Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt (2022)

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35   4.1 Overview After state DOTs and surface transportation agencies have identified a need to issue debt along with developing guiding policies for debt issuance in Phase 1, issuers must prepare indi- vidual transactions. Developing individual transactions involves the following key decisions, which are not necessarily conducted in a linear or sequential order but are determined collec- tively and iteratively by debt practitioners as indicated in Figure 10. The outcome at each decision point will have implications for the remaining decisions to be made. This chapter discusses the key decision-making factors for approaching each of these six decisions, including discussing the different approaches in leveraging outside professionals as well as communicating, coordinating, and discussing the various tools available to practitioners. Differences in the characteristics of surface transportation debt programs will result in differences in approaches, including differences in how debt programs engage with outside professionals, dif- ferences in approaches to coordination and communication within and outside of the relevant agency, and differences in which tools are most effective. Throughout this chapter, the findings from eight case studies provide contextual examples for readers. Central to Phase 2 is the development of relevant debt documents for each issuance. Debt docu- ments, including the official statement, are essential to the debt issuance process since they commu- nicate internal program decision-making to investors and the market. In conclusion, this chapter describes how decisions made at each stage fit within the debt documents, and how debt docu- ments are populated at different times depending on the complexity of an issuer’s debt program. The chapter is organized as follows: • Section 4.2 discusses the relevance of determining the timing and amount of the issuance. • Section 4.3 discusses the importance of determining the type of sale. C H A P T E R 4 Phase 2: Individual Transaction Preparation and Development The Decision Process—Planning for Debt Issuance Marketing and Placement of Individual Transactions Post-Issuance Compliance Strategy Individual Transaction Preparation and Development

36 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt • Section 4.4 explains the importance of confirming the debt approach. • Section 4.5 describes the process of soliciting and utilizing professional support. • Section 4.6 describes the process of selecting and engaging with credit rating agencies. • Section 4.7 summarizes the need for developing relevant debt documents. 4.2 Determining Timing and Amount of the Issuance 4.2.1 Key Decision-Making Factors: Timing and Amount of the Issuance Practitioners issue debt to meet the needs of their surface transporta- tion program, fund capital projects and programs, or both. Therefore, each issuance should be tailored to support the needs of the program to meet the issuer’s established goals. The timing and amount of each issuance should be aligned with the proposed use of debt. Appropriately determining an approach for when to issue and how much to issue is critical to this phase of the issuance and management process. While these two items do not need to be the first decisions made when preparing the transaction, the timing and the amount do set the foundation for other aspects of the issuance, such as what method of sale to utilize and the confirmation of debt approach. Figure 10. Individual transaction preparation and development overview. Key Considerations to Determine the Timing and Amount of an Issuance • State policies & regulations • Revenues • Project needs • Limitations on certain types of debt • Market conditions

Phase 2: Individual Transaction Preparation and Development 37   Determining the timing and amount of the issuance will be greatly inuenced by the out- comes of Phase 1 with respect to determining a debt strategy and conducting market analysis. In Phase 1, practitioners consider how to navigate external factors, such as relevant state regula- tions and state procedures for approving an issuance. For example, certain states have placed restrictions on the types of debt that are eligible to be issued or have placed limitations on the amount of debt that can be issued. Practitioners should again consider these factors in Phase 2, in conjunction with identied project needs, to be compliant with state policies and make certain that individual transactions are meeting stated agency needs. e timing of the issuance is inuenced by the following two important factors: • Availability of proceeds. Practitioners should determine when the proceeds are needed based on project and program schedules. Issuing too soon may generate excess investment earn- ings that must be rebated to the U.S. Treasury. Issuing too late can result in project delays or overburden the cash ow. • Total interest cost. Changing nancial market conditions can impact investor interest in the issuance and have implications for total interest cost, or the actual cost of issuing the debt. Numerous factors can impact market conditions, including domestic and international events, economic indicator releases, nancial trends and news, and others. Practitioners should continue to monitor market conditions in conjunction with their nancial advisors and underwriters to determine when to price the debt. e amount of the issuance will be determined by the available capacity, based on legal or policy limitations, and the project and/or programmatic needs. When determining the issuance amount, practitioners must consider state- and agency-level regulations, such as state debt caps or restrictions, which are oen safeguards established by statute and/or the state treasurer to provide for prudent nancial practices. Generally, two types of analyses can help determine the amount to issue, cash ow modeling and expenditure modeling. Cash ow modeling allows issuers to determine how much debt ser- vice their cash ow can actually service over time. Expenditure modeling compares the expected pace of project expenditures to the spending exception and temporary period deadlines, which are both tax rules for investment of proceeds, to ensure both can be achieved. e approach for determining the timing and amount of an issuance will vary based on the characteristics of the debt program. e case study examples of Ohio (Example 11) and Virginia (Example 12) describe the variation of eective practices based on the structure and character- istics of the debt program. Example 11. Navigating Statewide Debt Limits to Determine the Issuance Amount (Ohio) Ohio’s statewide debt limit establishes overall constraints to the ODOT debt program. ODOT must navigate these constraints when determining the amount of debt issuance. The ODOT Business Plan forecast establishes the planned need for debt in future years. The ODOT debt program communicates this information to the ODOT Division of Planning, which evaluates projects to which to apply the applicable bond funding. The Division of Planning programs these projects in the internal planning module accordingly.

