BONDING PROBLEMS FOR SPECIAL ACT PUBLIC LIBRARY DISTRICTS
By Douglas E. Goodfriend, Esq., Bond Counsel, Orrick, Herrington & Sutcliffe, LLP
If you are a public library with a public library district established by special act of the state legislature and you may want to finance a capital improvement in the foreseeable future such as the reconstruction of a library building, building a new library or constructing an addition on your existing library building, now is the time to take a look at the special legislation that authorized the formation of your library district. Many special acts were written without input of bond counsel and may make it difficult to finance your planned capital improvement or limit your financing options. Similarly, if you are presently considering special legislation to establish a public library district – here are some essential features to look for:
A Firm Constitution. Since 1938, the State Constitution has not permitted the legislature to adopt acts establishing a special district (or any other new, local governmental authority or entity) with both the power to tax (or cause a tax to be levied on its behalf) and the power to issue bonds, notes or other evidences of indebtedness in its own name. This is not commonly known. Thus, you should first check that your special act does not give you both powers. If it does, it is constitutionally suspect.
A second aspect of potential constitutional infirmity concerns whether your board and your budget (when increased) are subject to approval by popular vote. Both popular votes are considered essential features of your district governance in order for your power to cause a tax to be levied on your behalf to be considered constitutionally valid. And that is essential to borrow money (unless you have another statutorily provided source of funding).
Election Provisions. Does your special act authorize only annual budget votes in the event the library wishes to increase the annual levy? Unless special elections are also authorized, your library will have to wait until the next annual election to ask the voters to authorize the capital improvement, its financing and an annual increase in your budget specifically sufficient to cover maximum annual debt service on the proposed financing for your capital improvement. That election is always a prerequisite to such financing, and of course, your special act must authorize you to go to the voters for same, unless it provide some other funding mechanism.
Financing Options. Since the State Constitution does not permit new local governmental entities to be created with both the power to levy (or cause taxes to be levied on their behalf) and the power to issue debt, most special acts authorize and direct the affiliated municipality (ies) which are responsible for levying a tax on behalf of the library district to also issue the bonds or notes to finance capital improvements of a library district.
In the case where a library district is only affiliated with one municipality, this does not usually present a problem. However, it is important to note that, even though it is your library district’s project and it is the tax levy raised on your behalf which will be used to cover debt service, technically the bonds or notes will be debt of your affiliated municipality to which they must pledge their own faith and credit by constitutional mandate. While special act library districts established since 1938 cannot and do not have the authority to issue bonds or notes in their own name, library districts can be given the authority to enter into financing agreements with the Dormitory Authority of the State of New York (“DASNY”) to participate in their public library financing program or with a local development corporation (more on this shortly). These are desirable financing options to be able to consider.
When a library district’s special act only authorizes the local affiliated municipality to issue bonds or notes for a library’s capital improvement, this is particularly difficult when the public library is a joint library and has two or more affiliated municipalities. This is a common type of special act library district. In this case, it is common for the special act to provide that such affiliated municipalities will issue joint indebtedness on behalf of the library district. Joint debt is a bond or note in which all of the obligors, i.e. affiliated municipalities, authorize, sell and issue the debt as one shared obligation.
This can be problematic for two reasons:
(1) Joint municipal debt in New York State is very, very rare. The capital markets are not familiar with it and so it becomes a “story bond”, i.e. the bond houses which sell municipal debt have to explain in detail to their customers how joint debt will work and why it is a good investment. This can result in higher interest rates to cover the time it takes to place the debt. Such “story” debt is normally negotiated with an investment bank rather than competitively sold. However, while counties, cities, towns, villages, school districts and fire districts can all negotiate up to $5,000,000 in their own debt annually, joint bonds can only be negotiated in an amount not to exceed $1,000,000 annually. (Shorter term notes can be negotiated in any amounts). This effectively eliminates the option for larger joint capital improvements, compelling the bonds to sell competitively. For story bonds with risk of delayed resale to customers potentially requiring the winning bidder bank to carry the bonds on its books for a period of time, the result could be significantly higher interest rates. For this reason it is important to check your special act to see who is authorized to issue debt on your behalf and whether you have the option to enter into financing agreements with DASNY or a local development corporation. If you are affiliated with just one municipality, you do not have this problem.
(2) Joint municipal debt means that each affiliated municipality will be liable on 100% of the borrowed amount and interest, even though the joint debt should provide for allocation of the cost of your capital improvements to be financed by each municipality (on the same prorata basis as provided in your special act for the tax levy generally). The Constitutional and Local Finance Law provisions governing the issuance of joint debt require that each joint municipal obligor is liable for the whole debt in the event other joint obligors fail to pay. This is a little known aspect of joint debt that can be a very rude awakening to your affiliated municipalities when it comes time to finance a public library capital improvement under a special act that only authorizes joint debt. Even if the municipalities are ready, willing and able to issue “several” debt, that is debt in their name only for only their pro-rata allocation of the overall financing responsibility, they are without legal authority to do so unless your special act so explicitly provides.
The DASNY Library Financing Master List. DASNY has a special public library finance program dedicated to assisting public libraries obtain the lowest interest rates, as well as a construction management program available to help with the actual capital improvement itself. If your library wishes to have the option to do its financing in its own name without debt being issued by your affiliated municipality(ies), then it is necessary to have special legislation to add your library name to list of “eligible” libraries, if that was not done as part of your special act or by later legislative action. Without this, DASNY does not have the authority to work on your library financing.
