Chapter 9

Municipalities regularly borrow money for a variety of purposes. Ordinary borrowing purposes include satisfying cash flow needs, financing the acquisition of capital assets and paying for the construction and repair of municipal infrastructure. State law strictly regulates both the purposes for which cities and towns can borrow and the time periods for which these borrowings can occur. Borrowing purposes and maximum loan durations are set out in Ch 44 §§7 & 8.

Municipalities may incur both short-term and long-term debt. They generally make short-term borrowings for periods of less than one year, often in anticipation of a particular municipal revenue source. The short-term debt instrument is called a “note,” which is a written document containing an express promise of the signer to pay a definite sum of money at a specified time not more than a year from the execution of the note.

Long-term debt, on the other hand, involves loans with a maturity date of 12 months or more. It is issued using an instrument called a bond, which is a written document containing an express promise of the bond issuer to repay a specified sum of money, alternately referred to as the face value, par value or bond principal, to the buyer of the bond on a specified future date, called the maturity date, together with periodic interest at a specified rate.

Notes are categorized according to the purpose for which they are issued. For example, notes issued in anticipation of the receipt of operating revenues are called Revenue Anticipation Notes (RANs); notes issued in anticipation of bond proceeds are called Bond Anticipation Notes (BANs); and notes issued in anticipation of state and federal grant receipts are called State Grant Anticipation Notes or Federal Grant Anticipation Notes (SAANs and FAANs).

Ch. 44 sets out strict rules and procedures regarding municipal borrowing. The issuance of long-term debt always requires a 2/3 vote of the legislative authority. Certain types of debt, such as debt for landfill capping and certain building renovation, require the approval, as well, of various state agencies or boards.

The Bureau of Accounts (BOA) of the Department of Revenue (DOR) possesses jurisdiction and responsibility to monitor and maintain records of municipal indebtedness. On or about July 1^st of every year, BOA’s Director of Accounts sends to each community a form called, Statement of Indebtedness, which the community must fill out and return to the bureau. (See form, pp. 9-39 through 9-41.) Furthermore, upon a city, town, or district’s authorizing debt, the clerk must notify BOA by furnishing the Director with a copy of the vote within 48 hours after the vote has become effective.

Debt Limitations

Cities, towns and districts must comply strictly with Ch. 44 in all matters of public debt. Ch. 44 §2 asserts this requirement, stating, “Except as otherwise expressly permitted by law, cities, towns and districts shall incur debt only in the manner of voting and within the limitations as to amount and time of payment prescribed in this chapter….”

Ch. 44 enunciates numerous limitations and procedures that govern local debt issues. One of these limitations places a ceiling on the maximum amount of debt a city or town may have authorized at any one time. Ch. 44 §10 sets this limit at 5% of their equalized valuation (EQV) for towns and 2½% of their EQV for cities. The statute permits municipalities to exceed these limits only with the approval of the Emergency Finance Board (EFB), established under the provisions of Ch. 10 §47. With EFB approval, a city’s borrowing limit may be increased by an additional 2½% of its EQV; likewise, a town’s borrowing limit may be increased by an additional 5%.

The aggregate amount of a community’s authorized and outstanding debt for purposes of the Ch. 44 §10 debt limit, however, includes only the debt authorized under Ch. 44 § 7. The borrowing purposes set out in this statute are “inside” the debt limit. (See pp. 9-31 through 9-34 for a listing of borrowing purposes inside the debt limit.) The borrowing purposes set out in Ch. 44 §8, on the other hand, are “outside” the Ch. 44 §10 debt limit. (See pp. 9-35 through 9-38 for a listing of borrowing purposes outside the debt limit.)

The indebtedness incurred by a regional school district cannot exceed the amount approved by the EFB. (71:16(d). With regard to other districts, the debt limit of a district wholly contained in one municipality is calculated by multiplying that municipality’s EQV by a fraction, the numerator of which is the assessors’ valuation of the taxable property of the district for the preceding year and the denominator of which is the assessors’ valuation of the taxable property of the entire municipality in which the district is located for the preceding year. The debt limit of a district located in two or more communities is calculated by multiplying the sum of the EQVs of those communities by a fraction, the numerator of which is the assessors’ valuation of all of the taxable property of the district in the respective communities for the preceding year and the denominator is the assessors’ valuation of all of the taxable property of all the communities for the preceding year.

Issuing Debt

Once debt has been properly authorized by a municipality’s legislative authority and all other legal requirements have been met, the municipal treasurer must prepare and sign the notes or bonds. For debt issued by a city, the debt instruments must be countersigned by the mayor, unless the charter otherwise provides. In towns, a majority of the selectmen must sign the instruments. The chairman of the school committee must sign debt instruments for regional school district borrowings, and a majority of the prudential committee or commissioners must sign these documents in other kinds of districts.

Short-term Debt

Purposes for Short-term Borrowing

The various kinds of short-term debt include:

Revenue Anticipation Notes (RANs) or Tax Anticipation Notes (TANs), i.e., notes issued to satisfy temporary cash flow needs. (44:4)
Grant Anticipation Notes (GANs), i.e., notes issued prior to the receipt of a state or federal grant to begin a project. GANs are repaid when grant funds are received. (44:6A; Ch. 74 of the Acts of 1945)
Bond Anticipation Notes (BANs), i.e., notes issued prior to the issuance of long-term debt to begin a project. BANs may be fully repaid when the long-term debt is issued. (44:17) BANs may also be issued when the total amount of a bond issue is not needed immediately or when the long-term issue is intended to include several different projects that have different startup dates and construction schedules. Sometimes, a municipality may issue BANs when bond interest is high, postponing to a more favorable time the issuance of long-term debt. Moreover, municipalities might issue BANs for school construction projects when a state school construction grant is several years away, due to the large number of projects awaiting funding on the Department of Education’s Priority List, but the need for school space is urgent.

Revenue Anticipation Notes (RANs)

Ch. 44 §4 permits cities, towns and tax-levying districts to incur short-term debt in any fiscal year in anticipation of taxes and other current revenues of that fiscal year. Such borrowing requires approval of the same official or board authorized to countersign the notes, generally the mayor or the selectmen. The borrowing amount cannot exceed the municipality’s “certified” revenue borrowing capacity, which is the aggregate of: (1) the tax levy of the preceding fiscal year, (2) the net amount collected in the prior fiscal year from motor vehicle and trailer excise, and (3) payments made to the municipality by the Commonwealth in lieu of taxes during the prior year as reimbursement for property taken for institutions or for Metropolitan District Commission purposes. For a district, the borrowing cannot exceed the district’s aggregate receipts from taxes, rates, and services in the year preceding that for which the debt is incurred.

The aggregate amount borrowed by a town or district must be approved by the Director of Accounts or bond counsel and must be shown on an estimated cash flow statement prepared on a form approved by the Director. Borrowings for periods less than one year may be renewed, so long as the total term does not exceed one year from the date of the original borrowing. Revenue anticipation notes must be paid within one year of their date; however, payment may span two separate fiscal years.

When and How Much to Borrow

Treasurers may borrow on or after July 1^st of any fiscal year that their cash flow analysis indicates a need for borrowing. To determine whether a need exists, treasurers should analyze monthly operating cash receipts for the preceding one or two years, the comparative expenditures made during those years and the anticipated disbursements for the subject year. If this analysis indicates the likelihood of a cash deficit at any time during the fiscal year, the treasurer may perform a revenue anticipation borrowing.

The treasurer can borrow the projected net cash shortfall prior to the expected receipt of revenue for the fiscal year. The treasurer can also borrow a larger amount in order to provide a cash reserve to counteract any reduction or tardiness in anticipated receipts or to advance payments for the acquisition of capital equipment funded by an appropriation. The treasurer should update the cash flow statement at least monthly and be continually on the lookout for any extraordinary payments that could transform cash flow projections. (Chapter 11 provides a more detailed discussion of cash flow projections.)

Treasurers must be aware when making municipal borrowings that the federal arbitrage laws, set out in §103 of the IRS Code, restrict the investment of tax-exempt bonds and note proceeds in higher yielding, taxable securities and requires that certain earnings on such notes and bonds be paid to the IRS. Treasurers may not borrow in anticipation of revenue if other revenue funds are invested.

The treasurer should fix the due date of revenue anticipation borrowing to occur shortly after the tax due date. In setting the date, the treasurer should allow sufficient time after the tax due date for (a) collection and turn over of adequate tax receipts for the debt payment and (b) completion of the necessary procedures to make that payment.

