The debt committee of the Government Finance Officers Association is proposingrecommended practices on derivatives and tax increment financings for municipal issuers.
Committee members approved the proposed practices at a meeting they held on Saturday, just before the formal start of the GFOA's annual meeting inmidtown Manhattan. The recommended practices are to be sent to GFOA's executive boardfor approval on Oct. 1.
Also at that meeting, debt committee members were told that the GFOA's executive boardhas decided to create a new panel on economic development and capital planning that willwork closely with the debt committee on a number of issues. And they were told the nameof their committee will be changing.
The debt committee's proposed recommended practice on derivatives comes as other munimarket groups are also developing derivatives guidance. The Governmental AccountingStandards Board proposed a staff technical bulletin in early April on the informationthat issuers should include about their derivatives contracts in the notes to theirfinancial statements.
The National Federation of Municipal Analysts last week issued a white paper outliningthe type of information that analysts would like to see disclosed on derivatives. Thegroup is seeking public comments on the paper. And The Bond Market Association announcedlast Thursday that it is setting up a working group to draft guiding principles fordealers' activities in the muni derivatives market.
The GFOA debt committee's proposed derivatives guidance, which updates and combines tworecommended practices previously adopted by the GFOA, calls for municipal issuers to fully understand the risks and potential rewards ofderivatives products before using them.
It also urges any issuer considering derivatives transactions to adopt a comprehensivepolicy that establishes the legal authority for entering into such products anddescribes how these products would fit within the overall debt management program. Inaddition, it identifies the conditions under which derivatives will be used, establisheswhich products may and may not be used, and determines the approaches for measuring,monitoring, and managing the associated risks.
The committee identified and defined at least nine types of risks that issuers shouldaddress, including tax, interest rate, credit, basis, and termination risks.
An issuer's derivatives policy also should describe the methods for selecting andprocuring derivatives products, including when competitive and negotiated bids arewarranted, the committee said in the proposed guidance.
In addition, the policy should contain procedures governing the proper disclosure ofmaterial derivatives information to the rating agencies, the issuer's governing body,the public - in financial statements - and investors in bond documents. The disclosuresshould contain information about the legal authority, risks, guidelines, and the marketvalue of derivatives transactions, the committee said.
Further, the policy should identify the method and personnel responsible for monitoringthe issuer's obligations and the exposure to risks, as well as the methodology forproviding periodic termination value analyses, the committee said.
Once an issuer adopts such a policy and enters into a derivatives transaction, it shouldtake action to limit the associated risk exposure, such as by using hedging strategiesif appropriate, and developing contingency plans in the event of early termination ofthe transactions, the committee said.
The panel's proposed recommended practice on tax increment financings acknowledges thatTIF financings have become an important tool for local governments to attract economicdevelopment, job creation, infrastructure, or the rebuilding of blighted undevelopedareas.
TIF is a technique currently in use in more than 40 states for financing a capitalproject or related infrastructure from a stream of revenue generated by the TIF area.
The proposed guidance calls on local governments to assess whether TIF areas can assistthem in their economic development plans. It outlines the steps that governments shouldtake in making such assessments.
One step, for example, is for the issuer to identify the area of possible development orredevelopment and to determine whether it meets state law criteria as well as thepriorities established by the governing body.
Another step is for the risk sharing between the locality and the private developers forthe TIF project to be documented in a development agreement that clearly states eachparty's responsibilities.
The proposed practice warns localities to take steps to ensure that a TIF will notadversely affect the operations of other taxing entities.
If the issuer believes TIF is warranted, the proposed guidance cites procedures thatshould be taken to move forward with the financing, such as the preparation of adevelopment or redevelopment plan that identifies the project and estimates theincremental assessed valuation to be created by the project.
As for the new GFOA committee on economic development and capital planning, W. PatrickPate, the GFOA's board president and an assistant city manager for High Point, N.C.,said a working group headed by Timothy H. Riordan, Cincinnati's assistant city manager,is developing the new committee's mission statement and work plan.
The board, under the leadership of San Francisco controller Edward Harrington, who willsucceed Pate as president tomorrow, will select members of the new committee, Pate said.Its creation will bring the GFOA's total number of committees to seven.
In addition, the debt committee's name will be changing so that the word "fiscal" isremoved. The GFOA board's plans call for changing the name from the committee on debtand fiscal policy to the committee on governmental debt management. But panel membersdecided at their Saturday meeting that they would ask the GFOA board to remove the word"management" so that the committee will become the debt committee.
