Issuing municipal bonds is a significant endeavor for any California school or community college district. However, the journey doesn’t end for districts following the successful sale of their municipal debt. There are ongoing responsibilities and commitments that must be diligently managed. This includes adhering to regulatory requirements, managing proceeds to ensure projects are completed and maintaining transparency with investors and taxpayers through annual financial reporting. These obligations are critical not only for preserving the district’s creditworthiness and investor confidence but also to fulfill their promises to the communities that they serve and provide a quality education for their students. In this article, Chris Hiatt of Keygent LLC discusses the ongoing reporting requirements that California school and community college districts have and what they entail.
The issuance process for a municipal bond is a multifaceted endeavor that begins with a school or community college district identifying its project needs and costs. Afterwards, districts will typically develop a detailed plan that outlines their projects, the required funding, and timing. The district then will work with its financing team, which typically consists of their municipal advisor, bond counsel, and underwriters, to navigate the legal and financial intricacies involved with issuing municipal bonds and other securities. This process includes obtaining a credit rating or ratings, which assesses the municipal securities’ risk for investors and helps determine the interest rate for the bonds, structuring the bonds to ensure the district can repay them while maintaining financial flexibility for future issuances, and the preparation of legal documents associated with the issuance of the municipal security. The district’s underwriter will then market the municipal bond to investors, eventually leading to the sale of the bonds. After a successful sale, the project funds are received by the district once the bonds are finalized, which is the final step of a municipal bond issuance. However, once the issuance process is complete, it does not mean that the district’s work is complete.
In the world of municipal finance, transparency and timely information are important to investors. This is where continuing disclosure comes into play. An essential element for maintaining transparency are the ongoing continuing disclosure obligations that districts have to ensure that investors are regularly informed about the financial health and operational metrics of the issuing district. There are two primary ongoing continuing disclosure reporting required for California school and community college districts.
Keygent Explains Continuing Disclosure Requirements
When California school and community college districts issue municipal bonds, they typically will enter into a covenant with investors that they will provide continuing disclosures. Continuing disclosure for these districts refers to the ongoing obligation to provide current information about their financial health and other important operational metrics to investors and the general public. This obligation is required by Rule 15c2-12 of the Securities Exchange Act of 1934. It applies to publicly-sold, such as competitive and negotiated sales, primary offerings with an aggregate principal amount of $1,000,000 or more. Municipal bonds that are sold through private placement are not required to have continuing disclosure requirements, but some financings do have them. Rule 15c2-12 obligates issuers of municipal bonds and other financing instruments to provide ongoing disclosure about their financial condition and specific events that may affect their ability to meet their obligations to bondholders. The rule outlines two main types of disclosures: annual financial information and material event notices. These disclosures are designed to provide bondholders and potential investors with up-to-date information necessary to make informed investment decisions, thereby ensuring the continued integrity and stability of the municipal bond market in California. The reporting requirements and deadline for the annual report for each municipal bond issuance can typically be found in an appendix in the Official Statement. The information for the annual report may include, but is not limited to, the audited financial statements, adopted budgets, and local demographic data such as assessed value. The most common deadline for most California school and community college districts is nine months after the end of their fiscal year. However, there are situations that a reporting deadline may be sooner. The reporting requirements and deadline are unique to each municipal debt issuance, so it is important for districts to carefully look at the continuing disclosure certificates for each of their debt financings.
In addition to annual reporting, California school and community college districts must also provide material event notices to investors. These notices must be filed after the occurrence of specific events that could impact the issuer's financial status or the bond's value, such as changes in credit ratings, unscheduled draws on debt service reserves, defeasances, or the incurrence of a financial obligation. The list of possible material events can also be found in the continuing disclosure certificate in the Official Statement for the municipal debt security. If a district is unsure if their event qualifies as a material event, they can reach out to their bond counsel for clarification. Material event notices are required to be filed within 10 business days of the occurrence of the event.
Keygent LLC: What is EMMA?
Once a California school or community college district has prepared their annual report or material event notice, how do they get them to investors? The Municipal Securities Rulemaking Board (“MSRB”) plays an integral role in the continuing disclosure process through its Electronic Municipal Market Access (“EMMA”) system. The MSRB was established under the Securities Exchange Act of 1934 as a self-regulatory organization to regulate the activities of broker-dealers and banks that buy, sell and underwrite municipal securities. In 2010, the MSRB’s authority was expanded to include the regulation of municipal advisors and their firms that provide advice to state and local governments and other municipal entities.
EMMA is a comprehensive online database that provides free public access to offering documents, official disclosures, trade data, and other relevant information about the municipal securities market, including municipal bonds and other securities issued in California. In the past, there were several different repositories where districts could file their continuing disclosure reports and event notices. However, as a result it could be difficult for investors to find this information. EMMA now serves as a central repository for Official Statements, annual financial reports, material event notices, and other disclosures, making it easier for investors to find and analyze information. EMMA also provides investors with market data such as upcoming municipal bond sales, recently sold bonds and yield curves.
