Steps to Issuing a

Municipal Bond An
Interactive Module
December 2013

SUB-NATIONAL TECHNICAL ASSISTANCE PROGRAM

1
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 Overview of the Module
Objective:
This interactive Module introduces the user to the process of issuing
municipal bonds in a city’s domestic capital market to finance urban
infrastructure. It is based on Developing Sustainable and Inclusive Urban
Infrastructure Services: A Guidebook for Project Implementers and
Policy Makers in India, 2011 by TCG International. LLC

The municipal bond issuance process includes:

o Step 1: Fiscal Strengthening and Capital Investment Planning
o Step 2: Credit Rating
o Step 3: Project Development
o Step 4: Financial Structuring
o Step 5: Authorization and Approval
o Step 6: Preparation of the Prospectus
o Step 7: Marketing to Investors
o Step 8: Preparation of Documents
o Step 9: Completion of the Transaction
The module concludes with a schematic representation of the process and
information on how PPIAF – SNTA can assist cities with bond issuance.
 What is a Municipal Bond?

 A security issued by a local government to debt finance infrastructure.

 Repays bondholders the face value plus interest over a specific time.

 Broken down into multiple securities disbursed among different investors.

 Most often issued at a fixed interest rate.

 Long term debt with payments due quarterly, semiannually or annually.

 In some countries interest earned on municipal bonds is tax free.

Access to more
about Municipal Bonds

What are the Steps to Issuing a Municipal Bond?

 Step 1: Fiscal Strengthening and Capital
Investment Planning

Get the city’s financial house in order.

Access to more
about Fiscal Strengthening

Debt financing is only possible once a city has established

a reliable fiscal surplus of revenues (from all sources) over
expenditures (for all purposes)

Prepare a capital investment plan for infrastructure

projects that need to be implemented

 Project Identification and initial costing Access to more

about Investment Planning
 Prioritizing
 Phasing
 Step 1: Fiscal Strengthening and Capital
Investment Planning

Determine the city’s borrowing capacity.

Access to more
about Borrowing Capacity

The amount of money that a city can afford to borrow depends

largely on how much of its annual revenue the city can reasonably
devote to debt repayment, and the likely terms of the debt
(interest rate and duration).
 Estimate annual debt service (repayments) that the city can afford.

 Remember that the annual debt service can be no more than the
reliable fiscal surplus available.

 Calculate the capital amount on market terms that can be supported by

the amount of debt service the city can afford.
 Step 2: Credit Rating
Obtain an institutional credit rating from a well respected
rating agency using the national rating scale.

Access to more
about Credit Ratings

 Need to demonstrate to potential investors that the city has become

financially viable and capable of servicing long term debt.

 Rating needs to be on the ―national scale‖ that compares the city’s

creditworthiness to that of other corporations and governments in the
country.

 The rating process can start with a ―shadow‖ credit rating to informally
preview the results before proceeding to a published rating that is
disclosed to potential investors.
 Step 3: Project Development
Complete all necessary detailed engineering, costing, and
procurement planning for the project
Experience shows that local governments are more likely to have
success if they hire an experienced consulting engineering firm to help
them develop the technical side of the project.

Design projects to be financially viable and to operate

commercially whenever possible.

Access to more
 Projects that generate revenues can cover all about Project Viability

or part of the debt repayments due on the

municipal bonds.

 The financial viability of the projects underlying

the bond issue creates greater investor confidence
in the city’s ability to repay its debt.
 Step 4: Financial Structuring
Structure the bond in a way that attracts private investors
while minimizing the cost of interest to the local government.

Access to more
About Financial Structuring

 Just as an infrastructure project needs to be carefully engineered; its

debt financing also needs to be properly designed.
 Successful bond issuers use financial advisors that are familiar with the
needs of investors, and who work with the city to minimize the cost of
borrowing.
 Financial structuring determines the type of bond issue: general
obligation bond, revenue bond or structured debt obligation bond.
 The financial structure may also incorporate ―credit enhancements‖, such
as a partial credit guarantee, which make the bonds more creditworthy and
thereby increases their marketability and reduces their interest rate.
 Step 5: Authorization and Approval

Obtain all authorizations required by law and regulations.

