The Oregon Municipal Debt Advisory Commission (MDAC) assists local governments in meeting disclosure requirements and in the technical aspects of marketing bonds

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STEP 4: TYPES OF DEBT INSTRUMENTS

The following list briefly summarizes the types of debt and financial instruments authorized for

Oregon local Issuers. For further definitions and information on varying types of bonds, see the

MSRB Glossary.

General Obligation Bonds

General Obligation (GO) bonds typically benefit a community as a whole and are secured by the

full-faith-and-credit and taxing power of the Issuer. The Issuer pledges unconditionally to pay

the interest and principal on the debt as it matures. For Oregon local Issuers, a GO pledge

means that the Issuer

pledges all of its unrestricted resources to meet debt service, including

an unlimited property tax on all taxable property within the district. Local government GO

bonds may only be issued if authorized by a ballot election of the issuing jurisdiction. Voter

authorized General Obligation Bonds are supported by an unlimited tax levy outside of the

limits imposed by the Oregon Constitution, Article XI, Section 11.

Under ORS 287A.001-287A.145 General Obligation debt can be incurred for capital costs,

including costs associated with acquisition, construction, improvement, remodeling, furnishing,

equipping, maintenance or repair, having an expected useful life of more than one year. This

does not include maintenance and repair (the need for which could be reasonably anticipated),

supplies, and equipment that are not intrinsic to a structure. General Obligation debt has been

the traditional form of financing for capital projects such as land acquisition, schools, water

facilities, sewerage facilities, and roads that are owned and operated by governments. GO

bonds can also be issued to replace outstanding General Obligation Bonds. See Refunding

Bonds for a discussion of such bonds.

There are several types of GO bonds, which place varying emphasis on the full-faith-and-credit

security and the Issuers’ taxing ability. These types of ULTGO bonds are categorized by source

of repayment as follows:

Non Self-Supporting GO Bonds

Non-self-supporting GO bonds or tax-supported bonds are those which are paid for by

property taxes or other tax sources. School district bonds in Oregon are traditionally

supported by property taxes and are historically GO non-self-supporting bonds. Non-

self-supporting and partially self-supporting GO bonds determine an Issuer’s net bonded

debt. Net bonded debt is a measure of the debt burden on property of the Issuer.

The term “Issuer” is a general reference to issuing districts, municipalities, and local governments.

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Self-Supporting GO Bonds

Self-supporting GO bonds are debt issues that carry the Issuer’s ULTGO pledge and have a

revenue stream separate from the Issuer’s taxing authority to repay the bonds. The bond

proceeds construct a revenue-generating enterprise or facility that provides the primary

source of funds for bond repayment. These bonds may be fully self-supporting or only

partially self-supporting. If fully self-supporting, the bonds are not included in the net

bonded debt of the Issuer, but are included in its gross bonded debt. If only partially self-

supporting, then 100% is included in the net bonded debt calculation. (See Computing Net

Direct Debt). These are often referred to as double-barreled bonds.

Full Faith and Credit Obligations

Full Faith & Credit Obligations (FF&C) may be secured by a variety of pledges except as

restricted by the Oregon Constitution or statutes or by local charter. FF&C obligations are also

authorized under ORS 271.390. Limited Tax Revenue Bonds are authorized under ORS

287A.150. In such a case, the Issuer is still required to use all legally available resources to meet

its obligations. FF&C obligations are backed by the general revenue and taxing power of the

Issuer within the limits of the Oregon Constitution, Article XI, Section 11. FF&C obligations do

not include a pledge of an unlimited property tax on all taxable property within the district, as is

the case with GO bonds.

FF&C obligations are generally perceived by investors to have a higher risk than the unlimited-

tax General Obligation Bond, but are still perceived to be a more secure investment than COPs

since they are not subject to an annual appropriation process. The difference in interest rates

will depend on numerous factors, including the financial condition and reputation of the Issuer,

the revenue source used to repay the debt, the security pledge, the total amount of FF&C debt

outstanding and the nature of the asset being financed.