38 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt 4.2.2 Tool: Cash Flow Analyses Case study research identified several valuable tools to support decision-making regarding timing and amount. The Arizona study (Example 13) and the Ohio study (Example 14) depict how the tools vary based on whether issuers adopt a programmatic or project-specific approach to issuance. Many issuers may use a combination of project-specific and programmatic approaches to debt issuance and timing. 4.3 Determining the Method of Sale 4.3.1 Key Decision-Making Factors: Method of Sale When issuing debt, practitioners must consider which method of sale is most likely to achieve the lowest cost of borrowing. Practitioners can elect two primary methods: competitive or negoti- ated. In a competitive sale, underwriting firms submit bids for the bond offering, and the agency selects the firm with the bid with the lowest interest rate.1 The submitted bids must meet the criteria outlined in the issuer’s notice of sale, which outlines the offering’s terms and condi- tions. Other than a statutory requirement, other factors may favor the use of a competitive sale, according to Government Finance Officers Association (GFOA):2 • The rating of the bonds, either credit-enhanced or unenhanced, is at least in the single-A category. • The bonds are general obligation bonds—full-faith and credit obligations of the issuer—or secured by a strong, known, and long-standing revenue stream. • The structure of the bonds does not include innovative or new financing features that require extensive explanation to the bond market. • The issuer is well known and frequently in the market. For a negotiated sale, the issuer selects an underwriter prior to formalizing the terms and condi- tions of the offering. Prior to offering the bonds to potential purchasers, the underwriter and issuer agree on a proposed pricing scale and after the order period closes, both parties review and possibly adjust the pricing. GFOA has identified several factors that may favor the use of a negotiated sale: • The rating of the bonds, either credit-enhanced or unenhanced, is lower than single-A category. • Bond insurance or other credit enhancement is unavailable or not cost-effective. • The structure of the bonds has features such as a pooled bond program, variable rate debt, deferred interest bonds, or other bonds that may be better suited to negotiation. Communication and Coordination To implement the strategy for determining the timing and amount of the issuance, practitioners must often work internally and in some cases with other state agencies. Integral to the success of this stage is coordination and communication. Offices must work together and across departments—such as in the case of Ohio (Example 11)—to determine the amount and timing of issuance. Additionally, in state environments where multiple agencies are involved in the debt issuance and management process—typically the state treasurer’s office—surface transportation debt management staff must communicate the desired timing and amount to other agencies. The details of this process will differ based on the structure and characteristics of the debt program. Virginia is an example of effective communication across the various agencies involved in the debt issuance and management process (Example 12).

Phase 2: Individual Transaction Preparation and Development 39   Example 12. Collaborative Analyses for Project-Specic Decision-Making (Virginia) The division of authority between the Treasury Board, Commonwealth Transportation Board (CTB), and VDOT requires constant coordination and communication between the entities to provide for effective transportation debt issuance and management. Interviews with VDOT and Treasury staff found that the relationship between the Treasury Board and VDOT has been long-standing and collaborative. The two agencies have developed a working rapport with one another to facilitate the process. Frequent communication is key to this successful relationship. Some exemplary coordination points between VDOT and Treasury include the following: • VDOT shares a projected calendar of bond sales with the Treasury each year. • The Treasury debt management team often solicits additional information from VDOT to stay informed about the timing of issuances. • The VDOT team routinely meets with the Treasury debt management team and the Treasury Board when issuances are being prepared to agree upon the details of the issuance. • Communications between VDOT staff and Treasury staff is often more frequent during the legislative session as statewide agendas are being set and relevant legislation is under consideration. VDOT and the Treasury use the same financial advisors to facilitate continuity and understanding for such complex timing and sizing decisions. • e issuer desires to target underwriting participation to include disadvantaged business enterprises or local rms. • Other factors that the issuer, in consultation with its municipal advisor, believes favor the use of a negotiated sale process. Since GARVEEs are subject to Congressional politics associated with approval of the annual federal budget and federal-aid program extensions, these bonds are oen sold through a nego- tiated sale. is process allows the issuer to select an underwriter with experience in selling GARVEE transactions and provides the ability to educate investors.

40 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt Example 13. Pro Forma Issue Cash Flow (Arizona) ADOT has developed an Excel-based pro forma model in which the expenditures of the project, or mix of projects, are modeled to make certain that temporary period and spending exception deadlines will be met. Financial staff meets with construction engineers to identify projects in the capital program with useful asset lives that are appropriate for the term of the issue. Project budgets and schedules are confirmed and cash burn rates are estimated for each project. The monthly project expenditures for each project are entered into the model based on expected start dates, along with an estimate of investment earnings over the life of the proceeds. The resulting net expenditure amounts are then compared to the tax deadlines as shown in the spending exception graph below. If the tax deadlines are not achieved, the project mix may be changed or the expected timing or amount of the issue may be adjusted. To achieve deadlines with a high degree of certainty, ADOT: • Funds multiple projects with an issue to facilitate moving the funds to faster burning projects if one slows down. • Tracks project progress and actual spending monthly and funds additional projects from the issue if problems are encountered in the field which will result in delays. • Establishes the proceeds as one of the first spending priorities in the accounting system if possible, before both federal-aid and state funds. • Executes a Declaration of Intent for each issue, which allows it to be reimbursed for expenditures that occur within a certain time frame in advance of the issue. Once the model demonstrates the project mix and timing of the issuance will combine to meet the tax deadlines, the model is archived to serve as validation of ADOT’s “reasonable expectations” for the issuance.

