Advice to Solicitors on Their Role in a Municipal Bond Issue
As a solicitor for a local government, authority or school district, you have one of the most challenging positions a Pennsylvania lawyer can hold. Your municipal client is a special type of entity, different from a private company but with legal challenges that run the gamut, ranging from general litigation to contracts, labor law to zoning, Right-to-Know Law to dog-bite law and just about anything else you can think of.
In most cases, you are not experienced in public finance. When your municipal client issues bonds to finance or refinance a capital project, your client will often retain a special counsel qualified in municipal finance, known as bond counsel. The bond counsel is an expert in the process of issuing debt and will quarterback the legal aspects of the bond issue.
So, does that leave you, as solicitor, with anything to do in a bond issue? Yes. You have an important role to fill, and with respect to certain aspects of the debt process, you play a key part in protecting your municipal client—the issuer.
Here is some advice regarding your role as solicitor in a bond issue:
• Make sure your client understands the roles of all the entities involved in the bond issue.
Your role should be clear to both you and your client: You are the municipality's general counsel, and you are there to protect your client's legal interests. But as for all the other parties involved in a bond issue, your client may be confused as to who does what and in whose interest they are working.
An important role for you is to make sure your client understands who all the actors are and whose interests they represent. The bond counsel usually considers your municipal client to be its client too.
Review the bond counsel's engagement letter to confirm that the bond counsel has identified the municipality as its client. Make sure bond counsel understands that you expect to be kept in the loop if there are any problems that could negatively affect your mutual client. The level of anticipated communication required of the bond counsel by the municipality may be confirmed in the bond counsel's engagement letter.
The financial adviser has a fiduciary duty to your client, but underwriters, bank lenders, investment providers and swap providers may have limited or no duty to your client. Make sure you and your client understand the duties and roles of these other parties. The bond counsel can help you sort this out.
• Kick tires and ask questions.
You are probably not an expert in public finance, but you are an experienced attorney who has seen all sorts of legal issues that municipalities face. As the transaction moves forward, ask questions if you do not understand something—there are no stupid questions whether one dollar or millions of dollars of public funds are involved. The odds are, if you don't understand something, your client probably doesn't understand it either.
Don't accept "that's just the way it's done" as an answer. You and your client deserve clear answers to your questions. Here are a few examples of good general questions: To bond counsel, are there any thorny tax issues you are analyzing or any difficult disclosure issues you are considering? To the financial adviser, do you think the issuer's disclosure is appropriate? If at any point you feel uncertain or uncomfortable regarding the transaction, stop the train until you get comfortable.
• The official statement is your client's document, no matter who prepares it, so make sure it's accurate.
The prospectus in a bond issue is called an official statement, or OS. In many transactions, the financial adviser or the underwriter's counsel will draft the OS, but no matter who drafts the OS, under the law it is considered your client's—the issuer's—disclosure.
Because you represent and interact with the municipality on a daily basis, you know much more about the municipality than any of the other professionals involved in the financing. Be sure to carefully read the draft OS, and make sure your client carefully reviews it too. The OS usually contains a description of the municipal government and of the local area and economy—make sure all of that information is complete and accurate. Pension liabilities, OPEB (other post-employment benefits) liabilities, litigation and swap liabilities are areas of specific concern to regulators and investors and must be adequately described in the OS.
• Follow the Sunshine Law.
Make sure the official action to approve the debt taken by the governing body of your municipal client is in conformity with your required procedures, including the Sunshine Law. The Local Government Unit Debt Act may supersede some of your procedures; consult with bond counsel on this point.
• Understand your legal opinion.
In many cases, the bond counsel will prepare a draft of your legal opinion to be delivered at closing. Ask bond counsel to give you a draft of the opinion very early on in the course of the transaction. Review it carefully and make sure you are comfortable with the opinions you are required to render. Pay particular attention to opinions regarding outstanding or potential litigation. If there are any complicated litigation matters, be sure to review them with the other parties as soon as possible, and definitely before the preliminary OS is distributed.
• Get paid an appropriate fee.
If you are in private practice, charge an appropriate fee to cover the time it will take you to diligently represent your client. The duties outlined in this article take time and involve your general expertise as the municipality's lawyer—you should be appropriately compensated.
• Post-issuance compliance is more important than ever; make sure your client is prepared to undertake its post-issuance responsibilities.
After a bond issue closes, there are requirements under the tax code and under the securities laws that continue to apply to the bonds. On the tax side, there are regulations governing the investment and spending of bond proceeds and the use of the bond-financed facilities. On the securities law side, there are requirements to make annual financial disclosures and special event disclosures with the Municipal Securities Rulemaking Board.
Both the Internal Revenue Service and the Securities and Exchange Commission strongly encourage issuers to adopt and follow written post-issuance compliance policies. And all of the regulators are becoming more and more aggressive in supervising the post-issuance requirements. Before the bond issue closes, you should work closely with bond counsel and the financial adviser to help the issuer develop these post-issuance compliance policies. After closing, you should work with your municipal client to make sure it takes these policies seriously and follows them.
When you are working on a financing, it may often have the feel of a nonadversarial proceeding, but the stakes for your client are very high. The success of the financing is often integral to your client's economic well-being. Approach the financing with part of your brain in an accommodating frame of mind to get the deal done, but you should also approach it in part as you would a piece of litigation for your municipality—be a little skeptical, ask questions and, above all, pay attention to your gut. If something bothers you, don't worry about your lack of expertise in public finance; do what you always do as solicitor—diligently look out for your municipal client.
David Unkovic and Donna Kreiser are public finance lawyers with McNees Wallace & Nurick with offices in Harrisburg, Lancaster, Scranton and State College, Pa. The firm regularly serves as bond counsel for state agencies, local governments, authorities and school districts. Unkovic formerly served as the first state-appointed receiver for Harrisburg, and Kreiser formerly served as deputy general counsel to the Pennsylvania Governor's Office of General Counsel.