CSMFO CALIFORNIA SOCIETY OF MUNICIPAL FINANCE OFFICERS
M A G A Z I N E
SEPTEMBER 2016 #7
1 CSMFO MAGAZINE SEPTEMBER 2016
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3 CSMFO MAGAZINE JULY 2016
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CALIFORNIA SOCIETY OF MUNICIPAL FINANCE OFFICERS
M A G A Z I N E SEPTEMBER 2016 #7
NOW IS A GOOD TIME
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CSMFO MAGAZINE SEPTEMBER 2016
The California Society of Municipal Finance Officers is the statewide organization serving all California municipal finance professionals. We promote excellence in financial management through innovation, continuing education and the professional development of our members. CSMFO members are deeply involved in the key issues facing local agencies. We value honesty and integrity, and adhere to the highest standards of ethical conduct. Thank you to all the authors in this issue for sharing with us their time and expertise. If you have an idea for a future article, please contact Melissa Dixon at the CSMFO office at melissa.dixon@staff.csmfo.org. Disclaimer: The views and opinions expressed in these articles are those of the authors and do not necessarily reflect the official policy or position of CSMFO. For more information on CSMFO or this Magazine, please contact the CSMFO office at 916.231.2137 or visit the website at www.csmfo.org. CSMFO.ORG
CONTENTS SEPTEMBER 2016
6 President’s Message
24 Debt Management
8 Executive Director’s Message
28 The Other Shoe Drops
10 Financing Economic Development in 2016, and
31 Where Are The Happy Days
Beyond
12 The Dodd-Frank Act 16 Going Green Can Save You Money
34 2017 Host Committee Diary 35 Careers: Job Opportunities
18 Bad Players Necessitate Task Force on Bond Accountability
19 The Mello-Roos Facilities Act Of 1982 22 How Your Relationship With Your Municipal Advisor Is Evolving
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Our Responsibility in Managing Debt
I
f you are like me and spend the first 15 minutes of your day reading the daily news headlines, maybe you saw recent articles like: “SEC Settles with 71 Issuers under the MCDC Initiative” or “American Paradox, It’s Never Been Cheaper for Cities and States to Borrow Money….And They Refuse to Do It”. These are just a couple of recent articles to remind us how complex municipal finance can be when issuing and administering public debt, especially if you are an infrequent issuer.
PRESIDENT’S LETTER JOHN ADAMS
JOHN ADAMS FACTS John is also Treasurer for a school sports booster club!
This month, the CSMFO Magazine focuses on Debt Management and the importance of municipal finance officers’ administration of public debt. As I write this message, I am preparing to make a presentation at a CDIAC training called “Municipal Market Disclosure: The Now, if you are asking yourself Development and Administration of why the focus on Debt Management, Debt Disclosure Policies”. In preparing especially Debt & Disclosure Policies, my presentation, it reminds me of the there are two really good reasons: importance of training, and the value 1) the U.S. Securities and Exchange CSMFO provides to its members in this Commission (SEC), and 2) the State area. Training is a core function of of California. First, the SEC CSMFO and we should take Public Finance Abuse Unit advantage of the many is bringing enforcement opportunities that are actions against public available. If you are entities stemming from seeking additional “If you are seeking the Municipalities training on Debt additional training on Debt Continuing Management, Disclosure I would highly Management, I would Cooperation recommend CDIAC highly recommend CDIAC (MCDC) Initiative. or GFOA. In One of the key addition to CDIAC’s or GFOA.” factors that public training this month agencies need to on debt policies, address to resolve they have a training actions is to establish entitled “Municipal Debt policies, procedures, and Essentials” scheduled in training in regards to its disclosure October. If you have limited time obligations. As far as the State, in or resources for training, I hope you early 2015 the State Treasurer formed took advantage of GFOA’s webinar a Task Force on Bond Accountability to in August called “Debt Management: develop guidelines for best practices in Update on Continuing Disclosure managing public debt. From this report, Requirement”. These are just a few Senator Hertzberg introduced SB 1029, examples of the tremendous training which would require local agencies opportunities available to California to annually report to CDIAC on its municipal finance officers. outstanding debt and ultimately would require the establishment of debt and disclosure policies.
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Regardless of these two very important reasons, having comprehensive debt and disclosure policies is a must, and if you don’t currently have a debt policy or have not updated it recently you should start immediately. I know it can be daunting, but there are great resources available, like GFOA. Also, consult with your hired professionals; your bond and/or disclosure counsel may have a template that can be your starting point. Remember, write your policy to fit your organization and make sure it is something that you can live with. For Thousand Oaks, we did a major revision to our debt policy in 2013, which was formally adopted by our City Council in January 2014. Our debt policy went from 2 to 18 pages, in which it established a Disclosure Review Group and required formal training, even including the Governing Board. Development of the revised policy would not have been possible without the hard work of Jane Adelmann, the City’s Debt & Investment Analyst, and the wisdom of Chris Lynch, our Disclosure Counsel with Jones Hall. I want to personally thank them in my President’s Message as I appreciate their efforts to ensure our continuing compliance with our bond documents. As I conclude this month’s message, I hope you had a wonderful summer and are looking forward to the fall. As for “turning over a new leaf”, please take this opportunity to revise or develop comprehensive debt and disclosure policies for your agency. Managing Public Debt is a very important responsibility, and I know that CSMFO members understand that.
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Utilizing Our Local Chapters A
EXECUTIVE DIRECTOR’S LETTER MELISSA DIXON
MELISSA DIXON FACTS
Melissa uses a Disney credit card so she can spend more, guilt-free, in the parks.
s the Executive Director for CSMFO, I get to see a broader picture of the association. CSMFO offers so many outstanding benefits to our membership, including participation in its annual conference, e-mail updates on upcoming events, and networking connections with industry professionals. We really go out of our way to ensure there’s something useful for everyone. One of the most useful benefits for CSMFO membership is the utilization of local chapters. Most local chapters hold regular meetings that provide opportunities for members to attend training classes, to communicate with municipal and commercial CSMFO members who are experts in their respective fields, and to introduce some of their coworkers who may be new to the CSMFO experience. Recognizing the importance and benefits of local chapter meetings, the CSMFO Board of Directors recently studied chapter utilization, and has put significant effort into reactivating dormant areas. One such area was the Coachella Valley Chapter. After a long period of inactivity, the Coachella Valley Chapter held its first chapter meeting on August 30, 2016 in La Quinta. The successful meeting drew more than 50 attendees from a chapter that has 45 active CSMFO members. Attendees included representatives from county, city, special district and commercial agencies, from a wide range of staff levels. It was a worthwhile educational event for the attendees and provided a venue for these professionals to finally meet face-to-face after exchanging e-mails and phone calls for so many years. Many left with new contacts, a better comprehension of property tax and sales tax concepts thanks to the HdL presentation, and an eager anticipation for the next meeting (already in the works for November).
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On behalf of CSMFO, I’d like to thank Coachella Valley Chapter Chair Karla Campos, Finance Director/Treasurer for the City of La Quinta, and Vice Chair Isaiah Hagerman, Director of Administrative Services for the City of Rancho Mirage for volunteering their time in re-activating the chapter. We could not have accomplished this for the membership in that area without their efforts, or the incredible work from the City of La Quinta staff. There are other inactive chapters out there, and you could be the person who revitalizes them. (Yes, you!) Between the Past President, the Board, the Membership Committee and other Chapter Chairs, we have resources in abundance to help make the experience a lot less daunting. If this paragraph resonated with you at all, please take a moment and email me, melissa.dixon@ staff.csmfo.org, or fill out the Volunteer Interest form on our website.
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Online Courses in
Governmental
Finance If you are a steward of government funds, these self-paced online courses from the University of Georgia can enhance your value— and your career. All qualify for CEs/CPEs.
Participation in your local chapter, whether at the leadership level or as an attendee, is a great way to get the most out of your CSMFO membership and benefit your professional career. You can find more information about your local chapter by visiting www.csmfo.org.