Phase 2: Individual Transaction Preparation and Development 41   Example 14. Collaborative Analyses for Project-Specic Decision-Making (Ohio) ODOT maintains a web-based cash forecasting tool, which was created internally by the ODOT information technology department. The tool is used to determine the timing and amount of debt issuances for the GARVEE program and highway capital improvement program. The purpose of the tool is to forecast project expenditures and estimate when bond issuances need to take place and how much debt needs to be issued to meet the forecasted project needs. The tool categorizes historical spending data on similar projects based on a common set of criteria to forecast future debt needs. ODOT then requests the Treasurer to prepare issuances based on the projected debt financing needs. Additionally, ODOT shares a summary of the outputs from the cash forecasting tool with the Treasurer, typically in conjunction with spend-down requirements. Table 3 describes the advantages and disadvantages of each sale type. To determine the method of sale for an issuance, practitioners should consider the following factors: • Advantages and disadvantages of the two methods of sale, • Issuer’s overall credit standing, • Wider market trends, • Type of debt vehicle, • Size of the transaction, and • Special circumstances of structure that require greater investor dialogue. For instance, a negotiated sale might be advantageous for an issuer with weaker credit ratings or when new credit is being sold or markets are more volatile.3 Additionally, dierent types of DESCRIPTION ADVANTAGES DISADVANTAGES C O M PE TI TI VE Underwriting firms submit bids for the bond offering and the agency generally selects the firm with the bid with the lowest interest rate. The issuer can secure a low interest rate. Sales historically entail lower underwriter fees. The issuer has less flexibility in terms of the structure of the sale and the timing. The issuer may have less control in selecting the underwriter. N EG O TI A TE D The issuer selects an underwriter before formalizing the terms and conditions of the offering. In advance of the sale, the issuer and the underwriter negotiate the terms of the sale and the price. Underwriters have greater incentives to participate in presale marketing activities, which can attract a wider array of investors.. More flexibility in the sale to meet investor needs. The issuer has greater flexibility to select an underwriter. Timing/flexibility to move the issue date based on market conditions. The issuer must dedicate more time and resources to stay informed about the market conditions, to provide for favorable pricing. May have a higher cost of issuance. Table 3. Overview of competitive and negotiated sales.

42 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt debt, such as a general obligation bond, have different security structures, which have implications for the credit rating and overall attractiveness to investors. Generally, the method of sale should maximize the value of the issuance for the debt program. The decision process for determining the method of sale will differ based on the frequency of issuances and the number of issuance-dependent decisions. For example, a program that issues frequently and has established policies regarding the sale method will generally apply these policies uniformly and may not need to determine the method of sale for each issuance. Alternatively, programs with different characteristics must evaluate each issuance and deter- mine the strategy for method of sale based on the structure, timing, amount, and type of debt. The decision process for determining the method of sale will vary based on many considerations, including legal, policy, market condi- tions, and credit rating factors. However, there are three primary deci- sion factors, all of which can be utilized simultaneously, that can be considered at this stage in the debt issuance process: • Evaluate historical issuances to determine whether certain types of sales have been more advantageous than others for similar debt vehi- cles in the past for the program. • Review available market information, including assessing recent issuances by peer agencies to determine how these issuances have fared in the market and which sales have been most favorable. • Rely on internal or external experts to help guide decision-making. Outside professionals such as FAs can evaluate market conditions, past issuances, and peer issuances to provide an informed position about which method of sale to elect, which may also be informed by the timing of the issuance, the type of debt being issued, the amount of the issuance, and the program’s credit rating. Each of these factors could contribute to determining the approach for method of sale. An example of how Virginia determined which method to use for the issuance of GARVEEs can be found in Example 15. Several market research tools are available to practitioners to inform the decision process for method of sale. These resources include the MSRB’s EMMA webpage—official statements, market trends—analysis of past sales, and research conducted by the FA. EMMA provides open- source information about all prior bond sales and can serve as a wealth of information for debt finance practitioners. By leveraging the information on EMMA, practitioners can readily assess how bond transactions are faring in the market and research if there have been any changes in various yield curves and indices. 4.4 Confirming the Debt Approach 4.4.1 Key Decision-Making Factors: Debt Approach The debt approach comprises the type of debt, the revenue pledge, the interest rate structure (fixed or variable), and the tax status (tax-exempt or taxable). The type of debt vehicle and the type of security are often closely linked, such that choosing a debt vehicle also means electing the security. The type of debt should be aligned with the project or program that the debt will be financing. Table 4 provides an overview of how certain types of debt are traditionally utilized on a project-driven or program-driven basis. With respect to revenue pledges, while the dis- tinction between project financing and programmatic financing is typical, revenue pledges can Additional Resources to Inform Decision-Making about Type of Sale GFOA has developed a group of five best practices related to the sale of bonds, available on the GFOA website (https://www.gfoa.org): • Selecting and Managing the Method of Sale of Municipal Bonds • Selecting and Managing the Municipal Advisors • Selecting Bond Counsel • Selecting Underwriters for Negotiated Bond Sales • Pricing Bonds in a Negotiated Sale

