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Lesson 1 - Why Governments Borrow Money
Local government finance professionals and paraprofessionals need a thorough understanding of why governments borrow money. Governments need to borrow money primarily to make acquisitions just as most ordinary people have to borrow money to purchase a home or a vehicle. Few of us have the money upfront to pay for the entire purchase. This first lesson provides knowledge of the relationship between the types of purchases made and the types of debt issued.
Learning Objectives:
1. Relate types of debt to capital versus operating expenditures;
2. Examine why an effective capital improvement program needs to be interrelated with debt administration;
3. Understand the importance of a formal debt policy; and
4. Identify why debt policies should be integrated into the capital improvement program.
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Lesson 2 - Typical Methods of Financing Capital Projects
In determining what methods of financing will be used to finance capital projects, a government needs to examine all options, including the issuance of long-term debt. This chapter offers suggestions on typical sources of funding capital projects, including:
• Grants
• Capital contributions
• Low-interest loans
• Joint ventures/privatization
• Pay-as-you-go financing and
• Pay-as-you-use financing (debt issuance).
Learning Objectives:
1. Identify typical sources of funding capital projects;
2. Discover what impact fees are and how they are used;
3. Examine possible sources of low-interest loans;
4. Understand the advantages and disadvantages of pay-as-you-go financing; and
5. Understand the advantages and disadvantages of pay-as-you-use financing.
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Lesson 3 - Common Types of Debt Issued
If a government plans to implement its capital improvement plan and does not have the cash on hand to finance the project, then some type of debt must be incurred. This lesson presents the more common types of debt issued by government. These types include:
• Municipal bonds - general obligation and revenue
• Special assessment bonds
• Capital leases
• Certificates of participation
• Municipal notes
Learning Objectives:
1. Identify the common characteristics, as well as, the advantages and disadvantages of municipal bonds.
2. Understand how revenue bonds differ from general obligation bonds.
3. Define special assessment bonds and discover how they are repaid.
4. Learn why capital leases are so attractive to governments.
5. Examine how certificates of participation differ from capital leases.
6. Discover the purpose of municipal notes in governments.
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Lesson 4 - How Bonds Are Rated
The first step in debt management is to develop our long-range capital improvement program -- identifying the individual capital improvement projects. The next step is to determine where we will obtain the monies to finance the projects. After consideration of all possible alternatives, we have decided the best approach is to issue long-term debt in the form of bonds. Now we are ready to explore the bond rating process.
Learning Objectives:
1. Understand what a bond rating represents;
2. Know who issues bond ratings;
3. Recognize the designations from each of the bond rating agencies;
4. Be aware of the rating process; and
5. Distinguish between types of credit enhancements.
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Lesson 5 - The Players
It has been said that government, as we know it today, would not exist without the ability to issue bonded debt. Therefore it is important that we are familiar with the players who are involved in the process.
This lesson examines the different players, how they are selected, how they are compensated, and their role in the bond issuance process. The different players mentioned in this lesson are:
• Financial advisor
• Bond counsel
• Underwriters
• Underwriter's counsel
• Other players, including:
• Paying agent
• Registrar
• Trustee
• Securities depositories
• Printers
Learning Objectives:
1. Find out who makes up the primary players in the bond issuance process;
2. Discover the role of each of these primary players;
3. Identify how each of these primary players is selected; and
4. Determine how each of these primary players is paid.
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Lesson 6 - The Method of Sale
Once the decision has been made to finance a capital project through the issuance of debt (bonds), the government must choose the most suitable and cost-effective method of sale.
This lesson describes the most common methods of sale, including:
• Competitive bid
• Negotiated sale
• Private placement
Learning Objectives:
1. Understand the three most common methods of sale;
2. Recognize the advantages and disadvantages of the competitive bid and negotiated sale; and
3. Be aware of when a private placement might be used.
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Lesson 7 - Bond Structuring -- Interest and Maturities
The method of sale has been selected and the financing team has been chosen. It is now time for us to direct our attention to structuring the proposed bond issue. This lesson will examine the most common alternatives in debt structure -- including maturities and interest rate structure alternatives.
Learning Objectives:
1. Define the term "debt structuring";
2. Differentiate between fixed-rate and variable-rate bonds;
3. Understand the differences between serial and term bonds; and
4. Discover alternatives in debt service structures.
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Lesson 8 - Bond Documents
Many legal and financial documents are prepared during the course of issuing bonds. Most of these documents compose what is referred to as the bond transcript. This lesson reviews the aspects of the more noticeable documents including the notice of sale, the preliminary and final official statements, the bond resolution, the bond purchase agreement and the tax certificate.
Learning Objectives:
1. Identify the principal documents resulting from a bond offering;
2. Discover the major components of the notice of sale;
3. Find out what is in the final official statement that is not in the preliminary official statement;
4. Know when a bond purchase agreement is required and when to use a notice of sale; and
5. Who issues the tax certificate.
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Lesson 9 - So, Am I Done Yet?
If you think you are finished with a bond issue when it has been sold to bondholders, think again. In all reality, that bond issue will require monitoring and disclosure until the final payment is made. This lesson discusses some of the more important of those post-sale responsibilities including the investment of bond proceeds, arbitrage and continuing disclosure.
Learning Objectives:
1. Identify the requirements for investing bond proceeds;
2. Discover what arbitrage is and how it relates to bonds;
3. Define disclosure; and
4. Understand why continuing disclosure is important.
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Lesson 10 - The What, Why, and When of Refunding Bonds
You are a homeowner and the interest rate on your mortgage is 9.5%. Currently, the interest rates on mortgages are 5%. The first thing you should think about is refinancing your mortgage. Some of the questions you consider are:
• Can I lower my payment and increase my spendable cash?
• Can I reduce the maturity of my mortgage (fewer years to pay) and keep relatively the same payment?
• What are the legal implications of refinancing my mortgage?
Governments who have outstanding bonds payable should be asking themselves the same questions. This lesson examines the aspects of refunding bonds.
Learning Objectives:
1. Discover what a refunding is;
2. Understand why governments refund bonds; and
3. Identify when a government should consider refunding bonds.
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