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The Challenges and Opportunities of the “New” Municipal Marketplace. Prepared and Presented By:. Learning Objectives. The Participant will be able to identify key events that created the “New” Municipal Marketplace.

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learning objectives
Learning Objectives
  • The Participant will be able to identify key events that created the “New” Municipal Marketplace.
  • The Participant will be able to compare alternative financing vehicles, including:
    • Privately Placed Bank Loans.
    • Negotiated Sale of Public Securities.
    • Competitive Sale of Public Securities.
  • The Participant will be able to recognize the importance of Credit Ratings in the “New” Municipal Marketplace.
  • The Participant will be able to explain the Characteristics of Highly Rated Credits.
  • The Participant will be able to consider approaches to strengthen their own Unit’s credit rating.
events that shaped the new municipal marketplace
Events that Shaped the “New” Municipal Marketplace

August 2007:

Bear Stearns Hedge Fund Collapse

September 2008:

FNMA/FHLMC Takeover /

Lehman Files for Bankruptcy

October 2008:

DOW Jones drops 22% in one week.

April 2010:

Moody’s & Fitch Recalibrate Ratings Scale

February 2009:

American Recovery and Reinvestment Act Signed Into Law





July 2009:

First NC BABs Issued (Negotiated)

August 2009:

First NC GO BABs (Competitive)

January 2008:

AMBAC Downgraded, beginning a string in Municipal Bond Insurer Downgrades

October 2008:

Municipal Rates Spike

Municipal Variable Rate Market struggles due to a lack of liquidity

Municipal Fixed Rate Market “Frozen” to many issuers

the bank marketplace
The Bank Marketplace
  • Bank financing can be an attractive alternative to the public markets depending on the specific needs of the locality.
  • Generally, bank financing is most effective when the debt can carry the Bank-Qualified designation.
  • Bank financings can accommodate most any funding need and can provide many of the same “options” as are typically found in a public offering:
    • Wide range of credit pledges including General Obligation, Installment Purchase, Revenue, and Asset Backed /Subject to Appropriation.
    • Fixed or variable rate structures.
    • Short-term or long-term financing.
    • Various amortization options including capitalized interest, interest only and most any principal structure.
the bank marketplace6
The Bank Marketplace
  • Bank financings can provide an issuer with a number of benefits and advantages as compared to the public markets:
    • Streamlined issuance period – typically about 60 days from start to finish – can be done more quickly if needed.
    • Less cumbersome issuance process – no ratings required and less extensive offering documents – minimal staff time and resources are required.
    • Financing terms and related documentation requirements are generally more favorable – shortened pre-payment lock-out term, if any at all, upfront and on-going fees are minimized by comparison and minimal on-going disclosure requirements.
the bank marketplace7
The Bank Marketplace
  • Bank financing has not been spared the effects of recent financial turmoil. That said, many banks are still on solid footing and actively participate in municipal finance.
  • Perhaps the greatest change we’ve seen in the bank funding environment over the last year 1-2 years is the heightened level of loan-related credit analysis and due diligence.
    • Essentiality of asset pledge is key.
    • Increased documentation.
    • Demonstrated ability to manage budget.
    • Ability to repay planned debt from current or future sources.
  • In today’s market, Banks are also not as willing to extend credit to longer term financings. While 20-year final maturities are available from some Banks, many have limited terms to 5 or 10 years.
the bank marketplace8
The Bank Marketplace
  • Based upon our experience with the bank funding process, Davenport recommends the following strategies to help insure a successful effort:
    • Develop a competitive process through a formalized RFP solicitation including all pertinent deal-related details:
      • Project overview.
      • Loan security and source of repayment.
      • Desired bond structure, term and repayment schedule.
    • Include as many banks in the RFP process as you can – local, regional and national entities – different banks have different lending capacities and needs at any given time.
    • Provide audited financials to all RFP recipients and be prepared for a series of due diligence inquiries.
indicative bank rates
Indicative Bank Rates