Phase 2: Individual Transaction Preparation and Development 43   oen be used for both. Additionally, it is important for practitioners to consider and to monitor the revenue pledge, or revenues, that will be utilized to pay the debt service. e availability of these revenues and the assurance that they will continue to be available into the future will have implications for the transaction’s credit rating, and also potentially hinder the program’s ability to pay for debt service and realize the project or sustain the program that the debt was meant to nance. When developing policies that govern the use of alternative debt structures, state DOT prac- titioners should consider the level of interest rate risk the state DOT is willing to assume, the purpose of the bonds, and what debt structures will achieve short-term and long-term capital needs. Many states limit the amount of variable rate debt that can be used in order to minimize nancial exposure. For example, for ADOT, a maximum interest rate is established for the Example 15. Method of Sale and GARVEEs (Virginia) The default approach for VDOT is to issue debt competitively. Based on interviews with staff, using competitive sale has been viewed as an effective and appropriate approach, particularly given the Commonwealth’s strong credit rating. However, the establishment of Virginia’s GARVEE program in 2012 introduced an opportunity to consider the pros and cons of negotiated sales. At the time, the VDOT FA advised that GARVEEs are riskier for investors than state-backed debt, since there is uncertainty around the Highway Trust Fund reimbursements to the states, which in turn fund the debt service payments. GARVEEs are subject to the issuer’s performance under the federal surface transportation program and the program is subject to reauthorization. A negotiated sale allows an underwriter to adequately respond to the investors’ concerns and hopefully secure the most cost-effective pricing for the bonds. This has been VDOT’s approach to GARVEEs over the past several years. However, VDOT has recently reconsidered this programmatic approach and opted to issue its November 2018 GARVEEs on a competitive basis since the issuance is smaller than most VDOT issuances (less than $100 million) and VDOT assessed that it was an appropriate time to use this method of sale. PROJECT FINANCING PROGRAMMATIC FINANCING TY PE S O F D EB T Project revenue bonds Transportation Infrastructure Finance and Innovation Act Loans Private Activity Bonds Grant Anticipation Revenue Bonds Consolidated Revenue Bonds General Obligation Bonds Transportation Infrastructure Finance and Innovation Act Loans PL ED G E * Tolls Fares Other (e.g., facility charges) General revenues of the state or municipality Sales tax Excise tax Fuel tax Congestion charge revenues State & local contributions Other dedicated statewide fees Federal grant funds * These revenue-pledged sources often support project financing or programmatic financing as shown, but each is able to provide both project and programmatic financing. Table 4. Types of debt and revenue pledge.

44 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt variable rate bonds that are to be issued.4 In contrast, ODOT uses variable rate debt and interest rate swaps to manage risk.5 Surface transportation debt programs may establish the debt approach for issuing in Phase 1 or in Phase 2. Programs that issue frequently and have few issuance-specic decisions, such as MTA and PTC, establish the debt approach in Phase 1, arming the type of debt vehicle, the security, the revenues, and the debt structure. Programs that make more issuance-specic decisions, such as CDOT and VDOT, will likely need to conrm the debt approach, or at least aspects of it during Phase 2. Table 5 highlights these dierences between New York MTA and CDOT. e decision process for determining the debt approach strategy greatly varies across pro- grams. Eective decisions, however, are typically based on ecient internal communication, internal research on historical issuances, and market research to determine the appropriate debt type, security, and debt structure. e Massachusetts DOT (MassDOT) example (see Example 16) oers insights into how the agency determines the structure of each upcoming refunding. e Colorado High Performance Transportation Enterprise (HPTE) example (see Example 17) provides insights into determining NY MTA Large & Frequent Issuer COLORADO Small & Infrequent Issuer MTA is a frequent issuer of debt, using primarily fixed-rate debt negotiated sales. However, MTA has recently opted to issue more competitive deals to streamline issuances, since these do not require the tate o ptroller’s approval. Additionally, MTA utilizes debt-financing mechanisms for overall program funding, rather than project- specific funding. MTA’s progra atic de t approach is determined in Phase 1of the debt issuance and management process. Given that Colorado has unique requirements with respect to debt issuance and management because of the limitations set by the TABOR, CDOT and HPTE almost exclusively use alternative debt structures. Outside of revenue-backed bonds, CDOT and HPTE - utilize non-traditional debt structures to meet the needs of the state’s transportation progra . T and HPTE determine on an issuance-by-issuance basis which structures to use to meet project goals and leverage cost-effective financing. Table 5. Comparison of conrmation of debt approach. Example 16. Leveraging Financial Advisors to Determine Debt Approach (Massachusetts) Prior to confirming their debt approach, MassDOT must consider how to structure refundings to optimize the financial benefit of the issuance. MassDOT leverages the expertise of its external FA to help evaluate existing debt and to develop a refunding structure that will allow the agency to reduce its overall obligation. For example, MassDOT utilized advice from its FA to structure a transaction of $140 million, which converted the debt to a fixed-rate obligation and reduced the financial burden to MassDOT and the Commonwealth. There is no one way that MassDOT structures refundings, but rather the debt management team and their FA work collaboratively to effectively structure the issuance. To issue the refunding, MassDOT is obligated to receive approval from the MassDOT board and the State Finance and Governance Board prior to issuing. To keep the relevant parties aware of upcoming refundings, the MassDOT debt management team establishes a transparent timeline for each refunding, holds regular group conference calls leading up to the issuance, and presents to the MassDOT board several times.

