State Agency



TOPIC: Bond PremiumsOFFICE: AuditorSTATE: NJDATE: 06/07/13QUESTION / ISSUE: Our state recently issued transportation bonds at a significant premium and is considering spending that premium on transportation projects rather that setting it aside for the debt service and thereby lowering the true interest cost on those bonds. Amounts normally appropriated for transportation projects in the state budget would therefore be reduced by the amount of the premium.We are interested in the following information:Does your state have an official law, regulation, or policy governing the use of bond premiums?If so, what is that law, regulation, or policy?StateCommentsConnecticutAccording to section 3-20 of the General statutes, premiums are to be used to pay the expenses of issuing bonds.?Any premiums left over after paying expenses are to be deposited to the General Fund.?The State Treasurer deposits premiums into a fund 12060 restricted account and the funds are used to pay debt service. Section 3-20, subsection (f):Any expense incurred in connection with the carrying out of the provisions of this section, including the issuance of refunding bonds, shall be paid from the accrued interest and premiums or from the proceeds of the sale of such bonds or refunding bonds and in the same manner as other obligations of the state, except that expenses incurred in connection with the preparation, issuance and delivery of general obligation bonds issued in accordance with sections 3-17 and 10-183m, and delivered to the retirement fund provided for in section 10-183r shall be paid out of the General Fund if sufficient accrued interest and premiums are not available to pay such expenses.Except as may be provided herein or in any other public or special act, net earnings of investments of proceeds of bonds and such funds, and accrued interest and premiums on the issuance of such bonds shall, after payment of expenses incurred by the Treasurer or State Bond Commission in connection with their issuance, if any, be deposited to the credit of the General Fund.GeorgiaGeorgia’s laws do not specifically address bond premiums, nor do we have in place an official policy.We have a practice of applying premium to retire certain outstanding general obligation bonds of the state coming due within 90 days of the issuance of the bonds. We have considered applying premium to fund capital projects, but have not yet used premiums for those purposes.MaineThe Treasurer’s office has a standard practice. The Treasurer’s standard practice is to use bond premium to issue less debt or to pay for debt issuance costs such as paying for bond rating or a debt manager. MassachusettsThe prevalent couponing structure for tax-exempt bonds is a premium coupon (due to the price protection it affords against de minimus tax events should rates rise). We spend any premium we receive on the state's capital budget. However, it is important to note that we base our borrowing needs on bond proceeds received (par plus bond premium) and not just par.MissouriWe are not aware of specific laws or regulations governing the use of bond premiums by state and local governments for which we have audit authority. For your information, we have attached two files:* The first file includes provisions regarding state transportation bonds and bonds issued by certain local governments. As you will see, restrictions pertain to the use of bond proceeds in general (not specifically to bond premiums).* The second file is an excerpt from the state Department of Elementary and Secondary Education's (DESE's) guidance for school districts that have issued bonds. (Page 2 discusses alternative treatments for bond proceeds.)\sNew HampshireYes, state law addresses how bond premiums may be applied. Two statutes specifically address this issue: Revised Statutes Annotated (RSA) 6-A:12 (Bonds Sold at Discount or Premium) and RSA 6-A:13 (Cost of Debt Issuance; Application of Premium). These statutes can be found at the following link to RSA 6-A, which covers others aspects of debt issuance as well: CarolinaThe only general legislation that North Carolina has concerning the use of bond proceeds is GS 142-82(6) which describes in general terms the eligible use of bond proceeds (par and premium). Unless the authorizing legislation for a particular debt issue speaks differently to the use of bond premium, it is deemed part of “bond proceeds” and may be used to pay any authorized costs. Generally speaking bond premiums can be used to pay the expenses associated with issuing the bonds, later fees associated with the bonds (legal, regulatory, arbitrage etc.) as well as debt service and termination fees for derivatives. North Carolina does not use any premium to fund projects for GO bonds because the authorizing legislation for GO bonds usually names the par amount to be issued and thus applying any premium here would exceed legal authorization limit. Special Indebtedness legislation usually uses more vague language (“not to exceed”) and accommodates the use of premium for projects as long as the total authorization is not exceeded. Special indebtedness premium is also be used to pay the items mentioned above (legal, fee etc.) for a given issue.OhioOhio statutes specify the use of bond premiums. Those provisions are found in two statutes, Ohio Revised Code 133.32 and Ohio Revised Code section 5705.10. Both of the statutes are attached in Acrobat format and the relevant text is highlighted in yellow.RC 133.32 (B) provides in relevant part: “Any amount received as payment of premium and accrued interest *** shall be paid into the bond retirement fund and credited to accounts as provided in the legislation.”RC 5705.10(E) provides in relevant part: “All proceeds from the sale of public obligations or fractionalized interests in public obligations as defined in section 133.01 of the Revised Code, except premium and accrued interest, shall be paid into a special fund for the purpose of such issue, ***. The premium and accrued interest received from such sale shall be paid into the sinking fund or the bond retirement fund of the subdivision.”WisconsinWisconsin can, and has, issued General Obligation bonds to finance highway projects. However, the vast majority of our bonds for transportation purposes are revenue bonds.Regarding revenue bonds, Wisconsin does not have a specific law prescribing the use of premiums for transportation projects.?Under Wisconsin Statute 18.55 (4) “Revenue obligation bonds may be sold at any price or percentage of par value” and since there are no restrictions on the use of proceeds from premiums, they can be used for debt service and/or projects. Wisconsin does have a law for its general obligation bonds. Under Wisconsin Statute 18.08 (2) “Any such moneys that represent premium or any payments received pursuant to any agreement or ancillary arrangement entered into for public debt with respect to any such public debt may be credited to one or more of the sinking funds of the bond security and redemption fund or to the capital improvement fund, as determined by the commission”. As specified by this law, Wisconsin has the ability to use premium for debt service and/or capital projects, as determined by its Building Commission. Historically, the premiums had been deposited to the Bond Security and Redemption Fund, to be used for debt service purposes. However, during the past few years, a part of the premium has been deposited to the Capital Improvement Fund, to be used for project purposes. ................
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