• Governmental Accounting • Intro & Intermediate Budget • Revenue Administration • Debt Administration • Capital Improvement Program • Treasury Management • Internal Controls • Purchasing • Human Resources For Government Officials
www.georgiacenter.uga.edu/govfinance/GFR
Units of the Office of Public Service & Outreach
Financing Economic Development in 2016, and Beyond Tim Seufert, NBS
E
conomic development comes in many shapes and sizes. Depending upon the makeup of your community, it could include any one, or possibly a combination, of the following: • Infill residential or mixed-use development • Conference center and hotels • Renovating or rebuilding a commercial zone, your downtown or “Main Street” • Improved community infrastructure (roads, libraries, utilities including improved access to the internet and recycled water, etc.) To finance such improvement though, you are going to need a financing tool. One option is to create a Special Financing District (SFD): 1. Community Facilities District (CFD) or Parcel Tax 2. Business Improvement District (BID) or Property and Business Improvement District (PBID) 3. Special Assessment District 4. Infrastructure Financing District (IFD) or Enhanced IFD (EIFD) More information on these are provided in the Details section below. Pay as you go can be a viable option in such situations. If financing is needed, then we turn to financing tools such as these: 1. Municipal bonds, in taxable or tax-exempt form 2. State Revolving Funds/SRF 3. Bank loans 4. iBank or other tools available to California agencies DETAILS, DETAILS: The first phase of any economic development or improvement project is often the most challenging and most crucial step in the process: We must understand the financing options available and choose one. CSMFO MAGAZINE SEPTEMBER 2016
This involves financial analysis of course, but it also requires an important legal analysis to ensure that the desired financing tool is actually available to your city, town, special district, or other local agency. Is it in your enabling legislation? Are you a charter city or general law city? If the SFD is not available currently, can legislative or legal steps be taken so that the desired tool can be used? Lastly, you will have to do a practical analysis of the pros and cons of the preferred tool(s), including the allimportant approval step. Is a vote of the registered voters needed, and at what threshold? Can property owners approve the SFD? Will your community accept the SFD of choice? It is wise to keep your SFD options open throughout the process, and vet the most viable ones. Here are a few different types of SFDs along with actual project examples to help illustrate how these details come to life in a real scenario. CFD: Above all of the other tools, CFDs are the most flexible. They are credited for having financed hundreds of millions of dollars of California infrastructure over the past few decades, as well as for funding essential public services. Consider the following uses of CFDs: • Supporting infill development for residential, mixed-use, or commercial projects • Rebuilding or building new library facilities or other community assets • Replacing aging utility infrastructure, or adding new infrastructure • “Pre-financing” for tax increment financing (until the increment is significant)
were able to craft them to finance energy efficiency and alternative energy (solar, wind, etc.) improvements. Two recent examples of CFDs that I find interesting are: 1. San Francisco: To fund the endless list of desired infrastructure, San Francisco is maximizing the conceptual “headroom” of 1% (of additional assessed value for taxation) to finance such improvements as transit, parks, and storm drain facilities in an “infill” development setting. 2. Santa Cruz County Libraries: The community just voted (70% yes) to form a CFD which will finance $60MM in countywide library facilities, some “pay as you go” but mostly bond-financed. PBID: A property and or business-based business improvement district also has the potential to finance projects. This financing ability, above and beyond the commonly-known funding of annual services, has been available for a few years, though without significant activity. For example, a PBID can fund or finance: • Parking facilities • Benches, kiosks, shelters, and signs • Public restrooms, decorations, parks, and fountains • Street, sidewalk, and plaza improvements SPECIAL ASSESSMENT DISTRICT: Special assessments have been used in California for over one hundred years, financing essential local infrastructure like streets and utilities. This includes Landscape & Lighting Districts, Benefit Assessment Districts, and the well-known 1913/1915 Act Districts.
The Mello-Roos Community Facilities Act of 1982 (i.e., CFD statute) is Recently, assessment districts have available for use by cities, counties, and financed downtown streetscape most special districts. Charter cities have improvements and recycled water the ability to adjust the general CFD law infrastructure: to tailor to certain needs. Because of the CFDs inherent flexibility, the charter cities of Berkeley and San Francisco
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1. Downtown Burlingame Avenue: An assessment district provided 1/3 of the $16MM complete overhaul of the well-trafficked and robust main drag in Burlingame, the wealthy enclave on the San Francisco peninsula. The project included everything from rebuilding utilities to widening and beautifying sidewalks to adding an environmentally friendly storm drain infrastructure. The transformation was nothing short of amazing and the budget contribution provided by the assessment district was a critical component in getting it done. 2. Los Carneros Water District: The tried and true 1913/1915 Act Assessment District financed the ability to bring recycled water, affectionately called “purple pipe” water, to a large area of Napa County. The viticultural area is known worldwide for its’ storied vineyards, and it requires water to thrive. The local water supplies had dwindled for many years preceding the project. With its completion, the recycled water will effectively support both current stability and the future economic potential of the area. EIFD: The recently-touted EIFD (Enhanced Infrastructure Financing District) is here. The question is, is it useful to you? It is not the same IFD that was enacted a few years ago, but rather SB 628 called for the creation of an essentially new governmental entity that can finance a wide range of improvements both locally and regionally. The list of improvements includes roads, water/ sewer treatment, flood control, transit facilities, libraries and parks. Unlike the old Redevelopment Agencies (RDA), there are no housing set–aside or affordable housing obligations, but the option to fund low and moderate income housing remains. Unlike redevelopment of the recent past, an EIFD may not use eminent domain to acquire property, nor may it buy and sell property.
The primary revenue tools and their respective required approval thresholds are: • TIF/Bonds: 55% voter approval (or landowner if less than 12 registered voters) • CFD: 2/3 approval required by voters (or possibly landowners if no registered voters) • Assessment Districts: By majority protest ballot procedure, per Proposition 218 • User Fees and Development Impact Fees: By administrative approval (in the same manner as currently provided by any local agency, under guidelines from statutes and Proposition 218 and 26)
However, most cities are not that fortunate. In those cases, an EIFD is likely not a suitable financing tool. That said, here are a few projects where an EIFD, perhaps in conjunction with a CFD, could make a project viable: • A downtown conference center with an adjoining hotel is one project presently under discussion in a city in Northern California, where the city could benefit and thus increment from a larger area can be taken into consideration • Similarly, a large freeway interchange project in Central California has EIFD potential, positively affecting a large area with at least a nominal level of tax increment • San Francisco, as a city and a county with a large tax increment share, is also in pursuit of EIFD financings, having already implemented IFD projects.
An EIFD can be formed by a city or county. Other special districts may voluntarily join the EIFD, with the notable exception of school districts who may never participate in an EIFD. No vote is required to initially form the EIFD, When considering economic but as highlighted above, a 55% vote is development, there are almost as many required for bond issuance. financing options as there are desires to improve a community. In the end, the In summary, EIFDs may not divert only way to know which tool is right for revenue from any non-consenting your situation is to do your research. municipality or special district. Instead, Only then will you be in a position to they provide a specialized tool for choose wisely. local government(s) to install, replace or enhance desired infrastructure, via existing and anticipated new revenues as discussed above. A municipality with a relatively-high share of total property tax revenues is the most likely candidate for an EIFD.
An EIFD has the power to issue bonds via the use of Tax Increment Financing (TIF). The EIFD may also enact fees, special assessments or taxes, as allowed or by approval of the voters or property owners.
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The Dodd-Frank Act – What Is It, How Does It Impact Municipalities and What Has Happened Since The Law Went Into Effect?
By Scott Johnson, CPA, CGMA; Partner, State & Local Government, Advisory Services Macias Gini & O’Connell LLP (MGO) CPAs & Advisors
D
uring my municipal career I had the privilege and opportunity to serve the City of San Jose as Director of Finance at a period we characterized as the “Decade of Investment”. I started in San Jose in 2001 and continued as the Finance Director until I left to serve the City of Oakland as Assistant City Administrator in 2011. During my time in San Jose, along with many other responsibilities, I was responsible for the City’s debt management program. We issued over $6 billion of debt, (comprised of new issues and refundings) for a comprehensive capital improvement program that included a new city hall complex, a new airport, expansion of the convention center and new parks, libraries, public safety facilities and various other public improvements. It was during this time that we all experienced the “Great Recession” and the many impacts and changes in CSMFO MAGAZINE SEPTEMBER 2016
response to that challenging time. As a former municipal finance officer and administrator, I recognize the need for continuous monitoring and tracking of changes and updates relating to the laws and regulations that impact municipalities. In response to the Great Recession, the Dodd–Frank Wall Street Reform and Consumer Protection Act [(the Act), commonly referred to as Dodd–Frank], was passed and later signed into federal law by President Obama on July 21, 2010. Dodd-Frank was one of the most significant laws that impacted municipal finance and brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression. Dodd-Frank made changes in the American financial regulatory environment that affect all federal financial regulatory agencies and almost every part of the nation’s financial services industry, including municipal issuers.
This comprehensive law provides for regulations affecting U.S. banking, securities, derivatives, executive compensation, consumer protection, and corporate governance. The law also created the Consumer Financial Protection Bureau, the Office of Financial Research, and the Office of National Insurance, all under the U.S. Department of the Treasury (Treasury.) It also created the Financial Stability Oversight Council, which is chaired by the Secretary of the Treasury. In addition to the new agencies, other federal agencies have been tasked with creating new rules and conducting studies, including the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Federal Reserve, the Federal Trade Commission, the Government Accountability Office, the U.S. Department of Housing and Urban Development, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Securities and Exchange Commission (SEC), and the Treasury.