The decision whether to perform all tax anticipation borrowing for a fiscal year at one time or more than once during that year depends on several factors:

Likelihood of revaluation or recertification-related delays in obtaining tax rate approval.
Issuance costs for a single or multiple offerings.
Interest projections for varied amounts and terms.
Effect on the municipality’s ability to comply with the federal Tax Reform Act of 1986 restrictions. (See below.)

In determining how frequently to make tax anticipation borrowing, the treasurer should consult with other municipal treasurers, with BOA’s Debt Section and with local and regional bankers. The treasurer should take full advantage of the expertise of the financial advisor employed by the municipality. Ultimately, however, decisions about when and how often perform tax anticipation borrowings lie with the treasurer.

Issues relating to Revenue Anticipation Borrowings

Cities, towns and most districts do not require authorization from their legislative bodies to issue RANs or TANs. However, regional school district treasurers must obtain authorization from their school committees for such borrowings. They should acquire this authority early in the fiscal year to avoid last minute crises.
The total amount of each borrowing should not exceed the amount reasonably required and should be substantiated by a cash flow projection. In a town or district, BOA must approve this amount.
Since the federal government has established strict arbitrage laws and regulations relating to the amount of tax-free interest a local governmental entity can earn on investments of notes and bonds proceeds, the treasurer should regularly consult with the municipality’s financial advisor and bond counsel to make certain that municipal borrowings do not contravene these laws and regulations.
Tax anticipation notes must be payable, and paid, not later than one year from their date of issue and cannot be renewed or paid by the issuance of new notes beyond that period.

Grant Anticipation Notes (GANs)

Municipalities regularly receive grants of money from the Commonwealth and from the federal government for diverse municipal projects. Frequently, the municipalities must pay the project costs up front and receive reimbursement for these costs later, after completion of the project. Massachusetts law permits municipalities to make borrowings to pay up front project costs in anticipation of reimbursement from grant proceeds.

State Aid Anticipation Notes (SAANs )

If a municipality receives a grant from the Commonwealth to reimburse the municipality for its up front expenditures for any project for which the municipality could borrow for 5 years or longer, the treasurer can incur debt outside the debt limit and issue state aid anticipation notes for the project for a period not exceeding 2 years. (44:6A) The loan may be renewed from time to time, as long as the grant remains payable in an amount at least equal to the amount of the outstanding loans. The availability of grant funds must be verified by an accountant’s letter with each renewal. (See sample, pg. 9-55.)

Borrowings under Ch. 44 §6A do not require town meeting vote. Rather, they require, in towns, the approval of the selectmen and, in cities, the approval of the official whose approval is required by the city charter for the borrowing of money. The notes must be signed by the treasurer and certified by either BOA or bond counsel. The note proceeds may be used to discharge the loan without the need for additional appropriation.

Borrowings in anticipation of state grants may also be made under Ch. 44 §6. However, borrowings are infrequently made under this statute, partly because they require a majority vote of the legislative body. Furthermore, the purposes for which borrowings may be made are more limited under this statute. Municipalities may only borrow under its provisions for the costs of altering a grade crossing, constructing a highway, installing traffic lights or paying land damages.

Federal Aid Anticipation Notes (FAANs )

Federal aid anticipation notes may be issued to provide temporary financing for projects that will ultimately be funded by federal grant proceeds. (Ch. 74 of the Acts of 1945)

Issuing FAANs does not require approval of the legislative body; however, the legislative body must have voted to approve the project and have authorized debt for the local share of the project costs. If a grant is awarded to reimburse the costs for a public works project, the municipality must obtain approval from the EFB before undertaking the project or issuing FANNs. To obtain such approval, the municipality must submit to the EFB an environmental statement, grant documentation, a project cost breakdown and a copy of the town or city vote accepting the grant.

Upon obtaining the necessary approvals, a municipality may issue notes in anticipation of federal aid for a maximum of 2 years. The municipality may from time to time renew these notes, so long as the accountant or auditor certifies that at the time of the refunding, the municipality is entitled to receive from the grant an amount at least equal to the amount of the refunding loan.

When and How Much to Borrow

If a community desires to borrow in anticipation of reimbursement from the Commonwealth for an infrastructure project, such as highway resurfacing or reconstruction, the treasurer should consider the two following questions in developing a borrowing plan:

What is the cost of the project for which a contract is about to be awarded?
What is the anticipated completion date of that project?

For projects like highway construction or reconstruction, the work may be performed in the spring, summer and fall. When soliciting bids for such a project, a treasurer should always carefully consider how the timing of the performance of the work on that project might be staggered. Such consideration will enable a better formulation of the bid documents, on the one hand, and a minimization of traffic delays or interruptions, on the other.

If, for example, a highway construction contract for $100,000 were to commence on July 1^st and be completed on August 15^th, funds would only have to be available upon the passage of 30 days following the award of the contract, i.e., on August 1^st, unless the particular contract otherwise specified. If the work were completed on September 1^st and the public works department immediately filed evidence of that completion with the granting agency, the grant proceeds would probably be received by the municipality within 60 days of that filing, i.e., by November 1^st. In such a situation, the treasurer should structure the borrowing to have available the $100,000 needed to advance fund the project from August 1^st to December 1^st in order to allow leeway for the state reimbursement.

Grants for other kinds of infrastructure projects, such as water system rehabilitation and sewer construction, might entail different reimbursement schedules. To determine the most appropriate term for a borrowing in anticipation of reimbursement for such a project, the treasurer should obtain from the department charged with the responsibility for that project an estimated project payment schedule. The treasurer should also determine the likely dates and amounts of the reimbursements to be received. From this information, the treasurer should create a project cash flow chart. The treasurer should take steps to receive an updated completion schedule at least every 3 months during a construction program in order to be aware of any alterations in contract timelines since such adjustments will affect the timing of reimbursements.

A good rule of thumb for treasurers for projects for which the up front funding will derive from grant anticipation borrowing is to have proceeds on hand in an amount at least the equivalent of two months’ estimated billings. The treasurer should fix the payoff date not earlier than the date sufficient reimbursement payments will have been received to discharge the temporary loan obligation.

The treasurer should be cognizant of the payment schedule for each ongoing project. Making payments in accordance with the construction contract will help the municipality to avoid significant interest penalties. Also, being aware of the payment schedule will help the treasurer to protect against unnecessary borrowings. In timing grant anticipation borrowings, the treasurer should take care to avoid federal arbitrage penalties.

Bond Anticipation Notes (BANs )

Municipalities may issue bond anticipation notes (BANs) in anticipation of contracting long-term debt. (44:17) Prior to issuing BANs, a municipality’s legislative body must have specifically authorized the long-term debt with a 2/3 vote.

Municipalities can issue BANs for up to 2 years without having to make principal payments. They can refund BANs for up to 5 years from the date of the original loan. However, municipalities that refund BANs must make principal payments in the third and fourth years. Each paydown must be at least equal to the minimum payment that would have been required if the temporary loan had been converted to a serial loan.

Example : Pleasantville issues a BAN for $100,000 to purchase 2 police cruisers and a pickup truck. The maximum allowable term to borrow for the acquisition of departmental equipment (without EFB approval) is 5 years. Pleasantville can issue BANs for 2 years without making principal paydowns. Subsequently, the community must make the requisite principal payments in the third, fourth and fifth years and repay the debt in full within 5 years. (44:17)

Amount Issued	Issue Date	Maturity Date	Amount Paid at Maturity
$100,000	1/1/2001	1/1/2002	$ 0
$100,000	1/1/2002	1/1/2003	$ 0
$100,000	1/1/2003	1/1/2004	$34,000
$ 66,000	1/1/2004	1/1/2005	$33,000
$ 33,000	1/1/2005	1/1/2006	$33,000

For a project with a 10-year term:

Amount Issued	Issue Date	Maturity Date	Amount Paid at Maturity
$100,000	1/1/2001	1/1/2002	$ 0
$100,000	1/1/2002	1/1/2003	$ 0
$100,000	1/1/2003	1/1/2004	$12,500
$ 87,500	1/1/2004	1/1/2005	$12,500
$ 75,000	1/1/2005	1/1/2006	$12,500

After five years the municipality could bond $62,500 for no longer than five years.

Exception: A municipality can issue BANs for a school construction project for up to 7 years with no principal payments if the project is listed on DOE’s school building priority list and the municipality has not begun to receive grant payments for the project. However, the total financing, including both bonds and BANs, cannot exceed 25 years. (See IGR 96-102, pp. 9-42 through 9-47.)

