Municipal Indebtedness

February 26, 2018

The ability to borrow is a major area of municipal finance. In addition to taxation and intergovernmental aid, local governments borrow funds to finance capital expenditures and to meet operating expenses. This chapter provides general information about municipal debt. However, individual transactions can be complex; they require that elected officials understand the economic risks associated with borrowing funds to finance municipal projects as well as the legal requirements for disclosure of information to the municipal bond marketplace and the various professionals involved in the transaction.

Economic Considerations

Before deciding to borrow any appreciable amount, municipal officials should consider the economic constraints on borrowing. Preparation of a comprehensive forecast of future revenues and expenditures is essential. The forecast should provide sufficient detail so that steps can be taken to ensure a flow of funds for debt liquidation as well as for existing and planned expenditures in other areas.
This chapter considers how and when municipalities in Georgia may incur indebtedness. The topics discussed include types of debt instruments available to municipalities, fundamental legal restraints and exceptions, and marketing municipal bonds.

Types of Debt Instruments

If a city decides to borrow, it must determine the form or type of indebtedness to incur. Several types of debt instruments are available. The most commonly used forms are bonds (both general obligation bonds and revenue bonds) and promissory notes.
Bonds are classified into different categories according to source of payment, time of maturity, and type of issuer. With respect to source of payment, bonds are either repaid from general revenues of the issuing municipality or from a particular source of revenue. Bonds that are repaid from the city’s revenues are referred to as general obligation or full faith and credit bonds, meaning that the city promises to pay the interest and retire the principal. The money to pay these bonds will normally come from taxes levied by the municipality. Bonds that are repaid solely from a specific source of revenue are called revenue bonds. Revenue bonds cannot be paid out of general municipal funds; money to repay revenue bonds is generated by the project purchased or constructed from the proceeds of the bond sale.
On the basis of date of maturity, bonds may be generally classified as those that mature in 1 to 5 years (short-term bonds), 5 to 10 years (intermediate bonds), or more than 10 years (long-term bonds).

