Let the Sunshine In...2019/06/25 · Let the Sunshine In Continuing Disclosure and Best Practices...
Transcript of Let the Sunshine In...2019/06/25 · Let the Sunshine In Continuing Disclosure and Best Practices...
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Let the Sunshine InContinuing Disclosure and Best Practices Related to Public Bond Offerings
50 South 6th StreetSuite 2250Minneapolis, MN 55402
Tel: 612-338-3535Fax: 612-338-7264
www.pfm.com
Arcelia Detert and Chuck Upcraft, Senior Managing ConsultantsPFM Financial Advisors LLC
Presented By:
June 25, 2019
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ObjectivesGain a better understanding of your post-
issuance responsibilities and how to manage them
Overview of regulatory oversight and applicable rules relating to Disclosure
How to comply with continuing disclosure requirements
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Chuck UpcraftArcelia DetertSenior Managing Consultant Senior Managing Consultant
Tel: (612) [email protected]
16 Years with PFM I 18 Years of Experience
Ms. Detert’s primary focus is local government financings. She has worked with many cities and counties in Greater Minnesota with different types of financings such as general obligation, lease revenue, sales tax and nursing home revenues obligations. Furthermore, she has been involved in watershed and ditch transactions.
Ms. Detert graduated from the University of Minnesota receiving a B.A. in International Relations with an emphasis on Economic Development and a minor in Economics. She is a registered Municipal Advisory Representative (Series 50).
Tel: (612) [email protected]
16 Years with PFM I 32 Years of Experience
He provides these clients with a broad range of financial advisory services including identifying potential financing alternatives for various projects, preparing debt capacity analyses, evaluating debt restructuring opportunities, coordinating rating agency relations and executing debt transactions.
Mr. Upcraft graduated of the College of Liberal Arts and the Law School of the University of Minnesota. He is a Registered Municipal Advisory Representative (Series 50).
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Post-Issuance Compliance
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Post Issuance Compliance Components
Internal Revenue Service (IRS)
Tax Law Requirements
• Filing IRS Forms
• Use of Proceeds
• Private Activity Bonds
• Arbitrage
• Record Retention
• Allocation of Bond Proceeds to Expenditures
Securities and Exchange Commission (SEC)
Disclosure Requirements
• SEC Rule 15c2-12 Requirements
• Notification to Underwriters of Bonds
• Information Required to be Filed with Other Entities
• Local Disclosure (Investor Relations)
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Tax Law Requirements
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IRS Compliance
Filing IRS Forms
• Form 8038-G: Tax-exempt governmental bonds with issue price of $100,000 or greater
• Form 8038GC: Small tax-exempt governmental bond issues, leases, and installment sales with an issue price of less than $100,000
Use of Proceeds
• Tax Covenants: The issuer covenants and agrees with the holders of the Bonds that it will not take any action which would cause interest on the Bonds to become subject to taxation under the IRS Code of 1986 (the “Code”), and that it will take all affirmative action within its power that may be necessary to ensure that such interest will not become subject to taxation under the Code
• Proper Use: Issuer should use bond proceeds for projects as represented to voters in election campaigns or public hearings
Private Activity Bonds
• A municipal bond will be deemed a private activity bond if more than 10% of the proceeds from the bond issue are used for any private business, and the principal and interest payment on more than 10% of the sale proceeds of the issue is secured by a private business property
• a municipal bond will be classified as a private activity bond if the amount of proceeds of the issue used to make loans to non-governmental borrowers exceeds 5 percent of the proceeds or $5 million, whichever is lesser
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IRS Compliance
Arbitrage
• Arbitrage is earned when the proceeds of an issue are used to purchase investments that earn a yield “materially higher” than the bond yield
• Rebate of excess arbitrage earnings on bond proceeds
• Exceptions to rebate requirements:
• Small issuer < $5 Million
• Spending exemptions
• 6-month
• 18-month
• 2-years
Record Retention
Allocation of Bond Proceeds to Expenditures
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Disclosure Requirements
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History of SEC Municipal Securities Regulations
Unique Regulatory Framework
Municipal Issuers are exempt from Filing Requirements under Securities Exchange Acts of 1933 and 1934
Municipal Issuers are subject to anti-fraud provisions
Tower Amendment
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SEC – Rule 15c2-12
The SEC regulates Underwriters through Rule 15c2-12 (the “Rule”)
Amendment in 1995
• Underwriters are required to ensure that the Issuer contractually agrees to provide certain ongoing continuing disclosures
• Annual financial information (financial statements and/or additional financial information)
• Material events (11 events)
Amendment in 2010
• Includes additional material events (3 additional events)
Amendment in 2018
• Includes additional material events (2 additional events)
Transmission of reports and notices
• NRMSIR’s
• CPO – Central Post Office
• EMMA – Electronic Municipal Market Access (http://emma.msrb.org)
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Rule 15c2-12 - Exemption and Limited Obligations
Exemption from filing requirements
• Small issues under $1 million
• Private Placements
Limited filing requirements
• Only financial statements and material events are required
• Issuers with less than $10 million of total outstanding debt
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Rule 15c2-12 – Annual Financial Information
Audited financial statements for state or local government or other obligated persons, if available
Financial information and operating data provided by state and local government or other obligated persons
• For example:
• Outstanding Debt
• Valuation Trends
• Tax Levies and Collections
• Budgets
• Largest Taxpayers
• Tax Rates
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Rule 15c2-12 – Material Events1. Principal and interest payment delinquencies
