Typical Chronology:

 After authority to raise money through debt is granted by city council or town meeting, actual issuance of notes or bonds may occur months, or even years, later. For this reason, it is good practice for local finance officials to meet periodically to review borrowings that have been authorized, but not issued, to make sure that the debt position of the community is understood by all. Once the structure of a borrowing has been determined, a preliminary official statement (POS) is developed under direction of the treasurer and disseminated to the bond market community. The POS will also be used by rating agencies in their analysis of credit worthiness. Both the POS and the final Official Statement (OS) are documents prepared for potential investors that contain information about a prospective bond or note issue and financial data about the city or town. The OS is sometimes referred to as an offering circular or prospectus. After all of the preliminary work has been done and the various experts (e.g. bond counsel, rating agencies) have weighed-in on the sale, the bonds or notes are sold to underwriters or broker syndicates and, ultimately, to investors. Once payment on the purchase has been made, the community has the funds for the specified capital improvement or operating expenditures. To minimize interest costs, or more efficiently assemble borrowing packages, treasurers should always communicate with the department head, who will oversee a project or purchase, to better understand when funds will be needed. By taking a deliberate and thoughtful approach toward debt, cities and towns can optimize their borrowing practices to better maintain capital assets and minimize costs. Having a basic understanding of the process and making use of the knowledge of investment professionals improves a community’s odds of success.

Jeff Bennett

From the Massachusetts Department of Revenue;

Understanding Municipal Debt The decision to borrow money can be intimidating. To make matters more uncertain, the mechanics of issuing debt may be the least understood financial process among citizens, local officials and even some professional staff. Generally known is the statutory requirement that a town meeting, or a city council, can authorize borrowing only by twothirds vote. State law also specifies what expenditure purposes may be funded through debt and the allowed duration of the borrowing term (M.G.L. Ch. 44). The terms of a borrowing are made final when a majority of the board of selectmen, or the mayor, affixes their signature to required documentation. However, between authorization and issuance much more occurs with little notice outside the treasurer’s office. In the narrative that follows, we hope to provide some clarity. Discussed will be typical reasons why municipalities borrow and the borrowing vehicles that are available. The players who are a part of the process are described, as well as the process itself. Communities in Massachusetts have an ongoing responsibility to create and maintain capital assets. Hopefully, decisions of this nature are based on a capital improvement plan developed through analysis and prioritization of the community’s needs. Beyond a role in funding capital improvements related to buildings, infrastructure and equipment, it is the treasurer’s responsibility to maintain sufficient cash balances to meet the spending demands of departments, within the limits of appropriations. Occasionally, some communities also find themselves in need of a short-term infusion of cash for either capital or operating purposes. For these and other reasons, Massachusetts General Law authorizes cities and towns to issue debt under certain circumstances and for various durations. Often, the reasons for borrowing will dictate the type of debt a community chooses to take on. This is because some vehicles are better suited than others, depending on the nature of the need for funds. To make the discussion simpler, we can conceive of municipal debt as essentially falling into two categories: short-term and long-term.

Short-term Debt:
 Short-term debt can be classified best as borrowing through the issue of notes in anticipation of either paying them off or permanently financing the debt. Short-term borrowing also allows communities to make interest-only payments. However, such debt usually has a maturity date of no more than two years and, in some cases, statute dictates a shorter time frame. Additionally, a community might choose to re-issue short-term debt and/or make principal payments under certain circumstances. The various types of short-term debt vehicles used in Massachusetts include the following:

Bond Anticipation Notes (BANs) – These notes are issued to provide funding for capital improvements. BANs are usually paid-off with the proceeds of long-term financing instruments such as general obligation bonds. However, state law allows for BANs to be re-issued for up to five years if principle payments are made in accordance with an amortization schedule that would be required if the outstanding balance had been financed as long-term debt (M.G.L. Ch. 44, §17). Since short-term debt normally carries a lower interest rate than permanent, this strategy may make sense under certain circumstances.

Question: is there a line item in the fiscal year budget, 2017, which begins July 1, 2016 and will be voted on this May at Annual Town Meeting.

Jeff Bennett