Expectation Gap
(What an Audit Does Not Do)
• The goal of the audit is to obtain reasonable,
but not absolute assurance the Financial
Statements are fairly presented
• Not all transactions are looked at
• Does not ensure the discovery of fraud
How the Frauds Occurred
Poor Controls
Management Override
High Risk Industry
3rd Party Collusion 33
Employee Collusion
No Ethics Policy |^7
<
No Director Control 16
Other I2
0 20 40 60
10 30 50 70
SOUKC KPUG 199« Fnud Sluay
in-23
-------
How Frauds Were Discovered
Internal Controls
Employee Notice
Internal A Licit
Mgt. Invest
Customer Notice
Accident
Anonymous Letter
Supplier Notice
Employee Invest
Police Notice
Gov't Agency Notice
Third Party Notice
External Auditors
Other
1994 Fraud Sofvey KPMS
Governmental Auditing
Standards "Yellow Book"
• Compliance
• Internal Control over financial reporting
in-24
-------
Colorado Opinions
• Independent auditor's report
• Independent auditor's report on compliance
and internal controls
Single Audit
• Purpose
• Provides the federal government with reliance that
major program funds are expended in accordance
with their guidelines
• Major program compliance opinion
• Internal controls over compliance
• Schedule of expenditures of federal awards
• Schedule of findings and questioned costs
• Corrective action plan
• Prior audit findings
ID-25
-------
Colorado Single Audit
-See handout-
Why Single Audit Does
Not Work for SRF's
• SRF will rarely get selected on a state wide
basis
• EPA programs do not make the top 20
Federal Programs
in-26
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INDEPENDENT AUDITOR'S REPORT
Board of Directors
Colorado Water Resources and Power Development Authority
Denver, Colorado
We have audited the accompanying financial statements of the Colorado Water Resources and
Power Development Authority as of and for the year ended December 31, 1997, as listed in the
foregoing Table of Contents. These financial statements are the responsibility of the Authority's
management. Our responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards and Government
Auditing Standards issued by the Comptroller General of the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of the Colorado Water Resources and Power Development Authority at
December 31, 1997, and the results of its operations and cash flows of its proprietary fund for the
year then ended, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the financial statements taken as a
whole. The combining fund financial statements and other schedules as listed in the Table of
Contents as Supplemental Information are presented for purposes of legal compliance and
additional analysis and are not a required part of the financial statements of the Colorado Water
Resources and Power Development Authority. Such information has been subjected to the
auditing procedures applied in the audit of the financial statements and, in our opinion, is fairly
stated in all material respects in relation to the financial statements taken as a whole.
In accordance with Government Auditing Standards, we have also issued a report dated March 5,
1998, on our consideration of the Colorado Water Resources and Power Development Authority's
internal control over financial reporting and our tests of its compliance with certain provisions of
laws, regulations, contracts and grants.
March 5, 1998
-------
INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE AND ON INTERNAL
CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF
FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH
GOVERNMENT AUDITING STANDARDS
Board of Directors
Colorado Water Resources and Power
Development Authority
Denver, Colorado
We have audited the financial statements of the Colorado Water Resources and Power
Development Authority (the Authority) as of and for the year ended December 31,1997, and have
issued our report thereon dated March 5, 1998. We conducted our audit in accordance with
generally accepted auditing standards and the standards applicable to financial audits contained in
Government Auditing Standards, issued by the Comptroller General of the United States.
Compliance
As part of obtaining reasonable assurance about whether the Authority's financial statements are
free of material misstatement, we performed tests of its compliance with certain provisions of
laws, regulations, contracts and grants, noncompliance with which could have a direct and
material effect on the determination of financial statement amounts. However, providing an
opinion on compliance with those provisions was not an objective of our audit and, accordingly,
we do not express such an opinion. The results of our tests disclosed no instances of
noncompliance that are required to be reported under Government Auditing Standards.
Internal Control Over Financial Reporting
In planning and performing out audit, we considered the Authority's internal control over
financial reporting in order to determine our auditing procedures for the purpose of expressing our
opinion on the financial statements and not to provide assurance on the internal control over
financial reporting. Our consideration of the internal control over financial reporting would not
necessarily disclose all matters in the internal control over financial reporting that might be
material weaknesses. A material weakness is a condition in which the design or operation of one
of more of the internal control components does not reduce to a relatively low level the risk that
misstatements in amounts that would be material in relation to the financial statements being
audited may occur and not be detected within a timely period by employees in the normal course
of performing their assigned functions. We noted no matters involving the internal control over
financial reporting and its operation that we consider to be material weaknesses.
-------
Page Two
Board of Directors
Colorado Water Resources and Power
Development Authority
This report is intended for the information of the Board of Directors and the U.S. Environmental
Protection Agency. However, this report is a matter of public record and its distribution is not
limited.
March 5, 1998
-63-
-------
COLORADO WATER RESOURCES AND POWER DEVELOPMENT AUTHORITY
REGULATORY BASIS
COMBINING SCHEDULE OF BALANCE SHEET -
DRINKING WATER REVOLVING FUND
DECEMBER 31, 1997
ASSETS
Cash and cash equivalents
Investments
Total cash, cash
equivalents and
investments
Current portion of loans
receivable
Loans receivable
Accounts receivable -
Borrowers
Interest receivable on
investments
Capitalization grant receivable
Total Assets
LIABILITIES AND EQUITY
LIABILITIES
Current portion of bonds
payable
Long-term bonds payable
Accrued interest payable
Accounts payable - Other
Project costs payable
Due to other funds
Other liabilities
Total Liabilities
EQUITY
Contributions from
Federal Government
Retained earnings
Total Equity
Total Liabilities an
Equity
State Non-State
Revolving Revolving
Fund Fund
$ 133,149
$
6,474,260
24.587.820
24,720,969
6,474,260
56,018
236,206
26,905,250
4,892,422
312,738
17,924
249,858
77,666
84.412
S 52.244.833
$
11.782.890
$ 40,000
$
24,055,000
292,925
77,546
24,060,024
1,146,197
136,755
50.321
48.447.949
1,410,81?
993,959
84,412
2.$02.925
10.287.659
3.796.884
1
10.372.071
1
$ 52.244.833
$
11.782.890
Elimination Total
$ $ 6,607,409
24.587.820
31,195,229
292,224
31,797,672
330,662
327,524
84.412
$
-0- $ 64.027.723
$
$ 40,000
24,055,000
292,925
77,546
25,206,221
136,755
50.321
49.858.768
1,078,371
13.090.584
14.168.955
$
-0- $ 64.027.723
This schedule is prepared on a regulatory basis as required by the Environmental Protection
Agency for the Drinking Water Revolving Fund. This presentation includes both Enterprise Fund
and Agency Fund operations. Therefore, differences between this presentation and the combining
statement do exist.
-33-
-------
COLORADO WATER RESOURCES AND POWER DEVELOPMENT AUTHORITY
REGULATORY BASIS
COMBINING SCHEDULE OF REVENUE, EXPENSES AND
CHANGES IN RETAINED EARNINGS
DRINKING WATER REVOLVING FUND
YEAR ENDED DECEMBER 31, 1997
State Non-State
Revolving
Fund
Revolving
Fund
Elimination Total
INTEREST REVENUE
Cash and investments
Loans receivable
$ 249,859
368.597
$ 357,945
113.139
$
$ 607,804
481.736
Total Interest
Revenue
618,456
471,084
1,089,540
INTEREST EXPENSE -
BONDS
224.912
224.912
Net Interest Revenue/
(Expense)
393.544
471.084
864.628
OTHER REVENUE
State of Colorado gTant
income
Administrative fee
Other
1,900,000
91,233
8.651
1,900,000
91,233
8.651
Total Other
Revenue
1.999.884
1.999.884
Net Revenue
393.544
2.470.968
2.864.512
OTHER EXPENSE
Grant administration
285.542
285.542
Total Other
Expense
285.542
285.542
OPERATING TRANSFERS
2.749.882
2.749.882
TRANSFERS
2.409.381
(2.409.381)
NET INCOME
2,802,925
2,525,927
5,328,852
RETAINED EARNINGS -
BEGINNING OF YEAR
-0-
7.761.732
7.761.732
RETAINED EARNINGS -
END OF YEAR
$ 2.802.925
$ 10.287.659
$
-0- S 13.090.584
This schedule is prepared on a regulatory basis as required by the Environmental Protection
Agency for the Drinking Water Revolving Fund. This presentation includes both Enterprise Fund
and Agency Fund operations. Therefore, differences between this presentation and the combining
statement do exist.
-34-
-------
COLORADO WATER RESOURCES AND POWER DEVELOPMENT AUTHORITY
SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS
YEAR ENDED DECEMBER 31, 1997
Contributed
Capital
Federal Accrued Recognized Accrued
Grantor
Program Title
CFDA
Number
Grant
Award
December
31. 1996
Receipts
Which Equals
ExDenditures
December
31. 1997
U.S. Environmental
Protection Agency
Title VI Water
Pollution Control
Revolving Fund
1993 Grant
1994 Grant
1995 Grant
1996 Grant
1997 Grant
66.458
66.458
66.458
66.458
66.458
$15,374,601
9,536,100
9,852,000
16,138,618
4,935,600
$
-0-
182,869
$4,396,306
675,809
$
4,396,306
492,940
$
-0-
-0-
Total Federal Financial
Assistance - WPCRF
$
182.869
$5,072,115
$
4.889.246
$
-0-
Kinking Water
Revolving Fund
1997 Grant
66.468
16,784,100
$
-0-
$ 993.960
$
1.078.371
$
84.411
Total Federal Financial
Assistance - DWRF
$
-0-
$ 993.960
$
1.078.371
$
84.411
Total Federal Financial
Assistance
$
182.869
$ 6.066.075
$
5.967.617
$
84.411
-61-
-------
INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH REQUIREMENTS
APPLICABLE TO EACH MAJOR PROGRAM AND INTERNAL CONTROL
OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133
Board of Directors
Colorado Water Resources and Power Development Authority
Denver, Colorado
Compliance
We have audited the compliance of the Colorado Water Resources and Power Development
Authority (the Authority) with the types of compliance requirements described in the U.S. Office
of Management and Budget (OMB) Grcular A-133 Compliance Supplement that are applicable to
each of its major federal programs for the year ended December 31,1997. The Authority's major
federal programs are identified in the Summary of Auditor's Results section of the accompanying
Schedule of Findings and Questioned Costs. Compliance with the requirements of laws,
regulations, contracts and grants applicable to each of its major federal programs is the
responsibility of the Authority's management. Our responsibility is to express an opinion on the
Authority's compliance based on our audit.
We conducted our audit of compliance in accordance with generally accepted auditing standards;
the standards applicable to financial audits contained in Government Auditing Standards, issued
by the Comptroller General of the United States; and OMB Circular A-133, Audits of States,
Local Governments and Nonprofit Organizations. Those standards and OMB Circular A-133
require that we plan and perform the audit to obtain reasonable assurance about whether
noncompliance with the types of compliance requirements referred to above that could have a
direct and material effect on a major federal program occurred. An audit includes examining, on
a test basis, evidence about the Authority's compliance with those requirements and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion. Our audit does not provide a legal determination on
the Authority's compliance with those requirements.
In our opinion, the Authority complied, in all material respects, with the requirements referred
to above that are applicable to each of its major federal programs for the year ended December
31, 1997.
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Page Two
Board of Directors
Colorado Water Resources and Power
Development Authority
INTERNAL CONTROL OVER COMPLIANCE
The management of the Authority is responsible for establishing and maintaining effective internal
control over compliance with requirements of laws, regulations, contracts and grants applicable
to federal programs. In planning and performing our audit, we considered the Authority's internal
control over compliance with requirements that could have a direct and material effect on a major
federal program in order to determine our auditing procedures for the puipose of expressing our
opinion on compliance and to test and report on internal control over compliance in accordance
with OMB Circular A-133.
Our consideration of the internal control over compliance would not necessarily disclose all
matters in the internal control that might be material weaknesses. A material weakness is a
condition in which the design or operation of one or more of the internal control components does
not reduce to a relatively low level the risk that noncompliance with applicable requirements of
laws, regulations, contracts and grants that would be material in relation to a major federal
program being audited may occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. We noted no matters involving the internal
control over compliance and its operation that we consider to be material weaknesses.
SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS
We have audited the financial statements of the Colorado Water Resources and Power
Development Authority as of and for the year ended December 31, 1997, and have issued our
report thereon dated March 5, 1998. Our audit was performed for the puipose of forming an
opinion on the financial statements taken as a whole. The accompanying schedule of expenditures
of federal awards is presented for purposes of additional analysis as required by OMB Circular
A-133 and is not a required part of the financial statements. Such information has been subjected
to the auditing procedures applied in the audit of the financial statements and, in our opinion, is
fairly stated, in all material respects, in relation to the financial statements taken as a whole.
This report is intended for the information of the Board of Directors and the U.S. Environmental
Protection Agency. However, this report is a matter of public record and its distribution is not
limited.
March 5, 1998
-65-
-------
COLORADO WATER RESOURCES AND POWER DEVELOPMENT AUTHORITY
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED DECEMBER 31, 1997
PART I - SUMMARY OF AUDITOR'S RESULTS
Financial Statements
Type of auditor's report issued:
Internal control over financial reporting:
Material weakness(es) identified?
Reportable condition(s) identified
not considered to be material weaknesses?
Noncompliance material to financial statements
noted?
Unqualified
yes /_
yes •£_
yes
no
none reported
no
Federal Awards
Internal control over major programs:
Material weakness(es) identified?
Reportable condition(s) identified
not considered to be material weaknesses?
Type of auditor's report issued on compliance
for major programs:
Any audit findings disclosed that are required
to be reported in accordance with Circular
A-133, Section .510(a)?
yes
yes
no
none reported
Unqualified
yes
no
Identification of major programs:
CFDA Number(s) Name of Federal Program or Cluster
66.458
66.468
Title VI Water Pollution Control Revolving Fund
Drinking Water Revolving Fund
Dollar threshold used to distinguish between
Type A and Type B programs:
Auditee qualified as low-risk auditee?
$300,000
yes
no
PART H - FINDINGS RELATED TO FINANCIAL STATEMENTS
There were no findings required to be reported under generally accepted government auditing
standards.
PART m - FINDINGS RELATED TO FEDERAL AWARDS
There were no findings or questioned costs for Federal Awards required to be reported under
OMB A-133 standards.
-66-
-------
COLORADO WATER RESOURCES AND POWER DEVELOPMENT AUTHORITY
CORRECTIVE ACTION PLAN
YEAR ENDED DECEMBER 31, 1997
There were no findings required to be reported under generally accepted government auditing
standards or OMB A-133 standards.
-67-
-------
COLORADO WATER RESOURCES AND POWER DEVELOPMENT AUTHORITY
PRIOR AUDIT FINDINGS
YEAR ENDED DECEMBER 31, 1997
There were no prior findings required to be reported under generally accepted government
auditing standards or OMB A-133 standards.
-68-
-------
Separate Financial
Statements for SRF's
• Inspector General wants separate audited
statements of the SRF issued by each state
• Provides information on financial condition
• A separate Single Audit will include
opinions on the SRFs internal controls and
compliance
• If a separate audit is not done, the Office of
Inspector General will do it
State of California
Financial Statements
m-27
-------
For the State of California Water Pollution Control Revolving Fund(WPCRF) determine the
following from the financial statements:
1. What reliance does the audit opinion provide?
2. Is there anything unusual about the opinion?
3. What are the total cash and investment at the end of the year?
4. What is there largest investment?
5. What risks are associated with this type of investment?
6. Is the SRF program accounted for in a special revenue or enterprise fund?
-------
7.
How much was loaned to borrowers in the current year?
8. How were these loan primarily financed (bond or grant funds)?
9. What is the total receivable from borrowers at the end of the year?
10. How much has been received from the EPA?
-------
State of California WPCRF additional questions:
1. How much was received from borrowers in the current year that was
reloaned?
2. How much will be received next year from principal payments made
by borrowers, how much of these payments will be available for
reloan to new borrowers?
3. How much has the EPA granted to California in total?
4. How much of the EPA loan has been committed to projects and how
much is available for future projects?
5. Where there any Drinking Water grant funds drawn from the EPA?
6. How much has been provided in State match funds?
7. How has the State match been provided?
-------
05/05/96
15:06 FAX 415 744 1078
U.S EPA
121002
1
say
UNrrCD STATES CNVIRONMENTAl PROTECTION A6CNCY
V OFFICE OF THE INSPECTOR SENERAL FOR AUOfTd
WCSTtUX DIVISION
Tt HAWTHORNE STREET
trrn floor. mail mnr n
SAN FRANCISCO. CA MKX-MBl
December 31,1997
Memorandum
Subject Auditor's Report for the State of California Water Pollution Control Revolving
Fund For the Year Ended September 30.1996
EPA Audit Report Nq^2HTL7-09-0065-8100033
From: CnoncalC McOnllum. Audit Mcnagcr
Racnmterctn Branch. Western Audit Divi *in»\
To: Felicia A. Mwras
Regional Administrator
EPA, Region 9
Son Francisco, Cxlifirrmta
Attached is a copy of the subjrei mirijt irpnrt wr soil rp thr. Starr of GOifhrron. The report
contains reports on the financial statements, internal controls md on compliance requirements
applicable to the State Revolving Fund (SRF) is California.
We have Issued an unqualified opinion on the financial statements and the compliance reports.
In our report on internal controls, we no matters involving the fatpmnl control structure
its operations that we considered to be a Tn«pnai weakness. Consequently, we are the
audit report number upon issuance.
The OIG has no objection to the release of this report to any member of the public upon request.
This report contaim do confidential business or propriety information.
If you have any questions or concerns regarding this matter, please feel free to call me or Mr.
William Dayton at (916) 498-6530.
Attachment
cc: Truman R. Beeler, Divisional 1G, OIG-WAD
¦Kenneth Hockman, Director, Resources Management Division, OIG
FIHwa Kaxpf, Assistant IG for External Audits, OIG
Juaniti T if aft, SRF Coordinator, EPA, Region 9
MM « fajrW
-------
UNITED «TATRS eMVtMOMMEMTAL P1U7TECTI0N A6CMCV
OFricc of the inspector general for audit®
WC3TCTN DIVISION
7t HAWTHORNE STHEFT
HTH PLOOR. MAIL CODC 1-1
SAN FRANCISCO. CA MtQt-ttOI
Dcccnbo-31.1997
Mr. WahPettlt
Executive Director
Stale Water Resource* Control Rnwnl
P.O. Box 100
SauamcutD. CA 95812-0100
Subject: Inricpencirnt Auditor's Report far the Stsze of California Water Pollution Control
Rffvnlviog Fimd far the Year Ended September 30,1996
Dear Mr. Pr.rtif:
Wc reemdy crmdiirtrd an audit of the California Water Pollution Control Revolving Fund for
the year ended September 30,1996. The purpose of our audit was to:
. Frflmhw the financial statements of the California State Revolving Fund (SRF) for the
year ended September 30,1996 and issue a report containing our opinion on the
financial staTfrnmrt;
- Report on the internal control Btructiw of the California SRF program; and
- Report on compliance with specific program requirements applicable to the California
SRF.
We have issued an unqualified opinion on the finnnwAl statements and the compliance reports.
In our report of the internal controls, we noted no matters involving the internal control structure
and its operations that we considered to be a material weakness. We discussed these reports with
your SRF management, who generally agreed with the results of our audit
We appreciate the cooperation and courtesies extended to us during our audit If you have any
questions or concerns, please oontact Mr. William Dayton at (916) 498-6530.
Charles R. McCollum
Audit Manager
ec: Kelley Woodard
Tem Oliver
*mui mm BacpcM
-------
State of California
Wafer Pollution Control Revolving Fund
Table of Contents
independent Auditor's Report 1
fiate/we Sheet 2
OlatCJTcH of Revenues. E*|—was otc Changes r Retained Earnings 3
Gtatementaf C*** Fkwus 4
Notes to Hrwiriwl Stwtwments 6
Independent Auriinvs Report or the Internal Control struavra Bat bo on an
Audit of the Rnaneiol Statements Performed In Aooontsnce with
Onvummwni AicttmQ Standards 12
Independent Aorfttnr'x Report on Compliance wltn tfw Requirements Applicable to the Environmental
~TctecDor. Agency's State RevoMng Fund Program in Accordance with
Government AurittnQ Standards 1B
-------
•INTOD STATU ENVIRONMENTAL WIOTCCTK>N AttCNCY
OFFICE OF THF INSPECTOR GENERAL FOR AUDITS
WEETCRN DIVISION
n hawtmonnp *T*FET
«tm flood, mail coos h
•an FRANCISCO. CA WKtt-Hm
Independent Auditor's Report
Caitomie State VtMer Resources Control Board
We hs*« exarhned the accompanying batance ahnet of the State 01 California Water Polludon Control
Revoking Fund as of September 30,1996, and the rotated statements of revenues, expeww and
changes in retained earnings, and cash flows tor me year men enOed. These flnancoi statements are the
tospcneibifity of the Fund's management Our responsibility b to wprM an opinion on these franco*
s&tfenpms based on our auoit.
Except as Olscussefl in tne tolbrnrtng paragraph we conducted our audit in accordance with generally
•ooepted auditing standouts and Government Auditing Standards issued by the Comptrdlnr General of
the Urttec SQte£ Those standards require that we plan and parform the audit to obtain reasonable
essirance about whether the tnancial statements are free of marten* misstatement An audn Includes
examining, on a ted basis, evidence supporting the amounts and disclosures at the ftnanoial statements.
An audit also indudes assessing the accounting principles used and dgnfflcsnt estimates made by
management, as well as evaluating the overall financial sLitwiril presentation. We believe that our audit
provides a reasonable basis for our opinion.
This was our iret audit of the Fund's financial statements, and the scope of our saorrmaBon aid not
mauoe an audit of the financial tUtoixwiU of the prooedin$ year sufficient to enable us to express, and
we do not express. on opinion cm the balance sleet or tne Fund as of September 30,1BBS or tha related
statements of revenue, expanses and changes in retained earnings, and oesh flows for the year then
ended, nor do we express an opinion on the consistency of appscason or accounting prvtc^lec with the
preceding year.
In our opinion, the financial statements referred to in the first paragraph present fairly, in al material
respects, the financial position of the State of Camomia Water Pollution Control Revolving Fund as of
September 30,1086 and the reautb of to operator and hs cash flows for the ymrthmvrvlect in
conformity with generally accepted accounting pnnopies.
As os&isscd to Mote 1, the linanaai statements referred to above are intended to present the financial
position and results of operations of the Stat* nf Califnmt\ Water Polluton Control RflvoMng Fund, a
component of the State of California. Theee statements are not intended to present the financial position
or results of operations for the State nf Cnftvnia or the Catfomla Envfronmental Protection Agency, of
wnicfi the State of CaBfomia Water Pollution Control Rsvotvvig Fund « a port
In accordanoe with Government AvdRrTOStandorifs, we hswe also bsued a report dated Auoietlfi. 1997,
on our corwirlpmtinn of the California Water Pollution Control Revorvrg Fund's internal control structure
with tow* and mguMrvts.
Office of the Inspector General
Environmental Protection \jency
San Francisco, Cattom'ia
lust 16,1997 on
Mm* mm tigort
-------
STATE OF CALIFORNIA
WATER POLLUTION CONTROL REVOLVING FUND
Balance Bbeet
September», 1996
With Unaudited Comparative Totals tor 1965
(in thousand*)
Anati
Caen and cash equivalents
Receive htes-
Loans
InierKct nn loans
interest on nwertnentD
Other
ratal receivables
_12S4_
S 166,470
714.346
4,489
2.090
2.000
77? 3^
Unaudited
* 112.654
398.015
3,906
1.«?
6.607
rinosfl
Total arrets
5 B31 <04
77974
Liability end Fund Equity
UaMrfes:
Aeemnts payable and accrues expenses
% 307
t 370
Conctructon Coats payable
600
7,407
Ottwr
30
Total current koblfiea
1 187
7,777
Fund equity.
Contributed capital.
Envronmental Protection Agency
674.012
937,834
State of Calfomtt
153,246
139.910
Looel Agency Contributions
2,639
0
Retained earnings
90,310
S7 4D3
Total equity
715 147
Total &aUime& and fund equity
S 691.404
ST?? 374
The accompanying notes ere an integral pert of the fiikuildl statements.
2
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05/05/88 15:10 FAX 415 744 1076 U.S EPA (£007
STATE OF CALIFORNIA
WATER POLLUTION CONTROL REVOLVING FUND
Staiamrrt of Rtv«nu», Eiptntn and Changes In IWainad Earnings
For the rev ended September 30,1996
With Unaudited Com para try* ToUt« for 1995
(r thousands}
Revenues:
Inarae en loans
investment income
Total revenues
Expenses:
AOminictratN* npsnsac
Revenue! over upwiut
Retained earnings. beginning of year
ReainM aomfrigs, and of year
-------
05/05/98 16:10 FAI 415 744 1078 U.S EPA <2008
STATE OF CALIFORNIA
WATER POLLUTION CONTROL REVOLVING FUND
Statement of C*ah Flows
For tha yaar andad Saptambar 30,1996
With Unaudited Comparative Totals lor 1995
(in thousenda)
Umufkof
1Wt 1Wt
Cash tows from mwuting octivibee:
Bw/wthus nwr wjiBnww S 22,907 9 14,901
Adjustments to reconcBe operating Income to
net coeh flow provided by operatario ectovitea:
Changes in assets and labUfttes:
(Increase) Decrease in receivables
Increase (Decrease) fri accounts payable and
accrued expenses
Met oath provided by operating activities
Cash flows from capital end related financing activities:
Funds received from Environmental Protection Agency
Funde received from the State of California
Cantri&Lrtlan of state machlng funds tram local agencies
2,487
(6,560)
1B.814
138,178
13.336
2835
(6.625)
£50)
7-BB6
122,610
36.914
Net cash provided by capital and rstaffitl financing actMDes
^53153
158.724
Cash flows from Investing acTMBcs.
Loan disbursements
Repayments on bans receivaCkies
Net cash used in tnvncthg activates
Increase In cash and caBt\ equivalents
Carfi and cash equivalents, beginning or year
Cash ana cash squivalar.ts, and of ysar
(138.294)
23.863
(11S.33H
65,636
112.83d
» 168.470
(145.363)
1B.5T7
H26.B3E1
40,774
7?, 060
LH2.B34
Thr Kccxmpanying notes are an integral part of tne Ana nets I statements.
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STATE OF CALIFORNIA
WATER POLLUTION CONTROL REVOLVING FUND
Notes Id Financial Statements
Soptambar 30,1996
(in thousands)
i. Organization of the Fund
The Catfemie GtBte Water Potution Control Revotvhg Fund (the Fund) was cataWshed pursuant
to Title VI of the Federal Wfetar Quality Aa of 1687 (the Afl). The Aa estabUsnad me swe
revoking fund (5RF) program to replaoe the construction grants program to provide loans at
reduced irilaevt rates to finance the construction of policy owned water poiuCon control
fecSitiea, nonpoint source polution control projects, and estuary management plans. Instead of
maiang grants to committittes mat pay tor a poreon or building wastewater treatment fedBiles. the
6RF provides tor low interest rote loans to finance the entire cost of qualified projects The 3RF
proroes a fiesdwe financing source mat can be u*ad tor a variety of pollution oontroi prefects,
induing non-point source poflution oontroi projects, end developing estuery conservation and
management plant. Loans made by tno Fund must be repaid wfeMn 20 years, and ail
repayments, including interest and principal, must remain in the Fund.
The Fund was oaotahzed by the U.6. Eiwuhii«i1h! Proteciian Agency (EPA) by B series of
grants starting in 1M9. states are reqisred to provide an additional 20 percent of the Feoeral
caprtafeabon grant as matching funds in order to receive a grant As of September 30,1996.
Congress authorized the EPA to award S9U.2A6 In capoailzation grants to tha Stata of California
(California). California a required to oontrfttuts $197,650 in matching funds.
The Fund is administered by the California Envtonmentsl Protect on Agency (Cat/EPA) through
tha Dwsnon of Oaan Watar Programs of tha Stata Water Resources Control Board (the Board).
Cal/EPA's primary Bctmbos with regard to the SRF include the making of loans for water potution
control facilities. and the management ana coordlnaoon or trie Fund. Ttta Boart oonnta of fwe
members, oil of which are appointed by the Governor.
The Fund does not have any Kin time employees. Instead. CaVEPA charges the Fund tor time
spent on SRP aavmac by employees of the Board, and the Fund laintouraac California's General
Find for auch costs in the tallowing month. The charges include the salaries and benefits of the
employees, as well as inoirect oosts aflocattd to the Fund baaed on dract salary oosts.
Employees charging time to the Fund are covered by the benefits of CaSfomia. The Fund is also
charged inavect costs of Caltomia through the cost atocation plan for general state expenses.
Tha Fiau is included in CaMoma's general purpose financial atatements ae a Special Revenue
Fiaid using the modifed accrual bass. Because of thedtfierenf presentation. there may be
differencee between the emounts reported in these financial statemenb and the general purpose
financial statements.
3
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STATE OF CALIFORNIA
WATER POLUmON CONTROL REVOLVING FUND
Notes to Financial Statements
September 30,1996
pi tnoucanoe)
2. Summary of Significant Accounting Policies
Sm* or Acoowmng
The tiMYi presents Be finanaal statements as a nonoxpondabl# trust tune. The Fund usee Dm
accrual method at accounting whereby revenues are recorded as named and wxpanees an;
recorded when 0% babity it incurred. Ceifomia has elected to follow the aocountrtg
pronouncements of the Governmental Accounting Standards Board (GASB), as well as
atalemenft issued by the Fin ana b) Accounting Standards Board before November 30,19&S
unless the pronouncements conflict wttn or contnttct GASB pronouncements.
Cart and Cash Equtvaimia.
Ai montas of the Fund w dapocaed wttn the Caltomta Treasurers Office, ana are ooncttered
cash. According to Caktomie taw, the Treasurer«responsible for maintaining tie cash balances
and mvactng axcecs each of the Fund, as discussed in Note 3. Therefore, management of the
Fund does not have any oontrd over the iirvealimait of excess cash, and the aljtpitait of cash
tows conodore all funds deposited wfth the Treasurer to be each or cash equivalents, regardless
of actual maturities trf the underlying investments.
Loans fieca/vt&e
California operates the Fund as a area loan program, wmere&y loans made id communities are
69.9 percent funded by the Foderal coprtataton grant, end 16.7 percent by the state matching
amount Loan funds are disbursed id the local agencies as they expend tiros Itv the purposes of
the loan, end request reimbursement from the Find. Interest a calculated from the date Viet
lunds are advanced, and after the final disbursement nas been made, the payment schedule
identified r the loon agreement» ecbusted tor the actual amounts disbursed, and interest accrued
curing the project period. No provision for uneolectitjle accounts has bean made as all loans are
current and management believes thai all loars will be repaid according to the loan terms.
Contributed Capital
In accordance wtth generaky arr^ywi accounting principles, funds receded from the EPA and
California for the c&Dftafizetion of the Fund ore recorded as contributed capital. In certain
rstanees, local communities nave also contrttxnae CaMtomta's 20 percent mater in excrarpa for
2ero rtemt rate loans, es more fully daoussed in Note 5. The state matnh made by local
agencies has beer recoraed as contributed capital
0
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STATE OF CALIFORNIA
WATER POLLUTION CONTROL REVOLVING FUND
Notes to Financial Statements
September 30,1996
d operates under a continuous eppreprintion beoauee the
finding of the motoring funflt approved hy Ihe voters contained its own appropriation authority.
Theretor*. the Fund opersbone ere not meluded in Csatomja'sannisi! k**jpet
ReotassffkTfnna
Certain arre».t th* rrveat-itenta of the PM(A can be
obtain «a from the state Treasumr. Aft of June 30.1996, the West Bats Mtia&le, Cafttomc*'*, Mai
pooled investments were appradmatefy C6 Wlion, and the wmtge remeintng life of the
securities Masted was M1 day*. The combined deposits of the tfMlF wot June 30,1990 were
appreaometehr 812.1 bBlkm, end total earnings tor me yearenrtnri June 30.1996 went
approximately 3062 mflllon.
AD eaefi orvie Funo it satBd iitmni tnveatments.m tocel government Investment pools ere nrrl
mtevuiitcfl because they ane not evuenoed by securities (hut in phyaioal or book entry form.
Carrying Market
Amount. value
Mat subject to cetegonution.
Local government Investment pad I 166 470 « 16B.470
A. Loans Receivable
The Fund makes loans to qusirfiad agencies for orbtccb that meet Ihe eltgfciDty requirements nf
the Act. Loans ere financed by capitafizaoor grank. state ruaUJi. tocel oorrtnbutiona, end
revoking funds. Effective interest rates on loens yary between 0.0 an
-------
STATE OF CALIFORNIA
WATER POLLUTION CONTROL REVOLVING FUND
Notes to Financial Statements
September 30,1996
(in thousands)
Loans Receivable (continued)
Loans by Category-'
Loena receivable et September 30,1W6 ere a* fellow#:
Loen Remaining
Atrthortteg Commmrient
Completed projects ( 467,372 ( 0 S 374,106
Projects fri progress <07.006 1M.7B6 Sflfl.241
Toots
Loans maun at various Intervals tnrougn September 30.301B- Tne scneduiec principal
payments on loena metunng in eubseauent years areas follows:
Yeer ending September 30: Amount _
1997 $ 27,063
1999 36,998
1999 41.604
2000 49,737
2001 47.116
Thereafter 815.620
Loena to Uator Loeil Agtneit*
As of September 30,1995, the Fund had made loans to eleven agencies that m the evgragate.
excaodati 810 million The oustarttlng balances of hau loans represent appropriately 81
percent of the total loens receivabte, as follows:
Authorized Outstanding
Local Aaencv Loan Amount Balance
City ft County of 3en Francisco $ 227.194 3 180,782
Lot Anjetet County 106,185 87,132
East Bay Municipal IMfty District 100.000 M.M4
Santa Ana Watershed Prefect Authority 73,222 70,146
City of Santa Cruz 4A.346 33.1-17
City of San Luis Obispo 31,227 26,427
Union Sanitary District SO.flflO 77.733
t
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06/05/8)3 18:12 FA1 41S 744 1078 IJ.S EPA
0013
STATE OF CALFORNIA
WATER POLLUTION CONTROL REVOLVING FUND
Notes to Financial Statements
September 30.1996
(in thouaencta)
4. Loan* Receivable (continued)
City of Santa Rom 25,088 22,370
Ffwcno Metropolitan Flood Control Dtsdct 20,230 16.437
City of Lrvermore 16,469 12,706
Ojai Valley Sanitary Dttrtrtet la.m < 13.651
Total * TP1.29C f S7&.6S4
Tho ajmorOftO loan amount tndudcc both completed projects arte projects In progress As of
September 30.1996, principal repayments or completed projects to the above agencies were
971,376 and remaining amounts to be tfsburwd on projects m progress was 151,290.
G. Contributed Capital and Fund Balance
The Fund b capitalized by grants from EPA authorized by "Htto VI of the Ad, matching tacit from
Caiwrwa and contrtbuttonii by cwtain local agenoes. At funds dmn are recorded as
contributed capital from the Environmental Protection Agency end Cakfoma. As of September
SO. 1996. EPA rtas warned capitalization orarrts of *988.246 Id CaSfamia. of which SC74.012 has
been drawn for bona and edrninratrBtNe expenses. California has provided matching fundi of
S153.246. The toflowtne fiurnrrHrtzes the capitalization grants awarded, amounts drawn an each
pram » of the balance sheet dote, and balances evaiaMe for Mure loans:
Total Draws
Total Draws
Available
September *0.
September 30.
September 30.
xw .
Grent Amount
199S
1996 Drews
10SS
1986
19(19
» 177.579
9 177.4(13
S SO
a 127.523
X 56
1990
119,777
116,836
1.976
117,411
2.366
1891
146,776
137.64*
fl.»i
144,344
2,434
1992
138,962
108,216
26.616
134,832
4,130
1993
137,465
46,124
75.636
l?1.78fl
13.6M
1994
£5,296
2,322
25.498
27,920
67.476
1995
¦a, 092
0
302
302
87.790
1996
144.297
0
0
0
144.297
Totals
S 963.246
} 537,834
1 136.179
$ 674.012
9 314.2*
As of September 30.1995 and 1996, State metehing ©onWbufons were:
September X. 1996 September 30,
1BB5 Contribution 1996
State Of California S 138,010 % 13.336 S 153 246
B
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STATE OF CALIFORNIA
WATER POLLUTION CONTROL REVOLVING FUND
Notes to Financial Statement*
6*ptambar30, 1996
(in thousands)
Contributed Capital and Fimd Balance (continued)
Local Agency Contributions
Beginning in 1006, Fund offered local agendas the opbon of raoaisflng scrMnieoKt rate loans
(zero-rate loans). In order to obtain r zprc-rate W»n. the H9«nry had »n pwy C^Mnmw'* mwrAing
ahere of the ban, jeneially 16.7 peroent of the total loon amount
At of September 30,1996, seven agencies entered into agreements for mro-rate loans tor
$27,119, wnlcn Includes col rrstctirig find* of Vl.318 to be con tributes by the Inmi mmriis. A)
the balance sheet dote. $14,708 in loan funds had been disbursed, including the local agency's
contributions of 12,639. Detais of the loans at
Amount
Funds
Local Agency
Rermining
Authorized
Disbursed
Cenfffouton
Contribution
Compieteo projects
9 e.Aoa
$ fl,«48
» 1.073
S 0
Projects m progress
20.G71
6 260
1.586
1.879
Tetab
f 77,119
f 14 70S
f fcwe
S 1.879
Rastrictod Fttmia
6tate matchrg funds tor the 1993 eantalizaton grant and portions of the 1994 end 1995
capitalzation grants were provided by transferring 135,770 In etgioie loans outstanding from
CaSfomie's Wetw Reclamation Loan Fund. Wnle these teens were transferred into the Fund,
repay menu on tnese loans are restnetea lor future water reclamation loans that are eligible under
the SRF.
Contingencies and Subsequent Evanta
Conflrrpant/Bi
The Fund is exposed to vanois risks of loss related to torts, thefts of wimst;. «rmrs or nmssnas.
¦juries to state employees while performing Fund business, or acts of God.
The Fund maintains insurance for ol rata of loss which b induded tn the indirect oosts charged to
the Fund. There have not been any claims aoatrst the Fund since Its Inception ki 19M.
Subaoquant wonts
Subsequent to year end, epa awarded the 1887 capitatzatcn grant to California. The gram
Orcr*«jes S53.48S ri additional finds, including California matching share of $6,915, for making
loans to cjjalified communities
10
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16:12 416 <44 J.U/6
U.S> fcfA
«Ui6
Independent Auditor's Report on the
Internal Control Structure BaGed on an
Audit of the Financial Statements
Performed In Accordance with
Government Auditing Standards
-------
.5L1*
mi
J*
UNITED STATU ENVIRONMENTAL PROTECTION ACSNCT
OPPICC or THE INSPECTOR GENERAL FOR AUDITS
WUTEKN DIVISION
ra hawtmornc eTurer
TITH FLOOR. MAIL CODE M
«AN PHANC15CO, CA M1QS-U01
California State Water Resources Control Board
Sacramento, CaBtoma
We haw auOted the financial statements ot (he California Vtater Polutior Control Revolving Fund M of
and for the year ended September 30,1896. end hove issued our report theraon oatao August IS, 1K7.
We conducted ouraudft vi accordance with generally accepted auditing standards and Government
AtnMmg Starxtarat issued by the Comptroller General of the United States. Those standards require that
we plan wrd perform the audit to obtain reasonable assurance about whether the finarwtiu statements art
tree of maturtil misstatement
The management of the Canomia mater Pdhjten control RevoMng Fund b icsporsble for establishing
and rraintaining ar internal control structure. In fulfilling this responsibility, estimates and Juogements fiy -
management are required to assess the expected benefits and related costs of internal control pdiaes
and procedures. The objectives of an rtemal control structure are to provide management with
reasonable, but not absolute, assurance mat assets are saieguamed againitf toss from unauthorized use
or tfepasftjon and that transactions are executed in accordance with management"s authorization and
recorded properly to perrm the preparation of financial statements in acoontonce with generally accepted
accounting principles. Because of inherent limitations in any internal control structure, errors or
irregularities may nevertheless occur and not be detected. Also, projection of anjr evaluation of the
structure to future periods is subject to the risk that procedures may become inadequate because of
changes r conditions or that the eftecoveness of the design and operation of policies ano procedures rray
In (fanning and performing our audt of the financial statements of the California Water Polirtxxi Control
Revolvrg Fund for the year ended Septemoer 3D, 1696, we obtained an understanding cf the internal
control structure Wth respect to the internal control structure, we obtamed an understanding of the
design of relevant poiioos and procedure and wnederthey have been placed In operation, und we
assessed cnntrnl nsk in order to determine our auditrg procedures for the purpose of expressing our
opinion on the financial statements and not to provioe an opnion on the fritemai control structure
Accordingly, we do not fsq>res& &uc*i an opinion.
Our consioeratton of the invtrmi control structure would not neoessarity disclose ad metiers in the internal
control structure that might be matenal weaknesses under standards established by the American Institute
of Centred PUMC Accountants. A material weakness Is a condition in which the design or operation of
one or more of the specific internal control elements does not reduce to a reiaweiy low level the rtsk (hat
errors and irregularities in amounts that would be. material in rotation to the ftnaraa! statements being
audited may occur and not be detected within a timely period by employees "n the normal course of
perforrrang their asaoned functions. We noted no matters involving the internal control structure and its
operations hat we consider to be material weaknesses as defined above. *
1?
-------
w . ft? LfA
IfcJ U1 (
This report s intended for (he Information erf managamani of the Canwnta Water Pollution Control
Revoking Fund and tha Untod SiatM Emnronmontal Piatedjun \jnnry. However, till report b a matter
Of public record and distftxibon b not limited.
Office of the Inspector General
ErMrenmemai ProtecBon ^ency
Sar Francisco. CA
August 15.1897
13
-------
Independent Auditor's Report
on Compliance with the Requirements Applicable to the
Environmental Protection Agency's
State Revolving Fund Program
in Accordance with
Government Auditing Standards
14
-------
>' f* \
UNITED STATES ENVIKnNMCNTAl PROTECTION AOENCY
OFFICE OF TMt INSPECTOR GENERAL FOR AUDITS
WESTERN DIVISION
71 HAWTHORNS street
WTh FLOOn, MAIL CODE 1-1
(AN FRANCISCO, CA MttS-UOl
Caifomia State Water Resources Control Board
Sacramento, California
We have audited the financial statements of Pie CnHomia Water Pollution Control Revolving Fund (the
Fund) as of and for the year ended September 30.1006, and tare issued w report tfteneon dated Augiprt
15,1067
We have sbo audited the Fund's compliano# wan spadfc program requirements governing activities
atCHKC and unallo»M. matching requirement earmarWng, period ^ availability of funds, reporting
aubreoipent monitoring, environmental reviow requirements, bfrutng commitments, ash management
and fund establishment loan repayments and fund earnings that are applicable to rte Emrironmental
Protection Agency State Revolving Fund program tor the year ended September 30.1996. The
management of the California Water Pollution Control Revolving Fund b res portable for the Funcf s
compliance with those requirements. Our responsibility is to express an opinion on those requirements
based on oir audit
We conducted our audit or compliance witn those requirements in accordance with generally accepted
nuriiti^e !«andarda. Government Autbong Standards, ksued by the Comptroller General of the United
States, and the draft Environmental Protection Agency Srato RemMno Fund Audit Guide. Those
slarv£*Tfc n^rjurrf that we plan and perform the aud it to obtain reasonable assurance about whether
materia! noncompliance with the requirements referred to above ocwred. An audit includes examining,
on a test tasty nyidence about the Fund's eompGenoe with those requirements. We believe that our audit
pro/idee a reasonable bass tor our opinion Our audit does not provide a legal detemwiation of the
Fund's oornplianm with those requirements.
in our opinion, the Cnhfrmn Wnier PdMion Control Revolving Find oomplied, ri al rmleruii reepacts,
«t the specific program requirements that are applicable to Environmental ProiBCton Agency State
RavoMng Fund prog ram for ihp yvsv ended September 30,1996.
This report Is intended for the informatinn nf nwiwgement of the Fund and the United States
Environmental Protection Agency. However, this report is a matter of public record ana tts CKStnOLfOon is
not imrtea.
Omae or tne *rv»»nr general
Environmental Protection Agency
San Francisco. CA
August 15,1997
15
-------
v«'Vi!/fO XS.i.0 rAA 4X0 <44 iU/0
U.S fcKA
12)020
DBTRJBimON
II—dnmitaw Offlc*
Aajuunte Administrator for Regional Opftirra
sm Srata/Locai FUlMont (1501)
Awwantw Ariminwtiwli« fcw Cnfu»ww.M»ii»l and
legislative Adams (1301)
Astocata AdmrurtraU* tor ComrnunEa&onK,
Eduoetoor & Pubtc Affon (1701)
Region fl
Regionel Administrator
Dfrvctor. waw Managwngrt Dtvition
Audit Fofrwruji CnrsWrwrfnr
Public A/tars Office
OtflT
State Water Reoourou Control Board
-------
Internal Controls
•To protect a government's assets against the
danger of loss or misuse and to ensure that
all transactions are properly authorized and
recorded.
Internal Controls
• Good management requires good internal
controls
• Profession skepticism by management sets
the tone for the entire operation
• Weak internal controls are the primary
factor contributing to fraud
ID-28
-------
Aspects of Effective
Internal Controls and
Financial Statement Risk
• Cash and investments
• Loans receivable
• Bonds payable
• Cash receipts
• Cash disbursements
• Payroll
• Data processing
Cash and Investments
• A set investment guidelines
• Management review of investments
• Bank reconciliation
• Prepared in a timely manner
• Not done by an employee involved with
cash disbursements or cash receipts
• Reviewed by management
m-29
-------
Cash and Investments:
What to Avoid
• Illegal investments
• High risk investments
• Below average yields
• Interest not being properly or timely
allocated
• Non investment of available cash
• Adequate collateralization
• Uninsured accounts
Case
One individual does all of the bookkeeping
for small company. The owner and
president approves all invoices and signs
the checks once per month. As the
bookkeeper has been a trusted employee for
ten years, the owner reviews only the
monthly financial statements.
in-30
-------
Result
The bookkeeper writes the checks in
erasable ink and pays her own personal bills
then changes the names on the checks when
the checks come back with the bank
statements
Loans Receivable
• Adequate analysis of borrowers financial
position
• Restrictive covenants are met
• Borrower meets all legal and borrowing
requirements
• Appropriate consideration of loan losses
• Interest charged is adequate to meet future
revolving loan demands
in-3i
-------
Loans Receivable:
What to Avoid
• Borrowers do not meet covenants
• Payments are not applied
• Individual who receives cash receipts is also
responsible loans receivable record keeping
Bonds Payable
• Compliance with covenants
• Refinancing opportunities are monitored
• SEC continuing disclosure requirements
in-32
-------
Bonds Payable:
What to Avoid
• Defaults or late payments
• Complex covenants
Cash Receipts
• Timely deposits
• Restrictive endorsement
• Proper posting to borrowers loan
• Lock box system
in-33
-------
Cash Receipts:
What to Avoid
• Large amounts of cash on hand
• Theft of checks
Case
A water and sanitation plant receives
multiple checks on a monthly basis for
service fees. The mail is opened by a
receptionist and given to the bookkeeper to
prepare the deposit slips and post the
payments to the billings system.
m-34
-------
Results
The bookkeeper has opened a separate
account in the District's name and is
depositing checks then transferring the
funds to his personal account
Cash Disbursements
• Invoices are properly approved
• Approval of invoices should be separate
from check signor
• Adequate filing and cancellation of paid
invoices
• Timely review of the project being financed
• Expenses are allowable and within budget
in-35
-------
Cash Disbursements:
What to Avoid
• Duplicate invoices
• Missing discounts
• Fake invoices
• Fraudulent checks
• Multiple funding sources of a project that
exceed the total project
Case
A small water district's board of directors
meets only four times per year due to
limited activity. They have no employees.
All checks require two board member
signatures. All nonstandard checks are
approved at meeting and the president signs
blank checks so that the treasurer can pay
the standard monthly bills that have very
little variation. The board does receive
monthly financial statements from the
treasurer.
in-36
-------
Result
The board treasurer writes checks to her
own bank account and prepares false
financial statements.
Payroll
• Adequate documentation in personnel files
• Separation of input and approval
° Accurate tracking of time
in - 37
-------
What to Avoid
• Duplicate employees
• Inaccurate or late tax filings
• Unauthorized pay increases
• False reporting of hours
Case
• A water amusement park requires that all
purchases and time sheets be approved by a
department head and the finance director.
Budget to actual statements are reviewed
monthly by management and the
department heads
in-38
-------
Result
• The department head and finance director
are over reporting hours and order
additional supplies that they sell or take
home for personal use
Data Processing
• System that can produce adequate reports
• Only authorized employees can change
information
• Appropriate password protection
• Back up of system (store offsite)
m-39
-------
What to Avoid
• Management does not receive accurate
reports
• False or oops journal entries
• Duplication of entry
The City of Vine has just begun its own financing authority for financing. The
Authority is in its first year of operation and has only three employees. Neil the
accounting and general administrative staff, Derek is an engineer that will review
the progress of projects and Karen the executive director who has a finance
background. Neil receives all checks through the mail. He stores them in a locked
desk drawer until he can deposit them. Because the bank is not within walking
distance he makes the deposit every Friday. All deposits are made to the local
checking account If there is excess funds they are transferred to the money market
account As Neil receives all of the mail he files invoices by their due date. Every
two weeks he enters them into the computer and prints checks. He then has Karen
the executive director sign the checks and he mails them out. If Karen is not around
one of the members of the board of directors will sign the checks. Neil keeps the
check stock in a locked file cabinet. For reimbursement requests from borrowers
Neil receives and reviews the requests and makes the wire transfers over the phone.
A summary of the status of the projects is given to Karen on a monthly basis. Neil
also prepares a reconciliation of all the bank accounts, which is filed with the
statements. As there are only three salaried employees the Authority uses a payroll
service. The funds are automatically transferred from the checking account As
payroll is considered confidential Karen receives the statements and is authorized
the only person authorized to make changes.
IE-40
-------
Town of L Financial
Statements
in-4i
-------
For the Town of L, review the financial statements to answer the following questions:
1. Is there anything unusual about the audit opinion?
2. What basis of accounting does each fund use?
3. How much are total cash and investments?
4. What is the primary investment of the Town?
5. Which funds reflect a net loss?
6. Did cash received for user fees cover operating expenses?
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7.
How much was paid for interest and principal on long term debt during the current year?
8. In 1997 how much will be required for total debt service?
9. How much cash is available for debt service next year?
10. What significant contingencies exist that could have a material impact on the Town?
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TOWN OF L
GENERAL PURPOSE FINANCIAL STATEMENTS
and
SUPPLEMENTAL INFORMATION
DECEMBER 31, 1996
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TOWN OF LOCHBUIE, COLORADO
TABLE OF CONTENTS
DECEMBER 31, 1996
Page
Independent Auditor's Report 1
General Purpose Financial Statements
Combined Balance Sheet - All Fund Types and Account Groups 2-3
Combined Statement of Revenue, Expenditures and Changes in
Fund Balance - All Governmental Fund Types 4
Combined Statement of Revenue, Expenditures and Changes in
Fund Balance - Budget and Actual - All Governmental Fund Types 5-6
Combined Statement of Revenue, Expenses and Changes in
Retained Earnings (Deficit) - Enterprise Funds 7
Combined Statement of Cash Flows - Enterprise Funds 8
Notes to Financial Statements 9-21
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INDEPENDENT AUDITOR'S REPORT
Board of Trustees
We have audited the accompanying general puipose financial statements of the Town of L as of
and for the year ended December 31, 1996, as listed in the foregoing Table of Contents. These
financial statements are the responsibility of the Town's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the general purpose financial statements referred to above present fairly, in all
material respects, the financial position of the Town of L at December 31, 1996 and the results
of its operations and the cash flows of its proprietary fund types for the year then ended, in
conformity with generally accepted accounting principles..
The accompanying general puipose financial statements have been prepared assuming that the
Town will continue as a going concern. As discussed in Note 12 to the financial statements, the
Town's deficit in the General Fund, working capital deficits and accumulated deficits in the
Enterprise Funds, litigation matters, noncompliance with Bond and Loan covenants and Colorado
Department of Public Health issues raises substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters also are described in Note 12. The general
purpose financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
July 18, 1997
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GENERAL PURPOSE FINANCIAL STATEMENTS
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COMBINED BALANCE SHEET - ALL FUND TYPES AND ACCOUNT GROUPS
DECEMBER 31, 1996
Proprietary
ASSETS AND OTHER DEBITS
Cash and cash equivalents
Restricted cash and cash equivalents
Accounts receivable
Property tax receivable
Due from other governments
Property, plant and equipment
Amount to be provided for retirement of
general long-term debt
Total assets and other debits
LIABILITIES AND EQUITY
LIABILITIES
Accounts payable
Accounts payable from restricted assets
Accrued interest payable
Deferred revenue
Capita] lease payable
Bonds and loans payable
Total liabilities
EQUITY
Special
General
Revenue
Enterorise
$ (2,148)
$
61,233
$ 38,568
455,117
2,957
34,324
19,520
10,938
2,219,537
S 31.627
$
61.233
S 2.747.546
$ 86,569
$
$ 36,104
321,559
17,330
19,520
1.474.130
106.089
1.849.123
Contributed capital
1,388,068
Investment in general fixed assets
Fund balances (deficits)
Reserved
61,233
Deficit
(74,822)
Retained earnings (deficit)
(489.645")
Total equity
(74.822^
61.233 898.423
Total liabilities and equity
S 31.267 $
61.233 S 2.747.546
-2-
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Account Groups Total
General General Long- (Memorandum
Fixed Assets Term Debt Only)
166,362
97,653
455,117
37,281
19,520
10,938
2,385,899
S 166.362 $
8.429
8.429
8.429 $ 3.014.837
$ S $ 122,673
321,559
17,330
19,520
8,429 8,429
1.474.130
8.429 1.963.641
1,388,068
166,362
166,362
61,233
(74,822)
(489.645")
166.362
1.051.196
$
166.362 S
8.429 $ 3.014.837
The accompanying notes are an integral part of the financial statements.
