Happy New Year! As 2021 begins, we offer this list of items to keep in mind as you plan for new capital projects and manage your existing projects. Here are a few things to think about at least once a year:
Compliance with financing covenants. If you have any borrowings that are not LGC controlled general obligation bonds, you almost certainly have financing documents that require you to do certain things and not do certain other things. For example, you might be required to send annual insurance certifications to your lender. Review your financing documents at least annually to help ensure you’re compliance with covenants. Here’s a related blog post about continuing compliance.
Unused financing proceeds. Once you determine that financing proceeds will not be used for the project for which they were borrowed, the IRS regulations require you to act to limit the investment of those proceeds. Even if the project is continuing, you generally must limit your investment after the third anniversary of the closing. Depending on the type of financing, there may also be State law limits on what you can do with any unused proceeds.
15c2-12 continuing disclosure submissions. If you have a publicly offered financing that is still outstanding, including general obligation bonds sold through the LGC, you almost certainly have an annual obligation to send your financial statements and certain other information to the “EMMA” information service by January 31. For any covered financing, the rules also require you to send notice of certain special events (such as refundings or early redemptions) to EMMA. Not all these special events will come up just when you are doing another financing. If you have a financing that is subject to these rules, your obligations will be detailed either in some contract or board action taken around the time of the issuance. Call us if you would like a list of the special reporting events.
Reimbursement. For many years now, IRS rules have required local governments to follow certain procedures to be eligible to reimburse themselves out of financing proceeds for project expenditures made prior to closing. Nevertheless, governmental entities are still having to alter deal structures because they have not complied with the rules. Keep in mind that the rules also generally require you to close on your reimbursement financing within eighteen months after you finish your project. Here’s a related blog post on the reimbursement rules.
Rebate calculation and payment. If 2021 marks any five-year anniversary for one of your financings (that is, financings closed in 2016, 2011, and so on), this year you may need to calculate and pay any rebate you might owe to the IRS with respect to that financing. Check your documents for the date of the required payment. Also, keep in mind that you are usually required to make a rebate calculation and payment promptly after paying off a financing, even if you retire the financing by a refinancing (such as renewing bond anticipation notes, or converting notes to bonds). It’s been a long time since local governments were routinely having to make any actual rebate payments, but you may have a contractual obligation with your lender to make a calculation anyway, and you may find peace of mind in having it done.
Sale or lease of financed property. If you sell or lease any financed property, the IRS regulations limit what you can do with the proceeds of the sale or lease. The regulations even treat some contracts merely for the management of financed property the same as a sale of the property. These limitations on the sale, lease or management of financed property apply even in the case of general obligation bond financing. You should consider these limitations when evaluating whether to sell or lease the property.
Annual meeting of controlled nonprofits. Many local governments have, directly or indirectly, organized nonprofit corporations to participate in financings or in economic development projects. It can be difficult to get these nonprofits back in order once they fall into legal disrepair. Therefore, the nonprofit’s governing board should meet at least annually to take care of necessary legal housekeeping, such as filling board vacancies. Industrial development authorities, housing authorities and other similar groups should also meet at least annually, for similar reasons. Here’s a related blog post on “legal housekeeping” for your local authorities and controlled nonprofits.
The $10 million “small issuer” qualification. Most local governments are taking advantage of the benefits of $10 million “small issuer” status when feasible. In planning to take advantage of this status, however, be careful to count all the borrowings that count toward the $10 million limit. Under IRS rules, for example, your unit must count toward its own $10 million annual allotment most debt issued by entities over which your unit exercises legal or practical control (such as by the appointment of a majority of the other entity’s board members). Under these rules, for example, counties must count debt issued by water and sewer authorities as to which the county commissioners appoint more than half the governing board, and must also count debt issued by their water and sewer districts. Please note that this means an entity can affect your $10 million small issuer status without even notifying you of the issuance (I have seen it happen).
Don’t forget about your “two-thirds” bonds. Each fiscal year a local government can issue general obligation bonds – without the need for voter approval – to the extent of two-thirds of the amount by which it reduced general obligation debt in the previous fiscal year. This may not be a lot of debt capacity, and it can be awkward to use this capacity, but sometimes these bonds can be the right solution to a problem. Don’t forget about them. Here’s a related blog post about two-thirds bonds.
Planning for bond referenda. With no State-wide or County-wide elections scheduled for 2021, bond referenda for 2021 will generally be limited to November and to cities and Towns. To have a bond election in November, you generally need to begin formal action by early summer to have an unhurried pace to the proceedings. And before you. can begin formal action, you need to have informally worked out the bond program with your elected officials. Call us if you would like a sample schedule of the legal procedures required to hold a bond referendum.
We offer these issues for your consideration in light of your particular circumstances. After all, legal analysis is only reliable for you if it considers the facts of your specific situation. If we can help you with a specific situation or provide you with more information on any topic covered in this letter, please let me know. Please see our disclaimer and click here for more information on our public finance practice.