Rating agencies may rate at the same level as the full unlimited-tax general obligation rating of

the Issuer; however, in early 2017, Moody’s Investors Service changed their rating methodology

for FF&C obligations, resulting in rating upgrades for many Issuers to the same level as their

outstanding ULTGOs. S&P historically has been rating FF&C and ULTGO’s at the same level.

There are two types of FF&C obligations which place a varying emphasis on credit security and

the Issuer’s taxing ability. These types of obligations are categorized below.

Full Faith & Credit (non-self-supporting)

FF&C (non-self-supporting-N) obligations are paid by property taxes or other tax sources

within the limits of the Oregon Constitution, Article XI, Section 11.

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Full Faith & Credit (self-supporting)

FF&C (self-supporting-S) obligations are paid from a project’s revenue stream. The

proceeds are used to construct revenue generating enterprises or facilities, or there is an

independent source of funds for repayment. The taxing authority behind the security

pledge on the obligation is limited by the Oregon Constitution, Article XI, Section 11.

Revenue Obligations and Bonds

Revenue Bonds are usually payable from revenues generated by the project or enterprise. They

may be issued under the authority of ORS 287A.150 and must adhere to applicable state and

federal statutes and regulations. Alternatively, Revenue obligations may be issued under ORS

271.390. Both bonds and obligations have the same security structure and considerations with

the caveat that Revenue Bonds are more widely recognized by investors outside of Oregon

markets. No ad valorem property taxes are levied or pledged. Revenue bondholders do not

have recourse against the full-faith and unlimited or limited taxing power of the government

and these bonds are expected to be fully self-supporting. The bonds are generally repaid from

user charges, system development charges or from enterprise earnings and do not rely on the

ad valorem taxing powers of the government for their security. The following are advantages

to issuing Revenue Bonds:

• Governments have the ability to finance traditional projects without pledging the

power to tax, reserving this power for other services. Special districts have been

created to promote projects as an alternative to general government action.

Although they don’t have the power to tax, they may have the power to float bonds

and serve as conduits for financing non-governmental activities in the tax-exempt

market.

• Those responsible for the payment are those who benefit reflecting a “user pays”

philosophy.

• Revenue Bonds are usually not restricted by various debt limitation statutes. They

generally also are not subject to the lending of credit prohibition in the Oregon

Constitution, and so there may be more flexibility in the kinds of projects financed.

• Voter approval is usually not required. However, bonds issued pursuant to ORS

287A.150 may be subject to voter approval if sufficient petition signatures are

gathered within the timeframe prescribed for non-emergency actions of the Issuer.

A city’s charter may have additional restrictions and could require voter approval.

Revenue Bonds often have other associated requirements and several distinctive disadvantages

such as:

• Repayment revenue depends on the continuity of the revenue source and the

Issuer’s willingness to raise rates as necessary to repay the bonds. For certain

Revenue Bonds, this may result in higher interest rates and issuance costs than

ULTGO bonds because of their limited security, but not always. The strength of the

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system could put the rating at the same level as the ULTGO. Revenue Bonds issued

for essential services, such as water and sewer, may carry ratings and borrowing

costs comparable to an Issuer’s ULTGO or potentially higher LTRB credit.

• Higher coverage requirements for issuing additional parity bonds (i.e. revenues

compared to debt service).

• Depending on the financial health of the system, the Issuer may have to meet debt

service coverage requirements.

• Requirement to maintain a debt service reserve fund, for certain types of Revenue

Bonds.

• Generally require more complex financial arrangements.

• Bonds issued under ORS 287A.150 require that voters have the opportunity to refer

the question of issuing the bonds to a public vote through a petition process. The

timeframe and elector signature requirement necessary to refer the issuance to a

public vote varies depending on how the proposed bonds were authorized

(ordinance vs. resolution).

Revenue Bonds are often categorized by source of revenue. Some examples of different types

of Revenue Bonds follow.

Enterprise Revenue Bonds

Enterprise Revenue Bonds finance projects (i.e., water and sewer) that are expected to

generate revenues to repay the debt. The bonds are issued under the provisions of ORS

287A.150 or under other specific statutes.

Special Revenue Bonds

Special Revenue Bonds are secured by special revenues such as an assessment or gasoline

tax. These funds are directed to a special fund established for the purpose of bond

repayment. The contents of the fund form the bond’s security and repayment source.

