Ice Miller attorneys offer helpful information on the financing alternatives available to Illinois Cities and Villages pursuant to Illinois law and consideration to federal tax and securities laws. Learn how we can help through our guide, “Financing Options: Using Bonds for Illinois Cities and Villages
.” An excerpt follows:
Financing Options: Relevant Laws
Adherence to federal and Illinois state laws is a required component of any bond issuance. Below is a sampling of current laws that govern the borrowing activities of cities and villages.
A. Illinois State Law. The Code, the Debt Reform Act, the Property Tax Extension Limitation Law of the State of Illinois, as amended (the “Limitation Law”), the Bond Issue Notification Act of the State of Illinois, as amended (“BINA”), the Bond Authorization Act of the State of Illinois, as amended (the “Authorization Act”), the Registered Bond Act of the State of Illinois, as amended (the “Registered Bond Act”), and the Bond Replacement Act of the State of Illinois, as amended (the “Replacement Act”), all authorize and govern the issuance of municipal bonds in the State of Illinois.
The Debt Reform Act was adopted by the Illinois General Assembly to provide supplemental authority to local governmental units regarding the issuance and sale of bonds to accommodate market practices that resulted in additional costs for those citizens residing in local governmental units which were affected by higher rates than would otherwise be necessary. Pursuant to the Debt Reform Act, whenever the authorization of or the issuance of bonds is subject to either a voter referendum or a back door referendum, the approval, once obtained, remains effective (a) for five years after the date of the referendum or (b) for three years after the end of the petition period for the back door referendum.
BINA requires non-home rule cities and villages proposing to sell non-referendum general obligation bonds or limited bonds except refunding bonds to hold a public hearing concerning its intent to issue such bonds. Issuers must follow the specific requirements of BINA regarding publication of notice and timing of the public hearing in order to conform to Illinois law when issuing general obligation bonds through non-referendum procedures. The city or village clerk must publish notice of the hearing at least once in a newspaper of general circulation in the municipality not less than seven (7) and not more than thirty (30) days before the date of the hearing and must post notice of the hearing at the principal office of the municipality at least forty-eight (48) hours before the hearing. The notice must appear above the name or title of the city or village clerk. The governing body must then wait at least seven (7) days following the hearing before adopting an ordinance providing for the issuance of the bonds.
The Limitation Law limits the annual growth in the amount of property taxes to be extended for certain Illinois non-home rule units of government. In general, the annual growth permitted under the Limitation Law is the lesser of 5% or the percentage increase in the Consumer Price Index during the calendar year preceding the levy year. Taxes can also be increased due to new construction, referendum approval of tax rate increases, mergers and consolidations. The Limitation Law currently applies to Cook County, the collar counties, and counties that have specifically approved the Limitation Law by referendum. County boards of any county decide whether or not to allow voters to choose if property tax extension increases should be limited. The County board can place the issue on the ballot at any election other than a consolidatated primary election by passing an ordinance or resolution at least 79 days before the election. If the referendum is successful, then the Limitation Law will become applicable to those non-home rule taxing bodies having all of their equalized assessed valuation in the county beginning January 1 of the year following the date of the referendum. Villages and cities subject to the Limitation Law are able to issue limited bonds in lieu of general obligation bonds authorized by applicable law payable from a separate tax levy unlimited as to rate but limited by amount pursuant to the Limitation Law. Limited bonds are payable from the city or village’s debt service extension base (generally nonreferendum bond levy (excluding alternate bonds) for year to which Limitation Law first applied). The Limitation Law does not restrict referendum approved general obligation bonds and alternate bonds.
B. Federal Income Tax Law. The Internal Revenue Code of 1986, as amended (the “Tax Code”) and the arbitrage and rebate regulations promulgated thereunder (the “Regulations”) govern the tax-exempt status of municipal bonds. Upon issuance of any municipal bond, the city or village will covenant to follow certain federal rules and regulations in order to maintain the tax-exempt status of the bonds. These covenants includes reasonable expectations that the bonds are not private activity bonds, meaning they generally benefit a private entity, or arbitrage bonds, which are issued to profit from the difference between tax-exempt and taxable rates, pursuant to the Tax Code and the Regulations.
C. Securities Laws.
1. Rule 10b-5. Rule 10b-5 of the Securities Exchange Act of 1934 (the “Rule 10b-5”), states that:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme or artifice to defraud.
