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Official statement

What Is an Official Statement?

An Official Statement is a comprehensive disclosure document prepared by or on behalf of a state or local government entity when issuing new municipal bonds. This crucial document provides essential financial and operational information about the issuer and the specific debt securities being offered to potential investors. It serves as a primary source of information within the realm of municipal finance and securities regulation, enabling informed investment decisions. The Official Statement helps investors understand the terms, risks, and creditworthiness associated with a municipal bond offering.

History and Origin

The evolution of the Official Statement is closely tied to the development of disclosure requirements in the municipal bond market, which historically had fewer stringent federal regulations compared to corporate securities. While municipal securities are exempt from the registration requirements of the Securities Act of 1933, they remain subject to the antifraud provisions of federal securities laws16.

A significant turning point came with the adoption of Rule 15c2-12 by the Securities and Exchange Commission (SEC) in 1989, and subsequent amendments. This rule indirectly imposed disclosure obligations on municipal issuers by requiring underwriters to obtain, review, and distribute the issuer's Official Statement to investors in primary offerings15. The SEC emphasized the importance of adequate disclosure in the municipal market, and this rule effectively standardized the preparation and dissemination of the Official Statement. Further guidance from organizations like the Government Finance Officers Association (GFOA) has provided best practices for the content and preparation of these documents.

Key Takeaways

  • An Official Statement is a mandatory disclosure document for most new issues of municipal bonds.
  • It provides comprehensive financial, operational, and legal information about the bond issuer and the specific bond offering.
  • The document is crucial for investors to conduct credit analysis and assess the risks of municipal securities.
  • While issuers are not directly regulated by the SEC in the same way corporations are, SEC Rule 15c2-12 mandates that underwriters ensure the Official Statement is prepared and distributed.
  • Information within an Official Statement generally includes bond terms, redemption provisions, sources of repayment, and the issuer's financial condition.

Interpreting the Official Statement

Understanding an Official Statement is essential for investors considering fixed-income securities issued by state and local governments. The document should be read carefully to glean critical details that influence the investment's risk and return profile. Key sections to interpret include descriptions of the bond's interest rate, payment schedule, and any provisions for early redemption. Investors should also focus on the "security for the bonds" section, which outlines the source of funds pledged for repayment, distinguishing between revenue bonds backed by specific project revenues and general obligation bonds supported by the issuer's taxing power14. Furthermore, the Official Statement details the issuer's outstanding debt, financial operations, and any legal considerations that could impact the bond's performance.

Hypothetical Example

Consider the City of Harmony, which plans to issue $50 million in municipal bonds to finance a new public library. To facilitate this offering, the City of Harmony prepares an Official Statement. This document would detail:

  1. Purpose of the Bonds: Clearly state that the proceeds are for the construction of a new public library.
  2. Repayment Source: If they are revenue bonds, the Official Statement would specify that repayment comes from a dedicated sales tax earmarked for library services. If they are general obligation bonds, it would explain that the city's general taxing authority backs the bonds.
  3. City's Financial Health: Provide audited financial statements, a summary of its budget, population demographics, economic indicators like employment rates, and existing debt levels.
  4. Bond Terms: Outline the interest rates, maturity dates, call provisions (if the city can redeem the bonds early), and payment frequency.
  5. Legal Opinions: Include a legal opinion from bond counsel confirming the validity of the bonds and their tax-exempt status.

A potential investor reviewing this Official Statement would assess the city's financial stability and the reliability of the stated repayment source to determine the investment's suitability.

Practical Applications

The Official Statement plays a central role across various aspects of the municipal bond market:

  • Primary Offerings: In the initial sale of municipal bonds, the Official Statement is the primary disclosure document provided to potential investors by the underwriters13. It forms the basis for investors' purchasing decisions.
  • Regulatory Compliance: Underwriters are required by SEC Rule 15c2-12 to obtain and review the Official Statement, ensuring that issuers have committed to provide ongoing disclosure through platforms like the Electronic Municipal Market Access (EMMA) system12. The Municipal Securities Rulemaking Board (MSRB) also sets rules, such as MSRB Rule G-17, which requires underwriters to deal fairly with issuers and disclose their role and any conflicts of interest11.
  • Credit Evaluation: Rating agencies, bond insurers, and investors rely heavily on the information in the Official Statement to perform credit analysis and assign credit ratings to the bonds. The Government Finance Officers Association (GFOA) publishes best practices for Official Statement disclosure, aiding issuers in providing transparent and comprehensive information. GFOA Best Practice: Official Statement Disclosure
  • Secondary Market Trading: While primarily for new issues, the Official Statement remains a valuable reference for bond terms and initial issuer information when bonds trade in the secondary market10.

Limitations and Criticisms

While the Official Statement is a cornerstone of municipal bond disclosure, it does have limitations. It primarily "speaks as of its date," meaning the information is current at the time of the bond's issuance and may not fully reflect subsequent changes in the issuer's financial condition9. Although ongoing disclosure is required for most issues through continuing disclosure agreements, material events or changes in financial data are disclosed separately over time8.

A significant criticism revolves around the less stringent direct regulatory oversight of municipal issuers by the SEC compared to corporate issuers. This framework means that while underwriters have a due diligence responsibility to review the Official Statement, the primary legal responsibility for its accuracy lies with the issuer7. Instances of inadequate disclosure have led to investor losses and regulatory actions. A notable historical example is the Orange County bankruptcy in 1994, where the county's financial difficulties were not adequately disclosed in connection with its municipal securities offerings, leading to significant losses for investors and subsequent SEC enforcement actions. SEC Report on Orange County

Official Statement vs. Prospectus

The Official Statement is often compared to a prospectus in corporate finance, as both are primary disclosure documents for new securities offerings. However, key differences exist. A prospectus is typically used for corporate stock or bond offerings and is subject to the direct registration requirements of the SEC under the Securities Act of 1933. This involves a formal review process by the SEC before the offering can proceed. In contrast, the Official Statement is specific to municipal bonds and is not directly filed with or reviewed by the SEC as part of a registration process6. While both documents aim to provide material information to investors, the regulatory framework and the direct oversight by the SEC differ significantly between corporate and municipal securities offerings.

FAQs

What information is included in an Official Statement?

An Official Statement typically includes details on the issuer's financial condition, economic data, outstanding debt, and management. It also provides specific information about the bond offering itself, such as interest rates, maturity dates, call provisions, and the source of funds for repayment5.

Is an Official Statement required for all municipal bond issues?

No, not all municipal bond issues require an Official Statement. Certain exemptions apply, such as small issues (typically under $1 million), bonds sold in large denominations to sophisticated investors, or short-term issues3, 4.

Where can investors find an Official Statement?

For most new issues of municipal bonds, the Official Statement is available on the Municipal Securities Rulemaking Board's (MSRB) Electronic Municipal Market Access (EMMA) website2. Underwriters are also generally required to provide copies upon request to potential customers for a specified period after an offering1.