TOPIC: Bond Premiums
OFFICE: Auditor
STATE: NJ
DATE: 06/07/13
QUESTION / ISSUE: Our state recently issued transportation bonds at a significant premium and is
considering spending that premium on transportation projects rather that setting it aside for the debt
service and thereby lowering the true interest cost on those bonds. Amounts normally appropriated for
transportation projects in the state budget would therefore be reduced by the amount of the premium.
We are interested in the following information:


Does your state have an official law, regulation, or policy governing the use of bond premiums?
If so, what is that law, regulation, or policy?
State
Connecticut
Comments
According to section 3-20 of the General statutes, premiums are to be used to pay
the expenses of issuing bonds. Any premiums left over after paying expenses are
to be deposited to the General Fund. The State Treasurer deposits premiums into a
fund 12060 restricted account and the funds are used to pay debt service.
Section 3-20, subsection (f):
Any expense incurred in connection with the carrying out of the provisions of this
section, including the issuance of refunding bonds, shall be paid from the accrued
interest and premiums or from the proceeds of the sale of such bonds or refunding
bonds and in the same manner as other obligations of the state, except that
expenses incurred in connection with the preparation, issuance and delivery of
general obligation bonds issued in accordance with sections 3-17 and 10-183m,
and delivered to the retirement fund provided for in section 10-183r shall be paid
out of the General Fund if sufficient accrued interest and premiums are not
available to pay such expenses.
Georgia
Maine
Massachusetts
Missouri
Except as may be provided herein or in any other public or special act, net earnings
of investments of proceeds of bonds and such funds, and accrued interest and
premiums on the issuance of such bonds shall, after payment of expenses incurred
by the Treasurer or State Bond Commission in connection with their issuance, if
any, be deposited to the credit of the General Fund.
Georgia’s laws do not specifically address bond premiums, nor do we have in place
an official policy.
We have a practice of applying premium to retire certain outstanding general
obligation bonds of the state coming due within 90 days of the issuance of the
bonds. We have considered applying premium to fund capital projects, but have not
yet used premiums for those purposes.
The Treasurer’s office has a standard practice. The Treasurer’s standard practice is
to use bond premium to issue less debt or to pay for debt issuance costs such as
paying for bond rating or a debt manager.
The prevalent couponing structure for tax-exempt bonds is a premium coupon (due
to the price protection it affords against de minimus tax events should rates rise).
We spend any premium we receive on the state's capital budget. However, it is
important to note that we base our borrowing needs on bond proceeds received
(par plus bond premium) and not just par.
We are not aware of specific laws or regulations governing the use of bond
premiums by state and local governments for which we have audit authority. For
your information, we have attached two files:
* The first file includes provisions regarding state transportation bonds and bonds
issued by certain local governments. As you will see, restrictions pertain to the use
Bond Premiums 1
State
Comments
of bond proceeds in general (not specifically to bond premiums).
* The second file is an excerpt from the state Department of Elementary and
Secondary Education's (DESE's) guidance for school districts that have issued
bonds. (Page 2 discusses alternative treatments for bond proceeds.)
Missouri
sf-JGeneralObligati
Statutes_Bond Requirements.docx
onBonds.pdf
New Hampshire
North Carolina
Ohio
Yes, state law addresses how bond premiums may be applied. Two statutes
specifically address this issue: Revised Statutes Annotated (RSA) 6-A:12 (Bonds
Sold at Discount or Premium) and RSA 6-A:13 (Cost of Debt Issuance; Application
of Premium). These statutes can be found at the following link to RSA 6-A, which
covers others aspects of debt issuance as well:
http://www.gencourt.state.nh.us/rsa/html/NHTOC/NHTOC-I-6-A.htm
The only general legislation that North Carolina has concerning the use of bond
proceeds is GS 142-82(6) which describes in general terms the eligible use of bond
proceeds (par and premium). Unless the authorizing legislation for a particular debt
issue speaks differently to the use of bond premium, it is deemed part of “bond
proceeds” and may be used to pay any authorized costs. Generally speaking bond
premiums can be used to pay the expenses associated with issuing the bonds, later
fees associated with the bonds (legal, regulatory, arbitrage etc.) as well as debt
service and termination fees for derivatives. North Carolina does not use any
premium to fund projects for GO bonds because the authorizing legislation for GO
bonds usually names the par amount to be issued and thus applying any premium
here would exceed legal authorization limit. Special Indebtedness legislation usually
uses more vague language (“not to exceed”) and accommodates the use of
premium for projects as long as the total authorization is not exceeded. Special
indebtedness premium is also be used to pay the items mentioned above (legal, fee
etc.) for a given issue.
Ohio statutes specify the use of bond premiums. Those provisions are found in two
statutes, Ohio Revised Code 133.32 and Ohio Revised Code section 5705.10. Both
of the statutes are attached in Acrobat format and the relevant text is highlighted in
yellow.
RC 133.32 (B) provides in relevant part: “Any amount received as payment of
premium and accrued interest *** shall be paid into the bond retirement fund and
credited to accounts as provided in the legislation.”
RC 5705.10(E) provides in relevant part: “All proceeds from the sale of public
obligations or fractionalized interests in public obligations as defined in section
133.01 of the Revised Code, except premium and accrued interest, shall be paid
into a special fund for the purpose of such issue, ***. The premium and accrued
interest received from such sale shall be paid into the sinking fund or the bond
retirement fund of the subdivision.”
Ohio Revised Code Ohio Revised Code
Sec. 133.32.pdf
Sec. 5705.10.pdf
Wisconsin
Wisconsin can, and has, issued General Obligation bonds to finance highway
projects. However, the vast majority of our bonds for transportation purposes are
revenue bonds.
Bond Premiums 2
State
Comments
Regarding revenue bonds, Wisconsin does not have a specific law prescribing the
use of premiums for transportation projects. Under Wisconsin Statute 18.55 (4)
“Revenue obligation bonds may be sold at any price or percentage of par value”
and since there are no restrictions on the use of proceeds from premiums, they can
be used for debt service and/or projects.
Wisconsin does have a law for its general obligation bonds. Under Wisconsin
Statute 18.08 (2) “Any such moneys that represent premium or any payments
received pursuant to any agreement or ancillary arrangement entered into for public
debt with respect to any such public debt may be credited to one or more of the
sinking funds of the bond security and redemption fund or to the capital
improvement fund, as determined by the commission”. As specified by this law,
Wisconsin has the ability to use premium for debt service and/or capital projects, as
determined by its Building Commission. Historically, the premiums had been
deposited to the Bond Security and Redemption Fund, to be used for debt service
purposes. However, during the past few years, a part of the premium has been
deposited to the Capital Improvement Fund, to be used for project purposes.
Bond Premiums 3