Policy References:

GASB Statement No. 7 – Advance Refundings Resulting in Defeasance of Debt

GASB Statement No. 34 – Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments as amended by GASB Statement No. 63 - Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position

GASB Statement No. 53 – Accounting and Financial Reporting for Derivative Instruments as amended by GASB Statement No. 63 - Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position and GASB Statement No. 64 - Derivative Instruments: Application of Hedge Accounting Termination Provisions

GASB Statement No. 62 – Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements

GASB Statement No. 65 - Items Previously Reported as Assets and Liabilities

GASB Statement No. 86 – Certain Debt Extinguishment Issues

GASB Statement No. 88- Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements

Process and Document Preparation:

The State has entered into contractual financing arrangements with certain public benefit corporations and other entities for various capital assets. Under these agreements, construction costs are initially paid by the State from appropriations (reported as capital construction expenditures in the Governmental Funds). These appropriations are then repaid to the State from the proceeds of bonds issued by the public benefit corporations or other entities (reported as proceeds from financing arrangements in the Governmental Funds). The State becomes the tenant of the facility under a financing agreement, which provides for the payment of rentals sufficient to cover the related bond debt service and for the passage of title to the State after the bonds have been repaid.

The State has also entered into contractual obligation financing arrangements (also referred to as “service contract bonds”) with certain public benefit corporations. The terms of these arrangements require the State to fund the debt service requirements of the specific debt issued by these entities.

In recent years, certain public benefit corporations have issued both service contract type bonds and other financing bonds within the same statutory debt authorization (e.g., Correctional Facilities bonds issued by the Urban Development Corporation). As a result, both types of debt are now reported under the same title, other financing arrangements.

In 2001 the State enacted legislation providing for the issuance of State Personal Income Tax (PIT) Revenue Bonds to be issued by several State public benefit corporations. The legislation provided that 25 percent of annual personal income tax receipts, excluding refunds owed to taxpayers and deposits to the School Tax Assistance Relief (STAR) Fund, be deposited to the Revenue Bond Tax Fund (RBTF), a subfund of the General Debt Service Fund, for the purpose of making debt service payments on PIT Bonds, with excess amounts returned to the General Fund.  In the event the State Legislature failed to appropriate amounts required to make debt service payments on the PIT bonds, or if required payments were not made when due, the legislation required that personal income tax receipts continue to be deposited to the RBTF until amounts on deposit in the Fund equaled the greater of 25 percent of annual personal income tax receipts or $ 6 billion. Amounts in excess of that needed for current debt service were subsequently transferred to the General Fund.  Legislation enacted in 2007 removed the exclusion for STAR Fund deposits, effectively increasing the amount of personal income tax receipts to be deposited into the RBTF.  The 2019 fiscal year enacted budget included legislation creating an Employer Compensation Expense Program (ECEP) and a Charitable Gifts Trust Fund.  To address the potential reduction in the level of personal income tax receipts resulting from activity of the ECEP and Charitable Gifts Trust Fund State Finance Law provisions creating the RBTF were amended to increase the percentage of personal income tax receipts required to be deposited in the RBTF from 25 percent to 50 percent.  In addition, the legislation that created ECEP required 50 percent of ECEP receipts be deposited to the RBTF. These changes became effective April 1, 2018.  In fiscal year 2021, the Pass-Through Entity Tax (PTET) was enacted and resulted in 50 percent of PTET receipts deposited to the RBTF. The amendments also increased the amount of all personal income tax receipts, ECEP receipts, and PTET receipts that must be deposited in the RBTF if the State legislature fails to appropriate amounts required to make all debt service payments on PIT bonds or if required payments are not made when due from the greater of 40 percent of the aggregate of annual personal income tax receipts, ECEP receipts, and PTET receipts or $12 billion.

