public finance for utilities
DESCRIPTION
Public Finance for Utilities. Robert W. Doty A merican G overnmental F inancial S ervices Sacramento. What is public finance?. Issued by governmental entities (state, local) Interest generally excluded from income taxation. What is public finance?. - PowerPoint PPT PresentationTRANSCRIPT
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
• 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