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
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. There never too much knowledge and especially the kind shared among experts, click here to read more on the “Green Light” perspective. These town’s concerns below in a spreadsheet for all to read.
- Banks prefer to loan money to towns in the 1 – 3 year time frame as longer than that is unpredictable.
- Bank loans are less expensive and less onerous than bonds.
- Interest rates on short term notes (1 year) are typically 300 to 400 basis points lower than the interest rates on 20 year bonds.
- Bank loans are something that all of the towns’ treasurers are familiar with doing.
- Most of these small towns have never issued a bond and have no bond rating and no experience.
- 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.
- 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.
- Using 1 year notes does not increase the financial risks of a town and in fact decreases the risks
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.