8 CCR 1508-2-1.8 - Types and Structural Features of Financial Obligations

A. Type of Financial Obligation.

1. General Obligation ("GO") Bonds. GO bonds are backed by the "full faith and credit" of the issuing entity. GO bonds may only be issued by the State upon satisfaction of all requirements of the State Constitution, including voter approval. Currently, the State has no outstanding GO debt.

2. Lease Purchase Agreements without or with COPs

(a) Lease purchase agreements may be used to finance a wide variety of capital assets, including office buildings, prisons and equipment, such as motor vehicles and computer systems. The State may enter into a lease purchase agreement, as lessee, in two main forms:

(1) a "stand alone" lease under which an asset owner or a single private placement investor funds the assets constituting the leased property under the lease purchase agreement and

(2) a lease where the lease base rental payments due from the State are certificated into participation interests described as "Certificates of Participation" or COPs. The lease purchase agreements may be renewed from one fiscal year to the next fiscal year by the State, as lessee, by the act of appropriation of the base rental payments due under the lease purchase agreement. The lease purchase agreements are not a debt or multiple fiscal year financial obligation of the State.

(b) Before proceeding to obtain any necessary legislative approval pursuant to sections 24-82-801 and 24-82-802, C.R.S., or any other statute or proceeding with a lease purchase agreement/COPs financing, the Office of the Attorney General must be consulted regarding appropriate legal structuring matters, including the property proposed to constitute the leased property and base rental payment structures.

3. Revenue Bonds. There are various types of revenue bonds depending upon the source of revenue from which the bonds are to be paid. One type is used to finance assets which produce revenue to repay the financial obligation issued or incurred (toll road bonds, for example). Another type is payable from a specific revenue source but is not used to finance revenue-producing assets (the CDOT TRANs or higher education revenue bonds paid from student fees, for example). Revenue bonds may be issued by the State or a State Agency upon satisfaction of all requirements of the State Constitution.

4. General Tax Revenue Anticipation Notes ("GTRANS") and Education Tax Revenue Anticipation Notes ("ETRANS"). Pursuant to sections 24-75-901, 29-15-112 and 22-54-110, C.R.S., the State Treasurer is authorized to sell notes payable from anticipated revenues to fund cash flow shortfalls of the State and certain school districts. The State Treasurer will enter into Financial Obligations for the GTRANS or ETRANS programs when market conditions warrant, and upon demonstration of short term cash flow deficits that can be repaid from anticipated tax revenues.

B. Financial Obligation Features.

1. Variable Rate Demand Obligations ("VRDO"). Interest rate savings can generally be achieved along the shorter end of the yield curve and provide benefits in structuring the State's portfolio of Financial Obligations. VRDOs are easier to refund than fixed rate obligation, as these obligations are redeemable at their outstanding principal amount on any date with applicable notice as detailed in the documents. Prior to structuring a financing with variable rate obligations, the State Treasurer will assess, among other factors:

(a) Financial flexibility;

(b) Liquidity provider/third party risk;

(c) Asset liability management;

(d) Interest rate risk; and

(e) Market conditions.

2. Capitalized Interest. Interest may be capitalized as warranted by market conditions and limitations on the repayment schedule of the Financial Obligation.

3. Optional Redemptions. Generally, Financial Obligations issued or incurred by the State or a State Agency may contain optional redemption features unless the State Treasurer determines there are sufficient benefits to a non-callable structure. With regard to redemption features, the State Treasurer will ultimately determine what is in the State's best interest in selecting appropriate dates and prices, taking into account such items as the costs of funds versus future financial flexibility.

4. Capital Appreciation Obligations. Capital appreciation obligations shall only be used if the State Treasurer determines it to be in the State's financial interest considering current investor demand, future cash flows and expected interest rates.

5. Liquidity and Credit Facilities. When judged prudent and advantageous to the State, and as permitted by State statute, the State Treasurer may authorize agreements with municipal bond insurance companies, commercial banks or other financial entities for the purposes of acquiring letters of credit or insurance policies in respect of the Financial Obligations, based upon the following considerations:

(a) The net present value of the estimated annual repayment savings from the use of credit enhancement should be greater than the fees and/or premium paid by the State to obtain such credit support.

(b) A competitive process may be used to select credit enhancement providers.