Phase 2: Individual Transaction Preparation and Development 45   Example 17. Electing Alternative Debt Structures (Colorado) When electing to utilize alternative debt structures, HPTE leverages agency policies and collaborates closely with external partners. With respect to P3s, HPTE has established guidelines and procedures in the P3 Management Manual for how to proceed with TIFIA loans and PABs when HPTE is acting as a conduit bond issuer, meaning that HPTE is responsible for issuing the debt and a third party uses the funds generated from the issuance and is responsible for debt service. For PABs, it is the responsibility of the private partner to provide a financial model for HPTE to evaluate that the bond issue will provide the best value for the residents of Colorado. For TIFIA loans held by private partners, the HPTE team works closely with USDOT TIFIA staff in the Build America Bureau to evaluate the eligibility of the project. The HPTE staff will also facilitate discussions between the Build America Bureau TIFIA credit program staff to answer questions about the loans, acting as an intermediary between the Build America Bureau TIFIA credit program staff and the private partner. Example 18. Determining the Type of Debt (Arizona) ADOT currently has the option of using three main types of debt: HURF, RARF, and GANs. The determination of the specific type of debt for a particular issuance is based on several factors, which can be used as a guide to other issuers during this decision-making process: • The amount of funding needed to meet the needs identified in the 5-year program. • The current coverage, additional bond tests (ABTs) and available capacity under each of the three credits. • The geographic location of the projects, since the RARF credit can only be used in Maricopa County. • The perception of the financial markets. For instance, a GANs issuance may be more expensive if the federal aid highway program is closer to the end of its long-term program authorization. • Desired term of the debt. Both the HURF and the RARF credits have varying terms in statute, whereas the term for a GANs issuance is generally dictated by the appetite of the financial markets. which type of alternative debt structure to elect for an issuance. Arizona’s decision process (see Example 18) provides high-level insights into what to consider when determining the type of debt vehicle to utilize. 4.4.2 Tool: Types of Debt Types of debt available for surface transportation can be categorized by (1) the type of security and (2) the type of mechanism. e type of debt may be determined during the rst phase of the debt management process, depending on the program; and Chapter 3 describes each type. When determining and nalizing the type of debt, practitioners should consider the debt vehicles characteristics, including the objectives of the vehicle, the eligibility, and the advantages and disadvantages. Figure 11 is an example of key debt vehicle characteris- tics for toll-backed debt. Appendix B of this guidebook provides similar tables for the other types of debt.

46 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt 4.4.3 Developing the Preliminary Ofcial Statement e timing for completing the type of debt and type of revenues sections of issuance-specic documents will vary based on the number of issuance-specic decisions a program must make. As stated above, issuers who have few issuance-specic decisions, such as MTA and PTC, will complete this part of the debt document in Phase 1. However, issuers with more issuance-specic decisions will complete these sections of the debt document during Phase 2. 4.5 Soliciting and Utilizing Professional Support 4.5.1 Key Decision-Making Factors: Professional Support Support from outside professionals is critical to eective debt management and can be valu- able at all phases of the debt issuance and management process. Outside professionals include, but are not limited to, FAs, special disclosure counsel, and bond counsel. In Phase 2, outside professionals can be leveraged to inform a program’s strategy for key decision-points, such as when to issue the bonds, what amount to issue, and which method of sale to select. How outside professionals are leveraged and which decision-points they are solicited to inform will vary depending on the program, particularly how frequently the program issues debts, how many types of debt are issued, and the number of issuance-specic decision-points. Figure 12 provides an overview of the types of professional support available to debt management practitioners, Figure 11. Overview of general obligation bonds.

Phase 2: Individual Transaction Preparation and Development 47   noting that technical support may vary widely based on the type of the project, and Table 6 provides a brief description of each. Surface transportation debt practitioners may choose to solicit outside professionals to sup- port particular issuances or a certain debt series within their program, or to provide support to a program in general. Additionally, depending on the program, the agency responsible to solicit outside professionals may be a central state body such as the treasurer’s office, rather than the Figure 12. Types of professional support. ROLE DESCRIPTION Financial Advisor Employed by the issuer to provide financial structuring, credit and market condition guidance on the bond issuance. Bond Counsel Law firm or attorney retained to provide legal opinion related to bond issuance and management. Disclosure Counsel A firm or attorney retained by the issuer to prepare official statements and continuing disclosure agreements, and provide advice about issuance and disclosure. Underwriters Dealers who purchase securities from state and local issuers. Underwriters Counsel Law firm or attorney who represents the underwriter’s interests, and reviews key bond issuance documents including the bond resolution and the official statement. Trustee A financial institution that enforces the terms of the bond contract on behalf of the bond holders and may act as a paying agent (transferring payments from the issuer to the bondholders) and as an escrow agent for refundings. Arbitrage Compliance Specialist A firm that provides advice on and performs arbitrage rebate calculations and reporting. Verification Agent An firm engaged in verifying the accuracy of the arithmetical computations that establish the adequacy of the deposit of moneys and securities, and the payments of the principal of and interest on such securities, to pay when due the principal of and interest and premium on refunded notes, bonds and other indebtedness. Tax Counsel Law firm or attorney retained to provide legal opinion related to tax compliance. Sources: Municipal Securities Rulemaking Board. “Glossary of Municipal Securities Terms.” http://www.msrb. org/glossary.aspx; Law Insider. “Definition of Verification Agent.” https://www.lawinsider.com/dictionary/ verification-agent Table 6. Description of financial and legal outside professionals.

