As local governments head into budget preparation and planning season, we want to make sure you are aware of important changes the North Carolina legislature made to the general obligation bond referendum process. On July 8, 2022, Governor Roy Cooper signed into law Senate Bill 265, which was enacted as Session Law 2022-53. Among other changes, the law amends the Local Government Bond Act in an effort to increase transparency in the bond referendum process. These amendments are effective for bond orders introduced on or after October 1, 2022.
Below are some of the ways that these changes will affect how governmental units need to approach the referendum process and future issuances of general obligation bonds.
1. Statement of Disclosure
Under Section 159-55.1, a new “statement of disclosure” must be prepared and filed with the clerk of a unit’s governing body after the bond order is introduced but before the public hearing on the bond order. It is also required for the statement of disclosure to be posted on the unit’s website and filed with the Local Government Commission of North Carolina (the LGC).
The statement of disclosure must contain:
(A) The estimated total interest to be paid on the bonds over the expected term of the bonds and a summary of the assumptions on which the estimate is based.
(B) The estimated increase in the property tax rate necessary to pay debt service on the bonds, if any, or, if no increase in the property tax rate is estimated to be needed, a brief statement that existing projected revenues are expected to be sufficient to pay debt service on the bonds.
(C) The amount of two-thirds bonds capacity the unit has available for the current fiscal year.
The statement of disclosure must also contain a statement to the effect that (a) the information contained in it is preliminary and for general informational purposes only, (b) there is no assurance that the assumptions upon which the disclosures are based will occur, (c) the occurrence of certain of the assumptions is beyond the control of the unit, and (d) differences between the actual circumstances at the time the bonds are issued from the assumptions included in the disclosure could result in significant differences between the disclosures made and the actual occurrences.
2. LGC Safe Harbor Policy for Reasonableness of Estimated Interest Assumptions
The new law amended Section 159-52(b) by requiring that the LGC find “[t]hat the assumptions used by the finance officer of the unit in preparing the statement of [disclosure] . . . pursuant to G.S. 159-55.1(a) are reasonable” when approving an application for a general obligation bond issuance.
At its November 1, 2022 meeting, the LGC adopted a safe harbor policy providing that it would find estimated interest assumptions to be reasonable if the estimate is based on the following assumptions:
(A) Principal on the bonds will be paid in 20 annual equal principal installments measured from the date of issue of each separate series of bonds.
(B) The interest rate on the bonds will be equal to a Bond Buyer 20 index (BB20) rate published within 25 days prior to the introduction of the bond order plus 200 basis points (2%) or higher.
The policy provides that finance officers may use alternate assumptions to estimate the total interest to be paid on the bonds. However, the safe harbor will not cover those alternate assumptions and the LGC will consider their reasonableness when it considers the application for approval.
3. Updates to Notice of Introduction of Bond Order and Notice of Adoption of Bond Order
Sections 159-56 and 159-58 require that additional language regarding estimated property tax increases, if any, be added to notices of introduction and adoption of the bond order published in the newspaper. Specifically, the following language, among other changes, must be added to the notices:
“The finance officer has filed a statement estimating that [a property tax increase of $______ per $100.00 of assessed valuation] [no property tax increase] will be required to provide sufficient funds to pay the principal and interest on the proposed bonds. These estimates are preliminary, are for general informational purposes only, and may differ from the actual interest paid on the bonds or the actual property tax increases required to provide sufficient funds to pay the principal and interest on the bonds.”
As a result, notices of introduction and adoption of the bond order will now include information on the total estimated interest to be paid and the estimated property tax increase, if any.
For more information, please contact one of the members of our North Carolina Public Finance Group listed below or your normal Parker Poe contact.