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WHAT DOES THIS ALL MEAN? HIGHLIGHTS OF THE DODD-FRANK ACT What should municipal finance officers be aware of that changed as a result of reform and regulation brought forth by Dodd-Frank? Municipal issuers and investors should be aware that the roles and responsibilities for both consultants and issuers have changed, in addition to how the relationships between parties have changed. The purpose of this article is to take a brief view into Dodd-Frank and the provisions that impact municipal issuers and investors. Municipal finance officers should be aware of the following key areas of Dodd-Frank. DERIVATIVES - CREATING TRANSPARENCY AND ACCOUNTABILITY The Act closes regulatory gaps by providing the SEC and Commodity Futures Trading Commission (CFTC) with authority to regulate over-thecounter derivatives so that irresponsible practices and excessive risk-taking can no longer escape regulatory oversight. In addition, the Act requires central clearing and exchange trading for derivatives that can be cleared and provides a role for both regulators and clearing houses to determine which contracts should be cleared. The Act also requires data collection and publication through clearing houses or swap repositories to improve market transparency and provide regulators important tools for monitoring and responding to risks. Finally, the Act adds safeguards to the system by ensuring dealers and major swap participants have adequate financial resources to meet responsibilities and by providing regulators the authority to impose capital and margin requirements on swap dealers and major swap participants, not end users. Through these measures, there is a higher standard of conduct. The Act establishes a code of conduct for all registered swap dealers and major swap participants when advising a swap entity. For example, when acting as counterparties to a pension fund, endowment fund, or state or local government, dealers are to have a reasonable basis to believe that the fund or governmental entity has an independent representative advising them. Municipal finance officers should
be keenly aware of these regulations, including the monitoring and reporting aspects. SEC AND IMPROVING INVESTOR PROTECTIONS The Act gives the SEC the authority to impose a fiduciary duty on brokers who give investment advice — the advice must be in the best interest of their customers. In addition, a Whistleblower Program was established within the SEC to encourage people to report securities violations, creating rewards of up to 30 percent of funds recovered for information provided. The Act also implemented several SEC Management Reforms including Mandating a comprehensive outside consultant study of the SEC, an annual assessment of the SEC’s internal supervisory controls, and the Government Accountability Office’s review of SEC management. Lastly, several new advocates for investors were created, including; the Investment Advisory Committee, a committee of investors to advise the SEC on its regulatory priorities and practices; the Office of Investor Advocate in the SEC, to identify areas where investors have significant problems dealing with the SEC and provide them assistance; and an ombudsman to handle investor complaints. MUNICIPAL SECURITIES The Act requires registration of municipal advisors and subjects them to rules written by the Municipal Securities Rulemaking Board (MSRB) and enforced by the SEC. In addition, the Act puts “Investors First” on the MSRB by requiring that at all times, the MSRB must have a majority of independent members, to ensure that the public interest is better protected in the regulation of municipal securities. Finally, the Act imposes a fiduciary duty on advisors to ensure that they adhere to the highest standard of care when advising municipal issuers. NEW RULES AND REGULATIONS DUE TO DODD-FRANK ACT After the Act became law, a number of new rules and regulations were implemented. Below are highlights of just a few of the new rules and regulations, such as the SEC Municipal Advisor (MA) Rule, the MSRB G-42 and G-37 rules, and the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative. It should be
noted that additional regulations and rules have been implemented due to the Dodd-Frank Act, including new disclosure requirements, new arbitrage provisions, and other rules and regulations by federal agencies such as the MSRB, SEC, and IRS, to name a few. The MA Rule – The SEC gave final approval to this rule which took effect July 1, 2014, defining the term, Municipal Advisor. The SEC MA Rule specifies activities which are covered by the Dodd-Frank Act’s imposed fiduciary duty of a municipal advisor to its government client, which may limit the manner in which underwriters and other professionals interact with issuers. The Rule does not regulate issuers directly; however, there are numerous indirect implications. The effect of the MA Rule on issuers is to limit the ability of underwriters to provide advice to issuers. However, it should be noted that a few exemptions to the Rule may apply. The GFOA has issued a comprehensive alert on this topic which can be found at: http://www.gfoa.org/gfoa-alert-marule-and-issuers. MSRB Rule G-42 – Effective June 23, 2016, this Rule establishes core standards of conduct for municipal advisors engaging in municipal advisory activities. Implementation of Rule G-42 has implications for underwriters. Further amendments were approved to Rule G-42, which became effective August 12, 2016. For a comprehensive overview of this rule, please refer to the MSRB website at http://www.msrb.org/ Rules-and-Interpretations/MSRB-Rules/ General/Rule-G-42.aspx. MSRB Rule G-37 - In 1999, the MSRB published a notice on the application of Rule G-37, on political contributions and prohibitions on municipal securities business to issuer officials related to Presidential campaigns. On September 28, 2011, the MSRB issued a reminder regarding the application of Rule G-37 to federal election campaigns of issuer officials. Specifically the Rule; (a) prohibits brokers, dealers, and municipal securities dealers from engaging in municipal securities business and municipal advisors from engaging in municipal advisory business with municipal entities if certain political contributions have been made to officials of such municipal
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entities; and (b) requires dealers and municipal advisors to disclose certain political contributions, as well as other information, to allow public scrutiny of such political contributions, the municipal securities business of dealers, and the municipal advisory business of municipal advisors. The purpose and intent of this rule is to ensure that the high standards and integrity of the municipal securities market are maintained; to prevent fraudulent and manipulative acts and practices; to promote just and equitable principles of trade; to perfect a free and open market; and to protect investors, municipal entities, obligated persons, and the public interest. A comprehensive overview of this Rule can be found at: http://www.msrb.org/ Rules-and-Interpretations/MSRB-Rules/ General/Rule-G-37.aspx. Municipalities Continuing Disclosure Cooperation Initiative (MCDC Initiative) was established by the SEC in March 2014. The MCDC Initiative provided issuers and underwriters the opportunity to self-report instances of material misstatements in bond offering CSMFO MAGAZINE SEPTEMBER 2016
documents regarding the issuer’s prior compliance with its continuing disclosure obligations. The deadline for selfreporting under the MCDC Initiative was December 1, 2014. This Initiative was intended to address potentially widespread violations of the federal securities laws by municipal issuers and underwriters of municipal securities in connection with certain representations about continuing disclosures in bond offering documents. Most recently, on August 24, 2016, the SEC announced enforcement actions against 71 municipal issuers and other obligated persons (collectively, the municipal issuers) under the Initiative for selling municipal bonds with offering documents that contained materially false statements or omissions about compliance with continuing disclosure obligations. These enforcement actions are the first against municipal issuers since the first action under the MCDC Initiative was announced in July 2014 against a school district in California. The 71 municipal issuers charged comprise a wide variety of issuers from 45 states, including states, state
authorities, local issuers ranging from small towns to large counties, local authorities, school districts and charter schools, colleges and universities, health care providers, utilities, and a retirement community. These municipal issuers settled the actions without financial penalty (unlike the SEC’s prior MCDC enforcement actions against underwriters) and without admitting or denying the findings and agreed to cease and desist from future violations. Pursuant to the terms of the MCDC Initiative, the municipal issuers agreed to establish appropriate policies, procedures, and training regarding continuing disclosure obligations; comply with existing continuing disclosure undertakings (including updating past delinquent filings); disclose the settlement with the SEC in future offering documents; and cooperate with any future SEC investigations. The settlements included disclosure failures that occurred between 2011 and 2014 and covered both competitive and negotiated transactions. The
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conduct the SEC cited in the settlements ranged from failures to disclose that such municipal issuer had made no continuing disclosures at all to those where the disclosures were very late or incomplete. The settlements also included situations where municipal issuers made false statements that they were in compliance with their continuing disclosure agreements, as well as those where municipal issuers were silent about their continuing disclosure and misled investors by omission. The settlements also included a situation where there was a failure to file a material event notice.
Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and golden parachutes. Provides tough new rules for transparency and accountability for credit rating agencies to protect investors and businesses.
Below is a summary of other impacts and changes that have been implemented due to the Act:
In closing, as municipal finance officers, one must continue to keep up-to-date on changes and updates relating to the laws and regulations that impact municipalities. The Dodd-Frank Act and related regulations and rules highlighted above are only a small representation of the overall regulatory environment that is ever changing. One good reason why organizations such as the California Society of Municipal Finance Officers, the California Debt and Investment Advisory Commission and the Government Finance Officers
Consumer Protections with Authority and Independence: Created a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get clear, accurate information they need as they consider mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices. Ends Too Big to Fail Bailouts: Ends the possibility that taxpayers will be asked to write a check to bail out financial firms that threaten the economy by; (1) creating a safe way to liquidate failed financial firms; (2) imposing tough new capital and leverage requirements that make it undesirable to get too big; (3) updating the Federal Reserve’s authority to allow system-wide support but no longer prop up individual firms; and (4) establishing rigorous standards and supervision to protect the economy and American consumers, investors, and businesses.
Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest, and manipulation of the system that benefits special interests at the expense of American families and businesses.
Association are such valuable resources to municipal finance professionals is the continuous educational programs and training resources they offer us that help us navigate through such regulatory and legislative changes. ABOUT THE AUTHOR Scott Johnson has over 30 years of experience in government administration, with a focus on successfully overseeing internal service operations including; debt management, information technology, human resources, municipal finance and budget. He has led large and mid-sized operations in government including the cities of Santa Clara, Milpitas, San Jose, Oakland, and Concord and the County of Santa Clara. Scott is a past president of CSMFO and continues to be an active member of the organization. During his municipal career, he oversaw over $6 billion of debt issuances. He is currently a partner with Macias Gini & O’Connell LLP (MGO), leading the Advisory Services sector, specializing in State & Local Governments. He welcomes any questions or comments via email: sjohnson@mgocpa.com.
Disclaimer: The views expressed in this article are those of the author and do not reflect the official policy or position of CSMFO or Macias Gini & O’Connell LLP.
Advance Warning System: Creates a council to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy. Transparency and Accountability for Exotic Instruments: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated -including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers, and payday lenders.
