Recent legislation passed by the Pennsylvania General Assembly offers a new short short-term borrowing option to local governments and school districts dealing with budget uncertainties related to the ongoing COVID-19 Pandemic. House Bill 2536 was signed into law by Governor Tom Wolf on November 23, 2020, as Act 114 of 2020. Among other things, Act 114 created a special, limited emergency tax and revenue anticipation note program for the 2021 calendar year. The new program will provide greater financial flexibility to local governments and school districts as they await the results of tax collections in the coming months.
In general, the ability of a county, municipality or school district (referred to herein as a “local government unit”) to issue tax and revenue anticipation notes, or TRANs as they are commonly called, is governed by the Local Government Unit Debt Act, Act 177 of 1996 (S.B. 689), 53 Pa.C.S. §8001 et seq. (the “Debt Act”). Under the Debt Act, TRANs are defined as “notes issued in anticipation of taxes, in anticipation of revenues or in anticipation of both as designated in the notes.” The Debt Act prescribes a number of limitations on the ability of a local government unit to issue a TRAN, including the following requirements which are of particular interest:
- The total amount of TRANs issued in a fiscal year cannot exceed 85% of the amount of taxes levied and revenues budgeted to be received by the local government unit for that fiscal year.
- The local government unit must certify to the Commonwealth as to the estimated amount of taxes and revenues anticipated to be received in the current fiscal year. This estimate must be based on collection experience and current economic conditions of the local government unit, i.e., it must take into account the current economic climate, including the impact of the COVID-19 Pandemic.
- The final maturity date of a TRAN may not extend beyond the last day of the fiscal year in which the TRAN is issued. In the event the TRAN is not repaid at maturity, the unpaid balance is treated as non-electoral debt under the Debt Act, and the local government unit must include the repayment of it in its budget for the ensuing fiscal year.
In the current economic climate, where there is ongoing uncertainty as to tax collection and revenue results, the issuance of a TRAN prior to the passage of Act 114 was a bit of a gamble. A local government unit considering issuing a TRAN had to be confident that it would collect enough taxes and other revenues before the end of the fiscal year (for school districts, June 30, 2021, and for counties and other municipalities, December 31, 2021) to repay the TRAN. For certain local government units affected by the Pandemic, the uncertainty might be so great that they would be unable to deliver the required certification to the Commonwealth under the Debt Act.
Recognizing the need for greater financial flexibility for local government units dealing with the impact of the Pandemic, the General Assembly passed Act 114, which amends the Debt Act to authorize local government units, solely during the 2021 calendar year, to issue TRANs with a final maturity date no later than the last day of the 2022 fiscal year (for school districts, June 30, 2022, and for counties and other municipalities, December 31, 2022).
Additionally, Act 114 modifies the certification requirement discussed above in a concession to local government units facing uncertainty in their tax collections and revenues to be received in 2021. While the local government unit is still restricted to issuing TRANs to an amount no greater than 85% of the taxes levied and revenues budgeted to be received for the 2021 fiscal year, the local government unit may include in its certification to the Commonwealth a determination that the local government unit anticipates that the taxes levied and revenues received in the 2021 fiscal year may not be received, in full or in part, until after the end of the 2021 fiscal year, due to one or more of the following factors:
- The extension of tax filing deadlines;
- Administrative break-down during the COVID-19 Disaster Emergency Declaration issued by the Governor on March 6, 2020, and any renewal thereof;
- Unexpected severe economic contraction; or
- The inability to timely enforce collection due to the COVID-19 Disaster Emergency Declaration.
Finally, Act 114 is not limited to a single “bite at the apple.” Local government units can issue multiple TRANs under the authority of Act 114, so long as each borrowing meets the requirements of the Debt Act, as modified by Act 114, and the aggregate amount of TRAN debt does not exceed the 85% limit. TRANs which take advantage of Act 114 must be issued on or before December 31, 2021.
A local government unit addressing cash-flow uncertainties this year should consider all available options, including the issuance of a TRAN (whether traditional or under the special provisions of Act 114). Before making such a decision, be sure to consult with your trusted legal and financial advisors. The public finance attorneys and other professionals at McNees are here to help.
Reprinted with permission from the February 4, 2021 edition of The Legal Intelligencer © 2021 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.