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COMBINED STATEMENT OF REVENUE, EXPENDITURES
AND CHANGES IN FUND BALANCE
ALL GOVERNMENTAL FUND TYPES
YEAR ENDED DECEMBER 31, 1996
REVENUE
Taxes
Licenses and permits
Intergovernmental
Fines and forfeits
Miscellaneous
Total revenue
EXPENDITURES
Genera] government
Public safety
Public works
Parks and recreation
Total expenditures
EXCESS (DEFICIENCY) OF REVENUE
OVER EXPENDITURES
OTHER FINANCING SOURCES
Operating transfer in
Proceeds from sale of land
Total other financing sources
EXCESS OF REVENUE AND OTHER
FINANCING SOURCES OVER
EXPENDITURES
FUND BALANCE (DEFICIT) -
BEGINNING OF YEAR
FUND BALANCE (DEFICIT) -
END OF YEAR
Special
Total
General
Revenue
(Memoran-
Fund
Fund
dum Onlv)
$ 116,206
$
$ 116,206
49,842
49,842
46,575
10,553
57,128
25,922
25,922
6.915
2.868
9.783
245.460
13.421
258.881
180,492
180,492
201,665
201,665
14,831
14,831
2.569
2.569
396.988
2.569
399.557
(151.528)
10.852
(140.6761
150,000
150,000
25.000
25.000
175.000
175.000
23,472
10,852
34,324
(98.2941
50.381
(47.9131
S (74-8221 $ 61.233 S (13.589)
The accompanying notes are an integral part of the financial statements.
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COMBINED STATEMENT OF REVENUE, EXPENDITURES
AND CHANGES IN FUND BALANCE - BUDGET AND ACTUAL
ALL GOVERNMENTAL FUND TYPES
YEAR ENDED DECEMBER 31, 1996
General
Variance-
Favorable
Budget
Actual
(Unfavorable)
REVENUE
Taxes
$ 179,765
$ 116,206
$ (63,559)
Licenses and permits
21,400
49,842
28,442
Intergovernmental
43,721
46,575
2,854
Fines and forfeits
50,000
25,922
(24,078)
Miscellaneous
334.330
6.915
(327.415)
Total revenue
629.216
245.460
(383.756)
EXPENDITURES
General government
104,126
180,492
(76,366)
Public safety
201,976
201,665
311
Public works
321,983
14,831
307,152
Parks and recreation
Total expenditures
628.085
396.988
231.097
EXCESS (DEFICIENCY) OF REVENUE
OVER EXPENDITURES
1.131
(151.528)
(152.6591
OTHER FINANCING SOURCES
Operating transfer in
150,000
150,000
Proceeds from sale of land
25.000
25.000
Total other financing sources
175.000
175.000
EXCESS (DEFICIENCY) OF REVENUE
AND OTHER FINANCING SOURCES
OVER EXPENDITURES
1,131
23,472
23,341
FUND BALANCE (DEFICIT) -
BEGINNING OF YEAR
4.271
(98.294)
(102.565)
FUND BALANCE (DEFICIT) -
END OF YEAR
$ 5.402 $ (74.8221 $ (80.224)
-5-
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Special Revenue Fund
Variance-
Favorable
Budget Actual (Unfavorable)
$ $ $
10,500 10,553 53
2.200 2.868 668
12.700 13.421 721
16.209 2.569 13.640
16.209 2.569 13.640
(3.509) 10-852 14.361
(3,509)
48.259
$ 44.750
10,852
50-381
$ 61.233
14,361
2-122
$ 16.483
The accompanying notes are an integral part of the financial statements.
-6-
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COMBINED STATEMENT OF REVENUE, EXPENSES AND
CHANGES IN RETAINED EARNINGS (DEFICIT)
ENTERPRISE FUNDS
YEAR ENDED DECEMBER 31, 1996
OPERATING REVENUE
Chaise for services $ 370,778
Late charges 4.050
Total operating revenue 374.828
OPERATING EXPENSES
Water operations 196,081
Sewer collection and transmission 2,965
Sewage treatment 31,498
Administration and general 160,499
Depreciation and amortization 46.263
Total operating expenses 437.306
OPERATING (LOSS) (62.478)
NONOPERATING (EXPENSE)
Interest income 6.942
Miscellaneous 20,341
Interest expense (51,242)
Amortization (5,981)
Settlement agreement - Water charges (300.000)
Total nonoperating (expense) (329.940)
NET (LOSS) BEFORE OPERATING TRANSFERS (392,418)
OPERATING TRANSFERS IN (OUT) (150.000)
NET (LOSS) (542,418)
RETAINED EARNINGS - BEGINNING OF YEAR 36,599
ADD: DEPRECIATION APPLICABLE TO CONTRIBUTED CAPITAL 16.174
RETAINED EARNINGS (DEFICIT) - END OF YEAR $ (489.645~)
The accompanying notes are an integral part of the financial statements.
-7-
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COMBINED STATEMENT OF CASH FLOWS
ENTERPRISE FUNDS
YEAR ENDED DECEMBER 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES
(Loss) from operations $ (62,478)
Adjustments to reconcile (loss) from operations to
net cash (required) by operating activities
Depreciation and amortization 46,263
Changes in assets and liabilities
(Increase) in accounts receivable (7,667)
Decrease in due from other funds 70,928
(Decrease) in due to other funds (103,097)
Increase in accounts payable 39,659
(Decrease) in customer deposits (9801
Cash flows (required) by operating activities (17.3721
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES
Operating transfer (out) (150,000)
Nonoperating revenue 20.341
Cash flows (required) from noncapital financing activities (129.6591
CASH FLOWS FROM CAPITAL AND RELATED
financing AcnvrnEs
Contributed capital - Tap fees 21,000
Capital outlay (314,129)
Loan proceeds 682,000
Principal paid on long-term debt (12,870)
Interest paid on long-term debt (50.1841
Cash flows provided by capital and related financing activities 325.817
CASH FLOWS FROM INVESTING ACTIVITIES
Interest income 6.942
Cash flows from investing activities 6.942
INCREASE IN CASH AND CASH EQUIVALENTS 185,728
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 307.957
CASH AND CASH EQUIVALENTS - END OF YEAR $ 493.685
The accompanying notes are an integral part of the financial statements.
-8-
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NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1) DEFINITION OF REPORTING ENTITY
was organized as a statutory town of the State
of Colorado by court order in 1974. The Town provides the following services:
public safety, street maintenance, public improvements, planning and zoning,
recreation, water and sanitation and general administrative services.
The Town follows the Governmental Accounting Standards Board (GASB)
accounting pronouncements which provide guidance for determining which
governmental activities, organizations and functions should be included within the
financial reporting entity. GASB pronouncements set forth the financial
accountability of a governmental organization's elected governing body as the basic
criterion for including a possible component governmental organization in a
primary government's legal entity. Financial accountability includes, but is not
limited to, appointment of a voting majority of the organization's governing body,
ability to impose its will on the organization, a potential for the organization to
provide specific financial benefits or burdens and fiscal dependency.
The Town is not financially accountable for any other entity.
Fire protection services are provided to residents of the Town by the
Protection District.
NOTE 2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The more significant accounting policies of the Town are described as follows:
a) Fund Accounting
The accounts of the Town are organized on the basis of funds or account
groups, each of which is considered a separate accounting entity. Fund
types and account groups used by the Town are described below.
Governmental Fund Types
General Fund - The General Fund is the general operating fund of the
Town. It is used to account for all financial resources except those required
to be accounted for in other funds.
Special Revenue Fund - Special Revenue Funds are used to account for the
proceeds of specific revenue sources that are legally restricted to
expenditures for specified puiposes.
-9-
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Proprietary Fund Types
Enterprise Funds - The Enterprise Funds account for water and sewer
operations that are financed and operated in a manner where the intent of
the Town is that the costs of providing goods and services to the general
public on a continuing basis be financed or recovered primarily through
user charges; or where the Town has decided that periodic determination
of revenue earned, expenses incurred and/or net income is appropriate for
capita] maintenance, public policy, management control, accountability or
other purposes.
The Town has elected to follow Governmental Accounting Standards Board
pronouncements. Therefore, statements issued by the Financial Accounting
Standards Board after November 30, 1989 are not applied.
Account Groups
General Fixed Assets Account Group - This group of accounts is
established to account for recorded fixed assets of the Town, other than
those accounted for in the proprietary fund types.
Genera] Long-Term Debt Account Group - This group of accounts is
established to account for all long-term obligations, including claim
liabilities, of the Town, except those accounted for in the proprietary fund
types.
b) Basis of Accounting
The modified accrual basis of accounting is followed in the governmental
fund types. Revenue is recorded when susceptible to accrual, i.e., both
measurable and available. Available means collectible within the current
period or soon enough thereafter to be used to pay liabilities of the current
period. The major sources of revenue which are susceptible to accrual are
property taxes and sales and use taxes. Expenditures, other than interest on
long-term obligations are recorded when the liability is incurred or the
long-term obligation paid.
The accrual basis of accounting is utilized in the proprietary fund types.
Revenue is recognized when earned and expenses are recognized when the
liability is incurred. Depreciation is computed and recorded as an operating
expense. Expenditures for property, plant and equipment are shown as
increases in assets and redemption of bonds are recorded as a reduction in
liabilities. Tap fees are recorded as contributed capital when received or
issued.
c) Budgets
In accordance with the State Budget Law, the Town's Board of Trustees
holds public hearings in the fall each year to approve the budget and
appropriate the funds for the ensuing year. The appropriation is at the total
fund expenditures level and lapses at year end. The Town's Board of
Trustees can modify the budget by line item within the total appropriation
-10-
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without notification. The appropriation can only be modified upon
completion of notification and publication requirements. The budget
includes each fund on its basis of accounting unless otherwise indicated.
Encumbrance accounting (open purchase orders, contracts in process and
other commitments for the expenditures of funds in future periods) is not
used by the Town for budget or financial reporting purposes.
The Town incurred expenditures in excess of appropriations for the year
ended December 31, 1996 in the Water Fund which may be in violation of
the Local Government Budget Law.
d) Pooled Cash
The Town follows the practice of pooling cash and investments of all funds
to maximize interest earnings. Except when required by trust or other
agreements, all cash is deposited to and disbursed from a single hank
account. Cash in excess of immediate operating requirements is pooled for
deposit and investment flexibility. Interest is allocated periodically to the
participating funds based upon each fund's average equity balance in the
total cash.
e) Cash Equivalents
For purposes of the statement of cash flows, the Town considers cash
deposits and highly liquid investments (including restricted assets) with a
maturity of three months or less when purchased, to be cash equivalents.
f) Restricted Cash
Restricted cash in the Water and Sewer funds are established pursuant to the
1980, 1981, 1991 and 1996 loan and bond resolutions (see Notes 4 and 6).
g) Property, Plant and Equipment
General Fixed Asset Account Group
Property and equipment are stated at cost except for those assets contributed
which are stated at estimated fair market value at the date of contribution
or at the developer's cost. No depreciation is provided on general fixed
assets.
Public domain or infrastructure fixed assets such as roads, curbs and
gutters, streets and sidewalks, drainage systems, lighting systems and
similar assets that are immovable and of value only to the Town are not
capitalized.
-11-
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Property, Plant and Equipment - Proprietary Funds
Property, plant and equipment are recorded at cost except for those assets
which have been contributed which are stated at estimated fair market value
at the date of contribution or at developer's cost. Depreciation expense has
been computed using the straight-line method over the estimated economic
useful lives.
h) Property Taxes
Property taxes are levied by the Town Board of Trustees. The levy is
based on assessed valuations determined by the County Assessor generally
as of January 1 of each year. The levy is normally set by December 15 by
certification to the County Commissioners to put the tax lien on the
individual properties as of January 1 of the following year. The County
Treasurer collects the determined taxes during the ensuing calendar year.
The taxes are payable by April or if in equal installments, at the taxpayers
election, in February and June. Delinquent taxpayers are notified in
August and generally sales of the tax liens on delinquent properties are held
in November or December. The County Treasurer remits the taxes
collected monthly to the Town.
Property taxes, net of estimated uncollectible taxes, are recorded initially
as deferred revenue in the year they are levied and measurable. The
deferred property tax revenue are recorded as revenue in the year they are
available or collected.
i) Compensated Absences
Compensated absences are recorded as current salary when paid. It is the
Town's policy that compensated absences do not accumulate, therefore, no
accrual is necessary .
j) Fund Equity
Fund Balance
The fund balances have been reserved for that portion of the fund balance
that is legally segregated or is not subject to future appropriation.
Designations of unreserved fund balances indicate management's intention
for future utilization of such funds and are subject to change by
management.
Reserved Fund Balance
The amount reserved in the Special Revenue Fund - Conservation Trust
Fund represents state lottery money which is legally restricted for parks and
recreation purposes.
-12-
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Deficits
The following individual funds had deficits as of December 31, 1996:
General Fund
S 74.822
Water Fund
Sewer Fund
$ 263,313
226.332
$ 489.645
See Note 12 for discussion regarding economic environment.
k) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions in preparing financial statements. These estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported revenue and
expenses. Actual results could differ from those estimates.
1) Totals (Memorandum Only)
Total columns on the combined statements are captioned "(Memorandum
Only)" because they do not represent consolidated financial information and
are presented only to facilitate financial analysis. Data in these columns do
not present financial position or results of operations, in conformity with
generally accepted accounting principles. Interfund eliminations have not
been made in the aggregation of this data.
Cash Deposits
The Colorado Public Deposit Protection Act (PDPA) requires that all units of local
government deposit cash in eligible public depositories. Eligibility is determined
by state regulators. Amounts on deposit in excess of federal insurance levels must
be collateralized. The eligible collateral is determined by the PDPA. PDPA
allows the institution to create a single collateral pool for all public funds. The
pool for all the uninsured public deposits as a group is to be maintained by another
institution or held in trust. The market value of the collateral must be at least equal
to the aggregate uninsured deposits.
The State Regulatory Commissions for banks and financial services are required
by Statute to monitor the naming of eligible depositories and reporting of the
uninsured deposits and assets maintained in the collateral pools.
NOTE 3) CASH AND INVESTMENTS
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At December 31, 1996, the Town's cash deposits had a bank balance and a
carrying balance as follows:
Cash on hand
Insured deposits
Investments
Carrying Bank
$
200
$
4.019
43.803
$
4.219
S 43.803
Colorado statutes specify investment instruments meeting defined rating and risk
criteria in which local governments may invest which include:
Obligations of the United States and certain U.S. government agency
securities
Certain international agency securities
General obligation and revenue bonds of U.S. local government entities
Bankers' acceptances of certain banks
Commercial paper
Written repurchase agreements collateralized by certain authorized securities
Certain money market mutual funds
Guaranteed investment contracts
Local government investment pools
Investments in local government investment pools or in money market funds are
not categorized because they are not evidenced by securities that exist in physical
or book entry form.
Carrying Market
Amount Value
Local government investment pool $ 548.551 $ 548.551
Total cash deposits and investments $ 552.770
As of December 31, 1996, the Town had invested in the Colorado Local
Government Liquid Asset Trust (the Trust), an investment vehicle established for
local government entities in Colorado to pool surplus funds. The Trust operates
similarly to a money market fund and each share is equal in value to $1.00. The
Trust offers shares in two portfolios, COLOTRUST PRIME and COLOTRUST
PLUS+. Both portfolios may invest in U.S. Treasury securities and repurchase
agreements collateralized by U.S. Treasury securities. COLOTRUST PLUS +
may also invest in certain obligations of U.S. government agencies, highest rated
commercial paper and repurchase agreements collateralized by certain obligations
of U.S. government agencies. A designated custodial bank serves as custodian for
the Trust's portfolios pursuant to a custodian agreement. The custodian acts as
safekeeping agent for the Trust's investment portfolios and provides services as the
depository in connection with direct investments and withdrawals. The custodian's
internal records segregate investments owned by the Trust. As of December 31,
1996, the Town had $142,666 invested in COLOTRUST PRIME.
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At December 31, 1996, the Town had investments of $405,885 held in tnjst at
Norwest Bank. These investments are restricted for capital improvements in
connection with the Town's loan from the Colorado Water Resources and Power
Development Authority (see Notes 4 and 6). This amount is invested in
COLOTRUST PRIME.
Cash deposits and investments are reflected on the December 31, 1996 balance
sheet as follows:
Cash and cash equivalents $ 97,653
Restricted cash and cash equivalents 455.117
$ 552.770
NOTE 4) RESTRICTED CASH AND CASH EQUIVALENTS
a) Debt Service
Cash and cash equivalents in the amount of $19,661 and $29,571 in the
Water Fund and Sewer Fund, respectively, are restricted for debt service
at December 31, 1996. This restriction was established pursuant to the
1980, 1981 and 1991 bond resolutions (see Note 6).
b) Water Enterprise Fund - Held in Trust
$405,885 was held in trust at Norwest Bank. This amount represents
unspent loan proceeds restricted for capital improvements in the Water
Fund.
NOTE 5) PROPERTY, PLANT AND EQUIPMENT
Property and Equipment - Governmental Funds
An analysis of the changes in property and equipment for the year ended December
31, 1996 follows:
Balance
Balance
January 1,
December
Bv Classification
1996
Additions
Retirements
31. 1996
Land
$ 4,500
$ 75,000
$
25,000
$ 54,500
Buildings
18,975
5,332
13,643
Vehicles
67,212
300
66,912
Equipment
34.808
1.196
4,697
31.307
$ 125.495
$ 76.196
$
35.329
$ 166.362
During 1996, a Developer contributed land valued at $75,000 to the Town's
General Fund. One of the lots to be used as a well site was sold to the Water
Enterprise Fund for $25,000.
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NOTE 6)
Property, Plant and Equipment - Proprietary Funds
The property, plant and equipment of the Town is summarized as follows:
$
Land
Utility plant
Collection and distribution system
Machinery and equipment
Construction in process
Accumulated depreciation
LONG-TERM OBLIGATIONS
Enterprise Funds
87,403
434,672
1,535,437
22,415
652.815
2,732,742
513.205
$ 2.219.537
The following is an analysis of changes in long-term obligations for the year ended
December 31, 1996:
Balance
January 1,
Balance
December
Additions Retirements
1980 Sewer Revenue Bonds
1981 Sewer Revenue Bonds
1991 Water Revenue Bonds
1996 Water Supply Loan
1996 Water Interim Loan
Total long-term debt
Less current portion
Long-term portion
$ 355,000
$ $
7,000
$ 348,000
61,000
1,000
60,000
389,000
3,000
386,000
352,000
1,870
350,130
330.000
330.000
805,000
(12.8951
$ 792.105
$ 682.000 $ 12.870
1,474,130
(349.284")
$ 1.124.846
The detail of the Town's long-term debt is as follows:
$428,600 June 3, 1980 Sewer Revenue Bonds due in varying amounts through
2020; interest at 5 %. These bonds may be called at any time at the option of the
Town.
$75,000 May 7,1981, Sewer Revenue Bond due in varying amounts through 2021;
interest at 5 %. These bonds may be called at any time at the option of the Town.
$400,000 September 9, 1991, Water Revenue Bonds due in varying amounts
through 2031; interest at 6.875 %. These bonds may be called at any time at the
option of the Town.
$352,000 August 28, 1996, Water Supply Loan with the Colorado Water
Resources and Power Development Authority due in 41 quarterly installments of
$6,712.78 principal and interest, beginning September 1, 1996 and ending
September 1, 2016; interest at 4.5 %.
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$330,000 August 28,1996 Water Interim Loan with the Colorado Water Resources
and Power Development Authority due August 28, 1997, interest at 4.5% of any
principal drawn. The Town paid and satisfied this debt in July 1997 (see Note 13).
The loan and revenue bond resolutions contain various provisions, reserve
requirements and covenants. The Town was not in compliance with the rate
covenants for the year ended December 31, 1996. Additionally, the Town's Water
Enterprise Fund does not have sufficient funds to meet a three month operating and
maintenance reserve (approximately $55,000) required by the Colorado Water
Resources and Power Development Authority loan.
The Proprietary Fund's long-term obligations will mature as follows:
Principal Interest Total
1997
$ 349,284 $
47,817
$ 397,101
1998
23,800
61,485
85,285
1999
25,340
60,289
85,629
2000
26,905
59,018
85,923
2001
29,496
57,636
87,132
Thereafter
1.019.305
817.204
1.836.509
$ 1.474.130 $ 1.103.449 $ 2.577.579
General Long-Term Debt Account Group
Balance Balance
January 1, December
1996 Additions Retirements 31. 1996
Capital lease payable $ 14.324 $ -0- $ 5.895 $ 8.429
$18,153 Capital Lease with Philip D. Winn for the purchase of a 1995 Chevrolet
Caprice police car. Due in 36 monthly installments of $549.50 principal and
interest beginning May 20, 1995 and ending April 20, 1998; interest at 6.0%.
The capital lease matures as follows:
Principal Interest Total
1997
$ 6,259
$
335 $
6,594
1998
2.170
28
2.198
$ 8.429
S—
363 $
8.792
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NOTE 7)
CHANGES IN FUND EQUITY
The following is an analysis of the changes in fund equity for the year ended
December 31, 1996
Contributed Capital Retained Total
Water Sewer Total Faming Fund Eouitv
Balance - January 1,
1996 $ 303,000 $ 780,242 $1,083,242 $ 36,599 $ 1,119,841
Net loss (542,418) (542,418)
Tap fees 21,000 300,000 321,000 321,000
Contribution (to)
from other funds 300,000 (300,000)
Depreciation trans-
ferred to contri-
buted capital (16.174) (16.174) 16.174
$ 624.000 $ 764.068 SI .388.068 $ (489.645) $ 898.423
During 1996, the Sewer Fund issued 150 sewer taps valued at $2,000 each to
Beebe Draw Water and Sanitation District in connection with the settlement of
disputed past water charges. The Sewer Fund recognized $300,000 of contributed
capital - tap fees upon the issuance of the taps and made a $300,000 contribution
to the Water Fund. The Water Fund recognized the $300,000 as contributed
capital and reflected a $300,000 nonoperating expense for the past due disputed
water charges.
At December 31, 1996, Beebe Draw Water and Sanitation District had used 61 of
the sewer taps.
NOTE 8) STATE FIRE AND POLICE PENSION PLAN (FPPA)
The Town contributes to the Statewide Defined Benefit Plan, a cost-sharing
multiple-employer defined benefit pension plan administered by the Colorado Fire
and Police Pension Association. The Statewide Defined Benefit Plan provides
retirement benefits for members and beneficiaries. Death and disability coverage
is provided for members hired prior to January 1, 1997 through the Statewide
Death and Disability Plan which is also administered by the Colorado Fire and
Police Pension Association. This is a noncontributory plan. All full-time, paid
police officers of the Town are members of the Statewide Defined Benefit Plan and
the Statewide Death and Disability Plan. Colorado Statutes assign the authority to
establish benefit provisions to the state legislature. FPPA issues a publicly
available annual financial report that includes financial statements and required
supplementary information for both the Statewide Defined Benefit Plan and the
Statewide Death and Disability Plan. That report may be obtained by calling
FPPA at 770-3772 in the Denver Metro area and 1-800-332-FPPA (3772) from
outside the metro area.
-18-
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The financial statements of the Statewide Defined Benefit Plan are prepared using
the accrual basis of accounting. Plan member contributions are recognized in the
period in which the contributions are due. Benefits and refunds are recognized
when due and payable in accordance with the terms of the plan. The Statewide
Defined Benefit Plan investments are presented at fair value except for short-term
investments which are recorded at cost, which approximates fair value.
The contribution requirements of plan members and the Town are established by
statute. The contribution rate for plan members is 8.0% of covered salary and for
the Town is 8.0% of covered salary. The Town contributions to the Statewide
Defined Benefit Plan for the years ending December 31, 1996, 1995 and 1994
were $11,388, $15,400 and $13,554, respectively, equal to the Town's required
contributions for each year.
NOTE 9) COMMITMENTS AND CONTINGENCIES
The Town is currently the defendant in a lawsuit filed by a former employee in
1992. The former employee alleges that he was improperly removed from his
position and has submitted, through his counsel, a new notice pursuant to the
Colorado Government Immunity Act, seeking damages in the amount of
$1,000,000. To date, the Town has vigorously defended the claims asserted by the
former employee and has been unwilling or financially unable to engage in
meaningful settlement discussions. An evaluation of the likelihood of an
unfavorable outcome is somewhat difficult to determine at this time.
The Town is also involved in four additional pending or threatened lawsuits from
three former employees and a developer. The Town has vigorously defended these
claims and is unable to estimate the impact, if any, that these actions would have
on the Town's financial statements.
NOTE 10) RISK MANAGEMENT
The Town is exposed to various risks of loss related to torts, thefts of, damage to,
or destruction of assets; errors or omissions; injuries to employees, or acts of God.
The Town maintains commercial insurance for all risks of loss. Settled claims
have not exceeded this commercial coverage in any of the past three fiscal years.
NOTE 11) TAX, SPENDING AND DEBT LIMITATIONS
Article X, Section 20 of the Colorado Constitution, commonly known as the
Taxpayer's Bill of Rights (TABOR) contains tax, spending, revenue and debt
limitations which apply to the State of Colorado and all local governments.
Enterprises, defined as government-owned businesses authorized to issue revenue
bonds and receiving less than 10% of annual revenue in grants from all state and
local governments combined, are excluded from the provisions of TABOR. The
Town's management believes a significant portion of its enterprise operations
qualifies for this exclusion.
-19-
-------
Spending and revenue limits are determined based on the prior year's Fiscal Year
Spending adjusted for allowable increases based upon inflation and local growth.
Fiscal Year Spending is generally defined as expenditures plus reserve increases
with certain exceptions.
TABOR requires local governments to establish Emergency Reserves. These
reserves must be at least 3 % of Fiscal Year Spending (excluding bonded debt
service). Local governments are not allowed to use the emergency reserves to
compensate for economic conditions, revenue shortfalls, or salary or benefit
increases. At December 31, 1996, the General Fund had a deficit and could not
meet this reserve requirement of approximately $7,400.
On November 5, 1996, the voters of the Town approved the Town to retain and
spend for purposes of municipal operations, capital projects and other lawful
municipal purposes, revenue in excess of Fiscal Year Spending in the amount of
$60,000 and $40,000 collected in 1994 and 1995, respectively.
Additionally, on November 5,1996, the voters authorized the Town to collect and
retain the full revenue received during 1996 and each subsequent year thereafter,
and to spend such revenue for debt service, municipal operations, capital projects
and any other lawful municipal purpose.
The Town's management believes it is in compliance with the provisions of
TABOR. However, TABOR is complex and subject to interpretation. Many of
its provisions, including the interpretation of how to calculate Fiscal Year Spending
limits and qualification as an Enterprise will require judicial interpretation.
NOTE 12) ECONOMIC ENVIRONMENT
The Town's General Fund has a deficit of $74,822 and the Enterprise Funds have
an accumulated deficit of $489,645 at December 31, 1996. In addition, the
combined Enterprise Funds have a working capital deficit. Also, the Town has a
number of lawsuits pending (see Note 9) and is not in compliance with certain loan
and bond covenants and reserve requirements (see Note 6). Additionally, the
Colorado Department of Health has issued an enforcement order to the Town
requiring installation of a new water treatment plant. In the event the Town does
not comply with the enforcement order, it could be subject to fines of up to $1,000
per day. These matters raise substantial doubt about the Town's ability to continue
as a going concern.
The Town is taking action in an attempt to eliminate the deficits, settle its lawsuits
and comply with the loan and bond covenants and provisions. The Town has
reduced staff, obtained a new loan (see Note 13) to complete construction of its
own water system and is considering increasing certain rates and evaluating other
revenue sources. Additionally, the Town expects substantial growth which should
increase revenue.
It is not presently determinable whether action taken by the Town and the
anticipated growth will generate sufficient revenue for the Town to continue as a
going concern.
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NOTE 13) SUBSEQUENT EVENT
During June 1997, the Town issued Water Revenue Bonds, Series 1997 in the
amount of $1,010,000 with an interest rate of 4.5% payable over 40 years in
semiannual payments of $27,341, including principal and interest. The proceeds
of the bonds will be used to finance certain improvements to the municipal water
system of the Town and pay off the $330,000 Water Interim Loan with the
Colorado Water Resources and Power Development Authority (see Note 6).
-21-
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IV. Structuring SRF Programs
to Fund Private Entities
SRF Programs are
Breaking New Ground in
Lending to Privates
• CWSRF: lending for NPS/Estuary projects:
- Over 500 projects totaling over $534 million
- Many projects are small loans to farmers for
BMPs
• DWSRF: lending to private entities
- Included in most DWSRF programs
- Will range from major water companies to mobile
home parks
IV-1
-------
Number of NPS Projects
Funded — 1990-1997
400
350
300
250
200
150
100
50
0
r - :c-.
t ¦ ' '
¦ ¦
¦ R
M
¦ ¦ ¦
1990 1991 1992 1993 1994 1995 1996 1997
Most Water Systems
are Very Small
¦ 25-100 persons
B 100-500 persons
¦ 500-3300 persons
H > 3300 persons
IV-2
-------
Lending Approach
Considerations
• Responsibility for financial assessment
- Credit review
- Ratio assessment - liquidity/solvency
- Pro forma Financials
• Responsibility for establishing security and
collateral arrangements
- Liens, guarantees
- Lock boxes/LOCs
Considerations - continued
• Administrative burden on state
• Assumption of loan default risk
• Costs associated with approaches
- Banking
- CPA/financial analysts
- Internal staffing
• Impact on number/volume of loans
• Control of the loan decision
IV-3
-------
State Approach Options
• In-House Review (Oregon)
- No outside parties involved
• Contract Assistance - CPA/FA
(PENNVEST)
- CPA/FA assist with review of applications
• Linked-Deposit (Ohio)/
Compensating Balances (California)
- Bank gives reduced interest loans
• Local Lender (Minnesota)
- Bank receives fee to manage loan
• Loan Participation (Minnesota)
- Loan rate is a blend of market rate and SRF rate
In-House Review
Oregon
• In-house review and loan
management
• No outside parties involved
• State performs comprehensive financial
capability assessment, collateral review
• State assumes all repayment risk
IV-4
-------
In-House Review
Oregon
• Financial Capability
Assessment
- Review credit reports
- Financial ratios
• Last 3 years of financial statements
• May require CPA review/compilation of reports
- Pro forma review
• Review projected revenues/expenses for project
- Collateral options
• Liens, guarantees, etc.
• No loan exceeds 70% of value of collateral
Contract Assistance
Pennsylvania
•
SRF assisted by outside
CPA firm
c
•
CPA conducts screening
- 3 years of financial statements and income tax
returns
- Pro forma financial statements
- Current/proposed rate structure
- Collateral requirements
IV-5
-------
Contract Assistance
Pennsylvania
Certified public accountant
makes recommendations
to SRF and Board
State makes loan decisions, manages loan,
assumes repayment risk
Financial condition of loan recipient
monitored annually by CPA and State
Linked Deposit
Ohio
• Bank conducts financial
capability assessment and
collateral review
• SRF invests in a reduced interest CD ~ ^
repayment is guaranteed
• Bank lends funds to NPS project at reduced
interest rate (CD, loan rate reduced by same
amount)
• Numerous states are considering the linked
deposit model
IV-6
-------
Two Ways to Fund a
Linked Deposit CD
1. Use SRF nonfederal funds
- Fund CD up-front with Fund repayments, state
match, investment earnings
2. Draw cash on reimbursement basis through
the EPA's Automated Clearing House
- Fund CD as construction/implementation
proceeds
Compensating Balances )
California \
• SRF deposits funds in a variety of \ ^
interest bearing accounts at a bank \
• Bank lends funds to an approved projects^
* %
• A percentage of the loan amount is debited
from the interest bearing accounts and
deposited into a non-interest bearing
Compensating Balance Account
IV-7
-------
Loan Participation
Minnesota
• Bank conducts financial
capability assessment and
collateral review
• SRF and bank each provide one-half of project
financing ~ bank at market rate, SRF at
reduced rate
Local Lender
Minnesota
• Bank receives 3% fee to
manage SRF loan
• Bank conducts financial
capability assessment and
collateral review, guarantees
loan
• SRF funds project as
construction proceeds
IV-8
-------
Summary
• States have devised many unique structures
to fund private entities in the SRF programs
• SRF programs can...
- Consider their strengths and weaknesses,
- Consider the advantages of different structures,
and
- Match an appropriate structure to their needs
• New ideas will continue to be developed as
states look for better ways to run their SRF
programs
Overview Of Credit Analysis
And Collateral Security Issues
For Private Borrowers From
SRF Programs
IV-9
-------
Funding Privately-Owned Public Water Systems
in the Drinking Water State Revolving Fund Program
June, 1998
-------
Funding Privately-Owned Public Water Systems in the Drinking Water State Revolving
Fund Program
I. Introduction
The Safe Drinking Water Act«(SDWA) amendments of 1996 established a Drinking Water
State Revolving Fund (DWSRF) to help public water systems finance infrastructure projects.
These funds are available as loans to "community" and "nonprofit noncommunity" drinking
water systems. The SDWA definition of a "community" water system includes many privately-
owned water systems.
The widespread eligibility of private entities for SRF funding is a departure from the Clean
Water State Revolving Fund (CWSRF) program design. The CWSRF program, like the Federal
Construction Grants program it replaced, focuses on Publicly-Owned Treatment Works
(POTWs). The CWSRF program allows loans for private projects associated with nonpoint
source pollution control and estuary management. However, to date, only a few state CWSRF
programs have experience with lending to private entities. Some states have developed
significant experience in lending to private entities through state-run loan programs that are
unrelated to the CWSRF program. For example, the Pennsylvania Infrastructure Investment
Authority (PENNVEST) has lent to private entities since 1988.
Lending to private entities will present challenges to states with limited experience. There
are many types of potential borrowers, and there are many types of potential security/collateral
options available for use when lending to private entities.
Assessing the form or amount of security or collateral needed for a loan can be more
complex for private entities than it is for municipalities. Many municipalities can provide a "full
faith and credit" pledge in a loan agreement. With this pledge, a municipality agrees to raise
funds through taxes and other charges if necessary to repay the loan. Private entities cannot tax
their customers. Therefore, an assessment of the borrower's financial capability and the need for
collateral is critical to ensure the security of loan repayments. The collateral required for loans
to privately-owned public drinking water systems varies, but typically includes the following
items:
• Liens on water revenues - payments to the water system can directly repay outstanding debt
• Guarantees of parent companies, affiliate companies, or individual stockholders - the lender
receives a pledge of company stock that can be sold if the borrower defaults
• Liens on the real estate owned by the company - the lender can recoup cash by selling
company real estate
In some cases, the above collateral is insufficient. The lender may need further security such as
the following:
• Personal guarantees - the lender can hold individual stockholders responsible for repayment
• Key man life insurance - an individual borrower purchases a life insurance policy with the
-------
lender as beneficiary
• Letters of credit - the borrower purchases a bank letter of credit - if necessary, the borrower
can draw funds against this letter of credit to repay the loan
This report presents different options for funding privately-owned systems that states are
currently using or are planning to use for the DWSRF program.
-------
Tl. State Approaches for Lending tn Private Entities
States are taking advantage of the flexibility of the DWSRF program and developing a
variety of methods to meet the challenge of lending to privately-owned public drinking water
systems.
• Oregon is developing a program in which DWSRF program staff will do all loan evaluation.
• Pennsylvania has run a successful program for almost a decade in which an independent
CPA firm does much of the loan evaluation.
• Ohio's CWSRF program has used a linked deposit method to offer small loans to private
entities for more than three years. The linked deposit method places the burdens of loan
evaluation and potential default on commercial banks. In turn, to compensate the bank, the
SRF program deposits funds with the bank and earns a significantly reduced interest rate on
the funds. Several states are considering the linked deposit method for use in their DWSRF
programs.
• Minnesota is considering the use of a loan participation method. In this method, a
commercial bank evaluates potential borrowers. The bank funds one half of each approved
loan at the bank's regular commercial rate, while the state funds the other half of the loan at
a reduced rate. The combination of loan rates results in an attractive low interest loan.
Section III presents a case-study style discussion of these state programs. The programs
represent the variety of methods that states presently are considering for their DWSRF programs,
but this does not represent all possible options. States will develop new methods as they address
their need to fund privately-owned public water systems through the DWSRF program.
Section IV considers the merits of the four options based on the following key factors:
• Administrative burden
• Control of the loan decision
• Security of repayment to the DWSRF
• "Leveraging" of funds
• Cost of the lending method
This evaluation does not determine that one method is "best." It should, however, inform states
as they consider how their DWSRF program can provide loans to private entities.
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III. Case Studies
Oregon
The Oregon Health Division, the Oregon Economic Development Department (OEDD), and
the Department.of Environmental Quality share responsibility for the state DWSRF program.
Oregon's program should receive its first capitalization grant in summer 1998.
Oregon is planning an internal evaluation of all applications for DWSRF loans. Some
members of Oregon's DWSRF program staff have previously worked for programs that lent
funds to private entities. The Business Finance Section of the OEDD also has experience
lending to the private sector, and the DWSRF staff can tap that resource if necessary.
Oregon plans to assess the financial capability of private-sector loan applicants based on four
elements. These elements are character and management ability, financial ratios and ratings, pro
forma financial statements (projections), and collateral.
An OEDD financial analyst will first assess the applicant's track record to assure that the
applicant has proven management ability and integrity. The Oregon Economic Development
Department will order corporate credit reports on the firm and personal credit reports on the
principals from standard credit bureaus.
The financial analyst will then evaluate the liquidity, solvency, and trends of the applicant's
finances. This evaluation will require review of the applicant's last three years of financial
statements and last three years of income tax returns. Financial statements will include balance
sheets, income statements, and statements of cash flow. They must conform to the guidelines of
the generally accepted accounting principles and the Financial Accounting Standards Board. If a
Certified Public Accountant (CPA) does not prepare the applicant's financial statements, the
Oregon Economic Development Department may approve a loan subject to submission of a
review or compilation by a CPA.
As part of the liquidity, solvency, and trend evaluation, the financial analyst will compare
twenty-four specified financial ratios (Table 1) with industry norms compiled by standard
financial information companies. For example, as part of an analysis of the applicant's liquidity,
the analyst will use the current ratio: current assets/current liabilities.
Unless a project will aire financially weak performance, Oregon will deny loan requests
from systems that have failed to produce positive "cash provided by operations" in two of the
last three years. Loan requests from systems that have not performed in the upper or middle
quartiles for the majority of the twenty-four financial assessment ratios will likewise be denied.
In a loan application, the borrower must submit three years of projected revenues and
expenses for the project, including any new rate schedules. Considering the projected operating
budget, the projected operating cash reserve, and the projected profit, the Department's financial
analyst will evaluate these projections. The projected operating cash reserve must be equal to
-------
oce-twelfth of the annual operation,
maintenance, general, and
administrative expenses. Cash
available for debt service must be at
least 10 percent greater than the cash
required for debt service. And the
Oregon Economic Development
Department will require the
borrower to maintain net revenues in
the system's enterprise fund of not
less than 120% of the annual debt
service on any senior lien debt and
110% of the annual debt service on
the loan.
The financial analyst will also
evaluate the collateral available for
the loan. The state indicates that
collateral may include any or all of
the following items and any other
credit enhancements:
Liens or assignments of user
charges
Corporate guarantees
Mortgage liens on a system's real
property and water rights
Liens upon personal property acquired with loan funds
Liens that attach to all real property served by a project
Securities, commercial paper, and escrow accounts
Personal guarantees
Table 1
Financial Ratios for Private Entity Loan Evaluation (Oregon}
Cash & Equivalents/Total Assets
Net of Trade Receivables/Total Assets
Inventory/Set Assets
Prepaids/Total Assets
Net of Fixed Assets/Tital Assets
Short Term Notes Payable/Total Liabilities and Net Worth
Current Maturities of Long Term Debt/Total Liabilities and Net t
Trade Payables/Total Liabilities and Net Worth
Income Taxes Payable/Total Liabilities and Net Worth
Total Current Liabilities/Total Liabilities and Net Worth
Long-Term Debl/Total Liabilities and Net Worth
Deferred Taxes/Total Liabilities and Net Worth
Current Ratio
Quick Ratio
Sales/Receivab les
Sales/Working Capital
Earnings Before Interest and Taxes/Interest
Fixed Assets/Net Worth
Debt/Worth
Percent of Profit Before Taxes/Tangible Net Worth
Percent of Profit Before Taxes/Total Assets
Sales/Net Fixed Assets
Sales/Total Assets
Percent of Depreciation, Depletion, and Amortization/Sales
Oregon's DWSRF procedures establish loan to value ratios for all forms of collateral. No loan
will ever exceed 70% of the appraised value of the collateral.
Oregon's DWSRF staff will produce a report for Oregon's DWSRF management. This
report will include the conclusions of the financial analyst detailing the applicant's character,
management ability, financial strength, projected debt service coverage, and collateral. Program
management will review the staff recommendations, then approve or deny the loan request. If
approved, the Oregon Economic Development Department will award the loan.
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Pennsylvania
Pennsylvania established the Pennsylvania Infrastructure Investment Authority
(PENNVEST) in 1988 to provide low interest loans for stormwater, wastewater, and drinking
water systems. The State designed the program to provide aid to both publicly- and privately-
owned systems. Since the program's inception, PENNVEST has lent
$55 million to private entities. In nine years, only one private Ficure 1
borrower has defaulted.
This program evaluates prospective loan applications with the
assistance of an independent firm of Certified Public Accountants
(CPAs). The CPA firm first conducts a detailed analysis to
reconcile all financial information. All information in the
application must be complete, consistent, and correct. The
independent contractor then reviews the financial situation of the
applicant based on the following information:
• Three years of financial statements and/or income tax reports
• Pro-fonna financial information
• Current and proposed rate structures
To fulfill the review requirements specified in its contract, the CPA
firm must consider sixteen identified financial aspects and ratios.
These ratios are similar to those examined by Oregon in the above
example.
CPA FIRM
ASSISTANCE WITH
LOAN EVALUATION
AND MANAGEMENT
DWSRF
LOW INTEREST RATE
LOAN
DWSRF-
ELIGIBLE
PROJECT
The independent CPA firm prepares a credit analysis
memorandum for the PENNVEST staff. This memorandum
summarizes the applicant's balance sheets and operating statements
and contains a detailed cash flow analysis using the proposed debt service and historical cash
flow. The CPA firm also provides analytical comment on the summarized balance sheets and
operating statements and on the detailed cash flow analysis. (Table 2).
Concurrent with the independent CPA evaluation, a PENNVEST project specialist evaluates
the ability of the public water system's consumers to indirectly repay the loan. This
PENNVEST analyst reviews the system's financial information as the applicant has presented it
in the application. The analyst then reviews the economic situation of the system's service area,
considering data such as census information and unemployment rates. Once the independent
CPA firm completes its evaluation, PENNVEST considers any reassessment of the system's
financial situation and reexamines its initial appraisal of affordability.
PENNVEST next confers with the independent financial consultant to determine collateral
requirements for the loan. PENNVEST always requires a lien on the loan recipient's applicable
revenues. It regularly requires two more forms of collateral: a mortgage lien on company real
estate and a pledge of company stock from a parent company, affiliate companies, or individual
-------
stockholders. Should a loan need greater security, PENNVEST uses one or more of the
following collateral options:
• Guarantees of parent or affiliate
companies - secured by a mortgage
or lien on other assets owned by
these companies
• Pledge of a debt service reserve
fund for one or two years debt
service
• Personal guarantees of individual
stockholders
• Evidence of the approval of rate
increases by the Public Utility
Commission (if PUC regulated)
sufficient to support the projected
operating expenses and project debt
service
• Liens on other assets identified and
available
• Bank letter of credit from
satisfactory domestic banks (for all
or part of the PENNVEST loan)
• Trustee collection of revenues via a "lock box" - the trustee ensures that funds are disbursed
appropriately
• Subordination and deferment of principal on notes or loans payable by the applicant to its
stockholders or affiliated companies
• Key man life insurance
• Power to appoint receiver in the event of bankruptcy
After conferring with the independent CPA firm, the PENNVEST staff makes a
recommendation regarding each loan application based upon three issues: the project's impact on
public health, the viability of the system, and the ability of the borrower to repay the fund. The
PENNVEST board reviews the staff recommendation and decides to approve or deny a loan to
the applicant. If the board approves the loan, it also determines the rate, term, and necessary
collateral.
The PENNVEST staff and contracted CPA firm monitor loans annually. If, during review
of a loan, PENNVEST discovers that the financial condition of the borrower has deteriorated,
PENNVEST works with the borrower to renegotiate the loan. This "work-out" process may
result in a requirement of further security or, in selected cases, an extended repayment period.
In all cases, the work-out enhances the likelihood of repayment. As noted above, despite
PENNVEST's primary mission of assisting projects that will have the greatest impact on public
health, it has had a high rate of repayment to its revolving fund. In nine years, PENNVEST has
lent $55 million to private entities. One borrower defaulted on $23,000.
Table 2
Contents of PENNVEST's Credit Analysis Memorandum
* Balance sheet
• Size and available resources of applicant
• Present liabilities of applicant
' Effect ofproject debt on financial condition of applicant
m Operating statement
• Historical trend in revenues and expenses/expenditures
• Historical trend in net surpluses/(deflcits)/income/(losses)
• Explanation of very large deviations from normal
trends/identification of non-recurring items
» Cash flow
• Adequacy/inadequacy of historical cash flow
• Applicant's projection of rates needed to cover debt service
• CPA firm projection of rates needed to cover debt service
• Collectability/creditworthiness of PENNVEST loan
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Ohio
Ohio's Clean Water State Revolving Fund (CWSRF) uses an innovative method to lend to
small private borrowers. Using the "linked deposit" method described below, Ohio has made
ninety loans for $3.5 million since January 1994.
Ohio's linked deposit program places the burdens of credit analysis and default risk on
commercial banks. For this service, the SRF and individual projects provide banks with
compensation similar to the banks' commercial loan rate.
Figure 2 displays the basic elements of a linked deposit Figure 2
structure.
In Ohio's program, individuals or small businesses that
have the approval of their county Soil and Water
Conservation District for proposed nonpoint source pollution
controls are eligible for linked deposit loans. Eligible
borrowers can apply for a loan at any state-approved
participating bank. The bank analyzes the creditworthiness of
the applicant using its own evaluation criteria and approves or
denies the loan. This credit evaluation process is likely
similar to the process states (e.g., Oregon) use when they
make their own assessments.
When a bank approves a linked deposit loan, the Ohio
program purchases a certificate of deposit (CD) of equal
value from the bank.1 The term of the CD is equal to the
term of the linked deposit loan. The Ohio EPA accepts a
lower interest rate on its investment, and in return, the bank
makes an equal reduction to the interest rate of the linked
deposit loan. The interest rate of the CD is 3% less than the
rate of a U.S. Treasury Note or Bond with a comparable term
of years, but the interest rate is never less than 3%. The
repayment schedule in the certificate of deposit contains
semiannual payments of principal and interest to the SRF.
INVESTMENT IN A
REDUCED INTEREST CD
(e.g.,3%)
CREDIT ASSESSMENT.
LOAN MANAGEMENT,
SECURE RETURN TO FUND
REDUCED INTEREST
LOAN (e.g„ 6%)
CWSRF
BANK
CWSRF-
ELIGIBLE
PROJECT
In comparison with other options for lending to private entities, Ohio's linked deposit
program places CWSRF funds in little risk. The Ohio SRF's investment with the bank is not
collateral for the linked deposit loan. FDIC insurance secures all loans up to $100,000. Banks
must secure all deposits greater than $100,000 with a collateral fund that provides exclusive
105% coverage for the CWSRF funds (and contains only those securities in which CWSRF
'Ohio uses SRF repayments to fund linked deposit CDs. If a state used capitalization
grant dollars and state match dollars to fund the linked deposit CDs, it would have to fund the
CDs incrementally, as construction proceeded on each project.
-------
funds can be invested).
Many'states are considering the use of a linked deposit method to fund privately-owned
public water systems with the DWSRF.
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Minnesota
The State of Minnesota is considering two methods for lending to private entities in its
DWSRF program: the linked deposit method discussed in the above case study and a loan
participation method that other Minnesota state programs have used. The program's
administrative rules allow for either approach as the program develops.
The loan participation method (Figure 3)
relieves the state of the burden of loan
evaluation and management and part of the
burden of potential default. A priority project
can apply to any participating bank, and the
bank then analyzes the creditworthiness of the
applicant using its own evaluation criteria. This
evaluation will closely resemble the credit
analysis described in the Oregon and
Pennsylvania case studies. If the bank approves
the loan, it provides one-half of the funding for
the project. The DWSRF provides the other half
of the loan. The state rate is 100 basis points
(1 %) lower than the rate of a US Treasury
Security with a maturity comparable to the
length of the loan. The borrower receives an
interest rate that is a proportional blend of the
bank and state rates.
Figure 3
BLENDED FUNDING
UP TO 50% OF LOAN
FUNDED AT LOW
INTEREST RATE
50% OR MORE OF LOAN
FUNDED AT TYPICAL
BANK RATE
BANK
DWSRF
DWSRF-
ELIGIBLE
PROJECT
Because the state provides up to one-half of
the loan in this method, the funds that the state uses for this purpose are at risk. Both the bank
and the state have a lien on the borrower's collateral.
The Minnesota DWSRF program received its first capitalization grant in April 1998. It is
preparing to make its first loan to a private system. Its loan participation method offers another
blueprint for DWSRF programs to consider.
-------
IV. Considerations when Selecting a Method for Lending tn Private Entities
DWSRF programs can evaluate methods for lending to the private sector with the five
considerations this report initially identifies:
• Administrative burden
• Control of the loan decision
• Security of repayment to the DWSRF
• "Leveraging" of funds
• Cost of the lending method
The following section uses these key considerations to compare the lending methods
discussed in Section III. States will consider variations of these methods and their own
innovations, but a state can evaluate any method with these factors.
Administrative burden
Lending to private entities can be an administrative burden for a DWSRF program. For
DWSRF programs planning to do internal evaluation and management of loans, this burden is
twofold. First, the DWSRF program must have staff available to do this work. Many states do
not have significant numbers of existing personnel available to work on the DWSRF program,
and some may be unable to hire new personnel due to state hiring restrictions. Second, the staff
must have the technical skills necessary to manage the program. Few CWSRF programs have
significant experience determining the creditworthiness of or collateral requirements for private
borrowers. States may have difficulty hiring qualified personnel because of difficulties
matching private sector salaries and benefits. DWSRF personnel may have to gain experience as
they implement their programs. Programs that use external resources reduce these
administrative burdens.
Of the four options considered, Oregon's internal evaluation method places the greatest
burden on state staff. Pennsylvania's contractor evaluation method removes part of this burden,
but still requires staff evaluation. Ohio's linked deposit method and Minnesota's loan
participation method require no creditworthiness or collateral analysis by state staff.
Control of the loan decision
When a DWSRF staff retains the final authority to approve or deny loans, the staff can fund
the highest-priority projects by stretching the program's credit requirements or developing
unique collateral packages. Without this control, a high-priority project with risk only
marginally greater than "acceptable" may not receive DWSRF funding.
In both the internal evaluation and contractor evaluation methods, the DWSRF program staff
retains the right to approve or deny loans. In linked deposit and loan participation methods,
DWSRF programs delegate that decision-making to a bank. It seems possible that states could
alter linked-deposit and loan-participation lending structures to retain control of the loan
-------
decision, but to date no SRF program has proposed using this variation.
Security of repayment to the DWSRF
DWSRF repayments enable the program to fund future drinking water infrastructure loans.
The security of repayments is key to the revolving nature of the DWSRF program.
As traditionally structured, the linked deposit method is the most secure of these four
options. Ohio's linked deposit program does not use SRF funds to offer loans or secure loans,
but uses those funds to capitalize and subsidize bank loans. FDIC insurance secures SRF funds
invested for this purpose in a certificate of deposit, and a collateral pool further secures
investments greater than $100,000.
One can consider Minnesota's loan participation method to be partially secure because a
bank funds one-half of each loan participation loan. One hundred percent of each loan funds a
public water system project, but only 50% of the loan is a state risk. The repayments to the SRF
are also less secure in traditionally structured internal evaluation and contractor evaluation
methods. One hundred percent of all loans are at risk. In all methods where SRF funds are at
risk, the emphasis that a state places on providing environmental benefits and protecting public
health regardless of a borrower's financial condition affects the security of DWSRF repayments.
When using any of these methods, it seems possible that DWSRF programs could arrange for
banks to provide additional loan security.
"Leveraging" of fund
Although it does not entail leveraging as defined in DWSRF regulations, the loan
participation method creates a leveraging-like effect. If a bank funds one-half of each DWSRF
loan, the DWSRF potentially doubles the available funding. The other three methods discussed
in this document do not leverage the fund in this way.
Cost of the lending method
Each of the lending methods presented in this report has costs associated with it. The
DWSRF program and the borrower bear these costs. In using a method, a state can determine
how it apportions these costs, but that does not affect the overall cost of the lending method (see
inset, next page).
The DWSRF program and the borrower bear the costs of three financial services:
• Loan evaluation and management
• Repayment security
• Leveraging of fund
In programs that use linked deposit and loan participation methods, participating banks
provide loan evaluation and management. In return, the DWSRF funds a project on which the
-------
bank receives a share of the loan interest.
Similarly, in programs that employ
contractors to evaluate loans, the contractor
requires a fee. In programs that evaluate
loans internally, the program staff spends
valuable time analyzing the loans.
Because the private sector has greater
experience lending to private entities, it is
possible that it would evaluate and manage
loans more efficiently than would DWSRF
program staff. However, the private sector
must also profit by providing these services.
Assuming staff resources are available, the
cost of internal review will reflect staff
efficiency and experience and the program's
ability to spread personnel costs over many
loans. The costs associated with external
review will depend on the competitiveness
of the banking and financial industries
within a state. Each state can compare the costs
management.
Apportioning Costs Between the DWSRF and the Borrowe-
The DWSRF and the borrower share the costs of any lendn
arrangement. For example, when using the loan participation
method, banks are paid in the form of loan interest. If a bank requires
9% interest on its one-half of the loan, the bank would find any of the
following scenarios to be acceptable:
Interest tn Bank
9%
9%
9%
Interest tn DWSRF
4%
2%
0%
Average Ix)an Rate
(Cost to Borrower)
6.5%
5.5%
4.5%
In this example, there is a fixed cost -- the bank must receive 9%
interest on its half of the loan. The DWSRF defrays some of the cost
to the borrower by giving the borrower a reduced rate on its one-half
of the loan. The interest that the borrower pays is the borrower's
cost Any reduction in the interest paid to the DWSRF is a "cost" to
the DWSRF.
of internal and external loan evaluation and
In Ohio's linked deposit method and Minnesota's loan participation method, banks provide
the DWSRF with other financial services. In both methods banks assume some lending risk. In
Minnesota's loan participation method, banks fund one-half of each loan, leveraging DWSRF
dollars. In both methods, banks require significant loan interest in exchange for these financial
services. It is therefore unlikely that linked deposit or loan participation loans will be available
at rates comparable to the
rates of direct DWSRF
loans (see inset, this page).
States must weigh the
benefits of extra security
and fund leveraging against
their costs.