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
Rule 10b-5 sets out the general statement of federal intent to protect investors against misleading statements or omissions of important facts in official statements or other documents pertaining to the bond issuance. Full disclosure for bond purposes means disclosure of all information material to investors. Recent SEC enforcement actions and a speech from an SEC commissioner indicate a vigorous enforcement initiative on bad disclosure practices targeting issuers and their officials. Issuers should adopt “best practices” to protect themselves and their officials from antifraud provisions including, but not limited to, hiring of disclosure counsel, which is a law firm typically representing the issuer on disclosure issues, and the adoption of effective disclosure policies and procedures that ensure appropriate disclosure. Based on recent enforcement actions against big and small issuers (ranging from large states to small local municipalities), claiming “small unsophisticated issuer” as a defense may not be viable.
2. Continuing Disclosure. Rule 15c2-12, governs the preparation and distribution of official statements for municipal securities. While this Rule applies primarily to directly regulated entities such as underwriters, broker-dealers and dealer banks, a significant portion of the burden of compliance with Rule 15c2-12 falls on the issuer to supply certain information and disclosure and to take the proper steps to comply with Rule 15c2-12 in a timely fashion. As an example of the importance of meeting continuing disclosure requirements, the Securities and Exchange Commission (“SEC”) recently charged a school district in Indiana and a municipal bond underwriter with falsely stating to bond investors that the school district had been properly providing annual financial information and notices required as part of its bond offerings. The school district was ordered to cease and desist from violating securities laws and undertake remedial actions and the underwriter agreed to a $580,000 fine along with a one year collateral bar and permanent supervisory bar for one of its employees.
The SEC recently announced its Municipalities Continuing Disclosure Cooperation Initiative (the “MCDC Initiative”) to address potentially widespread violations of the federal securities laws by municipal issuers and underwriters of municipal securities in connection with certain representations about continuing disclosures in bond offering documents. The MCDC Initiative provides issuers and underwriters an opportunity to self-report materially inaccurate statements made in final official statements regarding prior compliance with their continuing obligations as described in Rule 15c2-12. The MCDC Initiative began March 10, 2014 and ends at 12:00 a.m. EST, December 1, 2014.
3. State Blue Sky Laws. The offering, sale and purchase of securities in Illinois are governed by the Illinois Securities Law of 1953, 815 ILCS 5/1 et seq. (the “Blue Sky Law”). The Blue Sky Law provides for registration of securities, licensing and regulation of securities broker-dealers, agents, investment advisers, and investment adviser representatives. Subject to statutory exemptions or exceptions, offers and sales of securities in Illinois which are not covered by federal securities law must be registered by coordination or qualification procedures, as applicable. Registration statements for offerings registered by qualification in Illinois must contain full and fair disclosure of all material facts regarding the investment offered and present specific categories of information and financial statements pursuant to the Blue Sky Law.
4. Municipal Advisor rules. September 20, 2013 marked the official adoption by the Securities and Exchange Commission (“SEC”) of its final rules for municipal advisors (“Final Rules”), as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Further, the SEC released additional guidance in May of 2014.
While underwriters have long been regulated by the SEC and other regulatory bodies, the regulation of municipal advisors pursuant to the Final Rules is new. The Final Rules took effect on July 1, 2014. Issuers of municipal securities will likely notice changes. While the issuer is not required to hire a municipal advisor, the Final Rules require registration of municipal advisors, define who is a municipal advisor and impose certain limitations on underwriters. An underwriter is exempted from registering as a municipal advisor as long as certain protocols are followed. To qualify for the underwriter exemption, the underwriter must have an engagement to act as underwriter on a specific issuance of municipal securities. Inclusion in a pre-approved underwriting pool is not sufficient. Engagement letter may state that it is preliminary and non-binding, is subject to applicable procurement laws, formal governing body approval, final bond structuring and execution of a bond purchase agreement, may be terminated by either party without liability, and does not prevent the issuer from engaging other underwriters, or from selecting a different underwriting group. Oral or written acknowledgment of engagement from the issuer/obligated person is permitted. Preliminary, non-binding engagement is permitted so long as issuer/obligated person reasonably expects to formally engage the broker-dealer as underwriter. Multiple engagements are permitted, and there is no need to specify status as senior or co-manager.