Double-Barreled Revenue Bonds

Some Revenue Bonds are dually secured with a dedicated revenue source and a

jurisdiction’s qualified or unqualified tax pledge. This enhancement generally results in a

higher credit rating for the security which can result in lower interest rates for the bonds.

Industrial Development Revenue Bonds

Industrial/Economic Development Revenue Bonds (IDBs, IDRBs or EDRBs) are Revenue

Bonds authorized to be issued in Oregon through the Oregon Business Development

Department, port districts, and cities of over 300,000 in population. These bonds finance

construction of facilities for eligible private enterprises to increase employment and to

promote economic development and diversity. IDBs are private activity bonds and require

an allocation of the State’s private activity bond volume cap to qualify as tax-exempt.

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Appropriation Bonds

Certificates of Participation (COPs), sometimes sold to investors through a Lease Purchase

Agreement, may be an alternative to issuing bonds and are often used to finance real property

or equipment, construction of public facilities, and facility maintenance and renovation. COPs

are authorized under ORS 271.390. COP's principal and interest (debt service) payments are not

secured by a particular revenue source nor does the government have the authority to levy

extra taxes beyond constitutional limits to pay debt service. COPs are secured by an obligation

of the government to make regular payments to meet debt service and, most commonly, a

security pledge of the real property or equipment. In the typical COP, if the Issuer defaults, the

structure or asset is “repossessed.” The security of the instrument, in the eyes of the investors,

lies in the expectation that the government will choose not to forego use of the structure or

asset which may be a facility critical to the government’s function. COPs differ from Full Faith

and Credit Obligations in that COPs are subject to annual appropriation and therefore are not

bonds and not subject to certain debt limits. Since they are subject to annual appropriation,

collateral (if used) is generally viewed as one means to incent the Issuer to keep appropriating

or lose access to an essential public asset. Since the real credit is the annual appropriation of

the Issuer, highly rated Issuers sometimes issue COPs with little or even no collateral. In these

cases, future access to the capital markets would be difficult should they fail to appropriate for

the payment of the COP.

Some attributes of Certificates of Participations include:

• No voter approval is required, nor is adherence to the restrictions of the Uniform

Revenue Bond Act (ORS 287A.150).

• General fund revenues, at the option of the governing body, may be used to pay the

debt service.

• Interest rates are generally higher because the payments are subject to annual

appropriation and lack a pledge of specific taxes.

• COPs are more complex than GO bonds. This may result in higher issuance costs and

fees from service providers (Bond Counsel, MA, Underwriter).

• COPs are typically rated at least one notch below the Issuer’s GO rating.

Urban Renewal Bonds

Tax Increment (Urban Renewal) Bonds, are authorized for cities, designated agencies of cities,

and counties as authorized by the Oregon Constitution, Article XI, Section 11c and ORS Chapter

457 (Urban Renewal of Blighted Areas—Tax Increment Financing of Urban Renewal Financing).

Urban Renewal Bonds are repaid by property taxes but the agency has no control over the

amount of property tax revenue generated. They may be used for infrastructure improvements

such as streets, sewers, property acquisition and housing development for the purpose of

remedying “blighted” conditions within a specific community. The repayment source is limited

primarily through taxes on any increase in assessed value above the previously established

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frozen base. This is referred to as “Divide the Taxes Revenues”. To use these bonds, an urban

renewal area must be designated and property assessed valuations for this designated area are

then “frozen” levels.

Divide-the-Tax Revenues are calculated by multiplying the incremental assessed value of an

urban renewal area by the consolidated billing tax rate. The consolidated billing tax rate is the

sum of certain tax rates of taxing districts that overlap the area. The incremental assessed

value is the difference between the frozen base and the current assessed value of all taxable

property in the area.

The security for the borrowing is the revenues generated from the future growth in property

tax revenues resulting from the urban renewal improvements and from the growth in assessed

values under Oregon property tax law. These bonds are riskier than General Obligation or most

Revenue Bonds because there is no guarantee that resultant property values and tax revenues

will increase sufficiently to repay the urban renewal. Unless the agency has special levy

authority, they have no control over the amount of taxes received each year. Consequently,

this usually results in lower bond ratings and higher interest rates paid on the bonds.