Fundamental Legal Restraints and Exceptions

Georgia cities possess the authority to contract for or incur indebtedness only as authorized by the Georgia Constitution and other applicable law. Before attempting to borrow money, a municipality should know the limits on its power to go into debt as well as the types of borrowing not subject to debt limitations.
Debt Limitations
Generally, the Georgia Constitution limits indebtedness to 10% of the assessed value of all taxable property located within a municipality (Ga. Const. Art. IX, § 5, ¶1). This provision also states that no new debt may be incurred without the assent of a majority of the qualified voters voting on the question of whether the city should incur the debt (Ga. Const. Art. IX, § 5, ¶1. See O.C.G.A. §§ 36-80-10 through 36-80-15 (election for authorization of unbonded debt) and O.C.G.A. § 36-82-1 et seq. (bonds)). It should be noted that under past constitutions (the 1983 constitution prohibits local amendments), a number of local constitutional amendments were passed authorizing certain municipalities to issue bonds in specified amounts for specific purposes in excess of the 10 percent limit. All local amendments were continued in force until July 1, 1987. Only those local amendments specifically continued by the governing authority or the General Assembly as provided in Art. XI, § 1, ¶4 of the Georgia Constitution are still in effect.
Exceptions to the 10% limitation and the required election include
  • funds granted by and loans obtained from the federal government or any agency pursuant to conditions imposed by federal law
  • funds borrowed from any person, corporation, association, or the state to pay in whole or in part the cost of property valuation and equalization programs for ad valorem tax purposes, and
  • temporary loans (Ga. Const. Art. IX, § 5, ¶4 et seq.).
A city may enter into a contract with an authority and levy taxes to meet its contractual obligations to the public authority as long as the contract between the city and the public authority is authorized by the intergovernmental contacts clause of the state constitution (Ga. Const. Art. IX, § 3, ¶1(a); Building Authority of Fulton County v. State of Georgia, 253 Ga. 242, 321 S.E.2d 97 (1984); Nations v. Downtown Development Authority of the City of Atlanta, 256 Ga. 158, 345 S.E.2d 581 (1986); Clayton County Airport Authority v. State of Georgia, 265 Ga. 24, 453 S.E. 2d 8 (1995); Reed v. State of Georgia, 265 Ga. 458, 458 S.E.2d 113 (1995)).
Special District Debt
Municipalities may incur debt on behalf of special districts created to provide local government services in such districts. Before doing so, the city must provide for the assessment and collection of an annual tax within the district sufficient to pay the principal and interest of the debt within 30 years. The state constitution requires that such debt must be approved by a majority of the voters of the special district voting in a special election held for that purpose. A municipality cannot incur any debt on behalf of a special district that, when added to the rest of the municipality’s outstanding debt, exceeds 10 percent of the assessed value of all taxable property within the municipality. The proceeds of the tax collected from the special district must be used exclusively to pay off the principal and interest of the debt incurred on behalf of the special district (Ga. Const. Art. IX, § 5, ¶2. See also Ga. Const. Art. IX, § 2, ¶6, which provides for the creation of special districts).
Temporary Loans
The constitution also provides that, subject to certain conditions, cities may incur debt by obtaining temporary loans in each year to pay current expenses. These are commonly known as tax anticipation notes or “TANs.” The conditions for such temporary loans include the following requirements:
  1. The aggregate amount of all such loans shall not exceed 75% of the municipality’s total gross income from taxes collected in the preceding year.
  2. Such loans are payable on or before December 31 of the calendar year in which they are made.
  3. No such loan may be made when a prior temporary loan is still unpaid.
  4. The municipality shall not incur an aggregate of temporary loans or other contracts, notes, or obligations for current expenses in excess of the total anticipated revenue for the calendar year (Ga. Const. Art. IX, § 5, ¶5).  
Be aware that Georgia cities cannot simply go to the local bank and borrow money. Any municipal borrowing or financing must carefully comply with applicable law and should be fully evaluated by the city attorney well in advance.
Exceptions to Long-Term Debt Limitations
A municipality may incur debt of a relatively long-term nature in several ways without being subject to constitutional debt limitations or election requirements.
Revenue Bonds
One method of incurring debt is through the issuance of revenue bonds for the purchase or construction of public works designated as revenue-producing facilities by the Georgia Revenue Bond Law (Ga. Const. Art. IX, § 6, ¶1. See also O.C.G.A. §§ 36-82-60 through 36-82-85). The Georgia Constitution provides that both the principal and interest must be paid only by revenue pledged to the payment of such bonds. Because of the promises or covenants made to the purchasers of the bonds (the bondholders), city officials may be required to increase the rate for services providing the revenue stream to pay off the bonds. One of the most common uses of revenue bonds is to pay for constructing or expanding water and sewer systems or other utility systems.
Revenue bonds are not deemed to be debts of the municipality, and a municipality may not levy or use taxes to pay any part of the principal or interest of such bonds (Ga. Const. Art. IX, § 6, ¶1; O.C.G.A. § 36-82-66). Because revenue bonds are not debt of the municipality, the municipality is not required to obtain the assent of the qualified voters before issuing them. The maturity date of revenue bonds cannot exceed 40 years (O.C.G.A. § 36-82-64).
Development Authorities Debt
Creating a development authority that can incur debt itself through the issuance of revenue bonds for the development of trade, commerce, industry, and employment is another method of incurring debt. Revenue bonds issued by a development authority do not constitute debt of the municipality, but municipalities can contract with development authorities and pledge their full faith and credit and levy taxes to meet their obligations under the contract as mentioned previously (Ga. Const. Art. IX, § 6, ¶3; O.C.G.A. § 36-62 (governing development authorities); Stephenson v. State of Georgia, 219 Ga. 652, 135 S.E.2d 380 (1964)). Examples of development authority projects include the acquisition, construction, improvement, or modification of any property to be used as or in conjunction with the production, processing, storing, or handling of agricultural, mining, manufactured, or industrial products; a sewage or waste disposal facility; constructing, equipping, or remodeling industrial facilities; sports facilities or convention or trade show facilities; airports, docks, or other mass commuting and parking facilities; other listed projects; and any other such project that would further the public purpose of the law (O.C.G.A. § 36-62-2).
Multiyear Installment Purchases and Leases
Another method of financing involves the use of multiyear installment purchases or leases (O.C.G.A. §§ 36-60-13, 36-60-15). To provide for the terms and conditions under which cities may enter into multiyear lease, purchase, or lease purchase contracts to acquire property or services, Georgia law provides that such a contract
  • must terminate absolutely and without further obligation on the part of the municipality at the close of the calendar or fiscal year in which it was executed and at the close of each succeeding calendar or fiscal year for which it may be renewed
  • may provide for automatic renewal unless positive action is taken by the municipality to terminate it, and the nature of such action shall be determined by the municipality and be specified in the contract
  • shall state the total obligation of the municipality for the calendar or fiscal year of execution and further state the total obligation that will be incurred in each calendar or fiscal year of the renewal term, if renewed
  • must provide that title to any supplies, materials, equipment, or other personal property is to remain in the vendor until fully paid for by the city. However, a municipality may accept title to property, subject to the contract, and transfer title back to the vendor if the contract is not fully consummated
  • the principal portion of the contract, when added to the amount of general obligation debt incurred by the city pursuant to Article IX, section 5, paragraph 1 of the state constitution, must not exceed 10% of the assessed value of all taxable property in that city
  • any real or personal property being financed by such contract must not have been the subject of a failed referendum within the preceding four calendar years unless such property is required to be financed by a court order or imminent threat of a court order, as certified by the municipal governing authority
  • a public hearing must be held after publication of notice in a newspaper of general circulation on any contract for the acquisition of real property
  • average annual payments on any contract with respect to real property must not exceed 7.5% of the governmental fund revenues of the municipality for the preceding calendar year plus any available special county 1% sales and use tax proceeds.  
In addition to the above, such contracts may contain
  • a provision for automatic termination in the event that appropriated and otherwise unobligated funds are no longer available to satisfy the obligations of the municipality under the contract
  • a provision for the payment by the municipality of interest or the allocation of a portion of the contract payment to interest, or
  • any other provision reasonably necessary to protect the interest of the municipality.
Such contracts are deemed not to create a debt of the city for the payment of any sum beyond the calendar or fiscal year of execution or, in the event of a renewal, beyond the calendar or fiscal year of the renewal. Nothing in this law restricts cities from executing contracts arising out of their proprietary functions (O.C.G.A. §§ 36-60-13, 36-60-15).
Utilizing this law, the Georgia Municipal Association has created several financial programs that allow municipalities to purchase on a multiyear basis without referenda essential items such as firefighting and law enforcement vehicles, staff vehicles, utility equipment, computers, and public facilities.  

