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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

Public Finance for Utilities

Robert W. Doty

American Governmental Financial Services

Sacramento

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
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)
investors
Investors
  • 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
regulators
Regulators
  • 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
slide18
SEC
  • Underwriter enforcement:
    • Interpretation
    • Must form a “reasonable belief” in “key” issuer representations
slide19
SEC
  • Issuer enforcement:
    • Official statements approved by issuers
    • Issuers primarily responsible for their disclosures
    • Ultimately liable
slide20
SEC
  • 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
slide23
IRS
  • 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
conclusion
Conclusion
  • Public finance market highly efficient, effective
  • Provide financing for enormous variety of public projects, including utility projects
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