Town Financing of Debt for Last Mile Construction

On August 9, 2016 Gov. Baker signed a wide-ranging “municipal modernization bill” that changed how towns could borrow money for long term debt as specified in M.G. L Chapter 44 Section 17.

The previous Section 17 allowed towns to borrow funds in one year periods for up to 5 years before the borrowing had to be converted to a long term serial loan. The first two years the notes could be renewed and only interest need be paid. Years 3, 4, and 5 the notes could be renewed but a portion of the principal also had to be paid as if a serial loan had been issued in year 3. The legal borrowing term starts on the date the first note is issued. The legal term for telecommunications borrowing under M.G.L. Chapter 44 Section 8(8) is 20 years. So in years 3, 4, and 5 one seventeenth of the principal would have to be paid out of town revenues and not by rolling over the notes.

The municipal modernization bill changed the number of years that one year notes could be used from 5 years to 10 years before the borrowing had to be converted to a serial loan. All other provisions remained the same. That is the first two years are interest only payments and years 3 through 10 the payments are interest and one seventeenth of the principal.

In year eleven the town can apply for a serial note under the State House Note Program. These are long-term multiple notes issues consisting of a series of notes. All of the notes have the same date of issue with each not maturing in a consecutive year. Each note is issued with interest payable on an annual or semi-annual basis. The amount is typically limited to $1 million but may be more. The term is limited to approximately 10 years but may be longer. For further information please see the attached State House Note Program PDF.

Why the Financial Advisors Association recommended to the Governor and legislature to limit the one year borrowing to 10 years and require a 10 year serial note I don’t understand.   If the one year note process is good enough for 10 years why not for 20 years or whatever the legal borrowing term is under Chapter 44 Sections 7 and 8. The differential between one year notes and 10 or 20 year notes is typically 300 to 400 basis points which ends up costing the towns more for their borrowings. But at least the one year borrowings have been extended to 10 years which gives us 10 years to change the legislation.

The good news for the towns is that they will not have to issue bonds to fund their portion of the last mile construction. So while the “Green Light” review of each towns borrowing authorization by Bond Counsel is no longer required because no bonds need to be issued, Bond Counsels review does provide assurance to each town and to the state that the town’s borrowing authorization has been legally constituted.

Spreadsheet comparing borrowing options for each town

Literature and Forms about State House Notes

The ability of the towns to use a one year note rollover scenario has the following advantages

