Does the SEC Want to Hear from NJ Bond Issuers?

by Matthew D. Jessup on March 24, 2011

Earlier this week, the Securities and Exchange Commission (SEC) announced that additional field hearings examining the state of the municipal securities market were being suspended due to budgetary constraints. In lieu of these hearings, the SEC is asking market participants to submit comments on a wide range of municipal securities market topics, including “disclosure and transparency, financial reporting and accounting, and investor protection and education”. A complete list of topics may be found on the SEC’s website (

The New Jersey Government Finance Officers Association (GFOA) recently asked Ed McManimon for his opinions on whether the GFOA should formulate a response to the SEC. Here is Ed’s response:

Our view is that the SEC is really looking for comments and suggestions from the market itself, not the Issuers. It is the SEC’s hope that the Financial Community will urge more specific procedures for municipal debt, similar to corporate debt, so that it might serve as a catalyst for more regulation of tax-exempt debt, or replacing tax-exempt debt with taxable debt or more routine disclosure, etc. I believe that any comments from the GFOA or extended government community will be a waste of effort and will at this point fall on deaf ears. However, we should be prepared to react to extreme positions that may result from their exercise.

I am also concerned that it would be difficult for us to make a strong case at this stage since, candidly, in my opinion, the lax and inconsistent compliance by many local governments with fairly benign initial and continuing disclosure and related issuing requirements has probably spurred this effort on and makes it hard to confront this exercise by the SEC in any meaningful way.

We need to get our house in order by making sure all local governments and all Finance Officers and all auditors and all bond attorneys, etc., understand the significance of continuing disclosure filing requirements, arbitrage calculations on a regular basis and the benefit of maintaining current updated financial information if you want to access the market effectively and keep regulators from proposing more stringent, costly and onerous requirements on all of us.

To further Ed’s point, note the statement made by the SEC on its website: “[P]rotecting investors in the municipal securities market is a core function of the Commission and the staff is continuing its’ [sic] efforts to gather information about the market and develop recommendations for improving the state of the municipal securities market.”

Readers that know Ed know that he is always interested in the contrarian view. Leave us a comment below and share your view. And if you decide to submit a comment to the SEC, let us know.

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Who Is Filing Your Secondary Market Disclosure?

by Matthew D. Jessup on March 16, 2011

This is the time of year when each calendar-year municipality is finalizing its audited financial statements for the year ending December 31, 2010 and adopting its budget for 2011. The focus is generally on the finishing touches for the audit, as well as working with the Division of Local Government Services to fine-tune the revenue and expenditure numbers in the budget.

Let me add one very important step to this process that is often forgotten or overlooked, and yet is now more important than ever. Someone needs to file the completed audit and the adopted budget with the Municipal Securities Rulemaking Board (MSRB) through the MSRB’s Electronic Municipal Market Access Dataport ( to ensure compliance with your municipality’s secondary market disclosure requirements.

That last sentence may have made your head spin, but the filing of secondary market information needs to be a priority for any municipality that has issued municipal bonds. In order for a purchaser of municipal bonds to comply with certain Securities Exchange Commission (SEC) and MSRB requirements, the purchaser must receive a written promise from the issuer of the municipal bonds that the issuer will (1) provide annually its updated financial information, including the audit, the budget and certain demographic and other economic data originally included in the Official Statement that was used to sell the municipal bonds; and (2) provide notice of the occurrence of certain “material events” if they occur. This promise is written into every Official Statement distributed in connection with the issuance of municipal bonds. Without it, there would be no buyers of those bonds.

The SEC and the MSRB are more focused than ever on enforcing the written promise made by municipalities. In fact, the SEC Chairwoman reported to the House of Representatives yesterday that the SEC would like the ability to pursue municipal issuers directly, versus having to enforce disclosure obligations indirectly through the purchasers of municipal bonds, the way it does currently.

It has been my experience that all too often, municipalities forget to file their secondary market information with the MSRB. The municipality thinks the auditor, bond counsel or financial advisor automatically completes the filing, and the same professionals think the municipality completes the filing. The deadline for filing secondary market information varies by issuer and is contained within the form and sale resolution authorizing the bonds.

So, please allow this to serve as a reminder. Contact your auditor, bond counsel and financial advisor and make sure everyone has the same understanding of who is filing this information. Hire one of your professionals to undertake this responsibility if need be. Any fees associated with this work are well worth preserving your municipality’s access to the municipal bond market and will pale in comparison to the fines and penalties the SEC may one day have a right to collect from your municipality.

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R.I.P. Build America Bonds

by Matthew D. Jessup on December 17, 2010

Last night, the House of Representatives followed the earlier action of the Senate and approved significant tax legislation that, among other things, failed to include an extension of the Build America Bond (BAB) Program. The BAB Program automatically expires on December 31, 2010, and tax legislation was the last chance for a stay of execution. The BAB Program allowed governmental issuers to issue taxable bonds to finance tax-exempt capital projects and receive a 35% (or in some cases 45%) interest subsidy from the Federal government.

