Letter to the Editor

Public Finance Authority disputes WSJ, MMA claims on impairments

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An article published in the Wall Street Journal earlier in October about “risky” debt in Wisconsin appears to make what the Public Finance Authority (PFA) believes to be several misleading claims about the PFA and specific projects it has been involved with, in part, based on a specious “impairment report” prepared by Municipal Market Analytics (MMA). The PFA feels compelled to set the record straight and provide what PFA believes to be the true facts regarding the organization, our mission, operations and specific projects raised in the article.

Overview of the PFA
The PFA was authorized in 2010 by unanimous vote of the Wisconsin Legislature for the purpose of issuing tax-exempt and taxable conduit revenue bonds for public and private entities nationwide. In addition to the five local governments that created PFA, the PFA is sponsored by both national and local associations dedicated to representing the interests of local government — the National Association of Counties, the National League of Cities, the Wisconsin Counties Association and the League of Wisconsin Municipalities.

It is the PFA’s opinion that the association sponsors recognize PFA’s vital role as an economic development resource for their constituents. PFA partners with local governments nationwide to assist in the financing of public benefit projects that, in PFA’s opinion, create temporary and permanent jobs, affordable housing, and community infrastructure and otherwise improve the overall quality of life in local communities. No Wisconsin taxes or revenues have ever been used to support the activities of the PFA.

As a creation of local government existing for the benefit of local government, nearly every single PFA bond transaction is required to receive local government approval by the elected body where the project is located – i.e., those most impacted by the project must approve the project prior to issuance. PFA’s bonds are federally tax-exempt only and do not provide investors a state tax-exemption, which minimizes the local tax impact where PFA bonds are issued. PFA’s local approval and tax impact features differ from most state conduit issuers that typically conduct all necessary public approvals within the confines of the state capitol, regardless of project location, and provide a dual federal and state tax-exemption for bond investors.

Each and every PFA tax-exempt bond transaction receives an unqualified tax opinion from independent bond counsel, which confirms project eligibility for tax-exempt status. Moreover, every PFA bond transaction is professionally underwritten, placed by an independent investment bank or directly purchased by one or more banks or institutional investors. According to the PFA’s issuance policies, only investment-grade rated bonds may be sold to the public — the PFA requires its non-rated or less than investment grade bonds to be purchased by qualified institutional buyers or accredited investors. The PFA relies on the underwriter, placement agent, or institutional purchaser, and ultimately the qualified investor to make its own independent decision on whether to purchase the PFA bonds at what price and under what terms.

MMA’s “Impairment Report”
PFA believes that its overall number of MMA’s self-defined “impairments” and “impairment rate” are lower than suggested by MMA, and comparable to other similar issuers. Analysis of “impairments” (even according to MMA’s definition) requires more than an aggregation of EMMA filings. Rather, PFA believes it is necessary to take a more qualitative approach. Some of the apparent “impairments” can be disregarded — one example is a case in which an underlying conduit obligor erroneously included PFA’s CUSIP in a material event notice to report a late interest payment on an entirely unrelated obligation. The obligor reposted the notice when PFA called the error to their attention. In another case, the Bond Trustee erroneously withdrew money from a debt service reserve that should have been taken from another fund and reported an unscheduled draw on debt service reserves on the day the withdrawal was made and before PFA had an opportunity to correct it.

Both of these examples illustrate that errors can be made, and in some cases may give the appearance of an “impairment” when none exists. Moreover, the decision to report frequently turns on the obligor’s assessment of the “materiality” of the event, which can vary. As reflected in the June 21, 2019, issue of the Bond Buyer (“Issuers Avoiding 15c2-12 Materiality Debate”), many obligated persons over-report in an effort to avoid deciding what will be considered truly “material.” The PFA believes more important than a numerical analysis of the number of “impairments” is to determine whether investors were made whole on any particular issue. PFA takes pride in its track record of working with investors to minimize the impact of particular problems that projects inevitably face.

Conduit Issuers and Speculative Projects
All nongovernmental borrowers that access the tax-exempt bond market do so by way of conduit bond issuers, as required by the federal tax code. Virtually every state has a conduit issuer option for the issuance of private activity bonds. PFA disagrees with the article’s illogical characterization of PFA as somehow being “unique” as a conduit issuer. PFA also disagrees with the suggestion that PFA is a “so-called conduit” that will “often issue debt for speculative projects” and believes this is absurd given PFA is but one of many conduit bond issuers that all issue debt for qualified projects.

Role of GPM Municipal Advisors
The local governments that created PFA and the local officials that make up PFA’s board of directors, realizing that they could not requisition state money, solicited responses for a performance-based contract to perform the day-to-day administrative, program management and municipal advisory services necessary to execute PFA’s policies and procedures. PFA selected GPM Municipal Advisors, LLC, a registered municipal advisor with the SEC and MSRB, to serve in this capacity based on its experience and qualifications in administering local government finance and procurement programs.

PFA is not a state agency nor is it controlled by the state. Therefore, it would make little sense for PFA to have state employees. The PFA’s headquarters, the headquarters of PFA’s founding local governments and the headquarters of two of PFA’s local government driven sponsors are in Wisconsin. In other words, PFA has a significant connection to Wisconsin.

The Wall Street Journal’s and Municipal Market Analytics’ motivations behind, as well as the source(s) of, the misleading information are unclear. The PFA believes its model is producing tangible public benefit for local governments around the country, which validates the impetus for PFA’s creation and likely concerns state issuers that have, until now, enjoyed a relative monopoly on conduit revenue bond activity.

By the Public Finance Authority Board of Directors, which is composed of current and former local government officials.

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