Any BAN proceeds remaining when a serial loan is issued may, at the municipality’s option, be applied to the payment of the BAN. However, if a serial loan is issued after the final costs of a project are known and those costs are less than the amount for which the BAN was issued, the serial loan may only be issued for the amount of the project costs.

Some municipal borrowing purposes require the approval of the EFB or other state agencies prior to the issuance of the serial loan or BANs. (44:7&8) Moreover, if a municipality seeks to incur debt in an amount of $500,000 or more, BOA may require the municipality to obtain a preliminary legal opinion from bond counsel attesting to the legality of incurring that debt.

Procedures for Short-term Borrowing

Once a municipality’s legislative authority has authorized a borrowing, the municipality has satisfied all of the legal requirements for the borrowing, and project plans have been completed, the treasurer should initiate the short-term borrowing procedure by notifying prospective purchasers that bids will be accepted at a particular time and place and for a particular amount. Bids may be submitted in writing, by fax, by telephone or electronically.

The community, together with its financial advisor, must determine whether the notes will be designated as qualified tax-exempt obligations, i.e., “bank-qualified,” for purposes of Section 265(b)(3) of the IRS Code. A municipality’s borrowing is bank qualified, that is, tax exempt to a bank, if that municipality does not reasonably anticipate issuing more than $10,000,000 of debt in a calendar year. Such a municipality is defined as a “qualified small issuer” in the IRS Code. If the issue is offered as bank qualified, the municipality will have to provide the purchaser with a Certificate of Designation so indicating. The issuing bank will be allowed a tax deduction for a portion of its interest expenses allocable to the notes.

For issues in the amount of $100,000 or more, a municipality must submit to the IRS a Form 8038-G, Information Return for Tax-Exempt Governmental Obligations, on or before the 15^th day of the 2^nd calendar month after the close of the calendar quarter in which the issue was issued. For issues less than $100,000, the municipality must submit to the IRS a Form 8038GC. Usually, a municipality’s financial advisor will provide these forms for signatures of the appropriate officers. (See also State House Note Program, pp. 9-48 through 9-60 and Additional Loan Reporting Requirements, pg. 9-61.)

Since federal securities law imposes penalties on debt issuers who provide false or misleading information to investors or who withhold requisite information from investors, the treasurer should be particularly diligent in preparing a disclosure statement relating to notes that might be sold or resold to other than Massachusetts major institutional investors. (See Municipal Securities Disclosure Requirements, pp. 9-27 & 9-28).

In evaluating bids after their receipt, the treasurer should take into account the following market conventions:

Bids are usually expressed in hundredths of a percent.
A hundredth of a percent (.01%) is called a basis point.
A difference of one basis point for a period of six months on $100,000 is $5.00.

Some banks will add a premium to break a tie or to make a bid more competitive. If a municipality receives a premium, that premium, together with any accrued interest resulting from the delivery of the notes on a date subsequent to their dated date, must be credited to estimated receipts, not applied to offset a portion of the interest expense, although premiums may be used to pay issuance costs on the sale.

Upon accepting or rejecting a bid, the treasurer or financial advisor must notify all bidders of the decision.

State House Notes

State House Notes are debt instruments for municipalities, counties and districts certified by the Director of Accounts. (44:23-28) These instruments are payable annually. Usually, they are limited to maturities of 5 years and principal amounts of $2,250,000. Certification fees are relatively low for these notes, and the notes do not require an official statement or full disclosure. State House Note forms are available on the DLS website at www.dls.state.ma.us.

Ch. 44 §23 requires the Director to furnish forms to each municipal and district treasurer for the issuance of notes for money. To comply with this requirement, the Director delivers to each treasurer a book of serially numbered notes. The notes, as required by Ch. 44 §24, contain blanks for the treasurer to insert an issue date, interest percentage and due date.

Whenever a municipality or district votes to borrow money other than by issuing bonds, the treasurer, using the forms provided by the Director, may make notes for the amount of the proposed loan. The treasurer may use one or more of these forms, filling in the blank spaces. The notes must be issued in serial order. If a note is somehow ruined, the treasurer must return it to BOA.

The treasurer must sign all notes, and they must be countersigned by a majority of the selectmen, in a town, by the mayor in a city and by a majority of the prudential committee or the commissioners in a district. The district treasurer and the chairman of the school committee must sign school district notes. The clerk of the city, town or district must attest all signatures.

The treasurer must retain a duplicate record of each note issued on the “treasurer’s stubs” in the book of state house notes . If a municipality uses notes prepared by a bank instead of state house notes, the treasurer must still record the details of the loan in the book of state house notes. In this case, the treasurer must send the next serially numbered note from the state house notes provided by the Director with the bank-prepared notes. BOA will void the state house note and return it to the treasurer. (See sample State House Note, pg. 9-59.)

After making a duplicate record, the treasurer must forward the state house notes, with a copy of the loan authorization, all signatures having been attested by the clerk, to the Director for his certification. The Director, after certification, must return the notes by registered mail to the treasurer. The Director may not certify a note more than 5 days before the issue date appearing on the face of the note. (44:24)

For further information, see BOA’s forms for state house note program on pp. 9-53 through 9-56.

Issuance of Notes

When a municipality or district votes to incur short-term debt, the treasurer must provide bond counsel with a certified copy of the authorizing vote. Bond counsel must review the validity of the vote and the legality of the borrowing purpose and, if all is in order, issue a preliminary opinion approving the borrowing.

The treasurer and the financial advisor must create a financing plan based upon the cash needs of the borrowing. Once a plan has been established, the treasurer or financial advisor must notify potential bidders of the particulars of the sale.

Bidders may submit their bids in writing, by fax, by telephone or electronically, declaring the rate of interest at which they will loan the amount sought. Promptly after having accepted a bid, the treasurer must notify all bidders of the bidding results.

The financial advisor and bond counsel must prepare the necessary documents and certificates and transmit them to the treasurer for the appropriate signatures. Sometimes local ordinances provide that signatures must be certified. When the documents have been properly signed, the treasurer or the financial advisor must turn them over to bond counsel for review and for preparation of an approving opinion.

Following the receipt of bond counsel’s approving opinion, the treasurer or financial advisor must deliver the notes to the purchaser. At that time, the purchaser must tender the agreed price for the notes. The treasurer must notify the Director of accounts of the amount, purpose, date, and term of the loan. The treasurer must maintain a record of each loan to ensure compliance with the borrowing limits imposed by Ch. 44 §10.

Procedures for Long-term Borrowing

Introduction

When issuing long-term debt, a treasurer should generally employ the services of a bond counsel and a financial advisor. The issuance process involves the preparation of a disclosure document, an application for a credit rating and, generally, a formal, sealed, competitive bidding procedure.

A number of outside factors affect the interest rate a municipality will have to pay on its sales of bonds or State House Notes . These factors:

General market conditions.
The financial standing of the community, which is generally reflected in its bond rating.
The term of the loan.
The restrictions of the Tax Reform Act of 1986. (See below.)

Role of Bond Counsel

Bond counsel plays an important role in the bond issuance process. In order for a municipality to issue bonds, bond counsel must give an approving opinion. This opinion must state that the bonds have been properly issued in accordance with law, that they constitute a binding obligation of the municipality and that they are payable from a described revenue source. The opinion will also describe the tax-exempt nature of the interest to be paid on the bonds.

Bond counsel’s approving opinion will be unqualified, stating explicitly that the bonds are valid and the interest is tax-exempt as described. If the bonds turn out not to be valid or the interest turns out to be taxable, bond counsel will be liable to the purchaser.

The services provided by bond counsel in the process of assuring that bonds are properly issued include:

Determining whether the municipality or district possesses the requisite legal authority to issue the bonds.
Drafting a motion for a vote whereby the legislative body can authorize the bond issue.
Making certain that the bonds were properly authorized, that the issuer possesses the legal power to carry out the project the bonds are intended to finance.
Ensuring that all requisite steps were taken and the necessary certification provided to guarantee that interest on the bonds will be tax-exempt.

Because bond counsel plays a critical role in the borrowing process, communities should be careful to select a law firm that possesses an extensive and widely regarded expertise in this area of jurisprudence. Selecting a bond counsel in whom the investment community has confidence substantially assists a community to market its bonds. Of course, bond counsel receives compensation based on the firm’s expertise, as well as on the complexity of the work involved and the extent of the services provided.

Structuring a Loan

A municipality must take the following factors into account when structuring a long-term loan: legal restrictions, market conditions and the borrower’s ability to pay. The cost of issuance is also a significant consideration in the case of smaller loans. Frequently, these factors may be in conflict, necessitating a compromise in the final structure of a borrowing. In any case, a municipal treasurer must keep these factors in mind while making the various decisions, discussed below, relating to a loan’s structure.

