The COVID 19 outbreak has caused various government officials including Governor Tom Wolf to issue orders halting some activities and requiring substantial modifications in how we conduct business.
What does this mean for our local school districts, counties, cities, townships and other municipal entities?
What about debt proceedings in Pennsylvania? Can local government issue debt?
Under Pennsylvania’s Local Government Unit Debt Act (“Debt Act”), local government units are required to file applications or debt proceedings with the Department of Community and Economic Development (“DCED”). In fact, local government units must secure approval from DCED prior to closing on any debt transactions involving new money capital projects or refundings/refinancings. Local government units include school districts, counties, cities, townships, and other municipal entities.
Under the Debt Act, certain documents need to be included with the debt proceedings filed including an authorizing resolution or ordinance adopted at a meeting complying with the Sunshine Act, advertisements both pre-meeting and post-meeting complying with the advertisements provisions of the Debt Act and certain financial information about the local government unit’s debt capacity and existing debt portfolio. Once a proceeding is received by DCED, DCED officials have 20 calendar days to review and either issue an approval or disapprove the proceedings.
COVID 19 has required the shutdown of many government offices. As a result, on March 16th lead legal counsel for DCED provided a directive that effective on March 16, 2020 DCED will not accept or review any new proceedings until March 31st at the earliest.
DCED has subsequently indicated that it will accept email filings provided certain steps are followed. The original directive had the temporary effect of suspending local government units in Pennsylvania’s ability to issue any debt for new money construction, renovation projects or refundings.
What about cash flow financing for operational needs?
Occasionally, local government units have cash flow issues relating to sustaining their operations. When experiencing cash flow issues, local government officials may determine that it is the best interest of the local government unit to issue Tax and Revenue Anticipation Notes or bonds (TRANs). Cash flow financings differ in many respects from the capital project and refunding transactions discussed above. While we will not outline all the differences in this article, we will highlight a few.
At the outset, it is important to note that TRANS must be paid back in the fiscal year in which they are issued. In contrast, capital borrowings repayment period could be ten, fifteen, twenty or even thirty years depending on the useful life of the capital projects being financed. This means that typically local government units wait until the beginning of the fiscal year which is July for school districts and January for many other municipalities before they issue a TRAN. This allows the local government unit a full year to repay the TRAN.
Another difference is that in a TRAN financing the local government certifies that they anticipate that there will be a time period or periods in which they will not have enough money to operate, but they anticipate they will receive those funds at some point during the fiscal year. In other words, there is a time lag or mismatch in when revenues are received, and expenses are due. There are certain limitations both under federal law and the Debt Act as to how much can be borrowed for cash flow purposes and how the cash flow deficit must be demonstrated.
A final and important difference to highlight is unlike capital project and refunding transactions, under the Debt Act TRANs are reviewed pursuant to a different set of streamlined procedures.
Local government units still must authorize the action pursuant to resolution or an ordinance, and they still must file certain documentation with DCED. However, under the Debt Act, DCED is not required to and in fact will not approve a TRAN proceeding. Instead, DCED will issue a letter of acknowledgment evidencing receipt of the necessary documentation typically within 7 days. The letter of acknowledgement is an important document for the TRAN to be issued; but because of the limited scope of review, it can be secured in an expeditious manner.
The original DCED directive suspending proceedings placed a temporary hold on the issuance of debt as it related to capital projects and refundings. The process has now been reopened allowing local governments to access the markets. As things continue to develop, we will have to wait and see how access to the municipal markets and its volatility impacts overall operations of local governments. During these uncertain times, perhaps the only thing that is certain is change is inevitable. Local governments need to be poised and ready to react quickly.
If you have a question, please contact your legal counsel or one of the education attorneys at KingSpry.
School Law Bullets are a publication of KingSpry’s Education Law Practice Group. This article is meant to be informational and does not constitute legal advice.