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GOING GREEN CAN SAVE YOU MONEY - FINANCING PUBLIC IMPROVEMENTS WITH GREEN BONDS Craig Hill, Principal - NHA Advisors, LLC
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hat is a Green Bond? Everyone has probably heard the term or read an article over the last few years talking about this new financing tool known as “Green Finance.” Boiled down to its simplest form, “green” can be defined as anything having to do with environmentally friendly projects (e.g. solar, wind, pollution reduction,
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energy efficiency, water efficiency or other technologies) that reduce our demand for natural resources. The ever-expanding definition now includes bioenergy, agriculture and forestry, as well as other low carbon transportation solutions. Many of these projects are public improvements that cities do on a regular basis or are specific to large industry and private utility companies. The issuance of Green Bonds is used by both private and public entities around the world. Believe it or not, a form of Green Bond financing has existed for years in the municipal arena. Cities, counties and special districts have funded water, sewer, energy efficiency and solar projects through traditional municipal bond offerings in the form of general
obligation bonds, certificates of participation, equipment leases or even revenue bonds without designating them a Green Bond. In an effort to widen the appeal for investors and reduce borrowing costs, financial experts are now designating certain projects that are financed through the issuance of bonds as Green Bonds. WHO BUYS GREEN BONDS? Most bondholders base their investment decisions on risk and return. Over the last 15 years, a new concept has been added by investors to their investment decision – social responsibility. A socially responsible investor, also known as an “Impact Investor” is someone who not only wants to earn a return on his/her investment, but also wants that investment to make a social or environmental difference in the world. The term most commonly used to describe this investment approach is “Impact Investing.” Impact Investors include individuals and investment funds. The amount of capital dedicated for investment in Green Bonds has grown as more investment dollars are directed toward environmentally friendly projects. CSMFO.ORG
This is different from philanthropy for which there is no anticipated financial return. Impact Investing through the purchase of Green Bonds deliver funds to public or private companies to make improvements to infrastructure or buildings that will reduce the carbon footprint, reduce waste or require fewer natural resources to operate. HOW DO YOU KNOW WHAT IS A GREEN BOND? Standardization of the Green Bond designation is critical to Impact Investors. Several non-profit and trade associations are spending significant time developing standards and guidelines to officially define a “Green Bond.” Current guidelines include the following criteria:
Bond market is projected to reach $100 billion by year’s end. According to the Green Bond Database, as of August 23rd, there have been over $150 billion in total Green Bonds issued since 2007. Most Green Bonds have been issued for transportation and energy production facilities, but non-profits and public agencies are continuing to expand the use of Green Bonds for universities, water projects and other public infrastructure.
As the Green Bond market continues to expand, third-party rating agencies like Moody’s Investors Service are developing criteria that will help investors understand the credit qualities and metrics related to the investment. These new services will help both issuers Use of bond proceeds (the project and investors develop sound, consistent financing structures that will continue or improvement being financed) Project evaluation for sustainability to make the issuance of Green Bonds efficient and advantageous to public and other environmental factors agencies. (the quantifiable impact of the improvement) LOCAL EXAMPLES Management of the bond California public agencies have been proceeds to protect against active in issuing Green Bonds for a the use of funds for non-green number of years. In 2016 alone issues improvements have included: Third-party verification (project • The San Francisco Public Utilities performance on a forward-looking Commission issued $240 million basis to confirm the project is in May 2016 to fund sustainable meeting its target environmental storm water management and benefits) wastewater projects
three years, Renovate America, as an administrator for the HERO program operated through WRCOG, has issued over $1 billion in Green Bonds to fund its residential PACE projects throughout California.
WHAT DOES THIS MEAN FOR LOCAL GOVERNMENT? • Designating an issue as a Green Bond will expand the universe of investors • that will potentially purchase the bonds from the public agency. While bond ratings and the structure of the financing (revenue bond, certificate of • participation, special tax or assessment) will be similar regardless of whether it is a Green Bond, the pool of potential investors will expand as Impact Investors • review and potentially bid for the Green Bonds. As the Impact Investor market continues to grow, the demand for Green Bonds should exceed the supply from issuers, driving down the WHO CAN ISSUE GREEN BONDS? • The State of California, through its relative interest rates. As an example, Public agencies are competing Infrastructure Bank loan program, two similar rated bonds should have with private companies for the same issued $410 million in April 2016 the same interest rate. However, if audience of Impact Investors. Utilities to fund various projects one is designated “Green,” its interest and large corporations are issuing • The San Diego County Water rate should be lower as more investors Green Bonds on a regular basis to Authority issued $98 million of (including the Impact Investors) bid for fund wind farms, geothermal plants, water revenue bonds in June the Green Bonds. solar arrays and other clean energy 2016 for water efficiency projects As Impact Investors, issuers (both production facilities. Green Bonds are • The City of Napa has designated private companies and public agencies), also being used to fund new construction its $11,000,000 Solid Waste and non-profits such as the Climate of both public and private buildings Revenue Bonds as Green Bonds Bond Initiative, continue to develop based on standards of the Leadership in and is anticipated to sell the standards and guidelines for the Green Energy and Environmental Design (LEED) bonds in September 2016 Bond market, issuers will benefit from certification. Market experts estimate Potentially, the biggest use for Green increased demand and lower interest that the greatest deployment of “green” Bonds may come through the growing rates compared to the traditional bond capital will be for redevelopment of market for PACE (property assessed market. Public agencies looking to buildings and existing facilities. clean energy). PACE is used to fund maximize their financing and minimize HOW BIG IS THE GREEN BOND solar and other renewable energy, the cost of funds will want to consider MARKET? water and efficiency projects on both the Green Bond designation when Based on information provided by the residential, commercial and industrial structuring their next Green project. non-profit group Climate Bonds Initiative, properties. There are three active $42 billion of Green Bonds were issued programs in California managed by in 2015. Year-to-date through July CSCDA, Western Riverside Council of 2016, more than $46 billion of Green Governments (WRCOG) and the Golden Bonds have been issued, and the Green State Finance Authority. Over the last
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INSIDE LOOK
Bad Players Necessitate Task Force on Bond Accountability – The View from a member of the task force and CSMFO Carrie Corder, Cucamonga Valley Water District cities, counties, special districts and school districts. I was fortunate to participate representing special districts in the state. The Task Force met five times over an eight month period and received testimony from municipal finance professionals, auditors, investment bankers, tax experts and bond trustees. Almost half of the expert speakers are current members of CSMFO. The Task Force created a comprehensive set of practices to help agencies administer their bond funds and reduce the risk of fraud, waste and abuse. The Task Force was emphatic that the following 17 practices (abridged) are recommendations and not mandates.
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ne might think that a mansion on the Oregon Coast and $24,000 art sculpture is only meant for the rich and famous. Not so -- a municipal finance officer for a regional planning agency in San Francisco found a way to circumvent internal controls for bond proceeds and funneled the money to his own account. Fortunately, the majority of the embezzled funds were returned and a guilty plea resulted in a prison term. To prevent this from happening again, California State Treasurer John Chiang convened a Task force on Bond Accountability (Task Force) in February 2015. The Task Force was charged to develop best practice guidelines for the care and use of state and local bond proceeds. Co-chaired by Jay Goldstone and Fred Keely, the Task Force was made up of 10 other professionals representing financial advisors, bond counsel, the State Controller’s Office, the State Treasurer’s office and a handful of municipal finance officers representing CSMFO MAGAZINE SEPTEMBER 2016
1. Governing body is ultimately responsible for the internal control system 2. Assign authority and responsibility to staff to implement controls 3. Establish an audit committee to assess the effectiveness of the system 4. Adopt written policies to ensure adherence to internal controls 5. Recruit and train competent personnel 6. Hold personnel accountable for their control responsibilities 7. Define the objectives of the agency’s debt administration program 8. Conduct a risk assessment 9. Establish control activities the objectives will be met 10. Disbursement of bond proceeds should be authorized by at least 2 staff members 11. Conduct an annual assessment to ensure that bond reporting has been fulfilled 12. Use a bona fide accounting system for bond proceeds and disbursements 13. Develop a reporting strategy to communicate the results of the program 14. Develop a system to alert personnel to changes in internal controls
15. Train staff and board members about their responsibilities 16. Periodically evaluate control system for new or changed risks 17. Consider a citizen’s bond oversight committee So what is an agency to do with this daunting list of recommendations? The Task Force created a helpful checklist included in the full report (see references) and suggests that the California Debt and Investment Advisory Commission (CDIAC) assist agencies with training. Members of CSMFO also have numerous training opportunities at the annual conference, as well as chapter meetings and live and recorded webinars. GFOA has a sample debt management policy on its website and the CSMFO member Listserve is an excellent resource for policy samples. On a related note, SB-1029 was just signed by the Governor on September 12, 2016 and requires municipal issuers of debt to adopt a debt policy outlining specific provisions recommended by GFOA. In addition, local agencies are required to annually report to CDIAC the debt issued and authorized during the year, the balance of outstanding debt, as well as other information. Although the Task Force did not participate or recommend this legislation, hindsight makes it clear that a legislative approach to this issue was forthcoming. CDIAC will be working with local agencies to devise a reporting method to comply with this law. The moral of this story is important to all of us municipal finance officers who have responsibility with public debt. Don’t let your petty cash policy be more extensive than your debt management policy. If you don’t have a debt policy or formal debt program, there is no need to reinvent the wheel. Experience tells us that our CSMFO family is very supportive and is willing to share their policies and expertise.
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THE IMPORTANCE OF ESTABLISHING A STATEMENT OF GOALS AND POLICIES FOR THE USE OF
THE MELLO-ROOS COMMUNITY FACILITIES ACT OF 1982 IN YOUR CITY
Michael Busch, CEO, Urban Futures Inc.