Beginning in 2002, the State began incorporating interest rate exchange agreements (swaps) into some of its bond issuances as a way to lower its borrowing costs and diversify its debt portfolio. Originally, synthetic fixed rate swaps were used on underlying variable rate issuances with the intention of lowering the cost of borrowing below what could have been achieved by issuing fixed rate bonds due to the expected differences between short and long-term interest rates and relationships between taxable and tax-exempt benchmarks. In 2004, the State began entering into synthetic variable rate swaps on underlying fixed rate debt as a way to diversify its variable rate portfolio at a lower cost than by issuing variable rate debt. Beginning in 2008, due to the unrest in the variable rate bond market and the Lehman Brothers bankruptcy, the State began terminating many of its swaps. In 2021, the State terminated all of its swaps and has no plans to enter into new agreements in the near term.

In 2013 the State enacted legislation providing for the issuance of State Sales Tax Revenue Bonds to be issued by certain State public benefit corporations. The legislation created the Sales Tax Revenue Bond Tax Fund, a subfund of the General Debt Service Fund, that will provide for the payment of these bonds. The new bonds will be secured by the pledge of payments from this fund, which will receive 25 percent of the State’s sales and use tax receipts. Upon the satisfaction of all the obligations and liabilities of LGAC on April 1, 2021, this increased to 50 percent of the State’s sales tax receipts. Amounts in excess of that needed for current debt service will be transferred to the General Fund.

GASBS 34 requires debt issued to be reported as a long-term liability in the Statement of Net Position and, along with related items (unspent proceeds and deferred items) be accounted for and, as appropriate, deducted from Net Investment in Capital Assets in the Net Position Section of the Statement of Net Position. For this reason, it is necessary to identify and monitor all debt that is invested in State-reported capital assets relating to governmental activities.

GASBS 53 requires swaps to be reported at fair value on the Statement of Net Position and allows for an offsetting deferral account if the swap is determined to be effective, if not, the changes in fair value must be reported through the investment income section of the Statement of Activities.

GASBS 62 applies to all extinguishments of debt, whether early or not, except: debt defeased by a current or advance refunding, debt defeased in-substance using only existing resources, debt extinguished through a non-exchange financial guarantee payment transaction and debt extinguished through a troubled debt restructuring.  Under GASBS 62, debt is considered to be extinguished for financial reporting purposes when a debtor uses financial resources not arising from debt proceeds to pay a creditor and is relieved of all its obligations with respect to the debt or when the debtor has been legally released from being the primary obligor under the debt, either judicially or by the creditor, and it’s probable the debtor will not be required to make future payments with respect to that debt under any guarantees.  When debt has been extinguished the difference between the reacquisition price and the net carrying amount of the extinguished debt should be recognized in the Statement of Activities as a separately identified gain or loss in the period of extinguishment, not amortized to future periods. 

GASBS 65 requires the deferred gain or loss on current and advance refundings (difference between the reacquisition price and the net carry amount of the old debt) to be reported as a deferred outflow of resources or a deferred inflow of resources and recognized as a component of interest expense in a systematic and rational manner over the remaining life of the old debt or the life of the new debt, whichever is shorter. Additionally, debt issuance costs, except any portion related to prepaid insurance costs should be recognized as an expense in the period incurred. Prepaid insurance costs should be reported as an asset and recognized as an expense in a systematic and rational manner over the duration of the related debt.

GASBS 86 extended the in-substance defeasance accounting and financial reporting requirements required by GASBS 7 for certain advance refundings to include transactions in which cash and other monetary assets acquired with only existing resources (i.e. resources other than the proceeds of refunding debt) are used to extinguish debt. Like GASBS 7, GASBS 86 requires the cash and other monetary assets be placed with an escrow agent in an irrevocable trust to be used solely for satisfying scheduled payments of both principal and interest of the defeased debt and the possibility that the government will be required to make future payments on the debt is remote.  The trust is restricted to owning only monetary assets that are essentially risk-free as to the amount, timing and collection of interest and principal and provide cash flows that approximately coincide, as to timing and amount, with the scheduled interest and principal payments on the defeased debt.  When these conditions are met, regardless of whether done through a refunding or with cash and monetary assets acquired with only existing resources, the debt is considered defeased in-substance and should no longer be reported as a liability in the Statement of Net Position.   Unlike GASBS 7 which requires the difference between the reacquisition price and the net carrying amount of the old debt to be deferred and recognized as a component of interest expenses related to the new debt over the shorter of the remaining life of the old debt or life of the new debt, GASBS 86 requires the difference between the reacquisition price and the net carrying amount of the old debt to be immediately recognized as a separately identified gain or loss in the period of the in-substance defeasance on the Statement of Activities.  In addition, GASBS 7 requires payments to the escrow agent from proceeds of refunding debt be shown as an other financing use in the governmental fund Statement of Revenues, Expenditures and Changes in Fund Balances in contrast to GASBS 86 which requires payments to the escrow agent made from existing resources be reported as debt service expenditures.  GASBS 86 also added an additional requirement that any remaining prepaid insurance related to extinguished debt, whether through an in-substance defeasance or legal extinguishment, should be included in the net carrying amount of that debt for the purpose of calculating the difference between the reacquisition price and the net carrying amount of the extinguished debt.  Finally, GASBS 86 added additional disclosures for all in-substance defeasances when substitution of essentially risk-free monetary assets with monetary assets that are not essentially risk-free has not been prohibited.

