Robert W. Doty

American Governmental Financial Services

Sacramento

 

Public Finance for Utilities

                                                               

• Issued by governmental entities (state, local)

• Interest generally excluded from income taxation

What is public finance?

• For publicly-owned (governmental) entities

• Privately-owned utilities generally cannot benefit from tax-exempt obligation issues

What is public finance?

• Prepaid gas, electricity contracts

• Publicly-owned utilities issue obligations, purchase supply

• Stability of supply, lower costs than index prices

• Privately-owned utilities sell long-term supply contracts (receive cash)

What is public finance?

• Bonds (usually revenue supported)

• Notes, synthetic short-term securities (VRDNs)

• Lease/installment purchase/certificates of participation (COPs)

Types of obligations

• Thousands of issuers (up to 50,000)

• Diverse credit structures, obligations (taxes, revenues, etc.)

• Rise of bond counsel through the 1800s (canals, railroads, Civil War)

Market diversity/history

• Legal documentation establishing obligation, source of payment

• Payment source—usually utility revenues; revenue pledge, coverage

• Legal opinions—bond counsel

• Formal disclosures to investors

Key elements

• Issuers/obligors

• Investors

• Service providers—bond & other counsel, underwriters, financial advisors, rating agencies, trustees

• Regulators—SEC, IRS (also courts)

Market participants

• Governmental entities:

Multi-state joint action agencies

Local governmental bodies—usually special districts, city departments

• Privately-owned utilities in pollution control issues

Issuers/obligors

• Official statements

• Offering circulars (private placements)

Disclosure documents

• General registration exemption

• Federal standards—fraud for investor actions; negligence for SEC enforcement

• State law—fraud, negligence, strict liability

Disclosure standards

• Materiality

• SEC guidance—pronouncements, enforcement

• NFMA, GFOA private guidance

• Role of fault (differences from corporate finance)

Disclosure standards

• Mutual funds (often medium- or longer-terms)

• Money market funds (very short-term, synthetic terms)

• Individuals, trusts, private funds

• Banks (shorter-terms)

Investors

• Bond counsel

State law opinions, due authorization, validity

Tax exclusion from gross income (federal, state)

Very strict opinion standards (no reasonable room for doubt about outcome in court)

• Underwriter, disclosure counsel (securities law opinions)

• Issuer counsel (issuer local action)

Service providers

• Underwriters (generally, principals)—sell obligations

• Financial advisors (fiduciaries; often independent)—advise issuers

• Feasibility analysts; auditors (GASB role)

• Trustees (limited roles defined by documents, barring default)

Service providers

• Rating agencies

Standard & Poors

Moody’s

Fitch

• Ratings impact interest rates

• Bond insurance—common; reduce interest rates

Service providers

• SEC: Underwriter/dealer enforcement

Issuer regulation—enforcement

Enforcement against others

• Municipal Securities Rulemaking Board (self-governance; dealer/underwriter rules; approved by SEC)

• NASD, bank agencies—dealer enforcement

Regulators

• Underwriter enforcement:

Interpretation

Must form a “reasonable belief” in “key” issuer representations

SEC

• Issuer enforcement:

Official statements approved by issuers

Issuers primarily responsible for their disclosures

Ultimately liable

SEC

• Other enforcement:

Participation in disclosure document preparation

Providing information

Aider & abettor responsibility in SEC actions

SEC

• Major SEC actions:

New York City

Washington Public Power Supply System

Orange County, California

Land-based financings

• Administrative or court actions

SEC Enforcement

• SEC: Investigating mutual fund evaluation

standards (illiquid securities)

Continuing disclosure issues

Private use/evaluation in land-based financings (stopped one in progress)

MBTA—uncertain information

529 plans

SEC Enforcement

• IRS:

Promulgates tax rules (highly complex)

Increasing role as auditor/enforcer

• Courts (final arbiters of challenged SEC, IRS actions)

IRS

• Examples of IRS interests:

Arbitrage (e.g., yield burning)

Private purpose financings

Detailed compliance

IRS Enforcement

• IRS:

Circular 230 (bond counsel opinions, tax shelter rules)

Arbitrage abuses in derivative transactions

Private purpose abuses

IRS Enforcement

• Public finance market highly efficient, effective

• Provide financing for enormous variety of public projects, including utility projects

Conclusion

THE END