Michigan Laws 141.2317 – Interest rate exchange or swap, hedge, or similar agreement; definitions
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(1) For the purpose of more effectively managing its debt service, a municipality may enter into an interest rate exchange or swap, hedge, or similar agreement or agreements in connection with the issuance or proposed issuance of debt or in connection with its then outstanding debt.
(2) In connection with entering into an interest rate exchange or swap, hedge, or similar agreement, a municipality may create a reserve fund for the payment of the exchange or swap, hedge, or similar agreement.
Terms Used In Michigan Laws 141.2317
- Debt: means all borrowed money, loans, and other indebtedness, including principal and interest, evidenced by bonds, obligations, refunding obligations, notes, contracts, securities, refunding securities, municipal securities, or certificates of indebtedness that are lawfully issued or assumed, in whole or in part, by a municipality, or will be evidenced by a judgment or decree against the municipality. See Michigan Laws 141.2103
- Debt retirement fund: means a segregated account or group of accounts used to account for the payment of, interest on, or principal and interest on a municipal security. See Michigan Laws 141.2103
- Department: means the department of treasury. See Michigan Laws 141.2103
- Governing body: means the county board of commissioners of a county; the township board of a township; the council, common council, or commission of a city; the council, commission, or board of trustees of a village; the board of education or district board of a school district; the board of an intermediate school district; the board of trustees of a community college district; the county drain commissioner or drainage board of a drainage district; the board of the district library; the legislative body of a metropolitan district; the port commission of a port district; and, in the case of another governmental authority or agency, that official or official body having general governing powers over the authority or agency. See Michigan Laws 141.2103
- Interest rate: The amount paid by a borrower to a lender in exchange for the use of the lender's money for a certain period of time. Interest is paid on loans or on debt instruments, such as notes or bonds, either at regular intervals or as part of a lump sum payment when the issue matures. Source: OCC
- Municipal security: means a security that when issued was not exempt from this act or former 1943 PA 202 by the provisions of this act or by former 1943 PA 202 or by the provisions of the law authorizing its issuance and that is payable from or secured by any of the following:
(i) Ad valorem real and personal property taxes. See Michigan Laws 141.2103Municipality: means a county, township, city, village, school district, intermediate school district, community college district, metropolitan district, port district, drainage district, district library, or another governmental authority or agency in this state that has the power to issue a security. See Michigan Laws 141.2103 Obligation: An order placed, contract awarded, service received, or similar transaction during a given period that will require payments during the same or a future period. Trial: A hearing that takes place when the defendant pleads "not guilty" and witnesses are required to come to court to give evidence. Variable Rate: Having a "variable" rate means that the APR changes from time to time based on fluctuations in an external rate, normally the Prime Rate. This external rate is known as the "index." If the index changes, the variable rate normally changes. Also see Fixed Rate.
(3) An agreement entered into pursuant to this section shall not be included within the total debt of a municipality for any statutory or charter or other debt limitation purpose.
(4) If an interest rate exchange or swap, hedge, or similar agreement described in this section is entered into by a municipality in connection with debt that was not approved by the voters of the municipality, or in connection with a refunding of debt not originally approved by the voters of the municipality, 1 or more of the following apply:
(a) The interest under the agreement constitutes a limited tax full faith and credit pledge from general funds of the municipality.
(b) Subject to any existing contracts, the interest under the agreement shall be payable from any available money or revenue sources, including revenues that shall be specified by the agreement, securing the municipal security in connection with which the agreement is entered into.
(5) If an interest rate exchange or swap, hedge, or similar agreement described in this section is entered into by a municipality in connection with debt that was approved by the voters of the municipality, or in connection with a refunding of debt originally approved by the voters of the municipality, the municipality’s interest payment obligation under the agreement shall be considered to be additional interest on the debt, shall constitute an unlimited tax full faith and credit pledge of the municipality, and the municipality shall levy all of the following:
(a) The full amount of taxes required, or in the case of a variable rate obligation the amount reasonably estimated to be required, for the payment of principal and interest on the municipal securities without limitation as to rate or amount and in addition to other taxes that the municipality may be authorized to levy.
(b) The full amount of taxes required, or in the case of a variable rate obligation the amount reasonably estimated to be required, for the payment of the municipality’s net interest obligation under an interest rate exchange or swap, hedge, or similar agreement entered into under this section.
(c) The amounts levied under subdivisions (a) and (b) shall be reduced by any surplus funds on hand in the debt retirement fund in excess of a reasonable reserve as determined by the municipality’s chief financial officer.
(6) For purposes of this section, “net interest obligation” means the amount of interest payable by a municipality in a given year under an agreement entered into under this section minus any interest payment received by a municipality from the other party to the agreement in the same period under the agreement, but not less than zero. Termination payments shall constitute interest to the extent that the treatment does not cause the interest rate on the debt to exceed the limits established by this act.
(7) A municipality shall not enter into an agreement under this section unless all of the following conditions are met:
(a) The governing body of the municipality has, by resolution or ordinance, expressly approved the agreement and acknowledged the potential risks associated with the agreement.
(b) The counterparty to the agreement has been assigned a rating of “A” or better, or other rating as the department may determine, by a nationally recognized rating agency at the time the agreement is entered into.
(c) The length of the agreement does not extend beyond the final maturity date of the debt issued in connection with the agreement.
(d) The municipality shall not have waived its right to a jury trial.
(e) The municipality has created a debt management plan.
(f) The municipality has created a swap management plan.
(8) An agreement entered into under this section shall be described in the municipality’s annual audit report filed under section 303(1).
(9) As used in this section:
(a) “Debt management plan” means a written debt management plan of the municipality that includes, but is not limited to, the following:
(i) Total amount of debt of the municipality.
(ii) Total amount of variable rate debt of the municipality.
(iii) Analysis of the effect of rising interest rates on variable rate holdings of the municipality.
(iv) Analysis of risk in maintaining variable risk holdings.
(b) “Swap management plan” means a written management plan that includes, but is not limited to, all of the following:
(i) Analysis of the benefits and costs of entering into swap agreements.
(ii) Analysis of the risk associated with entering into swap agreements.
(iii) Analysis of early termination, involuntary termination, default, and cost considerations associated with swap agreements.
(iv) System in place to monitor the status of all outstanding swap agreements.