GFOA of New Jersey

REPORT NEWSLETTER

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APRIL 2008 Issue

Featured Articles

EDITORIAL
Navigating the Road to Change A Clear Look at State Health Benefit Program Changes

PRESIDENT'S CORNER

By Raymond N. Carnevale, President Government Finance Officers Association

In this issue you will find many important notices regarding the Government Finance Officers Association. First, there is an application for Membership for the Year 2008. For those of you that have not paid your membership; we would ask that you become a member before May 31st, so that you will be listed in our new Membership Directory.
Membership in the GFOA offers, information and skill-building opportunities, education programs, peer contact, professional recog-nition and benefits of membership.

The Executive Board keeps the mem-bership informed on all financial matters and regulations that are paramount to your fiscal responsibilities. Members also have access to our web site which has a variety of informational links and is updated on a daily bases.
GFOA members receive special discounts and benefits when they take advantage of the associations many resources to enhance their professional skills and keep up to date on develop-ments in their field. The Fall Conference committee is currently in the process of putting together the program for this year’s con-ference.

Keep your eyes open for more infor-mation on the Conference appearing in the mail, on our Web Site at GFOANJ.org and in the next issue of Report.
Also in this issue you will find an application to participate in the GFOA Annual Golf Outing being held on June 25, 2008 at the Pebble Creek Golf Club, Clots Neck, New Jersey. Whether you decide to be a golfer or a sponsor, please complete the applica¬tion and mail back as soon as possible as spots go quickly.

For the past nine years this event has been a day of fun and relaxation for the GFOA membership. We have had over 120 golfers every year meeting with their colleagues, playing a round of golf, having lunch and sharing many stories. The day promises to be a lot of fun. Finally, our Executive Director, Michael Conti, is busy at work starting the process of preparing a new GFOA Directory for the GFOA membership, only paid members as of May 31st will be listed in the directory. We ask that 2008 paid members go to the GFOA web site (GFOANJ.org), complete the directory application and email to HYPERLINK mail to: gfoadirectory@optonline.net

Articles of Interest in the 2008 APRIL Issue

SERIOUS FINANCIAL ISSUES FACING NEW JERSEY MUNICIPALITIES - UNCERTAIN FUTURE

By Ed McManimon, Esq. McManimon & Scotland, LLC

Some recent articles in small town newspapers point out how deep and precarious the financial outlook is for local governments over the next decade.
They also serve as notice of the fact that this could be the beginning of the long period of financial uncertainty for all local govern¬ments in trying to prepare budgets. The like¬lihood is that there will be significant tax increases and little tax relief. One article in the Hopewell Valley News dealt with the financial implications of the new COAH rules. This area has largely been ignored by Finance Officers as simply an issue that will be dealt with by develop-ment. This article noted, for instance, that Hopewell Township’s COAH obligation for the next decade is 700 affordable units. This is greater than all of the dwelling units, market and affordable, built in the Township over the past decade. It warns that the ulti¬mate cost will be borne by the taxpayers.
The second article in the Trenton Times noted the tremendous projected increases in the funding requirements that will hit all municipalities for pension payments for its retired and future retired employees. These amount in the aggregate billions of dollars. The article warns that when this is coupled with the draconian cuts in state aid to most municipalities, it could financially cripple local tax payers over the next decade. What these two articles do is serve notice that the financial problems that seem to be focused on large urban municipalities in New Jersey are going to be faced by both large and small and urban and suburban municipalities in a significant way. A recent seminar conducted by the Institute of Professional Development focused not only on these two often ignored areas, but also on the cost of 1) other post employment benefits (OPEB); 2) the budg¬et limitations in both the appropriation and tax levy budget cap laws; 3) increases in energy costs; 4) contractual binding increas-es in labor costs; 5) shrinking state revenues and corresponding state aid; and 6) the ulti-mate impact all of these may have on the credit ratings of local governments in New Jersey and the corresponding increased costs for their debt. On top of all of this, there are also out