Financial Services Increase Lending Costs
Linked deposit loans and loan participation loans will likely be more expensive to
the borrower than direct DWSRF loans. In the following loan participation example,
the DWSRF receives 2% less interest than it receives with its direct loan rate. Despite
this, because of financial service costs, the lending rate to borrowers is higher than the
direct loan rate.
Intwesl tn Rank
Direct Loan
Loan Participation 9%
Interest tn DWSRF
4%
2%
Loan Rate for Borrower
4%
5.5%
-------
V. Conclusion
States have developed many methods for lending to private entities that are appropriate for
use in the DWSRF program, and they will develop many more improvements and innovations.
Each state will consider its strengths and priorities, consider the advantages of different methods,
and match an appropriate method to its needs.
The challenge of lending to the private sector with SRF funds is new to the DWSRF. States
are meeting this challenge and will continue to improve their programs as they learn from their
own experiences and the experiences of others.
-------
Appendix A: Contacts
Betty Pongracz
Manager
Oregon Infrastructure Development Department
503-986-0134
Beverly Reinhold
Financial Analyst
PENNVEST
717-783-6589
Robert Morisarrat
Manager
Environmental Planning Section, Ohio EPA
614-644-3655
Jeff Freeman
Program Coordinator
Minnesota Public Facilities Authority
612-296-2838
-------
Session Contents
• Introduction - Resume/Experience
• Application Review Process
• Unique Characteristics of Private Borrowers
• Collateral and Security Considerations/ Options
• Financial Capability Finding
• Loan Portfolio Monitoring/Loan Amendments/Loan
Rating System - Relative Risk Code Assignment
• Case Study - Breakout
Introduction -
James L. Bowman, CPA
Manager of Harrisburg Office of
Kurtz, McNaney & Company, P.C.
234 State Street
Harrisburg, PA 17101
IV- 10
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Relevant Credit Analysis
Experience
• Financial consultant to Pennsylvania Infrastructure Investment
Authority (PENNVEST), 1988 to present
• Loans approved to date in excess of $ 1.7 billion
• Over 1,000 applications
• Current outstanding loan portfolio, over $ 1.048 billion
• Loans for public and private water, sewer and storm water projects
• Financial consultant to Water Facilities Loan Board (WFLB), '83 to
'88
• Predecessor agency to PENNVEST
• Made 134 loans totaling over $85.4 million for water, sewer, dam
repair, and port facility projects
Relevant Credit Analysis
Experience
• Financial consultant to Water Facilities Loan Board (WFLB), '83 to
'88
• Predecessor agency to PENNVEST
• Made 134 loans totaling over $85.4 million for water, sewer, dam
repair, and port facility projects
• Financial consultant to Pennsylvania Industrial Development
Authority (PIDA), 1976 to present
• Direct low interest, second mortgage loan program to private
manufacturing and industrial companies to assist in creation and
retention of jobs in Pennsylvania
IV- 11
-------
Relevant Credit Analysis
Experience
• Current outstanding loan portfolio of approximately $650 million
- Approves 100 to 200 applications per year for loans aggregating
between $80 to $ 100 million per year
- Assisted in presentation of bond issues to bond underwriters, rating
agencies and bond insurers
- Current "Shadow" Bond Rating A; A-
• Board member of Pennsylvania Development Credit Corporation,
1979 to 1987.
• High risk lending agency for small developing businesses which could
not secure private commercial financing
Objectives of Presentation
• Rough overview of credit analysis process as practiced by
PENNVEST
• Advantages of independent credit review
• Example of application analysis
• Unique characteristics of private borrowers
• Review collateral and security considerations/options
• Review financial capability documentation
• Portfolio monitoring/loan rating - relative risk assignment
IV- 12
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Application Review Process
• Review application (Exhibits A and B)
• Financial statement analysis/preparation of
memorandum
• Form and quality of financial information
• Cash flow analysis (Exhibit C)
• Rate impact analysis (Exhibit C)
• Relative risk code assignment (Exhibit D)
Unique Characteristics Of
Private Borrowers
• Different types of borrowers
- Large publicly-held company
- Small closely-held company
- Homeowners' association
- Trailer parks
- Other
• Primary Difference With Public Borrowers
- No taxing authority
- No municipal guarantees
IV-13
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Collateral and Security
Considerations/Options
• Purpose and function of collateral
• Should have some minimum collateral
requirement
• Menus of collateral options
- Public borrowers (municipality and municipal
authority) (Exhibit E-l)
- Private borrowers (Exhibit E-2)
Collateral and Security
Considerations /Options
• Independent consultant does not make final
decision
- Recommendation to administrative staff and board
- Ultimately board has approval power and
authority
IV-14
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Collateral and Security
Considerations/Options
• Quality of collatera.1
- Documentation
- Cost vs. benefit of collateral requirements and
documentation
- Appraisals, Environmental Phase I; Title search; Title
insurance
- Confirmation/corroboration of assets and liabilities on
personal financial statements (tax returns, bank or
brokerage statements, personal credit reports)
- Spousal guarantee issue
- Laws in states differ
- Legal counsel input essential
Financial Capability
Finding
• Purpose
• Sample document (Exhibit F)
IV- 15
-------
Loan Portfolio Monitoring
• Annual report review conducted on all
outstanding loan recipients
• Adverse changes in financial position or
operation reported to agency
• Agency follow-up
• Annual audit of authority by independent
Loan Amendments
• Types of loan amendment requests
- Increases in project costs and loan requests
- Changes in security due to other borrowing from
independent sources
- Acquisitions, assumptions, mergers
• Loan amendment request memo (Exhibit G)
IV- 16
-------
Loan Rating System
• Relative risk code assignment (Exhibit D)
• Risk codes updated with annual report reviews
• Allows administrative staff to evaluate overall
portfolio risk
Summary
• Review of collateral requirements memo
• Memo dated November 15, 1996 (Exhibit H)
IV- 17
-------
REFERENCE
ATTACHMENTS
IV. OVERVIEW OF CREDIT ANALYSIS AND COLLATERAL SECURITY ISSUES
FOR PRIVATE BORROWERS FROM SRF PROGRAMS
-------
Page 1 of 3
EXHIBIT A
APPLICATION REVIEW PROCESS
As financial consultants to the Pennsylvania Infrastructure Investment Authority
(PENNVEST), we perform the following procedures in our review of each application:
PART I, Page 1
1. Identify and list type of organization, PUC regulated, date established, owner,
operator, and financier. Note differences.
2. List project county and applicable interest rates.
3. List project costs and funding sources. Check footing.
PART II, Pages 2-4
1. Read responses to questions in Part II (Pages 2 and 3) for general idea of project.
Note differences with Part I information.
PART III, Pages 5-9
1. Check footing on Pages 5 and 6 econcile applicable amounts on Pages 5
and 6.
2. Reconcile project cost and funding sources on Page 6 to Page 1. Note differences.
3. Question status of anticipated or pending grants, other financing sources, existing
liens, lien availability or anything else unusual.
4. Reconcile number of households, average annual residential bill, and total
residential bills levied in each column of Page 8. Question any material differences
that result in different Average Annual Residential Bills.
5. For water applications - number of households stated on Page 8 should compare
closely t" nose stated on the Planning and Feasibility Report - A. Reconcile
differen
6.
Check footing on Page 8 for each column.
-------
Page 2 of 3
7. Compare far left column with most recent year's financial statements (revenues and
expenses should tie in closely).
8. Compare annual debt payment on Page 9 with that listed on Page 8 and the Long-
Term Debt Note disclosed in the most recent year's financial statement.
Request appropriate bound Accountants'/DCED Reports:
If the Authority or Municipality is the System's owner and operator -
3 years financial statements of that respective entity.
If the Authority is the owner and the Municipality is the operator via a lease
agreement -
Most recent 3 years financial statements of the Municipality (operator).
Most recent financial statement of the Authority (owner).
3
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Page 3 of 3
PREPARATION OF MEMORANDUM TO PENNVEST
Upon receiving the answers to the questions that we have asked, we review the incoming
information to be certain that all questions have been answered and all inconsistencies
have been clarified. We then summarize the appropriate financial statements' balance
sheets and operating statements on a Confidential "Credit Analysis Memorandum" which is
delivered to the PENNVEST staff.
Also included in this Credit Analysis Memorandum are our comments on the summarized
portions of the appropriate financial statements and a detailed historical cash flow analysis
l ig proposed debt service versus historical cash flow
A additional comment on this cash flow analysis corr ates the Credit Analysis'
Memorandum.
The comments on the Credit Analysis Memorandum commonly include the following:
Balance Sheet Comment:
- Size and available resources of applicant
- Present liabilities of applicant
- Effect of project debt on financial condition of applicant
Operating Statement Comment:
- Historical trend in revenues and expenses/expenditures
- Historical trend in net surpluses/(deficits)/income/(losses)
- Exp!-nations for very large deviations from normal trends and non-recurring items
ider. led.
Cash Flow Analysis Comment:
- Adequate/inadequate historical cash flow
- Applicant's projection of rates needed to cover debt service
- Our projections of rates needed to cover debt service
- Collectability/creditworthiness of PENNVEST loan
After the Credit Analysis Memorandum has been completed, we then prepare a "Financial
Conclusion and Recommendations" memorandum for the PENNVEST Board. This Report
summarizes the comments on the Credit Analysis Memorandum, indicates the projected
impact on future water or sewer rates as a result of the proposed project, and recommends
conditions and collateral to secure the repayment of the PENNVEST loan portion of any
func d project.
-------
EXHIPIT P
SAMPLE APPLICATION REVIEW
5
-------
Ai*ri^iv.Ar» i:
XYZ Authority
DATE:
FIGURES MUST REFLECT
ONLY THE UTllITY
affected by ttds
PROJECT ON A SYSTEM-
WIDE BASIS.
Per Last
Completed
Audit Ye*r
1997
Current
Year
19 98
Fint Full
Year After
Project
Complet
XftK 201
BILLING
Estimated population
U Households served by system
# EDUs served by system/total
# EDUs served by system/residential
Average anmiaJ residential bill
11.500
2,770
177TT
5159.39
11.750
2,830
T7B5T
?-mn
$173.96
Total residential bills levied 1996-97 Fiscal 5441,502 $492»
Total residential bills collected S 441,502 ^' '$492,
300
'5492,300
Total residential bills collected _ .
Total commercial/industrial bills levied $616,405 3683,700
Total commercial/industrial bills collected ^ a6 1 , 4(15 $683.700
12.500
2,940
b.Obb
2.940 . "ft-
5219.42 >
v, j 645,100 ;
$ 645,100 !
$896,000 ;
$896.000 j
INCOME
Total bills collected
Other charges collected*^3PP1 n9 "fees/mi sc .
Totalioperating revenues
Non-operating revenues* interest income
TOTAL INCOME
$ 1 ,057,907 ^-sl, 176,000 ^ 1,541,100
294^489 15,000 lb,00()
' 1.352.*96* 1.191,100^" 1,556,100
120,01H 50,000 AO,000
$ 1.472.407 $ 1,241.S00^-S 1.590.100
EXPENSES
NET
INCOME
OPERATING EXPENSES
Labor
Utilities
Materials and supplies
Outside services
Other Expenses* General I Admin.
Total O & M expenses
Depreciation
Total operating expenses
NON-OPERATING EXPENSES'
Annual debt service excluding this project
Other* Principal
Total non-operating expenses
TOTAL EXPENSES
$ 241.643
$ 256,000
$ 201,600 !
112,331
118,500
130,400
83,992
103,H00
llb.UUf
»
205,172
222,200
244,400 |
G43.138
700.500
772.400 1
270,768
160,000
160,000 j
913,906 ^
860,500
932,400 ¦
127,676
127,676<\
^
113,600
155,000
260,600
97,700
170,000 I
267,700
1,041,582
1,129,100
1,200,100'
— -r
+TOTAL INCOME
-TOTAL EXPENSES
NET INCOME
£
1,472,407
1.041.532
s 430,025
sl,241,000
1,129,100
«¦ 111,900
5 ~
s 1,596 , lOCj
1,200,100
^ 396,000
4/96
*Pt«x attach ciplanallon for all "other" Income and cipcnsa.
PENNVEST - PART III - FINANCIAL/INCOME &. EXPENSES
-------
AUTHORITY
WATER DIVISION
BALANCE SHEETS
ASSETS
SEPTEMBER 3 0.
1997 1996
*RENTASSETS
Cash
Accounts receivable:
Consumers, net of allowance for uncollectible accounts
($ 4,606 for 1997, $ 3,876 for 1996)
Sewer division and other
Interest receivable
Special deposits
Unbilled revenue
Inventory, materials and supplies, at average cost
Prepaid expenses
Total cun-enl assets
iCIAL FUNDS, use restricted as provided in trust indentures (Note 2)
Debt Service Fund
Cebt Service Reserve Fund
R>nd Redemption Fund
Operating Reserve Fund
RRED DEBITS
Unamortized debt issuance cost (Note 1)
Deferred vacation pay
Flood damages
DPERTY, PLANT AND EQUIPMENT, at cost (Note 1)
Property, plant and equipment in service
Less accumulated depreciation, computed on the straight-line method
Construction work in progress
$ 1,083,418
$ 772,410
125.391
127,403
69,838
29.748
3.446
9,549
4,226
5.600
111,824
96.190
38.524
39.647
21.983
20.307
1.458,650
1.100,054
75.105
194,595
296,755
262,513
617,255
566.466
193,988
184,149
1,183,103
1.227.723
66,956
106,215
3,520
9,410
13,399
11,736
86.875
127,361
8,177,684
8,026,348
2,008,818
1,856,206
6,168,866
6,170.142
260.265
105.928
6,429.131
6,276.070
% 9.159,759
$ 8,732.008
The Notes to Financial Statements are an integral part ot these statements.
7
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LIABILITIES AND AUTHORITY EQUITY
SEPTEMBER 30,
1997 1996
CURRENT LIABILITIES
Current maturities of long-term debt (Note 3)
Accounts payable, trade
Accrued expenses:
Interest
Other
Consumers' service deposits
$ 10,000
67,021
55,234
46,745
53,490
$ 120,000
10,166
74.852
53,075
52,831
Total current liabilities
232,490
310,924
ONG-TERM DEBT (Note 3)
2,380,000
2,305,000
ONTRIBUTIONS IN AID OF CONSTRUCTION (Note 5)
2,042,347
2,066,611
UTHORITY EQUITY
4,504,922
4,049,473
$ 9,159,759 $ 8,732.008
The Notes to Financial Statements are an integral part of these statements.
-------
AUTHORITY
WATER DIVISION
STATEMENTS OF INCOME
peraling revenues
Operating expenses:
Water collection system
Purification system
Pumping station
Distribution system
General operating expenses
Depreciation and amortization
Operating income
Other income:
Interest
Gain on sale of investments
Gross income
Debt expenses:
interest on bonds
Trustee fees and expenses
Income before administrative expenses
Administrative expenses:
Management fee
Officers' and board members' compensation
Legal fees
Auditor's fees
Engineering fees
Mel income
YEARS ENDED SEPTEMBER 30.
199? 1996
$ 1.353.397 $ 1,360,107
64 5
1.016
129,517
12 7.489
161,879
160.406
79.206
OJ.936
195,162 /
189,376
270,768*'
1SO.120
037.177
686,343
515,220
6/3,764
115,372
93,056
4.640
2.223
120,012
95.279
636,232
769,043
126,87$
149,705
800
333
127.676
150.036
508,556
619,005
53,003
49,595
3,563
3,750
3,601
2.750
3,475
3,575
14,108
31,008
77,750
91,276
$ <30.806 i 527,727
The Notes to Financial Statements are an integral part of these statements.
9
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AUTHORITY
WATER DIVISION
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30.
1997 1996
ash flows from operating activities:
Net income
$ 430,806
$
527.727
Non-cash items -
Depreciation and amortization
270,768
160.120
Changes in:
(Increase) decrease in accounts receivable
(Increase) decrease in inventory
(Increase) decrease In other current assets
Increase (decrease) in non-financing current liabilities
(Increase) decrease in special funds
(Increase) decrease in deferred debits
(46,235)
1,123
(1,676)
31,566
44,620
(79,670)
(3.372)
419
290
(35,466)
(77.495)
(17.196)
Net cash provided (used) by operating activities
651.302
555,027
:sh flows from investing activities:
Purchase of property, plant and equipment
(305,673)
(96.297)
Net cash provided (used) by investing activities
(305,673)
(96.2
sh flows from financing activities:
Repayment of long-term debt
Proceeds from Bond Issue
Increase in contributions in aid of construction
(2,425,000)
2,390,000
379
(110,000)
0
0
Net cash provided (used) by financing activities
(34.621)
(110,000)
Net Increase (decrease) in cash
311,008
348,730
sh at beginning of year
772,410
423,680
sh at end of year
$ 1,083,418
$
772.410
Supplemental Disclosures Of Cash Flow Information
sh Payments For.
Interest
$ 146.494
$
152.565
The Notes to Financial Statements are an integral part of these statements.
-------
EXHIBIT C
SAMPLE CASH FLOW ANALYSIS/RATE IMPACT CALCULATIONS
11
-------
Operating Data:
Revenues
Operating Expenses
Operating Income (Loss)
Other Income (Expenses)
Net Income (Loss)
1997
S 1,353,397
837,177
XYZ Authority
Years Ended - September 30,
1996 1995
$ 1,360,107 S 1,060,834
516,220
(65,414)
$ 430,806
686,343
673,764
(146,037)
$ 527,727
648,024
432,810
(139,500)
S 293,310
Balance Year 6 = $ 5,379,798
Cash Flow vs. Debt Service:
Debt Service: Years 1-5
PltA loan S 434,608
Prior PIIA /
WFLB loan
Current Maturities
of Existing Debt 267.738
Total $ 702,346
Years 6-20
$ 461,416
267,035
$ 728,451
Cash Flow:
Net Income
Depr./Amort,
Interest Expense
Total
9/30/97
Historical
$ 430,806
270,768
126,876
5 828,450
9/30/00
Projected
$ 663,700
160,000
$ 823,700
1) Financial Information per Application:
Period Depreciation
Last Year 9/30/97 $ 270,768
This Year 9/30/98 160,000
1st Year
w/Project 9/30/00 160,000
Net
Income
$ 558,501
380,500
663.700
Operating
Expenses
$ 913.906
860,500
932,400
Revenue
$ 1,472,407
1,241,000
1,596,100
2) Annual O & M expenses are projected to increase from $643,138 in '97
to $772,400 in '00 upon project's completion, (a $129,262 increase)
3) 1st lien on water revenues probably secures existing bondholders.
-------
Residential Percentage = 42%
od 1
Total Proj'd
Oper'g Expes. $ 772,400
TPIIA Debt Serv. 434.608
. Prior PIIA/WFLB
Exst'g Debt Serv. 267,738
Total Cash Needs: $ 1,474,746
^on-recurring Cash Sources
Interest./Div.'s $ 40,000
ulk Sales
Tap Fees 15,000
Other:
Method 2
Net Income
with Adjustments
Proj. change in
Oper'g Expenses
lnc.(Dec.in
Other Revenue
$ 828,450
(129,262)
(359.500)
(288,120)
42%
120,606.98
2,940
Dther:
(Inc.) Dec. in
S
41.02
Other Expenses
$
159.39
$
200.41
$ 1,419,746
- 42%
594.306
-r 2.940
$ 202.14
PIIA Debt Service (434,608)
Prior PIIA /
WFLB Loans
Exist'g Debt Service. (267,738)
New Residential
Customer Revenue 27,096
New C & I
Customer Revenue 47,442
Other:
fotal Recurring
Cash Sources: $ 55,000
Total Surplus
(Deficit)
$ (288,120)
13
-------
EXHIBIT D
MENU OF RELATIVE RISK CODE ASSIGNMFNT
As part of our Annual Report Review, we have reviewed the files of the PENNVEST loan recipients on the attached
M ti. We have reviewed these applications at your request to rate the credit risk of the application. We reviewed
the , canons to identify any application that had projected user rates based on the PENNVEST staff calculation of over
$500 per year and any application that had a user base which consisted of over 50% new users. We have also indie; if M any
PENNVEST and the prior WFLB program loan that is currently listed by the Commonwealth Comptroller's office as being
delinquent.
The following is the legend that was used to identify the applications:
S.P. = Speculative or High Risk as indicated in Kurtz, McNaney & Company's
original Memora.
C/S.U.
Concern/Speculative User Base (over 50% new)
(see Kurtz, McNaney & Company's original Credit Memorandum)
~'H.R.
Concern/High .te (over $500/year) per PENNVEST
C/H.P.I. = Concern/High Percentage increase in User Rates (over 100% increase)
N.S.
Not Speculative per above criteria
It should be noted that the above rating does not necessarily indicate the collectability of any PENNVEST loan.
14
-------
Page 1 of 2
EXHIBIT E
CRITERIA USED TO DETERMINE COLLATERAL AND SECURITY RECOMMENDATIONS
In preparing our "Financial Conclusion and Recommendations Memorandum," we exercise a
certain degree of judgement and discretion in determining what security conditions to
recommend to the PENNVEST Board. As a minimum, a condition requiring a lien on the water
or sewer revenues is required for all projects. This will be the best lien position available,
depending on the existence of prior liens or other participating financing for a particular project.
If the historical cash flow of the operating entity is not adequate to support projected debt service
and projected increases in operating expenses, then a standard condition regarding an
ordinance or resolution providing for increased water or sewer rates sufficient to support the debt
prior to the initiation of repayment is also required.
Depending on the facts and circumstances in connection with the structure of a project as well
as the perceived relative risk of collectability of a particular PENNVEST loan, other additional
security conditions are often recommended, along with typical circumstances that would warrant
certain recommendations, is as follows:
Additional Security Recommendation
Circumstances Warranting the Security
1. Guarantee of a municipality with
a pledge of taxing authority
- Required when a new municipal authority is
formed, or when an existing operating
municipal authority will have to revise user
rates to a point where collectability on a
timely basis is questionable (generally when
rates in excess of $500/year or rate
increases in excess of 100% are projected).
The need for this additional security will
further depend on amount of current rates
paid and collection experience.
2. Guarantee of a municipality
secured by lien on revenues
- Required when loan applicant is a financing
authority which leases the system to a
municipality.
3. Assignment of lease between
authority and municipality
- Required when loan applicant is a financing
authority which leases the system to a
municipality.
15
-------
Page 2 of 2
Additional Security Recommendation
4. Pledge of Debt Service Reserve
Circumstances Warranting the Security
- Required when projected rate increase is so
large that timely collectability of rates is
seriously in doubt. Also may be required
when other credit related risks are identified,
such as delinquency or other debts, highly
leveraged or strained financial position, or
limited revenue history
5. Guarar j of parent companies or
persona guarantee of principal
stockholders secured by a pledge
of stock in the company
- Reqi. :d in the case c privately owned
utilities in order to provide both additional
security as well as control in ownership of
the system.
6. Mortgage on real property or
personal property of applicant
- Required generally in connection with
private wastewater treatment projects for
Private manufacturing or industrial entities
where no revenue stream is generated from
any utility operations. Also required on
private water projects to assure some legal
standing in bankruptcy proceedings.
16
-------
EXHIBIT E-1
MENU OF SECURITY OPTIONS - MUNICIPALITY AND MUNICIPAL AUTHORITY
I. Municipality as Applicant
~ The guaranteed revenue note of the municipality, secured by a lien on the
sewer revenues.
~ General obligation note (includes pledge of taxing authority).
~ If a municipality leases system to an. authority, assignment of lease agreement
the authority and municipality, and the guarantee of the authority secured by
the system's revenues.
~ Evidence of an ordinance increasing rates sufficient to support projected system
operating expenses and debt service including the project debt.
~ Require a trustee to collect revenues via a "lock box" in order to control use of funds.
II. Municipal Authority as Applicant
~ A lien on the water or sewer revenues.
~ Evidence of a resolution to increase rates sufficient to support the projected operating
expenses and debt service including the project debt.
~ The guarantee of the municipality(s) served, with a pledge of taxing authority.
~ If the authority leases system to a municipality, an assignment of lease agreement
between the municipality and authority, and the guarantee of the municipality secured
by a lien on the system's revenues.
~ The pledge of debt service reserve for years' debt service.
~ Require a trustee to collect revenues via a "lock box" in order to control use of funds.
water or
between
a lien on
17
-------
EXHIBIT E-2
MENU OF SECURITY OPTIONS ¦ PRIVATE APPLICANTS
~ A lien on water/sewer revenues.
~ The guarantee of the parent company or individual stockholders limited to and secured
by a pledge of the company stock.
~ A mortgage lien on real estate owned by the company.
~ A lien on equipment financed by the project.
~ The guarantee of parent or affiliated company .secured by a mortgage or lien on other
assets owned by these companies.
~ The pledge of a debt service reserve fund for years' debt service.
~ The personal guarantee of individual stockholders and their spouses.
~ Evidence of the approval of rate increases by the PUC (if PUC regulated) sufficient
support the projected operating expenses and debt service including project debt.
~ A lien on other assets identified and available .
~ A bank letter of credit from a satisfactory domestic bank for all or part of the PENNVEST
loan.
~ Require a trustee to. collect revenues via a "lock box" in order to control use of funds.
~ Subordination and deferment of principal on notes or loans payable by the applicant to
the stockholders or affiliated companies.
18
-------
EXHIBIT F
PENNVEST FINANCIAL CAPABILITY FINDING
pE: ; Pennvest ID#:
PENNVEST Loan Request:
Date: Completed by:
Finding: Above Water System has/lacks Financial Capacity (see below)
(circle one)
~ Lack of Financial Capability Finding
The above applicant for a PENNVEST loan funded out of Federal DWSRF Funds has been determined to lack
financial capability as required by Federal funding guidelines for the following reason(s):
1. ~ The borrower and, or its parent company/related municipality has declared bankruptcy which has not
yet been discharged.
2. ~ The borrower or a related party is currently delinquent with respect to one or more outstanding
WFLB/Pennvest loans.
3. ~ The borrower does not have any reliable recurring revenue source, either historical or projected, from
which to fund the repayment of the Pennvest loan, and other satisfactory collateral is not available.
4. ~ The projected annual residential user rate has been determined to be excessive both as an absolute
amount and on a relative basis when compared to the PACNIF "Target Rate"; therefore its
collectability on a timely basis is doubtful.
5. ~ The borrower does not have adequate or reliable financial information on which to evaluate financial
capability.
. 6. . ~ The borrower has sustained large net deficits, negative cash flows and declining revenues over the
last three years, which can not reasonably be expected to reverse as a resuftof the proposed project.
7. ~ Other: (Specify)
~ Financially Capable Finding
The above applicant for a PENNVEST loan funded out of Federal DWSRF Funds has been determined to be
financially capable as required by Federal funding guidelines for the following reason(s):
1. ~ The relative risk code assigned to this borrower by Pennvest's independent financial consultant is "not
speculative". (See attached Credit Analysis and Financial Conclusion and Recommendations
Memorandums from Financial Consultant)
2. ~ In addition to the general obligation of the above borrower, the Pennvest loan will require the
guarantee or general obligation of a municipality(ies) with a pledge of taxing authority.
3. ~ In addition to the general obligation of the above borrower,the Pennvest loan will be secured by other
guarantees or collateral consisting of :
4. ~ The projected residential user rate resulting from the completion of the project is equal to or less than
the PACNIF "Target Rate".
5. ~ Other: (Specify)
19
-------
EXHIBIT G
LOAN AMENDMENT REQUEST MEMO
MEMORANDUM
RE:
Increase Loan Amendment Request
TO: Pennsylvania Infrastructure Investment Authority (PENNVEST)
FROM: Kurtz, McNaney & Company
Financial Consultant
DATE:
Reason for Increase Request:
Amount of Increase: $
As Approved As Amended
Total Project Cost
PENNVEST Loan Request
Local Equity
Other
Updated Financial Statements Provided:
Yes Date:
No
Comments on Updated Financial Statements (if applicable):
Originally Revised Rate
Projected Projected
Current Rates
Percentage Increase Required
Recommended changes in security or other conditions:
Effect on Projected User Rates
(Based on Interest Rate and Terms
as approved by PENNVEST)
No change in conditions previously recommended
20
-------
Page 1 of 4
EXHIBIT h
MEMORANDUM
RE: Review of Collateral Requirements Relating to Private Water Company Applicants to PENNVEST
TO: Paul K. Marchetti
Executive Director
Pennsylvania Infrastructure Investment Authority (PENNVEST)
FROM: James L. Bowman, CPA
Kurtz, McNaney & Company
DATE: November 15, 1996
At your request we are providing you with our thoughts concerning the financial review and collateral
requirements in connection with private drinking water applications for PENNVEST financing. Currently,
the number of private water companies financed by PENNVEST has been somewhat limited due to funding
availability. However, we understand that new Federal regulations will make more Federal funds available
for these projects. Therefore, more of these types of applications may be considered going forward.
As you are aware, the primary focus of our financial review of drinking water applications is on rate impacts
to residential customers, collectability of future rate increases, and cash flow both historically and as
projected. Ultimately, the collectability of any PENNVEST loan depends on cash flow derived from water
revenues and water rates, which cover current operating expenses plus the debt service requirements of
all the debts of a water system. Consequently, our initial review of both private and public water
applications focuses first on these items. Circumstances which affect our confidence in the collectability
of a particular PENNVEST loan include the historical results and cash flow generated by a system, the
number of existing customers versus projected new customers, the percentage increase in residential water
rates, and the projected nominal amount of the projected annual residential water bill. If, for instance, a
particular applicant has a large customer base, significant historical results and positive cash flow, and if
any rate increase projected results in a moderate percentage increase or results in a reasonable annual
billing (not in excess of $500-$600 per year), then our conclusion would be that the collectability of that
PENNVEST loan would be satisfactory, and therefore no extraordinary collateral security requirements
would be recommended.
21
-------
Page 2 of 4
Understand that standard security for PENNVEST loans requires at a minimum a lien on the w<_.
revenues, and evidence of approval of rate increases necessary to support the PENNVEST debt service.
Generally, in connection with private companies we have also required PUC approval of rate increases,
as well as the guarantees of immediate owners of the private water company, limited to a pledge of the
water company stock. The latter requirement is not for financial security, but has been recommended by
legal counsel for control purposes only. Obviously, the pledge of the stock has no more financial value than
the general obligation of the water company that underlies the stock.
It should be noted that also as a general rule, and at the suggestion of PENNVEST legal counsel, we have
initiated a new requirement for a mortgage lien on the water company real estate, again not so much for
its financial value but more for providing PENNVEST legal standing and notice in the case of bankruptcy
proceedings.
If the circumstances surrounding a particular private drinking water applicant are the opposite of that
outlined above, that is, that there is only a small (or in some cases no) existing water customers, there is
inadequate historical cash flow (or in the case of a new system, no historical track record) and if projected
rates required represent a very large percentage increase and result in a higher than normal nominal
average annual residential billing (in excess of $500-$600 per year), then our conclusion would be that the
particular applicant would represent a higher risk one and one where additional financial security would be
warranted. The types of additional financial security available and appropriate will depend largely on the
type and ownership of the private water company applicant. Basically, private water applicants can
broken down into three categories. First, there is the large publicly held water company or a subsidia
a public company, such as Pennsylvania-American Water Company; second, there is the closely held waier
company; and third, there is the non-profit homeowners association. In the case of the public company,
the kind of additional security that could be considered might include, parent company guarantees, liens
on other valuable fixed assets supported by appraisals and lien searches, the pledge of a bank letter of
credit for all or a portion of the PENNVEST loan, or the pledge of a dedicated, cash, debt service reserve
fund. Obviously the availability and the appropriateness of any specific collateral would be judged on a
case-by-case basis and need to be negotiated up front.
22
-------
Page 3 of 4
In the case of the smaller closely held water company, the personal guarantees of the individual owners
and their spouses, or specific pledges of assets owned by them, again supported by appraisal or other
independent valuation, might be required. Obviously, if the water company itself has valuable real estate
or other assets, these alsd could be looked to for financial security. The pledge of a one or two year cash,
debt service reserve fund might also be required of either the company or the owners. It should be noted
that the appropriateness of additional security required will also depend on the circumstances surrounding
the application. For instance, if the applicant is a new water company formed as an affiliate of a real estate
development company, it might be appropriate to require the guarantee of the affiliate, and even secure
that guarantee by specific valuable land being developed at the site.
One thing that also should be pointed out is that the availability of certain security such as personal
guarantees or pledge of personal assets may not be particularly agreeable to some owners. In the past,
owners of existing water companies have argued that it was not appropriate for their personal obligation
to be required because, generally speaking, their company's water rates as well as the return that they were
allowed to generate on their ownership interest, were regulated by the PUC. In their mind, it was not fair
to require that they put their personal assets at risk when their reward or return was limited by a public
entity, such as the PUC. It is hard to argue against this line of thought, and in fact the predecessor Water
Facilities Loan Board, in the actions it took approving loans to private closely held water companies, did
generally support the applicant's side of that argument. I am not sure that in all instances we would agree,
but ultimately the PENNVEST Board needs to make this decision with the guidance and input from the
PENNVEST staff.
In connection with the third category of applicants, non-profit homeowners associations, the available
collateral alternatives are limited at best. In some cases there may be a small amount of real estate
connected to the homeowners association, but if all that is owned is the water system, it would be limited
at best and have no significant financial value. Unless there is a community building, or
developable/saleable land owned by the association, a lien on real estate would represent only legal
standing in bankruptcy proceedings. Considering its ownership structure, the guarantees of individual
members or pledge of personally owned assets would not likely be available, nor would the marshalling
of those guarantees or assets be legally manageable. Consequently, the only additional security that might
be available for these types of projects is a debt service reserve fund. Obviously, this might require the
association to make a one-time assessment of its members to fund the debt service reserve, but if an
improved water system is important to them, then they should not hesitate to provide this limited additional
security.
23
-------
Page 4 of 4
The above summarizes our analysis of the financial review and collateral security options available in
connection with private water company applicants. Circumstances might arise that suggest other collateral
security, but we have covered the most common scenarios. In all cases, the credit worthiness of a
particular applicant and the collectability of a particular PENNVEST loan must be judged on a case-by-case
basis, and the additional security required needs to be negotiated as appropriate. We would be happy to
discuss our analysis further with you at your convenience.
24
-------
CASE STUDY
JACK'S MOBILE TRAILER PARK
-------
CASE STUDY
JACK'S MOBILE TRAILER PARK
NARRATIVE OF APPLICATION/PROBLEM
Jack's Mobile Trailer Park is a privately owned trailer park located In rural northeast
Pennsylvania that is 100% owned by Mary Clark. Mary acquired the real estate In 1990
which is currently leased to 35 individuals. Mary was divorced several years ago, but in
the review of the application we discovered that she had remarried in early 1997.
The application received in May of 1997 was for the replacement of the failing on-
lot septic system with a new package treatment facility to eliminate the discharge of
inadequately treated sewage into the environment and nearby streams. The total project
cost is estimated at $224,550 and they are applying for a State Revolving Fund loan for
that amount carrying an interest rate of 2.521% for 20 years.
A review of Mary's Personal Financial Statement indicted total debts payable as
shown below:
Mortgage Debt - Business
Seller Mortgage
Farm Credit Mortgage
Personal Residence Mortgage
Other Business Debt
Backhoe
Other Personal Debt
(Car Loan, Home Equity, Credit Cards)
Total Principal
Outstanding
$ 47,454
48.536
$ 95.990
$ 30,483
$ 17,500
$ 36,389
Annual
Debt Service
$ 25,236
9.060
$ 34,296
$ 5,024
$ 4,044
Various
Other Information:
- Debt service on State Revolving Fund Loan
- Other Business Debt Service (Principal and Interest)
$ 14,306/Year
$ 38,340/Year
-------
PROBLEMS
1. What is the fundamental error in the original application that must be adjusted in
order to properly complete the cash flow analysis and lot rate rental impact?
2. What additional information would you like to have before you complete your
analysis and decide what collateral to recommend?
3. Roughly calculate cash flow and lot rental rate impact, (method 1 and 2)
4. Would you recommend approval of this SRF loan? Why or Why not?
5. Assuming you could overcome your concerns, what security and collateral would
you recommend?
-------
-------
Residential Percentage =
Bod 1
Total Proj'd
Oper'g Expes.
PIIA Debt Serv.
Prior PIIA/WFLB
Exst'g Debt Serv.
Other:
Total Cash Needs:
-recurring Cash Sources
Interest./Div.'s
^ulk Sales
;%
^ap Fees
Other:
Total Recurring
Cash Sources: $
Method 2
Net Income
with Adjustments $
Proj. change in
Oper'g Expenses
Inc.(Dec.in
Other Revenue
(Inc.) Dec. in
Other Expenses
PIIA Debt Service
Prior PIIA/
WFLB Loans
Current Maturities
New Residential
Customer Revenue
New C & I
Customer Revenue
Other:
Total Surplus
(Deficit)
Questions:
-------
APPLICANT:
J.*.:
Xf IL A A- *
FIGURES MUST REFLECT
ONLY THE UTILITY
AFFECTED BY THIS
PROJECT ON A SVSTEM-
WEDE BASIS.
Per Last
Compieted
Audit Year
19 ?<*
s rv5
$ £
$
s ?V. FJ-a
J TV.y>e
i.
INCOME
Total bills collected
Other charges collected*
Total operating revenues
Non-operating revenues*
TOTAL INCOME
$ HftT
una
u&m.
S Wf T'rtr S TV gyp
sry ryo
$ ttwo $ £~y Tvo
EXPENSES
OPERATING EXPENSES
Labor
Utilities
Materials and supplies
Outside services
3 oij_
1 *?(,!.
.XSffl.
. A-OcO
Other Expenses*
VT 3oe>
Total O & M expenses
Depreciation
A. r>7
to. 3S"r
53. too
S3. Six.
J£MT
Total operating expenses
£TSW?
NON-OPERATING EXPENSES
Annuai debt service excluding this project
ZfST
a..xrf
a: D"V
Other*
—
—
—
Total non-operating expenses
. A PT~
A. SjrS"
* Ef r~
TOTAL EXPENSES
6 6.5 Y A
O;,
NET
INCOME
+TOTAL INCOME
-TOTAL EXPENSES
NET INCOME
$ L% m
. frTfra o.
S ff. ?¥o
(>i>3f2
s gy.Vfv |
nti*r ;
5 $ xkMii s ;
1 PJeas* Attach explanation Tor ell "sdher" 1/iccwne *nd expenses.
4/96
PENNVEST - PART 111 - FINANCIAL/INCOME &
-8-
EXPENSES
-------
ATTACH TO PAGE 8
JACK'S MOBILE TRAILER PARK
OTHER EXPENSES
1996
1997
1998
Auto and Travel
$ 4,232
$ 4,500
$ 4,500
Insurance
1,078
1,500
1,700
Legal and Professional
3,364
3,500
3,500
Mortgage Interest
11,784
11,500
11,200
Other Interest
12,100
1 1,400
11,700
Repairs
2,933
3,000
3,100
Taxes
2,501
2,800
3,222
Meetings and Seminars
1,271
1,500
1,500
Equipment and Operating Expense
459
500
1,000
Donations
545
600
600
Licenses and Permits
263
300
500
Service Charges
109
120
0
Refuse
3,192
3,500
4,000
Water Testing and Chemical Treatment
491
550
850
Security
248
250
250
Service for Sewerage Plant
3.113
2.780
1.000
Total Other Expenses
$ 47,683
$ 48.300
$ 48.622
-------
fthiUNML ^IMILIVICIa I
PLEASE LEAVE NO BLANK SPACES. INSERT WORD "NONE" IN ABSENCE OF ANY AMOUNT. RV 11-OOB
Office Mr£yr—2 19^2
4\ 4>V C^s(q.xf\ Address At\y U/kfre- ^ / rr_
Hereby request a loan of $ for the specific purpose of
ay able . and/or submit this statement in support of outstanding indebtedness to
fWe warrant it to be a true and accurate statement of my/our financial condition on the date here below written. I/We further agree
lat if any change occurs wliich would materially lessen my/our means or ability to pay all claims or demands against me/us, the under-
'gned will immediately and without delay notify the said Bank of such change in my/our financial condition, and until such notifi-
ation has been received, the Bank may continue to rely upon the information herein given as a true and accurate statement of my/our
nancial condition.
IOTICE: InconM Irom alimony, child tupport or maintenance paymenti need no! be revealed il you do not ehooo to diacloM fuch Income in applying
for credit. Il any Income diacloeed below derived from alimony, child support or maintenance payment!? CD YES CD NO
hNANCIAL INFORMATION FURNISHED AS OF CLOSE OF BUSINESS fMnniM May fDav) 7 19 97 .
ASSETS
LIABILITIES
H ON HANO AND IN BANKS
4
525
NOTES PAY ABLE TO FIRST NATIONAL
-0-
GOVT. SECURITIES • SEE SCHEDULE A
-0-
-SECURED
TED SECURITIES - SEE SCHEDULE A
-0-
-UNSECUREO
-0-
^ISTEO SECURITIES • SEE SCHEDULE A
-0-
NOTES PAY-ABLE TO OTHER BANKS
"?2
889
!OUNTS AND NOTES RECEIVABLE
IE FROM RELATIVES AND FRIENDS
-0-
-SECURED
-UNSECURED
1
000
E FROM OTHERS ¦ GOOD
-0-
NOTES PAYABLE TO RELATIVES
-0-
- DOUBTFUL
-0-
NOTES PAYABLE TO OTHERS
-0-
>L ESTATE OWNED • SEE SCHEDULE B
535
000
REAL ESTATE MORTGAGES PAYABLE
126
473
li^fcTATE MORTGAGES RECEIVABLE
-0-
ACCOUNTS AND BILLS DUE
-0-
^^H.UE, LIFE INSURANCE
^^ULE C
-0-
UNPAID INCOME TAX AND INTEREST
-0-
OTHER UNPAID TAXES AND INTEREST
-0-
SONAL PROPERTY
5
000
CHATTEL MORTGAGES AND OTHER
LIENS PAYABLE
-0-
OMOBILES
15
523
ier assets - itemize Backboe
17
500
OTHER DEBTS -ITEMIZE
-0-
Lat Bed Trailor
1
500
lsc Bide Materials
1
000
TOTAL LIABILITIES
180
36>2
ariTDuter
2
462
NET WORTH
402
148
AL ASSETS
582
510.
TOTAL LIABILITIES AND NET WORTH |
582
510
ANNUAL INCOME (LATEST YEAR)
PERSONAL INFORMATION
ARY J
BUSINESS OR OCCUPATION
Owner/Operator of Trailor Park
JUS AND COMMISSIONS $
IDENDS AND INTEREST $ 22
EMPLOYER AND POSITION YEARS IN JOB
7
IL ESTATE INCOME (NET) - SEP. SCHED. $ 6.337
IER INCOME • ITEMIZE <*NOTICE ABOVE) $
PARTNER OR OFFICER IN ANY OTHER VENTURE
Tild Sunnort 3.540
al * q.899
NUMBER OF DEPENDENTS. INCLUDING APPLICANTIS) 2
k CONTINGENT LIABILITIES None
GENERAL INFORMATION
ENDORSER, COMAKER
i GUARANTOR *
ARE ANY ASSETS PLEDGED? NO
ARE YOU DEFENDANT IN ANY SUITS OR
LEG AL ACTIONS? NO
LEASES OR CONTRACTS I
AL CLAIMS t
ARE THERE ANY JUDGEMENTS UNSATISIFIEO
AGAINST YOU? NO
'VISION FOR FEDERAL INCOME
iX CLAIM S
HAVE YOU EVER BEEN THROUGH BANKRUPTCY TT
fJ o
OR MADE SETTLEMENT WITH CREDITORS?
IER SPECIAL DEBT $
FOR BANK USE ONLY
_ Q Business, Commercial or Agricultural Purpose Q Personal, Family or Household Purpose
The Federal Equal Opportunity Act prohibits creditors from discriminating Against credit applicants on the basis of race, color, religion, national origin, sex. marilal status. age
(providing that the applicant has the capacity to enter into a binding contract). The federal Agency which administers compliance with litis law concerning this bank is the Federal
Deposit Insurance Corporation. Regional Director. 432 5th Avenue. 21st Floor. New York. NY 10018
-------
PLEASE LEAVE NO BLANK SCHEDULES. INSERT WORD "NONE" IN ABSENCE OF ANY AMOUNT.
SCHEDULE A - U.S. GOVERNMENTS, CORPORATE DONDS AND STOCKS
OF SHARES
VLUE (Bonds)
DESCRIPTION
IN NAMEtSI OF
MARKET
VALUE
IF PLEDGED,
STATE WHERE
SCHEDULE B - REAL ESTATE OWNED
LOCATION & DESCRIPTION OF PROPERTY
AND IMPROVEMENTS
TITLE IN NAME (exact) OF
DATE
ACQUIRED
) Trailor Park & Improvements
. /hsrY -
5/30/90
¦) Personal Trailor.& Improvements
1990
i
f
ii
COST
) 250.000
35.000
PRESENT
VALUE
500.000
35.000
MORTGAGE
MORTGAGEE
MV5 . \Sq _
Bank
^Usa. (.
Farm Credit
CURRENT
BALANCE
47.454
30.483
48.536
MATURITY
5/5/99
2005
6/1/05
TOTAL
MO. PAYMENT
2. 103
755
SCHEDULE C - LIFE INSURANCE CARRIED
FACE
AMOUNT
NAME OF COMPANY
BENEFICIARY
CASH
SURRENDER VALUE
LOANS
SCHEDULE D - BANKS. FINANCE COMPANIES AND OTHER REFERENCES WHERE CREDIT HAS BEEN OBTAINED
NAME AND LOCATION
HIGH CREDIT
BASIS
CURRENT BALANCE
PAST OUE
ee Attached Schedule
LIST OTHER BANKS WITH WHICH YOU HAVE ACCOUNTS
AME OF BANK
LOCATION
NAME OF BANK
LOCATION
I/We certify that both sides hereof and the information herein has been carefully read and is irue and correct, knowing submission of
a false financial statement constitutes a Federal and Slate criminal offense.
l/We authorije Reeves Bank to make whatever credit inquiries it deems necessary in connection with this credit application or in the course
of review or collection of any credit extended or maintained in reliance on the application. I /We authorise and instruct any person or consumer
reporting agency to compile and furnish Reeves Bank any information it may have or obtain in response of such credit inquiries.
)NE NUMBE RS:
HOME
'USINESS
SOCIAL SECURITY NUMBER
2 t&uj -
jl^NA"
SIGNATURE OF APPLICANT
.'9 .
SOCIAL SECURITY NUMBER
SIGNATURE OF CO-APPLICANT (II any)
OATE SIGNED
IS THIS APPLICATION MADE BY MORE THAN ONE PERSON? (ZWeS ~ NO IF YES, BOTH APPLICANTS MUST SIGN ABOVE.
PAW
notion
-------
Schedule D Supplement
Zelie Cons. Co. (Backboe); Current Balanee-17,500;
Maturity 9/13/03; Monthly Payment-337
Zelie Cons. Co. (Unsecured); Current Balance-1,000
Security Pacific; Current Bala.nce-4, 115 ; Monthly Payment-134;
Reeves Bank ('91 Probe); Current Balance-1,723
HFC; Current Balance-6f584
Associates (Trailor Deck); Current Balance-9,167; Maturity-
5/16/08; Monthly Payment-136
First Federal ('94 GMC Truck); Current Balance-13,800;
Maturity-8/30/99; Monthly Payment-523
-------
1041
D«pwVTi«rH of Tfasory - Internal R«v*ni;« S«rylci
U.S. Individual Income Tax Return
D96
(99)
IRS Um OrJy—Do not WM 01 »upw h >nu »p»e«.
• 19 loMB Ho. li^i-OOrT
Your social Mcurit} numbar
abel f
e*
For the y*t* Jan. 1-Oec. 31. 1996. or oQw m yw beginning
IRS
few (lrH nMtM and InWaI
•A
\Sy
tf
If a >3lr* return. jpouso'S flrtf nam and initial
. 1996. ending
last numt
C (ffc
Last noma
Home addreu Immhw wd • 19 ). (See Instructions.)
zxemptlons
i ...ore than six
iependents,
;ee the
nstructions
or line 6c.
3
YounwW. If your parent (or someone else) can claim you as a dependent on his or her tax
return* do nol check bo* 6a . ,
b
c
OepaodenU:
(H r.a; wm Uil rv>rrn
If;- D^partfaifi hcU
McurtT/ rwnb*r. II taro
h &k. 1H6. W9 IfttL
(1} D*»and«rtf t
lelillonihlp w
K0U
(4) Ht>. B norths
M h rotr
bm h 1991
|
:
:
:
I
Ho. iltaiM
tb«dti4 M
IImi M M
Ni. ll r»ir
ciJK-m m IL-.i
fcwtn:
• lhad wllli cfru .
• iH nal Ihra vttt
r«a if to Hrttt*
or MptraUM
InttracUaatl .
OtpwWtob wi 8c
not Mian* iftevi
Mi Mtniirt
•nterW oa
Total number of exemptions claimed IImi ibon »•
.me
Attach
Copy B of your
Forms W-2,
v-2G, and
. J9-R kit.
li you did not
gz\ a W-2,
see the
instructions
for fine 7.
lose, but do
nol attach, any
paymertt. Atso,
please enflota
Form 1040-V
(see the
instructions
For line 62).
7
Ba
b
9
10
11
12
13
14
15a
16a
17
13
19
2Qa
21
I 8b I
Wages, salaries. Ops, etc. Attach Foem(s| W-2
Taxable Interest. Attach Schedule B tf over J<00 .
Tax-exempt Interest. DO NOT include on line Ba
Dividend income. Attach Schedule B If over 1400
Taxable refunds, credits, or offsets of state and local Income laces (see Instructions)
Allrticoy received .
Business Income or (loss). Attach Schedule C or C-tZ
Capital gain or (loss). If required, attach Schedule D
Other gains or posses). Attach Form 4797
Total IRA distributions . .
Total pensions and annuities
Ba
22
15a
l&a
Ib Taxable amount (see Inst.)
b Tmbte amount (see lnsi.)
Rental real estate, royalties, partnerships. S corporations, trusts, etc. Attach Schedule E
Farm Income or (loss). Attach Schedule F
Unemployment compensation . , .
Social security benefits . 1 *°« I 1 I b Tanble amour* (see frcsi.f
Other Income. List type and amount—see Instructions
22 Add the amounts In the far right column for lines 7 through 2 V This Is your toUflncoma
Adjusted
Grass
Income
" 'ire 31 is under
9S (under
If a chlfd
(ve wfth
a the
-dons lor
Sine 54.
23i
t
2*
IS
26
27
2S
29
30
31
Yow fRA deduction (see InsiAJCiions)
Spouse's IRA deduction 1s?e InstructJorsI
Moving expenses. Aiacti Fofir KQ3 or 3903-f . . .
One-ha.l ol self-&crp(eynMrtl to*-Anach S:h«fcle5E .
Self-employed heal in insurance dedociion 99«
-------
Form IWO |IWQ
Page i
Tax
Compu-
tation
32 Arnaurii from line 31 ^c^usted grass Income)
31a Check if; O Yckj ware 6J or ofcier, Q SSrxJ; D SpouM *ras 65 ot older, ~ Bind.
Add tha number of boxes checfceef ato« ami ertcar tfw totsi h&e
»- 33b ~
If you want
the IRS to
figtre your
tax, see the
instrxjezOons
tor Ifne 37.
34
3S
38
37
35
II you a-® married HHJog j-eparslefv jr>d yceitoo shewn bolow tor your flltng status. But see tha
Instructions 1/ you checked any set jie—H.OCC • Marked filing Jointly or QuaWybg w(dov^er)—16,100
• Head of household—IS.9CO » Ma-r1«J iWtg separately—SUS-3
Subtract line 34 from Wne 32 . , , . . , .
W lire 3Z Is. 138>7i or less, imullp-V 12.SW by iha total rumber at exemptions c)aime 3ne 59 y
f b Flouting number I 1 I I t ' I I I I .1 c Type; D Checking O Savings
m i ri i ii n i n i i m
^ d Account number
61 towufTt&llliH HvouwirtfcmiEOT&TOUB iW? UTlMMtll TAJC »- I 61 [
AmOUflt '5 morB tf,an "no SB, suatrecctno SBtromlne SI. Hits Is the AMOUNT YOU OWE.
YOU OWB Fc* details on how to pay end use Form 1040-V, sea Instructions >
6] Esli.Tiaied tax penalty. Also Include on 62 . , , . | 83 | 1
Sign
Here
Keep a copy
of this return
for your
records.
Undw pwwM»v of fj&yj-f, 1 ESeclu-* thai ! he« a iimln»d Lhb riun »nt» jeeompflnying jc/Wutel wd uewrrorls. end io the bail of my Itnowtadga
btOti. sh»> «¦» inn, cancC «nd corrplrt«. OedwiUon d ptep»w (oihw ih»n usip»«*i to t»sed cm »l Wormatlun Of which prtpattr h»» any kflowriaog^.
V Your slgratur#
f yS Plasty C&eux.dz
1 5p
-------
-SCHEDULE E
(Form 1040)
Department of I he Treasury _
Internal Revenue Service w)
Supplemental Income and Loss
(From rental real estate, royalties, partnerships,
S corporations, estates, trusts, REMICs, etc.)
~ Attach to Form 1040 or Form 1041. ~ See Instructions for Schedule E (Form 1040).
OMB No. 1545-0074
Attachment
Sequence No. 13
Name
-------
•*£4562
0»p»1rT>#n< ot lh« Truiury
tnlarnal A«v*nu« S*rvlc« t®)
Depreciation and Amortization
(Including Information on Listed Property)
separate Instructions. Attach this form to your return.
OMB No. 1545-0172
D96
Attachment
Sequence No. 67
shown on return
Business or activity to which this lorm relates
Identifying number
i 1
| Election To Expense Certain Tangible Property (Section 179) (Note: if you have any "listed property,"
complete Part V before you complete Part I.)
1
2
3
4
5
Maximum dollar limitation. It an enterprise zone business, 3ee page 2 of the instructions .
Total cost of section 179 property placed in service. See page 2 of the Instructions . . .
Threshold cost of section 179 property before reduction In limitation
Reduction In limitation. Subtract line 3 from lino 2. If zero or less; enter -0-
Dollar limitation for tax year. Subtract line 4 from line 1. II zero or less, enter -0-. If married
filing separately, see page 2 of the Instructions .
J_
2_
_3_
4
$17,500
$200.000
(a) Description of property
(b) Cost (bosloea* um only)
(c) Elected cost
7 Listed property. Enter amount from line 27
8 Total elected cost of section 179 property. Add amounts In column (c), lines 6 and 7 . . .
6 Tentative deduction. Enter the smaller of line 5 or line 8
10 Carryover of disallowed deduction from 1995. See page 2 of the Instructions ......
11 Business income limitalion. Enter Ihe smaller of business Income (not less than zero) or lina 5 (see Instructions)
12 Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line 11 . .
