WASHINGTON – The National Federation of Municipal Analysts is soliciting market comments on a draft of recommended best practices for local government general obligation debt issuers. The draft details what analysts want issuers to disclose in eight main categories and emphasizes their preference for quarterly reporting.
NFMA will leave the paper, released on Thursday, open for market input until Sept. 30. After that, the group will review comments and assess whether any changes should be made.
The draft paper is part two of an update to NFMA’s December 2001 Recommended Best Practices in General Obligation and Tax-Supported Debt, which covered all general obligation and tax-exempt debt. NFMA released the first part of the update, which focused on state debt, in September 2015. Like the first update, this new draft is the product of a working group of NFMA representatives and industry participants including issuers, financial advisors, and bond counsel.
“The differences between state and local debt issuance and the concomitant disclosure required became evident to us early in the process of updating the paper,” said Anne Ross, senior credit analyst with Lumesis Inc. and a co-chair of the subcommittee that revised the 2001 paper.
Ross added that the group is not "asking issuers to reinvent the wheel" but are instead hoping issuers give frequent information that many times the issuers are producing anyway. She said they are "asking that the disclosure see the light of day and make it to the offering statement."
Ross also said that the best practices come at a time when analysts are seeing some issuers promise to provide even less disclosure after the Securities and Exchange Commission's Municipalities Continuing Disclosure Cooperation initiative. MCDC promised underwriters and issuers would receive lenient settlement terms if they self-reported instances over the last five years where issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements.
"Contrary to what one might consider, after MCDC, some of the new offerings are offering less substance in their [continuing disclosure agreements]," Ross said. She said that for example a CDA that might have promised five data points before might now only promise two to limit the obligations that the issuer would otherwise be required to uphold.
Nicole Byrd, a senior investment professional with Nationwide Investments and the other co-chair of the subcommittee, said that while separating state and local GO debt added time to the process, “we felt it was worthwhile given the importance of the sector to the municipal market.
The new draft pays particular attention to state oversight programs, the ability to file for Chapter 9 bankruptcy, the potential presence of a statutory lien, and the existence of alternative debt, according to Byrd. The paper also emphasizes the importance of interim disclosure on at least a quarterly basis.
The paper is not intended to provide one-size-fits-all recommendations, and NFMA points out that not every proposed disclosure item will make sense for every issuer.
The recommendations are divided into eight categories: general disclosure items; demographic/economic information; financial statements; general revenue base; expenditures; debt and financial obligations; pensions and other postemployment benefits (OPEBs); and cash flow financings. Each category has a list of things to disclose and the paper includes whether each item should be disclosed in the official statement and whether it should be included in every interim and annual disclosure, or only included when the information has changed.
The section on general disclosure items includes information for official statements, annual, and interim disclosure that is “fundamental to providing a useful set of disclosure documents for local general obligation bond issuers regardless of size, frequency of issuance, or bond structure,” according to NFMA. The group recommends issuers include, among other things, a description of the security and nature of the obligation as well as continuing disclosure obligations, default events, any legal or tax matters, and any applicable risk factors.
NFMA said that some of the information it is recommending issuers disclose about demographics and the economy may already be contained in annual financial reports and that some of the requested information may not be available for certain issuers. Recommended demographic and economic disclosures include descriptions of the governmental structure or organization of the issuer, economic development initiatives, population size and median household income.
Issuers should also keep their disclosed financial statements as recent as possible and include information on major revenue sources, total government funds, and the programs that the issuer’s major operating funds cover, according to NFMA.
The recommendations on information about an issuer’s general revenue base include suggestions to disclose any category of revenue that represents more than 10% of the issuer’s general fund or operating fund revenues. It also asks that issuers share historical data on revenue sources, the top ten payers for major revenue sources, as well as data about property tax collection and state aid and revenue sharing. Issuers should also include certain information about federal grants and any other revenues or financing sources.
The NFMA’s section on debt and other financial obligations tells issuers to work with a goal of presenting information “that will give the reader a full appreciation of the scope and magnitude of the debt and any indirect debt obligations … to allow for a full evaluation of the debt burden facing the issuer’s constituents.” Debt that could fit into that description includes direct placements and bank loans, capital or operating leases, and variable rate obligations, according to NFMA.
Issuers interested in seeing samples of how analysts would like the information disclosed can find 12 chart templates in the first appendix to the document.
The second appendix, designed specifically for school districts, runs through disclosure items like enrollment numbers, demographics, and compensation structures.