Local Improvement District Financing

Local Improvement District Bonds, known as Assessment Bonds are authorized in ORS Chapter

223. These bonds are secured by charges or assessments to property owners who benefit from

the improvements. To collect the charges or assessments, municipalities may form Local

Improvement Districts (LID) within which the improvements are to be made.

Special districts, such as county road districts, may use special assessment procedures and

authority to issue bonds to finance various local improvements such as sewer, water and

streets. Special Assessment Bonds are issued for the amount of the unpaid assessments and an

amount necessary to establish a debt service fund and pay issuance costs. Properties that

benefit from the improvements are proportionately assessed the actual cost of the

improvement. The method of distributing the cost of the improvements among the benefitted

properties may be determined in a number of different ways and is determined by the

governing body. The assessment payments are used to meet debt service obligations. Since

the timing of assessment pre-payments from benefitting property owners are unpredictable,

the credit analysis of improvement bonds is more complex than certain other types of bonds.

Assessment bonds are typically structured as a term bond with one maturity and a call

provision which allows redemption from assessment payments at any time. Some assessment

financings are issued as Full Faith and Credit Obligations (ORS 271.390) or Limited Tax

Improvement Bonds (ORS 287A.150) with the assessments as the expected primary source of

bond repayment, but pledging the Issuer’s full faith and credit as additional security for the

obligations.

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If the Issuer uses its full faith and credit to secure the obligations, it is important that the Issuer

develop internal policies and procedures to minimize the risk that the Issuer’s general revenues

will be needed to repay the bonds. These policies and procedures should include a minimum

property value to assessment ratio which considers all liens on the property. Some Issuers

require additional collateral from property owners that own large portions of the LID, whose

assessed value versus assessment ratio does not meet the guideline or may not meet the

financial standards of the Issuer. Issuers must also determine the interest rate to be charged on

assessment contract. Many Issuers “pass-through” the rate on any bonds issued to finance the

assessment, plus an additional “bump rate” intended to offset the risk of payment

delinquencies and other risks.

Private Activity Bonds

Private Activity Bonds (PABs) are government debt instruments issued for the direct benefit of

private businesses. These bonds bear numerous restrictions imposed by federal and state

regulations. Specifically, they are subject to the limitations and provisions of the Federal Tax

Reform Act of 1986 of the Internal Revenue Code and ORS 286A.605 to 286A.625.

A frequent advantage of PABs is the private use of a municipality’s tax-exempt name as a

conduit to tax-exempt interest rates. Another advantage is that the government Issuer incurs

no legal obligation to repay private activity conduit bonds; rather, the private business’ credit

quality provides the security for the debt financing and ultimately all repayment

responsibilities.

If proposed Private Activity Bonds are to be sold in the public debt markets (as opposed to a

private placement or bank loan), Issuers may wish to impose minimum credit rating standards,

minimum bond denominations and other restrictions, in order to minimize the risk that lower

rated bonds are purchased by investors that may not have the capability to fully understand the

risks of the bonds.

The paramount consideration for the issuance of PABs in the State of Oregon is to maximize

economic benefits to the citizens of the State by the promotion of appropriate economic

development and other public purposes. PABs are issued to increase the number of family

wage jobs, promote economic recovery in small cities heavily dependent on a single industry,

emphasize development in underdeveloped rural areas, utilize educational resources available

at public universities, support development of Oregon’s small businesses, including businesses

owned by women or minority groups, encourage use of Oregon’s human and natural resources

in endeavors that harness Oregon’s economic comparative advantages, and assist lower

income families to obtain housing.

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Private Activity Bonds authorized for a variety of uses including: single family mortgage, small

issue industrial development, student loans, water/sewer/solid waste, hazardous waste

facilities, district heating and cooling, local gas and electric, and tax-increment financing bonds.