Items of Note

Indicative Bank Rates

  • Receive less of a yield curve benefit.
  • Instead fixed rate loans are often priced at one rate associated with the average life or final maturity.
competitive vs negotiated sales
Competitive vs. Negotiated Sales
  • Competitive Sale – Bids accepted for purchase of bonds by underwriters at a time and date certain.
    • Traditional issuance method of General Obligation Bonds in North Carolina.
    • Competitive process can help to achieve low rates.
    • Size, timing, and structure determined at least 1 week prior to sale of bonds.
  • Negotiated Sale – Underwriters are selected prior to the sale at an agreed upon fee. Underwriters then market bonds to the public at an opportune time and offer to purchase bonds from the Unit at negotiated rates and terms.
    • Traditional issuance method of Revenue Bonds and Certificates of Participation in North Carolina.
    • Provides flexibility as to size, timing, and structure of bond issuance up to and through day of pricing.
  • In 2009, the North Carolina General Statutes were amended so as to permit negotiated sales of General Obligation bonds in circumstances beyond refunding transactions – primarily for issues in which a federal subsidy was available. 
    • This year the General Assembly further amended this provision so as to eliminate the expiration date. 
nc g o issuance competitive vs negotiated
NC G.O. Issuance: Competitive vs. Negotiated

Items of Note

North Carolina G.O. Bond Issuance June 2009-June 2010

Competitive Transactions

  • 41 issues totaling $1.4 billion.
  • 20 New money issues
    • 3 taxable (2 stimulus)
    • 21 Refunding issues.

Negotiated Transactions

  • 33 issues totaling $1.3 billion.
  • 14 New money issues
  • 8 taxable (7 stimulus)
  • 19 Refunding issues

83%, of Negotiated Transactions were Refunding or Taxable Issues.

58% of Competitive Transactions were Refunding or Taxable Issues

municipal market issuance volume
Municipal Market Issuance Volume

Items of Note

Municipal Issuance ($ Billions)

  • Since April 2009, the issuance of BABs has lowered the supply of tax-exempt debt in the marketplace.
  • The reduction in supply of tax-exempt bond has helped compress tax-exempt yields during this period.
  • Since April 2009, BABS have comprised 25% of the municipal market supply.
long term borrowing rates arra options
Long-Term Borrowing Rates: ARRA Options

Items of Note

30-Year Borrowing Rates

  • ARRA programs expire at the end of CY 2010. Discussion continues that some programs will continue beyond 2010.
  • Qualified School Construction Bonds
    • At or near zero interest loan.
  • Recovery Zone Economic Development Bonds (RZEBs)
    • 45% interest rate subsidy of taxable bonds.
  • Build America Bonds (BABs)
    • 35% interest rate subsidy of taxable bonds.
competitive issuance bab te hybrid
Competitive Issuance: BAB/TE Hybrid

Items of Note

Parity Summary of Bids

  • The competitive bid offering platform, PARITY, has made adjustments to allow for a combined issuance of tax exempt and BABs.
  • It is important to verify every bid received to confirm accuracy of Parity calculations.
competitive issuance bab te hybrid16
Competitive Issuance: BAB/TE Hybrid

Items of Note

Parity Bid Detail

  • As shown in the bid to the right, bidders have the option to choose which maturities they choose to issue as BABs.
long term borrowing rates
Long-Term Borrowing Rates

Items of Note

Historic Bond Buyer 20-Bond Index

  • 20-Bond Index Matures in 20 years and is rated ‘Aa2’/‘AA’ by Moody's and S&P.
  • Historical Statistics:
    • Average: 5.38%
    • Max: 7.56%
    • Min: 3.94%
    • Current: 4.37%
long term borrowing rates19
Long-Term Borrowing Rates

Items of Note


  • The Municipal Market Data Daily Rate Publication (MMD) is the benchmark for municipal yields.
  • Municipal borrowers who issue public securities receive the benefit of the yield curve.
  • Current municipal rates are lower across the board (i.e. years 1-30) than the same period over the previous five years.
credit spreads
Credit Spreads

Items of Note

30-Year MMD

  • The spread between ‘BBB’ and ‘A’ rated bonds has increased:

June ‘03 – Sept. ‘08

    • Average: 0.28%
    • Minimum: 0.07%
    • Maximum 0.51%

Sept. ‘08 – Present

    • Average: 1.78%
    • Minimum: 0.79%
    • Maximum 2.58%
  • On a $25,000,000 borrowing, a difference of 1.0% in rates could equate to an increase of $3.4 million in total debt service.

