Issuing municipal bonds is essential for California school and community college districts striving to fund their construction and modernization of facilities. While navigating the intricacies of a municipal bond issuance can be challenging, these districts are not alone in their efforts. They are often supported by a dedicated financing team, comprising of a municipal advisor, bond counsel, and underwriter, who provide the expertise and guidance needed to successfully secure funding through the issuance of bonds. This collaboration ensures that school and community college districts can access the necessary capital to improve facilities and enhance student learning environments, thereby making a significant impact on the future of education in California. Chris Hiatt of Keygent LLC walks us through the various financing team members and their roles.
Keygent Discusses a Municipal Advisor’s Role in the Municipal Bond Issuance Process
A municipal advisor plays a pivotal role in the municipal bond issuance process for California school and community college districts, primarily by serving as a fiduciary for issuing districts. Chris Hiatt explains, “Acting as a fiduciary to a California school or community college district requires a municipal advisor to always act in the district’s best interests.” A municipal advisor’s primary responsibility is to ensure that the district receives the fair and reasonable terms when issuing their municipal bonds. This begins with a thorough assessment of the district’s debt and capacity to repay the bonds, coupled with an evaluation of its long-term capital needs. By analyzing existing debt obligations, considerations that determine a district’s ability to repay its municipal bonds, and future funding requirements, the municipal advisor helps the district develop a strategic approach to issuing municipal bonds that aligns with its bond measure goals. This meticulous planning is crucial in setting the stage for a successful municipal bond issuance and general obligation bond measure.
As previously mentioned, municipal advisors can be of assistance to a California school or community college district well before the issuance of a bond. Once a district has put together its list of projects and needs and identified its funding needs, a municipal advisor can step in and assist with tailoring a general obligation bond program. They can help identify the total bond measure amount that a district may reasonably access based upon their tax base along with what voters are willing to approve. In working with the district to determine the size of its bond authorization to present to its voters, a municipal advisor will also present issuance schedules to coincide with project needs.
Once a California school or community college district receives voter-approval to issue general obligation bonds, and are ready, the municipal advisor can help the issuance process get started. Leading up to the sale of the bonds, the municipal advisor also acts a liaison between the district and other financial professionals involved in the process, such as the district’s bond counsel and underwriter. The municipal advisor also will typically ensure that other parties involved in the issuance such as the district’s respective county and paying agent. Moreover, the municipal advisor will perform quantitative analysis based on current interest rates to ensure the municipal bonds are structured correctly to maintain a projected tax rate that will allow the district to issue its future municipal bonds to meet project needs. They will often also assist the district with reviewing all of the legal documents.
Finally, the municipal advisor plays a critical role during the sale of the bonds. In addition to being responsible for structuring the municipal bond issue, they also help determine the timing of the sale and sale type. If the bonds are sold through a negotiated sale, the municipal advisor will verify the interest rates with market comparables to ensure that the district is receiving favorable financing terms. If the municipal bonds are sold through a competitive sale, the municipal advisor will verify all of the bids received along with verifying that the winning bid meets the terms set forth in the notice of sale. This phase requires a deep understanding of current market conditions and the ability to forecast economic trends that might impact the sale. By skillfully navigating these market factors, the municipal advisor helps the district secure favorable interest rates and terms, which can result in significant savings over the life of the bonds. Their expertise better ensures that the district’s bond issuance is executed efficiently, maximizing financial benefits and minimizing risks.
During the closing phase, municipal advisors work with the district’s bond counsel to ensure that all the costs associated with the financing are correct and invoices are sent to the paying agent so that all parties are paid upon closing. Additionally, they will work with the underwriter to verify the closing instructions to ensure that funds are correctly sent to the district and the paying agent on the day of closing.
Bond Counsel: Ensuring Everything is Legal & Complies
The role of bond counsel in the bond issuance process is critical, particularly for ensuring the bonds comply with all laws and regulations. Bond counsel is primarily responsible for providing legal advice to a California school and community college district, drafting the necessary legal documents, and, as previously mentioned, ensuring that the bond issuance complies with all applicable laws and regulations. This involves a detailed review of the authorizing statutes and legal framework under which the municipal bonds are issued. Bond counsel also prepares documents such as the bond resolution and the official statement, which details the terms of the bonds and disclosure of material information to investors. If the municipal bonds are being sold through a competitive sale, the district’s bond counsel is responsible for putting together the notice of sale, with the help of the municipal advisor, to outline the terms of the financing for bidding underwriters. Their expertise is vital in safeguarding the district against potential legal issues that could jeopardize the bond issuance.
