Sameera Kapasi Mahendru graduated from Tufts University with a B.A. in International Relations, and Boston University with a dual J.D/M.A. (International Relations). She was admitted to the Massachusetts Bar in 1997 and the Texas Bar in 2002. She began her legal career as a civil litigator at Boston law firms in practice areas ranging from medical malpractice to commercial litigation. Prior to joining the City of Houston Legal Department, Ms. Mahendru practiced tax litigation with the Massachusetts Department of Revenue. Ms. Mahendru joined the City of Houston Legal Department in 2003, and is currently practicing as an Assistant City Attorney in the General Counsel Section where she works on issues related to tax, annexation, and public finance. Gary L. Wood graduated from the University of Texas, B.A. magna cum laude in 1963, and from New York University, J.D. cum laude in 1966 where he was an editor of the Law Review. Mr. Wood was with the law firm of Baker & Botts (1969-1977), was Senior Vice President and General Counsel of the investment banking firm Rotan Mosle, Inc. (1978-1986) and has served as a Senior Attorney with FDIC. Mr. Wood joined the City of Houston Legal Department in 1994 and is currently practicing as a Senior Assistant City Attorney in the General Counsel Section. Mr. Wood has specialized in municipal finance law since joining the City and has over 40 years experience in the area of municipal and corporate finance law, including extensive work on securities disclosure issues.

1. Municipal Finances and Debt Obligations
City of Houston Legal Department
Presented by
Gary Wood, Senior Assistant City Attorney and
Sameera Kapasi Mahendru, Assistant City Attorney
General Counsel Section
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2. Municipal Finances and Debt Obligations
Overview:
• Types of Debt Security:
– Long Term
– Short Term
• Bond Elections
• Bond Offering and Sales Process
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3. Municipal Finances and Debt Obligations
Long Term Securities
• Bonds – Generally
• General Obligation Bonds
• Revenue Bonds
• Refunding Bonds
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4. Municipal Finances and Debt Obligations
Bonds
• A security which evidences the issuer’s obligation to repay a specified
principal amount at the specified maturity date together with interest either at
a stated rate or according to a formula for determining that rate.
• Types of interest rates
• Fixed
• Variable – indexes
• Redemption Features
• Optional
• Mandatory
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5. Municipal Finances and Debt Obligations
General Obligation (GO) Bonds
• The source of payment is the entity’s taxing power, i.e. ad valorem taxes
• Backed by the full faith and credit of the City
• Supported by the issuers ability to levy and collect tax
• Voter approval is required
• Cities must collect a sufficient sum to:
– pay interest on any general obligation debt and
– create a 2% sinking fund for the debt (Texas Constitution Article II, Section 5)
• This requirement is made into a covenant with bondholders in the City’s ordinances
authorizing issuance of each series of general obligation bonds
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6. Municipal Finances and Debt Obligations
Revenue Bonds
• Payable only from a specific revenue source and not entitled to the full faith and credit of
the City (the City cannot be compelled to levy taxes to pay debt service)
• Other considerations:
• Rate covenants – charging rates or fees to achieve a stated minimum coverage
• Additional Bonds Test – Revenues must meet certain levels
• 3 systems issue revenue bonds in the City of Houston
• Combined Utility System
• Airport
• Convention and Entertainment
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7. Municipal Finances and Debt Obligations
Combined Utility System (CUS)
• Formerly the Water and Sewer System
• Payable primarily from revenues received from customers of the system
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8. Municipal Finances and Debt Obligations
Airport
• Payable from revenue received from airlines and other customers of the
City’s airports, e.g., airline rental space, landing fees, concession rentals, fixed
base operators and parking revenues
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9. Municipal Finances and Debt Obligations
Conventions and Entertainment (C&E)
• Currently outstanding bonds were issued to expand the George R. Brown
