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Public Finance for Utilities

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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  1. Public Finance for Utilities Robert W. Doty American Governmental Financial Services Sacramento

  2. What is public finance? • Issued by governmental entities (state, local) • Interest generally excluded from income taxation

  3. What is public finance? • For publicly-owned (governmental) entities • Privately-owned utilities generally cannot benefit from tax-exempt obligation issues

  4. 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)

  5. Types of obligations • Bonds (usually revenue supported) • Notes, synthetic short-term securities (VRDNs) • Lease/installment purchase/certificates of participation (COPs)

  6. 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)

  7. 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

  8. Market participants • Issuers/obligors • Investors • Service providers—bond & other counsel, underwriters, financial advisors, rating agencies, trustees • Regulators—SEC, IRS (also courts)

  9. Issuers/obligors • Governmental entities: • Multi-state joint action agencies • Local governmental bodies—usually special districts, city departments • Privately-owned utilities in pollution control issues

  10. Disclosure documents • Official statements • Offering circulars (private placements)

  11. Disclosure standards • General registration exemption • Federal standards—fraud for investor actions; negligence for SEC enforcement • State law—fraud, negligence, strict liability

  12. Disclosure standards • Materiality • SEC guidance—pronouncements, enforcement • NFMA, GFOA private guidance • Role of fault (differences from corporate finance)

  13. Investors • Mutual funds (often medium- or longer-terms) • Money market funds (very short-term, synthetic terms) • Individuals, trusts, private funds • Banks (shorter-terms)

  14. 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)

  15. 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)

  16. Service providers • Rating agencies • Standard & Poors • Moody’s • Fitch • Ratings impact interest rates • Bond insurance—common; reduce interest rates

  17. 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

  18. SEC • Underwriter enforcement: • Interpretation • Must form a “reasonable belief” in “key” issuer representations

  19. SEC • Issuer enforcement: • Official statements approved by issuers • Issuers primarily responsible for their disclosures • Ultimately liable

  20. SEC • Other enforcement: • Participation in disclosure document preparation • Providing information • Aider & abettor responsibility in SEC actions

  21. SEC Enforcement • Major SEC actions: • New York City • Washington Public Power Supply System • Orange County, California • Land-based financings • Administrative or court actions

  22. 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

  23. IRS • IRS: • Promulgates tax rules (highly complex) • Increasing role as auditor/enforcer • Courts (final arbiters of challenged SEC, IRS actions)

  24. IRS Enforcement • Examples of IRS interests: • Arbitrage (e.g., yield burning) • Private purpose financings • Detailed compliance

  25. IRS Enforcement • IRS: • Circular 230 (bond counsel opinions, tax shelter rules) • Arbitrage abuses in derivative transactions • Private purpose abuses

  26. Conclusion • Public finance market highly efficient, effective • Provide financing for enormous variety of public projects, including utility projects

  27. THE END

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