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:
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.
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/.