Due to the Absence of ‘AAA’ Bond Insurers and a Flight to Quality by Municipal Investors, Strong Credit Ratings are more important now than ever before.

ten characteristics of highly rated credits
Ten Characteristics of Highly Rated Credits
  • Resilient Economy
  • Diverse Tax Base
  • Affluent Population
  • Established Financial Policies
  • Effective Management Practices

Strong Reserves

Financial Flexibility

Affordable Debt Burden

Balanced Capital Plan

Long-range Planning

1 resilient economy
1. Resilient Economy

Highly rated credits have a diverse, resilient economy that exhibits steady growth or renewal

  • Multiple industry clusters.
  • Economic resilience in recessionary environment.
  • Industrial/commercial growth and reinvestment in community.
  • Transportation links within region.
  • Unemployment consistently below state, regional, and national averages.
  • High proportion of knowledge based jobs/industries.
  • Few sectors in decline.

Resilient Economy

Employment by Industry

resilient economy continued
Resilient Economy (continued)

Highly rated credits have a diverse, resilient economy that exhibits steady growth or renewal

Unemployment Rate

Poverty Rate

2 diverse tax base
2. Diverse Tax Base

Highly rated credits’ Ad Valorem tax base exhibit commercial and industrial diversity, not just residential growth

  • Market value of taxable property per capita is above average.
  • No concentration among top ten taxpayers (less than 10% of total assessed value).
  • Tends to be successful in redevelopment projects.
    • Underscores demand and desirability of community.

Diverse Tax Base

Assessed Value Per Capita

diverse tax base continued
Diverse Tax Base (continued)

Highly rated credits’ Ad Valorem tax base exhibit commercial and industrial diversity, not just residential growth

  • No concentration among top ten taxpayers (less than 10% of total assessed value).

Diverse Tax Base

Top 10 Tax Payers

3 affluent population
3. Affluent Population

Highly rated credits tend to be affluent areas in or adjacent to core cities

  • Have a solid, independent job base.
  • Number of jobs tends to be a high percentage of the Labor Force.
  • Wealth and income indicators above State and U.S. Averages (student population or governmental presence may temper income levels, but are stable).

Affluent Population

Per Capita Income

affluent population continued
Affluent Population (continued)

Highly rated credits tend to be affluent suburbs adjacent to core cities

  • Steadily growing or stable population.
  • Educated labor force with high portion of employees in executive and professional occupations.

Affluent Population

Regional ‘AAA’ Communities

Washington, DC*

  • Arlington, VA
  • Fairfax, VA
  • Loudoun, VA
  • Montgomery, MD
  • Prince George’s, MD
  • Calvert, MD
  • Charles County, MD
  • Bowie, MD
  • Frederick, MD
  • Talbot, MD
  • Falls Church, VA
  • Herndon, VA

City of Baltimore*

  • Howard, MD
  • Baltimore, MD
  • Annapolis, MD
  • Carroll, MD
  • Harford, MD

City of Richmond*

  • Chesterfield, VA
  • Hanover, VA
  • Henrico, VA
  • Albemarle, VA
  • Charlottesville, VA

Virginia Beach, VA

  • James City, VA

City of Raleigh/Durham

  • Durham, NC
  • Wake, NC
  • Cary, NC
  • Chapel Hill, NC
  • Apex, NC
  • Wake Forest, NC

City of Charlotte

  • Mecklenburg, NC
  • Cornelius, NC

City of Winston-Salem

  • Forsyth, NC

City of Greensboro

  • Guilford, NC
  • High Point, NC

City of Wilmington*

  • New Hanover, NC

*Not rated ‘AAA’

4 established financial policies
4. Established Financial Policies

Highly rated credits have formally adopted a broad spectrum of state of the art fiscal and debt management policies that are adhered to

  • Reviewed / discussed with Elected Officials and adopted, if possible.
  • Fund Balance.
    • Reserve policies establish minimum reserve level and conditions for use and replenishment.
  • Non Recurring Funds.
    • Policy regarding use, and may prohibit use in some operations.
  • Investment Management Policy.
  • Debt Capacity.
    • Debt to assessed value target and/or maximum limit.
    • Debt Service to expenditures target and/or maximum limit.
    • 10-year Payout Ratio target and/or minimum limit.
    • Amount of cash funding of CIP.
  • Policies need to allow for responsible future growth, not limit it.
5 effective management practices
5. Effective Management Practices

Highly rated credits exhibit best industry practices in managing their affairs

  • Demonstrate willingness to maintain structural balance in difficult economic environments:
    • Revenue adjustments.
    • Expenditure/program reductions.
    • Operating surpluses are the norm.
  • Strong disclosure practices.
  • Interim financial reporting is common.
  • Stability of key personnel and informed elected officials.
  • Regular financial performance monitoring and reporting to elected officials.