Private Activity Bonds are subject to a statewide bond volume cap limit. The amounts allocated

for PABs, as provided in ORS 286A.615, are determined on a per capita basis using U.S. Federal

government census data for Oregon’s population. The Oregon Legislature determines PAB

allocations each calendar year for the various state agencies such as the Oregon Economic

Development Commission, Business Development Department, Housing and Community

Services Department, Office of Energy, and the PAB Committee. The current volume cap and

allocations are updated after each meeting.

The Oregon State PAB Committee is responsible for the allocation and reallocation of PABs

among local governments, districts, and other public Issuers. Oregon Administrative Rule 170-

71-0005, Allocation of Private Activity Bond Limit, provides PAB allocation guidance and

procedures for Oregon local governments and municipalities. For additional information,

contact the State Treasurer’s Debt Management Division.

Short Term Debt

By convention, short-term debt is defined as debt with a stated final maturity at the time of

sale of 13 months or less. General Obligation and Revenue Bonds are typically long-term debt,

whereas short-term debt instruments are usually referred to as notes or warrants. Local

governments, districts and agencies may, pursuant to ORS 287A.180, pledge anticipated taxes,

grants, bond proceeds, or other revenues when entering into contracts with lending institutions

for short-term financing. Obligations issued in anticipation of taxes or other revenues may not

be issued in an amount greater than 80 percent of the amount budgeted to be received in the

fiscal year in which the obligations are issued. Such obligations may be repaid according to the

schedule determined by the governing body.

The Office of the State Treasurer, Debt Management Division does not track municipal debt of

less than 13 months. Several types of short-term instruments are described below.

Tax Anticipation Notes and Warrants

Tax Anticipation Notes (TANs) are issued to provide interim financing for operations to which

taxes are committed but not yet collected. In general, these instruments are used to alleviate a

cash flow situation in which collections do not coincide with expenditure needs. Usually TANs

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are retired from tax collections, and only from proceeds of the tax levy whose collections they

anticipate to be used for repayment.

Issuers of TANs may be able to access the public market if the amount to be issued is large

enough and the credit quality is strong. Otherwise Issuers may look to a private placement with

a bank. School districts, education service districts and community colleges also have access to

the Oregon Education Districts Short-Term Borrowing Program which pools together Borrowers

allowing them to gain access to the public market and save on costs of issuance.

Bond Anticipation Notes

Bond Anticipation Notes (BANs) are issued to provide immediate funds to begin a project prior

to issuing approved bonds. Obligations issued to provide interim financing must mature not

later than five years after the interim financing is issued. In periods of market instability and

volatile interest rates, Bond Anticipation Notes may be used to delay the sale of a long-term

debt issue until the market climate becomes more favorable to the Issuer. BANs may be sold in

a fashion similar to bonds or more commonly they are sold as direct bank placements or as

lines of credit. Other considerations related to the issuance of BANs include:

• Difference between long term rates or cost of capitalizing interest versus short term

rates.

• Timing of ratings on long-term debt.

• Coverage requirements related to Revenue Bonds.

• Actual cost of the project.

It is important to note, however, that deferring long-term debt involves the risk that interest

rates may rise from the time of the planning phase of the project to the actual issuance of the

permanent financing. Care must be taken in financial projections to allow sufficient room in

projections for some upward movement in interest rates.

Revenue Anticipation Notes

Revenue Anticipation Notes (RANs) are used as interim financing prior to collection of revenues

that will be generated once a project is completed. RANs may also be used for operating

purposes prior to collection of specific revenues.

Grant Anticipation Notes

Grant Anticipation Notes (GANs) may be used to finance a project for which a state or federal

grant has been committed.

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Refunding Bonds

Refunding Bonds are issued to replace or refinance previously issued debt with new debt.

Refunding is typically used to restructure debt, to save borrowing costs through lower interest

rates and revise legal restrictions or covenants. There are two principal types of Refunding

Bonds as noted below.

Current Refunding

Oregon Law ORS 287A.360, allows the redemption of bonds up to 1 year in advance of their call

date to be considered a current refunding and not fall under the state’s advance refunding

rules. Federal law defines a current refunding as the refunding of outstanding bonds within 3

months of their optional call date.