Convention Center and build the convention center hotel, Hilton Americas-
Houston
• Payable from revenues received from a portion of the Hotel Occupancy
Tax (approximately 5.65% of room rentals) and revenues from certain City
parking garages
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10. Municipal Finances and Debt Obligations
Refunding Bonds - Chapter 1207 of the Government Code
• Refund outstanding obligations
– Refund bonds to obtain lower interest rate – not the same as redemption –
– Escrow set up to pay bonds as the debt service becomes due
– Refund short term commercial paper into long term bonds
• usually with a fixed rate to avoid too much exposure to variable rate debt
– Refund other obligations (e.g. to pay judgments against the City)
• City Council authorization needed, but not an election
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11. Municipal Finances and Debt Obligations
Types of Shorter Term Debt Security:
• Commercial Paper (CP)
• Certificates of Obligation (COs)
• Bond Anticipation Notes (BANs)
• Tax and Revenue Anticipation Notes (TRANs)
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12. Municipal Finances and Debt Obligations
Commercial Paper (CP)
• Short term obligations which by law cannot exceed 270 days
– Continuous rollover may be permitted if it is not automatic but at the issuer’s
discretion
• Backed by a bank line of credit or letter of credit
• COH has CP programs for GO debt, CUS, Airport and C&E
• The notes generally have the same source of payment as the bonds of the respective
systems
• Most City projects initially paid for by issuing commercial paper notes, which are
periodically refunded by long term bonds
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13. Municipal Finances and Debt Obligations
• Use of commercial paper assists in timing the issuance of debt with the needed
expenditure and thus avoids arbitrage problems
• The Internal Revenue Code (IRC) subjects tax-exempt bonds to arbitrage rebate
requirements
– Any profit or “arbitrage” must be rebated to the federal government
– An entity cannot issue bonds and invest the proceeds at a higher rate than what
the entity is paying on the bonds
• General obligation CP notes are treated as bonds for voter authorization purposes
– Issuing the notes reduces the amount of voter authorization, just as would
issuing general obligation bonds
• Revenue system CP notes are “evergreen”
– Once CP notes are refunded to long-term bonds, the CP authorization is restored
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14. Municipal Finances and Debt Obligations
Certificates of Obligation (COs)
• Certificate of Obligation Act, Chapter 271 of the Local Government Code
• Intended to provide a new class of securities to be issued and delivered within the financial
capabilities of the issuer
• Can be issued for almost any contractual obligation
• No voter approval required
• Notice by publication
• Petition signed by at least 5% of qualified voters can prevent passage unless an election is
held
• CO’s can be issued for capital projects and other purposes for which voter authorized
bonds can be issued
• CO’s may be issued for demolition of dangerous structures without the notice requirement
(public health, public calamity, unforeseen damage exception)
• May mature over a period not exceed 40 years
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15. Municipal Finances and Debt Obligations
Bond Anticipation Notes (BANs)
• Chapter 1431 of the Government Code
• Issued by City Council action through ordinance
• Voter approval is not required
• A county or municipality with a population over 80,000 can issue the BANs to be paid
out of ad valorem taxes, despite the prohibition in chapter 1371 of the Government
Code
• Proceeds may be used for many of the same purposes as can COs, (e.g., contractual
obligations incurred for the construction of public works and for the purchase of
materials, supplies and equipment, machinery, buildings, lands and rights of way)
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16. Municipal Finances and Debt Obligations
• Notes can also be issued for current or operating expenses and for an issuer’s
cumulative cash flow deficit subject to certain limitations
• Can be secured by revenues, taxes or bond proceeds (if bonds approved by voters)
• Notes must mature within seven years of date of approval by AG (1 year for notes
issued for operating expenses or cash flow deficits)
• COH issues BANs in the form of commercial paper pursuant to Council approval of
CP programs.