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connection with the issuance of debt and the provision of annual information regarding any District established by the city with respect to which Bonds have been issued, including requiring any developer in a District who is material to the Bond issue to transmit BEST PRACTICE DISCLOSURE appropriate information to the city REQUIREMENTS Disclosure Requirement for Developers. or its designee for disclosure to Bond investors. Establishing this process early In my experience as an issuer of CFD’s, there is nothing more important than the on through the formation process and the drafting of the continuing disclosure disclosure by the developer that there agreement when bonds are issued is will be full disclosure of the Mello-Roos vital to your success as an issuer. special taxes and any other special tax, assessment, overlapping special EQUITY OF TAX ALLOCATION taxes or assessment of other districts, FORMULAS or other liens on individual parcels to The rate and method of existing and future property owners, apportionment of the special tax must and to prospective purchasers of be both reasonable and equitable in property including interim purchasers apportioning the costs of the public and sales to merchant builders. This facilities to be financed to each of the can be accomplished by conditioning parcels within the boundaries of the Cities should develop goals and the developer to provide disclosure proposed District. Cities should require policies regarding eligible facilities and of such information to the purchasers the apportionment of costs be based on priorities, best practices in disclosure, as of property within the District, with the benefit to those in the District receive well as equity of tax allocation formulas respect to the existence of the District, from the public facilities. specific to Mello-Roos financing as a maximum and/or backup special taxes In addition to those exempted under guideline to assist concerned parties, to be levied within the District, facilities the Mello-Roos Act, the rate and method such as developers, in following a to be constructed, the foreclosure of apportionment may provide for particular city’s approach to CFD process and the terms and conditions additional exemptions to be extended financing. After all, it’s a common of Bond issues on behalf of the District. to parcels that are to be dedicated at goal of cities to support projects which For example, for a residential project a future date to public entities, held address a public need and provide such disclosures include home buyer by a home owner’s association, or a public benefit. Proposed projects notifications requiring a signature prior designated open space. requesting CFD financing should be to home purchases or an offer to the When CFD’s are being formed, it evaluated to determine if such financing residential buyers the option of having important to understand the projected is financially viable and in the best all special taxes prepaid upon close of maximum annual special tax, together interest of the city and current and escrow, with a corresponding increase with ad valorem property taxes, future city and project residents. Such in the purchase price of the residence. special assessments or taxes for an goals and policies are designed to Unfortunately, because buying a overlapping financing district, including comply with Section 53312.7 of the home requires a significant amount of other charges, taxes, or fees. This Government Code. paperwork many buyers fail to recall is referred to as “overlapping” debt these disclosures leading to questions ESTABLISHING ELIGIBLE PUBLIC burden. Through the rate and method, each tax year when assessment is FACILITIES AND PRIORITIES the objective is to limit the “overlapping” collected on the tax rolls. Having the The improvements eligible to be debt burden on any parcel to two financed through a CFD must be owned disclosure requirements and specific percent (2%) of the expected assessed by a public agency or public utility, and disclosure documents close by will serve value of the parcel upon completion of you well around property tax collection must have a useful life of at least five (5) the improvements. In evaluating whether periods. years. In any event, no bonds should this objective can be met, city staff be issued with a maturity date greater Compliance with Federal Securities should consider the aggregate public than the useful life of the facilities or Laws. As you all may recall, 71 public service needs for the proposed project. improvements being financed. The agencies across the U.S. were recently Specifically, consideration should be development proposed within the fined by the SEC for disclosure related given to which public improvements the District must be consistent with the city’s issues. Simply stated, compliance applicant is proposing to be financed in general plan and must have received with federal securities laws is no relation to these aggregate needs and any required zoning or specific plan joke. Because CFD’s are a form of decide what is an appropriate amount approvals. security, cities should use all reasonable to extend in public financing to the Public facilities eligible to be financed means to ensure compliance with identified public improvements. The total applicable federal securities laws in by a CFD include, but are not limited maximum annual special taxes that can n my former role as a municipal finance director and now as a municipal advisor, I am often asked if policies specific to certain debt structures are necessary and/or important. While most well managed public agencies have general debt policies, few have established goals and objectives for one such structure commonly used by fast growing communities and as an alternative to redevelopment: Community Facilities District (CFD) financing. The discussion below has been drafted around a few significant elements of a goals and policies for the use of CFD financing from a current municipal client I am working with. I have found it’s use effective in the developer negotiation process and considered a best practice of the GFOA and with the various rating agencies.
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to, the following: streets, highways and bridges, street lighting, traffic signals, parks, libraries, police and fire facilities, public utilities and land acquisition necessary to meet mitigation requirements (e.g., habitat preservation).
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or on behalf of the District in each year that said Bonds will remain outstanding.
rules”. Many communities have waived established goals and policies for MelloRoos Community Facilities Act. Most Keep in mind, CFD’s are occurrences are at the request of the developer when market demand for not designed to fund 100% of infrastructure housing products change (e.g., large residential units to smaller units), during costs or to finance recessionary periods (which by the developer impact way occur in California roughly every fees. More likely 7 years) or when the 2% overlapping than not, CFD Such financing will fund tax rate may be exceeded. exceptions should not be considered only a portion of the infrastructure mandatory and should be evaluated by the city and its special tax consultant needed. As a on a case by case basis. Once result, facility the evaluation is completed and an priorities are exception is recommenced by staff and necessary to the special tax consultant, action of ensure we fund the City Council is necessary in order priority facilities and do so equitably to provide transparency regarding the public purpose and justification for through transparent the exception to established goals and tax allocation formulas policies. specific to Mello-Roos financing.
be collected from taxable property in a must be equal to at least one hundred ten percent (110%) of the gross annual debt service on any Bonds issued by
SHOULD WE HAVE EXCEPTIONS TO THE ABOVE GOALS AND POLICIES? Most of us have heard the phrase “there are always exceptions to the
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How Your Relationship with Your Municipal Advisor Is Evolving By Margaret C. Henry, Deputy General Counsel, Stifel Financial Corp.
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n June 23 of this year, a new rule took effect that has the potential to change significantly the way that issuers interact with their municipal advisors. The Municipal Securities Rulemaking Board, or “MSRB,” adopted Rule G-42, which governs the conduct of municipal advisors who provide advice on bond issues or derivatives. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 already provided for a new regulatory regime over municipal advisors, which includes a federal fiduciary duty to their state and local clients. G-42 describes what that fiduciary duty means.
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This rule, taking almost six years to develop, aims to help state and local governments by protecting them from bad actors in the marketplace. The new rule has placed additional requirements on municipal advisors, and you, as their client, may have already noticed the difference. Most obviously, you’ve probably already received some disclosures from your municipal advisor about conflicts of interest. G-42 requires your municipal advisor to disclose material conflicts of interest at the time or before they provide you with advice. Even if they don’t think they have a conflict, they are required to tell you so. Also, if your MA contract calls for your MA to be paid when a bond issue closes and/or says the amount of the MA’s fee will vary according to the size of the issue -- contingent fees -- your MA is required to tell you that’s a
conflict of interest. Other arrangements that are considered conflicts and must be disclosed include services being provided by an affiliate of the MA, payments made by the MA to get your MA business, and payments received by the MA to recommend someone else to you, like an underwriter or swap provider. G-42 also requires your MA to tell you how you can discover whether they have any legal or disciplinary history that you might consider to be material. Notice that they don’t actually have to provide you with those disclosures, unless you ask them to. They only have to refer you to the Securities and Exchange Commission’s website, which unfortunately is not easy to navigate, where they’ve filed a lengthy form, which in turn may cross-reference
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another form. If you don’t already have a written contract with your MA, they are likely going to ask you to sign one. It’s important to note that G-42 doesn’t actually require a written two-party contract. It merely requires a “writing,” which may be a writing provided to you by your MA. An email would technically suffice, but the most likely and practical way for the “writing” requirement to be satisfied is a contract. That writing is required to include certain basic information: • the form and basis for direct or indirect compensation, if any, for the services to be performed; • any conflicts not previously disclosed; • a description of the type of legal and disciplinary information about the MA firm and its MA employees you can find on the SEC website; • the date of the last material change to their SEC forms; • the scope of services they will perform and any limitations; and • provisions about termination of the contract. So far this is all paperwork. But there’s much more to G-42. You already probably expect your MA to help you make decisions about whether to do a bond issue or a derivative, but the kind of conversations they have with you to arrive at a decision have never been dictated by a rule and vary considerably depending upon your experience and the type of deal being considered. That has changed with G-42. G-42 says that, if your MA makes a recommendation to you about a bond issue or derivative, they must first conclude that it is suitable for you. To arrive at that conclusion, they must consider at least the following eight factors, which you will recognize as similar to the ones that your broker might ask you about when you open a brokerage account. • • • • • •
your financial situation and needs; your objectives; your tax status; your risk tolerance; your liquidity needs; your experience with bond issues or derivatives generally or of the type and complexity being
recommended; • your financial capacity to withstand changes in market conditions during the term of the derivative or the period that the bonds to be issued are expected to be outstanding; and • any other material information known by the MA about you and the recommended bond issue or derivative, after reasonable inquiry. And, like your broker, you may find that your MA is going to ask questions to make sure they have a record that they considered all the factors. That’s because there is likely going to be a regulator examining them and asking them to prove that they considered all the factors. YOUR MA IS ALSO REQUIRED BY G-42 TO INFORM YOU ABOUT: • their evaluation of the material risks, potential benefits, structure, and other characteristics of what they recommended; • the basis upon which they reasonably believed that what they recommended was suitable for you; and • whether they investigated or considered other reasonably feasible alternatives. They have to go through almost the same process if they’re evaluating someone else’s recommendation -- for example, an underwriter’s proposal. The only difference is the suitability analysis. When someone else is making the
recommendation, your MA only has to tell you whether or not they consider that third party’s recommendation to be suitable for you. Your MA is likely going to keep a record of all the conversations they have with you about these points so they can
show a regulator that they complied with the rule. CERTAIN CONDUCT IS PROHIBITED BY G-42, EVEN WITH DISCLOSURE: • receiving excess compensation; • making false or misleading statements in order to get hired; • fee-splitting with underwriters and undisclosed fee-splitting with investment providers; • making payments to help get your MA business other than payments to affiliates and registered municipal advisors; and • in general, selling you investments of bond proceeds when they have been the MA. There is much more to say on this topic and you may wish to look at the Government Finance Officers’ website for more in depth resources on this topic. It’s important that state and local governments be wellinformed about the bond issues and derivatives that they are doing and that they understand whether their MAs have conflicts of interests or a checkered disciplinary history. My point is simply that your relationship with your MA is likely to change as a result of G-42. It’s likely to become more formal and to involve a lot more paperwork. Hopefully, the end result is a positive.
