Opinion EC-COI-85-79

Date: 10/08/1985
Organization: State Ethics Commission

A conventional industrial development bond issuance of the Massachusetts Industrial Finance Agency (MIFA) is not a contract made by a state agency for the purposes of G.L c. 268A, § 7 because: 1) conventional MIFA bonds are not secured by the full faith and credit of MIFA or by any pledge of MIFA revenues or receipts; and 2) MIFA undertakes no obligations with respect to the bond issuance. A member of the General Court could therefore have a financial interest in a conventional industrial development bond of MIFA. On the other hand, a bond issued by MIFA through its Guaranteed Loan Program is a contract for § 7 purposes because MIFA guarantees the payment of the principal and interest. and state funds are used to support the insurance fund backing the bonds. A member of the General Court would therefore violate § 7 by borrowing funds pursuant to the program because he would have a financial interest in a contract made by a state agency.

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You are a member of the General Court. You and a business partner would like to obtain financing through the Massachusetts Industrial Finance Agency (MIFA) for a project which will involve renovating an office building. You would like the financing to come either from a conventional issuance by MBA of industrial development bonds or from a MIFA bond issuance through its Guaranteed Loan Program (Program).

The general purpose behind the issuance of industrial development bonds is to "stimulate industrial growth and expansion by encouraging a larger flow of private investment funds from banks, investment houses, insurance companies and other financial institutions... " This is accomplished through the use of a federal tax incentive whereby the state "lends" its tax-exempt status to an eligible conventional loan or mortgage arrangement between a private borrower and a private lender by issuing industrial development bonds. The benefit to the lender is a tax-free investment which is passed on to the borrower in the form of a loan at a lower interest rate than would be available without the state's intervention.[1] Because the underlying arrangement is really a Conventional loan, the acceptability and terms of the arrangement rest entirely on the creditworthiness of the borrower in the first instance. The state agency responsible for the processing, approval and issuance of industrial development bonds is MIFA. MIFA's duties, powers and authority are set out in G.L. c. 23A, § 29 et seq. and G.L. c. 40D.

When a developer applies to MIFA for an issuance of industrial development bonds to finance a project, he must meet a variety of criteria and agree to a number of conditions, some required by statute and some imposed by MIFA. The most important criterion is that the project must comply with the purposes of G.L. c. 23A and G.L. c. 40D. Specifically, the project must be one which will either create jobs or revitalize a commercial urban area. MIFA is also required by G.L. c. 40D, § 12 to make certain findings including findings that the borrower is a responsible party, that the financing documents comply with the provisions of c. 40D, and that financing arrangements are adequate. In the various documents that are a part of the bond issuance, the borrower, who is the developer, and the lender, which generally is a financial institution, make various covenants and representations required by MIFA. For example, the borrower must agree to indemnify MIFA for any claims that might arise either out of the bond issuance or out of the project itself. The lender must agree that it is not relying on MIFA as to the reliability of any credit analysis or information on the borrower or the bond. Once the statutory criteria and MIFA's requirements have been met, MIFA issues the necessary certificates and then issues the bonds. MIFA makes no representation or finding as to the tax exempt status of the bonds. That is the responsibility of bond counsel who reviews the entire arrangement and issues an opinion to the borrower and lender. Any developer who meets the criteria and conditions established by MIFA and by statute may participate in the industrial development bond program.[2] The bond itself is issued in the name of MIFA, but it carries the following statement on its face:

     This bond (and any coupon appertaining hereto) does not constitute a general obligation of
     the Massachusetts Industrial Finance Agency nor a debt or pledge of the faith and credit of
     the Commonwealth of Massachusetts except to the extent paid from bond proceeds. The
     principal of and interest and premium, if any, on this bond are payable solely from the
     revenues and funds pledged
for their payment in accordance with the loan agreement and
     the trust agreement. (emphasis added)

The pledged receipts are defined in the accompanying financing documents as the loan payments received from the borrower. MIFA itself does not provide any money in connection with the bond issuance, take title to any property or collateral, or incur any liability. No party or any other person has recourse against MIFA in connection with the bond issuance. Throughout the process MIFA's representations and covenants are limited to the following:

     (a) that it is a body politic and corporate and a political instrumentality of the commonwealth
     established under G.L. c. 23A, with the power pursuant to G.L. c. 23A and c. 40D to execute and
     deliver a bond purchase agreement and a trust agreement and to perform its obligations
     under each thereof and to issue and sell the bond pursuant to the bond purchase agreement
     and trust agreement;

     (b) that it has taken all necessary action and has complied with all provisions of the
     Constitution of the Commonwealth and its enabling act, including but not limited to
     the making of the findings required by G.L. c. 40D, § 12, in order to make the bond
     purchase agreement, the trust agreement and the bond the valid obligations they purport
     to be; and when executed and delivered by the parties, the trust agreement will constitute
     a valid and binding agreement of MIFA and be enforceable in accordance with its terms;

     (c) when delivered to and paid for by the purchaser in accordance with the terms of the bond
     purchase agreement and trust agreement, the bond will constitute a valid and binding special
of MIFA. (emphasis added)

The term "special obligation" utilized in this last covenant means that the principal, interest and premium on the bond are payable only from the pledge receipts and not from any assets of MIFA.

Simultaneously with the issuance of the bonds, MIFA irrevocably assigns any further interest it may have in the issuance and in the bond payments to a trustee. Assignment of the borrower's payments on the loans to a trust is required by G.L c. 40D, § 13. Any other rights or responsibilities MIFA may have after the issuance of the bond are also assigned to the trust. This is in accordance with MIFA's own policy of undertaking minimal obligations which might require staff time or attention. Such obligations would involve such things as maintaining a bond register or notifying the bond holder(s) of certain events or information relative to the bond issuance. The trustee is then completely responsible for overseeing and administering the proceeds from the bond sale throughout the lifetime of the issuance.

The Guaranteed Loan Program, which is not yet totally operative, will work differently from the conventional bond issuance. The purpose of the Program is to bring the benefits of fixed-rate, long-term public financing to small businesses and developers. Conventional MIFA bonds carry no credit rating other than that of the individual borrowers. While the borrower may be viewed as creditworthy to its own commercial bank which buys the bonds, the bank buys the bonds on a short-term, floating interest rate basis. In contrast. bonds that are sufficiently "ratable" to be sold on the public market are eligible for long-term, fixed interest rates. To make such financing available, since it lacks sufficient assets in its own name and since it cannot use the commonwealth's name or credit rating, MIFA has decided to use a $10 million pool of money under its control called the Industrial Mortgage Insurance Fund (the Fund). The Fund will be used to insure/guarantee a portion of any bond issuance. That is, in the event of a default MIFA will guarantee to the bond purchaser 25 percent of the payment, when due, of the principal, premium and interest on the bonds. Prudential Reinsurance has contracted with MIFA to guarantee the other 75 percent.

The Program will work in the following way. An interested small business or developer goes first to a commercial bank with the proposed project. The bank makes an initial credit determination, and if that determination is favorable, the bank issues the developer a letter of credit securing the maximum annual amount of principal and interest that would be due on the loan. The developer takes this letter of credit to MIFA which hires an outside independent appraiser, at the developer s expense, to evaluate the collateral. The MIFA staff also reviews the proposal, utilizing the same criteria it uses in evaluating conventional bond issuance requests. If the staff finds the project to be sound it recommends the project to the full MIFA board which then commits itself to make the guarantee. Bonds will not be sold until a pool of projects has accumulated in the amount of $15 to $20 million. It could take up to a year to accumulate a pool of sufficient size since each project is limited to $2.5 million. Once there is a pool, the bonds are sold by an underwriter. Simultaneously, MIFA will transfer any remaining interest it might have in the bond to a trust. In the event that one of the projects in the pool defaults, MIFA is notified by the trustee and, if necessary, it makes available its 25 percent of the guarantee to reimburse the bond purchaser. Prudential Reinsurance does the same with its 75 percent. In the event of a default the trust document is not cancelled or revoked. The defaulting party is treated like any other party who defaults on a loan in that the collateral is subject to foreclosure and sale. If foreclosure and sale are going to result in large scale unemployment, however, MIFA is permitted under the terms of its agreement to try to find an acceptable alternative within an agreed-upon period of time.