Based on the very scientific “by show of hands” survey I conducted last month at the League of Municipalities, governmental issuers in New Jersey won’t be mourning the death of BABs for long. Very few municipalities issued BABs, and the few that did are still (a) wondering whether they saved money compared to issuing traditional tax-exempt bonds and (b) holding their breath that the Federal government makes good on its promise to pay the subsidy for the next 20 or 30 years.

What municipalities should mourn is the reversion of the “Bank Qualification” limit from $30 million back to $10 million. Originally created in 1986, the $10 million limitation had never been increased based on inflation or regionalization, until 2009 when it was increased to $30 million pursuant to the legislation creating BABs. Tax legislation was needed to prevent the decrease back to $10 million at the end of the year.

Banks buying “Bank Qualified” debt are allowed to deduct 80% of the cost of borrowing and holding such debt issued by governmental issuers that issue no more than (for now) $30 million of tax-exempt debt each year. When banks have access to less expensive capital, those savings are passed down to the municipal issuers. On any given day, bank qualification can mean as many as 50 basis points or more in savings.

Rather than issue Build America Bonds, a significant number of New Jersey issuers took advantage of the limitation increase to $30 million and issued bank qualified debt in 2009 and 2010. The increase in the limitation was long overdue and provided critical debt service relief to municipalities. It is unfortunate that Congress couldn’t separate its dislike for BABs from the benefits of a higher bank qualification limit, so that the latter could continue. Heading into the worst budget year they have ever seen, local governments needed this valuable benefit.

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The New 2 Percent “Cap” and . . . the Rahway Valley Sewerage Authority

by Matthew D. Jessup on November 29, 2010

There I was on the Saturday morning after Thanksgiving, enjoying a cup of coffee and reading my local newspaper, when an open letter from Cranford, New Jersey’s Mayor-Elect Dan Ashenbach caught my attention.  Addressed to Governor Chris Christie and Senator Tom Kean, Jr., the Mayor-Elect pleads that a majority of the service fee paid by Cranford (and eight other member municipalities) to the Rahway Valley Sewerage Authority (RVSA) be treated outside the new 2 percent cap on annual property tax increases in New Jersey.

The new 2 percent cap does allow certain municipal costs to be raised outside the cap, including “amounts to be raised by taxation for capital expenditures, including debt service as defined by law.”  As the Mayor-Elect points out, approximately 85% of the service fee paid by Cranford to the RVSA is for Cranford’s share of debt service on RVSA Bonds, originally issued to finance $275 million in capital expenditures.

The concept of a municipality pledging its unlimited taxing power to pay debt service on a constituent government entity’s bonds and notes is not new.   Regional and municipal sewerage authorities, utilities authorities and other government agencies have for decades issued bonds to fund capital projects, secured by the unlimited taxing power of the localities benefitting from the capital projects.  This legal arrangement is wrapped up in an agreement between the authority and the municipality called a “service contract”, “deficiency agreement” or other similar agreement and allows the authority to sell bonds at interest rates significantly lower than bonds sold without the municipal promise-to-pay.  In the event of an authority shortfall in revenues, the municipality makes service contract payments to the authority, a portion of which pays debt service on the authority bonds and a portion of which pays for the authority’s current expenses, such as authority staff salaries.

The NJ Division of Local Government Services (Division) has consistently taken the position, under both the old 4 percent cap law and the new 2 percent cap law, that the payments made by municipalities to authorities and necessary to satisfy authority debt service requirements constitute “debt service” and are outside the cap.  The arrangement between the RVSA and its nine member municipalities should be treated no differently.

The solution here is simple.  The RVSA should divide the service fee into two components – a debt service component and an operating component – and send the member municipalities a bill reflecting the two payment amounts.  The member municipalities can then raise the debt service component in their municipal budgets outside the 2 percent cap, and the operating component inside the cap, the same way a municipality would treat a service contract payment.  The Division (and the Governor and Senator) would be honoring both the spirit and letter of the law by allowing the RVSA member municipalities to bifurcate the payment into “inside” and “outside” the cap payments.

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The New 2 Percent Cap and . . . Police Cars

by Matthew D. Jessup on November 19, 2010

Earlier this week, I joined hundreds of mayors, administrators, finance officers and others in attending a session at the New Jersey League of Municipalities entitled, “Budget and Audit Updates – Understanding the Process”.  The session was hosted by Clinton Mayor Christine Schaumburg and featured panelists Director Tom Neff, Marc Pfeiffer and Tina Zapicchi, all of the Division of Local Government Services (Division) and Leon Costello, a municipal auditor from Ford-Scott & Associates.

The session focused on the new 2 percent cap on property tax increases and its impact on municipal 2011 budgets.  The 2 percent cap law contains exceptions for amounts that can be raised “outside” the 2 percent cap, including an exception for “amounts to be raised by taxation for capital expenditures, including debt service as defined by law.”  During the session, an audience member asked whether lease payments made by municipalities for the lease of police vehicles from dealers would be treated as “inside” or “outside” the 2 percent cap.