13 Carryover of disallowed deduction to 1997. Add lines S and 10, less line 12
10
11
12
Note: Do not use Part II or Part III below for listed property (automobiles, certain other vehicles, cellular telephones,
certain computers, or property used for entertainment, recreation, or amusement). Instead, use Part V for listed property.
Part II
MACRS Depreciation For Assets Placed in Service ONLY During Your 1996 Tax Year (Do Not Include
Listed Property.)
Section A—General Asset Account Election
14 If you are making Ihe election under section 168(i){4) to group any assets placed In service during the tax year into one
tor more general asset accounts, check this box. See page 2 of the instructions ~ ~
f Section B—General Depreciation System (GPS) (See page 3 of the instructions.)
(a) Classification of properly
(b) Month and
year placed In
service
(c) Basis lor depreciation
(business/investment use
only—see Instructions)
(d) Recovery
period
{•) Convention
(I) Method
(o) Depreciation deduction
15a 3-year property
b
5-year property
c
7-year property
d
10-year property
e
15-year property
f
20-year property
g 25-year property
25 yrs,
S/L
Residential rental
property
27 .5 yrs.
MM
S/L.
27 . 5 yrs .
MM
S/L
I Nonresidential real
property
39 yrs ¦
MM
S/L
MM
S/L
Section C—Alternative Depreciation System (ADS) (See page 4 of the Instructions.)
16a Class life
HHHl
S/L
b 12-year
12 yrs.
S/L
c 40-year
40 yrs.
MM
S/L
Part Iff
Other Depreciation (Do Not Include Listed Property.) (See page 4 of the instructions.)
17 GDS and ADS deductions for assets placed in service In tax years beginning before 1996
18 Property subject to section 168(f)(1) election
19 ACRS and other depreciation
Part IV
17
18
19
10.565
Summary (See page 4 of the instruclions.)
20
Listed property. Enter amount from line 26. . .
Total. Add deductions on line 12, lines 15 and 16 in column (g), and lines 17 through 20. Enter here
and on the appropriate lines of your return. Partnerships and S corporations—sob Instructions.
For assets shown above and placed In service during the current year, enter
the portion of the basis attributable to section 263A costs
20
10,385
For Paperwork Reduction Act Notice, page 1 o1 the separate Irwtructlona,
Cal. No. 12906N
Form 4562 (1996)
-------
1040
Department of Ihe Treasury—Internal Revenue Service
U.S. Individual Income Tax Return
(P)
ins Uu Onv—Oo ml Willi or Htple In IMi >p«ct.
for the year Jan. 1-D»c. 31, 1995, or other lax year beginning
Ions
11)
Your first name and Initial
L .
A
B •
E
L
H
E
R
E
JL
, tpousa't
If a joinl rtlum,
i lint name and inJI In)
La 51 name
Lest nima
Label
f
j'b the IRS
abet.
Otherwise,
please print
v typo.
'residential
Election Campaign W Do you wonl S3 lo go io this lund? . .
e page 11.) f If a jolol return, does your spouse want $3 lo go to this fund7
, 1695, ending
. 19
OMB No. 1545-0074
Home address (number and atieetl. II you have a P.O. box. sne page It.
Apt. no.
City, town or cost olflco, stale, and ZIP codn. H you have a lorelgn address. see page 11.
Your tochl ••curlty number
r
• « 4 :
Spouai't aodaleecurlty number
! i
For Privacy Act and
Paperwork Reduction
Act Notice, see page 7.
Yes
No
Note: Checking 'Yes'
will not change your
t&x or re due* your
refund.
Filing Stalus
(See page 11.)
Check only
one box.
Single ¦
Married filing joint return (even If only one had Income)
Married filing separata relum. Enter spouse's social security no. above and full name here. ~
Head ol household (with qualifying person). (Seepage 12.) If the qualifying person Is a child but not your dependant,
enter this child's name here. ~
Qualifying widow(er) with dependont child (year spouse died ~ 19 ). (See papa 12.)
Exemptions
(See page 12.)
ii more than six
dependents,
see page 13.
6a
b
c
3 Yourself. II your parent (or someone else) can claim you as a dspendarrt on his or her tax
return, do not check box 6a. But be sure lo check the box on line 33b on page 2
Dependents;
(f) First name last njm<
12) Dcptndenl'] social
security numf>((. It born
In 1993. sec pane 13.
(3) Dtpindent'J
relJtlonsfifp lo
vau
(1} No. ol mcnlhi
Bvtd in yovr
ltsmi In 1195
:
i
:
i
II your child dldn'l live wilh you bul Is claimed as ydur dependent undei a pre-1965 agreement, check hen I I
Total number of exemptions claimed . . . '.
No. ol boiei
checiid on 0s
. (nil (b
He. of your
children on 6c
who:
• livid wllh you
• didn't live with
you due io
dlvorta or
• tptiillon (las
pi|i t«|
DepiittfgMi on Be
not entered abora
Add numbm
• nlertd on
linei ibort P-
Income
Attach
Copy B of your
>rms W-2,
.«-2G, and
1099-H here.
II you did not
gel a W-2, see
page 14.
iclose, but do
nol attach, your
payment and
payment
voucher. See
page 33.
Adjustments
to Income
7
08
b
0
10
11
12
13
14
15a
1Bb
17
1B
19
20a
21
22
239
b
24
25
26
27
28
20
30
Wages, salaries. Hps. etc. Attach Form(s) W-2
Taxable Interest Income (see page 15). Attach Schedule B If over $400 . . .
Tax-exempt Interest (see page 15). DON'T Include on line 8al_5^_J
Dividend Income, Attach Schedule B If over $400 . . . .
Taxable refunds, credits, or offsets ol slate end local Income taxes (seo page 15)
Alimony recelvod
Business Income or (los9). Attach Schedule C or C-EZ
Capital gain or (loss), ff required, attach Schedule D (see page 16) ....
Olber gains or (losses). Atlach Form-4797
Total IRA distributions .
Total pensions and annuities
15a
10a
b Taxable amount (see page 16)
b Taxable amount (see page 16]
Rente! reel estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E
Farm Income or (loss). Attach Schedule F
Unemployment compensation (see page 17)
Social security benefits I 20o i I I b Taxablo amount (see page 18)
Other Income. Llsl type and amount—see page 18
Adjusted
Gross Income
Your IFIA deduction (see page 18)
Spouse's IRA deduction (see page 19)
Moving expenses. Attach Form 3903 or 3903-F , . .
One-half of eelf-employment tax
Self-employed health Insurance deduction (see page 21)
Keogh & self-employed SEP plans. 11 SEP, check ~ 0
Penalty on early withdrawal of savings
Alimony paid. Recipient's SSN ~ • :
Add lines 23a through 29. These are your total adjustments
23b
23 b
24
25
28
27
28
2D
31
Subtract line 30 It cm line 2?. This is you i adfusled grois Income, II less lhan J26.673 and a child lived
wilh you (less linn 19.230 il 3 child didn'l live with ymi). see 'Earned Income Credit' on page 27 >•
Cat. Mo. 1JSOOG
8a
10
11
12
13
14
15b
16b
17
18
16
20b
21
31
7.084
7.064
7,084
Form 1040 (1995)
-------
Form 1040 [WS>
P»g» 2
Tax
Compu-
tion
pags
32 Amount (rom tine 31 (ad|usled gross Income) ' J
33a Check 11: O You were 65 or older, D Blind; Q Spouse was £5 or elder, O Blind.
• Add (he number of boxes checked above and enter the total hero ~ 33a
b !l your parent (or someone else) can claim "you bs a dependent, check here . 33b
II you are married filing separately and your spouse Itemizes deductions ¦ 33c
II you want
(he IRS to
figure your
tax. see
page 35.
34
35
36
37
33
39
40
Enler
the
larger i
of
your:
Itemized deductions from Schedule A, line 28, OR
Standard deduction shown bfelow for your tiling slatus. But If you checked
any box on line 33a or b, go to page 23 to find your standard deduction.
If you checked bo* ODc, your standard deduction is lero,
• Single—$3,900 • Married Tiling jointly or Qualifying wldow(er>—$6,550
• Head of household—$5,750 • Married filing separately—$3,275
Subtract line 34 Irom line 32
If fine 32 Is $86,025 or less, multiply $2,500 by !he total number of exemptions claimed on
line 6e. II line 32 Is over $05,025, see the worksheet on page 23 for the amount to enter .
Taxable Income. Subtract line 36 from line 35. If line 36 Is more than lino 35, enter -0-
Tax. Check If from a @ Tax Table, b O fa* Rate Schedules, c EJCapilal Gain Tax Work-
sheet, or dD Form 8515 (seB page 24). Amount from Forro(s) 8814 e I
Additional taxes. Chech if from a O Form 4970 to O Form 4972
Add lines 3fi and 39 ~
41
42
43
44
32
36
37
36
39
40
7,084
3,900
5.184
2,500
684
103
103
Credits
(See page
24.)
41 Credit lor child and dependent care expenses. Attach Form 244f
42 Credit lor Ihe elderly or the disabled. Attach Schedule R .
43 Foreign tax credit. Attach Form 1116
44 Olher credits (see page 25). Check II from b 0 Form 3600
b CD Form 8396 c O Form 6801 d D Form (specify)
45 Add lines 41 through 44
40 Subtract line 45 from fine 40. ff tine 45 Is more than line 40, enter -0-
46
' 103
Other
Taxes
a page
47 Self-employment tax. Altach Schedule SE
48 Alternative minimum (ax. Attach Form 625(
49 Recapture taxes. Check If (rom a 0 Form 4255 b0Formfl6(1 cO Form 8B28
50 Social security end Medicare lax on tip Income not reported lo employer. Altach Form 4137
51 Tox on qualified retirement plans. Including IRAs. If required, attach Form 5329 . . .
52 Advance earned income credit payments Irom Form W-2
53 Household employment taxes. Attach Schedule H
54 Add lines 46 through 53. This is your total tax . .
47
48
49
50
51
52
53
55
56
57
58
59
60
54
i03
Payments
Attach
Forms W-2,
W-2G, and
1099-R on
the Iront.
55
56
67
58
59
GO
ei
Federal Income la* withheld. It any Is Itom Fom(s) 1099, check *¦ Q
1995 estimated lax paymenls and amount applied from 1994 return .
Earned Incoms credit. Attach Schedule EIC if you have a qualifying
child. Nontaxable earned Income: amount I I I
and lype
Amount paid wilh Form 4060 (extension request) ....
Excess social securily and RRTA lax withheld (see page 32)
Other payments. Check If from o O Form 2439 b 0 Fo/m 4136
Add lines 55 through 60. These are your tolal paymenls
Refund or
Amount
You Owe
G2
€3
64
65
66
If line 51 Is more than tine 54, subtract line 54 Irom line 61. This Is tha amount you OVERPAID.
Amount ol line 62 you want REFUNDED TO YOU.
Amount ol line 62 you want APPUED TO YOlm 1996 ESTIMATED TAX ~-
62
63
64 1
II line 54 Is more than line 61, subtract line 61 Irom line 54. This Is the AMOUNT YOU OWE.
For details on how to pay and use Form 1040-V, Payment Voucher, see page 33 . . ~
Estimated lax penally (see page 33). Also include on line 65 1 66 1
-0-
103
Sign
Here
Keep a copy
ol this return
for your
•cords.
Under penalties ol perjury, I declare mat I have examined this return and accompanying schedules and statements, and lo the best ol my knowledge And
belie I. they are true, conecl. and complete. Dsclarailon ol preparer (other than taxpayer) Is based on all IhlorinaMon ol which preparer has any knowledge.
Date Your occupation
K
>
Your signature
Spousa's signage. If a jofnl relum, SOTH must sign.
¦ \
Dale
Tq/H
aid
Preparer's
Use Only
Preparer's
signature
~
Spouse's occupation
Check W
j-^-cmployed
ta
Film's n.ime (or yours
ff sell-employed) find
address
Preparers social security no.
EIW
ZIP cofla
0
rtryete& *tmptf
Government Pflrtlbg Ofl«c»; 1995 - 369-339
-------
SCHEDULE E
(Form 1040)
0«parlm«nt ot 1h* Tifttaury
JnlwnaJ A«v«nu» S«rric% (5)
Supplemental Income and Loss
(From rental real estalo, royalties, partnerships,
S corporations, estates, trusts, REMICs, etc.)
~ Attach lo Form 1040 or Form 1041. See rnstrvctlons for Schedule E (Form 1040).
IJIfllJ 14U. 1
H®95
Atlachmsnl ¦«
Sequence No. 13
Nama{&) shown on ffllurn M
o/qs*c
.Your toctal >«cuitty number
Income or L033 pfom Rental Real Estate and Royalties Not#: Report Income and expanses from your business of.rentlng
personal property on Schedute C or C-EZ (see page 6-1). Report farm rental Income or loss from Form 4635 on page 2, line 39,
1
Show the kind and location of each rental real estate property:
2 For each rental real estate
Yes
No
A
'j . .Habile..Jr.ai .-
property listed on line 1, did you
or your family use It for personal
purposes for more than the
greater of 14 days or 10% of the
total days rented at fair rental
. v . value during the tax year? (See
• page E-1.)
A
.
X
B
B
C
C
Properties
Totals
{Add columns A, 0, «nd C.)
(iiuuinv;
A
B
C
3 Rents received
3
70r 074.
3
; '
4 Royalties received
4
4
Expenses:
5 MatMm ETjtmt. .X. 5,0}?
6 Auto and travel (see page E-2)
7 Cleaning and maintenance. . .
n Q | | in i mir Equip Dp TC^-p
5
919
6
2f 340
1
7
8
742
9 Insurance
10 Legal and other professional fees
9
1.219
10
100
¦
12
11
294-
12 Mortgage interest paid to banks,
etc. {see page E-2)
13 Other interest
Repairs
12
12.956
1.
13
11.593
19
14
7.271
^Supplies & ,0£f ;Lce Post
Taxes . . . .
17 Utilities .........
ia other (list) ~..Test ings
.L i c en 9 e s.. & . Perm it s.
.Bart k.. S erv i c.e. Charge s
jk e.fuse
15
1.058
16
3.929
17
3.843
18
913
548
244
'
3. 192
Security
164
19 Add lines S through 1B . . . .
20 Depreciation expense or depletion
(see page E-2)
21 Total expenses. Add lines 1S and 20
22 Income or (loss) Irom rental real
estate or ' royalty properties.
Subtract lino 21 from line 3 (rents)
or line 4 (royalties). If the result is
a (loss), see page E-2 lo find out
if you must file Form 6198. . .
23 Deductible rental real estate loss.
Caution: Your rental real estate
loss on line 22 may be limited. See
page E-3 to find out if you must
file Form 8582. Real estate
professionals must complete line
42 on page 2
19
51.325
20
11.665
20
21
62.990
24
7,084
22
7.084
23
)
(
)
( "
)
m fin linA ?? fin not inrliirln nnv losses
25 Losses. Add royally losses from line 22 and rental real estate losses Irom line 23. Enler the lotal losses here ,
Total rental real estate and royally income or (loss). Combine lines 24 and 25. Enter the result here.
If Parts II, III, IV, and line 39 on page 2 do not apply to you. also enter this amount on Form '1040,
line 17. Otherwise, Include this amount In the lotal on line 40 on paqe 2
25
(
)
26
7,084
For Paperwork Reduction Acl Notice, see Form 1040 Instructions.
Cat, No. M344L
Schedule E (Form 1040) 1995
-------
1040
Dapnrtm^nt 6l Ihn Iifasury—Inlemol tAcvoriyn Soviet
U.S. Individual Income Tax Return
DD94
ID
IBS Uia CWr—Do not wril* Of »upl« In Ihii ipjce.
For the year Jan. I-Oec. 31. 1594. or other tax year beginning
1994, ending
« »9 0M8 No. \SiS:QQ7<\
Youi lit at nam* and Initial
_ jf\
II o |oir>l relurn./fip^
-y
,/5po\J5e'»
first nama and Inlltal
l_Mt name
C/fdsfc
Last nam*
Home address (number and slreelj- M you havn a P.O. bo*, $e« paga 12.
Label
"•>e
'Clions
is II.)
.ha IBS
Othervylse.
phose print
or lype.
Presidential
Election Campaign L Oa you want $3 (o go to this fund?
See page 12.) f II a Joint return, does your spouse want $3 to go to this lurid?
Apt. no.
City, town or posl otltcE. slate, anrl 7IP codt. II you have a lor-^n eildresi. sea paje 12.
Your social security number
Spouse's social security number
For Privacy Act and
Paperwork Reduction
Act Notice, see page 4.
Yes
No
Hois: OiecJt/np "Y«*
iviff f*ol r.tmnpn yutir
1st C tfidiJC* yfHtt
tefurtd.
Filing Status
(See page 12.)
Check only
one bo*.
Single
Married tiling Joint relurn (even l( only one had income)
Married filing separate return. Enter spouse's social security no. above and lull name here. ~
Head of household (wilh qualifying person). (See page 13.) II Ihs qualifying person is a child but not your dependent,
enter this child's name here. ~
Qualifying wldow(er) wilh dependent child (year spouse died ~IS ). (See page 13.)
Exemptions
IPee page 13.)
If more than six
dependents,
see page M.
en
Zj. Yoursoll. II your parent (or someone else) can claim you es a dependent on his or her tax
relurn. do not check box 6a. Bui bg sure to check the box on line 33b on page 2
[ 1 Spouse .
Dependents:
(!) Name (llrsl. i»ili?l, mi bjl mmt)
|I| t-lnck
V vnitr
iat I
|3| II tge I or older,
dependent'! social itcurity
nvmber
(4) OEpendent's
retillonihlp to
vou
111 llo ol monlbt
ffrtd h W
home h 191t
: :
i ¦
: :
j ;
II your thilrf didn't live wilh yotr bul Is claimed as your dependent under i pre-1985 sgieemenl, check here ~ I I
Total number ol exemptions claimed
No. ol bo>«s
(Haded en Ci
•nd tb
Ho. at yow
thlldrcn on t«
who:
• lived with ynv
• HUn'l live with
yutr dut la
jtvorci or
Kpjrjlton (tea
pig« 14)
Dipendenli on St
not enlerii above
kit mimbm
intend on
line I above *¦
Income
attach
Copy B of your
Forms W-2,
W-2G, anil
1099-R hers.
If yoti dirl riol
pel a W-2, see
page IS.
Enclose. bul rio
not attach, any
payment with
VOitr roturn.
7
an
b
s
10
11
12
13
14
15a
10a
17
18
19 .
20a
21
22
Wages, salaries, tlt>s. etc. Attach Form(s) W-2
Taxable interest Income (see page 15). Attach Schedule B If over $400 .....
Tax-exempt InteresI (see page 16). DON'T Include on line BaL®^_J I
Dividend Income. Attach Schedule 8 II over 1400
Taxable refunds, credits, or offsets of slate and local income taxes (see page 16) . .
Alimony received
Business Income or (loss). Attach Schedule C or C-EZ
Capital gain or (loss). If required, allach Schedule D (see page 16)
Other gains or (losses). Allach Form 4797
Total IHA distributions , I I | j b Taxable amount (see page 17)
Jolaf pensions anrl annuities 1 16a I I I b Taxabls amount (sea page 17)
Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E
Farm Income or (loss). Attach Schedule F
Unemployment compensation (sec page IB)
Social security benefils I ^0a i I I b Taxable amount (see page IB)
Olher Income. Usl type and nmounl—see pari® in
8a
0
10
11
U
13
14
15b
16b
JA
18
_19_
20b
21
22
Adjustments
to Income
Caution: See
instructions . . t*
23a Your IRA deduction (see pagr) 19) .
b Spouse's IRA deduction (see page IS)
24 f/ioving expenses. Allach Form 3903 or 3903 F , . .
25 One-half of self-employment tax
26 Sell-employed health insurance deduction (see page 21)
27 Keogh retirement plan and sell-employee! SEP deduction
28 Penally on early withdrawal of savings
29 Alimony pair). Recipient's SSH V ' j
30 Add lines ?3n through 29. Ttwse are your lolnl adjustments
23a
23b
24
25
26
27
26
29
i.ujusled
Gross Income
31 Subtract line 30 Irom line 22. this is your ad(n$l(d gr, i o?i
-------
m 1040 (1994)
Page 2
IX
ompu-
~ 33c ~
34
you want
te IRS to
gure your
i*. see
age 24.
32 Amount Irom line 31 (ad)usled gross Income) . . . .
33a Chock If: D You were 65 or older, Q Blind; CU Spouse was 65 or older. Q Blind.
Add the number ol boxes checked above and enter the total here ^3°
b If your parent (or someone else) can claim you as a dependent, check here . ~ 33b
c If you are married filing separately and your spouse Itemizes deductions or
you are a dual-status alien, see page 23 and check here
Itemized deductions frorrf Schedule A, line 29. OR
Standard deduction shown below (or your filing status. But If you checked
any bo* on line 33a or b, go lo page 23 lo lind your standard deduction.
If you checked box 33c, your standard deduction Is zero.
• Single—$3.ODD • Head ol household—$5,600
• Married Tiling Jointly or Qualifying wldow(er)—$5,350
• Married filing separately—$3,175
Subtract line 3<1 from line 32
If tine 32 Is $83,850 or less, multiply $2,450 by the tolal number ol exemptions claimed on
line 6e. If line 32 Is over $03,850. see the worksheet on page 24 lor the amount lo enter .
Taxable Income. Subtract line 36 from line 35. II line 36 Is more than line 35. enter -0-
Tax. Check If from a 0 Tax Table, b D Tax Rate Schedules, c CUCapllal Gain Tax Work-
sheet. or dD Form 8615 (see page 24). Amount from Form(s) 0814 ~- e I
Additional taxes. Check If from a Q Form 4970 b 0 Form 4972 ........
Add lines 38 and 39
32
truer
larger
your:
_> g> CP .Q.
35
36
37
38
I &
36
< to
37
- Ca
38
- C3 -
39
40
39
41
42
43
44
40
- C=> -
Credits
See page
'4.)
41
42
43
44
45
46
Credit for child and dependent care expenses. Attach Form 2441
Credit for the elderly or the disabled. Attach Schedule R .
Foreign tax credit. Attach Form 1116
Other credits (see page 25). Check l( from a CD Form 3800
b D Form 8396 c CU Form 8801 d CD Form (specify)
Add lines 41 through 44
Sublracl line 45 from line 40. II line 45 Is more than line 40. enter -0-
- Q -
O'her
s
•ge
47
48
49
50
51
52
53
Self-employment tax. Attach Schedule SE
Alternative minimum lax. Attach Form 6251
Recapture taxes. Check II from o D Form 4255 bCD Form 8611 cOFormBB2B
Social security and Medicare lax on tip Income not reported lo employer. Attach Form 4137
Tax on qualified retirement plans. Including IRAs. II required, attach Form 5329 .
Advance earned Income credit payments Irom Form W-2
Add lines 46 through 52. This Is your total tax....
47
46
49
50
51
52
53
-
Paymenls
Allacti
Forms W-2.
W-2G, and
1099-R on
the front.
54 Federal Income lax withheld. II any Is Ifom Form(s) 1099. chtck Q
55 19!)4 estimated lax paymenls and amovint applied liom 1993 return .
58 Earned Income credit. If required, attach Schedule EIC (see page
27). Nontaxable earned Income: amount ~- I 1 I
and type ~
57 Amount paid with Form 4868 (extension request) ....
5fl Excess social security and RRTA tax withheld (see page 32)
59 Other payments. Check If Irom a O Form 2439 b O Form 4136
60 Add lines 54 through 59. These are your total payments
54
55
50
57
58
$
59
$
60
- C3 -
Refund or
Amount
You Owe
61
62
63
64
65
If tine 60 Is more than line 53. subtract line 53 Irom line 60. This Is the amount you OVERPAID.
Amount of line 61 you want REFUNDED TO YOU
Amount ol line 61 you want APPLIED TO YOUR 1995 ESTIMATED TAX ~ 1 63 I
61
02
If line 53 Is more lhan line 60. subl'acl line 60 Irom tine 53. This Is the AMOUNT YOU OWE.
For details on how to pay. Including what lo write on your payment, see page 32 . . .
Estimated lax penalty (see page 33). Also include on line 64 | 65 | |
-c^-
Sign
Here
Keep a copy
of this return
for your
'ds.
Umlcr penalties ol perjury, I declare thai I have examined Ihla relurn and accompanying schedules and statements. and to the best of my knowle'.kic and
belief, they are true. correct. and complete. Declaration of preparer (other lhan taxpayer) Is based on all Information ol which preparer has ony knowledge.
K
~
Your signature
Spouse's signaly*4. If a joint leluin, DOTH must sign.
Dnte
Da\e
Your occupation
Spouse's occupation
Preparer's
Use Only
Preparer':
slonnluie
Finn's name (o» vou**
if sclf-employM) .v»d
address
~
Oale
Cheek II
self-employed
0
Preparer's social tpcurity no.
C.I. No.
ZIP code
-------
SCHEDULE E
(ronn 10-10)
'*»-frl |l"» liram*y
S(tvie« (r«)
Supptemetital Income and Loss
(From rental real estate, royalties, partnerships,
S corporations, estaten, trusts, nEMICs, etc.)
~ Attach to Form 10-10 or Form 10-11. »- See laslructlonj for Schedule E (Form 1040).
1 in 1 • ¦
1l§)94_
AltnnlHiirnt _
Sei|iKiic> Mo. 13
r.fiovMU nu teltnn .
/nn.y'-, Cs/osfc
Your soclnl sr>ctitliy niimhfr
1ft 1
[ Income or Loss Fiom Rental Real Estate and Royalties Hole: Report frico/ne nnd expemis from yotv innm"**. >-< tmiitip
pmsonnl pivpeiiy en Schedule C or C-BZ (see patjn F¦ II. flfpotl f.vm rental Income or lass (torn form 4035 on paga «", /«»« ."V.
Show the kind ami location ol each renlfil_renl estate property: 12 For each rental real estate Yes No
^o> i. .v—ortZ .^
Income:
3 nflll*! ITOivmi
*1 Royalties received ....
Fypnnsnp:
K A't" -i lining T)>o-i_c^n_ p
ft Aiiln nnrl tiavnl pari" E*2)
Cleaning and inaintniiancr>.
7
n
9
to
I I
12
lM*iuiniu:p
1."(]al ami olltr-r professional Ip""5
Mnnaci«m"nl l^ns
M"i1fpcj« inlnie-.l paid In hanli*.,
etc, (^r-n pagr E-?)
(^1fit inlornst
nr>pnii«s
pripplins 0«:c ; C-j£_ '%Tr?0 ¦» t
Tnrr"i
IJIililir"
Oil in (list) o£
19
20
21
22
7.1
Arid liri^i S Ihmucjh 10 ...
llnpinrialinn o^puiiP'! fit r|oplr»1inn
pan? Ev)
lolnl Pxp«nso*; Add linpr. 1fland?0
Income or (lo:is) lioin inula! real
eMato or royally proper ii"s.
Subtract fin" I'I from linn .Tfinilr.)
or liii" 'I (rnyrllift) II II m ilJ i<:
a fins*), snp pag" P ? In I»hI rml
il yen muni file Form (1191.
Il^'lin lihln |f»"lal rr>al rslal" l'>~.r».
Caution: Vol/' filial irnl ns/al"
hion him 22 niav hi liitiil"ti. See
parjo E-3 to find mil if yon muzl
HI", r or/n 0502. flral cr-lnlo
pmfnssionats twist ro/n/i/ofr? linn
'IP nn page 2
3
4_
5
G_
7
0
9
10
11
20
21~
22
23
For each rental real estate
property listed on line 1. did yoir
or your family use It for personal
purposes lor more than the
greater of 14 days or 10%" "ol the
iotal days rented at Inlr rental
value during the tax year? (See
page E-1.)
."13 i .
i-3_s © ..
..e e> c.
v. & o
. L.C
rj
A O i. o ."\
14
-Oct-S
15
-J_c?
16
^ .
_17_
.3.S. <=> »
.
e.
10
-3r.?S ¦>.(- .
i . \ .
"2- °v
19
Y
s
(Aflil cohhimm A H. mi'l CJ
24 Income. Add positive nrriotmls shown on lino 22. Do not Inr.lirde any losses
25 Losses. Arid mynlty Io<;<:p"; Imin Ii'iip 77. and ffilnl rpnl f>.cl.ilr> Incqnc lirnn lin^ 23. Efller llw total losses hni» .
6 I'olal iPnlal rpat pctnlp anrf invatly inrorne nr C-oitil'ino liti"s 74 and 25. Enler (tin rfir.lill hnrc.
II r,arl«J II. III. IV, and lin" .'Ul on pari" P. rin not apply t« vrin. aho ntilnr (his.muoUMl on Form IH'10.
line 17, Olhnixvisr. include this amniinl in the lolal <«i Hur -I" nti pagq 2
Tnr rnpoiv/ntk notlnr.llnn Ar.l llnlir.r.
-------
040
Department of Um Traaaury—tnumal Ravarua Sarvtca
U.S. Individual Income Tax Return
96
(991
IBS UM On>r—Do not nwU or utpm h tftl spaca.
Label
For tha year Jan. 1-Oac. 31.1996. or ochef la* yw beginning
(See
¦>®9e 11J
m, the IRS
PbeL
Otherwise,
please print
or type.
Presidential V—
Election Campaign
(See page 11.)
Y«* flrtt nwne and Mlal
[A/fry* P ^
It a Joint return, spouse's first nam* and WUai
Last name
L p uy/4
1996. andlng
Ifr I OMB Mo. 1548-0074
Last nam*
Home »drv»*i (number and sue*' " "ou haw a P.O. box, saa page 11.
Apt. no.
Cttv. town or oost office. state. and ZIP coda. If you have a foreign address, see page 11.
Your todal security reanbar
SpouM'i social security number
For help finding line
instructions, in pages
2 and 3 in the booklet
~ Do you want S3 to go to this fund?
If a
joint return, does your spouse want S3 to go to this fund?
Yes
No
X
Note: Checkhg
"Yesm wit not
change yoir ui or
reduce /our refund.
Filing Status 2
3.
Check only *
one box.
Single
Married filing Joint return (even If only one had Income)
Married filing separate return. Enter spouse's social seculty no. above and full name here. ~
Head of household (with qualifying person). (See Instructions.) If the qualifying person Is a child but not your
dependent, enter this child's name here. ~
Qualifying wldow
-------
F(*m 1040 (1996)
Page 2
Tax
Compu-
tation
32
33a
If you want
the IRS to
figure your
tax. see the
instructions
for line 37.
34
35
36
37
38
Amount from line 31 (adjusted gross Income)
Check If: D You were 65 or older, G Blind; D SpouM was 65 or older, D Blind.
Add the number of boxes checked above and enter the total here . . . . ~ 33a
If you are married filing separately and your spouse Itemizes deductions or
you were a dual-status alien, see Instructions and check here ~ 33b
Itemized deductions from Schedule A. Une 28, OR
Standard deduction shown below for ycxr filing status. But see the
Instructions If you checked any box on line 33a or b or someone
can claim you as a dependent.
• Single—$4,000 • Married filing Jointly of Qualifying wldow(er)—$6,700
• Head of household—$5,900 • Married filing separately—$3,350
Subtract line 34 from line 32
Enter
the
larger
of
your;
If line 32 Is $88,475 or less, multiply $2,550 by the total number of exemptions claimed on
line 6d. If line 32 Is over $88,475, see the worksheet In the Inst, for the amount to enter .
Taxable income. Subtract line 36 from line 35. If line 36 Is more than line 35. enter -0-
Tax. See Instructions. Check If total Includes any tax from a O Form(s) 8814
b ~ Form 4972 ~
36
Credits
39
40
41
42
43
44
Credit for child and dependent care expenses. Attach Form 2441
Credit for the elderly or the disabled. Attach Schedule R. .
Foreign tax credit. Attach Form 1116
Other. Check If from a CD Form 3800 b D Form 8396
cG Form 8801 d Q Form (specify) :
Add lines 39 through 42
39
40
41
i;
Subtract line 43 from Hne 38. If line 43 Is more than line 38. enter -0-
37.618
5. 900
35 31,718
7,650
37 24.068
3,611
3.611
Other
Taxes
45
46
47
48
48
50
51
Self-employment tax. Attach Schedule SE
Alternative minimum tax. Attach Form 6251
Social security and Medicare tax on tip Income not reported to employer. Attach Form 4137
Tax on qualified retirement plans, including IRAs. If required, attach Form 5329 . . .
Advance earned Income credit payments from Form(s) W-2
Household employment taxes. Attach Schedule H
Add lines 44 through 50. This Is your total tax
. ayments
Attach
Forms W-2,
W-2G, and
1099-R on
the front
.52 Federal Income lax withheld from Forms W-2 and 1099 . .
53 1996 estimated tax payments and amount applied from 1995 retun .
54 Earned Income credit. Attach Schedule EIC if you have a qualifying
child. Nontaxable earned income: amount ~ I l__l
and type ~
55 Amount paid with Form 4868 (request for extension) . . .
56 Excess social secirity and RRTA tax withheld (see Inst.). .
57 Other payments. Check if from ad Form 2439 b O Form 4136
88 Add lines 52 through 57. These are your total payment*
52
53
54
55
56
57
3.611
4,437
Refund
Have it sent
directly to
your bank
accoyntl See
Inst and fill In
60b. c. and d.
59 If line 58 is more than Hne 51, subtract line 51 from line 58. This is the amount you OVERPAID
60a Amount of line 59 you want REFUNDED TO YOU ~
~ b Routing number I I I I I I 1 I I I c Type: O Checking O Savings
~ d Account number
61 Amount of lint 59 you want APPUED TO TOUR 1997 ESTIMATED TAX ~ I 61
AfllOlint 62 " ',ne Is than line 58. subtract line 58 from line 51. This Is the AMOUNT YOU OWE.
YOU Owe For details on how to pay and use Form 1040-V, see instnictions ~
63 Estimated tax penalty. Also Include on line 62 I 63 I 1
Sign
Here
Keep a copy
of this return
for your
rords.
Under penalties of perXry. I declare thai I have exarrtned this twain and accompanying schedules and statements, and to the best of my knowledge and
belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) Is based on al Information of which preparer has any knowledge.
~
~
Your signature
id
preparer's
Use Only
Spouse's slgnaAre. If a JokVreturn. BOTH must sign.
—1^
signature v >
~
~ate
V/o/t?
Date
Data
4/13/97
Firm's name (or yous
V self-emptoyed) and 9 —
address
>
Your occupation
Spouse's occupation
Check If
self-employed
0
Preparer's social secu>*>v no.
EIN
ZIP code
0
-------
^o[nh6{3
recurring Cash Sources
Interest./Div.'s
Bulk Sales
Tap Fees
Other:
$ 83,568
100.00%
83,568
35
$ 2,387.66
Method 2
Net Income
with Adjustments
$ 40,606
Proj. change in
Oper"g Expenses (2,329)
lnc.(Dec.in
Other Revenue
(Inc.) Dec. in
Other Expenses
PIIA Debt Service (14,306)
Prior PIIA /
WFLB Loans
$ (14,369)
100.00%
14,369.00
35
5 410.54
$ 1,977.11
$ 2,387.65
Current Maturities
(38,340)
New Residential
Customer Revenue
New C & I
Customer Revenue
Other:
Total Recurring
Cash Sources: $
Total Surplus
(Deficit) $(14,369)
-------
Operating Data:
Revenues
Operating Expenses
Operating Income (Loss)
Other Income (Expenses)
Net Income (Loss)
1996
$ 69,199
42,786
26,413
(20,076)
$ 6,337
JACK'S MOBILE TRAILER PARK
YE - December 31,
1995
$ 70,074
46,264
23,810
(16,726)
$ 7,084
1994
$ 73,255
51,028
22,227
(16,528
$ 5,699
Balance Year 6 = $ 174,959
Cash Flow vs. Debt Service:
Debt Service: Years 1-5
PIIA loan $ 14,306
Prior PIIA/
WFLB loan
Current Maturities
of Existing Debt
Add'l / Prop. Debt
38,340
Years 6-20
$ 15,485
13,104
Cash Flow:
Net Income
Depr./Amort.
Interest Expense
12/31/96
Historical
$ 6,337
10,385
23,884
12/31/98
Projected
$ 15,933
15,085
22,900
Total $ 52,646
$ 28,589
Total
$ 40,606
$ 53,918
-------
Page 2 of 2
FINANCIAL CONCLUSION AND RECOMMENDATIONS
RE: Tetc-fc'S MOBILE TRAILER PARK
Total Project Cost - $224,550
PENNVEST Loan Request - $224,550
DATE: Tu/y 3/ /???
CONCLUSION AND RECOMMENDATIONS (Continued)
This projected annual trailer lot rental is as follows:
Projected Average Annual Trailer Lot Rental $ 2,387.48
Current Average Annual Trailer Lot Rental $ 1,977.1 1
Percentage Increase Required 20.8%
We understand that rental rates of other trailer parks in the area are nearly identical to this
projected annual rate.
In light of limited assets and the modest projected increase in
the annual trailer lot rentals, we recommend the following conditions to the Board in its
consideration of this PENNVEST loan request of $224,550:
1. A lien on all, the revenues of Mobile Trailer Park.
2. The joint personal guaranty of Ct*sk . and spouse.
3. A real estate appraisal on the property known as Mobile Trailer Park
prepared by a MAI or State Certified Appraiser reflecting a fair market value of no
less than $500,000.
4. A mortgage lien on the real estate known as Mobile Trailer Park
subordinate only to the existing mortgages totaling $95,990 on said real estate
at the time of this loan application review and as reflected on Aieny C-Ush
May 7, 1 997 personal financial statement.
5. Receipt of the complete Individual Federal Income Tax Returns of /li&'y Cfurh
I _ . • for the term of the PENNVEST loan.
-------
V. SRF-Related Bond Issuance:
Leveraging Overview
Leveraging in the SRF
Program
• SDWA allows states to "leverage"
capitalization funds
• Involves issuing bonds - using proceeds for
loans
• In CWSRF: used by 22 states since 1989
• FY 1997: 12 states issued $1.1 billion
• Several basic types of leveraging - however,
no two state approaches are identical
v-1
-------
Why Leverage?
• Leveraging most appropriate for states with
high demand
- "Demand" vs. "Needs"
• Trade-offs:
- Funding today vs. funding tomorrow
- Environmental protection today
vs.environmental protection tomorrow
• Decision reflects flexibility given to states
by SDWA
EPA's Roles
• Inform decision-making process
- Leveraging options
- Steps in decision-making process
- Trade-offs
• During grant award process: review
structures for compliance with DWSRF
guidelines
• During annual review: review compliance
with approved program
V - 2
-------
Types of Leveraging
• Reserve fund
• Blended rate
• Cash-flow
Reserve Fund
Characteristics
• Most common structure in CWSRF
• Capitalization Grants Used to Provide
"Oversized" Reserve Fund
• Reserve Fund:
- Generates Interest Used to Repay Bonds
- Provides Extra Security for Bonds
V - 3
-------
Reserve Fund Leveraging
SRF
Capitalization
Grant
Debt
Service Reserve
State
Match
Earninj >
Issue
Leverage Bonds
Loan
Fund
SRF
Loans
Revenue
Fund
Repay
Bond Holders
SRF
Capitalization
Grant
_ $100 _
Debt
Service Reserve
$100
State
Match
$20
Haminj >
S5.5/yi
Loan Fund
$20+5196 =
$216
SRF Loans
$216@3.5%. 20yr
Revenue Fund
Loans: $15.1
DSR: $5.5
Total: 20 6
Coverage 124%
Repay Bond
Holders: $16.7/yr
Issue Leverage
Bonds: $200
^5.5%k20yr^
Reserve Fund Leveraging
V - 4
-------
Reserve Fund Leveraging
SRF
Capitalization
Grant
Debt
Service Reserve
State
Match
Earninj
Issue
Leverage Bonds
SRF
Loans
Revenue
Fund
Repay
Bond Holders
-------
Reserve Fund Leveraging
SRF
Capitalization
Grant
$100
Debt
Service Reserve
$100
State
Match
$20
Earning
$5.5/yr
Loan Fund
$20+$ 196 =
$216
Issue Leverage
Bonds: $200
5.5%,20yr
SRF Loans
$216@3.5%, 20yr
Revenue Fund
Loans: $15.1
DSR: $5.5
Total: 20.6
Coverage 124°/
Repay Bond
Holders: $16.7/yr
-------
Blended Rate
Characteristics
• Grant funds and bond proceeds used for
loans
• Can be used as blending of no-cost funding
(grants) and market rate funding (bonds)
• Net effect is low interest rate
• Extra security is provided with high cash-
flows
• Also called cash-flow leveraging
Blended Rate Leveraging
SRF
Issue Leverage
Bonds
Debt
Service Reserve
State
Match
Capitalization
Grant
Revenue Fund
Repay
Bond Holders
V- 5
-------
Blended Rate Leveraging
SRF
Issue Leverage
Bonds: 1120
5.5%20yr^
State
Match
S20 .
J Loan Fund
J106+S20+100
JV S226
Capitalization
Grant
S100 ^
SRF Loans
S226@3.5%, 20yr
Revenue Fund
Loans: SI5.9
DSR: S.66
Total: 16.S6
Coverage 165%
Repay
Bond Holders
. S10/year
Cash Flow Leveraging
• Similar to blended-rate: bonds size based on
cash-flow
• Difference: doesn't require up-front
capitalization
• May be used at any point during life of SRF
V - 6
-------
Blended Rate Leveraging
SRF
Issue Leverage
Bonds
Debt
Service Reserve
State
Match
Earninj
Capitalization
Grant
Loan Fund
SRF Loans
Revenue Fund
Repay
Bond Holders
-------
Blended Rate Leveraging
SRF
Issue Leverage
Bonds: $120
5.5%,20yr
Debt
Service Reserve
$12
State
Match
$20
Earninj
$.66/yr
Loan Fund
$106+$20+100 =
$226
Capitalization
Grant
$100
SRF Loans
$226@3.5%, 20yr
Revenue Fund
Loans: $15.9
DSR: $.66
Total: 16.56
Coverage 165%
Repay
Bond Holders
$10/year
-------
Cash-Flow Leveraging
'Xap. Grant & StateS
Match Year 1
SI 20
SRF
Cap Granl & State
Match Year 2
$120
ap Grant & State
Match Year 3
S120
issue Year 4
Leverage Bonds.
sS2!6@5 5*A20yr
Direct Loan Fund
S120+120+120 ¦
^~V S360
Revenue Fund
Loans: S2S.32
Coverage 140%
Bond
Proceeds Used
for New Loans
216@3.5V«v20yr
"Leverage-like "
Approaches
• Issue debt outside SRF
• Run nonleveraged loan program for SRF
• Effect is same as leveraging
V-7
-------
Cash-Flow Leveraging
Cap. Grant & State'
Match Year 1
$120
Cap. Grant & State"
Match Year 2
$120
SRF
Direct Loan Fund
$120+120+120 =
$360
jans: $360 @3.5%,
20yr repay: $25.32
Cap Grant & State
Match Year 3
$120
Issue Year 4
Leverage Bonds:
,$216@5.5%>20yr
Revenue Fund
Loans: $25.32
Coverage 140%
Bond
Proceeds Used
for New Loans
216@3.5%,20 yr
-------
CWf R
Capitalisation
SRF
Progra
0tract 8RF Loan
9 rogram
Loans
State G.O.
Bond
Intarcapt Moial
Obligation (•»
¦••dad)
Subildjf Fund
Ravaea* Bond
Exercise
• Review actual leveraging structure
diagrams
• Identify what type of leveraging is in use
V - 8
-------
Connecticut: What's Wrong
With This Picture?
Revenue Bond Proceed*
Clean Water Fund
Revenue Bond
Program (SRF)
Cost
Administrative
Fund
Loan Fund
Loans
Earnings
Earnings
Additional Pledged,
Receipts
(Existing G.O. Loans
Pre-1991)
Pledged Receipts
Revenue Fund
(Transfer of Pledged
Receipts, IF needed)
Earnings
Debt Service Fund
(Outside SRF)
Earnings
Interest Subsidy
Fund
Debt Service Fund (¦
Revenue Bond Holders
Interest
Subsidy
G.O. Payments
Pit t (ipian
L«a«
Arkansas
V - 9
-------
Leveraging Implementation
V- 10
-------
Leverage-like Example: Wisconsin
; CWF Revenue
. Bond Proceeds
; Capitalization
Grants & State
SRF
Program
Loan Fund
Direct SRF Loan
•; Prbjj rfiiri : :
Loans
Repayments
Loans
C lean
Water
Fund
State G .0.
Bond
Repaym ents
Intercept: Moral
Obligation (as.
: needed)
Working Capital
Revenue Fund
Subsidy Fiirid
Interest Earnings^
Principal as Needed)
Revenue Bond;
Holders : :
IIMMM
Loan Credit
Reserve Fund
-------
Connecticut: What's Wrong
With This Picture?
Revenue Bond Proceeds
(Outside SRF)
Administrative
Fund
Loan Fund
Issuance
Earnings
Earnings
Revenue Fund
Earnings
Earnings
Debt Service Fun
Additional Pledged
Receipts
(Existing G.O. Loans
Pre-1991)
Clean Water Fund
Revenue Bond
Program (SRF)
Loans
Pledged Receipts
(Transfer of Pledged
Receipts, IF needed)
Debt Service Fund
3
Revenue Bond Holders ^
Interest
Subsidy
Municipalities
/Projects
(Outside SRF)
Interest Subsidy
Fund
G.O. Payments
-------
Arkansas
Federal Grant
Revenu.eBohd
Proceed si.;.
State Match:
Issuance Cost!..
. State drant
Sub-Account
Loan R6t fpterttt
Loan Account;:..
Pledged Receipt*
i
• Account
X
Revanue Fiiiid
Fi»e & Expense :
Fund .
4r
l::i RebatePuhd:
>
Internal Revenue
Service
4r
debt.Service Fund
~
Paying A gent
1 +
Debt Service
Reserve FUnd
:Bond Holders
Supplemental
! Reserve Fund :
^ ""
Unrestricted
;:i: Account :
-------
Federal
Capitalization
Brants
Administration
Loan
Repayment
Clearing Account .
(Funding Sources far
Loans to
Communities)
cress Bond
Proceeds
Net Bond
CWSkF
PM
¦' - ........ A-----
mmtmmi
mmmm
WPCLfUoan .. .
Repayment*
: Fund
Depladgad i«oan
"Repayments.
Fund
State Match
suWurid
mmi
Cost or issuance
fgiplllili
iiplf®
Debt Service
Reserve Fund
Principal ;
Fund
merest
Capitalization Grant
ifM
Debt Service
Fund
water Quality
Subfund
Surplus Principal
Fund
ss^Revenues From:
Unpledged principal
Fund
capitalization Grant Subfundl
®||| Interest Fund J
ss:; :A vVater Quality Subfund £
mmmmmmii mMf
-------
Overview of Leveraging
Planning Process
• Characterize financial assistance
needs/demand
• Conduct program modeling
• Review decision considerations
• Develop final decision
Characterize Financial
Assistance Needs/Demands
• Demand for assistance
• Timing of needs
• Role of other funding mechanisms
-RUS
- State grants/other loans
- Local financing
V-11
-------
Conduct Program
Modeling
• Financial model allows comparison of
differing program structures
• Compare leveraged program vs.
Nonleveraged program
• Compare supply of funding vs. demand for
funding
Review Decision
Considerations
• State political acceptability
• State policy
• Relationship among state departments
• Interest in program
• SRF management skills
• Administrative burden
V- 12
-------
Develop Final Decision
and Future Plans
• Develop implementation schedule
• Establish responsibilities of state
departments
• Plan any needed modifications to SRF
enabling legislation
• Determine any needed modifications to SRF
procedures/state regulations
• Initiate contact with financial community
• Inform EPA and client communities of
plans
Leveraging
Implementation Steps
• Initiate the implementation process
• Establish financial structure
• Develop program documentation
• Marketing SRF bonds
• Issuing SRF bonds
V- 13
-------
Initiate Implementation
Process
• Establish team
- State personnel
- Bond counsel
- Underwriter
- Trustee
- Financial advisor
• Establish goals and schedule
Establish Financial
Structure
• Level of state credit support
• Loan participants
• Type of bond indenture
• Cash flow/account structure
• Preliminary communications with rating
agencies/EPA
V- 14
-------
Develop Program
Documentation
• Develop trust indenture, bond resolution,
legal opinion form, and bond certificates
(bond counsel)
• Develop preliminary official statement,
bond purchase agreement, and agreement
among underwriters
(underwriters/underwriter's counsel)
• Execute loan agreements and interagency
agreements (state)
Marketing Bonds
• Presentation to rating agencies
• Advertising and printing
• Investor awareness
V- 15
-------
Issuing Bonds
• Bond pricing - underwriter
• Bond printing - state's bond counsel
• Bond closing - all involved
• Transfer of proceeds - trustee manages flow
of funds
Leveraged Program
Cash Draw Rules
• Default conditions
• Non-default conditions
- All project method
- Group of projects method
• Aggressive leveraging
- Cash draw mechanism - not associated with
leveraging ratio
- Not in use anywhere - generally not in best
interest of state
V-16
-------
Cash Draw Rules for
Leveraging
• SRF funding process
• Cash draw examples
SRF Funding Process
Fiscal
Year 1
Fiscal
Year 2
Ftscai •
Year 3
ttsoi
Year 4
Rscai
Year 5
Appropriation/
Apportenmentf
Allotment
$
Capoakzabon
Grant Award
Award m
ear of appr
ipnabonst
rfoOoMmQ]
ear
Payments
Earlier c
8 quarters
of Cap gra
t award or
2 quarter?
af aflotmen
Binding
Corrmtments
Entered
nto wrthtn
year of pa
memEqua
to 120%o
payment
Cash Draws
As COSE
aremcurre
1
Disbursements
General
yfotawlte
pattern of (
ash flow
Project Funding
Proass
Loan Aq
reemeni-
¦tan cortstn
ebon - FYo
xt compel
on-Begin
•epaymert m 1 year
payment ax 20 yean
V-17
-------
SRF Funding Process
Fiscal
Year 1
Fiscal
Year 2
Fiscal
Year 3
Fiscal
Year 4
Fiscal
Year 5
Appropriation/
Apportionment/
Allotment
$
Capitalization
Grant Award
Award in
rear of appr
~
Dpriations a
r following
ear
Payments
Earlier c
f 8 quarters
of Cap grai
it award or
12 quarters
of allotmen
Binding
Commitments
Entered
into within '
year of pa
fment Equa
to 120% o
payment
W
Cash Draws
As costs
are incurre
j
>•
W
Disbursements
General
y follow the
pattern of c
ash flow
~
w
Project Funding
Process
Loan Ac
reement - i
Start constri
ction - Pro
ect complet
on - Begin
repayment in 1 year
payment in 20 years
-------
Cash Draw Disbursement
Repayment Process
2. Request (or
Cosh Draw .
Municipality/
Public Water |
System/
Contractor
1. Invoice for Incurred
Costs
5. Cash
6. Repayment
SRFs Bank
Gj
'3. Certication of
Request
4. Wired Cash
Draw
I US Treasury 1
ACH System!
Cash Draw Issues
• Different rules for each type of assistance
• Generally based on pace of construction
• Can be complicated for leveraging and
refinancing
• Proportionality requirements
V- 18
-------
CWSRF Cash Draw
Example
• With federal grant of $100, state match
equals $20
- Total in SRF: $120
- Federal share: $100/$ 120 = 83%
- State share: $20/$ 120 = 17%
- Proportional cash draw reflects 83%/17%
shares
DWSRF Cash Draw
Example
• DWSRF cash draws must also consider set-
asides
- Federal capitalization grant: $100
- State match: $20
- Set-asides: $25
- Federal cash draw ratio: ($ 100-$25)/($ 100-
$25)+$20 = 79%
V-19
-------
CWSRF Cash Draw Example
Leveraged Program
• Cash draw ratio changes with addition of
$200 in leveraged funds
- Total dollars in SRF program: $320
- Total for SRF projects: $220
- Federal funds for debt reserve: $100
- Federal cash draw ratio: $100/$220 = 45%
V - 20
-------
CHAPMAN
*NDCUTLER
Legal implications:
The effect of Federal Securities Laws on
State Revolving Fund Programs
By Charles L. Jarik
Chapman and Cutler
I. INTRODUCTION AND OVERVIEW
A. SIGNIFICANCE OF FEDERAL SECURITIES LAWS IN THE MUNICIPAL BOND
Markets
B. STATUTORY AND REGULATORY FRAMEWORK
1. Securities Act of 1933
2. Securities Exchange Act of 1934
3. Trust Indenture Act of 1939
4. Regulations
5. SEC No Action Letters
6. Caselaw
C. OVERVIEW
1. Primary and Secondary Market Disclosure
2. Pay to Play
3. Yield Burning
4. SEC Enforcement Actions
II. PRIMARY DISCLOSURE - FINAL OFFICIAL STATEMENT - RULE 15C2-12
A. CONTENTS OF NEARLY FINAL OFFICIAL STATEMENT
1. Required Information
Chicago Phoenix Salt Lake City
111 West Monroe Street 2 North Central Avenue 50 South Main Street
Chicago, IL 60603-4080 Phoenix, A2 85004-2383 Salt Lake City, UT 84114-0402
(312)845-3000 (602)256-4060 (801)533-0066
-------
SUB
2. Permissibly Missing Information
a. Interest Rates
b. Yields
c. Other
B. Requirement that issuer deem the official statement to be final
C. Delivery of final official statement within seven Days
D. New Definition of Final Official statement Mandates three
substantive requirements
1. Information Material to an Offering
a. Standard: Not Specifically Defined; Left to Practice; SEC Expects
More Disclosure
1) Rule 15c2-12
2) Anti-Fraud Provisions
3) Industry Standards: GFOA, NFMA, NCSHA, ALFHA, etc.
b. Significant Borrower in Designated Pool - Standard
c. Conduit Financings (Private Activity Bonds, Qualified 501(c)(3)
Bonds, etc.)
