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Senate Proposal Would Dramatically Change Process for DCED Approval of Municipal Debt

by Timothy J. Horstmann

A bill has been introduced in the Pennsylvania Senate by Senator Mike Folmer (R-Lebanon) and others which would, among other things, dramatically change the process by which municipal financings are reviewed by the Department of Community and Economic Development (“DCED”).

Currently, a local government unit is required to file an application with DCED after authorizing the incurrence of debt, following the procedures described under LGUDA.  As part of its application, a local government unit must, among other things, complete a debt statement and borrowing base certificate, as described under LGUDA, to demonstrate that the intended debt issuance will not result in the local government unit exceeding its debt limitations imposed by law.  A local government unit may not issue its bonds or notes until DCED has issued its certification and approval of these proceedings.

Senator Folmer’s proposal would add a new layer of complexity to this government approval process.  Senate Bill 294 requires a local government unit to obtain an additional, preliminary approval from DCED prior to authorizing the incurrence of debt and seeking the “final” approval under LGUDA as described above.

Senator Folmer introduced Senate Bill 294 in connection with a package of proposals that addresses the finances of local government units.  The package includes bills that, among other things, would prohibit the use of qualified interest rate management agreements, i.e., swaps, by local government units and municipal authorities (Senate Bill 293), and provide for criminal penalties for filing false self-liquidating debt certifications (Senate Bill 295).

It is Senate Bill 294, however, that would result in the most dramatic changes for local government units considering an issuance of debt.  Under the proposed bill, a local government unit would have to file with DCED a notice of intention to incur debt, and the local government unit would not be permitted to proceed with a contemplated financing until DCED had reviewed the notice and granted its preliminary approval.  While the proposal assumes a 30 day review process for most notices, DCED may unilaterally extend the review period for up to an additional 60 days.

The notice required under Senate Bill 294 would be in the form of a certificate containing a brief description of the proposed financing and bearing the signatures of two municipal officers.  In addition, and as part of the notice procedure, Senate Bill 294 requires the local government unit to submit to DCED all of the following:

1. the local government unit’s most recent audited financial statements;
2. information sufficient to document the local government unit’s satisfaction of its municipal bond disclosure obligations under federal law;
3. if the intended financing is to be excluded as subsidized or self-liquidating debt, documentation sufficient to show that the financing will satisfy applicable LGUDA requirements;
4. confirmation that prior debt excluded as subsidized or self-liquidating continues to meet applicable LGUDA requirements;
5. if the financing is a refunding that does not have as its purpose the reduction of total debt service over the life of the series, documentation sufficient to show that the financing is a sound financial transaction and is in the best long term financial interest of the local government unit; and
6. if more than 10% of the proceeds of the financing are to be used for working capital, documentation sufficient to show that the financing is a sound financial transaction and is in the best long term financial interest of the local government unit.

DCED, upon review of the documents submitted, also may request any additional information that it deems “necessary or useful” in its review.

A local government unit which receives a preliminary disapproval from DCED may appeal the decision.  A local government unit that receives DCED preliminary approval has only six months to complete the financing and obtain final approval from DCED.  The preliminary decisions of DCED are required to be posted online for viewing by the public.

Senate Bill 294 also contains provisions unrelated to the preliminary approval process.  The bill would also prohibit the use of guaranty agreements for which a local government unit receives a fee in exchange for extending its guaranty of other municipal or authority debt and extends the length of time that DCED is required to retain its records of LGUDA proceedings.  Under current law, DCED is obligated to maintain records for four months after a particular proceeding is “closed” (through an approval or a disapproval taking into account any appeal periods).  Senate Bill 294 would extend the record-keeping requirement to a period lasting five years after the debt issued under an approval was repaid in full, or, in the case of a DCED disapproval, five years after the disapproval was issued and all appeals exhausted.  Any debt issued to refund a prior debt issuance would extend the record-keeping requirement for the prior issuance to a period coterminous with the refunding.

Senate Bill 294 was referred to the Senate Committee on Local Government on February 1st.  Municipalities and school districts should carefully monitor the status of this bill and be prepared to revise their procedures for issuing new debt should the measure become law.

Timothy J. Horstmann is an associate of McNees Wallace & Nurick and practices in the firm’s Financial Services and Public Finance, Business Counseling and State and Local Tax groups.  McNees Wallace & Nurick represents state and local governments and agencies as issuers of revenue bonds and general obligation bonds.  The firm also routinely serves as underwriter’s counsel and counsel to conduit borrowers, banks and trustees.

Tim may be contacted at 717-237-5462, or at thorstmann@mwn.com.

© 2013 McNees Wallace & Nurick LLC

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