  1. Banks prefer to loan money to towns in the 1 – 3 year time frame as longer than that is unpredictable.
  2. Bank loans are less expensive and less onerous than bonds.
  3. Interest rates on short term notes (1 year) are typically 300 to 400 basis points lower than the interest rates on 20 year bonds.
  4. Bank loans are something that all of the towns’ treasurers are familiar with doing.
  5. Most of these small towns have never issued a bond and have no bond rating and no experience.
  6. Issuing a bond at the start of a project doesn’t make sense until the project is complete and you know how much needs to be borrowed.
  7. Bonds typically cannot be prepaid whereas with one year notes a town can pay as much of the principal as they choose in any given year.
  8. Using 1 year notes does not increase the financial risks of a town and in fact decreases the risks
If a city, town or district votes to issue bonds, notes or certificates of indebtedness in accordance with law, the officers authorized to issue the same may, in the name of such city, town or district, make a temporary loan for a period of not more than two years in anticipation of the money to be derived from the sale of such bonds, notes or certificates, and may issue notes therefor. A city, town or district may refund, by the issue of other notes, a temporary loan issued under the authority of the first sentence; provided, however, that the period from the date of issue of the original loan to the date of maturity of the refunding loan shall not exceed two years, unless such temporary loan is paid in part from revenue funds of the city, town or district as hereinafter provided for, in which case the period from the date of issue of the original loan to the date of maturity of the refunding loan shall not exceed five years. A temporary loan refunded under this section shall be paid in part from revenue funds of the city, town or district at or before the maturity date of any such refunding loan that is issued to mature more than two years, but not more than three years, from the date of issue of the original loan. A like payment from revenue funds shall be made at or before the maturity date of any such refunding loan that is issued to mature more than three years, but not more than four years, from the date of issue of the original loan and again at or before the maturity date of any such refunding loan that is issued to mature more than four years from the date of issue of the original loan. Each such payment from revenue funds shall be at least equal to the minimum annual payment which would have been required if such temporary loan had been converted to a serial loan prior to its first refunding that required a payment from revenue funds under this section, and the authorized amount of the serial loan shall be reduced by the aggregate amount of all such payments. Each payment made by a city, town or district as provided in the preceding sentence shall be reported by the auditor or accountant of the city or town or other officer having similar duties, or by the treasurer if there be no such officer, to the assessors, who shall include the amount so reported in the determination of the next annual tax rate, unless the city, town or district has otherwise made provision therefor. The amount of a payment from revenue funds made by a regional school district or regional refuse disposal district as provided herein shall be included in the next annual district operating and maintenance budget, unless the regional district committee has otherwise made provision therefor. The time within which a serial loan shall be due and payable shall not be extended by reason of the making of a temporary loan hereunder beyond the time fixed by law. If a balance remains in the proceeds of a temporary loan issued in anticipation of a serial loan at the time when the serial loan is issued, said balance may be applied to the payment of such temporary loan. Notes issued under sections four, six and six A for a shorter period than is permitted by said sections may be refunded by the issue of other notes within the required period; provided, however, that the period from the date of issue of the original loan to the date of maturity of the refunding loan shall be not more than the statutory authorization; and provided, further, that no notes shall be refunded under this section except under authority of such vote, if any, as is required for the original borrowing.
SECTION 65. Section 17 of said chapter 44, as so appearing, is hereby amended by striking out the first paragraph and inserting in place thereof the following paragraph:- If a city, town or district votes to issue bonds, notes or certificates of indebtedness in accordance with law, the officers authorized to issue the same may, in the name of such city, town or district, make a temporary loan for a period of not more than 2 years in anticipation of the money to be derived from the sale of such bonds, notes or certificates, and may issue notes therefor. A city, town or district may refund, by the issue of other notes, a temporary loan issued under the authority of the first sentence; provided, however, that the period from the date of issue of the original loan to the date of maturity of the refunding loan shall not exceed 2 years, unless such temporary loan is paid in part from revenue funds of the city, town or district as hereinafter provided for, in which case the period from the date of issue of the original loan to the date of maturity of the refunding loan shall not exceed 10 years. A temporary loan refunded under this section shall be paid in part from revenue funds of the city, town or district at or before the maturity date of any such refunding loan that is issued to mature more than 2 years, but not more than 3 years, from the date of issue of the original loan. A like payment from revenue funds shall be made at or before the maturity date of any such refunding loan that is issued to mature more than 3 years, but not more than 4 years, from the date of issue of the original loan and again at or before the maturity date of any such refunding loan that is issued to mature more than 4 years but not more than 5 years; more than 5 years but not more than 6 years; more than 6 years but not more than 7 years; more than 7 years but not more than 8 years; more than 8 years but not more than 9 years, from the date of the original loan, and again at or before the maturity date of any such refunding loan that is issued to mature more than 9 years from the date of issue of the original loan. Each such payment from revenue funds shall be at least equal to the minimum annual payment which would have been required if such temporary loan had been converted to a serial loan prior to its first refunding that required a payment from revenue funds under this section, and the authorized amount of the serial loan shall be reduced by the aggregate amount of all such payments. Each payment made by a city, town or district as provided in the preceding sentence shall be reported by the auditor or accountant of the city or town or other officer having similar duties, or by the treasurer if there be no such officer, to the assessors, who shall include the amount so reported in the determination of the next annual tax rate, unless the city, town or district has otherwise made provision therefor. The amount of a payment from revenue funds made by a regional school district or regional refuse disposal district as provided herein shall be included in the next annual district operating and maintenance budget, unless the regional district committee has otherwise made provision therefor. The time within which a serial loan shall be due and payable shall not be extended by reason of the making of a temporary loan hereunder beyond the time fixed by law. If a balance remains in the proceeds of a temporary loan issued in anticipation of a serial loan at the time when the serial loan is issued, said balance may be applied to the payment of such temporary loan.

 

 

 

1A serial loan is a loan for more than one year in which the principal is paid in equal installments each year and interest Is calculated each year on the remaining principal.