Local governments have little control which are causing disrup-tion in what has otherwise been a relatively stable bond market with easy access to New Jersey local governments. Our office was in the midst of planning the refinancing of outstanding bonds on behalf of the Township of West Windsor when interest rates rose markedly to force the Township to postpone the bond sale. While it was not uncommon for such delays to occur to adjust to market changes, this one was a significant one and required more analysis of the actual length and amount of impact. Most of the Municipal Bond Insurers lost their AAA credit rating recent¬ly as a result of their involvement and investments in the subprime mortgage cri¬sis. Then the very large State issuers throughout the country who issued variable interest rate bonds with an auction process to reset such variable rates in the 7-30 day short term market lost access to such mar¬kets. These factors, particularly the huge variable rate debt looking to be restructured in more traditional fixed or longer variable terms, forced interest rates up dramatically for all other municipal issuers. This points out the need for and benefit of real advice and analysis by municipalities in determin¬ing whether and when and with what struc¬ture to issue debt in the market.

BQ and U

By David Thompson, CEO, Phoenix Advisors, [[C Jeffrey Winitsky, Esq., Parker McCay P.

HIGHLIGHT:

No, it's not a Saturday morning cartoon show, but BQ or not BQ can have a major effect on your community's borrowing cost.

TThe term "BQ" was coined when the Tax Reform Act of 1986 ("1 986 Tax Act") was passed into law. Prior to the passage of the 1986 Tax Act, banks were privileged to take a tax deduction for 80% of the interest that they paid (their cost of carry) on borrowed funds (think interest paid on deposits). At the same time, banks were allowed to exclude tax exempt income from the securities purchased with those borrowed funds in the calculation of their net taxable income. As a result of these privileges, prior to the passage of the 1 986 Tax Act, banks were among the major purchasers of tax exempt municipal securities.

The intent of the Act is to balance the interests of employers and employees and to permit employees to take a reasonable unpaid leavefor certain family and medical reasons. TheAct seeks to accommodate and ensure thelegitimate needs of employers for adequate work force coverage and provide time from the job for employees when a serious health condition occurs.

The 1986 Tax Act eliminated the bank's cost of carry deduction privilege, with the exception of "qualified tax exempt obligations" issued by governmental entities and held by the banks. There are three criteria that must be met for tax exempt governmental obligations to be a qualified obligation under Section 265(b) (3) of the Internal Revenue Code of 1986, as amended: 1.) the tax exempt obligations must be for a public purpose; 2.) the issuer must reasonably expect to issue less than $10 million tax exempt obligations during the calendar year, i.e., be a "qualified small issuer" (not the same as small issuer for arbitrage rebate purposes); and, 3.) the tax exempt obligations must be specifically designated as "qualified tax exempt obligations" by the issuer. When making the determination of whether "qualified small issuer" status applies to tax exempt obligations to be issued by a municipality, the municipality must include within the $10 million dollar limitation its expected issuance any tax exempt debt to be issued by a subordinate entity; such as an authority whose members are appointed by the municipality's governing body. That debt, if any, must be included in calculating whether the $10 million dollar threshold has been reached. It is also vitally important to recognize that the regulations apply to the "Issuer" and not to the "Borrower". As an example, participation in a pool or conduit financing would obviate a "qualified tax exempt obligation" designation by a borrower if the aggregate tax exempt issue is not itself a "qualified tax exempt obligation", which is seldom the case.
Banks are shut out of the tax exempt market except for BQ issues. Since BQ securities are but a sub-set of the municipal market, supply is limited. As for demand, each Bank's appetite for BQ securities is different. That demand is related to a bank's profitability, their opportunities for higher yielding taxable investments and loans, and their portfolio liquidity objective. Experience has shown that demand for BQ securities has pretty consistently exceeded their supply.

GFOA OF NJ REPORT NEWSLETTER

About Report Newsletter
The Government Finance Officers Association of New Jersey publishes a quartely newsletter "Report". It features articles pertinent to the Governmental Finance Community. For further information, you can contact: Editor, GFOANJ, PO Box 2018, Clifton, NJ 07015-2018