 State/Provincial and National Government authorities.
 Capital market regulators, and securities exchanges.

Most importantly, obtain irrevocable approval from the local

government legislative council.

Access to more
about Local Approval

 Since the debt incurred will have to be repaid over a long time period the
bond must be binding on all future local administrations.
 Potential investors need to see a solid political commitment to repay
debt that has been contracted for broadly supported public infrastructure
projects.
Step 6: Preparation of the Prospectus
Prepare the prospectus explaining the amount, purpose and
structure of the bond issue.

Access to more
about Bond Prospectuses

 A preliminary prospectus is used for discussions with the rating agency

and potential investors in order to define a final bond amount and structure
that can be sold at a particular price in the current market.

 A final prospectus is made available to all potential investors when the

bonds are officially offered to the market.
 Step 7: Marketing to Investors
Seek investors to purchase the bonds.

 The city’s financial advisor can organize a ―road show‖ to Access to more
about Marketing Bonds
present the purpose, structure, and potential rating of the
bonds to potential investors in the local capital market.

 Discussions with potential investors may lead to changes

to the bond structure to make it more attractive to the market.

Once the bond is ready to be issued, obtain a rating for it as a

specific security using the same credit rating agency used for
the institutional rating.

Access to more
about Credit Ratings
 Step 8: Preparation of Documents
Prepare the Trust Indenture which is the legal contract
between the local government and the bondholders.

Access to more
about Bond Documents

 A specialized legal team (bond counsel) works closely with the city’s
financial advisor to translate the financing structure into a set of legal
documents that are the formal basis for contracting the debt financing for
the infrastructure projects.
Step 9: Completion of the Transaction
Close the financing transaction
Access to more
about Closing the Transaction

 Once the market for the bonds has been confirmed and the legal
documents have been prepared and approved, the bonds can be issued to
the investors in return for their payment
 At the financial close, all of the legal documents are officially signed and
the city receives its funds
 It is good practice for the proceeds of the bond issue to be deposited
directly into an escrow account that can only accessed to pay for
implementation of the projects funded by the bond issue
 Transaction Costs

 There are costs to the local government for doing a bond

issue, just as there are loan origination costs charged to the
by banks for their lending

 Completing all the steps for issuance of a municipal bond

requires the assistance of a number of financial service
providers: financial advisory firm, credit rating agency, bond
counsel, underwriter and trustee at a minimum

Access to more
about Transaction Costs
Recapping the Municipal Bond
Issuance Process
 SNTA Financial SNTA Credit Rating
Mgt Assessment Support

Fiscal Strengthening and Institutional

Capital Investment Planning Credit Rating

Project Development
Financial Structuring Bond Issue
Credit Rating

Authorization and Approvals

Marketing to Investors Preparation of Documents

Prospectus & Legal Docs

SNTA Transaction
Support Services
Completion of the Transaction
SUB-NATIONAL TECHNICAL ASSISTANCE PROGRAM

Thank you.
 Following slides are hyperlinked from the main
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 What is a Municipal Bond?
A municipal bond is a promissory note issued by a local government (or local
public infrastructure authority) to finance capital investments in infrastructure
made by the issuer.
The local government pledges to repay bondholders the face value of the
bond plus interest over a specific period of time.

A Municipal bond issue is broken down into multiple bonds disbursed among
different investors. For example, an LC 20 million bond issue might be offered
in 10,000 individual bonds, each with a face value of LC 2,000.
Municipal bonds are most often issued at a fixed interest rate, but variable rate
bonds are also possible.
Municipal bonds have a long repayment period that approximates the useful
life of the infrastructure being financed, with payments due quarterly,
semiannually or annually.

BACK
 Getting the city’s financial house in order
Before attempting to issue municipal bonds, a local government or local public
service enterprise must be in good financial condition so that it can repay its
debts. This means that there must be a reliable surplus of revenues over
expenditures that can be used to make the interest and principal payments to
bondholders on time and in full. Efforts may need to be made to increase
revenue collection from existing taxes, fees and user charges. It may also be
necessary to reduce unnecessary expenditures or institute cost saving
measures in areas where it is essential to continue expenditures.

