Title: Type of Debt, Debt Limitations and Techniques of Debt Limit Avoidance
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Title: Type of Debt, Debt Limitations and Techniques of Debt Limit Avoidance
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Language: English
Publisher: National Association of Bond Lawyers
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Spatial Coverage: North America -- United States of America -- Florida
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Abstract: Type of Debt, Debt Limitations and Techniques of Debt Limit Avoidance Fundamentals of Municipal Bond Law 1996 National Association of Bond Lawyers
General Note: Box 8, Folder 7 ( Vail Conference, 1997 - 1997 ), Item 27
Funding: Digitized by the Legal Technology Institute in the Levin College of Law at the University of Florida.
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18 Fundamentals of Municipal Bond Law 1996


II. Types Of Debt, Debt Limitations
And Techniques Of Debt Limit
Avoidance

A. Types of Debt

1. General Obligation Bonds
General obligation bonds are secured by the full faith
and credit and general taxing power, usually ad valorem
taxes, of the governmental issuer. Usually no lien is
created on governmental property. General obligation
bonds are usually secured by unlimited tax power
(unlimited tax bonds), and a bondholder may look for
repayment to all sources of revenue which the
municipality is entitled to receive, but sometimes bonds
only secured by limited taxing powers (limited tax
bonds), where the limit is often expressed in terms of
millage which may be collected. A "mill" is 1/10 of
1%. Thus a limited taxing power for debt service
limited to 10 mills of assessed valuation means a
property tax equal to only 1 % of assessed valuation can
be collected to pay debt service.
How does a bondholder enforce a general obligation
pledge? Statutory remedies may be available. For
example, Section 15.1-227.61 of the Code of Virginia of
1950, as amended, provides for the governor to withhold
state funds payable to a defaulting local government to
be used to cure default.
If the municipality fails in its duty to raise taxes
sufficient to pay for debt service on general obligation
bonds, it may be compelled by mandamus at any time to
make such levy en masse for all principal and interest
past due. The provision for levying and collecting the
tax may be made by the legislature of the state, or it
may be left to the officers of the municipality to make it
when the debt is created; this is why the rate of tax to be
levied must be definitely fixed so that it may be
determined by a purely ministerial act; if the terms of
the statute are such that, when the municipality has
issued its bonds in compliance therewith, the bondholder
may resort to a court and by mandamus compel the
municipality to levy a tax sufficient to pay the interest
annually and to raise the required sinking fund, then the
provision for levying a tax is sufficient.'


2. Revenue Bonds
Revenue bonds are payable solely from revenues from a
specific source or pooled revenues from various sources.
Revenue bonds may be project-based (payable from user
fees such as water or sewage charges) or tax-based
(payable from specific project oriented taxes such as
hotel and motel taxes dedicated to a convention center
issue). Questions may arise as to what types of income
constitute "revenues." Also, a practical prerequisite to
the validity or enforceability of revenue bonds secured
by an encumbrance of the revenue of a system (such as
a water and sewage system) is the ownership of the
system by the municipal authority issuing the bonds or
a valid assignment of some other entity's revenues.
Reimbursements from the state to a state hospital have
been held not to constitute revenues for purposes of
determining whether bonds are self-liquidating.2
The Florida Supreme Court has held that a municipality
could not pledge all non-ad valorem revenues received
by the county and also covenant to maintain services
necessary to collect such fees, fines, etc., as this creates
an indirect pledge of ad valorem taxes.3
State revenue bonds secured by highway user excise and
other vehicle taxes violate the special fund doctrine and
are considered "debt.-"
Generally, debt limitations; discussed, in the subsection
"Debt Limitations Generally" do not apply to revenue
bonds if properly structured under the laws of the
particular jurisdictions.
The Issuer typically covenants to give bondholder a first
lien on revenues, but. operating. and maintenance
expenses are usually payable before debt service (net
revenue pledge); reserve funds and restrictive covenants
as to use, maintenance of insurance; continued existence
of issuer, etc., are usually required, including
restrictions on additional debt (parity tests) and
covenants to set rates (rate covenants) at sufficient levels
to provide debt service coverage of an amount in excess
of 100% maximum annual debt service.
Bond counsel must be careful that the applicable statutes
and documents create the lien and must be cognizant of
related laws, including the Uniform Commercial Code,
state insolvency laws and the Federal Bankruptcy law as
to the validity and priority of the lien as well as to
remedy and enforcement issues.


3.~3. 2


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General Law Chapter III 19


Bondholders' security may not be diminished by
diverting revenues pledged. A repeal of a covenant
restricting ability of Port Authority of New York and
New Jersey to use certain revenues pledged to
outstanding bonds is a violation of the contract clause of
United States Constitution.' However, under the
Energy Reserves test,6 there is "no showing that the act
of legislature has taken from the bonds the quality of an
acceptable investment for a rational investor;" absent an
"alteration of contract, remedy or security device, or a
danger of default," bondholders can't reasonably expect
to prevent the state from the exercise of its sovereign
powers.7
A state statute mandating that governmental entity
issuing bonds fix rates and charges to finance the
indebtedness did not impair contract between
municipality and district for the sale of water.8

3. Double-Barreled Bonds
Double-barreled bonds are normally secured both by the
full faith and credit of the issuer and the revenues from
a particular project. While procedural and other
requirements vary in different jurisdictions, these bonds
may be subject to referendum requirements, but may or
may not be subject to debt limits.
Many double-barreled bonds are issued in Pennsylvania
and Indiana due to liberal constitutional and statutory
provisions. The Pennsylvania Local Government Unit
Debt Act sets the annual non-electoral debt limitation at
250% (100% for first class school districts, 300% for
counties) of the average revenues received over the last
three fiscal years. For projects funded by
double-barreled bonds, this limit is increased by an
additional 100% of the borrowing base. Also,
indebtedness for a project which is certified to be
self-liquidating or self-supporting (by statutory
procedure) can be excluded from the debt limits
completely.
Double-barreled bonds have been issued in Indiana for
decades for airports and parking garages and more
recently for tax increment and economic development
projects.


