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McNees Municipal Recovery Client Alert

October 24, 2013

Pennsylvania Senate Local Government Committee Advances Amended Municipal Financial Reform Legislation

On October 22, 2013 the Pennsylvania Senate Local Government Committee voted unanimously to move an amended version of Senate Bill 901, the vehicle for municipal financial reform, out of committee for consideration by the full Senate.  The Committee’s mark-up of Senate Bill 901 contains a number of changes from the original bill that are of interest to municipalities, school districts and financial professionals.

Senate Bill 901 was originally introduced by a bipartisan group of senators in June 2013, and followed on the heels of Senate Bill 294 which contained similar reforms.  A full analysis of the original Senate Bill 901 is available at our website, and can be accessed here.  Senate Bill 901 initially won the support of the Committee and was reported without change to the full Senate.  But, after the Committee held a hearing on September 9, 2013 on municipal financial reform, the bill was returned to the Committee for mark-up.

Among the changes in amended Senate Bill 901 are various changes to the preliminary debt issuance approval process requirement, first introduced in Senate Bill 294 and modified by Senate Bill 901.  The changes are intended to ease the burden of compliance and clarify the requirements for obtaining preliminary approval.  Notably, amended Senate Bill 901 extends the period in which a local government unit may obtain final approval for a transaction from six months to one year, and extends the period in which the bonds or notes may be sold, from one year to two years.  At the same time, the amended bill shortens the period of review of a preliminary approval application by the Department of Community and Economic Development (DCED) from sixty days to thirty days.  The amended bill also clarifies the types of documentation required to be submitted with the application, and exempts certain “small-issue” borrowings for capital projects from the preliminary approval requirements (such borrowings are already exempt from the current DCED approval requirements).  At the same time, the dollar limit for “small-issue” borrowings is to be raised from $125,000 to $250,000.

Amended Senate Bill 901 also removes some provisions that drew criticism from local government units and the professionals that represent them.  The amended bill removes the blanket prohibition on using debt to finance costs of a project incurred in the year prior to the issuance of the debt, and inserts in its place a requirement that all costs must be incurred no earlier than two years prior to the issuance of the debt.  The amended bill also eliminates the limitation on costs of issuance to 2% of the debt proceeds, but does provide that DCED may, prior to granting an application for preliminary approval, request an explanation as to why a transaction’s estimated costs of issuance exceed 2%.

Amended Senate Bill 901 also substantially rewrites the provision limiting the ability of a local government unit to guarantee the debt of a municipal authority.  As originally written, Senate Bill 901 would have prohibited the making of a guarantee except in connection with certain water or sewer projects backed by the federal government, the Pennsylvania Infrastructure Investment Authority or other state agency or authority.  The amended bill deletes these exceptions, and replaces them with a broader provision continuing the giving of guarantees for “drinking water, storm sewer or sanitary sewer projects,” debts incurred pursuant to a plan of recovery under the state’s Act 47 municipal financial recovery program, and debts where the guarantee is necessary to enable the Authority to obtain the most competitive interest rate available in the marketplace as demonstrated by comparables.

Finally, amended Senate Bill 901 expands those provisions relating to the fiduciary duties of financial professionals.  In addition to retaining the fiduciary duty requirements, the amended bill adds a new certification requirement, under which each professional advising a local government unit must certify in writing the identification of the local government being represented, the source from which the professional’s compensation will be paid, and whether such compensation is contingent on the issuance of the debt.  The amended bill also adds a new section specifying that a local government unit may pursue a civil action against its professionals for damages resulting from their violation of the Local Government Unit Debt Act where the violation was not the fault of the local government unit.

Municipalities, school districts and their hired professionals should continue to carefully monitor the status of Senate Bill 901.  It is possible that the bill may come up in the Senate for a vote before the end of the year.  Municipal officers and representatives are encouraged to 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 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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