BACK
 What is city financial viability?
A city should endeavor to become ―financially viable‖ before seeking long
term financing in the local debt market. A city that is financially viable is one
that has the financial means to support the social and economic development
goals of its citizens and to create a good quality of life for them on a
sustainable basis. The following are the features of a financially viable city:

1.The city has in place an efficient, cost‐effective organizational structure

built around its key business processes and objectives.

2.Administrative procedures are efficient and well‐documented, and provide

understandable, accurate information to all key stakeholders, both internal
and external, to support good decision making.

3.The city has a system of internal and external controls that minimize
corruption and create a culture of transparency and accountability.

Continued on the next slide…

 What is city financial viability?
Continued…

4.Services are provided using a model of commercial viability that controls

expenses and mobilizes adequate resources directly from users, whenever
possible, while making subsidies transparent.

5.The city mobilizes buoyant, diversified, local revenue sources in order to

ensure financial sustainability and increase financial autonomy.

6.Citizens have a say in determining the level and quality of services to be

provided, and provide feedback on the quality of services and input on urban
development decisions through participatory mechanisms.

(from Chapter 4: City Financial Viability in Developing Sustainable and Inclusive

Urban Infrastructure Services: A Guidebook for Project Implementers and Policy
Makers in India, 2011 by TCG International)

BACK
Chapter 4: City Financial Viability in Developing Sustainable and Inclusive
Urban Infrastructure Services: A Guidebook for Project Implementers
and Policy Makers in India, 2011 by TCG International, LLC, Silver Spring,
MD, USA

BACK
 Estimating Borrowing Capacity
Before the City of Ahmedabad successfully issued the first municipal bond in
India without a guarantee from state or national government, the city’s
financial advisors carried out preliminary revenue and expenditure forecasts.
Various options were analyzed in terms of alternative revenue assumptions,
expenditure forecasts, and borrowing. Utilizing an iterative process and
estimated financial performance levels and borrowing terms, it was
determined that the city could afford an investment equivalent to
approximately US$150 million. Based on this analysis, the city reviewed
different project priorities and worked out a capital investment plan of US$
149 million (in Indian Rupees) for 1997 – 2001.

BACK
 Credit Ratings and Municipal Bonds
 Credit ratings quantify the risk that a local government will be unable or
unwilling to repay its debt.

 There are “institutional ratings” and specific “bond ratings”.

 National scale ratings rank risk in compared to national government bonds.

AAA Highest Safety – the rating for national government bonds
AA High Safety
A Adequate Safety
BBB Moderate Safety
BB Inadequate Safety
B High Risk
C Substantial Risk
D Default
 The credit rating of a municipal bond determines the local government’s
cost of financing its projects.
BACK
 Credit Ratings and Municipal Bonds
Municipal credit ratings are an objective external assessment of the risk that a
local government will be unable or unwilling to repay its debt in full and on time.
The rating on a GO bond is often referred to as the “institutional rating” of the
local government’s creditworthiness. The rating on an SDO or revenue bond is
referred to as the “bond rating” and applies only to the specific bond issue.
The credit rating of a bond is the principal factor affecting the bond’s interest
rate, period of repayment, and other financial conditions required by investors.
Therefore, the credit rating of a municipal bond determines the local
government’s cost of financing its projects.
Municipal bond ratings rank repayment risk in comparison to the riskiness of
national government bonds. For local currency bonds, national government
bonds are considered risk free and are designated “AAA” on the national rating
scale, e.g. AAA(za).

Continued on next slide….

Credit Ratings and Municipal Bonds - Continued
Investment Grade Ratings:
AAA (Triple A) Highest Safety (Can be AAA – )
Instruments rated 'AAA' are judged to offer the highest degree of safety with
regard to timely payment of financial obligations. Any adverse changes in
circumstances are most unlikely to affect the payments on the instrument
AA (Double A) High Safety (Can be AA+ or AA – )
Instruments rated 'AA' are judged to offer a high degree of safety with regard to
timely payment of financial obligations. They differ only marginally in safety from
`AAA' issues.
A Adequate Safety (Can be A+ or A – )
Instruments rated 'A' are judged to offer an adequate degree of safety with regard
to timely payment of financial obligations. However, changes in circumstances can
adversely affect such issues more than those in the higher rating categories.
BBB (Triple B) Moderate Safety (Can be BBB+ or BBB – )
Instruments rated 'BBB' are judged to offer moderate safety with regard to timely
payment of financial obligations for the present; however, changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay principal
than for instruments in higher rating categories. Continued on next slide…
Credit Ratings and Municipal Bonds - Continued
Non-Investment Grade Ratings (“Junk Bonds”):