1) Reporting Companies
2) Non-Reporting Companies
d. Inclusion of Financial Information by Reference
1) Information Filed with SEC
2) Information Filed with NRMSIR
e. Other Material Information Regarding the Offering (See
Comments to NABL: Aggressive Tax Positions)
2. Description of Undertaking(s)
-2-
Chicago
P HOE N 1X
Salt Lake City
-------
3.. Description of Failure to File Continuing Disclosure
CONTINUING DISCLOSURE REQUIREMENTS - AMENDMENTS TO RULE 15C2-12
A. INTRODUCTION
1. Effective Date: July 3, 1995
2. Genesis of the Amendments
a. History of Events and SEC Involvement in the Municipal Market
b. Identified Concerns of SEC in Municipal Market
c. Goals of SEC in Promulgating Amendment
1) Promote Improved Disclosure in Primary Market
2) Promote More Responsible Behavior in Secondary Market
3) Assure Honesty and Integrity in Municipal Market
d. Two Sets of Clarifications from the SEC
3. Approach
a. Underwriter's Commitment to Purchase Bonds
b. Continuing Disclosure
c. Exemptions
B. UNDERWRITER'S COMMITMENT TO PURCHASE BONDS
1. Rule:
Underwriter cannot purchase or sell bonds in an offering unless it has
reasonably determined that an issuer or obligated person has undertaken
in writing to provide certain pieces of information over the life of the
bonds
2. Obligation to Obtain Written Undertaking
a. Delivery of Written Undertaking at Closing
b. Methods of Assurance
-3-
ChicaOO Phoenix Salt Lake Cni
-------
Chapman
""CUTLER
1) Negotiated Sales
(a) Bond Purchase Agreement (Pre-condition to Closing)
(b) Attachment of Undertaking as an Exhibit to the Bond
Purchase Agreement
(c) Requirement of a Legal Opinion
2) Competitive Bid Sales
(a) Notice of Sale Should Include Statement Assuring
Bidders That Undertaking Will Be Delivered at
Closing
(b) If Notice of Sale Is Silent
(1) No Bid
(2) Bid Conditioned on Delivery of Undertaking
3. Preparation of Written Undertaking at Time of Mailing of POS
4. Placement of Written Undertaking
a. Four Possibilities
1) Bond Resolution/Ordinance
2) Trust Indenture
3) Bond Form
4) Separate Agreement or Certificate
5. Content of Written Undertaking
a. Identification of Obligated Persons: any person, including an
issuer of municipal securities, who is either generally or through
an enterprise fund or account of such person, committed by
contract or other arrangement to support payment of all or part of
the obligations on the municipal securities to be sold in the offering
(other than providers of municipal bond insurance, letters of credit
or other liquidity facilities)
1) Care — Identify All
-4-
Chicaco Phoenix Salt Lake City
-------
Chapman
andCutler
2) Blind Pools — Objective Criteria
b. Financial Information and Operating Data
1) Repetition of Information from Official Statement
a) Annual Financial Statements, if available
b) More Information Than Financial Statements
c) Burden — Who Will Perform
2) Specify Accounting Standards
c. Date of Filing — Leave Flexibility
d. Identification of Repositories
1) NRMSIR's
2) SID's (Have to verify if one exists)
e. Amendment Procedures
1) In Connection with Changes in Legal Requirements,
Changes in Law, Change in the Identity, Nature, Status or
Type of Business of Obligated Person
2) Amended Undertaking Would Have Complied with Rule at
Time of Primary Offering
3) Does Not Materially Impair Rights of Bondholders or Is
Approved by Bondholders
4) Explanation of Amendment in Annual Financial Information
f. Description of Remedies Available to Bondholders
1) Limit to Specific Performance
2) Requisite Percentage of Bondholders/Trustee Pursuit of
Remedies
Chicago
-5-
Phoenix
Salt Lake City
-------
Chapman
andCutler
g. Material Events Disclosure
1) Inclusion of all Eleven Material Events in Undertaking,
Whether or Not Applicable
2) Do Not Need to Give Notice of Mandatory Sinking Fund
Redemptions or Other Similar Scheduled Redemptions
3) Do Not Need to Give Notice of Events Relating to Secondary
Market Credit Enhancement
h. Prior Compliance History
6. Who Will Prepare the Written Undertaking
a. Underwriter
b. Financial Advisor
c. Issuer
d. Bond Counsel or Underwriter's Counsel
C. CONTINUING DISCLOSURE REQUIREMENTS
1. Pursuant to Written Undertaking(s), Obligated Persons Must File Annual
Financial Information and Operating Data and Notice of Material Events
2. Filing by Obligated Persons
a. Direct
b. Indirect
1) Another Obligated Person
2) Trustee
3) Designated Agent (Service)
4) SID May Not Be Designated Agent
3. Content of Continuing Disclosure
a. Financial Information and Operating Data
-6-
Chicaco Phoe m \ Salt Lake City
-------
Chapman
^Cutler
b. Material Events
1) Principal and Interest Payment Delinquencies
2) Non-Payment Related Defaults
3) Unscheduled Draws on Debt Service Reserves Reflecting
Financial Difficulties
4) Unscheduled Draws on Credit Enhancements Reflecting
Financial Difficulties
5) Substitution of Credit or Liquidity Providers, or Their
Failure to Perform
6) Adverse Tax Opinions or Events Affecting the Tax-Exempt
Status of the Security
7) Modifications to Rights of Security Holders
8) Bond Calls
9) Defeasances
10) Release, Substitution, or Sale of Property Securing
Repayment of the Securities
11) Rating Changes
c. Failure to File: Must Be Disclosed, May Render Bonds
Unmarketable
4. Termination of Duty of Continuing Disclosure
1. Bonds Are Paid
2. Bonds Are Legally Defeased
3. Termination of Obligation of Obligated Person
5. Disposition of Information
a. Rule:
No broker or dealer may recommend the purchase of a municipal
security unless it has procedures in place by January 1, 1996,
-7-
Chicaco Phoenix Salt Lake City
-------
providing reasonable assurances that it will receive such
information.
b. Liabilities
c. Retrieval of Information
D. EXEMPTIONS
1. Offerings of $ 1,000,000 or Less
2. Private Placement
a. $100,000 Denominations
b. No More Than 35 Sophisticated Investors
3. Short-Term Securities
a. Nine-month Exception
1) $100,000 Denominations
2) Nine-month Term
b. Eighteen-month Exception
1) $ 100,000 Denominations
2) Eighteen-month Term
3) Material Event Disclosure
4. Tender Option Securities: Will Cover Most Modes
a. $100,000 Denominations
b. Must Be Subject to Tender to Issuer or Agent at Least as
Frequently as Every Nine Months
5. Small Issuer Exception
a. Each Obligated Person Is Responsible for No More Than
$10,000,000 of Outstanding Municipal Securities (Excluding
Exempted Securities)
-8-
C H I C A C O
P H O E N' I X
Salt Lake City
-------
Chapman
andCutler
b. Each Obligated Person Must Execute Written Undertaking to
Provide Annual Financial Information to Anyone on Request
c. Undertaking Must Obligate Reporting of Material Events to SID, if
any
d. Final Official Statement Must Identify Person
e. Effective January 1, 1996
6. SEC May Provide Exemption
IV. PAY TO PLAY
A. PERCEIVED ABUSE
B. SEC RESPONSE
1. Regulatory Function over Broker-Dealers
2. Rule G-37 of the Municipal Securities Rulemaking Board
a. Rule Against Political Contributions
1) Application: Brokers, Dealers, Municipal Securities Dealers,
Public Finance Professionals and PAC's
2) Prohibition Against Engaging in Securities Business with
Issuers Within Two Years of Contribution to an Official of
the Issuer - Direct or Indirect
b. $250 Exception
3. Compliance
4. Reporting Requirements
C. ABA RESPONSE - Inconclusive
V. YIELD BURNING
A. DEFINITION
1. Advance Refunding
-9-
Chicago
Phoenix
Salt Lake City
-------
II
2. Creation of Escrow
a. United States Government Obligations - State and Local
Government Securities.
b. Open Market Securities - United States Government Obligations
Trading on Open Market
c. Yield Restrictions
3. Yield Burning
a. Underwriter Purchases Government Securities at a Market Price
b. Underwriter Sells Government Securities at Higher Price into
Escrow
c. Artificially Lower Yield
d. Tax Problems
e. Failure to Disclosure
IV. SEC ENFORCEMENT ACTIONS
C H I C A C O
-10-
Phoenin
Salt Lake City
-------
The term final official statement means a document or set of documents prepared by
an issuer of municipal securities or its representatives that is complete as of the date
delivered to die Participating Underwriter(s) and that sets forth information concerning the
terms of the proposed issue of securities: information, including Financial information ar
operating data, concerning such issuers of municipal securities and those other entities,
enterprises, funds, accounts, and other persons material t'o an evaluation of the Offering; and
a description o£ the undertakings to be provided pursuant to paragraph (b)(5)(i), paragraph
(d)(2)(ii), and paragraph (d}(2){iii) of this section, if applicable, and of any instances in the
previous five years in which each person specified pursuant to paragraph (b)(5)(ii) of this
section failed to comply, in all material respects, with any previous undertakings in a written
contract or agreement specified in paragraph (b)(5)(i) of this section. Financial information
or operating data may be set forth in the document or set of documents, or may be included
by specific reference to documents previously provided to each nationally recognized
municipal securities information repository, and to a state information depository, if any, or
filed with the Commission. If the document is a final official statement, it most be available
from the Municipal Securities Rulemaking Board.
C «\c*co
Phoe«u
5*ii L*xe Cjtv
-------
[H 25,117] Municipal Securities Disclosure
Reg. § 240.15c2-12. Preliminary Note: For a discussion of disclosure obligations
relating to municipal securities, issuers, brokers, dealers, and municipal securities
dealers should refer to Securities Act Release No. 7049, Securities Exchange Act
Release No. 33741, FR-42 (March 9, 1994). For a discussion of the obligations of
underwriters to have a reasonable basis for recommending municipal securities, bro-
kers, dealers, and municipal securities dealers should refer to Securities Exchange Act
Release No. 26100 (Sept. 22, 1988) and Securities Exchange Act Release No. 26985
Oune 28, 1989). (Added in Release No. 34-34961 (If 85,456), effective July 3, 1995, 59
F.R. 59590.]
(a) General. As a means reasonably designed to prevent fraudulent, deceptive, or
manipulative acts or practices, it shall be unlawful for any broker, dealer, or municipal
securities dealer (a "Participating Underwriter" when used in connection with an
Offering) to act as an underwriter in a primary offering of municipal securities with an
aggregate principal amount of $1,000,000 or more (an "Offering") unless the Partici-
pating Underwriter complies with the requirements of this section or is exempted from
the provisions of this section. [Amended in Release No. 34-34% 1 (J 85,456), effective
July 3. 1995, 59 F.R. 59590.]
(b) Requirements.
(1) Prior to the time the Participating Underwriter bids for, purchases, offers, or
sells municipal securities in an Offering, the Participating Underwriter shall obtain
and review an official statement that an issuer of such securities deems final as of its
date, except for the omission of no more than the following information: the offering
price(s), interest rate(s), selling compensation, aggregate principal amount, principal
amount per maturity, deliver^ dates, any other terms or provisions required by an
H25,H7 Reg. §240.15c2-12 ©1997. Commerce Clearing House, Inc
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Prohibited Activities— § 15(c)
18,255-7
issuer of such securities to be specified in a competitive bid, ratings, other terms of the
securities depending on such matters, and the identity of the underwriter^).
(2) Except in competitively bid offerings, from the time the Participating Under-
writer has reached an understanding with an issuer of municipal securities that it will
become a Participating Underwriter in an Offering until a final official statement is
available, the Participating Underwriter shall send no later than the next business day,
by first class mail or other equally prompt means, to any potential customer, on
request, a single copy of the most recent preliminary official statement, if any.
(3) The Participating Underwriter shall contract with an issuer of municipal
securities or its designated agent to receive, within seven business days after any final
agreement to purchase, offer, or sell the municipal securities in an Offering and in
sufficient time to accompany any confirmation that requests payment from any
customer, copies of a final official statement in sufficient quantity to comply with
paragraph (b)(4) of this rule and the rules of the Municipal Securities Rulemaking
Board.
(4) From the time the final official statement becomes available until the earlier of
(i) ninety days from the end of the underwriting period or (ii) the time when the official
statement is available to any person from a nationally recognized municipal securities
information repository, but in no case less than twenty five days following the end of
the underwriting period, the Participating Underwriter in an Offering shall send no
later than the next business day, by first class mail or other equally prompt means, to
any potential customer, on request, a single copy of the final official statement.
(5)(i) A Participating Underwriter shall not purchase or sell municipal securities
in connection with an Offering unless the Participating Underwriter has reasonably
determined that an issuer of municipal securities, or an obligated person for whom
financial or operating data is presented in the final official statement has undertaken,
either individually or in combination with other issuers of such municipal securities or
obligated persons, in a written agreement or contract for the benefit of holders of such
securities, to provide, either directly or indirectly through an indenture trustee or a
designated agent:
~ Paragraphs (bXSXiXA) and (B) shall not apply with respect to fiscal years
ending prior to January 1,1996.
(A) To each nationally recognized municipal securities information repository and
to the appropriate state information depository, if any. annual financial information
for each obligated person for whom financial information or operating data is presented
in the final official statement, or. for each obligated person meeting the objective
criteria specified in the undertaking and used to select the obligated persons for whom
financial information or operating data is presented in the final official statement,
except that, in the case of pooled obligations, the undertaking shall specify such
objective criteria;
(B) If not submitted as part of the annual financial information, then when and if
available, to each nationally recognized municipal securities information repository
and to the appropriate state information depository, audited financial statements for
each obligated person covered by paragraph (b)(5XiXA) of this section;
(C) In a timely manner, to each nationally recognized municipal securities
information repository or to the Municipal Securities Rulemaking Board, and to the
appropriate state information depository, if any, notice of any of the following events
with respect to the securities being offered in the Offering, if material:
(J) Principal and interest payment delinquencies;
(2) Non-payment related defaults;
(J) Unscheduled draws on debt service reserves reflecting financial difficul-
ties;
Federal Securities Law Reports
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(4) Unscheduled draws on credit enhancements reflecting financial difficul-
ties;
(5) Substitution of credit or liquidity providers, or their failure to perform;
(6) Adverse tax opinions or events affecting the tax-exempt status of the
security;
(7) Modifications to rights of security holders;
(S) Bond calls;
(9) Defeasances;
(70) Release, substitution, or sale of property securing repayment of the
securities;
(11) Rating changes; and
(D) In a timely manner, to each nationally recognized municipal securities
information repository or to the Municipal Securities Rulemaking Board, and to the
appropriate state information depository, if any, notice of a failure of any person
specified in paragraph (b)(5)(i)(A) of this section to provide required annual financial,
information, on or before the date specified in the written agreement or contract.
(ii) The written agreement or contract for the benefit of holders of such securities
also shall identify each person for whom annual financial information and notices of
material events will be provided, either by name or by the objective criteria used to
select such persons, and, for each such person shall:
(A) Specify, in reasonable detail, the type of financial information and operating
data to be provided as part of annual! financial information;
(B) Specify, in reasonable detail, the accounting principles pursuant to which
financial statements will be prepared, and whether the financial statements will be
audited; and
(C) Specify the date on which the annual financial information for the preceding
fiscal year will be provided, and to whom it will be provided.
(iii) Such written agreement or contract for the benefit of holders of such securities
also may provide that the continuing obligation to provide annual financial informa-
tion and notices of events may be terminated with respect to any obligated person, if
and when such obligated person no longer remains an obligated person with respect to
such municipal securities.
[Paragraph (bX5) added in Release No. 34-34961 (fl 85,456), effective July 3,
1995.59 F.R. 59590.]
(c) Recommendations. As a means reasonably designed to prevent fraudulent,
deceptive, or manipulative acts or practices, it shall be unlawful for any broker, dealer,
or municipal securities dealer to recommend the purchase or sale of a municipal
security unless such broker, dealer, or municipal securities dealer has procedures in
place that provide reasonable assurance that it will receive prompt notice of any event
disclosed pursuant to paragraph (bXSXiXC), paragraph (bXSXiXD). and paragraph
(dX2X»)(B) of this section with respect to that security. [Added in Release No.
34-34961 (J 85,456). effective January 1. 1996, 59 F.R. 59590.1
(d) Exemptions. (1) This section shall not apply to a primary offering of municipal
securities in authorized denominations of $100,000 or more, if such securities;
(L) Are sold to no more than thirty-five persons each of whom the Participating
Underwriter reasonably believes;
(A) Has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of the prospective investment; and
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Prohibited Activities^— § 15(c)
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(B) Is not purchasing for more than one account or with a view to distributing
the securities; or
(ii) Have a maturity of nine months or less; or
(iii) At the option of the holder thereof may be tendered to an issuer of such
securities or its designated agent for redemption or purchase at par value or more at
least as frequently as every nine months until maturity, earlier redemption, or
purchase by an issuer or its designated agent.
(2) Paragraph (b)(5) of this section shall not apply to an Offering of municipal
securities if, at such time as an issuer of such municipal securities delivers the securities
to the Participating Underwriters:
(i) No obligated person will be an obligated person with respect to more than
$10,000,000 in aggregate amount of outstanding municipal securities, including the
offered securities and excluding municipal securities that were offered in a transaction
exempt from this section pursuant to paragraph (d)(1) of this section;
> Paragraphs (dX2Xii) and (iii) shall not apply to an offering of municipal
securities commencing prior to January J, 1996.
(ii) .An issuer of municipal securities or obligated person has undertaken, either
individually or in combination with other issuers of municipal securities or obligated
persons, in a written agreement or contract for the benefit of holders of such municipal
securities, to provide:
(A) Upon request to any person or at least annually to the appropriate state
information depository, if any, financial information or operating data regarding each
obligated person for which financial information or operating data is presented in the
final official statement, as specified in the undertaking, which financial information
and operating data shall include, at a minimum, that financial information and
operating data which is customarily prepared by such obligated person and is publicly
available; and
(B) In a timely manner, to each nationally recognized municipal securities
information repository or to the Municipal Securities Rulemaking Board, and to the
appropriate state information depository, if any, notice of events specified in para-
graph (b)(5)(i)(C) of this section with respect to the securities that are the subject of
the Offering, if material; and
(iii) the final official statement identifies by name, address, and telephone number
the persons from which the foregoing information, data, and notices can be obtained.
(3) The provisions of paragraph (b)(5) of this section, other than paragraph
(b)(5)(i)(C) of this section, shall not apply to an Offering of municipal securities, if such
municipal securities have a stated maturity of 18 months or less.
(4) The provisions of paragraph (c) of this section shall not apply to municipal
securities:
(i) Sold in an Offering to which paragraph (b)(5) of this section did not apply,
other than Offerings exempt under paragraph (d)(2)(ii) of this section; or
(ii) Sold in an Offering exempt from this section under paragraph (d)(1) of this
section.
[Redesignated as paragraph (d) and amended in Release No. 34-34961 (H 85,456),
effective July 3, 1995, 59 F.R. 59590.)
(e) Exemptive Authority. The Commission, upon written request, or upon its own
motion, may exempt any broker, dealer, or municipal securities dealer, whether acting
in the capacity of a Participating Underwriter or otherwise, that is a participant in a
transaction or class of transactions from any requirement of this section, either
unconditionally or on specified terms and conditions, if the Commission determines
Federal Securities Law Reports
Reg. §240.15c2-12 1125,117
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that such an exemption is consistent with the public interest and the protection of
investors. [Redesignated as paragraph (e) and amended in Release No. 34-34961
(f 85,456), effective July 3, 1995, 59 F.R. 59590.]
(0 Definitions. For the purposes of this rule—
(1) The term "authorized denominations of $100,000 or more" means municipal
securities with a principal amount of $100,000 or more and with restrictions that
prevent the sale or transfer of such securities in principal amounts of less than
$100,000 other than through a primary offering; except that, for municipal securities
with an original issue discount of 10 percent or more, the term means municipal
securities with a minimum purchase price of $100,000 or more and with restrictions
that prevent the sale or transfer of such securities, in principal amounts that are less
than the original principal amount at the time of the primary offering, other than
through a primary offering.
(2) The term "end of the underwriting period" means the later of such time as (i)
the issuer of municipal securities delivers the securities to the Participating Underwrit-
ers or (ii) the Participating Underwriter does not retain, directly or as a member or an
underwriting syndicate, an unsold balance of the securities for sale to the public.
(3) The term Gnal official statement means a document or set of documents
prepared by an issuer of municipal securities or its representatives that is complete as
of the date delivered to the Participating Underwriter^) and that sets forth informa-
tion concerning the terms of the proposed issue of securities; information, including
financial information or operating data, concerning such issuers of municipal securities
and those other entities, enterprises, funds, accounts, and other persons material to an
evaluation of the Offering; and a description of the undertakings to be provided
pursuant to paragraph (bX5)(i), paragraph (d)(2)(ii), and paragraph (dX2)(iii) of this
section, if applicable, and of any instances in the previous five years in which each
person specified pursuant to paragraph (b)(5)(ii) of this section failed to comply, in all
materia] respects, with any previous undertakings in a written contract or agreement
specified in paragraph (b)(5)(i) of this section. Financial information or operating data
may be set forth in the document or set of documents, or may be included by specific
reference to documents previously provided to each nationally recognized municipal
securities information repository, and to a state information depository, if any, or filed
with the Commission. If the document is a final official statement, it must be available
from the Municipal Securities Rulemaking Board. [Amended in Release No. 34-34961
(J 85,456), effective July 3, 1995, 59 F.R. 59590.J
(4) The term "issuer of municipal securities" means the governmental issuer
specified in .section 3(a)(29) of the Act and the issuer of any separate security,
including a separate security as defined in rule 3b-5(a) under the Act.
(5) The term "potential customer" means (i) any person contacted by the Partici-
pating Underwriter concerning the purchase of municipal securities that are intended
to be offered or have been sold in an Offering, (ii) any person who has expressed an
interest to the Participating Underwriter in possibly purchasing such municipal securi-
ties, and (iii) any person who has a customer account with the Participating Under-
writer.
(6) The term "preliminary official statement" means an official statement pre-
pared by or for an issuer of municipal securities for dissemination to potential
customers prior to the availability of the final official statement.
(7) The term "primary offering" means an offering of municipal securities directly
or indirectly by or on behalf of an issuer of such securities, including any remarketing
of municipal securities (i) that is accompanied by a change in the authorized denomi-
nation of such securities from $100,000 or more to less than $100,000, or (ii) that is
accompanied by a change in the period during which such securities may be tendered
1125,117 Reg. § 240.15c2-12 ©1997. Commerce Clearing House, Inc.
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Prohibited Activities— § 15(c) 18,255-11
to an issuer of such securities or its designated agent for redemption or purchase from a
period of nine months or less to a period of more than nine months.
(8) The term "underwriter" means any person who has purchased from an issuer
of municipal securities with a view to, or offers or sells for an issuer of municipal
securities in connection with, the offering of any municipal security, or participates or
has a direct or indirect participation in any such undertaking, or participates or has a
participation in the direct or indirect underwriting of any such undertaking; except,
that such term shall not include a person whose interest is limited to a commission,
concession, or allowance from an underwriter, broker, dealer, or municipal securities
dealer not in excess of the usual and customary distributors' or sellers' commission,
concession, or allowance.
(9) The term annua] financial information means financial information or operat-
ing data, provided at least annually, of the type included in the final official statement
with respect to an obligated person, or in the case where no financial information or
operating data was provided in the final official statement with respect to such
obligated person, of the type included in the final official statement with respect to
those obligated persons that meet the objective criteria applied to select the persons for
which financial information or operating "data will be provided on an annual basis.
Financial information or operating data may be set forth in the document or set of
documents, or may be included by specific reference to documents previously provided
to each nationally recognized municipal securities information repository, and to a
state information depository, if any, or filed with the Commission. If the document is a
final official statement, it must be available from the Municipal Securities Rulemaking
Board. [Added in Release No. 34-34961 (tf 85,456), effective July 3, 1995, 59 F.R.
59590.1
(10) The term obligated person means any person, including an issuer of municipal
securities, who is either generally or through an enterprise, fund, or account of such
person committed by contract or other arrangement to support payment of all, or part
of the obligations on the municipal securities to be sold in the Offering (other than
providers of municipal bond insurance, letters of credit, or other liquidity facilities).
(Added in Release No. 34-34961 (f 85,456). effective July 3, 1995, 59 F.R. 59590.]
[Redesignated as paragraph (0 and amended in Release No. 34-34961 (f 85,456),
effective July 3, 1995, 59 F.R. 59590.1
(g) Transitional Provision. If on July 28, 1989 a Participating Underwriter was
contractually committed to act as underwriter in an Offering of municipal securities
originally issued before July 29, 1989, the requirements of paragraphs (b)(3) and (b)(4)
shall not apply to the Participating Underwriter in connection with such an Offering.
Paragraph (bX5) of this section shall not apply to a Participating Underwriter that has
contractually committed to act as an underwriter in an Offering of municipal securities
before July 3, 1995; except chat paragraph (b)(5)(iXA) and paragraph (bX5)(i)(B) shall
not apply with respect to fiscal years ending prior to January 1, 1996. Paragraph (c)
shall become effective on January 1, 1996. Paragraph (d)(2)(ii) and paragraph
(d)(2)(iii) of this section shall not apply to an Offering of municipal securities com-
mencing prior to January 1. 1996. [Redesignated as paragraph (g) and amended in
Release No. 34-34961 (f 85,456), effective July 3, 1995, 59 F.R. 59590.]
(Adopted in Release No. 34-26985 (tf 25,098), effective January 1, 1990, 54
F.R.28799; amended in Release No. 34-34% 1 (f 85,456), effective July 3, 1995, except
for Rule 15c2-12(c). which is effective January 1, 1996, 59 F.R. 59590.]
.10 Quotations rule applies to broker-deal- tions for a security under circumstances which
era.—Rule 15c2-l I under the Exchange Act. re- come within the provisions of the rule and has no
gar ding initiation and resumption of quotations application to the issuers. The quotations must be
without specified information, applies only to bro- arrived at by the broker-dealer completely inde-
ker-dealers wishing to publish or submit quota- pendent of the issuer to avoid antifraud and Se-
[The next page is 18.255-13.]
Federal Securities Law Reports Reg. §240.15c2-12 25,117.10
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1772 6-25-97
Prohibited Activities— § 15(c)
18,255-13
curities Act violations. The issuer may furnish the
broker-dealer the information specified in the
rule.—Charney & White (SEC 1971), '71-72 CCH
Dec. J 78.548.
.11 Securities listed on exchange—Converti-
ble security.—A security which has been admit-
ted to trading on a national securities exchange
and is traded there on the same day or on the day
before the publication or submission of a quota-
tion is exempt from Rule 15c2-ll under the Ex-
change Act. Quotations regarding a convertible
security traded over-the-counter must comply
with the Rule even though the underlying com-
mon stock is traded on an exchange.—G.A. Saxton
& Co.. Inc. (SEC 1971), 71-72 CCH Dec.
f 78.550.
.12 Securities of small banks.—A registered
broker-dealer specializing in the purchase and sale
of the securities of small banks was not exempt
from the requirements of Rule 15c2-ll. Some of
the banks were subject to various governmental
reporting requirements. The submission of quota-
tions was limited to the shares actually available
for sale, or desired to be purchased and was not
continued once the purchase or sale was made.—
Sommerfield & James (SEC 1972), '71-72 CCH
Dec. I 78.706.
«
.15 Submission of information regarding is-
suer—Subsequent quotation.—A broker-dealer
submitting information concerning an issuer
under Rule 15c2-ll (aX4) of the Exchange Act
must provide the information at least two days
before he submits a quotation of the issuer's stock
to the inter-dealer quotation system. Such infor-
mation must be reasonably current. It is possible
that, if information which has been timely sub-
mitted continues to be true, correct and reasona-
bly current, a subsequent quotation for the same
security would not require submission of addi-
tional information.—Carey and Duncan, Inc.
(SEC 1972) '71--72 CCH Dec. f 78.782.
See also:
Rothschild Securities Corp. (SEC 1973). "73-74
CCH Dec. f 79,693 (broker-dealer exemption re-
quest when information is not available denied).
.151 "Near-final" official statement by is-
suer.—The SEC granted an exemption to the
underwriters of offerings of governmental lease-
purchase and installment sale agreements in
which the assignment of the entire interest in the
agreement was made to a single investor. A corpo-
ration may bid for or buy agreements in which
certificates of participation are assigned to two or
more investors without obtaining a "near-final"
official statement, and may also d<-em such a
statement as final for purposes of Rule
15c2-12(bX 1 )Jrirst Continental Financial Corp.
(SEC 1990). '90-'91 CCH Dec. 1 79.641.
See also:
Mudge Rose Guthrie Alexander
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18,256
Broker-Dealer Regulation
1772 6-25-97
dard of public availability based on Rule
15c2-l l(aX4) information would not be met).
22 Quotations for securities of foreign issu-
ers.—In view of a foreign issuer's voluntary com-
pliance with the provisions of the publication and
submission of quotations for the issuer's common
stock is exempt from the provisions of Rule
I5c2-ll.—Reed Shaw Oster Ltd. (SEC 1976).
'76-'77 CCH Dec. 130,679.
.25 OTC markets—Fraudulent practices—
Seller of fact service.—A seller of an annual fact
sheet concerning over-the-counter securities may
operate in a deceptive manner if the information
provided by the service is not updated as often as
required.—O.T.C. Fact Sheets (SEC 1972).
'72-73 CCH Dec. J 78.987.
.30 Quotations—New corporation formed
by reorganization—Annual report informa-
tion.—Broker-dealers having an annual report on
Form 10-K for a corporation succeeding a corpora-
tion in a reorganization proceeding may insert
quotations in an inter-dealer quotation system for
the stock of the new corporation.—Imperial-
American Resources Fund, Inc. (SEC 1977).
"77-'78 CCH Dec. J 81.113.
.40 Reports—SEC review of adequacy.—On
reconsideration of views previously expressed, the
Corporation Finance Division believes that the
determinations of whether a report contains the
information described in Exchange Act Rule
15c2-ll(aX5) and whether the report is generally
available to the investing public are essentially
factual. Since the Division is not in a position to
verify these matters, it will no longer advise
whether a report of a particular issuer is adequate
under these standards for purposes of satisfying
the content and dissemination requirements of
Rule 144(cX2) under the 1933 Act.—AN AD AC,
Inc. (SEC 1990), 1990 CCH Dec. J 79.454.
.45 Municipal securities.—Exemption
granted from Rule 15c2-12(cX3) requirement that
securities be offered in authorized denominations
of $100,000 or more, in order to permit a
remarketing agent to remarket the bonds for con-
secutive remarketing periods extending for a pe-
riod of not more than nine months.—
PaineWebber Incorporated (SEC 1992), 1992
CCH Dec. f 76.288.
See also:
Public Securities Association (SEC 1992), 1992
CCH Dec. 176,267 (under Rule 15c2-12(bXl). a
"deemed final official statement" can not omit
information concerning credit enhancement if
that information is known or reasonably ascer-
tainable as of the date of the statement; if credit
enhancement is not reasonably expected to be
obtained, it is not necessary to include informa-
tion about credit enhancement solely because en-
hancement is a possibility).
Public Securities Association (SEC 1992), 1992
CCH Dec. J 76267 (determination that municipal
securities will be subject to optional or mandatory
redemption ordinarily will be made prior to the
date of the "deemed final official statement." and
such facts should be contained in the documents
comprising the statement; in negotiated offerings,
where specific matters such as particular sinking
fund redemption dates may not be fixed or ascer-
tainable until pricing, these specific items need
not be contained in the final official statement).
Public Securities Association (SEC 1992), 1992
CCH Dec. J 76,267 (under Rule 15c2-12(bXl).
terms that cannot be determined until pricing or
the determination of the amount of underwriter
compensation and offering expenses, need to be
contained in the "deemed final official state-
ment," but information concerning matters that
are known or reasonably ascertainable should be
included).
First Boston Corporation (SEC 1991). "91-'92
CCH Dec. I 76.091 (exemption granted from Rule
15c2-12(cX3) requirement that securities be of-
fered in authorized denominations of $100,000 or
more, in order to permit remarketing agent to
remarket bonds for consecutive remarketing peri-
ods extending for periods of not more than nine
months).
.46 Exemptions.—Exemption from Rule
15c2-ll granted with respect to Fixed Income
Pricing System operated by NASD to permit par-
ticipating brokers to publish in the Fixed Income
FViring System quotations for high yield corporate
debt securities that NASD approved for inclusion
in the system.—Fixed Income Pricing System
(SEC 1994) "93-'94 CCH Dec. 1 76.854.
.51 Burden of production.—SEC's determina-
tion that broker-dealer had burden of production
under Rule 15c2-ll did not constitute rule mak-
ing, but was interpretation of requirements im-
plied in existing rule.—General Bond & Share Co.
v. SEC (CA-10 1994), 39 F3d 1451, '94-"95 CCH
Dec 198,517.
fl 25,117.22 Reg. §240.15c2-12
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the bond buyer
WASHINGTON
April 24, 1998
CoreStates Pays $3.7
Million To End
Yield-Burning Case
By Lynn Stevens Hume
Related Information:
• Key Dates in the CoreStates Case
Related Articles:
• False Claims Suit Partially Unsealed
• Antifraud Provisions Could Still Affect Bonds
In a landmark global settlement that protects
issuers and bondholders, CoreStates Financial
Corp. will pay $3.7 million to settle all federal
charges stemming from yield-burning allegations
by the Securities and Exchange Commission,
Internal Revenue Service, and Justice
Department.
The settlement announced yesterday is the
culmination of two years of discussions between
CoreStates and federal agencies. It covers 102
refundings done for 83 issuers - all but two in
Pennsylvania -- from 1992 through 1995 by
Meridian Capital Markets Inc., a Reading,
Pa.-based firm acquired by CoreStates in 1996.
Meridian was both underwriter and escrow
provider in most of the transactions.
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Federal regulators and CoreStates officials said
they hope the agreement - which is
unprecedented and marks a new era of federal
cooperation in municipal enforcement cases --
will serve as a template for other firms that want
to globally settle federal charges in connection
with alleged yield-burning abuses.
"We hope it provides a blueprint for addressing
similar situations in the future," William
McLucas, the outgoing director of the SEG's
enforcement division, said in a statement.
SEC chairman Arthur Levitt said the
commission will be tough in other cases,
warning, "This case signals to municipal finance
professionals that this conduct will be vigorously
prosecuted."
In a related action, a federal judge in New York
City dismissed False Claims Act charges against
Meridian Securities that were filed in May 1996
by former Smith Barney Inc. managing director
Michael Lissack. The judge acted after the
Justice and Treasury departments intervened in
the suit and agreed to the settlement, resulting in
an unsealing of the charges. However, most
sources believe False Claims Act charges are
still pending against other Wall Street and
regional firms under a part of Ussack's suit that
remains sealed.
In addition, the SEC announced thai Martin
Stallone, a former Meridian official, agreed to
pay $100,000 and a civil penalty of $15,000 to
settle securities fraud charges in connection with
24 of the refundings. The SEC filed securities
fraud charges against Steven Snyder, another
former Meridian official, who refused to settle.
Of the $3.8 million -- $3.7 million of which
CoreStates is paying under its global settlement
and $100,000 of which Stallone is paying
through his SEC settlement - $3.4 million will go
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w
to the federal government and $420,884 will go
to two issuers: the Reading School Authority
and the Borough of Ambler. Both suffered
losses through negative arbitrage earnings in
their refundings.
The SEC action resulted from an investigation by
the commission's Philadelphia district office,
whose director is Ronald Long. SEC officials
said their settlements with Meridian, CoreStates,
and Stallone focused on 24 refundings involving
markups on escrow securities ranging from less
than 1% to more than 13% -- and 46% in two
refundings in which new bonds were not issued.
The SEC alleges they took excessive markups,
falsely certified the escrow securities were sold
at fair market value, and breached fiduciary
obligations by failing to disclose their markups
and resulting profits. CoreStates and Stallone
neither admitted nor denied the charges.
CoreStates officials said they are relieved and
expect the settlement to resolve all allegations.
"Our perspective is this takes care of
everything," said Thomas Dooney, the
president and chief executive officer of
CoreStates Securities Corp.
Dooney and his lawyer, Richard J. Morvillo of
Crowell & Moring, said the agreement settles
"a prospective controversy with the IRS" rather
than specific IRS charges and does not include
tax penalties under Section 6700 of the federal
tax code -- which CoreStates had opposed. The
IRS is to notify issuers of the settlement and
that, as a result, it will not revoke the bonds'
tax-exempt status.
Dooney said the settlement is "good" because
neither the firm nor the agencies were
completely happy with it. The agreement, he
said, "sets a precedent in that there is now a
methodology for solving this problem. And by
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that I mean: getting the three regulators on the
same page; keeping scores of issuers
comfortable during the process and at the same
time protecting CoreStates' shareholders."
Dooney said the negotiations were "frustrating"
at times because "you were dealing with so
many different regulators and each party,
including ourselves, had a different view of the
issues." On some issues such as markups, they
all had to agree to disagree, he said.
Sources said the SEC calculated markups for
each escrow security - contrary to IRS rules and
industry practice.
"It was not our purpose to assist the government
in deciding internally what appropriate markups
were for transactions of this magnitude," said
Morvillo. "Rather our purpose was to resolve
these issues on a global basis. That's not to say
there isn't a need for further regulatory guidance."
Key Dates in the CoreStates
Case
May 1996
Whistleblower Michael Lissack, represented by
Washington, D.C.-based law firm Phillips &
Cohen, files suit against Meridian Capital
Markets under the federal false claims act for
yield burning. The suit is sealed by the court
while the Justice Department decides whether to
join Lissack as a co-plaintiff.
February 21, 1997
In a letter to issuers, CoreStates Capital
Markets, which purchased Meridian in 1996, tells
them it will take any steps necessary to prevent
the Internal Revenue Service from declaring the
bonds taxable.
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J
Page 5 of 5
March 1998
Sources say settlement talks between
CoreStates and the IRS, SEC, and Justice
Department have broken down over the IRS'
insistence that the bank pay penalties under
Section 6700 of the tax code.
April 23, 1998
CoreStates, the IRS, SEC, and Justice
Department reach a global settlement calling for
the firm to pay $3.7 million in return for the
government dropping all of its claims -- including
Lissack's suit, which was dismissed. No Section
6700 penalties were imposed under the deal.
Copyright ©1997,1998 The Bond Buyer. All
YOU ARE ENTITLED TO DISPLAY AND SEARCH THE
CONTENT OF THIS SERVICE AT THE TERMINAL
ACCESSING OUR SITE, AND TO DOWNLOAD
ARTICLES, SOLELY FOR YOUR OWN TRANSITORY,
INTERNAL USE. NO PART OF THIS SERVICE OR
CONTENT CONTAINED HEREIN MAY BE OTHERWISE
RETRANSMITTED, REDISTRIBUTED, COPIED,
STORED, DOWNLOADED, ABSTRACTED,
DISSEMINATED, CIRCULATED OR INCLUDED AS
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Rights Reserved.
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EHHQmaai
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Tm bo.vc Birsp
WASHINGTON
Tutjs'sv ,\'a; 19 iJSS 5
C1VII LITIGATION
Lawyer Charges Yield-Burning Cases Prosecutable Under False Claims Act
By AmyB.Resr.kk
Yield burning violnei the federal
False Claims Ac: because it repre-
kmi "intentional nvi opportunistic
prscing friud." an aLcorney persuing ccsej
under the act said.
Ertka KaUon. i partner it Phillips Se
Cotwn here. Fnday told tiw American B&r
ADociaticii T« Section 'a eommitiee on
Tu-ExernpJ Financing (hat by ptirehis.
ir,gcpen-ma:kei escrow lecjriues based
on falseinformationfromdeileTS. issuers
were Heered away from buyinj SLGSi
and Uron up the cos I oi borrowa.ng I-oi
rhe federal government
"I don't think there can be scnojs dis*
pule that the federal government was
harmed by yield burning and [hit the in*
vestment provider knew that high press
would cause federal harm," Keiten said.
PhiHtpj it Cohen represent the Los An*
gele* Meiropolllsn Transportation Au*
thortty ird former Smith Baraay Inc.
investment banker Michael Uaaack in
yieid-b«rr.ing reined False Clatmi Aci
cases against financial idvUer Lazard
Frim in Superior C&.r. in California.
The False Claims Act filed against
Meridian Securities by Liaiack in 1994
The Securities and Exchange Com«
mission it iftvei(j|4tinj the former
Smith Bansty.w Salomon Smith
Btrney Int.. for yield-burning, pay.to*
play, and other alleged abuses tn connec*
ffo.i with « aumber ct municipal offerings
around the country, aources said yeatef.
day
The SEC tov«ii|Miofi) wtrt cfted fry
form/ tide i/tt? nu.T.Se* "but no' deacabed.
in & one-page May 14 letter that a lawyer
sepreser.ung former Smith Barney man-
aging director Michael Ussack sent to
Jamei E. Beit, staff d;fe«or ot (he do-
mestic tarJung implications dfrufon it the
Fedettl Reserve Bark of New *fork.
Jn the letter. Usmk's lawyer, Jeffrey
Robinson of Beach RobMson it LewU,
told Be:i thai the probes Mmiy be relevant"
to tht-Feieral Reserve Board'* review of
the planned $70 billion to S80 billion
mtrstr between Smiffl Barney's parent.
Tr«velari Croup, and Citicorp — the
Urgest nerget ever proposed in the ,
or the suits are settled or litigated. Plain*
lift aeek treble damages under the law.
Smith Barney effveiaU did not comment.
But sources slid the two SEC probti —
"In the Matrer of Certain Municipal Bond
Refunding!" and "In the Matter of Certain
Smith Barney Municipal Bond Trans*:-
uoru"— jo beyond the more than a half-
doten rtfjndinfs in Flonda that are known
-to be under investigation by the SEC.
The SEC >ai teen in^eiugtiing -yield*
bumifl| abaiei in ccnneciton Kith the re*
fundings In Florida. The Internal Revenue
Service is also probing several of these
transactions In addition, the SEC is also
exa/wruftf whether there was a fee>*hahng
frr«ag«meru between -S-Cirth Barney ind
VVmum R. Hough & Co. ih some of the
refunding! in which both firms were par-
ticipants.
8tit sources said the SEC investigation
of Smith Barney covers ether ttanecetions
as well and is not hmiied to alleged yitii-
burninj abuses
M«anu>hil«. Federal Reserve Board of-
ficial* said Utey aent Ussack'a Mter, along
wt;h about 20 other letters on the planned
merger, to Travelers Group. They have giv.
en the company a chance to respond. The
comment peacd ends on June IJvThe Fed
may hold public heanH* on the proposed
merfer, they sard.
A Travelers Creep ipoVesperson sa:d
several approvsii from federal arid tute
relators are needed before the planned
irierftj can lake place The Fid has to ap>
prove rhe ipp.'icauon for the merged en-
tuy iq become a bank holding company
ans cauld mikt a decmon by Aug. 6. In
addition, the SEC has to approve a pre*
liminary proxy prospectus, and four state
insurance cosummons and ihArenolden
musi approve The tiajiaactron. Q
While the Mendian-rel^ed portion of
LusitX's iyu was Kttici ar/j unst&led
last month. :he remainder — believe J to
enctede charges Against fevtnl oiher Wa])
Street r;;ms — waj not discloses or even
acknowledged.
Detpite the secernent end Kelton's
comments. sev«;i] attorneys ai the ABA
meeting questioned applying the F4(se
Claims Act to rr.wueipil bonC euei.
Kefron stressed ihat covrts h**e jfttrr-
preted (he act liberally and that tr.e lake
aiaicmrntx in ^uesuon4o not Uve to have
been made directly to the federal govern-
mem, no/ do they ha%« to relate lo nbiij'
aiions due directly to the government.
"There is plenty of precedent, includ-
ing Supreme Court precedent, thnt says
the Fa/« Claims Act is to be cp:i';eJ
broadly and nsn-re^inctively: thec ii i: in-
tended to reach all fraudulent attempts to
cause the government to pay out money,"
Kehoit said.
Mitch Kapaport a partner with >Uon,
Kargrave, D*van A Doyte here, yes;cr*
day reiterated the qvesttgns rj;ied during
the session questioning two aspects of the
Falsa Claims Act irgvrncni.
First, h* questioned whether the pro-
hibition against applying the aci to
"statements made under (he internal
Revenue coce."1 prevents ii from applying
to bond cases.
S<::nd. he vd others said U ii not clear
that ^cr.d tssuen o? stcur.ties dealers ha*e
sn obiigaiijrs to buy State and Local Co*,
crimen: 5ert« securities from ^>e Bureau
0t Public Debi. and thereby reduce (he
federal jovernjnent't borrowing «xempc,
it is an obligation to tht bondholders, not
to the ?ede:a) government, and ii ii an
ubl'.gauoA to seep (the escrow securities']
y.elil belcw the band y.eld. j. doe sr. t nec<
essanly -.can an obligation to bi;v
SLG5*"
Deart Wdatr. a panner with O'MiN
vany & Myers in California, agreed that
if the bonds art taxable, the issuer has no
cWrri.'/on 19 life /etersl govf.rjmeni
Rapaport'j first argument was disput-
ed dutng Friday's session by an attorney
wfcp pointed ok: that the Bureau of Public
Debf it not the Jntenal Revenue Service,
and statements about the purchase of es-
crow securities might net be statement*
under the Internal Revenue ceoe
Kefton netted (hat /al#« jriie-ienn on a
t.vx re.\im tint uas used :c apply for a loan
from the Small Business Administration
has been subject to False Claims Act
penalties, even thoufh iht tax /num >;•
self waj not. She said t jimiLai bterpre-
tauon could apply in bond cases. Q
ENFCflCEWEKT
S£C Said to Examine Smith Barney Abuses
By Lynn Stevens Hume
We ore pltattd Jo onnouoc* the following
appointment to...
The
CAN DOt
Team
William /. Hogan
Prtr&p a)
Secondary Market Inst/ronca
(till 34t-94Si
ond
Steven P. Rofsky
frirx\po}
yndcrwrWnf
(2l7)}4Mm
"A" JUwd by ^eka
ber4 inwfir.ca wSef* n Is mow n«ded.
bek*(i by • mm at proftti^vi mw U\*n el* etnwlu o' iwvlww.
AM£TdCA3^ CAPITAL ACCESS
"The CAN OC tsfr.piny"
CH2»I*MBP • [|«a)«ULMTIO • 6m yurfr »hm ¦ IWH«fN»»h^NrU«l
-------
The financial guarantor
who always stands out
from the red ot the crowd.
A1BIA
raee i 01 o
w
The Bond Buyer
WASHINGTON
April 27, 1998
Several Firms Are
Exploring
Yield-Burning
Settlements
By Lvnn Stevens Hume
Several broker-dealer firms are holding
exploratory talks with Securities and Exchange
Commission and other agency officials about the
possibility of entering into global settlements of
federal allegations stemming from yield-burning
abuses, sources said Friday.
SEC officials would not comment.
But the sources, who would not identify the
firms, said that CoreStates Financial Corp. is
not the only one that has been talking to federal
agencies about a global yield-burning settlement.
The revelation came a day after
Philadelphia-based CoreStates entered into a
precedent-setting settlement with the SEC,
Internal Revenue Service and Justice
Department. The firm will pay $3.7 million to
settle all federal agency and False Claims Act
charges stemming from yield-burning abuses in
connection with 102 refundings involving
Meridian Capital Markets, a firm it acquired in
1996.
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JJUjftl VJXUUIC. IS.Cl.iiil
rage 101 &
The settlement is being closely reviewed by
other firms under scrutiny for alleged
yield-burning abuses that must decide whether
they want to enter into similar settlements or
continue to fight the government through
possible enforcement and court actions,
municipal market participants said Friday.
"I think people will be trying to go over whatever
information they have about this case with a fine
tooth comb," said Heather Ruth, president of
The Bond Market Association. They will be
"trying to figure out what each of the variables is
[because] all of those variables will be important
in determining whether anyone thinks this is
pressure to settle as opposed to slugging it out
as they have been,"
Some lawyers said a $3.7 settlement for 102
refundings appears attractive because it
translates into about $36,275 per deal.
"it struck me as a modest amount of money,"
said William Conner, president of the National
Bond Lawyers Association, "It would suggest
that maybe there is a way to get these cases
resolved."
But federal officials and others involved in the
CoreStates case cautioned against this kind of
thinking. 'It s bard to da any reverse enginea-ing
on the numbers because it's a one-of-a-kind
case," said John Phillips, a lawyer with Phillips
& Cohen, which represented former Smith
Barney Inc. managing director Michael Lissack
in the talks after Lissack filed False Claims Act
charges against Meridian.
Phiiiips and SEC officials said that even though
they hope the CoreStates case serves as a
template for other firms, it was unique because:
it involved small transactions and small issuers;
CoreStates inherited the yield-burning problems
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rage j 01 o
and pushed to resolve them to protect issuers
and shareholders; and this is the first such
settlement.
William R. Baker 3d, an associate director in
the SEC's enforcement division, said CoreStates
earned points for actively seeking a settlement
with the federal agencies.
Richard J. Morvillo, a lawyer with Crowell &
Moring who negotiated the landmark settlement
for CoreStates, added, "Now that the
government agencies have learned how to
cooperate with one another, that should make it
easier for the next party who is interested in
resolving one of these."
But he and other market participants said Friday
that even though the settlement sets up a
procedural model for other firms, the documents
reveal little about substantive issues that must
be negotiated.
The biggest issue for broker-dealers is what
standard the agencies are using to determine
whether markups on escrow securities are
excessive. CoreStates officials suggested
Thursday that they have no uniform standard.
SEC documents contain no guidance and say
only that Meridian's "markups were excessive
based upon all of the relevant facts and
circumstances."
Another big issue for the firms - fiduciary
obligations - was part of the SEC's complaint
but was not detailed. The SEC charged Meridian
breached fiduciary obligations by failing to
disclose its markups and profits. TBMA's Ruth
said dealers will not be happy with these
charges because they contend they have no
fiduciary obligations when they are underwriters.
The SEC claims underwriters take on such
obligations when they help issuers invest bond
proceeds,
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rage 4 ot 6
The complexity of the settlement and the fact
that each agency settled over different lists of
refundings (IRS-102, Justice-24, SEC-24) shows
that they each had different negotiating stances
with CoreStates.
But Lissack's False Claims Act suit creates a
major incentive for firms to globally settle alleged
yield-burning abuses, sources said.
Documents on file with a federal court in
Manhattan show that Lissack filed a False
Claims Act suit against several Wall Street firms
in early 1995 and against Meridian in May 1996.
The False Claims Act charges against Meridian
were dismissed on Thursday after the Justice
and Treasury departments and Lissack settled
with CoreStates. Lissack stands to win 15% to
25% of the $3.4 million obtained by the federal
government through the CoreStates settlement.
The final amount will be negotiated at some
point in the future. False Claims Act charges are
still pending against other firms and Lissack is
seeking treble damages in the remaining sealed
portion of the suit.
But Lissack's attorney Phillips said Friday that
the CoreStates settlement is important because
"it is now the Justice Department's formal
position that the False Claims Act applies to
yield burning."
if firms do not settle, he warned, "they will have
to fight on separate fronts against three federal
agencies [ensuring] a long period of uncertainty
for [themselves and their] issuers with the
potential for huge damages and great legal
expenses."
But there is a growing dispute over whether the
False Claims Act would apply in yield-burning
cases.
Dealers claim the False Claims Act does not
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rage d 01o
apply in yield-burning cases because it exempts
cases in which the government is attempting to
recover taxes.
But Phillips, who advised lawmakers on revising
the law, said, "They can make that argument,
but it's a loser. We have exhaustively reviewed
that issue with the government and the
overwhelming conclusion is that it applies."
Phillips said the exemption was added to the act
in 1986 to ensure it would not be applied to
individual and corporate taxpayers who had
underpaid their taxes.
"This case does not involve underpayment of tax
revenues," he said. "It's a failure of the Treasury
to get the benefit of the arbitrage that was
earned through yield burning and that's not tax
revenues."
Frank Shafroth, director of policy and
governmental relations for the National League
of Cities, is "very pleased" with the settlement.
"This is the kind of agreement we asked for 20
months, 18 days, four hours and three minutes
ago. We asked the federal agencies to go after
the wrongdoers" without harming issuers and
bondholders.
But Shafroth said he "remains disappointed" that
the federal agencies still have no system under
which issuers can come to them with
yield-burning concerns without fear they will be
thrown into a costly and burdensome probe.
Copyright ©1997,1998 The Bond Buyer. All
Rights Reserved.
YOU ARE ENTITLED TO DISPLAY AND SEARCH THE
CONTENT OF THIS SERVICE AT THE TERMINAL
ACCESSING OUR SITE, AND TO DOWNLOAD
ARTICLES, SOLELY FOR YOUR OWN TRANSITORY,
INTERNAL USE. NO PART OF THIS SERVICE OR
CONTENT CONTAINED HEREIN MAY BE OTHERWISE
RETRANSMITTED, REDISTRIBUTED, COPIED,
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uwnu uuvci VJUIUIC.
Fage 1 of 4
g) Fitch IBCA click
The Iritcrfiitiotul Rating Agcr.c/
FjTCH iJJCA Rn jnciat Wire, Tuning A
Surveillance, Analytical (
5eivia>s, Fitch tBCA F
"Rjting Actions, ftasearch, SuTVPtllai
The Bond Buyer
WA8HIMOTON
April 23, 1998
CoreStates,
Government in Global
Yield-Burning Deal
By Lynn Stevens Hume
In a first-of-a-kind action, the SEC, Internal
Revenue Service and Justice Department are
expected today to announce a global settlement
agreement with CoreStates Securities Corp
under which the firm will pay almost $4 million to
settle alleged securities and tax law violations
stemming from yield-burning abuses in
connection with dozens of refundings done from
1992 through 1995.
The Securities and Exchange Commission is
expected to approve the settlement agreement
during a closed meeting this morning.
At the same time, sources expect the Justice
Department will unseal a massive federal
whistleblower suit that former Smith Barney Inc.
managing director Michael Lissack filed against
a number of broker-dealer firms in connection
with yield-burning abuses after he was fired from
Smith Barney in early 1995.
The landmark settlement agreement with
Philadelphia-based CoreStates marks a new era
of cooperation between federal agencies over
municipal securities enforcement and could
provide a framework for broker-dealer firms that
want to simultaneously settle all federal charges
stemming from yield-burning abuses.
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Fage2 of 4
Lissack's whistleblower suit, which was filed
under the federal False Claims Act, may provide
firms with a strong incentive to enter into similar
global settlements because it permits Lissack
and the Justice Department, on behalf of the
other federal agencies, to collect treble damages
from firms for yield-burning abuses if they prevail
in the suit.
But CoreStates' global settlement should protect
it from further legal action under the
whistleblower suit.
The CoreStates settlement comes after months
of intense negotiations between the federal
agencies and the firm and just before
CoreState's planned April 30 merger with
Charlotte, N.C.-based First Union Capital
Markets inc.
It also comes about a year after CoreStates took
the unprecedented step of notifying municipal
issuers that some of its transactions were under
federal investigation for yield burning.
CoreStates told the issuers that it would take
whatever steps were necessary to protect them
from federal sanctions. In particular, CoreStates
suggested ft would do anything to prevent the
IRS from declaring the refunding bonds taxable.
The alleged yield-burning abuses were
committed not by CoreStates, but rather by
Meridian Capital Markets Inc., a firm that was
acquired by CoreStates in 1996.