Advance Refunding

Advance Refunding occurs when outstanding bonds are refinanced 90 or more days before the

refunded bond call date. Bond proceeds are invested in an irrevocable escrow structured so

that the escrow generates sufficient revenues to pay the debt service on the refunded bonds up

to and including the redemption date. Refunded Bonds defeased in accordance with their bond

indenture are technically no longer considered outstanding until the call date and do not count

against the Issuer’s debt limitations, as long as they are legally defeased. To ensure the

escrowed proceeds produce the expected payments, non-callable, Full Faith and Credit

obligations of the US Government are required.

The federal government restricts yield on the investment of the proceeds of an Advance

Refunding Bond. State regulations also limit the size of the Refunding Bond and the manner in

which the proceeds can be invested. State regulations require that Advance Refunding Bonds

be sold only to achieve a net dollar benefit to the Issuer or for debt reorganization purposes.

An Advanced Refunding must comply with OAR 170-062-0000.

Advanced Refunding proceeds were most often invested in special State and Local Government

Series (SLGS) Securities. SLGS are securities offered by the U.S. Treasury directly to state and

local government entities as an investment alternative which assists Issuers of tax-exempt

securities in complying with yield restrictions and arbitrage rebate provisions of the Internal

Revenue Code. SLGS are subject to the federal debt limit and may be unavailable if the debt

limit is reached. As a consequence, Issuers may have to procure securities on the open market

through a bidding process. While this process is commonly used by Issuers when SLGS are not

available, it can carry more risk and involve more complexity. Bond professionals will be of

assistance in navigating this process should the need arise. Open Market Securities (OMS) may

offer better yield than SLGS and could be used to fund an escrow even when SLGS are available.

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When available, SLGS securities are purchased through the U.S. Treasury and additional

information can be obtained at http://www.treasurydirect.gov.

Issuers of Advance Refunding bonds that are issued more than 1 year prior to a call must

comply with ORS 287A.360-287A.380 and the State Treasurer’s Administrative Rule detailing

the Procedure for Submission, Review and Approval of an Advance Refunding Plan, OAR 170-

62-0000). The December 2017 federal Tax Cuts and Jobs Act (TCJA) eliminated tax-exempt

advance refundings.

Zero Coupon, Capital Appreciation, and Deferred Interest Bonds

Typical fixed rate bonds pay interest every six months until they mature. These are also

referred to as Current Interest Bonds. Zero Coupon, Capital Appreciation (CABs), and Deferred

Interest Bonds (DIBs) do not pay current interest, but rather delay all payment to the investor

until maturity. These bonds are a tool used by Issuers to manage the amount of annual debt

service due and, for GO bonds, the resulting levy rate. Interest accretes until the maturity date

and is calculated every 6 months based on the accreted value. Since the accreted interest is not

paid to the investor in the period it accretes, the debt service due or levy rate is lower than it

otherwise would be with all current interest bonds. It is important to note that these types of

bonds appeal to a different segment of the bond market and typically result in a higher

borrowing cost than current interest bonds.

Variable Rate Bonds

Variable Rate Bonds do not have a fixed interest rate, rather the interest rate is allowed to

fluctuate in response to particular market rates. The rate is periodically reset based on a period

that is generally set by a remarketing agent, who is hired by the Issuer and remarkets the bonds

each period at the lowest rate that the remarketing agent believes is necessary to remarket all

of the outstanding bonds. This period can range from every day to several years. The bonds

that are remarketed are called Variable Rate Demand bonds. Since it is possible that a

remarketing may fail, Variable Rate Demand Bonds require a bank to provide liquidity to buy

any un-remarketed bonds. This market is very large and trades occur quickly. It is also a

market for only the highest rated securities so, if an Issuer is not at least AA rated, the bonds

will probably need credit enhancement, most commonly provided by the same banks that

provide the liquidity. These transactions bear significant risks related to interest rates, bank

credits, and enhancement/liquidity renewals. Additionally, these transactions may be

complicated and have higher issuance costs, and therefore may not be suitable for all issues.

Since the interest rates vary on Variable Rate Bonds, the Issuer must be prepared to pay high

interest rates at any point in time. However, the long-term average interest rate for this type of

transaction is well below the long-term average rate on fixed rate debt.