BB (Double B) Inadequate Safety (Can be BB+ or BB – )

Instruments rated 'BB' are judged to carry inadequate safety with regard to timely
payment of financial obligations; they are less likely to default in the immediate
future than instruments in lower rating categories, but an adverse change in
circumstances could lead to inadequate capacity to make payment on financial
obligations.
B High Risk (Can be B+ or B – )
Instruments rated 'B' are judged to have high likelihood of default; while currently
financial obligations are met, adverse business or economic conditions would lead
to lack of ability or willingness to pay interest or principal.
C Substantial Risk (Can be C+ or C – )
Instruments rated 'C' are judged to have factors present that make them
vulnerable to default; timely payment of financial obligations is possible only if
favorable circumstances continue.
D Default (Can be D+)
Instruments rated 'D' are in default or are expected to default
on scheduled payment dates. BACK
Fitch Ratings, International Local and Regional Governments Rating
Criteria, August 17, 2012.

Moody’s Investor Services, Rating Methodology: Regional and Local

Governments, January 18, 2013

Standard and Poors, Criteria/Governments/International Public Finance:

Methodology for Rating International Local and Regional Governments,
September 20, 2010.

BACK
 Financially and Commercially Viable Projects
Financial viability means that the full cost of services will be paid over the
useful life of the infrastructure. The financial structure of the project should be
based on market demand and the willingness to pay for services. Tariffs need
to be revised over time to reflect total costs, including compliance with defined
environmental standards, service expansion and quality, ongoing operation
and management, and depreciation and replacement of assets. It may be
necessary to augment project revenues with other funding commitments from
general revenues, governmental grants, and transfers.

Analysis of local market conditions determines the feasibility of providing

commercially viable services and informs detailed project design. Technical
design needs to be based on the market demand for services, the willingness
to pay tariffs for sustainable infrastructure services, physical development
patterns, land values, and environmental sensitivities. The complexity of the
design needs to take into account long-term O&M, relative to local agencies’
management capacity. These are key to defining a financially and
commercially viable project. If these issues are not taken into
consideration, investment could be wasted. BACK
 Commercially Viable Infrastructure Projects
Developing infrastructure projects in a commercially viable format helps improve
management efficiency, mitigate implementation risks, and attract commercial
investment. Project development is the process of turning broad planning
concepts for infrastructure into implementable designs. A commercially viable
format (1) ensures that adequate revenues from project services and from other
dedicated sources will cover project capital costs and operations and
maintenance (O&M); (2) is socially inclusive and operates in a systemic and
sustainable basis; (3) is environmentally sustainable; and (4) has a regulatory
framework to enforce quality of service, preservation of public interest, and
economic sustainability.

A commercially viable infrastructure project addresses residents’ demand for

basic services in an economically and environmentally sustainable manner. The
project structure will more effectively mitigate risks of implementation and
provides better long-term management. As a result, the private sector is more
interested in investing resources in projects structured in commercially viable
formats than in projects relying on traditional, government-led methods of
service delivery. Continued on next slide…
 Commercially Viable Infrastructure Projects
continued…
Since commercially viable projects require in-depth studies, credit
enhancements, and institutional structuring, they are more time consuming and
costlier in their initial stage than traditionally structured government projects are,
but their long-term benefits are far greater. Even with a project development
process that encourages commercial viability, special consideration to include
the poor in service provision is necessary, particularly in the absence of a
regulatory framework that safeguards social and environmental public interests.
Substandard government regulation and low implementation capacity create
opacity that translates into unquantifiable risk for project developers and
investors.

