SCIIP projects for small SC utilities: Three tasks for local counsel 

By C.D. Rhodes 

Last June, the South Carolina Rural Infrastructure Authority announced it would accept applications for its South Carolina Infrastructure Investment Program, or SCIIP. The program will give approximately $900 million in federal funds allocated to the State of South Carolina under the 2021 American Rescue Plan Act.  

SCIIP is a once-in-a-generation opportunity for South Carolina utilities to receive grants of up to $10 million to improve water, wastewater and stormwater systems. Many utilities, including smaller utilities, sought the maximum amount of available funding for projects that are far larger than any they have previously contemplated.  

Financial match requirement 

Since the program was announced, local government leaders have discussed little else than their individual SCIIP’s projects. Now, the focus has turned to SCIIP’s required financial match. Large utilities serving more than 30,000 customers are required to invest a local match of 25% of the project cost, while small utilities are only required to provide 15%. Many utilities may be asked to cover costs of their projects in the amount of $1 million-$2.5 million. 

Since funding requests far exceeded available funding, some utilities will be disappointed and will likely look for other means to fund important projects. Many local governments may find that they have an urgent need to borrow money, whether to pay SCIIP’s local matches or to self-fund rejected projects, and many of these local governments will be infrequent or first-time borrowers.  

Attorneys who serve as local or general counsel to these governments will have a role to play in these financings and may be asked to give advice on the process by which local governments are able to borrow money. Given that public finance is an exceptionally small niche of governmental law, this is an ideal moment to offer attorneys three considerations as you advise on funding for these projects. 

1) Understanding financing tools 

The South Carolina Constitution limits the means by which local governments may borrow money. They are not allowed to simply take out a loan from their local bank, and they may not secure a borrowing by giving a lien on their utility system.  

Local governments typically borrow money to finance capital improvements for their water and sewer systems by issuing revenue bonds. Revenue bonds are authorized under Article X, Section 14(10) of the South Carolina Constitution, which authorizes local governments to incur “indebtedness payable solely from a revenue-producing project or from a special source, which source does not involve revenues from any tax or license ….” While a home mortgage is secured by a lien on the asset itself, revenue bonds are:  

• Primarily secured by a lien on a particular revenue stream. For water and sewer revenue bonds, this is the revenue stream that is generated by charging water and sewer fees 
• Typically secured by a “statutory lien” on the utility system that generates the revenue stream, which is authorized under S.C. Code § 6-21-330. A statutory lien does not allow a creditor to foreclose on the utility system in the event of a default. Rather, the creditor may seek to have the courts enforce the covenants that are commonly given to bondholders, such as a covenant to impose sufficient fees and charges to cover operation and maintenance costs and bond debt service.  
• Issued as tax-exempt borrowings, meaning the lender will not pay federal income taxes on the interest that it earns on the bond. This is the most important distinguishing feature of revenue bonds because they allow the lender to set an interest rate that is substantially lower than the rates available to individuals and businesses.  

2) Forming the team for a financing 

One key for success in any financing is having a well-qualified team in place to guide the local government, the issuer, through the process of borrowing money. The team is typically led by two professionals — bond counsel and the municipal financial advisor.  

Bond counsel is responsible for the legal and procedural side of the transaction, including the preparation of the two ordinances that are used to authorize the issuance of a series of revenue bonds, the “master bond ordinance” and the “series ordinance.” Bond counsel is also responsible for the delivery of an opinion at the bond closing confirming that the borrowing is valid, that the issuer followed all procedures under state law, and, most importantly, that the interest that the bondholder earns on the bond is exempt from federal income taxes.  

The financial advisor is a specialist in municipal finances and is responsible for providing issuers with information and projections of borrowing terms (interest rate, term, etc.) and amounts of money they are likely to be able to borrow. Additionally, the financial advisor will assist in the process to select a bank or underwriter to purchase the bonds. 

The third member of the financing team is local counsel. Local counsel’s formal role is the delivery of an opinion at closing that confirms the validity of the issuer, that the issuer followed procedures and state law requirements for taking governmental action, and that there is no outstanding litigation concerning the borrowing. Ideally, local counsel has served as the issuer’s long-standing legal counsel and is involved in and understands the day-to-day legal matters of the issuer.  

3) Preparing for a Bond Issuance 

Local counsels’ assistance and advice is critical for smaller municipalities that do not regularly borrow money. Below are some initial steps that local counsels may advise.  

• Highlight the importance of annual audits. Prospective lenders will evaluate the credit quality of a municipality on the basis of its audited financial statements for the prior three fiscal years. While the preparation of an annual audit is standard practice for many municipalities, some may not approve their audits until later in the year. For these issuers, local counsel can assist by inquiring about the status of audited financial statements.  
• Select the borrowing team early in the process. Putting a well-qualified team in place early in the planning process can prove incredibly beneficial. Issues such as the method of sale of the bonds — whether the bonds are sold to a bank or a state or federal agency or in the public bond markets — are best addressed as early as possible. Bond counsel and the financial advisor can advise the municipality on the best path forward. 
• Engage in the procurement process, particularly focusing on the contracts. There is little that is worse than having to do a second borrowing because costs exceeded the amount of the funds that were initially borrowed. SCIIP’s injection of $900 million into the construction market for municipal utilities is likely to cause volatility in construction prices, which increases the risk of cost over-runs. Local counsel can help mitigate the risk to the project by remaining engaged in the means, methods, and contracts that municipalities use to procure the projects.  

For smaller, first-time or infrequent issuers, the process of borrowing money can be murky and confusing. The stakes are even higher with a rare SCIIP grant opportunity. Local counsel has an important role to play in historic transactions that can chart a path for many South Carolina utilities far into the future.  

C.D. Rhodes is a public finance attorney with Pope Flynn. Connect with him at https://www.linkedin.com/in/cdrhodes/.