Issuing Bonds or State House Serial Notes

An initial decision when considering long-term borrowing is whether to issue the debt in the form of bonds, approved by bond counsel with an official statement for disclosure, or in the form of State House Serial Loan Notes, approved and certified by the Director of Accounts . The major advantages of using State House Notes are the ease and the relatively low cost of their issuance. The major advantages of using bonds, on the other hand, are the liquidity and the marketability of these instruments, attributes that generally result in a lower interest rate for the municipality.

Based upon a consideration of the local banking environment and the size and term of a desired loan, the treasurer should try to ascertain the likely amount of the additional interest the municipality would have pay if it made the borrowing using State House Serial Notes instead of bonds. After that, the treasurer should compare the increased interest cost accompanying State House Notes with the significant administrative expenses associated with the sale of bonds. In the process, the community should investigate BOA’s guidelines, which contain information about the maximum size, term, and number of certificates that the bureau will approve for a long-term loan using State House Notes. With all of this information in mind, the community will be in a good position to determine which debt instrument to use.

Determining the Maturity Schedule

The General Laws govern the maximum term for long-term loans. However, municipalities can borrow for shorter terms than those permitted by statute. Of course, the shorter the term, the lower the ultimate interest cost. The treasurer should take into account the useful life of a project paid for with the loan proceeds when determining the term of a loan.

Ch. 44 §19 permits some flexibility in timing the first principal payment on bonded indebtedness. This payment can be made at any time in the next fiscal year. Thus the municipality through the use of “long or short” first interest payments can time the first and succeeding principal payments to come due at a time of the year when cash flow is most advantageous.

This statute also permits level debt payments instead of level principal payments for some loans. Some loans which may be repaid with level debt service include (a) loans voted to be excluded from Proposition 2½ limits levy limits, pursuant to Ch. 59 §21C(k), (b) loans issued for costs relating to an enterprise for which an enterprise fund has been established, pursuant to Ch. 40 §39K or Ch. 44 §53F½ or (c) loans for an approved school project as defined in Ch. 645 or the Acts of 1948, as amended by G.L. Ch. 70B. Under Ch. 70B, school building assistance reimbursement payments to municipalities are calculated based on a level principal structure regardless whether the community arranges its payments using this option. Of course, interest costs over the life of a loan repaid using level debt service will be greater than for those repaid using level principal payments.

Deciding the Manner in Which the Loan Will be Awarded

A municipality must also determine the manner in which it wishes to bid and award a loan. Until the late 1970s, the most common method was to require that bids be for the full amount of a loan and at a single rate of interest. Although this method is still frequently utilized for loans of less than 5 years, most communities now permit multiple rates bidding for long-term debt. Under this method, the bidder is allowed to specify different interest rates for different maturities, but no more than one interest rate for bonds of the same maturity.

To prevent aberrations, a bid request may (a) specify the maximum differential permitted between the lowest and highest rates bid or (b) require the various rates to be in ascending order. Municipalities then select the winning bids based either on the lowest net interest cost or the lowest true interest cost, after taking into consideration the premium (selling price in excess of par value) offered, if any. In the single-rate method, the award is usually made on the basis of the lowest stated rate bid, and premium is only considered if two or more bidders offer the same low rate. In the vast majority of cases, bonds are still sold on an all-or-nothing basis, although on occasion an issuer might allow different purchasers for different lots of bonds.

Call Provisions

If a treasurer must sell bonds in a high-rate environment or at a time with a significant differential between long-term and short-term yields, the treasurer might consider including with the offer a condition permitting the municipality to call in the bonds, i.e., to retire them prior to the stated maturity date, at the treasurer’s option. To include such a condition generally requires the payment of a premium at call because the bondholder will lose the high interest rate when such an option is exercised. Each year the option is not exercised, however, the amount of the premium to be paid at call is generally reduced. In most cases, later call options can be effected without the necessity of paying a premium.

Bond Ratings

In order to successfully market bonds, an issuer should generally seek a bond rating on the issue. Through bond ratings, investors gauge the relative credit worthiness of purchasers, underwriters, traders and sellers of municipal bonds. Bond ratings are established by independent, private, rating agencies and reflect the rating agency’s judgment as to a community’s capacity and willingness to pay interest and principal in a timely fashion. Ratings have a significant effect on the cost of borrowing; indeed, investors will generally accept a lower interest rate for bonds issued by a higher-rated community. The ratings range from Aaa (AAA) to C. The highest four rating categories (Aaa, Aa, A, and Baa by Moody’s Investors Service, or AAA, AA, A, and BBB by Standard and Poors) are considered “investment grade.” Institutional investors, such as banks and fiduciaries, are often legally prohibited from purchasing bonds that do not have an investment grade rating. The three major rating agencies are Moody’s Investors Service, Fitch and Standard and Poors Corporation. Securing a bond rating is well worth the cost in most cases, except for very small issues. (See pp. 11-11 & 11-12 for information related to establishing municipal bond ratings.)

Credit Enhancements

Credit enhancement is the process of using the credit of a stronger, more highly-rated entity to enhance the credit of a lower-rated entity. The major forms of credit enhancement are private bond insurance, bank letters, and lines of credit. The most prevalent credit enhancement for long-term debt issues is municipal bond insurance. Bond insurance is a legal commitment by an insurance company to make debt principal and interest payments if the issuer is unable to make those payments on time.

Most providers of municipal bond insurance are rated triple A by both Moody’s and Standard & Poors. Providers offer a variety of options for procuring municipal bond insurance, such as direct purchase by the issuer or by direct or optional purchase by the underwriter. The premium for this insurance is usually expressed as a percentage of the total principal and interest; it is payable at the time of closing.

When deciding whether or not to offer insurance, the treasurer must weigh the present value of the premium against the anticipated interest savings. Generally, purchasing insurance is not particularly cost effective for short-term loans or for loans issued by communities with high bond ratings. A treasurer contemplating obtaining bond insurance should provide the prospective insurers with complete information about the bond sale at least 3 weeks prior to the sale date to give the insurers adequate time for their review process. In this way, the insurance package can be developed early enough to have a positive influence on the bid rates.

Bank letters of credit are generally written for a substantially shorter term than bond insurance. In the case of default, a letter of credit will pay both the principal and accrued interest of a loan to the investor. A line of credit might also pay principal and interest to an investor in the case of a default; however, this kind of credit enhancement is weaker than a bank letter and has many more conditions that have to be satisfied before it will pay.

Alternatives to Competitive Bidding

The vast majority of municipal bond and note issues are sold by competitive bid. However, bonds and notes may also be sold by private placement or negotiated public sale.

In the case of a private placement, the securities are sold directly to a single investor or to a small number, less than 5, of sophisticated investors. A private placement significantly reduces the direct cost of issuance by shifting the primary burden of disclosure and rating procurement from the issuer to the investor. Of course, the costs are ultimately paid by the issuer in the form of a higher interest rate on the bonds. A negotiated public sale is usually reserved for large or complex issues of weaker credits, issues that might reasonably attract only one “competitive” bid or that require extraordinary presale solicitation on the part of the underwriters.

Requisite Actions before Proceeding with a Sale

Before proceeding with a sale of notes or bonds, the treasurer should ensure that the following actions have transpired:

The community has selected a financial advisor, a bank to act as paying agent and a bond counsel.
The treasurer and financial advisor have determined how the borrowing will be structured.
The legal requirements for the loans have been satisfied up to the point of sale, and bond counsel has provided an approving opinion.
The cost of the project or acquisition for which the borrowing is to be made has been precisely determined.

The Offering Documents

The two, primary documents utilized in a competitively bid, public sale of long-term debt are the Notice of Sale and a prospectus, called the Official Statement. The Notice of Sale sets forth the structure of the loan, bidding restrictions, method of award, anticipated time and place of delivery and method of payment. It is a precise, legal document.

The Official Statement provides more general information about the bonds being offered and, more importantly, communicates to the potential investor all the information reasonably necessary to make a prudent investment decision. This information includes the notice of sale, a description of the issue, financial and other economic data about the municipality, the proposed form of the bond counsel’s opinion and forms for use in submitting offers.

The financial advisor generally prepares or assists in the preparation of the Official Statement, utilizing audit reports, financial statements and other public records and reports, including information from interviews with key municipal officials. No matter who prepares the statement, however, the primary responsibility for its adequacy and accuracy lies with the treasurer. Federal securities law imposes significant penalties if the statement contains materially false or misleading information or does not disclose material facts.