Effective Management Practices

GFOA Awards

6 strong reserves
6. Strong Reserves

Highly rated credits have a strong fund balance that consistently meets or exceeds internal targets

  • Depending on diversity and dependability of revenues, unreserved general fund balance for a Highly Rated Credit can range widely from as low as 10% of Budget to as high as 60%.
  • Excellent liquidity across all major funds.
  • No need for cash flow borrowing.
  • Enterprise, internal service funds, and pension funds are healthy.

Strong Reserves

Unreserved / Undesignated GF balance as % of Budget

7 financial flexibility
7. Financial Flexibility

Highly rated credits have solid overall fiscal flexibility

  • Regular pay-as-you-go funding for Capital.
  • Competitive tax rates.
  • Rapid debt retirement.
  • Diversity of revenue sources is typical:
    • Property tax.
    • Lesser taxes/fees available have been implemented.
  • Conservative budgeting.
  • Positive fiscal relationships with related jurisdictions.


Tax Rates of Local / Regional Units

financial flexibility continued
Financial Flexibility (continued)

Highly rated credits have solid overall fiscal flexibility

  • The Payout Ratio measures how quickly a Credit pays down its debt.
  • The industry standard is to analyze the 10-year payout ratio, or the percentage of the principal paid back over the next 10 years.


10-Year Payout Ratio

8 affordable debt burden
8. Affordable Debt Burden

Highly rated credits regularly measure debt affordability and policies are in place to control amount and timing of debt issuance to meet policy targets

  • Low to moderate debt ratios measured by:
    • Debt to assessed value.
    • Debt service to expenditures.
    • 10-year payout ratio.
  • Strong record of pay-as-you-go funding.

Affordable Debt Burden

Debt Service vs. Expenditures

9 balanced capital plan
9. Balanced Capital Plan

Highly rated credits typically have a well-defined 5 or 10 year capital improvement plan (CIP)

  • Balanced sources and uses/
  • Minimal use of “To Be Determined” funds.
  • Highest priority projects are identified.
  • Incremental operating costs associated with CIP are clearly identified.
  • Reviewed and updated at least annually.

Balanced CIP

CIP Planning

10 long range planning
Debt Capacity Analysis

DS vs. Expenditures

10-year Payout

Debt to AV

Debt Affordability

10. Long Range Planning

Long term planning is a hallmark of highly rated credits

  • Emphasis on internal planning; early issue identification.
  • Tend to be “first implementers” for new standards.
  • External planning and cooperation with other entities to tackle regional issues.
  • Multi-Year financial planning discipline is in place and updated regularly.

Long Range Planning

Planning Process

Annual CIP Review / Update


long range planning
Long Range Planning

Existing and Proposed Debt

  • Review Existing Debt Profile.
  • Layer proposed CIP debt on top of exiting debt profile in order to:
    • Measure Debt Capacity.
    • Measure Debt Affordability.
  • Evaluate alternative debt structures to alleviate any potential problems.

Long Range Planning

Existing and Proposed Debt

long range planning38
Long Range Planning

Key Debt Ratios

  • Review how proposed debt impacts key debt ratios.

Long Range Planning

Debt to Assessed Value

long range planning39
Long Range Planning

Key Debt Ratios

  • Review how proposed debt impacts key debt ratios.

Long Range Planning

Debt Service to Expenditures

long range planning40
Long Range Planning

Key Debt Ratios

  • Review how proposed debt impacts key debt ratios.

Long Range Planning

10-Year Payout Ratio

long range planning41
Long Range Planning

Debt Affordability

  • Review how proposed CIP / Plan of Finance impacts cash flows available to pay for debt service.
    • Evaluate all potential costs associated with projects
      • Debt Service
      • Operating Impacts
    • Evaluate potential sources of payment
      • Debt Service Budget
      • Sales Tax
      • Capital Reserves
      • Other

Long Range Planning


  • If there are any questions about the material presented today, please feel free to contact anyone from the Davenport Team.
  • Raleigh Office

Bob High


[email protected]

  • Charlotte Office

Walter Goldsmith Patrick Smith

704-998-5396 704-375-0550

[email protected] [email protected]

  • Richmond Office

Ted Cole Mitch Brigulio

804-697-2907 804-697-2903

[email protected] [email protected]