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

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