BACK
Chapter 5: Developing Commercially Viable Infrastructure Projects in
Developing Sustainable and Inclusive Urban Infrastructure Services: A
Guidebook for Project Implementers and Policy Makers in India, 2011 by
TCG International, LLC, Silver Spring, MD, USA

BACK
 Types of Municipal Bonds
General obligation bond (GO)
 Pledges all sources of revenue, and sometimes all assets, to repayment.

Revenue bond
 Pledges only project revenues, and sometimes project assets, to repayment.

Structured bond (SDO)

 Pledges only specific revenue sources to repayment as specified in the bond.

Types of Credit Enhancements

 Debt Service Reserve (Collateralization) Escrow Account: Holds money
in reserve for each payment.
 Revenue Intercept: Directs transfer revenues to bondholders before they
reach the city’s account.
 Partial Credit Risk Guarantee: Assures bondholders of at least
partial payment.
BACK
 Types of Municipal Bonds
General obligation bonds (GOs)
General obligation bonds represent a promise by the issuer to raise all the
revenue necessary to make full and timely payments to investors. Bondholders
have a legal claim on all sources of revenue and sometimes all assets of the
issuer.
Revenue bonds
Principal and interest payments for revenue bonds are secured only by
revenues generated by the particular project being financed. Bond holders
have a legal claim only on project revenues and sometimes project assets.
Structured bonds
Principal and interest payments for structured bonds (sometimes referred to
as structured debt obligations or SDOs) are secured only by a specific revenue
source which is not typically associated with the project being financed.
Bondholders have a legal claim only on the revenues specified in the bond,
e.g. sales taxes, hotel occupancy taxes, or intergovernmental tax transfers.

Continued on next slide…

 Credit Enhancements
Credit enhancements are elements built into the design of a municipal bond
which result in an upgrading of the bond’s rating by the rating agency.
Types of credit enhancements:
 Debt Service Reserve (Collateralization) Escrow Account: Holds money in
reserve for each payment.
 Revenue Intercept: Directs transfer revenues to bondholders before they
reach the city’s account.
 Partial Credit Risk Guarantee:
A partial credit risk guarantee (PCG) provides comprehensive cover to
municipal bond investors in the event the local government fails to make
debt service payments, thereby causing a default, for any reason.
The advantages of adding a PCG to a municipal bond are:
• Enables more financing options
• Off-sets market failures that limit borrowing and raise the cost of debt
• Stimulates the local capital market
• Improves the efficiency of scarce capital resources
• Supports development of local government
• Leverages additional private funding BACK
SNTA Briefs 1: The Advantages of Structured Financing for Sub-National
Authorities, Public Private Infrastructure Advisory Facility, 2013

SNTA Briefs 5: Partial Credit Guarantees for Sub- National Transactions,

Public Private Infrastructure Advisory Facility, 2013

BACK
 Authorizations and Approvals

 State/Provincial and National Government authorities need to approve in

order to ensure oversight of the municipal finance system in their
jurisdiction.
 Capital market regulators, and securities exchanges need to approve in
order to maintain orderly markets and assure fair dealing between issuers
and buyers of bonds.
 Since the debt incurred will have to be repaid over a long time period the
bond must be binding on all future local administrations. Approval of the
legislative body of the city should be binding for the term of the debt.
 Potential investors need to see a solid political commitment to repay
debt that has been contracted for broadly supported public infrastructure
projects. Willingness to repay is important and can only be assured if there
is local consensus on the need to finance the projects covered by the bond.

BACK
 Authorizations and Approvals
Before proceeding to the capital market, a local government needs to have
authorization from the local, state/province (if applicable), and central
governments to contract debt, as well as approval from the capital market
regulatory authority and the securities exchange organization to issue
bonds in the capital market.

It is especially important that the bond issuance be formally authorized by

the local government’s legislative council, since the debt incurred will have
to be repaid over a long time. In some bond issues in the United States
(e.g., GO bonds), there is a specific referendum voted by the citizens of the
jurisdiction. The point is to assure potential investors that there is a solid
political commitment to repay debt that has been contracted for the purpose
of implementing public infrastructure project.

BACK
 Bond Prospectuses
When municipal bonds are offered to the public in the U.S., the issuer must
publish a prospectus (also known as an Official Statement) that
summarizes the main features of the bond and the financial condition of the
issuer.