The Municipal Securities Rulemaking Board, an adjunct of the Federal Securities and Exchange Commission, requires every registered municipal securities dealer to disseminate the information contained in the Official Statement to its customers. The Government Finance Officers Association (GFOA) has promulgated guidelines that have become the industry standard for the content and format of an Official Statement. These documents are typically 30-40 pages in length, with the community’s most recent audit attached as an appendix. Depending upon the quality of a community’s records and the diligence of its effort, an Official Statement will take from 4 to 6 weeks to generate.

Advertising the Sale

The most common method of advertising a sale of municipal bonds is publishing a notice in the Daily Bond Buyer, the municipal bond industry’s primary newspaper and information source, and circulating the Official Statement to prospective purchasing underwriters, locally and nationally. These activities should take place approximately 2 weeks, and no less than 10 days, prior to the sale date. For extraordinary or particularly complex bond sales, the treasurer might communicate using on-line access with municipal government and corporate financial markets through the currently available telecommunications network, which includes Munifacts, Telerate Systems Incorporated, Bloomberg L.P., J.J. Kenny Information Systems, Inc., ADP Quote Systems, and Blue List Ticker.

The Sale

A sale of municipal bonds generally entails opening the sealed and electronic bids of prospective investors at the office of the financial advisor. The treasurer or financial advisor should immediately notify the apparent low bidder, i.e., the person who offers the most favorable interest rates. Low interests rates constitute the most critical factor in making an award because they result in the highest price being paid for the bonds. Although an issuer usually reserves the right to reject any or all bids, a municipality or district should only exercise this right in unusual or extraordinary circumstances; otherwise, the number and quality of bids submitted for future sales will very likely be diminished. If the market changes dramatically against the issuer’s advantage between the dates of advertising and sale, the municipality might be more prudent to delay or cancel a sale rather than to reject all bids.

Post-Sale Activities

Immediately after a sale, the treasurer or financial advisor must assemble the details of the bids and the debt service schedules in order to prepare for the formal award vote. Bond counsel should draft the actual form of this vote. The financial advisor and bond counsel must arrange for printing and delivery of the bonds and for completing the official statement. Bond counsel must prepare the necessary final papers for delivery, and the financial advisor must arrange for execution of those papers. Delivery usually occurs between 10 and 14 days after the bid opening date.

Delivery of the Bonds

At the closing, the municipality must deliver the bonds, closing papers, final official statements and bond counsel’s opinion to the purchaser, and the purchaser must electronically transfer the purchase price, accrued interest and any premium to the municipality’s account. The municipality should receive a statement of the payment, with a breakdown of the principal, premium and accrued interest. The municipality should also receive a schedule of principal and interest payments, delineating the payment amounts and the due dates. Generally, interest is paid semiannually, and principal is paid annually.

Debt Records & Activities

The treasurer must maintain records of all municipal borrowings; these records must contain the following information for each issue:

Loan description.
Name of purchaser.
Dates of issuance and maturity.
Annual interest with due dates.
Annual principal amortization and due dates.
Loan balance.

If an issue is a multiple purpose loan, i.e., issued for more than one statutory purpose, the treasurer must keep records of the amount and maturities of each component of the total loan. (44:16)

Treasurers must determine the amounts of interest and principal becoming due on debt and must notify the accountant or auditor, the finance committee in towns, and the mayor or selectmen for inclusion of these amounts in the annual budget. (41:59)

The accountant or auditor must notify the assessors in writing of the amount of debt becoming due during the next financial year and explain to them what provision has been made for meeting this requirement. (44:16)

Upon receiving each bank statement, the treasurer should reconcile the loan accounts shown on the statement. As bonds mature, the bank will either destroy them or cancel them and return the cancelled bonds to the treasurer. In either case, the bank will provide the treasurer with document for treasury records. If a balance of loan proceeds remains after the completion of the project for which a loan was authorized, that balance may be appropriated for any purpose for which the municipality could borrow for the same or a longer period as the period permitted for the subject project. (44:20)

Refunding of Existing Debt

During periods when interest rates decline, municipalities can save money by refunding some or all of their outstanding debt. The refunding process involves the issuance of refunding bonds and is analogous to refinancing a home mortgage to take advantage of lower rates. New debt is issued in the form of refunding bonds, and the proceeds are used to retire the outstanding, higher interest debt, i.e., the refunded bonds. The savings is the difference between the higher annual debt service on the refunded bonds and the lower annual debt service on the refunding bonds.

Refunding is generally classified as either current or advanced. In the case of a current refunding, the proceeds of the refunding bonds are used to retire the refunded bonds on the call date. Under Internal Revenue Service regulations, a current refunding must occur no more than 90 days prior to the payment of the refunded bonds.

Advanced refunding is the procedure whereby one bond issue is replaced with another bond issue. This procedure is utilized typically when a municipality discovers that it can borrow with better terms than the terms of an existing bond issue. The treasurer uses the proceeds of the new bond issue to purchase government securities to be held by an escrow agent. The escrow agent invests the principal and income from these securities and uses the earnings to service the outstanding debt. The agent might hold the escrow until the first call date or until the maturity of the original bond issue. If the agent uses the escrowed funds to retire the original issue at the first call date, then the bond issue is pre-refunded.

Bonds must be callable in order for a treasurer to utilize advanced refunding. Moreover, a sufficient present value savings must be available to make the process worthwhile. Strict federal regulations govern the investment of the refunding bond proceeds. A municipality’s financial advisor can best advise about the financial feasibility of undertaking a refunding.

Qualified Bonds

Ch. 44A makes available to municipalities with marginal credit ratings an investment procedure under what is denominated the “qualified bond” program. Under this program, a participating community issues “qualified bonds,” and the state treasurer pays the debt service on these bonds directly from the community’s local aid, thereby increasing the security of the bonds. “Qualified bonds” may be issued for any legal borrowing purpose authorized by a vote of the municipality’s appropriating authority.

Issuing qualified bonds entails the following steps:

The treasurer files an application with the EFB to qualify the bonds, accompanying the application with copies of the original vote authorizing the debt and a vote of the mayor or selectmen, authorizing the treasurer to apply for qualified bonds.
The EFB investigates the need for the improvements to be financed from the proceeds of the bonds, the ability of the municipality to provide other essential public improvements and to repay the debt service, the reasonableness of the amounts to be expended, and the amount of the local aid payments likely to be made to the municipality.
If the EFB is satisfied that the municipality is entitled to issue qualified bonds, the board adopts a resolution authorizing issuance within 60 days of the application’s submission.
The board may require future debt restrictions or other fiscal limitations that it deems necessary as a result of its investigation. These requirements, which must be in writing, are binding, although they may be modified in the future.
The municipality issues the qualified bonds for a period of not less than 10 or more than 30 years. The debt securities must contain language on their face that they are issued pursuant to the Qualified Bond Act.
Within 10 days after the issuance of the qualified bonds, the treasurer certifies to the state treasurer the following:

The maturity schedule of the debt issue.
The interest rate or rates.
The debt service payment schedule.

The state treasurer becomes the paying agent for the full debt service on the qualified bonds. All payments will automatically be withheld from the municipality’s distributable state aid.
The treasurer or financial advisor transmits copies of the Official Statement, debt service schedules (maturity schedule) and wire instructions to BOA’s Debt Section . Since qualified bond payments originate within DOR from annual local aid appropriations, it is critical that municipalities participating in the qualified bond program file the requisite documents with BOA.

State Distributions to Pay Debt Service

Ch. 44 §19A sets out a process to forestall a municipality’s defaulting on a debt service obligation. If a treasurer believes that the municipality is, or is likely to be, unable to make an installment payment on a borrowing, the treasurer must notify the selectmen or mayor. If the selectmen or mayor concur, they must certify the inability or likely inability to the commissioner of revenue. If the commissioner concurs, the commissioner must immediately certify the inability to the state treasurer who must make the payment from state funds, up to the amount of the municipality’s Cherry Sheet entitlement during that fiscal year. Any amounts paid are charged against the amount otherwise due from the state to the municipality.

