With their wishes for sweeping reforms of New York's arcane local public finance laws finally granted, municipalities are now trying to figure out what to do with their new financing powers.
Local government officials and municipal bond professionals, who had been urging state legislators for years to modify laws governing debt issuance, say public officials from counties, cities, and towns are reviewing the complex list of reform measures passed this year as part of a relief package from state-mandated spending and regulations.
Thye also are waiting for the state comptroller to provide them with regulations for some of the new porers.
In addition, there is the potential for at least a small boon for the public finance business in the state, as issuers look to bankers, lawyers, and financial advisers for help on these matters.
The reform package passed in July included authorization for localities to sell variable-rate and discount bonds; elimination of the 5% down payment the state requires from municipalities a bond is sold; extending the maturity of bond anticipation notes beyond one year; refining and expanding the regulaions governing the sale of certificates of participation; and raising the amount of bonds that can be sold through negotiated sale to $1 million, from $500,000.
Some local governments have already taken advantage of the less complicated reforms. The City of Lackawanna, in a private placement underwritten by First Albany Corp., is thought to be one of the first issuers in the state to have taken advantage of the reforms, selling a $4.6 million bond anticipation note offering with a four-year maturity.
Other issuers are contemplating jumping off the blocks as soon as some of the hurdles are cleared away. Depending on the final draft of state regulations and market conditions, the City of Buffalo is contemplating including $44 million of variable-rate notes in an upcoming $80 million revenue anticipation note offering, according to Joel Giambra, the city comptroller.
Mr. Giambra said, "We are waiting for an analysis of a regular short-term fixed-rate deal and a blended deal."
New York City, one of the largest issuers in the nation, also is expected to include variable-rate and discount bonds in future bond sales.
Benefits of Reforms
Mark Tenehaus, a vice president in the municipal securities department of Dean Witter Reynolds Inc., said the reforms give "issuers more financing flexibility and they give them a flexibility already enjoyed by other issuers in other parts of the country."
Nevertheless, there has not been a real surge in issuance by local governments. A host of questions about the reforms have to be answered before many issuers can take advantage of these new financing powers.
J. Dwight Hadley, assistant deputy comptroller with the state and treasurer of the New York State Government Finance Officers Association, said, "It is tough to measure the impact so far."
Mr. Hadley noted that the state's GFOA, bond lawyers, and financial advisers are engaged in a major effort to educate issuers about how to use their new powers.
"Everybody is in the educational mode," he noted.
Arthur T. Murphy Jr., senior vice president and manager of First Albany's municipal bond department, said, "There hasn't been much of an increase in volume for a couple of reasons: Number one, the information hasn't been fully digested."
"The second reason is the comptroller's new regulations are being worked on right now," he said. Those rules, he noted, are going to some degree impact municipalities' use of some of the bonding powers because they cover variable-rate and discount securities.
Mr. Murphy noted that the initial draft of the comptroller's regulations was "somewhat restrictive."
Bud Larson, president of the state GFOA and assistant director in the New York city of Office of Management and Budget, said, "At this point in time, the discussions with the state Comptroller are ongoing, and they have indicated modifications and a second draft."
A spokesman for the comptroller's office said, "What we are doing is gathering comments. And we are responding to those comments and we are drafting rules and regulations." The new regulations could be presented next week, she noted.
C. Todd Miles, a partner with the bond counsel firm of Hawkins, Delafield & Wood, said, "I am pretty confident that what emerges from this process will be fair, in terms of providing protection through the comptroller's office as well as the flexibility originally intended in the statute."
While the changes in the local finance law are welcomed by local government officials, some officials have said lawmakers did not go far enough.
Edwin Crawford, executive director of the New York State Association of Counties, said, "One of the major things that didn't get done, but issuers would like to see, is the constitutional amendment for level debt service payments."
Changing the constitutionally mandated "50% rule" would allow issuers in the state to be able to structure their debt repayment schedules for bonds so they would be able to make level payments over the life of the bonds.
The law now requires issuers to pay the bulk of their debt service payments in the first few years, Mr. Crawford said.
But Mr. Crawford also was quick to point to the benefits of the changes that have been made in the finance laws. "The package that was put through will have benefits as we go down the road.
Without The 5% Rule...
"We will have some counties that have in mind issuing bonds" before the end of the year because they have been relieved of the 5% rule, he noted. The rule had required issuers before the sale of their bonds to put up 5% of the total bond deal from revenues drawn from other funds. This rule had delayed or prevented some issuers from selling bonds, he said.
A number of counties are contemplating bond issues to finance jails, he noted.
As issuers ponder the reforms and potential bond deals, municipal market professionals wait patiently.
Raymond G. Hart Jr., a president of the financial advisory firm of Public Finance Associates Inc., said, "We really haven't seen a flurry of activity."
He noted, however, that there were "certainly more opportunities for the investment community."
"We don't expect to see a dramatic increase in volume overnight -- it will be more of slow burn," Mr. Murphy observed. "Down the road, we expect we'll see an increase in variable-rate transactions by some of the larger municipal entities, such a the larger counties."
Kenneth W. Bond, a partner with the bond counsel firm of Sullivan, Donovan, Bond & Bonner, said, "For the moment, [the reforms] are kind of neutral. They were intended as measures for mandate relief.
"Somehow, municipalities and school districts save moneu wtih these legal changes," he said. "Whether or not there is a saving needs to be seen."
Nicole Anderes, a vice president and municipal researcher with Roosevelt & Cross Inc. in New York City, said, "I think that there are large issuers that definitely needed these changes, but I don't think it was necessary to revise the local finance law for all localities."
For example, she said, "New York City's debt structure needs are very different from those of a small village that is one square mile with a thousand people."
With the new financing powers comes more responsibility and the potential for abuse. Issuers in the state will be looking for guidelines in the list of regulations being prepared by state Comptroller Edward V. Regan.
If the new regulations are too tight, local government officials say, then a drawn-out battle could be expected. But at the same time, there are those who feel the complexity of the new reforms requires oversight.
As these transactions become more sophisticated, the possibility for abuse and the burden of the cost on taxpayers increases, Mr. Bond said, adding, "I support the comptroller overseeing" the reforms.
Mr. Larson said, "It is still very early. We would not advocate anybody using the new options without adequately studying them.
"The fact that there is this now movement shows that people are taking a very thoughtful and analytical approach to it," Mr. Larson said.