Public finance for utilities
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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?.

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Public Finance for Utilities

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Public finance for utilities

Public Finance for Utilities

Robert W. Doty

American Governmental Financial Services


What is public finance

What is public finance?

  • Issued by governmental entities (state, local)

  • Interest generally excluded from income taxation

What is public finance1

What is public finance?

  • For publicly-owned (governmental) entities

  • Privately-owned utilities generally cannot benefit from tax-exempt obligation issues

What is public finance2

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)

Types of obligations

Types of obligations

  • Bonds (usually revenue supported)

  • Notes, synthetic short-term securities (VRDNs)

  • Lease/installment purchase/certificates of participation (COPs)

Market diversity history

Market diversity/history

  • 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)

Key elements

Key elements

  • Legal documentation establishing obligation, source of payment

  • Payment source—usually utility revenues; revenue pledge, coverage

  • Legal opinions—bond counsel

  • Formal disclosures to investors

Market participants

Market participants

  • Issuers/obligors

  • Investors

  • Service providers—bond & other counsel, underwriters, financial advisors, rating agencies, trustees

  • Regulators—SEC, IRS (also courts)

Issuers obligors


  • Governmental entities:

    • Multi-state joint action agencies

    • Local governmental bodies—usually special districts, city departments

  • Privately-owned utilities in pollution control issues

Disclosure documents

Disclosure documents

  • Official statements

  • Offering circulars (private placements)

Disclosure standards

Disclosure standards

  • General registration exemption

  • Federal standards—fraud for investor actions; negligence for SEC enforcement

  • State law—fraud, negligence, strict liability

Disclosure standards1

Disclosure standards

  • Materiality

  • SEC guidance—pronouncements, enforcement

  • NFMA, GFOA private guidance

  • Role of fault (differences from corporate finance)



  • Mutual funds (often medium- or longer-terms)

  • Money market funds (very short-term, synthetic terms)

  • Individuals, trusts, private funds

  • Banks (shorter-terms)

Service providers

Service providers

  • 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 providers1

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 providers2

Service providers

  • Rating agencies

    • Standard & Poors

    • Moody’s

    • Fitch

  • Ratings impact interest rates

  • Bond insurance—common; reduce interest rates



  • 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

Public finance for utilities


  • Underwriter enforcement:

    • Interpretation

    • Must form a “reasonable belief” in “key” issuer representations

Public finance for utilities


  • Issuer enforcement:

    • Official statements approved by issuers

    • Issuers primarily responsible for their disclosures

    • Ultimately liable

Public finance for utilities


  • Other enforcement:

    • Participation in disclosure document preparation

    • Providing information

    • Aider & abettor responsibility in SEC actions

Sec enforcement

SEC Enforcement

  • Major SEC actions:

    • New York City

    • Washington Public Power Supply System

    • Orange County, California

    • Land-based financings

  • Administrative or court actions

Sec enforcement1

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

Public finance for utilities


  • IRS:

    • Promulgates tax rules (highly complex)

    • Increasing role as auditor/enforcer

  • Courts (final arbiters of challenged SEC, IRS actions)

Irs enforcement

IRS Enforcement

  • Examples of IRS interests:

    • Arbitrage (e.g., yield burning)

    • Private purpose financings

    • Detailed compliance

Irs enforcement1

IRS Enforcement

  • IRS:

    • Circular 230 (bond counsel opinions, tax shelter rules)

    • Arbitrage abuses in derivative transactions

    • Private purpose abuses



  • Public finance market highly efficient, effective

  • Provide financing for enormous variety of public projects, including utility projects

Public finance for utilities


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