Emergency Finance Board

The Emergency Finance Board is a entity authorized by Ch.10 §47 to oversee the issuance of certain debt by municipalities. A municipality cannot issue debt in excess of its debt limit unless authorized by the EFB. (44:10) Municipalities also must obtain the prior approval of the EFB before they can issue debt for the following purposes:

Remodeling, reconstructing, and making extraordinary repairs to public buildings. [44:7(3A)]
Acquiring departmental equipment if the borrowing term is greater than 5 years. [44:7(9)]
Remodeling, reconstructing, or making extraordinary repairs to reservoirs and filter beds. [44:8(4A)]
Establishing, purchasing, extending, or enlarging a gas or electric plant or a community antenna television system if the amount borrowed exceeds in a town 5% and in a city 2.5 % of the equalized valuation of the town or city. However, the amount borrowed, even with EFB approval, cannot exceed in a town 10% and in a city 5% of its EQV. [44:8(8)]
Constructing sewers, sewerage systems, and treatment plants and disposal facilities, or making the lump sum payment of a tie-in to these services in a city or town. [44:8(15)]
Constructing a regional incinerator for the purpose of disposing of solid waste, refuse, and garbage by 2 or more communities; however, the indebtedness cannot exceed 3% of the last EQV of the city or town. [44:8(18)]
Implementing a project financed in whole or in part by the Rural Development Administration. [44:8(20)]
Approving contracts or agreements between municipalities and companies for the disposal of garbage, refuse and offal by incineration, for sewerage facilities, for water supply treatment and distribution facilities for the supply of water. [40:4]
Remodeling, reconstructing or making extraordinary repairs to various solid waste disposal facilities. [44:8(23)]
Approving public works projects that are receiving federal assistance. (Ch. 74 of the Acts of 1945)

The EFB also must approve the issuance of all long-term debt, including BANs, by regional school districts. [71:16(d)]. Moreover, the board designates issues of “Qualified Bonds” under Ch.44A.

Communities seeking EFB approval of a borrowing must submit a written request. (See sample letter, pg. 9-56.) A request must be accompanied with a certified copy of the article(s) relating to the project for which the borrowing authority is sought and of the town meeting or city council vote to incur debt for the project. The request must also contain a breakdown of the proposed work, with the estimated cost of each phase. Copies of any applicable state or federal grants must also be included, as well as an Environmental Assessment Form for the project, signed by the responsible official. The request, with the requisite materials, must be sent to:

The amount and term of the requested loan.
A detailed description of the emergency.
All documents supporting the need for the loan.

The Emergency Board will only consider a request for the approval of an emergency loan if filed within 20 days of the time the necessity for the loan became apparent.

State School Building Assistance

Ch. 70B, enacted in July of 2000, amends Chapter 645 of the Acts of 1948, the School Building Assistance Program. The purpose of the program, as described in Ch. 70B §1, is “[t]o promote thoughtful planning and construction of school facility space in order to ensure safe and adequate plant facilities for the public schools, and to assist towns in meeting the costs thereof.”

Ch. 70B grandfathered certain former projects under the old act. In order to be grandfathered, a project had to have been authorized as of December 1, 2000 and the completed applications (including plans and construction loan authorizations) for the project had to have been submitted to the Department of Education (DOE) by June 1, 2001.

While retaining many of the procedures established under the earlier act, Ch. 70B makes important changes in program standards, priorities and requirements. It also provides significant incentives for communities to renovate existing buildings or to implement alternative solutions to space needs problems instead of constructing new buildings. The fact that the program has been codified as part of the General Laws gives it a greater sense of stability. At the same time, budget dilemmas threaten its ability to continue providing grants at former levels.

Ch. 70B gives legislative authority to DOE to receive applications, to determine eligibility and rank, and eventually to approve actual reimbursement grants to cities, towns and districts for their school bonding costs of an “approved school project.” Such a project is “any capital construction or major reconstruction; lease of buildings or modular facilities; arrangements with higher education facilities or other nonprofit or municipal entities; year-round schooling to prevent overcrowding; use of swing space between school buildings in the district; tuition arrangements (entered into subsequent to the passage of th[e] statute) with other school districts to prevent overcrowding or other school facilities project as may be approved by the [B]oard [of Education]. (70B:1) The priority of each project is calculated based on information provided by the school district and approved in accordance with the order of priorities set out below. Priority is given to school projects undertaken for the following reasons: (70B:8)

To replace buildings that are a hazard to the health and safety of school children.
To relieve severe overcrowding.
To prevent the loss of accreditation.
To prevent severe future overcrowding.
To increase energy conservation and decrease energy related costs.
To relieve short term overcrowding.
To replace or add to obsolete buildings.
To transition from court-ordered and board-approved racial balance school districts to walk-to school districts.

In order for a project to be considered, an applicant must include with its application an unrestricted bond authorization and final working designs and specifications for the project. The application must fully consider all available options for satisfying the needs of the project including those listed under “approved school project,” described above. It must also demonstrate that it has provided sufficient resources toward building maintenance. Loan contingencies, such as Proposition 2½ debt exclusions, must be eliminated prior to an application’s submittal, provided the contingency does not relate to a DOE approval.

The School Building Assistance Program is funded through the annual state budget process. The legislature, in budget language associated with program accounts, appropriates each year a dollar amount for new school construction grants. This appropriation, or authorization, is equal to the aggregate of the first estimated annual payments of each approved grant. Once the annual state budget has been enacted, BOE can approve new projects until the appropriation has been exhausted. Generally, new approvals are made during the late summer. In addition, the legislature appropriates funds for payment in the current fiscal year for projects previously approved.

The amount of a municipality school construction grant is obtained by multiplying the final approved cost of a project, including interest that accrued on both short and long term borrowings, by the municipality’s reimbursement percentage, as determined by the formula set out in Ch. 70B §10. This formula takes into account the municipality’s per capital income, property wealth and proportion of low-income students as a percentage of the state averages. No grant is approved for less than 50% nor greater than 90% of approved project costs.

Grants are paid with a minimum of 5 and a maximum of 20 equal installments, based on the local financing terms of the particular project. A municipality may issue bond anticipation notes for up to 7 years (or until the grant is approved) without required paydowns of principal. However, the total financing, including both bonds and BANs, cannot be longer than 25 years. Following a project’s completion and prior to the final grant payment, DOE will audit the project. If the final costs vary from the projected costs, DOE will adjust the remaining reimbursements accordingly.

When borrowing, the treasurer should attempt to time the bond issue to coincide as much as possible with state payments. However, recent delays in state payments make timing very difficult. Furthermore, placement on the “priority list” does not necessarily mean the imminent receipt of grant payments. Several years may elapse first. Cities and towns that undertake school construction projects before “grant approval” may have to absorb the full financial impact of that construction for several years before receiving any SBAB payments.

Consequently, a municipality engaged in planning and carrying out a school construction project should stay in close contact with DOE throughout the process in order to be aware on an ongoing basis about the eligibility status and the payment schedule of its project. The municipality can help to avoid communication confusion by selecting one official to be responsible for maintaining this contact.

Any project not approved in the year submitted remains on the list for future approval; however, whether that project remains “grandfathered” depends on the appropriation language in the state budget. Ultimately, regardless of any particular language in Ch. 70B concerning the perpetuation of school construction grants, “The Legislature cannot, through enactment of an act or statute, bind itself or its successors to make a particular appropriation.” Massachusetts Coalition for the Homeless v. Secretary of Human Services, 400 Mass. 806 (1987). [See also, Town of Milton v. Commonwealth, 416 Mass. 471 (Mass. 1993).] Accordingly, SBAB grants rely from year to year upon the Legislature’s action in adopting the annual budget.

Ch. 70B §15 sets out some recapture provisions whereby grant proceeds awarded for construction of a school building that is later taken out of service, sold or leased may have to be paid back to the Commonwealth.

For other information about SBAB grants, a treasurer should contact DOE.

Water Pollution Abatement Trust

The Massachusetts Water Pollution Abatement Trust is the state agency established under the provisions of Ch. 29C to administer the Water Pollution Abatement Revolving Fund, set up pursuant Ch. 29 §2L. This state revolving fund grants low-interest loans to communities, local governmental units and private water suppliers for the construction and rehabilitation of wastewater and drinking water treatment plants and related infrastructure.

The Water Pollution Abatement Trust is governed by a three-member board of trustees, consisting of the state treasurer, the secretary of administration and finance and the commissioner of the Department Of Environmental Protection (DEP). It is funded through grants from the U.S Environmental Protection Agency, augmented with a 20% state matching appropriation.

Projects funded under the revolving fund program are eligible for varying levels of financial assistance in the form of loan subsidies. Because of these subsidies, many communities find it financially advantageous to issue bonds through the trust rather than to sell bonds on their own.

