CHICAGO — The Government Finance Officers Association’s debt committee on Saturday updated its 14-year-old best-practices document on issuing taxable municipal debt.
“We’re seeing more taxable debt issuance, not only with Build America Bonds but with other types of taxable debt,” said Eric Johansen, chairman of the committee and former treasurer of Portland, Ore. “We needed to take it down, dust it off and make sure it was reflective of the market.”
The best-practices document, which must still be approved by the GFOA board, outlines what state and local governments should consider when deciding whether to issue taxable or tax-exempt bonds. It was last updated in 1998.
In 2009 the American Recovery and Reinvestment Act created the now-expired taxable BAB program and authorized other taxable municipal bonds such as qualified school construction bonds. Under those programs, issuers that sold taxable, direct-pay debt received subsidies equal to a percentage of their interest costs from the Treasury Department.
The paper now explains how issuers may choose to use a hybrid financing structure, one that includes tax-exempt and taxable debt in order to satisfy Internal Revenue Service rules regarding sizing, cost of issuance and private-use restrictions.
“An 'interim’ taxable issue may also make sense when there is uncertainty regarding a project’s ability to comply with IRS requirements,” the revised document says.
The paper addresses what factors issuers should evaluate when deciding whether to issue taxable debt, which, while it typically has a higher interest cost, is not subject to the arbitrage rebate restrictions that apply to tax-exempt bonds. Issuers typically choose taxable debt to obtain operating flexibility and avoid IRS restrictions regarding what types of projects can be financed with tax-exempt bonds, the document says.
Taxable bonds also do not restrict an issuer’s ability to enter into operating and profit-sharing agreements with private entities. As a result, taxable bonds are often issued in conjunction with public-private partnerships such as concert venues and mixed-use facilities that are financed by municipalities and private parties.
The updated document clarifies that there may be state law requirements in addition to federal law requirements regarding taxable debt and what can be issued.
“Issuers should be aware of the existence of state laws restricting the lending of issuer’s credit to private entities,” the best practices document says.
The GFOA debt committee also discussed a draft outline for a new best-practices document addressing direct costs and the fees charged in a publicly offered financing that are not included in the underwriter’s discount.
The direct administrative costs listed include a day loan fee, a pricing platform fee and a forthcoming Governmental Accounting Standards Board fee. Issuers worry underwriters might pass on to state and local governments the fees they are assessed to help finance GASB operations.
Previously, GASB relied on voluntary contributions from state and local governments, as well as revenues from the sale of publications, but has faced repeated budget shortfalls. GFOA has spoken out against the fees.
Johansen expects the debt committee will complete the best practices, which are targeted at all issuers but will be particularly beneficial to small issuers, by January of next year.
“We thought it would be helpful for the membership to have a comprehensive list of the kinds of expenses they can expect to incur as part of the process,” he said. “We thought this is a pretty complicated process for many folks. If you are only doing it every five to 10 years and have no idea what to expect or what to budget for, having some place to go that laid out all of those types of expenses you’re likely to get means there should be fewer surprises.”
Typically the costs and fees depend on the size of the bond issue. He estimates that for a $20 million bond sale, fees incurred to the issuer could range between $40,000 and $80,000.
The draft also discusses the basis on which some fees are calculated. Some financial advisers, for example, may charge hourly fees while other others may charge a flat fee.
Separately, Chris Mier, chief strategist with Loop Capital Markets LLC, presented a market update to the debt committee and forecasted that full-year municipal bond volume for this year will total around $350 billion due to low interest rates, which have spurred refundings and new-money issues.
“Borrowing is cheap,” he told the committee. “Issuers have all this refunding to do. It’s so important right now with all of the budgetary problems.”