Slate of Municipal Debt Reform Proposals Reintroduced in PA House, Senate
April 22, 2019
The bills that have been introduced in the 2019-2020 legislative session primarily consist of two packages – one in the House and one in the Senate. The package of reform proposals in the House can be found at House Bills 882-884. The package of reform proposals in the Senate can be found at Senate Bills 204-210. One proposal was introduced as House Bill 320, and is a standalone measure addressing interest rate swaps.
The bills can be grouped into the following categories: (1) reforms to the process by which municipalities obtain state approval for the incurrence of debt; (2) reforms to the process by which municipalities enter into interest rate swaps; (3) reforms to borrowings by municipal authorities; (4) reforms to the financial security provisions of public works contracts; (5) reforms to the laws governing criminal prosecutions of public officials; and (6) reforms to the process by which third class cities contract for most professional services. Each of these categories is discussed below.
Approval of Municipal Debt Incurrence
House Bill 882 and Senate Bill 204 contain substantially similar provisions and if enacted would dramatically change the process by which municipalities seek approval for and incur debt in Pennsylvania. The proposals are virtually identical to the proposals of prior sessions, most notably Senate Bill 490 of the 2017-2018 legislative session.
Under these bills, municipalities would be required to apply for preliminary approval from the State prior to enacting an ordinance authorizing the incurrence of debt. After obtaining such approval, municipalities would be permitted to proceed with the enactment of an ordinance, but as with current law could not actually incur the debt until they had applied for and received formal approval from the State for the debt.
These bills would also revamp the formal approval process. The requirements for the debt ordinance would be revised to require that municipalities provide more specific information about the project and the financing, among other things. Municipalities would be required to make additional certifications regarding outstanding debt, particularly debt for which the municipality had claimed an exclusion from the applicable debt limits based on the self-liquidating nature of the debt.
The changes in these bills would also extend to the professionals representing the municipalities. All Attorneys, financial advisors and municipal advisors would be affected. Most notably, the bills define the fiduciary duties owed by these advisors to their clients, and prescribe penalties for the violation of those duties.
Interest Rate Swaps
Three bills have been introduced in the 2019-2020 legislative session dealing with interest rate swaps: House Bills 320 and 884, and Senate Bill 206. House Bill 320 and Senate Bill 206 contain similar provisions, and if enacted into law would repeal the existing provisions of the Local Government Unit Debt Act governing municipal interest rate swaps, and replace them with a new, more robust set of standards that contain various restrictions on the form of the swap and the method by which it is approved. The new standards apply across the Commonwealth with the exception of the City of Philadelphia; both bills carve out the City and create separate standards for swaps entered into by the City (or any authority created by the City).
Both House Bill 320 and Senate Bill 206 contain a new requirement that any municipality with outstanding swaps provide on at least a quarterly basis, an update on the performance of the swaps at a public meeting. At a minimum, the update must include the current market to market valuation of the swap.
House Bill 320 as originally introduced differed most notably from Senate Bill 206 in that it would have prohibited all municipalities, with the exception of the City and School District of Philadelphia, from entering into new swaps. However, this prohibition was removed during committee markup, and thus the bill as amended tracks the language in its Senate counterpart.
House Bill 884 in contrast only amends the rules relating to interest rate swaps entered into by the City of Philadelphia. Its language tracks the language in the other bills regarding related interest rate swaps entered into by the City.
Municipal Authority Borrowings
House Bill 883 and Senate Bill 205 are identical proposals to amend the Municipality Authorities Act to explicitly prohibit the use of proceeds of a borrowing by an authority for a purpose unrelated to the project for which the debt was incurred. The bills also would amend the Pennsylvania Public Official and Employee Ethics Act to vest the Ethics Commission with the power to investigate authorities for alleged violations of the public bidding requirements contained in the Municipality Authorities Act.
Financial Security Provisions of Public Works Contracts
House Bill 885 and Senate Bill 207 would amend the Public Works Contractors’ Bond Law to explicitly require that financial security equal to 100% of the cost of the project be provided, and that such security must consist of: (1) a performance bond; (2) a letter of credit; or (3) an escrow account.
Additionally, both bills would increase the threshold for which application of the financial security provisions would apply. Current law requires that financial security be provided for all contracts in excess of $10,000; House Bill 885 (as amended) would increase that threshold to $50,000, while Senate Bill 207 would increase the threshold to $500,000.
Criminal Prosecutions of Public Officials
Senate Bills 208 and 209 propose changes to the laws governing the criminal prosecution of public officials for crimes committed while in office. Senate Bill 208 would amend the Commonwealth Attorneys Act to authorize the Office of Attorney General (OAG) to prosecute political crimes at all levels of government in the Commonwealth. Currently, the Commonwealth Attorneys Act authorizes OAG to prosecute in county criminal courts State officials or employees and those persons attempting to influence such State officials or employees. Under current law, OAG can only get involved in local and municipal prosecutions where there has been a direct referral of the case by the local district attorney to OAG (often due to a perceived conflict of interest).
Under Senate Bill 208, OAG would gain the power to prosecute any public official, at any level of government in the Commonwealth, for any crimes “affecting the performance of their public duties or the maintenance of the public trust.” This expansion of prosecutorial power would also extend to OAG’s ability to bring criminal charges against persons attempting to influence such officials, or benefit from such influence.
Senate Bill 209 would amend the Judicial Code to increase the statute of limitations for crimes committed by public officials and employees. Under current law, the statute of limitations for such crimes, when committed in the course of or in connection with the public office or position, is tolled for so long as the person remains in that office or position; but in no event may the statute be extended for more than the lesser of (i) five years after the person leaves public office or employment; or (ii) eight years from the actual crime.
Senate Bill 209 would scrap the overall eight year limit and expand the limit after leaving office to eight years. Thus, a public official or employee could face prosecution at any time during the tenure of his office or employment, and up to eight years afterwards.
Competitive Bidding for Most Third Class City Professional Service Contracts
Senate Bill 210 would amend the public contracting provisions of the Third Class City Code to require Third Class cities to publicly bid for any contract involving personal or professional services. Third Class cities are a particular class of cities in Pennsylvania determined by population, and include the cities of Harrisburg, Lancaster and York, among others.
Under current law, a Third Class city’s contracts involving personal or professional services are exempt from the general rule that contracts in excess of $18,500 (as adjusted for inflation) must be awarded to the lowest responsible bidder after public notice.
Senate Bill 210 would eliminate the “personal or professional” service exception for most contracts, with the exception of contracts that involve city employees, the city solicitor, city engineer, city administrator, deputy city treasurer or independent auditor.
The proposals contained in these bills would have a far-reaching impact on the municipal finance industry in Pennsylvania if they were enacted into law. Municipal officials and their advisors should review them carefully and contact their state legislators with any concerns.
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