48 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt surface transportation agency itself. In that case, the responsible state agency may set the param- eters for how outside professionals are procured (e.g., through a request for proposal process). e case study research captured the various ways practitioners can eectively utilize out- side professionals in Phase 2. Surface transportation agencies have adopted economical and eective ways to procure expertise across the various agencies involved in preparing a debt issuance. e CDOT example (see Example 19) highlights the ecacy of securing the same FA for two agencies. 4.5.2 Tool: Procurement Materials and Contracts To solicit outside professionals, debt practitioners rely on procurement materials and con- tracts. e specic type of materials and the details of the contracts will vary based on the pro- gram and the requirements of the agencies that provide oversight to the surface transportation agency. To leverage outside professionals once retained, debt practitioners rely on research conducted by the experts and their experience to prepare individual transactions. 4.5.3 Developing the Preliminary Ofcial Statement With respect to developing the preliminary ocial statement, outside professionals, such as legal counsel, may be utilized to help complete the ocial statement, bond indenture, and other relevant documents. Additionally, outside professionals will be featured in the documents themselves, and the timing of soliciting outside professionals and the reason for selecting out- side professionals (e.g., to advise on a debt program) will vary based on the number of issuance- specic decisions a program makes and the complexity of the program’s debt portfolio. 4.6 Selecting and Engaging with Credit Rating Agencies 4.6.1 Key Decision-Making Factors: Credit Rating Agencies A credit rating is an opinion about credit risk and speaks to the credit quality of an issuer, such as a state or city government, or an individual debt issue, such as a municipal bond.6 CRAs provide credit ratings to issuers. e credit rating is typically expressed as a letter grade that ranges, for example, from “AAA” to “D” and indicates the risk of default. A credit rating measures the probability of the timely principal and interest payments on debt issues and is not a statement of fact or recommendation to purchase, hold, or sell a security, according to the MSRB.7 Credit ratings can provide material benets to an issuer, including attracting Example 19. Coordinating Professional Support Across Agencies (Colorado) With respect to FAs, CDOT manages a single contract typically lasting for a 5-year timeframe. Usually, general FAs are secured, but CDOT sometimes issues a new task order to get an FA with relevant expertise. CDOT staff said that they rely heavily on their FA, since they have limited staff to support debt management. For example, the CDOT FA is responsible for monitoring for refunding and refinancing opportunities. HPTE and CBE manage specific task orders for the FA held on the contract maintained by CDOT. Currently, CDOT, HPTE, and CBE all maintain the same FA. Given that CDOT and HPTE—and at times CBE—work together to identify the necessary financing for transportation projects, it has been helpful for them to have the same FA to facilitate continuity and understanding.

Phase 2: Individual Transaction Preparation and Development 49   institutional investors that are restricted from purchasing unrated debt or debt below a certain rating threshold8 and reducing the interest rate that must be paid on bonds.9 Each CRA has a slightly dierent approach to measuring creditworthiness and has developed rating methodologies for dierent types of debt issues. CRAs are required by the SEC—which oversees credit agencies that are registered with the SEC as nationally recognized statistical rating organizations—to publish their rating methodologies, which can be found on the respec- tive websites. While many of the rating methodologies are similar, the weightings of specic criteria and the rating scale dier across the CRAs. Additionally, there are dierences in how CRAs rate debt, and methodologies vary by type of security (e.g., GARVEEs versus motor fuel tax bonds). e nationally recognized statistical rating organizations for the municipal market include DBRS Morningstar, Moody’s, Standard & Poor’s (S&P), Fitch Ratings, and Kroll.10 Securities can receive a rating at the time of issuance or at any time over the life of the secu- rity, and such rating may be changed or withdrawn at any time. ere are no federal require- ments for municipal securities to be rated or, if a security has received a rating, to be rated by all rating agencies.11 However, there may be state law or policy level requirements for ratings. For example, TIFIA requires that the senior debt to TIFIA be investment grade by one CRA. In evaluating the need for a credit rating, GFOA recommends that issuers consider six primary factors: cost of credit rating, administrative burden, information required, size of issuance, frequency of issuance, and method of sale.12 Issuers should consult their nancing team— particularly their FA and their underwriters (if applicable)—to develop a credit rating strategy that considers the potential economic benets and costs of obtaining one or more credit ratings for a particular debt issue. Issuers should also consider the shiing landscape in approaches to transportation agency credit ratings. e enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 placed more stringent restrictions on the nancial sector in the wake of the Great Recession. e act imposed reforms on CRAs and provided authority to the SEC to impose sanctions on CRAs for inaccurate credit ratings. As a result, ratings methodologies are now more transparent and quantitatively based. When trying to maximize the credit rating of an issuance, surface transportation debt practi- tioners should also consider how CRA’s debt assessment criteria serve to reect the structure of the bonds. Certain CRA criteria may be better suited to emphasize certain characteristics of bond issuance, such as the security structure and the particular debt vehicle. In addition, some CRAs may publish more-thorough reports about the bonds they are rating than other CRAs, which some investors appreciate. e example of Ohio (see Example 20) highlights how pro- grams can eectively mold and adapt to CRA criteria, and Table 7 emphasizes the dierences between issuers in engaging with CRAs. Finally, debt practitioners identify and adopt dierent approaches with respect to the number of ratings to solicit. Certain programs have maintained consistent relationships with the same Example 20. Aligning Credit Ratings with Credit Structure (Ohio) Historically, the State of Ohio—through the Office of Budget and Management (OBM)—has solicited ratings from the same credit rating agencies. Recently, however, OBM reevaluated and decided that the highway capital improvement bond’s double-barrel pledge was not being appropriately captured by the ratings agencies. In response, OBM chose to solicit an additional rating, by a CRA that utilizes a different methodology, to capture this aspect of the bonds and provide more accurate information to investors.

