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McNees Client Alert

July 27, 2013

Bipartisan Group of Senators Advance Additional Municipal Debt Reform Legislation

by Timothy J. Horstmann

A bipartisan group of Pennsylvania Senators led by Senators John Eichelberger (R) and Rob Teplitz (D), the majority and minority chairs of the Senate’s Local Government Committee, and including Senators Mike Folmer (R) and John Blake (D), has introduced another package of municipal debt reform bills that would dramatically change the way local governments issue debt.  Senate Bills 901 through 904 follow the prior introduction of Senate Bills 292 through 296 in February and contain a number of the same reforms proposed in the earlier reform bills, as well as some new proposals.  Readers interested in learning more about the earlier package of reform bills are directed to the summary available at our website.  Unlike those earlier proposals, however, the Senate has begun to consider two of the bills after unanimous approval by its Local Government Committee, suggesting greater renewed in approving these reforms.

Senate Bill 901, the first of the new reform bills proposed by Senators Eichelberger and Teplitz, proposes a number of changes to the Local Government Unit Debt Act (LGUDA), some of which were contained in Senate Bill 294.  For example, Senate Bill 901 prohibits the collection of fees by municipalities in exchange for issuing a guaranty.  A similar provision is contained in Senate Bill 294.

The hallmark feature common to Senate Bills 294 and 901, however, is the establishment of new debt issuance approval process which requires local government units to obtain a preliminary approval from the Department of Community and Economic Development (DCED) prior to authorizing the incurrence of debt and seeking the “final” approval of DCED  under LGUDA.  To obtain the requisite preliminary approval, the local government unit must submit information regarding the proposed financing, the local government unit’s fiscal health and its compliance with federal municipal bond disclosure laws and state municipal laws.

Both bills contain this preliminary debt issuance approval process requirement, although the proposal in Senate Bill 901 is different from Senate Bill 294 in certain respects.  For instance, Senate Bill 901 reduces the maximum amount of time that DCED may review an application for preliminary approval from ninety days to sixty days, although DCED will be entitled to the sixty-day review period automatically.  Under Senate Bill 294, DCED is given thirty days to review an application, but may unilaterally extend the period to ninety days upon giving notice to the applicant.

Senate Bill 901 also clarifies that the requirement to provide audited financial statements means “current” financial statements; the language in Senate Bill 294 allows the use of older audited financial statements, if determined to be “recent enough” by DCED.  Senate Bill 901 also does not include a right of DCED to require a conference on a proposed financing with the issuer, which may speed up the approval process (although DCED might still request a conference notwithstanding).

Senate Bill 901 changes Senate Bill 294’s public disclosure requirements for applications.  Senate Bill 294 requires that all preliminary approval documents be posted to the Internet.  This requirement is eliminated in Senate Bill 901 in favor of a requirement that all documentation of LGUDA proceedings, including preliminary approvals, constitutes public records.

Senate Bill 901 also makes a number of changes to LGUDA that are not made by Senate Bill 294.  For instance, Senate Bill 901 changes the concept of “self-liquidating debt” in LGUDA.  The bill changes the definition of this term to clarify that any debt on which a payment has been made pursuant to a municipal guaranty no longer qualifies as self-liquidating.  The bill also limits the use of municipal guarantees in connection with such debt to only guarantees of federal loans and loans issued by the Pennsylvania Infrastructure Investment Authority or other state agencies and instrumentalities, and only where the debt issued is for a water and/or sewer project.  Finally, the bill requires that engineer’s certificates executed in connection with the issuance of self-liquidating debt that contain an increase in gross revenues greater than 5% in any year specifically justify such increase.

Senate Bill 901 proposes new requirements to the current DCED approval process.  The bill requires local government units to include with their requests for DCED approval proof of obtainment of the required financial security to insure the completion of projects to be financed.  Local government units also are required to disclose all disbursements to be made from the proceeds of the borrowing.  Costs of issuance are capped at 2% of the amount of debt issued.  For local government units electing to issue debt through a private negotiated sale, the bill imposes additional reporting requirements if the amount of the debt to be issued exceeds $5,000,000.  If this limit was exceeded, the local government unit is required to document that a private negotiated sale in excess of the limit is necessary and in the best financial interest of the local government unit.

Senate Bill 901 also outlines the role a local government unit’s financial advisors and attorneys play in the issuance of debt.  The bill states that such professionals stand in a fiduciary relationship with the local government unit, and therefore are required to “perform loyally, in good faith, and in a manner the attorney or financial advisors reasonably believes to be in the best interests of the local government unit.”  The bill further provides that such individuals “shall act with such care, including reasonable inquiry, skill and diligence that a person of ordinary prudence would use under similar circumstances.”

