Cities and states are pondering how much they need to tell their bond holders about threats to federal funding they face under the Trump administration.
"When there's a lot of uncertainty, which currently we have, it does make disclosure very difficult," said Carol Juang McCoog, a partner at Hawkins Delafield & Wood LLP, on Sunday during a panel at the Government Finance Officers Association's annual conference, held this year in Washington, D.C.
"No one is surprised that federal funding is a huge tricky hot-button area," McCoog said. "What we're finding is everyone's situation is very different, even within the same sector," she said. "As the lawyers working on the disclosure, we stick to the basic principles of securities law, which is what is material."
The disclosure discussion comes as the Trump administration
"We're getting a lot of questions" about how much to disclose, Brian Garzione, partner at Hawkins Delafield & Wood LLP, said Saturday during a disclosure update at the GFOA's debt committee meeting.
"There's a lot of uncertainty and it makes sense as a question," Garzione said. Issuers that have received letters from federal agencies, like the Department of Transportation, warning of reviews of specific grant or fund cuts should disclose that, he said.
And issuers who are in sectors that are facing heightened threats — like in higher education — should also probably talk about the issue, Garzione said.
"When you're in the headlines and you're in the market, you certainly have to say something," he said. "If you're not concerned, you still have to describe the threat and say why you're not concerned."
For those issuers, however, that have not received a specific correspondence from the federal government, the need for disclosure is less evident, Garzione said. "I don't see folks describing the general threat," he said.
Dave Sanchez, director of the SEC's Office of Municipal Securities, told the debt committee Saturday that basic disclosure requirements remain the same for all credit risks.
"Does this actually affect your credit? That's the basic principle," Sanchez said. "Is it going to materially affect [your] ability to pay [your] bonds?" he asked. "Our concern is always going to be materiality."
Questions over what to disclose in the bond document's risk section — what PFM CEO JoAnne Carter calls the "parade of horribles" section — has concerned issuers for years through events like the international pandemic to climate and cyber risks and even stretching back to Y2K, Carter said.
"What's different this time is the rate of change and the volatility is much higher," Carter said. "For disclosure, which is supposed to be measured, deliberate and legal, it's hard to move fast. Don't let the pace drive you to respond in a way that's premature," she said. "No information versus bad information — it's an easy choice."
