CGFO Debt Administration 3 — Questions and Answers
Question 1: What distinguishes a current refunding from an advance refunding of municipal bonds?
- Current refundings use taxable bonds; advance refundings use tax-exempt bonds
- Current refundings retire old bonds within 90 days; advance refundings retire them more than 90 days later (Correct answer)
- Current refundings require SEC approval; advance refundings do not
- Current refundings are prohibited under federal law since 2018
Correct answer: Current refundings retire old bonds within 90 days; advance refundings retire them more than 90 days later
A current refunding retires the old bonds within 90 days of issuance; an advance refunding places proceeds in escrow for more than 90 days before the old bonds are called.
Question 2: Which federal tax law change in 2017 significantly impacted advance refunding of tax-exempt municipal bonds?
- The Tax Cuts and Jobs Act eliminated tax-exempt advance refunding (Correct answer)
- The Dodd-Frank Act required SEC registration of advance refunding bonds
- GASB 91 prohibited advance refunding escrow structures
- The American Recovery Act capped advance refunding at $1 million
Correct answer: The Tax Cuts and Jobs Act eliminated tax-exempt advance refunding
The Tax Cuts and Jobs Act of 2017 (effective January 1, 2018) eliminated the ability to issue tax-exempt bonds for advance refunding purposes.
Question 3: In a competitive bond sale, what document invites underwriters to submit bids?
- Preliminary official statement
- Notice of sale (Correct answer)
- Bond indenture
- Escrow agreement
Correct answer: Notice of sale
The notice of sale (or notice of bond sale) is the advertisement that specifies bid requirements, sale date, bond terms, and evaluation criteria for competitive sales.
Question 4: What is the role of an escrow agent in a bond refunding transaction?
- To underwrite and distribute the new refunding bonds
- To hold and invest refunding proceeds in government securities until old bonds are retired (Correct answer)
- To provide the official legal opinion on the transaction
- To calculate the government's debt capacity for the new issuance
Correct answer: To hold and invest refunding proceeds in government securities until old bonds are retired
The escrow agent holds refunding bond proceeds invested in Treasury or agency securities, releasing funds on schedule to retire the refunded bonds.
Question 5: Which GFOA best practice recommends that governments adopt formal, written debt policies?
- It is optional under GFOA guidelines but required by MSRB Rule G-17
- GFOA recommends written debt policies to guide issuance decisions, set limits, and ensure consistency (Correct answer)
- GFOA only recommends debt policies for governments with over $100 million outstanding
- Debt policies are required by the SEC but not recommended by GFOA
Correct answer: GFOA recommends written debt policies to guide issuance decisions, set limits, and ensure consistency
GFOA strongly recommends that governments adopt comprehensive written debt policies to promote informed decision-making, protect credit quality, and ensure accountability.
Question 6: What is a 'moral obligation' bond?
- A bond backed by a government's unconditional legal pledge to repay
- A bond where a higher-level government has a non-binding legislative intent to appropriate funds if needed (Correct answer)
- A bond issued to fund ethical or socially responsible projects
- A bond that requires annual voter reaffirmation of repayment intent
Correct answer: A bond where a higher-level government has a non-binding legislative intent to appropriate funds if needed
A moral obligation bond carries a non-legally binding pledge that a higher government (e.g., state) will seek legislative appropriation to cover any shortfall, but it is not a legal guarantee.
Question 7: A government is analyzing whether to use a negotiated or competitive sale method. Which factor most favors negotiated sale?
- The bonds are simple, highly rated, and the market is stable
- The bonds are complex, the issuer is infrequent, or market conditions are volatile (Correct answer)
- State law prohibits competitive sales for this bond type
- The government wants to minimize underwriter fees
Correct answer: The bonds are complex, the issuer is infrequent, or market conditions are volatile
Negotiated sales are favored when bonds are complex, the issuer rarely comes to market, or volatile conditions require flexibility in pricing and timing.
CGFO Debt Administration 3
What distinguishes a current refunding from an advance refunding of municipal bonds?