GASBS 88 provides guidance to enhance and clarify certain liabilities included in debt-related note disclosures. The debt obligations referred to in this statement include direct borrowings and direct placements where the government negotiates the terms directly with the investor or lender and not offered for public sale. These debt obligations are to be presented separate from other debt in the notes to the financial statements. Additional note disclosure requirements for all outstanding debt include details of unused lines of credit, assets pledged as collateral for debt, and terms specified in debt agreements resulting in significant finance-related consequences. Such debt agreement terms result from events of default, termination and subjective acceleration clauses. There is no financial impact to the state’s basic financial statements resulting from GASBS 88. The impact is solely to debt disclosures in the notes.

Changes in the amounts outstanding for other financing arrangements are reported in the footnotes to the financial statements, by issuing public benefit corporation, in the following format:

Other disclosures related to other financing arrangements include:

• Future Minimum Debt Service, including net swap cash flows, for each of the next five years and in five-year increments for any remaining balances
• Amount of Debt Service Reserves maintained
• Debt service paid during the year
• Range of interest rates on debt outstanding
• Present Value and Cash Flow Gain or Loss on advanced refunding of debt outstanding
• A general description of in-substance defeasances using only existing resources which may include: the amount of existing resources placed with an escrow agent, the amount of debt defeased, the reasons for the defeasance and the cash flows required to service the defeased debt
• Amount of defeased-in-substance debt outstanding as a result of an advanced refunding or defeasance using only existing resources.
• The existence of risk of substitution of essentially risk-free monetary assets with monetary assets not essentially risk-free if this substitution is not prohibited for in-substance defeasances (whether through a refunding or with existing resources) occurring during the reporting period and the amount of debt defeased in-substance that remains outstanding subject to such risk

Disclosures related to interest rate swap agreements include:

• Objectives, terms, and risks
• Notional Amount
• Changes in fair value during the reporting period and the classification in the financial statements where those changes in fair value are reported
• Fair values as of the end of the reporting period and the classification in the financial statements where those fair values are reported
• Fair values of derivative instruments reclassified from a hedging derivative instrument (effective) to an investment derivative instrument (ineffective)

Disclosures for the long-term liabilities associated with other financing arrangements and interest rate swap agreements are reported in the aggregate under the Changes in Long-Term Liabilities note and include:

• Disclosure of other financing arrangements outstanding
• Disclosure of accumulated bonds accretion on deep discount debt
• Disclosure of unamortized issuance premiums/discounts
• Disclosure of arbitrage rebate payable
• Disclosure of derivative instrument liability

Each of these items is reported in the footnotes to the financial statements in the following format:

The issuance of other financing arrangements can result in the establishment of a debt service reserve fund or equivalent form of security to the bondholders such as a letter of credit. Any debt service reserve fund established should be reported among the cash and investments of the debt service fund. Aggregate information on letters of credit is reported as a footnote disclosure.

Issuance costs associated with other financing arrangements are recognized in the appropriate fund as an expenditure when paid. On the government-wide statements they should be recognized as an expense in the period incurred. No footnote disclosure is required for these costs.

Guide to Financial Operations

REV. 12/26/2023