Municipal Financing Options
Municipal Financing Options
• Municipality identifies need for project financing:
– Do we have cash or other revenues available to pay the costs?
• Current revenues
• Unassigned fund balances
• Previously collected impact fees
• Grants or donations
• Intergovernmental revenues
• Developer funds
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Municipal Financing Options (cont.)
• Municipality identifies need for project financing:
– Except for small projects or purchases, most municipal projects
involve some level of debt financing
– Levy limits promote the use of debt financing vs. cash financing
due to levy limit debt service adjustment
– Municipalities have statutory authority to issue a variety of debt
instruments…
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Financing Authority
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Wisconsin Statutes
Debt Instrument
67.01; 67.03
General Obligation Bonds
67.12(12)
General Obligation Notes
67.12(1)(b)
Bond or Note Anticipation Notes
66.0621
Utility Revenue Bonds
66.1333; 66.1335
CDA or RDA Lease Revenue Bonds
66.0621(4)(2)
Revenue Bond Anticipation Notes
67.12(1)(a)
Tax & Revenue Anticipation Notes
66.0713(4)
Special Assessment B Bonds
Subchapter II, Chapter 24
State Trust Fund Loans
Tax Exemption
• Interest paid on most municipal debt obligations is
exempt from federal income tax
– Interest on debt issued by a Community Development or
Redevelopment Authority also exempt from Wisconsin income
tax
• Taxable debt
– Required when a project is deemed to constitute “private activity”
– A common example is financing issued for development
incentives where developer guarantees debt service repayment
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Security Pledge for Debt
• Municipal debt obligations can be secured in one of two
ways:
– General Obligation (G.O.) pledge
• Repayment of obligation secured by an irrepealable tax levy imposed at the
time the obligation is issued
– Revenue pledge
• Repayment of obligation secured by a pledge of specified revenues such as
water or sewer system revenues, tax increments or special assessments
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G.O. Debt
• Principal amount outstanding cannot exceed 5% of a
municipality's TID IN EV (Constitutional limit)
• Wisconsin G.O. debt is considered “unlimited tax” (vs.
“limited tax”)
– Importance of post July 1, 20015 levy limit adjustment for G.O.
debt
• Widest market acceptance = lowest interest rates
• Least costly type of debt to issue in terms of fees
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G.O. Debt (cont.)
• G.O. Bonds
– Maximum term of twenty years
– May only be issued for specific purposes as provided for by
statute
• Statutes provide for financing most forms of public infrastructure, but does
not include vehicles or administrative/city hall facilities for example
• Issuing bonds for other purposes requires that a referendum be held first
– If bonds issued for more than one purpose, funds cannot be
reallocated among purposes
– Must be sold via a competitive sale, unless for purposes of
refinancing prior obligations
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G.O. Debt (cont.)
• G.O. Promissory Notes
– Maximum term of ten years
– May be issued to pay for any “public purpose”
– Offers more spending flexibility vs. G.O. Bonds
– May be sold via competitive sale, negotiated sale or private
placement
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G.O. Debt (cont.)
• Abatement
– Repayment of G.O. debt is secured by an irrepealable tax levy,
but it is common to use other revenue sources to reduce, or
“abate” the tax levy required
– Common abatement sources include:
• Utility revenues
• Tax increments
• Special assessments
• Impact fees
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Revenue Debt
• Debt limit not applicable
• Viewed as less secure credit than a G.O.
– For essential purpose utility, interest rate .10% - .25% greater
than G.O. rate
• Reserve fund typical
• More costly to issue than G.O. debt
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Revenue Debt (cont.)
• Utility Revenue Bonds
– Maximum term of forty years
• Market appetite normally dictates a shorter term
– Typical utility operations include water, sanitary sewer, storm
water management, parking and airports
– Must be issued to pay for system improvements
– Rate covenant – requires municipality to maintain a utility rate
structure that produces net revenues equal to a specified
percentage of the annual debt service payment (125% typical)
– May be sold via competitive sale, negotiated sale or private
placement
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Revenue Debt (cont.)
• CDA or RDA Lease Revenue Bonds
– TID financing mechanism
• Maximum term limited to life of TID
– Bonds are issued by the municipality’s CDA or RDA
• CDA/RDA uses bond proceeds to pay TID project costs and “owns” the
funded improvements
• CDA/RDA leases the funded improvements to the municipality
• Municipality uses the tax increments collected to pay the lease payments
– Most often sold using the negotiated sale method
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Revenue Debt (cont.)
• Special Assessment B Bonds
– Means to fund the cost of public improvements that confer a
special benefit on specific properties
– Municipality must levy special assessments on the benefitted
properties
– As assessments are collected, they are use to make the debt
service payments
– Term of bonds the same as the term over which the special
assessments are levied
– Most often sold using the negotiated sale method
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Revenue Debt (cont.)