Municipalities can borrow both short term and long term through the trust. Short term loans, called “Interim Loans,” work in the same way as BANs, providing funds temporarily until the trust issues long term bonds. In any case, the city or town must authorize a borrowing through its town meeting or city council, obtain a preliminary legal opinion from bond counsel and fulfill all the requirements of DEP as well as of the trust. Once a loan is in place, the city or town submits invoices associated with the project to DEP for approval. Once DEP approves an invoice, the trust will forward funds to the treasurer to pay the invoice costs.

Municipal Securities Disclosure Requirements

The Federal Securities and Exchange Commission’s (SEC) Rule 15c2-12 requires underwriters participating in primary offerings of municipal bond and note issues of $1,000,000 or more to obtain, review and distribute copies of disclosure documents to investors. This rule was designed to increase investors’ protection by requiring the disclosure to them of relevant information prior to their submission of bids. The rule contains timetables for distribution, as well as specific exemptions.

Provisions Affecting Municipalities:

Rule 15c2-12 does not directly regulate municipal issuers. Rather, the rule affects municipal securities underwriters, including banks, that purchase bonds and notes for resale. If underwriters do not timely prepare the requisite disclosure documents, the rule prohibits them from bidding for municipal bonds and notes and re-offering them on the secondary market.
The rule requires an underwriter, for offerings in excess of $1 million, to obtain, review, and distribute to investors copies of the issuer’s disclosure document or official statement.
Municipalities must contract with the successful underwriter to deliver to that underwriter sufficient copies of the final and complete disclosure document to meet the requests of investors within 7 business days of the sale.
Individual bond or note issues will be exempt from the provisions of the rule if:

The issue is less than $1 million or,
The bonds or notes are issued in denominations of $100,000 or greater, and:

The issue is sold to no more than 35 sophisticated buyers for their own investment or,
The bonds or notes will mature in 9 months or less or,
The purchaser has the option to tender the bonds or notes back to the issuer at par at least every 9 months.

Treasurers should consider the following steps in developing an approach to these disclosure requirements for their municipalities:

The treasurer should perform a cost benefit analysis to determine the comparative costs of preparing the requisite disclosure information, on the one hand, or tailoring the issue to fall into one of the exclusions, on the other. Limiting the size of the issue and the denominations of the bonds or notes could have a negative impact on interest rates. The treasurer should discuss what would be the rate impact of the various options with the municipality’s financial advisor and with potential bidders.
If the municipality decides to issue debt requiring disclosure, the treasurer should analyze the comparative costs of preparing disclosure materials “in house” or contracting for their preparation by a vendor.
The treasurer should communicate frequently with department heads about their future needs in an attempt to limit the frequency of issuing debt requiring disclosure, thereby decreasing issuance costs.
The treasurer should keep in mind that issuing debt requiring disclosure takes longer because of the time required for preparing, distributing and reviewing the disclosure documents.

Tax Reform

In 1986, the federal government, in fashioning a sweeping reform of the tax code, introduced various restrictions relating to municipal borrowing. The restrictions limited tax exempt debt, restricted purchasers of tax exempt securities, and imposed rules on arbitrage.

Tax-Exempt Debt: The Tax Reform Act of 1986 instituted a clearer distinction between governmental-use and private-activity bonds. Governmental-use bonds are bonds issued to fund projects beneficial to the general public, such as schools, roads and public buildings. These bonds have tax-exempt status. Private-activity bonds, on the other hand, are bonds issued for purposes that benefit private parties. For example, bonds issued to construct a municipal building to be rented in substantial part to a third party would be private-activity bonds. These bonds are not tax-exempt. Treasurers should work with bond counsel to determine the tax status of their bond issues.
Restrictions on Financial institutions: The tax reform act placed restrictions on certain buyers of tax exempt securities. Prior to this legislation, financial institutions could deduct most of the interest costs they incurred when investing in any municipal bonds. Under the reform act, financial institutions can only deduct a percentage (80%) of their purchasing and carrying costs for bonds of municipalities that do not issue more than $10 million of bonds annually. Consequently, municipalities that issue a larger annual amount must contend with a more restrictive market when issuing bonds and notes, resulting in their paying higher interest rates.
Arbitrage: Arbitrage limitations constitute a very significant impact of the tax reform act for cities, towns and districts. The legislation severely limits a municipality’s ability to earn interest on borrowed funds. Prior to tax reform, treasurers could invest the proceeds of bonds and notes at higher rates in certificates of deposit, treasury bills and money market accounts to maximize earnings. The interest earnings were usually greater than the interest cost the municipality paid on the borrowed money. These earnings went into the general fund and often meant significant revenue for the city or town.

The new law restricts interest earnings by requiring that investment income of borrowing proceeds higher than the interest expense that is being paid on the bond or note be rebated to the federal government. A community that fails to comply with this requirement risks losing the tax-exempt status of its securities, retroactive to the issuance date.

Arbitrage Rebate Exceptions

The tax reform act provides exceptions that enable cities and towns in limited situations to earn interest on borrowings without having to pay a rebate. Interest earnings are not subject to rebate in the following circumstances:

Small Issuers: No rebate is required with respect to governmental-use bonds and notes if the issuer can reasonably expect to issue no more than $5 million in bonds and notes during the calendar year of issue. This limit applies to the total long and short-term debt originally issued during the year. It does not apply to renewals of prior loans. In addition, in municipalities that issue $5,000,000 or more in a year to finance certain public school facilities, the limit increases to $10,000,000 for that year.
Expenditure Exceptions (Bonds and BAN Proceeds): Even if a municipality is unable to qualify for the small issuer exception, it can nevertheless avoid a rebate under two circumstances:

A municipality can avoid rebating interest earnings if it expends 95% of the proceeds of a bond or note issue, including interest earnings, within 6 months and all of the proceeds and earnings within 1 year.

Alternatively, a municipality can avoid rebating interest earnings on construction bonds if it expends 10% of the proceeds and earnings within 6 months, 45% within 1 year, 75% within 18 months and 100% within 2 years. In the case of non-construction bonds, the community can avoid rebating interest earnings if it expends 15% within 6 months, 60% within 1 year and 100% within 18 months. The exception provisions also permit an issuer to pay a penalty rather than a rebate if these schedules are not satisfied.
Revenue Anticipation Notes : A municipality is not subject to rebating interest earned on notes issued to cover anticipated tax or grant receipts if the accumulated cash flow deficit exceeds 90% of the face amount of the notes within 6 months of the date of issue. Eligibility for this exemption is not based on the expectation at the time of issuance. Accordingly, if the actual deficit does not turn out to exceed 90% of the face amount of the notes, the municipality must pay an arbitrage earnings rebate.

Effects of Tax Reform on Municipal Debt

Federal tax reform legislation has made the issuance of tax exempt debt more expensive, complex and time consuming for cities and town. The restrictions that prevent financial institutions from deducting some of their costs when investing in municipal bonds have increased municipal costs when issuing debt. The arbitrage rules that limit the investment of the proceeds of tax-exempt bonds and notes have resulted in the loss of interest earnings. Moreover, the complexity of the legislation has increased the need for municipalities to rely on the expertise of financial advisors and attorneys, significantly increasing borrowing costs, as well.

Besieged with the many pitfalls that currently beset municipal borrowing, a treasurer can best serve the interests of the municipality by undertaking the following activities when issuing debt:

Meet with the financial advisor at the beginning of each year to plan the timing and sizing of note and bond issuance. Communicate regularly with the financial advisor and bond counsel as financing needs change during the course of each year.
Review each project for a potential private activity that may threaten the tax-exempt status of municipal debt. Try to think ahead. Do not hesitate to raise questions with bond counsel before issuing debt.
Stay alert about proposals for debt authorization, mailing of tax bills, revaluation delays, impending large expenditures and other matters that could affect borrowing requirements and cash flow.
Educate local officials, particularly assessors and department heads, about federal tax reform law. Encourage department heads to prepare cash flows relating to capital expenditures in an effort to keep borrowing to a minimum.
Ensure that assessors and the tax collectors have sufficient resources for timely mailing and processing of tax bills in order to reduce the need for tax anticipation borrowing. Recommend utilizing estimated tax bills if actual tax bills will be significantly delayed.
Try to avoid late fall town meetings, which delay the setting of the tax rate and often necessitate the issuance of tax anticipation notes .
Attempt to keep the size of bond issues down by funding equipment and minor renovations in the operating budget rather than from bond proceeds. If this is not possible, consider utilizing the capital outlay exclusion provided in Proposition 2½. [59:21C(i½)]
Encourage all department heads to implement a policy whereby major discretionary expenditures are scheduled for a time when the municipality is in a positive cash position.
Schedule due dates for bond issues for times of positive cash flow.
Encourage the establishment of a capital financing plan to even out borrowing from year to year. This will provide a better chance of complying with statutory requirements and will provide for a reasonable, long term financing plan for capital projects.