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Debt Management:
What You Need To Be Thinking About Before, During and After You Enter the Capital Markets By: Jay M. Goldstone, Former Chief Operating Officer and Chief Financial Officer, City of San Diego
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and you are left with the legal and administrative responsibilities spelled out in o you’re a newly hired Finance the bond documents for perhaps the next 20 Director with a broad range of or 30 years. As such, the decisions made responsibilities, including budgeting, and obligations agreed to when the deal is payroll, procurement, accounts payable being structured will be with you long after and receivable, investments, and debt everyone else has gone home. management. Your background may be in accounting, financial reporting, investments, So where do you begin? First and etc. and one day your boss comes to you foremost and long before you’re faced and says we need to raise $20 million with the need to enter the capital markets dollars for a variety of capital projects. you should have established a written Now what? And while you may have had debt policy that has been reviewed and to account for previously issued debt in one approved by your governing board. At of your previous job and may have inherited a minimum, this policy should include a outstanding debt in your current job, there discussion on the types of projects to be is a chance you have never been directly financed, when to use debt versus cash, involved in the issuance of debt before. the role of the rating agencies, the type of Even if you have, there are a number of financing instruments your organization is things you need to consider before, during willing to consider, the terms of the debt, and after the bond sale. What do you when to use credit enhancements, are need to be aware of, who are the players you willing to consider variable rate debt, in the transaction, what are their roles, what when to include a debt service reserve, the is your role and what is the role of other selection process for your financing team, people in your organization? These are post issuance administration, and refunding critical questions you need to be thinking policies. about and hopefully have a fairly clear Once this is in place, you are better understanding before you even begin the positioned to move forward with the actual process. With more and more light being issuance. This does not mean you can shined on the municipal bond market and minimize your actual role or that you are ever increasing Securities and an expert, but at least there is a Exchange Commission framework from which to begin. (SEC) actions being While always the case, in taken against issuers of municipal debt “Finally, the organization recent years accessing the capital markets brings with it and not just the hired needs to keep detailed a high level of scrutiny from professionals, you records as to how the bond the regulators. And while cannot take this part of proceeds were spent. the municipal bond market your job lightly. is exempt from many of the So, without getting regulations and oversight afforded into the details of the the corporate bond market, it does roles and responsibilities of not mean that the regulators aren’t watching the professionals you may hire, just know and willing to take whatever steps within that you will need to select a variety of their authority (explicit or implied) to ensure consultants including bond counsel, a “fair, accurate, complete, and timely” municipal advisor (in most instances), an disclosure and compliance with the legal underwriter/investment banker (in most commitments made to the investors who buy instances), possibly a disclosure counsel, your bonds. paying agent/trustee, rating agency (one or As such, you are more than just a casual more), bond insurer (possibly), and one or participant in the sale. You are the owner more letter of credit banks (if transaction is of the transaction and the obligor of the done in a variable rate mode). debt until “final maturity” when the debt is While each consultant plays a key fully repaid or refunded. This means that role in the process, no one can step into you and other staff of your organization, your shoes and no one can eliminate including elected officials must take full your responsibilities and exposure to an ownership of the transaction and be enforcement action should something fall involved in every decision. Again, while through the cracks as either part of the there are various finance professionals process or in the subsequent years following assisting in the structuring of the offering and the transaction. Remember, once the deal the preparation of various legal documents is done and the money is in your account and financial analysis, staff must also have a ready to be spent on the projects, the army firm understanding of the commitments being of professionals you hired to assist you are made. If staff (and by this I really mean you) long gone onto the next client/transaction do not fully understand the transaction and CSMFO MAGAZINE SEPTEMBER 2016
cannot explain the structure and obligations of the transaction to the governing board, the deal most likely should not be done. The issuer’s typical duties at and after the time of sale include the approval of a pricing scale (if the bonds are to be sold on a negotiated basis). While it may only be a few basis points, the decision to accept or reject a proposed pricing scale could mean the difference of hundreds of thousands of dollars in interest expense over the life of the bonds. Once the sale is completed and bids accepted, the designated staff will sign a bond purchase agreement. Following this, the lawyers will finalize the remaining legal documents which will be signed a day or two before the actual closing of the transaction. Once the deal closes, staff will need to book the transaction in the general ledger/balance sheet. Depending upon the structure, consulting with your external auditors may be advised to ensure proper recording of the debt. In addition, setting up a tickler file with key dates reminding you when your bond payments are due and when you need to file your continuing disclosure information is extremely useful. During the period when there are unspent bond proceeds or reserve funds, staff will want to determine how these funds should be invested. This may be with the help of a third party, the purchase of a guaranteed investment contract, providing specific investment instructions to your Trustee, or in some instances, managing the funds directly in-house. Federal tax laws, in most instances, will require you to rebate any net positive arbitrage earned on the investments of the bond proceeds. As such, staff will need to track interest earnings, offset by the true interest costs, in order do the calculations. Finally, the organization needs to keep detailed records as to how the bond proceeds were spent. First of all, when the original bond documents were signed, staff acknowledged that there was a reasonable expectation that the bond proceeds will be spent within a three year period. If this doesn’t happen, your agency will be required to yield restrict the investments of any remaining unspent bond proceeds. In addition, it is important to be able to report the use of bond proceeds to the governing board, the general public as well as should your transaction ever be audited by the IRS. In conclusion, while what you say and do during the structuring and initial offering of a bond sale is important, what you say and do after the sale and during the life of the bonds is as important. Your continuing disclosure, both in timing and content, is an ongoing responsibility that you cannot take lightly. Not you, nor anyone else in CSMFO.ORG
your organization, including your governing board. For additional information and reference resources, GFOA has developed a number of best practices that you may want to familiarize yourself with. Some of these are: • • • • • • • • • •
GFOA Best Practice: Selecting Bond Counsel GFOA Best Practice: Selecting and Managing Municipal Advisors GFOA Best Practice: Selecting and Managing Underwriters for Negotiated Bond Sales GFOA Best Practice: Using Credit Rating Agencies GFOA Best Practice: Debt Issuance Transaction Costs GFOA Best Practice: Selecting and Managing the Method of Sale of Bonds GFOA Best Practice: Issuing Taxable Debt GFOA Best Practice: Understanding Bank Loans GFOA Best Practice: Debt Management Policy Debt Issuance Checklist: Considerations When Issuing Bonds
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The Other Shoe Drops: SEC Announces MCDC Enforcement Actions Against Municipal Issuers Katie Dobson, Associate, Jones Hall, a Professional Law Corporation
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n March 10, 2014, the U.S. Securities and Exchange Commission (SEC) announced its Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, which was intended to address violations of anti-fraud provisions of federal securities laws related to continuing disclosure. MCDC provided predictable settlement terms for issuers and underwriters who self-reported possible violations of Rule 15c2-12 (Rule) involving materially inaccurate statements relating to prior compliance with continuing disclosure undertakings. These settlement terms apply to issuers who filed self-reports with the SEC by the December 1, 2014 deadline. RULE 15C2-12 AND CONTINUING DISCLOSURE The Rule, which was promulgated by the SEC under the Securities Exchange Act of 1934, requires that, before an issuer sells municipal securities to investors in a public sale, the underwriter must reasonably determine that the issuer has undertaken to provide certain information to the Electronic Municipal Market Access
portal (EMMA), the official information repository for the Municipal Securities Rulemaking Board, following the issuance of the securities. The Rule was adopted in order to improve the quality and timeliness of material information to investors in the primary and secondary markets. This information includes audited financial statements, updated financial and operating data relating to the securities and notices of certain listed events. In addition, the Rule requires that final official statements for municipal securities describe instances of material non-compliance by issuers with existing continuing disclosure undertakings during the previous five years, the purpose of which is to give investors information that may help them evaluate the likelihood that the issuer will abide by its new continuing disclosure undertakings. Prior to the announcement of the MCDC initiative, the SEC expressed concern that issuers of municipal securities may not have been complying with their continuing disclosure responsibilities and may not have been disclosing material non-compliance with existing undertakings in their official statements. The MCDC initiative focused on whether issuers had been accurately
describing instances of material noncompliance with their existing continuing disclosure undertakings in their official statements, and whether underwriters had been performing adequate due diligence in order to identify the misstatements and omissions before offering and selling the bonds to their customers. MCDC ENFORCEMENT ACTIONS On August 24, 2016, the SEC announced enforcement actions against 71 municipal issuers and other obligated persons who self-reported under MCDC in the first MCDC enforcement actions against municipal issuers since the self-reporting deadline. The 71 entities included states, counties, school districts and other entities from 45 states, including one California issuer, the City of Alameda. All of the enforcement actions against issuers impose the standardized settlement terms discussed below. Earlier, in June 2015, September 2015 and February 2016, the SEC announced enforcement actions against 72 underwriting firms who self-reported under MCDC. According to the SEC, the affected underwriting firms comprise approximately 96% of the market share for municipal underwritings. STANDARDIZED SETTLEMENT TERMS Pursuant to MCDC, issuers who self-reported agreed to standardized settlement terms, without admitting to or denying the findings of the SEC. The standardized settlement terms, as offered by the MCDC initiative, require that the issuer: •
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establish appropriate written policies and procedures and implement training regarding continuing disclosure obligations within 180 days of the enforcement order, including the designation of an individual responsible for ensuring the issuer’s compliance with the policies CSMFO.ORG
•
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and procedures. comply with its existing continuing disclosure undertakings, including updating past delinquent filings as necessary, within 180 days of the enforcement order. disclose in a clear and conspicuous fashion the settlement terms in any final official statement for a securities offering by the issuer in the five years following the enforcement order. provide the SEC with a compliance certificate regarding the above undertakings by no later than the oneyear anniversary of the date of the enforcement action. cooperate with any subsequent investigation by the SEC regarding the violations disclosed in the self-report, including the roles of individuals or other parties involved.
