Municipal Debt Reform Legislation Introduced in State Senate

March 25, 2013
Publications

Municipal Debt Reform Legislation Introduced in State Senate

By Donna L. Kreiser and Timothy J. Horstmann*

A package of reform-minded bills has been introduced in the Pennsylvania Senate by Senator Mike Folmer (R-Lebanon) and others that, if enacted, would dramatically change the process by which local government units and municipal authorities may issue bonds, notes and other public debt.

The legislation is being proposed in response to perceived abuses generally in the debt financing of local government units (which consist generally of municipalities and school districts) and municipality authorities, and deficiencies in the laws that authorize the incurrence of debt by such governmental entities. The catalyst for the package is, in large part, the financial crisis currently facing the City of Harrisburg as the result of the failed resource recovery retrofit project and related financings undertaken by The Harrisburg Authority, as well as the City’s guaranty of that debt which has driven the City into State receivership and insolvency. The package is comprised of Senate Bills 292 through 296 and is the culmination of the public hearings on the City of Harrisburg debt crisis which were conducted by the Senate Local Government Committee late last year.

Senate Bill 292 authorizes the appointment of a special prosecutor to conduct an independent investigation of the debt proceedings of the Harrisburg Authority, the City of Harrisburg and Dauphin County as they relate to the Harrisburg Incinerator and water and sewer matters, to determine if criminal proceedings are warranted. The bill is co-sponsored by Republican Senators John Rafferty, Pat Vance and Randy Vulakovich, and was referred to the Senate Judiciary Committee on February 1of this year.

The second piece of the reform package is Senate Bill 293, which would prohibit the use of qualified interest rate management agreements, i.e., swaps and other derivatives products, by local government units and municipal authorities. Local government units were first specifically authorized to enter into qualified interest rate management agreements by amendments to the Local Government Unit Debt Act (“LGUDA”) adopted in 2003; municipal authorities have had the ability to enter into such agreements for a longer time. The use of such agreements has come under close scrutiny since the 2008-09 financial collapse, with many local governments reporting significant losses from such agreements. Senate Bill 293 would prohibit local government units and municipal authorities from entering into any new swaps or other derivatives agreements as of the date of passage of the bill. The bill is co-sponsored by Republican Senators John Rafferty, Randy Vulakovich, John Eichelberger and Senate Majority Leader Dominic Pileggi, as well as freshman Democratic Senator Rob Teplitz. Senate Bill 293 was referred to the Senate Local Government Committee on February 1.

The next bill in the reform package, Senate Bill 294, proposes amendments to LGUDA that would dramatically change the process by which municipal debt proceedings are reviewed and approved 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.

Senate Bill 294 would add a new layer of complexity to this governmental approval process. Under the proposed bill, local government units would be required to obtain an additional, preliminary approval from DCED prior to authorizing the incurrence of debt and seeking the “final” approval of DCED under LGUDA as described above.

The request for preliminary approval would be in the form of 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:

the local government unit’s most recent audited financial statements;
information sufficient to document the local government unit’s satisfaction of its municipal bond disclosure obligations under federal law;
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;
confirmation that prior debt excluded as subsidized or self-liquidating continues to meet applicable LGUDA requirements;
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
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, may also 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. For instance, the bill prohibits 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, Senate Bill 294 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 of 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 is co-sponsored by Republican Senators John Rafferty, Randy Vulakovich, John Eichelberger, Mike Waugh and Senate Majority Leader Dominic Pileggi, and was referred to the Senate Local Government Committee on February 1.

The fourth bill in the municipal debt reform package is Senate Bill 295, which would impose criminal penalties for the filing of any false report or certification in connection with a debt proceeding. The proposal would cover reports and certificates signed and filed by both officers of the local government unit as well as professionals or other advisors to the local government unit. The most common certificate to which the new criminal provisions would apply is the so-called self-liquidating debt certification under LGUDA. Self-liquidating debt certificates are filed with DCED in cases where a local government unit desires to exclude so-called lease rental or subsidized debt from its debt limits under LGUDA on the basis that a pledged revenue stream or other dedicated source of funds is available to fully pay all debt service on the related municipal debt. The making or filing of a false certificate would constitute a misdemeanor of the first degree, which under Pennsylvania law, is punishable by up to five years in prison, or a fine of not less than $1,500 nor more than $10,000.

Senate Bill 295 is co-sponsored by Republican Senators John Rafferty, Randy Vulakovich, John Eichelberger and Mike Waugh, and was referred to the Senate Judiciary Committee on February 1.

The final bill in the package, Senate Bill 296, amends the Sewer Rental Act to prohibit the imposition of sewer and water rates that are in excess of the rates necessary to provide for the maintenance of the system, the payment of any debt incurred in connection with the system, and a ten percent safety margin. The proposed bill also imposes criminal penalties for violations of this prohibition and grants to the local court of common pleas the power to review all such rates that are charged. Senate Bill 296 is co-sponsored by Republican Senators John Rafferty, Randy Vulakovich, John Eichelberger and Mike Waugh, and was referred to the Senate Local Government Committee on February 13.

Municipalities and school districts should carefully monitor the status of these bills, as their enactment into law would dramatically change the process by which local government units approve the issuance of debt and would prohibit the use of swaps as an interest rate management tool. Municipal finance officers and financial advisors, engineers and other professionals engaged by municipalities in connection with self-liquidating debt analyses, review or study should take particular note of the need to ensure the accuracy and completeness of such reports prior to filing with DCED in light of the new potential criminal penalties. No doubt these bills will be the subject of intense public debate, discussion and scrutiny if and when the bills move forward in the legislative process. While it is too early to predict the ultimate fate of this package, the bills address issues of such significant current interest that it is reasonable to expect that there will be “more to come.”

* Donna L. Kreiser is a member of the law firm of McNees Wallace & Nurick in Harrisburg and serves as co-chair of the firm’s Financial Services and Public Finance group. Timothy J. Horstmann is an associate of the firm and practices in the firm’s Financial Services and Public Finance, Business Counseling and State and Local Tax groups. The firm 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.