ALTERNATE BONDS

By STEVE McCLURE, Director, DCCA

Municipalities have long had the problem of not saving for large projects, persuading their electorate to pass a bond referendum, or paying the higher rates required of a revenue bond. The Local Government Debt Reform Act, (Ill. Rev. Stat. 1989, Ch. 17, par. 690.1 et seq.) passed in 1988, provides a new flexibility to the process of issuing bonds. One of the provisions in the Act is for alternate or "double-barrelled" bonds.

Alternate bonds are any bonds issued in lieu of revenue bonds or payable from any revenue source of the municipality. Alternate bonds may be issued without a referendum and generally do not affect the statutory debt limitation. The Act has made Illinois more competitive in the national bond market without changing any important and long standing precepts such as: debt limits, citizen control and cost of borrowing.

Of considerable interest to small municipalities is the fact that an investment rating may now be obtained by pledging more than one source of revenue to debt reduction. An example of this procedure might be that sewer service revenues could be used for principal and interest payments for a General Obligation Bond issued to build a sewage treatment plant. The General Obligation Bond is less expensive than revenue bonds because of the lower rates that are brought about by being able to use two sources of revenues for bond retirement. These two sources give rise to the term "double-barrelled" bonds.

The purpose of the alternate bonds provisions of the Act is to permit a municipality to combine its revenues and pledge them as an additional assurance to bond investors that another source of payment will be available for debt service. Small communities benefit in two ways: 1. The municipalities can get lower interest rates, and 2. The municipalities should be able to receive a better bond rating if they have one or obtain a rating if they have not had one in the past.

Alternate bonds may be issued for any lawful purpose of the municipality. If they are issued in lieu of revenue bonds, they must be issued for the purpose that revenue bonds are normally issued. If they are to be paid for from revenues which have a special purpose, then the bond must be for that purpose. An example might be a bond which is to be paid off by revenues from Motor Fuel Tax Fund distributions, an authorized street project would be an eligible purpose.

Alternate bonds are subject to a backdoor referendum. The ordinance authorizing the bonds must be published in a newspaper of general circulation in the municipality. In addition, the number of voters required to sign a petition forcing the issue to be submitted for a referendum is to be included. The time when such a petition must be filed and the date of such a referendum must be published as well. If a proper petition is not filed during the appropriate time period, the governing body may proceed with issuing the bonds.

If alternate bonds are to be paid off by enterprise fund revenues, the amounts available must be calculated to ensure that such revenues are sufficient. The total amount required shall include all operation and maintenance costs of the utility or other enterprise, less depreciation; debt service on all outstanding revenue bonds payable from the revenues of the enterprise; reserve account transfers required for those same revenue bonds; contractual or tort liability requirements to

December 1990 / Illinois Municipal Review / Page 11

be paid from the enterprise; and 1.25 times the debt service on the alternate bonds issued and those proposed to be issued. This last requirement may be reduced by the amount of monies available from other sources at the time of the delivery of the bonds.

To determine sufficient revenues the most recent municipal audit is referenced as the supporting document. The audit must be for a fiscal year ending no more than 18 months prior to the issuance date of the alternate bonds. If the audit does not reflect sufficient revenues, an independent accountant may prepare a report reflecting that increased taxes, increased service charges or other revenue increases will provide the required revenues for debt service. Once the corporate authorities accept the audit or the independent report that determines that sufficient revenues are available, it shall be evidence that the revenue sufficiency requirements have been met and that the alternate bonds are valid.

The applicable revenues determined to be required for the debt service are pledged to the payment of the alternate bonds plus the additional 25% times the amount of the debt service. The pledge, and the establishment of new rates or charges or the increase of any taxes, shall constitute a continuing governmental obligation of the municipality. A continuing appropriation of the amounts required will be made until the bonds are paid off.

Alternate bonds remain a general obligation of the municipality after issue and shall be paid off by the levy of taxes if the revenues of the enterprise or other sources are not sufficient to satisfy the indebtedness. In the event that taxes must be extended, the amount of the alternate bonds then outstanding shall be included in the computation of the statutory limitations of indebtedness. The amount shall continue to be included until an audit would show that the bonds are again being paid from enterprise revenues or other sources.

For more information about alternate bonds, contact the Office of Local Government Management Services at (312) 814-6696.

Page 12 / Illinois Municipal Review / December 1990