Investors and other interested parties are able to look up documents and filings by the district name, financing name, or Committee on Uniform Securities Identification Procedures (“CUSIP”) number. A CUSIP number is a unique identifier used for securities such as municipal bonds. CUSIP numbers consist of a combination of nine letters and numbers. The first six characters are a unique identifier for the issuing entity and the last three identify the security. Typically, each maturity is assigned its own CUSIP number and term bonds share one CUSIP number, meaning that each maturity within a term bond does not have its own identifier. CUSIP numbers are intended to help investors quickly look up information on municipal bonds and other securities.
Keygent Explains CDIAC Annual Debt Transparency Reports
CDIAC is short for California Debt & Investment Advisory Commission. It was created in 1982 to provide information, education, and assistance on municipal debt issuances to local governments and other municipal entities. In an ongoing effort to improve the responsible issuance of municipal securities and transparency, Senate Bill 1029 (SB 1029) was introduced. As part of SB 1029, California school districts were required to adopt a Board debt policy and submit an annual report for any issue of municipal debt. They are required for all municipal securities issued in California with a report of final sale filed after January 21, 2017. These reports capture a detailed snapshot of debt issuance and outstanding debts across California’s diverse municipalities. These reports aggregate data on various types of municipal securities, including general obligation bonds, certificates of participation, and lease revenue bonds, among others.
Unlike continuing disclosure requirements, CDIAC’s annual debt transparency reports are more focused on the municipal security and their use. Information from these reports include, but not limited to:
- Financing Information: Includes information on the par amount, sale date, settlement date and any premium or discount generated during the sale of the municipal security.
- Authorization: Includes information on the amount authorized to be issued for the district. It can refer to the total general obligation bond measure or the not-to-exceed amount for refundings or municipal securities that do not require voter approval. It also details the amount of remaining authorization, if any, for future municipal bond issuances.
- Outstanding Principal: Includes information on the amount of principal outstanding at the beginning of the reporting period, principal paid during the fiscal year, and remaining outstanding principal.
- Use of Proceeds: Includes information on how the proceeds from municipal debt issuances are utilized, such as projects, renovations, costs or capitalized interest.
Also, unlike continuing disclosure, annual debt transparency reports are not filed on EMMA. Rather they are filed through an online portal directly with CDIAC. These reports can also be viewed through CDIAC along with other reports such as reports of final sale.
Transparency of financings is goal of both continuing disclosure and CDIAC’s annual debt transparency reports. Continuing disclosure ensures that all participants in the municipal bond market have access to the same information. For investors, the availability of ongoing disclosure information is crucial for making informed decisions. The insights gained from annual financial reports and event notices allow investors to assess the financial health of issuers, evaluate the risks associated with their municipal securities, and monitor any developments that might affect their investments. This level of transparency helps to build confidence in the municipal bond market, supporting its stability and growth. CDIAC’s annual debt transparency reports help create greater transparency with how municipal debt proceeds are spent. This fosters more trust from taxpayers and local communities.
Keygent LLC: Dissemination Agents & How They Can Help
As California school and community college districts issue more municipal securities, their ongoing reporting requirements increase. Some districts may decide to utilize a dissemination agent to assist them with meeting their reporting obligations. Chris Hiatt of Keygent explains, “While the requirements of continuing disclosure and CDIAC’s annual debt transparency reports are straightforward, preparing and filing the reports can be challenging for some issuers.” Dissemination agents can assist with the preparation of required reports including gathering demographic data if needed. Once prepared, they will typically provide a draft of the reports to the district for their approval. If the district is satisfied with the draft reports, the dissemination agent will go ahead and file the reports with the correct repository. The use of a dissemination agent helps districts ensure that their required reports are completed in a timely, accurate fashion.
In California, where the economy’s size and complexity create a robust municipal bond market, the commitment to continuing disclosure is particularly important. By ensuring that all market participants have access to accurate and timely information, California can maintain investor confidence, support municipal finance, and contribute to the overall stability of the state's economy. Continuing disclosure for California municipal bonds is not just a regulatory requirement but a critical component of market integrity and investor confidence. Continuing disclosures are also crucial for increasing transparency on how municipal securities proceeds are spent to help foster trust among the community. By building trust with taxpayers and voters, California school and community college districts can continue to rely on their support for future municipal bond election measures to help fund projects to improve the educational experience for its students.
Keygent LLC is a municipal advisor firm based in El Segundo, California that provides strategic and technical municipal advisory services solely to California school and community college districts. In addition to municipal advisory services, Keygent also provides dissemination agent services to assist California school and community college districts with the preparation and filing of their ongoing reporting requirements. For more information, please visit
www.keygentcorp.com.