In summary, under the Program MIFA plays two roles: that of bond issuer, and that of insurer. Unlike the conventional MIFA bonds, a bond issued under the Program will be a limited obligation of MIFA limited to a guarantee of a 25 percent reimbursement from the Fund in the event of a default.


1. Would G.L. c. 268A permit you to obtain project financing through a conventional MIFA industrial development bond issuance?

2. Would G.L. c. 268A permit you to obtain project financing through the MIFA Guaranteed Loan Program?


1. Yes.

2. No.


1. The conventional MIFA industrial development bond issuance

As a member of the General Court you are a state employee and, therefore, are subject to the provisions of G.L. c. 268A, the conflict of interest law. The sections of that law relevant to your first question are §§ 7, 4 and 23. Section 7 provides that no state employee shall have a financial interest, directly or indirectly, in a contract made by a state agency in which the commonwealth or a state agency is an interested party. Finding a violation of § 7 requires that three conditions be met concurrently. First, there must be a contract made by a state agency. MIFA is a state agency as that term is defined at § 1(p).[3] Second, either the commonwealth or a state agency must be an interested party to the contract. Third, the state employee must have a financial interest in the contract. Thus the first inquiry is whether a conventional MIFA bond issuance, or any aspect of it, can be characterized as a contract made by a state agency. For purposes of G.L. c. 268A the term "contract" refers not only to a formal written document setting forth the terms of two or more parties' agreement, but also has a much more general sense. Basically, any type of agreement or arrangement between two or more parties under which each undertakes certain obligations in consideration of promises made by the other(s) constitutes a contract. See e.g. Conley v. Town of Ipswich, 352 Mass. 201 (1967); EC-COI-84-51; 81-64.[4] It is in light of this definition that the various aspects of a bond issuance must be examined.

In a conventional MIFA bond issuance there are four basic documents: a bond purchase agreement between MIFA, the borrower and the purchaser: a loan agreement between MIFA and the borrower; the bond itself issued in MIFA's name to the purchaser; and a trust agreement between MIFA, the borrower and the trustee. The bond purchase agreement and the loan agreement contain the borrower's and lender's concurrence with the conditions imposed by MIFA. Additionally, the borrower covenants that it will indemnify MIFA as to as to any claims arising out of the bond issuance. The agreement further states that all proceeds from the bond sale will be used for construction of the project. The lender/bond purchaser for its part agrees that it will not rely on any of MIFA's findings under G.L. c. 40D with respect to the borrower or the bond itself or the security provided by the borrower. This means, among other things, that the lender is not relying an MIFA's information as to the creditworthiness of the borrower or the tax-exempt status of the bond issuance. It is clear from these two documents that the promises and obligations are one-sided: the borrower and the lender are making them, and MIFA is undertaking no obligations and making no promises in return.

The bond itself on its face is issued by MIFA to the bond purchaser with MIFA promising to pay to the purchaser the principal amount of the loan plus interest. Previous advisory opinions have held that a bond issued by a state agency is a contract because it creates a contractual obligation between the state and holders of the bond. See EC-COI-83-147 (and cases cited therein); 83-113.The bonds addressed in those two opinions are distinguishable from the bonds issued by MIFA, however, in that they were secured by the full faith and credit of the issuing agency or by a pledge of the revenues and receipts of the agency. In contrast, a MIFA bond must, by statute, clearly indicate that it is not a general obligation of MIFA or a pledge of the faith and credit of MIFA or of the commonwealth. See G.L. c. 268A, § 35(d). Rather the bonds are payable solely from the revenue and funds pledged for their payment which are payments from the borrower. Although MIFA's name is on the bond, the real obligor is the borrower, and the obligee the bond purchaser. While the imprimatur is necessary before an industrial development bond is issued, none of the underlying obligations or liabilities are MIFA's.