50 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt CRAs for years and have continued to sustain the practice of soliciting credit ratings from the three major CRAs—Moody’s, S&P, and Fitch. However, there is not a prescribed number of ratings that practitioners must solicit, and some programs have opted to reduce the number of credit ratings they solicit to reduce costs. is does not include TIFIA, however, which does require a minimum number of credit ratings for eligibility. e Arizona example (see Example 21) illustrates this decision-making process. 4.6.2 Tool: Presentations for Credit Rating Agencies A critical tool for communicating the details of an issuance to CRAs is the presentation. Presentations are a concise way to develop a narrative about how the issuance will provide value to the debt program and how the issuance ts within the program’s overall debt portfolio. Figure 13 is an outline of a CRA presentation from one of the case studies, highlighting what contents may be included in such a presentation. 4.6.3 Developing the Preliminary Ofcial Statement e number of credit ratings solicited and the CRAs utilized may vary based on the complexity of the program, which will be reected in the ocial statement. Credit ratings are a signal for investors about the risk and nancial benets of the issuance, and practitioners must be mindful PTC Large and Frequent Issuer COLORADO Small and Infrequent Issuer  Regular communication  One-on-one meetings with agencies at least once per year  Regularly disclose up-to-date financial information to CRAs  Communication usually primarily occurs before an issuance  Provide project/issuance-specific presentations to CRAs at this time  Dedicate time prior to an issuance to educate the CRAs on the project to provide for best credit rating Table 7. Differences in engaging with credit rating agencies. Example 21. Determining the Number of Credit Rating Agencies and Developing Ratings Call Package (Arizona) Over the years, ADOT has determined, with support from its FA team, that ratings from two of the major rating agencies are enough to meet investors’ needs. In most cases, ADOT has found that soliciting a third rating is not worthwhile. However, when the first GANs issuance occurred in 2000, ADOT also sought a third rating, in addition to their standard two, to provide the financial markets greater comfort with the new credit. ADOT has developed specific written procedures for assembling a ratings call package for each new issuance. These procedures support an updated package that provides a standardized and comprehensive view of ADOT’s credits. The procedures recognize that many existing files are needed to comprise a reference book that the CFO can reference in preparation for rating agency calls. This task, described in step-by-step detail in procedures, is the responsibility of the Debt Management and Compliance Administrator and is completed as soon as possible after an issuance calendar has been established and ratings calls have been scheduled.

Phase 2: Individual Transaction Preparation and Development 51   Communication and Coordination The purpose of engaging with CRAs is to maximize the creditworthiness of the issuance. To effectively engage with CRAs, debt practitioners must employ methods of engagement and communication, which will vary by program. Practitioners must communicate the details of each upcoming issuance in order for CRAs to make a determination of the creditworthiness, which is also contingent on the agency’s credit history and the credit history of the state that agency is located within. Universally, debt programs must share similar information about the issuance and the issuer, including information on governance and management practices and overall program information, for CRAs to make a determination of the creditworthiness, including the timing, type of debt, method of sale, overall benefits of the sale, pricing, and information about historical issuances in the debt series. Methods of communicating with CRAs range from robust and frequent communication, which is often adopted by frequent issuers and programs that make few issuance-specific decisions, to providing a presentation to CRAs in advance of an upcoming issuance, often employed by infrequent issuers. Figure 15 provides a comparison of two different strategies for engaging with CRAs. PTC is an example of a frequent issuer and, given how frequently the program is in the market, the agency’s staff maintains consistent contact with CRAs. Figure 13. Outline of presentation of credit rating agencies.

52 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt of what credit ratings communicate to investors on official statements. Additionally, the difference in the number of credit ratings solicited and the time when the ratings are solicited in the debt issuance process are based on the policies, procedures, and characteristics of the debt program. 4.7 Developing Relevant Debt Documents 4.7.1 Key Debt Documents In addition to the official statement, there are a variety of documents that must be prepared throughout the life of a bond to properly issue and to meet disclosure requirements. Table 8 defines the key documents. Pursuant to the continuing disclosure agreement, which is executed at closing between the issuer and the underwriter, the issuer must also prepare and file certain financial information at least annually. Such continuing disclosure documents must be filed on EMMA. Created by the MSRB, EMMA replaced the former system of multiple Nationally Recognized Municipal Securities Information Repositories and is the single source for free online access to prelimi- nary and official statements, presale documents, material events notices and other continuing disclosure documents. Submission of documents to EMMA can be made only by underwriters, issuers, or their designated agents. In addition to the documents included in EMMA, issuers are responsible for developing cer- tain foundational documents to govern their debt transaction, including bond indentures and resolutions, supplemental indentures and resolutions, and authorizing documents. The overarching purpose of developing and sharing relevant debt documents is to communicate the decisions made throughout Phase 2 to investors to build the case for the value of the bond issuance. The fact that the internal decisions will be communicated to investors should be consid- ered throughout the decision-making process to develop individual transactions. Figure 14 provides DOCUMENT DESCRIPTION Preliminary official statement The statement that includes all the necessary information for an investor to evaluate the issuance but may not include the final terms of the transaction, including the individual principal amounts of each maturity and the interest rate on the bonds. Official statement The statement that includes all the information for an investor to evaluate credit and has the finalized terms of the transaction, including the individual principal amounts of each maturity and the interest rates of the bonds. Presale documents Marketing documents, investor marketing or road-show presentations, and the notice of sale. Relevant amendments Technical corrections to an indenture, the inclusion of additional security provisions that enhance the credit quality of the bonds, or an expansion of the rights of the issuer, subject to bondholder consent. Master bond indentures & resolutions The documents that establish the responsibilities and rights of the issuer and the bondholder and establish the terms of the transaction, including the revenue pledge of funds, the maturity date, etc. Supplemental indentures & resolutions Contain the same information as the master bond indenture or resolution, but for a specific series of bonds. Authorizing documents from a state transportation board or state treasurer Formal documents that authorize the issuance of bonds. Certain states will authorize bond issuance on a blanket basis or on a deal-by-deal basis. Table 8. Definitions of debt documents.

