Bond Issues, Bond Anticipation Notes, Revolving Loan Fund and Capital Reserve Funds

• Author: Raymond S. DiRaddo
• Pages: 359-398

Chapter 7

Bond Issues, Bond Anticipation

Notes, Revolving Loan Fund and

Capital Reserve Funds

§7:10 New York Fire District Officers’ Guide 7-2

§7:10 BOND ISSUES AND BOND ANTICIPATION NOTES

Fire districts, as well as other municipalities, have flexibility in the manner in which they issue and repay debt.

In matte rs of deb t issuan ce and de bt repay ment, th e fire district attorney and bond counsel should be continuously

consulted. Under no circumstances should a Board of Fire Commissioners become involved in financing mechanisms

without proper legal advice.

§7:10.1 REGISTERED BONDS

The most familiar method for carrying out a capital improvement program is by using serial bonds. The serial

bond is the evidence of long-term debt. Local Finance Law §62.10. All fire district serial bonds have to be issued

in registered form. Fire districts have two choices for handling the registration requirement. (See Form 7-3).

1. Act as your own agent. The office of the State Comptroller strongly advises against acting as your own

agent because of difficulties that may be encountered in handling transactions in a cost effective and timely

manner.

2. Designate a bank as a transfer agent. In choosing a bank to act as transfer agent, the Fire District should

consider timeliness, accuracy, experience as a transfer agent and the bank’s ability to have the bonds

preregistered within 72 hours. Banks will charge for this service and a Board of Fire Commissioners

should make cost comparisons between banks before selecting the bank that will act as a transfer agent.

§7:10.2 BOND ANTICIPATION NOTES

Bond anticipation notes may be issued in anticipation of the sale of bonds when it is deemed expedient to

temporarily finance a project during the course of high long-term interest rates or to avoid the expense and paper-

work of other bonding processes. Such notes are payable from the proceeds of the serial bonds when issued.

Bond anticipation notes must mature within one year from the date of issue but may be renewed from time

to time. Renewals may not be made for a period in excess of one year. In no event may notes or renewals extend

more than two years beyond the original date of issue unless a portion of the notes or renewals is redeemed from

a source other than the proceeds of bonds within such two-year period. Under no circumstances may renewals

extend more than five years beyond the date of their original issuance. Bond Anticipation Notes may be sold at

either private or public sale. (See Form 7-6.)

§7:10.3 ARBITRAGE

Arbitrage is the borrowing of money at one rate and investing the proceeds of the loan at a higher rate.

Some municipalities have sold bond anticipation notes and invested the proceeds of such notes in this manner.

The office of the State Comptroller has taken the position that borrowing for the sole purpose of investing is

contrary to public policy and an abuse of the tax-exempt feature of fire district borrowings. Arbitrage certificates

frequently accompany the Bond anticipation note to assure the investor that the money borrowed will be used

for its intended purpose. (See Form 7-4.)

§7:10.4 PURPOSES

Fire district indebtedness may be incurred for those purposes related to the fighting of fires. Those purposes

may include: purchase of vehicles and apparatus (including those required for emergency relief of fire police

squads), purchase of fire alarm systems, acquisition of an adequate source of water supply to fight fires, and

acquisition of land and buildings for housing and storage of equipment and apparatus (such as fire houses, fire

stations or headquarters facilities).

7-3 Bond Issues, Bond Anticipation Notes §7:10.5

§7:10.5 PERIOD OF PROBABLE USEFULNESS (SEE FORM 7-4)

Fire districts, as well as other units of local government, are able to add flexibility in structuring their debt

more efficiently and marketing their obligations more effectively. However, they must comply with the rule set

out by law for the particular expenditure. Local Finance Law §§11.00 et seq.

§7:10.6 WEIGHTED AVERAGE

In the event the fire district needs to sell bonds or notes that are based upon equipment or improvements to

real estate that have different periods of probable usefulness, the indebtedness may not be contracted for a period

longer than a combination of the periods of probable usefulness of the equipment or improvement to real estate.

This combination of the periods of probable usefulness is called the weighted average.

The weighted average period of probable usefulness shall be determined by computing the sum of the

products derived by multiplying the dollar value of the portion of the proceeds of the indebtedness expected to

be received for each piece of equipment or improvement by the period of probable usefulness, or, if less, the

maximum authorized maturity of indebtedness to be contracted for such piece of equipment or improvement as

determined by the bond resolution authorizing such indebtedness, and dividing the resulting sum by the dollar

value of the proceeds expected to be received by the fire district from the combined indebtedness. Local Finance

Law §11.00a.

In determining the weighted average, bond counsel or a financial advisor should be consulted.

§7:10.7 LEVEL OR DECLINING ANNUAL DEBT SERVICE

Boards of Fire Commissioners may determine to issue bonds and provide for substantially level or declining

debt service. The determination of whether annual debt service is substantially level or declining shall not take

into account the first twelve months after issuance to the extent that no provision is to be made for the payment

of principal during such period. If a Board of Fire Commissioners determines to issue bonds with a substantially

level or declining annual debt service schedule, the aggregate amount of debt service payable in each year shall

not exceed the lowest aggregate amount of debt service payable in any prior year by more than the greater of

five per cent or ten thousand dollars.

§7:10.8 BOND RESOLUTION

After the Board of Fire Commissioners has determined the purpose or purposes for which debt is to be

incurred, the fire district attorney and bond counsel should prepare the bond resolution. The bond resolution will

set forth the purpose or purposes for which it is desired to issue serial bonds and the estimated maximum cost

and the amount of bonds to be issued together with a statement of the maximum life of the object or purpose

for which such bonds are to be issued. In the case of a multiple purpose bond issue, the weighted average of the

varying periods of probable usefulness will be used.

§7:10.8.1 APPROVAL OF BOND RESOLUTION

The bond resolution must first be approved by at least a three-fifths vote of the entire membership of the

Board of Fire Commissioners. It must then be approved by the voters of the fire district at the Annual or Special

Election called or held in the manner prescribed by law. See Fire District Officers’ Guide Chapter 3. If the propo-

sition for the bond resolution is disapproved by the voters, no future action is permitted. If the proposition for the

bond resolution is approved, the Board of Fire Commissioners may proceed with the undertaking of the project.