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GFOA Newsletter
April 27, 2017
Use of Debt-Related Derivatives

When used properly, derivatives can be effective for managing interest rates, providing a government financial flexibility and opportunities for interest rate savings, altering the pattern of debt service payments, creating variable rate exposure, or changing variable rate payments to fixed rate and otherwise limit or hedge variable rate payments. However, as we saw during and after the financial crisis of 2008 and 2009, these transactions involve significant risks, especially when related markets such as the variable rate market trigger events in swap contracts. Some governments have experienced collateral calls and involuntary and voluntary termination of their swaps, sometimes at a substantial cost. As a result, governments have significantly cut back on these types of transactions.

GFOA advises state and local government finance officers to exercise extreme caution in the use of derivatives and structured finance products. Governments must fully understand the potential risks and rewards of derivative and structured products before deciding if they should be used. A government would also need the ability (internal staff and external advisors) to determine the fair market price and be aware of the market, legal, accounting, credit and disclosure risks involved. Issuers should also read and understand the most current rating agency guidance regarding the effect of derivatives on ratings before executing a derivatives contract.

For more information, see GFOA’s Use of Debt-Related Derivatives Products advisory, which was recently updated to alert governments to new federal rules that affect the public sector.

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Association News
New Author-Led Lecture
Learn about the Key Role of Cities in Solving Global Issues

Well-designed cities are the key to solving America's great national challenges: environmental degradation, unsustainable consumption, economic stagnation, rising public health costs and decreased social mobility, according to Vishaan Chakrabarti, author of A Country of Cities. In a May 8 webinar, Chakrabarti will argue that if cities invest wisely in future development, they will help usher in a new era of progressive and prosperous stewardship. He will explain how job opportunities and an improved, sustainable environment are possible by intelligently increasing the density of cities and building the transit systems, schools, parks, and other infrastructure to support them.

The webinar will be held May 8 from 2-4 p.m. Eastern.

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Put Your Government on the Cutting Edge of Financial Sustainability

GFOA’s recent research into what it takes for a local government to be truly financially sustainable has uncovered six leadership strategies and eight organizational design principles that lead governments to ongoing financial health. We have also developed a self-assessment technique that will allow local governments to determine the extent to which they exhibit these leadership strategies and institutional design principles.

Now, GFOA is looking for local governments that would like to join with other forward-thinking local government leaders in pilot testing this self-assessment tool at an invitation-only special session at GFOA’s annual conference, May 21-24 in Denver, Colorado, to introduce the financial sustainability framework and the tool. We’ll also discuss what would be involved in participating in the pilot.

If you’re interested in participating in this session—or if you can’t make the annual conference but would like to consider joining the pilot—please e-mail Shayne Kavanagh

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Learn Best Practice Strategies to Help Move Your Organization Ahead

GFOA’s 111th Annual Conference is less than a month away! If you’re not yet registered, there’s still time to sign up! If you’re interested in sending junior staff to participate, take advantage of GFOA’s conference one-day rate on either Monday, May 22, or Tuesday, May 23. Check out this year’s sessions. Register today!

For those already signed up to participate in the Annual Conference, come to Denver early and participate in this year’s preconference seminars on Friday, May 19, and/or Saturday, May 20, at the Colorado Convention Center. Read more and register.

Badges will begin to mail to registered attendees on Friday, May 5. If you have not yet submitted your guests’ names, please send the information to GFOA Badges.

We look forward to seeing you in Denver! If you have any questions about the Annual Conference, contact GFOA.

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Seeking Your Input on SEC Rule 15c2-12

On March 1, 2017, the Securities and Exchange Commission (SEC) proposed amending Exchange Act Rule 15c2-12 to include additional event notices. GFOA has expressed serious concerns about the broad scope and potential unintended consequences of the proposed amendments. The SEC is seeking public comment on the proposed amendments by May 15, 2017. To help GFOA develop the arguments in its formal comment letter to the SEC, and to demonstrate the problems state and local governments face in undertaking such broad action, we would like to share ways in which these amendments could affect your jurisdiction. Please take this short survey and let us know!