Why can a public library district enter into financing agreements with DASNY in its own name when the district cannot issue debt in its own name? Because in a DASNY public library transaction, DASNY is issuing its debt in its name to loan the monies to you and you are entering into various agreements to pay them sufficient monies to cover debt service on the DASNY bonds and DASNY expenses. You are not technically issuing debt to DASNY or anyone else.
LDC Transactions. Financing transactions with local development corporations (“LDCs”) work on the same type of financing structure as DASNY transactions in which the LDC issues the debt in its name and the library district enters into agreements to cover the debt service and related matters. Your special act may contain authority to do a LDC financing as an option also. Unlike a DASNY transaction, there is no special “eligibility” list that requires the addition of your district’s name.
District “Tax” Levy Provisions and Maximum Annual Estimated Debt Service. In order to be able to enter into financing agreements with DASNY or an LDC, or have single, several or joint debt issued by your affiliated municipality(ies) the provisions of your special act relating to the levy of the library district tax on your behalf by the affiliated municipality(ies) must be unequivocally clear on: (1) what is your fiscal year and how your budget is set and increased, (2) by whom and how your levy is raised and collected, including specifically details on calculation of responsibility as between multiple municipalities, (3) by whom and how the tax monies are held and by what date are they paid to the library district, and (4) how are deficiencies handled. Your legislation can provide authority for your affiliated municipality(ies) to issue tax anticipation notes in anticipation of the receipt of the taxes levied on your behalf if the funds do not arrive by the date they are payable to you. In the case of multiple affiliated municipalities, each one can only issue tax anticipation notes with regard to the share of the library district levy that is their own responsibility. While an affiliated municipality could also technically issue a revenue anticipation note to fund its obligation to pay you your due, a budget note or deficiency note would not be appropriate.
Particular care must be taken in the wording of a special act with language referring to your library tax or assessment. In short, a tax and an assessment are not the same thing. Inconsistency in use of the applicable term can give rise to uncertainty as to the applicability of various exemptions from taxes and special ad valorem levies, tax refunds from court ordered property value assessment reductions, as well as certain other provisions of the Real Property Tax Law.
Finally, when the levy is first authorized to be increased to cover the maximum estimated annual debt service for the capital improvement financing, it is essential that this is done in compliance with the tax cap legal requirements of Chapter 97 of the Laws of 2011 and that the voter approval is a sufficient increase upfront to cover your debt service expense in its highest year without need to return for supplemental increase authorizations. This is a necessary prerequisite to any financing agreement with DASNY or an LDC and as well, no affiliated municipality (ies) would issue their debt on a joint or several or sole basis without knowing that the voter-approval tax levy was sufficient to cover debt service at its highest point (unless the library agrees to provide a guaranteed alternative source of funding). Therefore, the determination of what maximum estimated annual debt service could reasonably be by the time the library is ready to obtain financing must be made before the vote on a very conservative basis with professional assistance from those who know the municipal bond market. Even then, there are no guarantees. (If you find someone who definitely knows which way interest rates are going, please call the author at home as soon as possible).
Making the Library’s Capital Improvement Bondable. Your special act should not only provide that the library district is authorized to make capital improvements, and define that to include all “objects or purposes” in section 11.00 of the Local Finance Law which are valid library purposes, it should also explicitly provide that such library capital improvements are a “valid purpose” for which your affiliated municipality (ies) are authorized to issue their bonds or notes. Why? Because municipal debt in New York State can only be issued for a “valid purpose” of the type of municipality in question. Simple but essential. If the library district enters into a financing agreement with DASNY or a local development corporation, then the special act provision authorizing the library district to make capital improvements, as well as general Education Law provisions, make them a “valid purpose” of the library district. However, when a town, village, city or county is issuing debt on behalf of a library district, the validity of that purpose for debt issuance by that municipality must be clearly provided in the special act.
Books and Records. Most special acts require that the board of trustees determine what records the district treasurer shall maintain and in what manner as they shall require. The trustees’ authority in this regard is subject to the authority of the Office of the State Comptroller to prescribe a system of accounts for public libraries pursuant to section 36 of General Municipal Law. Section 30(3) of the General Municipal Law requires an annual report of financial transactions be made to the State Comptroller by the district treasurer at any public library established pursuant to Section 255 of the Education Law. The inclusion of the obligation to conform to same in a special act serves as a comfort to potential investors in debt issued on behalf of the library district in any manner.
Applicability of the Education Law. In order to avail yourself of the most powers to which a library district board of trustees is entitled, your special act should clearly state that as to all matters not covered by your act, that the state education law provisions for public libraries are applicable. Reference instead or in addition to town, village, city or county law can be a complicating factor in many regards, and the implications need to be discussed in detail with counsel. Even a special district library situated solely within the boundaries of one municipality needs to think through this issue.
A Deficient Special Act and the Solution. If your review of your special act reveals that you are missing any elements essential or desirable to be able to maximize your financing options for your capital improvement, fear not. This solution is relatively easy: You simply need to get your special act amended by the state legislature to incorporate the missing or additional legal authority you need to finance your capital improvement. Such acts are frequently in need of amendment. Aren’t you glad you checked now?
©2014 Douglas E. Goodfriend
Douglas E. Goodfriend, Esq.
NOTE: This article does not apply to school district-affiliated public libraries or any association library. See our book BOND BASICS FOR LIBRARY DISTRICTS AND OTHER MUNICIPAL LIBRARIES IN NEW YORK STATE for more information on capital financings by these type libraries. Available on-line at www.orrick.com.