Marketing Municipal Bonds

Besides fulfilling legal requirements, other factors are involved in the successful marketing of a municipality’s debt.
  • The municipality should obtain expert financial and legal advice. Since experts keep up with the bond market and confer with others in the field, their counsel may save considerable interest expense. When selecting a financial advisor it is important to ensure that such a person is experienced, properly licensed, and provides independent advice.
  • Municipal officials should fully understand the transaction being proposed. If the elected officials do not understand the transaction and the ongoing obligations it will place on the municipality, they should not approve the transaction. The elected officials also have an obligation to ensure that all of the financial information disclosed about the city in the course of the transaction is accurate. Elected officials should familiarize themselves with disclosure rules before approving any transaction and ensure that processes are in place to comply with any ongoing requirements. The Government Finance Officers Association (GFOA) website is a resource to begin learning more about these legal requirements, as are the U.S. Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB).
  • The timing of the bond issue must be carefully considered. Because interest rates on new bond issues fluctuate, officials should attempt to time the sale of bond issues to take advantage of favorable market conditions.
  • A bond attorney should be selected before the first bond resolution is passed. An accompanying favorable legal opinion from a bond attorney whose opinion is recognized as marketable will have a positive effect on the bids of bond underwriters.
  • A proposed bond sale should be publicized in local newspapers, in the foremost state financial paper, and in financial publications with national circulation as well as online sources. Notices should usually appear at least two weeks in advance of the sale and provide enough information so that underwriters can prepare their bids.
  • A municipality that is selling bonds must be prepared to present comprehensive data about the community, particularly its economic base and its financial situation. This requirement will necessitate engaging recognized engineers and accountants not only to aid in planning and supervising capital improvements but also to compile pertinent information. Engineers can help predict construction costs and future capital requirements. Accountants can provide data on anticipated earnings and expenses, the city’s credit history, and other facts about the economic and social life of the community.
  • A municipality issuing bonds has a continuing obligation to make financial disclosures, in particular disclosing any material event that could affect the municipality’s ability to repay the bonds. Any Georgia municipality considering entering into an interest rate swap agreement, interest rate cap agreement, or other interest rate agreement needs to comply with O.C.G.A. § 36-82-252, which requires the municipality to have an interest rate management plan in place prior to entering into such agreement.

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