The SEC is also expected to take enforcement
action against two farmer Meridian officials —
Steve Snyder and Martin Stallone. After leaving
Meridian, the two formed HamHton Partners, a
financial advisory firm based in Reading, Pa.,
which is no longer in business. Both are still
working as financial advisers, Snyder out of his
home, and Stallone with a firm in Pennsylvania,
it was riot clear yesterday whether the joint
settlement would include tax penalties levied by
the IRS under section 6700 of the tax code -
something that had been heatedly opposed by
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^age3 of4
CoreStates in settlement talks and by other firms
who had hoped to obtain a meeting with
Treasury Department officials to air concerns
about the use of such penalties.
The settlement talks between CoreStates and
federal regulators halted several weeks ago after
IRS officials said they planned to impose 6700
penalties against the firm.
Soon after that, the IRS raised the stakes by
sending several issuers in Pennsylvania
threatening letters demanding detailed
information and reams of documents from them
in connection with the Meridian refundings.
CoreStates sent the issuers fetters urging them
not to panic and saying they were hopeful that
some sort of global settlement with all of the
federal agencies could still be obtained.
But local officials were clearly upset with the
letters, which appeared to duplicate information
requests that had already been made by the
SEC in its investigations of the transactions.
Several issuers said that they had already
provided the documents to the SEC, which still
had them.
Neither CoreStates executives, nor their
attorneys would comment on the story. SEC and
IRS officials also refused to comment. Justice
Department officials did not return calls seeking
comment. In addition, lawyers with Phillips &
Cohen, the law firm representing Lissack in a
similar whistieblower suit in California, also
refused to comment.
Copyright ©1997,1998 The Bond Buyer. All
Rights Reserved.
YOU ARE ENTITLED TO DISPLAY AND SEARCH THE
CONTENT OF THIS SERVICE AT THE TERMINAL
ACCESSING OUR SITE, AND TO DOWNLOAD
ARTICLES, SOLELY FOR YOUR OWN TRANSITORY,
INTERNAL USE. NO PART OF THIS SERVICE OR
CONTENT CONTAINED HEREIN MAY BE OTHERWISE
RETRANSMITTED, REDISTRIBUTED, COPIED,
STORED, DOWNLOADED, ABSTRACTED,
DISSEMINATED, CIRCULATED OR INCLUDED AS
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-------
UU11U uu^Ci VJ1UH1C. I\.CUU1 1 Ot 3
The flnonctal guarantor, '
who always stands out ^
from Die rest of the crowd-
Mbm
The Bond Buyer
WASHINGTON
April 24, 1998
False Claims Suit
Partially Unsealed
By Lynn Stevens Hume
Related Articles:
• CoreStates Pays $3.7 Million To End
Yield-Burning Case
• Antifraud Provisions Could Still Affect Bonds
A federal judge in Manhattan agreed yesterday
to dismiss a False Claims Act lawsuit that was
filed against Meridian Securities in May 1996
by former Smith Barney Inc. managing director
Michael Lissack and his lawyers at Phillips &
Cohen.
The suit was dismissed by Judge Barbara Jones
of the U.S. District Court for the Southern District
of New York at the request of Lissack and his
lawyers, U.S. attorneys, and CoreStates
Financial Corp., which acquired Meridian in
1996. They made the request after the Justice
and Treasury departments intervened in
Lissack's suit against Meridian, and then agreed
to a settlement.
Although the Meridian charges were settled and
unsealed, the parties were silent about other
False Claims Act charges believed to be pending
against a number of major Wall Street firms.
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rage 1 ol3
There was no attempt to unseal, or even
acknowledge, the broader litigation that sources
believe Lissack and Phillips & Cohen initiated
after Lissack turned whistleblower in 1995 and
charged that securities firms had reaped huge
illegal profits by overcharging issuers for escrow
securities for advance refundings.
The settlement was part of an overall agreement
between CoreStates, the Securities and
Exchange Commission, the Internal Revenue
Service and the Justice Department, in which
CoreStates agreed to pay $3.7 million to settle
federal charges in connection with yield-burning
allegations. The allegations stemmed from
refundings involving Meridian.
CoreStates' settlement with Justice in
connection with the lawsuit covered two dozen
refundings - ranging from almost $3.1 million to
$102.8 million - that were done between 1993
and 1995, mostly for issuers in Pennsylvania.
Under the False Claims Act, citizens are allowed
to file suits against firms or other parties on
behalf of the federal government when they
believe the government has been defrauded.
The government is allowed to intervene in such
suits, which typically are sealed until the
government intervenes or the suit is settled or
litigated. Plaintiffs seek treble damages in such
suits.
In a press release issued by Phillips & Cohen
yesterday, Lissack stated, "I am gratified that the
Justice Department took my allegations seriously
and is moving to recapture the illegal profits
investment banking firms made at the expense
of taxpayers."
John Phillips, a lawyer with Phillips & Cohen,
said the Justice Department action "is
significant" and "shows the government can
utilize the False Claims Act to recover money
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4/25/98
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Fage 3 of 3
that investment banks took from the U.S.
Treasury through a tricky scheme involving the
sale of overpriced securities to municipalities."
Erika Kelton, another attorney with the firm,
applauded CoreStates for working hard to
resolve a problem it inherited when it acquired
Meridian and said the settlement is an "important
signal" to other Wall Street firms.
Copyright ©1997,1998 The Bond Buyer. All
Rights Reserved.
YOU ARE ENTITLED TO DISPLAY AND SEARCH THE
CONTENT OF THIS SERVICE AT THE TERMINAL
ACCESSING OUR SITE, AND TO DOWNLOAD
ARTICLES, SOLELY FOR YOUR OWN TRANSITORY,
INTERNAL USE. NO PART OF THIS SERVICE OR
CONTENT CONTAINED HEREIN MAY BE OTHERWISE
RETRANSMITTED, REDISTRIBUTED, COPIED,
STORED, DOWNLOADED, ABSTRACTED,
DISSEMINATED, CIRCULATED OR INCLUDED AS
PART OF ANY OTHER PRODUCT OR SERVICE.
~
RECENT ISSUES I SECTIONS I HOME
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-------
6 VStdntsdiy, Mdy 20, j 998
Washington
TH£ BCSD BO**
IRS ENFORCEMENT
IRS Is Taxing Bondholders in More Cases, Agent Tells Midwest Conference
B> Michael S'amon
CHICAGO — The Internal Revenue
Service n taxing bocidholdtf* in a
grcMng number of cases. even ai the
sancuon remains j« penalty of la i resort for
municipa) bond aud;u. & field monger sn the
agency's enforcement program iud yester-
day,
Jason Kail, who manages fcoe field
li the IRS' Houston cfEct, which is pvt of
its Mid'iUles rep on. said (he IRS his already
nottfi&i 50% of the bondholder va oi\t issue
in tne region ihiathey cue back unes for (he
i/iurcr. payments they received on Lhc bonds
for the pas: three yean, and U clou to tendug
umilti nouces to investors in two more is-
sues.
Kali, who spoke a: The Bond Buyer's
Midwest public finance conference here, did
no: ;iir,u.ey the fori is involve or the reasons
for declaring them taxable. The tax code's
conSderiiliiy provisions prohibit IKS agents
from disclosing jnformauon about investiga-
tions
Hi cio*4i that the agency prefer -o rush
"closuig agreement" «Rlemenu w;»h issuers
tat »id \hty w0) tax bondholders when u
cannot recover penalties (com any ether
source.
He said the agenc> '$ reluctance to tax m-
v«:cn stems bctr from the fan that they were
generally unaware of and urunvolved in ar.>
ux«h a bond ittuc, ai well *s the practical Hsi
Limt it ca/i be «utme]y di&ouh :c identity
bor.dhotoen
Ai i result, he jaid the agency is not ex*
peeling to make a full recovery of all axes
dut in \ne case that has already been declared
taxable He de»
scribed the recov-
ery effort, which
has only reached
about tulf of foe ia>
vestors, 4* 805c
complete
He j&id the ques-
acn of hew to treat
taxpayers who hef
tne bonds throw
shura of t mn
fund is stiJJ u
soWei. howeve.
Overall. Kail sajs
agents in the IRS
nui-tuut region, which includes more than
a dour, states from Texat to the Canadian
eojdtr. vurrtndy have between 30 and 9C
bofcd usues under tnvcsagation.
LAWYCIl Put*
Speaking separably during the same pan-
el NUrV Zahner. an aicmey in the Secunoe
and Exchange Commjuion't Office of Mu-
nicipal Securities, suggested thai issuers who
employ a controversial new put-opocn strvc-
wt1ji thes escrow accounts on advance re-
funding faniacucns should c are fally consid-
er how they inform investors about the
structures
Zehner noted tha: 6k procedure, which es-
ubbshts the poienMJ for iht issuer to bene 5:
from an increase ifl interest ntrs by exercising
a put to soli off the escrow securities at abo"»e
cruritet value and then use the proceeds to be-
gin a tender effe: for thesr outscandmg bonds.
COuid effectively esublish i "floor" or: the
pnee of the bonds.
Zfhner, uho. in a standard 6sclosun. taid
he *ti ip^akag Cor himself and no; for the
commission, urged issuers considering such
si/ucru.*es to consider (he SEC* posiuon on
escro,*-to*maMf\tv boTkds. m v^hieh it con-
tends ihai issuers must disclose to mveston
savccunJ tisues that rrjght effect the value of
(he bonds.
On uw eacro^-to-manjn:y isime, Zch^e:
wer.i or u discxu i cotanenuo by Mintz.
Gl&vsky & Popec bond lawyer
Laonard WcbcrVaron thai appear^ ir.The
Bond Buyer Monday
Z^hner sud WejwVaron's contenaon that
state contract la«s may protect issuers' legal
r.ghis to call bonds iney beer, escrowed
to maMr.c>- my be accural, 'ou'. soused tha:
the SEC believes iLSiMrs must forrrtaliy dis-
close to the rrorket that they ;ntend to reu:r,
those ngSv.»
Ho^e*e;. 2ehn::. ctung cocif*der.t;a!;iy
rules, also declirvei :c discuss whether the
SEC :i mvesugai-~i Galn&>12Je UlUfcfea. a
issuer that is planr^r.g to call bondi
_ i; previously escrowed to matur.r.. 3
Ring
in the
Summer...
TAAKSAMtXiC* ' k If ADC R It
acuYCSTMiMT op TAANs
Succtss coffl«s from kncwltflf* and tr*Bafatlon. So
wA«n i! tomts ta cheov^f an invaitmtnt agrttmam
provld*r tot Y9ur U* Revenue Notti, 4e
your homework - and chick out Transimattca.
Qui tea *n Has the cxperimcr you c«r> trust toafftr
tnnovatWc lolctlons for your particular TRANt n««dv
And.Traniamirlca oWers tha credit auallty. lieutdity
»n^ ylitd loeLinf Pw rr « murklsal
partn*;.
with the pjrst
Name
mTR'ANs
B/okt/s. financial edv/sors, entf liiut/S.
Put T/ansameriea en ycyr n*x( bid t'st and prepart
your schools tot the wpcornMg yur,
When you
Ha*4 ZihAtf
SIC
-------
Wednesday, Jun< 3, 1998
the Bond b{
i
NELD BURNING
Firms, Agencies Disagree on Markups But May Keep Talking
3y Lynn Stevens Hume
fall street firms and federal regu-
lators aie still far apart over the
j^H issue of what constitutes aa ap-
markup for escrow secunues. But
--^^ides are discussing whether the> can
agree on a level that could be used to ne-
gotiate a global or near-global settlement
of alleged yield-burning abuses, sources
said this week
In a related matter. White House offi-
cials said yesterday that they have been ad*
\ ited by their lawyers to stay out of yield
taming, since this topic is tied to ongoing
jauon and enforce-
ment actions.
claim this range of markups represents no
markup at all and is unsupported by the
federal securities laws and regulations
They claim that the regulatory guidance —
in particular the SEC's 1987 zero coupon
bond release — suggests markups of one
percent or less should not be considered
excessive. One source has even suggested
that firms have had heartburn over this SEC
stance because it may mean they have not
reserved enough funds for litigation or set-
tlements * funds which were disclosed in
financial filings
At the meeting on
Thursday, lawyers for
the firms told the fed*
eral officials that they
Se'cu'ritici ind"E™ a8end« comment on a quietly-scheduled meeting that was f^j/o?ra«ku£s for
change Commission. held last week to discuss yield-burning issues. competitive and nego-
the Treasury Depart- uated sales of escrows
•nent, the Internal ——^is much closer than the
Revenue Service, or the Justice Depart* to determine whether dealers sold Trea* two cents per par bond to S3.00 to $4.00
its first federal cour. case over yield-burr.*
ing. In that case, which the SEC filed in a
federal court in Phoerux in January, the
SEC is alleging, among other things, that
Rauscher's markup on the escrow secunues
it sold Arizona for a S 129.6 million in mid-
1992 refunding was excessive. That markup
averaged only about one half of one per-
cent.
Federal regulators generally have staked
out positions on markup levels that are far
apart f.*6in the firms. The IRS had been
insisting that spot prices should be used
Neither lawyers
representing the fans [Neither lawyers representing the firms nor officials from federal
m would comment on a quietly-sched*
.d meeting that was held last week to
discuss yield-burning issues.
But sources said that at the meeting,
¦vhich was attended by about 30 to 4Q peo-
ple, industry representatives made clear
that they are un»iibng to accept as exces-
sive markups on escrow secunues of one
percent or less.
Federal regulators, however, worry that
,His level is too high and that it would re*
ve from federal scrutiny a majority of
refunding deals that were done in the
*arly 1990s in which yield-bunung abus*
?s are alleged to have occurred/
Additionally, a markup level of one per-
cent or less presents a problem for the
SEC's case against Data Rauschtr Inc..
STATE AND LOCAL FINANCE
suries to issuers at fair market pnees.
However, the agency reportedly has more
recently moved a little higher, indicating it
might go along with a markup of one
eighth or J1.25 per S1.000 par bond over
spot price.
The SEC went even lower in its re-
cently filed response brief to Rauscher's
motion for dismissal of the yield-burn-
ing case the commission filed against it.
The SEC said it planned to present evi-
dence showing that the markups on com-
petitively-sold escrows typically ranged
trom zero to Vm of one percent and that
the range of markups on "honestly ne-
gotiated" escrows should not be sub-
stantially higher.
Broker-dealer officials and their lawyers
per par bond contrast cited by Phillips St
Cohen, the law firm representing former
Smith Barney Inc managing director
Michael LUsack in a sealed wJustleblo*-
er suit he filed against firms over yield
burning in early 1995.
The firms also claimed it is unfair and
unprecedented to determine markup levels
on the basis of markups taken for compet-
itively*sold escrows because the IRS con-
sidered mandating competitive bidding for
refunding escrows and did noi
However, there may be room for nego-
tiation because the SEC u said to have used
a markup level of at least one percent as a
basis for the recent global federal settle-
ment with CoriSutef Financial Corp.
over yield burning. ~
pling in Census May Result in Bond Cap Changes
Metsler
idem Clinton restated hit tup-
on for the use of statistical sam-
pling in the 2000 census at a
peech in Houston yesterday. Clinton
>poke at a town hall lathering devoted
o the topic
If used in the census, sampling could
^.crease the population counts of some
tes by as much as 3%. raising the pri-
vate-activity bond cap by tens of mil-
lions of dollars.
Clinton made hii remarks to a group
of municipal, academic, religious, and
¦iunonty leaders during a town hall gath-
ering devoted to issues involving the cen-
sus.
The Census Bureau wants to use sam-
pling. which would estimate 10% of the
"pulation from a survey of thousands
ramdomly-selected households. But
Republicans in Congress, including Rep.
Dan Miller. R-Fla., chairman of a sub-
:ommittee on the census, are opposed to
r.e method.
Miller said in a statement that Clin-
ton "continues to advocate the use of an
unproven methodology that ... won't
work in the 2000 census."
Some Republicans are also worried
that correcting the omission of millions
of poor and mi-
nority citizens,
groups that his-
torically vote for
Democrats, will
result in Repub-
licans losing the
majority in the
House.
Clinton scold-
ed those he ac-
cused of using
the issue for po-
litical gains.
"Improving the
census should not be a partisan issue,"
be said.
Meanwhile, supporters of taispling
PraiMeM (III Clinton
hailed Clinton's efforts. "We're very hap-
py the President is taking time out to do
this town hall meeting," laid Benjamin
Chevat. chief q( staffior Rep. Carolyn
The Bond Buyer,
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Maluney supports the use of sampling
and accompanied Clinton to Houston.
"I hope it sends a message to the Re-
publican majority that they're not going
to win " Chevat laid. He added that Re-
publicans will probably try to add a
clause banning sampling to this year's
appropriation bill for the Commerce De-
partment.
Meanwhile, the tint meeting of the Cen-
sus Monitoring Board u scheduled to takes
place this afternoon. The board has already
missed its April deadline for offering rec-
ommendations to Congress and the Sec-
retary of Commerce because its members
had not been appointed until recently.
The board was created last year when
Democrats and Republicans agreed to
delay a final decision on whether sam-
pling should be used.
House Speaker Newt Gingrich, R-
Ca., has filed a lawsuit claiming sam-
pling is illegal because the constitution
calls for "actual enumeration" in each
census. Q
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THE BOND B
SECURITIES
Form*
By Lynn Str
SEC vi
Gret
next
thecommis
Stenn T.!
director at?
Snyder*?
based firm
shner ask'
contendini
review »r
Securities
in Ptuladc
in the eas<
Comm
Greenber
ther there
time — <
the part>
momutg
Theju
uon by!
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mentof
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dispute
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ing ore
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P
-------
4 Tuesday. May 26,1998
Washington
The Boko Bvrzx
REGULATION
SEC's Baker Outlines Possible Yield-Burning Safeguards
By Any B. Resnick
A senior Securities and. Exchange
Commission enforcement official
said list week that jetting three
bona-fide bids when open market secu-
rities are purchased "probably" resolve*
yield-burning related questions
William Baker, associate director of
enforcement at the SEC. lold a pa&eJ late
Thuisday afternoon at (he spring secu-
ritiej conference of the National Asao*
cuiicn of Securities Dealer: reguinory
branch thai yie] i
burning ques-
tion) probably
would not arise
"assuming she
bids ire bona
fide, and they are
withio a fairly
narrow range and
the Jow b,-
win>."
After giving
the standard d;s*
cli.r.er that his
remarks repre-
sent only his
own vi«wi and roc choie of the com*
mission or other comnutsion naff. Bit-
er responded to audience queitwas by
»ay;r.g. "The commission would be hud
pressed co argue, and f assume — al-
though I am not a tax lawyer — that the
HOUSING
ft. t*fcar, Id
«C
IBS would be hard-pr»ued to argae that
those three bids don't establish basical-
ly where the market pnee is"
Determining the market price for
open-market securities has been a cru-
cial quejiion in yield burning cases, in
which regulators have argued thai deal-
ers mar&ed-up pnee; in an Wfort to
"burn" dowa yield on the investments to-
march the yield on the refunded bonds
Baker went on to say thai the com-
mission is uivesngaung only for securi-
ties-law violations in transactions where
the escrow jecuritie* were purchased on
» negotiated basis, "unless we become
aware that Ciere was some problem wilh
the bidCiag process, (such as} if 11 was
rigged or iJ what ts politely known as
'courtesy bids' were obtained"
"Absent thoie kind of situations, if the
securities were put out foz bid I think
you're in good shape.*' Baker said.
Pricing of securities is also crucial tn
establishing the markup* dealers charged
to issuers. Baker called the issue of
markups "more than a little controver-
sial T adding later thai"t think that there
is a. recognition that more needs to be
done in (his area."
The question it. how?.
'There has always been a concern that
when you establish percentage guide*
lines ... (he ceiling becomes the floor
And ... basically
everybody 4e-
faults to those
percentages."
Baker said "So
tie question oi
how to provide
gmdanct if j dif-
ficelt one But the
commission, !
rftink in my own ,
view, ij aware of '
Ibis problem a/id Makeim Nertfcwn
is struggling." nmd
with it
Plan* KJIrke, genera) counsel to the
Municipal Securities Rulemaking Board,
laid in response to an tudience question
the MSRB has no specific guidance oo
markups. but that once it has more pric-
ing information from the customer trans-
action database it is developing, it may
be able to offer more.
"Until you have evident: of what is
the right kind of price to charge, it is a
hard thing to say," Klinke said.
In addition to the price discussion, the
KASD used (he conference to unveil an
18-month pilot of the Alternative Mu-
nicipal Summation program that, is
part of the N'ASD'i riak'baaed examina-
tion program, will ule a questionnaire
and a review of documents, rather than
HUD Says Issuers Can Use Its Subsidies to Pay for Ratings
on>5ite visits, co examine "firms deemed
to be low risk for noncompliance or in-
vestor abuse" that do no underwriting or
other public f nance business
Daniel Slbesrs, vice president of
member regulation at the NASD regula-
tion organisation, Friday said that more
tiita 300 fomi wjJJ be eligible forth*
program over the course of the pilot.
Currently, municipal firms are examined
in person every 24 months, but under the
pilot the on-iite examination wilt occur,
at a minimum, every four years.
*'lt is a win-wm for both sides." Mal-
colm Northam, the NASD refutations
organization's director of fixed income
securities, ntd Friday "The firm avoids
hawng us there and taking up fheir atnc
and we save m time and resources by
doing [the examination) off lite."
The questionnaires, which began gome
out to firms Last week, will require
mcipal principal at the firm to fill
document and certify tiiat the ani-
correct The NASD can check r<
The NASD witt then use spoi
and comparisons wiih other tilinga. in-
cluding customer complaints, reports of
political co?.uit>uut>r.i. "and anything
else that bubbles up." to verify tht ac-
curacy of firms' reporting. Q
By OtMel Meulet
The V S Department of Houung a.id
tfrtan Developmem will allov. pub-
Its housing authorities to use fed-
eral subsidies to pay for rating agencies'
evaluations of fiscal and management
strength
In i letter to Standard & Poor's dat-
ed April 2-i. Oeboreh Vincent. HUD as-
sisUinr tcreticy for public ls6i*a
hausmg. said the department wit! cl^s-
sify housing author*
ides' spending an
evaluations as oper-
acmg expenses,
which are eligible
tor reimbursement
from HUD subsi-
dies
"Wiuie wfi don'(
endorse any proprietary programs or
methods," Vincent wrote, "having a re-
spected independent entity eviiutte a
public housing authority'» management
ability and fmaccial soundness can only
be helpful"
Standard £ Poor's started an evalua-
tion program for PHAs in March. p\*
ing the Richmond, VaM Redevelopment
and Housing Authority an "above-av-
erage" ittettment.
Agency analysts are qu;ck to pome out
that the evaluations are not rating; upon
which investments can be based. B-;
thev also sart the HUD letter cou.d drum
up business for its evaluation program
"This is a very helpful thing to us,*
said Shawn Harrington, an analyst tr,
Standard & Poor's housing division
"We're hopeful that if [PHAs] were
holding off that they will go ahead . L_ ., < ur -» -*.a,
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-------
SECURITIES ENFORCEMENT
SEC: A Muni Unit Should Have Same Policies as Rest of Firm
By Lynn Stevens Hume
A broker-dealer's municipal finance de-
partment should have roughly the
same kinds of "rigorous supervision
and other customer protections" that exist in
other areas of the firm, a Securities and Ex-
change Commission official said late last
week.
This is an "emerging theme" from some
of the municipal bond enforcement cases,
including the SEC's recent settled cases
with Smith Itarney Inc. and Credit Suisse
First lloston, said William R. Baker 3d,
an associate director in the SEC's enforce-
ment division, during a panel session at the
National Association of Bond Lawyers'
Washington seminar on Thursday.
Baker also said: "1 would certainly hope
after the CSFB (settlement) and [the SEC's
municipal disclosure rules) that there is no
question thai an underwriter has a duty to
undertake some investigation into the state-
ments that an issuer makes in an official
statement."
Baker made the statement after Bruce
Hiler, a partner with O'Mclvcny & My-
ers, challenged the SEC's charges in the
CSFB case.
CSFB and two former officials have set-
tled SEC charges lhat they failed to ensure
that the official statement for some Orange
County, pension bonds was not mislead-
ing. The SEC claimed CSFB — which both
engaged in reverse repurchase agreements
with the county and underwrote some of its
pension bonds — should have made sure
the bonds' official statement disclosed the
risks of the county's investment pools and
the potential impact on the county's fi-
nances.
Hiler claimed (he SEC charges were "sort
of a new concept" that has "great ramifica-
tions potentially for underwriters."
Historically, Hiler said, broker-dealers
have sought to keep-a "Chinese wall" be-
tween parts of their firms, such as the in-
vestment banking and investment depart-
ments. While there were only charges and
no findings in (he settlement, he said, "If
I'm an underwriter, I'm concerned about
whether I have to go search out everything
that's in my firm about [the issuer] when
I'm doing a bond underwriting."
But Baker said this concept is not new.
In a municipal bond enforcement case
against Donaldson, Luftin & Jcnrette Se-
curities Corp. years ago, Baker said, "the
commission said you can't wall off one
floor from another. You have to make some
inquiry."
"1 think where First Boston ran into prob-
lems ... was (he lack of any meaningful
procedures in place to provide guidance to
the investment bankers on the transaction,"
Baker said. In the corporate world, where it
is easier to hold underwriters liable for prob-
lems with offerings, firms have due dili-
gence policies and procedures in place, he
said.
However, Hiler said, "I think it's an
evolving area as to what is due diligence"
for underwriters in the municipal market.
The panelists also sparred over the SEC's
yield-burning case against Rauscher,
Pierce, Refsnes Inc., which was a finan-
cial adviser and escrow provider for a
$129.6 million refunding done for Arizona.
In that case, the SEC has levied a broad
range of securities fraud charges against
Rauscher, accusing (he firm of, among oth-
er things, failing to disclose excessive mark-
ups and breaching its duties as a financial
adviser and investment adviser by not dis-
closing its profits.
The case has led to complaints that the
SEC is trying to regulate markups through
enforcement actions.
1
1
Baker told the lawyers, "The Rauscher
case, I think, has the virtues of highlight-
ing all of the strengths of the commission's
arguments and the litigation risks that we
face as well."
But he also said that Rauscher "profited
at the expense of their client" and "that's
not a novel theory of prosecution."
Meanwhile, in another panel session,
Paul Maco, the director of the SEC's Office
I think where CSFB ran
into problems ... was the lack
of meaningful procedures to
provide guidance," says the
SEGs William R. Baker.
of Municipal Securities, said that dealers
should check to see if a municipal issuer
has met its continuing disclosure obliga-
tions before deciding whe(her to underwrite
lhat issuer's bonds.
Under the SEC's secondary market dis-
closure rules, municipal issuers must agree
in writing to disclose annual financial in-
formation and notices of material events on
an ongoing basis in order for a broker-deal-
er to be able lo underwrite those bonds.
Maco reminded (hose attending the
NABL meeting that the rules also call for is-
suers to disclose in their official statements
for new offerings whenever they have failed
to meet their continuing disclosure obliga-
tions. Under the rules, an official statement
does not the meet the definition of a final
BANK DEREGULATION
Supporters of financial modernization leg-
islation face a distinct challenge in passing
i hinarti^fcbill Wednesday Inuse Banking
official statement unless (he issuer has dis-
closed any instances in which it lias failed (o
meet its continuing disclosure obligations
during the past five years. In addition, is-
suers must issue material event notices
when they do not disclose annual financial
information.
Maco pointed out later that the SEC said
in a 1994 release that an underwriter is not
barred from underwriting the bonds of an
issuer who fails to nieel its continuing dis-
closure obligations. However the release
also says, "if a failure to comply. ..has not
been remedied as of the start of the offering
or if the [issuer] has a history of persistent
and material breaches, it is doubtful whether
[the underwriter] could form a reasonable
basis for relying on the accuracy of the is-
sucr'sor obligated person's ongoing dis-
closure representations."
On another disclosure issue, David Sliill-
man, a lawyer in the SEC's division of m;ir-
kc( regulation, said (he SEC is "aware of
concerns" that some issuers have cut back
on their disclosures under the SEC's mu-
nicipal disclosure rules. 'To the extent (hat
this is occurring — and I tl\ink that's a ques-
tion — then it would be a matter of con-
cern to us particularly to the extent lhat an-
tifraud issues might be implicated," he said.
"We also would hope that market discipline,
including that exercised by analysis on the
buysidc, might be able lo improve the dis-
closure practices of these issuers."
Bond lawyers said (hey are unaware of
any issuers seeking to cut back on their dis-
closures. Most issuers, they said, want to
know how to disclose more information so
that all market participants receive it at
once. ~
Republican confere hairinan John
Boehner, R-Ohio. f s were not in-
luded in those r (\
House Democrats at Odds Over Financial Bill
-------
The Bond ]
tsb uiuhov^s u fve owuh*
M ARlC KELLETT
NOPTH6PIOGE
1000 thohas jefferscn N*
5TE 510
tiASHINCTON DC 20007
TS»
¦ The Daily Newspaper of Municipal finance ¦
TuudavMn 26 1998
Nt» ^crV.NI
y's Market
Yields Rise
CtOM M1N
Watu; VTnu r,y t&'j
Biiytr 4o—Wwiref May i'bHn iafi* 08
*' . i v^.6?3
Js Grind to
•Holiday Halt
Sherman.
.""Buyer Wire
ipal prices were unchanged to up
Friday, following on the heels of a
government market in virtually
pre-holiday dealings
I
Conferees Kill Private-Activity
Provision in Highway Bill
The SECs William Baker
says competitive bidding
should resolve yield-burning
questions. raft 4
By Ola Kinnander
Congressional negotiators dropped a
Senate provision from the final surface
transportation legislation that would have
created a new category of private-activity
bonds and set up a pilot program thai
would have allowed private firms to bene-
fit from the issuance of $15 billion in tax-
exempt debt for IS highway projects
The so-called Highway Infrastructure
Privatization Act program was killed late
last week after House negotiators, pres-
sured by organized labor, opposed the pro-
vision and refused to include it in the fi-
nal bill.
Sen. John Chafet. R-R.l.. the chairman
of the Senate Environment and Public
(/iviiviiwa; ubajiiigo. _ f ^
raKJK?stVg^nvestors Seeking Greater Disclosure
Of Municipal Derivative Transactions
good'
for the bonds in the abbreviated
ession. but conceded overall ac-
ng the abbreviated session re-
parse.
s all quotes and there were very
tose." a Connecticut player said.
:kend began Thursday afternoon."
:arly weekend" theory was sup-
' the Municipal Securities Rule-
ioard's interdealer trading reports,
wed 4,074 trades for Thursday a
ease from Wednesday, comprising
ues with a par value of SI.02 bil«
bonds traded. 66 changed hands
ur ttmes Most active were North
i 3s of 2017, which traded 14
Pit a* turn to MUNICIPALS pat* 2
By Kflthenne M Rejnolds
WASHINGTON — State and local gov-
ernments should publicly disclose more
information about the swaps, caps, and
other derivatives they use for asset-liabil-
ity management, several municipal bond
fund managers said last week
"] think it should be pan of the ongo-
ing disclosures. If (here's a risk involved,
it s important that we understand that."
said Dianne Sales, a vice president with
John Hancock Ad>isers Inc. "If you're
making a change, it seems to me you
should let the market know that."
Although the municipal denvauves mar-
ket has been growing steadily for the past
several years, only a little information
about the deals that issuers are doing seeps
through to the public
So far in 1998, The Bond Buyer has
reported on $2.8 billion worth of new
swaps that 17 different issuers have
brought to market. That extrapolates to
about $7 billion of swaps brought by 40
issuers each year.
But market participants interviewed last
week gave estimates ranging from 510 bil-
lion to $30 billion for the total amount of
PUast turn to DERIVATIVES paft 34
Works Committee chairman who intro-
duced HIPA. also said late Fnday it was
dropped because cuts would have had to
be m*Je in spending for mass transit pro-
grams if the pilot program had been in-
cluded in the bill.
"Paying for it was something that didn't
make sense." said Chafee who promised
to try to bnng it up in the future.
The pilot program, which was in the
original Senate bill, but not in the mea-
sure passed by the House, would have
been included in the six-year. S203 billion
bill that was given final passage by the
Senate on an 68*5 vote Fnday afternoon.
PUait inn u ISTEA paft 5
Nashville's Education
Plan Includes Up to
$206 Million in GOs
By Jon McKenna
ATLANTA — After wincing last year
as the City Council cut more than half of
his school-borrowing plan, Nashville May-
or PhU Bredesen is trying again in 1998
with a request for as much as S206 mil-
lion of general obligauon bonds for edu-
cation.
Bredesen called the budget "taut" as he
previewed the details late last Thursday
for council members It includes a prop-
erty tax increase of 12 cents per $100 of
valuation. Ten cents of that hike would
pi tan cum w nashviuje pott 40
:E DIGEST:
kCHUSETTS OFFICIALS CAME
kV YORK Ff\dav to do some pielimi-
rketing for $1.3 'billion of asset-
jrant anticipation notes they expect to
Ihng within tuo weeks Page 40
HNGTON
OR SECURITIES AND
iNGE COMMISSION enforcement
aid last week that getting three bona
i when open market securities are pur-
probably" resolves yield-burning
luestions. Page 4
FEGIONS
CRAN PORTFOLIO MANAGER
nunicipal analyst have joined the
ng exodus from Massachusetts
il Services Co.'s troubled municipal
fund department. said people familiar with
the situation Page 30
FROM THE WIRE
NEW YORK CITY IS POISED TO
ENTER the primary market with the sale of
S1S0 million fuc4-r*\t gtntral oblifiuon new
money bonds in the compeunve arena, an
issue which playen expect will gamer good
bids from dealers Page 2
Investors ft Investing
WITH DISENCHANTMENT OVER THE
YTELDS of municipal bond funds mounting,
at least one fund company has called u quits
with tax-exempt secunues Caldwell Trust, a
Venice, Fla -based asset management
compam. announced last week that ii luu
liquidated m S3 million municipal bond
portfolio, Page 8
Retail
A $300 MILLION OKLAHOMA
CAPITAL Improvement Authonty negouaied
offering is beefing up an already hefty retail
appetite for municipal bonds in the Southwest,
and traders say as the summer reinvestment
months near, continued supply is vital for
repeat business. Page 9
Derivatives
THE CONNECTICUT HOUSING
FINANCE AGENCY last week entered into
the first ever tax-exempt swap associated with
single-family mortgages, ai Broward Count).
Fla. also dove into the swap markets with a
$49 million deal on port bonds subject to the
alternative minimum tax Page 35
UNDERWRITERS ft DEALERS
BUY AN INSURED BOND AND YOU'LL
EARN about 5% a >ear. Buy stock in a bond
insurance company and you could make a lot
more. The value of the three largest pubhel)
held bond insurance companies' stock grew
b> a combined 56 6ft last year, and analysts
who track the industry expect that trend to
continue through 1998.
Page 31
Southwest
THE OKLAHOMA CAPITAL
IMPROVEMENT AUTHORITY'S nut
highway revenue bonds are much like a
speeding driver trying to avoid a state
trooper They're moving targets, as far as
pneing is concerned Page 32
LISTINGS
New-Issue Calendar Page 10
Requests for Proposals Page 16
Notices of Sale Pages J 7-20
Executive Placement Page 23
Bond Redemptions Pages 25'29
Market Statistics Pages 36-39
Editor's Note
The Bond Bujer was not published
yesterday due to the Memorial Da> holiday.
To subscribe to The Bond Buyer, call 212-803-8270 or 800-982-0633.
Prnpi f.
-------
34 Tuesday May 26.1998
Derivatives & Structured products
THE Bond Biym
Fund Managers: Issuers Need to Improve Swap Disclosure
frwf H(r
¦ muTii swaps thai come 10 markei
h yea*
Sales arid oihcr portfolio managers
Mid muni issuers tend not to voluntetT
information about swaps, instead rele-
gating an}' mention of the transactions
to their annual financial statements —
often in tht footnotes
"HisioncaUy the disclosure has atA be«
a2J rj: strong," u.~ led >'«Bd * zm*f.ng
-dnccior ai Nuvetn Ad-
vtsory Corp. "If *'t do
f«r Mat br,d of infer-
rastion, if'j in the nor-
mal course of their an-
nual dudosure."
Sales uid. "O/tcc a
year is not enough"
She Wvi Sejii said
incidents like the Ot»
at»g* County bank-
ruptcy filing —. admit- _
lediy an extreme
example — demon-
strate rtit importance of investors un-
derstanding & -mMnicipalny'a rult man*
»$ernt itruciu-td j5rt»Ju:i5 tfrer
Futid managers say iht
Orange County bankruptcy
Citing, shows U U important
for investors to know wfaai
risks an issuer facts.
use "Thiytefrd io treat it as if it's their
idea." *\t iv.d
Privaie-jectoT issuers who are oang
the uvexempi laond mirkts often fetl
no obligation to disclose information
about structured produce
E&rfier this >aid ujuer*
ihouid disclose structured producu, juch
as swaps and interest rate caps, ss ma-
wtjai evens
'TntM mbf btV.cvt tfhav it nit t rr ¦
yorcaot to cucCcit ^t typ« of inform*.
»on ... aatii is." Ktnay teid.aovitglhn
the Sccurmesatttf Exrnn^e Comnu-
jion't rule 15c-2-12 has failed to im>
piove duclowre
"U the rule was working, any time an
usaer did efitei mio an off*balance sfciet
iransacuon such as a svap, that wouli
be dsaeloaed," Jit said. Tkaily theie's
ro-c-m for majof Imprpvereent 4nd a«
hope !hat happens going forward."
Ken WHJmajift. vice president of mu-
tual fund portfolios at VSAA lnv«ji-
ment Management Co.. said If asked,
municipal ujuers wt!3 tell investors
about the swaps and other structured
products thev have used-
"'Yoq can find crul about it,1" Wj]]jruM
said, "if there * a large issuer on a road
tfetw or conference calls ... it'll usuallv
come on', inmost lhtnjs--
Ho^ever, a sn»Mtr is^er or as
issuer who isn't issuing new bonds, he
added. "You'd hive w ^utyi »1 down."
"T ibmlc it c«iph( to be prominent in
the official statement wd it ought to fee
prominem in annual rtporct or things
that go into theNRMSiRj" he said. r<-
fernftg to nationally retiognixed murac-
jpaJ securities information repositories.
Thtte oight to »e sortie way lhat that
is made public."
Hw-w chef and n.&jtgei-sgsntral'
\y would not Jsvor fo-rmal reguUooos
t.W forced dudc^urt on issueri
"Is -wcuVl be better if U wer* done vol-
untarily," Sales Mid. "Sonte of the dts-
ctosvre regale nous hive caused u* to gel
leu diicJcuure ... J'rr. not a big fan of
rrymfi to do it b^ regulation-"
>lpild said: "If really is a hard thing
to regviite because ihtre an so many
different tads of exposures atfd labili-
ty structures "
<\t for whether H is cipproptiate for
municipal issuers to use scructured prod-
ucts. he said' "There is a place for all
these things, as people get more sophis-
ticated .. They are appropriate when
used ccrtecUv"
SjJcj agreed, cuing the Masiachu*
setti Wftttr Jteswrcet Authority at a
particularly expepenctd ?isue>r. b^L s3ie
toted tlit ircicisei danger when smaii-
ir, iesJ-icptuttcawfi issuts? jtl irn,*clved
&.t dtMVB\ ves market.
"(r wcU-t^ucattd and Nuel^irtfonned
hangs it's a very u&efut vsoC. TV ^uts\ion
is. 'Hc«* wefl-educattd and wcll-^fortrved
are the people who are doing ihiiV " the
Pl*nrt« Wlil
Msn nancbc* Advaso
t^d "Vf'hes \t starts filtering down [to
smaller issuers}- it's *'h*n you stsn tn be-
come concerned. ... li s eas> for tnem to
lose track of what
the risks are be-
cause thev re fc-
cusing on thr pc-
teniial tetLrr s.v
oilman ^tc
qatsi^oncd
y-hethn tisutts
are mating 'ift
too complicated
"by getting in-
volved in struc
vjte«i products
•Ut tvoi ihuV'tn
agatasc (hem.
I've never been
convinced that it's a good idea," he said.
Kowei «r. just because an issuer used a
swap, "it wouldn't convince me not to
buy i bond." he satd.
Paul Dljdler. a senior portfolio man-
ager at Dteyfus Corp,, differed from the
others interviewed, siying he's "not car-
ticyiarly"^ interested in knawing whai
stractureti products issuers use
•The fid !h» irse? might b< hying ovi
interest raw swaps is iecordjn-10 ^hai
r'm m'-srecttd n." D:sdicr said, nott&g
b>s nam focur is the bond's siruciure
a spokeswoman for American Ex-
press Fin^ncfaJ Advisors also said bond
iwutrs" structured prodacu trt "not
som&tht.ns -v^v^>^v4,9s % _ n 6J,o5o
3aooc
M9.QQQ
U&.000
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10
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* •.! iftfti Oiia Bnaadf kfrabeUj
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A V'
. ^ • -- -• -
-------
T
V-KVO Tl A m Tl
DO 01043425 0796 SwOH2
HAQK KELLETT
NURTHDRJDGC
1000 THOMAS JCPFERSON NW
5 T E 510
WASHINGTON DC 20007
UYER.
MNCE ¦
e 3&40«
Monday. June 1 1996
New tok N Y
Y'S MARKET
Yields Fall
C>OM I.MS 0O**n 0)
Frt ",Tli»'{'S.W«S - *Tliur" >«?
•• v .S.« *!"*,/. • -
Sftuytr«fr-Ww)iotM«y3i>Mfy2V i
nicipals Hover;
asuries Buoy
Louis.
d Buyer Wire
ripals ended unchanged to up Va
spott> trading Friday as a man*
amount of supply and a slew of
c data await the market next week.
• secondary Friday, activity was
rail, trader? and brokers said Some
sarticipanis said activity picked up
und 3 p.m, Eastern Daylight Tune,
vast majority of activity related to
i The Bond Buyer Index,
•emments. in late trading, the 30-
asurv bond was quoted up V'* point
5 80*
unes were buoyed throughout the
hanks to month-end buying, mar-
npants said Traders said (he Trea-
rket is going to have to improve a
a! more for investors to jump into
fcet who are currently balking at
jnces.
le municipal market continues to
ractive ratios relative to Treasuries,
rly on the long end. uhich has kept
Pleaii lum to MVStClPALS page 2
m
The CFTC's Brooksley Born isn't backing down from a Tight.
CFTC's Brooksley Born Shakes Up
Her Agency With Derivatives Policies
By (Catherine M Reynolds
WASHINGTON — Salmon that make
hundred-mile journeys upstream, swim-
ming against raging currents, could learn
a thing or two from the head of the Com-
modity Futures Trading Commission.
A slight woman with dose-cropped
brown hair and a clipped deadpan voice,
CFTC chairperson Brooksley Born has
coolly taken on the heavyweights of the
financial markets by initiating a review of
the agency's regulation of derivatives —
private contracts that are based on the per-
formance of an underlying sccunry, com*
modify, or index.
In adrlie«sing the almost unregulated
derivatives market, her actions have raised
a lot of high-powered eyebrows lately,
Treasury Secretary Robert Rubin. Fed-
eral Reserve Board chairman Alan
Greenspan. Securities and Exchange
Commission ctuurman Arthur Levitt, any
number of top WaJl Street firms, and mem-
bers of Congress can be counted among
those who question Bern's actions, and the
CFTC's authority to regulate the over-the-
counter derivatives markets, as expressed
in a recent CFTC "concept release."
Pltate imm ic DERIVATIVES putt 50
Broker-Dealer
Settles Case
Over Excessive
Markups
By Lynn Stevens Hume
WASHINGTON — Miami-based bro-
ker-dealer Howe, Solomon & Hall Inc.
and its chief financial officer, Christo-
pher J. Hall, have agreed to pay more
than $160,000 to settle securities-law
charges that the firm excessively marked
up the pnees of municipal secunties and
failed to disclose the markups to cus-
tomers
In the settlement, which was an-
nounced Friday, the Securities and Ex-
change Commission charged that the
firm "willfully violated" the federal se-
curities laws and Municipal Securities
Rulemaking Board rules G*17 on fair
dealing and 0-30 on pricing and com-
missions by charging $117,417 in undis-
closed excessive markups on $4 5 mil-
lion of municipal securities that were
sold to customers between Sept 7. 1994
and Oct 12.1994.
The commission found that Hall
"willfully aided and abetted and caused
(the firm's) violations."
Hall would not comment other than
to sb), "It's an old issue. It's something
that happened in 1994."
SEC officials taid Hall and the firm
took markups ranging from 19* to 20*
on the $4 5 million of housing bonds
they sold in 1994 to a small group of
Pltate turn in SEC P"te M
IE DIGEST:
'UBLIC OFFICIALS uho oversee (he
id-Alanieda County Coliseum complex
rhurjdiy to turn over management of
incially ailing center to a pnvate
i) Pag e 6J
)RS THAT A MERGER between Am-
and FSA Holding) Ltd resurfaced last
Ahich mav be traced to an industn ana-
rpon released Fnday Page 37
HINGTON
1TE OBJECTIONS FROM BANKS.
Z has approved an MSRB interpretation
- C-38 that sa>s banks or bank officials
•treated as consultants if the) solicit
pal business for dealer-affiliates in
cr 'credits" or some other form of com-
or, Page 4
The Regions
THE FLORIDA PORTS FINANCING
Commission is making plans for the second
phase of its bond program that would generate
up to JI30 million to aid ground
transportation in and around the state's 14
deep-water pons Page 3
From the wire
THE CONNECTICUT RESOURCES
Recovery Authontv — an infrequent visitor lo
the debt markets — said it will likely tell 540
million of debt this summer to refund its
UtHingford Project bonds Page 2
Retail
Northeast
WITHIN THE NEXT TWO WEEKS.
Massachusetts plans to bring the first
portion of us $1.5 billion of grant
anticipation notes lo market Meanwhile, of-
ficials are seeking to soothe any worries
investors and rating agencies may have
about some seemingly complex and ruky
aspects of the deal. Pagt 34
DERIVATIVES
THE COMMODITY FUTURES TRADLNG
Commission last week resumed consideration
of a Cantor Fitzgerald Inc. proposal to stan an
electronic exchange for trtdiag futures on gov-
ernment securities Page 32
A NEW JERSEY TRADER says the
Nonheast municipal market is relatively
uneventful in the uake of the landmark J1
billion Long Martd Power Authority deal, while
a New York trader says the next two months
look promising for retail investors, despite the
current »upp1> slump Pagt 9
LISTINGS
N««-luue Calendar
Executive Placement
Notices of Sale
Bond Redemptions
Market Statistics
Page 10
Pages 20-21
Pages 13-19
Pages 23-49
Paget 59-63
Sheridan, Colo.,
Reaches Agreement
To Settle COPs Case
By DarTell Preston
DALLAS — Sheridan. Colo., has made
a deal to move back into its city hall, over
which it defaulted on $3.2 million of COPs
and was forced to evacuate after trying to
retain tt through eminent domain
But the move is hardly good news for
investors, who must still approve the agree-
ment with the Denver suburb. Holders of
the outstanding, unrated lease-backed cer-
tificates of participation sold in 1988 to
build the city hall will fare little better than
if they had accepted an earlier offer
City officials and the trustee for the
COPs. St. Paul-based First Trust, an-
nounced last week that they reached an
agreement that would pay investors S2.0
Please mm ie> SHERIDA> page 6*
To subscribe to The Bond Buyer, call 212-803-8270 or 800-982-0633.
Pigc« ITOMIM
-------
OU Monda>. June J, 1998
The Bond Buyer
CFTC's Born Faces Capitol Hill Scrutiny Over Regulation Plans
m
SI
Conhnutd fnm front pat*
x recent action of issuing the con-
?ase by the agency was politi-
d strategically the most map-
*e and flawed move the agency
.iiade since I have been interacting
with it." said Douglas E. Harris, a pan-
ner at Arthur Andersen and former se-
nior deputy controller for capital mar-
kets at (he Office of the Comptroller of
the Currency.
uIt was very clear that the other major
financial regulators in this country —
*amng Robert Rubin. Alan Greenspan,
i Arthur Levitt — were unhappy with
it. She went ahead and issued it any-
way." said Harris. House Banking Com-
mittee chairman Jim Leach. R-Iowa,
had Harris supported for CFTC chair-
man when the post was open in 1996
Rep. Tom Ewing. R-HI . whose sub-
committee oversees the CFTC. plans a
heanng next week to review derivatives
regulation and the agency's concept re-
»se. In a telephone interview last
*eek. Ewmg said the hearing could lead
to legislation that would keep the
CFTC's action from disrupting the S28
trillion iwaps market
What Motivates Her?
Those puzzling over what drives
Born, including most everyone involved
in futures or derivatives, give any num-
t of hypothetical explanations for her
(ions, some less likely than others
She's a litigator, so she's used to con-
flict. She's a good old-fashioned regu-
lator who believes in a heavy govern-
ment hand controlling the markets. She
thinks her friendship with First Lady
Hillary Clinton will protect her from
any political fallout. She doein't under-
stand the damage a regulator can do to
r ~~ial markets She wants to leave
*>nal mark on the CFTC. She's
; her job
;h observers say they don't un-
. all the motivations for Bom's
~.«s. its clear she won't back down
trom a fight, which could mean some
fireworks over derivatives regulation in
the coming months.
With over 30 years of experience as
a Washington lawyer at Arnold &
porter specializing in futures. Born is
her home ground. She has represent-
ed clients on administrative law and reg-
ulatory procedures, as well as litigating
cases, most notably during the silver cri-
sis about two decades ago.
"My whole practice, to a large extent,
has been a preparation for this." she said,
in a recent interview. Jn one very tangi-
ble way, Born has ended up where she
began: the CFTC's current office is the
'd home of Arnold St Porter.
Shortly after Born took the helm in
August 1996. she plunged into a battle
to retain the commission's authority over
large futures traders who supported fed-
eral legislation to let them operate al-
most-unregulated "professional mar-
kets." Two such measures, sponsored by
Ewing and Sen Richard Lugar. R-Ind ,
died last year amid contentious indus-
'v debate over how to best structure
.gulation
One reason the passions are so high
over derivatives and futures regulation
is that the U.S. futures exchanges are
being outstripped by the growth of for-
eign exchanges and over-the-counter de-
rivatives — both exempt from most of
the CFTC's rules.
"An agency which watches the main-
stream activity that it's regulating be-
ginning to lose steam has to wonder
what its job is as well," noted Philip
McBrlde Johnson, a partner at Skad-
den, Arps, Slate, Meagher & Flom and
a former CFTC chairman.
The near-panic exchanges feel about
their market share is layered on top of
existing competition between exchanges
to capture the largest volume of trading,
thereb) enhancing their markets and the
value of an exchange seat.
Municipal market participants use fu-
tures and OTC derivatives in a number
of ways, such as trading in futures and
options to offset risks, entering into in-
terest rate swaps to manage assets and
liabilities, and buying customized fi-
nancial products that match their in-
vestment needs
Comment Letter Sparks
CONTROVERST
Born said that sales practice and dis-
closure rules for OTC derivatives are
one possible outcome of the concept re-
lease. stressing that the release only asks
questions about the regulatory scheme
for derivatives
"We would certainly listen very close-
ly to government agencies or organiza-
tions representing them in terms of their
own assessment of the need for cus-
tomer protections," she said, in response
to a question about whether state and
local governments need different pro-
tections than other institutional cus-
tomers
Born said the review of derivatives
regulation is part of a systematic analy-
sis of all the commission's regulations
to make sure they are up-to-date, not too
burdensome, and yet protect the mar-
kets and customers
"She's done an outstanding job. She's
a very approachable, bright, articulate
woman." Ewing said. "She has brought
some stability to the agency."
Born defends the concept release as
part of the agency's statutory responsi-
bility to regulate the exchanges. CFTC
registrants, and derivatives that fall with-
in its jurisdiction.
"It's hard for me to understand if peo-
ple have actually read the concept re-
lease why they would object, because
the concept release truly is a request for
comment on whether or not the com-
mission's regulations are appropriate in
today's market." she said. "It seems to
me an appropriate and wise question to
ask. The commission has said it does-
n't have any preconceived notions go-
ing into this concept release. There are
no proposals contained in the concept
release."
Critics of the concept release say it
opens derivatives contracts to legal chal-
lenge — such as a disgruntled counter-
party refusing to pay — by assuming
that the commission has the authority
to regulate OTC derivatives. The prob-
lem arises if an instrument is not cov-
ered by a 1993 CFTC policy exempting
certain swaps and hybrids from most
regulations — the so-called Shad-John-
son accord — because it could be con-
sidered an illegal, off-exchange futures
contract.
W1 find the concept release troubling
1 think the compromise that was worked
out in *93 was a very difficult one and a
delicate one. and one. that to my mind,
provided some certainty for the market,"
said Virginia Tech finance professor
Robert Mackey. a former chief of staff
at the CFTC and the current director of
the university's futures and options cen-
ter. "It's been a very innovative, very
dynamic [derivatives] market, one that's
served tremendous good, and one's
that's done it with a proper mix of pri-
vate regulation and public regulation
Layering futures regulation on that mar-
ket is just inappropriate."
Derivatives market participants say
that if the U.S. becomes an overregu-
.Tttle:Chalrperson, Commodity : ••
P"uturtl-'Trtdlng Commission'.-:.
" -a----" ¦ - r"r- ..'
|oln»d.CrrC: August. t9?^)S--i.
; Prevfour JobrPartrter it Arnold fit
porter, .where »hy began Jn:-1965-' :"
j^ProfeMjonal positions: Member,
.of the boards of directors of the " "
"American.Bat fourtdatlon.andthe -
* National Women'j,taw£eriter,.AIso
i aniactlve memBerot the.American '
.'Bar. Ajjooallorvand th^DiC. Bar;'- .•
'•Recer^dthe;V^marr Uiwyer.oflthe •
"Ye at award from the Women's 17"
^BarAisodatlon of Cr.C. Iryl 981.ti-V i'
*Agc&7- •
.,v f f \ ^ c_
j Famlly:1ManTed'to'Alexander E.r:J ..
'¦'Bennett' two'chlldren'andthree
stepchildren"? '
.EducatloruA.B.frorn Stanford.-';-
^q7196l;,)'.D.liro'rn Stanford Law
.School in.1964;' president of '',
the Stanford taw Review. ^
Hobblej: Sailing, fcird-wstchlng ¦'
-------
HF BOND HUtM
DERIVATIVES & STRUCTURED PRODUCTS
Slmday. June 1. I99S 51
ed environment. ihe market u-ill pick
and mo^e overseas, as happened in
: late 1930$ when the commission
vt advmce noitct of a proposed nile-
ikjng "The business almost overnight
•ru 10 Lcvndon and only came back
ien the CFTC backtracked." a fcno*l*
{table observer said.