The final document to be considered is the trust agreement, also called the mortgage, security and trust agreement, between MIFA, the borrower and the trustee. General Law c. 40D, § 13 requires that the proceeds from the sale of industrial development bonds be deposited with a trustee and are to be used solely for the payment of the cost of the project and the expenses of the issuing agency. In addition, MIFA has established an internal policy to under-take only minimal obligations which might require staff time or attention during the lifetime of a MIFA bond issue, whether before or after a default. It therefore also assigns irrevocably to the trust any other rights or interests or duties it may have with respect to the bond issuance. The agreement sets out with specificity the duties of the trustee in handling the bond proceeds. It reiterates the borrower's covenant and MIFA's limited representation contained in the loan agreements and bond purchase agreement. MIFA requires that it include at the outset the same limited covenant by MIFA to make payments on the bond solely from the pledged receipts. The agreement also sets out the powers of the trustee upon the occurrence of any default, including the power of sale. In the event of a default, the trust agreement provides that any money received shall first be applied to any costs or expenses incurred by MIFA.

Although the trust agreement introduces a new person or entity into the bond issuance process in the form of a trustee, it is essentially a restatement of all the conditions required by MIFA of the borrower. To that extent it is an appendage to the other documents that are a part of the issuance. Even if the agreement or some aspect of it were to be viewed as a contract made by MIFA, it would not be one in which you, as a state employee, have a financial interest. The substance of your obligations to the lender and to MIFA are set out in the bond purchase agreement and the loan agreement. You are not assuming any additional obligations in the trust agreement. Instead, MIFA is simply appointing someone else to act in its interest. An analogy might be made to a bank which sells a home mortgage it holds to another entity. The original obligations of the homeowner/borrower do not change, but the payee does. The homeowner's financial interest is not affected by the sale, either to his advantage or his detriment.

The recurring theme running through these four documents is that MIFA is undertaking no obligations of any substance. It is undertaking no financial responsibility, nor is it liable for any claim against the borrower, nor does the bond purchaser have any recourse against MIFA with respect to any aspect of the bond issuance. In short, all that MIFA is undertaking is to certify that it is a duly constituted state agency, that it has made the findings required of it by G.L. c. 40D, and that it has issued the bond as a special MIFA obligation, payable only with revenues from the borrower. MIFA's limited role is consistent with the real nature of the arrangement: a conventional loan between a borrower and a lender. While it is true that without MIFA's intervention the borrower would not be able to get such favorable financing, this does not necessarily mean the bond or any accompanying document constitutes a contract made by a state agency. It is instructive to note that none of the substantive conditions required by MIFA of the participants is negotiable. Even when applying the broad construction of the term "contract" to the substance of the arrangement, no contract results. The borrower and the lender are both undertaking certain obligations, but MIFA is merely certifying that it has performed its duties under the statute. In fact it takes great pains throughout the application process to make clear that it is assuming no obligations. Although the bond itself and the accompanying documents may appear to be contracts to which MIFA is a party, a close examination of them shows that they are not, in substance, contracts made by a state agency. Rather, MIFA's involvement is similar to the involvement of any state licensing or certificate granting authority: that is, it is permitting private parties who have met certain state-imposed requirements to engage in a specific type of activity or obtain a certain type of benefit from the state. Your participation in project financing through a conventional MIFA bond issuance, therefore, would not constitute a violation of § 7.

You should also be aware of the provisions of § 4 which limit the activities you may undertake on the partnership's behalf in connection with the bond issuance. Section 4 prohibits a member of the General Court from personally appearing for any compensation other than his legislative salary before any state agency, unless:

  1. the particular matter before the state agency is ministerial in nature; or
  2. the appearance is before a court of the commonwealth; or
  3. the appearance is in a quasi-judicial proceeding.