– The CP programs generally are for equipment and vehicle purchases, or other
special projects (Cotswold)
– Major capital improvement projects are still funded through voter authorized
programs
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17. Municipal Finances and Debt Obligations
Tax and Revenue Anticipation Notes (TRANs)
• Section 1507.251of the Government Code
• For current expenses during the fiscal year drawn against current revenues for the
fiscal year
• Purpose: to provide current financing since ad valorem tax revenues are not received
in substantial amounts until February of each fiscal year
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18. Municipal Finances and Debt Obligations
The problem – the tax calendar:
• January 1 marks the beginning of property appraisal
• The chief appraiser sends the notice of appraised value by May 15 or as soon
thereafter as possible
• Property owners file protests: May 31 or 30 days from the date the notice was mailed
• Around May 15, the appraisal review board begins hearing protests
• In the fall, after the ARB finishes its work, the appraisal district gives the elected officials
of each taxing unit the appraisal roll
• Each taxing jurisdiction adopts tax rates for their operations and debt payments
• Tax collection starts around October 1 as tax bills go out
• Taxpayers have until January 31 of the following year to pay their taxes without penalty
• On February 1, penalty and interest charges begin accumulating on most unpaid tax
bills
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19. Municipal Finances and Debt Obligations
TRANS
• Limitations:
– Must be repaid before the end of the fiscal year
– Not considered debt for state law purposes thus do not require Attorney General
approval
– Cannot exceed greatest amount by which expenditures for the fiscal year are
estimated to exceed revenues during the fiscal year including a working capital
reserve of 5% of expenditures
• However: The City may issue more than one series of notes during the fiscal year
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20. Municipal Finances and Debt Obligations
Bond Elections
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21. Municipal Finances and Debt Obligations
Bond Elections – Chapter 1251 of the Government Code
• General rule – may not issue bonds to be paid from ad valorem taxes without election
(exceptions include refunding bonds, as discussed above)
• Requirements of bond election proposition
– Purpose: Attorney General allows general categories, no requirement to list
specific projects
– Interest rate
– Provide for taxes to pay interest and provide sinking fund
– Maturity date (not to exceed 40 years)
• Special notice requirements - posting and publication
• 15-90 day window to hold election after election is ordered
• Uniform election dates unless an exemption is specified. Section 41.001 Election Code.
• Federal Voting Rights considerations:
– preclearance
– describe transaction
– specific polling places
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22. Municipal Finances and Debt Obligations
Bond Offering and Sale Process
• Three basic types of bond offerings
• Negotiated
» Issuer selects underwriter and negotiates terms and conditions
» Most COH offerings are negotiated, except for TRANS
• Competitive
» Issuer sets the general terms and conditions and a group of
underwriters will submit the best interest rate cost it can offer
• Private placement
» Obligations are placed with one or more sophisticated investors,
usually a bank or an investment bank
• Team of underwriters is assembled: book running manager, co-senior managers and
co-managers (negotiated transactions only)
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23. Municipal Finances and Debt Obligations
• Bond and Disclosure Counsel are selected
• Bond Counsel
» Ordinance
» Bond opinion from a nationally recognized bond counsel firm
- Legal, valid and binding obligations of the issuer
- Verifies tax status of the debt
» Other related documents: Paying agent agreement, Escrow
agreement and Possible bank reimbursement agreement
» Obtains AG approval
• Disclosure Counsel
» Prepares official statement or private placement memorandum
» Continuing disclosure requirements
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24. “Would everyone check to see they have an
attorney? I seem to have ended up with two.”
copyright The New Yorker Collection from cartoonbank.com
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25. Municipal Finances and Debt Obligations
• City Council:
– Approves ordinance, official statement and other documents
– Delegates authority to carry out and close the bond sale to Mayor, City Controller
and other City officials
• Ratings are obtained from rating agencies
• Factors considered:
– most COH ratings are in the AA category or equivalent
– usually get ratings from 2 of the 3 major rating agencies: S&P, Moody’s &
Fitch.
• Different ratings for different types of debts (bonds, short-term CP)
• The City holds a due diligence conference with underwriters
• Ordinance and other documents are delivered to the Attorney General for review
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26. Municipal Finances and Debt Obligations
• Bonds are priced, offered for sale and City enters into a binding purchase agreement,
subject to closing conditions (negotiated transactions only)
• Attorney General
• Reviews all public securities except certain specified exceptions
• Issues “P” letter (preliminary approval) subject to satisfying any issues raised
by the AG in the review process
• AG issues opinion that the bonds are valid obligations of the City
– Differs from corporate issues, in that SEC emphasizes full disclosure,
but does not issue an opinion as to validity
• City Closing
– Closing certificates and other closing documents are signed and delivered
– The City receives proceeds from the sale, usually by wire transfer
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27. Municipal Finances and Debt Obligations
Questions?
Gary Wood – gary.wood@houstontx.gov or 832 393 6440
Sameera Kapasi Mahendru – sameera.mahendru@houstontx.gov or 832 393 6315
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