SEC Proposed Amendments to Rule 15c2-12
SEC Rule 15c2-12 currently requires bond dealers to review issuers’ official statements before underwriting municipal bonds and to reasonably determine that the issuer has contracted to disclose annual financial and operating information, as well as material event notices, in the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) system. Issuers make those guarantees to the underwriter in the continuing disclosure agreement (CDA). The proposed amendments would add to the list of event notices the issuer agrees to disclose within the CDA, to benefit bond investors and to ensure that they are aware of the entity’s financial standing.

GFOA best practices recommend that issuers disclose bank loans that may be material to outstanding bond holders, but the SEC’s proposal goes much farther than bank loans. The SEC is also asking, in very broad language, for issuers to disclose when they incur “financial difficulties.”

Specifically, the amendments would require governments to disclose information within 10 days of the event in the following situations:

  1. The incurrence and terms of material bank loans; direct purchases of securities by banks and other non-publicly offered debt; leases; guarantees; derivative instruments; and monetary obligations resulting from judicial, administrative, and arbitration proceedings; and
  2. The occurrence of defaults, acceleration and termination events; and modifications of terms or other similar events which reflect financial difficulties (this phrase is not defined by the SEC).
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News Links
White House Releases Principles for Tax Reform Proposal

On April 26, the Trump Administration released the outline for its plan to reform the federal tax code. Although the outline fell short of providing specifics and details, administration officials provided highlights of the plan that included:

  • A 15% rate for large corporations and small businesses.
  • An elimination of the alternative minimum tax, estate tax, and all deductions for individuals except for the mortgage interest and charitable deduction.
  • The repatriation of corporate earnings held overseas at a rate that has yet to be determined.
  • Three individual tax brackets of 10%, 25%, and 35%.

The outline does not include the border adjustment tax proposed by Congressional GOP leaders or any incentives for infrastructure investment. It remains uncertain how Congressional leaders will respond and if any of the components of Trump’s plan will ultimately be included in legislation that Congress will consider.

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States Continue to Rebuild Reserves: Pew Analysis

At the close of fiscal 2016, only 15 states had a bigger cushion in their budgets than they had before the recession, according to the Pew Charitable Trusts. The remaining states could cover fewer days’ worth of operating costs than in fiscal 2007 with their total balances, counting money saved in rainy day reserves plus general fund ending balances, which are the amounts left at the end of the budget year in what functions as a state’s main checking account.

After tax revenue plunged in the recession, states tapped both their savings and ending balances to help plug huge gaps that opened in their budgets. As state revenue has slowly recovered, so have their reserves and balances—largely because most states have made efforts to rebuild their rainy day funds over the past seven years of economic recovery. At least 24 states ended fiscal 2016 with larger rainy day funds as a share of operating costs than before the 2007-09 downturn.

Read More.
Public Pension News Wrap-Up

New Report on the Current State of Public Pension Reporting and What Is Working

Comprehensive and timely reporting and communication has become increasingly important as employees, policy makers, and other stakeholder groups attempt to navigate the changing public pension landscape. A new report from the Center for State and Local Government Excellence examines the reporting practices of 83 of the largest statewide pension plans and offers case studies of five pension systems to answer two central questions: 1) How do major pension systems across the United States communicate financial, benefit, and governance information to their members and other interested parties? and 2) which retirement systems provide examples and lessons learned for how to effectively communicate relevant information?

Key findings include:

  • A majority of systems follow GFOA reporting standards in producing their comprehensive annual financial reports, with nearly half of the sample also developing a plain language annual financial report.
  • Virtually all of the systems develop an actuarial valuation (annually), an experience study (at an average of every five years), and have a funding policy produced by the system and/or established in state statute.
  • Active engagement with key stakeholders is a hallmark of systems with robust communications and reporting initiatives.
  • Leveraging social media and/or establishing advisory committees has helped systems garner detailed feedback from their stakeholders.