BACK
 Bond Prospectuses
A prospectus is formal legal document that provides details about an
investment offering for sale in a capital market. Rules pertaining to the
information that must be disclosed and when it must be disclosed are set
by each country’s capital market regulatory authority. A prospectus
should contain the facts that an investor needs to make an informed
investment decision.

There are usually two types of prospectuses for municipal bonds:

preliminary and final. The preliminary prospectus is the first offering
document provided by a bond issuer to potential investors and includes
most of the details of the the municipality, the project(s) to be financed
and the structural features of the proposed bond. The final prospectus is
printed when the bond documents have been finalized, approved and are
ready for sale. It supersedes the preliminary prospectus. It contains
finalized background information including such details as final structural
features of the bond, the exact number of notes issued and the precise
offering price.
BACK
 Marketing Bonds
An important step in bond financing is selling the bonds to investors.
While bonds cannot legally be offered for sale until the date of issue, the
city’s public finance advisor or its underwriter will contact likely investors
in the weeks leading up to the sale to assess demand and determine the
price at which the bonds will be sold. In the U.S. this part of the process
is referred to as a ―roadshow‖ and it may be done through a visit by the
city to potential investors or an on-line presentation.

A handful of institutional investors – including insurance companies,

mutual funds and pension funds – dominate the bond market. The
feedback provided by these investors in response to a roadshow is likely
to determine how the bonds are priced and whether an attempt is made
to restructure the deal to make it more attractive to investors.

BACK
 Credit Ratings and Municipal Bonds
 Credit ratings quantify the risk that a local government will be unable or
unwilling to repay its debt.

 There are “institutional ratings” and specific “bond ratings”. The latter are
obtained immediately prior to issuing the bond.
 National scale ratings rank risk in compared to national government bonds.
AAA Highest Safety – the rating for national government bonds
AA High Safety
A Adequate Safety
BBB Moderate Safety
BB Inadequate Safety
B High Risk
C Substantial Risk
D Default
 The credit rating of a municipal bond determines the local government’s
cost of financing its projects.
Back to Module
BACK
 Credit Ratings and Municipal Bonds
Municipal credit ratings are an objective external assessment of the risk that a
local government will be unable or unwilling to repay its debt in full and on time.
The rating on a GO bond is often referred to as the “institutional rating” of the
local government’s creditworthiness. The rating on an SDO or revenue bond is
referred to as the “bond rating” and applies only to the specific bond issue.
Institutional ratings are the underlying basis for a bond rating, but careful
structuring of credit enhancements can improve the rating of a city’s bond so
that it is higher than the city’s institutional rating. For this reason, bond ratings
are obtained just before the bond in questions is issued on the domestic
capital market.
Municipal bond ratings rank repayment risk in comparison to the riskiness of
national government bonds. For local currency bonds, national government
bonds are considered risk free and are designated “AAA” on the national rating
scale, e.g. AAA(za).

BACK
Preparation of Documents
The Trust Indenture is the legal contract between the city bond issuer
and the bondholder. In the event of any dispute between the city and
the bondholders, it is the trust indenture that is the reference
document for dispute resolution. It is a highly complex legal
document because it must specify all of the terms and conditions that
apply to the city as they repay the debt. It must faithfully incorporate
all of the structural features and credit enhancements presented in
the final bond prospectus. Because bond indentures are complex
contracts, city’s employ highly specialized legal consultants, known
as bond counsels, to prepare the documents.

BACK
 Preparation of Documents
The trust indenture of a municipal bond is the legal and binding contract
between the bond issuer city and the bondholders. The indenture
specifies all the important features of a bond, such as its interest rate and
maturity date, timing of interest payments, method of interest calculation,
and how structural credit enhancements will operate. The indenture also
contains all the terms and conditions applicable to the bond including
financial covenants and methods for determining if the issuer is remaining
within the covenants. Should a conflict arise between the issuer and the
bondholders, the indenture is the reference document used by the trustee
representing the bondholders and the city to resolve the conflict.