Furthermore, bond counsel plays a role in verifying the tax-exempt status of the bonds. Keygent’s Chris Hiatt explains, “For California school and community college districts, issuing tax-exempt municipal bonds can significantly lower borrowing costs, as investors are willing to accept lower interest rates on bonds that do not require them to pay federal income tax on the interest earned.” Bond counsels meticulously review the proposed use of bond proceeds to ensure they meet the Internal Revenue Service criteria for tax-exempt financings. This includes confirming that the funds will be used for capital expenditures like building new school facilities or renovating existing ones and spent within a timeframe determined by the IRS.
In addition to ensuring legal compliance and the tax-exempt status of bonds, bond counsel also assists in the closing of the bond issuance. This phase includes coordinating with other members of the financing team to finalize all documentation and resolve any outstanding legal issues. Bond counsel ensures that all the signatures, seals, and certifications are correctly executed, and that the municipal bonds are properly authenticated and delivered to the buyers. Their role is essential in managing the myriad of details that involved with successfully completing a bond issuance, enabling a school or community college district to move forward with its funded projects without delay.
Underwriters: The Bridge from the Investors to the District
An underwriter plays a central role in the issuance of municipal bonds, primarily through their responsibility for selling the bonds to investors. This process begins with the underwriter conducting a thorough analysis of a municipal bond’s risk and marketability. Typically, they will work with a district’s municipal advisor providing preliminary interest rates ahead of the sale to assist with the structuring process of the bonds. Determining the structure ahead of the bond sale is crucial as it allows the underwriter to market the bonds to potential investors along with receiving feedback on potential interest rates that investors are willing to purchase the bonds. Additionally, similar to municipal advisors, underwriters will often also review legal documents prior to their adoption. Their expertise in market trends and investor preferences is vital in setting a competitive yet realistic price that balances the needs of the district with market demand.
If the municipal bonds are sold through a negotiated sale, the underwriter will market the bonds to potential investors. This involves preparing marketing materials that highlight the strengths and potential risks of the bonds, organizing investor calls, and leveraging relationships with institutional and retail investors. The underwriter’s network and reputation can significantly influence the success of the bond offering, as they need to effectively communicate the investment’s benefits and align it with investor’s interests and expectations. Their marketing efforts are essential not only in ensuring that the bonds are fully subscribed but also in achieving favorable terms for the school district. In the event the underwriter is unable to sell of the bonds during the order period, they may elect to purchase the unsold portion of the bonds to resale to investors at a later time. By doing so, this ensures that the district’s bonds will be fully funded.
If the municipal bonds are sold through a competitive sale, the underwriter will put together a bid to submit that meet the terms outlined in the notice of sale, which is put together by the district with the assistance of their municipal advisor and bond counsel. On the day bids are due, the underwriter with the lowest bids that conforms to the terms of the sale is awarded the municipal bonds. They, in turn, will resell the bonds to investors.
Finally, the underwriter is instrumental in the actual distribution and settlement of the bonds. Once the bonds have been successfully marketed and subscribed, the underwriter coordinates the transfer of funds from investors to the school or community college district, ensuring that the district receives the funds it needs in a timely manner. This involves managing the logistics of closing transactions, including finalizing transfer documents and overseeing the exchange of securities for payment.
Keygent Highlights Assistance Outside of the Issuance Process
The financing team typically assists California schools and community college districts even after the bonds have been issued. Municipal advisors often will continue to collaborate with districts to updated their bond programs to reflect changes in assessed value and interest rates. Municipal advisors and underwriters typically will monitor the district’s outstanding debt to identify any refinancing opportunities to take advantage of a favorable interest rate environment. Bond counsels remain available to answer any ongoing legal questions districts may have in regards to their outstanding bonds. Municipal advisors may also assist districts with the dissemination of their required ongoing reporting such as continuing disclosure or California Debt and Investment Advisory Commission’s annual debt transparency reports.
Working with experts in the issuance of municipal bonds offers numerous benefits, key among them being the assurance of compliance, efficiency, and financial optimization. Professionals such as municipal advisors, bond counsels, and underwriters bring specialized knowledge and expertise that is crucial in navigating the complex regulatory environment and market dynamics of a municipal bond issuance. Additionally, their understanding of market conditions and investment strategies helps in structuring the municipal bond issue to attract the right investors, securing favorable terms, and minimizing costs. Their involvement also streamlines the process, reducing the administrative burden on the issuing district and speeding up the issuance timeline. This collaboration not only enhances the chances of a successful bond issuance but also contributes to a successful long-term bond program, enabling districts to achieve their project goals effectively to provide their students with excellent learning environments.
Keygent LLC is a municipal advisor firm based in El Segundo, California that provides strategic and technical financial advisory services and dissemination agent services solely to California school and community college districts. Their public finance professionals have experience advising districts on the planning and issuance of municipal bonds and other types of financings. For more information, please visit
www.keygentcorp.com.