6. Interest Rate Exchange Agreements. The State Treasurer will determine when it may be advisable and in the State's best interest for a State Agency to enter into an interest rate exchange agreement pursuant to article 59.3 of title 11, C.R.S.

7. Reserves. When determined economically beneficial by the State Treasurer, the State may obtain a surety policy, letter of credit, line of credit, or similar arrangement in lieu of cash funded reserves to enhance the security for the Financial Obligations.

8. Moral Obligations. The State Treasurer, in consultation with the agencies and departments of the State required to authorize a moral obligation covenant of the State, will determine under what circumstances, if any, it is appropriate for the State to enter into a moral obligation covenant of the State in connection with a Financial Obligation. Under a moral obligation covenant, the State's obligation to honor the covenant is moral, rather than legal. Entering into a moral obligation covenant may be appropriate when necessary to protect the State's credit rating or preserve assets necessary for the functioning of state government. Prior to entering into any moral obligation covenant, the State Treasurer will consult with the Office of the Attorney General regarding legal requirements and ramifications of a moral obligation covenant, and may consult with a financial advisor to fully understand the rating implications of such a covenant.

9. Other Features of Financial Obligations . The State Treasurer may decide to issue or incur Financial Obligations that are authorized by state legislation when the State Treasurer determines that it is in the State's best interest to do so. Examples of such Financial Obligations are those authorized by stimulus legislation similar to Build America Bonds and Qualified School Construction Bonds.

10. Intercept Credit Enhancement. Upon satisfaction of state law requirements, the State Treasurer may use its authority to intercept State payments to Institutions of Higher Education, qualified charter school and school districts in order to enhance the credit of a Financial Obligation of an Institution of Higher Education pursuant to section 23-5-139, C.R.S.; a school district pursuant to section 22-41-110, C.R.S.; or a qualified charter school pursuant to section 22-30.5-406, C.R.S.

C. Derivative Products, The State Treasurer may determine to use derivative products to reduce the State's exposure to changing market conditions or to reduce interest rate risk, but shall not be used for speculative purposes.

D. Refundings and Early Redemptions. If determined to be in the State's financial interest, the State Treasurer will consider prepaying or defeasing outstanding Financial Obligations when resources are available to reduce the amount of Financial Obligations outstanding. The State Treasurer will consider refunding Financial Obligations in order to generate interest savings, restructure payment schedules and/or eliminate burdensome covenants. The State Treasurer will evaluate and may consider the following factors, among others, in analyzing, reviewing and proceeding with a refinancing opportunity on behalf of State Agencies:

(1) Net present value savings;

(2) Absolute dollar savings;

(3) Size of issue;

(4) Market conditions; and

(5) Number of years remaining on outstanding Financial Obligations.

E. Energy Performance Contract ("EPC") and Capital Lease Approval Process. State Agencies may initiate energy performance contracts to improve the energy efficiency of state buildings or facilities pursuant to sections 24-30-2001 to 24-30-2003, C.R.S. or 24-38.5-106, C.R.S. The Colorado Energy Office ("CEO") and the Office of the State Architect ("OSA") work with public entities and energy service companies ("ESCO"s) to provide program standard contract documents, processes and procedures as well as guidance, support, and due diligence services related to the Technical Energy Audit ("TEA") contract and report of the Energy Performance Contracts ("EPC"s). For state agency projects, the State Treasurer will work with the CEO and Department of Personnel and Administration (Offices of the State Controller and the OSA) to integrate the EPC and financing components including, but not limited to the following:

(1) Integrate financing process, procedures, and milestones into the State Agency's EPC documents;

(2) Determine the process in which the CEO, ESCO, and State Agency will notify the State Treasurer of a capital lease related to an EPC; and

(3) Work with the Attorney General's office to ensure a standardized contract for:

(a) TEAs,

(b) EPCs and

(c) capital leases related to EPC capital improvements for State Agencies to utilize.

Notes

8 CCR 1508-2-1.8

. Rules 1.11 emer. rule eff. 06/14/2013. . Rules 1.12 emer. rule eff. 06/14/2013. . Rules 1.4 emer. rule eff. 06/14/2013. Rule 1.11 eff. 09/14/2013. Rule 1.12 eff. 09/14/2013. Rules 1.4 eff. 09/14/2013.