Ministerial functions include, but are not limited to, filing or amendment of tax returns, applications for permits or licenses, incorporation papers, or other documents.

Finally you should be aware of the provisions of § 23 which contain general standards of conduct applicable to all state, county and municipal employees.[5] It provides in pertinent part that a state employee shall not use or attempt to use his official position to secure unwarranted privileges or exemptions for himself or others. It also prohibits a state employee from by his conduct giving reasonable basis for the impression that any person can improperly influence or unduly enjoy his favor in the performance of his official duties, or that he is unduly affected by the kinship, rank, position or influence of any party or person. In this regard you should be careful that you do not use your position as a legislator to influence MIFA's actions with regard to your application. Nor should you let your official actions with regard to MIFA be influenced by any action they take on your application.

2. The Guaranteed Loan Program

MIFA will be playing two roles with regard to the Program. First, it will be the issuer of the bond pools, performing the same approval and public purpose determination tasks it does in conventional bond issuances. To that extent the bonds will be no different from those considered above. Bonds issued as a part of the Program, however, will be accompanied by a guarantee that is absent in conventional bonds. That is, MIFA will guarantee to the bond purchasers the payment, when due, of the principal of, premium if any, and interest on the bonds. The existence of the guarantee converts the bond into a contract made by a state agency. Furthermore, it is a contract in which the state is an interested party because state money is being used as part of the insurance fund backing the bonds. The guarantee remains MIFA's guarantee even after it assigns the rest of its interest to the trust.

While the bond purchaser has a clear financial interest in the guarantee, the remaining issue is whether the borrower also has a financial interest. The Commission concludes that it does. Without the MIFA guarantee the borrower would not not have access to the public financing market. Without that access the bonds issued on the borrower's behalf would be sold on a short term, floating interest rate basis. In contrast, the public market would yield longer loan terms and fixed interest rates. Since the amount of the borrower's obligation is directly linked to the bond term and interest rate, it obviously is financially advantageous to the borrower to obtain financing through the public market. Therefore the borrower does have a financial interest in the guarantee.

Although § 7 contains several exemptions, none of these is available to you. The exemption that is closest to your situation is one which exempts from the § 7 prohibition:

     the interest of a member of the general court in a contract made by an agency other than the
     general court or either branch thereof, if his direct and indirect interests and those of his
     immediate family in the corporation or other commercial entity with which the contract is 
     made do not in the aggregate amount to ten percent of the total proprietary interests therein,
     and the contract is made through competitive bidding and he files with the State Ethics
     Commission a statement making full disclosure of his interest and the interests of his
     immediate family.

That exemption clearly refers to corporations and commercial entities in which a member of the General Court has a financial interest. A bond pool cannot be considered a commercial entity. Therefore, the fact that your financing request might comprise less than 10 percent of  the total amount of the bond pool does not bring you within this exemption. If your ownership interest in the development project itself did  not exceed 10 percent, you would be eligible for this exemption since the partnership would be considered a commercial entity.


End Of Decision

[1]See Lancome "State Development Finance Program." 25 Boston Bar J. No. 6. p. 23 (1981).

[2] The only limitation would be a cap placed by Congress on the total amount of bonds a state agency like MIFA can issue. Thus a developer/borrower who meets the necessary conditions and criteria can obtain a bend issuance as long as the cap has not been reached.

[3] G.L. c. 268A. § 1(p) defines "state agency" as "any department of a state government including the executive. legislative or judicial, and all councils thereof and thereunder. and any division, board, bureau, commission, institution, tribunal or other instrumentality within such department and any independent state authority, district, commission, instrumentality or agency, but not an agency of a county, city or town.

[4] These citations refer to prior Commission conflict of Interest opinions including the year they were issued and their identifying numbers. Copies of advisory opinions with identifying information deleted) are available for public inspection at the Commission offices.

[5] On July 9, 1985 the Supreme Judicial Court ruled that the Commission does not possess the jurisdiction to enforce G.L. c. 268A. § 23. The discussion contained above is based on prior commission rulings and is intended only to provide guidance to you.

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