Authors: Bill Arrigal & Tony Rassias
The Qualified Bond Act, incorporated into G.L. c. 44A, has offered Massachusetts cities, towns and regional school districts an opportunity to enhance their debt’s credit rating to at or near that of the Massachusetts Qualified Bond Program’s thereby enhancing the marketability of their bonds and lowering their overall debt cost. Since 1980, this program has been highly successful and here is how it works.
The city, town or regional school district votes to incur debt as allowed by law. For program purposes, in accordance with G.L. c. 44A, § 5, either the original authorization vote or one subsequent must indicate clear authorization to issue bonds under G.L. c. 44A. The entity budgets the annual debt service payment as usual but, after proper program approval is granted, does not make direct payment as will be explained below. The local treasurer with approval of the city council and city manager, if any, or otherwise the mayor in a city, the board of selectmen in a town or the regional school district committee may apply to the Municipal Finance Oversight Board (MFOB) to “qualify” that debt, a process where the state treasurer pays debt service costs from the entity’s state aid to the Depository Trust & Clearing Corporation (DTC) which then pays the bondholders. MFOB, composed of the auditor, treasurer, attorney general and Division of Local Services Bureau of Accounts Director (or their designees), receives the application which must include certified copies of the vote to authorize the debt and other documents required by the Board.
MFOB then is by law required to investigate, taking into consideration:
- the need for the improvements to be financed from the debt proceeds;
- the entity’s ability to provide other essential public improvements and services;
- the entity’s ability to pay when due principal and interest on its debt;
- whether the request is for a legal borrowing purpose;
- the reasonableness of the amounts to be expended for the intended purposes;
- the amount of State aid likely to be distributed to the entity;
- other factors that the Board may deem necessary or advisable including the estimated cost savings from having the bonds issued as state qualified.
The Division of Local Services provide MFOB and the entity with a “coverage analysis” to ensure that there is sufficient State aid to pay for all debt service, qualified and non-qualified, and for all other potential deductions from that aid. Coverage analysis is a standard financial tool used by rating agencies and other analysts in evaluating the sale of bonds. After MFOB’s investigation and within 60 days of the application’s submission, it may, by majority vote, qualify the debt which may include other restrictions and limitations it deems necessary. The qualified bonds may be issued for any legal borrowing purpose from ten to 30 years. However, one or more purposes within the authorized borrowing could have a purpose as short as five years. During the same 60-day period, MFOB may vote not to “qualify” the debt; a failure to take this vote is a deemed denial. The debt may still be issued but without the state’s qualification.
After MFOB’s final action is taken, or after the request to qualify is deemed denied, the Auditor’s Office notifies the Treasurer’s Office, certain local officials, the entity’s Financial Advisor, Local Aid and BOA’s Public Finance Section of the result. The Treasurer’s Office is notified of the entity’s maturity schedule, interest rate and dates of the debt service payable. Monthly, DLS reconciles its notification of MFOB qualified debt with the Treasurer’s Office. Using this system creates added security that the payment will be made in whole and on time. The treasurer, or another authorized to do so, will act as paying agent and make debt service payments directly to the DTC from the entity’s state aid or, if necessary, from any other amounts due to the entity. The entity’s accounting officer must record as revenue both the actual amount of state aid received and the state aid used to pay the debt service and charge the debt service payment to the appropriation.
In 2019, Moody’s announced a Program rating of ‘Aa2’ Stable and in 2023, Standard & Poor’s (S&P Global) announced a Program rating of ‘AA+’ Stable. More information on the Municipal Finance Oversight Board and the Qualified Bond Act can be found on the respective webpage.
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Editor: Dan Bertrand
Editorial Board: Marcia Bohinc, Linda Bradley, Sean Cronin, Emily Izzo and Tony Rassias
| Date published: | August 15, 2024 |
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