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The Role of Your Professional Advisory Team
In order for an authority to undertake a successful financing, outside advisors are frequently needed.
The Solicitor
One of the most important members of the authority's financing team is its solicitor. This is particularly the case if the financing involves a loan from a local lending institution that does not need the guarantee of the authority's sponsoring municipality. However, each solicitor will have had different degrees of experience in identifying potential lenders, negotiating the terms of the loan, and securing all of the opinions and certifications needed to complete the closing.
Bond Counsel
The solicitor is frequently assisted in these endeavors by special counsel referred to as bond counsel. The role of the bond counsel is to ensure that the debt issued by the authority is in full compliance with all federal and state laws governing the issuance of tax exempt debt. Bond counsel has typically had a great deal of experience with these matters and issues an opinion to the lender or debt holder that none of the relevant statutes have been violated. In instances where a municipal guarantee is needed, he will often coordinate the authority's efforts with the solicitor for the municipality and the elected officials. He will also be involved with the preparation or review of the submittal to DCED when their approval is required.
Consulting Engineer
Your consulting engineer will also play an important role in advising legal counsel of the amount and timing of expenditures related to the proposed project. He often must prepare the overall project schedule and an estimate of the project's cost. He is frequently called upon to provide certifications concerning the adequacy of rates and charges to repay indebtedness and other certifications concerning the useful life of the facilities being constructed. He will often be asked to calculate or recalculate user charges for those connecting to a water or sewer system or those using the services provided by the authority.
Bond Underwriting Firm
If the authority issues debt in the public market, short-term project notes or long-term revenue bonds, a bond underwriting firm is necessary. There are several in Pennsylvania that have public finance departments specializing in the issuance of debt by municipalities and municipal authorities. The underwriter will provide an analysis to the authority of the marketability of its debt, the interest rate that it will likely pay, and advice and guidance to the authority on how to go about issuing the debt. The underwriter will then proceed through his organization to sell the authority's securities to the investing public at large or to large institutional investors or banks. There are some who feel that the financial advisory role offered by the underwriting firm and its role as the marketer of the authority's securities represents a conflict of interest, however the practice is fairly widespread here in Pennsylvania .
Independent Financial Advisor
Often, authorities will retain the services of an independent financial advisor who will review the fundamental economics of the project, determine the authority's financing needs, and provide an impartial analysis of the types of financing that are best suited to the authority's repayment ability. They are also helpful in determining the estimated impacts on customers through the calculation of user charges, and they frequently can provide all of the necessary certifications to government agencies concerning the adequacy of revenues and other financial matters. Like the bond counsel, they typically have had extensive experience in a wide variety of municipal borrowing situations and are prepared to quickly identify the most cost-effective source of funds. They do not replace any individual or firm who would otherwise be involved in the transaction but will frequently provide assistance to them that helps reduce the costs. However, their true value is in the ability to secure improved interest rates and other borrowing terms that have a profound impact on the overall cost to the user. Even a small difference in the average interest rate over a 20 or 25-year period can result in a substantial dollar impact.
As you can see, the world of municipal finance can be complex and involve numerous individuals and interest. Obviously, authorities will always want to pursue those financing alternatives that result in the lowest net overall cost, while other professionals must pursue different goals (including the overall legality of the transaction or the creation of a favorable market environment). It is important that each authority member review the transactions very carefully and make certain that the overall financing makes sense in light of the authority's needs. From time-to-time, "gimmicks", "scenarios", and "innovative financing schemes" will be touted as too good a deal to pass up. Indeed, some of these alternatives can be immensely beneficial to an authority, but great care should be taken before choosing one of these alternatives since there is often some element of risk that must be assumed in order to achieve the reward. When a deal looks too good to be true, perhaps it is. If in doubt about a particular transaction or aspect of one, a second opinion is often useful.
This article was written by Russ McIntosh, HRG's director of financial services, and published in the Pennsylvania Municipal Authority Associations's magazine, The Authority. For more information on the financial decisions that face municipal authorities, contact Russ McIntosh. For more information about water/wastewater engineering, please contact Chuck Wunz. |