Phase 2: Individual Transaction Preparation and Development 53   a graphic representation of the process for creating debt documents for individual transactions. Some issuers have developed their own investor website to communicate with their investors. e tools for developing eective debt documents depend on the type of document and existing information. In many cases, debt documents used for previous, similar issuances can be used as models for developing new debt documents. For example, NY MTA has developed an ocial statement template to streamline this process, as highlighted in Example 22. Additionally, existing resources that provide details about the issuer’s specic policies, nancial status, and debt pro- gram characteristics may also be mined for relevant information to include in debt documents. It is critical that all nal debt documents contain current and accurate information, so key members of the debt issuance team must conduct various reviews and fact-checks throughout the issuance preparation process. e purpose of developing a preliminary ocial statement is to communicate to the market and potential investors the attractiveness of the issuance. e preliminary ocial statement documents all aspects of the issuance, including but not limited to, the purpose of the issuance, the security, the amount of the issuance, and interest rates and yields. Preliminary ocial state- ments, and ultimately the nalized ocial statements, also help to communicate the status of the debt program and to discuss any upcoming changes to the program, if and when they arise. When and how documents are nalized is contingent on whether the program has few issuance-specic decisions or whether the program has many issuance-specic decisions. All issuers need to determine the timing of the issuance; however, some well-established programs may have cyclical issuance strategies (e.g., debt is issued aer a regular interval, such as every 6 months), while other programs might issue only when it is deemed needed for a project and the timing is less structured. All issuers need to determine the amount of the issuance at this stage; however, some issuers—particularly those with strict issuance limitations or with Example 22. Ofcial Statement Templates (NY MTA) MTA has streamlined official statement updates by utilizing a base official statement template for each issuance, limiting the amount of language necessary for updating. Updates vary, but the official statement base is always the same. This streamlining is helpful in saving time and effort, especially with the number of debt issues and continuing disclosure requirements each year. Figure 14. Considerations of debt documents.

54 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt well-established programs that issue debt for programmatic purposes—may know the amount of the issuance in Phase 1, while other issuers may decide on a project-by-project basis. Ultimately, the debt documents themselves can serve as highly effective tools for communi- cating the characteristics of the specific bond purchase opportunity to the market. Debt docu- ments tend to be structured in a way that is consistent with those of other municipal issuers and relatively easy to navigate by prospective investors. The key summary information is typi- cally included upfront and more detailed elements are organized in a logical fashion. Figure 15 provides an example of an official statement cover page, and Figure 16 provides an example of Figure 15. Cover page of official statement.

Phase 2: Individual Transaction Preparation and Development 55   Figure 16. Summary page of ofcial statement. an ocial statement summary page, both of which highlight where the information decided throughout Phase 2 ts within these documents. 4.7.2 Leveraging Outside Professionals As previously discussed, an eective approach for developing relevant debt documents is to leverage expertise from outside professionals solicited to support the development of the transaction. Outside professionals, such as bond counsel and FAs, provide insights to debt practitioners about what information to include and how to include it in the document. For large programs that issue frequently, much of the material in debt documents will be pre- determined for each issuance, even though these programs can still benet from outside pro- fessionals’ expertise. Programs that issue infrequently and do not maintain a large internal

56 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt staff should leverage the expertise from outside professionals to develop debt documents to communicate to investors. 4.8 Summary This chapter has described effective practices for Phase 2, individual transaction prepara- tion and development. The purpose of this chapter was to provide descriptive information and active examples about each of the six key decisions practitioners need to finalize in this phase, including • Determining timing and amount of the issuance, • Determining the method of sale, • Confirming the debt approach, • Soliciting and utilizing professional support, • Selecting and engaging with CRAs, and • Developing relevant debt documents. Phase 2 lays the foundation for Phase 3, marketing and placement of individual transactions, which is discussed in the following chapter. 4.9 Endnotes 1. Governance Finance Officers Association. 1994. “A Practitioner’s Guide to Effective Debt Management: Competitive v. Negotiated, How to Choose the Method of Sale for Tax-Exempt Bonds.” Chicago, Illinois. http://www.gfoa.org/sites/default/files/APractitionersGuideCompetitiveVsNegotiated.pdf 2. Government Finance Officers Association. “Selecting and Managing the Method of Sale Bonds.” 2018. https://www.gfoa.org/materials/selecting-and-managing-the-method-of-sale-of-bonds 3. WM Financial Strategies. “Bond Sale Methods (Competitive vs. Negotiated Bond Sales).” http://www. munibondadvisor.com/SaleChoice.htm 4. Arizona State Transportation Board Policies, updated December 18, 2015. https://azdot.gov/sites/default/ files/2019/05/nondiscrimination-complaint-system-policy.pdf 5. Ohio Transportation Bond Programs. “Financial Documents.” https://www.ohiotreasurerbonds.com/ transportation/financial-documents/i654 6. Standard & Poor’s Rating Services. 2014. “Guide to Credit Rating Essentials: What Are Credit Ratings and How Do They Work?” https://www.spratings.com/documents/20184/760102/SPRS_Understanding- Ratings_GRE.pdf/298e606f-ce5b-4ece-9076-66810cd9b6aa 7. Municipal Securities Rulemaking Board. “Investment Risk.” http://www.msrb.org/EducationCenter/ Municipal-Market/About/Financial/Investment-Risk.aspx 8. Government Finance Officers Association. “Using Credit Rating Agencies.” September 2015. http://www. gfoa.org/materials/using-credit-rating-agencies 9. Center for Innovative Finance Support. “Financial Structuring and Assessment for Public-Private Partnerships: A Primer.” December 2013. https://www.fhwa.dot.gov/ipd/p3/toolkit/publications/primers/financial_ structuring_and_assessment/ch_4.aspx 10. U.S. Securities and Exchange Commission. “Current NRSROs.” https://www.sec.gov/ocr/ocr-current- nrsros.html 11. Municipal Securities Rulemaking Board, Education Center. “Investment Risk.” http://www.msrb.org/ EducationCenter/Municipal-Market/About/Financial/Investment-Risk.aspx 12. Government Finance Officers Association. “Using Credit Rating Agencies.” September 2015. http://www. gfoa.org/materials/using-credit-rating-agencies