Handbook for Muni-Bond Issuers. Mysak Joe

to come to work in the morning.

      This book would not have been possible without the active assistance of professionals in the field: Jim Hearty, Gary Killian, and Spencer Wright of Lehman Brothers; Christian McCarthy of Merrill Lynch; Jim Lebenthal; Doug Watson and Fran Laserson of Moody’s; Vlad Stadnyk of Standard & Poor’s; Byron Klapper and Frank Rizzo of Fitch Investors Service; Austin Tobin of Delphis Hanover; Mike Ballinger of MBIA; J.B. Kurish of the Municipal Issuers Research and Analysis Center; Sylvan Feldstein; and Jack Kraft of the American College of Bond Counsel.

      Not a few issuers have helped me over the course of the years, including Utah’s Ed Alter, Frank Hoadley of Wisconsin, Jan Rzewnicki of Delaware, Bob Lenna of Maine, and Joe Lhota and Mike Geffrard of the City of New York. Three former bankers, Mike Lissack, Steve Strauss, and Bill Wood, helped me on the reinvestment of proceeds and yield-burning sections.

      Special thanks, too, to Steve Gittelson of Bloomberg Press – who during a party at Janet Sullivan’s asked, “Do you want to write a book for us?” – and to my editor at Bloomberg, Jacqueline Murphy.

      The glossary is largely drawn from the book I wrote with George J. Marlin in 1992, The Guidebook to Municipal Bonds, which was published by The Bond Buyer. The book is not only out of print, but also out of date, which goes to show how fast things have changed in the municipal market.

      Finally, I would like to thank some friends for their support over the years, including the aforementioned Marlin, Patrick Foye, Mike Crofton, Mark Reed, Parker Bagley, and Steve Gustavson. And finally I would like to thank my wife, Susan Merett, who is also my best friend.

      FOREWORD

BY MICHAEL R. BLOOMBERG

      SOME YEARS BACK, The Bonfire of the Vanities author Tom Wolfe suggested to Joe Mysak that he write a book about the municipal bond market. Call it The Dark Continent, Wolfe suggested. You hold in your hands the result.

      The municipal market is a vast place, and not a little scary for those not privy to its mysteries. Despite its intimate connections with all of us – look no further than the sewers and the side-walks beneath your feet for examples of things financed through the sale of municipal bonds-the municipal market has never really become a part of our financial culture.

      The consequence is that most people probably know more about how to sell an initial public offering in the stock market than they do about selling municipal bonds. How do you choose a financial adviser, an underwriter, a bond counsel? How are bonds priced? How do underwriting syndicates work? Why do we need a credit rating? How do we pay all these people? This book takes you through the whole process, step by step.

      The municipal market is, by any measure, big. It has been estimated that more than 80,000 entities have the authority to issue municipal debt. And every year, more than 7,000 of them do so, selling some 10,000 separate bond issues. As Joe Mysak points out, the municipal market is particular and specific to a remarkable degree. But there is a basic framework to all municipal bond transactions, and it is explained here.

      That basic framework now includes heightened regulatory scrutiny. The Securities and Exchange Commission Office of Municipal Securities’s advice to issuers is simple and direct: You are responsible for your bond issues. You can rely upon the professionals you hire, but only up to a point. You have to understand exactly what is going on and why. Before you can do this, you have to know what questions to ask.

      I believe Joe Mysak delivers solid advice on how to tap a market that has become a wonder of the (increasingly decentralized) world. I think you will find this book a reliable source of guidance and good practice.

A Few Notes on the Format

      ♦ This book packs a lot of information. It is designed to be functional as well as factual, trim enough to be carried in a coat pocket and taken on the road, and read easily on train, ship, or plane.

      ♦ The book’s organization accommodates your hectic schedule. The material flows logically and offers real-world applications at every turn.

      ♦ Graphics are designed with the busy reader in mind, highlighting important concepts from the experts in color throughout.

      INTRODUCTION

HANDBOOK FOR MUNI-BOND ISSUERS

      ALL MUNICIPAL FINANCE officers have the same goal when they determine that the time has come to tap the municipal bond market – borrow money at the lowest cost, legally. Most officials seldom use the municipal market and find it unfamiliar turf when they do venture onto it.

      This book will help municipal bond issuers realize their goal, by providing an understanding of how the process of public finance works, who the cast of characters attendant to a sale are, how the regulators see the market, how others have used innovations in their bond sales, how to measure bond performance using simple bench-marks, and how to work with underwriters should they choose negotiated sale.

      The easiest way to understand municipal bond sales is to look at some successes and failures.

      ♦ The City of Richmond, Virginia designed a variable-rate, short-term note program that allows it to borrow for temporary capital and operating needs. “This program will enable the city to sell bonds more infrequently and in larger amounts, which is expected to lower debt issuance and debt service costs,” Moody’s Investors Service noted approvingly.

      Lesson: Concentrate on lower debt service costs (see Chapter 2).

      ♦ Utah, one of only six states rated triple-A by all three of the major rating agencies, instituted a program that allows the state’s 40 school districts to use the state’s rating as a guarantee on their own debt, thus giving them the chance to save millions of dollars on their borrowings.

      Lesson: Only half the states have these kinds of guarantee programs. If your state does, it can dramatically lower yields on your borrowings (see Chapter 12).

      ♦ San Francisco, mindful of one rating agency’s dictum that it “is more expensive to lure a new franchise than to retain an existing one,” used bond insurance to get voters to approve $100 million in bonds for a new stadium for the city’s 49ers National Football League (NFL) franchise. The agreement with the insurance company provided that the insurer, not the city, would make up any shortfalls in the special tax revenues that pay debt service. Usually bond insurance covers debt service only if the issuer actually defaults. “The upset victory confounded polls that showed the measure trailing by as much as 23 percentage points,” according to the Bloomberg wire service.

      Lesson: Bond issues on ballots need champions (see Chapter 9).

      ♦ Constrained by certain aspects of the Tax Reform Act of 1986, New York City was forced to sell taxable bonds, rather than tax-exempt bonds. The city found that in some instances it could sell such bonds more cheaply abroad than at home, and it set up a special agency to sell yen-denominated bonds in Japan. The city later estimated that interest rate savings on one bond issue approached nearly $4 million.

      Lesson: Your job is to borrow money at the lowest cost, legally (see Chapter 2).

      To be sure, these are examples of advanced municipal finance strategies. But they show just what you can accomplish if you devote some time and attention to the municipal market.

      Unfortunately, however, you are bound to learn more lasting lessons from the market’s horror stories. Cautionary tales abound. Here are some specific problems to avoid:

      ♦ Brevard County, Florida commissioners approved the construction of a new administration building using non-voter-approved securities called certificates of participation, whose repayment was subject to annual appropriation. Critics of the building forced a referendum on whether to repay or repudiate the issue.

      Lesson: Don’t assume your project with a nonessential purpose has popular support.

      ♦ Lewisburg, Tennessee sold some securities to build a golf course. It took longer to build the golf course than first estimated, and revenues fell short. The city chose not to appropriate money to cover debt