3orn said she n not worried thai will
>pen here.
lut Mackey satd the concept release,
ich asks extensive questions about
ilation. shows ihe direction the corn-
3)0ii ja l;*ejv to head "I don't think
have lo be a paranoid marker par-
aant to see a regulatory scheme in
I think there's a pretty clear licit-
egulatoiy regime," he said.
unbar?, 1981
(22, mi
Gramm becomes chairman
Born limply states that if muniments,
such as SEwegulated securities swaps,
aren't under the CFTC's jurisdiction
now.', they won't be covered or affected
by any new rules
Some sources speculated that an SEC
derivatives ptoposai last yea; added im-
petus to the CFTC's review of regula-
tions in the OTC area, The SEC pro-
posal. which would let broker-dealers
set up thinly regulated subsidiaries for
derivatives activities, sparked a sharply
worded comment letter from the CFTC
criticizing the SHC's aucmpx to cope in
derivatives not under us jurisdiction.
Under a Microscope
Some observers support Bom's action
CFICTlMOIKE
itobtr 23-24.1974
tngr«ss ciMtu the Commodity futures
iding Commission.
rtl 15,1975
(nam T. Bagiey swoin m as ihe first
TO chairman, along with three other
nmis&iortars.
H, W9
ies M. Stone becomes the second
C chairman
*. 6+1961
d McBride Johnson sworn In as chair*
Jinuam 22,1993
The commission formally exempts certain
swaps and hybrid instruments 1rom the
but* 01 One regulations. Quitting on a
1989 policy statement
October 13. T994
Miry l. Schapiro sworn in as chapman.
S»pl«iBbw21.1998
The commission launches a mrae-yaar pi-
lot program to let (utures exchangss C;-
vetop "prolessionat markets' for large
traders that wouM be exempt from many
regulation*.
Atfgtfft 26,199S
:FT£ ar.d the Sscunties and Exchange
Tu$ston agrt® on the Jurisdict oial
between tftc two agencies tor regu*
of a range of financial instruments, .
i-cal.eo ataa-Johnson accord.
131,1992
allows tradfng of options on a
it oflutures contracts, including
try Bond futures on the Chicago
of Trids.
bar 17.1991
PhHllps, a comimsslonei since
w 19B1, Decomes chairman,
ier3,19S4
nmission gives the National Fu-
soaatis-n ttsponstDifit/ to; fagts-
¦arket participants
Brooksley Bom takes the helm as chaw-
person.
February 11, 13,1997
ASenaie panel nofes fezrmpsor iegisla-
t-on to strip a large pan of the CFTC* au*
ttionty t>*et ^-callBd pro-markets and
clarify the agency's authority over swaps.
AprMS-17,1997
A House panel holds hearings on similar
legislation- Before tall, botti bills die amid
Industry disputes
December 17,1997
May 7, T993
The SEC proposes letting broker-dealers
set l'D thinly regulated subsidiaries tor de-
rivatives activities.
The CFTC issues t 'concept release" re-
vrsui/ig toe rssire of dr/vatrves regulation,
which swaps deaiers worry wilt give cus-
trows a loophole to default on swap con'
tracts The Treasury, tf>e Federal Reserve
0oard, and the SEC respond in a strong
)Oini statement questioning trie action.
— and even her opponents unfailingly
describe her as very smari and an able
atiorney
"What she's trying to do is ease iht
regulations to make them more practi-
cal but at the same time enforce them
more strongly . . and then protecr juris-
diction, which the agencies tend to do,"
satd Jerry Nlarktiam, t professor at the
University of North Carolina School of
Law, who was on the opposite side from
Born an th: silver crisis litigation
'This financial derivatives market u.
growing and changing so much, she
can't afford not to look at it." Markham
said ,vlt creates uncertainty for those tn
the marketplace while the review is go-
ing on"
If the CFTC decides to impose a reg-
ulatory scheme on the derivatives man
kct, it would need additional legislation
because it can't regulate jtuc through
the 1993 swaps exemption, he said.
"It's almost a backdoor way of say-
ing we're going 10 set up these regula-
tions and if you don't obey them you're
subjeci to the nuclear bomb of being il-
legal." one knowledgeable observer said.
The CFTC coulfi see plenty of action
on Capitol Hill soon. In addition to Ew-
ing's hearing, a few key senators keep
a close eye on the agency, ^nd give a lot
of weight w the vi«ws ofOw Treasury,
SEC. and tspeeially ihe Fed
"There's a lot of concent thai Born is
acting in an independent way and could
disrupt ihe working group mechanism."
said a Senate source, referring to the
President's Working Croup on Financial
Markets, of which Born, Rubin,
Greenspan, and Levitt are members
"The absolute most important thing is
to avoid a regulatory iurf battle. .. 1
wouldn't rule out hearings at all,"ihe
Senate aide added
Former CFTC chairman lohnson said
Born is not a self«aggrandtier, and is
just not eager to be left holding the bag
if b lack of regulation leads to a major
derivatives meltdown.
"1 think she's concerned thai if ihe
¦world blows up, it's going to blow up
in [the CFTC's j faces." be said "Brook-
iky is not a career bureaucrat. She's a
wonderful woman and a great lawyer.
She's not likely to even instinctively
wonder about where the agency will be
in 25 years. ... She's not playing to any
audience at all"
Her Own Pkoplc
Some of Bom's cntics »»y the agency
has lost touch with ihe marketplace and
although officials may meet and talk
with exchanges and market users, they
don't listen
"The commission is adrift and one
person — the chairperson — is control-
ling the agenda It seems to be a tradi-
tional. strictly regulatory agenda that
was common in the 'SOs. uid 60s It
dcesn't reflect the realities of the
changes in today s market." said Neat
P. CHUo, executive vice president and
general counsel ai the American Cotton
Shippers Association, a 7S*ytn>ol6
trade group.
"1 have a great deal of respect for
Brookjley Born, but the commission
now is functioning in a vacuum." Gillen
said, noting that he was one cf three to
testify on behalf of creating the CFTC in
1974
Others say one reason for ihe discon-
nect between the CFTC and the market
is Bom's background as a litigator and
the turnover the agency has seen since,
she took over, losing top staff such as
attorneys Susan Ervin and Andrea
Corcoran
"They have temoved almost any se-
nior person with knowledge of bosh the
commodities markets and a sense of the
institution." said an observer "They're
operating in a knowledge vacuum"
Another market participant said by
bringing in top people from big lau
firms — general counsel Dan Wald<
man. enforcement director Geoffrey
Aronov. trading and markets director
I. Michael Greenberger. and Born's
executive assistant Susan Lee — Born
is surrounded by people uith little mar-
ket perspective.
Some critics find Born coming up
short when compared to former chair-
men Wendy Grimm and 5u*an
Phillips, both economics Ph Ds. and
Mary Shapiro, who had worked ai
the SEC. the CFTC. and was general
counsel at the Futcres Industry Associa-
tion
But Bom maintains her background
is an advantage,
"I do not think it is a valid criticism.
I think, m£eed. the litigation experience
is an assistance in some aspects of my
job," she said, noiing that even though
tome of her caret; was spent in litiga-
tion. )i involved mossive federal regu-
latory frameworks such as the com-
modity laws, the antitrust laws, and the
securities laws.
Former commissioner Joseph Dial,
now a fellow at Harvard Universit).
pointed out that the CFTC has scores of
economists on staff who advise the com-
missioners
"You have this knowledge base that
Brooksley can partake of. and she can
take Ihe facts, analyze them objective-
ly, and make an enlightened judgment
that gives (he market forces full consid-
eration," he said
Bob Wllmoutfc, president of the in-
dustry's sclf'regulaicr, the National Fu-
tures Association, said fiom and the oth-
er commissioners have been very open
to discussion "I seem to see a more
open commission in terms of willing-
ness to listen and react to proposals we
and others are putting forward.11
Wilmouth said
As well as being a thorn in the side
of a number of marker participants. Born
u a wife and mother of two cnildren and
three step-children. She credits Arnold
& Porter's progressive policies with
making her success at work compatible
with raising a family
"1 worked three days a week from chc
time my first child was bom tn 1968 un-
til both my kids were in school for a full
day 1 made partner -while I was work-
ing three days a week."Born satd
She graduated from Stanford Law -
School in 1964, the same year that Ti-
tle VII required law funs to consider
women applicants 'I've had a lot of job
opportunities because of that, and be-
cause I think also, society was ready to
allow women to have broader economic
opportunities." Born said
She has returned the favor, being ac-
tive in women's rights issues and public
jervjee throughoui her career Q
-------
Lawyers Question Legitimacy Of Issuers' Use o.
Page 1 of 5
f=ULL ETOnY
Lawyers Question Legitimacy Of Issuers' Use of Put
Option
The Bond Buyer
About two dozen issuers have invested their
advance refunding or defeasance escrows in
structures that some bond attorneys believe
violate the spirit, if not the letter, of the tax
law, according to sources.
At least seven broker-dealers are pitching the structure, which
I combines open market Treasuries with a put option and, they say, is
I an innovative way to squeeze the most value for the issuer out of
j advance refundings.
| "I don't believe there's any logical or analytic objection to a fair
1 market purchase of a put," said C. Willis Ritter, a name partner at
: Ritter Eichner & Norris. "That in and of itself strikes me as perfectly
; appropriate."
; But several bond and tax lawyers interviewed last week said the
savings are not worth the potential headache, given the focus the
Internal Revenue Service and the Securities and Exchange
Commission have put on issuers, and ongoing yield-burning
investigations.
"You have to realize this is a potential magnet for SEC investigations
or IRS audits," said one nationally-known tax specialist. "An issuer
should very carefully evaluate the potential economic benefit... and
compare that against the downside."
Yield-burning refers to the practice of dealers' overcharging issuers
for securities purchased for advance refunding escrow accounts,
thereby burning - or reducing - the investment yield so that it is below
the bond yield and does not violate tax law restrictions.
Proponents of the new escrow structure argue that it is not yield-
burning because competitive bidding ensures that fair market prices
are paid. Moreover, they say, the put provides a real value to the
issuer - not just to the dealer selling Treasuries, as in a yield-burning
situation. Several supporters stressed that how an issuer structures
the transaction is important to avoiding legal problems.
Among those pitching the product are Chambers, Dunhill, Rubin &
Co.; f Chase Manhattan Corp. 1; Bear, Stearns & Co.; First Union
National Bank; f Lehman Brothers 1; Morgan Guaranty Trust Co.; and
National Westminster Bank, sources said.
Companies to Watch
»Chase Manhattan
Corp.
»Lehman Brothers
•Bell
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Lawyers Question Legitimacy Of Issuers' Use o.
Page 2 of 5
"More and more counsel, as they get their arms around it, are
comfortable, as long as it's done on a fair market value basis," said
David Rubin, president of Chambers Dunhill. "This is an example of
where the issuer can own value using the market for its benefit."
The Nuts and Bolts
The way the transaction works is that an issuer purchases
open-market Treasuries for an advance refunding escrow along with a
put option. The put allows the issuer to sell back either the entire
escrow or a set percentage of it at a fixed price, after a certain date.
The cost of the put, combined with the cost of the Treasuries, brings
down the yield on the Treasuries to equal that of the refunding bonds
- the so-called arbitrage limit, which is the most the IRS allows
issuers to earn on investment of bond proceeds. One attorney cited
Section 12-33-c, which specifies that the securities and put can be
considered a single economic event.
Then, if interest rates rise significantly, the issuer's refunded bonds
will be trading at a deep discount. The issuer can exercise the put
option and sell back the Treasuries, and buy its own bonds with the
proceeds, keeping the profit. Transaction supporters say that
maneuver is allowed under a 1995 IRS ruling.
"We understand that bond counsel have generally required that that
profit be used for good government purposes," noted John Lutz, an
associate at Rogers & Wells.
That takes the bonds out of the market, so the issuer doesn't have to
pay debt service, and doesn't have to hold as large an escrow, if any.
And, proponents argue, the federal government is happy because
there are fewer tax-exempt bonds outstanding.
"Every arbitrage technique reduces the amount of bonds issued, and
Uncle Sam has never been happy," one nay-saying attorney noted last
week.
Market participants emphasize that there are many variations on the
basic structure - some because they want to stress their own deal's
conservatism, and some because they want to keep the option open to
contend that more aggressive structures are still legal.
Dealers approached Gilmore & f Bell 1 about using the structure for
the law firm's clients, which include the Kansas Department of
Transportation and the Kansas Turnpike Authority, but Gilmore &
Bell wasn't comfortable approving the transaction.
Financial adviser Grant Street Advisors conducted a long due
diligence process before recommending a conservative version of the
structure to the Pittsburgh Water & Sewer Authority on a $200
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Lawyers Question Legitimacy Of Issuers' Use o.
Page 3 of 5
million advance refunding, said president Myles Harrington.
"When you look at the caliber of the professionals that have signed
off on it - Rogers & Wells, Kutak Rock, and Chapman & Cutler - that
gives you comfort," Harrington said.
Kutak Rock gave the tax opinion on the authority's deal and Eckert,
Seamans, Cherin & Mellott served as bond counsel, city officials said.
The "Life Is Too Short" Argument
Even some bond lawyers who believe the structure is legal
acknowledge that the difficulty of a potential IRS audit cannot be
discounted, regardless of the outcome.
"There are a lot of conservative issuers who are worried about all the
yield-burning controversy and say: Life's too short, we'll buy Slugs.'
It's hard to do open market Treasury escrows in today's
environment," a tax attorney said. "It's kind of a judgment decision as
to whether or not an issuer thinks it is suitable and worth it to get into
an open market Treasury with a potential opportunity to benefit if
rates go up."
Another tax lawyer, who is reluctant to approve these transactions,
said one problem is that the issuer couldn't have kept the money it
ended up spending on the put. Thus, for example, issuer officials
might be willing to pay $200,000 for a put that might only bring in
$400,000 in the best case scenario, because they wouldn't have gotten
the $200,000 otherwise.
"The theory is that this put is an expense that offsets the excess yield.
It's fiendishly clever," he said. "What's concerning about it is that
you're buying a hedge with the (federal) government's money."
Even if that put conveys real value to the issuer, it can be argued that
the money should have gone to the federal government, he said.
"Our reaction is it smells. I think technically there are some very good
arguments as to why it works, but it seems to me that it violates the
spirit of the regulations. It is the kind of thing that I think the service
would be mad and try to figure out some way to kill it," he said.
David A. Walton, a partner at Jones Hall who used to work at
Treasury, said one argument proponents use is that the IRS allows
governments to use guaranteed investment contracts as long as at
least three bids are received and the GIC terms are reasonable.
"I'm not saying that these programs are necessarily a violation, but I
have a concern about that 'reasonable' term in the regulations,"
Walton said. "I would like some clarification from the government
before I proceed with this."
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Lawyers Question Legitimacy Of Issuers' Use o.
Page 4 of 5
Proponents argue that the Treasury-put structure is permissible
because it is just like a GIC with an option to terminate.
The tax specialist noted that the analogy between this structure and
GICs is imperfect because GICs cannot be used for an advance
refunding escrow - they do not accomplish a legal defeasance.
"It is a fair statement that there is some similarity, but it kind of falls
apart because you're not doing that. You're doing something else," he
said.
Dangers to Avoid
He would not state categorically that the transaction is absolutely not
permitted, but urged issuers to tread carefully.
Attorneys and providers all recommended that issuers interested in
using the transaction first:
* Conduct a competitive bidding.
* Determine that the escrow period is long enough and other factors
combine to make it likely that rates will rise.
* Ensure the refunded bonds will be relatively easy to obtain if rates
rise, which depends on who owns them.
"If you're some little guy who sold them retail to widows and
orphans, the notion of getting those (bonds) back is no little task," the
proponent attorney said. "Bidding out the product is important to
show fair market value. It's important to bid out each of the pieces
separately so you know what you're paying for each piece."
He noted that the yield-burning cases the IRS is now investigating
usually involve Treasuries bought without any bidding.
Escrow structures that allow the issuer to purchase other issuer's
bonds concern some attorneys. "I think that product had a lot more
problems... there was all kinds of gnashing of teeth," he said.
Another twist on the product that some providers are pushing is for
the issuer to turn around and sell the put option and receive cash -
either up- front or during the life of the deal.
A number of attorneys and dealers warned against this.
"Most bond counsel don't like that idea. They think selling that option
is yield," a provider said. He added that the dangerous possibility
emerges that the initial Treasury and put dealer ends up buying the
option, and no prerefunded munis are ever delivered. "He ends up
owning both sides of the trade ... That scared me," he said.
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Lawyers Question Legitimacy Of Issuers' Use o... Page 5 of 5
There is also a question as to whether the escrow can be used to
purchase other issuers' prerefunded munis.
Copyright c 1998 American Banker, Inc. All Rights Reserved.
http://www.bondbuyer.com
(Copyright American Banker Inc. - Bond Buyer 1998)
via IntellX
Publication Date: March 07,1998
Powered by NewsReal's IndustryWatch
...back to too
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-------
VII. SRF Loan Portfolio
Analysis
Why Monitor SRF Loan Portfolio
Conditions?
• Assess the threat of defaults to the program at a point
in time - current conditions
• Track financial conditions over time - evaluate trends
• Bond ratings may only provide part of the picture
• Credit quality of the loan portfolio versus state policy
on providing assistance
• Determine whether further actions may be necessary
- Collateral arrangements for public and private
loan recipients
VII -1
-------
Methods for Tracking/Monitoring
Loan Portfolio Conditions
• Internal state financial capability
assessment rating approach - e.g.,
PENNVEST
• Bond rating summary approach - e.g.,
Maryland
• SRF bond ratings as overall indicator
• Other approaches
Internal State Rating Approach -
e.g., PENNVEST
• Use state-developed methodology to assess individual
borrowers
- Cash-flows
- Other factors
• Debt levels
• Socioeconomic conditions
• User fee levels
• Financial management
• Assign summary rating to each borrower
• Aggregate/summarize the borrower credit quality across
the SRF
• Track borrower credit conditions annually
VII-2
-------
Bond Rating Summary
Approach
• Uses bond ratings of borrowers
• Summarizes the volume of loans by bond
rating level
• Includes not-rated borrowers
• Displays the overall security of the portfolio
Maryland CWSRF
Approach
• Summarize volume of loans by bond rating
category
• For not-rated borrowers - conduct
assessment to determine credit quality
- Review general fund and enterprise fund
performance
- Compare to industry standards or Moody's
ratios
- Develop credit watch list identify specific
weaknesses and track closely
VII-3
-------
Composite Credit Rating Report -
June 30,1997
RATING
LOANS
% TOTAL
Aaa/AAA
$33,050,723
13.83%
Aa/AA
$116,135,010
48.61%
A/A
$70,595,147
29.55%
Baa/BBB
$9,926,209
4.15%
N/R-IG
$5,405,602
2.26%
N/R - NIG
$1,722,922
0.72%
N/R
$2,073,973
0.87%
TOTAL
$238,909,586
100.00%
Maryland Assessment of
Not-rated Borrowers
• Review of enterprise and general fund for
each borrower
• Application of industry standard ratios to
determine financial health
• Development of "watch list" where
conditions are weak
• Tracked annually
VII-4
-------
Ratios Computed:
Balance Sheet
• Current ratio: current assets/current
liabilities
• Cash/current liabilities
• Total assets/total liabilities
• Debt ratio: net debt/(net fixed assets+net
working capital)
Ratios Computed: Revenue,
Expenses, Fund Balance Statement
• Operating ratio: O&M expenses/total operating
revenues
• Net take down: net revenues/gross revenues and
income
• Fund balance/revenues
• Interest coverage: net revenues/interest requirements
for the year
• Debt service coverage: net revenues/debt service
• D/S safety margin: (net revenues-debt service)/gross
revenue and income
VII-5
-------
Moody's Water & Sewer 1996
Industry Standard Ratios
• Debt level: 29.9%
• Operating ratio: 64.6%
• Net take down: 38.8%
• Debt service safety margin: 22.2%
• Debt service coverage: 200%
Watch List Examples
• Negative net revenues
• Current ratio below standard
• Weak debt service coverage <100%
• Large transfers from enterprise to general
fund
• General fund with negative cash flow
VII-6
-------
MARYLAND WATER QUALITY FINANCING ADMINISTRATION
ANNUAL SRF CREDIT REVIEW
February 6,1998
-------
MARYLAND WATER QUALITY FINANCING ADMINISTRATION
ANNUAL SRF CREDIT REVIEW
RATED BORROWERS
February 6,1998
-------
MARYLAND WATER QUALITY FINANCING ADMINSTRATION
RATED BORROWER CREDIT QUALITY
AS OF JANUARY 31, 1998
BORROWER
MOODY'S
RATING
S&P
RATING
FITCH
RATING
Aberdeen
A
N/R
N/R
Allegany County
Baa2
A-
N/R
Annapolis
Aa
A +
N/R
Anne Arundel County
Aa1
AA +
AA +
Baltimore City
A1
A
A +
Baltimore County
Aaa
AAA
AAA
Calvert County
Aa
A +
N/R
Cambridge
A
N/R
N/R
Carroll County
Aa3
AA-
AA
Cecil County
A
A +
N/R
Charles County
Aa3
AA-
AA-
Cumberland
Baa
N/R
N/R
Frederick County
Aa
AA-
N/R
Garrett County
Baa3
N/R
N/R
Harford County
Aa
AA-
AA
Havre de Grace
A
N/R
N/R
Howard County
Aaa
AA +
AAA
Prince George's County
Baal
A
A +
Queen Anne's County
A1
A
N/R
Salisbury
A1
N/R
N/R
St. Mary's Co. Met. Comm.
A
A +
N/R
Washington County Sanitary District
A1
A +
N/R
Washington Suburban San. Comm.
Aa1
AA
N/R
Westminster
A
N/R
N/R
Wicomico County
A1
A +
N/R
-------
MARYLAND WATER QUALITY FINANCING ADMINISTRATION
ANNUAL SRF CREDIT REVIEW
UN-RATED BORROWERS
February 6,1998
-------
MARYLAND WATER QUALITY FINANCING ADMINISTRATION
UN-RATED BORROWER CREDIT QUALITY
AS OF FEBRUARY 6,1998
BORROWER
WATCH LIST
BORROWER
1
X
BORROWER
2
BORROWER
3
X
BORROWER
4
X
BORROWER
5
X
BORROWER
6
X
BORROWER
7
BORROWER
8
BORROWER
9
X
BORROWER
10
X
BORROWER
11
X
BORROWER
12
BORROWER
13
X
BORROWER
14
BORROWER
15
X
BORROWER
16
X
BORROWER
17
X
BORROWER
18
X
BORROWER
19
Moody's Water & Sewer 1996 Industry Standard Ratios
Debt 29.90%
Operating 64.60%
Net Take Down 38.80%
Debt Service Safety Margin 22.20%
Debt Service Coverage 2.00
-------
WQFA Annual Credit Review - WATCH LIST
Enterprise Fund
Water/Sewer 1997
Assets
Cash
507,945
Investments
0
A/R
262,799
Fixed Assets
8,073,213
Total Assets
8,843,957
Liabilities
MP
123,830
Current Maturites
0
Accrued Liab
15,275
Other Liab.
35,698
Long Term Debt
3,549,680
Total Liabilities
3,724,483
Contributed Capital
4,633,003
Restricted Fund
0
Unres Fund Bat
486,471
Liabilities & Equity
8,843,957
CA/CL
4.41
Cash/CL
2.91
TA/Tl
2.37
Debt Ratio
40.14%
Revenues
Service Charges
942,142
Other Net Rev
30,336
Gross Rev & Inc
972,478
Oper Expenses
(824,760)
Net Revenues
147,718
Interest Expense
(194,2671
Principal Expense
(93,542)
Net Gross Rev
(140,091)
Connections
43,560
Net Revenues
(96,531)
Unres Fund Bal
486,471
Operating Ratio
87.54%
Net Take Down
15.19%
Fund Bal/Revenues
50.02%
Interest Coverage
0.76
D/S Coverage
0.51
D/S Safety Margin
-14,41%
Governmental Fund/
Account Group 1997
Assets
Cash
514,506
investments
0
A/R
90,531
Fixed Assets
0
Res for Debt
0
Total Assets
605,137
Liabilities
A/P
32,449
Current Maturites
0
Accrued Liab
0
Other Liab.
152,240
Long Term Debt
0
Total Liabilities
184,689
Contributed Capital
0
Restricted Fund
0
Unres Fund Bal
420,448
Liabilities & Equity
605,137
CA/CL
3.28
Cash/CL
2.79
TA/TL
3.28
Debt Ratio
0.00%
Revenues
Taxes & Misc
1,754,239
Proceeds
0
Gross Rev & Inc
1,754,239
Expenditures
(1,598,263)
Net Revenues
155,976
Interest Expense
.0
Principal Expense
0
Net Gross Rev
155,976
Net Transfers
(184,978)
Net Revenues
(29,002)
Unres Fund BbI
420,448
Operating Ratio
91.11%
Net Take Down
8.89%
Fund Bal/Revenues
23.97%
Interest Coverage
N/A
D/S Coverage
N/A
D/S Safety Margin
8.89%
Watch List for negative net revenues an Enterprise Fund, not enough operating cash
to pay debt service. GF aiso shows negative cash flow after transfers.
Borrower 1
-------
WQFA Annual Credit Review
Enterprise Fund
Water/Sewer 1997
Assets
Cash
283.225
Investments
0
A/R
236,346
Prepaid Expen
11,063
Fixed Assets
5,207,565
Other
0
Total Assets
5,738.199
Liabilities
A/P
40,028
Current Maturites
0
Deposits
300
Accrued Expenses
0
Long Term Debt
1,562,160
Total Liabilities
1,602,488
Contributed Capital
3,196,682
Restricted Fund
0
Unres Fund Bal
939,029
Liabilities & Equity
5.738.199
CA/CL
13.16
fesh/CL
7.02
Him.
3.58
7ebt Ratio
27.22%
Revenues
Service Charges
682,490
Other Net Rev
31,321
Gross Rev & Inc
713,811
Oper Expenses
(513,917)
Net Revenues
199,894
Interest Expense
(77,089)
Principal Expense
(54,313)
Net Gross Rev
68,492
Transfers
(9,354)
Net Revenues
59.138
Unres Fund Bal
939,029
Operating Ratio
75.30%
Net Take Down
28.00%
Fund Bal/Revenues
131.55%
Interest Coverage
2.59
D/S Coverage
1.52
D/S Safety Margin
9.60%
The proprietary fund is made up of the
Utilities Commission and two rental
fusing facilities. The above includes
Kly the Utilities Comm.
General Fund
1997
Assets
Cash
198.772
Investments
0
A/R
287,916
Prepaid Expen
6,254
Due Other Govt
48,310
Due Other Funds
0
Total Assets
541,252
Liabilities
A/P
50,304
Current Maturites
0
Due to Other Funds
0
Deferred Revenue
282
Long Term Debt
221,560
Total Liabilities
272,146
Contributed Capital
Restricted Fund
0
Unres Fund Bal
269,106
Liabilities & Equity
541,252
CA/CL
10.70
Cash/CL
3.93
TAfTL
1.99
Debt Ratio
40.93%
Revenues
Taxes & Fees
1,799,974
Misc
32,910
Gross Rev & Inc
1,832.884
Expenditures
(1,781,581)
Net Revenues
51,303
P&l Expense
(23,712)
Principal Expense
UNK
Net Gross Rev
27.591
T ransfers
0
Net Revenues
27,591
Unres Fund Bal
269.106
Operating Ratio
98.98%
Net Take Down
2.80%
Fund Bal/Revenues
14.68%
Interest Coverage
N/A
D/S Coverage
2.16
D/S Safety Margin
1.51%
Borrower 2
-------
WQFA Annual Credit Review • WATCH LIST
Enterprise Fund
Water/Sewer/Trash 1997
Assets
Cash
100,891
Investments
99,171
A/R
41,179
Due Other Funds
63,006
Fixed Assets
5,821.772
Other
Total Assets
6,126,019
Liabilities
A/P
93,831
Current Maturites
526,087
Due Other Funds
142,631
Accrued Expenses
27,768
Long Term Debt
2,056,232
Total Liabilities
2,846,549
Contributed Capital
2,443,142
Restricted Fund
0
Unres Fund Bal
836,328
Liabilities & Equity
6,126,019
CA/CL
0.38
Cash/CL
0.13
TA/TL
2.15
Debt Ratio
42.15%
Revenues
Service Charges
262,061
Other Net Rev
22,617
Gross Rev & Inc
284,678
Oper Expenses
(210,595)
Net Revenues
74,083
Interest Expense
136,256)
Principal Expense
(37,650)
Net Gross Rev
177
Transfers
0
Net Revenues
177
Unres Fund Sal
836,328
Operating Ratio
80.36%
Net Take Down
26.02%
Fund Bal/Revenues
293.78%
Interest Coverage
2.04
D/S Coverage
1.00
D/S Safety Margin
0.06%
General Fund
1997
Assets
Cash
195,722
Investments
98,869
A/R
22,292
Due Other Govt
19,238
Due Other Funds
63,006
Total Assets
399,127
Liabilities
A/P
19,643
Accruals
0
Due to Other Funds
0
Deferred Revenue
0
Long Term Debt
0
Total Liabilities
19,643
Contributed Capital
Restricted Fund
58,358
Unres Fund Bal
321,126
Liabilities & Equity
399,127
CA/CL
20.32
Cash/CL
9.96
TA/TL
20.32
Debt Ratio
0.00%
Revenues
Taxes & Fees
425,032
Misc
17,246
Gross Rev & Inc
442,278
Expenditures
(515,335)
Net Revenues
(73,057)
Interest Expense
0
Principal Expense
0
Net Gross Rev
(73,057)
Transfers
0
Net Revenues
<73,057)
Unres Fund Bal
321,126
Operating Ratio
121.25%
Net Take Down
-16.52%
Fund Bal/Revenues
72.61%
Interest Coverage
N/A
D/S Coverage
N/A
D/S Safety Margin
-16.52%
Watch List for Enterprise Fund has poor balance sheet ratios and only 1x DSC.
General Fund expenditures exceed revenues.
Borrower 3
-------
WQFA Annual Credit Review • WATCH LIST
Enterprise Fund
Water/Sewer 1997
Assets
Cash
3,011
Investments
0
A/R
115,715
Prepaid Expen
10,489
Fixed Assets
4,414,717
Other
0
Total Assets
4.543,932
Liabilities
A/P
58,457
Current Maturites
127,570
Deposits
0
Accrued Expenses
13,497
Long Term Debt
874,771
Total Liabilities
1.074,295
Contributed Capital
3,232,287
Restricted Fund
0
Unres Fund Bal
237,350
Liabilities & Equity
4.543,932
CA/CL
0.65
Cash/CL
0.02
4.23
Vebt Ratio
22.06%
Revenues
Service Charges
804,026
Other Net Rev
1,633
Gross Rev & Inc
805,659
Oper Expenses
(406,097)
Net Revenues
399.562
Interest Expense
148,587)
Principal Expense
(77,568)
Net Gross Rev
273.407
Transfers OUT
(316,862)
Net Revenues
(43,455)
Unres Fund Bal
237,350
Operating Ratio
50.51%
Net Take Down
49.59%
Fund Bal/Revenues
29.46%
Interest Coverage
8.22
D/S Coverage
3.17
D/S Safety Margin
33.94%
General Fund
1997
Assets
Cash
63,788
Investments
A/R
29,474
Note Rec
149.999
Due Other Govt
25,964
Due Other Funds
0
Total Assets
269.225
Liabilities
A/P
108.586
Deposits
0
Due to Other Funds
1,748
Deferred Revenue
22.538
Long Term Debt
0
Total Liabilities
132,872
Contributed Capital
Restricted Fund
0
Unres Fund Bal
136,353
Liabilities & Equity
269,225
CA/CL
2.03
Cash/CL
0.48
TA/TL
2.03
Debt Ratio
0.00%
Revenues
Taxes & Fees
924,814
Other Net Rev
22,700
Gross Rev & Inc
947,514
Expenditures
(788,628)
Net Revenues
158,886
Interest Expense
(33,939)
Principal Expense
(166,904)
Net Gross Rev
(41,957)
Transfers IN
291,875
Net Revenues
249.918
Unres Fund Bal
136,353
Operating Ratio
85.27%
Net Take Down
16.77%
Fund Bal/Revenues
14.39%
Interest Coverage
4.68
D/S Coverage
0.79
D/S Safety Margin
-4.43%
Watch List due to large transfers from Enterprise Fund to subsidize General and
Highway Fund. This is due primarily to the fact that General Fund does not generate
ough revenue to. pay D/S on outstanding debt. Enterprise Fund balance sheet
. and Quick ratios are below industry standards.
Borrower 4
-------
WQFA Annual Credit Review - WATCH LIST
Enterprise Fund
Water/Sewer/Trash 1997
Assets
Cash
0
Investments
0
Other Receivables
64,002
Due Other Funds
409,190
Fixed Assets
5,821,772
Total Assets
6,294,964
Liabilities
A/P
93,831
Current Maturites
526,087
Due Other Funds
142,631
Accrued Expenses
27,768
Long Term Debt
2,056,232
Total Liabilities
2.846,549
Contributed Capital
2,443,142
Restricted Fund
0
Unres Fund Bal
1,005,273
Liabilities & Equity
6,294,964
CA/CL
7.97
Cash/CL
0.00
TA/TL
2.21
Debt Ratio
41.02%
Revenues
Service Charges
864,978
Other Net Rev
19,821
Gross Rev & Inc
884,799
Oper Expenses
1702,677)
Net Revenues
182.122
Interest Expense
(123,847)
Principal Expense
(110,161)
Net Gross Rev
(51,886)
Transfers
0
Net Revenues
(51.886)
Unres Fund Bal
1,005,273
Operating Ratio
81.24%
Net Take Down
20.58%
Fund Bal/Revenues
113.62%
Interest Coverage
1.47
D/S Coverage
0.78
D/S Safety Margin
-5.86%
General Fund
1997
Assets
Cash
43,096
Investments
202.243
A/R
1,051
Other A/R
122.007
Deposits
5,970
Due Other Funds
116,161
Total Assets
490,528
Liabilities
A/P
31,747
Accruals
10,569
Due to Other Funds
0
Deferred Revenue
0
Long Term Debt
0
Total Liabilities
42,316
Contributed Capital
Restricted Fund
0
Unres Fund Bal
448,212
Liabilities & Equity
490,528
CA/CL
8.85
Cash/CL
1.02
TA/TL
11.59
Debt Ratio
0.00%
Revenues
Taxes & Fees
852,211
Misc
62,566
Gross Rev & Inc
914,777
Expenditures
(867,215)
Net Revenues
47,562
Interest Expense
0
Principal Expense
0
Net Gross Rev
47,562
Transfers
(51,212)
Net Revenues
(3.650)
Unres Fund Bal
448.212
Operating Ratio
101.76%
Net Take Down
5.20%
Fund Bal/Revenues
49.00%
Interest Coverage
N/A
D/S Coverage
N/A
D/S Safety Margin
5.20%
Watch List for negative Net Revenues, not enough cash to pay
debt service on Enterprise Fund debt. Additionally General Fund transfers
caused negative net revenues.
Borrower 5
-------
WQFA Annual Credit Review - WATCH UST
Enterprise Fund
Water/Sewer 1997
Assets
Cash
291,547
Investments
0
A/R
269,622
Due Other Govt
474,566
Fixed Assets
26,253,114
Restricted Cash
0
Total Assets
27.288,849
Liabilities
A/P
726,428
Current Maturites
69,972
Due Other Funds
24,901
Other Liab.
606,430
Long Term Debt
5,204,029
Total Uabilities
6.631.760
Contributed Capital
20,238,144
Restricted Fund
0
Unres Fund Bal
418,945
Uabilities & Equity
27.288,849
CA/CL
0.73
"ssh/CL
0.20
,/TL
4.11
>ebt Ratio
19.33%
Revenues
Service Charges
744,136
Other Net Rev
77,081
Gross Rev & Inc
821.217
Oper Expenses
(821.389)
Net Revenues
(172)
Interest Expense
(236,554)
Principal Expense
(87,284)
Net Gross Rev
(324.010)
Transfers OUT
0
Net Revenues
(324.010)
Unres Fund Bal
418.945
Operating Ratio
110.38%
Net Take Down
-0.02%
Fund Bal/Revenues
51.02%
Interest Coverage
(0.00)
D/S Coverage
(0.00)
D/S Safety Margin
-39.45%
General Fund
1997
Assets
Cash
531,437
Investments
249,820
A/R
889,279
Other
148,665
Due Other Govt
620,694
Due Other Funds
24,901
Total Assets
2.464,796
Liabilities
A IP
571,785
Current Maturites
0
Due to Other Agency
293,680
Deferred Revenue
0
Long Term Debt
0
Total Liabilities
865,465
Contributed Capital
Restricted Fund
820,840
Unres Fund Bal
778.491
Liabilities & Equity
2.464,796
CA/CL
2.82
Cash/CL
0.61
TA/TL
2.85
Debt Ratio
0.00%
Revenues
Taxes & Fees
19,691,141
Other Net Rev
22,294
Gross Rev & Inc
19,713.435
Expenditures
(8,451,926)
Net Revenues
11,261,509
Interest Expense
(34,053)
Principal Expense
0
Net Gross Rev
11,227,456
Transfers OUT
(10,987,407)
Net Revenues
240,049
Unres Fund Bal
778,491
Operating Ratio
42.92%
Net Take Down
57.13%
Fund Bal/Revenues
3.95%
Interest Coverage
330.71
D/S Coverage
330.71
D/S Safety Margin
56.95%
Watch List due to negative NR and NGR in the Water & Sewer Fund. OE expenses
exceed revenues resulting in poor operating ratios, and CA/CL ratio is below
dustry standards.
Borrower 6
-------
WQFA Annual Credit Review
Enterprise Fund
Water/Sewer/Trash 1997
Assets
Cash
70,379
Investments
0
Other Receivables
356,796
Due Other Funds
449,378
Fixed Assets
8,100,715
Total Assets
8,977.268
Liabilities
A/P
32,217
Current Maturites
0
Due Other Funds
22,643
Accrued Expenses
26,193
Long Term Debt
1,456,774
Total Liabilities
1.537.827
Contributed Capital
6,378,255
Restricted Fund
0
Unres Fund Bal
1,061.186
Liabilities & Equity
8,977,260
CA/CL
10.81
Cash/CL
0.87
TA/TL
5.84
Debt Ratio
16.23%
Revenues
Service Charges
969,186
Other Net Rev
34.886
Gross Rev & Inc
1.004,072
OperExpenses
(825,870)
Net Revenues
178,-202
Interest Expense
1102,011J
Principal Expense
(63.488)
Net Gross Rev
12.703
Transfers
0
Net Revenues
12,703
Unres Fund Bel
1.061,186
Operating Ratio
85.21%
Net Take Down
17.75%
Fund Bal/Revenues
105.69%
interest Coverage
1.75
DIS Coverage
1.08
D/S Safety Margin
1.27%
General Fund
1997
Assets
Cash
1,052,855
Investments
0
A/R
56,046
Other Rec
17,145
Interfund Rec
0
Prepaid Expen
0
Total Assets
1,126,046
Liabilities
A/P
8,481
Other
4,422
Due to Other Funds
452,555
Deferred Revenue
0
Long Term Debt
Total Liabilities
465.458
Contributed Capital
Restricted Fund
283,767
Unres Fund Bal
376,821
Liabilities & Equity
1,126,046
CA/CL
2.42
Cash/CL
2.26
TA/TL
2.42
Debt Ratio
0.Q0%
Revenues
Taxes
462,393
Other (Transfer*
0
Gross Rev & Inc
462.393
Expenditures
(402,070)
Net Revenues
60,323
Interest Expense
0
Principal Expense
0
Net Gross Rev
60,323
Transfers
(66,776)
Net Revenues
(6.453)
Unres Fund Bal
376,821
Operating Ratio
86.95%
Net Take Down
13.05%
Fund Bal/Revenues
81.49%
Interest Coverage ¦
N/A
D/S Coverage
N/A
D/S Safety Margin
13.05%
Borrower 7
-------
WQFA Annual Credit Review
Enterprise Fund
Water/Sewer 1997
Assets
Cash
220,405
Investments
678,164
A/R
99,703
Interfund Loan
0
Fixed Assets
2,662,321
Bond Expen
0
Total Assets
3,660,593
Liabilities
A/P
10,638
Current Maturites
31,773
Inter Payable
9,819
Other Liab.
30,371
Long Term Debt
969,598
Total Liabilities
1,052,199
Contributed Capital
965,513
Restricted Fund
0
Unres Fund Bal
1,642,881
Liabilities & Equity
3,660,593
CA/CL
12.09
^sh/CL
2.67
Ja/tl
3.48
Debt Ratio
27.36%
Revenues
Service Charges
502,722
Other Net Rev
26,828
Gross Rev & Inc
529.550
Oper Expenses
(227,901)
Net Revenues
301,649
Interest Expense
(55,006)
Principal Expense
(30,615)
Net Gross Rev
216,028
Transfers OUT
Net Revenues
216,028
Unres Fund Bal
1,642,881
Operating Ratio
45.33%
Net Take Down
56.96%
Fund Bal/Revenues
310.24%
Interest Coverage
5.48
D/S Coverage
3.52
D/S Safety Margin
40.79%
General Fund
1997
Assets
Cash
212,682
Investments
502,566
A/R
6,020
Due From Funds
110,247
Restricted Cash
0
Other
197
Total Assets
831,712
Liabilities
A/P
29,510
Current Maturites
0
Other
26.547
Restricted Deposits
0
Long Term Debt
0
Total Liabilities
56,057
Contributed Capital
Restricted Fund
0
Unres Fund Bal
775,655
Liabilities & Equity
831,712
CA/CL
14.83
Cash/CL
3.79
TA/TL
14.84
Debt Ratio
0.00%
Revenues
Taxes & Fees
721,082
Other Net Rev
Gross Rev & inc
721,082
Expenditures
(508,180)
Net Revenues
212,902
Interest Expense
0
Principal Expense
Net Gross Rev
212,902
Adjustment
(22,241)
Net Revenues
190,661
Unres Fund Bal
775,655
Operating Ratio
70.47%
Net Take Down
29.53%
Fund Bal/Revenues
107.57%
Interest Coverage
N/A
D/S Coverage
N/A
D/S Safety Margin
29.53%
Borrower 8
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WQFA Annual Credit Review
- WATCH LIST
Enterprise Fund
General Fund
Water/Sewer 1997
1997
Assets
Assets
Cash
5,943
Cash
156,309
Investments
0
Investments
A/R
14,329
A/R
5,034
Prepaid Expen
0
Note Rec
0
Fixed Assets
103,610
Due Other Govt
0
Restricted Cash
10,521
Due Other Funds
125,739
Total Assets
134,403
Total Assets
287,082
Liabilities
Liabilities
A/P
999
A/P
1,345
Current Maturites
10,521
Deposits
0
Due Gen Fund
125,739
Due to Other Funds
0
Accrued Expenses
0
Deferred Revenue
0
Long Term Debt
70,472
Long Term Debt
0
Total Liabilities
207,731
Total Liabilities
1,345
Contributed Capital
23,844
Contributed Capital
Restricted Fund
0
Restricted Fund
125,263
Unres Fund Bal
(97,172)
Unres Fund Bal
160,474
Liabilities & Equity
134,403
Liabilities & Equity
287,082
CA/CL
0.15
CA/CL
119.96
Cash/CL
0.04
Cash/CL
116.21
TA/TL
0.65
TA/TL
213.44
Debt Ratio
65.38%
Debt Ratio
0.00%
Revenues
Revenues
Service Charges
60,800
Taxes & Fees
101,243
Other Net Rev
0
Other Net Rev
0
Gross Rev & Inc
60.800
Gross Rev & Inc
101,243
Oper Expenses
(65,525)
Expenditures
(100,870)
Net Revenues
(4,725)
Net Revenues
373
Interest Expense
(3,432)
Interest Expense
0
Principal Expense
(21,528)
Principal Expense
0
Net Gross Rev
(29,685)
Net Gross Rev
373
Transfers OUT
0
Transfers IN
0
Net 'Revenues
(29,685)
Net Revenues
373
Unres Fund Bal
(97,172)
Unres Fund Bal
160,474
Operating Ratio
107.77%
Operating Ratio
99.63%
Net Take Down
-7.77%
Net Take Down
0.37%
Fund Bal/Revenues
-159.82%
Fund Bal/Revenues
158.50%
Interest Coverage
(1.38
Interest Coverage
N/A
D/S Coverage
(0.19
D/S Coverage
N/A
D/S Safety Margin
-48.82%
D/S Safety Margin
0.37%
Watch List due to Enterprise Fund OE greater than GR&I. Additionally,
Enterprise Fund balance sheet ratios are poor. General Fund appears
stable.
Borrower 9
-------
WQFA Annual Credit Review - WATCH LIST
Enterprise Fund •
Sewer
General Fund
1997
1997
Assets
Assets
Cash
40,967
Cash
243,459
Charges Rec
19,469
nvestments
0
Interfund Rec.
13,164
A/R
19,394
Inventory
5,642
Prop & Equip Less Depr
813,802
nterfund Rec
14,099
Other
4,525
Total Assets
897,569
Total Assets
276,952
Liabilities
Liabilities
A/P
16,393
A/P
5,977
Current Maturites + LOC
24,005
Accrued Int
0
Deferred Rev
11,760
Notes Payable
325,239
Total Liabilities
365,637
Total Liabilities
17,737
Contributed Capital
Contributed Capital
Restricted Fund
Restricted Fund
Unres Fund Bal
531,932
Unres Fund Bal
259,215
Liabilities & Equity
897,569
Liabilities & Equity
276,952
CA/CL
1.96
CA/CL
15.61
^sh/CL
1.01
Cash/CL
13.73
pl/TL
2.45
TA/TL
15.61
Debt Ratio
39.11%
Debt Ratio
0.00%
Revenues
Revenues
Service Charges
158,613
Taxes & Other
425,945
Other Net Rev
804
Other (Transfer)
96,861
Gross Rev & Inc
159,417
Gross Rev & Inc
522,806
OperExpenses
(69,623)
Expenditures
(461,718)
Net Revenues
89,794
Net Revenues
61,088
Interest Expense
<4,818)
Interest Expense
0
Principal Expense
(9,468)
Principal Expense
0
Net Gross Rev
75,508
Net Gross Rev
61,088
Transfers to Gen Fund
(96,861)
Net Revenues
(21,353)
Unreserved Fund Bal
531,932
Unreserved Fund Bal
259,215
Operating Ratio
43.89%
Operating Ratio
108.40%
Net Take Down
56.33%
Net Take Down
11.68%
Fund Bal/Revenues
333.67%
Fund Bal/Revenues
49.58%
Interest Coverage
18.64
Interest Coverage
N/A
D/S Coverage
6.29
D/S Coverage
N/A
D/S Safety Margin
47.37%
D/S Safety Margin
11.68%
Watch List for negative net revenues on Enterprise Fund due to transfers
General Fund totaling 96,861.
Borrower 10
-------
WQFA Annual Credit Review - WATCH LIST
Enterprise Fund
Water/Sewer 1997
Assets
Cash
0
nvestments
0
A/R
116,120
Due Other Funds
66,436
:ixed Assets
3,482,525
Restricted Cash
0
Total Assets
3,665,081
.iabilities
A/P
16,523
Current Maturites
673,293
Due Other Funds
33,500
Accrued Expenses
0
Long Term Debt
1,606,103
Total Liabilities
2,329,419
Contributed Capital
1,305,586
Restricted Fund
0
Unres Fund Bal
30,076
Liabilities & Equity
3,665,081
CA/CL
0.25
Cash/CL
0.00
TA/TL
1.57
Debt Ratio
62.19%
Revenues
Service Charges
363,457
Other Net Rev
396,000
Gross Rev & Inc
759,457
Oper Expenses
(150,252)
Net Revenues
609,205
Interest Expense
(125,519)
Principal Expense
(154,446)
Net Gross Rev
329.240
Transfers Out
(387,857)
Net Revenues
(58.617)
Unres Fund Bal
30,076
Operating Ratio
41.34%
Net Take Down
80.22%
Fund Bal/Revenues
3.96%
Interest Coverage
4.85
D/S Coverage
2.18
D/S Safety Margin
43.35%
General Fund
1997
Assets
Cash
113,580
Investments
A/R
63,566
Note Rec
0
Due Other Govt
57,421
Due Other Funds
0
Total Assets
234,567
Liabilities
A/P
53,104
LOC - Current Matur.
150,000
Due to Other Funds
139,088
Deferred Revenue
45,233
Long Term Debt
0
Total Liabilities
387,425
Contributed Capital
Restricted Fund
0
Unres Fund Bal
(152,858)
Liabilities & Equity
234,567
CA/CL
0.61
Cash/CL
0.29
TA/TL
0.61
Debt Ratio
63.95%
Revenues
Taxes & Fees
1,104,314
Other Net Rev
142,752
Gross Rev & Inc
1,247,066
Expenditures
(963,793)
Net Revenues
283,273
Interest Expense
(81,020)
Principal Expense
(54,526)
Net Gross Rev
147,727
Net Revenues
147,727
Unres Fund Bal
(152,858)
Operating Ratio
87.28%
Net Take Down
22.72%
Fund Bal/Revenues
-12.26%
Interest Coverage
3.50
D/S Coverage
2.09
D/S Safety Margin
11.85%
Watch List due to negative fund balances in the General (-152,858) and
Water (-356,286) Funds. Additionally, Enterprise NR is negative, and debt ratios
on both Funds are high compared to industry standards. Town is taking steps
to rectify the aforementioned negative fund balances. GF TA/TL is less than 1.
Borrower 11
-------
WQFA Annual Credit Review
Enterprise Fund
Water/Sewer 1997
Assets
Cash
459,897
Other
247,907
A/R
500,649
Mortgage
6,283
Fixed Assets
11,241,385
Restricted Cash&lnv
675,668
Total Assets
13.131,789
Liabilities
A/P
32,566
Current Maturites
57,895
Due Other Funds
0
Other Liab.
41,800
Long Term Debt
1,597,685
Total Liabilities
1,729,946
Contributed Capital
8,696,135
Restricted Fund
0
Unres Fund Bal
2,705,708
Liabilities & Equity
13.131,789
0
*
1
9.14
l/CL
3.48
./TL
7.59
Debt Ratio
13.29%
Revenues
Service Charges
791,641
Other Net Rev
79,463
Gross Rev & Inc
871,104
Oper Expenses
(535,634)
Net Revenues
335,470
Interest Expense
(84,012)
Principal Expense
(50,651)
Net Gross Rev
200,807
Transfers OUT
(40,000)
Net Revenues
160,807
Unres Fund Bal
2,705,708
Operating Ratio
67.66%
Net Take Down
38.51%
Fund Bal/Revenues
310.61%
Interest Coverage
3.99
D/S Coverage
2.49
D/S Safety Margin
23.05%
General Fund
1997
Assets
Cash
210,870
Investments
30,000
A/R
7,013
Other
172,207
Restricted Cash
27,465
Mortgage Rec
48,337
Total Assets
495,892
Liabilities
A/P
13,793
Current Maturites
0
Due to Other Agency
8,274
Deferred Revenue
36,082
Long Term Debt
0
Total Liabilities
58,149
Contributed Capital
Restricted Fund
0
Unres Fund Bal
437,743
Liabilities & Equity
495.892
CA/CL
7.22
Cash/CL
3.63
TA/TL
8.53
Debt Ratio
0.00%
Revenues
Taxes & Fees
1,099,024
Other Net Rev
44,288
Gross Rev & Inc
1,143,312
Expenditures
(875,890)
Net Revenues
267,422
Interest Expense
(78,277)
Principal Expense
(141,468)
Net Gross Rev
47,677
Transfers OUT
0
Net Revenues
47,677
Unres Fund Bal
437,743
Operating Ratio
79.70%
Net Take Down
23.39%
Fund Bal/Revenues
38.29%
Interest Coverage
3.42
D/S Coverage
1.22
D/S Safety Margin
4.17%
Borrower 12
-------
WQFA Annual Credit Review - WATCH LIST
Enterprise Fund
Water/Sewer 1997
Assets
Cash
38,286
Other
165,015
A/R
166,752
Prepaid Exp.
63,499
Fixed Assets
8,864.589
Restricted Cash&lnv
0
Total Assets
9,298,141
Liabilities
A/P
37,773
Current Maturites
0
Due Other Funds
3,175
Other Liab.
25,860
Long Term Debt
1,471,738
Total Liabilities
1,538,546
Contributed Capital
6,875,837
Restricted Fund
0
Unres Fund Bal
883,758
Liabilities & Equity
9.298,141
CA/CL
5.54
Cash/CL
0.57
TAfTL
6.04
Debt Ratio
15.83%
Revenues
Service Charges
687,366
Other Net Rev
90,122
Gross Rev & Inc
777,488
Oper Expenses
(646,920!
Net Revenues
130.568
Interest Expense
(80.302)
Principal Expense
(84,896)
Net Gross Rev'
(34,630]
Transfers OUT
0
Net Revenues
(34,630)
Unres Fund Bal
883,758
Operating Ratio
94.12%
Net Take Down
16,79%
Fund Bel/Revenues
113.67%
Interest Coverage
1.63
D/S Coverage
0.79
D/S Safety Margin
-4.45%
General Fund
1997
Assets
Cash
11,754
Investments
3,031,612
A/R
5,669
Other
5,772
Restricted Cash
0
Mortgage Rec
0
Total Assets
3,054,807
Liabilities
A/P
24,652
Current Maturites
0
Advances
351,551
Deferred Revenue
0
Long Term Debt
0
Total Liabilities
376,203
Contributed Capital
Restricted Fund
0
Unres Fund Bal
2,678.604
Liabilities & Equity
3,054,807
CA/CL
8.12
Cash/CL
0.03
TA/TL
8.12
Debt Ratio
0.00%
Revenues
Taxes & Fees
1,757.97S
Other Net Rev
0
Gross Rev & Inc
1,757,979
Expenditures
(1,080,294)
Net Revenues
677,685
Interest Expense
(2,841)
Principal Expense
(16,323)
Net Gross Rev
658,521
Transfers OUT
(258,670)
Net Revenues
399,851
Unres Fund Bal
2.678,604
Operating Ratio
61.45%
Net Take Down
38.55%
Fund Bal/Revenues
152.37%
Interest Coverage
238.54
D/S Coverage
35.36
D/S Safety Margin
37.46%
Watch List for negative net revenues on Enterprise Fund, not enough Gash to pay
debt service. General Fund appears stable.
Borrower 13
-------
WQFA Annual Credit Review
I
iterprise Fund • Water & Sewer
1997
Assets
Cash
306,534
Charges Rec
56,203
Interfund Rec.