2. Non-payment related defaults, if material
3. Unscheduled draws on debt service reserves reflecting financial difficulties
4. Unscheduled draws on credit enhancements reflecting financial difficulties
5. Substitution of credit of liquidity providers, or their failure to perform
6. Adverse tax opinions, proposed or final determination of taxability, etc., or other material events affecting the tax-exempt status of the security
7. Modifications to rights of security holders, if material
8. Bond calls, if material, and tender offers
9. Defeasances
10. Release, substitution or sale of property securing repayment of the securities, if material
11. Rating changes
12. Bankruptcy, insolvency or receivership
13. Merger, acquisition or sale of all issuer assets, if material
14. Appointment of successor trustee, if material
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Rule 15c2-12 – Material Events (Newest Additions)
Became effective February 27, 2019
15.Incurrence of a new financial obligations (bank facilities, leases, etc.), if material, or agreement to covenants, events of default, remedies, priority rights . . . . of the issuer, any of which affect security holders, if material
16.Event Reflecting Financial Difficulties (Default, Event of Acceleration, Termination Event, Modification of Terms)
Concerns
• Undisclosed material financial obligations which could jeopardize the rights of bond holders
• Lease – Capital vs. Operating
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MCDC – A Wakeup Call
March 10, 2014, the SEC announced the Municipalities Continuing Disclosure Cooperation (“MCDC”) Initiative
Perception of widespread non-compliance
Allowed issuers to self-report instances of failures to file required reports and misstatement of level of compliance
Nearly universal reporting by Municipal Dealers
SEC issued Cease and Desist Orders against 72 underwriters and 71 issuers across 45 States
Underwriters were fined a total of $18 million
Enforcement actions against Issuers
• Disclose orders for five years – Scarlet Letter
• Materiality – late filings
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MCDC - Enforcement Actions
City of Miami Key, Florida Takeaways
• Willingness to go to trial / significant penalties
• Miami and its former budget director guilty of securities fraud for faulty disclosures
Beaumont Financing Authority, CA Takeaways
• “ . . Beaumont, California, and its then-executive director have agreed to settle charges that they made false statements about prior compliance with continuing disclosure obligations in five bond offerings”
• Uncovered as part of a review of municipal issuers/underwriters that did not self-report under MCDC
• The Order noted that “negligence is sufficient to establish violations of Sections 17(a)(2) and (a)(3)”
• A misrepresentation or omission is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision
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Continuing Disclosure Best Practices
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Best Practices (GFOA)
Issuers should have a clear understanding of their continuing disclosure responsibilities
Adopt a thorough continuing disclosure policy and adhere to best practices
• Identify a person designated to ensure the continuing disclosure filings are completed in time and in an accurate manner
• Identify the information that is required to be submitted
• Identify the time frame in which the filings are to be made
• List the required reporting events as stated by the SEC and your continuing disclosure agreements
• Ensure accuracy and timeliness of reported information
As recommended in the GFOA’s Certificate of Achievement for Excellence in Financial Reporting program, a government should complete its audited financial statements within six months of the end of its fiscal year
Include language in the OS for new bond issues regarding any material non-compliance with continuing disclosure requirements within the past five years.
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Practical Tips
Continuing Disclosure Agreement
• You control the terms of your Continuing Disclosure Agreement
• Be specific on when you intend to file your annual report (e.g. “By June 30” or “no later than 12 months”)
• Precise listing of information to be updated, not broad headings
• Information to be updated should be under your control
• Review the terms of the draft Continuing Disclosure Agreement and have Bond Counsel change it, if necessary
(B) to the extent not included in the financial statements referred to in paragraph (A) hereof, the
information for such fiscal year or for the period most recently available of the type contained in the Official Statement under headings: City Property Values; Trend of Valuations, Larger Taxpayers; Direct Debt; Tax Capacity Rates; Tax Levies and Collections; Special Assessment Levies and Collections.
(a) The Issuer shall provide to the Repository not later than twelve (12) months after the end of the Fiscal Year commencing with the year that ends December 31, 2018, an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Certificate; provided that the Audited Financial Statements of the Issuer may be submitted separately from the balance of the Annual Report.
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Practical Tips
Keep track of the due date of the annual report for each bond issue
Keep track of the continuing disclosure requirements for each bond issueRequired Tables for G.O. Credit 2009AB 2011 2014 2015A 2015B 2017A
Property Values (Property Valuations and Taxes)Property Classification RatesProperty ValuesHistorical Property ValuationsNTC by CategoryLevy Limits
Tax Rates, Levies and CollectionsTax CollectionsTax RatesPrincipal Taxpayers
Financial SummaryIndebtedness
G.O. Long-Term DebtRevenue DebtFuture FinancingDebt LimitOverlapping Debt
Economic and Demographic InformationPopulationLabor Force and Unemployment StatisticsMajor Employers
Legend1 = YES (included in filing)0 = Not Required to be filed.
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Practical Tips
If you are hiring a Dissemination/Filing Agent
• One firm should handle filing your Annual Reports
• Keep in your files the Annual Reports and Filing Confirmations
• Know the cost associated with such service
Communicate with your Dissemination/Filing Agent and Bond Counsel
• Private placements or any type of borrowing
• When in doubt if a material event may occur
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Quiz
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Thank you!