• Revenue debt shortfalls & levy limits
– In the event revenues pledged to secure repayment of a revenue
bond are insufficient to pay the debt service, a municipality may
need to levy for that shortfall
– Shortfall levy exempted from levy limits for:
• Utility Revenue Bonds
• Special Assessment B Bonds
– Shortfall levy not exempted for:
• CDA or RDA Lease Revenue Bonds
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Typical Capital Financing Sources
• Municipal Bond Market
• Private Placement
• DNR Environmental Improvement Fund (EIF) Loans
• BCPL State Trust Fund Loan program
• USDA Rural Development Loans
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Municipal Bond Market
• Debt issued in the form of tradeable municipal securities
• Regulated by the Securities and Exchange Commission
(SEC) and Municipal Securities Rulemaking Board
(MSRB)
• Purchased by broker-dealer firms (underwriters) and
sold to investor customers
– Institutional investors (e.g. mutual funds, pension funds, banks)
– Individuals
– Other governments
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Municipal Bond Market (cont.)
• Competitive Sale
– Multiple bids sought
– Award typically based on lowest True Interest Cost (TIC)
– Provides for transparency
– Ordinarily used when
• Offering carries an investment grade bond rating in the “A” or better range or
municipality has equivalent credit quality
• No unusual security or redemption features
• Required by State law when issuing G.O. Bonds (other than for refinancing)
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Municipal Bond Market (cont.)
• Negotiated Sale
– Purchaser selected in advance
– Rates agreed to on the day of sale
– Ordinarily used when:
• Credit concerns exist
• Certain types of securities that may not have broad market appeal, such as
CDA/RDA lease revenue bonds and Special Assessment B Bonds
• Debt offering contains unusual security or redemption features
• Source of security is revenue stream that is not yet established, such as
construction of a new water distribution system
• Volatile market conditions
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Private Placement
• Municipality sells debt obligation directly to an investor,
typically a bank, which holds the loan in its own portfolio
• Cannot ordinarily be bought or sold like a municipal
security
• Why municipalities use:
– When placed with community banks, a desire to “keep it local”
– Less documentation as compared to a public securities offering
– Typically no need to obtain a third party bond rating
– Not subject to continuing disclosure requirements
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DNR Environmental Improvement Fund Loans
• Two primary programs
– Clean Water Fund (waste water and urban storm water runoff)
– Safe Drinking Water Fund
– Projects must meet eligibility criteria
• Security pledge can be G.O. or revenue
• Term is always twenty years with level payments
• Subsidized interest rate – nearly always the lowest cost
option for a qualifying project
• Not pre-payable
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BCPL State Trust Fund Loan Program
• Maximum term of twenty years for G.O. secured loans
and thirty years for revenue secured loans
• Interest rates set by Board of Commissioners of Public
Lands
– Interest payments received fund public school library aids
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BCPL State Trust Fund Loan Program (cont.)
• Why municipalities use:
– Easy process
– No cost of issuance such as bond attorney or rating fees
– Can be prepaid in part or in whole within an annual window
– Can be a cost effective alternative when a project does not
qualify for tax-exempt financing
– Credit concerns
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USDA Rural Development Loans
• Community Facilities Direct Loan & Grant Program
– Loans for “essential community facilities in rural areas”
– Population of community must be 20,000 or less
– Commercial credit must be unavailable at reasonable rates and
terms
• Subsidized interest rate
• Loan may include a grant component
• Security pledge can be G.O. or revenue (usually the latter)
• Term of up to forty years
• Pre-payable
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Financing Economic Development Projects
• Many economic development projects pledge TIF
revenue to pay debt service
• Goal is to match increment stream from project to debt
service payments
• Often requires estimates for taxable value of proposed
developments
– Estimating values is a challenge, especially for
manufacturing/industrial projects due to equipment exemptions
– Desire by many municipal officials to obtain estimates and input
on potential values prior to committing to financing for a project
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Choosing the Right Tool
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•
Primary objective is to achieve the lowest cost of
financing
•
Other variables must however be considered:
•
G.O. debt capacity
•
Sufficiency of utility rates (for revenue debt)
•
Pre-payment ability
•
Ability to customize payment structures
•
Payment dates (cash flow)
Current Trends in Municipal Finance
• Increased Municipal Market regulatory scrutiny
– SEC crackdown on municipal continuing disclosure practices
• Municipal Continuing Disclosure Cooperation (MCDC) Initiative
• 36 underwriters fined $9.3 million in June 2015
– Increased IRS activity – arbitrage and use of proceeds
• More private placement activity
• Reassessment of what a General Obligation pledge
means in light of several high profile municipal
bankruptcy cases
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Future Trends in Municipal Finance
• Federal income tax exemption for municipal bonds likely
to remain threatened
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