No financial penalties were assessed against issuers under MCDC, though underwriters were assessed varying financial penalties in addition to receiving standardized settlement terms in accordance with the terms of the MCDC initiative. LESSONS LEARNED Common lapses in compliance with the Rule include the failure to timely file audited financial statements and annual reports, the filing of annual reports that do not contain all of the required information and the failure to correctly link continuing disclosure filings with outstanding securities on the EMMA system. In response to questions regarding MCDC received prior to the filing deadline, the SEC declined to provide guidance regarding which instances of non-compliance are considered material for purposes of disclosure in official statements and compliance with the Rule. However, a review of the issuer settlement agreements may provide guidance regarding what the SEC considers material for purposes of disclosure in official statements and compliance with the Rule.
Timely Filings. Most of the enforcement actions involved statements from final official statements that issuers had been compliant with their existing continuing disclosure undertakings in the previous five years, when in fact the issuer had failed to file its audited financial statements or annual reports on a timely basis. While no bright-line rule has been established with respect to how late a filing must be made in order to consider it a material failure under the Rule, none of the orders identified a filing that was less than one month late as a failure to comply.
potential enforcement actions, all issuers of municipal securities should review their existing continuing disclosure undertakings to ensure both ongoing compliance and the accurate disclosure of instances of material non-compliance in final official statements when issuing municipal securities. In addition, issuers should consider proactively adopting disclosure policies and procedures that include the designation of a responsible individual and systems to monitor disclosure requirements and deadlines to ensure ongoing compliance. Issuers can look to bond counsel and municipal advisors for assistance with Multiple Failures. The settlement agreements indicate that multiple failures the preparation of such policies and procedures. in compliance with an undertaking, some or all of which may not be material individually, could be material when considered on an aggregate basis. Material Event Filings. The failure to make certain material event filings in a timely manner was also found to be material, and one issuer’s settlement agreement cited only the failure to disclose that notices of defeasance related to securities which the issuer had previously set aside funds sufficient to service the remaining debt for had not been filed prior to the offering, though required. According to that order, the failure to file resulted in bonds being traded without accurate information. Notably, the failure to file event notices related to rating changes was not cited in any settlement agreements. ENFORCEMENT ACTIONS FOLLOWING MCDC
Going forward, SEC enforcement actions relating to violations of the Rule could result in the imposition of remedies beyond the MCDC settlement terms, and the SEC has stated that it will likely seek financial sanctions in the future against issuers who have materially violated their continuing disclosure undertakings and failed to disclose those violations. In addition, the SEC has affirmed its commitment to investigating Legal Standard for Materiality. Each settlement agreement released on August the failure by issuers to disclose noncompliance with the Rule. While it is 24, 2016 included a legal discussion unclear whether there will be additional citing a U.S. Supreme Court case, enforcement actions brought against Basic, Inc. v. Levinson, which held issuers under MCDC, the SEC has made that a misrepresentation or omission is it clear that ensuring compliance with material when a reasonable investor the Rule is a priority. would consider it important in making an investment decision. In order to avoid SEC scrutiny and
29 CSMFO MAGAZINE SEPTEMBER 2016
Piper Jaffray is committed to California municipal finance
For more information, contact the following representatives from our California public finance team: Mark Adler Managing Director 301 297-6010 mark.j.adler@pjc.com
Katie Koster Managing Director 949 494-6110 katherine.a.koster@pjc.com
Dennis McGuire Managing Director 916 361-6520 dennis.j.mcguire@pjc.com
Russell Reyes Managing Director 310 297-6014 russell.c.reyes@pjc.com
Victor Ume-Ukeje Managing Director 415 616-1662 victor.e.ume-ukeje@pjc.com
California municipal finance banking offices are located in Los Angeles, Orange County, Sacramento and San Francisco
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The Recession’s Been Over For 7 Years – Where Are the Happy Days? By Daniel Wiles, Principal, Fieldman, Rolapp & Associates, Inc., Irvine, California
H
appy Days are here again, The skies above are clear again, so let’s sing a song of cheer again, Happy Days are here again,” Ager (music) Yellen (lyrics), 1929.
. . And They Refuse to Do It,” David Harrison and Heather Gillers, August 7, 2016. Their point was that Wall Street is begging for new bonds through historically low interest rates, but Main Street (voters and public officials) is continuing to retrench. This retrenchment is coming in the face of ever increasing needs for additional The Great Recession dragged on for 18 months, but has been over since June infrastructure. While the Journal cited a McKinsey Global Institute report on 2009. A review of Municipal Market the need for increased US infrastructure Daily indices reveals that interest rates spending, virtually everyone can cite are near historic lows. Between 95% and 99% of the time, interest rates have examples of deteriorating infrastructure. The I-35 bridge collapse in August been higher. So where are the new 1, 2007 highlighted the national municipal bonds and the new projects? infrastructure issue, but any major In early August, the Wall Street increase in infrastructure financing Journal headline lamented: “American was truncated by the start of the Great Paradox, It’s Never Been Cheaper for Recession in December 2007. Cities and States to Borrow Money .
In April, 2016, the Pew Charitable Trusts published a research analysis paper “Issuance of New Money Bonds Remains Low in Large U.S. Cities,” April 7, 2016. The Pew research focused more specifically on the pattern of issuance of new money bonds, noting that refunding volumes comprised an increasing percentage of the total bond issuance volume. The significant savings realized through refunding produced reduced overall debt service payments in 18 of the 29 cities reviewed, indicating that the savings were not being plowed back infrastructure investments, but were being used to offset other reductions in revenue or current expenses. The logical argument would be that as interest rates decrease, governments would move to finance long term needs
31 CSMFO MAGAZINE SEPTEMBER 2016
at lower rates. . The Bond Buyer’s compilation of issuance volumes since 1986 tells a stark story. Adjusted for inflation, the highest total volumes of issuance occurred in the period from 2002 to 2010. Since 2010 volume has dropped with total inflation adjusted volumes between 2011 and 2015 ranging from 65% (2011) to 83% (2012) of the 2010 volume. In fact, while long term interest rates (as compiled through Municipal Market Daily (MMD) have decreased by between 2% and 3%, the volume of bonds issued also decreased. The decrease in new money bond issuance volume is even more extreme. The current market for municipal bonds has a large concentration of refunding bonds as compared with new money bonds for infrastructure development From 1986 to 2009, the proportion of new money bonds to all bonds sold was approximately 70%. Since that period, the proportion of new money bonds has dropped to about 55%. In the last 2 year, the proportion is hovering below 50%. If the annual volumes are adjusted for inflation from 1986, the new money bond volume in 2015 is the lowest total since 1987. The aftermath of the 2001 recession saw significant increases in bond issuance activity for both new money and refunding purposes, reflecting what were perceived as historic lows in interest rates. That pattern was not borne out in the aftermath of the Great Recession.
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The reasons for the lack of new infrastructure spending and new money bond issuance appear to be: the failure of net available revenues to completely recover from pre-Great Recession highs; the body politic’s apparent unwillingness to absorb higher tax burdens for improved infrastructure and the competition within government budgets between new infrastructure and other liabilities, such as healthcare, pension costs and OPEB. The National Association of State Budget Officers Spring 2016 Fiscal Survey of States noted that while state revenues have increased in recent years, the rate of growth for 2017 has slowed significantly. Budgets will reflect only modest spending increases – which for state budgets will be focused on K-12 education and Medicaid. In many states, transportation spending is decreasing, with some of the pressure coming from decreased gas tax revenues due to advances in fuel efficiency.
voter approval has had a chilling effect on new capital programs. Costs that had previously been relatively minor elements of the overall budget have grown to pose serious competition to other priorities. The governmental costs of healthcare, both in the form of Medicaid and employee OPEB, have mirrored the overall economy in growing to historically large proportions of the budget. Pension funding requirements have also expanded to absorb a greater proportion of available funds. While pension and OPEB funding have prompted some apocalyptic cries from some in the finance community, like Meredith Whitney famously did in December 2010, the reality has been less dramatic, but still significant.