Inside Debt Limit

Statutory Authority	Purpose	Maximum Term
44:7(1)	Constructing and reconstructing surface drains, sewers, sewerage and sewage treatment and disposal facilities.	30 yrs.
44:7(1A)	Lining sewers by cement or metal.	10 yrs.
44:7(2)	Acquiring land for public parks, playgrounds, or public domain. (Indebtedness incurred for public domain may not exceed ½ of 1% of the equalized valuation of the city or town.)	30 yrs.
44:7(2A)	Constructing an artificial ice skating rink.	15 yrs.
44:7(2B)	Constructing an outdoor swimming pool.	15 yrs.
44:7(3)	Acquiring land for any purpose for which a municipality is authorized to acquire land not otherwise specifically provided for; constructing buildings or additions to existing buildings where such additions increase floor space, including original equipment and furnishings.	20 yrs.
44:7(3A)	Remodeling, reconstructing, or making extraordinary repairs to public buildings. (Approval of EFB required.)	20 yrs.
44:7(3B)	Making energy conservation and alternative energy improvements to public buildings.	10 yrs.
44:7(4)	Constructing or reconstructing bridges of stone, concrete, or iron superstructure.	20 yrs.
44:7(5)	Constructing, extending or widening public ways, including paying land damages, the cost of pavement, and sidewalks laid at the same time; constructing specified types of permanent pavement; constructing, surfacing, or resurfacing off-street parking areas.	10 yrs.
44:7(6)	Installing macadam pavement or other road material, resurfacing off-street parking areas with such pavement, or construction of sidewalks.	5 yrs.
44:7(7)	Constructing walls or dikes to protect highways or property.	10 yrs.
44:7(8)	Purchasing land for cemetery purposes.	10 yrs.
44:7(9)	Acquiring departmental equipment. With the approval of the EFB.	5 yrs. 15 yrs.
44:7(9A)	Remodeling and rehabilitating fire-fighting apparatus and heavy equipment.	5 yrs.
44:7(10)	Connecting dwellings and buildings to sewers where whole or part of cost is assessed on abutters.	5 yrs.
44:7(11)	Paying final judgments.	1 yr.
44:7(14)	Installing traffic signals, public lighting, fire alarms, and police communications, and extending and improving such installations.	10 yrs.
44:7(16)	Paying fire insurance premiums covering 5-year period.	4 yrs.
44:7(17)	Improving tidal and non-tidal rivers and streams, harbors, tide waters, foreshores, and shores along a public beach, and constructing or reconstructing public wharves.	10 yrs.
44:7(18)	Paying for expert appraisal of taxable property or for updating existing tax maps.	2 yrs.
44:7(18)	Obtaining new tax maps based on aerial photography	10 yrs.
44:7(19)	Making payments under contracts with the Commonwealth under 40:40D, but only for such purposes as a city or town may borrow under 44:7	subject to applicable limits under s.7
44:7(20)	Developing land for burial purposes and constructing paths and avenues and embellishing grounds in a cemetery owned by the city or town.	5 yrs.
44:7(21)	Paying for architectural services for plans and specifications for any proposed building for which a town, district, or city may borrow or for additions to buildings which increase the floor space thereof, if authorized separately from other debt relating to said buildings or additions provided the city, town, or district owns site the for the proposed building or addition at the time the loan is authorized.	5 yrs.
44:7(22)	Paying for engineering or architectural services for plans for any project not defined in 44:7(21) for which city or town is authorized to borrow, if authorized separately from other debt relating to the project.	5 yrs.
44:7(23)	Constructing municipal tennis courts, including platform tennis courts and acquiring land and constructing buildings thereon, including acquiring original equipment and furnishings of these buildings.	15 yrs.
44:7(25)	Constructing and reconstructing municipal outdoor recreational and athletic facilities, including acquiring land for these facilities.	15 yrs.
44:7(26)	Paying for energy audits as defined in 25A:3 if authorized separately from debt for energy conservation or alternative energy projects.	5 yrs.
44:7(27)	Undertaking projects for the preservation and restoration of publicly-owned freshwater lakes and great ponds in accordance with the provisions of 21:37A.	not stated
44:7(28)	Developing, designing, purchasing, and installing computer hardware, other data processing equipment, and computer-assisted integrated financial management and accounting systems.	10 yrs.
44:7(29)	Developing, designing and purchasing computer software incident to the purchase, installation, and operation of computer hardware and other data processing equipment and computer-assisted integrated financial management and accounting systems.	5 yrs.
44:7(30)	Installing, repairing, or replacing exposed structural or miscellaneous steel which has been treated with the hot-dip galvanizing process.	3 yrs.
44:7(31)	Removing asbestos from municipally owned buildings.	10 yrs.
Ch.487 of the Acts of 1980	Constructing off-street parking facilities in predominantly commercial areas.	20 yrs.

Outside Debt Limit

Statutory Authority	Purpose	Maximum Term
44:8(1)	Paying temporary loans under 44:4, 6, 6A, and 17A.	as provided in relevant sections
44:8(2)	Providing and distributing food and shelter during emergencies.	2 yrs.
44:8(3)	Establishing or purchasing a water system, taking or purchasing water sources, water rights, or land for the protection of water system.*	30 yrs.
44:8(3A)	Conducting groundwater inventory and analysis in connection with developing new or additional water supply sources.	10 yrs.
44:8(4)	Constructing or enlarging reservoirs, constructing filter beds, standpipes, buildings for pumping stations, including original pumping station equipment, buildings for water treatment, including original equipment therefore, and acquiring land or any interest in land necessary in connection with any of the foregoing.*	30 yrs.
44:8(4A)	Remodeling, reconstructing, or making extraordinary repairs to reservoirs and filter beds.*	30 yrs.
44:8(5)	Laying and relaying water mains of not less than 6 inches but less than 16 inches in diameter; lining such mains with linings of not less than 1/16 of an inch, and developing additional well fields, for wells, and acquiring pumping station equipment.*	40 yrs.
44:8(6)	Constructing, reconstructing, laying, and relaying aqueducts and water mains larger than 16 inches in diameter; lining such mains with linings of not less than 1/16 of an inch.*	40 yrs.
44:8(7)	Extending water mains.*	40 yrs.
44:8(7A)	Purchasing and installing water meters.*	10 yrs.
44:8(7B)	Paying the town’s share of the cost to increase the storage capacity of any reservoir, including land acquisition, constructed by water resources commission for flood prevention or water resources utilization.*	20 yrs.
	*Debts under 44:8(3), (4), (4A), (5), (6), (7), (7A), and (7B) (water debt) may not exceed in the aggregate 10% of the equalized valuation.
44:8(7C)	Purchasing, replacing, or rehabilitating water department equipment.	10 yrs.
44:8(8)	Establishing, purchasing, extending, or enlarging a gas or electric plant or a community antenna television station. (May not exceed 5% in towns or 2½% in cities of the EQV; but with approval of the EFB, loans in excess of 2½% but not in excess of 5% of EQV may be authorized in cities, and loans in excess of 5% but not in excess of 10% of EQV may be authorized in towns.)	20 yrs.
44:8(8A)	Remodeling, reconstructing, or making extraordinary repairs to a gas or electric lighting plant, or a community antenna television system. (Approval of EFB required. Debt to be included in the limit of gas and electric plants and community antenna television systems established in 44:8(8).	10 yrs.
44:8(9)	Making emergency appropriations approved by state treasurer, attorney general, and Director.	2 yrs.
44:8(10)	Acquiring land or constructing buildings or other structures including original equipment as a memorial to armed forces. (Not to exceed ½ of 1% of EQV.)	20 yrs.
44:8(12)	Acquiring street railway property under Ch. 161, operating the same or contributing toward capital expenses of a transportation area. (Not to exceed 2% of EQV.)	10 yrs.
44:8(13)	Acquiring, constructing, enlarging, improving, or protecting public airports, including land. (Not to exceed 1% of the EQV.)	10 yrs.
44:8(14)	Eradicating Dutch Elm Disease.	5 yrs.
44:8(15)	Constructing sewers, sewerage systems, and sewage treatment and disposal facilities or making a lump-sum payment of the cost of tie-in to such services in a contiguous city or town. (Approval of EFB required.)	30 yrs.
44:8(16)	Constructing golf courses, including acquiring land, constructing buildings, and paying the cost of original equipment and furnishings.	20 yrs.
44:8(17)

MCTA Treasurer’s Manual