Senate Bill 901 also establishes new criminal penalties that are far broader than the penalties contained in the prior reform package.  Under the bill, any officer or member of the governing body of the local government unit who knowingly participates in the commission by the local government of an “ultra vires act,” or files or assists in the filing of a materially false or misleading certification or statement with DCED, is guilty of a second degree misdemeanor, and may be sentenced to pay a fine of not more than $5,000, or a term of imprisonment of up to two years, or both.  An “ultra vires act” is defined to mean any act which the local government unit lacks the authority to perform, or is in excess of the authority granted to the local government unit.  Financial advisors and attorneys that assist in the commission of these crimes face similar penalties.  In addition, firms associated with a convicted financial advisor or lawyer may be barred from future representation under LGUDA for a period of two years.

Finally, in an effort to pay for these reforms and the expected increase in the cost of enforcing LGUDA, the bill increases filing fees by $200, and provides that all fees collected by DCED shall be earmarked for its use.  It is expected that the dedication of all LGUDA filing fees to DCED will result in an expansion of DCED staff responsible for the review of applications.

Senate Bill 901 was introduced on June 7, 2013 by Senator Eichelberger and referred to the Senate Local Government Committee.  The bill is co-sponsored by Senators Blake, Folmer, Teplitz, John Yudichak (D), Dominic Pileggi (R), John Wozniak (D), Tim Solobay (D), Pat Vance (R) and Bob Mensch (R).  The bill was approved unanimously by the Committee and sent to the Senate on June 26, 2013.  The Senate has begun to consider the bill.

The next bill in this reform package is Senate Bill 902, which amends the Municipality Authorities Act in two ways.  First, this bill tightens up the existing prohibition on the use of authority funds for non-authority purposes, which went effect last August under Act 73 of 2012.  Senate Bill 902 clarifies that this prohibition applies to any money borrowed pursuant to LGUDA and requires that such funds be account-restricted.  The bill also specifies that a violation of the Municipality Authorities Act’s conflict of interest provisions constitutes a violation of the State’s ethics laws, effectively giving enforcement authority to the State Ethics Commission, local district attorneys and the Office of Attorney General, all of whom share enforcement duties under the ethics laws.  The reform proposals contained in Senate Bill 902 were not included in the prior reform package introduced in February.

Senate Bill 902 was introduced on June 7, 2013 by Senator Blake and referred to the Senate Local Government Committee.  The bill is co-sponsored by Senators Eichelberger, Teplitz, Folmer, John Rafferty (R), Judith Schwank (D), Yudichak, Pileggi, Wozniak, Solobay, Lisa Boscola (D) and Lawrence Farnese (D).  The bill was approved unanimously by the Committee and sent to the Senate on June 26, 2013.  The Senate has begun to consider the bill.

Senate Bill 903 proposes amendments to the Municipality Authorities Act and LGUDA to prohibit the use of qualified interest rate management agreements, i.e., swaps and other derivatives products by local government units and municipal authorities.  The prohibition on swaps is identical to the prohibition proposed in Senate Bill 293, which was introduced in February as part of the prior municipal debt reform proposal.  Senate Bill 903 also removes references to swaps contained in LGUDA which were left intact under Senate Bill 293, but provides that those removed provisions continue to apply to swaps in effect prior to the effective date of the bill.  The bill also contains criminal provisions applicable to municipal authorities that are identical to those proposed in Senate Bill 901 as to municipalities.

Senate Bill 903 was introduced on June 7, 2013 by Senator Folmer and referred to the Senate Local Government Committee.  The bill is co-sponsored by Senators Teplitz, Eichelberger, Blake, Boscola, Pat Browne (R), Yudichak, Wozniak and Solobay.

Senate Bill 904, the final bill in this municipal debt reform package, extends the prohibition on swaps proposed in Senate Bill 903 to the City of Philadelphia.  The bill was introduced on June 7, 2013 by Senator Teplitz and referred to the Senate Local Government Committee, and is co-sponsored by Senators Folmer, Blake, Eichelberger, Boscola, Yudichak, Wozniak, Solobay, James Brewster (D), Farnese and Michael Waugh (R).

As with the prior package of reform bills introduced in February, municipalities, school districts and their hired professionals should carefully monitor the status of these bills.  The Senate Local Government Committee has already approved unanimously Senate Bills 901 and 902 and sent them to the full Senate for consideration.  Municipal officers and representatives should contact their financial professionals or bond counsel if they have questions about the local impact of these proposals.

Timothy J. Horstmann is an associate of the law firm of McNees Wallace & Nurick in Harrisburg and practices in the firm’s Financial Services and Public Finance group.  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.

© 2013 McNees Wallace & Nurick LLC 

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