FINANCING IV

AUTHORIZATIONS/REVIEWS

What parties must approve a bond issue for the bonds to be legal?

Before bonds are issued, the bond documents must be reviewed and approved by the issuer.  If the issuer is a pass-through bonding authority sponsored by a legislative body or government agency, the sponsoring entity must generally approve the documents as well.  Finally, the issuer or sponsoring entity may wish or be required to submit the documents to its own counsel for review.

In many states, bond documents must also be approved by one or more state agencies – such as the office of the Attorney General or a bond review board – that provide some degree of oversight over the process.  The scope of such reviews varies depending on the state and the issuer.  In some cases, the agency simply reviews the documents to see if they conform to state law, while in other cases, the agency evaluates the feasibility of the project and its impact on the state’s overall debt levels.  In order to speed the approval process, draft documents may be submitted in advance and be kept on file by the state agency. 

RECOMMENDATION: Obtain bond documents pre-filed with state agencies

It can be difficult for concerned residents to get access to bond documents before the papers have been approved and the bonds sold.  Because private firms often manage the preparation of bond documents, the issuer may not always have current drafts on file or may not feel obligated to share unfinished documents.  In some cases, however, these documents can be obtained from the state agencies with which they have been pre-filed.

RECOMMENDATION: Communicate with state authorities to make sure they have all relevant information concerning the proposed issue

The approval of bond issues by state authorities can be a “rubber stamp” process involving little meaningful oversight.  The information available to state authorities responsible for approving bond documents comes largely or entirely from the issuer and underwriter, and may not highlight legal or feasibility issues of concern.  The provision of timely information on such issues to state authorities may cause them to take a more careful look at a given bond issue, especially if there is public discussion and media coverage of the issue.  However, the concerns raised must fall under the jurisdiction of the agency: an Attorney General’s office charged with legal review of bond documents may not have any interest in, or ability to act on, information that goes only to the wisdom of a project.


INVESTORS

The final step in bond financing is selling the bonds to investors.  While bonds cannot legally be offered for sale until the date of issue, the underwriter will contact likely investors in the weeks leading up to the sale to assess demand and determine the price at which the bonds will be sold.  A handful of institutional investors – including insurance companies, mutual funds and pension funds – dominate the bond market.  The feedback provided by these investors is likely to determine how the bonds are priced and whether an attempt is made to restructure the deal to make it more attractive to investors.

Institutional investment managers sometimes specialize in particular types of bonds, but in general, they know less about a given bond deal than an agency rating the bonds or the company insuring them.  Officials and community residents can contact leading investment managers whose portfolios include similar bonds and provide information on aspects of the deal that might be of concern. Local residents can provide information that investors might otherwise never see. Institutional investors are even less accustomed to dealing with community groups than rating nor insurance analysts, but if the information is new, solid and relevant to their concerns, it may be taken seriously.