An example demonstrating the complexity of a bond indenture can be

found at: http://www.shepherd.edu/bogweb/june04/bond_indenture.pdf

BACK
Completion of the Transaction
The process of completing the financial closing and issuance of municipal
bonds in the U.S. typically includes the following steps.
1. City passes a resolution authorizing the issuance of the bonds.
2. City approves the Tax Exemption Certificate.
3. City approves the Continuing Disclosure Certificate.
4. Signing of bonds by the Mayor, City Clerk and Finance Director.
5. Signing of other closing certificates and documents: a) Delivery Certificate);
b) Transcript Certificate; c) City Clerk’s Certification to the County Auditor;
d) IRS Form 8038G Information Return; e) Comfort letter or guarantee
6. Financial Advisor compiles total costs of issuance to compare to benchmark
of 1.25% of the par value of the bonds issued.
7. City supplies closing wiring instructions to winning bidders.
8. City returns original, executed documents to bond counsel for distribution to
winning bidder.
9. City prepares wiring instructions for bond proceeds.
10. City confirms wire transfer of proceeds through the financial advisor.
11. City releases the bonds to the municipal bond clearinghouse.
BACK
 Transaction Costs
Transaction costs depend on local market conditions and in a mature
market they may range from 3% to 1.25% of the value of the bond issue.
The most typical costs of issuing a municipal bond include:
 Financial advisor. The complexity and purpose of the financing may
matter more in determining the fee than the actual amount borrowed.
 Bond counsel. Attorney fees may be based on time and charges or
negotiated in advance at a fixed amount.
Credit Ratings. Rating agencies typically vary their fee schedule by the
amount of the bond sale among other factors.
Guarantees or letters of credit (LOC). The cost of guarantees varies with
the kind of guarantee being made. Bank LOC are charged as a percentage
of the debt they secure.
 Underwriter fees. Much of their compensation accrues on a per bond
basis and thus larger bond issues incur higher underwriter fees.
Other fixed costs. Other costs associated with a bond sale, but generally
expected to be invariant with respect to the amount of the sale include the
printing of bond sale documents, and registration fees.
BACK
Capital Improvement Plans (CIP)
The value of a CIP is that it brings order and method to the planning
and financing a city’s required capital improvements. A CIP lists each
proposed capital project—the year and month when it will be started
and the amount expected to be expended on the project each year.
The costs of each project are aggregated for a programmatic summary
of all capital construction for each year. The total costs are compared
with funding available from all sources, including grants, current and
future revenues, and borrowings. In the end, a CIP represents a
realistic balancing of project requests and financial capabilities.

BACK
Preparing a Capital Investment Plan
1. Identify Potential Projects. A CIP needs to be formulated from
projects requested by local decision makers responsible for overall
financing and project implementation. Planning should be based
within a multi-stakeholder committee.
2. Adopt Criteria to Rank Project Requests. Because the CIP serves
as a tool for project prioritization, it must provide a methodology for
ranking projects using a uniform set of criteria that all the agencies
involved can use. The ranking criteria should encourage phased
project implementation where appropriate.
3. Determine Capital Investment Needs. Working from the prioritized
list of projects, the implementing units involved should indicate the
amount and timing of required funding, and how the funds would be
used over 5 or more years.

Continued on next slide…

4. Integrate the Needs of the Poor into the Planning. ―City- wide‖
infrastructure projects often fail to account for slum communities. Cities
should develop pro-poor strategies for service delivery, including
network expansion throughout slums.
5. Review Financial Resources. Working with the city’s accounting
department, a financial advisor can develop realistic financial
assumptions and estimate annual own-source revenue, transfers, grants
and debt capacity.
6. Address Financing Gaps. Annual investment needs compared to
annual resources will likely reveal financing gaps over the period of the
CIP. The planning process can offer different investment scenarios to
bridge this gap. Based on the options, city leaders can debate the level
of investment to implement and the reforms required to mobilize
additional own-source revenue and/or undertake a borrowing.
7. Approve the CIP. After completing the above steps, the city will have
to formally approve the CIP by deciding which investment and financing
scenario to implement.

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Chapter 3: Development Planning for Infrastructure Services in Developing
Sustainable and Inclusive Urban Infrastructure Services: A Guidebook
for Project Implementers and Policy Makers in India, 2011 by TCG
International, LLC, Silver Spring, MD, USA

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