Tina Zapicchi responded that lease payments for police cars will be treated as inside the cap.  Tina reiterated that only items that are allowed to be bonded under the Local Bond Law are eligible to meet the “capital expenditure” exception to the cap.

I believe this conclusion is incorrect, and have urged the Division to reconsider its position.  First, the inability to bond for the acquisition of police cars is the result of an oversight in the law that needs to be fixed.  The Local Bond Law allows municipalities and counties to bond for any capital project with a useful life of 5 years or more.  It used to be that police cars could be leased only for a period of 3 years.  But the Legislature in 2000 declared that police cars have a useful life of 5 years, by changing the Local Public Contracts Law to allow 5 year leases.  In making that change, the Legislature inadvertently forgot to conform the Local Bond Law for consistency.  Police cars are “capital expenditures” despite the current version of the Local Bond Law.

Second, municipal capital lease payments to improvement authorities are “debt service” and are outside the cap.  Many municipalities lease police cars and other capital items through improvement authority bond financings.  These “capital lease” financings have the improvement authority issuing bonds, using the bond proceeds to acquire the police cars and leasing the police cars to the municipality.  The municipality, in turn, makes capital lease payments to the improvement authority equal to the debt service on the improvement authority bonds.

The method by which municipalities and counties finance their police cars should not impact the issue of whether the lease payments are inside or outside the cap.  Police cars are capital items and the lease payments are debt service – a perfect fit for the outside-the-cap exception.

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The New 2 Percent Cap and . . .

by Matthew D. Jessup on October 21, 2010

The New Jersey Legislature recently enacted P.L. 2010, c.44, better known as the 2 Percent Property Tax Levy Cap Law, or the 2 Percent Cap.  The law is Governor Chris Christie’s attempt to bring property tax relief to the long-overtaxed residents of New Jersey.

The 2 Percent Cap prevents New Jersey municipalities from raising property taxes by more than 2 percent every year.  The law does provide five exceptions to the 2 Percent Cap: (1) amounts required to be raised by taxation for capital expenditures, including debt service, (2) increases in pension contributions in excess of 2 percent, (3) increases in health care costs in excess of 2 percent (but no higher than the increase of the State Health Benefits Program), (4) extraordinary costs resulting from a declared emergency and (5) amounts approved by simple majority of voters voting at a special election.

The 2 Percent Cap will have a severe impact on municipal budgets in 2011.  Whether Governor Christie’s 33-bill “toolkit” is approved by the Legislature and provides the assistance that municipalities desperately need in order to comply with the 2 Percent Cap remains to be seen.  One thing is for sure: in the coming weeks and months, there will be countless questions asked regarding what expenses will be limited by, or “inside”, the 2 Percent Cap and what expenses will qualify as exclusions, or be “outside” the 2 Percent Cap.

As these questions are raised, debated and answered, we will keep you updated here.


Material Changes to Material Events

by Matthew D. Jessup on June 1, 2010

The Securities and Exchange Commission has adopted amendments to Rule 15c2-12 that impact all issuers of municipal bonds and notes.  The amendments to the secondary market disclosure rule apply to all bonds and notes issued on or after December 1, 2010.  However, given that issuers adopt a bond or form and sale resolution weeks or months in advance of issuing obligations, it is important to think about these changes now.

The following is a summary of the amendments:

  1. Notices of those events listed in 15c2-12(b)(5)(i)(C), otherwise known as “Material Events”, must be submitted to the Municipal Securities Rulemaking Board (MSRB) “in a timely manner not in excess of ten business days after the occurrence of the event”.  Previously, issuers were simply required to provide notice “in a timely manner”.  An identical change is being made to the “small issuer” exception found at 15c2-12(d)(2)(ii)(B).
    This is the only amendment that is likely to impact New Jersey municipal issuers of bonds and notes.  Remember that “ratings changes” are one of the Material Events.  If your municipality receives a ratings upgrade or downgrade, you now have only 10 days to report the change to the MSRB.
  2. The materiality condition is being eliminated for the following Material Events: (1) principal and interest payment delinquencies, (2) unscheduled draws on debt service reserves reflecting financial difficulties, (3) unscheduled draws on credit enhancements reflecting financial difficulties, (4) substitution of credit or liquidity providers, or their failure to perform, (5) defeasances and (6) rating changes.  These events need to be reported to the MSRB no matter how minor or insignificant.
  3. The Material Event “adverse tax opinions or events affecting the tax-exempt status of the security” is being amended in its entirety to “Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security”.
  4. The previous list of 11 Material Events is being expanded to include four additional events: (1) tender offers, (2) bankruptcy, insolvency, receivership, or similar proceeding of the obligated person, (3) the consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material, and (4) appointment of a successor or additional trustee, or the change of name of a trustee, if material.
  5. The exemption from the Rule (15c2-12(d)(1)(iii)) for demand securities is being eliminated.  There is a limited grandfather provision, which those who deal with demand obligations should explore further.

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