12,904
Inventory
Property & Equip
1,847,590
Other
Total Assets
2,223,231
Liabilities
A/P
4,256
Accrued Int
8,847
Notes Payable
433,844
Total Liabilities
446,947
Contributed Capital
Restricted Fund
Unres Fund Bal
1,776,284
Liabilities & Equity
2.223,231
M/CL
28.67
Jpbh/CL
23.39
TAIJI
4.97
Debt Ratio
19.51%
Revenues
Service Charges
209,300
Other Net Rev
39,265
Gross Rev & Inc
248,565
Oper Expenses
(168,876)
Net Revenues
79,689
Interest Expense
(22,647)
P & I Expense
(20,678)
Net Gross Rev
36,364
Unres Fund Bal
1,776,284
Operating Ratio 80.69%
Net Take Down 32.06%
Fund Bal/Revenues 714.62%
Interest Coverage 3.52
D/S Coverage 1.84
D/S Safety Margin . 14.63%
General Fund
1997
Assets
Cash
363,802
Investments
.77,176
A/R
47,999
Inventory
Interfund Pay
(12,904)
Other
Total Assets
476,073
Liabilities
A/P
8,975
Total Liabilities
8,975
Contributed Capital
Restricted Fund
Unres Fund Bal
467,098
Liabilities & Equity
476,073
CA/CL
54.48.
Cash/CL
40.54
TA/TL
53.04
Debt Ratio.
0.00%
Revenues
Taxes & Other
721,871
Other
10,803
Gross Rev & Inc
732,674
Expenditures
(696,473)
Net Revenues
36,201
Interest Expense
0
P & I Expense
0
Net Gross Rev
36,201
Unres Fund Bal
467,098
Operating Ratio
96.48%
Net Take Down
4.94%
Fund Bal/Revenues
63.75%
Interest Coverage
N/A
D/S Coverage
N/A
D/S Safety Margin
4.94%
Borrower 14
-------
WQFA Annual Credit Review • WATCH LIST
Enterprise Fund
Water/Sewer 1997
Assets
Cash
202,161
Investments
0
A/R
973,628
Fixed Assets
25,625,320
Total Assets
26,801,109
Liabilities
A/P
268,954
Current Maturites
506,178
Accrued Liab
89,512
Other Liab.
0
Long Term Debt
305,032
Total Liabilities
1,169,676
Contributed Capital
24,700,766
Restricted Fund
0
Unres Fund Bal
930,667
Liabilities & Equity
26,801,109
CA/CL
1.36
Cash/CL
0.23
TA/TL
22.91
Debt Ratio
3.03%
Revenues
Service Charges
1,256,731
Other Net Rev
9,354
Gross Rev & Inc
1,266,085
Oper Expenses
(1,264,421)
Net Revenues
1,664
Interest Expense
(27,424)
Principal Expense
(3,576)
Net Gross Rev
(29,336)
Transfers IN
120,189
Net Revenues
90,853
Unres Fund Bal
930,667
Operating Ratio
100.61%
Net Take Down
0.13%
Fund Bal/Revenues
73.51%
Interest Coverage
0.06
D/S Coverage
0.05
D/S Safety Margin
-2.32%
Governmental Fund/
Account Group 1997
Assets
Cash
618,715
Investments
49,312
A/R
453,017
Fixed Assets
0
Res for Debt
3,788,054
Total Assets
4,909,098
Liabilities
A/P
399,579
Current Maturites
270,000
Accrued Liab
151,679
Other Liab,
0
Long Term Debt
3,788,054
Total Liabilities
4,609,312
Contributed Capital
0
Restricted Fund
495,085
Unres Fund Bal
(195,299)
Liabilities & Equity
4,909,098
CA/CL
1.37
Cash/CL
0.75
TA/TL
1.07
Debt Ratio
82.66%
Revenues
Grants & Assesments
2,317,735
Proceeds
0
Gross Rev & Inc
2,317,735
Expenditures
(1,903,179)
Net Revenues
414.556
Interest Expense
(192,416}
Principal Expense
(85,142)
Net Gross Rev
136,998
Net Transfers
(120,189)
Net Revenues
16,809
Unres Fund Bal
(195,299)
Operating Ratio
82.11%
Net Take Down
17.89%
Fund Bal/Revenues
-8.43%
Interest Coverage
2.15
D/S Coverage
1.49
D/S Safety Margin
5.91%
Watch List for negative net revenues on Enterprise Fund, not enough operating cash
to pay debt service. Governmental Fund and Account Grp are showing positive cash
flow but negative unreserved fund balance.
Borrower 15
-------
WQFA Annual Credit Review • WATCH LIST
Enterprise Fund- Water/Sewer
General Fund
1997
1997 .
Assets
Assets
Cash
150,377
Cash
487,791
Investments
0
Investments
0
Other Receivables
707,033
A/R
58,236
Other Rec
20,845
Fixed Assets
5,220.993
nterfund Rec
47,511
Other
95.194
Total Assets
6,173.597
Total Assets
614.383
Liabilities
Liabilities
A IP
24,576
A/P
13,385
Current Maturites
78.051
Salaries & Taxes
15,824
Due Other Funds
0
3ue to Other Funds
548.957
Accrued Expenses
36,590
Deferred Revenue
50,614
Long Term Debt
2,202.491
Long Term Debt
Total Liabilities
2,341.708
Total Liabilities
628,780
Contributed Capita!
0
Contributed Capital
Restricted Fund
0
Restricted Fund
0
Unres Fund Bal
3,831,889
Unres Fund Bal
(14,397)
Liabilities & Equity
6,173.597
Liabilities & Equity
614,383
CA/CL
6.16
CA/CL
0.98
"ssh/CL
1.08
Cash/CL
0.78
TL
2.64
TA/TL
0.98
ot Ratio
37.52%
Debt Ratio
0.00%
Revenues
Revenues
Service Charges
732,685
Taxes
669,873
Other Net Rev
1,964
Other (Transfer!
403,456
Gross Rev & Inc
734,649
Groat Rev & Inc
1,073,329
Oper Expenses
(580,188
Expenditures
(1; 189,973)
Net Revenues
154,461
Net Revenues
(116.644)
Interest Expense
(156,178
Interest Expense
0
Principal Expense
(66,497)
Principal Expense
0
Net Gross Rev
(68,214
Net Gross Rev
(116.644)
Transfers
0
Transfers
Net Revenues
(68,214
Net Revenues
Unres Fund Bal
3,831,889
Unres Fund Bal
(14.397)
Operating Ratio
79.19%
Operating Ratio
177.64%
Net Take Down
21.03%
Net Take Down
-10.87%
Fund Bal/Revenues
521.59%
Fund Bal/Revenues
-1.34%
Interest Coverage
0.99
Interest Coverage
N/A
D/S Coverage
0.69
D/S Coverage
N/A
D/S Safety Margin
•9.29%
D/S Safety Margin
-10.87%
Watch List for negative Net Revenues, not enough cash to pay
debt service on enterprise fund debt. Additionally General Fund expenses
leded revenues.
Borrower 16
-------
WQFA Annual Credit Review
- WATCH LIST
Enterprise Fund -
Sewer
1997
Assets
Cash
1,083,716
Investments
205,318
Other Receivables
106,829
Restricted Assets
5,000
Prop & Equip Less Depr
3,798,421
Other
0
Total Assets
5,199,284
Liabilities
A/P
751,114
Current Maturites + LOC
48,402
Accrued Expenses
10,579
Notes Payable
744,077
Total Liabilities
1,554,172
Contributed Capital
2,874,556
Restricted Fund
5,000
Unres Fund Bat
765,556
Liabilities & Equity
2,319.728
CA/CL
1.72
Cash/CL
1.34
TA/TL
3.35
Debt Ratio
15.24%
Revenues
Service Charges
450,908
Other Net Rev
52,500
Gross Rev & Inc
503,408
Oper Expenses
1616,174)
Net Revenues
(112.7661
Interest Expense
(33,720)
Principal Expense
(48,407)
Net Gross Rev
(194,893)
Transfers to Gen Fund
0
Net Revenues
(194,893)
Unreserved Fund Bal
765,556
Operating Ratio
136.65%
Net Take Down
•22.40%
Fund Bal/Revenues
152.07%
Interest Coverage
(3.34)
D/S Coverage
(1.37)
D/S Safety Margin
-38.71%
General Fund
1997
Assets
Cash
285,245
Investments
410,636
A/R
107,269
Other Rec
37,672
Interfund Rec
689,365
Restricted
462,194
Total Assets
1,992,381
Liabilities
A/P
40,212
Developer Dep
121,579
Total Liabilities
161,791
Contributed Capital
Restricted Fund
370,983
Unres Fund Bal
1,459,607
Liabilities & Equity
1,992,381
CA/CL
9.46
Cash/CL
1.76
TA/TL
12.31
Debt Ratio
0.00%
Revenues
Taxes & Other
1,393,969
Other (Transfer)
0
Gross Rev & Inc
1,393,969
Expenditures
(1,005,008)
Net Revenues
388,961
Interest Expense
(8,209)
Principal Expense
(37,161)
Net Gross Rev
343,591
Unreserved Fund Bal
1,459,607
Operating Ratio
72.10%
Net Take Down
27.90%
Fund Bal/Revenues
104.71%
Interest Coverage
47.38
D/S Coverage
8.57
D/S Safety Margin
24.65%
Watch List for negative net revenues on Enterprise Fund, OE exceed GR&I.
General Fund appears stable.
Borrower 17
-------
WQFA Annual Credit Review - WATCH LIST
Enterprise Fund
General Fund
Water/Sewer 1997
1997
Assets
Assets
Cash
513,660
Cash
597,286
Other
nvestments
0
A/R
98,163
A/R
1,989
Interfund Loan
3,955
Due From Funds
832,705
Fixed Assets
12,306,455
Restricted Cash
18,920
Bond Expen
52,635
Mortgage Rec
0
Total Assets
12,974,868
Total Assets
1,450,900
Liabilities
.labilities
A/P
41,689
A IP
82,053
Current Maturites
115,601
Current Maturites
760
Inter Payable
64,123
Other
106
O.ther Liab.
3,955
Restricted Deposits
18,920
Long Term Debt
3,860,058
.ong Term Debt
9,875
Total Liabilities
4,085,426
Total Liabilities
111,714
Contributed Capital
9,029,201
Contributed Capital
Restricted Fund
238,430
Restricted Fund
29,308
Unres Fund Bal
(378,189)
Unres Fund Bal
1,309,878
Liabilities & Equity
12,974,868
Liabilities & Equity
1,450,900
CA/CL
2.71
CA/CL
14.06
nsh/CL
2.28
Cash/CL
5.87
Ia/tl
3.18
TA/TL
12.99
Debt Ratio
30.77%
Debt Ratio
0.73%
Revenues
Revenues
Service Charges
654,986
Taxes & Fees
1,322,309
Other Net Rev
43,920
Other Net Rev
Gross Rev & Inc
698,906
Gross Rev & Inc
1,322.309
Oper Expenses
(617,201)
Expenditures
(1,004,366)
Net Revenues
81,705
Net Revenues
317,923
Interest Expense
(223,915)
Interest Expense
(760)
Principal Expense
(110,329)
Principal Expense
Net Gross Rev
(252,539)
Net Gross Rev
317,163
Transfers OUT
Capital Outlay
(130,741)
Net Revenues
(252,539
Net Revenues
186,422
Unres Fund Bal
(378,189
Unres Fund Bal
1,309,878
Operating Ratio
94.23%
Operating Ratio
75.96%
Net Take Down
11.69%
Net Take Down
24.04%
Fund Bal/Revenues
-54.11%
Fund Bal/Revenues
99.06%
Interest Coverage
0.36
Interest Coverage
418.32
D/S Coverage
0.24
D/S Coverage
418.32
D/S Safety Margin
-36.13%
D/S Safety Margin
23.99%
tetch List for negative net revenues on Enterprise Fund, not enough cash to pay
|bt service. General Fund appears stable.
Borrower 18
-------
WQFA Annual Credit Review
Enterprise Fund
Garbage/Water/Sewer 1997
Assets
Cash
76,899
A/R & Investments
66,268
Interfund Loan
156,307
Fixed Assets
2,316,222
Restricted Cash
15,060
Long Term Note Rec
285,922
Total Assets
2,916.678
Liabilities
A/P
1,185
Current Maturites
39,447
Accrued Liab
27,336
Other Liab.
0
Long Term Debt
1,038,716
Total Liabilities
1,106.684
Contributed Capital
1,220,489
Restricted Fund
0
Unres Fund Bal
589,505
Liabilities & Equity
2,916.678
CA/CL
2.11
Cash/CL
1.13
TA/TL
2.64
Debt Ratio
41.22%
Revenues
Service Charges
563,156
Other Net Rev
4,752
Gross Rev & Inc
587.908
Oper Expenses
1427,013)
Net Revenues
140,895
Interest Expense
(40,878)
Principal Expense
(49,506)
Net Gross Rev
50,511
Transfers OUT
Net Revenues
50,511
Unres Fund Bal
589,505
Operating Ratio
75.82%
Net Take Down
24.81%
Fund Bal/Revenuea
103.80%
Interest Coverage
3.45
D/S Coverage
1.56
D/S Safety Margin
8.89%
General Fund
1997
Assets
Cash
400
Investments
18,052
A/R
103,140
Prepaid Expen
3,795
Restricted Cash
53,119
Long Term Note
1,138,546
Total Assets
1,317,052
Liabilities
A/P
24,120
Current Maturites
16,643
Accrued Liab
704,963
Due' Other Funds
164,485
Long Term Debt
0
Total Liabilities
910,211
Contributed Capital
Restricted Fund
0
Unres Fund Bal
406,841
Liabilities & Equity
1.317,052
CA/CL
0.14
Cash/CL
0.00
TA/TL
1.45
Debt Ratio
9.32%
Revenues
Taxes & Fees
808,996
Proceeds
41,500
Gross Rev & Inc
850,496
Expenditures
(763,273)
Net Revenues
87,223
Interest Expense
(38,632)
Principal Expense
(61,566)
Net Gross Rev
(12,975)
Adjustment
0
Net Revenues
(12,975)
Unres Fund Bal
406,841
Operating Ratio
94.35%
Net Take Down
10.26%
Fund Bal/Revenues
47.84%
Interest Coverage
2.26
D/S Coverage
0.87
D/S Safety Margin
-1.53%
Borrower 19
-------
Fitch SRF Bond Rating
Approach
• Reflects one rating agency's rating
approach - S&P/Moody's have them too
• Fitch reviews every aspect of the program
- Leverage structure
- Management
- Loan underwriting
- Loan pool monitoring
- Permitted investments
Fitch Stress Test
• Fitch applies "stress tests" on loan pool to
determine tolerances for SRF leveraging
bonds
• Test approach reflects:
- borrower bond ratings - number by rating
- portfolio diversity - number of borrowers
- pledged security - G.Q. versus SRF revenue
VII-7
-------
Fitch IBCA Stress Test
lLoans Backed by System Revenue or Oher Local Taxes I
Low Rating |BBB |A |AA (AAA
Pools of 50 or More Borrowers
Speaiatrve/NR
28
32
36
40
BBB
0
10
14
18
A
0
0
8
12
AA
0
0
0
8
AAA
0
0
0
0
Loan Rating
BBB
A |AA | AAA
Pools of 20 to 49 Borrowers
SpeaiabvefNR
30
35
40
45
BBB
0
12
16
20
A
0
0
10
14
AA
0
0
0
10
AAA
0
0
0
0
Loan Rating
BBB
A
AA
AAA
Pools of 10 to 19 Borrowers
SpecUabvefNR
35
40
. 45
50
BBB
0
16
20
24
A
0
0
14
18
AA
0
0
0
14
AAA
0
0
0
0
Sample Stress Test
Sample Stress Test
(AA Category Stress Test, System Revenue Supported Loan Pool)
Assumed Weighted
% of Four-year Average
Borrower Rating Category
Portfolio
Default Rate % Default Rate %
Speculative/NR
20
40.0%
8.0%
BBB
20
16.0%
3.2%
A
20
10.0%
2.0%
AA
20
0.0%
0.0%
AAA
10
0.0%
0.0%
Largest Borrower ('A1 Category or Below)
10
100.0%
10.0%
Total
100
23.2%
VII-8
-------
Fitch IBCA Stress Test
Loans Backed by System Revenue or Other Local Taxes
Loan Rating
BBB
A
AA
AAA
Pools of 50 or More Borrowers
Speculative/NR
28
32
36
40
BBB
0
10
14
18
A
0
0
8
12
AA
0
0
0
8
AAA
0
0
0
0
Loan Rating
BBB
A
AA
AAA
Pools of 20 to 49 Borrowers
Speculative/NR
30
35
40
45
BBB
0
12
16
20
A
0
0
10
14
AA
0
0
0
10
AAA
0
0
0
0
Loan Rating
BBB
A
AA
AAA
Pools of 10 to 19 Borrowers
Speculative/NR
35
40
45
50
BBB
0
16
20
24
A
0
0
14
18
AA
0
0
0
14
AAA
0
0
0
0
-------
Fitch IBCA
The International Rating Agency
Public Finance
REVENUE ¦ SPECIAL REPORT
State Revolving Fund Rating Guidelines
Jason F. Dickerson Patricia M. Healy
(212) 908-0684 (212) 908-0678
jdickerson@fitchibca. com phealy@fitchibca. com
¦*sSTV-i; = ~ ~ v.
¦ ;i=j- " ;• t •&. .
. v This rcportexplains Fitch IBCA3s guidelines for rating
*\bqnds that'leverage dean-water arid drinkii^ watcr ¦
T estate Tcvo^ing fonds (SRFs). THeJ^iidelines'are tip- c
"^:;pGed toother municipal loan poof structures as well. '¦ -
'lV.. ' r- .»¦ C*r .1. - ."r, . _ L"-J -I -
¦ Summary
State revolving funds (SRFs) have become an im-
mensely important funding vehicle for environmental
infrastructure projects. The SRF program was created
by amendments to the federal Clean Water Act in
1987, and clean water SRFs (CNVSRFs) now provide
more than $24 billion in loans to over 5,000 local
borrowers. Because demand for loans has exceeded the
supply of funds, more than half the states issue bonds
to leverage SRF Financial resources and lending capaci-
ties. These bonds currently provide about $8.8 billion, or
36%, of the total funds in CWSRF lending pools. Expand-
ing on the success of CNVSRFs, drinking water SRFs
(DVVSRFs) were created in 19% and state infrastructure
banks (SIBs) for road and transportation system funding
were established in 1995, both providing for leveraged
loan pool financing mechanisms (seepage 7 for a historical
discussion of SRFs and related structures).
Leveraged municipal loan pool programs that have issued
high credit quality bonds share several characteristics:
strong state commitment; solid management; creditwor-
thy borrowers; thorough loan underwriting and monitor-
ing practices; effective legal protections; and conservative
investment policies. An essential part of Fitch IBCA's SRF
bond rating methodology is an evaluation of each of these
measures to make certain that the SRF is structured and
managed to ensure financially sound operations and un-
interrupted cash flow to repay bondholders (seepage 4for
a listing of Fitch IBCA municipal loan poo! ratings).
David T. Utvack
(212) 908-0593
dlitvack@fitchibca.com
High credit quality SRF bonds are well secured. Federal
capitalization grants and state matching funds are com-
bined with bond proceeds to make additional loans or
establish sizable reserve funds. This allows high levels of
overcollateralization, i.e. cash inflows from loan repay-
ments, investment income, and, if necessary, reserve fund
liquidations well in excess of scheduled debt service pay-
ments. To determine the rating level of SRF bonds, Fitch
IBCA models SRF performance assuming unprece-
dented levels of interruption in borrower repayments
caused by prolonged periods of economic stress.
Fitch IBCA's stress test for rating SRF and other lever-
aged municipal loan pool bonds is adapted from the
model used in rating bond insurers' claims-paying abili-
ties. Fitch IBCA tests the pools under varying degrees
of economic stress, with greater stress intensity applied
to higher rating categories. For a given rating level's
stress test, the severity of borrower repayment interrup-
tion is based on the credit quality, diversity, and security
of the underlying loans. Details of the stress test and
imputed loan default rates are discussed on pages 3-6.
Capitalization levels of most leveraged SRFs are many
times higher than those of 'AAA' rated bond insurers.
This allows many SRF bonds to achieve high ratings,
even though SRF loans are sometimes less creditwor-
thy than insured bonds, and SRF loan portfolios are less
diversified than the bond insurers' books of business.
SRFs and leveraged municipal loan pools differ from state
to state. Fitch IBCA strongly believes that no rigid set of
criteria can be applied to bonds of these loan pool struc-
tures. Accordingly, these guidelines may be modified
when necessary to account for unique characteristics of a
particular loan pool. Fitch IBCA will describe methodol-
ogy adjustments in its research reports and will respond to
MARCH 18, 1998
www.fitchibca.com
-------
State Revolving Fund Rating Guidelines
Information Requirements .
Transaction Information.
Preliminary official statement.
»• Relevant legal documents (trust agreement or indenture, sample loan
agreements, authorizing (resolution, supplementary indentures, and
. legal enforceability opinions, among other things).:
:> Loan portfolio composition.
. Annual projected reveniie'and debt service schedule..
r > Default tolerance .analysis (typically, ihc ihaximum race of four-year
' borrower default that caii be withstood by a loan pool).v
: Audited issuer,financial statements (three.years).
„ Borrower information (ais needed). :
j. Surveillance Information
.. Loan portfolio composition (annually):*:
. Default tolerance analysis (as,needed).'
Notice of defaulted or distressed leans and below-expected reserve
, j fund investment earnings (immediately)^
'•»- Audited issuer financial smements (anriuallY).'
Borrower information (as needed):
Other.significant changes (immediately);
comments or questions concerning ap-
propriate application of these guide-
lines to specific transactions.
¦ Structural and Legal
Characteristics
Leveraged SRFs are structured to meet
each states financing requirements.
Therefore, the programs vary from state
to state. However, wo basic structures
have evolved: reserve fund and cash flow.
Reserve Fund SRF Structure: Typically,
loans to municipalities are funded by
bond proceeds, while federal capitaliza-
tion grants and state matching moneys
are directed into reserve funds. The re-
serves. combined with loan repayments,
provide security for the bonds. Typically,
reserve interest earnings also subsidize
loan interest rates, thereby reducing bor-
rower costs. Reserves are generally re-
leased as the bonds they secure amortize.
As reserves are released, they can be re-
cycled to secure new loans.
Cash Flow SRF Structure: Loans are fi-
nanced from a combination of loan pool
capital (consisting of federal SRF capi-
talization grants and state matching
moneys) and bond proceeds. The
bonds are secured by all loan repay-
ments. Therefore, by providing a large
enough mix of loans funded from pool
capital, it is possible to provide below-
market loan interest rates, as well as
ample credit enhancement through
overcollateralization.
Fitch IBCA considers each structure in
terms of its ability to direct loan repay-
ments, interest earnings, liquidated re-
serves, and other cash flows to
bondholders in a timely, efficient, and
legally secure manner. Legal opinions
attesting to each structure's enforceabil-
ity under applicable federal, state, and
local law are required. Legal debt caps are
also considered. Leveraged SRFs have a
number of additional bonds test require-
ments. Generally, these provide for mini-
mum coverage and/or reserve levels.
Some leveraged SRF programs allow no
new bonds to be issued if they would
result in a downgrade to existing bonds.
¦ Management
Fitch IBCA evaluates management
vis-a-\ is the technical, administrative, and
financial skills and resources necessary to
successfully operate an SRF program.
Most SRF programs are managed by
multiple agencies. Typically, a state en-
vironmental agency oversees technical
aspects of SRFs and relations with the
U.S. Environmental Protection Agency
(EPA), while other agencies manage
loan underwriting, bond issuance, fund
investments, borrower monitoring, and
general financial oversight. Interagency
structures require strong formal or infor-
mal agreements on roles and practices to
assure efficient fund management.
Alternatively, SRFs may be managed by a
single agency. In these cases, the agency
needs to demonstrate sufficient expertise
in technical, administrative, and financial
areas to manage the program.
¦ Loan Underwriting
Fitch IBCA reviews underwriting criteria
while recognizing that environmental and
infrastructure priorities, federal regula-
tions, and state guidelines often require
loans to non-investment-grade borrowers.
SRFs should undertake comprehen-
sive reviews of potential borrowers' fi-
nances, debt structure, service area,
management practices, and future capi-
tal needs, especially for the pool's larg-
est borrowers and borrowers known to
be less creditworthy. Loan agreements
and other financing documents should
have strong legal provisions to provide
maximum assurance of repayment. A solid
track record of underwriting high-quality
loans is viewed favorably, while start-up
loan funds should demonstrate specific
underwriting guidelines consistent with
their desired pool rating category.
¦ Loan Pool Monitoring
SRF management should have stand-
ard processes and appropriate staffing
2 Fitch IBCA, inc.
-------
State Revolving Fund Rating Guidelines
Typical SRF Structural and Legal Characteristics
,:.:K . - -
* Cash Flow. SRF Structure -r ~ v
SRF Revenue
'-'J '¦> „ - '"jV* J-" ."r
Municipal
Bonds
Borrowers
EPA Capitalization
Grants
State Matching
Moneys
Debt Service
Fund
'.Principal and"
Interest Repayments ' J
"3
" :S- r
¦ -v^": ^e^Tentsvt; 'V
" yr'C* ' V' * ^ ~" 'I /ro* 1 f C'1! , ' ..'nf'-* V*'-
; .i v • " -:J;
" • Reserve Fund5RF StmctUrei,^_V- .1 ^ " v,'
, '• - i - '5 'j. .£> "»j ••^y1' ^
SRF Revenue
Bonds
"•ri- '
'• • • L_ "• C '
Municipal
Borrowers
"V " •' * '• . '"rfv' V-r Xij' J y ./'-"f-.
EPA Capitalization '•¦ r 'Jr'. Iv. Earnings *¦ • ¦ ¦
Grants \j 7 f| npht rvire w " > Debt
'-Tl• Principal and. ''
Interest Repayments
Debt Service
Fund
Debt Service
Reserve Fund
State Matching
' . 4 ; * *" 2% ' z - i * • "7^" • • — i' ¦ j " * v.' V •.. . -• - V • - J ~-
v.'" ¦" "!;• "p"'.1 1 .,it' -%r v'1."
1 SRF"- State Revolving Fund. EPA ^O.S' Environmental PrdtectkyiLAgency. S, "• " • "<
• " *: ' \Tt 4 . ' J """'''Z
-afa.-j4Ti"!'—-'.!:.¦ ¦ 1:i.»ajew:'
levels to monitor the fiscal health of
borrowers. Provisions requiring annual
reporting by borrowers should be in-
cluded in loan agreements. Frequent
repayment schedules (monthly or bi-
monthly), while not universal, can pro-
vide an early warning of a borrower's
financial weakness in advance of bond
payment dates.
In conjunction with borrower surveil-
lance mechanisms, management should
have response plans and adequate legal
controls to avoid unplanned draws on
reserves or excess cash flows. Courses
of action, can include: enforcement of
covenants or general obligation tax lev-
ies to cure deficiencies in a timely man-,
ner; triggering of state aid intercept
nechanisms; replacing troubled loans
with performing loans or their present
value cash equivalent; or appointment
of a receiver for a municipality or its
utilities. Fitch IBCA will evaluate the
fund's response to any delinquent bor-
rower payments as a test of future
creditworthiness. A solid history of
avoiding delinquent repayments and
unplanned reserve draws is viewed as a
.credit strength.
¦ Permitted Investments
Reserve fund investment earnings
often constitute a large percentage of
SRF funds pledged to pay bond debt
service. Fitch IBCA gives full credit for
investments rated equal to or higher
than the rating on the bonds. Most SRF
programs invest their reserve funds in
guaranteed investment contracts (GICs),
bank investment contracts (BICs), and
investment agreements (lAs). If aGIC,
BIC, or IA provider's long-term rating
is below the bond rating, full credit can
still be given if the provider has the
highest short-term rating ('Fl+') and
the issuer can replace the provider on
short notice. Alternatively, full credit
may be given if the GIC, BIC, or IA has
been sufficiently collateracized and a
recognized law firm has opined that the
collateral will pass to the SRF without
delay in the event of the provider's
bankruptcy or insolvency.
¦ Stress Test
Fitch IBCA's stress test allows for evalu-
ation of SRFs and other leveraged mu-
nicipal loan pools based on several
important criteria. It tests a loan pool's
vulnerability to a severe economic down-
turn and a resulting unprecedented level
of repayment interruptions, adjusted for
the diversity and credit quality of borrow-
ers in the portfolio, as well as the loans'
pledged security.
The stress test simulates a severe eco-
nomic downturn lasting four years.
This corresponds to the period during
the Great Depression in which bond
defaults exceeded recoveries. The
higher the desired pool rating, the more
stringent the level of simulated loan
defaults. Full resumption of repay-
ments is typically assumed for public
sector borrowers following the stress
period, which is considered appropriate
due to the taxing power of local govern-
ments, as well as the monopoly envi-
ronment in which municipal water and
sewer authorities operate. The stress test
permits the use of debt service reserves
to make bond payments. Mechanisms
that allow for replenishment of the re-
serves are viewed favorably.
The economic downturn is tested to
begin at several points. This accounts
for different coverage levels over the
bonds' life. To pass the stress test for a
Fitch ibca, Inc. 3
-------
STATE REVOLVING FUND RATING GUIDELINES
Leveraged Municipal Loan Pools Rated by Fitch IBCA
State
Fitch IBCA
Rating*
Combined Clean Water and Drinking Water SRFs**t
New York (Pooled Loan Issues, Master Financing Indenture) 'AAA'
Clean Water SRFst
Connecticut
(Clean Water Revenue Bonds) 'AAA'
(Subordinate Revenue Refunding Bonds) 'AAA'
Indiana 'AAA'
Maryland 'AA'
Massachusetts
(Pooled Loan Program, Series 2 and 3) 'AAA'
(Pooled Loan Program, Series 1) 'AA+'
Missouri 'AAA'
New Jersey 'AAA'
Texas (SRF Senior Lien Revenue Bonds) 'AAA'
Drinking Water SRFst
Colorado 'AA'
Kansas 'A+'
Single-Borrower SRF Bondstt
Massachusetts
(Massachusetts Water Resources Authority Loan Program) 'AA'
(New Bedford Loan Program) 'AA'
(South Essex Sewerage District Loan Program) 'AA'
New York
(New York City Municipal Finance Authority, 1991 Series A and E) 'AAA'
(New York City Municipal Finance Authority Project, Other Series) 'AA'
Other Leveraged Municipal Loan Pools
New Mexico (New Mexico Finance Authonty, Public Project Revolving Fund) 'A+'
Ohio (Ohio Water Development Authority, Community Assistance Program) 'A+'
Oregon (Oregon Bond Bank Water Fund, Special Public Works 'AA-'
Fund Programs, and Government Purpose Revenue Bonds)
Pennsylvania (Pennvest Loan Pool Program) 'AAA'
Wisconsin (Clean Water Fund Program, Leveraged Portfolio) 'AA+'
"Rating typically is unenhanced rating of bonds of the state's largest and most active issuing loan
pool, unless otherwise noted "Includes state revolving funds (SRFs) that can use assets of a clean
water SRF to secure drinking water SRF debt and vice versa, by means of cross-collateralization and
temporary investments by one fund in another, among other methods, tlncludes SRFs capitalized
via grants from the U.S. Environmental Protection Agency. ^Includes bonds that provide SRF funds
to one borrower and/or isolate a statewide pool from single-borrower concentration risk.
given rating level, the loan pool must
continue to meet its debt obligations to
all bondholders in a timely fashion un-
der all tested scenarios. Future ex-
pected bond issues are included in the
stress test if relevant.
The stress test varies in severiry, re-
flected in corresponding loan defaults,
depending on the rating level sought
on the SRF bonds; higher raced SRF
bonds must pass more severe stress
tests. A portion of loans rated below the
rating level of the stress test are as-
sumed to default for the length of the
stress period, with higher default rates
for loans of lower credit quality.
Portfolio diversity is also considered. A
pool with a large number of unrelated
loans is expected to experience less
overall volatilitv, so default tolerance
levels can be lower. Additionally, the
largest single borrower rated below the
rating level of the stress test is typically
assumed to default on all its SRF repay-
ment obligations for the length of the
stress period. This accounts for the risk
that a single borrowers default could
have a significant adverse effect on the
program's financial strength.
Finally, the loans' pledged security is
considered. Loans secured by strong
state or local general obligation pledges
are assumed todefaultata lower rate than
loans backed by system revenue pledges.
The default assumptions based on the
aforementioned factors are shown in the
table at the top of page 5, as typically
applied to SRF pools consisting of 10 or
more borrowers. Fitch IBCA develops
appropriate default rates for loans backed
by other security, SRF pools smaller than
10 borrowers, or other pools on a case-by-
case basis.
Some SRF programs have established
srngle-borrower pools in conjunction
with their statewide pools. In these
cases, the single borrower typically has
a separate dedicated reserve, with a
claim on the statewide pool reserves
only after they have been released.
This type of structure improves the
stress test results of bonds backed by
the statewide pool by limitingexposure
to the largest single borrower. Fitch
IBCA also applies its stress test to
bonds backed by single borrower pools,
recognizing their subordinate claim on
statewide pool reserves. The single
borrower is assumed to default on its
repayments for the length of the stress
period, and the standard stress test de-
fault rates are applied to the statewide
pool borrowers.
For example, to be eligible to achieve an
'AA' rating on bonds backed by the pool
of general obligation loans to 35 borrow-
ers illustrated in the Sample Stress Test
table at the bottom of page 5, with the
largest borrower rated 'A' and accounting
for 10% of loans, the bonds must con-
4 Fitch IBCA, Inc.
-------
State revolving Fund Rating Guidelines
Fitch IBCA State Revolving Fund Stress Tests
(%, Annual Loan Repayment Default Rates During Severe Four-Year Recession)
Loans Backed by Local General Obligation Pledges Loans Backed by System Revenue or Other Local Taxes
Stress Test Severity Stress Test Severity
loan Rating '8B8' jV 'AA' 'AAA' Loan Rating 'BBB' W 'AA' 'AAA'
Pools of 50 or More Borrowers
Pools of 50 or More Borrowers
Speculative/NR
26
30
34
38
Speculative/NR
28
32
36
40
'BBB'
0
8
12
16
'BBB'
0
10
14
18
'A'
0
0
6
10
'A'
0
0
8
12
'AA'
0
0
0
6
'AA'
0
0
0
8
'AAA'
0
0
0
0
'AAA'
0
0
O
0
Pools of 20 to 49 Borrowers
Pools of 20 to 49
Borrowers
Speculative/NR
28
32
36
40
Speculative/NR
30
35
40
45
'BBB'
0
10
14
18
'BBB'
0
12
16
20
'A'
0
0
8
12
'A'
0
0
10
14
'AA'
0
0
0
8
'AA'
0
0
0
10
'AAA'
0
0
0
0
'AAA'
0
0
O
0
Pools of 10 to 19 Borrowers
Pools of 10 to 19
Borrowers
Speculative/NR
32
36
40
44
Speculative/NR
35
40
45
50
'BBB'
0
12
16
20
'BBB'
0
16
20
24
'A'
0
0
10
14
'A'
0
0
14
18
'AA'
0
0
0
10
'AA'
0
0
0
14
'AAA'
0
0
0
0
'AAA'
0
0
0
0
Note: Bonds must continuously perform under a given stress test severity to be eligible for assignment to that category. The largest borrower with
credit quality below the desired rating on the bonds backed by the loan pool is typically assumed to default 100% for four years during recession
scenarios. Default rates for loans backed by other security, state revolving fund pools smaller than 10 borrowers, and other municipal loan pools
are developed on a case-by-case basis. Full repayment resumption is typically assumed after the four-year period for public sector borrowers.
NR - Not rated.
tinue to perform assuming the follow-
ing loan defaults for four years: 8% for
'A' rated loans; 14% for 'BBB' rated
loans; and 36% for non-investment-
grade loans. The large 'A' rated bor-
rower is also assumed to default on all
SRF repayment obligations during the
stress period. Therefore, as indicated in
the table at right, the assumed annual
default rate is 21.6%. If the loan pool
can withstand 21.6% annual loan repay-
ment default for four years, it passes the
'AA' stress test.
Assessing Borrower Gedit QuaRty: Fitch
IBCA publicly rates the debt of many-
large SRF borrowers. In cases where
Fitch IBCA does not rate individual
borrowers, documents provided by
SRF administrators (such as borrowers'
audited financial statements) or other
.public information concerning bor-
rower finances, debt, administration,
service area, and capital needs may be
utilized to assign a shadow rating.
Shadow ratings are internal borrower
credit quality estimates used by Fitch
IBCA analysts for the purpose of ad-
ministering the SRF stress test. In
many cases, it is not practical to assign
a shadow rating for every loan within a
portfolio, especially when borrowers
are small municipalities with little or no
history of participation in the capital
markets. In these cases, Fitch IBCA
Sample Stress Test
('AA' Category Stress Test, General Obligation Loan Pool)
Borrower Rating Category
% of
Portfolio
Assumed
Four-Year
Default Rate
(%)
Weighted
Average
Default Rate
(%)'
Speculative/NR
20
36
7.2
'BBB'
20
14-
2.8
'A'
20
8
1.6
'AA'
20
0
0
'AAA'
10
0
0
Largest Borrower ('A' Category or Below)
10
100
10
. Total
100
21.6
•Calculated as percentage of portfolio limes assumed four-year default rate. NR - Not rated.
Fitch IBCA, Inc. 5
-------
State Revolving Fund Rating Guidelines
analysts attempt to gain a general level
of comfort with underwriting criteria to
establish shadow ratings for portfolio
participants. Shadow ratings for un-
rated borrowers used in SRF stress
tests are typically in the 'BBB' or specu-
lative-grade categories. On loans where
insufficient information is available to
develop a shadow rating, Fitch IBCA
will assume the loans to be of specula-
tive-grade credit qualiry. Fitch IBCA
will make conservative credit quality
assumptions for unknown borrowers of
future bond proceeds.
Fitch IBCA will apply credit enhance-
ment from tested and reliable state in-
tercept mechanisms, if historical state
aid receipts are well in excess of maxi-
mum annual loan service payments for
a particular borrower or borrowers. The
mechanisms must ensure that state aid
payments flow to SRF debt service in a
timely manner, or else reserves must be
sufficient to allow continued bond per-
formance until the aid is captured.
Generally, credit enhancement pro-
vided by a state intercept will be rated
below the general obligation rating of
the state.
Flexibility in Analyzing New and
Alternative Loan Pools: Fitch IBCA
will assign appropriate default assump-
tions for other types of loan pool secu-
rities based on their relative historical
or projected performance compared
with debt backed by municipal general
obligations or water/wastewater system
revenues. Analysis of individual loan
pools may differ based on unique legal,
administrative, or other characteristics
of the loan pool, its borrowers, its pur-
pose, or its service area.
Relation of Stress Test Results to the
Final Rating: The stress test is just one
step in Fitch IBCA's rating process for
leveraged municipal loan pools. The
stress test alone does not determine a
pool's final rating. However, a pool must
typically pass a given rating category-
stress test for its debt to be eligible for
assignment to that category. For exam-
ple, a pool's failure to pass the 'AA' stress
test will generally result in the assign-
ment of a lower rating category.
However, passing a given category's
stress test does not guarantee the pool's
debt will be assigned to the category.
Weak legal structures, additional bonds
test requirements, management sys-
tems, underwriting practices, borrower
monitoring processes, and investment
policies can cause a pool's debt to be
placed in a lower category than that
indicated by the stress test alone.
Fitch IBCA adds plus (+) and minus (-)
symbols (modifiers) to some ratings to
denote relative status of debt within a
rating category. For SRF bond ratings,
modifiers are often used to reflect Fitch
I BCA's qualitative assessment of the pool
characteristics cited in the prior para-
graph. Modifiers can also reflect the mar-
gin by which a program passes a given
category's stress test. For example, loan
pool X (with adequate general credit
characteristics) may barely pass the 'A'
category stress test and be assigned Fitch
IBCA's 'A-' rating, while loan pool Y
(with strong general credit charac-
teristics) may pass the stress test by a
wide margin, earning it an 'A+' rating.
Two loan pools passing the *AA' category
stress test by similar margins may earn
different ratings within the' AA' category
based on one pool's stronger manage-
ment practices, investment policies, or
legal protections for bondholders.
6 Fitch IBCA, inc.
-------
State Revolving Fund Rating Guidelines
Evolution of State Revolving Funds and Other Leveraged Municipal Loan Pools
Increasingly over the past decade^ municipal environmental . authorizes DWSRF capitalization allotments annually through •
infrastructure, projects-have been funded through municipal . FEY 2003 to achieve this funding level. DWSRFs will, likely
Joan pools, especially federally capitalized dean water state be'established in each state. Several states have begun or will'
^revolving funds (CWSRFs).The intense competition among ,/soon begin leveraging of DWSRF funds. Examples of projects'
localities for'Iimited CWSRF funds demonstrates the popular-'. x that may be funded are drinking water infrastructure improve-
ity'of these -prograrns and helps explain why- the loan pool.-..- ments, related land acquisition,'system planning; design, and
concept has since been applied to'drinking "water. \SRFs-i^rcsthictunng; DWSRFproivisions for increased loan disburse-
(DWSRFs), state infrastructure banks (SIBs), and otherjsin-r ment to small and disadvantaged communities, as well as the
gie-srate loan poqls. - : ;?"-;~DVVSRFs'ability.tomake'loans.toprivatesystems, are widely ¦
- - ~ . ' . ' -i ^ -L" Vexpected u/lcad to somewhat lower credit quality pools com-
Tn\1987, federal legislation replaced the U-S.rEnvirphjmental: pared ,with ihe CWSRFs.' .However, most states* are-staffing
Protection Agency's (EPA) wastewater faciliry'grant program \ their DWSRFs, with'/experienred personnel .who.have also ;
•with CWSRFs. CWSRF funds, are used to .make loans tbr been involved with. :the CWSRF, strengthening somewhat
municipalities for financing wastewater treatment; facilities,.7 ' FitchJBCAXoudookfor average DWSRF credit quality.Fed-
. nonpoint source-pollution control activities',' and estuary pro-'-'cial statutory provisions lirni't the portion of federal grants that
gram-activities. Loans are mide at low interest rates'(ringirig \ ran be used for state adinmistrarion;of CWSRFs to 4%.
from'0& to market rate) over terms of up to 20 yearsC Sirice^-f,.- .'t, .' V,) - ¦ -J : hu"--v'*'1
adoption of the legislation; EPA; has funded capitalization Federal regulations now allow states tocross-collateralizetheir
grants," which, once-received,'; must remain' intact (in dollar \ eSRFs, essentially using assctsin CWSRFs to secure DWSRF
-terms) within state's.SRF, ifor'perpctuity..Caiwtalization-..debtand vice versa" if-certain requirements are": met.' While "
--grants have been allocated annually/iOeachjstateJand havei a'-Fi^JIBCA^Ixilicy^that cross-colIateralization of DWSRF '
become availableiipon dcmonstrationoC theneed for required'-;pools with;relativelyweaker cie^dit profiles could deteriorate a
' projects and readiness to proceed.-Betweeri l988 and ,1997/.;typical.CWSRI^Yeredit qualiry, thisfooncern is mitigated by
federal capitalization grants totaling $13-2 billion were awarded . die increased either, through leveraging ot direct lending of capitalization grant
market activities. tpy'.-i;Jyj ^ , aiw state matching moneysL However,-leveraging has become
- popufir because it allows resources'^io be magnified to meet larger
The Safe Drinking Water Act (SDWA)"Amendme'nts ofl9%'/ demand forproject financing. According,to a 19% report by the
-authorized the creation of DWSRFs'similarin structure to thcT.';" Council of Infrastructure. Financing Authorities and EPAs Envi-
CWSRFs. Federal officials anticipate eventual apitalization ronmentai FinancialAdvisory Board, more than half the states now
of the DWSRFs so that, they can support approximately $500}.' _ leverage/their CWSRFs, accounting for $8.8 billion, or 36%, of
million of annual loan activity in thefuture.'Federal legislation} - funds in tliie nationwide CWSRF loan pool..
Fitch IBCA, Inc. 7
-------
VIII. Using Cash-Flow
Modeling for SRF Program
Projections
Cash-Flow Modeling
Questions
• Why use cash-flow modeling?
• Where can you get a cash-flow modeling
program? '
• How do you use a cash-flow model?
• What kinds of analysis can be done with
cash-flow modeling?
VIII -1
-------
Sample Stress Test
Sample Stress Test
(AA Category Stress Test, System Revenue Supported Loan Pool)
Assumed Weighted
% of Four-year Average
Borrower Rating Category
Portfolio
Default Rate % Default Rate %
Speculative/NR
20
40.0%
8.0%
BBB
20
16.0%
3.2%
A
20
10.0%
2.0%
AA
20
0.0%
0.0%
AAA
10
0.0%
0.0%
Largest Borrower ('A' Category or Below)
10
100.0%
10.0%
Total
100
23.2%
-------
Where Can You Get a Cash-
Flow Modeling Program?
• Financial advisors
- Financial advisors have been the traditional source
of cash-flow modeling assessments
- Financial advisors will provide the modeling, but
not the model
• EPA
- EPA developed a cash-flow model for the State of
Maryland's SRF program
- This model was also intended to have nationwide
utility as an SRF financial management tool
Where Can You Get a Cash-
Flow Modeling Program?
• Your own office
- Some states generate their own models
- Reflects staff skills and willingness to commit
resources
VIII-3
-------
Why Use Cash-Flow
Modeling?
•To inform policy decisions
- To explore the impacts of individual policy
decisions on future funding capacity (e.g., a 1%
interest rate reduction on SRF loans would have
what effect?)
- To view the impacts of an entire program structure
in aggregate
- To assess the short-term and long-term goals of a
program
Why Use Cash-Flow
Modeling?
• To provide support for SRF policy decisions
- For the public
- For other state officials
- For EPA
• To explore trends developing in the program
VIII - 2
-------
Intended Uses of EPA's
Cash-Flow Model
• Loan data management
• Tracking of program cash flows
• Creation of financial schedules
• Bond sizing
• Forecast future of SRF program/conduct
sensitivity analyses
- Using historical data and proposed policies
- Using proposed policies at DWSRF startup
Structure of Model Use
• System initialization
• Three major inputs to model
- Grant and match information
- Project information
- Bond information
• Aggregation of information
• Revision of "actual" data
• Financial projection
VIII - 4
-------
Main Menu
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System Initialization
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VIII- 5
-------
Grant and Match
Information
Grant and Match
Information
• Foundation of SRF cash flow
- Federal grants used for projects
- State match
• Future grant and match inputs can be
estimated using allotment formula
VIII - 6
-------
Grant and Match
Information
Grant and Match
Information
VIII - 7
-------
Project Information
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Project Cash Flows
• Loan repayments are driven by disbursement
dollars, interest rates, and timing
• Ability to make future loans and/or repay debt
depends on the loan repayments
VIII - 8
-------
Loan Data Requirements
• Project identification
• Loan and subsidy amount
• Loan and P&I timing
• Interest rates during construction and loan
amortization
• Cash draw rate
• Loan repayment terms
• Administrative fee structure
• Disbursement timing
Project Information
Selc'cl Pioiccl (01 D*l< Cnlip
VIII - 9
-------
Project Information
ma
Project Information
VIII- 10
-------
Bond Information
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a^tir^.--.,-.fa^K^^.^;p,^-^^^r--,
VS:»*&aJifi'mntf* *f&2&
Bond Sizing
• Bond sizing for leveraging is driven by a
revenue stream
- Loan repayments
- Investment earnings
• For a given revenue stream, bonds can be
sized subject to the following:
- Interest rates
- Security type
- Coverage requirements
- Debt service reserve structure
VIII -11
-------
Bond Sizing Data
Requirements
• Timing of the issue
• Borrowing rate (average or scale)
• Investment earning rate
• Items to be funded by bond proceeds
• Debt service reserve structure
• Source of revenue stream
• Coverage requirements
• Bond instruments
Bond Information
Select lond li
VIII - 12
-------
Bond Information
Bond Information
VIII- 13
-------
Aggregate Data
"Actual" Information
VIII - 14
-------
Financial Projections
(mmciil Pioiection Assumption!
Cash Flow Projections
• Grants, match, project, and bond data
provide basis for projections
• Projection module can automate some
aspects of projection process
- Timing, terms of new loans
- Investment earnings
- Loan subsidies
• Projections displayed in financial proformas
or with graphs
VIII- 15
-------
Sensitivity Analyses
• Evaluate impact of SRF structures on current
and future funding of program
- Loan interest rate
- Extended capitalization
- Investment return
- Fund utilization
- Demand level
- State match revenue bonds
- Leveraging
- Set-aside level (DWSRF)
- Disadvantaged community subsidy (DWSRF)
Interest Rate
Cumulative Lean Disbursements (Unadjusted)
Annual Loan Disbursements (Unadjusted)
12 0
soo
80
40%
2 9%
00%
E 250
2 200
150
29%
¦0.0%
s
a
«*
40
20
00
2018
2038
1008
2028
2038
2008
2018
2028
Cumulative Loan Disbursements (Adjusted)
Annua) Loan Disbursements (Adjusted)
50
200
40
35
150
s 100
2038
2008
2028
19M
00
2018
2008
2038
VIII- 16
-------
Extended Capitalization
Annual Loan Disbursements (Unadjusted)
-^through 2015
— through 2009
^—through 2003
Annual Loan Disbursements (Adjusted)
through 2015
through 2009
through 2003
Cumulative Loan Disbursements (Unadjusted)
^—through 2015
through 2003
Cumulative Loan Disbursements (Adjusted)
— through 2015
^—through 2009
^—through 2003
Fund Utilization
Annual Loan Disbursements (Unadjusted)
Cumulative Loan Disbursements (Unadjusted)
Annual Lotn Disbursements (Adjusted)
Cumulative Loan Disbursements (Adjusted)
f*cyc)w
— nol rocyctod
VIII- 17
-------
Changing Demand With a
Subsidy
Annual Loan Dlsbgrsaments (Unadjusted)
-tew •canano
••20% no fMM
Annual Loan Dtsbureamants (Adjusted)
Cumulative Loan Olsbursamants (Unadjusted)
-ban ¦
-20* n
Cumulative Loan Disbursements (Adjusted)
-tMM
-20%
Conclusion
• Cash-flow modeling can provide powerful
insight for both seasoned SRF managers and
SRF novices
• EPA developed a cash-flow model that is
available for state use
• The model is powerful and complex, but an
investment of time yields familiarity and
insight
VIII- 18
-------
Main Menu
SRF Cash Flow Model Main Menu
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System Initialization
Custom Settings
-------
Grant and Match
Information
Giant and Match Dala Entry Assumptions
-------
Grant and Match
Information
-------
Project Information
Select Project for Data Entry
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Project Information
Ptojecl Assumptions
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Project Information
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Bond Information
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Bond Information
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Bond Information
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Financial Projections
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-------
IX. Strategic Financial
Management in Action
Case Study of SRF Business
Plan Development
Case Study Overview
• History of Ohio's CWSRF program
• Purpose of strategic planning
• Steps in the assessment process
• Financial variables considered in the
planning process
• Modeling results
• Public input
• Selection of financial structure/next steps
IX- 1
-------
History of Ohio's CWSRF
Program
• First loan issued: October, 1989
• Leveraging initiated: 1996
• Extensive borrowing for state match
• Average loan interest rate: 4.25%
• Federal Grants: $723 million
• Total funds available: $1.2 billion
• Total assistance provided: $1.0 billion
• Number of loans: 433
Purpose of Strategic
Planning
• Ohio EPA used a strategic planning process to
develop a long-term business plan
• This long-term business plan will be used as a
"blueprint" to guide program activity through
the year 2002
• The business plan will prepare the program for
the changing supply and demand of funds
IX-2
-------
Steps in the Assessment
Process
• The development of the business plan required
a 3-step planning process
1 Assessment of environmental needs and priorities
2 Evaluation of funds available for assistance
3 Integration of results from steps 1 and 2 into a
business plan
• This case study focuses on step 2 of this
process
Meeting Program
Objectives in the CWSRF
• Program objectives
- Providing financing for priority wastewater and
nonpoint source projects
- Maintaining the fund in perpetuity
• All financial structures were evaluated on
their ability to meet these two objectives
IX-3
-------
Variables in CWSRF
Financial Structures
• Loan interest rates
- 4.25%, 5%, or variable
• Loan repayment period
- 12 yrs, 20 yrs
• Program capitalization
- Federal capitalization through 1997, through 2001
• Target funding levels
- $200 million/yr, $300 million/yr
- Nominal terms, inflation adjusted terms
Modeling Results
• A combination of fund management steps will
be necessary to meet funding targets
• Leveraging will be an integral tool for
matching the timing of available funds to loan
demand, but must be managed carefully to
minimize loss to the program's overall
funding capacity
• Variation in capitalization and loan interest
rates had the greatest impact on the CWSRF's
overall capacity
IX-4
-------
Modeling Results
Annual Capacity (1998 Dollars)
%
*
I
*
I
1
1
i
1998 2008 2018 2028
2038 2048
$200M/yr (adj), 5.00%
$200M/yr (adj). 4.25%
- - - S200M/yr, 4.25%
Extended Capitalization
— - Base Case
Capitalization
250
200
150
o
£ 100
w
50
0
1998
Annual Capacity (1998 Dollars)
•Extended Capitalization
Base Case
2008
2018
2028
2038
2048
Five years of extended capitalization ($250 million) would increase
the total loan capacity by $5.4 billion over this period
IX-5
-------
Near-Term Capacity vs.
Long-Term Capacity
Annual Capacity (1998 Dollars)
250
200
c 150
5 100 ^
- - - $200M/yr, 4.25%
Extended Capitalization
50
1998
2008
2018
2028
2038
2048
To maintain a minimum loan capacity of $200 million (current
dollars), the program would sacrifice loan capacity after 2016
Near-Term Capacity vs.
Long-Term Capacity
Annual Capacity (1998 Dollars)
250
200
" 150
o
2 100
M
50
1998
2008
2018
2028
2038
2048
$200M/yr (adj). 4.25%
- - - $200M/yr, 4.25%
Attempting to maintain a minimum loan capacity of $200 million
(1998 dollars), the program would fail in 2052
IX-6
-------
Interest Rate
Annual Capacity (1998 Dollars)
250
200
IB
C
150
O
S
100
50
1998 2008 2018 2028 2038 2048
$200M/yr (adj), 5.00%
$200M/yr (adj), 4.25%
By increasing the loan rate to 5%, the program revolves further into
the future
Annual Capacity (1998 Dollars)
1998 2008 2018 2028 2038 2048
$200M/yr (adj), 5.00%
$200M/yr (adj), 4.25%
$200M/yr, 4.25%
~ Extended Capitalization
— - Base Case
Modeling Recap
IX-7
-------
Public Advisory Group
Comments
• An analysis of demand should accompany this
study ~ appropriate financial management
steps could be taken to match supply and
demand curves (this analysis will be done)
• Immediate needs should be funded at the
expense of long-term capacity
• 5% interest rates (instead of 4.25%) would be
acceptable
• Additional state capitalization may be
available
• Is a 54-year planning horizon necessary?
IX- 8
------- |