Legislation (Senate Bills No. 901, 902, 903 and 904 (SB 901, SB 902, SB 903 and SB 904)) has been introduced in the Pennsylvania General Assembly that, if passed, in whole or in part, could significantly affect certain types of municipal finance transactions involving municipal authorities and other local governments. These new requirements and restrictions would include:

• Preliminary approval of debt by the Department of Community and Economic Development (DCED) prior to its authorization;
• Requirements and restrictions related to selling negotiated debt;
• Limits on the amount of costs of issuance that can be financed; and
• Prohibitions on entering into swaps and similar agreements.

SB 901 would make a number of changes related to local bond financings that, among other things, could impact the timing of a bond financing. SB 901 (which includes many of the provisions set forth earlier in 2013 in proposed Senate Bill 294) would establish a preliminary approval requirement relating to the incurrence of debt by local government units under the Local Government Unit Debt Act (LGUDA). Prior to taking any action to incur debt, a local government unit would be required to file with DCED a certificate regarding its intention to incur debt, accompanied by its most recent audited financial statements and information demonstrating that the local government unit is in compliance with its continuing disclosure obligations under the Securities and Exchange Commission’s Rule 15c2-12.

SB 901 also imposes requirements to demonstrate to the satisfaction of DCED that existing subsidized or self-liquidating debt continues to qualify as such and certain refunding and working capital financings are “sound financial transactions” and in the “best long-term financial interest” of the local government unit. However, SB 901 does not define such terms or set forth the type of information that would demonstrate these standards have been satisfied. With respect to self-liquidating debt, a justification is required to be included in the filing with DCED for any assumed increase in gross revenues of more than 5 percent in any one year with respect to the related project.

SB 901 also prohibits a local government unit from collecting a fee to guaranty the debt of a municipal authority or another local government unit. It further provides that a local government unit may only issue a guaranty of municipal authority debt when the debt is incurred in connection with a loan from the federal government, the Pennsylvania Infrastructure Investment Authority or any other instrumentality or agency of the commonwealth. This provision would prohibit the well-established practice of using municipal guaranties for publicly offered municipal authority debt. Moreover, such guaranties would be limited to debt incurred for “a water or sanitary sewer project." It is not clear whether storm sewer projects, as distinguished from sanitary sewer projects, are intended to be treated differently in this provision. Solid waste projects, however, would be ineligible for a guaranty.

SB 901 would limit to 2 percent the amount of debt proceeds that may be used to pay costs of issuance, require proof that financial security to insure completion of a project has been obtained, and require submission to DCED of evidence of the necessity of a private sale of debt by negotiation of more than $5,000,000 in any fiscal year. However, SB 901 provides neither general criteria nor specific types of information to determine whether a private sale is necessary.

SB 903 would prohibit municipal authorities and local government units, and SB 904 would prohibit the city of Philadelphia, from entering into interest rate management agreements including swaps, interest rate caps and other similar agreements. Neither bill expressly addresses the ability to amend, novate or terminate existing swaps.

SB 901 and SB 903 also provide that any officer or member of the governing body of a local government unit or any municipal authority who knowingly participates in an ultra vires act commits a second degree misdemeanor. “Ultra vires act” is defined to include an act when the local government unit or municipal authority is without authority to perform the act or when the act is not explicitly prohibited, but is in excess of the powers granted to the local government unit or municipal authority.

Each of SB 901, SB 902, SB 903 and SB 904 were referred to the Senate Committee on Local Government on June 7, 2013. As of July 3, 2013, SB 901 and SB 902 had been reported from committee, given first consideration and laid on the table for potential movement to second consideration. As of September 4, 2013, no subsequent actions had been reported with respect to the foregoing Senate bills. The Senate Committee on Local Government has scheduled a public hearing with respect to these bills at 10:00 a.m. on Monday September 9, 2013 in Hearing Room 1 of the North Office Building.