Thank heavens that loan closing is done!!
A loan closing is a cause for celebration. Whether it’s a big bond issue or a small installment financing, it’s natural to see the closing as a bright dividing line in your process – the money is in the bank, and the rest of the work can proceed.
But if your local government borrows money, you will have continuing obligations with respect to that financing. Paying principal and interest is of course the most important obligation, but it’s not the only one. If you don’t keep up with these other requirements, you could end up in default under your financing documents, end up with an expected payment liability, or just end up in a situation that makes your next borrowing more complicated than it needs to be.
How do you know what else you need to do?
Your obligations arise from three different sources –
From your financing documents. Your loan paperwork will determine the commitments you’ve made to the lender. This might include maintaining insurance on the property you financed, for example, or providing copies of annual audits or budgets to the lender. If you don’t follow-through on these commitments, you can end up with a loan that’s technically in default, even if you’ve made the payments. This can lead to complications in closing your next loan, additional fees from the lender and even, in extreme cases, other enforcement action by the lender.
From the securities laws. If you sold bonds through the LGC’s sealed bid process, or sold bonds through an underwriter you hired, you probably made a commitment to make formal continuing disclosures to the municipal bond marketplace. The LGC does a good job of reminding folks when the standard annual disclosure of financial information is due, but you also most likely made a commitment to provide specific disclosure of certain special events – here’s a link to a summary of the general rule for continuing disclosure Failing to comply with these requirements can cause time and trouble when it comes to subsequent deals, and can even lead to possible fines from federal agencies.
From the tax laws. To maintain the tax-exempt status of interest on your bonds, IRS rules requires that your borrowed proceeds be used in compliance with the tax laws, that your financed property be used in compliance with the law, and that you maintain records showing your compliance with the laws. If you don’t comply with these rules, you can end up in default under your loan documents and also potentially with a liability to the IRS.
What should you do about this?
Make a plan for the work, and then follow the plan.
Make a chart of compliance deadlines. When you close a loan, you probably make a note in your reminder system of when you have to make your payments. In that same fashion, make a chart of your other on-going responsibilities. Do you have to send a copy of your audit to the lender? Provide evidence of insurance by each September 1? Make a continuing disclosure by January 31? If you add these dates to your system – and give yourself room in advance of the deadlines – that will make your compliance much easier.
Make a chart of other commitments. Some of your commitments will not be tied to particular dates – such as the event disclosures we linked to earlier in the post, or your commitment to make and maintain records of how you spent your borrowed money. Make another chart of these commitments, and review it every six months or so in case there’s something on the chart you find you need to address. Put the date for reviewing the chart on your calendar, just like the deadlines described in the preceding paragraph.
Keep good records. Compliance with many of the requirements includes keeping good records of compliance. That’s especially the case in connection with showing compliance with the tax rules – Both GFOA and the National Association of Bond Lawyers have come out with recent guidance on this kind of record-keeping (and we’ll have much more to say about this in a subsequent post).
Make this someone’s job. Creating a compliance culture is everyone’s job, but at the same time carrying out these compliance tasks needs to be part of the job for someone specific – someone who’s sufficiently in the loop to know when something has to be done. Let the person have the time and get the training they need to carry out these obligations. Communicate the clear expectations of this task to the person assigned, and perhaps also plan for a cross-check (especially at the beginning of the process).
Get help when you need it. Your friendly neighborhood bond lawyers will always be there for you, and there are plenty of other consultants ready help out when called upon.
Please see our disclaimer and let us know if you have any questions about any of this.