To Save Money, CalPERS Considers Changing the Way It Makes Private-Equity Investments

The California Public Employees’ Retirement System (CalPERS) is studying dramatic changes in how it invests in private equity that would slash payments to Wall Street managers,” the Wall Street Journal reported. The system earned 12.3% on its private-equity investments over the last 20 years, but that return was 19.3% before fees and costs to money managers. “The internal review is the latest effort by the CalPERS to re-evaluate its more expensive bets as it wrestles with a cash crunch, a widening funding deficit and declining estimates of future earnings from stocks and bonds,” according to the article.

The pension system is considering options that would allow it to be more involved in selecting and managing its private-equity investments, which is expected to reduce costs. These options include buying a private equity firm or moving private equity investments in-house.

Weaker Fiscal 2015 Investment Returns Widen State Pension Funding Gaps

A worsening fiscal picture for state pension funding in fiscal 2015 was driven largely by weaker investment returns than in the previous year, according to a Pew issue brief. Given the continued volatility in investment returns, state and local policymakers cannot count solely on returns to close the pension funding gap over the long term; they also need to follow funding policies that put them on track to pay down pension debt, the analysis concludes. The gap between the total assets reported by state pension systems across the United States and the benefits promised to workers, now reported as the net pension liability, reached $1.1 trillion in fiscal year 2015, the most recent year for which complete data are available. That represents an increase of 17% from 2014. Although final data for 2016 are not yet available, low returns will also be reflected there, according to Pew. 

Governments Need to Address Succession Planning

Few governments have succession plans in place, but the ones that do are seeing some positive results, according to Governing. In a recent survey, 60% of respondents said they were developing a plan for replacing employees and managers at all levels—but only 11% had a process in place. Some governments have reaped important benefits from implementing succession plans, but doing so “takes support from top leadership, understanding of departments' strategic goals, analysis of workplace needs, a solid sense of the attributes needed for critical positions, and a training and development component that will help employees gather skills way before the day when they may be needed.”

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MSRB Offers Free E-Learning Course for Municipal Bond Issuers

The Municipal Securities Rulemaking Board (MSRB) is offering a free online course to support the educational needs of municipal government professionals who finance public projects with municipal bonds. The course, “Being an Informed Municipal Bond Issuer,” provides engaging lessons to highlight best practices and potential pitfalls in the municipal bond issuance process. The course, part of the MSRB’s growing catalog of interactive, online MuniEdPro courses, was developed with input from senior government finance professionals. Participants assume the role of the issuer in a series of real-world scenarios that illustrate important considerations at various stages of the issuance process, including the roles and responsibilities of key members of the financing team and the disclosure obligations of an issuer. Watch a short video for a look behind the scenes of MuniEdPro.

Register for MuniEdPro here to take the free, 45-minute course. Continuing professional education credit is available. The course also can be integrated into in-house learning management systems.

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Practical Tips Help Improve Employee Engagement

Many organizations accept the importance of employee engagement and do some form of survey to determine where they stand. Many organizations also agree these surveys aren’t particularly helpful. a Magazine provides some suggestions for improving your annual employee survey, including polling everyone (“get a census and not just a sample size”), making the survey shorter (quality over quantity), making sure the questions are relevant and open ended, and, crucially, following up. Other, possibly better, ways to track engagement include interpersonal interaction and short and relevant surveys conducted more often. Regularly monitoring employee engagement pays off in several ways:

  • It gives a good baseline.
  • It leads to improved performance.
  • It helps the organization retain its best employees.
Read More.
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Editor: Marcy Boggs  |  Executive Director/CEO: Jeffrey Esser

The GFOA Newsletter (ISSN 1051-6964) is published weekly by
the Government Finance Officers Association of the United States and Canada.
Correspondence regarding editorial and/or business matters should be sent to
GFOA, 203 N. LaSalle St., Suite 2700, Chicago, IL 60601-1210. Phone - 312/977-9700 FAX - 312/977-4806.


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