The result has been that while the infrastructure needs of the United States are well known, the resources to resolve our issues remain out of reach. The US presidential election features promises by both parties to embark on renewal of Much like the Great Depression of the public infrastructure. The real question 1920’s and 1930’s, the Great Recession will be whether the result will include has spurred some movement toward any real political will provide resources austerity. It is said that Depression area that will allow local governments to children were more careful in spending exploit the lowest interest rates most of and borrowing. In political terms, us have ever seen. the wake of the Great Recession has increased the movement to government austerity and limitation of overall spending. This trend is accentuated by requirements, such as California’s Proposition 218, that require voter approval for tax increases. On a macro level, it appears that the requirement for
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INSIDE LOOK
2017 Host Committee Running Diary Drew Corbett, CSMFO President-Elect As President-Elect and Host Committee Chair Drew Corbett works on preparations for the 2017 Annual Conference in Sacramento, he thought it would be fun to give the membership a glimpse into the process of putting the conference together. Each month, Drew will provide a running commentary on some of the work that goes into conference preparations.
July 22-29, 2016: I shifted gears a little bit during this time period to focus my attention on the work of the Program Committee. As I have mentioned in previous diary entries, the work of the Program Committee is the foundation of a great conference. The Program Committee is responsible for a significant part of the conference’s content, including the pre-conference sessions, the early bird session(s), and the concurrent sessions. The committee also partners with the President-Elect on selecting the general session speakers. Getting the conference programmed is a monumental task that typically starts with the “Call for Sessions”, which is an opportunity for our membership to tell us what they want in terms of content at the conference. With the deadline for submissions recently concluded, the Program Committee started to plot out its next steps to efficiently run through these sessions and determine which ones will be programmed as concurrent sessions. This is a challenging task to say the least, especially trying to determine who will get the opportunity to speak when there are 3 or 4 similar sessions submitted. Having been a part of this committee for the last few years, I can tell you firsthand that these committee members put a lot of time and effort into putting forth the best content possible for the conference. For my part, I met with some of the committee members during this time and discussed some process changes to build upon this group’s efforts to improve review efficiency over the past several years and discuss the meeting schedule for the whole group. With all of that mostly settled, the Program Committee is off and running, putting together a great program CSMFO MAGAZINE SEPTEMBER 2016
DREW CORBETT for Sacramento. I am looking forward to seeing the full slate of speakers later on this calendar year.
July 29, 2016: I had a phone conference with Melissa, predominantly to discuss the Thursday night event logistics prior to the next full Host Committee meeting. Given some of the logistical challenges I have been describing, I was really anxious to get the remaining questions answered about the location(s) of the event that night so that we could really start focusing on the details. When I got on the phone with Melissa, I was thrilled to learn that she and the lead of the Thursday night event sub-committee, Joan Michaels Aguilar, had gotten together and hammered out some of the key logistical details, which will pave the way for finalizing location(s) and starting to be able to focus on the event details. I’m greatly appreciative of their efforts to move things forward and get us positioned to have a productive discussion when the full committee meets in August. As soon as we have things nailed down as far as event details go, I will make sure to let everyone know. August 6 – 12, 2016: After a short vacation break, I got back to work exchanging emails and having conversations on a number of conferencerelated topics. In addition to working through some of the smaller details, I had a really productive conference call with Melissa, Joan, Janet and Marisa to try to settle out on some of the major aspects of
the Thursday night event so that the subcommittee could begin working through the details. Following the lead from the work that Joan and Melissa had already done in their working meeting, we delved a little deeper in our conference call and I think we are now to the point where we have a good plan and can focus going forward on the details so that we can put together a great event. Once we get more in place, I will start to provide some details on the event.
August 17, 2016: We held a conference call with the Host Committee today. After two consecutive months of convening as many of the committee as possible in Sacramento, we decided on a conference call this month. We made great progress over the course of our two-hour meeting. We started off discussing the opening of conference registration, which we are planning for October 3rd. It’s a little earlier than usual this year, but then again, so is the start of the conference. We also talked through an idea to promote the conference and provide some incentive to our members to register early. More on this to come in September! We also discussed our Friday general session speaker (soon to be announced), the President’s Dinner, the Thursday night event, the Tuesday golf event, speaker gifts, and the conferencebranded items provided to all attendees. Lots of progress made on all fronts, and I expect us to be able to provide a lot of conference details when registration opens on October 3rd. Our next meeting is scheduled for September 30th in Sacramento, and between now and then there will be a number of sub-committee meetings to start putting together details on events like the President’s Dinner and the Thursday night event, and to finalize the conference budget, which will go to the Board for approval in September. I’m so grateful for all of the work the committee is putting in during the meetings and offline to pull this conference together. I am fortunate to be able to work with such a great group.
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CAREERS JOB OPPORTUNITIES Senior Budget Analyst, Santa Monica Salary Range: $7,821 - $9,655 per month Application Deadline: 7-Oct-16 Finance Director, Buellton Salary Range: $91,032 - $110,652 Annually Application Deadline: 17-Oct-16 Administrative Services Division Manager, Ralph Andersen & Associates Salary Range: Salary range is $171,708 $208,728 DOQ plus excellent execu Application Deadline: 14-Oct-16 Finance Director, Avery Associates Salary Range: $118,000 - $153,426 annually, DOQ Application Deadline: 14-Oct-16 Finance Director, SACOG Salary Range: $8105 - $15,184, per month Application Deadline: 10/6/16 (5:00 pm) Senior Accountant- Payroll Administration, Irvine Ranch Water District Salary Range: $6,071 - $8,232/monthly Application Deadline: 9/30/2016 Financial Analyst I/II, City of Oxnard Salary Range: $50,832.70 - $93,634.32 annually Application Deadline: 9/19/2016 Finance Technician, City of Huntington Park Salary Range: $4187-$5140 (+3% inc 1/1/17) Application Deadline: TH, September 22, 2016 Manager, General Accounting, Southern California Regional Rail Authority Salary Range: $99,832.00 ? $155,989.00 Application Deadline: Accounting Supervisor, Jurupa Community Services District Salary Range: $6,963.00 - $8,464.00 / month Application Deadline: 9/30/2016
Finance Director, City of Fortuna Salary Range: Salary: $65,843.62$80,000.00 per year (Starting salary DOQ) Application Deadline: 23-Sep-16
Budget Manager (one year Contract position), City of San Luis Obispo Salary Range: $80,990.00 - $101,192.00 Annually Application Deadline: 14-Sep-16
Managing Director, Finance & Administration, Port of Long Beach Salary Range: $190,000 - $240,000 Application Deadline: 9/23/2016
Assistant City Controller, City of Long Beach, CA Salary Range: Annual Salary: expected to be between $120,000 to $130,000 Application Deadline: Friday, September 9, 2016
Accountant II, City of San Rafael Salary Range: $5,342 - $6,493 per month Application Deadline: Friday, September 16, 2016 at 5:00 p.m. Accountant II, Alameda Salary Range: $74,013.00 - $89,964.00/ yearly based on a four day work week Application Deadline: Monday, September 19, 2016 at 5:00 pm Accounting Services Manager, City of Marina Salary Range: $92,040-$111,876/year Application Deadline: 3-Oct-16 Management Analyst, City of South Pasadena Salary Range: $5,153 - $6,264 Application Deadline: September 20, 2016 by 5:00 p.m. Housing Accounting Analyst, Community Devel. Comm., County of Los Angeles Salary Range: $54,180.00 - $76,788.00 Annually Application Deadline: Capital Planning Manager, San Francisco International Airport Salary Range: $113,672.00 $145,106.00/year Application Deadline: Capital Finance Director, San Francisco International Airport Salary Range: $141,310 - $180,336/year Application Deadline: Senior Accountant, Avalon Salary Range: $63,961 - $77,745 Annually Application Deadline: Until Filled
Accountant 2 (Defined-Term*), Alameda County Water District Salary Range: $91,482.64-$111,200.53 annually, plus excellent benefits. Application Deadline: September 16, 2016 at 5:00 p.m. DEPUTY ADMINISTRATIVE SERVICES OFFICER/FINANCE DIRECTOR, Signal Hill Salary Range: $101,892 to $130,043 Application Deadline: 30-Sep-16 Accountant, Downey Salary Range: $3,816.33 - $4,727.74 Monthly Application Deadline: Chief of Fiscal Resources, San Bernardino Assoc. of Governments Salary Range: $ 96,149 - $ 144,224 Application Deadline: Friday, September 23, 2016 at 4:00 p.m. Financial Services Analyst, City of La Quinta Salary Range: $68,502 - $85,628 per year Application Deadline: 12-Sep-16 General Manager, Canyon Lake Property Owners Assn Salary Range: 139,127 - 173,909 208,691 DOE Application Deadline: Until filled Administrative Services Director, City of Murrieta, CA Salary Range: salary range $132,738 $173,880 Application Deadline: Sunday, September 18, 2016
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