Legal Issues & Developments for the New Year?From Bond Counsel?s Perspective

As has been the case for years, water and wastewater utilities throughout the United States start the New Year with capital improvement needs that exceed available financing resources, and they do so in an ever changing legal, regulatory and financial environment. Here are some of the legal issues and developments that public finance lawyers are watching in 2016 as their water and wastewater utility clients address their financing challenges and opportunities.

New Financing Methods and Options

WIFIA

The Water Resources Reform and Development Act of 2014 included the Water Infrastructure Finance and Innovation Act (WIFIA), aimed at supplementing the federally subsidized financing assistance for water and wastewater systems provided by the State Revolving Funds (SRFs) created under the Clean Water Act and Safe Water Drinking Act.? WIFIA?s promoters designed it to meet some needs they perceived the SRFs to be leaving unmet, at least in some jurisdictions. For projects with costs greater than $20 million, the WIFIA program would permit project sponsors to secure advantageous financing (with lower interest rates obtained through federal credit enhancement) for up to 49 percent of project costs. As originally enacted, however, WIFIA prohibited the use of tax-exempt debt to fund any of the remaining 51 percent.

In December 2015, the Fixing America?s Surface Transportation Act (FAST Act) amended WIFIA to eliminate that prohibition and so heighten the potential benefits WIFIA could provide. Congress has appropriated funds for the administrative costs of establishing the EPA?s WIFIA office, but appropriations are still needed to provide the actual federal financial support for WIFIA loans. Until then, public finance lawyers will be working with water and wastewater utility officials, project developers and potential investors to determine how to take advantage of the new program and meet its legal requirements and hurdles. They will also be working with the SRFs, which must be given a right of first refusal on providing assistance for projects seeking WIFIA loans and which may seek to be the provider of the non-WIFIA portion of a project?s financing.

Green Bonds

Increasingly, issuers of bonds for water and wastewater systems (both utilities and SRFs) are using the ?Green Bonds? designation to signify to investors and the public that they are financing projects and programs they consider to be environmentally positive and sustainable.? Unlike characterizations of the security structure or tax status of municipal bonds, the ?Green Bond? designation is not based on legal or contractual definitions or requirements and does not yet rest on a well-established set of industry standards, though efforts are underway among industry participants to develop general standards for its use. Nonetheless, legal counsel to issuers considering the ?Green Bond? designation are increasingly called upon to assist their clients in preparing disclosure documents that explain to potential investors what the designation means, and what it does not mean, for that issuer and to assist in the preparation of related commitments and covenants that ?Green Bond? issuers may make regarding matters such as transparency, accountability and ongoing reporting.

Regulatory Matters

Federal Securities Law

Public finance lawyers had their eyes on the Securities and Exchange Commission in the past year because the SEC had its eyes on their municipal bond industry clients, both issuers and underwriters, and that was true of participants in the water and wastewater sector as well. The same will be true in 2016. In the past year, the SEC?s highly publicized Municipalities Continuing Disclosure Cooperation (MCDC) initiative, aimed at heightening compliance with the continuing disclosure obligations and related disclosure obligations of municipal bond underwriters and issuers, shifted from the self-reporting phase (during which issuers and underwriters could report failures to fulfill their obligations or to disclose them accurately in order to avail themselves of potentially less onerous sanctions) to the settlement phase, in which the SEC negotiated settlement agreements with those who reported such failures.

The SEC enforcement division staff focused their initial review on underwriters? self-reports, and they are expected to shift attention to issuers? self-reports next.? There is also the potential for the SEC then to focus on issuers and underwriters who did not self-report and, possibly, on other transaction participants as well.? In the aftermath of the MCDC initiative and its heightened attention to continuing disclosure compliance history, public finance lawyers are likely to engage issuers in further discussions regarding best practices and protocols for facilitating continuing compliance, specifically with contractual continuing disclosure undertakings and more generally with federal securities law.?

Federal Tax Law

In the often esoteric tax law sub-specialty of municipal bond lawyers, much of the focus in 2016 is expected to be on complex issues such as the manner in which the ?issue price? of municipal bonds is computed at their time of issuance. This topic becomes one of more than academic interest to bond issuers when that issue price comes into play in determining whether any portion of the interest income that the issuers earned on bond proceeds before they were expended might be subject to the requirement of rebate to the federal government. As interest rates begin to edge up from their historic lows, rebate may become a topic of greater concern. The IRS and bond industry participants continue to debate the appropriate means of making that computation and avoiding potential manipulation.

Another tax law issue that may be of special concern to public water and wastewater utilities with massive capital improvement programs is the extent to which they may enter into management agreements or leases with private businesses for utility facilities funded with tax-exempt bonds without jeopardizing that tax-exempt status. As utilities continue to explore public-private partnerships as a means of infusing private-sector capital into their capital-intensive projects (e.g., bio-digesters), they can be expected, both directly and through their industry associations, to pursue both greater clarity and flexibility from the IRS in the rules governing the extent to which those arrangements can be made without causing bonds to lose their tax-exempt status.

In summary, a year of both challenges and opportunities lies ahead for public water and wastewater utilities considering their immediate and long-term financing needs. As they do so, they are well advised to engage in comprehensive discussions with their public finance legal counsel regarding the range of options that are currently available and that may become available and the legal and financial benefits and risks that each of those options may entail.
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David S. Goodman is a partner with Squire Patton Boggs (U.S.) LLP in the firm?s Cleveland, Ohio office. Prior to this role, he served as a co-leader of the firm?s nationally known public finance practice for several years. His practice encompasses all types of public finance issues including acting as bond counsel in both general obligation financings and revenue bond issues and serving as underwriters? counsel for national and regional underwriters of bond issues by issuers at the state and local level. Goodman?s practice emphasizes the financing of water, wastewater and other infrastructure projects, particularly through state revolving loan programs.

Goodman leads the firm?s representation of the Ohio Water Development Authority (OWDA) as bond counsel and special counsel. As bond counsel for OWDA, Goodman has handled more than $3 billion (U.S.) of bond issues in pooled loan programs for water and wastewater projects. Goodman has been listed in The Best Lawyers in America since 2008 and is regularly selected as an Ohio Super Lawyer in a survey distributed by Law & Politics. His finance practice leadership is also noted by U.S. Legal 500.

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