4. Short-Term Debt
a. Bond Anticipation Notes
Bond anticipation notes may be used during a
construction period or during high interest rate periods
to avoid incurring long-term high interest debt. The
notes may be either revenue or general obligation debt,
or payable solely from refunding proceeds, any may be
subject to the same debt limit and other restrictions of
permanent financing. An issuer generally needs to adopt
a resolution or ordinance which provide for the
long-term bonds prior to issuance of BANS, so that little
or no "political" risk of nonissuance remains, only
"market access" or litigation risk remains.
b. Grant, Revenue and Tax Anticipation Notes
Specific statutory authority generally outlines maturity
limits and sources of repayment for grant, revenue and
tax anticipation notes. Statutory authority for revenue
anticipation notes may not define "revenues" precisely.
The Louisiana Supreme Court upheld state revenue
anticipation notes that pledged accrued revenues slightly
beyond the current fiscal year.9
See Appendix G for additional cases on Debt.

5. Special Assessment Bonds
Special assessment bonds are payable from revenues
derived from special taxes on property or user taxes with
respect to property deriving a particular benefit from a
public improvement. These bonds do not generally
create debt unless backed by the issuer's full faith and
credit.
Assessments must be in reasonable proportion to the
benefit derived to avoid unconstitutional taking.
Compliance with procedural requirements is essential in
most states. But it may not be enough to follow
statutory procedure. If the interest of a property owner
will be substantially affected by an act of government,
and where the owner's name and address are known, due
process requires that actual notice be given.'0
A due process problem can lead to large liability. For
example, a landowners' challenge to a county's
wastewater treatment plant special assessment under
1983 was upheld and over $585,000 was awarded in
1988 attorney's fees. The special assessment
proceedings violated procedural due process. Although
statutes provided for a hearing at which owners can


33,33











Fundamentals of Municipal Bond Law 1996


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o unequal assessment, no provisions existed to
landowners the opportunity to discontinue the
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1 the cost had exceeded the original estimate.""
ing is not required for correction by the
ire of boundaries establishing an improvement
which were incorrectly drawn.2
-braska Supreme Court takes a particularly
ve approach. A city's creation of a water
,n district to levy a special assessment on tract
served with water is invalid;'3 property owner
laterally attack special assessment for purposes
(property was not and could not be specifically
-d), a fundamental defect formation of the
* and lack of jurisdiction. '
)f large parcel of real estate objected to sewer
assessment, based on city's lot size for single
e. City is not required to engage in a detailed
of each parcel's zoning, shape and the like. It
ficient that the assessment was apportioned with
imate equality," involved a "reasonable basis of
action and took into consideration benefits
1 16

properly imposed special assessment of $63 per
al dwelling for solid waste disposal services
s home rule powers. "Apportionment of benefits
gislative function that should not be second
"17

'pendix H for additional cases on Special
tent Bonds.

ax Increment Financing
rement bonds are special obligations secured by
ntal increases in tax revenues paid by users of
td property or by general increases in taxable
ns within the tax increment area.
, tax increment financing ("TIF") was used to
a providing infrastructure and other public
ments for redeveloping blighted areas.
opment commissions (or other TIF implementing
:es) are required by state law to identify a
area by a set of factors including age,
:ence, deterioration of improvements, succession
th and the like. State law may also require a
that the blighted area will not be redeveloped


by normal regulatory processes or the ordinary operation
of private enterprise. Courts have generally not
substituted their judgment for that of local bodies in
blight determination.
More recently, TIF has also been used for purely
economic development. State law may permit
redevelopment commissions to use redevelopment-like
powers to pursue economic development without the
determination that blight exists. Economic development
purposes are generally fashioned after standards that
have been upheld by courts in the context of economic
or industrial development bonds. As the concept of
redevelopment has evolved to include purely economic
development, courts have focused on issues related to
"public use" or "public purpose" and generally deferred
to determinations by the state legislature and local
governing bodies that redevelopment is itself a public
use or public purpose.
Tax increment financing is available in at least 34 states.
The taxes involved are usually ad valorem real and/or
personal property taxes. State laws specify the
mechanism and process for the implementation of TIF.
In general; the TIF process is similar to that for all
economic and community development devices. A
redevelopment plan is prepared, specifying a project and
costs; a public hearing is set; notice of the hearing is
given to affected taxpayers and taxing districts; the
hearing is held and the plan and project are approved
and adopted. In some cases, a mechanism to reverse it
all may follow (e.g., petition and referendum).
Incremental taxes may fund a project on a "pay as
received" basis, or TIF revenue bonds or TIF general,
obligation bonds may be issued to pay the project costs.
Tax increment provisions have withstood challenge in
the context of most constitutional provisions.
i) Constitutional tax limitation provisions have been
found not to apply to TIF.'
ii) Tax increment obligations do not constitute debt
for the purpose of debt limitations."
iii) Constitutional provisions requiring uniform equal
rate of assessment and taxation are not violated by
tax increment statutes."
iv) Challenges to TIF on the basis of the impairment
of contract by holders of general obligation bonds
have not been successful on the theory that tax


3.3.4


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